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This study examines the impacts of air transport liberalization policies on economic growth, traffic volume, and traffic flow patterns, and investigates the mechanisms leading to those changes. Our investigation concludes that (1) liberalization has led to substantial economic and traffic growth. Such positive effects are mainly due to increased competition and efficiency gains in the airline industry, as well as positive externalities to the overall economy; (2) liberalization allows airlines to optimize their networks within and across continental markets. As a result, traffic flow patterns will change accordingly. Strategic alliance is a second-best solution and will have a reduced role when foreign ownership restrictions are relaxed; (3) there is a two-way relationship between the expansion of low-cost carriers (LCCs) and liberalization. The rapid growth of LCCs leads to increased competition and stimulated traffic, calling for the removal of restrictions on capacity, frequency, pricing and entry. In addition, development of LCCs in domestic markets can promote liberalization policy for international aviation by increasing the competitiveness of the national aviation industry. On the other hand, the existing regulations hindered the growth of LCCs. Further liberalization is needed for the full realization of associated benefits. [ABSTRACT FROM AUTHOR]