From today any European carrier will be allowed to operate domestic services in any other member state - the third and final phase of the European Commission's deregulation of the airline market.
But British Midland, one of the pioneers of European liberalisation, said it feared this would not usher in cheap fares and increased competition because of airport overcrowding.
Sir Michael Bishop, the airline's chairman, said: "The restrictions are such that there is now unlikely to be an explosion of carriers on the major routes, bringing down fares and resulting in more people travelling abroad, as has happened in the US."
He added that millions of travellers were being denied the positive effects of competition by infrastructure constraints at Europe's busiest airports.
Heathrow, the world's busiest international airport, is full and even if Terminal 5 is approved it will not open until early next century. Frankfurt is also becoming capacity constrained while Milan's Milate airport is full and Malensa airport will not be fully functional for a number of years.
According to a report by British Midland, 27 of Europe's busiest cross- border routes start or finish at airports where capacity is constrained. It estimates there are only 33 domestic routes in Europe with significant potential for new entrants to start services. Although the number of scheduled carriers operating across Europe has risen from 114 in 1987, when deregulation began, to 156 last year, the report says the German, Irish, Greek and Portuguese markets continue to be dominated by one national flag carrier.
The report says there is an urgent need to expand airport capacity, tackle the environmental problems around airports that limit capacity and make better use of existing airports.