2nd National Aviation Economics And Statistics
Workshop – 2011
on 7th January, 2011
Air Trade Services in the growing
Globalization & Liberalization Era - Role and
importance: case study for India
By
Dr. Sanat Kaul
Chairman
International Foundation for Aviation, Aerospace &
Development
Legal and Conceptual Framework
Air services as an industry is very different from general
rung of industry as there is a difference between the
Chicago Convention of 1944 and World Trade
Organization (WTO).
Chicago Convention provides sovereignty of air space
over each country and gives rise to eight freedoms of
air. WTO on the other hand calls for liberalization of
trade with equal and non-discriminatory treatment
between countries.
Chicago Convention has a led to a web of Air Services
Agreements(ASAs) between the countries which are
restrictive in nature and tend to provide protection to
the home airlines.
As a result, improved international connectivity has
been restricted and has led to code-sharing alliances
and also oligopolistic and cartelization tendencies.
In addition to the restricted policies under Chicago
Convention, there has also been the issue of nationality
of airlines based on “substantial ownership and
effective control principle of airline ownership”. This
concept did not allow cross ownership of airlines.
US was the first country to question the bilateral
system of Air Service Agreements (ASA) which
restricted the number of flights, the number of
airports, the number of national airlines, capacity and
also fifth and sixth freedoms. US insisted on limited
open sky provided under Bermuda II System, which
allowed a unlimited number of flights between two
countries but restricted to number of airlines and cities.
European and Western Countries started signing
Bermuda II Type ASAs with USA.
Bermuda I
First generation ASAs granted third and fourth freedoms
to single designated carriers from each country, with restricted
routes. This was followed by price fixation of tickets under
auspices of International Air Transport Association (IATA). Thus
while air traffic between two countries was controlled by
governments through bilateral agreements, price fixation was
done by IATA which acted as cartel.
Post domestic aviation de-regulation in the US in 1978,
US started insisting on liberalized ASAs. USA concluded
liberalized agreements with European countries and
countries like Thailand, Philippines, Singapore
Open Skies
1990’s saw a new generation of liberalized ASAS called Open
Skies Agreements (OSAs). These agreements which the US
signed removed restriction on capacity, number of carriers of
each country or even number of airports but retained restriction
of investment and cabotage rights. Open Skies Agreements
typically provided for 3rd, 4th and 5th freedom rights and removed
restriction on designation, capacity, frequencies, code sharing
and fares.
MALIAT
Multilateral Agreement on Liberalization of Air Transport.
The US then moved to multi lateral agreements consisting
of group of countries rather than bilateral agreement
between two countries. In 2001, the first multilateral open
sky agreement was concluded between US and Brunei,
Chile, New Zealand and Singapore . This multilateral
agreement provided for 5th freedom right, free
determination of price and capacity.
US – EU Open Sky Agreement(OSA)
2008
The major breakthrough has come from the open sky agreement
between US & EU.
In November, 2002, European Court of Justice declared that bilateral
ASAs by Member Countries were illegal as they discriminated against
other member State’s on the basis of nationality. This decision
presented to entangle a dense web of over 200 bilateral ASAs with
over 22 governments. Consequently, US & EU negotiated an Open Sky
Agreement effective from March, 2008. This agreement provided for a
common sky of EU countries with 5th freedom right granted to all US –
EU countries (Cargo and passengers). This meant a US airline could fly
from Boston to London to Frankfurt and pick up local passengers in
London. It also enabled US and EU carriers to code share on each
others flights.
It also enabled EU to consolidate its airlines into cross border
entities. For example Air France and KLM were able to merge
there operations without loosing their right to flight to US.
Further it enabled EU Airlines to offer transatlantic services from
any location in EU. Air France has already begun a non-stop
flight between London and Los Angeles.
No concession was given on foreign ownership which has been
kept for negotiation in the second stage of agreement.
Impact
of
US
–
EU
OSA
In 2006, estimate by Booz Allan Hamilton, the US – EU
OSA which will impact the world’s 6% of scheduled
international passenger market is likely to increase the
traffic at least 30 times more. However, granting US 5th
freedom rights within EU and conversely EU carriers in US
market, will also have its impact
Advantages of OSA
• We have seen the advantages that EU & USA
are deriving from their open sky agreement.
While EU became a single market in 1992,
they have not been able to go in for a single
market for air travel till about 2008. In fact the
single market remains incomplete because of
ASA regime.
• India could also look at a US – EU type
arrangement between India & EU as EU now
consists of 27 countries with a population of
over 350 million with high affordability to fly.
Competition Policy
• EU Competition Policy aims to prevent market distortion
practices by dominant players. It also breaks down barriers
to increase competition amongst member states and bring
in a single integrated European Market. EU Competition
Policy is defined in Article 81 & 82 of the Treaty of Rome in
which it prevents restricted or distort competition and also
discourages state subsidies and even state owned
enterprises.
• India’s Competition Commission is also taking a grip of the
situation in India. It is already looking into cartelization.
• Therefore, with Competition Laws effective in both EU and
India, the level playing field required would be available.
Latest Developments
• IATA in its 64th Annual General Meeting and World
Transport Summit held in June, 2008 at Istanbul,
resolved unanimously to pursue a campaign to
eliminate certain restrictions on a way in which
carriers can operate and adapt to change in their
economic environment. The Freedom Summit in which
officials from 15 economies including India, US & EU
attended, tried to find ways to expand commercial
freedoms of airlines mainly access to markets and
global capital.
EU – Canada Air Transport Agreement,
2008
• The Istanbul Declaration was succeeded by EU – Canada Air
Transport Agreement of November, 2008 which is
groundbreaking as this agreement will eventually allow
foreign ownership of domestic airlines. Besides unrestricted
flying between EU and Canada including 5th Freedom rights
to cargo carriers.
• The agreement also allows European investors to own up to
49% of Canadian carriers and passenger airlines will be
granted 5th Freedom Rights and cargo airlines will be
granted 7th Freedom Rights. In the final phase of this
agreement, cabotage rights will be granted to all carriers.
UK – Singapore ASA
• This agreement was signed in October, 2007.
It grants 7th freedom rights for passenger
airlines of the two countries as the carriers are
allowed to base aircrafts in each others
countries and operate services to any other
destination. This means that Singapore
Airlines will now have the right to use London
– Heathrow as a hub while UK carriers will
have same rights to use Singapore’s Changi
Airport.
LESSONS OF EU-US OSA
• OSA between two equal sides have many lessons
for us too. We need to examine the present state
of our airlines and whether they can compete
with international competition in various sectors
and regions. Foe example India-Eu or India-Asian
or India –SAARC region.
• Once we feel confident that there would be
advantages on both sides and our airlines are
fully geared up to take on the competition, we
should open up in a region wise OSA
India’s new emerging middle class is about the
same size and will be a good match.
• We have a time difference between EU & India of
8 hours which is good enough for a long haul
flight. We have six or seven airlines which will be
able to compete with the airlines of EU which are
merging as EU allows cross ownership within EU
and is likely to be of an equivalent number. We
have already
twelve declared international
airports and some more custom airports where
we allow international flights. We could overtime
declare more airports international after
improving their condition and length of runway.
•
THANK YOU