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LIBERALISATION : Past Experience and Future Steps . Montreal 22-23 March 2003. Professor Rigas Doganis Rigas Doganis & Associates Visiting Professor, Cranfield University. Aviation in Transition: Challenges & Opportunities of Liberalisation . Exhibit 1.

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Liberalisation past experience and future steps
LIBERALISATION : Past Experience and Future Steps

Montreal 22-23 March 2003

Professor Rigas Doganis

Rigas Doganis & Associates

Visiting Professor, Cranfield University

Aviation in Transition:

Challenges & Opportunities of Liberalisation

Supply conditions in traditional bilateralism

Exhibit 1


The two phases of post 1978 liberalisation

Exhibit 2

The two phases of post-1978 liberalisation




    After 1991

Exhibit 3

1: “Open Markets” Phase,


  • New liberal US bilaterals (after 1977)

  • Liberalised intra-European bilaterals (from 1984)

  • Two European liberalisation packages (1987 and 1990)

  • In Asia national regulations relaxed: ANA, Asiana, Eva Air fly internationally

Traditional and post 1978 open market bilaterals compared

Exhibit 4


*While US bilaterals gave US airlines rights from any point in USA, foreign airlines restricted to a handful of US points

Traditional and post 1978 open market bilaterals compared1

Exhibit 4 (cont’d)


Source: Rigas Doganis, ‘Flying Off Course: the Economics of International Airlines’, Third Edition, Routledge 2002

Uk singapore bilateral july 1989 example of open market asa
UK – SINGAPORE BILATERAL July 1989 (example of “Open Market” ASA)

Exhibit 5

  • Multiple designation

  • Double disapproval on fares

  • Capacity controlled to

    two daily to London (for each country)

    three/week to Manchester (for each country)

    i.e. 17 per week by 1993-94

    then to 21 week as traffic increases

  • Singapore full 5th freedom to London but not beyond

  • UK may hub in Singapore

    up to 20 x 747 weekly

    or 50 smaller aircraft

  • Increase frequencies Singapore – Hong Kong

2 towards open skies 1991 2003

Exhibit 6

2: Towards “Open Skies”, 1991-2003

US “Open Skies” Bilaterals (after 1991)

  • European Third Package (Jan 1993)

     Regional Initiatives

    e.g. Yamoussoukro II (1999)

    APEC (2000)


New us open skies bilaterals after 1991 almost 60 signed by end 2002
NEW US “OPEN SKIES” BILATERALS AFTER 1991(almost 60* signed by end 2002)

Exhibit 7

  • Free pricing for passengers and cargo

  • No capacity or routing restrictions

  • Access to any point in each country

  • Unlimited fifth Freedom rights

  • Open code-sharing opportunities with third countries having similar rights

    * But only 19 involve competitive markets

    e.g. Netherlands-USA (1992) or Singapore-US (1997) but not with UK or Japan

European union s third aviation package from 1 st january 1993 completed april 1997
EUROPEAN UNION’S THIRD AVIATION PACKAGEfrom 1st January 1993 – completed April 1997

Exhibit 8

Free pricing regime for tariffs

  • only “ex-post double disapproval” for fully flexible fare

    Open market access

  • i.e. all EU airlines have rights to fly between any two EU points

    Criteria for operators’ licences harmonized

  • owners can be from any EU state, I.e. nationality rule abandoned (e.g. Virgin Express in Belgium is UK owned)

    Changes apply equally to scheduled and charter

Us open market and post 1991 open skies air services agreements
US ‘Open Market’ and post-1991 ‘Open Skies’ Air Services Agreements

Exhibit 9

Source: Rigas Doganis ‘The Airline Business in the 21st Century’, Routledge 2001

What open skies does not do
What ‘Open Skies’ does not do

Exhibit 10

  • Traffic rights

    No 7th freedom

    No domestic cabotage

  • Nationality/Ownership

    Still “substantial ownership and effective control

    Some states do not allow over 25% of foreign ownership (e.g. US, Canada)

  • Anti-competitive behaviour

    No provision for dealing with this uniformly

  • Protectionist measures continue

    State subsidies, Chapter II (US)

    Government traffic limited to national carrier (e.g. USA)

    US does not permit US carriers to wet lease from non-US

Liberalisation has been spreading

Exhibit 11

Liberalisation has been spreading


* Most states have mix of air services agreements

Traditional (most widespread)

Open Market

Open Skies (least common)

* New Regulations spreading and becoming extra-territorial

Competition rules

Merger controls (In EU and US)

Passenger rights (e.g. denied boarding compensation)

Safety oversight (ICAO,KAO, FAA, EU)

Environmental rules


Liberalisation has not improved profitability

Exhibit 12

Liberalisation has not improved profitability

ICAO World’s Airlines: Profit as a % of Total Revenue

To improve international airline profitability need to

Exhibit 13

To Improve International Airline ProfitabilityNeed to:

  • Facilitate access to world-wide capital markets

  • Reduce debt finance – use more equity capital

  • Limit over-capacity by:

    • Encouraging cross-border consolidation

    • Allowing airlines to fail

    • Control of capacity in thin markets

      First step is to relax nationality rule

Drawbacks of nationality rule

Exhibit 14

  • Denies airlines full access to capital markets

    yet most airlines grossly undercapitalised

  • Limits cross-border mergers/airline consolidation

    Prevents lower costs, integrated networks

    Alliances are poor substitute and not sustainable

     Distorts airline markets

    Limits market access of more dynamic airlines

    Encourages state subsidies/bailouts

    Discourages designation by smaller states of foreign-owned carriers

  • Encourages smaller ‘flag’ carriers to overextend network,

    i.e. self-destruct (the Sabena syndrome)


    Airline industry uniquely national not global – unlike all other sectors

Previous action through icao

Exhibit 15

Previous action through ICAO

  • ICAO Assembly (resolution A24 – 12) has accepted ‘Community of Interest’ concept.

  • 1994 Air Transport Conference recommended:

    designate any airline substantially owned and effectively controlled by nationals of any States parties to an agreement

  • 1997 Air Transport Regulation Panel (ATRP/9-4) recommended:

    ‘principle place of business and permanent residence plus strong link with designating state’

Nationality ownership rule by passed

Exhibit 16


  • Airlines with multi-national ownership (e.g. SAS, Gulf Airways, Air Afrique)

    “Community of Interest” concept urges states to accept designation by one developing state of an airline owned by another within same economic grouping (e.g. BWIA)

    Charter carriers Monarch (Swiss-owned) and Britannia (Canadian then German owned)

    ”Principal place of business concept” (used by Hong Kong in its ASAs)

  • Abandoned for intra-EU services (3rd Package 1993)

    i.e. Nationality rule not sacrosanct

Governments may choose to ignore ownership issue
Governments may choose to ignore ownership issue

Exhibit 17

Examples include:

  • Aerolineas Argentinas(91% Spanish owned in 1991)

  • Sabena (49% owned but effectively controlled by Swissair)

  • Sri Lankan(40% owned but effectively controlled by Emirates)

  • Maldives has given its 3rd/4th freedom rights to Sri Lankan

    i.e. Nationality articles are permissive

Nationality rule could be progressively abandoned
Nationality rule could be progressively abandoned

Exhibit 18

Replaced with – “principle place of business” or by “any Community carrier” (in Europe)

Action through

  • European Union – European Court Decision

    - Enlargement (17 to 27 states)

  • ICAO 2003 Conference

  • Bilaterally or regionally

    e.g. APEC or Yamoussoukro

    or even TCAA

Outstanding regulatory issues

Exhibit 19

  • Relaxing ownership rules

  • Allowing domestic cabotage in major markets

  • Harmonising competition rules as alliances expand and/or airlines merge/consolidate

Exhibit 20

  • Relaxing nationality rule will help but will not ensure long-term profitability if:

  • Real yields continue to decline

    • Real costs do not decline fast enough

    • Load factors too low

  • Need to:

  • Tackle inherent over-capacity

  • Rethink the full service business model

  • Exhibit 21

    For more discussion of the airline industry’s problems and prospects see:

    The Airline Business in the 21st Century


    Rigas Doganis

    Publisher: Routledge

    Available from: or