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2 nd National Aviation Economics And Statistics Workshop – 2011 on 7 th January, 2011 Air Trade Services in the growing Globalization & Liberalization Era - Role and importance: c ase study for India By Dr. Sanat Kaul Chairman International Foundation for Aviation, Aerospace & Development.
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2nd National Aviation Economics And Statistics Workshop – 2011on 7th January, 2011Air Trade Services in the growing Globalization & Liberalization Era - Role and importance: case study for IndiaBy Dr. SanatKaulChairmanInternational Foundation for Aviation, Aerospace & Development
Legal and Conceptual FrameworkAir 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 Skies1990’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) 2008The 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 OSAIn 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.
