LIBERALISATION : Past Experience and Future Steps

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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
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SUPPLY CONDITIONS IN TRADITIONAL BILATERALISM
Exhibit 1
THE BILATERAL BONDS THE BILATERAL BONDS
MARKET ENTRY or ACCESS Controlled by TRAFFIC RIGHTS - points served - 3rd/4th or 5th freedoms - No 7th freedom - No domestic cabotage - No charter rights NATIONALITY RULE DESIGNATION - Normally single or double only - Most states only have one airline
MARKET ENTRY or ACCESS Exit difficult STATE SUBSIDIES NATIONALITY RULE CHAPTER 11 (in US)
OUTPUT (i.e. capacity) Controlled by ASA capacity sharing/controls Inter-airline pooling agreements
PRICE Controlled by IATA tariffs conference Inter-airline agreements
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The two phases of post-1978 liberalisation
Exhibit 2

• OPEN MARKETS PHASE
• 1978-1991
• TOWARDS OPEN SKIES
• After 1991

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Exhibit 3
1 Open Markets Phase, 1978-1991

• 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

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TRADITIONAL AND POST-1978 OPEN MARKET
BILATERALS COMPARED
Exhibit 4
Traditional New open market bilaterals
MARKET ACCESS Only to points specified Increased number of points or open access
MARKET ACCESS Limited Fifth Freedoms granted more in US bilaterals Generally more Fifth Freedoms, especially in US bilaterals
MARKET ACCESS Charter rights not included Charters included
DESIGNATION Single some multiple in US bilaterals Multiple
DESIGNATION Airflines substantially owned and effectively controlled by own nationals Airflines substantially owned and effectively controlled by own nationals
While US bilaterals gave US airlines rights from
any point in USA, foreign airlines restricted to
a handful of US points
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TRADITIONAL AND POST-1978 OPEN MARKET
BILATERALS COMPARED
Exhibit 4 (contd)
Traditional Open Market
CAPACITY Capacity agreed or shared 5050 No capacity/frequency controls in liberals, but subject to review No frequency or capacity controls
TARIFFS Double approval by both governments To be agreed using IATA procedures Double disapproval IATA tariffs often flouted (especially in Asia)
Source Rigas Doganis, Flying Off Course the
Economics of International Airlines, Third
Edition, Routledge 2002
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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

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2 Towards Open Skies, 1991-2003
Exhibit 6

• ?US Open Skies Bilaterals (after 1991)
• European Third Package (Jan 1993)
• ? Regional Initiatives
• e.g. Yamoussoukro II (1999)
• APEC (2000)
• ECOSUR

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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

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EUROPEAN UNIONS 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

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US Open Market and post-1991 Open Skies Air
Services Agreements
Exhibit 9
1978-1991 Open Market bilaterals Post-1991 Open Skies bilaterals Post-1991 Open Skies bilaterals
Market Access Named number of points in each state Unlimited Unlimited Fifth Freedom Unlimited Unlimited Fifth Freedom
Market Access Many with unlimited Fifth Freedom Unlimited Unlimited Fifth Freedom Unlimited Unlimited Fifth Freedom
Market Access Domestic Cabotage not allowed Domestic Cabotage not allowed Domestic Cabotage not allowed
Market Access Seventh Freedom not granted Seventh Freedom not granted Seventh Freedom not granted
Market Access Open Charter Access Open Charter Access Open Charter Access
Designation Multiple Multiple Multiple
Designation Substantial ownership and effective control by nationals of designating state Substantial ownership and effective control by nationals of designating state Substantial ownership and effective control by nationals of designating state
Capacity No frequency or capacity control No frequency or capacity control No frequency or capacity control
Tariffs Double disapproval Double disapproval Free Pricing
Code-sharing Not part of bilateral Not part of bilateral Code-sharing permitted
Source Rigas Doganis The Airline Business in
the 21st Century, Routledge 2001
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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

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Liberalisation has been spreading
Exhibit 11

• BUT
• 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
• AND HAS NOT IMPROVED PROFITABILITY

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Liberalisation has not improved profitability
Exhibit 12
ICAO Worlds Airlines Profit as a of Total
Revenue
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To Improve International Airline
ProfitabilityNeed to
Exhibit 13

• 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

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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)
• Result
• Airline industry uniquely national not global
  unlike all other sectors

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Previous action through ICAO
Exhibit 15

• 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

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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

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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

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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

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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

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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
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Exhibit 21
For more discussion of the airline industrys
problems and prospects see The Airline Business
in the 21st Century by Rigas Doganis Publisher
Routledge Available from Amazon.com or
amazon.co.uk