At its conference in March, ICAO will once again play host to a drive to free air transport from the national regulation which has prevented it from emerging as a truly global industry
At no time in the history of civil aviation has there been so great a need for international airlines to be unleashed from the harness of national ownership and control provisions. Similarly, never have governments been more receptive to liberalisation of international air transport. Unfortunately, however, a quantum change in the framework of air services agreements should not be expected anytime soon - the maze of sovereign and procedural complexities is likely to make this a long and tortuous process. That said, it appears there may be ways around the maze that could in the meantime produce much of the desired effect while the unravelling and rebuilding goes on.
For years, international carriers have worked around national restrictions on market access through codesharing and, more comprehensively, through the establishment of alliances. But this has been a less than satisfactory patchwork of ties between partners which retain their own independent operations, shareholders and cultures. Alliance carriers have limited influence over the fate of their partners as Star Alliance members have recently found, with the entry of United Airlines into bankruptcy protection.Neither do the alliances do much, if anything, to help badly needed fresh capital flow into the business. Some carriers desperately require injections of capital which are simply too large or too risky to be taken up by their national capital markets.
Air carrier ownership and control vested in a single state or its nationals is an anachronism in the global economy. Indeed, it even looks increasingly out of place within the air transport sector itself. A growing number of airport, ground handling and maintenance companies, for example, can now be defined as multinationals. BAA - which has a larger market capitalisation than British Airways - has management contracts to run Harrisburg and Indianapolis airports in the USA, a foreign intervention that would run into major obstacles for an airline.
In fact, even an air carrier can escape ownership and control restraints when it is defined as a charter operator. Britannia Airways, based in the UK and now selling flights as well as charter packages to the public, was long owned by the Thomson group of Canada before becoming part of German travel giant TUI, along with France's Corsair. In direct contrast, the likes of BA, which is quoted on several stock exchanges around the world, must keep close tabs to ensure that majority ownership stays within strict nationality limits. Assessment of ownership limits can get complicated, as illustrated by the current debate in the USA as to the extent to which DHL is actually a "US citizen".
Both industry and regulation are in a state of flux. There are increasing challenges to the full service airline model by new low-cost competitors. Distribution channels too have changed radically. Political and economic uncertainty are not only placing restraints on demand, they are threatening the already unstable financial health of carriers with further increases in costs such as fuel, security, insurance, landing charges and compensation for denied boarding. In many instances, this has led to retrenchment and remodelling. And in some cases, it has led to bankruptcy protection or liquidation.
Limited scope
On the regulatory front, the judgement from the European Court of Justice (ECJ) in November has been heavily trailed as a groundbreaking decision. In fact, it was actually very limited in scope. It related only to the US open skies agreements struck by seven European countries plus the UK's Bermuda II bilateral. Also, the judgement related to only a few specific bilateral provisions, of which nationality restriction was the most prominent.
While evolution of policy on the basis of imposition of rule of law rather than consensual agreement is not an ideal way forward, it does have significant precedent within the European Union (EU). For instance, in the 1986 case of French leisure company Nouvelles Frontières, the ECJ found that certain aspects of the regulation of air tariffs by the French government were incompatible with the Rome Treaty rules on competition. And in the 1989 Ahmed Saeed case, the court found that bilateral or multilateral agreements on air fares were, under certain conditions, void under the competition rules. These cases substantiated the argument for regulation at European rather than national level: first for intra-EU air transport and then for certain external elements. The European Commission (EC) has already given notice that it is once again keen to build on the limited terms of this latest legal decision.
However, negotiation and agreement need partnership between the EC, the growing band of EU member states and all other nations that have or wish to have air service relations with Europe.
The USA has indicated that it would be prepared to negotiate with the EC, on the understanding that the goal is to achieve agreement at least as open as the most liberal of its existing "open skies" bilaterals with individual European countries. At the same time, it has also served notice that it will continue to negotiate bilaterally with European nations.
For its part, the EC has taken positions on air transport which are at least as liberal as those of any of the individual member states of the EU at the World Trade Organization forum, where it already has a negotiating mandate for certain aspects of air transport under the General Agreement on Trade in Services (GATS).
The procedural intricacies are daunting but will hopefully not divert too much time and energy away from the fact that the key to regulatory change and a primary stimulus for restoring health to the airline industry worldwide - not just in Europe - lies in ownership and control provisions.
External application of an ownership and control provision at community rather than national level was the only real element of the ECJ judgement which gave the EC something to get its teeth into. But the concept is not a new one. Acceptance by third parties of a proposed "community of interest" designation of carriers (sponsored by the USA among others) was adopted for developing countries by the ICAO Assembly in 1983. This was more broadly accepted for global application by ICAO's Worldwide Air Transport Conference in 1994 and is in effect in a number of bilateral agreements.
An EU ownership and control provision itself appears in several bilateral agreements with Germany, which is one of the countries in the ECJ dock for not having such a clause in its agreement with the USA. But the ECJ decision, even if implemented through agreement with the USA, does not go as far as was proposed for a transatlantic common aviation area, where the common ownership and control would have encompassed the USA as well as European countries.
While "community of interest" designation is undoubtedly a step forward, it still has its limitations. One of them is the potential entrenchment of bloc positions. In addition to the EU and the Caribbean Community, the 21 member States of Common Market for Eastern and Southern Africa and the 16 Member States of the Arab Civil Aviation Commission already have variants of a community ownership and control provision as far as intra-regional operations are concerned. The Pacific Island Air Services Agreement, up for signing and ratification in 2003, could signal a further 14 states taking this approach.
All the regional groupings concerned might logically follow the EC line towards extra-regional application. There are also other formats, some conceived in other regional groupings and some to meet special circumstances: for example, countries involved in the multinational ownership of SAS, Gulf Air and the former Air Afrique. At the same time, the vast majority of bilateral air service agreements, which continue to predominate at the inter-regional level, retain the "traditional" national ownership and control provision.
A way forward
The time is ripe for more co-ordinated strategic thinking and a broader consensus. Starting from the bottom line, it is a given that civil aviation has to avoid the maritime "flags of convenience" regime, the worst aspects of which were exemplified by the liability issues arising from the sinking and oil spillage of the tanker Prestige off the coast of Spain last November. The Prestige was registered in the Bahamas, owned by a one-ship Liberian company with limited insurance managed from Greece. The Prestige carried oil for a company formed in Gibraltar, with directors mostly from the UK, headquartered in Switzerland and owned by a Russian conglomerate.
Fortunately, the issues of who is liable and for how much can be answered in the case of aviation by two tests. First, by the state that issues the air operator certificate, which has an obligation to respond to the safety and security standards established by ICAO - and is now subject to audits of its capability that identify deficiencies and call for remedial measures. Second, by the global liability established by various air law conventions, which will be unified once the 1999 Montreal Convention comes into force within the next year or soon after.
Ultimately, all that is required to bring civil aviation safely in line with the global economy is the endorsement of the global liability regime and the specification of which authority has "effective control". In other words, the authority which has issued the safety and security-related certification and is responsible for designating criteria for proof of financial health, ability to meet public interest requirements and so on.
So how do we get there? First, drop or sidestep any hard ownership provisions in air services agreements and retain only "effective control". There is a recent precedent for this in the Kona multilateral agreement championed by the USA in the Pacific together with Brunei, Chile, New Zealand, Peru, Singapore and Samoa. Where necessary, for example as a transitional arrangement, the concept of an airline having a "principal place of business" in the designating state as well as "effective control" by that state might be retained.
Second, rather than wait for more than 2,000 bilateral and regional air services agreements to be renegotiated in order to effect such change, we should work on the understanding that a "receiving" state may waive the designation provisions in an air services agreement. A well-known precedent for this is US permission for Aerolineas Argentinas to continue as Argentina's designated carrier even though it was majority-owned by Iberia and Spanish state holding company SEPI.
By co-ordinating such waivers, a framework could be created to enable a growing group of states to accept designation of a foreign airline in cases where that airline does not meet the ownership and control provisions of the relevant air services agreements. The ICAO Secretariat, building on the work of an expert group, is proposing such a formula to the Worldwide Air Trans-port Conference in March. It is based on interested states issuing individual or joint statements of policy (and/or developing a binding legal instrument) for accepting designation of foreign airlines.
Pending the resolution of the fallout from the ECJ decision and EC negotiations with eastern European states and others, European states in particular may find their hands tied at the ICAO conference. However, the proposal could serve as a catalyst for mobilising a critical mass of states prepared to move forward on the ownership and control issue.
While a generic breakthrough on ownership and control would be a quantum step forward for the liberalisation and health of international air transport, there would still be a number of issues to be resolved. For example, should the EC enter into negotiations with the USA? Apart from the difficult horse trading of routes and rights, issues on the table might include: whose competition law would apply and in what circumstances; EU and US public service obligations; treatment of infrastructure constraints and slot allocation (a prominent application exercise being London Heathrow); the Fly America programme (whereby all US federal officials, recipients of federal funds and their contractors are generally required to travel on US carriers); war risk insurance; wet-leasing of aircraft; and Chapter 11 bankruptcy provisions. A machinery for dispute settlement would also have to be agreed.
Fair competition and safeguards are global issues for air transport. The vast majority of states do not feel that international air transport is susceptible to generic competition law and in any event there is no recognised common global competition law in place (or even a national one in many states). Specific safeguards are required for the sustainability of air carriers and the assurance of air service, particularly, but by no means only, for developing countries, many of whom are heavily dependent on tourism or air freight. The state aid following 11 September 2001 in the form of cash compensation, tax concessions and government guarantees for loans or war risk insurance, has underlined the perception of the air transport industry as a strategic sector, and for many states, their national carriers as strategic investments.
Accommodation of framework
In developing new regulatory arrangements, it is important to recognise that the air transport policy of states is, and is likely to remain, heterogeneous, but that with accommodation (notably as regards acceptance of another state's air carrier designation provisions) the different mechanisms for regulation can function fairly effectively side by side.
The existing framework of regulation is not necessarily a barrier to liberalisation. The intra-regional agreements mentioned above are testimony to this. Furthermore, there are now some 85 "open skies" bilateral agreements involving approximately 70 countries. Two-thirds of these agreements involve the USA as one of the partners, but one-third do not. Three-quarters of them involve developing countries.
With respect to market access, these agreements generally provide for unrestricted route and operational rights, as well as third to fifth and sixth freedom traffic rights; many also grant seventh freedom rights for air cargo services. While some circumstances, such as the current US-EU situation, may predicate the unravelling or coalescing of the existing, legally binding, network of bilateral air services agreements, in others liberalisation may necessarily have to be achieved by modification of agreements.
The potential extended application of the WTO mechanism adds another dimension to the whole exercise. In the view of some, additional elements of the regulation of international air transport should gradually be transferred to the GATS and eventually the framework would be ready, with safeguards in place, to hand over in its entirety. However, and perhaps contrary to popular belief, even at that stage there would be no need to amend the Chicago Convention. The Convention can accommodate the most fundamental shifts in the economic regulatory environment. This is perhaps just as well considering the most recent amendment to the Convention took over 12 years to enter into force.
The continuing wave of globalisation has already chipped away at the edges of air transport regulation as regards, for example, maintenance, distribution, ground handling and express/mail. As globalisation inexorably draws closer to the core issue of airline market access, some of the energy being expended by the industry and its present regulators might be beneficially applied to the evolution of a co-ordinated, progressive approach to liberalisation and the avoidance of piecemeal recipes for destabilisation.
BY CHRIS LYLE AT ICAO IN MONTREAL
Source: Airline Business
