Freer skies?

Earl Scott of Aero-Accords/SEATTLE

For all the talk about liberalisation, is the airline industry really becoming more free to respond to market forces? Earl Scott's study attempts to separate the fact from the fiction.

Hardly a week goes by without news of negotiations towards a more liberal air services agreement somewhere. The USA forges ahead with its open skies policy and there is talk of common aviation areas. Yet at the same time, the old operational barriers to increased competition appear to be no lower.

The slot constraints, for example, at congested or environmentally controlled airports remain firmly in place and special interest groups are not beyond championing such limits. So to those involved in day-to-day air transport operations, it must seem that the impact of deregulation and liberalisation has not changed reality.

Regulated skies

People hold different views over whether the skies are more or less regulated. This inconsistency is because of a confusion between the particular and the general. Examples of restrictions are drawn too close to a particular market or airport. Key points hinge on whether the air service agreements being negotiated today are fundamentally different from those negotiated before US deregulation. If they differ, how are they different?

To answer this, four basic operational elements of an air service agreement need to be considered: the number of carriers that may be negotiated; the means of allocating capacity; the method of setting tariffs and the number of gateway cities.

The impact of liberal aviation policies on carrier designation is minimal. Between 1966 and 1975, before US deregulation, the number of negotiations reaching multiple and single designation were about equal: 51% and 49%, respectively (see tables page 98). However, between 1986 and 1995, there was a slight shift to multiple designation: 56% to 43%. In a few agreements there was also a flexibility of wording, with phrases such as "and to withdraw or alter such designations" sometimes added.

Such small changes are probably not statistically significant in themselves. Agreements that specify that each party could designate "one or more airlines" have rarely been clear as to whether the intent was for multiple carriers on the same route or only that different carriers could be designated for different routes.

In a few agreements an upper limit on the number of carriers on each route has been specified, but such details are omitted in most. There are valid reasons for states not to specify their exact intent. Needs change, and neither party may wish to be boxed into one interpretation which might prove of limited value in the future.

Long-standing exceptions - where different numbers of carriers are specified by route - are found in the US-Canadian, the US-Mexican and the US-UK agreements. Another exception is the 1996 Czech-Swiss agreement which allows each party to designate one or more carriers, providing no more than one is designated "on each individual route".

A more general exception is found in dual designation. For example, the 1974 Philippine-Singaporean agreement was modified in 1991 to delete single designation and substitute dual. In many cases, dual designation will specify one combination carrier, plus one all-cargo carrier for each party. In these agreements, the routes and/or gateway cities for each carrier type may vary.

Nevertheless, it seems that neither the small change in the single/multiple split, nor the occurrence of a specified number of carriers can account for the increase in the number of new entries in various markets worldwide. The major impetus to the addition of new competitors appears to be newer interpretations; not new bilaterals. In other words, there is a greater willingness by authorities to accept new carriers under existing agreement structures.

Capacity regulation

As early as 1988, the International Civil Aviation Organisation (ICAO) began noting agreements "expressly excluding unilateral capacity controls". However, this restriction on unilateral controls has not reduced capacity regulation, but has shifted control from a unilateral to a bilateral stage. As a result, the impact of liberal aviation policies on capacity issues is vague (Table B) . The increase in percentage of free determination agreements from one decade to the next is more than offset by a greater increase in percentage of predetermination agreements. Simultaneously, there has been a dramatic decline in agreements relying on the relatively liberal "Bermuda" capacity article so widely accepted before the late 1970s.

Table B may appear at first glance to understate the number of free determination agreements. But this is correct only if the wording of the capacity article is considered. When other features are included, such as capacity limitations found in annexes or in attached memoranda of understanding, it becomes apparent that many so-called free determination agreements actually limit aircraft size, weekly frequency, and other operational aspects. In this study, such cases have been re-evaluated and reclassified as appropriate, reducing the number of free determination agreements.

Amendments to designation provisions are made less frequently than those to capacity, tariffs or route provisions. Here, both agreements and amendments have been included. This was done to measure the results of negotiations over a decade rather than simply to count agreements in force. A few of these documents may not have remained in force during the decade, but counting the individual negotiations gives a perspective on the thinking throughout the decade and of the change in consensus between decades.

Liberal policies

The impact of liberal policies on the issue of tariffs is greater than the impact of the previous two elements (Table C). Between 1966 and 1975, sovereignty reigned supreme and no agreement used a tariff article which limited either party's right to disapprove a tariff; all required dual approval. However, almost 60% of agreements signed between 1986 and 1995 limit each party's right to disapprove a tariff. The nature of this group, classified as limited disapproval, varies. Some cases specify the need for dual disapproval as opposed to dual approval. In other cases, tariffs have to be accepted within specified price zones. Still others limit disapproval to specific issues. All of these combine in Table C under the label limited disapproval.

Most agree that the freedom to unilaterally set tariffs provides airlines with greater freedom to respond to market forces. This freedom also appears to have become an accepted means of increasing carrier efficiency. Under such regimes, only efficient carriers survive. What is not yet demonstrated, however, is how unilaterally set tariffs breed innovation in the market and in service. Today, tariff matching - not innovation - appears to be the key phrase. But without innovation, an industry stagnates.

Additional gateways

The impact of international deregulation and liberal policies on the issue of gateways is by far the most interesting. As in the case of tariff articles, the number of observations - or negotiations - has greatly increased. Here, several major changes are taking place. First, there is proliferation of new and revised routes within established markets. Second, there has been not one, but two, shifts in route structure. In both cases, there has been a movement away from the traditional single gateway format "from my major city to your major city and vice versa". Instead, more and more contracting are exchanging additional gateways (Table D). Almost twice as many agreements negotiated in the 1990s name three gateways compared to the 1970s - 64 against 37. And over twice as many name 5-10 gateways - 37 compared to 11.

Just as dramatic is the change in agreements which do not name their gateways. Here, the non-specific route format - "from points in my country to points in your country" - is twice as frequently selected as in the earlier decade (200 to 104).

Two other recent changes are notable. In the first, sixth freedom is being authorised, allowing "points behind our country, via our country, to your country". In the second, codesharing services with third-country carriers are authorised.

A survey of ICAO data into the past 12 years demonstrates that the average delay in registration of an air service agreement is about four years, so up to half the agreements signed since 1995 may not have been registered yet and may have been omitted from this study. However, this is offset by the inclusion of non-ICAO registered agreements obtained from the UN registry and other sources.

Based on data available, however, it is clear that there is a move towards liberal agreements and this has important implications. While airports in London, New York and Tokyo should continue as dominant international gateways, it is likely that new airports comparable to Atlanta, Manchester and Osaka will appear. This likelihood is increased by liberal regional agreements, such as the 1996 Agreement on Subregional Air Services between six South American countries. That agreement expands third and fourth freedom service to gateways not covered by current bilaterals without altering any provisions of those bilaterals.

The problem of congestion at existing airports, plus concerns about noise and exhaust pollution, are driving the shift to alternate gateways as much as any desire for economic deregulation. Population growth and increased suburbian development are crowding the major cities and their airport expansion opportunities.

New and even revised predetermination agreements may continue in some markets and their features will be prolonged for years. But as markets mature, predetermination will be discarded. Like the Berlin Wall, predetermination is predicated on the false philosophy that the status quo can be enshrined and that continued progress can be sustained in a protective environment.

The new tariff articles are here for good. Liberals may see them as providing inexpensive seats and service for the common people. Conservatives may see them as protecting capital investments by denying new entrants a strong economic foothold.

The world's strong airlines should continue. A few new entrants - mainly from emerging nations with weaker markets - will appear, but survival is likely to require a strong political base. Nothing in liberal air agreements produces a crying need for new airlines, nor for new gateways and certainly not for the new tariff articles. The demise of Braniff, Eastern, Laker and Pan Am, among others, led to few new international carriers.

Table A - Designation history
Designation article type	1996-number	-1975 percent	1986- number	-1995 percent
Multiple	216	51%	227	52%
Dual	0	0%	16	4%
Variable	0	0%	6	1%
Single	181	43%	158	36%
Specified*	26	6%	27	6%
TOTAL	423	100%	434	100%
NOTE: *Usually each party specified only air carrier per route, but some identified routes with multiple air carriers

Table B - Capacity article history
Tariff article type	1996-number	-1975 percent	1986- number	-1995 percent
Free determination	27	4%	37	8%
Bermuda	161	28%	63	14%
Predetermination	312	55%	269	62%
Other capacity	37	7%	31	7%
No Capacity	33	6%	37	8%
TOTAL	567	100%	437	100%

Table C - Tariff article
Tariff article type	1996-number	-1975 percent	1986- number	-1995 percent
No Tariff	27	1%	36	1%
Dual approval	161	99%	310	42%
Limited disapproval	312	0%	421	57%
TOTAL	399	100%	737	100%

Table D - Current gateway access by route
Number of gateways	1996-number	-1975 percent	1986- number	-1995 percent
Single	764	72.3%	731	60.5%
Dual	129	12.2%	163	13.5%
Three	37	3.5%	64	5.3%
Four	11	1.0%	14	1.2%
Five	4	0.4%	6	0.5%
Six-ten	5	0.5%	25	2.1%
Over ten	2	0.2%	6	0.5%
All specific routes	952	90.2%	1009	83.5%
Multiple**	80	7.6%	180	14.9%
Multiple implied	24	2.3%	20	1.7%
Non-specific routes	104	9.8%	200	16.5%
TOTAL	1056	100%	1209	100%
Notes: *Number not specified, such as "points in" All article dates are taken at time of entry/singing. Gateway access at time of entry into force. The Data in the tables above should not be compared direct. All figures are from the Aero-Accords Treaties Database.

Source: Airline Business