LIBERALISATION : Past Experience and Future Steps

1. 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

2. Exhibit 1 SUPPLY CONDITIONS IN TRADITIONAL BILATERALISM

3. Exhibit 2 The two phases of post-1978 liberalisation • “OPEN MARKETS” PHASE 1978-1991 • TOWARDS “OPEN SKIES” After 1991

4. 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

5. Exhibit 4 TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPARED *While US bilaterals gave US airlines rights from any point in USA, foreign airlines restricted to a handful of US points

6. Exhibit 4 (cont’d) TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPARED Source: Rigas Doganis, ‘Flying Off Course: the Economics of International Airlines’, Third Edition, Routledge 2002

7. 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

8. 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) ECOSUR

9. 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

10. 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

11. 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

12. 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

13. Exhibit 11 Liberalisation has been spreading 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

14. Exhibit 12 Liberalisation has not improved profitability ICAO World’s Airlines: Profit as a % of Total Revenue

15. 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

16. 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

17. 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’

18. Exhibit 16 NATIONALITY/OWNERSHIP RULE BY-PASSED • 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

19. 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

20. 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

21. 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

22. 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

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