Journal of Air Transport Management Volume 2 Issue 1 1995 [Doi 10.1016_0969-6997(95)00009-z] Chris...

7/23/2019 Journal of Air Transport Management Volume 2 Issue 1 1995 [Doi 10.1016_0969-6997(95)00009-z] Chris Lyle -- The

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Journal of Air Transport Management Vol 2. NO I pp. 3-10 1995

Copyright 0 1995 Else&r Science Ltd

Printed in Great Britain. All rights reserved

0969-6997195 10.00 + .oO

0969-6997 95)00009-7

The future of international air

transport regulation

Chris Lyle1

Economics and Stat isti cs Branch, Int ernati onal Civ il Av iat ion Organizati on ICAO ), 1000

Sherbrook e St West, M ontr tal , Q ut bec, Canada H3A 2R2

The conclusions of the ICAO World-wide Air Transport Conference held from 23

November to 6 December 1994 provide an opportunity to reflect on the evolution of

the economic regulation of international air transport in the 50 years since the Chicago

Conference of 1944 to examine the underlying forces that are driving regulatory change

and to consider what aspects of international air transport may need to be regulated in

the future and through what mechanisms.

Keywords: regulation, liberalization, international air services agreements, bilateralism, multilateralism

The

evolution of regulatory structure

The Chicago Conference of 1944 was an ambitious

effort to achieve widespread consensus amongst

governments on how all aspects of international civil

aviation should be regulated. However, the funda-

mental product of the Conference, the Convention

on International Civil Aviation (usually referred to

as the Chicago Convention), while successfully

establishing the framework for rules, procedures

and responsibilities to regulate technical and safety

aspects of international flights, was not framed as a

vehicle for the economic regulation of these flights

(ICAO, 1980).

Nevertheless, the Convention does have some

implications for economic regulation. In particular,

Article 1 of the Convention formally recognizes that

every State has complete and exclusive sovereignty

over the airspace above its territory, which means

that an agreement or understanding of some kind

between two or more States is necessary for inter-

national commercial air transport to take place. This

fundamental principle is also reflected in Articles 6

and 7 of the Convention, which specify the require-

ment for permission or authorization by a State for

access to its airspace for scheduled services and for

cabotage operations respectively, and is relaxed

only in regard of certain aspects of non-scheduled

operations through Article 5. Certain other Articles

of the Convention refer to various aspects of

This article contains personal views of the author, which do not

necessarily reflect those of ICAO; some parts of the article were

included in a presentation to the Institute of Economic Affairs

Conference on Liberalization of Air Transport in Europe in

London on 14 November 1994.

economic regulation - for example, Article 15

relates to airport and similar charges - but the

Convention nowhere delineates the conditions for

commercial access to national airspace or indicates

how permission for such access should be given or

exchanged.

The reason for this omission was that the

Convention was to be accompanied by two multi-

national agreements developed by the Chicago

Conference for the regulation of commercial air

services. The first of these, the International Air

Services Transit Agreement, covering overflights

and technical stops (the first and second freedoms

of the air), was readily achieved and can be

regarded as relatively successful (ICAO, 1992a, pp

24); it remains in force today ratified by 100 States

(for comparison

the Chicago Convention is

currently ratified by 183 States). The second multi-

national agreement emerged in the form of the

International Air Transport Agreement (the five

freedoms

agreement),

which, however, never

achieved critical mass, and despite various propos-

als over the years to revive or amend it, has long

been a dead letter (ICAO, 1992a, pp 4-7). The

Agreement came into force for 19 States, eight of

which subsequently denounced it; it does nominally

remain in force today for the remaining 11 States.

Even during the Chicago Conference, the general

acceptability of the International Air Transport (or

any similar universal multilateral) Agreement was

perceived as facing formidable implementation

barriers, and the Conference consequently drew up

a Standard Form of Agreement for Provisional Air

Routes,

which, although in theory intended to

cover a transitional period until the Transport

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The future of international air transport regulati on: C Ly le

Agreement came into effect, opened the door for

the development of bilateral air services agreements

(US Government Printing Office, 1945). In 1946, a

prototypical bilateral agreement drawn up in

Bermuda (United Nations, 1947)2 between the two

parties that had led the arguments for the two major

conflicting philosophical viewpoints in Chicago,

namely the UK and the USA, paved the way for the

development of the network of nearly 3000 bilateral

agreements in place today.

In recent years, however, there has been some

diminution of the role of bilateral agreements at the

regional level, notably within the European Union

and the wider European Economic Area, where

common international air transport regulation now

applies to 18 States, and within the Andean Pact,

where open skies applies amongst five States.

Nonetheless the bilateral agreement remains the

predominant regulatory structure for international

air transport regulation today.

The evolution of regulatory content

The content of international air transport regulation

has expanded considerably over the years. For many

years, it concerned solely hard rights, as described

below.

The International Air Transport Agreement and the

Standard Form relate essentially to traffic rights and

to traffic, route and operational rights respectively,

although each also has a provision regarding airport

and other facility charges (pursuant to Article 15 of the

Chicago Convention), and the Standard Form has a

provision regarding exemption of consumables (fuel,

spare parts, etc) from customs and inspection fees

(pursuant to Article 24 of the Convention). An inter-

esting feature of the Transport Agreement is that (like

the Transit Agreement) it applies to any air carrier

that has substantial ownership and effective control

vested in nationals of any State contracting to the

Agreement. An interesting feature of the Standard

Form is that it is predicated upon the refrain from

grant of exclusive rights of transit, non-traffic stop and

commercial entry by a State to any other State or

airline (that is, a most favoured nation provision).

By 1946, the UK-USA agreement included, in

addition to traffic, route and operational rights, an

air carrier tariff clause (requiring approval of filed

tariffs by both governments, so-called dual

approval), narrowed the substantial ownership and

effective control to nationals of either contracting

party, and made the grant of rights exclusive to the

two parties concerned.

By 1959, when the European Civil Aviation

Conference drew up a set of standard administrative

The Agreement is now colloquially referred to as Bermuda I.

having been superseded by a further bilateral air services agree-

ment between the United Kingdom and the United States in

1977, also signed in Bermuda and hence known as Bermuda II.

and technical clauses for use in bilateral agreements,

the first soft right had appeared in a number of

agreements (ICAO, 1962)3 governing currency

conversion and remittance of earnings. Over

succeeding years, there was an increasing prolifera-

tion of inclusion of soft rights in bilateral air

services agreements, not necessarily because they

were appropriate for inclusion in such agreements

but more likely because, at the time, other more

general vehicles for coverage of the subject matter

concerned (which was of a general doing business

or trading nature) were either not available or not

regarded as effective for air transport; use of the

existing bilateral air services agreement mechanism

was an easy option, which ensured reciprocal treat-

ment for a single economic sector.

Today, a significant number of air services agree-

ments include

inter liu

provisions concerning:

exchange of statistics, reciprocal exemption from

taxation on income of airlines, establishment of

offices and airline representation (including sales and

marketing provisions), local or convertible currency

sales by airlines, ground-handling arrangements,

computer reservation systems, currency conversion

and remittance by airlines, and other commercial

guidelines for airlines (ICAO, 1988, 1995).

Hence, in todays world, air services agreements

generally include not only provisions for hard

rights that are specific to air transport, but also an

extensive range of soft rights, which may be

equally applied to other service sectors or even to

traded commodities.

Driving forces for change

In recent years, both existing regulatory structures

and regulatory content have come under increasing

pressure for change from two primary driving

forces: commercial reality, and broadening objec-

tives of regulation.

Commercial reality is undoubtedly the more influ-

ential of these driving forces. The seeds of liberal-

ization of international scheduled air transport in

the modern era were probably sown with the intro-

duction of floating currency exchange rates in 1973,

which threw regimented fare structures into disar-

ray, a rapid increase in charter flights to meet latent

demand for visiting friends and relations (VFR)

and tourist traffic, and the introduction of the

advance purchase excursion (APEX) fare in 1975

by scheduled airlines as a competitive response. This

fare offered a greatly reduced price for a limited

number of seats on flights where forecasts indicated

that there would otherwise be capacity left unoccu-

pied, on condition of advance purchase and certain

limits of stay; it was the origin of what is today

called yield management. The rules and conditions

For example, Lebanon4witzerland (1953), Libya-UK (1953),

Germany-UK (1955).

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The fut ure of int ernat ional air t ransport egulati on: C Lyl e

attached to the APEX fare, while providing the

necessary control and direction of consumer

demand, were complex and in some respects virtu-

ally unenforceable (backdating a purchase date

being as easy as backdating a club membership for

an affinity group charter, with which the APEX fare

was designed to compete).

And not only was there subsequently an increas-

ing proliferation of fares, rules and conditions, a fare

itself became increasingly difficult to define with the

advent of marketing initiatives such as frequent

flyer programmes and other benefits associated with

carriage. So, following a period of increased but

largely futile tariff enforcement activity in an

atmosphere of less than enthusiastic support from

consumers, governments elected to take a less active

role in the regulation of fares. In a few cases this

was done pre-emptively by replacing the dual

approval concept in bilateral air services agree-

ments with country of origin, dual disapproval or

fare zone arrangements, and in some cases it was

a consequence of legal action (notably the

Nouvelles Front&es and Ahmed Saeed decisions

in Europe), but in most cases it was done by simply

tolerating so-called

illegal discounting (albeit

frequently because of inadequate resources to

devote to enforcement).

And as with so many other economic sectors,

where pricing leads, so inevitably follows the harsh

reality of fundamental regulatory issues such as

market access and capacity. Over the past several

years these issues have been brought to the

forefront of the international air transport arena by

air carriers in an increasingly competitive environ-

ment seeking cost reductions, new sources of financ-

ing and expansion of markets beyond traditional

boundaries. They lie behind the trends to transna-

tionalization and globalization.

Transnationalization

means airlines

going

offshore, locating parts of their operations outside

their national base. Some prominent examples are

American Airlines with its accounting and data

entry departments in Barbados, Cathay Pacific with

its data centre in Australia, Swissair with its

accounting department in India, and many airlines

(particularly smaller ones) contracting out mainte-

nance work to suppliers in foreign countries.

Globalization can take several forms. One form is

equity investment by one carrier in another, epito-

mized by the stakes by British Airways in Carib

Express, Qantas and USAir. Other forms, less

legally committing than equity investment but no

less influential and even more widespread, are

commercial, marketing and technical alliances. An

analysis of the trade press indicates that in the past

ten years some 200 such agreements have been

reported. Most involve joint operations and/or code

sharing, and most involve a major carrier as one of

the partners. Yet another, newly emerging, form of

globalization is franchising. The past two years have

seen the introduction of the first international

airline franchises outside North America: for

example, City Flyer Express, Maersk Air and

Loganair with British Airways; Cityjet with Virgin

Atlantic; and Contact Air with Lufthansa. So far

these are all within Europe but, while an innovation

for the air transport sector, international franchising

is common in many industries and could set a new

trend in the globalization of airlines.

Foreign ownership of equity in national air

carriers clearly has direct implications for air

services agreements, which tend to be predicated

upon protection of the interests of the national

carrier, while code sharing and franchising,

whatever the reason for their introduction, both

have similar regulatory implications: that is, bypass-

ing traditional market access (traffic right) limita-

tions in air services agreements.

And there are more general implications in the

fact that globalization is a trend that goes well

beyond air carriers. In the travel and tourism indus-

try alone, this is exemplified by:

computer reservation systems (down to six with

global reach and probably still falling);

tour operators and travel agents (American

Express and Thomas Cook, Carlson and

Wagonlit are topical examples);

hotel and resort chains (the majority purchase of

Meridien by Forte is a recent example, if unusual

in circumstance).

The point is made that international air transport

can no longer be considered from a purely national

standpoint or as an isolated sector. Commercial

reality is a driving force for regulatory change.

The second driving force mentioned above is the

widening recognition that the objectives of regula-

tion should be of a broad economic nature rather

than simply reflecting the interests of air carriers

and specifically national carriers. While the inter-

ests of carriers, and in particular the provision of a

healthy operating environment in which they can

achieve a reasonable rate of financial return, will

always remain a significant element in regulatory

objectives, there is increasing perception of a need

to reflect more adequately the interests of parties

such as airports, communities, regions and, by no

means least, consumers, as well as the contribution

of air transport to trade, tourism, employment and

economic development in general. Such broadened

objectives, aimed at maximizing net national

economic benefit, are slowly but surely gaining

prominence in international air regulatory negotia-

tions, and they are also one of the factors underly-

ing the trend to privatization of air carriers.

The subsuming of international air transport

regulation into broader economic trading arrange-

ments has also emphasized the broadening of

regulatory objectives. Prime examples of this are the

European Union and the Andean Pact, but others

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The future of i nternational air transport regulat ion: C Lyl e

are emerging: for example, by the Caribbean

Community, the Economic Community of Central

African States and the Southern African

Development Community, as well as by some of the

member States of the Association of South East

Asian Nations.

The outcome of the Uruguay Round of Trade

negotiations will have a broader effect. In April 1994,

consensus was reached on a package of trade agree-

ments that for the first time include services as well

as commodities (Uruguay Round, Trade Negotiations

Committee, 1994).

The new World Trade

Organization, which serves as the single institutional

framework for the General Agreement on Tariffs and

Trade, came into being on 1 January 1995 with 81

initial member States, and this number may rise to 128

when ratification procedures are complete. At present

the General Agreement on Trade in Services applies

to only three elements of air transport: aircraft repair

and maintenance,

selling

and marketing,

and

computer reservation systems. But the Agreement is

a multilateral vehicle for liberalization; it is not a

closed deal, and the scope of coverage of air transport

will be revisited some time within the next five years.

The ICAO Air Transport Conference

This was the background against which ICAO

convened its Air Transport Conference in

November 1994, exactly 50 years after the Chicago

Conference. The 1994 Conference, attended by

delegates from 138 States and 27 international

organizations, conducted the most comprehensive

examination of all facets of international air trans-

port regulation since the 194Os, including both hard

and soft rights issues. Following two weeks of

discussion, the Conference adopted a single, wide-

ranging recommendation, which provides a great

deal of insight as to the future of international air

transport regulation (ICAO, 1995).

The recommendation included, as a general goal:

. .gradual. progressive, orderly and safeguarded

change towards market access in international air

transport regulation...

The Conference recognized that each State will

determine its own path and its own pace of change,

on the basis of equality of opportunity and using

bilateral,

subregional,

regional

and/or global

avenues according to circumstances. Bearing in

mind the disparate levels of economic development

amongst States, it was felt that liberalized arrange-

ments at the subregional or regional level provide

valuable experience as a possible precursor to inter-

regional or global liberalization.

It was also recognized that, in view of the dispar-

ities in economic and competitive situations, there is

no prospect in the near future for a global multilat-

eral arrangement for the exchange of traffic rights

(that is, hard rights). On the other hand there was

sufficient consensus for the Conference to recom-

mend further work by ICAO on developing some

regulatory arrangements on doing business matters

(that is, soft rights) into more formalized arrange-

ments. Within this general context, some of the

more substantive conclusions of the Conference are

described below.

Safeguards/Safety net

One of the reasons why the Conference felt the time

was not yet ripe for a global regulatory arrangement

on hard rights was a general perception that there

were inadequate safeguards currently in place to

ensure the participation of all States in international

air transport, and to protect against inequity in scale

of operations and particularly against capacity or

price dumping or predation. The Conference was

presented with a proposed regulatory arrangement

on safeguards in the form of a Code of Conduct on

Healthy Sustained Competition and an associated

innovative

and

speedy

Dispute

Resolution

Mechanism. The Conference also considered a

proposal for a safety net through which a capacity

freeze could be imposed as an extraordinary

measure for a limited time period in response to a

rapid and significant decline in participation in a

particular country-pair market. The Conference

welcomed these proposals, but felt that they needed

further elaboration and greater emphasis on preven-

tion rather than ex

post facto

reaction. They are

therefore in the process of further development.

Ai r carrier ownership and control

In their air services agreements, States generally

retain the right to withhold, revoke or impose condi-

tions upon the operating permission that an air

carrier needs in order to operate the agreed

commercial air services if the carrier is not substan-

tially owned and effectively controlled by the desig-

nating State or its nationals. There are some

exceptions to these criteria, notably in provisions

related to air carriers created by intergovernmental

agreement, such as Air Afrique, Gulf Air and SAS.

Furthermore, a regulation of the Council of the

European Union, effective 1 January 1993 and

directly applicable in all member States of the

Union (European Communities, 1992): includes in

the criteria for defining a community air carrier a

requirement that such a carrier be majority owned

and effectively controlled by member States of the

Union and/or their nationals, and that its principal

place of business and, if any, its registered office be

located in a member State.

-The principles in the regulation currently apply not only to the

15 member States of the Union but also to three further States

in the European Economic Area (Iceland, Liechtenstein and

Norway), and negotiations are in hand for its extension to seven

additional States (Bulgaria, Czech Republic, Hungary. Poland.

Romania, Slovakia and Switzerland).

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The future of international air transport regulat ion: C Ly le

Recognizing the needs for capital and the trend to

transnational investment in carriers, the ICAO

Conference agreed by consensus on two alternatives

for broadened criteria beyond national ownership and

control for use of market access. The first alternative

is that an air carrier be substantially owned and effec-

tively controlled by nationals of any one or more

States that are parties to an agreement (whether bilat-

eral or multilateral) or by any one or more of the

parties themselves. The second alternative is that an

air carrier be substantially owned and effectively

controlled by nationals of one or more States that are

not necessarily party to the agreement concerned but

which are in a predefined group of States with a

community of interest. It was felt that each of these

alternatives would beneficially broaden ownership

and control provisions within limits that would

proscribe the development of flags of convenience.

State aids subsidies

The Conference felt that State aids per se were not

necessarily inappropriate, and did not

ipso facto

constitute unfair competitive practices, but rather

focused on the need to develop transparent and

effective measures to ensure that aids/subsidies to

certain air carriers do not adversely affect compet-

ing air carriers.

Competition laws

The Conference felt that, in the short term, States

should use the existing ICAO guidelines and/or

model clause on the application of competition laws

to avoid or resolve disputes that may arise when

applying such laws to international air transport

(ICAO, 1989). In the longer term, the safeguards

mechanisms described above might be used as the

primary means to deal with anti-competitive abuses.

Environmental protection

In essence, the Conference, acknowledging the

importance of and need for appropriate measures

for protection of the environment as it may be

affected by international air services, agreed to

emphasize non-discrimination of environmental

measures amongst States or against air transport,

and the role of ICAO as the global forum for devel-

oping environmental measures for international air

services (ICAO, 1993a,b).5

Taxation

The Conference here endorsed existing ICAO

policies6 by calling on parties to air services

agreements to undertake to reduce to the fullest

5The Organization develops certification Standards and

Recommended Practices for aircraft noise and emissions (Annex

16 to the Chicago Convention: Environmental Protection) and

has also agreed on operating restrictions, for example as regards

the phasing out of noisier (Chapter II) aircraft (Assembly

Resolution A28-3).

%pelled out in ICAO (1994).

practicable extent all forms of taxation on the sale

or use of international air transport by air, includ-

ing in particular certain specified taxes.

Doing business

The Conference called on parties to air services

agreements to consider agreed regulatory arrange-

ments on ground handling, currency conversion and

remittance of earnings, employment of non-national

personnel, sales and marketing, and computer reser-

vation systems (see Appendix). These regulatory

arrangements, possibly together with ones on user

charges and taxation (ICAO, 1992b), will form the

basis for the development by ICAO of more

formalized arrangements on soft rights as

requested by the Conference.

Impact on regulation

So what do the conclusions of the Air Transport

Conference and, more importantly, the underlying

driving forces for change mean for the future of

international air transport regulation? First, it seems

likely that different elements of regulatory

content

will be treated in different regulatory structures (the

differences lying both within the air transport sector,

for example between bilateral or multilateral agree-

ments, and also between the air transport sector and

more general trading or competition arrangements).

For example, so-called doing business or soft

rights, notably those just mentioned concerning

computer reservation systems and selling and

marketing, will be treated multilaterally in the

context of the World Trade Organization and ICAO,

which already has a Code of Conduct on the

Regulation and Operation of Computer Reservation

Systems (ICAO, 1992a, pp 3047): and with which

the new trade body is bound to work closely.

The treatment of hard rights, notably market

access through traffic, route and operational rights,

will continue to be covered by air services agree-

ments for the time being, but there may well be

some moves away from bilateralism in certain

circumstances, for example to intra-regional regula-

tion where the level of economic development of

the States concerned is similar and/or, as exempli-

fied earlier, where broader economic trading

arrangements already exist. The near-term

prospects for inter-regional regulation of hard

rights through air services agreements remain dim,

even between regions of comparable economic

fortune (where there is continuing perception of a

potential for inequitance allocation of rights

The Code is currently under review by the ICAO Council in the

light of experience (it was first adopted in 1991) and with a view

to determining the feasibility of developing it into a multilateral

agreement, possibly in conjunction or in complement with a

model computer reservation systems clause for insertion in bilat-

eral air services agreements.

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The futur e of int ernati onal air t ransport egulati on: C Lyl e

amongst sovereign states by a third party).8 On the

other hand, the power of trading interests should

not be underestimated, and the inclusion of hard

as well as further soft air transport rights in the

General Agreement on Trade in Services (GATS)

remains a distinct possibility. What would be the

consequences?

A special economic sector?

One obvious consequence could be a quantum leap

into multilateralism for the many States concerned.

Given the mandate of the World Trade Organi-

zation and the objectives of the GATS, this would

almost certainly be associated with liberalization,

and while some States might welcome liberalization,

others have made it clear that they are not prepared

to welcome liberalization, at least of hard rights,

without adequate safeguards.9

The key question to be answered for all States is:

to what extent is international air transport a special

economic sector thereby requiring special economic

treatment? Lobbyists from within the sector have

continually argued that air transport exhibits special

characteristics, without, however, clearly defining

these characteristics. On the other hand, some

academics and macro-economists are currently

arguing that air transport exhibits many characteris-

tics in common with other services or even with

many traded commodities, without, however, justi-

fying such broad assumptions.

Once the extent to which international air trans-

port is a special economic sector has been defined,

then the scope of those aspects of international air

transport needing special regulatory treatment can

also be determined, leaving the remaining aspects to

more generic laws concerning trade, competition,

environmental protection, etc.

Substantive aspects of international air transport

that are frequently mentioned from within the

sector as special are sovereignt y, pr esti ge, defence,

safety,

the

scale of investment requirements,

and

physical limitations on market access.

These aspects

are each briefly reviewed in turn below.

Sovereignty

The exclusive authority of a sovereign State over

operations within its national territory is universally

accepted under international law, and therefore

8A possible exception to this could be the phasing-in of hard

rights for specified categories of operations, such as all-cargo or

n&-scheduled, and/or for specified regional airports. -

91n the short term. the inclusion of hard rights in the GATS

Annex on Air Transport Services might rest6 in the filing of a

substantial number of exemptions to the most favoured nation

treatment required by Article II of the GATS (and continued

application of relevant provisions in bilateral or regional air

services agreements), but there are specific time limitations and

review and negotiation processes in the GATS aimed at removal

of all exemptions.

applies to any form of economic activity.

International air transport is unique only to the

extent that this basic principle is explicitly

reaffirmed in Article 1 of the Chicago Convention

(although even this relates to airspace

over

the terri-

tory). This explicit recognition, however, does

create an administrative or legal hurdle, in that it

necessitates the express consent of a State (includ-

ing conditions attached thereto) in order to enable

market access from another State.

Prestige

The days of a government running an airline to

show the national flag seemingly irrespective of the

operating result, a natural desire in particular of

States newly emerging from colonial status, seem to

be numbered. Nonetheless, the concept of showing

the flag should not be dismissed out of hand, since

it can act, for example, as an effective marketing

tool for a tourist destination country (the broader

net national economic benefit justification); it is,

however, of doubtful value as an argument for

defining international air transport as a special

sector.

Defence

One instance of a linkage between economic

regulation of air transport and defence require-

ments is the Civil Reserve Air Fleet (CRAF)

programme in the USA, whereby air carriers inter

al ia

enter into voluntary arrangements with the

Government regarding access to military charter

business in peacetime and delivery of aircraft and

crews to the military as may be required in times

of conflict. The Government compensates the

carriers accordingly; there is no maritime equiva-

lent.10 In most countries reliance for defence needs

is simply made on charter capability or general

legislation enabling

the commandeering of

resources. Lesser economic powers than the USA,

assuming that they have a perceived inadequacy of

military airlift capacity, may be concerned that

foreign ownership of carriers could limit their

ability to commandeer aircraft; if this is the case,

protection could be achieved by linking the

commandeering provision to registration of aircraft

rather than to the primary place of business of air

carriers and insisting on registration of some

aircraft locally (or in a defence partner State) as a

condition of foreign ownership. In any event, even

if there is a defence argument for national owner-

ship of air carriers or national registration of

aircraft, it is not an argument that air transport as

an activity is special or distinct from other modes

of transport or other economic sectors.

Wome implications of foreign investment in US carriers for the

CRAF are discussed in US General Accounting Office (1992) pp

50-59.

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The future of international air transport regulat ion: C Lyl e

Safety

The continuing implementation of the Annexes to

the Chicago Convention should in theory ensure

that safety is assured irrespective of commercial

considerations, including ownership and control of

air carriers (although it is noteworthy that, in the

light of uncertainty regarding the extent to which

certain Annex provisions are actually applied in

some countries, ICAO has recently found a need to

establish a safety oversight programme aimed at

assuring worldwide integrity). At the same time,

given the increased use of leased aircraft and the

seeking of tax havens by lessors for their aircraft, it

could be considered necessary at some point to link

the market access rights of air carriers to the States

of registry for the aircraft used by the carriers, these

States having the ultimate responsibility for the

safety of the aircraft concernedunder the Chicago

Convention. In this case, a further but perhaps more

controversial measure might be to define a list of

countries in which aircraft operated among the terri-

tories covered by an agreement may be registered.

This would seemingly constitute a special need; on

the other hand, the need could be met by separate

safety agreements rather than by necessarily includ-

ing the subject in air services agreements.

Scale of i nvestment requirement s

In the past it has been claimed that there is a partic-

ular barrier to freedom of entry into international

air transport imposed by the. fact that operating

capacity is available only in the form of large,

discrete and extremely capital-intensive blocks,

namely jet aircraft. However, there is now a wide

range of sizes of jet aircraft available to meet the

demands of a wide range of route densities and

distances, and aircraft ownership and long lead

times are in any case no longer a prerequisite for

market entry, thanks to the widespread introduction

of leasing and innovative forms of financing.

Physical li mit ati ons on market access

This is one, crucial, element on which the case for

or against special treatment for international air

transport has yet to be made from either the

sectoral or the external protagonists. The argument

for the special case might go as follows.

Coca-Cola can in theory be made available (and

is well on the way in practice to being available) in

every corner store in every small town and village

in the world. Telecommunication, banking and

insurance services can in theory be made available

in every household in the world. Even other

(surface) modes of transport services such as

automobiles and buses are almost always available

locally, and train stations are often not too far away.

Decision taken by the Council at the twelfth meeting of its

143rd Session, on 26 October 1994.

But international air transport is land-intensive

at point of entry and exit. Because land is a

precious and finite commodity there is, and always

will be, an insufficient coverage of airports (and

surrounding airspace) to enable the achievement

of total market access in international air trans-

port, which enjoys its pre-eminence in the long-

haul transportation of passengers owing to an

important defining advantage, namely a quantum

differential in speed (an advantage that has all but

eliminated the scheduled maritime transport of

passengers).

Hence international gateways or hubs with

relatively long runways will continue to be a defin-

ing constraint on air transport. Thus there are physi-

cal (and environmental) limitations on the supply of

infrastructure, which not only lead to potential for

local monopoly but also place limitations on the

supply of operations. There will therefore for the

foreseeable future be a need for special regulation

to ensure fair and equal opportunity of access to

this limited supply.

That is the hypothesis that seems to represent the

nub of the economic argument for international air

transport to continue to be treated as a special

sector. As indicated above, it remains to be proven,

and it is hoped that this article will spark some

analysis and debate on the issue.

Codicil

Even assuming that the case is proven that inter-

national air transport is not a special economic

sector in any way, it remains to be seen whether it

would be appropriate for its inclusion as regards

market access under the present provisions of the

General Agreement on Trade in Services, for two

primary reasons. First, the sector involves the

operations of aircraft and the carriage of passen-

gers not only to and from their country of regis-

tration or citizenship but over and between the

territories of other countries; it is consequently

particularly susceptible to the extra-territorial

application of national or regional competition law

(ICAO, 1989); this is where the embryo ICAO

Code of Conduct on Healthy Sustained

Competition could be of particular importance.

Second, the development of predatory behaviour

and dumping can occur within a very short time

frame in air transport in comparison with other

sectors, as investment in operating capacity is so

expensive, demand is highly fluctuating, and the

product is extremely perishable, with a conse-

quently low marginal cost per seat or per unit of

freight capacity in times of excess capacity. There

is some doubt that the general dispute settlement

procedures of the World Trade Organization

would be timely enough to respond to the demands

9


8/8

The future of international air transport regulat ion: C Lyl e

of international air transport for a fair competitive

operating environment.

References

European Communities (1992) Council Regulation (EEC) No

2407192 on Licensing of air carriers,

n Offi cial Journal of

European Communities, No L 24011

International Civil Aviation Organization (1962)

Handbook of

Admini strat iv e Clauses in Bil ateral Air Transport Agreements

Circular 63-AT/6


Convention on

internat ional Civ i l Aviat i on 6th edn, Dot 730016

International Civil Aviation Organization (1988 and 1995) Digest

of Bilateral Ai r Transport Agreements

Dot 9511 and

Supplement


Guidance

M aterial on the Avoi dance or Resolut ion of Confl icts over t he

Appli cati on of Competi t i on Law s to International Air Transport

Circular 215-AT/85

International Civil Aviation Organization (1992a)

Policy and

Guidance M aterial on the Regulat ion of International Air

Transport

Dot 9587

ppendix

International Civil Aviation Organization (1992b) Stat ements by

the Council to Contr acting States on Charges for Ai rport s and

Air Navigation Services 4th edn, Dot 908214

International Civil Aviation Organization (1993a)

Assembly

Resolut ions in Force (as of 8 October 1992) Dot 9602

International Civil Aviation Organization (1993b)

Environmental

Protection - Annex 16 to the Conventi on on International Civi l

Av iat ion

Volume I, 3rd edn, and Vol II , 2nd edn

International Civil Aviation Organization (1994) ICAOs Policies

on Taxation i n the Field of International Air Transport

Dot

8632-C/968

International Civil Aviation Organization (1995) Report of the

Worl d-w ide Air Transport Conference on International A ir

Transport Regulation: Present and Future Dot 9644

US General Accounting Office (1992)

Foreign Inv estments in US

Airl ines GAOIRCED-93-7

\

US Government Printing Office (1945)

Internat ional Civ i l

Av iat ion Conference - Final Act and Related Documents

United Nations (1947) Treaty Series (Volume 3) No 36, United

States of America and United Kingdom of Great Britain and

Northern Ireland, Agreement relating to air services, signed at

Bermuda on 11 February 1946

Uruguay Round, Trade Negotiations Committee (1994)

Final Act

of the Uruguay Round of M ult i l ateral Trade Negoti at i ons

Regulatory arrangements for doing business issues as

agreed by the 1994 ICAO Air Transport Conference

Ground handling

Parties would authorize foreign air carriers to:

(a) perform their own ground-handling services;

(b) handle another or other air carrier(s);

(c) join with others in forming a service providing

entity; and/or

(d) select among competing service providers (at

each designated carriers choice).

An air carrier would be permitted to choose freely

from among the alternatives available and to

combine or change its option, constrained only by

relevant safety and security considerations, and

(with the exception of self-handling in (a) above) by

the scale of airport operations being too small to

sustain competitive providers. Parties would always

be required to take the necessary measures to

ensure reasonable cost-based pricing and fair and

equal treatment for all designated air carriers.

Currency conversion and remittance of

earnings

Parties would agree that each air carrier may

convert and remit abroad to a carriers choice of

State, on demand, local revenues in excess of sums

locally disbursed with conversion and remittance

permitted promptly without restrictions, discrimina-

10

tion or taxation in respect thereof at the rate of

exchange applicable to transactions and remittance

as of the date of request.

Employment of non-national personnel

Each party would agree to accord the right for each

foreign designated air carrier to bring in and

maintain employees who perform managerial, sales,

technical and operational duties for the air carrier,

consistent with the laws and regulations of the

receiving State concerning entry and residence.

Sales and marketing

Each party would grant the right for each desig-

nated air carrier to be accorded national treatment

for the sale and marketing of international air

service products (directly or through agents or other

intermediaries of the carriers choice), including the

right to establish offices, both on-line and off-line.

Computer reservation systems

States would use the ICAO Code of Conduct on the

Regulation and Operation of Computer

Reservation Systems as their basis for regulating

computer reservation systems.

Journal of Air Transport Management Volume 2 Issue 1 1995 [Doi 10.1016_0969-6997(95)00009-z] Chris...

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