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  1. 1. LIBERALISATION : Past Experience and Future Steps Professor Rigas Doganis Rigas Doganis & Associates Visiting Professor, Cranfield University Aviation in Transition: Challenges & Opportunities of Liberalisation Montreal 22-23 March 2003
  2. 2. SUPPLY CONDITIONS IN TRADITIONAL BILATERALISM Exhibit 1 THE “BILATERAL BONDS” MARKET ENTRY or ACCESS Controlled by TRAFFIC RIGHTS - points served - 3 rd /4 th or 5 th freedoms - No 7 th freedom - No domestic cabotage - No charter rights NATIONALITY RULE DESIGNATION - Normally single or double only - Most states only have one airline 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
  3. 3. The two phases of post-1978 liberalisation <ul><li>“ OPEN MARKETS” PHASE </li></ul><ul><ul><li>1978-1991 </li></ul></ul><ul><li>TOWARDS “OPEN SKIES” </li></ul><ul><ul><li>After 1991 </li></ul></ul>Exhibit 2
  4. 4. Exhibit 3 1: “Open Markets” Phase, 1978-1991 <ul><li>New liberal US bilaterals (after 1977) </li></ul><ul><li>Liberalised intra-European bilaterals (from 1984) </li></ul><ul><li>Two European liberalisation packages (1987 and 1990) </li></ul><ul><li>In Asia national regulations relaxed: ANA, Asiana, Eva Air fly internationally </li></ul>
  5. 5. TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPARED Exhibit 4 *While US bilaterals gave US airlines rights from any point in USA, foreign airlines restricted to a handful of US points Traditional New ‘open market’ bilaterals MARKET ACCESS Only to points specified Increased number of points or open access Limited Fifth Freedoms granted – more in US bilaterals Generally more Fifth Freedoms , especially in US bilaterals Charter rights not included Charters included DESIGNATION Single – some multiple in US bilaterals Multiple Airflines ‘substantially owned and effectively controlled’ by own nationals
  6. 6. TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPARED Exhibit 4 (cont’d) Source: Rigas Doganis, ‘Flying Off Course: the Economics of International Airlines’, Third Edition, Routledge 2002 Traditional “ Open Market” CAPACITY Capacity agreed or shared 50:50 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)
  7. 7. UK – SINGAPORE BILATERAL July 1989 (example of “Open Market” ASA) <ul><li>Multiple designation </li></ul><ul><li>Double disapproval on fares </li></ul><ul><li>Capacity controlled to </li></ul><ul><li>two daily to London (for each country) </li></ul><ul><li>three/week to Manchester (for each country) </li></ul><ul><li>i.e. 17 per week by 1993-94 </li></ul><ul><li>then to 21 week as traffic increases </li></ul><ul><li>Singapore full 5th freedom to London but not beyond </li></ul><ul><li>UK may hub in Singapore </li></ul><ul><li>up to 20 x 747 weekly </li></ul><ul><li>or 50 smaller aircraft </li></ul><ul><li>Increase frequencies Singapore – Hong Kong </li></ul>Exhibit 5
  8. 8. 2: Towards “Open Skies”, 1991-2003 <ul><li> US “Open Skies” Bilaterals (after 1991) </li></ul><ul><li>European Third Package (Jan 1993) </li></ul><ul><li> Regional Initiatives </li></ul><ul><ul><li> e.g. Yamoussoukro II (1999) </li></ul></ul><ul><ul><ul><ul><li>APEC (2000) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>ECOSUR </li></ul></ul></ul></ul>Exhibit 6
  9. 9. NEW US “OPEN SKIES” BILATERALS AFTER 1991 (almost 60* signed by end 2002) <ul><li>Free pricing for passengers and cargo </li></ul><ul><li>No capacity or routing restrictions </li></ul><ul><li>Access to any point in each country </li></ul><ul><li>Unlimited fifth Freedom rights </li></ul><ul><li>Open code-sharing opportunities with third countries having similar rights </li></ul><ul><li>* But only 19 involve competitive markets </li></ul><ul><li>e.g. Netherlands-USA (1992) or Singapore-US (1997) but not with UK or Japan </li></ul>Exhibit 7
  10. 10. EUROPEAN UNION’S THIRD AVIATION PACKAGE from 1 st January 1993 – completed April 1997 Exhibit 8 <ul><li>Free pricing regime for tariffs </li></ul><ul><ul><li>only “ex-post double disapproval” for fully flexible fare </li></ul></ul><ul><li>Open market access </li></ul><ul><ul><li>i.e. all EU airlines have rights to fly between any two EU points </li></ul></ul><ul><li>Criteria for operators’ licences harmonized </li></ul><ul><ul><li>owners can be from any EU state, I.e. nationality rule abandoned (e.g. Virgin Express in Belgium is UK owned) </li></ul></ul><ul><li>Changes apply equally to scheduled and charter </li></ul>
  11. 11. US ‘Open Market’ and post-1991 ‘Open Skies’ Air Services Agreements Exhibit 9 Source: Rigas Doganis ‘The Airline Business in the 21 st Century’, Routledge 2001 1978-1991 Open Market bilaterals Post-1991 Open Skies bilaterals Market Access Named number of points in each state Unlimited Unlimited Fifth Freedom Many with unlimited Fifth Freedom Domestic Cabotage not allowed Seventh Freedom not granted Open Charter Access Designation Multiple Substantial ownership and effective control by nationals of designating state Capacity No frequency or capacity control Tariffs Double disapproval Free Pricing Code-sharing Not part of bilateral Code-sharing permitted *
  12. 12. What ‘Open Skies’ does not do <ul><li>Traffic rights </li></ul><ul><ul><li>No 7 th freedom </li></ul></ul><ul><ul><li>No domestic cabotage </li></ul></ul><ul><li>Nationality/Ownership </li></ul><ul><ul><li>Still “substantial ownership and effective control </li></ul></ul><ul><ul><li>Some states do not allow over 25% of foreign ownership (e.g. US, Canada) </li></ul></ul><ul><li>Anti-competitive behaviour </li></ul><ul><ul><li>No provision for dealing with this uniformly </li></ul></ul><ul><li>Protectionist measures continue </li></ul><ul><li>State subsidies, Chapter II (US) </li></ul><ul><li>Government traffic limited to national carrier (e.g. USA) </li></ul><ul><li>US does not permit US carriers to wet lease from non-US </li></ul>Exhibit 10
  13. 13. Liberalisation has been spreading <ul><li>BUT: </li></ul><ul><li>* Most states have mix of air services agreements </li></ul><ul><ul><li>Traditional (most widespread) </li></ul></ul><ul><ul><li>Open Market </li></ul></ul><ul><ul><li>Open Skies (least common) </li></ul></ul><ul><li>* New Regulations spreading and becoming extra-territorial </li></ul><ul><ul><li>Competition rules </li></ul></ul><ul><ul><li>Merger controls (In EU and US) </li></ul></ul><ul><ul><li>Passenger rights (e.g. denied boarding compensation) </li></ul></ul><ul><ul><li>Safety oversight (ICAO,KAO, FAA, EU) </li></ul></ul><ul><ul><li>Environmental rules </li></ul></ul><ul><ul><li>AND HAS NOT IMPROVED PROFITABILITY </li></ul></ul>Exhibit 11
  14. 14. Liberalisation has not improved profitability ICAO World’s Airlines: Profit as a % of Total Revenue Exhibit 12
  15. 15. To Improve International Airline Profitability Need to: <ul><li>Facilitate access to world-wide capital markets </li></ul><ul><li>Reduce debt finance – use more equity capital </li></ul><ul><li>Limit over-capacity by: </li></ul><ul><ul><li>Encouraging cross-border consolidation </li></ul></ul><ul><ul><li>Allowing airlines to fail </li></ul></ul><ul><ul><li>Control of capacity in thin markets </li></ul></ul><ul><li>First step is to relax nationality rule </li></ul>Exhibit 13
  16. 16. DRAWBACKS OF NATIONALITY RULE <ul><li>Denies airlines full access to capital markets </li></ul><ul><li>yet most airlines grossly undercapitalised </li></ul><ul><li>Limits cross-border mergers/airline consolidation </li></ul><ul><li> Prevents lower costs, integrated networks </li></ul><ul><li>Alliances are poor substitute and not sustainable </li></ul><ul><li> Distorts airline markets </li></ul><ul><li>Limits market access of more dynamic airlines </li></ul><ul><li>Encourages state subsidies/bailouts </li></ul><ul><li>Discourages designation by smaller states of foreign-owned carriers </li></ul><ul><li>Encourages smaller ‘flag’ carriers to overextend network , </li></ul><ul><li>i.e. self-destruct (the Sabena syndrome) </li></ul><ul><li>Result: </li></ul><ul><li>Airline industry uniquely national not global – unlike all other sectors </li></ul>Exhibit 14
  17. 17. Previous action through ICAO <ul><li>ICAO Assembly (resolution A24 – 12) has accepted ‘ Community of Interest’ concept. </li></ul><ul><li>1994 Air Transport Conference recommended: </li></ul><ul><li> designate any airline substantially owned and effectively controlled by nationals of any States parties to an agreement </li></ul><ul><li>1997 Air Transport Regulation Panel (ATRP/9-4) recommended: </li></ul><ul><li>‘ principle place of business and permanent residence plus strong link with designating state’ </li></ul>Exhibit 15
  18. 18. NATIONALITY/OWNERSHIP RULE BY-PASSED <ul><li>Airlines with multi-national ownership (e.g. SAS, Gulf Airways, Air Afrique) </li></ul><ul><li> “ 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) </li></ul><ul><li> Charter carriers Monarch (Swiss-owned) and Britannia (Canadian then German owned) </li></ul><ul><li> ” Principal place of business concept” (used by Hong Kong in its ASAs) </li></ul><ul><li>Abandoned for intra-EU services (3 rd Package 1993) </li></ul><ul><li>i.e. Nationality rule not sacrosanct </li></ul>Exhibit 16
  19. 19. Governments may choose to ignore ownership issue <ul><li>Examples include: </li></ul><ul><li>Aerolineas Argentinas (91% Spanish owned in 1991) </li></ul><ul><li>Sabena (49% owned but effectively controlled by Swissair) </li></ul><ul><li>Sri Lankan (40% owned but effectively controlled by Emirates) </li></ul><ul><li>Maldives has given its 3 rd /4 th freedom rights to Sri Lankan </li></ul><ul><li>i.e. Nationality articles are permissive </li></ul>Exhibit 17
  20. 20. Nationality rule could be progressively abandoned <ul><li> Replaced with – “principle place of business” or by “any Community carrier” (in Europe) </li></ul><ul><li> Action through </li></ul><ul><ul><li>European Union – European Court Decision </li></ul></ul><ul><ul><li>- Enlargement (17 to 27 states) </li></ul></ul><ul><ul><li>ICAO 2003 Conference </li></ul></ul><ul><ul><li>Bilaterally or regionally </li></ul></ul><ul><ul><li>e.g. APEC or Yamoussoukro </li></ul></ul><ul><ul><ul><ul><ul><li>or even TCAA </li></ul></ul></ul></ul></ul>Exhibit 18
  21. 21. OUTSTANDING REGULATORY ISSUES <ul><li>Relaxing ownership rules </li></ul><ul><li>Allowing domestic cabotage in major markets </li></ul><ul><li>Harmonising competition rules as alliances expand and/or airlines merge/consolidate </li></ul>Exhibit 19
  22. 22. <ul><li>Relaxing nationality rule will help but will not ensure long-term profitability if: </li></ul><ul><li> Real yields continue to decline </li></ul><ul><ul><ul><li>Real costs do not decline fast enough </li></ul></ul></ul><ul><ul><ul><li>Load factors too low </li></ul></ul></ul><ul><li>Need to: </li></ul><ul><li>Tackle inherent over-capacity </li></ul><ul><li>Rethink the full service business model </li></ul>Exhibit 20
  23. 23. For more discussion of the airline industry’s problems and prospects see: The Airline Business in the 21 st Century by Rigas Doganis Publisher: Routledge Available from: or Exhibit 21