This document summarizes the evolution of aviation liberalization from traditional bilateral air services agreements to more open agreements like "Open Skies". It discusses how early liberalization in the 1978-1991 period led to more freedom around capacity, pricing, and designation of multiple airlines. However, liberalization has not improved airline profitability overall. The document argues that further progress requires relaxing ownership nationality rules to allow for more cross-border mergers and consolidation in order to reduce overcapacity and costs in the industry. Unresolved issues around domestic cabotage and competition rules with expanding alliances also need addressing for long term profitability.

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. 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

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. 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)

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 *

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

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: Amazon.com or amazon.co.uk Exhibit 21