LIBERALISATION : Past Experience and Future Steps

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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
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SUPPLY CONDITIONS IN TRADITIONAL BILATERALISM
Exhibit 1
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The two phases of post-1978 liberalisation
Exhibit 2

• OPEN MARKETS PHASE
• 1978-1991
• TOWARDS OPEN SKIES
• After 1991

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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

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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
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TRADITIONAL AND POST-1978 OPEN MARKET
BILATERALS COMPARED
Exhibit 4 (contd)
Source Rigas Doganis, Flying Off Course the
Economics of International Airlines, Third
Edition, Routledge 2002
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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

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2 Towards Open Skies, 1991-2003
Exhibit 6

• ?US Open Skies Bilaterals (after 1991)
• European Third Package (Jan 1993)
• ? Regional Initiatives
• e.g. Yamoussoukro II (1999)
• APEC (2000)
• ECOSUR

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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

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EUROPEAN UNIONS 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

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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
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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

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Liberalisation has been spreading
Exhibit 11

• 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

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Liberalisation has not improved profitability
Exhibit 12
ICAO Worlds Airlines Profit as a of Total
Revenue
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To Improve International Airline
ProfitabilityNeed to
Exhibit 13

• 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

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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

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Previous action through ICAO
Exhibit 15

• 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

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NATIONALITY/OWNERSHIP RULE BY-PASSED
Exhibit 16

• 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

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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

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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

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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

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