1. LIBERALISATION : Past Experience and Future Steps
Montreal March 2003
LIBERALISATION : Past Experience and Future Steps
Professor Rigas Doganis
Rigas Doganis & Associates
Visiting Professor, Cranfield University
Aviation in Transition:
Challenges & Opportunities of Liberalisation

2. SUPPLY CONDITIONS IN TRADITIONAL BILATERALISM
Exhibit 1
SUPPLY CONDITIONS IN TRADITIONAL BILATERALISM
THE “BILATERAL BONDS”
MARKET ENTRY or ACCESS
Controlled by
TRAFFIC RIGHTS
- points served
- 3rd/4th or 5th freedoms
- No 7th 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
CHAPTER 11 (in US)
OUTPUT (i.e. capacity)
ASA capacity sharing/controls
Inter-airline pooling agreements
PRICE
IATA tariffs conference
Inter-airline agreements

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

4. 1: “Open Markets” Phase, 1978-1991
Exhibit 3
1: “Open Markets” Phase,
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. TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPARED
Exhibit 4
TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPARED
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
*While US bilaterals gave US airlines rights from any point in USA, foreign airlines restricted to a handful of US points

6. TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPARED
Exhibit 4 (cont’d)
TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPARED
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)
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
UK – SINGAPORE BILATERAL July (example of “Open Market” ASA)
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
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. 2: Towards “Open Skies”, 1991-2003
Exhibit 6
2: Towards “Open Skies”,
US “Open Skies” Bilaterals (after 1991)
European Third Package (Jan 1993)
 Regional Initiatives
e.g. Yamoussoukro II (1999)
APEC (2000)
ECOSUR

9. Exhibit 7
NEW US “OPEN SKIES” BILATERALS AFTER 1991 (almost 60* signed by end 2002)
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. Exhibit 8
EUROPEAN UNION’S THIRD AVIATION PACKAGE from 1st January 1993 – completed April 1997
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
US ‘Open Market’ and post-1991 ‘Open Skies’ Air Services Agreements
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*
Source: Rigas Doganis ‘The Airline Business in the 21st Century’, Routledge 2001

12. What ‘Open Skies’ does not do
Exhibit 10
What ‘Open Skies’ does not do
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. Liberalisation has been spreading
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. Liberalisation has not improved profitability
Exhibit 12
Liberalisation has not improved profitability
ICAO World’s Airlines: Profit as a % of Total Revenue

15. To Improve International Airline Profitability Need to:
Exhibit 13
To Improve International Airline Profitability Need 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
DRAWBACKS OF NATIONALITY RULE
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. Previous action through ICAO
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. NATIONALITY/OWNERSHIP RULE BY-PASSED
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
Governments may choose to ignore ownership issue
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
Nationality rule could be progressively abandoned
 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
OUTSTANDING REGULATORY ISSUES
Relaxing ownership rules
Allowing domestic cabotage in major markets
Harmonising competition rules as alliances expand and/or airlines merge/consolidate

22. Tackle inherent over-capacity Rethink the full service business model
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. The Airline Business in the 21st Century Rigas Doganis
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