liberalisation : past experience and future steps

© 2003 Professor R Doganis© 2003 Professor R Doganis

LIBERALISATION : LIBERALISATION : Past Experience and Future Steps Past Experience and Future Steps

Professor Rigas DoganisProfessor Rigas DoganisRigas Doganis & AssociatesRigas Doganis & Associates

Visiting Professor, Cranfield UniversityVisiting Professor, Cranfield University

Aviation in Transition: Challenges & Opportunities of Liberalisation

Montreal 22-23 March 2003


SUPPLY CONDITIONS IN TRADITIONAL SUPPLY CONDITIONS IN TRADITIONAL BILATERALISMBILATERALISM

Exhibit 1Exhibit 1

THE “BILATERAL BONDS”THE “BILATERAL BONDS”

MARKET ENTRY or MARKET ENTRY or ACCESSACCESS

Controlled Controlled byby

TRAFFIC RIGHTSTRAFFIC RIGHTS - points served- points served - 3- 3rdrd/4/4thth or 5 or 5thth freedoms freedoms - No 7- No 7thth freedom freedom - No domestic cabotage- No domestic cabotage - No charter rights- No charter rightsNATIONALITY RULENATIONALITY RULEDESIGNATIONDESIGNATION - Normally single or double only- Normally single or double only - Most states only have one airline- Most states only have one airline

Exit Exit difficultdifficult STATE SUBSIDIESSTATE SUBSIDIESNATIONALITY RULENATIONALITY RULECHAPTER 11 (in US)CHAPTER 11 (in US)

OUTPUT (i.e. capacity)OUTPUT (i.e. capacity) Controlled byControlled by ASA capacity sharing/controlsASA capacity sharing/controlsInter-airline pooling agreementsInter-airline pooling agreements

PRICEPRICE Controlled byControlled by IATA tariffs conferenceIATA tariffs conferenceInter-airline agreementsInter-airline agreements


The two phases of The two phases of post-1978 liberalisationpost-1978 liberalisation

1.1. ““OPEN MARKETS” PHASE OPEN MARKETS” PHASE

1978-19911978-1991

2.2. TOWARDS “OPEN SKIES” TOWARDS “OPEN SKIES”

After 1991After 1991

Exhibit 2Exhibit 2


Exhibit 3Exhibit 3

1: “Open Markets” Phase, 1: “Open Markets” Phase,

1978-19911978-1991

New liberal US bilaterals (after 1977)New liberal US bilaterals (after 1977)

Liberalised intra-European bilaterals Liberalised intra-European bilaterals (from 1984)(from 1984)

Two European liberalisation packages Two European liberalisation packages (1987 and 1990)(1987 and 1990)

In Asia national regulations relaxed: In Asia national regulations relaxed: ANA, Asiana, Eva Air fly internationallyANA, Asiana, Eva Air fly internationally


TRADITIONAL AND POST-1978 ‘OPEN MARKET’ TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPAREDBILATERALS COMPARED

Exhibit 4Exhibit 4

TraditionalTraditional New ‘open market’ bilateralsNew ‘open market’ bilaterals

MARKET ACCESSMARKET ACCESS Only to points specifiedOnly to points specified IncreasedIncreased number of pointsnumber of points or or open accessopen access

Limited Fifth Freedoms Limited Fifth Freedoms granted – more in US granted – more in US bilateralsbilaterals

Generally more Fifth FreedomsGenerally more Fifth Freedoms, , especially in US bilateralsespecially in US bilaterals

Charter rights not Charter rights not includedincluded

Charters includedCharters included

DESIGNATIONDESIGNATION Single – some multiple in Single – some multiple in US bilateralsUS bilaterals

MultipleMultiple

Airflines ‘substantially owned and effectively controlled’ by Airflines ‘substantially owned and effectively controlled’ by own nationalsown nationals

*While US bilaterals gave US airlines rights from any point in USA, *While US bilaterals gave US airlines rights from any point in USA, foreign airlines restricted to a handful of US pointsforeign airlines restricted to a handful of US points


TRADITIONAL AND POST-1978 ‘OPEN MARKET’ TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPAREDBILATERALS COMPARED

Exhibit 4 (cont’d)Exhibit 4 (cont’d)

TraditionalTraditional ““Open Market”Open Market”

CAPACITYCAPACITY Capacity agreed or Capacity agreed or shared 50:50shared 50:50

No capacity/frequency No capacity/frequency controls in liberals, but controls in liberals, but subject to reviewsubject to review

No frequency or No frequency or capacity controlscapacity controls

TARIFFSTARIFFS Double approval by Double approval by both governmentsboth governments

To be agreed using To be agreed using IATA proceduresIATA procedures

Double disapprovalDouble disapproval

IATA tariffs often IATA tariffs often flouted (especially in flouted (especially in Asia)Asia)

Source: Rigas Doganis, ‘Flying Off Course: the Economics of International Source: Rigas Doganis, ‘Flying Off Course: the Economics of International Airlines’, Third Edition, Routledge 2002Airlines’, Third Edition, Routledge 2002


UK – SINGAPORE BILATERAL July 1989 UK – SINGAPORE BILATERAL July 1989 (example of “Open Market” ASA)(example of “Open Market” ASA)

Multiple designationMultiple designation Double disapproval on faresDouble disapproval on fares Capacity controlled toCapacity controlled to

two daily to London (for each country)two daily to London (for each country)

three/week to Manchester (for each country)three/week to Manchester (for each country)

i.e. 17 per week by 1993-94i.e. 17 per week by 1993-94

then to 21 week as traffic increasesthen to 21 week as traffic increases Singapore full 5th freedom to London but not beyondSingapore full 5th freedom to London but not beyond UK may hub in SingaporeUK may hub in Singapore

up to 20 x 747 weeklyup to 20 x 747 weekly

or 50 smaller aircraftor 50 smaller aircraft Increase frequencies Singapore – Hong KongIncrease frequencies Singapore – Hong Kong

Exhibit 5Exhibit 5


2: Towards “Open Skies”, 2: Towards “Open Skies”, 1991-20031991-2003

US “Open Skies” Bilaterals (after 1991)US “Open Skies” Bilaterals (after 1991)

European Third Package (Jan 1993)European Third Package (Jan 1993)

Regional InitiativesRegional Initiatives e.g. Yamoussoukro II (1999)e.g. Yamoussoukro II (1999)

APEC (2000)APEC (2000)

ECOSURECOSUR

Exhibit 6Exhibit 6


NEW US “OPEN SKIES” BILATERALSNEW US “OPEN SKIES” BILATERALS AFTER AFTER 1991 1991(almost 60* signed by end 2002)(almost 60* signed by end 2002)

Free pricing for passengers and cargoFree pricing for passengers and cargo

No capacity or routing restrictionsNo capacity or routing restrictions

Access to any point in each countryAccess to any point in each country

Unlimited fifth Freedom rightsUnlimited fifth Freedom rights

Open code-sharing opportunities with third countries having similar Open code-sharing opportunities with third countries having similar rightsrights

* But only 19 involve competitive markets* But only 19 involve competitive markets

e.g. Netherlands-USA (1992) or Singapore-US (1997) but not e.g. Netherlands-USA (1992) or Singapore-US (1997) but not with with UK or JapanUK or Japan

Exhibit 7Exhibit 7


EUROPEAN UNION’S THIRD AVIATION PACKAGEEUROPEAN UNION’S THIRD AVIATION PACKAGEfrom 1from 1stst January 1993 – completed April 1997 January 1993 – completed April 1997

Exhibit 8Exhibit 8

Free pricing regime for tariffsFree pricing regime for tariffs

• only “ex-post double disapproval” for fully flexible fareonly “ex-post double disapproval” for fully flexible fare

Open market accessOpen market access

• i.e. all EU airlines have rights to fly between any two EU pointsi.e. all EU airlines have rights to fly between any two EU points

Criteria for operators’ licences harmonizedCriteria for operators’ licences harmonized

• owners can be from any EU state, I.e. nationality rule owners can be from any EU state, I.e. nationality rule abandoned (e.g. Virgin Express in Belgium is UK owned)abandoned (e.g. Virgin Express in Belgium is UK owned)

Changes apply equally to scheduled and charterChanges apply equally to scheduled and charter


US ‘Open Market’ and post-1991 ‘Open Skies’ US ‘Open Market’ and post-1991 ‘Open Skies’ Air Services AgreementsAir Services Agreements

Exhibit 9Exhibit 9

1978-1991 Open Market bilaterals1978-1991 Open Market bilaterals Post-1991 Open Skies bilateralsPost-1991 Open Skies bilaterals

Market AccessMarket Access Named number of points in each state Named number of points in each state UnlimitedUnlimited

Unlimited Fifth FreedomUnlimited Fifth FreedomMany with unlimited Fifth FreedomMany with unlimited Fifth Freedom

Domestic Cabotage not allowedDomestic Cabotage not allowed

Seventh Freedom not grantedSeventh Freedom not granted

Open Charter AccessOpen Charter Access

DesignationDesignation MultipleMultiple

Substantial ownership and effective control by nationals of designating stateSubstantial ownership and effective control by nationals of designating state

CapacityCapacity No frequency or capacity controlNo frequency or capacity control

TariffsTariffs Double disapprovalDouble disapprovalFree PricingFree Pricing

Code-sharingCode-sharing Not part of bilateralNot part of bilateral Code-sharing permittedCode-sharing permitted**

Source: Rigas Doganis ‘The Airline Business in the 21Source: Rigas Doganis ‘The Airline Business in the 21stst Century’, Century’, Routledge 2001Routledge 2001


What ‘Open Skies’ does What ‘Open Skies’ does notnot do do

Traffic rightsTraffic rightsNo 7No 7thth freedom freedom

No domestic cabotageNo domestic cabotage Nationality/OwnershipNationality/Ownership

Still “substantial ownership and effective controlStill “substantial ownership and effective controlSome states do not allow over 25% of foreign Some states do not allow over 25% of foreign

ownership (e.g. US, Canada)ownership (e.g. US, Canada) Anti-competitive behaviourAnti-competitive behaviour

No provision for dealing with this uniformlyNo provision for dealing with this uniformly Protectionist measures continueProtectionist measures continue

State subsidies, Chapter II (US)State subsidies, Chapter II (US)Government traffic limited to national Government traffic limited to national carrier carrier (e.g. USA)(e.g. USA)US does not permit US carriers to wet lease from non-USUS does not permit US carriers to wet lease from non-US

Exhibit 10Exhibit 10


Liberalisation has been spreadingLiberalisation has been spreadingBUT:BUT:

* Most states have mix of air services agreements* Most states have mix of air services agreementsTraditional (most widespread)Traditional (most widespread)Open MarketOpen MarketOpen Skies (least common)Open Skies (least common)

* New Regulations spreading and becoming extra-territorial* New Regulations spreading and becoming extra-territorialCompetition rulesCompetition rulesMerger controls (In EU and US)Merger controls (In EU and US)Passenger rights (e.g. denied boarding compensation)Passenger rights (e.g. denied boarding compensation)Safety oversight (ICAO,KAO, FAA, EU)Safety oversight (ICAO,KAO, FAA, EU)Environmental rulesEnvironmental rules

AND HAS NOT IMPROVED PROFITABILITYAND HAS NOT IMPROVED PROFITABILITY



Liberalisation has not improved profitabilityLiberalisation has not improved profitability

-4

-3

-2

-1

0

1

2

3

4

5

1970 1975 1980 1985 1990 1995 2000

Percent

ICAO World’s Airlines: Profit as a % of Total Revenue



To Improve International Airline ProfitabilityTo Improve International Airline ProfitabilityNeed to:Need to:

Facilitate access to world-wide capital marketsFacilitate access to world-wide capital markets

Reduce debt finance – use more equity capitalReduce debt finance – use more equity capital

Limit over-capacity by:Limit over-capacity by:• Encouraging cross-border consolidationEncouraging cross-border consolidation• Allowing airlines to failAllowing airlines to fail• Control of capacity in thin marketsControl of capacity in thin markets

First step is to relax nationality ruleFirst step is to relax nationality rule



DRAWBACKS OF NATIONALITY RULEDRAWBACKS OF NATIONALITY RULE Denies airlines full access to capital marketsDenies airlines full access to capital markets

yet most airlines grossly undercapitalisedyet most airlines grossly undercapitalised

Limits cross-border mergers/airline consolidationLimits cross-border mergers/airline consolidation Prevents lower costs, integrated networksPrevents lower costs, integrated networks

Alliances are poor substitute and not sustainableAlliances are poor substitute and not sustainable

Distorts airline markets Distorts airline markets Limits market access of more dynamic airlinesLimits market access of more dynamic airlinesEncourages state subsidies/bailoutsEncourages state subsidies/bailoutsDiscourages designation by smaller states of foreign-owned Discourages designation by smaller states of foreign-owned carrierscarriers

Encourages smaller ‘flag’ carriers to overextend networkEncourages smaller ‘flag’ carriers to overextend network, , i.e. self-destruct (the Sabena syndrome)i.e. self-destruct (the Sabena syndrome)

Result: Result: Airline industry uniquely national not global – unlike all other sectorsAirline industry uniquely national not global – unlike all other sectors



Previous action through ICAOPrevious action through ICAO

1.1. ICAO Assembly (resolution A24 – 12) has ICAO Assembly (resolution A24 – 12) has accepted accepted ‘‘Community of Interest’Community of Interest’ concept. concept.

2.2. 1994 Air Transport Conference recommended:1994 Air Transport Conference recommended:

designate any airline substantially designate any airline substantially owned and effectively controlled by owned and effectively controlled by

nationals of any States parties to annationals of any States parties to anagreementagreement

3.3. 1997 Air Transport Regulation Panel (ATRP/9-4) 1997 Air Transport Regulation Panel (ATRP/9-4) recommended:recommended:

‘‘principle place of business and principle place of business and permanent residence plus strong link permanent residence plus strong link

with with designating state’designating state’



NATIONALITY/OWNERSHIP RULE BY-PASSEDNATIONALITY/OWNERSHIP RULE BY-PASSED

Airlines with multi-national ownership (e.g. SAS, Gulf Airways, Air Airlines with multi-national ownership (e.g. SAS, Gulf Airways, Air Afrique)Afrique)

““Community of Interest” concept urges states to accept designation by Community of Interest” concept urges states to accept designation by one developing state of an airline owned by another within same one developing state of an airline owned by another within same economic grouping (e.g. BWIA)economic grouping (e.g. BWIA)

Charter carriers Monarch (Swiss-owned) and Britannia (Canadian then Charter carriers Monarch (Swiss-owned) and Britannia (Canadian then German owned)German owned)

””Principal place of business concept” (used by Hong Kong in its ASAs)Principal place of business concept” (used by Hong Kong in its ASAs)

Abandoned for intra-EU services (3Abandoned for intra-EU services (3rdrd Package 1993) Package 1993)

i.e. Nationality rule not sacrosancti.e. Nationality rule not sacrosanct



Governments may choose to ignore Governments may choose to ignore ownership issueownership issue

Examples include:Examples include: Aerolineas ArgentinasAerolineas Argentinas (91% Spanish (91% Spanish

owned in 1991)owned in 1991) Sabena Sabena (49% owned but effectively controlled by (49% owned but effectively controlled by

Swissair)Swissair) Sri LankanSri Lankan (40% owned but effectively (40% owned but effectively

controlled controlled by Emirates)by Emirates) MaldivesMaldives has given its 3 has given its 3rdrd/4/4thth freedom freedom

rights to Sri Lankanrights to Sri Lankan

i.e. Nationality articles are permissivei.e. Nationality articles are permissive



Nationality rule could be Nationality rule could be progressively abandonedprogressively abandoned

Replaced with – “principle place of Replaced with – “principle place of business” or by “any Community carrier” business” or by “any Community carrier” (in Europe)(in Europe)

Action throughAction through European Union – European Court DecisionEuropean Union – European Court Decision - Enlargement (17 to 27 states)- Enlargement (17 to 27 states) ICAO 2003 ConferenceICAO 2003 Conference Bilaterally or regionallyBilaterally or regionally

e.g. APEC or Yamoussoukroe.g. APEC or Yamoussoukro or even TCAAor even TCAA



OUTSTANDING REGULATORY ISSUESOUTSTANDING REGULATORY ISSUES

Relaxing ownership rulesRelaxing ownership rules

Allowing domestic cabotage in major Allowing domestic cabotage in major marketsmarkets

Harmonising competition rules as Harmonising competition rules as alliances expand and/or airlines alliances expand and/or airlines merge/consolidatemerge/consolidate



Relaxing nationality rule will help but will Relaxing nationality rule will help but will not ensure long-term profitability if:not ensure long-term profitability if:

Real yields continue to declineReal yields continue to decline

Real costs do not decline fast enoughReal costs do not decline fast enough

Load factors too lowLoad factors too low

Need to:Need to:

Tackle inherent over-capacityTackle inherent over-capacity

Rethink the full service business modelRethink the full service business model



For more discussion of the airline industry’s problems and For more discussion of the airline industry’s problems and prospects see:prospects see:

The Airline Business in the 21The Airline Business in the 21stst Century Century

by by

Rigas DoganisRigas Doganis

PublishePublisher: Routledger: Routledge

Available fromAvailable from: Amazon.com or amazon.co.uk: Amazon.com or amazon.co.uk


liberalisation : past experience and future steps

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