The Economic Impact of Air Service Liberalization Summary of the Results of Two Studies Intro to IVC Main offices in Washington, Boston, Vancouver, the U.K. Chief Economist Mike Tretheway led these studies. The first was published in June 2006, Boeing, ACI-NA, Air Transport Action Group, European-American Business Council, GE, IATA, the Pacific Asia Travel Association, Pratt & Whitney, US-ASEAN Business Council, the U.S. Chamber of Commerce and the World Travel & Tourism Council. The updated study was published 2 years ago, in June 2015. This 2015 update was sponsored by Boeing, GE, the Aerospace Industries Association (AIA), FedEx, the World Travel and Tourism Council, the National Association of Manufacturers (NAM), and ACI EUROPE (Airports Council International).

2006 Study Found extensive and significant evidence in support of the “conventional wisdom” that air service liberalization generates significant economic opportunities for consumers, shippers, and others. Restrictive ASAs stifle travel, tourism, business, economic growth and job creation Traffic grew much faster after liberalized agreement than before Typically averaged 12-35% with cases of 100% Why was this undertaken?

2006 Study – Case Studies While econometric findings are a useful scientific tool, interpreting them is more powerful when complemented with case studies EU 1993 1993-2004 growth rate doubled 1.4 mn person years employment US-UK 1995 Some existing routes saw traffic double (ORD-LON) 9 routes to 17 Malaysia-Thailand 37% higher growth due to liberalization of routes, which also allowed new LCC entry

2015 Updated Study The 2006 study had found substantial gains, but nearly 10 years had passed, yielding more evidence and data on the impacts. Debate had renewed as to whether liberalization creates benefits, whether they had been exhausted, or whether they turned negative. Objectives for this study: Validate previous results Investigate whether liberalization gains have changed In 2015, IVC re-examined the impact of liberalization. With an additional 10 years of experience, data, and academic papers – and with some in the industry beginning to question the underlying benefits, we believed it was time to see if the benefits still existed or had been exhausted. Objectives: Validate previous results Test whether the gains from liberalization have changed in past decade Three key parts to the study approach 1 .Literature Review: What have other researchers found in recent years? Are they any general conclusions? 2. Estimate the benefits from liberalization, Our original study used data from 2005 Data is for traffic volumes for nation pairs. We use nation pairs, as that is the relevant measure for questions about bilateral air service agreements between nation. We added data for 2012 -- The most recent year for which all the data we needed was available -- Top 1000 nation pairs We believe the focus on changes at the nation-pair level is appropriate – the ASA are between governments, not points of service – and inherently conservative. 3. Case Studies: Complement the econometric findings with historical and forward looking case studies

Updated Empirical Findings on the Gains from Liberalization Key Results Liberalization increased traffic between nations by 16% This is virtually identical to the 2005 results The research validated the previous findings Globally, if all markets had been fully liberalized: 500 million more passengers Full liberalization would have increased employment by 1.4 million Including supplier industries and aviation-dependent tourism, full liberalization would have added another 9 million jobs Began with review of peer-reviewed academic literature – considerably more since the prior study was published, adding data on markets other than the U.S. Key results: Almost uniform in finding liberalization produces major benefits for travelers and aviation dependent industries Fares reduced 15-35% Traffic increases 18-75% Wider economic benefits to air transport-dependent industries and nat’l productivity NO EMPIRICAL FINDINGS OF NEGATIVE EFFECTS. Emphasis on EMPIRICAL Analysis controls for whether ASA is restrictive or liberal Technical: We used a “reduced form” equation, where quantity (traffic) is the dependent variable We estimate by OLS, controls for GDP, distance, regional differences There is some heteroskedasticity, but controlling for it produces same magnitude for results We used data for 2005 (from prior study) and 2012 – the most recent available at the time The results from the 2015 study validated and reinforced the earlier findings. The effect was 3% smaller than that found in 2006, but that difference is not statistically significant.

Case Study: ASEAN Example of progressive liberalization 2008, restrictions removed on 3rd/4th freedoms between capital cities 2011, full liberalization on 5ths between capital cities Traffic increased over 115% from 2005-2012 Growth following the ASEAN-SAM agreement was significantly faster than prior to the agreement: 13% vs. 8% LCCs led the growth during 2009-2012: flag carrier grew by 6%, LCCs by 22% Growth was greater in secondary markets. The 2015 report re-examined the case studies from the 2006 report and found that the findings were still valid The 2015 report also expanded the number of case studies of passenger markets: ASEAN U.S. – Japan India’s domestic market The 2015 report also illustrated the importance of liberalizing 5th and 7th freedoms, so it included an example of air cargo services Most of the empirical research has focused on passenger’s airfares as it was the primary focus of deregulation. However, air cargo is a critically important aspect of globalized economies. It represents an estimated 1% of the volume (tonnage) shipped but 35% of the value.

Case Study: U.S. - Japan Between 2000 and 2009, total US-Japan traffic dropped by nearly 5 million, or 33 percent. JAL was failing financially; announced restructuring in Jan. 2010. It lost 2.5 million pax to the U.S. (50%) 2010 Agreement created opportunities for new markets to be served Despite remaining slot constraints and a global recession: 7 new non-stop routes Frequency increased by 60 flights per week Traffic rebounded to the highest level in 5 years

Role of 5th & 7th Freedoms Supporting Air Freight Cargo airlines have used Open Skies 5th and 7th freedoms to open new hubs, decrease the cost of delivery, improve supply chain performance, and enhance global trade. Hubs include: UPS – Cologne, Shanghai, Hong Kong FedEx – Paris, Kansai, Guangzhou, and Dubai DHL – Bahrain & 4 in Asia Link markets around the globe to enable businesses to expand their product and service offerings more broadly

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