1. © 2003 Professor R Doganis 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. © 2003 Professor R Doganis SUPPLY CONDITIONS IN TRADITIONAL BILATERALISM Exhibit 1 THE “BILATERAL BONDS” MARKET ENTRY or ACCESS Controlled by TRAFFIC RIGHTS - points served - points served - 3 rd /4 th or 5 th freedoms - 3 rd /4 th or 5 th freedoms - No 7 th freedom - No 7 th freedom - No domestic cabotage - No domestic cabotage - No charter rights - No charter rights NATIONALITY RULE DESIGNATION - Normally single or double only - Normally single or double only - Most states only have one airline - 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

3. © 2003 Professor R Doganis The two phases of post-1978 liberalisation 1.“OPEN MARKETS” PHASE 1978-1991 1978-1991 2.TOWARDS “OPEN SKIES” After 1991 After 1991 Exhibit 2

4. © 2003 Professor R Doganis 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

5. © 2003 Professor R Doganis TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPARED Exhibit 4 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. © 2003 Professor R Doganis TRADITIONAL AND POST-1978 ‘OPEN MARKET’ BILATERALS COMPARED Exhibit 4 (cont’d) 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. © 2003 Professor R Doganis UK – SINGAPORE BILATERAL July 1989 (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 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 or 50 smaller aircraft  Increase frequencies Singapore – Hong Kong Exhibit 5

8. © 2003 Professor R Doganis 2: Towards “Open Skies”, 1991-2003  US “Open Skies” Bilaterals (after 1991)  European Third Package (Jan 1993)  Regional Initiatives e.g. Yamoussoukro II (1999) e.g. Yamoussoukro II (1999) APEC (2000) APEC (2000) ECOSUR ECOSUR Exhibit 6

9. © 2003 Professor R Doganis 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 Exhibit 7

10. © 2003 Professor R Doganis EUROPEAN UNION’S THIRD AVIATION PACKAGE from 1 st January 1993 – completed April 1997 Exhibit 8 Free pricing regime for tariffs only “ex-post double disapproval” for fully flexible fare 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 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) 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. © 2003 Professor R Doganis US ‘Open Market’ and post-1991 ‘Open Skies’ Air Services Agreements Exhibit 9 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 DesignationMultiple 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 21 st Century’, Routledge 2001

12. © 2003 Professor R Doganis What ‘Open Skies’ does not do  Traffic rights No 7 th 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 Exhibit 10

13. © 2003 Professor R Doganis 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 Exhibit 11

14. © 2003 Professor R Doganis Liberalisation has not improved profitability ICAO World’s Airlines: Profit as a % of Total Revenue Exhibit 12

15. © 2003 Professor R Doganis 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 Encouraging cross-border consolidation Allowing airlines to fail Allowing airlines to fail Control of capacity in thin markets Control of capacity in thin markets First step is to relax nationality rule Exhibit 13

16. © 2003 Professor R Doganis 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 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) i.e. self-destruct (the Sabena syndrome)Result: Airline industry uniquely national not global – unlike all other sectors Exhibit 14

17. © 2003 Professor R Doganis Previous action through ICAO 1.ICAO Assembly (resolution A24 – 12) has accepted ‘Community of Interest’ concept. 2.1994 Air Transport Conference recommended: designate any airline substantially owned and effectively controlled by nationals of any States parties to an agreement designate any airline substantially owned and effectively controlled by nationals of any States parties to an agreement 3.1997 Air Transport Regulation Panel (ATRP/9-4) recommended: ‘principle place of business and permanent residence plus strong link with designating state’ Exhibit 15

18. © 2003 Professor R Doganis 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 (3 rd Package 1993) i.e. Nationality rule not sacrosanct Exhibit 16

19. © 2003 Professor R Doganis 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 3 rd /4 th freedom rights to Sri Lankan i.e. Nationality articles are permissive Exhibit 17

20. © 2003 Professor R Doganis 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 European Union – European Court Decision - Enlargement (17 to 27 states) - Enlargement (17 to 27 states) ICAO 2003 Conference ICAO 2003 Conference Bilaterally or regionally Bilaterally or regionally e.g. APEC or Yamoussoukro or even TCAA or even TCAA Exhibit 18

21. © 2003 Professor R Doganis OUTSTANDING REGULATORY ISSUES  Relaxing ownership rules  Allowing domestic cabotage in major markets  Harmonising competition rules as alliances expand and/or airlines merge/consolidate Exhibit 19

22. © 2003 Professor R Doganis Relaxing nationality rule will help but will not ensure long-term profitability if: Real yields continue to decline 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 Exhibit 20

23. © 2003 Professor R Doganis For more discussion of the airline industry’s problems and prospects see: The Airline Business in the 21 st Century by Rigas Doganis Publishe r: Routledge Available from : Amazon.com or amazon.co.uk Exhibit 21