Liberalisation: Breaking the bilateral web

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If every nation in the world had an air services agreement with every other nation, it would take about 12,500 bilateral agreements to blanket the globe. Now there are just over 4,000, but that is still enough to prompt IATA director general Giovanni Bisignani to lament: "The archaic nature of the current system is no longer relevant to, or useful for, the 21st century reality. The flags on the tail of our aircraft were meant as protection when airlines were primarily an extension of national policy." And, after racking up $50 billion in net losses over the last decade, airlines need to be in tune with the new reality.

Ever since the Chicago Convention in 1944, airlines have operated in what Jeffrey Shane, former US undersecretary of transportation calls "a closed market", where permission to fly is "granted route by route, carrier by carrier, pursuant to carefully calibrated, highly mercantilist bilaterals."

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Some hoped the EU/US Open Skies accord might usher in a new era. If other nations adopted it, the EU/US pact might expand and replace a growing number of bilateral agreements. Iceland and Norway have joined, but they are hardly the groundswell optimists hoped for. And now talks on a second stage deal are concluded, there seems even less chance for it to become a vehicle for liberalisation. On the key issue of airline ownership and control, both sides only agreed, without deadlines, to what the EU calls "a commitment to engage in a process".

This then puts the onus back on to the US Congress, which so far has shown no inclination to budge on airline ownership or control. It comes as no surprise then, that IATA would say this draft phase two accord "did not move us forward". Others note that keeping the lid on foreign investment will push more airlines toward more alliances, which will lead to more requests for anti-trust immunity.

The most that can be said for liberalising ownership and control is that the new accord permits a waiver of nationality if a European airline acquires a third country carrier and that country has an Open Skies pact with the USA. More immediately, the new accord takes the November deadline from phase one off the table - the Europeans have agreed not to rescind the advances gained in phase one, as they had reserved a right to do, even though phase two falls short of what they sought.

EU-US negotiators may have heeded the words of controversial 20th century US Bishop, James Pike, who said: "In our changes we should move like a caterpillar, part of which is stationary in every advance, not like the toad." But the unremarkable result raises the question of whether airlines can now look forward to anything except incremental gains. Must full liberalisation wait until the world's nations finally negotiate 12,500 Open Skies agreements? If there is a faster and better way, when and how will it happen?

For starters, there is no consensus on the best way to proceed. John Byerly, deputy assistant secretary for transportation affairs at the US State Department and a veteran negotiator of air services agreements, still believes in the bilateral system and is a strong advocate of Open Skies under it. "I think the United States stands first in the world in pushing the bilateral system to get maximum liberalisation through the over 90 Open Skies partners that we have," Byerly boasts. Sceptics note that the USA did not start pushing for liberalisation until after its own carriers had built a strong international presence, but the USA now seems committed. "We're actively thinking about this all the time," says Byerly.

Yet, even he acknowledges that the USA remains driven by what is best for Americans. "I wouldn't want to water down our Open Skies bilateral approach solely for the purpose of having a multilateral agreement," Byerly admits. "I don't think the trade-off would be in the interest of US consumers."

Byerly and Shane acknowledge the role of US anti-trust immunity in convincing other nations to accept Open Skies - Japan being the latest. Shane, who is now with Washington law firm Hogan & Hartson, and aviation lawyer Warren Dean, a partner at Thompson Coburn, recently stressed the importance of antitrust immunity: "The confluence of Open Skies agreements, alliances, and anti-trust immunity has spawned a fundamental reinvention of the global air transport industry."

The USA is not the only champion of Open Skies bilateral agreements. Chile, New Zealand and Singapore have also pushed for them, with varying degrees of success. If the EU is considered one nation for "bilateral" purposes, it too belongs in this group.

Even without Open Skies, the trend in conventional bilaterals is toward relaxed rules. ICAO statistics show in 1986-2006 the number of bilaterals allowing multiple carrier designation rose from 51% to 56%; the number that still allowed unilateral tariff disapproval dropped to 40%; the number restricting carriers to specified gateways dropped by half; and both sixth freedoms and third-party code-sharing gained recognition.

ICAO spotted these changes even earlier and pondered how it might boost this trend. At its 2003 Worldwide Air Transport Conference it resolved to "explore the feasibility and possible benefits of serving as a global marketplace", where it might offer facilities and expertise so that nations could meet and discuss air service deals.

An Idea Is Born

Yuanzheng Wang in ICAO's secretariat, proposed that ICAO invite countries to a four- or five-day "one-stop shop" where they could talk one-on-one with each other. Traditional bilateral negotiations often took multiple rounds to reach agreement, sometimes lasting months or even years, and negotiators had to travel to each others' countries for such talks, Wang explains. This was time-consuming and expensive, "and especially hard for developing countries with limited resources".

As the one who proposes an idea often ends up running it, Wang became manager for the ICAO Air Services Negotiation Conference, dubbed ICAN, held in Dubai in 2008. "Dubai was a test case," Wang notes. Twenty-seven governments agreed to come, mostly from the Middle East, Africa, Asia and Europe. ICAO encouraged attendees to schedule meetings in advance. That first ICAN proved successful beyond expectations. Byerly recalls: "The US government was something of a sceptic. We went. We saw it was functioning. We had informal conversations with lots of people. They were making progress."

ICAO's goal was not to keep score, but Wang says: "Dubai produced more than 20 arrangements, including some Open Skies deals. More importantly, the ability to meet many potential partners opened the door for future opportunities." ICAO decided to make this an annual event. Wang set up ICAN2009 in Istanbul, and 52 nations attended, resulting in more than 60 additional bilateral agreements, including more Open Skies.

"Participants said that they were surprised at how much they could accomplish in such a short time," says Wang. "Knowing that they had only a limited amount of time helped. Preparing for these meetings and sometimes exchanging drafts ahead of time also helped."

ICAN2010 is about to convene in Jamaica, where Wang hopes to see a large turnout, especially from Latin and Caribbean countries, who were largely absent from the first two events. "I think ICAN is contributing to liberalisation," Wang concludes. "It is mass-building. When you have enough countries or major aviation markets embrace liberalised agreements, you may achieve a critical mass to move toward multilateralism."

Starting in the 1990s, aviation officials began to acknowledge the need for a regime that might move air travel beyond bilateral agreements. A 1995 US Department of Transportation policy statement spoke of a possible multinational approach. The USA proposed a Multilateral Agreement on the Liberalization of International Air Transportation, which the USA, Brunei, Chile, New Zealand and Singapore signed in 2001. MALIAT was launched with much fanfare, but all its signatories were members of Asia-Pacific Economic Co-operation and already had Open Skies with each other. MALIAT remains open for others to join, but none have.

As Byerly notes, MALIAT is based on a full-fledged Open Skies regime: "The underlying challenge to the multilateral approach is finding the common denominator and keeping it from being too little." Law professor Brian Havel, director of DePaul University's International Aviation Law Institute in Chicago and author of Beyond Open Skies: A New Regime for International Aviation, says MALIAT "essentially stitched together the content of the individual bilateral open skies agreements and applied it multilaterally". Without more, he predicts: "The US bridge to multilateralism would be a bridge to nowhere."

Multilateral efforts seem more likely to succeed among regional groups that share common geography and views. The European Community is the poster child of such groups, even though it is the product of economic and political integration that did not start with aviation. Multilateral aviation in Europe stems from the November 2002 European Court of Justice ruling that brought an end to third-country bilateral agreements with individual European states.

Other regional groups have taken more modest steps. They include the Andean Pact (Open Skies among Colombia, Ecuador, Peru, and Bolivia), Mercosur's Fortaleza accord (Open Skies among secondary cities in Argentina, Bolivia, Brazil, Chile, Paraguay and Uruguay), the Yamoussukro Decision in Africa, the Single Aviation Market (reciprocal cabotage between Australia and New Zealand), and southeast Asia's ASEAN. A Pacific Islands Air Services Agreement and Single Caribbean Sky are still only proposals.

Eastern Promise

ASEAN holds the greatest promise of these regional groups. After some delay, ASEAN last year lifted all third and fourth freedom limits on flights between capital cities. Lee Yuen Hee, Singapore's deputy transport secretary, who negotiates air services agreements for Singapore, expects ASEAN to execute another multilateral agreement this year. This, he says, will "sustain the momentum of liberalisation". This new accord will allow fifth freedoms later this year and move to open skies by 2015. Lee explains this is "part of the region's vision to establish the ASEAN Economic Community by 2015".

Indonesia's recent request to delay Open Skies could change this schedule, but Andrew Herdman, director general of the Association of Asia Pacific Airlines says: "ASEAN is moving in the right direction. Third and fourth freedoms between capital cities are now in effect. On the rest of this roadmap agreement, implementation depends on how quickly each country ratifies. So we are moving at a patchy pace." Yet, he does not share the view of some that ASEAN's progress is too slow. "ASEAN is quite diverse," he notes. "Given that diversity, it has moved as fast as it can."

Lee views ASEAN's accords as "significant achievements for such a diverse group of nations that do not have many of the supporting features of an economic union such as the EU, nor the level of sophisticated development of the USA". ASEAN deserves credit for its progress, Lee maintains. "What European states took more than five decades to construct and are still fine-tuning, is being undertaken by ASEAN in less than half that time frame."

Herdman adds that ASEAN, unlike the EU, lacks authority to negotiate as a block or bind its members. Thus, ASEAN's current aviation talks with China are for "a framework agreement", he explains. Once that is concluded later this year, each ASEAN member will still need to sign its own bilateral with China. After China, Lee says, "ASEAN is also looking to commence negotiations with India on a similar air services agreement this year."

Even if ASEAN cannot bind its members, it is still the only regional group besides the EU to look outward. The rest focus solely on air rights among themselves. Herdman observes: "ASEAN is no longer just a southeast Asian organisation. The rest of Asia realises the value of engaging with ASEAN as a group."

Bypassing Chicago

Bilateral and multilateral agreements start from the premise that air services must be agreed between pairs or groups of countries. But what about a borderless pact that commits every signatory without any need for individual negotiations? That was the path not followed 66 years ago when world leaders rejected a global aviation treaty at the Chicago Convention. But two recent initiatives are steps in that direction.

The first is IATA's Agenda for Freedom, a set of policy principles signed last November by Chile, Malaysia, Panama, Singapore, Switzerland, the United Arab Emirates and the USA. Kuwait has since signed. Also endorsed by the EC, IATA says this document is now accepted by some 60% of global aviation. The agenda is based on three stated principles: freedom to access capital markets, freedom to do business and freedom to price services.

None of the signatories are bound by these principles, but they commit to reciprocally waive more restrictive clauses in their current bilateral agreements. Thus, the Agenda for Freedom might be seen as a way to liberalise market access, ownership and pricing more quickly than by amending the 4,000 bilateral agreements now in force around the world.

IATA's Bisignani predicts the agenda's influence will spread in two ways: "The first is by countries who have signed the policy principles, integrating them in bilateral agreements. We are already seeing this happen. The second is by more countries signing the declaration. The good news is that countries are knocking at our door. I cannot say which ones yet, but we expect to announce additional signatories at regular intervals during the year."

The second initiative that may bypass the bilateral system is a draft multilateral treaty to liberalise foreign investment in airlines. It would authorise nations that sign it to waive nationality clauses in their bilateral agreements. Circulated by the USA and now in its third draft, Byerly explains that it would not obligate a country to change its own laws on foreign ownership of airlines. Yet, the future of this draft remains uncertain. Byerly says: "We have to decide, and others have to decide, whether they now want to get behind this as an idea. We haven't made a decision."

Bisignani views IATA's agenda and this draft treaty as "compatible and complementary". The agenda, he says, "has the advantage of speed". The combination allows governments "to signal their intentions with Agenda for Freedom as they prepare the ground for the more formal US treaty". But Havel believes both share a common weakness.

"Assume the USA waives the nationality clause in its Open Skies agreement with Australia," he says. Then assume that Australia changes its laws, allowing Qantas to become majority foreign-owned. It can still fly to the USA, but if Japan does not waive its nationality clause, "Qantas would be denied lucrative routes into Japan". In short, until most nations waive the nationality clause in their bilateral agreements with Australia, Havel says, "the value of the US waiver is compromised."

Such an analysis underscores Byerly's view that there is no silver bullet. "I'm a little sceptical that we're going to see a multilateral liberalisation accord of global scope. We've still got a lot of work to do bilaterally." Still, innovators like Bisignani keep pushing. "The marketplace is driving important changes," he proclaims, and more governments are recognising a need to liberalise. Bisignani sees "movement" especially "in big markets".

Havel takes the longer view. "The various multilateral initiatives out there won't unravel bilateralism," he predicts. But they can contribute to cutting out some of its more archaic features. "Who knows?" he says. "Maybe these small efforts will lead to a shift in thinking about air services. I think it's clear now that there isn't just one road to a fully liberalised, global air transport market."

Read our 2009 outlook for liberalisation and the industry's push for greater freedom