CHRIS LYLE AT ICAO MONTREAL The debate on liberalisation no longer centres on whether it will happen, but on how. Should the air transport industry continue to steer its own path or hand over the process to the World Trade Organisation?

When the International Civil Aviation Organisation (ICAO) hosted its worldwide air transport conference five years ago, the benefits of global liberalisation were still open to debate. Yet, last December, when the US Department of Transportation (DoT) convened 93 countries for its ministerial conference in Chicago, not one of the nations represented questioned the basic credo of liberalisation and its benefits for air transport in particular, or for the economy in general.

This reflects a significant change in philosophy in a large part of the world. Not only have the much-trumpeted US open-skies bilateral agreements increased from 10 to 40 in number during the intervening years, but there are 20 non-US deals. Another eight multilateral intra-regional liberalisation agreements have been forged among groups of developing countries. So the fat-chewing in Chicago was not about whether to liberalise, but rather what to liberalise next - and how.

The European Commission (EC) has put the US multilateral open skies initiative on its back foot by promoting the concept of a Transatlantic Common Aviation Area (TCAA), which is also being championed by the Association of European Airlines.

The TCAA, which is modelled on the European Common Aviation Area, would harmonise, at the most liberal level, the present bilateral agreements between US and European Union (EU) member states on traffic rights, capacity, routings and pricing. This would presumably be welcomed by the USA, particularly as it would speed up full open skies with France and bring in the four other EU members with which the USA has no open-skies agreement: Greece, Ireland, Spain (of particular interest, given the American Airlines and British Airways equity in Iberia) and, most notably, the UK.

However, the TCAA proposal goes further. Ownership and control of carriers could be vested in nationals of any of the participating TCAA member states. The broader concept exists in the EU and some of the recent intra-regional agreements, but seems to be anathema to US carriers, as well as labour unions and Congress, due to sovereignty and defence concerns.

The USA maintains a Civil Reserve Air Fleet programme in which US carriers enter into voluntary arrangements with the government to provide aircraft and crews in times of crisis. Alternative approaches are feasible, through requisitioning powers, for example, but change would not be easy. One proposed alternative to the ownership and control provision - that a carrier be required to have its principal place of business on TCAA territory - would exacerbate the issue rather than provide any relief.

The related question of cabotage in the USA is sometimes cited as an important element of true open skies and has been propounded by Virgin chairman Sir Richard Branson, but with either communal ownership and control or the principal place of business concept, the cabotage issue would become moot (since Branson or any other European could set up or buy into a carrier operating within the USA and vice versa).

Supporters of the TCAA tried, but failed, to include reference to the proposal in the statement issued at the closing of the Chicago meeting. They did, however, receive a promise from DoT secretary Rodney Slater to take a serious look at the idea. In so doing, the DoT and the aviation community at large may need to study and resolve related issues. These include:

Competition law: while the basic approach on each side of the Atlantic is similar, the EU and the US Government recognise a need to establish convergence, at least in the context of air transport, on the application of EU competition rules and US antitrust laws. This is necessary to avoid conflicts over extraterritoriality and to get a grip on dealing with predatory behaviour and with airline alliances that stretch beyond the territories directly concerned. It would also be desirable to have a common approach to issues such as ground handling and charges for airport and air navigation services. Bankruptcy protection/state aid: as with competition law, there are differences on each side of the Atlantic. US Chapter 11 provisions, in particular, are perceived as giving too much advantage to potentially failing carriers. Slot allocation: this seems to be too specific an issue to be readily susceptible to generic competition law. At the same time, it is difficult to see a TCAA without provision for "fair and equal opportunity" of access to the limited supply of slots at, say, London Heathrow. The slot allocation provisions are fundamentally different in nature, with the issue of slot trading yet to be addressed head-on. Environmental protection: it is difficult to see how a level playing field could be created without a common understanding on environmental protection issues. Aside from the thorny issue of hushkitting, there is need for agreement, through ICAO, on other matters. These include more stringent aircraft certification standards; stricter operational procedures; potential phasing out of noisier or more polluting aircraft; and market-based options such as taxes (notably on fuel), charges and emissions trading. Consumer protection: the EU and the USA have aviation-specific consumer protection regulation, such as on computer reservation systems (CRS) and on denied-boarding compensation. In practice, most of the rules concerned are similar. The most contentious issue is the European predilection for prescribing the criteria to order flights on CRS screens. This is of lessening importance, however, in an era of varied travel-agent commission rates and diversification of distribution channels. Both product distribution and denied-boarding matters could perhaps eventually be covered by generic competition policy, although the widespread exemptions on CRS in the General Agreement on Trade in Services (GATS) annex on air transport services indicate otherwise. Fly America programme: the US Government maintains a policy in which all federal officials, recipients of federal funds and their contractors are generally required to travel on US carriers, a policy perceived as discriminatory by other governments and carriers. Institutional issues: the EC's long drawn-out mission to obtain comprehensive negotiating authority with the USA has yet to be authorised by the EU Council of Ministers, while the Commission's referral in 1998 of eight EU States to the European Court of Justice for concluding aviation agreements with the USA has yet to be resolved. Also, the TCAA as envisaged, would require mechanisms (and possibly a new body) for monitoring implementation and resolving disputes, which would mean some derogation of power by all states concerned and the EC. Controversies over hushkitting and the Hatch amendment (extraterritorial application by the USA of security measures) illustrate both the need for and the potential difficulty of establishing such mechanisms, as well as a requirement for the involvement of ICAO on many elements. Third parties: the TCAA proposal encompasses only the EU and the USA. In Chicago, several countries, developing and developed, expressed concern at the potentially exclusive bloc that might be created, with substantial implications for Canada and Mexico in particular. While the TCAA proposal provides for participation by additional countries, this would have to be on the terms already established by the bloc, which may by no means strike a common chord in other regions. The issues are worth elaboration, however, since most of them would need to be addressed in any inter-regional multilateral, not just one for the North Atlantic. Ownership and control provisions, in particular, seem archaic in an increasingly globalised world and their lifting could remove many of the inhibitions of developing countries over liberalisation beyond their regions, particularly if associated with some of the preferential regulatory measures for developing countries suggested by ICAO in 1998. Some controls may be needed to address concerns about flags of convenience.

The GATS route

Given the formidable range of hurdles - many of which are trade issues - the question arises as to whether liberalisation might be pursued more effectively through the World Trade Organisation (WTO) and the GATS. Although the WTO conference in Seattle failed to set the agenda for a new round of trade negotiations, a review of the annex on air transport services will be initiated this year.

The GATS is a liberalisation mechanism for all services, although air transport is unique for its exceptional and very limited treatment -Êat present, coverage is restricted to issues of selling and marketing, CRS and aircraft repair and maintenance. But the coming review has the objective of considering further application of the agreement to this sector.

Reluctance by the aviation community to subject the sector to the GATS process stems from the basic GATS principles of most favoured nation (MFN) and national treatment. MFN requires a GATS member to accord the service suppliers of other members treatment no less favourable than it accords service suppliers of any other country. In aviation terms, open skies to one would mean open skies to all.

National treatment requires a member to accord service suppliers of all other members treatment no less favourable than it accords its own service suppliers. This, for example, would require the end of the Fly America programme.

While a system of negotiated exemptions to MFN and commitments to market access and national treatment provides for transition, the objective of the GATS is a fully open marketplace in the shortest possible timeframe, and exemptions are time limited. This "big bang" approach to evolution is a major concern to the aviation community and has been cited as an inhibitor of air transport liberalisation.

Another fundamental reason for reluctance by the aviation community is the penchant of the WTO for cross-sectoral trading, particularly in the light of the lack of transparency of the working level process and the limited participation of aviation expertise. For example, negotiations have been mandated this year for agriculture, and links with aviation have been mooted - if only in terms of timetable. The "bananas for aviation traffic rights" scenario should not be lightly dismissed, but aviation has unique characteristics as far as safety and security are concerned. With the growing convergence of economic and safety/security issues, there is a strong case for keeping regulation of all these issues under the same umbrella.

Support before and during the Seattle conference for extension of coverage of air transport in the GATS was minimal and limited to cargo, express package delivery, non-scheduled services and leasing. The major integrated freight carriers were notably vocal. But, while they hold a common position supporting inclusion in the GATS of matters such as customs and ground handling, they have differing views on traffic rights.

The GATS process will undoubtedly continue to be a "who knows" scenario, one in which trade authorities wield their considerable presence and aviation is given vastly lesser billing.

One significant element is that the EC, while not yet achieving its goal of a mandate for negotiating external air transport, does have a seat at the WTO negotiating table with the 15 EU member states.

The aviation way

While initiatives to open trade in services will almost certainly continue, the most promising channel for liberalisation remains the air services agreement, in intra-regional as well as bilateral form.

Contrary to popular myth, the Chicago Convention does not insist on a system of air transport regulation based only on bilateral agreements or restrictions. Apart from promotion of non-discrimination, the key provisions of the convention are recognition that every state has complete and exclusive sovereignty over the airspace of its territory (Article 1) and that no scheduled international air service may be operated over or into the territory of a contracting state except with the special permission or authorisation of that state (Article 6). The terms of special permission or authorisation, based on reciprocity, can be strict or liberal, negotiated bilaterally or multilaterally (the International Air Services Transit Agreement, in which overflight freedoms are granted multilaterally, is ratified by 115 states).

Unlike the unconditional MFN mechanism under the GATS, international air transport has been governed by a regulatory network that allows pairs or groups of states to exchange market access and determine conditions of operation based on specific needs, interests and situations. This regulatory regime serves in particular to keep safety, security and economic and environmental regulation, which are becoming more interlinked, under the same roof. It is also increasingly a liberalisation vehicle, with over 50 bilateral agreements and all eight intra-regional agreements negotiated since the GATS came into effect in 1995, providing for virtually full market access in which traffic rights are unrestricted to, from and beyond the territories of the partners. One noteworthy aspect of the more than 60 existing open-skies bilaterals is that no fewer than half are between developed and developing countries.

Aside from the burgeoning of open-skies bilateral and intra-regional agreements, the revival of the concept of the plurilateral agreement, first proposed in the early 1980s, bears serious consideration. Under this concept, an agreement by two or more parties is subsequently knitted together with another pact between like-minded third parties, with an anticipated domino effect greater than under bilateralism. Under this concept, a good starting point for North Atlantic liberalisation could be, for example, a USA-Italy-Netherlands agreement. The institutional concerns of the EC may place a damper on such initiatives, but interest in the concept has recently been renewed in Asia, notably by Singapore - although Japan remains firmly committed to bilateralism.

While the trade in services behemoth may yet gobble up air transport, the most likely scenario is an expanding patchwork of phased-in liberalisation under the aviation umbrella, through bilateral agreements and new or geographically extended intra-regional agreements, all of which may eventually offer opportunities for coalescence. The TCAA could become the first inter-regional multilateral; it faces many hurdles in its present conception, but a transitional version may appear in the future, although perhaps not during the run-up to this year's US Presidential election.

Intra-regional air services agreements

European Union: third and final phase in effect from 1993, single market by 1997, with15 countries and, subsequently, European Common Aviation Area: initiated with 18 EU and European Free Trade Association countries in 1993, joined by Switzerland in 1998 with ratification expected by 2001. Addition of 10 Eastern European countries expected this year. Caribbean Community: 14 states signed in 1996, in effect from 1998. Fortaleza Agreement: six South American states, 1997. Banjul Accord: six West African states, 1997. CLMV Agreement: four South-East Asian states, 1998. Arab Civil Aviation Commission: progressive liberalisation among 16 Middle Eastern states, 1998. Yamoussoukro II:ministerial decision adopted in November 1999 for gradual liberalisation among all 53 African states, with precedence over existing bilateral and subregional agreements within Africa. To take effect following signature at assembly of heads of state and government in June.


Chris Lyle is deputy director of the Air Transport Bureau at ICAO. A fellow of the Royal Aeronautical Society, Lyle's career spans British Airways and the UN Economic Commission. This article represents the views of the author and does not necessarily correspond to the official view of ICAO.

Source: Airline Business