The ICAO Conference on World Airline Liberalisation helped accelerate the debate on lifting nationality caps. The message for those states that still object or seek a slower pace, is that it is now time to step out of the way of those ready to liberalise

Airline leaders, provoked by the industry's unfolding global crises, have made little secret of their belief that it is now high time to sweep away the old regulatory regime of restrictive bilaterals and ownership limits that has kept the industry locked behind national borders for half a century. The multi-billion dollar question has been whether governments would agree.

At the end of March they got their chance to find out, as regulators gathered in Montreal for ICAO's Fifth Conference on World Airline Liberalisation. To the surprise of some and delight of others, the regulators, a decade on from their last such meeting, appear to have nodded their approval.

In the words of IATA director general Giovanni Bisignani, one of those pushing hard for change ahead of the conference, it represented "the last chance to set our industry on the right regulatory track". The regulators appear to have listened. And in its final form the conference lent backing to some unexpectedly strong recommendations on liberalisation. The conference did not exactly lay down a blueprint for airline globalisation, but it has at least put the liberalisation movement back on the road. Even Chris Lyle, ICAO's air transport bureau director, who had helped lead the conference effort, admits to being "a little surprised" by the strength of the consensus, especially on the issue of ownership.

One of the key aims of the conference was to bring fresh thinking to the traditional "ownership and control" clauses in bilaterals that have largely restricted rights to "national" players on either side. If those strict ownership clauses can be loosened, reasons ICAO, then carriers could get their wish of buying or building operations in foreign states, but without the need to dismantle the existing bilateral framework. Assad Kotaite, president of the council of ICAO, was careful to talk of "continuing evolution" rather than revolution and of the need for a "stable regulatory environment".

As a practical first step, the conference backed a new template clause which could be adopted by states wishing to liberalise. This replaces "ownership and effective control" with broader tests based on the airline having its "principle place of business" within a state, which would presumably allow investors to own a majority of a foreign carrier without risking the loss of bilateral route rights. The airline would also have to be within the "effective regulatory control" of the designating state, which should ensure that the industry does not become prey to flags of convenience. ICAO suggests that evidence for these measures could include:

Principal place of business: that the airline is established and incorporated in the state; has a substantial amount of its operations and capital investment in physical facilities there; pays income tax, registers and bases its aircraft there; and employs a significant number of nationals in managerial, technical and operational positions. Effective regulatory control: that the airline holds a valid operating licence or permit issued by the licensing authority such as an Air Operator Certificate (AOC); meets the criteria of the designating state for the operation of international air services, such as proof of financial health, ability to meet public interest requirements, obligations for assurance of service; and the designating state has and maintains safety and security oversight programmes in compliance with ICAO standards.

The final recommendations of the conference contains language with considerable latitude for individual states to select the speed at which they liberalise, but also makes it clear that those states choosing a slower pace should be encouraged to clear the way for states that wish to move more quickly. States should be able to pursue "the approach of their own choice at their own pace", it reads, but should also attempt to accommodate "the approaches chosen by others". The recommendations are also clear that states, even in the short term, should be free to go further in creating still more liberal agreements, possibly at multilateral level.

Elsewhere, the conference also recommended that air cargo be reformed on an accelerated basis, possibly by unilateral liberalisation of market access without a reciprocity requirement. Leasing reforms were also recommended, including clarification of safety and regulatory responsibilities and a clarification of the distinction between wet- and dry-leased aircraft as well as short-term, ad-hoc wet leases. "It is fairly clear that with such a strong global endorsement, governments will go ahead and take another look at their regulation," says Lyle.

Call to action

In an impassioned address to the several hundred who convened in Montreal for a seminar before the main event and the 800 who represented their states and organisations at the conference itself, Bisignani left no doubts that IATA wants action and at a global level. "We call on all like-minded governments to begin the modernisation of the bilateral system," he said. "Airlines should be free to merge and approach the international financial markets for capital. The wave of globalisation must eliminate national ownership limits wherever they represent an obstacle to development."

He identifies "three pillars of stagnation" which the industry urgently needs to address: the bilateral system, national ownership rules and the attitude of competition authorities. Now, he says though, it is time to move beyond simply recognising these areas to action, which will be made possible when nations that are not members of the consensus cease objecting. They may not agree, but, Bisignani says, "many countries are now ready and others should not stand in their way." In fact, the need to limit even the most well-meaning objections and to allow consenting states to act was stressed repeatedly at the seminar and again at the conference.

The industry has already adopted such a principle, says Barry Humphreys, director of external affairs and route development for Virgin Atlantic and the chairman of the IATA international aviation issues task force: "The key to IATA's approach is that irrespective of a country's policy toward the ownership of its own airlines, it should not stand in the way of other countries adopting a more liberal policy. "

Professor Rigas Doganis, the noted European airline academic, adds that the current state of industry losses is proof enough that liberalisation has not yet gone far enough. "The primary need is to facilitate access to worldwide capital markets, reduce debt finance and encourage more use of equity capital and to limit overcapacity by encouraging cross-border consolidation, controlling capacity," he says. Qantas, for one, estimates that keeping foreign investment out of Australia would increase the carrier's capital costs by 2%.

The first step, Doganis says, is to relax the nationality rule. It denies airlines full access to capital markets and limits cross-border consolidation, "preventing integrated networks, for which alliances are a poor substitute and in the long run not sustainable". He adds that nationality limits "encourage state subsidies and bailouts." They also discourage designation by smaller states of foreign-owned carriers that in many cases do a better job than the weak but locally owned national flag carrier, which he says "is encouraged by the nationality rules to overextend itself and self destruct in the Sabena syndrome".

ICAO has considered changes to ownership clauses before. Its 1994 Air Transport Conference recommended designation of any airline substantially owned and effectively controlled by nationals of any state as parties to an agreement. In 1997, a panel recommended that the criterion become "principle place of business and permanent residence plus strong links with designating states".

Doganis notes that the nationality rule is not sacrosanct. Governments may choose a policy of "selective silence", ignoring ownership as in the case of SriLankan Airways, which is 40% owned and controlled by Emirates. Airlines with multi-national ownership such as SAS, Gulf Air, or, in the past, Air Afrique, bypass the rule, as do charter carriers such as the UK's Britannia, which was owned first by Canadian and now by German interests.

Richard Janda, a McGill University Institute of Air and Space Law associate professor, stresses the importance of lowering objections to agreements to which states are not directly a party. Just because a country insists that its airlines continue to be owned by its nationals, that should not be a block on other states or regions that wish to loosen their rules.

European kick-start

Indeed Europe has already "kick-started" the global liberalisation of ownership, says Janda. He points to the European Court of Justice (ECJ) decision in November which ruled that nationality clauses enshrined in bilaterals (in this case US open skies deals) ran counter to the right of any European company to establish itself anywhere in the European Union (EU). That has provoked the need for a mass renegotiation of bilaterals, he argues, which in turn "creates an opportunity to revisit the entire ownership issue and control framework much more systematically".

John Balfour, of European law firm Beaumont & Son, cautions that the ECJ decision leaves some central questions unanswered, including that of whether a carrier going into another EU country could be required to obtain a local operating licence or certificate to operate with locally registered aircraft. But Balfour says: "A practical solution to the complex legal situation is now needed, and further litigation would not achieve this."

This largest regional agreement remains in a regulatory holding pattern while the European Commission awaits the new arrangements that would empower it to broker a new deal for the EU as a whole. A late March transport ministers meeting made it clear that the formal mandate was coming, perhaps as soon as mid-year, although Balfour warns that it may be months until the powers granted are clear.

While the prospect of the USA and Europe leading the way with a new liberal transatlantic deal has captured imaginations, this regional approach to liberalisation is not the only game in town. An alternative direction, as highlighted in Montreal, is to look for a broader, more global framework. If chosen, the vehicle, by general consent would be the World Trade Organisation's General Agreement on Trade in Services (GATS).

GATS solution

Martin Dolan, Australia's first assistant secretary for aviation and airport services policy, argued that GATS has a major advantage in framing relations among states with differing levels of development. He says: "The architecture of the agreement allows individual members to choose to make sector-specific market access and national treatment commitments. Members are free to pursue any liberalisation that they wish and their right to regulate is recognised. This allows GATS members to control a progressive liberalisation of access to and from their own markets."

Developing nations find this attractive; Mayda Molina, vice-president of the Institute of Civil Aeronautics of Cuba, argued that sustainability of carriers in developing nations must be protected under any regime. The framework is also attractive to some who argue for consideration of the sustainability of air carrier service in nations dependent on tourism.

Pierre Latrille, counsellor to the trade in services division of the WTO, notes that the WTO council reviews developments in the air sector at least every five years with an explicit view to consider the possible further application of the agreement in this sector.

The WTO dispute-settlement understanding is open to criticism; of 240 disputes that have come before a panel between 1995 and 2003, only three have concerned the service sector, and none has concerned air transport services, says Richard Smithies of IATA. Earlier ICAO conferences have stressed the need for a dispute settlement mechanism that addresses competitive issues. The conference adopted a model clause on dispute settlements that would give ICAO a central role in an expedited process. But the conference concluded: "It is inconclusive at this stage as to whether the GATS is an effective option for air transport liberalisation."

If states do not approach an existing global regime such as that of GATS, they can consider a regional approach. A much-discussed possibility is regional progress through structures along the lines of the Kona open skies agreement of six member states of Asia-Pacific Economic Cooperation (APEC). Kona is generally considered a breakthrough in that it achieved agreement between the USA and nations of varying degrees of liberalisation (Brunei, Chile, New Zealand, Peru, Samoa, and Singapore); it also presents an interesting approach to dispute resolution by allowing third parties to declare their interest in a bilateral dispute. This, concludes Smithies of IATA, increases the transparency of proceedings. Kona, however, retains an effective-control provision that Janda says can be "a stricter test than substantial ownership".

Whatever the vehicle for liberalisation, Montreal appears to have proven that the debate is now alive and in the open. It will be the task of the airline industry to keep it there.

Source: Airline Business