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UK puts forward case for airline ownership liberalisation

UK Civil Aviation Authority analysts believe there is a strong case for relaxing ownership and control regulations for airlines after concluding the primary objections to such a move could be addressed by appropriate mechanisms.

The CAA has released its assessment today in a discussion document, entitled Ownership and Control Liberalisation, arguing that concerns over safety, non-reciprocity, and regulatory convergence need not be an obstacle to lifting constraints on airline control.

Ownership has become a high-profile issue in the USA where the US Department of Transportation is attempting to revise rules governing foreign involvement in airlines – and where US major carriers have fiercely contested the ownership status of start-up Virgin America.

Although the development of ‘open skies’ agreements has given carriers the freedom to dictate frequencies, capacity and fare levels, it has also highlighted the limitations of the remaining regulations – such as the prohibition on cabotage services.

The CAA’s analysis centres on creating ‘open aviation areas’ which would remove the restrictions on ownership and control.

Speaking during a briefing at the CAA’s head office in London, head of economic policy and international aviation Alex Plant said: “The intellectual argument has been won on ‘open skies’ – but not on this issue.

“We felt it was the right time to seek an objective view of the various issues. The arguments stack up firmly in favour of a change.”

But while the document mentions the ownership situation in the USA, and quotes senior US airline executives’ statements support for a liberalised market, Plant insists the CAA’s document is not intended solely as European ammunition to combat rigid US regulations at a time when the two sides are still trying to thrash out a transatlantic liberalisation agreement.

“It isn’t all about the USA,” he says, adding the same reasoning can apply to Asia, Latin America and Africa. “It’s broader than the USA – we’re hoping to move the debate on a bit. The USA is an important factor but this is a much wider issue than the nuts-and-bolts of a [transatlantic deal].”

Increased safety risk has been the most powerful argument against ownership liberalisation in the air transport sector, says Plant, but the CAA analysis suggests this could be mitigated by ‘selective liberalisation’. This would require prospective new members of an ‘open aviation area’ to demonstrate – probably through an audit – a level of safety compliance equal to that of existing members.

“Such an approach has a dual benefit,” says the CAA document. “In addition to increasing the pressure for high safety standards for airlines operating within the group, the presence of such a strict requirement should incentivise higher safety standards within candidate countries and airlines wishing to gain access to an expanded ‘open aviation area’.”

In order to prevent airlines from taking advantage of geographical detachment from its safety regulator, with the possibility that carriers might operate under a ‘flag of convenience’, the CAA would support International Civil Aviation Organization and European Commission requirements for closer ties between an airline’s regulatory base and its principle area of operations.

Countries outside the open area would be subject to other methods of safety regulation. Aviation ‘blacklists’, such as that created by the EC this year, could be used as a method to bar airlines which fall below accepted standards.

“This combination of measures should ensure that safety standards are at least maintained, and at best improved, as a consequence of ownership and control liberalisation,” the document adds.

Regulatory differences between potential ‘open aviation area’ members could pose a threat to competition, says the CAA, and could justify participating states’ imposing conditions of regulatory convergence.

“Requiring candidate countries to sign up to a commitment on competition and state aid is one solution that would enable a carriers’ behaviour to be measured against broad, enforceable principles,” it says.

“Such a commitment would prohibit, among other things, anti-competitive behaviour and the granting of state aid capable of distorting competition.”

ICAO or a similarly-authoritative organisation would need to establish a dispute-settlement procedure to investigate complaints and ensure that this code of practice was applied and maintained.

The CAA document identifies non-reciprocity, or ‘free-riding’, as another potential concern. Third countries could theoretically exploit a liberalisation agreement between two other states but protect their own carriers’ interests by withholding opportunities from foreign investors.

“There is a legitimacy to some of these concerns that necessitates a sensitive handling of the liberalisation process,” says the CAA. It says that avoiding exploitation by ‘free-riders’ would require ownership and control rights to be open only to investors from states which have signed up to ‘open aviation area’ agreements.

“Although this approach may limit the sources of capital available to a carrier in the short term, it should provide added incentives for the expansion of ‘open aviation area’-type agreements as excluded parties seek both investment and market opportunities in the liberalised open-area markets,” it adds.

Liberalisation of ownership within the airline industry would mean handing the responsibility for negotiating future open-area agreements to the authority with legal competence for establishing control rules.

While bilateral talks have been the primary forum for aviation liberalisation discussions, there have been moves to transfer this to supranational organisations such as the EC, which is heading up transatlantic liberalisation negotiations with the US government.

“The rationale for more supranational leadership in aviation is strong,” says the CAA document. “The restrictions placed on airline ownership in bilateral agreements mean that reform at a national level is difficult.”

But the CAA admits that this proposal is not without contention, stating: “A number of countries within Europe have resisted the proposition that the EC should take more of a leading role in the liberalisation of aviation relations.”

The document rejects suggestions from unions that liberalisation would threaten employment standards through the recruitment of cheap labour. While such a situation is perceived to have developed in the maritime sector, says the CAA, the nature of aircraft operation and the high levels of training required for pilots and cabin crew mean that it is difficult for airlines to obtain cheap, unqualified labour from third countries.

Jackie Thompson, features editor at Airline Business, asks why such an obvious win-win situation for aviation as ownership liberalisation has been stalled for long. And by whom.

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