David Knibb WASHINGTON DC As momentum grows to liberalise the skies, the rules for fair and open competition become more important. But few agree on what they should be.

When Grupo TACA accused Continental Airlines last November of predatory pricing and capacity dumping, a charge the latter denied, it was not a routine dispute: it arose in the context of an "open skies" bilateral.

Without the US-El Salvador bilateral, which inscribes the right of airlines to make pricing and capacity decisions without government intervention, Continental would not be able to lower fares or add frequencies. Yet, to the dismay of TACA and El Salvador, the bilateral is silent on the legality of Continental's behaviour and on any mechanism to address it.

El Salvador has asked Washington for consultations and has proposed to change the bilateral. It wants rules to stop airlines from offering below-cost fares and excess capacity. Washington is resisting, saying the point of open skies is to end economic regulation.

Acknowledging that the bilateral offers no remedy, Washington suggests that reciting competition laws in it is unnecessary, because they apply anyway, and the parties are free to pursue them. Not in El Salvador, TACA replies. Because the bilateral is a treaty, that closes El Salvador's courts to disputes arising under it.

TACA still could sue Continental under US antitrust laws. US courts are open to plaintiffs of any nationality. Maybe, El Salvador says, but why should TACA risk the expense - and uncertain results - of a lawsuit in the USA, where the definition of illegal predation is so complicated and unsettled? Why should TACA's sole remedy be in a potentially unsympathetic foreign forum when the conduct in dispute arises under - and arguably because of - an air-services agreement? Why does that agreement itself not provide a remedy?

Robert Booth, Latin American aviation consultant, writes in his monthly newsletter that this row is going to make some people think twice. "All we need is for a few South American airlines to be put out of business by excess US-spawned capacity and fare wars, Booth warns, "and there will be a strong reaction against opening skies across the region."

This dispute is caused by conduct licensed by liberalising the skies. Displeased with this result, a complaining party wants to restore economic regulation. The other country demurs and, instead, proposes private antitrust remedies, which the complainant views as largely illusory. In the name of open skies, two countries have created a regime touted by one as freedom and the other as a lawless equivalent of the Wild West.

The TACA-Continental dispute is a preview of issues that the rest of the world could soon have to face.

From regulation to antitrust

On a subject where agreement on anything makes headlines, regulators and economists are in rare accord on the necessity for competition laws to step forward when regulation steps back. By abolishing regulatory controls, antitrust laws are the only way to prevent market abuse.

In February, John Nannes, deputy attorney general for the US Justice Department (DoJ) antitrust division, told a legal symposium of the International Air Transport Association (IATA): "As markets deregulate, countries must turn to antitrust." Addressing the audience of senior regulators and aviation lawyers, Nannes said "the goal should be to eliminate barriers of entry and let general competition rules police the market".

No one suggests that a deregulated market can work without antitrust laws. As Karl Sauvent, senior researcher at the United Nations trade office in Geneva, told the Wall Street Journal: "The more you liberalise, the more important it becomes for government to keep competitors honest. To the extent you reduce barriers to trade, the more you have to make sure these barriers aren't replaced by private barriers."

Allan Asher, deputy chair of the Australian Competition and Consumer Commission, criticises US businesses for helping to convince Russia to dismantle its regulatory system without having an effective antitrust system in place. "The result was a lot of chaos and unnecessary misery."

"The US economy evolved over 150 years," says Asher. "It is not driven entirely by the market. There is a whole set of traffic lights to police market conduct. Without them, the USA would be a basket case."

That, he implies, is what happens to underdeveloped nations if they deregulate without first having an effective set of competition laws. Does this mean that Washington pushes too hard when it signs up such open-skies partners as Namibia and Burkina Faso?

Asher, a fervent supporter of deregulation concedes: "In such cases open skies must be phased and managed to achieve desired results." He says countries must manage the transition from a regulated to an open economy. In aviation, the argument is not over the need for antitrust laws, but the need to synchronise deregulation with the start of effective antitrust controls and which antitrust laws and remedies to apply.

Silent bilaterals

John Kiser, chief of pricing and multilateral affairs in the international aviation office of the US Department of Transportation (DoT) defends the absence of antitrust rules and remedies in open-skies agreements. Washington did not deliberately exclude them, Kiser says, but simply saw no need to include them.

Frederik Sorensen, head of air transport economic regulation for the European Commission (EC), thinks that is a mistake. International airlines need to know the rules, Sorensen insists. "Not including competition rules in an air-services agreement is a potential source of conflict," he says.

Not only should a bilateral cite the rules, but it should also include a dispute-resolving mechanism, says Sorensen, echoing TACA and El Salvador's sentiments. He goes even further. The real reason Washington does not mention antitrust in its bilaterals is so that it can offer antitrust immunity in exchange for open skies, says Sorensen.

Bert Rein, a Washington DC aviation lawyer, calls this "an interesting trade-off." It reflects a policy evolution from the days of what he calls "gunboat diplomacy", when other nations resisted US antitrust actions against their airlines. Now, rather than sue, Washington offers foreign airlines immunity if countries will allow unlimited US entry.

The US approach seems to be about creating conditions for competitors to slug it out in the skies, rather than in courtrooms. Forget about procedures for predatory-pricing complaints. If you allow unlimited entry, no predator can ever recoup the benefits of predation. The system regulates itself. Some would call this the John Wayne school of competition policy.

Europeans uncomfortable

Europeans are clearly uncomfortable with this. Not only do they prefer to see rules and remedies spelled out, but their perspective differs on what the rules should be. Trevor Soames, a lawyer specialising in aviation at Norton Rose in Brussels, explained some of these differences at IATA's February symposium.

Washington sees hubs as competing with each other, while Brussels sees each as a separate market. That difference leads to opposite conclusions about most airline alliances. In addition, Washington sees nothing wrong in negotiating air-service bilaterals with individual nations of Europe - and thinks it may even put pressure on the tougher holdouts. Europe sees this as "cherry picking", discriminatory and distorting.

Observers agree that accusing Europe of protectionism is misplaced and that Washington's "John Wayne" approach is largely because the size and scale economies of US airlines allow them to fend better for themselves. But that only partly explains the two regions' opposing views.

Jeffrey Shane, former US assistant secretary of transportation for policy and international affairs, reminded the IATA symposium that a "structural imbalance exists between the USA and Europe" because of current home-territory rules. Lufthansa, he points out, can only fly to the USA from Germany, while US airlines can fly to anywhere in Europe from anywhere in the USA, the latter market being larger than the whole of Europe.

In addition, as Soames detailed, the EC still lacks the authority to negotiate external aviation policy on behalf of Europe, and must tiptoe around differing intra-European policies and politics. Meanwhile, the hazy lines between EC aviation powers and those of local competition authorities within Europe still produce what Soames calls "an enormous mess".

He argues that transatlantic policy differences are more about caution, power and diplomacy. On both sides, the aim is to enhance competition, but one prefers a hands-off approach while the other tends to intervene. The DoJ's Nannes adds: "I see a move towards convergence on legal standards, but not on remedies. Maybe the remedial convergence will come later."

International rules

When it comes to advocating more liberalised aviation, Australia's Asher is no shrinking violet. He would like to see IATA change its approach to requests for antitrust immunity. Instead of applying to individual agencies around the world - an expensive and cumbersome process that will only get worse as their number multiplies - he suggests that IATA adopt a simplified immunity request and submit it to an international body, such as the Organisation for Economic Co-operation and Development (OECD) or the General Agreement on Trade and Services (GATS) for one-stop approval.

Asher argues that there are fewer national differences in competition law than in other areas. He hints agreement with Nannes that countries differ more over antitrust remedies than standards. Asher suggests a universal code of competition needs only to address three concerns: price-fixing or exclusionary practices; predatory conduct; and mergers or acquisitions.

"Competition policy has won the battle over trade policy," in the past 50 years, says Asher, and aviation should acknowledge this. Criticising "flag carrier hangover" - the equity limits and preferential rules that still hamstring aviation - he notes a shift away from rulemaking by "formal" bodies such as parliaments. Global rules now come from informal entities such as the OECD, where sovereignty is seen as provincial.

Yet IATA and Washington have not embraced Asher's call to put aviation under an international regime such as GATS. "Deregulation, or liberalisation, has not yet reached the point where the need for specialised treatment of aviation competition issues - or specialised expertise - has withered away," says Reins.

Global coherence on aviation antitrust issues seems more likely to come in smaller steps. The OECD is circulating a draft multilateral agreement on air cargo with a related workshop planned by September. The EC plans to form a European Common Aviation Area embracing the EC, Norway, Iceland, and 10 nations in central Europe. The United National Economic Commission for Africa is working on a draft multilateral pact between African nations that could include aviation. Washington has invited Caribbean nations to discuss a regional Caribbean-US aviation agreement.

TCAA opportunity

The multilateral initiative most likely to bring the greatest change is the Trans-Atlantic Common Aviation Area (TCAA). US Secretary of Transportation Rodney Slater describes the TCAA as "a most inviting concept".

The key purpose of the TCAA, as envisioned by the Association of European Airlines (AEA), which proposed it, is not to grant its members freedom to fly, but to create a set of common rules, especially on competition. The AEA wants commonality on other issues too - hushkitting, airport security, and so on - but its desire for a common competition policy is the driving force behind the TCAA.

Even if the TCAA is launched, Soames does not think that coherence will come immediately. Instead, he foresees agreement on basic principles, followed by a procedural mechanism to expand common rules as both sides work them out. He urges starting on specifics - such as alliances and hushkits - rather than on "such contentious issues" as cabotage or airline ownership.

Soames may find little agreement on what is "contentious", but at least there is agreement on an issue-by-issue approach. The DoT's John Kiser says: "The USA prefers a micro approach to resolving differences in competition laws, rather than trying to agree in advance on a detailed set of rules. We [also] prefer to go for what is obtainable instead of what economists might call the best solution."

Soames thinks that the TCAA is the best vehicle for progress. "The EU and USA are among the world's largest air-transport markets," he notes. "Both apply liberal, pro-competitive air transport policies internally and are best equipped to lay the foundation for a new single coherent regulatory framework."

The answer seems to lie in moving liberalisation and competition policy at the same pace, thus avoiding the resentment the USA provoked by putting one ahead of the other in Central America.

Source: Airline Business