Session "Aviation Regulation: New Millennium - New Direction"
56th IATA Annual General Meeting, (Sydney, 5 June 2000)
The theme of this session is: “Aviation Regulation: New Millennium - New Direction”. The new millennium is a given. As to the new direction, we are here to ask ourselves some questions, particularly regarding the liberalization of air transport.
Let me start with an overview of what is already under way.
Current trends in economic regulation
First, the International Air Services Transit Agreement, through which overflight freedoms are granted multilaterally, is currently ratified by 118 States, up by 17 States in the past five years.
Second, there are now more than 70 bilateral air services agreements providing for virtually full market access, where traffic rights are unrestricted to, from and beyond the territories of the partners. Significantly, no less than half of these "open skies" bilaterals are between developed and developing countries, and one-third of them do not involve the United States as one of the partners.
Third, and perhaps even more significantly, there are now a number of regional multilateral agreements in place or in progress, most of which provide for instant or phased in liberalization leading to full market access.
One impressive aspect of these regional agreements is their worldwide dispersion:
- in Europe, we have the European Union liberalization process completed in 1997, followed by the European Common Aviation Area, with the addition of ten eastern European countries anticipated by the end of this year
- in South America, we have the five State Andean Pact arrangement and the six State Fortaleza Agreement
- in the Caribbean Community, an agreement amongst 14 States
- in Asia, we have the four State CLMV Agreement
- in the Middle East, an agreement for progressive liberalization by the 16 State ArabCivil Aviation Commission
- and in Africa, the six State Banjul Accord and liberalization agreements amongst the six States of the Central African Economic Union and amongst the 21 States of the Common Market for Eastern and Southern Africa, with the Yamoussoukro II Ministerial decision for gradual liberalization amongst all 53 African States to be effective following signature at an Assembly of Heads of State and Government next month.
Taking into account all the open skies bilaterals and these regional agreements, no less than 157 (or 85 per cent) of ICAO’s 185 Contracting States are already involved in some form of liberalization, with 97 States (or over half of ICAO States) being parties to some arrangement towards full market access.
Moreover, in addition to these arrangements which are already in place or about to become so, others are in the pipeline, for example:
- an initiative by the 16 Pacific Forum Island Countries for multilateral liberalization
- a proposal by the European Commission for a Transatlantic Common Aviation Area (TCAA)
- a proposal endorsed by leaders of the Asia Pacific Economic Cooperation (APEC) aimed at increasing competitive air services within this 21 member group
- a liberalization initiative by the United States with a number of Caribbean States
- a common regional commercial air policy for South America being prepared under the aegis of a regional Conference of Ministers.
One key point emerging from this overview is that a great deal of liberalization activity is taking place without resort to the World Trade Organization (WTO) and the General Agreement on Trade in Services (GATS). In fact, since the GATS came into effect in 1995, 60 “open skies” bilaterals and no less than eight multilateral regional liberalization agreements have been produced.
The existing regulatory framework provides the way forward. It enables pairs or groups of States, like-minded or even with different national objectives, to exchange market access and determine conditions of operation based on specific needs, interests and situations. It customizes market access and, in particular, it provides for special consideration of the interests and needs of developing countries.
The most promising channel for further liberalization remains the air services agreement, now in regional as well as bilateral form. The most likely scenario at present is for an expanding patchwork of phased in liberalization under the aviation umbrella, both through bilateral agreements and through new or geographically extended regional agreements, all of which may eventually offer opportunities for coalescence.
An even more basic point made by my overview is the flexibility, resiliency and capacity of the Chicago Convention to accommodate fundamental shifts in the regulatory environment. The Convention has stood, and will continue to stand, the test of time through its combination of global consistency with national responsibility. Perhaps contrary to popular myth, the Convention is not an encumbrance. The Convention has not hindered privatization, of air carriers or of infrastructure providers, and as I have just illustrated it has certainly not confined regulation of international air transport to bilateralism.
At a time when international air transport is going through a period of dynamic change and trade in services initiatives are once more on the table, there is no need to throw the baby out with the bathwater. I understand the reluctance by the aviation community to subject air transport fully to the GATS process. This stems from the basic GATS principles of unconditional most favoured nation treatment and national treatment. Currently support for extension of coverage of air transport in the GATS beyond the current "doing business" issues is minimal, and limited to non-scheduled services, leasing, express package delivery and all cargo. In particular, the OECD which, comprising 29 of the most powerful economies in the world, can be highly influential in the GATS process, is reportedly close to finalizing a draft multilateral agreement on the liberalization of air cargo. And yet 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 lesser billing.
With the growing convergence of economic, safety, security and now environmental issues, there is a strong case for keeping regulation of all these issues under the same umbrella. At the same time, we have to acknowledge the role of the GATS. The air transport focus of the WTO at present is on classifying “services directly related to the exercise of traffic rights”. This could possibly lead to a helpful conclusion as to which services will be left to aviation regulators and which will be handed over to the WTO. In any event, I believe it is in the interest of the aviation community to work closely with the WTO.
IATA’s five principles
I hope my overview has provided an idea not only of who will be the regulators in the new millennium, but also why and how they will regulate. I will now turn to the subject of what will be regulated in this era of liberalization and address the "five principles" in IATA’s paper on "Wings for the Future".
- Consistent safety and security oversight. ICAO can of course fully endorse this principle. The ICAO Worldwide Air Transport Conference in 1994 readily agreed "that safety is and always must be of paramount importance in the operation and development of air transport and there is a need to continuously update and implement safety standards and practices". The ICAO Universal Safety Oversight Audit Programme (USOAP), initiated by a worldwide ICAO conference of Directors General of Civil Aviation (DGCAs) in 1997, is clearly the key here. By the end of 2001, all 185 States will have received at least one audit of legislation, procedures and practices in relation to personnel licensing and the operation and airworthiness of aircraft. At the same time we are preparing to expand the Programme progressively to cover aerodromes, air traffic services, aircraft accident investigation and eventually the Standards in all safety-related Annexes to the Chicago Convention. Each State will be audited at least once every five years, but ICAO will respond quickly whenever it has reliable information which leads it to believe that a State may no longer be complying with ICAO safety provisions. The USOAP will be closely linked with ICAO’s Global Aviation Safety Plan (GASP) which, in collaboration with States and industry, will focus on achieving a significant decrease in accident rates.
- Adequate infrastructure available on a non-discriminatory basis to meet the public’s demand for service. Again, ICAO can support this principle, which is embedded in the Chicago Convention. Indeed, we would go further and add the words "cost-effective" to "non-discriminatory". Airports and air navigation services are generally local monopolies and as their provision is increasingly handed over to autonomous bodies or even to the private sector, economic regulation by States as well as safety and security regulation is of the essence. Under the Chicago Convention States remain responsible for the provision of infrastructure, no matter who owns or provides the service. The subject of infrastructure provision and cost recovery will be addressed extensively at the ICAO Conference on the Economics of Airports and Air Navigation Services (ANSConf 2000) which will take place in Montreal later this month. IATA has already contributed a number of substantive working papers for the Conference, and we are delighted that your Director General has agreed to participate in the session on major challenges which is designed as the culmination of the preparatory seminar.
- Continued availability of the multilateral interline system. This principle is entirely consistent with the recommendation of ICAO’s 1994 Conference, which recognizes that while States have many differing goals and policies, they share a fundamental objective of participation through reliable and sustained involvement in the international air transport system. While the airline alliances argue that they can provide seamless travel through a single transaction paid for in a single currency, these alliances are continuously changing and even the largest of them does not have complete global reach. It is the smaller markets which give rise to concerns, and particularly those markets involving developing countries. In relative terms, the needs of developing countries for air transport are greater than other countries if they are to participate in the increasingly global economy and they often have very much more to gain in terms of the economic multiplier effect. Collapse of the multilateral interlining system or of the Prorate Agreements would not only raise competition concerns regarding dominance of individual carriers or groups of carriers, it could effectively eliminate the opportunity for small carriers and low traffic-generating nations to participate in air transport.
- Open access, giving all players fair and equal opportunity to participate in the sustainable growth of the global air transport system. Again, ICAO can fully endorse this principle, which is closely linked with the previous one. Our 1994 Conference not only emphasized a fundamental objective of participation in the international air transport system, it stated that any change in approach to international air transport regulation should have due regard to the interests of all stakeholders, including air carriers, users, airports, distribution intermediaries and labour. In short, the aviation community has a responsibility to inhibit the unacceptable face of globalization whereby only the already rich and powerful can succeed. Furthermore, it is difficult to see how a level playing field could be created without a common global understanding, through ICAO, on environmental protection issues. Aircraft noise continues to attract a great deal of attention and we can expect aviation’s contribution to greenhouse gas emissions to become a more significant issue for policy-makers in our industry over the next few years.
- Industry mechanisms to improve business efficiency. While it is of course difficult to argue against business efficiency, the role of governments in this is generally limited to encouraging small business and, more pertinently for IATA, to ensuring that industry mechanisms are not anti-competitive. This is a sensitive area, in which ICAO’s primary role has been to develop guidance material on such issues as code sharing and computer reservation systems aimed at ensuring fair competition and prevention of abuse, and on application of general competition law, while strongly condemning unilateral action by States which impacts on international air transport operations.
Other key principles
To these five IATA principles which I have just commented upon, I would like to add a few other considerations.
One is the need for a common liability regime worldwide, starting with adherence to the 1999 Montreal Convention. Your support in encouraging ratification by your governments would be most welcome.
Other key issues which are not under the wing of civil aviation, but which we will need to influence actively, include the application of competition law, particularly in cases of extraterritoriality or conflict, state aid and bankruptcy protection, labour legislation and consumer protection provisions, where the different regimes in place in different parts of the world inhibit the existence of the proverbial “level playing field”, for civil aviation no less than for other sectors. I would also like to make a special mention of the radio frequency spectrum. While the civil aviation position at the recent ITU World Radiocommunication Conference in Istanbul received more support than in the past, radio frequency allocation continues to be a key issue because it is an essential element for safety and growth. Therefore, we should work at a strategy for long-term protection of the frequency spectrum allocated to civil aviation.
Two key issues for aviation regulators
As these issues are being addressed and as the various regulatory mechanisms evolve, I believe there are two key matters on which aviation regulators should focus.
The first of these is achieving universal adherence by States to the International Air Services Transit Agreement. Let’s agree once and for all on “open-skies” for overflights worldwide and avoid the nagging difficulties that restrictions still bring to this day.
The second key issue is air carrier ownership and control.
In their bilateral air services agreements, even all but one of the new “open skies” ones, States generally accept operations by a foreign carrier only where it is “substantially owned and effectively controlled” by the designating State or its nationals. This is a primary reason why, in the air transport sector, we have today airline alliances and code-sharing arrangements rather than the true multinationals of other business sectors.
At ICAO’s 1994 Conference there was broad support for the need to review this traditional ownership and control requirement in order that carriers could broaden potential sources of investment and that States be given greater opportunities to participate meaningfully in international air transport. The Conference readily accepted the concept of broadening the criteria to include ownership and control within a group of States rather than a single State and this concept is now applied in the single aviation market of Australia and New Zealand, in the European Union, included in some of the newer regional multilaterals and proposed in the TCAA.
ICAO has continued to take the ownership and control issue further, with approval by our Council in 1997 of a recommendation regarding broadened criteria for air carrier use of market access.
In my view, the evolution of ownership and control provisions on a global basis would be a key economic regulatory development towards ensuring the safe, secure and orderly growth of civil aviation. It would bring our industry into line with other economic sectors, and could produce substantial economic benefits both for the industry and, through the now well-documented multiplier effect, for the economy at large. It would reduce the need for carriers to find alternative, indirect means, such as codesharing, of obtaining market access, which are complex, confusing to users and a regulatory challenge. Direct regulation would clearly be preferable, being simpler, more transparent, easier to enforce and not running the risk of falling between the cracks of different regulatory regimes. It should respond to safety and economic concerns relating to the avoidance of “flags of convenience” with lack of regulatory control and social “dumping”.
A global understanding on ownership and control could also render moot the even more complex and sensitive issue of cabotage, reducing concerns regarding both national security and the spectre of allowing the entry of any party under most favoured nation provisions. And a global understanding on ownership and control could remove the inhibitions of developing countries regarding liberalization beyond their regions, particularly if associated with some of the preferential regulatory measures for developing countries suggested by ICAO in 1997.
Broadening of ownership and control provisions is inevitable, but unless the aviation community is directly involved in their evolution, the risks will be high. I cannot emphasize too strongly the need to keep ahead, in terms of safety and security oversight, of trans-border alliances and transnational outsourcing. On the other hand, if aviation shows the way, safety and security oversight could actually be enhanced. Bearing in mind also the considerable potential economic benefits, let us therefore embrace the concept and lead it forward.
In just over a hundred days, the 27th games of the modern olympiad will open in this beautiful city of Sydney. The Olympic Motto “Citius, Altius, Fortius” is generally accepted to mean “Swifter, Higher, Stronger”. I believe that we can aptly apply this motto to the future regulation of international air transport: first, as globalization and the business environment continue their relentless unfolding, we need to have mechanisms which are swifter in identifying and responding to shortcomings and deficiencies and getting related regulation into place; second, as aviation regulation is challenged by new concepts and new entities, we must reach higher in our vision, beyond the confines of civil aviation and into such areas as competition, trade and telecommunications, in order to secure the optimal requirements of our industry; and third, we must be stronger in promoting the views of our industry and, above all, in implementing our standards consistently. And in so doing we should base ourselves on our own enduring creed in the preamble to the Chicago Convention: “that international civil aviation may be developed in a safe and orderly manner and that international air transport services may be established on the basis of equality of opportunity and operated soundly and economically”. I am pleased that the future strategy in “Wings for the Future” refers to working through the International Civil Aviation Organization, and I can assure you that ICAO will continue to pursue actively its rightful and necessary role.