AviationRegister   E-Xpert Witness Journal

Global developments presenting risks and rewards for the aircraft trading and financing market

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Headline News was last updated: November 17, 2009

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November 2009

Consolidation/Merger: The European Union, the USA and six other countries agreed on an "agenda for freedom" for airlines.

Consolidation/Merger: Agenda for Freedom signatories include Chile, Malaysia, Panama, Singapore, Switzerland, and the UAE.

IATA expects other countries, including Australia, India, Morocco, and New Zealand, to sign up in the near future.

Consolidation/Merger: The agenda for freedom could open the way for mergers and

consolidation across the airline industry.

Consolidation/Merger: The agenda for freedom is based on key principles: freedom to access to global capital markets, freedom to do business, and freedom to price services.

Consolidation/Merger update: The agenda for freedom is designed to boost economies and create jobs.

IATA study shows freeing up market access and ownership rules would create over 2M jobs, increase GDP and cut average fares by 38%.

Bilateral aviation agreements that governments now enforce were introduced 65 year ago and bar cross-border mergers.

Bilateral aviation agreements exceptions in the EU: The Air France-KLM merger and the proposed BA and Iberia merger.

Consolidation/Merger update: The non-binding Agenda for Freedom agreement was signed at a meeting hosted by IATA at Montebello, Canada.

IATA says the agreement is an historic achievement that will help set the foundation for a financially sustainable global aviation industry.

Consolidation/Mergers: IATA says the 27 EU countries and the United States account for 60% of global aviation.

Consolidation/Merger update: The agreement could clear the way for more deals like the proposed merger between British Airways and Iberia.

BACKGROUND ISSUES

Traffic rights

ICAO uses the following definitions for traffic rights.

Fifth freedom rights

These are the "rights to one party between a point or points in the other party's territory and intermediate and/or beyond points in third countries on the route or routes granted. The

fifth freedom rights are considered to have not been granted where a route granted to one party names one or more intermediate and/or beyond points in third countries but denies local traffic rights between such point or points and the other party's territory, or where the general grant of such rights is made subject to subsequent agreement. However, if their use is only made subject to future specification, such as selection of a point or points, such rights are considered to have been granted."

Seventh freedom rights

So-called seventh freedom rights are the grant of "rights to one party between a point or points in the other party’s territory and any point or points in third countries with no requirement to include on such operation any point in the territory of the recipient party, i.e. the service need not

connect to or be an extension of any service to/from the recipient party of the carrier."

Eighth Freedom rights or Cabotage rights, or consecutive Cabotage rights

These  refer to the granting of "traffic rights to one party between two points in the territory of the other party, either on a service which originates or terminates in the home territory or

outside the territory of the granting party (also known as Eighth Freedom or "consecutive cabotage"), or on a "stand-alone" service performed entirely within the granting party's territory (also known as Ninth Freedom rights.)"

Court rulings:

In its 2002 judgments, the European Court of Justice ruled that the nationality clause found in

bilateral agreements of EC Member States was illegal and had to be replaced by a "Community clause". This clause states that Member States can designate EC carriers if these have an "establishment" in that Member State and are under effective regulatory control of the designating Member State. The notion of "establishment" has been interpreted very broadly by the ECJ, as it could be any sort of established presence, such as a business, sales

office or subsidiary. This means that an EC carrier could have one, single principal place of business but several establishments and thereby be designated by a Member State other than that in which it has its principal place of business (for a fuller discussion, see Hörstke, "Air Carrier Ownership and Control Revisited at the Fifth Worldwide ICAO Air Transport Conference", Annals of Air and Space Law Vol. XVIII, 2003). S/C/W/270/Add.1Page II. 651

LIBERALISATION OF AIR TRANSPORT UNFOLDING PROGRESSIVELY UNDER CURRENT REGULATORY FRAMEWORK

Sydney, 5 June 2000 - The liberalization of international air transport is progressing on the basis of specific needs, interests and circumstances of States and a wholesale application of the General Agreement on Trade in Services (GATS) to air services is not required, according to Dr. Assad Kotaite, President of the Council of the International Civil Aviation Organization (ICAO).

Addressing the 56th Annual General Meeting of the International Air Transport Association (IATA) in Sydney, Australia, Dr. Kotaite said the world aviation community has always cooperated with the World Trade Organization (WTO) in identifying aspects of aviation to be covered by the GATS. In its Annex on Air Transport Services, the GATS currently covers aircraft repair and maintenance, selling and marketing and computer reservations services.

"A great deal of liberalization activity has and is taking place outside of the WTO process," Dr. Kotaite explained. "Taking into account all the "open skies" bilateral agreements and the newer regional agreements, no less than 157, or 85 per cent of ICAO Contracting States, are already involved in some form of liberalization, with 97 States being parties to some arrangements towards full market access. Since the GATS came into effect in 1995, some 60 "open skies" bilaterals and no less than eight regional agreements have been produced and more such agreements are in the pipeline."

Dr. Kotaite added that although the GATS had an important role to play, the growing convergence of economic, safety, security and environmental issues makes a strong case for keeping regulation of these critical issues under the aviation umbrella. The most promising channel for further liberalization remains bilateral and regional air services agreements.

Dr. Kotaite also noted that broadening ownership and control provisions for air carriers was a key economic regulatory development for ensuring the safe, orderly and efficient growth of civil aviation.

In their bilateral air services agreements, States generally accept operations by a foreign carrier only where it is “substantially owned and effectively controlled” by the designating State or its nationals, a major factor in the development of airline alliances and code-sharing arrangements rather than true multinationals as in other business sectors.

Broadening the criteria, for example to include ownership and control within a group of States rather than a single State, could provide substantial benefits:

1.Bring the air transport industry into line with other economic sectors,

2.Produce substantial economic benefits for the industry and for the economy at large.

3.Reduce the need for carriers to find alternative, indirect means of obtaining market access, such as codesharing, which are complex, confusing to

  users and a regulatory challenge.

"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," he concluded.

All ICAO policy in this area is contained in ICAO document 9587, (Second edition), Policy and Guidance Material on the Economic Regulation of International Air Transport.