Journal of Air Transport Management Vol 2. NO I, pp.

3-10, 1995
Copyright 0 1995 Else&r
Science Ltd
Printed in Great Britain. All rights reserved
0969-6997195 $10.00 + .oO

0969-6997(95)00009-7

The future of international air

transport regulation
Chris Lyle1
Economics and Statistics Branch, International Civil Aviation Organization (ICAO),
Sherbrooke St West, Montrtal, Qutbec, Canada H3A 2R2

1000

The conclusions of the ICAO World-wide Air Transport Conference, held from 23
November to 6 December 1994, provide an opportunity to reflect on the evolution of
the economic regulation of international air transport in the 50 years since the Chicago
Conference of 1944, to examine the underlying forces that are driving regulatory change,
and to consider what aspects of international air transport may need to be regulated in
the future and through what mechanisms.
Keywords:

The

evolution

regulation,

liberalization,

of regulatory

international

air services

structure

The Chicago Conference of 1944 was an ambitious

effort to achieve widespread consensus amongst
governments on how all aspects of international civil
aviation should be regulated. However, the fundamental product of the Conference, the Convention
on International Civil Aviation (usually referred to
as the Chicago Convention),
while successfully
establishing the framework for rules, procedures
and responsibilities to regulate technical and safety
aspects of international flights, was not framed as a
vehicle for the economic regulation of these flights
(ICAO, 1980).
Nevertheless, the Convention does have some
implications for economic regulation. In particular,
Article 1 of the Convention formally recognizes that
every State has complete and exclusive sovereignty
over the airspace above its territory, which means
that an agreement or understanding of some kind
between two or more States is necessary for international commercial air transport to take place. This
fundamental principle is also reflected in Articles 6
and 7 of the Convention, which specify the requirement for permission or authorization by a State for
access to its airspace for scheduled services and for
cabotage operations respectively, and is relaxed
only in regard of certain aspects of non-scheduled
operations through Article 5. Certain other Articles
of the Convention
refer to various aspects of
This article
necessarily
included in
Conference
London on

contains personal views of the author, which do not

reflect those of ICAO; some parts of the article were
a presentation
to the Institute of Economic
Affairs
on Liberalization
of Air Transport
in Europe
in
14 November
1994.

agreements,

bilateralism,

multilateralism

economic regulation - for example, Article 15

relates to airport and similar charges - but the
Convention nowhere delineates the conditions for
commercial access to national airspace or indicates
how permission for such access should be given or
exchanged.
The reason for this omission was that the
Convention was to be accompanied by two multinational agreements developed by the Chicago
Conference for the regulation of commercial air
services. The first of these, the International Air
Services Transit Agreement,
covering overflights
and technical stops (the first and second freedoms
of the air), was readily achieved and can be
regarded as relatively successful (ICAO, 1992a, pp
24); it remains in force today ratified by 100 States
the Chicago
Convention
is
(for comparison
currently ratified by 183 States). The second multinational agreement emerged in the form of the
International Air Transport Agreement (the five
which, however,
never
agreement),
freedoms
achieved critical mass, and despite various proposals over the years to revive or amend it, has long
been a dead letter (ICAO, 1992a, pp 4-7). The
Agreement came into force for 19 States, eight of
which subsequently denounced it; it does nominally
remain in force today for the remaining 11 States.
Even during the Chicago Conference, the general
acceptability of the International Air Transport (or
any similar universal multilateral) Agreement was
perceived
as facing formidable
implementation
barriers, and the Conference consequently drew up
a Standard Form of Agreement for Provisional Air
Routes, which, although in theory intended to
cover a transitional period until the Transport
3

The future of international air transport regulation: C Lyle

Agreement
came into effect, opened the door for
the development
of bilateral air services agreements
(US Government
Printing Office, 1945). In 1946, a
prototypical
bilateral
agreement
drawn
up in
Bermuda
(United Nations, 1947)2 between the two
parties that had led the arguments
for the two major
conflicting
philosophical
viewpoints
in Chicago,
namely the UK and the USA, paved the way for the
development
of the network of nearly 3000 bilateral
agreements
in place today.
In recent years, however,
there has been some
diminution
of the role of bilateral agreements
at the
regional level, notably within the European
Union
and the wider European
Economic
Area, where
common international
air transport
regulation
now
applies to 18 States, and within the Andean
Pact,
where
open skies applies
amongst
five States.
Nonetheless
the bilateral
agreement
remains
the
predominant
regulatory
structure
for international
air transport
regulation
today.

The evolution

of regulatory

content

The content of international

air transport regulation
has expanded considerably
over the years. For many
years, it concerned
solely hard rights, as described
below.
The International
Air Transport Agreement and the
Standard Form relate essentially to traffic rights and
to traffic, route and operational
rights respectively,
although each also has a provision regarding airport
and other facility charges (pursuant to Article 15 of the
Chicago Convention),
and the Standard Form has a
provision regarding exemption
of consumables
(fuel,
spare parts, etc) from customs and inspection
fees
(pursuant to Article 24 of the Convention).
An interesting feature of the Transport Agreement
is that (like
the Transit Agreement)
it applies to any air carrier
that has substantial
ownership and effective control
vested in nationals
of any State contracting
to the
Agreement.
An interesting
feature of the Standard
Form is that it is predicated
upon the refrain from
grant of exclusive rights of transit, non-traffic stop and
commercial
entry by a State to any other State or
airline (that is, a most favoured nation provision).
By 1946, the UK-USA
agreement
included,
in
addition to traffic, route and operational
rights, an
air carrier tariff clause (requiring
approval of filed
tariffs
by
both
governments,
so-called
dual
approval),
narrowed
the substantial
ownership
and
effective control to nationals
of either contracting
party, and made the grant of rights exclusive to the
two parties concerned.
By 1959, when the European
Civil Aviation
Conference
drew up a set of standard administrative

The Agreement
is now colloquially
referred to as Bermuda
I.
having been superseded
by a further bilateral air services agreement between
the United Kingdom
and the United States in
1977, also signed in Bermuda and hence known as Bermuda
II.

and technical clauses for use in bilateral agreements,

the first soft right had appeared
in a number
of
agreements
(ICAO,
1962)3 governing
currency
conversion
and
remittance
of earnings.
Over
succeeding
years, there was an increasing
proliferation of inclusion
of soft rights in bilateral
air
services agreements,
not necessarily
because they
were appropriate
for inclusion
in such agreements
but more likely because,
at the time, other more
general vehicles for coverage of the subject matter
concerned
(which was of a general doing business
or trading nature) were either not available or not
regarded
as effective for air transport;
use of the
existing bilateral air services agreement
mechanism
was an easy option, which ensured reciprocal treatment for a single economic sector.
Today, a significant number of air services agreements
include
inter aliu provisions
concerning:
exchange
of statistics,
reciprocal
exemption
from
taxation
on income
of airlines,
establishment
of
offices and airline representation
(including sales and
marketing
provisions),
local or convertible
currency
sales by airlines,
ground-handling
arrangements,
computer
reservation
systems, currency
conversion
and remittance
by airlines, and other commercial
guidelines for airlines (ICAO, 1988, 1995).
Hence, in todays world, air services agreements
generally
include
not only provisions
for hard
rights that are specific to air transport,
but also an
extensive
range
of soft rights, which may be
equally applied to other service sectors or even to
traded commodities.

Driving forces for change

In recent years, both existing regulatory
structures
and regulatory
content have come under increasing
pressure
for change
from two primary
driving
forces: commercial
reality, and broadening
objectives of regulation.
Commercial
reality is undoubtedly
the more influential of these driving forces. The seeds of liberalization of international
scheduled
air transport
in
the modern era were probably sown with the introduction of floating currency exchange rates in 1973,
which threw regimented
fare structures
into disarray, a rapid increase in charter flights to meet latent
demand
for visiting friends and relations
(VFR)
and tourist
traffic, and the introduction
of the
advance purchase excursion
(APEX) fare in 1975
by scheduled airlines as a competitive
response. This
fare offered a greatly reduced price for a limited
number of seats on flights where forecasts indicated
that there would otherwise be capacity left unoccupied, on condition
of advance purchase and certain
limits of stay; it was the origin of what is today
called yield management.
The rules and conditions
For example,
Germany-UK

Lebanon4witzerland
(1955).

(1953),

Libya-UK

(1953),

The future of international air transport regulation: C Lyle

attached to the APEX fare, while providing the

necessary
control
and direction
of consumer
demand, were complex and in some respects virtually unenforceable
(backdating a purchase date
being as easy as backdating a club membership for
an affinity group charter, with which the APEX fare
was designed to compete).
And not only was there subsequently an increasing proliferation of fares, rules and conditions, a fare
itself became increasingly difficult to define with the
advent of marketing initiatives such as frequent
flyer programmes and other benefits associated with
carriage. So, following a period of increased but
largely futile tariff enforcement
activity in an
atmosphere of less than enthusiastic support from
consumers, governments elected to take a less active
role in the regulation of fares. In a few cases this
was done pre-emptively
by replacing the dual
approval concept in bilateral air services agreements with country of origin, dual disapproval or
fare zone arrangements, and in some cases it was
a consequence
of legal action (notably
the
Nouvelles Front&es and Ahmed Saeed decisions
in Europe), but in most cases it was done by simply
tolerating
so-called illegal discounting
(albeit
frequently
because of inadequate
resources to
devote to enforcement).
And as with so many other economic sectors,
where pricing leads, so inevitably follows the harsh
reality of fundamental regulatory issues such as
market access and capacity. Over the past several
years these issues have been brought to the
forefront of the international air transport arena by
air carriers in an increasingly competitive environment seeking cost reductions, new sources of financing and expansion of markets beyond traditional
boundaries. They lie behind the trends to transnationalization and globalization.
Transnationalization
means
airlines
going
offshore, locating parts of their operations outside
their national base. Some prominent examples are
American Airlines with its accounting and data
entry departments in Barbados, Cathay Pacific with
its data centre in Australia, Swissair with its
accounting department in India, and many airlines
(particularly smaller ones) contracting out maintenance work to suppliers in foreign countries.
Globalization can take several forms. One form is
equity investment by one carrier in another, epitomized by the stakes by British Airways in Carib
Express, Qantas and USAir. Other forms, less
legally committing than equity investment but no
less influential and even more widespread, are
commercial, marketing and technical alliances. An
analysis of the trade press indicates that in the past
ten years some 200 such agreements have been
reported. Most involve joint operations and/or code
sharing, and most involve a major carrier as one of
the partners. Yet another, newly emerging, form of
globalization is franchising. The past two years have

seen the introduction

of the first international
airline franchises
outside North America: for
example, City Flyer Express, Maersk Air and
Loganair with British Airways; Cityjet with Virgin
Atlantic; and Contact Air with Lufthansa. So far
these are all within Europe but, while an innovation
for the air transport sector, international franchising
is common in many industries and could set a new
trend in the globalization of airlines.
Foreign ownership of equity in national air
carriers clearly has direct implications for air
services agreements, which tend to be predicated
upon protection of the interests of the national
carrier,
while code sharing
and franchising,
whatever the reason for their introduction, both
have similar regulatory implications: that is, bypassing traditional market access (traffic right) limitations in air services agreements.
And there are more general implications in the
fact that globalization is a trend that goes well
beyond air carriers. In the travel and tourism industry alone, this is exemplified by:
l

computer reservation systems (down to six with

global reach and probably still falling);
tour operators and travel agents (American
Express
and Thomas
Cook, Carlson and
Wagonlit are topical examples);
hotel and resort chains (the majority purchase of
Meridien by Forte is a recent example, if unusual
in circumstance).

The point is made that international air transport

can no longer be considered from a purely national
standpoint or as an isolated sector. Commercial
reality is a driving force for regulatory change.
The second driving force mentioned above is the
widening recognition that the objectives of regulation should be of a broad economic nature rather
than simply reflecting the interests of air carriers
and specifically national carriers. While the interests of carriers, and in particular the provision of a
healthy operating environment in which they can
achieve a reasonable rate of financial return, will
always remain a significant element in regulatory
objectives, there is increasing perception of a need
to reflect more adequately the interests of parties
such as airports, communities, regions and, by no
means least, consumers, as well as the contribution
of air transport to trade, tourism, employment and
economic development in general. Such broadened
objectives,
aimed at maximizing net national
economic benefit, are slowly but surely gaining
prominence in international air regulatory negotiations, and they are also one of the factors underlying the trend to privatization of air carriers.
The subsuming of international
air transport
regulation into broader economic trading arrangements has also emphasized the broadening
of
regulatory objectives. Prime examples of this are the
European Union and the Andean Pact, but others
5

The future of international air transport regulation: C Lyle

are emerging: for example, by the Caribbean

Community, the Economic Community of Central
African
States
and
the
Southern
African
Development Community, as well as by some of the
member States of the Association of South East
Asian Nations.
The outcome of the Uruguay Round of Trade
negotiations will have a broader effect. In April 1994,
consensus was reached on a package of trade agreements that for the first time include services as well
as commodities (Uruguay Round, Trade Negotiations
new
World
Trade
Committee,
1994). The
Organization, which serves as the single institutional
framework for the General Agreement on Tariffs and
Trade, came into being on 1 January 1995 with 81
initial member States, and this number may rise to 128
when ratification procedures are complete. At present
the General Agreement on Trade in Services applies
to only three elements of air transport: aircraft repair
and
and maintenance,
selling and marketing,
computer reservation systems. But the Agreement is
a multilateral vehicle for liberalization; it is not a
closed deal, and the scope of coverage of air transport
will be revisited some time within the next five years.
The ICAO Air Transport

Conference

This was the background

against which ICAO
convened
its Air Transport
Conference
in
November 1994, exactly 50 years after the Chicago
Conference.
The 1994 Conference,
attended by
delegates from 138 States and 27 international
organizations, conducted the most comprehensive
examination of all facets of international air transport regulation since the 194Os, including both hard
and soft rights issues. Following two weeks of
discussion, the Conference adopted a single, wideranging recommendation,
which provides a great
deal of insight as to the future of international air
transport regulation (ICAO, 1995).
The recommendation
included, as a general goal:
...gradual. progressive, orderly and safeguarded
change towards market access in international air
transport regulation...
The Conference recognized that each State will
determine its own path and its own pace of change,
on the basis of equality of opportunity and using
and/or
global
regional
subregional,
bilateral,
avenues according to circumstances. Bearing in
mind the disparate levels of economic development
amongst States, it was felt that liberalized arrangements at the subregional or regional level provide
valuable experience as a possible precursor to interregional or global liberalization.
It was also recognized that, in view of the disparities in economic and competitive situations, there is
no prospect in the near future for a global multilateral arrangement for the exchange of traffic rights
(that is, hard rights). On the other hand there was
6

sufficient consensus for the Conference to recommend further work by ICAO on developing some
regulatory arrangements on doing business matters
(that is, soft rights) into more formalized arrangements. Within this general context, some of the
more substantive conclusions of the Conference are
described below.
Safeguards/Safety

net

One of the reasons why the Conference felt the time

was not yet ripe for a global regulatory arrangement
on hard rights was a general perception that there
were inadequate safeguards currently in place to
ensure the participation of all States in international
air transport, and to protect against inequity in scale
of operations and particularly against capacity or
price dumping or predation. The Conference was
presented with a proposed regulatory arrangement
on safeguards in the form of a Code of Conduct on
Healthy Sustained Competition and an associated
Resolution
and
Dispute
innovative
speedy
Mechanism. The Conference
also considered a
proposal for a safety net through which a capacity
freeze could be imposed as an extraordinary
measure for a limited time period in response to a
rapid and significant decline in participation in a
particular country-pair
market. The Conference
welcomed these proposals, but felt that they needed
further elaboration and greater emphasis on prevention rather than ex post facto reaction. They are
therefore in the process of further development.
Air carrier

ownership

and control

In their air services agreements, States generally

retain the right to withhold, revoke or impose conditions upon the operating permission that an air
carrier needs in order to operate the agreed
commercial air services if the carrier is not substantially owned and effectively controlled by the designating State or its nationals. There are some
exceptions to these criteria, notably in provisions
related to air carriers created by intergovernmental
agreement, such as Air Afrique, Gulf Air and SAS.
Furthermore,
a regulation of the Council of the
European Union, effective 1 January 1993 and
directly applicable in all member States of the
Union (European Communities, 1992): includes in
the criteria for defining a community air carrier a
requirement that such a carrier be majority owned
and effectively controlled by member States of the
Union and/or their nationals, and that its principal
place of business and, if any, its registered office be
located in a member State.
-The principles in the regulation
currently
apply not only to the
15 member States of the Union but also to three further States
in the European
Economic
Area (Iceland,
Liechtenstein
and
Norway), and negotiations
are in hand for its extension to seven
additional
States (Bulgaria,
Czech Republic,
Hungary.
Poland.
Romania,
Slovakia and Switzerland).

The future of international air transport regulation: C Lyle

Recognizing the needs for capital and the trend to

transnational
investment in carriers, the ICAO
Conference agreed by consensus on two alternatives
for broadened criteria beyond national ownership and
control for use of market access. The first alternative
is that an air carrier be substantially owned and effectively controlled by nationals of any one or more
States that are parties to an agreement (whether bilateral or multilateral) or by any one or more of the
parties themselves. The second alternative is that an
air carrier be substantially owned and effectively
controlled by nationals of one or more States that are
not necessarily party to the agreement concerned but
which are in a predefined group of States with a
community of interest. It was felt that each of these
alternatives would beneficially broaden ownership
and control provisions within limits that would
proscribe the development of flags of convenience.
State aids/subsidies
The Conference felt that State aids per se were not
necessarily inappropriate,
and did not ipso facto
constitute unfair competitive practices, but rather
focused on the need to develop transparent and
effective measures to ensure that aids/subsidies to
certain air carriers do not adversely affect competing air carriers.
Competition laws
The Conference felt that, in the short term, States
should use the existing ICAO guidelines and/or
model clause on the application of competition laws
to avoid or resolve disputes that may arise when
applying such laws to international
air transport
(ICAO, 1989). In the longer term, the safeguards
mechanisms described above might be used as the
primary means to deal with anti-competitive abuses.
Environmental protection
In essence, the Conference,
acknowledging
the
importance of and need for appropriate measures
for protection of the environment
as it may be
affected by international
air services, agreed to
emphasize
non-discrimination
of environmental
measures amongst States or against air transport,
and the role of ICAO as the global forum for developing environmental measures for international air
services (ICAO, 1993a,b).5
Taxation
The Conference
here endorsed existing ICAO
policies6 by calling on parties to air services
agreements to undertake to reduce to the fullest
5The
Organization
develops
certification
Standards
and
Recommended
Practices for aircraft noise and emissions (Annex
16 to the Chicago Convention:
Environmental
Protection)
and
has also agreed on operating
restrictions,
for example as regards
the phasing
out of noisier
(Chapter
II) aircraft
(Assembly
Resolution
A28-3).
%pelled out in ICAO (1994).

practicable extent all forms of taxation on the sale

or use of international air transport by air, including in particular certain specified taxes.
Doing business
The Conference called on parties to air services
agreements to consider agreed regulatory arrangements on ground handling, currency conversion and
remittance of earnings, employment of non-national
personnel, sales and marketing, and computer reservation systems (see Appendix). These regulatory
arrangements, possibly together with ones on user
charges and taxation (ICAO, 1992b), will form the
basis for the development
by ICAO of more
formalized
arrangements
on soft rights as
requested by the Conference.
Impact on regulation
So what do the conclusions of the Air Transport
Conference and, more importantly, the underlying
driving forces for change mean for the future of
international air transport regulation? First, it seems
likely that different elements of regulatory content
will be treated in different regulatory structures (the
differences lying both within the air transport sector,
for example between bilateral or multilateral agreements, and also between the air transport sector and
more general trading or competition arrangements).
For example, so-called doing business or soft
rights, notably those just mentioned concerning
computer
reservation
systems and selling and
marketing, will be treated multilaterally
in the
context of the World Trade Organization and ICAO,
which already has a Code of Conduct on the
Regulation and Operation of Computer Reservation
Systems (ICAO, 1992a, pp 3047): and with which
the new trade body is bound to work closely.
The treatment of hard rights, notably market
access through traffic, route and operational rights,
will continue to be covered by air services agreements for the time being, but there may well be
some moves away from bilateralism in certain
circumstances, for example to intra-regional regulation where the level of economic development of
the States concerned is similar and/or, as exemplified earlier, where broader
economic
trading
arrangements
already
exist.
The
near-term
prospects for inter-regional
regulation of hard
rights through air services agreements remain dim,
even between regions of comparable
economic
fortune (where there is continuing perception of a
potential
for inequitance
allocation
of rights
The Code is currently under review by the ICAO Council in the
light of experience
(it was first adopted in 1991) and with a view
to determining
the feasibility of developing
it into a multilateral
agreement,
possibly
in conjunction
or in complement
with a
model computer
reservation
systems clause for insertion in bilateral air services agreements.

The future of international air transport regulation: C Lyle

amongst sovereign states by a third party).8 On the

other hand, the power of trading interests should
not be underestimated, and the inclusion of hard
as well as further soft air transport rights in the
General Agreement on Trade in Services (GATS)
remains a distinct possibility. What would be the
consequences?
A special economic

sector?

One obvious consequence could be a quantum leap

into multilateralism for the many States concerned.
Given the mandate of the World Trade Organization and the objectives of the GATS, this would
almost certainly be associated with liberalization,
and while some States might welcome liberalization,
others have made it clear that they are not prepared
to welcome liberalization, at least of hard rights,
without adequate safeguards.9
The key question to be answered for all States is:
to what extent is international air transport a special
economic sector thereby requiring special economic
treatment? Lobbyists from within the sector have
continually argued that air transport exhibits special
characteristics, without, however, clearly defining
these characteristics.
On the other hand, some
academics and macro-economists
are currently
arguing that air transport exhibits many characteristics in common with other services or even with
many traded commodities, without, however, justifying such broad assumptions.
Once the extent to which international air transport is a special economic sector has been defined,
then the scope of those aspects of international air
transport needing special regulatory treatment can
also be determined, leaving the remaining aspects to
more generic laws concerning trade, competition,
environmental protection, etc.
Substantive aspects of international air transport
that are frequently mentioned from within the
sector as special are sovereignty, prestige, defence,
safety, the scale of investment requirements, and
physical limitations on market access. These aspects
are each briefly reviewed in turn below.
Sovereignty

The exclusive authority of a sovereign State over

operations within its national territory is universally
accepted under international
law, and therefore
8A possible exception
to this could be the phasing-in
of hard
rights for specified categories
of operations,
such as all-cargo or
n&-scheduled,
and/or for specified regional airports.
91n the short term. the inclusion of hard rights in the GATS
Annex on Air Transport
Services might rest6 in the filing of a
substantial
number of exemptions
to the most favoured
nation
treatment
required
by Article II of the GATS (and continued
application
of relevant
provisions
in bilateral
or regional
air
services agreements),
but there are specific time limitations
and
review and negotiation
processes in the GATS aimed at removal
of all exemptions.

applies
to any form of economic
activity.
International
air transport is unique only to the
extent
that this basic principle
is explicitly
reaffirmed in Article 1 of the Chicago Convention
(although even this relates to airspace over the territory). This explicit recognition,
however, does
create an administrative or legal hurdle, in that it
necessitates the express consent of a State (including conditions attached thereto) in order to enable
market access from another State.
Prestige

The days of a government running an airline to

show the national flag seemingly irrespective of the
operating result, a natural desire in particular of
States newly emerging from colonial status, seem to
be numbered. Nonetheless, the concept of showing
the flag should not be dismissed out of hand, since
it can act, for example, as an effective marketing
tool for a tourist destination country (the broader
net national economic benefit justification); it is,
however, of doubtful value as an argument for
defining international
air transport as a special
sector.
Defence

One instance of a linkage between economic

regulation of air transport and defence requirements is the Civil Reserve Air Fleet (CRAF)
programme in the USA, whereby air carriers inter
alia enter into voluntary arrangements
with the
Government
regarding access to military charter
business in peacetime and delivery of aircraft and
crews to the military as may be required in times
of conflict. The Government
compensates
the
carriers accordingly; there is no maritime equivalent.10 In most countries reliance for defence needs
is simply made on charter capability or general
the
commandeering
of
legislation
enabling
resources. Lesser economic powers than the USA,
assuming that they have a perceived inadequacy of
military airlift capacity, may be concerned that
foreign ownership of carriers could limit their
ability to commandeer aircraft; if this is the case,
protection
could be achieved
by linking the
commandeering provision to registration of aircraft
rather than to the primary place of business of air
carriers and insisting on registration
of some
aircraft locally (or in a defence partner State) as a
condition of foreign ownership. In any event, even
if there is a defence argument for national ownership of air carriers or national registration
of
aircraft, it is not an argument that air transport as
an activity is special or distinct from other modes
of transport or other economic sectors.

Wome
CRAF
50-59.

implications
of foreign investment
in US carriers for the
are discussed in US General Accounting
Office (1992) pp

The future of international air transport regulation: C Lyle

Safety

The continuing implementation of the Annexes to

the Chicago Convention should in theory ensure
that safety is assured irrespective of commercial
considerations, including ownership and control of
air carriers (although it is noteworthy that, in the
light of uncertainty regarding the extent to which
certain Annex provisions are actually applied in
some countries, ICAO has recently found a need to
establish a safety oversight programme aimed at
assuring worldwide integrity). At the same time,
given the increased use of leased aircraft and the
seeking of tax havens by lessors for their aircraft, it
could be considered necessary at some point to link
the market access rights of air carriers to the States
of registry for the aircraft used by the carriers, these
States having the ultimate responsibility for the
safety of the aircraft concernedunder
the Chicago
Convention. In this case, a further but perhaps more
controversial measure might be to define a list of
countries in which aircraft operated among the territories covered by an agreement may be registered.
This would seemingly constitute a special need; on
the other hand, the need could be met by separate
safety agreements rather than by necessarily including the subject in air services agreements.
Scale of investment

requirements

In the past it has been claimed that there is a particular barrier to freedom of entry into international
air transport imposed by the. fact that operating
capacity is available only in the form of large,
discrete and extremely
capital-intensive
blocks,
namely jet aircraft. However, there is now a wide
range of sizes of jet aircraft available to meet the
demands of a wide range of route densities and
distances, and aircraft ownership and long lead
times are in any case no longer a prerequisite for
market entry, thanks to the widespread introduction
of leasing and innovative forms of financing.
Physical

limitations

on market

access

This is one, crucial, element on which the case for

or against special treatment for international
air
transport has yet to be made from either the
sectoral or the external protagonists. The argument
for the special case might go as follows.
Coca-Cola can in theory be made available (and
is well on the way in practice to being available) in
every corner store in every small town and village
in the world. Telecommunication,
banking and
insurance services can in theory be made available
in every household
in the world. Even other
(surface) modes of transport
services such as
automobiles and buses are almost always available
locally, and train stations are often not too far away.
Decision
taken by the Council at the twelfth
143rd Session, on 26 October 1994.

meeting

of its

But international air transport is land-intensive

at point of entry and exit. Because land is a
precious and finite commodity there is, and always
will be, an insufficient coverage of airports (and
surrounding airspace) to enable the achievement
of total market access in international
air transport, which enjoys its pre-eminence
in the longhaul transportation
of passengers owing to an
important defining advantage, namely a quantum
differential in speed (an advantage that has all but
eliminated the scheduled maritime transport of
passengers).
Hence international
gateways or hubs with
relatively long runways will continue to be a defining constraint on air transport. Thus there are physical (and environmental) limitations on the supply of
infrastructure, which not only lead to potential for
local monopoly but also place limitations on the
supply of operations. There will therefore for the
foreseeable future be a need for special regulation
to ensure fair and equal opportunity of access to
this limited supply.
That is the hypothesis that seems to represent the
nub of the economic argument for international air
transport to continue to be treated as a special
sector. As indicated above, it remains to be proven,
and it is hoped that this article will spark some
analysis and debate on the issue.

Codicil
Even assuming that the case is proven that international air transport is not a special economic
sector in any way, it remains to be seen whether it
would be appropriate for its inclusion as regards
market access under the present provisions of the
General Agreement on Trade in Services, for two
primary reasons. First, the sector involves the
operations of aircraft and the carriage of passengers not only to and from their country of registration or citizenship but over and between the
territories of other countries; it is consequently
particularly
susceptible
to the extra-territorial
application of national or regional competition law
(ICAO, 1989); this is where the embryo ICAO
Code
of
Conduct
on
Healthy
Sustained
Competition
could be of particular importance.
Second, the development of predatory behaviour
and dumping can occur within a very short time
frame in air transport in comparison with other
sectors, as investment in operating capacity is so
expensive, demand is highly fluctuating, and the
product is extremely perishable, with a consequently low marginal cost per seat or per unit of
freight capacity in times of excess capacity. There
is some doubt that the general dispute settlement
procedures
of the World Trade Organization
would be timely enough to respond to the demands
9

The future

of international

air transport

of international air transport

operating environment.

regulation:

C Lyle

for a fair competitive

References
European
Communities
(1992) Council Regulation
(EEC) No
2407192 on Licensing
of air carriers,
in Official Journal of
European Communities, No L 24011
International
Civil Aviation
Organization
(1962) Handbook of
Administrative Clauses in Bilateral Air Transport Agreements
Circular 63-AT/6
International
Civil Aviation
Organization
(1980) Convention on
international Civil Aviation 6th edn, Dot 730016
International
Civil Aviation Organization
(1988 and 1995) Digest
of Bilateral Air Transport
Agreements
Dot
9511 and
Supplement
International
Civil Aviation
Organization
(1989)
Guidance
Material on the Avoidance or Resolution of Conflicts over the
Application of Competition Laws to International Air Transport
Circular 215-AT/85
International
Civil Aviation
Organization
(1992a) Policy and
Guidance Material on the Regulation of International Air
Transport Dot 9587

International
Civil Aviation Organization
(1992b) Statements by
the Council to Contracting States on Charges for Airports and
Air Navigation Services 4th edn, Dot 908214
International
Civil Aviation
Organization
(1993a)
Assembly
Resolutions in Force (as of 8 October
1992) Dot 9602
International
Civil Aviation Organization
(1993b) Environmental
Protection - Annex 16 to the Convention on International Civil
Aviation Volume I, 3rd edn, and Vol II, 2nd edn
International
Civil Aviation Organization
(1994) ICAOs Policies
on Taxation in the Field of International Air Transport Dot
8632-C/968
International
Civil Aviation
Organization
(1995) Report of the
World-wide Air Transport Conference on International Air
Transport Regulation: Present and Future Dot 9644
US General Accounting
Office (1992) Foreign Investments in US
Airlines GAOIRCED-93-7
\

US Government
Printing
Office
(1945) International Civil
Aviation Conference - Final Act and Related Documents
United Nations (1947) Treaty Series (Volume 3) No 36, United
States of America and United Kingdom of Great Britain and
Northern
Ireland, Agreement
relating to air services, signed at
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1946
Uruguay Round, Trade Negotiations
Committee
(1994) Final Act
of the Uruguay Round of Multilateral Trade Negotiations

Appendix
Regulatory arrangements for doing business issues as
agreed by the 1994 ICAO Air Transport Conference

Ground

handling

Parties would authorize

(a)
(b)
(c)
(d)

foreign air carriers to:

perform their own ground-handling services;

handle another or other air carrier(s);
join with others in forming a service providing
entity; and/or
select among competing service providers (at
each designated carriers choice).

An air carrier would be permitted to choose freely

from among the alternatives
available and to
combine or change its option, constrained only by
relevant safety and security considerations,
and
(with the exception of self-handling in (a) above) by
the scale of airport operations being too small to
sustain competitive providers. Parties would always
be required to take the necessary measures to
ensure reasonable cost-based pricing and fair and
equal treatment for all designated air carriers.
Currency
earnings

conversion

and remittance

of

Parties would agree that each air carrier may

convert and remit abroad to a carriers choice of
State, on demand, local revenues in excess of sums
locally disbursed with conversion and remittance
permitted promptly without restrictions, discrimina10

tion or taxation in respect thereof at the rate of

exchange applicable to transactions and remittance
as of the date of request.
Employment

of non-national

personnel

Each party would agree to accord the right for each

foreign designated air carrier to bring in and
maintain employees who perform managerial, sales,
technical and operational duties for the air carrier,
consistent with the laws and regulations of the
receiving State concerning entry and residence.
Sales and marketing
Each party would grant the right for each designated air carrier to be accorded national treatment
for the sale and marketing of international
air
service products (directly or through agents or other
intermediaries of the carriers choice), including the
right to establish offices, both on-line and off-line.
Computer

reservation

systems

States would use the ICAO Code of Conduct on the

Regulation
and
Operation
of
Computer
Reservation Systems as their basis for regulating
computer reservation systems.