Preface

The shift in focus that confronts competition in commercial aviation largely lies in the compelling need for measures that would enable airlines to maximize on potential available in the market, thereby preventing the industry from falling apart. Since the beginning of regulated civil aviation in 1944 and until recently, competition was rigidly regulated and often based on predetermined capacity as a determinant of a carrier’s entitlement to enter a market, , which stultified the global air transportation system. The transition from a somewhat smoothly running but cumbersome aviation industry was not easy, as the air transport industry was comfortable and languid with established legacy carriers dominating a vastly untapped market. However, the then air transport system had its advantages. There may not have been large aircraft and more connections than there are today, and notwithstanding the absence of the internet where airline tickets and hotel reservations could now be obtained at the flick of a hyperlink on the home PC, in the past a passenger almost anywhere in the world could purchase a ticket to fly seamlessly to almost any part of the world, through a complex but reasonably efficient set of working relationships between hundreds of individual air carriers. Transaction costs were low, where a single call to a travel agent at the corner of the street could finalize a trans-continental flight. This was mostly possible because individual airlines themselves ensured the provision of all their services, infrastructure and procedures to connect passengers and freight both within their own networks and those of connecting carriers. At the airport, the passenger did not encounter heat sensitive monitors that sought to establish that he was the carrier of a communicable disease nor were there physical checks of person and baggage. Industry standards and facilitation measures were in place through the International Civil Aviation Organization (ICAO) and the International Air Transport Association (IATA) procedures and clearance at the airport was hassle free and not subject to color coded security alerts.

Today, the story is somewhat different. Things have become more sophisticated. It was inevitable that they had to, as market conditions changed and the demand for air transportation grew (and keeps growing) at roughly double the rate of the growth in the general economy. The exponential infusion of capacity to meet this demand requires costly systems and infrastructure to serve the consumer. An inevitable corollary was that air transport became more expensive. However, if only this were the issue, things would have been easily manageable. The prolific use of air travel by the public made air transport an easy target for terrorism and the free movement of disease causing vectors. The threat of terror brought its own problems requiring more expensive aviation insurance and the necessity to cancel flights every now and then, while the proliferation of air travel brought in environmental concerns of aircraft noise and engine emissions, problems of airport congestion and slot allocation. Worst still, competition between carriers to offer capacity made some of them expand with the only objective of providing services at any cost. Critical services required for aviation safety, such as efficient ground handling and precise engineering were outsourced, with no guarantee of one hundred percent safety of a flight. The crisis deepened.

The above notwithstanding, neither a single nation nor the global aviation community ever deregulated safety and security. Responsibility still continues to devolve upon governments to provide additional capacity, find the money to fund safety and security inspectors and ensure that their carriers operate air services with full insurance coverage, however expensive, so that the world economy would not run aground for lack of international air services. Fortunately, all 188 States who are signatories to the Convention on International Civil Aviation (Chicago Convention) signed at Chicago on 7 December 1944, can rely on ICAO to find regulatory solutions that would keep the crisis from becoming unmanageable. In the recent past, ICAO has regulated on safety and security, established and conducted security and safety audits on Contracting States, adopted much needed principles of guidance on facilitation, assisted in preventing the spread of disease by air carriage and even developed a global aviation insurance scheme in case things go wrong in the insurance industry the way they did immediately after 11 September 2001.

Since its inception as a regulated industry, the overriding theme of international civil aviation has been, and continues to be, the pursuit of friendship and understanding among the people of the world with the ultimate objective of ensuring global peace. Toward this end both the principles of air navigation and aviation economics have to ensure that aviation is developed in a manner that would make sure the world has a safe, reliable, economical and efficient civil aviation system. An inherent characteristic of aviation is its ability to forge inroads into human affairs and promote international discourse. It also promotes international goodwill and develops a feeling of brotherhood among the peoples of the world. Therefore, it has been claimed that problems of international civil aviation constitute an integral part of the universal political problems of world organization and therefore aviation problems cannot be solved without involving the world political and diplomatic machinery. It is at these crossroads that one encounters the profound involvement of the International Civil Aviation Organization.

At present, the most critical challenge facing international civil aviation is to sustain the air transport industry and assure the consumer of continuity of air transport services. The initial setback suffered by the industry as a result of the events of 11 September 2001 and the combined impact of the economic downturn and the precipitous decline in air travel during the period that immediately followed portended an inevitable gloom for the air transport industry, and resulted in the abrupt downfall of air traffic globally during 2001. The retaliation by the world community against terrorism increased the airline passenger’s fear and reluctance to use air transport. Increasing costs of security enforcement and insurance prompted air carriers cancelled or postponed their new aircraft requisition orders. Many carriers, particularly in developing countries, were compelled to revisit their cost structures and downsize their human resource bases.

In the years that followed, the build up to the war in Iraq in 2002; the war in 2003; and the outbreak of Severe Acute Respiratory Syndrome (SARS), added to the initial setback of September 2001. These unfortunate historical landmarks indeed proved to be the “four horsemen of the Apocalypse”resulting in serious ramifications for air carriers. Their ill effects were seen in the rising costs of security and insurance; massive lay offs of employees; drastic reduction of non-profitable routes; closure of facilities and cessation of aircraft operations. In the manufacturing industry, delivery of aircraft already ordered were deferred, resulting in significant cut backs in employment in the aerospace industry and a colossal loss to the industry in 2002. Airports and air navigation service providers suffered a similar fate, losing income from user charges and non-aeronautical revenues, while at the same time facing enhanced insurance and security costs.

These set backs notwithstanding, current trends dictate that the world economy will remain moderately stable and healthy in the near future, despite a slowdown in economic growth. In the short term, inflation may hold steady and inflation rates will probably decrease gradually. The continuing upward trend in fuel prices is likely to increase airline fixed costs and aviation will increasingly be defined in trade terms, whilst being a strong candidate for trade liberalization with a firm focus on services. In the years ahead individual airlines would be compelled to remain competitive. They would need to flow with the tide of emergent and future commercial trends such as privatization, the use of information technology, and removing infrastructure constraints and governmental restraints.

Air travel has several determinants in regard to demand. Primarily, it is determined by income levels and demographics and the cost of air travel. With regard to the cost of air travel, world energy demand, supply and prices are key factors which drive both the profitability of the air carrier and the cost factor involving the use of travel offered by the carrier to the consumer.

All the above indicators incontrovertibly point to one central driver of future air transport — competition, which will help the increasing influence of global alliances and partnerships between carriers to be a key element in industry strategic development where ‘core’ groups of airlines will provide direction and focus. Airline management, geared towards competition, will be called upon to improve coordination, and provide integration and stability to the air transport industry, calculated to result in the inevitable corollary of cost reduction.

The outsourcing of non core activities will continue among airlines, encouraging fledgling carriers to emerge in a liberalized market. Larger airlines will seek franchising and code sharing agreements with other airlines to the farthest extent possible, and will not disregard the importance of creating low cost subsidiaries when possible, while also looking to consolidate their services with other carriers. In the process, existing distinctions between scheduled and non scheduled (charter) carriers will be minimalized. In terms of service distribution, airlines will invest in e-commerce, concentrating as much as possible on selling their services directly on line.

The growth in commercial air services has continued to outstrip the available capacity at more and more airports. Although many airports with congestion problems are located in Europe, a growing number of airports in other regions are reaching capacity limits. Moreover, because of the interconnected operations of the international air transport system, capacity constraints at some airports impact on other airports. This is becoming an increasing challenge to the continued growth of air transport and is having an impact on further liberalization with respect to market access, requiring , in some instances, airports to enter into alliances with one another.

Governments, airlines and airports have each developed measures to overcome or ameliorate situations of insufficient airport capacity. Many States have expanded existing airports or built new ones, runways or terminals. However, environmental, economic, political and physical constraints have, in some instances, prevented physical expansions to increase airport capacity. At least one inter governmental body and a regional body have taken action to improve air traffic control systems designed to increase the capacity of air traffic management and airports. Airports and air carriers have been able to enhance airport capacity by improved facilitation at existing facilities, despite increased security requirements after the events of 11 September 2001 which have limited capacity enhancements in this area.

Revenue and investment management is a key concept which has pervaded the air transport industry, particularly in the wake of trends in privatization of airports and air navigation services. Both airports and air navigation services need to consider issues involved in privatization in order to manage their revenues and investments. Along with the burgeoning need for an increase in airport capacity to accommodate the demand for increasing air transport capacity comes the issue of proper fiscal management of income derived by airports and air navigation services providers. Intrinsic to the issue of revenue and investment management are considerations of cost pricing, liability and duties imposed upon a privatized entity, which in turn have to be managed if successful revenue and investment management were to be accomplished. Intrinsically, an examination of appropriate cost pricing and revenue allocation will be a significant item on the agenda of both airport and air navigation service providers in the near future.

The preeminent regulatory challenge confronting air transport is to update policies, guidelines and other regulatory instruments to address changes in the aviation environment. Competition, when coupled with liberalization of air services which is taking place on an international scale, inevitably calls for a more open and free approach. However, it is not prudent to consider air transport services as being just another normal economic activity. The overarching objective of ICAO, as contained in Article 44 of the Convention on International Civil Aviation is for ICAO to foster the planning and development of international air transport so as to “meet the needs of the peoples for safe, regular, efficient and economical air transport”. This is a most fundamental challenge which not only draws the inference that air transport is a public utility, but also issues a challenge to ICAO, its Contracting States and their carriers to ensure the provision of a safe service satisfying fixed standards of continuity, regularity, capacity and pricing.

The inherent characteristics of air transport, of being a public utility on the one hand and of being confronted with the danger of over regulation on the other, admits of the need for a delicate balance between untrammelled competition and suffocative regulation. While the first approach may give rise to the usual free market inhibitors such as airport, airway and runway congestion, the other approach may ground to a halt the services that may provide air transport commensurate with the demand.

In order to face the exponential growth of the air transport industry, it is inevitable that competition and liberalization should be given serious consideration as a current and future trend in the aviation field. What is needed foremost, in order to improve international cooperation toward achieving a well meshed and overall competitive policy, is to consider the various possible options available. One of the options to promote competition and facilitate trade in air transport lies indisputably in combatting and eliminating anti competitive practices. State responsibility toward achieving this goal is a key factor. One way of ensuring collective State action in this regard might be for States to enter into understandings or agreements toward combatting restrictive trade practices, either bilaterally or plurilaterally. Along with a plurilateral framework of competitive policy, there also should be a concomitant bilateral structure of individual agreement between States to stringently monitor anti competitive conduct. This can only be achieved with a robust and effective international legislative structure. The important role played by public international law in this regard cannot be denied.

As for liberalization of air transport, there has so far been no indication that any State favours total liberalization calculated to open out its domestic market. Strategic alliances between airlines, be they through mergers or other arrangements, will be viewed with caution and objectivity by individual airlines and States so as to preclude the total overrunning of local interests. It is this consideration that would make liberalized ownership and control criteria less attractive to local entrepreneurs who would not encourage foreign ownership to encroach local control airlines have of their own markets.

The operative question - as to whether the global community proceeds to consider the operation of air transport services as a trading activity along the lines of other conventional trading activities or whether it should continue to consider it as a public utility which has broader connotations to States politically and therefore should remain regulated - remains one of fundamental importance to the future of international civil aviation. Therefore, liberalization of air transport cannot be dismissed as not being a viable prospect for the future, particularly in trading terms, and the players concerned must necessarily view air transport in its entirety, as a service composed of critical factors that are inherent in safe and efficient air transport.

The two integral areas that will carry the sustainability of air carriers and assurance of air services in the years to come will be regulatory control and economic strategy. From an economic perspective, it is inevitable that competition will be between airline alliances rather that individual carriers. Markets will be unstable, and, in the case of individual airlines, only those who go “back to basics” to offer the consumer a service as “value for money”will survive. Ethical and moral consideration of economics, in terms of strategic airline management that provides for quality customer service, will play a major role in airline sustenance and will be the bottom line for the years to come.

From a trading perspective, both States and carriers must share equal responsibility to ensure continuity of air transport services. The uniqueness of the operation of air transport services as a trading practice lies in the symbiosis required for its sustenance between States and carriers. This peculiar relationship requires that a certain responsibility devolves upon States to ensure the prosperity of its air transport industry and to prevent the industry from collapsing. Although air transport may be heavily privatized in some instances, particularly in the developed world, it does not take away the overall regulatory supervisory role of the State and its obligation to support its carriers.

From a regulatory perspective, the challenges faced in the economic field, both in the short term and from a long term perspective, are to update and promote ICAO policies and guidelines to meet the demands of a changing environment and to seek a balance between promoting economic growth in the industry, advancing civil aviation, and strengthening security measures and facilitation. In order to address these challenges, all players involved need to seek a harmonious relationship in the industry between a liberalized economic regulatory framework and proper safety, security, social and labor standards.

Economic activity in air transport, particularly in the movement of aircraft between States territories, requires to be viewed in the context of sustainable development, where environmental protection would play a key role. Although air transport does not pose catastrophic environmental consequences on a short term basis, it has now become opportune to address trade in air transport and its effect on global environmental welfare as a composite whole, rather than within a fragmented framework. The economic aspects of environmental protection, particularly in the areas of noise charges and emissions trading as a market based option, is an inevitable challenge, particularly when it concerns global consensus on criteria for levying such charges and their quantification.

At best, the air transport industry’s fortunes have been irregular. The airline industry, has experienced marginal profitability and cyclical fiscal growth in the long term, with periods of growth and profit being watered down by less successful periods to follow. One of the reasons for this fluctuating pattern is that the industry is driven by variable factors such as operational and technological changes as well as regulatory control. Overcoming the challenges which lie ahead would essentially require a balance between these three areas.

This book offers an overview of competition in air transport as it has existed over the past 60 years of regulated civil aviation and takes a look at the various trends driving commercial aviation operations and competition toward modified business plans for airlines and other service providers. This shift in focus, from traditional competition representing “fair and equal opportunity”and “perfect competition” to market driven competition is highlighted through the various features of the industry, from low cost carriers to privatized airports.

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Contents

PREFACE

CHAPTER ONE

1.1.    Introduction
1.1.1.     Current Trends in Competition
1.1.1.1.   Anti Competitive Conduct and Antitrust Issues
1.1.1.2    Ownership and Control and Airline Competition
1.1.1.3    Extra Territoriality

1.2.      The ICAO 5th Worldwide Air Transport Conference
1.2.1.      Achievements of the Worldwide Air Transport Conference
1.2.1.1.    The Global Declaration
1.2.1.2.    Conclusions and Recommendations of the Conference
1.2.1.3.    Regulatory and Economic Impact of the Conference

1.3.      Competition in Europe
1.3.1.     The Decision of The European Court
1.3.1.1.    Arguments of the Commission
1.3.1.2.    Substance of the Decisionsv 1.3.1.3.    Findings of the Court
1.3.1.4.    Legal Issues

1.4.    Competition in The United States

1.5.    Competition Options- The Transatlantic Common Aviation Area

1.6.       CIS States
1.6.1.     Fleet Modernization
1.6.2.     Strategic Alliances
1.6.3.     Strategies of CIS Carriers

1.7.        Economics of African Aviation
1.7.1.     Introduction
1.7.2.     The History of Civil Aviation in Africa
1.7.3.     Legal and Economic Issues
1.7.4.     The need for new aircraft fleets in Africa
1.7.5.     Market Access
1.7.6.     Aviation Safety
1.7.7.     Liberalization of Air Transport and Sustainable Tourism in Africa
1.7.7.1.  Introduction
1.7.8.     The African Air Transport Industry
1.7.8.1.  Air Transport and the African Economy
1.7.9.     Measures to be taken
1.7.10.   Ageing Aircraft
1.7.11.   The Alleviation of Poverty
1.7.12.   Sustainable Tourism in Africa
1.7.13.   Air Transport Management in Africa
1.7.13.1.    Introduction
1.7.13.2.    Legal and Economic Issues
1.7.14.   The Yamoussoukro Declaration
1.7.14.1.    How the Air Transport Industry Fared
1.7.14.2.    Problems Faced by Aviation
1.7.14.3.    What has to be done?
1.7.15.     Aviation and Improving the Economy
1.7.16.     A Common Strategy for African States
1.7.16.1.    Need for Competitiveness
1.7.17.     Initiatives of the United Nations
1.7.18.     The Yamoussoukro Decision
1.7.19.     Safe Skies and the Banjul Accord Group Agreement
1.7.19.1.    Introduction
1.7.19.2.    The Banjul Accord Group Agreement
1.7.19.3.    Effects of the Banjul Accord Group Agreement

CHAPTER TWO — TRENDS IN COMPETITION

2.1.    The Low Cost Carrier
2.1.1.     Legal and Regulatory Issues

2.2.    New Large Aircraft
2.2.1.     Security and Facilitation Issues
2.2.2.     Insurance and Risk Management Issues

2.3.    Privatization of Airports
2.3.1.     General Features of Privatization
2.3.2.     Forms of Private Participation
2.3.2.1.     The Best Approach for an Airport
2.3.3.     Privatization and Economic Issues
2.3.3.1.     The Single Till
2.3.3.2.     Privatization and Legal Issues
2.3.3.3.     Liability of the State
2.3.3.4.     Liability of Private Entities
2.3.3.4.1     Liability towards users 168
2.3.3.4.2     Assumption of risk
2.3.4.     Hong Kong International Airport - a Case Study
2.3.5     Cost Pricing
2.3.5.1.     Marginal Cost Pricing
2.3.6.     The Single Till

CHAPTER THREE — THE SHIFT OF FOCUS

3.1.    Current Trends

3.2.    Common Trading Agreements

3.3.    NAFTA as a Model

CHAPTER FOUR — CONCLUSION