2001-Promoting Trade in Airline Services

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*Tel.:#61-3-9905-5476; fax:#61-3-9905-2495.

E-mail address: [email protected] (P. Forsyth).

Journal of Air Transport Management 7 (2001) 43}50

Promoting trade in airline servicesPeter Forsyth*

Department of Economics, Monash University, Clayton, Vic. 3800, Australia

Abstract

With recent developments in the airline industry, trade concepts (e.g. the nationality of the airline) are becoming increasingly

di$cult to de"ne. However, de"nitions are needed primarily when trade is to be restricted, and the appropriate de"nition depends on

the objectives of the aviation policy. Trade generally enhances overall welfare, though individual countries can lose out from it.

Current arrangements considerably restrict other than bilateral trade in airline services * this suggests that there may be signi"cant

gains from more open trade. Aviation policies, like other trade policies, re#ect a balance between consumer, tourism, airline company

and employee interests. This balance is changing in a number of countries, with the move towards open skies bilateral agreements and

domestic deregulation re#ecting a greater weight being put on consumer interests. Notwithstanding this, most countries are still

hesitant about moves towards freer trade. They support trade when it involves greater market access for their own carriers, but oppose

it when it involves their carriers losing market share. In this respect, aviation policies are similar to policies towards other sectors. The

bilateral system of agreements is consistent with greater freedom of trade, though it makes some aspects of trade liberalisation di$cult

to achieve. Some regional agreements, especially that in Europe, have been successful in achieving trade liberalisation. Signi "cantly,

these have included airline services with other sectors, enabling trade o!s between sectors. 2001 Elsevier Science Ltd. All rights

reserved.

1. Introduction

The airline industry, while being distinctly interna-tional in character, is one in which international trade is

tightly regulated. Most airline markets are limited to the

airlines of a select few countries, and most airlines have

access to only a restricted group of markets, those within

and surrounding their home country. When trade is

tightly constrained, there are usually signi"cant gains to

be made from liberalisation of trade. This is likely to be

so for airline services.

It is not di$cult to understand why countries are

unwilling to open up the airline markets they control, or

share control of, to more trade. Simple protectionist

reasons will be, as in other sectors, quite important.Countries may wish to keep airline production and em-

ployment at home. Where routes are pro"table, possibly

because of regulatory restrictions, they will wish to keep

the pro"ts themselves, and not share them with other

countries (especially when the pro"ts are at the expense

of their own consumers). Some countries also fear domi-

nation of their routes by foreign carriers, which may

possess market power, and use it to the detriment of their

travelers and shippers. Many countries remain quite pro-

tectionist, but others are now taking a broader view oftheir aviation policy, and are re#ecting the interests of

their consumers and their tourism industries, as well as

the interests of producers, such as the airlines and their

employees. This is beginning to make a di!erence when

airline services trade issues are considered. Nevertheless,

most countries are unwilling to allow access to foreign

airlines in those markets they control, even if they give

consumer interests substantial weight when issues of

competition are being considered.

Airline services are also subject to very speci"c interna-

tional negotiating arrangements, namely the bilateral

system. This poses the question of whether the bilateralsystem itself limits the scope for trade, or whether it is

consistent with more open trade if this is the objective of

the countries participating in it. Another question it

poses is that of whether there are alternative negotiating

frameworks which would result in more open trade and

greater gains from trade. There are several options;

regional and multilateral aviation agreements are pos-

sible, as are regional and multilateral agreements which

cover trade in a range of sectors, not just aviation. For

example, trade in airline services could be included in the

General Agreement on Trade in Services (GATS).

0969-6997/01/$- see front matter 2001 Elsevier Science Ltd. All rights reserved.PII: S 0 9 69 - 6 9 9 7 ( 0 0 ) 0 0 0 2 8 - 4


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To start with, the meanings of various terms, such as

open skies, competition and trade in airline services are

clari"ed; most attention will be paid to the last of these.

Next, the possible gains from trade in airline services

are examined, and following this, current barriers to

trade, and countries' aviation objectives are considered.

This paves the way for a discussion of how the bilateral

system "ts in with trade in airline services. Finally, howmoves beyond the bilateral system, such as regional and

multilateral arrangements, will impact on trade, are

examined.

2. Open skies, competition and trade

In discussions of airline liberalisation, the concepts of

open skies, competition and trade are all commonly

referred to; they are interrelated closely, though there are

important distinctions which must be made. Particular

attention is paid here to the concept of trade in airlineservices.

Open skies is the most general of these terms. It refers

to airline markets where there is an absence of regulatory

controls. It could be applied to a bilateral agreement, in

which there are no capacity, entry or price regulations

which apply to airlines of the two bilateral partners

which do, or might, serve the route. The term could be

applied to a regional arrangement, such as European

open skies, or it could apply to a multilateral arrange-

ment if one were to come into being. It is important to

note that under open skies agreements, such as

open skies bilateral agreements signed by the United

States, there may remain some signi"cant restric-tions. For example, cabotage is not permitted, and

airlines of countries other than the bilateral partners

are usually tightly constrained, if they are allowed to #y

the route at all. `Open skiesa agreements will typically

allow for more competition between the airlines of

the partner countries, and they may make more trade

possible.

Competition is a more speci"c concept which refers

to the market structure and rivalry between individual

suppliers in a market. Thus, on a route between two

countries, competition refers to the number of air-

lines which compete independently, and how theycompete. More airlines means greater competition,

though the ways in which they compete are relevant.

A small group of airlines may compete strongly between

one another or, perhaps more likely, they may recognise

their interdependence, and moderate the strength of their

competitive behaviour. Strong competition is desirable

because it induces airlines to keep prices down, and in

turn to ensure that their costs are no higher than they

need to be. Competition however does not imply any-

thing about which countries the competing airlines are

from.

Trade in airline services involves a situation in which

"rms from one country export services to buyers in

another country. Thus, on a #ight between Germany

and the US operated by the German airline, Lufthansa,

trade will take place when US citizens, or citizens of

countries other than Germany, are carried * Germany

exports airline services to the US and other countries.

Trade in airline services is peculiar in a number ofrespects. The product is airline services (passenger

or freight) between two points (not necessarily in

separate countries). The countries at each end of

the route control the conditions under which trade

takes place, and determine which countries are allowed

to o!er airline services. If another country's airline

is permitted to o!er services on the route, there will be

an export of services, though unlike most trades, the

exporting country or its "rms will have little control over

the price at or conditions under which it exports the

service.

Much trade in airline services is bilateral in form. Ifmost of the users of the airline services between two

countries are citizens of those countries, there will be

trade when the airlines of one country sell to the citizens

of the other. There will also be trade when those airlines

#y citizens of other countries on the route. There is much

more scope for trade when an airline carries tra$c on

a "fth freedom or sixth freedom basis, since many of the

purchasers of the services it o!ers will come from coun-

tries other than its home country. However, these types

of tra$c are quite limited in most parts of the world; "fth

freedom rights are rarely granted except on a limited

basis, and the possibilities for sixth freedom tra$c are

constrained by geography.De"ning trade in airline services is becoming more

di$cult with the developments taking place in the airline

industry, though this is re#ected in what is going on in

other sectors as well. The seller is ceasing to be always the

producer * one airline may produce the service, but

another airline may sell it to the passenger or shipper.

This happens with code sharing, where one airline oper-

ates a service but another includes it in its schedule and

sells it to the customer. Here both airlines contribute to

the production process, though the one which operates

the service contributes the greater part. With a code

share service, two countries may be exporting airlineservices jointly.

Another complexity is that the nationality of an airline

is becoming more di$cult to determine. Until recently,

most airlines were owned, headquartered, and controlled

in a single country, did their major maintenance in that

country, and employed most of their sta!in that country.

This is ceasing to be the case. An airline may be head-

quartered in a country but be owned by foreign interests,

and it may employ sta! from a range of di!erent coun-

tries. It may obtain maintenance and information tech-

nology services from several other countries. In what

44 P. Forsyth / Journal of Air Transport Management 7 (2001) 43 }50


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sense is it an airline of the country in which it has its

headquarters?

This is an important question when there are restric-

tions being put on trade in airline services, and on which

airline from which country can produce and sell parti-

cular services * as there are in most markets.

For regulatory purposes, there are ways to de"ne the

product and determine which country supplies it. Forexample, it would be possible to de"ne the export of

airline services in terms of which country's airline oper-

ates or which country's airline sells the service, and to

determine which country the airline comes from in terms

of its ownership, headquarters or where it employs most

of its sta!. If a country is particularly concerned to

protect its airline production activities, it will de"ne na-

tionality accordingly. Thus, it may not be too concerned

about who owns the airline as long as it bases production

and employment within its borders. It will wish to restrict

other airlines on routes over which it has some control.

This country would reject code shares which result inother countries airlines actually operating services. This

is similar to a country which protecting its manufactur-

ing industries and also encouraging foreign investment in

them. Alternatively, a country may be concerned about

airline pro"ts. Such a country will be concerned that the

airline selling services over which it has control are do-

mestically owned. Such a country may not be too con-

cerned about which country's airlines actually operate

the services. It may be quite happy to agree to code

shares which involve other countries' airlines operating

the services as long as the pro"ts from the route accrue to

its own airlines (as, for example, Japan does with some of

its pro"table routes).Thus, we should not expect that one set of de"nitions

will suit all purposes. In some situations, ownership of an

airline may be more important than where it bases its

production, and in others the reverse. The nature of the

trade restrictions, and the de"nitions which accompany

them, will depend on what the country is trying to

achieve when it restricts trade. The problem of de"nitions

primarily occurs when there is an intention to restrict

trade in some way. If there were completely free trade in

airline and related services, all of these de"nitional ques-

tions would be irrelevant, since questions of nationality

do not arise when conditions under which a route is to beserved are considered.

Allied to trade in airline services is trade in services

which are purchased by the airline industry. These in-

clude maintenance, passenger and freight handling, and

information technology services. Some of these, unlike

airline services per se, are included within the General

Agreement on Trade in Services (GATS). Thus, one of the

key questions surrounding trade in airline services is

whether it can and should be included in the GATS (for

a discussion of aviation issues and GATS, see World

Trade Organization (1998)).

3. The case for trade

The case for trade is an old one, a simple one and

a robust one. If a country can supply a good or service at

a lower cost than another country can, it makes good

sense for the latter country to import the good or service

from the former. Airline services are fundamentally much

the same as any other goods and services. They arecurrently treated in a very di!erent way, and are subject

to a unique system of regulation which incorporates

trade restrictions. Trade in airline services could be

opened up much more than at present, as, for example

shipping services are (international routes are fairly free,

though some countries restrict cabotage). Granted the

general case for trade, it is appropriate to test whether,

for a particular context, there are speci"c reasons for

moving away from free trade.

It is di$cult to think of any arguments to the e!ect

that the overall gains to the world (as opposed to indi-

vidual countries) would be greater under an environmentwhich restricts trade. If trade in airline services were

associated with trade in other goods and services, which

created negative externalities, there could be some case

for restriction. For example, airline services and tourism

are closely related; suppose that tourism is excessive

because too much tourism is creating congestion in cities

and damage to environmentally sensitive areas. One way

of restricting this tourism would be to restrict airline

services * this trade restriction could result in overall

world welfare. However, there would be better ways of

handling this problem * if it is tourism which is creating

congestion and damaging the environment, more direct

ways of controlling these externalities are preferable,such as pollution controls or charges. Also, even if airline

services are to be restricted, it would still be desirable to

ensure that they are provided by the countries which are

most e$cient in doing so, and this will require trade in

airline services.

It is conceivable that individual countries could lose

from free trade in a service, such as airline services. The

optimum tari!argument is an accepted argument which

states that one country may be able to gain from restrict-

ing trade if it is able to raise the price at which its partners

purchase its exports. This can be applied to airline ser-

vices (see Clarke, 1998). Suppose a country is in a bilat-eral arrangement with another, and that both countries'

airlines operate on the route. Suppose further that most

of the tra$c on the route comes from the other country.

It may be in the "rst country's interest to restrict supply

on the route, forcing up prices and increasing the pro"ts

of its airline at little cost to its own consumers. While it

will be in the interest of the other country to keep fares

low, it may not see it this way (it may be protectionist),

and the "rst country may be able to impose an optimum

tari! without retaliation. This could also be the case

where the users of the service come from many di!erent

P. Forsyth / Journal of Air Transport Management 7 (2001) 43 }50 45


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countries, and retaliation is not feasible. This situation is

rather like that of voluntary export restraints, whereby,

one country agrees to the request of another to restrict

exports to it, and charge the importing country more for

its exports. It can be argued that this is the case on the

Japan}Australia route, on which most passengers are

Japanese* it may be in Australia's interest to keep fares

high, since its airlines can pro"t from high fares.One proviso to this argument is that regardless of the

restriction to supply, it will still be e$cient for the servi-

ces to be actually operated by the lowest cost supplier,

which ever country this may come from. If a lower cost

airline from another country could operate the service, it

would be in the "rst country's interest to allow it to do so

as long as it could reap the pro"ts from this happening.

Thus if a US airline could operate the Japan}Australia

route at a lower cost than the Japanese and Australian

airlines, and Australia could somehow gather the addi-

tional pro"ts from this airline, it would be in its interest

to allow it on to the market. In reality, this is often verydi$cult to achieve, and successful enjoyment of the

pro"ts will require preventing other countries' airlines on

to the route. Hence, when a US airline, Northwest,

attempted to enter the Japan}Australia route, it made

sense for Australia to try to block it, since it would simply

have diluted pro"ts going to Australian airline.

Even if free trade is in the interest of a country, it need

not follow that every move towards more trade, in the

context of an already restrictive environment, will be to

that country's bene"t. It could be that a route is tightly

regulated and is highly pro"table. These pro"ts will be

shared by the airlines on the routes, typically airlines

from the bilateral partners. While allowing airlines fromother countries to serve the route couldbe in the interest

of the country's consumers, it may not be in its overall

interest, since its airline pro"ts will be diluted. It will be in

the interest of the bilateral partners to restrict access to

their route by airlines of other countries, even if these

airlines could serve the route more e$ciently. US airlines

would very much like to serve the highly restricted and

pro"table intra-Asian routes; however, it makes sense

for Asian countries to restrict access to them, since

the US carriers will dilute the Asian countries' shares

of pro"ts. This is not a general argument against trade;

however it is a consideration which needs to be takenaccount of when moves towards greater freedom of

trade are considered- there may be good reasons for

individual countries to oppose speci"c trade enhancing

proposals.

There are other non-economic arguments which are

sometimes used to justify airline trade restrictions. One of

these is the security argument * countries wish to have

airline industries which may provide transport in times of

con#ict. However, most of the discussion of airline servi-

ces trade centers on how the gains and losses from such

trade are shared- even if a country gains from free trade

in airline services, not everyone in it will be a gainer.

Trade policy will depend here, as in other sectors, on the

balance of these interests.

4. Trade barriers and policies

Trade barriers are still extensive in the airline industry,though as the result of liberalisation, they have been

reduced somewhat. The bilateral system, while not

inherently trade restrictive, is the framework within which

most of the regulation of airline services takes place.

Most bilateral agreements provide only limited scope for

trade. Typically, they specify the conditions under which

airlines from the partner countries can operate and sell

services, and very often airlines from other countries are

not permitted into the market at all. Sometimes, some

limited "fth freedom rights may be granted. At other

times, geography may mean that airlines from non-part-

ner countries will be able to enter a market on a sixthfreedom basis. Countries are usually hesitant to grant

beyond rights. Even where liberal or open skies bilateral

agreements are concluded, for example, between the US

and its many open skies partners, trade is primarily

limited to bilateral trade between the partners.

There are other restrictions which are linked to those

which are present in the bilateral agreements. Airline

ownership is becoming an issue, and limits are being put

on ownership for purposes of participation in bilateral

trades. This is necessary to stop airlines from one country

getting around restrictions by establishing subsidiaries in

others, to access those countries' markets. Such restric-

tions are now beginning to restrict the corporate freedomof airlines- for example, when airlines try to take equity

stakes in alliance partner airlines.

Access to airport services can also restrict the scope for

trade at the airline level. If an airline cannot obtain slots

to use a busy airport, it will be able to enter markets

which include that airport. Airport access is becoming an

increasingly important factor when bilateral agreements

are concluded (for example, when the US and Canada

concluded an open skies agreement } see Tretheway

(1997)). Finally, it is worth noting that most countries

prohibit access by foreign airlines to their domestic mar-

kets (though New Zealand allowed Ansett New Zealand,which was owned by Australian and US interests, to

operate in its domestic markets, and Australia allows

Ansett Australia, now owned by New Zealand and

Singaporean interests, to #y within Australia).

Trade policies of countries are usually the outcome of

pressures from a range of di!erent interest groups. This is

true for policies as they impact on airline services trades.

There are groups with distinct and identi"able interests,

and somehow a balance between these competing inter-

ests is achieved. This balance can change over time, for

example, as consumer interests grow stronger.



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The groups which are most relevant in the airline

services context are consumers, tourism industries,

governments, airline companies and airline employees.

Consumers normally want low fares. To this end, they

will favour competition and also trade. Home tourism

industries will favour low fares for tourists from other

countries, so that more tourists come and purchase their

products. Normally, tourism industries will support com-petition and trade. However, in countries where most of

the tourism #ows are outward (such as Japan) the

tourism industry may favour high international fares, to

keep tourists at home. Governments may also be players

as well as disinterested referees. For example, a govern-

ment may be concerned about revenue #ows to itself,

perhaps in its role as an owner of an airline. Many

countries have recently privatised their airlines; in most

cases, their treasuries were more keen to maximise sale

proceeds than to promote liberalisation which would

lower pro"ts.

Producer interests are often lumped together, thoughdoing this is becoming increasingly inaccurate in the case

of the airline industry. In the days when more business

for the airline company meant more or higher paid jobs

for its workforce, there was a strong conformity of inte-

rest. These days, what is good for the company may not

be good for its workforce. For example, a company may

add to pro"ts by selling services on a code share basis

rather than by directly operating the service; their em-

ployees may lose out from this. The attitude of these two

groups towards trade issues will diverge, since it is in the

interest of the workforces (assuming they are home

based) to maximise production activity at home while the

airline companies can be expected to be more #exibletowards trade. Thus, they will support the opening of

trade if it enables them to take advantage of code sharing,

but they will oppose it if it results in a reduction in their

market share. They will also want access to new markets,

and will support opening up of markets they are current-

ly excluded from. Thus, US carriers support obtaining

beyond rights in Asia from Japan, but they are less keen

on promoting trade when it means allowing cabotage in

the domestic US market.

Changes taking place in the airline industry are also

impacting on airline attitudes to trade. It is no longer

simply a matter of market access that they are seeking.While airlines naturally wish to preserve protection of

their own markets, they want more #exibility to operate.

Thus, they wish to take equity in, and possibly control,

airlines in other countries, to form alliances across coun-

tries, to contract out services when economic to do so

and to source inputs across the world as cheaply as

possible. To form themselves as international businesses,

airlines now wish for some of the trade restrictions which

limit their #exibility to be removed. Strategic alliances

are, in part, a response to trade restrictions, but as they

develop, they will lead airlines to seek greater #exibility

through the liberalisation of several of the barriers to

trade and investment.

The balance of interests has been changing, and this

contributes to the explanation of the liberalisation that

has taken place over the past few decades. Consumer

interests have become more important as governments

recognise that travelers are voters, and they have had an

in#uence on the open skies bilateral agreements whichhave been concluded. Tourism interests are becoming

more vocal, and some countries, such as Australia, in-

clude them on their aviation negotiation teams. In some

cases, countries have permitted more trade, in the form of

greater access on bilateral routes to non-partner airlines,

re#ecting consumer interests. The demand for low fares

to Europe was a major reason why the Australian

government gave up on e!orts to restrict Asian airlines

from o!ering services on a sixth freedom basis on the

Australia}Europe routes (see Findlay, 1985, Chapter 2).

While consumer interests have become more impor-

tant, they have not yet featured prominently in pressurefor more open trade. Consumer interests have been keen

on competition, though they have not paid much atten-

tion to the possibilities for trade. Thus open skies bilat-

eral agreements typically do not open markets up to

more trade on a non bilateral basis, and most domestic

airline deregulations have limited competition to domes-

tically owned and operated airlines. This is not so sur-

prising when trade in other goods and services is

considered. The push to open markets normally comes

from producers, not consumers, who are more diverse

and are a much less e!ective lobby group than producers.

For example, Thai rice producers, not Japanese con-

sumers, are pushing for Japan to open its rice market,and US and other agricultural producers press Europe to

open its markets for agricultural products. European

consumers seem much less interested, even though they

are the ones paying the higher prices. (In the 1990s

Australia tried to galvanise consumer interests in Europe

by pointing out how much extra they were paying for

food, but it had limited success.)

Hence, when it comes to airline services, most coun-

tries are not particularly supportive of trade which goes

beyond the bilateral level. This is true even for countries

which are liberal when it comes to competition issues,

such as the US. Thus the US opposes trade when itwould lead to a reduction of market share for US car-

riers, for example, in the domestic market or on interna-

tional routes which its airlines share with those of

bilateral partners. It is pro trade when it is a matter of

additional access by US carriers to routes they are re-

stricted on, such as beyond rights from Japan into Asia.

It could be that countries are now putting less weight on

airline companies' interests but they are still weighting

employee interests heavily * thus, they may willing to

accept a loss of airline pro"tability (say as a result of

domestic airline deregulation) but not the loss of airline



6/8

jobs overseas. Few if any countries seem willing to pursue

pro trade policies, if these are against their producer'

interests, even though they are prepared to weight con-

sumer interests over producers in other situations. To

this extent, the strongest interest group support for more

open trade comes from producers seeking greater market

access.

5. Bilateralism and trade

At present, most international negotiation concerning

airline services takes place at a bilateral level. Are these

arrangements consistent with more open trade, and do

they promote such trade?

It is certainly possible for bilateral agreements to be

trade enhancing. Several agreements now being con-

cluded, especially those with the US as a partner, involve

open skies. While this does not mean free trade, it can

encourage more trade, especially bilateral trade. A liberalor open skies agreement will give greater scope for the

country which can supply airline services more e$ciently

to gain a greater share of the tra$c, thus creating gains

from trade. Under restrictive bilateral agreements, the

capacity of each of the countries airlines may be predeter-

mined, thereby, limiting the scope for trade. Under open

skies, the lower cost airlines can win market share from

their competitors, and airlines from higher cost countries

have greater ability to subcontract operation of services

to airlines from lower cost countries.

In the longer term, open skies agreements may have an

impact on trade through another mechanism. If open

skies lead to competitive airline markets, and only mod-est pro"tability of airlines, countries may be less inclined

to prevent entrants from other countries into the markets

they control. Currently, where markets are highly pro"t-

able, airlines and governments are reluctant to allow

other countries' airlines into the market to share the

pro"ts; thus, Asian countries do not want US airlines to

have access to pro"table intra-Asian routes. Lower fares

on direct routes need not always lead to greater reliance

on trade. Lower fares on a direct route may mean that

tra$c switches to it from less direct, but hitherto cheaper,

sixth freedom routes. There will be a reduction in

multilateral trade, though there will be an e$

ciency gain,since the previous trade pattern was the consequence of

arti"cial restrictions.

Nevertheless, even liberal bilateral agreements usually

leave many trade barriers in place. They typically do not

allow for airlines from non-partner countries to serve the

route. They rarely include domestic cabotage, and they

may not include much by way of beyond rights. They will

often fail to resolve airport access issues. Indeed, some

countries rely on airport access problems as a means of

reducing trade and competition when they are pressured

by their partners to be more liberal. Most of these are,

however, a matter of choice of the countries concluding

the agreements * they could, but do not wish to, include

such matters within a bilateral agreement. To this extent,

it is not bilateralism per se that is holding up movement

to greater scope for trade.

The bilateral approach to negotiation does make it

di$cult for more complex issues, involving more than

two countries, to be dealt with. If a country wants beyondrights which it can exercise, it needs to negotiate with

other countries as well as the immediate negotiating

partner. Such pressures for more open trade as there are

tend to come from airlines seeking access to markets they

are currently excluded from, and this invariably means

routes on which their home country is not a direct

partner. Somehow, within its various bilateral agree-

ments a country must obtain rights for its airlines to #y

on routes which other countries control.

Bilateral negotiations need not be limited to only air-

line services; they may be broadened to include other

trades as well. This is sometimes done (though it is oftendenied). Linking airline services to other trades has the

advantage that if both countries want concessions in

di!erent sectors, they may agree on a package which

delivers something on all sectors. It is easier to achieve

progress in negotiations if the range of options is not too

limited.

The overall result from several decades of bilateral

negotiations is that there is rather little scope for trade in

airline services other than bilateral trade. The contrast

with international shipping is stark; the lack of regula-

tions on a bilateral basis has led to extensive multilateral

trade. The aviation environment has come about partly

because countries have not sought to open up air-line services to more extensive trade, but it may also be

partly because the system itself does not facilitate trade

liberalisation.

6. Beyond bilateralism

While the bilateral basis for airline trade services nego-

tiations will remain, there is scope for negotiations on

a broader basis. One possibility would be regional agree-

ments, and another would be for agreements between

countries with similar objectives. Finally, there are multi-lateral possibilities.

There are some examples of `regionala agreements

under which groups of countries choose to liberalise

aviation services amongst themselves. Some of these are

really just bilateral agreements, such as those between

Canada and the US and between New Zealand and

Australia. The most important regional agreement is that

within the European Community. Members of the Com-

munity determined to include aviation along with other

sectors in moves towards liberalisation (Button, 1997).

This has resulted in signi"cantly greater competition and



7/8

trade (Civil Aviation Authority, 1998). Another form of

agreement would be that between a `cluba of countries

with similar objectives (see Productivity Commission,

1999a). Such a club need not have any regional basis,

though a regional club could be expected to be one with

a good deal of air tra$c between members. The problem

with the non-regional club option is that the members of

the club might be widely separated geographically, andthere might be little scope for additional tra$c and trade

at the air services level.

The advantage of the regional or club approaches is

that a wider range of options, involving trade in many

sectors and several countries, can be considered at the

same time. Where two countries may fail to agree, an

agreement between several may be feasible, especially

when each country involved has some market which it

would like more access to. A further advantage of a club

is that it could go further than a regional or multilateral

agreement if its members have similar objectives; there

need not be the problem of the convoy moving at thespeed of the slowest ship. As against this, regional and

multilateral approaches can involve more than one sec-

tor, and it is possible to trade concessions in one against

concessions in another. However, while it may be feasible

to form a club of countries which promote liberalisation

in airline services, it is likely to be much more di$cult to

form a club of countries which are seeking a similar

degree of liberalisation across a wider range of sectors.

The multilateral option is another, not necessarily mu-

tually exclusive, one. This could involve incorporation of

airline services more generally into the GATS. Currently,

few countries would support this, possibly because they

do not wish to be put under pressure to liberalise trade inairline services. The multilateral approach does have

advantages. It involves a large group of countries with

a wide range of sectors to be considered, and thus, it

provides a wide range of possible trade o!s. A multilat-

eral framework limited to only air transport would be

unlikely to achieve very much, as there would be little

scope for trade o!s. There is an established negotiation

framework, which has been able to handle agreements

with very di!erent sectors in the past.

There also several limitations of the multilateral pro-

cess. It is complex, and results are slow in coming. There

is the possibility that the agreement"

nally reached mayre#ect the position of the countries least prepared to

move * the lowest common dominator problem. This

will be less of a worry if all countries to the agreement

want something out of it, and are prepared to compro-

mise one some issues to get their way on others. A multi-

lateral agreement which covers a range of sectors holds

out more promise than one which is restricted to one or

a few sectors; for example, a multilateral agreement

which covers solely aviation.

It is also probably true that incorporating airline servi-

ces into a multilateral negotiations framework would be

quite di$cult. Airline services have developed in a very

di!erent way from other traded services, and there is an

established bilateral framework which is currently in use

and which is inconsistent, in many ways, with the ap-

proach to trade agreements currently adopted by the

WTO. As against this, however, there are other sectors

which each have their own peculiarities and pose particu-

lar di$culties, such as agriculture, which have been suc-cessfully incorporated into the multilateral approach.

While incorporation of air transport into the arrange-

ments such as the GATS has some potential, it is likely to

be achieved only in the longer term.

The primary issue may be one of whether su$cient

countries see themselves as gaining enough from liberal-

ising trade in airline services to push for this to be put on

to the agenda. Agriculture gets put on the agenda when

agricultural producer countries see this as a way of ope-

ning up access to markets. It is producer interests, and

their search for markets, which forces the issue. With

airline services, it may be that too few countries see it asin their airlines' interest to push for market access at the

multilateral level.

Countries will also see themselves as gaining from

trade liberalisation if they take a broader view of their

interests than they normally do. As mentioned, some

countries are taking note of consumer and tourism indus-

try gains when considering domestic aviation policy, and

when entering open skies bilateral agreements. While

producer interests are often dominant, this is not always

so; some countries are willing to reduce manufacturing

tari!s unilaterally, an action which results in the contrac-

tion of their industries. Information about the gains from

trade, such as that gained from models of liberalisation,may help decision makers to take a broader view (see, for

example, Productivity Commission, 1999b; Gillen et al.,

1999).

Whichever ways in which airline services are opened

up further to trade, there are some cautions which need

to be taken into account. One concern is that of market

dominance. If a more liberal trade environment led to

a small group of mega carriers which dominated most

airline markets, there would be the risk of misuse of the

market power that these carriers would possess. Even if

mega carriers did not dominate, low-density markets

could still be dominated by a few carriers, with attendantmarket power problems. To this end, any liberalisation

needs to be accompanied by monitoring of competition

policy aspects. Addressing market power problems in

a multinational environment could be di$cult.

Another caution concerns the tourism industry. Airline

services and tourism services are close complements.

Countries do possess market power in the sale of these; it

is this market power which enables them to regulate

international airline services as they do. If as a result of

some agreement, airline services are liberalised, it will still

be feasible for countries to exercise this market power at



8/8

the tourism level. Thus, instead of regulating airlines and

keeping air fares high, they may switch to taxing tourism.

Both these have the a!ect of restricting trade in tourism

and aviation services. Thus, if aviation is to be included in

a negotiating framework, so too should tourism.

7. Conclusions

There has been considerable liberalisation of trade in

airline services over the past few decades. This has come

about through liberal bilateral agreements, such as open

skies agreements, through regional agreements, and

through carriers taking advantage of sixth freedom op-

portunities open to them. Notwithstanding this, trade in

airline services is still relatively restricted. Few products

are open for all countries to supply. Thus, there is scope

for more trade, and more gains from trade.

Protectionist arguments explain a lot. Countries are

keen to promote production of airline services by theirairlines and employment in the industry. They also wish

to enjoy the pro"ts to be obtained in markets which they

restrict competition in. However, several countries are

now taking a broader views of their aviation interests.

They are prepared to take into account, to some extent,

bene"ts to their consumers and tourism industries, and

balance these against bene"ts to producers. This is being

re#ected in open skies bilateral agreements, and in do-

mestic deregulations. In spite of this few countries are

particularly pro trade if it comes to a matter of home

country producers losing business to foreign producers.

Even those countries which have unilaterally lowered

tari!s for their manufacturing industries are unwilling tolet foreign airlines into their markets.

There are forces for change. Open skies may be limited

in themselves to bilateral arrangements, but they can

lead to pressure for opening up of related bilateral

markets. Also, producer interests are changing. Airlines

which are seeking to become global businesses are "nding

themselves constrained by the various restrictions on

trade and investment, and some are pressing for these to

be liberalised.

The form of the system of international regulation, the

bilateral system, does make a di!erence, but it is prob-

ably of much less importance than countries'

objectives.It is possible for there to be more scope for trade within

a system of bilateral agreements, though this system does

hinder the process of enhancing opportunities for trade

on a multilateral basis. Given most countries' objectives,

and that they are normally only pro trade when it is

a case of increasing market access or creating more

#exibility for their own airlines, going beyond the bilat-

eral system is a means of expanding the scope for trade.

Increasing the number of countries involved, through

a regional or multilateral agreement, can facilitate ope-

ning up markets, but it is especially important to expand

the range of possible trade o!s, by including more thanjust aviation issues in negotiations. This is possible under

regional trade agreements but the greatest scope for trade

o!s occurs at the multilateral negotiations level. How-

ever this also happens to be the most di$cult level at

which to incorporate aviation negotiations, granted the

widely di!ering ways in which current aviation and gen-

eral trade negotiations are conducted.

For the short-to-medium term, the regional or club

basis probably provides the greatest scope for progress

towards liberalisation of trade, especially if trade in other

sectors is included. How much change such negotiations

e!

ect depends on how keen countries and their airlinesare for access to new markets and for more #exible

arrangements, and how much weight governments give

to interests other than producer interests, such as con-

sumers and tourism industries.

References

Button, K., 1997. Developments in the European Union: lessons for the

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Asia Paci"c Air Transport: Challenges and Policy Reforms.

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Civil Aviation Authority, 1998. The single European aviation market:

the "rst "ve years. London, June.

Clarke, H., 1998. Optimal air service agreements. Economic Analysis

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Findlay, C., 1985. The Flying Kangaroo: an Endangered Species. An

Economic Perspective of Australian International Civil Aviation

Policy. Allen & Unwin, Sydney.

Gillen, D., Harris, R., Oum, T.H., 1999. A model for measuring eco-

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Research Group Conference, Hong Kong, June.

Productivity Commission, 1999a. International air services report

no. 2 inquiry report. AusInfo., Canberra.

Productivity Commission, 1999b. Impacts of competition enhancing air

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Policy Reforms. Institute of Southeast Asian Studies, Singapore,

pp. 154}169.

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Note by the Secretariat, WTO, Geneva, November.


Documents

2001-Promoting Trade in Airline Services