TWELFTH MEETING OF THE AFCAC AIR TRANSPORT COMMITTEE (Dakar, Senegal, 30-31October 2012)

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1 TWELFTH MEETING OF THE AFCAC AIR TRANSPORT COMMITTEE (Dakar, Senegal, 30-31October 2012) Theme: Sustainability of Air Transport Agenda Item 5: Air Carrier Ownership and Control RELAXING THE RULES FOR AIRLINE DESIGNATION AND AUTHORISATION AND THE SIGNIFICANCE OF THE YD ELIGIBILITY CRITERIA (Presented by AFCAC) SUMMARY This paper provides Africa s strategy for sustainability of air transport, through the harmonisation of the authorisation and designation of airlines based on a common set of criteria and the need for flexibility in order to facilitate African Airline access to international capital markets. The common set of criteria is based on the YD eligibility criteria. The benefit is to enable eligible African airlines the possibility to gain access to the international capital market, and also encourage cooperation via consolidation, mergers and acquisition as well as cross border investments. Action: Recommended action is stated in section 5 1. INTRODUCTION: 1.1 The substantial ownership and effective control provision, commonly found in ASA is not a provision of the Chicago Convention, but has its origin in the International Air Services Transit Agreement. Article I, Section 5 of the cited treaty establishes the right of each State to withhold or revoke a certificate or permit to an air transport enterprise of another State in any case where it is not satisfied that substantial ownership and effective control are vested in nationals of a contracting State. 1.2 With globalisation and liberalisation of the industry, in particular airline privatisation, alternative ownership and control models have emerged. The ICAO proposed clause for the designation of carriers however seem to be the most favoured (CONF/5-2003). The proposed clause permits designation subject to the requirement of incorporation, principle place of business and effective regulatory control as attributed to the designating State. 1.3 In practice, States have considerable latitude and discretion in the interpretation of what constitutes substantial ownership or interpreting what constitutes effective control i. To give meaning to the concept of effective control, the key question is who actually exercises a decisive influence on the airline, in particular (a) the right to use all or part of the assets of the airline (the financial test) and (b) on

2 the composition, voting or decision making powers in the governing bodies of the airline, the management and the running of the airline (the management test). Hence some analysts posit that such provisions are just aero political clauses in ASA ii, which in practice means that judgement is made according to the precise facts of every case, particularly in closed bilateral negotiations. For instance, the US has waived the nationality requirement for airlines registered in States that meet FAA category I safety/security requirements and that have concluded an open skies agreement with the US. 1.4 Given the prevalence of the traditional ownership and control criterion in BASAs, globally, airlines have also developed several cooperation and partnership strategies, as ways of going round the ownership restriction including global alliances, mergers and acquisition, joint ventures, minority ownership, franchise operations, subsidiaries, code-sharing iii and in some cases operation of multiple hubs. 1.5 Where ownership and control restrictions have been removed, there is evidence that the airlines, consumers and employees have benefited. For consumers, the possibility of closer integration between currently nationality-tied airlines and the emergence of new entrant airlines, all with better access to global capital sources, offers the potential for more competition, greater network connectivity and better value services to consumers. For airlines, access to foreign capital and management resources, combined with opportunities for restructuring, provides options already available to most other global industries, but denied to airlines. For employees, liberalisation of ownership and control rules should enable efficient airlines to grow, increasing sustainable employment opportunities. 2. OWNERSHIP AND CONTROL WITHIN THE YD REGULATORY FRAMEWORK 2.1 The Yamoussoukro Decision (YD) is the continental agreement with the aim of gradually liberalization of scheduled and non-scheduled intra African air transport; a Regulatory framework for intra-african air service agreement. Its provision on ownership and control, adopted the ICAO proposed clause in replacing substantial ownership and effective control by the concept of principal place of business and effective regulatory control. The importance of this provision lies in the opportunities it creates for increased access to international foreign equity participation in African airlines and the possibly of encouraging the restructuring of African airlines through cross border capital injection and consolidations. 2.2 Designation and authorisation: Article 6 of the Decision provides the right of States to designate in writing, (a) At least one airline to operate the intra-african air transport services, (b) The right to designate an Eligible Airline from another State party to operate air services on its behalf and (c) The right to designate an Eligible African multinational airline in which it is a stakeholder. 2.3 Revocation of authorization: Should a State Party ( Article 6.5) be convinced that a designated airline does not meet the Eligibility criteria iv (as defined in Article 6.9), it may refuse authorization. A State may also revoke, suspend or limit the operating authorisation of a designated airline of the other State Party when the airline fails to meet the criteria of eligibility (article 6.10)

3 2.4 The YD eligibility criteria are also an important consideration in the designation of an African airline by an AU States in any ASA with an EU member State/States ( The AU guideline specifies that an African State should designate an airline that meets the eligibility criteria set forth in Article 6.9 of the YD. The EU regulations on ownership and control are found in EU regulation 2407/92 and it requires that in order to obtain and retain an operating licence, an air carrier must be majority owned and effectively controlled by EU nationals. 2.5 Therefore making determination as to the Eligibility of a given airline is critical to the successful implement of the YD. Amongst its eight criteria, four have relevance to the subject matter of ownership and control, as follows: The airline should- Criteria (a): be legally established in accordance with the regulations applicable in a State Party to the decision. Criteria (b): have its headquarters, central administration and principal place of business physically located in the State concerned; Criteria (c): be duly licensed by a State Party as defined in Annex 6 of the Chicago Convention; and Criteria (g): be effectively controlled by a State Party. 3. MAIN CHALLENGES TO OPERATIONALISATION OF YD 3.1 An eligible African airline is akin to the concept of a common or community carrier, with the rights to operate within an Open Africa Aviation Area (OAAA). YD allows several possibilities for the designation of airline(s) for intra-african traffic as indicated in Article 2.2. However, there are regulatory challenges that demand further guidance materials to enable the fair application of these criteria. 3.2 Establishing effective regulatory control v, is quite a complex issue with several considerations to be made. We have differences in applicable national regulations in the establishment of airlines, with many States still retaining the need for substantial ownership by nationals. Thus in applying criterion (a), a potentially eligible airline is de facto restricted to the applicable nat ional regulations in cases where domestic regulations demand substantial ownership. To give recognition to the provisions in YD, Party States will need to amend their national laws in synchronisation with the eligibility criteria and designation provisions of the YD. 3.3 Also despite the YD criterion (g) on eligibility, the old model clause requiring substantial ownership or its variants can still be found in several intra-african States BASA, particularly Articles on designation and/or authorisation. 3.4 The use of traditional ownership and control criterion in BASAs, limit the opportunities of many undercapitalised African airlines access to capital markets. Carriers based in the US, the EU and other developed economies have well developed equity markets and can therefore access such capital domestically. The majority of African airlines do not have the same luxury of a developed domestic capital market, start-up airlines common in Africa have weak credit ratings and as a consequence, most African airlines face higher cost of capital. Guidance is required on how States can take advantage of the

4 eligibility provisions in the YD, to enable States and their airlines exploit the available capital markets within the continent. 3.5 One of the noted impacts of the traditional ownership clause on airlines is the restriction imposed on cross border mergers and acquisition. Given the size and scale of many African airlines, consolidation is a necessary condition for the sustainable development of air transport in Africa. Despite the challenges, African airlines need to be engaged in similar cooperation strategies as indicate in paragraph 1.4 above, in order to compete in the global market. 4. AFRICAN CURRENT EXPERIENCE 4.1 The major intra-africa airlines are in 100% State ownership and most of these airlines are influential in determining State policies on the ownership clause. Amongst the first ten African airlines vi operating African skies, Egypt Air, South African Airways, Royal Air Maroc, Air Algérie, Ethiopian Airlines and Tunis Air are 100% State owned carriers. Among the first five, Kenya Airways is the only African Carrier with majority private sector ownership with the following share structures: the airline is owned by individual Kenyan shareholders (30.94%), KLM (now Air F rance-klm) (26%), Kenyan government (23%), Kenyan institutional investors (14.2%), foreign institutional investors (4.47%) and individual foreign investors (1.39%). However ownership is still in the hands of nationals of Kenya. 4.2 A number of cross-border airline investments have been recorded, in particular the creation of Asky Airlines, a West African regional airline based in Lome, Togo, with 49% Ethiopian Airlines equity holding, together with other African private investors. Kenya Airways also has 41.23% equity holding in a Tanzanian private airline Precision Air. The Aga Khan Fund for Economic Development has supported the establishment of new airlines across Africa: Air Uganda, Air Mali, and Air Burkina, through the provision of equity. The Aga Khan group (AKFED) also has a 15% stack in the new start-up airline Air Cote D Ivoire, with the Air France-KLM Group holding 20%. Air France regards its involvement in the start-up airline as a strategic defensive mechanism to maintain a strong position in Africa and fend off increasing competition from Emirates and Turkish Airlines. Nearly all the major African airlines have subsidiaries at their home base. 4.3 In terms of strategic cooperation and partnership, among the five major African airlines, South Africa Airways, Egypt Air and Ethiopian Airlines are members of the Star Alliance whilst Kenya Airways is a member of the Sky Team. The AKFED set of aviation companies are also operated under the Group Celestair Alliance. This provides for sharing of resources and expertise across the various airlines, in particular in the renewal of aircraft fleet. Several African airlines also have code-share agreements; however, it is mainly with non African airlines. South Africa has code share with Airlink, Air India, Air Mauritius, Emirates, Jetblue Airways, Lam Mozambique Airlines, Mango (its subsidiary), Qantas (One World) and Virgin Atlantic Airways 5. CONCLUSION AND RECOMMENDATION 5.1 The YD was conceived in 1999, during a period when the current experience in liberalisation never existed. Given the latitude and discretion that States have in the application of any ownership and control in their national regulations, in the spirit of YD, this should pose minimum concerns as States can always waive such provisions for intra-african ASA.

5 5.2 The eligibility criteria are crucial for both designation for intra-african traffic and access to EU market. It would be useful for further guidance materials to be provided to States, in order to help them in the designation of eligible airlines. The Executive Agency of the YD would also need such guidelines to enable the recognition of eligible African airlines. 5.3 To enable a fair application of the YD, there is need for regulatory convergences via having a harmonised set of competition rules, consumer protection regulations, powers and means of enforcement and a mechanism for dispute settlement. Safety and security oversight are cardinal in accepting an airline as eligible. Therefore convergence in the regulatory system of airline licensing is important, if the eligibility criteria are to be applied successfully. Harmonisation of safety and security oversight regulations is taking place at various regional organisations via the COSCAP projects including BAGASO, CASSOA, COSCAP-CEMAC, COSCAP-COMESA, COSCAP-SADC and COSCAP - UEMOA 6. ACTION BY THIS COMMITTEE 6.1 The Committee is invited to: (a) Note the information in this paper, in formulating an African position on this subject. (b) Support AFCAC s effort in the elaboration of guidance material for the determination eligible African airlines. (c) Support the AU and AFCAC efforts in the harmonisation of competition rules, consumer protection regulations and proposed mechanism for dispute settlement. (d) African Sates should be encouraged to waive any ownership and control requirements in their national regulations which stand as impediments to the full implementation of the YD.

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7 ATCONF/6-WP/xxxx Appendix A APPENDIX A 1. PROVISION OF YD: 1.1 The Decision includes the following provisions: art.1: a preamble setting the context within which the instrument was prepared; art.2: a definitions article assigning meaning to essential terms used; art.3: scope of application article which expresses the main purpose of the Decision; a grant of rights article which sets the rights granted; a tariffs article which sets the rules governing fares; a capacity and frequency article which lays down the agreed principles for the amount of services to be offered; a designation and authorisation article specifying the conditions for designation of airlines to operate the services including eligibility criteria; conditions for the revocation of authorisation; recognition of certificate and licenses; an aviation safety and security article setting forth procedures for co-operation to deal or avoid acts or threats for the security of civil aviation; a competition article which is a fair opportunity article setting forth a general principle designed to ensure non-discrimination; a settlement of disputes article intended to establish the agreed mechanism for resolving disputes between the parties; an institutional arrangement article which establishes the framework for the running of the system; a transitional measures article which specifies the condition under which the parties may limit their commitments; a miscellaneous provisions articles which lumps together: a commercial opportunities paragraph, an operational flexibility paragraph, a co-operative arrangements paragraph, a consultation paragraph, a review paragraph, a registration paragraph; a final provisions article covering entry into force, role of sub-regional and regional organisations, withdrawal and annexes vii. END i ICAO guidance: evidence of effective regulatory control is predicated upon but is not limited to: the airline holds a valid operating licence or permit issued by the licensing authority such as an Air Operator s Certificate (AOC), meets the criteria of the designating Party for the operation of international air services, such as proof of financial health, ability to meet public interest requirement, obligations for assurance of service; and the designating Party has and maintains safety and security oversight programmes in compliance with ICAO standards. ii The practise by the US DOT is to include the substantial ownership and effective control clause in virtually all its US BASA but the DOT can waive the ownership and control requirement, particularly for carriers from US open skies partners. The waiver is given if (a) it would be inimical to US aviation interest, (b) the foreign airline otherwise meets the standard licensing requirements reflected in the designation and/or authorisation article(s) of the relevant Government. iii In its most basic form, a code-share agreement simply allows for a flight operated by one carrier (which will offer the flight for sale under its own code or designator and associated flight number, such as AA1234 ), also to be

8 HLSC/2010-WP/xxxx Appendix A-2 marketed by another carrier, under that other carrier s code and flight number (e.g. YY5678 ). The carrier operating the flight (in this case, carrier with code AA ) is known as the operating carrier, while the carrier marketing the flight under its own code (in this case YY ) is known as the marketing carrier. iv The YD eligibility criteria as in article 6.9: To be eligible, an airline should: (a) be legally established in accordance with the regulations applicable in a State Party to this Decision; (b) have its headquarters, central administration and principal place of business physically located in the State concerned; (c) be duly licensed by a State Party as defined in Annex 6 of the Chicago Convention; (d) fully own or have a long-term lease exceeding six months on an aircraft and have its technical supervision; (e) be adequately insured with regard to passengers, cargo, mail, baggage and third parties in an amount at least equal to the provisions of the International Conventions in force; (f) be capable of demonstrating its ability to maintain standards at least equal to those set by ICAO and to respond to any query from any State to which it provides air services; (g) be effectively controlled by a State Party. v The effective control inquiry is often complex and multi-factorial. It must examine and assess the direct or indirect influences upon airline management by foreign persons. Relevant indicia include: (a) the membership of the airline s board of directors; (b) the availability of veto rights to foreign shareholders; (c) the rights, if any, of a foreign shareholder to acquire additional shares; (d) the existence of non-voting shares and the rights and obligations attached to such shares; (e) whether a particular foreign shareholder owns the largest block of shares; (f) arrangements for the provision of working capital, or additional capital, by a certain foreign shareholder; (g) the nature and extent of any equipment lease agreements with any shareholder; (h) the nature of extent of any management agreements which may confer foreign influence upon the board of directors or with respect to the management of the business; or (i) whether, for instance, the airline is required to use the booking, reservation or other information management system of a foreign shareholder airline and, if so, whether any conditions are attached to the use of the system. vi Top ten airlines in 2011 (k=1000 passengers): EgyptAir (9.517k), South African Airways (6.634k), Royal Air Maroc (6.034k), Air Algérie (3.5K), Ethiopian Airlines (3.344k), Kenya Airways (3.041k), Tunisair (2.443k), Arik Air (2.303k), Atlas Blue (1.6k) and Air Mauritius (1.133k). vii Clarification of issues and Articles of the Yamoussoukro Decision