Transport Learning Week 2006 Maritime & Air Transport Air Transport Regulation and Liberalization Charles E. Schlumberger 06 April 2006
Overview Origins of Economic Regulation Air Transport Regulation Air Carrier Regulation Deregulation of Domestic Air Service Regulation of International Air Service Liberalization of International Air Service Conclusions for Developing Countries Questions and Answers during presentation! 1-2
Origins of Economic Regulation Law on licensing and regulation of common carriers passed by English Parliament 1694 US Government established ICC, the first independent regulatory agency in 1887; The Interstate Commerce Commission regulated rates and practices of the railroads: From protecting the public from monopolistic abuses To protecting industry from unconstrained competition US Air Commerce Act of 1926: Jurisdiction for safety and maintenance of airways, airports, navigation facilities at US Department of Commerce Foreign ownership restrictions 1-3
Air Transport Regulation (I) Three forms of Government Regulation: Economic regulation Safety regulation Social regulation 1. Economic regulation: to balance the forces between the capital, labor, and the consumer Entry & exit: assign routes to be serviced by designated carrier that is fit, willing, and able to perform service. Rates: prescribe appropriate price for transport service, which were just and reasonable. Antitrust: Review of proposed carrier mergers, acquisitions etc. to determine if they are in public interest. 1-4
Air Transport Regulation (II) 2. Safety regulation: Provision of safe travel - to protect individuals from harm : Minimum standards of equipment ( airworthiness ) Operating methods ( flight standards ) Personnel qualifications ( personnel licensing ) 3. Social regulation: Regulatory focus on broad control over basic objectives of society and promotion of the public good ( service public ) US created the Civil Aeronautics Board (1938) to regulate the US air transport industry (economic regulation) 1-5
Air Carrier Regulation (I) Air Carrier Licensing (US Model) Certificate of Public Convenience and Necessity => carrier is fit, willing, and able to provide operations: 1. Does the applicant have managerial & technical skills? 2. Does he have the necessary financial resources? 3. Will the applicant comply with statues and regulations? Foreign Ownership restrictions, US citizenship: 1. President & 2/3 Directors are US citizen 2. 75% voting stock controlled by US citizens 3. 51% non-voting equity held by US citizens Carrier Selection for International Routes: Issued by DOT in competitive proceedings, approved by the President in conformance with foreign policy. 1-6
Air Carrier Regulation (II) Regulation of US rates and fares: Domestic pricing deregulated by Airline Deregulation Act of 1978 International fares must be filed with DOT and fall between 5% above and 50% below Standard Industry Fare Level. Consumer protection: Oversales (compensation 200% of remaining coupon) Smoking (ban on all domestic flights) Domestic baggage liability (maximum compensation $2,500) Consumer Credit Protection (comply with protection act) Code share (inform consumer of code-share partner) Computer Reservation System (reduce favoring carriers) 1-7
Deregulation of Domestic Air Service Civil Aeronautics Board criticized by Chairman Alfred Kahn (1977) because it: causes high fares & results in misallocation of resources encourages carrier inefficiency denies consumers better price/service options creates excess capacity in the industry Airline Deregulation Act of 1978: Gradual transition from regulation to competition Elimination of most entry controls (except fitness ) Result: More than 150 airlines bankrupt Eight large airlines: 81% market (1978) -> 94% (1989) Lower fares (but sharpest drop from 1976-1979) 1-8
Regulation of International Air Service (I) Conference in Chicago (1944): develop air transportation in a safe and orderly manner and that international air transport services may be established on the basis of equality of opportunity and operated soundly and economically : confirmed basic principals in regard to the sovereignty of states in the domain of civil aviation, their right to regulate international air traffic, and many rules for the promotion of safety and security. established the International Civil Aviation Organization. 1-9
Regulation of International Air Service (II) After World War II a basic regulatory framework to deal with economic issues of international air traffic emerged, which had three components: 1. the bilateral air service agreements (ASA) 2. the inter-airline commercial or pooling agreements, and 3. the tariff-fixing mechanism of the International Air Transport Association (IATA). 1-10
Regulation of International Air Service (III) Bilateral Air Service Agreements: control market access (points served) and market entry (designated air carrier) for air service between two distinct countries. In many cases the ASA also fixed capacities and frequencies. The inter-airline pooling agreements: enabled airlines to share revenues on the respective routes they shared on the basis of the ASA. The International Air Transport Association (IATA) got charged with fixing tariffs for all international routes. 1-11
Liberalization of International Air Service (I) Features of traditional air service agreements Feature Traditional-predetermination type Liberal Bermuda type Market access Specified and limited points and routes by each carrier. Specified and limited points and routes by each carrier. Few Fifth Freedoms. Charter traffic rights are not Included. Several Fifth Freedoms granted related to capacity. Charter traffic rights are not Included. Capacity Capacity agreed or split evenly between parties. No frequency or capacity control, but review possible if adverse effect on carrier. Inter-airline revenue pooling. No revenue pooling. Tariffs Determined on the basis of cost and profit. Determined on the basis of cost and profit. Double approval by both governments or IATA fixing procedure. Single destination. Double approval by both governments or IATA fixing procedure. Single, double or multiple. Carrier designation Carrier substantially owned and effectively controlled by nationals. Carrier substantially owned and effectively controlled by nationals. 1-12
Liberalization of International Air Service (II) Migration from traditional ASA to Open market Feature Traditional ASA Open Market ASA Market access All points specified Named number of points Limited Fifth Freedom Limited Fifth Freedom Capacity Split evenly between parties No capacity control Tariffs Double approval Double disapproval Carrier designation Single Multiple Ownership clause Ownership clause 1-13
Liberalization of International Air Service (III) Migration from Open Market to Open Skies Feature Open Market ASA Open Skies ASA Market access Named number of points Unlimited General Fifth Freedom Unlimited Fifth Freedom No cabotage allowed No Seventh Freedom Free charter access No cabotage allowed No Seventh Freedom Free charter access Capacity No capacity control No capacity control Tariffs Double disapproval Free pricing Carrier designation Multiple Multiple Ownership clause Ownership clause Code share not mentioned Code share approved 1-14
Liberalization of International Air Service (V) Differences between Open Skies and Single Market Feature Open Skies ASA Single Market Concept Market access Unlimited Unlimited to all freedoms Unlimited Fifth Freedom No cabotage allowed No Seventh Freedom Free charter access No distinction of charter Capacity No capacity control No capacity control Tariffs Free pricing Free pricing Carrier designation Multiple N/A Competition regulation Ownership clause Code share approved Bi-lateral provisions EU Ownership requirement N/A Competition regulation rules and code of conducts 1-15
Liberalization of International Air Service (VI) Multilateral Agreements for Liberalization European Single Market Yamoussoukro Decision Africa CARICOM The Caribbean ASEAN regional initiatives 1-16
Conclusions for Developing Countries Air transportation, by its nature, must be regulated Even in liberalized markets, air carriers should and are regulated, especially on safety and security Large domestic markets should be deregulated International liberalization is a bilateral or multilateral process. 1-17