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Airport regulation: Does a mature industry have mature regulation?
Journal of Air Transport Management 15 (2009) 116–120
Contents lists available at ScienceDirect
Journal of Air Transport Management journal homepage: www.elsevier.com/locate/jairtraman
Airport regulation: Does a mature industry have mature regulation? Andrew Charlton* Aviation Advocacy Sarl, Rue de la Gare 17, Nyon 1260, Switzerland
a b s t r a c t Keywords: Airport Regulation Lobbying Airport Charges Directive Air transport regulation
Air transport needs to be considered as a number of separate industries. Each is at their own point of maturity. Airports in Europe are soon to be regulated as never before by the European Airport Charges Directive. The process that saw that Directive be agreed is instructive on the maturity of the airport industry and the maturity of the regulatory regime that governs it. The new Directive shows that regulation of the airport industry is maturing. Ó 2008 Elsevier Ltd. All rights reserved.
1. Introduction
2. What is ‘mature regulation’?
The airline industry has been coming to terms with deregulation for more than 30 years. Soon it will have spent as long deregulating as it did being heavily (or over) regulated. However, at the same time, there seems to be no end of new regulations coming into effect. There are now nearly as many calls for re-regulation as there are for continuing deregulation. But with the greatest of respect to some of those making those calls, there are a number of points that need to be made clear. First, the ‘airline industry’ is a difficult and often misleading term. In fact, ‘the industry’ is actually a number of industries, flying in very close formation. Second, it is important that each of those businesses be reviewed, regulated and monitored with a high degree of specificity. Third, the debate should not be about more or less regulation, or of more or less deregulation, but rather of the maturity of regulation. Mature regulation calls for maturity on the part of both the regulated and the regulating, and that maturity needs to reflect and respond to the specificity of each part of the airline industry. This paper briefly considers the regulation of several major sectors of the air transport industry and poses the question of whether or not they are subject to mature regulation. It then reviews the new European Airport Charges Directive, currently before the European Parliament, and uses it as a means to assess the manner by which the European airport industry as a whole responded. It then attempts to apply that proposed Directive as a measure of the maturity of the European airport industry.
‘Mature regulation’ is a relative term. It is not easy to define in a vacuum. It is one of those things, like a hippopotamus perhaps, that is easier to point to than describe. However, it should be noted that the emphasis must be on the maturity of the regulations themselves, not the industry sector being regulated. It is the manner of the response of the industry being regulated that provides an indication of the maturity of the sector itself. This paper contends that mature regulation should be measured on three scales:
* Tel.: þ41 223630633. E-mail address: [email protected] 0969-6997/$ – see front matter Ó 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.jairtraman.2008.11.002
proportionality, light-handedness, and balance (between the interests of regulated entity and the legitimate concerns of the regulator). These criteria place an onus on the regulated as much as they place an onus on the regulator. They also require genuine dialogue. Each sector of the air transport industry, and their leaders, must be in a position to make the point to their regulators that they require of them mature treatment, and then to suggest responsible and mature solutions to genuine issues as they arise.
3. The aviation industry in context There are a number of free-standing sectors working in the aeronautical industry. They are interconnected, and of course, do much of their daily work at very similar addresses, but they are separate nevertheless. The management skills, the business drivers, the measures of success and the imperatives of each sector are different. So are the regulatory rules that need to be in place to regulate them appropriately.
A. Charlton / Journal of Air Transport Management 15 (2009) 116–120
The clearly distinct sectors in aviation include: the airlines, dominating the headlines and with a lock on most of the good headline words and phrases; the air traffic control industry; the airframe and engine manufacturers; the logistics operators; and, of course, the airports. All are all worthy of separate consideration. What is clear is that the level of maturation of each of those industries varies. 3.1. The airline industry Airlines have been deregulating since the introduction of changes to what was the Civil Aeronautical Bureau in the United States in the late 1970s. After the deregulation of US domestic airlines, international airlines (which at the time were largely government owned and operated entities outside of the United States) were privatised. The process of privatisation of airlines continues around the world, with perhaps only middle-Eastern airlines such as Emirates and Etihad amongst the category of ‘large government owned’ airlines. As the airlines have deregulated a number of the traditional airline institutions have been or are being dismantled. The most obvious example of that are the tariff and rates conferences run under the auspices of IATA. That change has a number of consequences, some which we have not seen played out in full at this stage. The most important consequence is that of the change to interlining. That will have a knock on impact on airports as well. Second, as the tariff and rates regime was deregulated, low cost airlines emerged. Again, the consequences of that change have not played themselves out to their final point, but already it is clear that this is an irrevocable change. The third change that has come about is that for airlines in the domestic environment (including Europe as a single domestic market for these purposes), the normal rules of business are starting to apply. The most obvious rule is that of the need to comply with competition law. In the last 30 years, coincidently with the deregulation of airlines, the world has seen a growth in the number of competition law agencies. Airlines are currently learning that competition law applies to them. Where the airline industry has not been as successful is in the area of international deregulation. Specifically, the airlines are hamstrung in the areas of development and investment. Or putting that in airline terms: route rights and ownership and control. The International Civil Aviation Orgainsation (ICAO), the United Nation’s specialist global aviation regulator, is responsible for overseeing a system that George Orwell’s Big Brother would have taken huge delight in the naming of – the so called ‘freedoms of the air’. You are free, in other words, to do anything as long as we tell you exactly what it is that you can do. The ‘substantial ownership and effective control’ regime arises not from the Chicago Convention itself, but from the two ancillary international treaties negotiated at the same time, the International Transit Agreement (which is in force) and the International Transport Agreement (which is not). The language of those treaties – which proposed the exchange of first and second freedoms in the case of the Transit Agreement and third and fourth freedoms in the case of the Transport Agreement, was then picked up in the first Bermuda Agreement and then most all Air Service Agreements subsequent to that. Airlines are currently working hard to find ‘work arounds’ for these problems, on the grounds that ICAO itself needs to be preserved (rather than, for example, calling for its complete disbanding), on the grounds that it provides a platform for international standard setting in the areas of safety and air navigation. IATA is calling for ‘like minded States’ to meet in 2008 to discuss a series of reciprocal, conditional declarations to be added to the Air Services Agreements of participating States to create an ‘inner
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sanctum’ of States prepared to mutually exchange a right of establishment, as well as unrestricted route access, within the context of the existing framework of such Air Service Agreements. In short, airline regulation has a significant dissonance between domestic and international activity, is unable to find ways to focus on the direct issues and cannot resolve underlying issues such as investment rules without fearing bringing down standard setting in other areas. At that point it is difficult to see how airlines can be considered to have done anything other than fail the three tests set out above for a mature regulatory environment. 3.2. Air navigation service providers Air navigation service providers (ANSPs) deliver their services within a complex regulatory environment. There are a number of international rules and regulations governing service delivery, standards and service platforms relevant to air traffic control. Nevertheless, in the case of ANSPs the principle issue can be distilled to one word: sovereignty. States that were happy to privatise their airlines and airports continue to believe that they have an unalienable and unbending obligation to provide air traffic services. This is based on a traditional, mystical even, reading of Article 28 of the Chicago Convention. There is considerable scope for competition and rationalisation in the provision of air navigation services – a point that IATA has been making for several years, but it is clear that the industry is, in regulatory terms, immature. Article 28 provides that each State is responsible for the provision of air navigation services in the airspace above its territory. However, the Article is silent on the distinction between oversight of an outsourced service and the actual provision of that service. There is a growing body of opinion that Article 28 does not mandate the actual provision of a service, but rather ensuing that such a service is provided. Recently, the Legal Director of ICAO gave support to that interpretation, support that deserves more notoriety. There are moves amongst the ANSPs themselves to liberalise. Within Europe, the European Commission has introduced two packages of EU Directives, all under the banner of a ‘Single European Sky’. The first package required ANSPs to find ways to provide services on a functional rather than a national basis, bottom up. When it was increasingly clear that little, if any, progress was being made, an increasingly frustrated European Commission introduced a second raft of legislation. That legislation was introduced in July 2008 and is yet to become binding. It proposed significantly more performance-based measures to monitor progress of each Member State as a means of forcing ‘top down’ reform. At the same time, there is increasing competition for some services. Training, new technology developments and even tower services are examples of some of this new competition. Recently, for example, the UK commenced a public consultation on establishing a pricing mechanism for contestable services in the provision of tower control services. 3.3. Airframe and engine provision The airframe and engine industry is mature in a regulatory sense. There are no ownership issues (unless you count as between Airbus’ shareholders). Airbus has announced the establishment of operations in the US (unthinkable in the airline sector); new airframe manufacturers have entered the market; and new research on engines and fuel types continues. These are all signs of a healthy sector. Whilst the airframe and engine manufacturers must comply with IACO and other standards, the obligations that they face are not disproportionate. The manufacturers have input into their
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composition and they are not heavy handed. In other words, they do pass the test set out above. Of course, the airframe manufacturers are also subject to the rules of the World Trade Organisation. That can be a laborious and difficult process, as Boeing and Airbus are now finding out. On the other hand, most all other sectors of the modern economy are also subject to World Trade Organisation (WTO) rules. It is not to be ‘special’ to be part of the WTO process, but ‘special’ to be exempt. 3.4. The situation for airports The range of government entities that hold an interest in an airport is significantly more diverse than that of airlines. In some cases the ownership includes local or regional governments, or even local chambers of commerce. If nothing else, the range of ownership shows the importance of an airport to a local community. The number of airports in commercial service also continues to expand. Low cost airlines are demanding, and finding, low cost airports from which to operate, including greenfield airports (typically converted former military bases). Governments are responding by acknowledging the need for additional infrastructure links to these airports, and for the need for better utilisation of them. This demand for infrastructure becomes, over time, a virtuous circle, creating the demand for new airports and thus the ability for competition between airports to develop. It takes a long time, and there are complex development criteria to comply with, but it is clear that there continue to be investors in the market prepared to invest in airports. Furthermore, the number of privately held airports continues to grow. These are a combination of privatised and greenfield airports. 3.5. Airports as a natural monopoly Around the world governments continue to make announcements about the intended deregulation of airports as well as their corporatisation and privatisation. Airport services are amongst the most liberalised of all sectors in air transport. In addition to ownership privatisation, corporatisation means that there is a considerable degree of administrative autonomy within government owned airports, and an array of new actors are entering the sector.1 A private monopoly is of course no better for the economy as a whole than a public monopoly, a point that is increasingly being understood by Government Treasury and Finance Departments and other government actors. Restrictions and regulatory guidelines are increasingly being imposed by the selling government as the airport ownership structure changes. At the time of the British Airport Authority privatisation, generally regarded as the world’s first significant airport privatisation, the regulatory guideline of preference was a CPI-X formulation for aeronautical charges. In the last few years, the UK Department for Transportation economists note that airports have often been unable to charge up to the limit of that theoretical cap. This shows that the ‘airport as natural monopoly’ argument is dead, or is certainly dying. And that is a good thing. If one is looking for evidence that this argument, or more accurately, this state of mind, is dying, one need look no further than to the recent discussions surrounding the new Airport Charges Directive in Europe. In that debate there was an expectation that airports can and should behave in a competitive manner. The ramifications for that change of mind-set are enormous. In terms of the three tests outlined above, they make all the
difference. When the fundamental understanding is that an entity is a monopoly, the regulation needs to be price driven. Economic regulation is seldom light handed. Nor, rarely does it match the action to the outcome. In other words, it is not proportionate. And the style of regulation is top down. In an environment where the argument is based on the assumption of competitive behaviour, the regulatory paradigm shifts, making light handed and proportionate regulation possible. Furthermore, it allows all parties, including of course the airline users of an airport, and the airport itself, to be able to discuss and agree on a regulatory framework. And, of course, by definition, the market is overseeing potential outcomes so that if pricing or service is skewed in one airport, a competitive airport can enter the market and compete for customers on a number of grounds, including price, service and ease of access. That is the sign of a mature industry. Thus the question becomes whether the industry is getting mature regulation. 4. The regulation of airports in Europe To test hypothesis, it is perhaps appropriate to look at the most recent piece of airport regulation in Europe, and to use it as a cipher for testing the current state of regulatory maturity. That means that we must look to the new European Airport Charges Directive, currently making its way through the rule making procedures in the European Union. It is now in the final stages of that process, with a second reading due in the autumn of 2008. There is currently no reason to assume that the version of the draft Directive will not be adopted in its entirety by the European Parliament. It has been approved by the European Council in this form. As with most other sectors in Europe, the development of airport regulation is multi-layered and it is changing. The European Commission started the process with the release of a package of documents in December 2006. That package included a communication: ‘An action plan for airport capacity, efficiency and safety’,2 a review of the Ground Handling Directive,3 and a draft Directive on Airport Charges.4 This package has formed the basis of considerable work by the Commission, and the Parliament, during 2007. Interestingly, as an aside, it is noteworthy that as recently as December 2006 ‘sustainable’ was not used in the title of the Communication. It is hard to believe that would be the case today. 4.1. ICAO charging guidelines Airport regulation world wide must contend with Article 15 of the Chicago Convention. That article provides that each signatory State must ensure that airport services are provided, and that they are provided at reasonable cost. The Commission is mindful of that and having noted the obligations of the Member States to the Chicago Convention, then proceeds to set out a basis for competitive behaviour between airports and between airports and airlines. Article 15 of the Chicago Convention is almost proto-WTO (World Trade Organisation) in its terms. It calls for non-discrimination, most favoured nation (MFN) treatment and transparency. This parallel with WTO is almost always ignored. Why the parallel with WTO is ignored is an interesting question worthy of analysis. Instead of relying on WTO provisions, most operators (both airport and airline) defer to the ‘Statement of the Council to contracting states on airport charges’,5 as the ICAO charging guidelines are
2
Communication from the European Commission COM (2006) 314. Report from the Commission on Council Directive 96/67/EC. 4 EC proposal for a Directive of the European Parliament and of the Council on Airport Charges. 5 The most recent edition is International Civil Aviation Organization (2004). 3
1 For a comprehensive review of the regulation of airport services, see the World Trade Organisation (2006, 2007).
A. Charlton / Journal of Air Transport Management 15 (2009) 116–120
more formally known, a document that is finely nuanced and subject to frequent review. The single most contentious issue in the Charging Guidelines is that of the single/dual till. Airlines are in favour of a single till, ensuing that all revenue from the operation of the airport is used to help offset the cost of providing aeronautical services. Airports (generally) would prefer a dual till, whereby commercial and retail revenue is not required to ‘cross-subsidise’ the provision of aeronautical services. Interestingly, the Charging Guideline is not definitive in relation to this point. There are a number of possible reasons why the ICAO Council Charging Guidelines have never resolved this dilemma. The first possible explanation is that at that time the airlines perhaps had collectively more persuasive might within the ICAO corridors (by dint of their ownership and so forth) and did not focus on the issue and push the point. Now, governments, with a significant and longer lasting ownership interest in airports (as their ownership in airlines decreases) are not interested in making the point. The second theory is that the ICAO processes themselves cannot be more definitive than the mild, non-decisive language that the ICAO Charging Guidelines contain. It is arguable that the new European Airport Charges Directive is in fact the first ever time that the principles set out in the ICAO Statement are to be put into ‘hard’ law. If that is the case, then the Airport Charges Directive is indeed highly charged. It also starts to pre-empt the power of the Council Statement, at least in Europe. This point is not well understood, but it is true, nevertheless.
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The final draft of the Directive, currently undergoing a second reading in the Parliament, has the compromise of 5 million passengers but with a further catch all that also includes the largest airport in every European Member State. This creates an interesting issue for Luxemburg, with only one airport, which must be subject to the regulation but which competes with a number of nearby airports in both France and Germany that are not required to comply with the regulation. With a threshold of 5 million passengers, Airports Council International – Europe (ACI) anticipates that it will cover more than 150 airports in Europe. That number is likely to rise to more than 200 by 2020. Intellectually, a single numeric threshold is a hard position to justify. It was proposed in order to ensure certainty. However, it is inevitable that changes will occur at the edge of the threshold, wherever that is set. But, as ever, politics is the art of the possible. Nevertheless, the end result of this proposal is that there is a clear recognition that competition law applies to all airports. It further recognises that there is a specific reporting and consultation regime for the largest airports in Europe, coupled with an explicit requirement that such large airports not behave in a manner that is considered to be abusive of their dominant market position. This outcome might be considered proportionate and light handed, even if there are arguments about where, exactly, such a threshold might be set. 4.5. Information required for a consultation
4.2. Airport–airline litigation concerning charging There have been cases around the world of airports and airlines clashing over charging practices, alleging anti-competitive behaviour. In Australia, Virgin Blue won a complaint lodged with the Australian Consumer and Competition Authority against Sydney Airport’s charging practices. IATA took the French government to court over ADP’s charges. Air France has sued Geneva Airport over plans to build a ‘low cost terminal’. As case law and precedent is being built up, a codification of the relationship between airports and airlines can be seen to be significant. 4.3. The new European Airport Charges Directive The new European Airport Charges Directive does a number of things that make it of interest not only inside, but outside Europe as well. First, it creates a two tier regulatory structure. Second, it specifies what information needs to be made available as part of a consultation. Third, it does not form an opinion on the ‘single/dual till’ conundrum. Finally, it provides a framework for pre-financing of future investments. All of these are important, but perhaps the most important issue is that it does so from a basis that assumes that airports can compete with each other and that competition law principles apply. 4.4. The two tier regulatory structure The first draft of the Directive proposed imposing the regulatory restrictions of the Directive on all European airports with more than 1 million passengers a year. Those restrictions included complex reporting and formal consultation procedures. The airlines argued that a threshold of 1 million passengers left too many airports not subject to this requirement; the airports argued that it covered too many airports. The purists argue that if it is clear that airports are subject to the full force of the anticompetitive law on issues such as abuse of a dominant position, then there should be no threshold at all.
All airports subject to the Directive will be required to conduct annual consultations with their airline users (or their representatives). The Directive also sets out the information that an airport subject to the Directive must make available as part of a consultation. This is consistent with the need for transparency that ICAO calls for in the Charging Guidelines. Airports complained that these requirements will add costs. Such an argument is less than credible. It would appear remarkable that a large airport, with more than 5 million passengers, is not able to provide relevant management data, financial information and statistics. Interestingly, as the debate and lobbying around the Airport Charges Directive continued in Brussels that point was down-played by the ACI, representing Europe’s airports. 4.6. No decision on single/dual till This is the most divisive issue in the airport/airline debate. As mentioned above, airlines, long the dominant lobbying voice in ICAO and in other debates, are now paying the price for failing to make their argument hold that there should be a single till. The ICAO Charges Guidelines, in version after version, has been equivocal on this issue. The airports, well within their rights to so, argue that in Europe, the hard law of the Charges Directive is silent on the business model that the airport chooses to use. That means that the draft Directive does not rule either version out. Interestingly, earlier drafts were explicit that airports were entitled to chose whichever business model that suited their particular situation. In the face of intensive lobbying by the airlines on this point, the final draft is silent. Notwithstanding the late changes to the draft, it is hard to read this as anything other than a ‘victory’ to the airports’ lobbying. 4.7. Pre-financing of future developments In early drafts of the Directive, airports had an explicit right to charge current users for developments in the future, even when all concede that there is a chance that such current users will not
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receive the benefit of that development. Arguably, this is what all mature businesses do – use current cash flows to fund future work. Interestingly, in condemning this proposal, many airlines conceded that they never do such things. That may say more about airlines than all of the ICAO delegations put together. Nevertheless, in the final draft of the Directive that explicit language was watered down. The right to pre-finance continues to exist, but there are now considerably more requirements of preconsultation and approval from the airport’s users than was originally the case. That might also reflect a last minute push by the airline lobby organisations. The consultation will now take place in the context of the required annual consultations. Nevertheless, such a practice has again not been ruled out, and indeed can be considered to be a ‘normal’ part of European air transport. It is hard not to read this as a major step forward for the airports, and their lobby groups. 5. Conclusions In short, the new European Airport Charges Directive shows that the airport industry has matured to a remarkable extent. It has developed an efficient and active lobby to defend its interests. It did
that by accepting reality: it accepted that a mature industry needs to exist in a competitive environment. And that, in aviation terms, sets it apart from the crowd. Furthermore, the new Directive shows that it has taken major steps to develop mature regulation to fit that industry. To go back to the three tests set out above: the new regulation is proportionate, in that it addresses the principle concerns of the airlines without imposing complex and onerous regulations on all; it is deliberately light handed; and it shows the benefit of being developed in a responsible and interactive way with considerable input from both the airlines, already well known and well established in Brussels, and the airports, now making themselves known as a force.
References International Civil Aviation Organization, 2004. Policies on Charges for Airports and Air Navigation, seventh ed. ICAO, Montreal. World Trade Organisation, 2006. Air Transport and the GATS – 1995/2000 in Review, S/C/W/163. WTO, Geneva. World Trade Organisation, 2007. Air Transport and the GATS – 2000/2005 in Review, S/C/W/270. WTO, Geneva.
Contents lists available at ScienceDirect
Journal of Air Transport Management journal homepage: www.elsevier.com/locate/jairtraman
Airport regulation: Does a mature industry have mature regulation? Andrew Charlton* Aviation Advocacy Sarl, Rue de la Gare 17, Nyon 1260, Switzerland
a b s t r a c t Keywords: Airport Regulation Lobbying Airport Charges Directive Air transport regulation
Air transport needs to be considered as a number of separate industries. Each is at their own point of maturity. Airports in Europe are soon to be regulated as never before by the European Airport Charges Directive. The process that saw that Directive be agreed is instructive on the maturity of the airport industry and the maturity of the regulatory regime that governs it. The new Directive shows that regulation of the airport industry is maturing. Ó 2008 Elsevier Ltd. All rights reserved.
1. Introduction
2. What is ‘mature regulation’?
The airline industry has been coming to terms with deregulation for more than 30 years. Soon it will have spent as long deregulating as it did being heavily (or over) regulated. However, at the same time, there seems to be no end of new regulations coming into effect. There are now nearly as many calls for re-regulation as there are for continuing deregulation. But with the greatest of respect to some of those making those calls, there are a number of points that need to be made clear. First, the ‘airline industry’ is a difficult and often misleading term. In fact, ‘the industry’ is actually a number of industries, flying in very close formation. Second, it is important that each of those businesses be reviewed, regulated and monitored with a high degree of specificity. Third, the debate should not be about more or less regulation, or of more or less deregulation, but rather of the maturity of regulation. Mature regulation calls for maturity on the part of both the regulated and the regulating, and that maturity needs to reflect and respond to the specificity of each part of the airline industry. This paper briefly considers the regulation of several major sectors of the air transport industry and poses the question of whether or not they are subject to mature regulation. It then reviews the new European Airport Charges Directive, currently before the European Parliament, and uses it as a means to assess the manner by which the European airport industry as a whole responded. It then attempts to apply that proposed Directive as a measure of the maturity of the European airport industry.
‘Mature regulation’ is a relative term. It is not easy to define in a vacuum. It is one of those things, like a hippopotamus perhaps, that is easier to point to than describe. However, it should be noted that the emphasis must be on the maturity of the regulations themselves, not the industry sector being regulated. It is the manner of the response of the industry being regulated that provides an indication of the maturity of the sector itself. This paper contends that mature regulation should be measured on three scales:
* Tel.: þ41 223630633. E-mail address: [email protected] 0969-6997/$ – see front matter Ó 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.jairtraman.2008.11.002
proportionality, light-handedness, and balance (between the interests of regulated entity and the legitimate concerns of the regulator). These criteria place an onus on the regulated as much as they place an onus on the regulator. They also require genuine dialogue. Each sector of the air transport industry, and their leaders, must be in a position to make the point to their regulators that they require of them mature treatment, and then to suggest responsible and mature solutions to genuine issues as they arise.
3. The aviation industry in context There are a number of free-standing sectors working in the aeronautical industry. They are interconnected, and of course, do much of their daily work at very similar addresses, but they are separate nevertheless. The management skills, the business drivers, the measures of success and the imperatives of each sector are different. So are the regulatory rules that need to be in place to regulate them appropriately.
A. Charlton / Journal of Air Transport Management 15 (2009) 116–120
The clearly distinct sectors in aviation include: the airlines, dominating the headlines and with a lock on most of the good headline words and phrases; the air traffic control industry; the airframe and engine manufacturers; the logistics operators; and, of course, the airports. All are all worthy of separate consideration. What is clear is that the level of maturation of each of those industries varies. 3.1. The airline industry Airlines have been deregulating since the introduction of changes to what was the Civil Aeronautical Bureau in the United States in the late 1970s. After the deregulation of US domestic airlines, international airlines (which at the time were largely government owned and operated entities outside of the United States) were privatised. The process of privatisation of airlines continues around the world, with perhaps only middle-Eastern airlines such as Emirates and Etihad amongst the category of ‘large government owned’ airlines. As the airlines have deregulated a number of the traditional airline institutions have been or are being dismantled. The most obvious example of that are the tariff and rates conferences run under the auspices of IATA. That change has a number of consequences, some which we have not seen played out in full at this stage. The most important consequence is that of the change to interlining. That will have a knock on impact on airports as well. Second, as the tariff and rates regime was deregulated, low cost airlines emerged. Again, the consequences of that change have not played themselves out to their final point, but already it is clear that this is an irrevocable change. The third change that has come about is that for airlines in the domestic environment (including Europe as a single domestic market for these purposes), the normal rules of business are starting to apply. The most obvious rule is that of the need to comply with competition law. In the last 30 years, coincidently with the deregulation of airlines, the world has seen a growth in the number of competition law agencies. Airlines are currently learning that competition law applies to them. Where the airline industry has not been as successful is in the area of international deregulation. Specifically, the airlines are hamstrung in the areas of development and investment. Or putting that in airline terms: route rights and ownership and control. The International Civil Aviation Orgainsation (ICAO), the United Nation’s specialist global aviation regulator, is responsible for overseeing a system that George Orwell’s Big Brother would have taken huge delight in the naming of – the so called ‘freedoms of the air’. You are free, in other words, to do anything as long as we tell you exactly what it is that you can do. The ‘substantial ownership and effective control’ regime arises not from the Chicago Convention itself, but from the two ancillary international treaties negotiated at the same time, the International Transit Agreement (which is in force) and the International Transport Agreement (which is not). The language of those treaties – which proposed the exchange of first and second freedoms in the case of the Transit Agreement and third and fourth freedoms in the case of the Transport Agreement, was then picked up in the first Bermuda Agreement and then most all Air Service Agreements subsequent to that. Airlines are currently working hard to find ‘work arounds’ for these problems, on the grounds that ICAO itself needs to be preserved (rather than, for example, calling for its complete disbanding), on the grounds that it provides a platform for international standard setting in the areas of safety and air navigation. IATA is calling for ‘like minded States’ to meet in 2008 to discuss a series of reciprocal, conditional declarations to be added to the Air Services Agreements of participating States to create an ‘inner
117
sanctum’ of States prepared to mutually exchange a right of establishment, as well as unrestricted route access, within the context of the existing framework of such Air Service Agreements. In short, airline regulation has a significant dissonance between domestic and international activity, is unable to find ways to focus on the direct issues and cannot resolve underlying issues such as investment rules without fearing bringing down standard setting in other areas. At that point it is difficult to see how airlines can be considered to have done anything other than fail the three tests set out above for a mature regulatory environment. 3.2. Air navigation service providers Air navigation service providers (ANSPs) deliver their services within a complex regulatory environment. There are a number of international rules and regulations governing service delivery, standards and service platforms relevant to air traffic control. Nevertheless, in the case of ANSPs the principle issue can be distilled to one word: sovereignty. States that were happy to privatise their airlines and airports continue to believe that they have an unalienable and unbending obligation to provide air traffic services. This is based on a traditional, mystical even, reading of Article 28 of the Chicago Convention. There is considerable scope for competition and rationalisation in the provision of air navigation services – a point that IATA has been making for several years, but it is clear that the industry is, in regulatory terms, immature. Article 28 provides that each State is responsible for the provision of air navigation services in the airspace above its territory. However, the Article is silent on the distinction between oversight of an outsourced service and the actual provision of that service. There is a growing body of opinion that Article 28 does not mandate the actual provision of a service, but rather ensuing that such a service is provided. Recently, the Legal Director of ICAO gave support to that interpretation, support that deserves more notoriety. There are moves amongst the ANSPs themselves to liberalise. Within Europe, the European Commission has introduced two packages of EU Directives, all under the banner of a ‘Single European Sky’. The first package required ANSPs to find ways to provide services on a functional rather than a national basis, bottom up. When it was increasingly clear that little, if any, progress was being made, an increasingly frustrated European Commission introduced a second raft of legislation. That legislation was introduced in July 2008 and is yet to become binding. It proposed significantly more performance-based measures to monitor progress of each Member State as a means of forcing ‘top down’ reform. At the same time, there is increasing competition for some services. Training, new technology developments and even tower services are examples of some of this new competition. Recently, for example, the UK commenced a public consultation on establishing a pricing mechanism for contestable services in the provision of tower control services. 3.3. Airframe and engine provision The airframe and engine industry is mature in a regulatory sense. There are no ownership issues (unless you count as between Airbus’ shareholders). Airbus has announced the establishment of operations in the US (unthinkable in the airline sector); new airframe manufacturers have entered the market; and new research on engines and fuel types continues. These are all signs of a healthy sector. Whilst the airframe and engine manufacturers must comply with IACO and other standards, the obligations that they face are not disproportionate. The manufacturers have input into their
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composition and they are not heavy handed. In other words, they do pass the test set out above. Of course, the airframe manufacturers are also subject to the rules of the World Trade Organisation. That can be a laborious and difficult process, as Boeing and Airbus are now finding out. On the other hand, most all other sectors of the modern economy are also subject to World Trade Organisation (WTO) rules. It is not to be ‘special’ to be part of the WTO process, but ‘special’ to be exempt. 3.4. The situation for airports The range of government entities that hold an interest in an airport is significantly more diverse than that of airlines. In some cases the ownership includes local or regional governments, or even local chambers of commerce. If nothing else, the range of ownership shows the importance of an airport to a local community. The number of airports in commercial service also continues to expand. Low cost airlines are demanding, and finding, low cost airports from which to operate, including greenfield airports (typically converted former military bases). Governments are responding by acknowledging the need for additional infrastructure links to these airports, and for the need for better utilisation of them. This demand for infrastructure becomes, over time, a virtuous circle, creating the demand for new airports and thus the ability for competition between airports to develop. It takes a long time, and there are complex development criteria to comply with, but it is clear that there continue to be investors in the market prepared to invest in airports. Furthermore, the number of privately held airports continues to grow. These are a combination of privatised and greenfield airports. 3.5. Airports as a natural monopoly Around the world governments continue to make announcements about the intended deregulation of airports as well as their corporatisation and privatisation. Airport services are amongst the most liberalised of all sectors in air transport. In addition to ownership privatisation, corporatisation means that there is a considerable degree of administrative autonomy within government owned airports, and an array of new actors are entering the sector.1 A private monopoly is of course no better for the economy as a whole than a public monopoly, a point that is increasingly being understood by Government Treasury and Finance Departments and other government actors. Restrictions and regulatory guidelines are increasingly being imposed by the selling government as the airport ownership structure changes. At the time of the British Airport Authority privatisation, generally regarded as the world’s first significant airport privatisation, the regulatory guideline of preference was a CPI-X formulation for aeronautical charges. In the last few years, the UK Department for Transportation economists note that airports have often been unable to charge up to the limit of that theoretical cap. This shows that the ‘airport as natural monopoly’ argument is dead, or is certainly dying. And that is a good thing. If one is looking for evidence that this argument, or more accurately, this state of mind, is dying, one need look no further than to the recent discussions surrounding the new Airport Charges Directive in Europe. In that debate there was an expectation that airports can and should behave in a competitive manner. The ramifications for that change of mind-set are enormous. In terms of the three tests outlined above, they make all the
difference. When the fundamental understanding is that an entity is a monopoly, the regulation needs to be price driven. Economic regulation is seldom light handed. Nor, rarely does it match the action to the outcome. In other words, it is not proportionate. And the style of regulation is top down. In an environment where the argument is based on the assumption of competitive behaviour, the regulatory paradigm shifts, making light handed and proportionate regulation possible. Furthermore, it allows all parties, including of course the airline users of an airport, and the airport itself, to be able to discuss and agree on a regulatory framework. And, of course, by definition, the market is overseeing potential outcomes so that if pricing or service is skewed in one airport, a competitive airport can enter the market and compete for customers on a number of grounds, including price, service and ease of access. That is the sign of a mature industry. Thus the question becomes whether the industry is getting mature regulation. 4. The regulation of airports in Europe To test hypothesis, it is perhaps appropriate to look at the most recent piece of airport regulation in Europe, and to use it as a cipher for testing the current state of regulatory maturity. That means that we must look to the new European Airport Charges Directive, currently making its way through the rule making procedures in the European Union. It is now in the final stages of that process, with a second reading due in the autumn of 2008. There is currently no reason to assume that the version of the draft Directive will not be adopted in its entirety by the European Parliament. It has been approved by the European Council in this form. As with most other sectors in Europe, the development of airport regulation is multi-layered and it is changing. The European Commission started the process with the release of a package of documents in December 2006. That package included a communication: ‘An action plan for airport capacity, efficiency and safety’,2 a review of the Ground Handling Directive,3 and a draft Directive on Airport Charges.4 This package has formed the basis of considerable work by the Commission, and the Parliament, during 2007. Interestingly, as an aside, it is noteworthy that as recently as December 2006 ‘sustainable’ was not used in the title of the Communication. It is hard to believe that would be the case today. 4.1. ICAO charging guidelines Airport regulation world wide must contend with Article 15 of the Chicago Convention. That article provides that each signatory State must ensure that airport services are provided, and that they are provided at reasonable cost. The Commission is mindful of that and having noted the obligations of the Member States to the Chicago Convention, then proceeds to set out a basis for competitive behaviour between airports and between airports and airlines. Article 15 of the Chicago Convention is almost proto-WTO (World Trade Organisation) in its terms. It calls for non-discrimination, most favoured nation (MFN) treatment and transparency. This parallel with WTO is almost always ignored. Why the parallel with WTO is ignored is an interesting question worthy of analysis. Instead of relying on WTO provisions, most operators (both airport and airline) defer to the ‘Statement of the Council to contracting states on airport charges’,5 as the ICAO charging guidelines are
2
Communication from the European Commission COM (2006) 314. Report from the Commission on Council Directive 96/67/EC. 4 EC proposal for a Directive of the European Parliament and of the Council on Airport Charges. 5 The most recent edition is International Civil Aviation Organization (2004). 3
1 For a comprehensive review of the regulation of airport services, see the World Trade Organisation (2006, 2007).
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more formally known, a document that is finely nuanced and subject to frequent review. The single most contentious issue in the Charging Guidelines is that of the single/dual till. Airlines are in favour of a single till, ensuing that all revenue from the operation of the airport is used to help offset the cost of providing aeronautical services. Airports (generally) would prefer a dual till, whereby commercial and retail revenue is not required to ‘cross-subsidise’ the provision of aeronautical services. Interestingly, the Charging Guideline is not definitive in relation to this point. There are a number of possible reasons why the ICAO Council Charging Guidelines have never resolved this dilemma. The first possible explanation is that at that time the airlines perhaps had collectively more persuasive might within the ICAO corridors (by dint of their ownership and so forth) and did not focus on the issue and push the point. Now, governments, with a significant and longer lasting ownership interest in airports (as their ownership in airlines decreases) are not interested in making the point. The second theory is that the ICAO processes themselves cannot be more definitive than the mild, non-decisive language that the ICAO Charging Guidelines contain. It is arguable that the new European Airport Charges Directive is in fact the first ever time that the principles set out in the ICAO Statement are to be put into ‘hard’ law. If that is the case, then the Airport Charges Directive is indeed highly charged. It also starts to pre-empt the power of the Council Statement, at least in Europe. This point is not well understood, but it is true, nevertheless.
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The final draft of the Directive, currently undergoing a second reading in the Parliament, has the compromise of 5 million passengers but with a further catch all that also includes the largest airport in every European Member State. This creates an interesting issue for Luxemburg, with only one airport, which must be subject to the regulation but which competes with a number of nearby airports in both France and Germany that are not required to comply with the regulation. With a threshold of 5 million passengers, Airports Council International – Europe (ACI) anticipates that it will cover more than 150 airports in Europe. That number is likely to rise to more than 200 by 2020. Intellectually, a single numeric threshold is a hard position to justify. It was proposed in order to ensure certainty. However, it is inevitable that changes will occur at the edge of the threshold, wherever that is set. But, as ever, politics is the art of the possible. Nevertheless, the end result of this proposal is that there is a clear recognition that competition law applies to all airports. It further recognises that there is a specific reporting and consultation regime for the largest airports in Europe, coupled with an explicit requirement that such large airports not behave in a manner that is considered to be abusive of their dominant market position. This outcome might be considered proportionate and light handed, even if there are arguments about where, exactly, such a threshold might be set. 4.5. Information required for a consultation
4.2. Airport–airline litigation concerning charging There have been cases around the world of airports and airlines clashing over charging practices, alleging anti-competitive behaviour. In Australia, Virgin Blue won a complaint lodged with the Australian Consumer and Competition Authority against Sydney Airport’s charging practices. IATA took the French government to court over ADP’s charges. Air France has sued Geneva Airport over plans to build a ‘low cost terminal’. As case law and precedent is being built up, a codification of the relationship between airports and airlines can be seen to be significant. 4.3. The new European Airport Charges Directive The new European Airport Charges Directive does a number of things that make it of interest not only inside, but outside Europe as well. First, it creates a two tier regulatory structure. Second, it specifies what information needs to be made available as part of a consultation. Third, it does not form an opinion on the ‘single/dual till’ conundrum. Finally, it provides a framework for pre-financing of future investments. All of these are important, but perhaps the most important issue is that it does so from a basis that assumes that airports can compete with each other and that competition law principles apply. 4.4. The two tier regulatory structure The first draft of the Directive proposed imposing the regulatory restrictions of the Directive on all European airports with more than 1 million passengers a year. Those restrictions included complex reporting and formal consultation procedures. The airlines argued that a threshold of 1 million passengers left too many airports not subject to this requirement; the airports argued that it covered too many airports. The purists argue that if it is clear that airports are subject to the full force of the anticompetitive law on issues such as abuse of a dominant position, then there should be no threshold at all.
All airports subject to the Directive will be required to conduct annual consultations with their airline users (or their representatives). The Directive also sets out the information that an airport subject to the Directive must make available as part of a consultation. This is consistent with the need for transparency that ICAO calls for in the Charging Guidelines. Airports complained that these requirements will add costs. Such an argument is less than credible. It would appear remarkable that a large airport, with more than 5 million passengers, is not able to provide relevant management data, financial information and statistics. Interestingly, as the debate and lobbying around the Airport Charges Directive continued in Brussels that point was down-played by the ACI, representing Europe’s airports. 4.6. No decision on single/dual till This is the most divisive issue in the airport/airline debate. As mentioned above, airlines, long the dominant lobbying voice in ICAO and in other debates, are now paying the price for failing to make their argument hold that there should be a single till. The ICAO Charges Guidelines, in version after version, has been equivocal on this issue. The airports, well within their rights to so, argue that in Europe, the hard law of the Charges Directive is silent on the business model that the airport chooses to use. That means that the draft Directive does not rule either version out. Interestingly, earlier drafts were explicit that airports were entitled to chose whichever business model that suited their particular situation. In the face of intensive lobbying by the airlines on this point, the final draft is silent. Notwithstanding the late changes to the draft, it is hard to read this as anything other than a ‘victory’ to the airports’ lobbying. 4.7. Pre-financing of future developments In early drafts of the Directive, airports had an explicit right to charge current users for developments in the future, even when all concede that there is a chance that such current users will not
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receive the benefit of that development. Arguably, this is what all mature businesses do – use current cash flows to fund future work. Interestingly, in condemning this proposal, many airlines conceded that they never do such things. That may say more about airlines than all of the ICAO delegations put together. Nevertheless, in the final draft of the Directive that explicit language was watered down. The right to pre-finance continues to exist, but there are now considerably more requirements of preconsultation and approval from the airport’s users than was originally the case. That might also reflect a last minute push by the airline lobby organisations. The consultation will now take place in the context of the required annual consultations. Nevertheless, such a practice has again not been ruled out, and indeed can be considered to be a ‘normal’ part of European air transport. It is hard not to read this as a major step forward for the airports, and their lobby groups. 5. Conclusions In short, the new European Airport Charges Directive shows that the airport industry has matured to a remarkable extent. It has developed an efficient and active lobby to defend its interests. It did
that by accepting reality: it accepted that a mature industry needs to exist in a competitive environment. And that, in aviation terms, sets it apart from the crowd. Furthermore, the new Directive shows that it has taken major steps to develop mature regulation to fit that industry. To go back to the three tests set out above: the new regulation is proportionate, in that it addresses the principle concerns of the airlines without imposing complex and onerous regulations on all; it is deliberately light handed; and it shows the benefit of being developed in a responsible and interactive way with considerable input from both the airlines, already well known and well established in Brussels, and the airports, now making themselves known as a force.
References International Civil Aviation Organization, 2004. Policies on Charges for Airports and Air Navigation, seventh ed. ICAO, Montreal. World Trade Organisation, 2006. Air Transport and the GATS – 1995/2000 in Review, S/C/W/163. WTO, Geneva. World Trade Organisation, 2007. Air Transport and the GATS – 2000/2005 in Review, S/C/W/270. WTO, Geneva.