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Promoting trade in airline services
Journal of Air Transport Management 7 (2001) 43}50
Promoting trade in airline services Peter 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 international 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 employment 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 domination of their routes by foreign carriers, which may
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possess market power, and use it to the detriment of their travelers and shippers. Many countries remain quite protectionist, but others are now taking a broader view of their 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 international negotiating arrangements, namely the bilateral system. This poses the question of whether the bilateral system 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 possible, 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).
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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, how moves 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 airline services. 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 arrangement 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 restrictions. 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 airlines which compete independently, and how they compete. 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 anything 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 of respects. 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. If most 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 countries 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$cult with the developments taking place in the airline industry, though this is re#ected in what is going on in other sectors as well. The seller is ceasing to be always the producer * one airline may produce the service, but another airline may sell it to the passenger or shipper. This happens with code sharing, where one airline operates a service but another includes it in its schedule and sells it to the customer. Here both airlines contribute to the production process, though the one which operates the service contributes the greater part. With a code share service, two countries may be exporting airline services jointly. Another complexity is that the nationality of an airline is becoming more di$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 headquartered in a country but be owned by foreign interests, and it may employ sta! from a range of di!erent countries. It may obtain maintenance and information technology services from several other countries. In what
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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 restrictions being put on trade in airline services, and on which airline from which country can produce and sell particular services * as there are in most markets. For regulatory purposes, there are ways to de"ne the product and determine which country supplies it. For example, it would be possible to de"ne the export of airline services in terms of which country's airline operates 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 nationality 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 in other countries airlines actually operating services. This is similar to a country which protecting its manufacturing 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 domestically owned. Such a country may not be too concerned 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 questions would be irrelevant, since questions of nationality do not arise when conditions under which a route is to be served are considered. Allied to trade in airline services is trade in services which are purchased by the airline industry. These include 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)).
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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 are currently 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$cult to think of any arguments to the e!ect that the overall gains to the world (as opposed to individual countries) would be greater under an environment which restricts trade. If trade in airline services were associated with trade in other goods and services, which created negative externalities, there could be some case for restriction. For example, airline services and tourism are closely related; suppose that tourism is excessive because too much tourism is creating congestion in cities and damage to environmentally sensitive areas. One way of restricting this tourism would be to restrict airline services * this trade restriction could result in overall world welfare. However, there would be better ways of handling this problem * if it is tourism which is creating congestion and damaging the environment, more direct ways of controlling these externalities are preferable, such as pollution controls or charges. Also, even if airline services are to be restricted, it would still be desirable to ensure that they are provided by the countries which are most e$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 restricting trade if it is able to raise the price at which its partners purchase its exports. This can be applied to airline services (see Clarke, 1998). Suppose a country is in a bilateral arrangement with another, and that both countries' airlines operate on the route. Suppose further that most of the tra$c on the route comes from the other country. It may be in the "rst country's interest to restrict supply on the route, forcing up prices and increasing the pro"ts of its airline at little cost to its own consumers. While it will be in the interest of the other country to keep fares low, it may not see it this way (it may be protectionist), and the "rst country may be able to impose an optimum tari! without retaliation. This could also be the case where the users of the service come from many di!erent
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countries, and retaliation is not feasible. This situation is rather like that of voluntary export restraints, whereby, one country agrees to the request of another to restrict exports to it, and charge the importing country more for its exports. It can be argued that this is the case on the Japan}Australia route, on which most passengers are Japanese * it may be in Australia's interest to keep fares high, since its airlines can pro"t from high fares. One proviso to this argument is that regardless of the restriction to supply, it will still be e$cient for the services 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 additional pro"ts from this airline, it would be in its interest to allow it on to the market. In reality, this is often very di$cult to achieve, and successful enjoyment of the pro"ts will require preventing other countries' airlines on to the route. Hence, when a US airline, Northwest, attempted to enter the Japan}Australia route, it made sense for Australia to try to block it, since it would simply have diluted pro"ts going to Australian airline. Even if free trade is in the interest of a country, it need not follow that every move towards more trade, in the context of an already restrictive environment, will be to that country's bene"t. It could be that a route is tightly regulated and is highly pro"table. These pro"ts will be shared by the airlines on the routes, typically airlines from the bilateral partners. While allowing airlines from other countries to serve the route could be in the interest of the country's consumers, it may not be in its overall interest, since its airline pro"ts will be diluted. It will be in the interest of the bilateral partners to restrict access to their route by airlines of other countries, even if these airlines could serve the route more e$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 taken account 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 services 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-partner countries will be able to enter a market on a sixth freedom 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 restrictions are now beginning to restrict the corporate freedom of 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 markets (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 interests 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 competition 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 government 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, though doing 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 interest. 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 employees 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 #exible towards 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 currently 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 countries, 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
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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 which have been concluded. Tourism interests are becoming more vocal, and some countries, such as Australia, include 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 important, they have not yet featured prominently in pressure for more open trade. Consumer interests have been keen on competition, though they have not paid much attention to the possibilities for trade. Thus open skies bilateral agreements typically do not open markets up to more trade on a non bilateral basis, and most domestic airline deregulations have limited competition to domestically owned and operated airlines. This is not so surprising 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 consumers, 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 countries 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 it would lead to a reduction of market share for US carriers, for example, in the domestic market or on international 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 restricted 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
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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 consumer 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 concluded, 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 liberal or 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 predetermined, 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 modest 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"table, 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 beyond rights 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 agreements a country must obtain rights for its airlines to #y on routes which other countries control. Bilateral negotiations need not be limited to only airline services; they may be broadened to include other trades as well. This is sometimes done (though it is often denied). 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 regulations 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 airline 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 negotiations will remain, there is scope for negotiations on a broader basis. One possibility would be regional agreements, and another would be for agreements between countries with similar objectives. Finally, there are multilateral 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 Community determined to include aviation along with other sectors in moves towards liberalisation (Button, 1997). This has resulted in signi"cantly greater competition and
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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, and there might be little scope for additional tra$c and trade at the air services level. The advantage of the regional or club approaches is that a wider range of options, involving trade in many sectors and several countries, can be considered at the same time. Where two countries may fail to agree, an agreement between several may be feasible, especially when each country involved has some market which it would like more access to. A further advantage of a club is that it could go further than a regional or multilateral agreement if its members have similar objectives; there need not be the problem of the convoy moving at the speed of the slowest ship. As against this, regional and multilateral approaches can involve more than one sector, and it is possible to trade concessions in one against concessions in another. However, while it may be feasible to form a club of countries which promote liberalisation in airline services, it is likely to be much more di$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 mutually 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 in airline 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 multilateral 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 process. It is complex, and results are slow in coming. There is the possibility that the agreement "nally reached may re#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 compromise one some issues to get their way on others. A multilateral 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 services into a multilateral negotiations framework would be
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quite di$cult. Airline services have developed in a very di!erent way from other traded services, and there is an established bilateral framework which is currently in use and which is inconsistent, in many ways, with the approach to trade agreements currently adopted by the WTO. As against this, however, there are other sectors which each have their own peculiarities and pose particular di$culties, such as agriculture, which have been successfully incorporated into the multilateral approach. While incorporation of air transport into the arrangements 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$cient countries see themselves as gaining enough from liberalising trade in airline services to push for this to be put on to the agenda. Agriculture gets put on the agenda when agricultural producer countries see this as a way of opening up access to markets. It is producer interests, and their search for markets, which forces the issue. With airline services, it may be that too few countries see it as in their airlines' interest to push for market access at the multilateral level. Countries will also see themselves as gaining from trade liberalisation if they take a broader view of their interests than they normally do. As mentioned, some countries are taking note of consumer and tourism industry gains when considering domestic aviation policy, and when entering open skies bilateral agreements. While producer interests are often dominant, this is not always so; some countries are willing to reduce manufacturing tari!s unilaterally, an action which results in the contraction of their industries. Information about the gains from trade, such as that gained from models of liberalisation, may help decision makers to take a broader view (see, for example, Productivity Commission, 1999b; Gillen et al., 1999). Whichever ways in which airline services are opened up further to trade, there are some cautions which need to be taken into account. One concern is that of market dominance. If a more liberal trade environment led to a small group of mega carriers which dominated most airline markets, there would be the risk of misuse of the market power that these carriers would possess. Even if mega carriers did not dominate, low-density markets could still be dominated by a few carriers, with attendant market power problems. To this end, any liberalisation needs to be accompanied by monitoring of competition policy aspects. Addressing market power problems in a multinational environment could be di$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
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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 opportunities 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 their airlines 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 domestic 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 to let 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 probably 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 bilateral system is a means of expanding the scope for trade. Increasing the number of countries involved, through a regional or multilateral agreement, can facilitate opening up markets, but it is especially important to expand the range of possible trade o!s, by including more than just 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. However 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 general 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 airlines are for access to new markets and for more #exible arrangements, and how much weight governments give to interests other than producer interests, such as consumers and tourism industries.
References Button, K., 1997. Developments in the European Union: lessons for the Paci"c Asia region. In: Findlay, C., Chia Lin Sien, Singh, K. (Eds.), Asia Paci"c Air Transport: Challenges and Policy Reforms. Institute for Southeast Asian Studies, Singapore. Civil Aviation Authority, 1998. The single European aviation market: the "rst "ve years. London, June. Clarke, H., 1998. Optimal air service agreements. Economic Analysis and Policy 28 (2), 169}182. 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 economic e!ects of bilateral air transport liberalization. Air Transport 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 services agreements: a network modelling approach. Research Report, Melbourne. Tretheway, M., 1997. Canada}US Open Skies. In: Findlay, C., Chia Lin Sien, Singh, K. (Eds.), Asia Paci"c Air Transport: Challenges and Policy Reforms. Institute of Southeast Asian Studies, Singapore, pp. 154}169. World Trade Organization, 1998. Air transport services. Background Note by the Secretariat, WTO, Geneva, November.
Promoting trade in airline services Peter 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$cult to achieve. Some regional agreements, especially that in Europe, have been successful in achieving trade liberalisation. Signi"cantly, these have included airline services with other sectors, enabling trade o!s between sectors. 2001 Elsevier Science Ltd. All rights reserved.
1. Introduction The airline industry, while being distinctly international in character, is one in which international trade is tightly regulated. Most airline markets are limited to the airlines of a select few countries, and most airlines have access to only a restricted group of markets, those within and surrounding their home country. When trade is tightly constrained, there are usually signi"cant gains to be made from liberalisation of trade. This is likely to be so for airline services. It is not di$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 employment 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 domination of their routes by foreign carriers, which may
* Tel.: #61-3-9905-5476; fax: #61-3-9905-2495. E-mail address: [email protected] (P. Forsyth).
possess market power, and use it to the detriment of their travelers and shippers. Many countries remain quite protectionist, but others are now taking a broader view of their 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 international negotiating arrangements, namely the bilateral system. This poses the question of whether the bilateral system 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 possible, 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 6 9 - 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, how moves 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 airline services. 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 arrangement 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 restrictions. 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 airlines which compete independently, and how they compete. 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 anything 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 of respects. 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. If most 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$c on a "fth freedom or sixth freedom basis, since many of the purchasers of the services it o!ers will come from countries other than its home country. However, these types of tra$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 operates 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 airline services 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 headquartered in a country but be owned by foreign interests, and it may employ sta! from a range of di!erent countries. It may obtain maintenance and information technology services from several other countries. In what
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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 restrictions being put on trade in airline services, and on which airline from which country can produce and sell particular services * as there are in most markets. For regulatory purposes, there are ways to de"ne the product and determine which country supplies it. For example, it would be possible to de"ne the export of airline services in terms of which country's airline operates 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 nationality 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 in other countries airlines actually operating services. This is similar to a country which protecting its manufacturing 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 domestically owned. Such a country may not be too concerned 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 questions would be irrelevant, since questions of nationality do not arise when conditions under which a route is to be served are considered. Allied to trade in airline services is trade in services which are purchased by the airline industry. These include 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)).
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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 are currently 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 individual countries) would be greater under an environment which 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$cient in doing so, and this will require trade in airline services. It is conceivable that individual countries could lose from free trade in a service, such as airline services. The optimum tari! argument is an accepted argument which states that one country may be able to gain from restricting trade if it is able to raise the price at which its partners purchase its exports. This can be applied to airline services (see Clarke, 1998). Suppose a country is in a bilateral arrangement with another, and that both countries' airlines operate on the route. Suppose further that most of the tra$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
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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$cient for the services to be actually operated by the lowest cost supplier, which ever country this may come from. If a lower cost airline from another country could operate the service, it would be in the "rst country's interest to allow it to do so as long as it could reap the pro"ts from this happening. Thus if a US airline could operate the Japan}Australia route at a lower cost than the Japanese and Australian airlines, and Australia could somehow gather the additional pro"ts from this airline, it would be in its interest to allow it on to the market. In reality, this is often very di$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 from other countries to serve the route could be 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 taken account 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 services 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-partner countries will be able to enter a market on a sixth freedom 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 restrictions are now beginning to restrict the corporate freedom of 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 markets (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 interests 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 competition 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 government 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, though doing 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 interest. 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 employees 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 #exible towards 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 currently 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 countries, 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
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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 which have been concluded. Tourism interests are becoming more vocal, and some countries, such as Australia, include 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 important, they have not yet featured prominently in pressure for more open trade. Consumer interests have been keen on competition, though they have not paid much attention to the possibilities for trade. Thus open skies bilateral agreements typically do not open markets up to more trade on a non bilateral basis, and most domestic airline deregulations have limited competition to domestically owned and operated airlines. This is not so surprising 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 consumers, 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 countries 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 it would lead to a reduction of market share for US carriers, for example, in the domestic market or on international 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 restricted 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
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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 consumer 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 concluded, 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 liberal or 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$c, thus creating gains from trade. Under restrictive bilateral agreements, the capacity of each of the countries airlines may be predetermined, thereby, limiting the scope for trade. Under open skies, the lower cost airlines can win market share from their competitors, and airlines from higher cost countries have greater ability to subcontract operation of services to airlines from lower cost countries. In the longer term, open skies agreements may have an impact on trade through another mechanism. If open skies lead to competitive airline markets, and only modest pro"tability of airlines, countries may be less inclined to prevent entrants from other countries into the markets they control. Currently, where markets are highly pro"table, airlines and governments are reluctant to allow other countries' airlines into the market to share the pro"ts; thus, Asian countries do not want US airlines to have access to pro"table intra-Asian routes. Lower fares on direct routes need not always lead to greater reliance on trade. Lower fares on a direct route may mean that tra$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 beyond rights 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 agreements a country must obtain rights for its airlines to #y on routes which other countries control. Bilateral negotiations need not be limited to only airline services; they may be broadened to include other trades as well. This is sometimes done (though it is often denied). 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 regulations 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 airline 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 negotiations will remain, there is scope for negotiations on a broader basis. One possibility would be regional agreements, and another would be for agreements between countries with similar objectives. Finally, there are multilateral 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 Community determined to include aviation along with other sectors in moves towards liberalisation (Button, 1997). This has resulted in signi"cantly greater competition and
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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$c between members. The problem with the non-regional club option is that the members of the club might be widely separated geographically, and there might be little scope for additional tra$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 the speed of the slowest ship. As against this, regional and multilateral approaches can involve more than one sector, 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$cult to form a club of countries which are seeking a similar degree of liberalisation across a wider range of sectors. The multilateral option is another, not necessarily mutually exclusive, one. This could involve incorporation of airline services more generally into the GATS. Currently, few countries would support this, possibly because they do not wish to be put under pressure to liberalise trade in airline services. The multilateral approach does have advantages. It involves a large group of countries with a wide range of sectors to be considered, and thus, it provides a wide range of possible trade o!s. A multilateral framework limited to only air transport would be unlikely to achieve very much, as there would be little scope for trade o!s. There is an established negotiation framework, which has been able to handle agreements with very di!erent sectors in the past. There also several limitations of the multilateral process. It is complex, and results are slow in coming. There is the possibility that the agreement "nally reached may re#ect the position of the countries least prepared to move * the lowest common dominator problem. This will be less of a worry if all countries to the agreement want something out of it, and are prepared to compromise one some issues to get their way on others. A multilateral agreement which covers a range of sectors holds out more promise than one which is restricted to one or a few sectors; for example, a multilateral agreement which covers solely aviation. It is also probably true that incorporating airline services into a multilateral negotiations framework would be
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quite di$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 approach to trade agreements currently adopted by the WTO. As against this, however, there are other sectors which each have their own peculiarities and pose particular di$culties, such as agriculture, which have been successfully incorporated into the multilateral approach. While incorporation of air transport into the arrangements such as the GATS has some potential, it is likely to be achieved only in the longer term. The primary issue may be one of whether su$cient countries see themselves as gaining enough from liberalising 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 opening 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 as in 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 industry 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 contraction 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 attendant market 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
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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 opportunities 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 their airlines 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 domestic 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 to let 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 probably 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 bilateral system is a means of expanding the scope for trade. Increasing the number of countries involved, through a regional or multilateral agreement, can facilitate opening up markets, but it is especially important to expand the range of possible trade o!s, by including more than just 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. However 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 general 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 airlines are for access to new markets and for more #exible arrangements, and how much weight governments give to interests other than producer interests, such as consumers and tourism industries.
References Button, K., 1997. Developments in the European Union: lessons for the Paci"c Asia region. In: Findlay, C., Chia Lin Sien, Singh, K. (Eds.), Asia Paci"c Air Transport: Challenges and Policy Reforms. Institute for Southeast Asian Studies, Singapore. Civil Aviation Authority, 1998. The single European aviation market: the "rst "ve years. London, June. Clarke, H., 1998. Optimal air service agreements. Economic Analysis and Policy 28 (2), 169}182. 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 economic e!ects of bilateral air transport liberalization. Air Transport 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 services agreements: a network modelling approach. Research Report, Melbourne. Tretheway, M., 1997. Canada}US Open Skies. In: Findlay, C., Chia Lin Sien, Singh, K. (Eds.), Asia Paci"c Air Transport: Challenges and Policy Reforms. Institute of Southeast Asian Studies, Singapore, pp. 154}169. World Trade Organization, 1998. Air transport services. Background Note by the Secretariat, WTO, Geneva, November.