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| Air transport, unlike any other mode of transport, is severely constrained by international treaty. While rail, maritime and road transport do not require the express permission of the State into which they operate services internationally, no scheduled air service can be operated over or into the territory of a contracting State, except with the special permission or other authorization of that State, and in accordance with the terms of such permission or authorization. |
by Dr. Ruwantissa Abeyratne
(May 06, Ontario, Sri Lanka Guardian) Broadly speaking, the phrase “sustainable development” means development that caters to the needs of the present generation without compromising the ability of the future generation to achieve their needs. Usually, this phrase is used in an environmental sense. However, it could also mean - as in the context of this chapter- development that ensures the sustainability of an industry. The initial and fundamental premise of the air transport industry is that the air transport sector has never been continuously profitable and that the industry’s profitability has been cyclical. Competition in air transport has been a key factor along with the perceived anomalies that are not seen in other transport modes, such as sovereignty which is a key issue in the award of air traffic rights and the requirement that ownership and control of an airline should be in the hands of nationals of a country in which an airline is registered on a majority basis. All of these factors lead to the Game Theory being relevant to air transport. The Game Theory, which is a branch of applied mathematics that is used in conformity with economic principles. The Game Theory suggests that strategic interactions among economic agents (air carriers in the case of air transport) result in outcomes with respect to their preferences. The success of their choices depends on choices made by others.
In the words of Giovanni Bisignani, Director General and CEO of IATA who, at a meeting he addressed in February 2011 said : “Aviation is a unique industry. In 2011 we expect to generate almost $600 in debt. The industry’s activity is critical. Aviation supports 32 million jobs and facilitates the global village by supporting $3.5 trillion in economic activity. Our commitments to tackle climate change are the most ambitious of any global industry. And we are the safest mode of transport. But our margins are pathetic—just 0.1% over the last 40 years. This is not sustainable. We need to look ahead to anticipate change as we prepare to handle the 16 billion passengers and 400 million tonnes of freight that we will handle in 2050”.
Air transport, unlike any other mode of transport, is severely constrained by international treaty. While rail, maritime and road transport do not require the express permission of the State into which they operate services internationally, no scheduled air service can be operated over or into the territory of a contracting State, except with the special permission or other authorization of that State, and in accordance with the terms of such permission or authorization. This anomaly has spawned hundreds of bilateral air services agreements and enabled States to adopt a protectionist attitude in guarding the “market share” of its own national carrier, thus stultifying competition among carriers and depriving the consumer of the most efficient and cost effective air transport product that an otherwise liberalized market would have produced.
To circumvent this obstacle, air carriers have used a multiplicity of tolls, by forming alliances and optimizing operations on routes they are otherwise not entitled to by combining each others’ air traffic rights. However, this has proved no permanent panacea, prompting aviation economists and lawyers to suggest that the best way out of the intractable situation would be to include market access in air transport in the GATS Annex of the World Trade Organization. One of the reasons which impelled the author to write this article is that, notwithstanding the numerous assertions made by aviation experts and economists at international fora, time and again, that market access in air transport should be brought under the purview of the General Agreement on Trade in Services (GATS) Air Transport Annex of the World Trade Organization, these experts do not seem to have addressed the issue as to how this feat could be achieved within the context of a complex economic and legal environment applicable to air traffic rights in air transport. Another often neglected issue is that the more powerful nations who are prolific in the air transport offered by carriers registered in those States, have resisted any hint at liberalizing market access in air transport through the GATS Annex.
Air transport has been, and continues to be, a complex business. It follows therefore, that transactions related to this industry are indeed complex and should be adaptable to modern exigencies. A survey of IATA carried out in 2007 of over 600 companies from 5 countries reflected that 63% confirmed that air transport networks are vital for their investments and business. 30% of those countries said that any constraint placed on the air transport industry would make them invest less. Airbus Industrie forecasts that between 2009 and 2028 there will be a demand for 24,95passenger and freighter aircraft worth USD 3.1 trillion, and that, by 2028 there will be 32,000 aircraft in service compared with 15,750 in 2009.
Air transport plays an integral part in the tourism industry where 40% of international tourists travel by air. Air transport contributes 10% of the world GDP and employs approximately 80 million people worldwide. Yet, over the decade 1999-2009 the industry lost $56 billion. Given that over that period there were 20 billion passengers carried by air, the industry lost $2.8 per passenger on average. This fact underscores the indispensability of air transport to the global economy on the one hand and the resilience of the industry to resuscitate itself after slow periods of growth followed by periods of losses.
Yet, commercial aviation has been nourished on a strange doctrine, which is based on the premise that aviation should primarily be used to strengthen friendship and understanding among the peoples of the world. This is a doctrine more suited to diplomacy, and should not exclusively be attributed to a commercial activity such as air transport. To make matters worse, the more appropriate doctrine for commercial aviation – competition – has been effectively rejected by the Convention on Civil Aviation (Chicago Convention) in its Article 6 which provides that no scheduled international air service may be operated over or into the territory of a contracting State, except with the special permission or other authorization of that State, and in accordance with the terms of such permission or authorization.
This is a most anomalous and strange philosophy and it does not explicitly apply to any other mode of transport.
The Chicago Conference of 1944 which brought 52 nations together to establish principles of air navigation and foster principles of air transport was aimed at adopting a treaty built on the ruins of war and discord. All that the delegates to the Conference were seemingly interested in were to protect their air power and sovereignty. As a result, a distinct lack of vision of the commercial future of the air transport industry seems to have prevailed, which precluded the adoption of liberal economic principles that would have otherwise allowed for the provision of air transport services to meet the exponential demand in the coming years. Arguably, the most glaring lapse of the Chicago Convention is the tone it sets in its Preamble that “international civil aviation may be developed in a safe and orderly manner and that international air transport services may be established on the basis of equality of opportunity and operated soundly and economically”. This prescribes a cautious approach for airlines, depriving them of the opportunity for competition. Worse, it focuses on the interests of the airlines and completely leaves out the important issue of the needs of the user – the passenger – and the consignor of air freight, both of whom depend on the best possible manner in which to use air transport.
One must hasten to add that this myopic attitude only prevailed in the field of air transport and did not affect air navigation. To this end, the Conference circumscribed the functions of The International Civil Aviation Organization - which came into being through the Chicago Convention - by stating that ICAO’s aims and objectives would be to “develop the principles and techniques of air navigation and foster the principles of air transport”, thus empowering the Organization to develop and regulate principles of air navigation but take a back seat in the development and regulation of global economic principles of air transport which would enable the user of the service to have the most number of choices of products in his best interest.
This unfortunate and self-stultifying approach has subjected commercial aviation to the peccadilloes of protectionist States who consider the concept of sovereignty (The principle of State sovereignty in airspace is embodied in Article 1 of the Chicago Convention which recognizes that every State has sovereignty over the air space above its territory, the latter being defined in Article 2 as land situated within and water adjacent to the State concerned) as preeminent in the provision of air transport to the travelling public and consignors of air freight. Furthermore, this trend has encouraged the protective instincts of States to ensure that their national carriers obtain optimum market share “belonging” to them, based on a now antiquated belief that all passengers, cargo and mail destined to a particular State or leaving that State, is the birth right of the national carrier of that State.
No other known major commercial activity is subject to arbitrary principles of nationality and national ownership, control of businesses and capacity controls as is air transport.
As to why ICAO has been refused by its member States the capacity to lead in the air transport field, and adopt compelling economic principles, and why they continue to do so is a puzzle, particularly when one looks at the robust role given to the Organization in other areas such as safety, security and the environment. For example, the 37th Session of the ICAO Assembly, held from 28 September to 8 October 2010, reaffirmed ICAO’s leadership role in the field of environmental protection, and adopted a comprehensive resolution to reduce the impact of aviation emissions on climate change. The agreement provides a roadmap for action through 2050 for the 190 Member States of the Organization. Solidifying its global influence, the Organization signed numerous international agreements, including cooperation agreements with regional civil aviation organizations and bodies from all regions of the world.
Against the backdrop of ICAO’s capacity and ability to conduct mandatory safety and security audits of States (which ICAO does) the Assembly endorsed a proactive safety strategy based on the sharing of critical safety information among governments and industry stakeholders. It also endorsed ICAO’s plan to establish a multi‑disciplinary approach to address the critical issue of runway safety. This will bring together representatives from airlines, airports, air navigation service providers and regulatory authorities. Following a successful diplomatic Conference in Beijing in August 2010, the Assembly built on this achievement by recognizing the need to strengthen aviation security worldwide. In a Declaration, unanimously adopted by participants, international commitment was reaffirmed to enhance aviation security collaboratively and proactively through screening technologies to detect prohibited articles, strengthening international standards, improving security information-sharing and providing capacity-building assistance to States in need. The Assembly also put its full support behind a comprehensive, new ICAO aviation security strategy.
The Resolution adopted by the Assembly on climate change makes ICAO the first United Nations Agency to lead a sector in the establishment of a globally harmonized agreement for addressing its CO2 emissions.
Why is there no such leadership in the economics of air transport?
In view of this lacuna in the economics of air transport, the industry has, as the Game Theory ascribes, been subject to the strategic interactions among economic agents (air carriers), whose success has depended on the choices made by others (the States). Strategic alliances among carriers have sprung up; franchising is quite common and “deals” between the protagonists have been seen. The lack of global leadership is one thing; but the strangulation of the industry by regulatory overkill is another. As Mr. Bisignani stated: “The global village that airlines helped to create has facilitated global business and global brands but there is not a single passenger airline in the top 100 of the Interbrand global brand equity survey. Kleenex, Kentucky Fried Chicken and Campbell’s Soup are there alongside Google, GE and IBM. National ownership restrictions of the bilateral system have restricted airline development as profitable global brands. Campbell Soup participates directly in 120 country markets, Google in 160 and IBM in 170. But even our biggest airlines -United or Delta, serve only around 65 countries directly.
Airlines need normal commercial freedoms to complete profitably as global businesses in a globalized world.”
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