Open skies

Bilaterals may generate increased passenger loads between two nations. But Aytac Aras believes they can also hinder countries with inferior aviation markets.
ANALYSIS

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Bilaterals may generate increased passenger loads between two nations. But Aytac Aras believes they can also hinder countries with inferior aviation markets.

On December 17, 1903, the Wright brothers made history after launching the world's first powered aircraft flight. Within five years of their breakthrough, passengers were boarding flights as commercial aviation began to take off. The emergence of international air travel forced global authorities to regulate the aviation industry.

Some states agreed on basic commercial aviation issues by signing the Paris and Habana Conventions in 1919 and 1928 respectively. Some 16 years later, the 1944 Chicago Convention was signed by several countries and still governs many aspects of civil aviation.

An area that the Chicago Convention doesn't cover is the economic regulations of commercial aviation. States need to establish bilateral agreements to specify these matters. Economical aspects of commercial aviation are crucial to a country because they relate to competition with other nations' airlines.

With this in mind, bilaterals control fares, frequencies and air service capacities, making them crucial to a country's commercial aviation industry. The result of airline deregulation in the US, which lifted the economic controls and constraints (except safety-related ones) on domestic aviation, was a positive move.

People started to ask: do bilaterals restrict international routes' efficiency, or are they necessary for protecting a nation's airline from much stronger forces? Saying yes or no is vital, because it may lead to the demise of a major national airline. On the other hand, it could be the catalyst for a better civil aviation system with a stronger and larger national airline.

Determining the advantages and disadvantages of bilateral agreements hasn't been easy, especially since the Airline Deregulation Act was approved by the US Congress in 1978. Having liberalised the domestic air transportation market and abolished the Civil Aeronautics Board, which set fares, routes and schedules, US authorities decided against liberalising the international air transportation market.

The argument was simple: it stated deregulation was successful in the US so why not the world? Although it caused three major airlines (Eastern, TWA, and Pan Am) to collapse, the International Air Transport Association says deregulation led to higher load factors and more flights between major hubs.

According to the aviation body, reducing red tape also opened up more destinations. The Federal Reserve Bank of San Francisco showed that the US' airline industry experienced a 225% growth and more than 50% decrease in fares between 1975 and 2000. This tremendous change was undoubtedly caused by deregulation. It also allowed air carriers to offer passengers more price/quality options.

Southwest revolutionised, the industry by introducing new marketing strategies and the low-cost airline model to the world. Canada and Australia, both liberalising their domestic airline systems in 1987 and 1990 respectively, have also benefited from deregulation. Besides these developed countries, Turkey liberalised its domestic market in 2003, leading to 50% price decreases and 300% traffic hikes.

Furthermore, the move boosted local trade within the country. Advocates of the above argument say that many examples like the US, Canada, Australia and Turkey show liberalisation is good for each country, suggesting international aviation would also benefit from deregulation.

The first ‘open skies' policy - which offered deregulated international markets and unrestricted code sharing rights by lifting governmental controls on airline industries - was made by the US' Department of Transportation (DOT) and EU countries in 1992. The DOT defined the term ‘open skies' as:

"An open skies agreement allows access to all routes between the US and the European Country; provides for the greatest possible degree of freedom in pricing; prohibits restrictions on the capacity and frequency of flights on these routes, and allows unrestricted route and traffic rights, such as an airline's ability to serve intermediate destinations and points beyond the countries that are parties to the agreement, to change the size of aircraft used, to serve "co-terminal" airports, and to exercise fifth freedom rights."

The first country to accept this offer was the Netherlands, although the European Commission objected saying it was against its policies.

Nevertheless, the Netherlands was served by the US after immunity to the alliance between Northwest Airlines and KLM Royal Dutch Airlines, the first large partnership, was granted. Other European countries soon followed by recognising the open skies agreement with the US.

Before 9/11, the DOT hailed open skies with EU countries as a success, reporting that airlines' average fares had dropped some 20% between 1996 and 1999. It also said passenger numbers had increased 65% from 1992 to 1999 on routes to the EU.

Although the US strongly argues liberalisation, and thus open skies, improves air transportation, many still disagree. The critics say that competition within a fully-liberalised air transportation environment will wipe out small carriers with limited resources. The detractors also believe alliances will dominate the market by either reducing prices or monopolising routes that smaller carriers struggle to operate on.

The proponents of open skies try to rebut this argument, claiming competition stimulates development. Their argument suggests there is no reason to worry because passengers, trade and efficiency will benefit even if small airlines collapse.

Sometimes it isn't difficult to predict the outcome of an open skies agreement between two countries that are somehow unequal when it comes to air transportation. Agreements between Italy and Eritrea or Turkey and Russia are good examples of this. Eritrea, once ruled by the Italians, is a new country which gained independence from Ethiopia almost 15 years ago.

It has limited traffic to Italy and pays more for fuel than the European country's carriers. In addition, Alitalia operates 179 aircraft but Eritrean Airlines only has one. It's fair to say, Alitalia will find it easy to dominate the traffic over Eritrea Airlines routes if both countries agree on the open skies concept and lift all commercial aviation restrictions.

The relationship between Turkey and Russia also shows an imbalance.

Nationals from the latter accounted for Turkey's highest tourist numbers in 2007, with 2.5 million making the trip. Russia develops cheap, eastern-made aircraft, ensuring low labour costs.

However, it's a different matter in Turkey. The European Civil Aviation Conference and Joint Aviation Authorities member only keeps "expensive" aircraft in its registry. Pilot wages are competing with those in the EU, creating huge costs for a Turkish carrier operating from tourist city Antalya to Moscow. This is why Turkey has never established an open skies agreement with Russia. Clearly, such an arrangement would be rather disadvantageous for Turkey.

Open skies offers always come from the strong and never the weak. An approach is made from a nation's aviation authority when it wants to open new markets and compete with rivals.

The airline industry is a trade just like other businesses. Somebody sells a product or service to somebody else, thus money, service or product is exchanged and trade occurs.

If competition is good for advancement then one can ask the following question: why does the US keep regulating its textiles industry and limiting importation to protect its own producers? The US could remove all quotas, enabling competition at high levels leading to lower textile prices, improved efficiency and increased trade.

In conclusion, it's clear that whether open skies or bilaterals are better depends on the participating countries. The aviation backgrounds and traffic potential should be considered when two nations reach an agreement. The number of registered aircraft and their suitability, possible routes, fuel prices and labour costs also need to be considered.

It's important to remember it took nearly 70 years for the US authorities to deregulate its airline industry. Liberalising in the US worked because the industry was mature enough to ensure competition wouldn't create monopolies or oligopolies.

Now, the US airline market is open to new entrants. However, if deregulation takes places between two countries whose aviation markets aren't on an equal footing, the weaker party will no longer have its own national airline. Such a scenario would also see the stronger country dominating the aviation industry in another territory.
 

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