Open skies agreements

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Open skies agreements are policies designed to create an international free-market environment for the airline industry. It involves using policy to relax rules and regulations and minimize government intervention for passenger, cargo, and combination air transportation – both scheduled and chartered. Air transport agreements may be bilateral (involving two countries) or multilateral (involving three or more countries). [1] Governments implementing open skies policies may seek to realize an economic benefit from doing so, such as increased commerce and tourism, or an increase in profits of their national carriers through international expansion.


Open skies policy revolves around nine freedoms of the air, as set-forth in the framework provided by the Convention on International Civil Aviation (a.k.a. Chicago Convention), signed at Chicago in 1944. The freedoms are as follows, quoted from the International Civil Aviation Organization (ICAO), the body which established and governs the Chicago Convention. [2]

  • First Freedom Right: The right or privilege, in respect of scheduled international air services, granted by one State to another State or States to fly across its territory without landing.
  • Second Freedom Right: The right or privilege, in respect of scheduled international air services, granted by one State to another State or States to land in its territory for non-traffic purposes.
  • Third Freedom Right: The right or privilege, in respect of scheduled international air services, granted by one State to another State to put down, in the territory of the first State, traffic coming from the home State of the carrier.
  • Fourth Freedom Right: The right or privilege, in respect of scheduled international air services, granted by one State to another State to take on, in the territory of the first State, traffic destined for the home State of the carrier.
  • Fifth Freedom Right: The right or privilege, in respect of scheduled international air services, granted by one State to another State to put down and to take on, in the territory of the first State, traffic coming from or destined to a third State.


ICAO characterizes all "freedoms" beyond the Fifth as "so-called" because only the first five "freedoms" have been officially recognized as such by international treaty.

  • Sixth Freedom Right: The right or privilege, in respect of scheduled international air services, of transporting, via the home State of the carrier, traffic moving between two other States. The so-called Sixth Freedom of the Air, unlike the first five freedoms, is not incorporated as such into any widely recognized air service agreements such as the "Five Freedoms Agreement".
  • Seventh Freedom Right: The right or privilege, in respect of scheduled international air services, granted by one State to another State, of transporting traffic between the territory of the granting State and any third State with no requirement to include on such operation any point in the territory of the recipient State, i.e the service need not connect to or be an extension of any service to/from the home State of the carrier.
  • Eighth Freedom Right: The right or privilege, in respect of scheduled international air services, of transporting cabotage traffic between two points in the territory of the granting State on a service which originates or terminates in the home country of the foreign carrier or (in connection with the so-called Seventh Freedom of the Air) outside the territory of the granting State (also known as a Eighth Freedom Right or "consecutive cabotage").
  • Ninth Freedom Right: The right or privilege of transporting cabotage traffic of the granting State on a service performed entirely within the territory of the granting State (also known as a Ninth Freedom Right or "stand alone" cabotage).


In contrast to open skies, some governments have imposed protectionist measures for their airlines. Following World War II, many countries have invested in forming national carriers (a.k.a. flag carriers, or legacy airlines) which often represented national pride. Many were also wholly or partially government-owned. As international competition grew and threatened to hurt underperforming airlines, some governments used protectionist policies to protect their carriers.


Whether a country's government pursues open skies, protectionism, or a mix of the two depends on factors such as the government's economic and political interests.


CONCEPT


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Goals


Conceptual Example

Country A’s government wishes to (and sees potential to) increase competition, lower fares, and increase route variety in air transportation markets. There may or may not be problems in the aforementioned respects, but there is room to improve. Country A’s airlines may also wish to expand geographically, in which case they may lobby to their government to push for open skies policies. Country B’s government wishes similarly.

Both countries decide to allow unrestricted commercial flight privileges, to and from their respective airports, by their respective airlines. The two governments agree on an open skies policy enabling the third and fourth freedom rights for their airlines. Country A’s airlines may offer services between Country A and Country B; Country B’s airlines may do the same.

As a result, on routes between the two countries, competition should increase, fares should drop, and airlines would add more routes.


Specific Example

The EU-US Open Skies Agreement, signed in 2007 to replaced individual agreements between the US and certain EU states, allows for the following traffic between the EU and USA: [3]

  1. Any EU airline, and any US airline, may fly between any point in the EU and any point in the US.
  2. US airlines may fly between points in the EU. EU airlines may NOT fly in between points in the US.
  3. EU airlines may fly between the US and non-EU countries such as Switzerland.


Results of this open skies agreement include, as examples:

  1. Transatlantic flights departing London Heathrow Airport are no longer exclusively operated by British Airways, Virgin Atlantic Airways, United Airlines, and American Airlines.
  2. Non-EU and Non-US carriers with the appropriate fifth freedom rights may operate routes between points in the EU and points in the US. These include: Air New Zealand (Heathrow to Los Angeles), Air India (Heathrow to Newark), Singapore Airlines (Frankfurt to New York JFK) and formerly Kuwait Airways (Heathrow to New York JFK). [4]
  3. Various low-cost carriers have commenced service between the US and EU, including Norwegian Air, airberlin, and Condor. Ryanair is also considering entering the transatlantic market. [5]



Tradeoffs

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Tradeoffs of implementing this policy may include:

  1. Increased competition could cause a country's flag carrier, which often was founded for national pride, to become unprofitable and go out of business.'
  2. Increased competition could lower revenues for incumbent airlines serving the affected routes.
  3. Open skies could result in domestic job losses if foreign carriers become dominant in the affected markets.
  4. Open skies could become problematic if certain airlines are supported by governments, whether by subsidy or bankruptcy protection. Competitor airlines which do not benefit will complain about unfairness. The battle could become political, as it has in a few recent cases involving the United States. [6] [7]
  5. Open skies is NOT a once-and-for-all solution to create a free-market in air transportation. Other factors, such as airport slot restrictions, must also be considered.


Compatibility Assessment

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If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:

  1. Are domestic-based airlines seeking to expand by entering new international markets?
  2. Are domestic-based airlines seeking to expand by increasing capacity to capacity-restricted international destinations?
  3. Is the government seeking in expand air service/route networks? Perhaps to grow its economy (ex. through more tourism and commerce)?
  4. Is there insufficient competition in a certain airline market?
  5. Has there been recent consolidation of airlines leading to a reduction in competition?
  6. Have there been recent airfare increases independent of fuel and labor issues?
  7. Is there a great disparity in quality between domestic and foreign airlines?
  8. Have consumers been seeking more competition in the airline industry?
  9. If preserving flag/national carriers is important, are domestic-based airlines financially stable or able to withstand greater competition?
Design

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Assuming that a jurisdiction has decided to adopt the policy, the following questions will need to be answered when determining how to implement this policy:

  1. With which countries should an agreement be entered?
    1. Consider the international political landscape.
    2. Consider what respective foreign airlines have to offer.
    3. Consider the impacts on economic growth of the countries involved.
  2. What should be the terms of the agreement? Which rights should be granted?
    1. Consider the negotiation landscape. What are the particular interests of the countries involved?
  3. How should the agreement be executed? Ex. phases
    1. Consider the timeframe needed by the countries involved to implement the agreement provisions. Some countries may experience governance or economic challenges, or may need time to handle the changes caused by the provisions.
    2. Example: a set of ASEAN open skies passenger and cargo agreements, effective in 2010, was designed to gradually remove certain air service restrictions gradually to cope with member countries with less developed airline industries. [8]
  4. What will be the response of the airlines involved?
    1. Consider their financial health.
    2. Consider strategic benefits and drawbacks these airlines may face.
    3. Consider the long-term goals of the airlines.
    4. Consider lobbying efforts of airline groups.
  5. What will be the response of (and benefits for) consumers?
    1. Consider lobbying efforts of consumer groups.



ADOPTION


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PolicyGraphics
  • Has adoption of: Common.
    • There are now many open skies agreements signed between various countries, allowing for the variety of international flight services we see today.
  • For area type(s): Urban.
    • Open skies agreements are most likely to affect urban areas, which handle most of the world's international air traffic, and has the most economic (especially business/commerce) need for access to international travel.
  • For issue type(s): Efficiency, Infrastructure, Finance.
    • Open skies policies affect the efficiency of the pricing and operations of air markets; more competition will drive down airfares and increase airlines' willingness to invest in cost-efficient operations.
    • Open skies agreements affect the usage (and thus financing) of airport infrastructure and facilities connecting to airports, such as public transit and roadways.
    • Open skies agreements affects business and commerce, thus affecting finance in the private sector.
Adopters


STAKEHOLDERS


Supporters

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Opponents

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REFERENCES


Research

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  • Open skies: Estimating travelers’ benefits from free trade in airline services. Winston, Clifford and Yan, Jia. (2015). This Brookings Institution academic article finds that open skies agreements involving the US "have generated at least $4 billion in annual gains to travelers and that travelers would gain an additional $4 billion if the US negotiated agreements with other countries that have a significant amount of international passenger traffic."
  • Open Skies: A Research Agenda. Pitfield, D.E. (2008). This Loughborough University academic paper takes a data-driven approach to determine the effects of open skies agreements.
  • Unravelling Open Skies. Mendelsohn, Allan. (2015). This McGill University academic paper discusses three current main issues in open skies policies involving the US. These issues involve Norwegian Air, the Middle Eastern carriers, and the US Export-Import Bank.
  • Competition regimes and air transport costs: The effects of open skies agreements. Micco, Alejandro and Serebrisky, Tomás. (2006). Journal of International Economics 70, 25–51. This paper assesses the effects of open skies agreements on airfare pricing, based on the income of the countries involved.
  • A Panel Data Analysis of Code Sharing, Antitrust Immunity and Open Skies Treaties in International Aviation Markets. Whalen, W. Tom. (2005). Quoted (partially) from abstract: "This paper estimates the effects of code sharing, antitrust immunity and Open Skies treaties on prices, output and capacity using an eleven-year panel of U.S.-Europe data."
  • Open Skies over the Middle East. Cristea, Anca; Hillberry, Russell; and Mattoo, Aaditya. (2014). Quoted (partially) from abstract: "This paper uses detailed data on worldwide passenger aviation to estimate the effect of air transport policy on international air traffic." The paper applies these concepts to air traffic in the Middle East.


Resources

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Footnotes
  1. "Open skies." Wikipedia.
  2. "Freedoms of the Air." International Civil Aviation Organization (ICAO).
  3. "Air Transport Agreement." Official Journal of the European Union, L134 (volume 50, May 25, 2007).
  4. Paris, Natalie (2015). "Kuwait Airways ends London to New York flights after discrimination complaint." Telegraph.
  5. Perkins, Ed (2014). "10 Cheapest Airlines for Flying to Europe." Airfarewatchdog.
  6. Mouawad, Jad (2015). "Open-Skies Agreements Challenged." The New York Times.
  7. Posaner, Joshua (2016). "Norwegian airline clouds open skies." Politico.
  8. (2008). "(Update) ASEAN nations sign 'open skies' deals for passenger and cargo." ABS-CBN News.
  9. "Open Skies Agreements." U.S. Department of State.
  10. "The Blue Sky Policy: Made in Canada, for Canada." Government of Canada.
  11. Flynn, David (2016). "Boom in Australia-China flights to follow 'open skies' agreement." Australian Business Traveller.
  12. (2016). "Foreign Minister Meets Australian Counterpart." QNA.
  13. Walker, Karen (2016). "Brexit could lead to doors closing on Open Skies." Air Transport World.
  14. "About ICAO." International Civil Aviation Organization (ICAO).
  15. "Air Transport Agreement." Official Journal of the European Union, L134 (volume 50, May 25, 2007).
  16. (2015). "ASEAN Open Skies Policy To Be Implemented in 2015." ASEAN Briefing.
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