Air Services

Pre-Liberalisation

Until the 1980s, relatively protectionist conditions prevailed in international trade, generally. This was reflected in agreements on air traffic rights. Many airlines were owned by state or publicly owned companies and were monopolies or left to set their prices on relatively competition-free terms.

Historically, states designated a limited number of carriers for the purpose of agreements. The effect might be that only a limited number of carriers, traditionally the national flight carrier and perhaps another or one or more others, were permitted to transit through the state under the agreement. Most states and nearly all agreements require that airlines must be owned or controlled by residents of the home state.

For many years, states sought to regulate airfares from their country to other states. Fare modifications and changes required approvals of changes on both sides. This feature has been liberalised substantially, and the requirements to file and have airfares approved have been largely abandoned. Price-based regulation has been largely abandoned.

States traditionally limited capacity and frequency by requiring approval on an ongoing basis from each state. Such agreements could split the markets of states so that an equal or other division of the traffic. Controls on capacity, in common with price controls, have largely disappeared. Some still exists in some agreements, particularly with less liberal economies.

Limited Multi-Lateral Agreements

Air services activities are the subject of bilateral agreements between states. The right to negotiate follows from the basic principles of sovereignty, preserved in the Chicago Convention. However, the Chicago Convention itself does not deal with airline trade services. The Chicago Convention provides a number of annexes dealing with air traffic rights.

Airline services other than a relatively narrow category are excluded from the General Agreement on Trade in Services. Ancillary services such as aircraft repair, maintenance/service and ventilation systems are included.

It is argued that the most favoured nation principle requires states to afford service suppliers of other states no less favourable treatment than applies to like services and suppliers of other states. Applied to aviation, the most favoured nation principle would require transit liberalisation to be extended unilaterally, if necessary. However, this view is not widely accepted.

The International Air Services Transit Agreement and International Air Transport Agreement sought to provide a certain degree of freedom of the air in terms of market access. The International Air Services Transit Agreement received a measure of assent and support, while the International Air Transport Agreement, which prospectively gave significantly greater freedom, was not widely supported and became a dead letter.

Bilateral Agreements & Freedoms

Following the relative failures of the International Air Transport Agreement, states commenced the use of bilateral air service agreements, “international agreements,” generally. They were entered on a reciprocal basis with the equivalent degree of liberalisation between the states.

The terminology of the above two agreements was reflected in later bilateral agreements. The first agreement,  the so-called Two Freedoms Agreement, allowed for the first freedom, the right of airliners to operate services over the other states’ territory.

The second freedom allowed landings for non-commercial use, such as in particular for refuelling, maintenance, technical checks, etc. They are referred to as transit agreements.

ASA agreements may provide that the foreign airline will be treated at least as well as domestic operators by local rules and regulations. They commonly affirm the right to establish business offices and conduct commercial enterprises, and use their own ground handling crews at foreign airports.

Major alliances have developed through a partnership of airlines. The alliances formed by larger carriers may allow them to circumvent the above rules. There are code-share flights regardless of which airline is providing services to a particular location.

ASAs provided for dispute resolution. There is a provision for nominating an arbitrator. There is no provision for appeal to the International Court of Justice.

Further Freedoms

The so-called Five Freedoms Agreement includes the above freedoms and an additional traffic right. This allows freedom to take and discharge passengers and cargo. The fourth freedom allows transit back from the foreign state. Passengers may be carried from the other state back to their home state. The freedoms are necessarily interlinked as otherwise returning flights could not pick up passengers and cargo.

The fifth freedom allowed the taking of passengers and cargo for further transit to a third state, generally, with which the home state maintains a bilateral agreement that allows that freedom to be exercised.

The sixth freedom supports freedom in relation to inbound traffic, with the third freedom. It allows for passengers and cargo originating from a state other than the home state to transit through the home state and continue on. The seventh freedom, which has not been widely developed, involves the sixth freedom within the home state.

Equivalent arrangements are now possible under the US EU ASA for airlines licensed under the common licensing area. Accordingly, any airline licensed under EU licensing criteria, owned by any EU state or nationals, may carry passengers or cargo from the EU to any point in the US.

The seventh freedom is sometimes extended by bilateral agreements for all airlines that carry cargo only. The eighth freedom allows non-national carriers to fill up as they transit between airports in a foreign state.

The ninth freedom referred to as cabotage in the true sense of the word, allows the set off and set down of passengers and cargo between two domestic points in another state. This is rarely permissible, even under liberalised agreements. Airlines may be entitled to establish a branch or subsidiary with a substantial legal and commercial presence in another state and enjoy these privileges.

Rights under ASAs

Traffic rights, in effect, must be secured under ASAs. Airlines must acquire traffic rights as a designated carrier pursuant to ASAs in effect in order to establish transnational routes. This may be done by acquiring existing airlines, establishing subsidiaries, or taking advantage of rights available for domestic carriers in the relevant state.

Under the Chicago Convention, states reserve the right to revoke or suspend traffic rights designated under an ASA if the airline is not substantially owned and effectively controlled by the carrier’s home state.The nationality requirements may operate by revocation of authorisation and designation under an ASA where there is a change in controlling stake. The revocation does not happen automatically.

The cabotage principles were developed for protectionist and security reasons. They are justified in modern times to prevent free rider issues and for the protection of labour rights.

The principles were commonly reflected in domestic legislation, typically involving controls over the foreign ownership of airlines. The principles are protected in ASAs. States domestic legislation generally controls the extent to which non-nationals may own or control their airlines.

Open Skies

Commencing in the 1990s, there has been a radical shift in the approach to airline services internationally. The United States has entered agreements with over 100 partner states dealing with the EU under its so-called Open Skies Policy.

The EU has provided an internal single aviation market and sought to expand this internationally, particularly through bilateral agreements. It has entered an Open Aviation Area Agreement with leading states, which parallels the US Open Skies Policy

The Single Aviation Markets at the EU level provides for the widest freedoms within the EU. The Court of Justice of the EU  has invalidated certain clauses in bilateral agreements providing for freedom to provide services.

The EU Commission has entered agreements with third-party states, modifying the terms of bilateral agreements of all states with those states in order to ensure equality under EU principles and secure freedom to provide services. Non-EU states may, under the amended nationality requirements, agree to accept EU air carrier status, being one controlled and owned by an EU national or state.

The Commission does not have full power on behalf of states to enter ASAs with third-party states unless the EU Council specifically so allows it. This has been specifically permitted in relation to agreements with the United States and Canada. Outside of this, bilateral agreements remain.

The European Common Aviation Area is sponsored by the EU. It involves the EU states and 10 further states in the east and south of Europe, together with Middle Eastern and North African states.

States continue to negotiate their own arrangements/ bilateral agreements but must respect EU principles of freedom to establish. In particular, they must not prevent EU airlines owned or controlled by EU states or nationals, providing the seventh principle of freedom from and to states outside the EU, using any EU airport.

EU & US Agreements

The EU has liberalised its law internally but does not allow unrestricted ownership of airlines by non-EU nationals and states. The EU has sought to remove discrimination in ownership of national airlines within the EU.

A Union air character is designated. It may be owned or controlled by any EU state and may serve traffic inside or outside the EU.

The EU-US agreement refrains from applying nationality requirements against designated third countries in which ownership or control of an airline becomes vested in US or EU citizens.

The typical air service agreement grants traffic rights, typically the first and second freedoms and the commercial third, fourth, and fifth freedoms mutually.  The sixth and seventh freedoms are not typically provided for. To some extent, the sixth and seventh freedoms can be circumvented by using third and fourth freedoms negotiated with third-party states.

The seventh freedom requires a bilateral agreement in that it drops the requirement for connection with the domestic or home state. The seventh freedom is rarely granted for air passenger services but has been more recently granted for cargo carriage.