The trouble with air transport

| by Dr. Ruwantissa Abeyratne

( January 06, Montreal, Sri Lanka Guardian) Air transport economics has always been unique compared to economics of other modes of transport. The normative foundation of air transport has been built on the myopic delusion that air transport and the sovereignty of States are inextricably linked by an immutable construct of protectionism and that airlines have to be substantially owned and effectively controlled by nationals of the States in which they are registered. The latter condition has neither been defined in any air law instrument nor entrenched in the Convention on International Civil Aviation (Chicago Convention) which lays down the overall principles pertaining to air navigation and air transport.
This anomaly has compelled commercial air carriers, in the absence of the possibility of the injection of foreign capital and equity, to perform elusive practices to circumvent collapse. Mergers, alliances, code sharing and franchising are some of the tools used by air carriers to maximise capacity and optimise market access. The accessibility to foreign direct investment by airlines warrants serious discussion and consideration if the airlines were to be treated like any other business and if passengers are to gain access to regular, efficient and economical air transport as prescribed by the Chicago Convention.
The problem with air transport is that, while on the one hand it is a product, on the other hand regulations pertaining to this product may constrain its availability to the consumer by depriving him of the various choices of air travel he might have under a liberalized system. In other words, State policy and the protection of national interests take precedence over the interest of the user of air transport. The aviation industry offers only one product to the ultimate consumer and that is the air transport product. One might well ask why this product is precluded from attracting untrammelled foreign direct investment (FDI) like other products such as those in the agriculture, textile manufacture and energy industries. Any aviation professional knows that there are three reasons for this.
The first reason is that from 1919 (The Paris Convention) States have asserted that they enjoy complete and exclusive sovereignty over the air space above their territory. This principle was reiterated in the 1944 Chicago Convention by which the Contracting States to the Convention recognize (taking a cue from the 1919 Paris Convention) that every State has complete and exclusive sovereignty over the airspace over its territory.
The concept of sovereignty is frequently misunderstood in Statecraft and therefore in the context of air transport as well. As will be discussed later, confusion is worse confounded when this misconception is applied to the restriction on market access in the Chicago Convention.
United Nations Secretary General Kofi Annan clarified this misconception well when he said that :State sovereignty, in its most basic sense is being redefined – not least by the forces of globalization and international cooperation. States are now widely understood to be instruments at the service of their peoples, and not vice versa (Two Concepts of Sovereignty, The Economist, September 18 1999).
Annan goes on to say that State sovereignty, which is a real and tangible right recognized by the United Nations Charter, has been strengthened further by a renewed and spreading consciousness of individual rights. It is incontrovertible that sovereignty is no longer an absolute concept that would shield States from any indiscretions against its citizens. Sovereignty can therefore no longer be accepted in the international fora as an absolute protection against interference. It is no longer an absolute right but a charge of responsibility on a State where it is accountable to both domestic and external constituencies.
Generally under legal theory, each State is sovereign and equal and the term sovereignty may be used as a synonym for independence. However, in modern parlance, with the rapid growth in telecommunications and global competition and rivalries, no State can be entirely sovereign to the exclusion of others. Sovereignty has a much more restricted meaning today than in the eighteenth and nineteenth centuries when, with the emergence of powerful highly nationalised States, few limits on State autonomy were acknowledged. At the present time there is hardly a State which, in the interests of the international community, has not accepted restrictions on its liberty of action.
A few years after the adoption of the Chicago Convention the sense of international responsibility that the United Nations ascribed to itself had reached a heady stage, where the role of international law in international human conduct was perceived to be primary and above the authority of States. In its 1949 Report to the General Assembly, the International Law Commission recommended a draft provision which required that every State has the duty to conduct its relations with other States in accordance with international law and with the principle that the sovereignty of each State is subject to the supremacy of international law.
This principle, which forms the cornerstone of international conduct by States, provides the basis for strengthening international comity and regulating the conduct of States both internally – within their territories – and externally, towards other States. States are effectively precluded by this principle of pursuing their own interests untrammelled and with disregard to principles established by international law.
The second reason is that the air transport product cannot be “traded” liberally like other transport products and for that matter any other products due to a self imposed restriction by Contracting States in the Chicago Convention which stipulates that no scheduled international air service may be operated over or into the territory of a Contracting State except with special permission or other authorization of that State, and in accordance with the terms of such permission or authorization. Needless to say, this provision has encouraged protectionism and discouraged liberalized trade in air transport, preventing carriers from gaining market access that could provide for the demand for air transport while providing the consumer with more choices. A study by the World Trade Organization has revealed that liberalising airline ownership and control has been found to provide benefits for passengers and the economy, by providing airlines with access to new and cheaper sources of capital, allowing airlines to draw from a greater pool of management talent, and enabling efficiencies through consolidation and mergers
The third and arguably most restrictive reason is the requirement that airlines be substantially owned and effectively controlled by nationals of the State of registry of the aircraft. This restriction, which effectively precludes FDI in air transport is the natural by product of sovereignty over the airspace above a State’s territory, and presents a fundamental flaw in the economics of air transport and veers from the normative foundation of trade and development which is foreign direct investment (FDI).
A perceived anomaly in the requirement of substantial ownership and effective control is that, although States have liberally used the two terms in their bilateral air services agreements, these terms have not been formally defined in any modern air law instrument. They remain a conduit to State practice which pays lip service to the two terms with monotonous regularity and are treated as a “catch all” protection against FDI. The protection is calculated to protect national carriers from losing to foreign carriers what they believe is their “market share” of traffic. In the absence of definitive certainty the term “ownership” can only be surmised as more than 50% ownership of company shares. Ownership legally defined is the exclusive legal title coupled with the legal right to possession, enjoyment of fruits and alienation of property. It is a collection of rights to use and enjoy property including the right to transmit it to others.
A majority ownership can be considered substantial. As for “effective control” the law contains no objective standard for what constitutes effective control of an airline. Thus regulators are free to interpret this concept according to national interests. Parties to the International Air Services Transit Agreement (IASTA) grant overflight rights for scheduled air services to an “air transport enterprise” that is substantially owned and effectively controlled by nationals of a Contracting States to IASTA. Article 1 (5) of IASTA stipulates that each contracting State reserves the right to withhold or revoke a certificate or permit to an air transport enterprise of another State in any case where it is not satisfied that substantial ownership and effective control are vested in nationals of a contracting State, or in case of failure of such air transport enterprise to comply with the laws of the State over which it operates, or to perform its obligations under this Agreement.
Defining ‘effective control” is more difficult than defining “substantial ownership” because, while ownership is usually transparent and can often be determined by public or other records of shareholders, effective control may be exercised in numerous different ways, many of which may not be transparent or readily perceivable. An example offered is that while air carrier management may exercise control over flight operations and other operations of an airline, its shareholders may exercise control over the injection of capital or dissolving the company.
The ownership and control requirement has upended the meaning and purpose of the Chicago Convention which makes it part of its philosophy in the Preamble that international air transport services may be established on the basis of equality of opportunity and operated soundly and economically. A fortiori, if these services are to meet the needs of the people of the world for regular, efficient and economical air transport, such restrictions on international investment in the industry could be nothing but counter-intuitive.
It is by no means suggested that the ownership and control approach should be totally abandoned. Neither is it contended that the concept should be rigidly enforced to the detriment of the ultimate consumer. States are not entrepreneurs. At best, they could macro-manage their economies through regulations. Airlines on the other hand are entrepreneurs and should have the flexibility of flowing along market trends. The concept of sovereignty should be applied to issues of State and should not be used as a tool to control markets.


Author: Sri Lanka Guardian

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