Resistances to and Options for Reform in International Air Transport

SUMMARY The regulation of international trade in air transport services involves an elaborate structure of bilateral agreements which fix a set of rules that identify the airlines of the contracting economies with the rights to fly on each route, determine the capacity that can be provided by each of those designated airlines limit the capacity that can be offered by airlines from third countries. The system therefore imposes a set of country-specific quotas in each market, where markets are defined in terms of routes between pairs of countries and in terms of the two-way traffic flow. Competition on each route is limited to those suppliers designated by the relevant bilateral air services agreements. When privately owned, nationality requirements are generally imposed upon the share register of the designated carriers. The regulatory system in air transport clashes with many of the principles of multilateralism. Rights are negotiated on a reciprocal basis with the aim of achieving a 'balance of opportunities' between the two sides. It does not therefore treat all trading partners in a non-discriminatory way. It also discriminates between foreign trading partners and domestic firms in terms of market access. As a result, the current arrangements deny some of the gains from international trade in this service. Not surprisingly, this system is subject to substantial pressure for reform. These include pressure from the mutlilateral system, from commercial interest of airlines and from administrative issues. There are also important resistances to change. There are for example legitimate concerns about competition policy issues that might arise as a consequence of reform. Indeed, one interpretation of the current regulatory system is that it was an early example of an internationally coordinated competition policy. Arranging the next steps in the reform of the current system requires some appreciation of its origins. There is now resistances to a " big bang " application of the principles of multilateralism. Paths of reform are likely to involve either reform within the bilateral system or else actions by groups of like minded countries. There are some rules which if applied are more likely to cause these pressures for regional initiatives to lead to a liberalising outcome. Another important question is whether these regional strategies can deal with the competition policy issues. One suggestion is that a commitment be made within regional structures which tackle air transport to refer such issues to an air transport competition policy dispute panel.