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and makes freighters less competitive with combination carriers, who need not charge such high prices, and maritime shippers, who already offer very low prices on a tonnage basis.

The distinction between all freight and combination services is broadly accepted, as is the idea of separate and more liberal traffic rights for air freight operations. One of the earliest initiatives to liberalise air freight at a faster pace than air passenger transport was the passage of the 1977 Domestic All-Cargo Deregulation Statute in the United States, a full year before the passage of the Airline Deregulation Act in that country as explained in the section on US deregulation earlier in this chapter.

The idea of accelerated international liberalisation of air freight services was discussed at the ICAO 4th World Wide Air Transport Conference in 1994, as well as by the OECD in 1997, and again in workshops held in 1999, 2000 and 2002.

The OECD (2002) recognised that some carriers and their national governments may regard passenger and cargo operations as indivisible. Especially in the case where the national carrier does not operate a freighter service, air freight rights could be used as a negotiation lever to obtain more favourable passenger transportation rights. However, the authors recommended governments to weigh this advantage against the broad economic benefits that market liberalisation can bring to air freight shippers and consignees.

To circumvent this issue, freighters have developed “triangular” routes, where they build up a number of one-way segments into a circular route, made-up of different routing on the outbound and inbound journeys. An example of this is Lufthansa’s freighter flights between Frankfurt and Mexico City, which stop in Chicago O’Hare on the westbound journey and in Dallas-Fort Worth on the eastbound journey. The choice of this routing likely reflects some trade imbalances that Lufthansa is trying to leverage. On the passenger side, even though there are significant imbalances from an origin/destination perspective, since most passengers fly a round trip, those imbalances do not affect loads in individual segments93.

The consequences of this is that freighter operators require some fifth freedom traffic rights in order to be able to pick up freight at the intermediate airport. However, passenger operators would not need to use this complex routing and would likely, as is the case with Lufthansa’s passenger aircraft, fly directly between Frankfurt and Chicago, Frankfurt and Dallas and Frankfurt and Mexico City, making fifth freedom rights a non-issue for those three passenger markets.

In addition, freight carriers may want to operate routes completely outside their home country. For example, in the previous Lufthansa example, the German carrier could possibly operate a profitable route from Mexico to a point in South America, flying Mexico-originating freight. This would require seventh freedom traffic rights. Such a scenario seems operationally more effective for freighters than passenger aircraft, as the latter tend to operate international flights mostly from and to their hubs to maximise its connectivity. On the other hand, outside of the air express business, freight operators combine both a hub-and-spoke network and point-to-point services depending on which is most cost effective.

Thus, in both cases, we are presented with a situation whereby freight services require a more liberalised regime than passenger services in order to operate profitably and effectively.

The second differentiating factor between passenger and freight traffic is that demand for passenger traffic is driven by where passengers live and where passengers desire to travel to, whether for leisure, business or visiting friends and family, whereas demand for freight traffic is driven by where goods are produced and where they are consumed. Therefore, both generate specific demand patterns at a citypair level which are not always aligned. In terms of ASAs, this means that there may be a very different need in terms of frequency between two countries for passenger aircraft and freighter aircraft.

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So far, discussion on liberalisation has focused on the supply side, with ASAs setting the framework to determine the capacity, level of service and price offered between city-pairs. However, when analysing air freight liberalisation, one must also consider an added dimension, liberalisation of trade, which in turn becomes a determinant of demand. At the 2014 IATA World Cargo Symposium, FedEx CEO Frederick W. Smith warned of how the growth in protectionist legislation, up by a quarter in just five years according to him, is hampering world trade expansion. The WTO (2013) indicated that protectionism may have played a role in decreasing global trade during the great recession.

Meanwhile, Pierce (2014) shows that the ratio of domestic production to international trade has stopped growing since the great recession and has even shown signs of a downward trend. This can be attributed to a number of factors, including non-tariff trade barriers and the phenomenon of reshoring. Finally, Hughes (2014) explains that supply chains for traditionally air eligible commodities94 are increasingly shifting to the marine mode, taking advantage of significant lower costs and marked improvements in reliability of the marine mode.

The key message here is that the drivers for demand for air passengers and air freight are from the onset significantly different and that demand for air freight can be influenced by factors beyond the control of airlines, such as trade policies or shifting supply chain models. These factors can significantly alter demand patterns, which must then be overlaid to the passenger demand that drives routes operated by passenger aircraft.

A clear consequence of this fundamental difference between demand patterns in passenger transportation and freight transportation is that they result in distinct spatial distribution patterns. However, an additional distinction, which will be our third differentiating factor, is that the density of demand for air freight services is significantly more concentrated than that for passenger services, while the demand for express services is actually more diffused. There are only a limited number of air freight markets that can economically sustain a daily freighter service (100 metric tonnes in each direction), with other markets being served by passenger aircraft or dedicated charters. On the other hand, express services need to be able to deliver to almost any address, meaning they require a much broader network, have an extensive fleet mix to align capacity and demand and make strategic use of ground services to complement their air network and offer a seamless door-to door service. Thus, it is unreasonable to expect that the optimal network for passenger transportation is aligned with that for freight or express services and points to the need for parallel regimes for passengers, express services and air freight.

A fourth differentiating factor between passenger and freight traffic is preference of gauge. Passengers may prefer to travel on a wide-body aircraft, especially on long-haul flights, but they can easily transfer from a wide-body flight to a narrow-body flight with no additional cost compared to transferring from wide-body to wide-body aircraft. In the case of freight, since it usually travels in unit load devices (ULD), be it standardised containers or pallets, there is a significant monetary and time cost in breaking down a wide-body container or pallet and reloading the freight on equipment designed for narrow-body aircraft. Thus, when leveraging a hub-and-spoke model, air carriers will try to avoid a gauge change in aircraft in order to connect ULDs “fin to fin”, meaning directly from one aircraft to another without a need to deconsolidate and reassemble a ULD, a consideration that is non-existent on the passenger side. This means that air carriers will prefer to operate wide-body aircraft on their most freight intensive routes, which may create issues with ASAs when capacity is capped at that of narrow-gauged aircraft.

In addition to these fundamental economic and operational differences, there is also an intangible differentiation between passenger transport and freight transport that makes the latter somehow less sensitive to economic regulators than the former. Tan (2013a) mentions that there is less sentimental

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attachment associated with the transportation of freight than with the transportation of passengers, while the OECD (2002) also noted that air freight services are less subject to “national sensitivities” than passenger traffic. Possibly beyond sentiment though is a difference of outcome.

In the case of freight transportation, countries are interested first and foremost in ensuring that international trade is fluid, efficient and reliable. The interest of countries in logistics performance, efficient international gateways and competitive supply chains reflects a realisation that these factors are intimately tied to economic growth and wealth creation. Removing barriers between local manufacturing and exports markets can have a significant positive economic impact. Thus, the focus for international air cargo transportation is articulated around seeking a market outcome that provides an efficient and lowcost supply chain to connect local exports to global markets and imports to the domestic market rather than supporting national carriers and ensuring that they receive their “fair share” of traffic.

In the case of passenger transportation, it is often taken for granted that the passenger will find a way to travel from origin to destination. Thus, the policy focus turns to how this travel will take place, with, generally speaking, the use of the home carrier being the best outcome, the use of a carrier from the destination country as the second best outcome and the use of a carrier from a third country as the worst outcome, unless viewed from the perspective of that third country where it would now become the best option. Thus, the focus for international air passenger transport is often on the choice of air carrier and the complex web of non-open skies ASAs which generally tries to impose quotas on supply as a way to ensure their home carriers obtain a “fair share” of passenger traffic.

In light of how different the air passenger and air freight markets actually are, there have been significant discussions in having a separate and more liberal ASA for freighter operators. Overall, seventh freedom rights for air freight exist in more than 100 of the 4 000 ASAs currently in force (ICAO, 2013). The United States has seventh freedom rights for air freight with over 70 countries (IITL, 2008). This has led FedEx to develop hubs in Paris, Kansai and Guangzhou and UPS to develop hubs in Hong Kong, Shanghai and Cologne.

These hubs make extensive use of seventh freedom traffic rights to give both integrators a truly global reach and help them play an extensive role in transporting freight that never enters the United States. This is indeed quite different from the situation on the passenger side where nearly all passengers travelling on a US airline travel through at least one US airport during their journey.

Tan (2013a) notes that the ten-country95 ASEAN Roadmap for Integration of Air Travel Sector (RIATS) called for a two-speed liberalisation regime, favouring air freight with full liberalisation by 2008, seven years before passenger services. The RIATS commitments led to the Multilateral Agreement on Full Liberalisation of Air Freight Services between all member countries. That agreement provided unlimited third, fourth and fifth freedom rights for all cargo traffic in two stages.

The first stage saw the agreement being applied to a specific list of 33 airports, including all the capital airports96 and Subic Bay, where, at the time, FedEx operated its principle Asia-Pacific hub97. The second stage saw this liberalisation being applied to all international airports in the region. By 2009, all ASEAN members, except Indonesia98, had implemented both stages of the agreement. However, it is important to remember that the agreement only covered intra-ASEAN international air freight. As we have discussed previously, this situation could create an imbalance in commercial potential of ASAs negotiated between ASEAN and single countries or groups of countries behaving as a single market (such as the case of the EU). Thus, the fifth freedom traffic rights enjoyed by ASEAN carriers for the intra-ASEAN market may not exist in a future ASA between ASEAN and a third party.

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With regards to air cargo, seventh freedom traffic rights also exist in both the Canada-US and the Canada-EU open skies agreement, although in both cases they have not been extensively used, saved for a Newark to Bermuda freighter flight, operated by Cargojet, a Canadian air operator.

It is clear that air freight and air passengers are two completely different markets but should they be afforded differential treatment? It has certainly been the view of ICAO member states that a separate regime for passengers and freight could be beneficial in situations where states are more willing to liberalise one, usually freight, but not the other, usually passengers. ICAO (2013) notes a number of restrictions facing the growth of air cargo, including limited freedoms under a large number of traditional agreements, a regime focused mainly on passenger services and combination services, night curfews, limited ground-handling rights and burdensome customs requirements. At the 6th Air Transport Conference, ICAO members agreed to continue liberalising air cargo on a bilateral basis, but also that ICAO itself should help develop a multilateral framework articulated around air cargo liberalisation which individual countries could join. This could, in effect, decouple air cargo traffic rights from the significantly more contentious air passenger rights in existing ASAs and significantly streamline the regulatory framework, especially if leading countries agree to it.

A more liberal air cargo regime would have an immediate beneficial impact on the industry as, in effect, it removes production quotas that are derived from passenger demand considerations. In addition, since a more liberalised air freight regime already exists in a number of major ASAs, expanding this fast track to liberalisation to other air services will likely not create overwhelming opposition. Furthermore, if air cargo liberalisation is successful, it could further put pressure on the air passenger segment to make further progress in liberalising.

One key consideration, however, is how a more liberalised freighter environment could be a competitive disadvantage for passenger airlines. At present, nearly 45% of the world’s freight, as measured in revenue tonnes-kilometres, travels by passenger aircraft, according to Boeing (2014). While freighter aircraft dominate the air cargo market to and from Asia, passenger aircraft dominate the transatlantic market and most north-south routes.

Any liberalisation in air cargo is faced with the challenge of arriving at a solution that will place the four main types of air cargo service providers, namely passenger carriers, combination carriers operating a mixed fleet of passenger aircraft, freighter operators and integrated express carriers, on the same competitive footing or, at least, to avoid a significant distortion of competitive conditions. A liberalised air cargo market could give freighter and express operators an advantage over passenger aircraft operators, who could react either by opposing efforts to liberalise the air freight market or by pushing for further liberalisation of the passenger market. Combination carriers could find themselves in a difficult position, having to compete with freighter operations benefiting from a more liberalised marketplace that their passenger operations.

This imbalance was recognised by the OECD (1999), which favoured a liberalised regime for freighters and express carriers, but admitted that it would create a distortion for passenger aircraft. On the whole, though, a partially liberalised regime for freight was better than a closed regime, despite the uneven treatment it would afford air carriers.

An additional consideration here would be the role of chartered freighters. Ad hoc charters usually operate outside of the scope of ASAs. This provides carriers with extensive flexibility to meet demand when it is present and sufficient. However, for most small to medium-sized shippers, charters represent an uncertainty since a flight will only be operated when there is sufficient demand for a large shipper or a forwarder to charter an entire aircraft. Thus, charter operators enjoy a level of freedom that scheduled

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operators do not, but their revenue stream is far less predictable due to the ad hoc nature of their operation.

Seeing that air cargo represents less than 10% of most passenger carriers’ revenues, and that they have progressively withdrawn from freighter operations, it is unlikely that a more open freight regime will lead passenger carriers to demand a more liberalised passenger regime to compete more evenly with freighters. Rather, passenger carriers would likely be more willing to compete on a price basis and, ultimately sacrificing some air freight business in order to maintain a more restrictive passenger traffic rights regime until such a time when it is to their advantage to open up the market.

A preferential treatment for air freight could have some unintended consequences on passenger traffic for routes flown by carriers with a significant belly freight operation. Zhang et al. (2002) demonstrate that if a freighter and passenger operator compete in a market where freighters enjoy more liberalisation than passenger aircraft, the advantage to freighters could translate in them gaining a bigger market share over passenger carriers compared to a situation where there was an equal level of liberalisation. Since the loss of some air freight traffic results in little reduction in operating costs for passenger carriers, they will experience a drop in profitability for a given route.

On routes such as the North Atlantic, where passenger airlines on both sides of the ocean have a relatively low reliance on airfreight revenues, the impact could be marginal. However, on routes between far-east Asia and either Europe or North America, the results can be quite different.

Asian carriers have a far superior reliance on air freight revenues than North American and European air carriers. For example, in 2013, Cathay Pacific’s freight revenues were 24.8% of its total aeronautical income99 compared to 2.6% for United Airlines. United Airlines’ significantly smaller reliance on air freight revenues means that it is less likely to adjust its passenger fare to make up for lower air freight loads. Cathay Pacific, on the other hand, would experience a more important revenue drop, which could force it to either revise its passenger fares upwards or even reduce its operating costs by down gauging or reducing frequency. In either case, the passenger air carrier with a heavy reliance on air freight revenues finds itself disadvantaged compared to the passenger carrier with low air freight revenues, in a scenario with a more liberalised air cargo regime and where freighters and passenger aircraft compete on the same market. Zhang et al. (2002) thus warn that separating passenger flight rights from air freight rights may be “fraught with difficulty” as both sides of the business are significantly more intertwined for

Asian carriers than they are for North American ones.

The case for Europe is less clear cut, as some leading European carriers, such as Lufthansa and Air France, do have a freighter operation, but that operation is rather modest and in fact has been shrinking in the past few years. As a case in point, in September 2014, Air France announced that it would be shedding two-thirds of its freighter fleet by 2016, going from 14 in 2013 to five in 2016. IAG Cargo, the combined British Airways, British Midland and Iberia’s cargo operations, ceased operating freighter aircraft in early 2014 and now relies on belly hold capacity and a single, wet-leased Qatar Airlines B-777- 200F freighter100. With 14 freighter aircraft, Lufthansa is the only major European carrier with both a significant passenger aircraft and freighter aircraft network and would likely face the same pressures as Asian carriers if freighter liberalisation was accelerated.

A final thought on a liberalised air freight regime goes to defining what is meant exactly by “liberalised”.

Generally, a liberalised air freight regime refers to granting seventh freedom rights, in addition to unlimited third to sixth freedoms. However, further benefits of liberalisation could be obtained through co-terminalisation, eighth and ninth freedom rights. Liberalisation also presumes conditions that are not usually included in ASAs, such as access to airports at “freight-friendly” times, customs clearance that is timely and an efficient and competitive market for ground handling services.

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Co-terminalisation

Co-terminalisation is a rather rare concept as it requires a number of variables to be aligned, namely that there is enough of an air cargo market in a given country to support two destinations, that the loads to and from each point are sufficient to offset the cost of flying a partially filled aircraft between the two domestic points and that geography doesn’t allow for other options, such as trucking, to be more cost and time efficient.

Co-terminalisation has been talked about mainly in three contexts:

in China, where China Southern tries to serve multiple Chinese airports on an international route, such as its Chongqing-Shanghai-Amsterdam freighter route

in Anchorage Alaska where freight can arrive from transpacific flights, be transferred from one aircraft to another and then continue to points in the United States, or vice-versa

in the case of US integrators wanting to serve multiple Canadian points on a single flight, with no local traffic rights (i.e. no cabotage).

In this last case, significant debate was generated on the merits and risks of co-terminalisation, with a fear that such an action could hurt the domestic Canadian air freight industry. This issue has been put to rest since 2006 as co-terminalisation was permitted in the Canada-US open skies agreement. The feared impact to the Canadian air freight industry never materialised and most of the co-terminalised routes, such as Memphis-Mirabel (Montreal)-Ottawa, had a domestic segment that was better suited for road haulage than a stand-alone domestic freight operation101.

Co-terminalisation can generate two significant benefits to air carriers where the market conditions and geography align to produce favourable conditions to such an activity. First, if the air carrier is flying from its home base to two points in the foreign country using in each case a smallor medium-sized aircraft, it could consolidate both flights into one, using a larger aircraft and generating substantial economies of scale coming from having to use only one aircraft and one flight crew. In addition, the total distance flown by one aircraft serving two destinations is certainly significantly less than two aircraft each serving one destination, which in turn reduces fuel burn and aircraft utilisation. Finally, as a rule of thumb, larger aircraft have a smaller operating and ownership cost per tonne-kilometre flown than smaller aircraft102. Therefore, reduced flight distances and the use of more efficient aircraft combine to drive down costs.

Intervistas (2006) simulated a case of co-terminalisation by consolidating two FedEx flights into one. The two flights in question were Memphis-Calgary, using an A300-600F, and Memphis-Vancouver, using a B727-200F. They calculated that the cost to operate each flight separately was CAD 129 400 on a return basis. By consolidating these flights into a single Memphis-Calgary-Vancouver flight using an MD-11, the operating cost could be lowered to CAD 121 700, a 6% reduction in cost with no impact on revenues. Further cost reductions could have been obtained by operating a circular flight, Memphis-Calgary-

Vancouver-Memphis; however this would likely be incompatible with FedEx’s operational requirements103, so it was not simulated.

A second case of co-terminalisation involves using a foreign country destination as a foreign hub. In this situation, an airline is flying from two or more different points in its home country (A) to two or more different points in the same foreign country (B). If all possible combinations were flown, this would produce A*B flights. However, if all flights from the home country first flew to the same foreign hub, then the carrier could operate one flight between the foreign hub and the various destinations, now reducing the number of flights to A+B-1104 which is certainly smaller than A*B.

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The simple representation below shows how a network with six flights without co-terminalisation (left) can be simplified to one with four flights (middle and right). In both cases, the carrier would have no local traffic rights, so no instance of cabotage. Instead, it would transport freight from home country airports to foreign airports via the foreign hub. This simplified network also reduces the number of aircraft needed to serve all six city-pairs, although the size of the aircraft may be larger, which in turn leads to economies of density. The difference between the middle and right scenarios is whether the two foreign airports are linked to the hub in a sequential manner by one aircraft or if they each have a non-stop flight to the hub, which requires two aircraft.

Figure 2.10 Schema of network design with and without co-terminalisation

Finally, it should be noted that restricted co-terminalisation seems to be a uniquely air cargo issue. In the case of passenger transport, air carriers routinely operate flights that have one or more segment with no local traffic rights, such as Lufthansa’s Frankfurt-Shenyang-Qingdao flights or Air New Zealand’s

Auckland-Osaka-Tokyo flights.

Why is aviation outside the World Trade Organisation?

The pre-existence of the Chicago Convention and its subordinate resolutions enabled traffic rights from being exempted the General Agreement on Trade in Services (GATS) while still providing them with a global framework. GATS took effect in 1995 and is incorporated as one of the Annexes to the Agreement Establishing the World Trade Organisation (WTO). Aviation is governed by a specific annex of GATS, the Annex on Air Transport Services. The annex excludes from its scope the largest part of international trade rights for aviation, namely traffic rights and services directly related to the exercise of traffic rights, which member states preferred to retain exclusively within the Chicago Convention105. Its application is explicitly limited to three ancillary services, namely, aircraft repair and maintenance, selling and marketing of air transport and computer reservation systems106. This “unique sectorial exclusion” resulted from a negotiating process in the Uruguay Round agreed unanimously by all 108 delegations107. The very limited coverage of air transport services by GATS is explained by the special characteristics of air transport (Mendes de Leon, 2011)108. The main issue concerns application of two central elements of the GATS system, namely the most favoured nation (MFN) principle, which is mandatory, and the optional national treatment (NT) principle to international air transport. That being said, given the optional nature of NT and the possibility of awarding MFN exemptions at the time of WTO membership, it would, at least in theory, have been possible to include all aspects of the industry under GATS,

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however this would have created a situation where no significant discipline would be applied to the sector.

Under the MFN principle and Article II(1) of GATS, each member state shall accord immediately and unconditionally to services and service suppliers of any member state treatment no less favourable than it accords to like services and service suppliers of any other country. While it may initially appear as a way to spread air liberalisation, MFN can in fact have the opposite effect in aviation. As it does not impose reciprocity it would enable states to take advantage of a liberal regime without being required to do the same. This issue was identified as the “free rider problem” by Havel (2009). Meanwhile, the NT principle would enable foreign airlines to operate on the same footing as national airlines, thus enabling full cabotage (Staniland, 1999).

Both principles lead to an outcome incompatible with the orientation of contemporary international aviation policies, making it unlikely, at least in the foreseeable future, of seeing air transport services incorporated with the GATS.

Air Liberalisation Index

ASAs incorporate many features covering a wide range of topics such as aviation security, incident investigation, immigration, control of travel documents and many others. In a recent study, the WTO Secretariat (WTO, 2006) identified seven features of ASAs as relevant indicators of openness for scheduled air passenger services. These include the “freedoms of the skies”, capacity restrictions, fare restrictions, restrictions related to foreign ownership, control and designation, and restrictions related to alliances such as code-sharing agreements.

A very liberal ASA is often referred to as an open skies agreement (OSA). However, the expression “open skies” has no single undisputed definition. It seems to cover at least two kinds of agreements. The US Department of Transportation introduced the term to designate agreements with no control of routes, tariffs and capacity and allowing fifth freedom rights. Such agreements may, however, differ depending on the time of signature and on the bilateral partner concerned. Other countries use the term in relation to more ambitious ASAs, including seventh freedom rights and even cabotage.

Tan (2014) states that the basic philosophy behind all modern open skies aviation agreements is removing restrictions on fares, capacity, frequency and aircraft type for airlines designated by both sides of the market. Such relaxation is provided for under the EU-US and EU-Canada ASAs, the ASEAN-China agreement as well as in certain bilateral agreements between individual countries on both sides.

Countries are obliged to register any co-operative agreement and arrangement relating to international civil aviation with the Council of ICAO (pursuant to Article 83 of the Chicago Convention and Assembly Resolution 37-20). ICAO displays the full bilateral agreements and amendments in an online database. However, getting the information about the actual capacity is difficult since they are typically confidential.

Several intergovernmental organisations and companies have developed indices to provide an indication of the overall degree of liberalisation introduced by ASAs, without disclosing the actual written content or the names of the operating carriers. The construction of an index involves the choice of weight to assign to each provision to denote its marginal contribution to the liberalisation of the aviation market. However, the choice of the weight is arbitrary and many options exist.

One of the indices most used in economic literature is the Air Liberalisation Index (ALI), constructed by the WTO Secretariat (WTO, 2006) and made available via an analytical tool on their website, called the

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Air Services Agreements Projector (ASAP). The ASAP tool was last updated on 16 January 2013 and is based on ICAO’s ASA database of 2011 and IATA’s traffic data from the same year. According to WTO, not all ASAs are included as ICAO contracting states do not always comply with their notification obligations. In addition, confidential memoranda are not notified to ICAO. Thus the ALI only presents a partial view of all ASAs in force.

The ALI is constructed by assigning weights to the different provisions of ASAs. The weights were defined by the WTO in consultation with a group of experts on aviation industry with the aim of capturing the relative importance of each provision in liberalising the sector. The ALI ranges between 0 and 50, where 0 is associated with the most restrictive agreement and 50 denotes the most liberal agreement.

Four different weighting schemes have been proposed, thus originating four different indexes. The weighting scheme of the so-called standard ALI assigns a weight between 0 and 8 to each of the seven components of ASAs. Each of the three other indexes emphasises one specific feature of ASAs. These are the ali_fifth freedom, the ali_ownership and the ali_designation. The ali_fifth freedom assigns a weight of 12 to fifth freedom. The ali_ownership assigns a weight of 14 to the provision that allows foreign airlines to service a country if their principal place of business is in the foreign country. The ali_designation assigns a weight of 7.5 to multiple designations (the right to designate more than one airline to operate a service between two countries).

The reason for introducing these alternative indexes is to account for specific geographical and economic factors that may in some circumstances render these provisions more relevant to improve market access. However, the four ALI indexes are highly correlated among themselves, with correlation coefficients and the Spearman rank correlations around 90% or above (WTO, 2008).

ICAO 2013 Initiative

Pursuant to Article 44(d) of the Chicago Convention, one of the aims and objectives of ICAO is to foster the planning and development of international air transport so as to meet the needs of the peoples of the world for safe, regular, efficient and economical air transport109.

Resolution A38-14 of the 38th Session of the ICAO Assembly110, in its Appendix A, refers to the economic regulation of international air transport. With regard to the issue of liberalisation of market access, the assembly urged member states to continue to pursue liberalisation at a pace and in a manner appropriate to needs and circumstances. With regard to air cargo services in particular, the assembly urged member states to give due regard to the distinct features of air cargo services when exchanging market access rights in the framework of ASAs.

The assembly requested the council to develop and adopt a long-term vision for international air transport liberalisation, including examination of an international agreement by which states could liberalise market access. With regard to air cargo services in particular, the assembly requested the council to develop a specific international agreement to facilitate further liberalisation of air cargo services.

With regard to co-operation in regulatory arrangements, the assembly acknowledged that the strict application of the criterion of substantial ownership and effective control could deny many states a fair and equal opportunity to operate international air services. It urged member states to continue to liberalise air carrier ownership and control, according to needs and circumstances, through various existing measures such as waivers of ownership and control restrictions in bilateral ASAs or designation provisions recognising the concept of community of interest within regional or sub regional economic

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groupings. Moreover, it requested the council to initiate work on the development of an international agreement to liberalise air carrier ownership and control.

With regard to competition, the assembly urged member states to take into consideration that fair competition is an important general principle in the operation of international air services. It further urged member states to develop air transport-specific competition law and policies and to encourage co-operation among regional and national competition authorities. Moreover, it requested the council to develop a compendium of competition policies and practices in force nationally or regionally. It further requested the council to develop a set of high-level, non-binding, non-prescriptive core principles on consumer protection. Last, it requested the council to develop tools such as an exchange forum to enhance co-operation, dialogue and exchange of information on fair competition between states.

With regard to the issue of including aspects of international air transport under GATS, the assembly requested the WTO to accord due consideration to:

air transport’s particular regulatory structures and arrangements and the liberalisation taking place at the bilateral, sub regional and regional levels

ICAO’s constitutional responsibility for international air transport

ICAO’s existing policy and guidance material on the economic regulation of international air transport111.

Last, it requested the council to:

continue to exert a global leadership role in facilitating and coordinating the process of economic liberalisation

pursue in a proactive manner developments in trade in services that might impinge on international air transport

promote communication, cooperation and coordination between ICAO, the WTO and other intergovernmental and non-governmental organisations dealing with trade in services.

Over the past decade, air liberalisation has gained considerable momentum. It is characteristic that the

2003 ICAO Air Transport Conference concluded that “conditions were not ripe at that stage for a global multilateral agreement for the exchange of traffic rights” and that states should “continue to pursue liberalisation […] at their own choice and own pace”. Then ten years later, the 38th session of the ICAO Assembly requested the council “to develop and adopt a long-term vision for international air transport liberalisation, including examination of an international agreement by which States could liberalise market access”, as well as “to develop a specific international agreement to facilitate further liberalisation of air cargo services”. By the same token, whilst the 2003 ICAO Air Transport Conference adopted a model airline designation clause for optional use by states, the 38th session of the ICAO Assembly requested the council “to initiate work on the development of an international agreement to liberalise air carrier ownership and control”.