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Country case studies

The following sections present a short case study of strategic states and where they stand in terms of domestic and international air transport liberalisation.

Australia

Aviation plays a critical role in connecting Australian travellers and goods to the world. Its insular location, combined with vast geography and low population density makes aviation particularly important to Australia. Its tourism industry is almost solely dependent on air, as that is the mode of entry for over 99% of its visitors.

There were over 31.7 million international passengers in Australia in 2014, flying mainly to and from Sydney (41%), Melbourne (24%) and Brisbane (15%). Four countries, New Zealand, Singapore, the United Arab Emirates and the United States, account for almost 52% of Australia’s international market on an enplaned/deplaned basis. Qantas carried over five million international passengers and five carriers account for half the international traffic of Australia. International air cargo plays an important role in Australian transportation, with 880 000 tonnes of airfreight carried in 2014 and 41 000 tonnes of air mail. The international market, in addition to Australian carriers, is served by 49 foreign passenger carriers and five foreign freighter operators (BITRE, 2014).

Australia pursued two distinct aviation policies until the 1990s, one for the domestic sector and one for the international sector. Domestically, the Two Airline Policy of 1952 enabled Ansett Airlines and Australian Airlines to operate a virtual duopoly in the domestic market. The Two Airline Policy was abolished in 1990 and the interstate domestic sector was fully deregulated112. Between 1990 and 2014, domestic traffic increased by 370% or 6.7% per year on a compounded basis. This was significantly better than the 1% drop per year experienced in the previous decade. In the process, Australia has given itself one of the most liberal domestic aviation regimes as it places no limits on foreign ownership and control of its own domestic carriers, subject to regulatory review. However it does not allow cabotage, meaning that to operate a domestic flight, an air carrier must be registered in Australia, independent of its ownership and management structure. Australia also privatised 22 airports between 1997 and 2002.

Internationally, Qantas was the only Australian airline permitted to operate international flights until 1992 with the advent of multiple designations. Australia established the International Air Services Commission in 1992 to distribute capacity and frequency rights defined in ASAs to Australian carriers who apply to operate on a given route. In allocating capacity, the commission assesses the merits of claims by applicants under specified public benefit criteria stemming from policy statements by the Australian government.

Qantas and Australian Airlines, both state-owned, merged in 1992 to become the Qantas Group, which was privatised a year later. Today, to operate international flights, Australian air carriers must meet certain ownership and control requirements as set out by the Air Navigation Act 1920. It requires Australian air carriers operating international flights to be at least 51% owned by Australian nationals. It also requires two-thirds of the board members, including the chairperson, to be Australian citizens.

Qantas initially faced additional requirements as per the Qantas Sale Act 1992 (QSA). That act limited the concentration of foreign ownership to 35% for a single foreign airline and 25% to a foreign individual, while it maintained a cap on foreign ownership at 49% similar to any other Australian international carrier. These Qantas-specific requirements were abolished in 2014 when the QSA was amended and

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Qantas is now governed by the same ownership and control requirements as any other Australian carrier operating international flights.

The Australian government has a policy of pursuing international aviation liberalisation where it is in the national interest. Australia has ASAs with 94 partners as of early 2015 (Australian government Productivity Commission, 2015). The Trans-Tasman agreement113, signed in 2000 and ratified in 2002, was Australia’s first open skies agreement and remains its most liberal. It allowed for New Zealand-based carriers to operate unlimited domestic flights in Australia, flights to Australia and beyond (fifth freedom flights) and for freighters to operate seventh freedom flights. Since then, Australia has also entered into open skies agreements with Japan, Singapore, Switzerland, the United Kingdom and the United States. Open skies with China is reportedly a desired outcome for Australia but China has preferred to take a more gradual approach. Nonetheless, in January 2015, Australia and China expanded their existing ASA to add close to 50% more capacity between key Australian and Chinese gateways as well as remove the requirement for Australian carriers to seek fare approval by China (CAPA, 2015b).

Australia has a very high degree of liberalisation, especially for the region, as one of its main concerns is being amply connected to the rest of the world. Zhang et al. (2014) found that Australia had the most liberal aviation policies across the Asia-Pacific region. They examined factors such as the presence of LCCs, foreign ownership of domestic carriers, open skies agreements and privatised national carriers. Australia also has established a regional open skies policy, the “Regional Package”, in effect unilaterally granting open skies for any of its airports, except Sydney, Perth, Melbourne and Brisbane. It will not include flights to one of these four airports in a foreign carrier’s capacity entitlements if the flight originates in, is destined for or stops at an Australian airport not on the list. This policy is meant to help its regional airports attract foreign air carriers and increase their international connectivity. However, to date, few carriers have taken advantage of this policy, indicating that commercial viability may have been a greater barrier than air traffic rights.

Australian carriers have established strong partnerships with carriers from the UAE. Since March 2013, Qantas and Emirates have formed a partnership and operate jointly about ten daily flights between Australia and Dubai, where passengers can connect onwards to destinations in Europe, Africa or the Indian Subcontinent. Co-operation between both carriers extends to co-ordinating schedules to facilitate connections in Dubai, code-sharing, joint marketing and mutual recognition of frequent flyer programmes. Following this new partnership, Qantas withdrew from the German market and put an end to its flights to London via Hong Kong or Bangkok114. Meanwhile, Australia’s second largest carrier, Virgin

Australia, is 21% owned by Etihad Airways with whom it offers a number of code-share services. Through this partnership, Virgin flies to Abu Dhabi where it connects with Etihad’s network and provides feeder traffic to Etihad’s Australian flights.

Policy priorities: Australia

Australia’s 2009 white paper on aviation policy highlighted the success that domestic deregulation has had on the Australian market for over two decades, but also the need to improve regional services, particularly in areas with low tourist demand. Internationally, Australia takes a liberal approach with so-called “like-minded” markets, with a view to maintaining a “strong and vibrant” Australian airline industry. However, one area where Australia remains quite vigilant is the market with the United States. While it has entered into an open skies agreement with the United States, it has refused carriers such as Singapore Airlines from operating flights to the United States on a fifth freedom basis to protect the lucrative Trans-Pacific market.

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In early 2015, the Productivity Commission released a research report looking at the country’s tourism policy. The report devotes a whole chapter to the question of international air services, illustrating the importance of the aviation sector to Australia’s tourism industry. The report found that Australia’s international aviation policy is generally successful but did suggest greater transparency in sharing the cost-benefit analysis that underpins the government’s decisions on further liberalisation. The report included a statement from the government on how it defines the national interest and how it balances the divergent needs of various stakeholders. Finally, it suggested unilaterally extending the Regional Package to Brisbane, Perth and Melbourne.

Belgium

In 2013, 26.6 million international passengers travelled through Belgium’s six international airports.

These serve over 200 airports worldwide. Among the ten largest markets are Spain, Italy, Turkey and Morocco, which are mainly tourist destinations from Belgium. The United Kingdom, the United States, Germany, Switzerland and Denmark are also important destinations with a more diversified mix of passengers. Three of these six airports are used mainly for charter flights. Liege-Bierset is one of the busiest cargo airports in Europe with over half a million tonnes of throughput in 2013 and more than 300 000 passengers. It is home to TNT’s main hub and acts as a European hub to a number of freighter operators, leveraging its advantageous geographical position and efficient logistics operations, despite a relatively small domestic market.

The other two airports are both located near the capital Brussels, but fulfil a rather different role. Brussels Airport, also known as Brussels-National or Brussels-Zaventem, is the closest to the city and has always been Belgium’s most important airport. It handled close to 22 million passengers in 2014 and over 450 000 tonnes of freight on passenger and freighter flights, making it also one of the top ten cargo airports in Europe. It was the hub of Belgium’s former national airline Sabena. The latter was founded in 1923 and has built up a large intercontinental network over the years, with connections to several African countries that were not served by any other European airline. The airline folded in 2001 in the wake of the 9/11 terrorist attacks and a failed plan to be bought out by Swissair. The other airport, Charleroi, is mostly geared towards leisure travel. It is an important base for Ryanair and Jetairfly and handled about 6.4 million passengers in 2014. Charleroi is a prime example of an airport that benefited from a liberalised regulatory framework and entry of an LCC stimulating strong growth in the market. Passenger traffic at Charleroi has grown 25-fold since 2000, the year before Ryanair opened a base there.

Belgium has five national carriers operating international flights. None of them provide domestic services due to the limited size of the country and Belgium’s extensive railway network. Brussels Airlines, the country’s largest carrier, was established in 2006 as a result of the merger between SN Brussels Airline, which can trace its lineage back to Sabena, and Virgin Express. However it has not been able to provide the same international coverage as Sabena. Its network is largely shortand medium-haul, with a few North-American routes (no points west of Chicago) and a large African network reminiscent of Sabena’s network but no Asian or Latin American routes.

In addition to Brussels Airlines, Jetairfly, part of the TUI group, is an important Belgium leisure carrier. It has a fleet of 22 aircraft and serves mainly seasonal and year-round leisure destinations in the Mediterranean basin, Europe, Africa, the United States and the Caribbean. Meanwhile, TNT Airways operates a fleet of 32 freighters and operates a global freight network from its main hub in Liege. Belgium in general and Brussels in particular, enjoy strong air connectivity. Brussels Airport ranked 12th in Europe in terms of direct connectivity and has seen its connectivity grow by a third in the past decade.

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With the expansion of the high-speed rail network, Brussels’ indirect connectivity has been further improved during the last decade. A direct connection links Brussels to Paris Charles de Gaulle and Amsterdam Schiphol in about one and a half hours, while Dusseldorf Airport, London Heathrow and Frankfurt Airport can all be reached in less than three hours. Brussels is also very well connected by high speed rail to the key European business centres, Paris, Amsterdam, Cologne, Frankfurt and London. High speed rail both feeds passengers to Brussels Airport and offers Brussels passengers additional connectivity through other European hubs. To make the air/rail connection appear seamless, Thalys’ high speed trains have code-share agreements with:

Jet Airways, Brussels Airlines and Hainan Airlines to bring passengers from Paris (Gare du Nord) to Brussels Airport and connect to flights to India

Delta and KLM to bring passengers from Brussels or Antwerp to Schiphol Airport

Air France and American Airlines to bring passengers from Brussels to Charles de Gaulle Airport.

The proximity of these competing hubs and competition from high-speed rail on key short-haul routes makes a restoration of a hub in Brussels comparable in size to Sabena’s former operation rather challenging. However, the abundance of choice for consumers helps discipline the prices for medium and long range destinations. It introduces a rich intermodal component into Brussels’ aviation connectivity that is unique. This connectivity offers travellers increased travel options but pushes Brussels into the catchment area of the largest airports in Europe.

Limited long-haul direct connectivity, especially with regard to intercontinental routes, is often put forward by policy makers as a threat for the attractiveness and business environment of Brussels and Belgium. At the same time empirical studies have showed that less time-sensitive passengers might actually have benefited from the absence of a strong network carrier in Brussels, at least in the short run. For example, Lijesen et al. (2001) found that British Airways, Air France and Swissair charged significantly lower fares for flights from Brussels via their hubs to US destinations. On average the fares were less than 50% of the fares on comparable routes. They suggested that this was due to the fact that Brussels, being the only airport in the densely populated North-West of Europe without a strong international home carrier, was the stage for a fierce price war.

Following Sabena’s bankruptcy in 2001, it took Brussels Airport about 15 years to reach the same annual number of passengers of 22 million annually. Brussels Airlines, which only operates from this airport, still accounts for the majority and currently has a total share of around 25% of the total Belgium market. This is low compared to the market shares of the large European airlines at their main hubs and reflects the strong competitiveness present in the Belgium market.

Irish carrier Ryanair is currently the second largest carrier serving the country, accounting for just over 20% of the seats. It is by far the largest airline at Charleroi Airport, where, in 2001, it established its first base outside Ireland or the United Kingdom. Ryanair’s expansion at Charleroi has helped it become one of Europe’s fastest growing airports, reaching the level of the 6.8 million passengers in 2013. Since then the number of passengers has decreased as Ryanair has shifted some of their services to Brussels Airport¸ which has also seen rapid expansion by other LCCs and leisure carriers, including Jetairfly, EasyJet and Vueling. LCCs now (Jan-Aug 2014) account for 39% of all international seats in Belgium, up from 17% before the global financial crisis in 2007. This reflects the fact that despite positive growth from full service carriers, LCCs and leisure carriers have been growing capacity at a more rapid pace.

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Policy priorities: Belgium

Belgium has not published global international air transport policy yet. However, due to its geographical location, proximity of competitive global hubs, structure of the airline industry and diversity of its airports, Belgium pursues a policy that seeks to establish better global passenger and freight connectivity. The government takes a balanced approach in accordance with (EC) Regulation 598/2014 taking into account the nuisances caused by airport activities and at the same time seeking to better the interests of carriers, airports, shippers, passengers and all the support industries that form the aviation value chain within a fair and reciprocal marketplace. Belgium is particularly concerned with value creation within the country, something which both national and foreign carriers take part in creating. Thus it seeks policy outcomes that enable all carriers to grow within a competitive marketplace in order to provide the most connectivity choices to passengers and shippers.

Canada

Canada’s air transport market is almost evenly split between the domestic market (48.8 million O&D passengers in 2013) and the international market (46.8 million O&D passengers in 2013). The international market is largely dominated by the United States, accounting for about half of it, while the United Kingdom, France and China, as well as leisure destinations in Mexico, Cuba and the Dominican Republic are also important international markets. Canada has open skies agreements with six of its ten largest partners and ASAs with unlimited third and fourth freedom rights with two others, namely Mexico and Cuba. There are 246 Canadian airports with scheduled domestic flights, of which 34 also have international flights to one of 188 foreign destinations. The airports in Toronto, Montreal and Vancouver account for over 85% of non-US international traffic.

Nine Canadian carriers operate international scheduled passenger flights, with the most significant being Air Canada, WestJet, Air Transat, Sunwing and Porter Airlines (only to the US). Air Canada is the only Canadian carrier to be part of an airline alliance, the Star Alliance, while its main domestic competitor, WestJet, has code-share agreements in place with seven SkyTeam members, five OneWorld members and one unaligned carrier and interline agreements with nearly 30 carriers. Cargojet is the only Canadian operator of international scheduled freighter flights.

Canada deregulated its domestic market in 1987 following the passage of the National Transportation Act. That same year, the government announced the privatisation of Air Canada, which was completed a year later. Canada’s domestic market is now fully liberalised but may only be served by air carriers where

Canadians have at least 75% of voting equity. The domestic market has a long tradition of having trunk routes dominated by two large carriers, supplemented by feeder, regional and northern carriers.

Policy priorities: Canada

Internationally, Canada’s Blue Sky policy, established in 2006, defines Canada’s approach to international air transport negotiations. It aims for the negotiation of open skies agreements (modelled on the 2005 Canada-US open skies agreement) when it deems it in the country’s national interest. Canada takes a number of different factors into consideration as it establishes its negotiating priorities, including the interest of Canadian carriers and airports, the potential of the market to grow and Canada’s international trade. The policy does permit the negotiation of less open agreements when marketplace conditions are believed to unfairly advantage a foreign carrier or when the entry of a new carrier would significantly reduce or eliminate competition. Canada currently has open agreements covering 45 countries, including

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the United States and the 28 member states of the European Union. Since the Blue Skies policy came into place, the number of Canada’s bilateral partners has gone from 73 to 116.

Canada will continue to pursue opportunities to negotiate more liberalised agreements that will maximise prospects for the introduction of passenger and all-cargo services, according to market forces.

Chile

In 2015, total annual passenger traffic in Chile reached 18.1 million passengers (JAC, 2016). International passenger traffic in Chile totalled 8.3 million passengers, up 11.1% compared to 2014, while domestic traffic reached 9.9 million passengers, up 0.9% from 2014. Chile expects its passenger traffic to reach 31.2 million by 2030 and 49.4 million by 2050 of which international passengers would account for 16.4 million and 26.6 million respectively.

With respect to air freight, which is particularly important in that country especially for its exports of fresh fruits and fish, 271 000 tonnes of freight were transported, almost all internationally. International airfreight tonnage was down 8.3% in 2015 and there was a significant shift in capacity from LAN’s freighter aircraft to its passenger aircraft, as LAN’s freighter fleet has been reduced by a fifth over the last couple of years (Air Cargo News, 2014). Chile’s domestic passenger traffic is the fourth highest in Latin America despite a relatively small population (18 million). Chileans have a high propensity to fly as a result of economic prosperity and a geographical situation that makes surface transportation a less feasible option. In 2014, Chile produced 0.97 passenger per capita, a number expected to rise to 2.6 by

2030 according to Chile’s Civil Aeronautics Board (Junta de Aeronáutica Civil or JAC) at which point it would reach a level commensurate with that of the United States today.

There are 19 Chilean airports with domestic scheduled flights and over 5 000 passengers in 2014, of which 8 also have international scheduled flights to one of 23 countries with direct air services from

Chile. Santiago’s Comodoro Arturo Merino Benítez International Airport is by far Chile's largest airport, handling 99% of Chile’s international traffic in 2014 and 44% of its domestic traffic (JAC, 2015). This indicates that nearly all commercial passenger air transport in Chile, both domestically and internationally, originates or ends in Santiago. In addition, 72.4% of domestic freight originates in Santiago and nearly all international freight enters or exits Chile through Santiago.

There were six carriers operating domestic flights in Chile, with the LAN Chile, which includes regional feeder LAN Chile Express, accounting for 7.3 million passengers or 74% of domestic passenger traffic and 24 000 tonnes or 90% of the domestic freight market. Chile’s second largest air carrier, Sky Airline, carried 2.4 million passengers in 2014.

On the international market, Chile is served by LAN Chile, Sky Airlines and 26 foreign carriers. Chilean carriers account for 57% of the market, with LAN Chile alone having a 51.3% market share with its 4.2 million international passengers in 2015. Major foreign airlines include Brazil’s TAM, COPA and LAN Peru. The LATAM group accounts for 61% of international traffic and explain OneWorld’s dominance in

Chile, with a 68.4% market share of international traffic.

Chile’s flag carrier LAN Chile was founded as a state-owned airline in 1929 and privatised in 1989. In

1995 it acquired Chile’s second largest airline Ladeco and in 2002 it started its internationalisation process by setting up and/or acquiring international subsidiaries. In 2004 LAN Chile and its subsidiaries, LAN Perú, LAN Ecuador, LAN Dominicana and LAN Express, became unified under the unique LAN brand and livery, eliminating each airline country name on the brands. LAN Argentina and LAN Colombia followed in 2005 and 2011. In 2012, LAN merged with Brazilian airline TAM Airlines to form the LATAM Airlines Group, which has been incorporated under Chilean law. The merger was

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approved by a divided three against two decision of the Chilean Competition Tribunal, subject to 11 mitigation measures aimed at maintaining a certain degree of competition, including the surrendering of slots at Sao Paulo to carriers willing to operate between that city and Santiago, extending for five years

LATAM’s frequent flyer programme to airlines wishing to participate in its relinquishment of membership of either OneWorld or Star Alliance (LATAM eventually left Star Alliance) and a commitment by LAN to publicly support unilateral cabotage in Chile by foreign carriers (OECD, 2014d). The merger of Grupo LAN with TAM resulted in what is by far the largest airline group in Latin-America.

Argentina is Chile’s largest international market, with 1.7 million passengers in 2014. It was followed by Brazil (1.3 million), Peru (938 000), the United States (853 000) and Panama (412 000). Two-thirds of Chile’s international traffic is to or from South America. With respect to air cargo, the market is tilted towards outbound freight, as outbound tonnage is over 50% higher than inbound freight. This reflects the commodity mix of Chile’s air freight, such as perishable fruits and fresh fish. The main markets for international air freight are the United States (133 000 tonnes in 2014), which accounts for almost half the market, Brazil (22 300 tonnes) and Peru (20 800 tonnes).

Chile’s aviation policy is crafted with free market principles in mind, with minimum state intervention. It is based on clear and stable regulations which aim to facilitate efficient, high quality and lowest cost air services. The policy rests upon three pillars: free market access, no intervention on air fares and a liberalised ownership and control framework. It has pursued a reciprocal open skies policy since the late 1970s. Chile has abolished all of its caps on foreign investment in its air carriers and since 1979 it has offered cabotage rights on a unilateral basis. It is one of the few countries with a sizeable domestic market to actually do so. Thus, airlines are required simply to have their principal place of business in Chile, no matter how their ownership is structured. This has allowed foreign carriers to set up subsidiaries in the Chilean domestic market. For example, in 2004, Spanish Grupo Marsans established Air Comet Chile to operate domestic services in Chile. The carrier ceased operations in October 2008 due to financial problems. Other carriers, such as Mexico’s Aerolineas Damojh and Sweden’s West Air have also operated domestic flights but both ceased their operations in 2013, for economic reasons. At present, no foreign carrier is operating scheduled cabotage flights in Chile although Xtra Airways of the United States is operating domestic charters on behalf of Chile’s One Airlines.

A number of Latin American countries have relaxed their foreign ownership rules to enable Chilean-owned and controlled LAN to acquire large (even majority stakes) in their carriers. In addition, the 2006 EU-Chile ASA acknowledges Chile’s liberal regime by allowing a number of Latin American countries (namely, the member states of the Latin American Civil Aviation Commission) to own or control Chilean airlines without jeopardising those airlines’ market access to EU member states115.

As of December 2015, Chile had ASAs in place with 55 partners. Of those, 15 were full open skies covering all nine freedoms of the air, 14 more had provisions covering the first seven freedoms116 and 10 more met the definition of open skies used in this document. Overall, 49 of Chile’s 55 ASAs provide for, at a minimum, unlimited third and fourth freedoms.

Chile has signed open skies agreements with a relatively large number of partners, either on a bilateral or multilateral basis. Bilateral agreements include those with the United Kingdom, the Netherlands, the UAE, Qatar, Paraguay, Panama, Jamaica and the Dominican Republic. Multilateral agreements to which Chile is a signatory include the MALIAT agreement with Brunei, New Zealand, Singapore and the United States, allowing unlimited traffic rights between each country under third, fourth and fifth freedoms, as well as unlimited seventh freedom traffic rights for freighter flights. There is also the Fortaleza Agreement of the Southern Common Market (Mercosur), with Argentina, Bolivia, Brazil, Paraguay, Peru and Uruguay; this agreement seeks to liberalise air services between these South

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American countries117. Furthermore, Chile was the first country to sign a horizontal agreement with the EU in 2005, allowing a carrier in one EU country to be designated to use traffic rights meant for a carrier in another EU country. Finally, in January 2015, Chile and Australia renegotiated their ASA to allow a doubling of capacity to 4 000 seats per week between both countries. This should benefit both LAN Chile and Qantas, who code-share on the Santiago-Sydney route.

The impacts of further liberalisation of the Chilean international air market have been estimated by InterVISTAS-EU (2009a) using a gravity model. Liberalisation of market access is forecast to increase international traffic to and from Chile by 1.2 million passengers, an increase of 24% from 2007 levels. Liberalisation would also provide considerable benefits for passengers. Average fares are forecast to decline by 18% with market access liberalisation, resulting in an increase in consumer surplus of USD 73 million. The increase in air service and passenger traffic is forecast to generate employment in the aviation and tourism sector. In addition, InterVISTAS-EU (2009a) assessed the catalytic impacts due to the role of air transportation in facilitating growth and productivity in the general economy by increased trade, business activity and greater personal productivity. In total, liberalisation of market access is forecast to generate 35 200 full-time equivalent jobs and an incremental GDP of USD 650 million.

Policy priorities: Chile

Chile’s policy priorities aim to promote the development of civil aviation, particularly domestic and international commercial air transport, and aims to generate the largest number of accessible, efficient, competitive, safe and quality air services for the benefit of current and future air transport users. This is done against a policy backdrop that includes implementing a new 20-year concession at Santiago’s Arturo Merino Benitez International Airport, developing a land-planning bill that balances the need for an airport to develop with the negative impacts on the environment and local health, reducing carbon emissions from aviation and putting into application a new Chilean law on air passenger rights.

Chile, through work carried out by the JAC (2015) focuses its aviation policies on:

promoting connectivity and international air transport of people and goods via the negotiation of new air transport agreements and the implementations of best practices

promoting international air transport facilitation through the coordination of appropriate public services maintaining and improving the system for granting commercial aircraft insurance policies

developing and managing tools to measure the performance and quality of air transport in Chile and generate market information.

Chile is looking to prioritise its next ASA negotiations first around the Pacific Alliance, which it is a part of with Columbia, Mexico and Peru and for which it hopes to obtain at least fifth freedom rights for passenger and freighter flights. Chile will also seek to liberalise as much as possible its ASAs with other South American countries and within the Latin American Civil Aviation Commission118 region.

It will also pursue negotiations in order to obtain fifth and sixth freedom rights from European Union members, either on a bilateral or multilateral basis, beyond the 11 ASAs it currently has in place with EU members, including ten that allow for unlimited third and fourth freedom rights. Alvarado and Marcos (2012) studied the economic impact of full open skies between Chile and the EU and found that unlimited third, fourth and fifth freedoms with the EU would generate between 183 000 and 198 000 new passengers on top of the half a million already flying between both markets and open new direct

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routes. This would generate an economic impact of EUR 138-165 million per year for the EU and an increase in consumer surplus of EUR 35-89 million per year. Finally, it intends to seek sixth freedom rights in its ASAs within the Asia-Pacific region.

The People’s Republic of China

Airports in China handled over 390 million passengers and almost 6 million tonnes of air freight in 2014 (CAAC, 2014). The country has 51 commercial carriers and 202 airports, including seven that handled over 30 million passengers each.

The Chinese aviation market has experienced phenomenal growth in the past four decades, mirroring the developments of its broader economy. Passenger traffic grew at an annualised pace of 14.9% between 1990 and 2010 (Fu, 2015), helping propel China’s rank in terms of passenger-kilometres performed from thirty-seventh place in 1978 to second place in 2008. During that time, China witnessed important aviation policy changes that re-regulated the market, consolidated it and progressively liberalised it.

Initially, commercial aviation in China was both regulated and operated under the authority of the air force as an extension of the armed forces. A first set of reforms between 1978 and 1986 saw operations being first transferred to the State Council and the Civil Aviation Administration of China. In 1987, the six CAAC regional bureaus set up regional airlines that began competing against each other although they were all state-owned. In effect, this removed the central office of the CAAC from the operational aspect of commercial aviation and allowed it to focus on its regulatory mandate only. Air fares were deregulated in 1997 triggering a price war amongst the 20 or so Chinese airlines, which reported a combined loss of USD 250 million in 1998, the first loss in 20 years. Prices were re-regulated the following year (Lei et al., 2011).

The Chinese airline industry experienced significant consolidation, first in October 2002, when ten airlines controlled by the CAAC were consolidated into three state-owned carriers, Air China, China Southern and China Eastern, which are the largest carriers in China today, and in 2010, when China Eastern and Air China acquired regional carriers. At the same time, China allowed privately-owned carriers to operate in the Chinese domestic market that remained regulated but relatively open.

Fu et al. (2015) states that it is not straightforward to measure the performance and competitiveness of Chinese airlines. In 2010 the total earnings of Chinese carriers reached CNY 35.1 billion (Yuan renminbi) (USD 5.18 billion), about 60% of the industry’s global profit that year. On the other hand, China Eastern

Airlines, the second largest carrier in the country, received a government capital injection of CNY 10 billion (USD 1.45 billion) in 2009, and another injection of more than CNY 3 billion (USD 0.44 billion) in 2012 to reduce its exceedingly high debt ratio. The other two large airlines, China Southern and Air China, received capital injections of CNY 2 billion (USD 0.29 billion) and CNY 1 billion (USD 0.15 billion) respectively in 2012 as an urgent measure to boost capital and reduce debt. In addition, Chinese carriers are recipient of significant levels of public subsidies. In 2014 alone, the four largest carriers received USD 1.1 billion in subsidies and grants (CAPA, 2015e), half of which was directed to China Eastern Airlines.

The domestic market in China is regulated in a two-tier system and reserved exclusively for Chinese carriers. The more liberalised tier, which includes freighter flights, routes that do not involve high traffic airports or routes between a carrier’s hub and any point except Beijing, Shanghai Pudong, Shanghai

Hongqiao and Guangzhou, only require the carrier to register with the regulator, whereas flights to slot controlled airports or on existing busy routes require regulatory approval. Fu (2015) finds that as of

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December 2013, 88% of China’s 3 353 domestic routes fall under the liberalised tier and do not require regulatory approval.

China’s international air policy seeks to develop its three international carriers by protecting their respective hubs from competition by other Chinese carriers. Thus, Air China, China Eastern and China Southern have been able to develop large hubs in Beijing, Shanghai-Pudong and Guangzhou respectively.

An innovative component in China’s international air policy is an open skies agreement between Korea and the Chinese province of Shandong. This is a very rare case of an ASA at a sub-national level.

China remains the largest market without an open skies-type agreement with the United States. The strong growth of the US-China market creates increasing opportunities that could only be fully realised by a liberalised market, something both countries had committed to in 2007. In 2015, for the first time, Chinese carriers overtook US carriers in the capacity share on direct China-US flights, operating 2 028 flights during the summer peak season compared to the 1 853 operated by US-based carriers (CAPA, 2015e). This is an important development in the aviation relationship between the countries; only four years ago, US carriers were operating twice as many flights as their Chinese counterparts. The number of direct flights between the countries nearly quadrupled in the last decade with the trend looking to continue or even accelerate in the coming years as new long range aircraft coming on-line, such as the Airbus A-350 and Boeing B-787 may help increase the number of viable routes. China’s geographical position also enables it to efficiently funnel sixth freedom traffic from Eastern and Central Asia to the United States via Chinese hubs whereas economically viable sixth freedom opportunities of US carriers are more limited.

Finally, it should be noted that until an open skies agreement is reached, USDOT is not expected to grant antitrust immunity to a joint venture between a US and a Chinese carrier. This creates an additional impetus for establishing an open skies agreement. But in the wake of the negative attention subsidies from Gulf countries have attracted, it remains to be seen if subsidies to Chinese carriers will impede the progress of liberalisation.

With respect to air freight, China adopted very liberal policies in order to help its time-sensitive exports better reach their markets. Taking advantage of seventh freedom rights, integrators such as FedEx and UPS established hubs in Guangzhou and both Shanghai and Shenzhen respectively.

Policy priorities: The People’s Republic of China

China is seeking to establish a more open and liberal regime with its neighbours in central and western Asia. However, those countries have concerns that their home carriers may not be able to compete against the much larger Chinese carriers.

With respect to the United States, Delta Airlines CEO Richard Anderson has speculated about the establishment of a Shanghai hub modelled on its Amsterdam hub. To succeed, it would require close cooperation or even a joint-venture with its SkyTeam partner, China Eastern Airlines, whose Shanghai hub could feed traffic to flights operated by Delta or its partners.

Denmark

Copenhagen International Airport, Denmark’s top gateway, processed 25 million passengers in 2014, including 23.6 million international passengers (Københavns Lufthavne A/S, 2015). Billund, the country’s second largest airport, had 2.9 million passengers in 2014. There are seven other airports with over 12 000 passengers per year.