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In either case, what we are witnessing is that even in markets where open skies agreements are in place and providing travellers and shippers with as much connectivity as the market can bear, policy makers can still face domestic pressure to limit market access in response to a situation deemed unjust by parties with a vested interest. While conflicts and divergent views will appear now and then in any trade relationship, the reflex to limit market access as a defence mechanism against practices deemed unfair is a worrisome trend. Policy makers should resist that option and favour negotiated or arbitrated solutions that do not rescind the advancement of liberalisation but rather help determine whether or not unfair competitive practices are taking place in the market and if so, how to mitigate them transparently, while keeping markets free and open.

Level playing field: the case of Gulf Carriers

Limited access rights have been used by a number of countries, including Germany, France, Spain and Canada to counterbalance the real or perceived issue of an unlevel playing field and competition from Gulf State carriers. By imposing what amounts to quotas, states are attempting to pre-empt any potential for capacity dumping, which would harm home carriers.

It is true that market conditions in Europe, Asia and North America differ greatly from those in the Gulf States. However, this is a common feature in international trade and not a sufficient reason to limit liberalisation. Nevertheless, concerns have been expressed over advantages arising from the operating conditions Gulf carriers enjoy in their home markets alongside suggestions that these carriers have benefited from inappropriate financial support.

Operating conditions are significantly more favourable to airlines in the UAE and Qatar than in many European and North American countries. Taxation, labour conditions and infrastructure capacity are all more competitive in Gulf countries although social standards, human rights and income equality are more favourable in Europe and North America. Labour costs for Emirates Airlines, for example, are in line with those of major carriers based in Southeast Asia, but still less than half those of major European carriers (Emirates, 2012). This reflects a significant comparative advantage for that area, able to offer top quality services within the cost structure of an emerging economy.

Lufthansa Group (2014b) points to a number of other areas in which companies based in Dubai enjoy an environment more favourable to business including:

low or no taxation

low airport fees

low air traffic control fees

low aviation security fees

no environmental or noise fees

no curfews

no unions

no right to strike.

However, all these advantages reflect general societal choices rather than specific aviation policy measures; the competitive advantages of operating in the UAE or Qatar are available to the more than 150 carriers present in those countries. Of course, home carriers benefit more from these advantages simply because such a substantial part of their operations is undertaken in their home country’s hub

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airports. Figure 2.11 compares eight carriers in relation to key competition factors. Aside from productivity, all other factors are the result of public policy decisions. The diagram indicates that carriers from China, Turkey and the United Arab Emirates benefit from policies that are relatively aviationfriendly in comparison to the European carriers examined.

Figure 2.11 Degree of aviation friendly policies of selected carriers in their home country

Source: Lufthansa Group (2014a).

Financial support is a complicated issue to examine because, whilst there is general agreement that governments should not provide financial support to carriers, states have come to the rescue of ailing national carriers, either directly through subsidies, or indirectly through the application of bankruptcy laws that allow airlines to reorganise and write-off their debt. Many airlines also benefited from start-up funding from governments. All three Gulf carriers benefited from state support to begin their operations. While this creates a market distortion, it also replicates a situation experienced by many non-US network carriers which started as state-owned carriers with an injection of public funds. Thus, while the injection of start-up capital distorts the playing the field, there is such a wealth of precedence for state-funded start-up capital, that it would be hard to argue that this is a sufficient condition to impose restrictions on the liberalisation of traffic rights for Gulf carriers. Operating subsidies are of greater concern as they can lead directly to capacity dumping by enabling carriers to operate despite continuously losing money. Such subsidy distorts the playing field by forcing non-subsidised carriers to match prices offered by subsidised carriers, while absorbing the financial loss.

De Wit (2014) shows that while the cost per available seat kilometre of Emirates is significantly lower than the cost of continental European carriers this can be explained by the hourglass-shaped long-route network it operates and the newer, fuel-efficient fleet of aircraft it flies. Its cost structure resembles that of Singapore Airlines and, to a lesser extent, that of British Airways. He also points out that, contrary to Lufthansa, Air France-KLM or Iberia, Gulf carriers do not operate a money-losing short/medium-haul

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network in competition with LCCs. Thus they are able to focus on the most profitable parts of an airline network, the long range route, without having to contend with a money-losing short-haul feeder network.

Possibly the biggest financial help Gulf carriers receive is the willingness of their home governments to invest massively in infrastructure. While this benefits all carriers serving the region, clearly the home carrier will derive the most benefit. Dubai, for example, is investing USD 33 billion in expanding the brand new Al Maktoum International Airport and growing the new Dubai World Central Airport; Abu Dhabi is investing USD 6.8 billion in expanding its airport; Qatar is investing USD 16 billion to build the new Hamad International Airport in Doha. The amounts of public funds invested and the speed at which the airports are being built are unimaginable by today’s European or North American standards. However, the major airports in those regions were also initially built with public funds and most are still, partially or fully, owned by public entities. Therefore, what some may see as an unlevel playing field can also be seen as a region establishing its aviation presence in a way not unlike that in which most OECD countries did half a century ago, with state-owned airlines and airports, start-up capital funding and major infrastructure investment.

Another form of indirect assistance comes from how airport fees are calculated in Dubai, Abu Dhabi and Doha. In order to be more competitive, hub airports often grant passenger facility charge (PFC) discounts for connecting passengers, which can vary from 25% at Heathrow to 58% in Amsterdam (De Wit, 2014). However, the three gulf hubs do not charge any passenger facility charge for transiting passengers. While these discounts are available to all carriers, they are clearly almost entirely used by the home carrier. Combining this discount with very low security and air navigation charges and no noise or passenger taxes, Zuidberg (2013) calculates that an A-330 with a 79.7% load factor and 80% of passengers connecting will pay EUR 1 810 in Dubai, compared to EUR 6 441 in Amsterdam, EUR 10 406 in Frankfurt and over EUR 12 000 at either London-Heathrow or Paris-Charles de Gaulle.

In their analysis of Dubai’s aviation model, Oxford Economics (2011a) show that airport charges in Dubai in 2010 were located close to median for the 96 largest airports in the world. In fact, about 70 of them, including Dubai, had charges in the USD 20-45 range per passenger. Landing fees in Dubai and Abu Dhabi were on par with London Heathrow and within about USD 10 of Frankfurt, Paris or Amsterdam. However, the structure of the airport charge in Dubai places significantly more weight on passenger charges than landing fees. Thus, when the PFC is waived for transiting passengers, Dubai’s airport fees become one of the lowest in its peer group.

The Partnership for Fair and Open Skies, a coalition made up of the three US network carriers and four labour unions, estimated that over the last decade, the three Gulf carriers have received USD 39.2 billion in subsidies and USD 3.1 billion in benefits which they called unfair (Partnership for Fair and Open Skies, 2015). By far the two biggest beneficiaries were Etihad (USD 18 billion) and Qatar Airways (USD 17.5 billion). These figures are collated from a wide variety of sources and include loans, shareholder advances, land transfers and benefits from operating at state-funded, lower cost airports. Without commenting on the validity or otherwise of these figures and approach, the complex methodology employed by the study’s authors and the variety of sources employed reflect a general lack of transparency on the issue or a set of clear rules as to what should or not be considered a subsidy and which subsidies should be considered problematic.

On the issue of direct operating subsidies, in the case of Emirates Airlines, whose financial results are independently audited and publicly available, there seems to be no state aid from the government of Dubai; rather, Emirates provides financing to the state through dividend payments. The issue is far less clear on the question of other subsidies, such as the ones raised by Partnership for a Fair and Open Skies

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(2014) on fuel hedging, airport infrastructure and purchases of goods and services from other stateowned companies.

In the case of Etihad and Qatar Airways, lack of transparent financial reporting, which is entirely within their right, makes it challenging to establish a judgment and, especially, to quantify the exact size of any subsidy.

An additional complexity in measuring the extent of subsidies received is the fact that all three are stateowned enterprises and operate in a business environment where many of their local suppliers are also state-owned enterprises. State-owned airlines are not new and a number of today’s largest, global, non- US-based carriers were at one time or still are state enterprises. However, they usually operated at arm’s length from the state and their local suppliers were usually private companies.

Where there is more transparency in the financial support received over the years by network carriers, either through direct capital injection, loans, debt write-offs, pension fund contributions or favourable debt restructuring legislation. The point here is that over the years, most flag carriers have at some point or another benefitted from state aid. It is often the result of a crisis situation that threatens the viability of the carrier. In analysing support to Gulf carriers, it is important to distinguish start-up capital and rescue funding from sustained funding.

There would be merit in conducting a thorough, objective, transparent and neutral analysis of the level playing field issue, which would dissociate direct state aid from comparative advantages resulting from better geography or airline-friendly policies. This being said, the issue of subsidies should not be used selectively to justify limiting granting traffic rights. Too many airlines from all parts of the world have benefitted from direct contributions, indirect subsidies, preferential national treatment or advantageous creditor protection legislation. Over the years, responding to aeropolitical pressures, governments have regularly taken actions that have unleveled the playing field in support of their home carrier. Going forward, states should be encouraged to limit the extent of their financial intervention in this industry, choose a method that is the least disruptive to market forces and when they do intervene, do so in a transparent manner.

Level playing field: looking beyond Gulf carriers

Competition can be distorted for a number of reasons, including:

a history of financial support that has enabled a carrier or an airport to achieve a significant size to be considered today a market leader

public spending on airport or navigation services infrastructure in some countries, but not in others

operating subsidies for airports or air navigation services providers in some countries, but not in others

more flexible creditor protection regimes in some countries rather than others enabling carriers in financial hardship to reorganise in a more efficient fashion

the presence or not of aviation-friendly national policies and the importance within a state’s international aviation policy framework of protecting the interest of national carriers compared to the interest of travellers and shippers

being based in a low-tax, low-cost jurisdiction compared to a higher-tax, higher cost one.

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Concrete examples from the list above, which could certainly be expanded, are found around the world and beg the question: was there ever a level playing field in aviation?

From the onset, differences in geography and size of the local market mean that carriers start off from a better or worse position simply based on which country they are registered in. Afterwards, since there are no global rules for public funding within the aviation supply chain, for local aviation policies (curfews, taxes, fees) or for negotiating priorities for ASAs, this will necessarily produce opportunities which are different for carriers from one jurisdiction compared to carriers from another.

Therefore, a level playing field in aviation may just be a theoretical construct never to be achieved for the simple fact that far too many variations exist between countries to ever achieve full equality between carriers and a true equality of opportunity between them, as prescribed by the Chicago Convention. That being said, this is not a situation that is unique; competitors in any sector have access to different sets of opportunities and as much as the playing field tries to be level, there will always be some comparative advantages between competing firms. Thus, perhaps the goal should not be as much equality of opportunity between carriers but rather equivalent opportunities for carriers within a given market.

In the absence of a level playing field, policy makers should be seeking to define some consistent rules that would apply to all, but also accept that distortions will exist within the playing field. To make a sport analogy, even when two players or two teams play by the same set of rules, very often one enjoys some clear advantages over the other, including financial resources. This puts an onus on regulators to properly define the rules and how to enforce them. It also requires them to accept that there will be inherent inequalities between competitors and that this situation is actually prevalent across most industries; it is not just limited to aviation.

Social dumping

The liberalisation of air transportation across the world has removed barriers to entry that used to exist. Indeed, a generation ago, in a number of countries, it was the norm that most scheduled international air services were offered either by state-owned flag carriers or in some form of stable duopoly between private carriers160 or a mix of state-owned and private air carrier161. Air carriers had a single or multiple home base in their country of nationality and most if not all crews were based in these locations. Labour regulations reflected these situations and the general norm was that the labour laws of the jurisdiction where the base was located applied to all crews. Privatisation and liberalisation have led to both a consolidation of incumbent carriers and the establishment of new carriers. It has presented air carriers with the opportunity to develop new labour models which the existing regulatory framework was not fully equipped to handle.

A peculiarity of the EU is that the single market combined with differences in labour, social security and fiscal legislation in member countries have enabled some carriers to take advantage of more favourable conditions in one EU member state compared to another. They have introduced employment models that, while legal, have sparked a debate on their social acceptability.

Commission regulation (EU) No 83/2014 defines as home base “the location, assigned by the operator to the crew member, from where the crew member normally starts and ends a duty period or a series of duty periods”.

A key change introduced mainly by LCCs has been to contract out as much as possible the different facets of their operations. By outsourcing ancillary services, airlines have been able to introduce greater flexibility and cost savings to their operations in effect moving towards becoming a “virtual airline”,

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meaning that it focuses solely on scheduling, sales and overall responsibility for the operations of the flight (Trafikstyrelsen, 2015). Within the EU, an added complexity brought on by the European Single Aviation Market is the possibility to establish transnational carriers, with a carrier being based in one EU country, having a subsidiary in another EU country and employing flight crews via placement agencies located in third countries.

There are also numerous cases where flight crews are self-employed, meaning they establish a single-employee company and the airline hires that company to supply a pilot. In this case, the carrier is contracting out the service of flying the aircraft to a third party, who may be flying for multiple carriers on multiple contracts. The case of the self-employed pilot raises significant issues from a labour law standard perspective. Labour laws usually treat employees and the self-employed quite differently, as employees are at the service of the employer, whereas self-employed contractors sell a service to carriers. Jorens et al. (2015) in a survey of 6 633 European pilots found that 21% of respondents had atypical employment arrangements, a proportion that rose to 47.4% for pilots flying for a low-cost carrier. The survey also found that 16.7% of pilots flying for LCCs were employed through a temporary work agency, compared to 1.7% for network carriers and 1.3% for regional carriers.

The ability to execute these new labour models varies greatly between EU carriers. Low-cost, non-unionised and start-up carriers face lower internal barriers to create such arrangements than do heavily-unionised legacy carriers, which have faced strong labour actions when they have tried to reduce labour costs (i.e. Air France, Lufthansa, Iberia, Alitalia etc.…).

Going back to the definition of home base, one can easily see how crews can do most of their flying from an airport in one EU country for a carrier from another EU country while starting and ending their duty period, which can span multiple days, in a third country, inside or outside the EU and only be subjected to the laws of that third country.

These innovative employment models have helped drive down labour costs for airlines that make use of them. They have also enabled carriers to select the EU country in which to establish themselves, based on which one offers the most advantageous fiscal and labour conditions. Since labour and fiscal laws vary significantly from one EU member to another, a situation is created where carriers can legally rule shop and take advantage of the most favourable conditions within the EU. Booz and Co (2009) suggested that labour mobility required the development of an intra-EU framework clearly defining the opportunities, rights and obligations of individuals and corporations.

These new employment models raise two important policy issues: do they impact the safe operation of a flight, which is of paramount concern in aviation, and do they create a labour situation that is socially incompatible with EU values and principles? On the issue of safety, the European Air Safety Agency has set up a regulatory advisory group to assess the potential safety implications of these new employment models.

In addition, Jorens et al. (2015) found that the safety management style of an airline, be it a culture of safety or a culture of cost-savings, and not the actual form of employment determines whether safety issues are reported or not. However, they also pointed out that since there is no global monitoring of a pilot’s flying hours, atypical employment makes it impossible for airlines and regulators to properly monitor the total flight hours of pilots flying for multiple carriers and make sure that they remain below the regulated threshold. They recommend instituting a system to monitor all flight hours of European pilots, no matter which carrier they happen to fly with as a means to address this information gap. What is abundantly clear though is that innovation in the labour marketplace cannot lead to any compromise on aviation’s very high safety standards.

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With respect to the social implications of atypical employment, the European Commission has been very concerned with social dumping and rule shopping in aviation. Rule shopping is a particular concern in the EU with LCCs. Outside the EU, nationality rules usually prevent an air carrier from enjoying the benefits of being a national carrier except in the country it is registered. Inside the EU, network carriers can of course in theory practice a form of regulatory shopping, by using their fundamental right of establishment to locate themselves in the EU jurisdiction whose national and local laws are most optimal for the carrier’s business model. However in practice it would be very difficult for a carrier such as Lufthansa or British Airways to move their entire network to another country. However, EU-registered LCCs operate under a business model that affords them far greater flexibility, establishing numerous bases around the EU. As a case in point, Ryanair operates 68 bases in 19 countries162 and Easyjet 24 bases in seven countries, making it far more straightforward to shop and shift regulatory activities from one country to another.

The EU held a conference on the issue in the spring of 2015 and expects to introduce measures by 2016 that would foster a more socially responsible aviation sector. The challenge for the commission will be putting forward measures that do not impede the free movement of people and capital within the EU, that take into account the fact that labour and fiscal laws are not harmonised across the EU and that ensure that all employees are subject to socially acceptable working conditions.

Norwegian Air International

One model that has raised significant controversy was proposed by Norwegian Air Shuttle group, Europe’s fourth largest low-cost carrier, in 2014. The Oslo-based carrier established a subsidiary airline in Ireland, Norwegian Air International (NAI), to fly long-haul, low fare flights from London to various points in Europe and the United States and, in particular, on routes to countries where existing ASAs allowed only airlines from the EU (but not Norway) to operate. On 2 September 2014, US Secretary of Transportation, Anthony Foxx, rejected a request from Norwegian Air International for a temporary exemption authority to enable it to operate scheduled flights between the European Union and the United States but indicated that USDOT would continue to study its request for a permanent foreign air carrier permit. On April 15th 2016, USDOT proposed to grant a permit following an extensive inter-agency review that concluded that the airline was legally entitled to authorisation under the US-EU (plus Iceland and Norway) Air Transport Agreement of 21 June 2011 and that a provision underscoring the importance of high labour standards did not provided a legal basis for unilateral denial of a permit. It found that the EU-US open skies agreement did not provide the basis for rejecting NAI’s request and that the carrier meets the department’s standards for awarding a permit. This tentative decision was subject to review following objections it may receive. With no final order issued yet, on 26 July 2016 the European Commission advised the USDOT that it would begin arbitration procedures. On 2 December 2016, USDOT finally approved NAI’s request which will start flying ten routes between five European cities and three US East coast destinations during the summer of 2017. This section discusses some of the history of this case as well as the important issues that it raised, particularly that of flags of convenience in aviation.

Norwegian Air International was vigorously opposed by incumbent air carriers on both sides of the Atlantic, including. Secretary Foxx’s order cites opposition from inter alia, Delta Air Lines, United Airlines, American Airlines, Lufthansa, Air France and KLM Royal Dutch Airlines. It was also opposed by a number of pilot unions, flight attendant unions and the International Association of Machinists and Aerospace Workers. The proposal did garner support from airports expecting to be served by NAI, the tourism sector and freighter operators Atlas Air and Federal Express.

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At first glance, it might seem surprising to observe such strong opposition to new entry in the largest long-haul market in the world and one that is fully liberalised. The crux of the issue though is a fear that

NAI’s proposal sets a precedent for a regime that would mimic flags of convenience in the maritime industry163.

The concept of flags of convenience dates back to antiquity when ships would use various flags to disguise their nationality and avoid potential conflicts. In its modern day form, the concept is a result of commercial developments reflected in the 1958 amendments to the Geneva Convention of the High

Seas whose Article 5(1) states that “each state shall fix the conditions for the grant of its nationality to ships, for the registration of ships in its territory, and for the right to fly its flag. Ships have the nationality of the state whose flag they are entitled to fly. There must exist a genuine link between the state and the ship; in particular, the state must effectively exercise its jurisdiction and control in administrative, technical and social matters over ships flying its flag.” This gives states the exclusive right to decide under what conditions to register a ship but does not define at all what constitutes a link, except for the administrative, technical and social oversight (D’Andrea, 2006).

In the case of the maritime industry, Mendelsohn (2014) explains that in the late 1950s, ship-owners were driven to flags of convenience, mainly from Panama, Honduras and Liberia for three main reasons: taxation, the compliance costs to higher safety regulations and labour. He goes on to draw parallels between the maritime situation and the Norwegian Air International proposal, using the maritime experience and arguing that how it all but virtually eliminated the US Merchant Marine fleet from international operations.

It is important to keep in mind that there are some significant differences between the two cases. On the taxation issue, it is certainly plausible that Norwegian Air International’s decision to base itself in Ireland was at least partially, if not wholly, influenced by that country’s lower corporate tax rates. According to OECD (2014), Ireland’s combined corporate tax rate of 12.5% is the lowest amongst the 34 countries that make-up the OECD. It compares quite advantageously to the United Kingdom’s 21% combined rate, Norway’s 27%, France’s 33.3% and the USA’s 40%. Thus, since the US-EU (plus Iceland and Norway) ASA of 21 June 2011 does not discriminate amongst the 30 European signatory countries, Ireland’s competitive fiscal framework can act as an incentive for European carriers to establish themselves there, benefiting from both the same traffic rights and a lower tax regime.

In addition to providing fiscal advantages, establishing NAI in Ireland enabled the Norwegian Air Shuttle group to establish an EU-based carrier and take advantage of EU (and also Irish) traffic rights. While this is a moot point for service between the EU and the United States, as the open skies agreement includes Norway since 2011, it is relevant for other countries that have a comprehensive ASA with the EU, such as with Canada, Israel or Morocco. These agreements are limited to actual EU members only.

In the maritime sector, safety requirements and the resulting costs of complying with them were certainly an important driver in the trend to adopt flags of convenience. Individual countries set the safety standards for ships flying their flag and the higher the safety standard, the higher the operating costs. Thus, ship owners were attracted to jurisdictions with lower safety standards. However, beginning in 1982 with the Paris Memorandum of Understanding, port state control enabled states to inspect ships and crews docked in their ports, independently of the flag they fly, and order corrective measures if needed. In case of major issues, inspectors may also detain the ships until proper corrective actions are taken.

In aviation, global safety standards, established by ICAO and augmented and enforced by national civil aviation authorities, ensure that this is not an issue. The success of this regime is evident in the very high safety record that international aviation enjoys and its continuing efforts to make the air transportation

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system even safer. Therefore, in that respect, there should not be a noticeable difference in safety standards whether the company is based in Ireland or Norway.

The third factor, labour, is probably the most contentious. Continuing on the maritime parallel, ships usually employ multinational crews, especially for international transport164. The working conditions on-board ships, including pay scales, hours worked and benefits, are determined by labour laws of the country whose flag the ship flies. These labour laws reflect the working conditions in the country where the ship is registered and, in the case of flags of convenience, are generally less favourable to labour than labour laws in developed countries.

According to an earlier interpretation of the Norwegian Immigration Act, crews flying for a foreign registered aircraft on international routes were exempt from the requirement of being Norwegian citizens or holding Norwegian residency and work permits. Norway does allow Norwegian carriers to operate foreign registered aircraft for 12 months or less, thus enabling the exemption to be applied. Norwegian Air International operated Irish registered aircraft for 12 months with foreign crew. Norwegian Air International hired Thai cabin crew through a placement agency in Singapore. The crew, based in Bangkok, where Norwegian also operates flights, and would thus be subject to Thai labour laws and pay scales, as opposed to significantly more expensive Norwegian ones, since the location where crews are based determines the applicable labour laws. The Norwegian flight attendant union reports pay scales as low as USD 520 per month, significantly less than wages paid to Norwegian flight attendants, but 20% more than the Thai average wage in 2013. However, the European Commission provided information to USDOT showing that the salaries of the Thailand-based flight cabin crew were substantially greater than the salaries of Norwegian cabin crew based in Spain and only marginally below the salaries paid to Norwegian cabin crew based in the United States.

Once the 12 month period was up, it then continued to use those crews on Norwegian registered aircraft and challenged that interpretation, claiming it was contrary to Norway's international obligations, notably the Schengen rules that Norway has adopted. In the fall of 2015 the Norwegian Department of Justice agreed with NAI, and the Norwegian government proposed to amend the wording of the immigration regulation to reflect this legal position.

Ireland, for its part, does not have such a provision for crew flying on Irish-registered aircraft, which was another key factor in choosing Ireland as the jurisdiction in which to register its aircraft. In this respect, Ireland is not alone in the EU in accepting non-citizens to crew aircraft registered in their country, but combining the labour and taxation factors certainly gives Ireland a cost advantage compared to Norway or other European countries.

The Norwegian case raises two significant policy issues: first, to what extent will aviation parallel the maritime sector when it comes to flags of convenience and, second, is this a case of social dumping and, if so, should anything be done?

The first question is treated extensively by Mendelsohn (2014) who thinks the Norwegian Air International model will set a precedent leading aviation to a regime of flags of convenience. His arguments were picked up and supported by labour unions, including the Air Line Pilots Association (2013), in recommending USDOT to reject Norwegian’s request. However, it does not seem very likely that a maritime-like outcome would be feasible. As previously discussed, the global application of safety standards negates much of the cost savings that marine carriers witnessed by using flags of countries with less demanding safety regimes. In addition, as airline heavy maintenance is increasingly outsourced to lower wage countries while maintaining the highest safety standards, any savings derived from lower maintenance costs without compromising safety can already be obtained.

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It should also be noted that the ASA framework which stems from Article 6 of the Chicago Convention does not have an equivalent in international marine transportation. In aviation parlance, the maritime world generally operates under an unlimited seventh freedom regime, something that is relatively rare in aviation, especially in the passenger market.

The Norwegian case has a unique feature in that it is taking advantage of an ASA where one party is in fact a community of interest with no limitations on rights of establishment. This is a rather unique situation which in aviation is limited mainly to the EU. Outside of the EU, there are very limited opportunities for a carrier from a high-cost country to establish a subsidiary in a low-cost country and use that subsidiary to operate flights between that country and a third country, basically amounting to a seventh freedom flight.

The situation in the European Union, Norway and Iceland (EU+2) is rather unique in that a carrier can be owned and controlled by nationals of one EU+2 country, registered in a second and operate under the EU-US open skies agreement from a third. This is not generally the case and explains why carriers such as Virgin Blue, Virgin America or Air Asia Thai have all to partner with majority local interests in order to be registered in Australia, the United States or Thailand respectively.

On the second point, that of social dumping, the issue is somewhat more complex. The Norwegian case is clearly an example of a company looking abroad to seek lower labour costs. The current shortage in qualified, European-licensed widebody pilots limits the ability of Norwegian (or any other airline) to cut the cost of pilots. On the other hand, establishing multiple cabin crew bases in countries outside Norway allows the Norwegian group to minimise hotel and per diem expenses as well as the costs of using seats that could otherwise be sold in order to ferry crew between a home base (e.g., Oslo) and cities where journeys commence (e.g., London, Barcelona, or New York). This is not objectionable. More problematic, however, is where salary levels in the home country (e.g., Norway) are significantly higher than what the airline needs to pay at foreign bases to recruit and retain crew. This can be quite problematic as it forces countries to either engage in a race to the bottom in terms of labour cost or accept that is unable to compete on a cost basis and allocate its resources where it is better suited. This is a classic Ricardian outcome. However, across all sectors of the economy, companies seek ways to reduce their labour costs, including through the use of foreign workers, either in the form of outsourcing or temporary migrant workers. This is a reflection of a globalised marketplace and, when labour laws are obeyed, is generally positive for the economy as it enables higher wage labour to focus on high value add activities while providing lower wage labour with opportunities that would not otherwise exist.

The Norwegian Air International case has stirred a lot of debate but many fears seem overstated. As explained above, it is highly unlikely that the current international aviation regime will ever give rise to the flag of convenience concept that prevails in international maritime transport and the cost savings garnered by Norwegian Air do not seem substantial enough to entice other carriers to follow suit. It does however highlight the fact that when various states unite as a block, such as the EU, but do not achieve full and complete regulatory convergence, such as the labour and fiscal differences between Norway and Ireland, it will create opportunities for air carriers to seek to take advantage of the most favourable conditions offered to it. However, the stringent aviation safety standards prevalent across the EU ensure that the situation prevalent in international maritime transport could not be replicated in aviation.

Subsidies

Aviation subsidies are almost as old as aviation itself. In international markets, the history of public subsidies in aviation can be traced back to as early as 1920 as Western European governments provided subsidies to their national carriers to operate cross-channel air services. In the subsequent 95 years it