CAA Advocates Removal of Ownership and Control Rules to Benefit the Aviation Industry
Date: 26 October 2006
The CAA today published a discussion paper examining the rules governing ownership and control of airlines. In particular, it examines the impact of these on airlines, consumers and employees and considers the situation were they to be removed, especially how safety regulation might be affected. It concludes that there are likely to be substantial benefits from ownership and control liberalisation and sets out a pathway for reform, which if followed, should lead to safer, more efficient and cheaper international aviation.
The paper notes that the largest benefits will be delivered if the removal of controls on airlines is accompanied by a few, carefully constructed, safeguards. It stresses that steps need to be taken to ensure that membership of Open Aviation Areas – country groupings where controls on ownership and control restrictions have been removed and markets opened up – is available only to those countries able to prove the requisite standards of safety regulation, and a sufficiently level playing field in areas such as competition enforcement and state aid.
Considerable progress has been made in recent years in dismantling the arcane controls over market access that have characterised international aviation. Such moves, typified by ‘Open Skies’ agreements, have done much to increase competition in international aviation. They have, however, only solved part of the problem, and have served to sharpen the focus on the restrictions that remain: strict nationality-based controls on the ownership and control of airlines which mean in practice that airlines are still prevented from taking advantage of the commercial opportunities that would be available as a matter of course in other sectors of the economy.
The paper says that the aviation sector is increasingly anomalous in tying the hands of international airlines in this way. Unflattering comparisons with the level of commercial freedom enjoyed by other international sectors of the economy such as financial services and even highly sensitive sectors such as utilities, oil and defence begs the question as to why airlines should be so special when it comes to ownership and control.
The paper finds that:
For safety: Liberalisation of ownership and control, if accompanied by sensible pre-requisites, should have a positive effect on international safety standards; by offering up the prospect of greater market opportunities for airlines meeting the right standards, irrespective of the nationality of their owners, the incentives for countries’ safety authorities and their airlines to improve safety performance will be enhanced.
For airlines: Reform would facilitate cross-border investment, as global investors would gain greater access to foreign airlines. Improvements to airline efficiency in the form of lower financing costs and innovative management could be considerable. Furthermore, freer flows of capital should allow a more financially stable industry structure to emerge as structural changes, such as consolidation and the growth of airlines with a significant presence in more than one continent, are made easier.
For consumers: lower prices and greater choice should result, as greater consolidation, cheaper capital and better access to markets by efficient airline competitors should lead to more effective rivalry. Furthermore, multinational airlines may offer new routeing possibilities for business and leisure passengers currently impossible today under the existing nationality-based regulatory structure.
For employees: the experience of ownership and control liberalisation within Europe has shown that employees have nothing to fear from reform: a more flexible and responsive sector enabled by liberalisation should increase demand for the industry’s outputs, with positive effects on employment.
The paper does not attempt to tackle the much wider issue of aviation’s effect on the environment. However, the CAA is committed to the sustainable development of aviation, and is supportive of efforts to get the environmental framework right, so that aviation meets its full costs, including those related to the environment. The conclusions of this paper, if followed, would remove barriers to exit, encourage a better alignment of capacity to demand, provide easier access to capital for earlier fleet renewal, and therefore enhance the efficiency of the sector as a whole, something that may in itself bring some secondary benefits in terms of environmental impact.
The CAA’s Director of Economic Regulation, Dr Harry Bush, said: “This paper shows that aviation is far adrift from most other sectors of the global economy in retaining anachronistic controls on the nationality of airline ownership and control. Aviation must embrace reform of ownership and control rules if it is to move forward in a sustainable way. It is more than a decade since Europe liberalised ownership and control for airlines in its own backyard; it is time now to drive this change beyond the boundaries of Europe and to harness the sharper commercial disciplines and wider benefits that should result. In doing so, it is critical that safety standards are maintained, indeed enhanced. The CAA’s paper shows how this can be done.”
Alex Plant, Head of Economic Policy and International Aviation, added: “This paper dispels a number of the myths about ownership and control liberalisation, for example that it will hurt employees and damage safety, and shows that the opposite is closer to the truth. Reform can be a catalyst for even safer skies and, with the implementation of the right safeguards, it should be relatively straightforward to reap the benefits for the industry, its consumers and employees. If these steps are taken, truly international airlines should emerge that are better able to match the needs and expectations of passengers, and of the increasingly global organisations they serve.”
Notes to editors:
1. Ownership and Control Liberalisation: A Discussion Paper is available from the CAA website at www.caa.co.uk/cap769
2. The paper examines the evidence from a number of countries that have agreed Open Aviation Areas (OAAs), thereby loosening their controls on the ownership and control of airlines, including Australia and New Zealand, and those in the European Economic Area (EEA).
3. Historically, international aviation has been defined by restrictive bilateral agreements between countries that placed caps on capacity, frequency and pricing of services. Much progress has been made in recent years to remove these constraints through the implementation of ‘Open Skies’ agreements, pioneered by the US in the 1970s and 1980s. However, these agreements fall short of full liberalisation by retaining tight controls on the ownership and control of airlines and limiting the ability of airlines to offer ‘cabotage’ services (i.e. the ability for foreign owned carriers to pick up and drop off domestic passengers) – see Table 1.
4. The largest example of an OAA currently in operation is that which has existed in the European Economic Area since the market was fully liberalised between 1993 and 1997. Airlines can operate unlimited services between and within any of the member states in the OAA, and ownership and control is open to nationals of all Member States (i.e. an airline licensed in Europe must be majority owned by nationals of the European Economic area, in contrast to most countries where the airline must be majority owned by the specific licensing country). The relative freedom given to airlines and investors in Europe has been one of the main reasons for the emergence of innovative services in the region (such as no-frills carriers).
5. Moving from the old system of bilaterals and ‘Open Skies’ agreements poses some challenges to governments and regulators. However, the conclusion of the paper is that the transition can be managed with the introduction of a few carefully constructed safeguards. The CAA argues that these should ensure that the full benefits of ownership and control liberalisation are captured by the industry and its users (see Figure 1).
The paper notes that the largest benefits will be delivered if the removal of controls on airlines is accompanied by a few, carefully constructed, safeguards. It stresses that steps need to be taken to ensure that membership of Open Aviation Areas – country groupings where controls on ownership and control restrictions have been removed and markets opened up – is available only to those countries able to prove the requisite standards of safety regulation, and a sufficiently level playing field in areas such as competition enforcement and state aid.
Considerable progress has been made in recent years in dismantling the arcane controls over market access that have characterised international aviation. Such moves, typified by ‘Open Skies’ agreements, have done much to increase competition in international aviation. They have, however, only solved part of the problem, and have served to sharpen the focus on the restrictions that remain: strict nationality-based controls on the ownership and control of airlines which mean in practice that airlines are still prevented from taking advantage of the commercial opportunities that would be available as a matter of course in other sectors of the economy.
The paper says that the aviation sector is increasingly anomalous in tying the hands of international airlines in this way. Unflattering comparisons with the level of commercial freedom enjoyed by other international sectors of the economy such as financial services and even highly sensitive sectors such as utilities, oil and defence begs the question as to why airlines should be so special when it comes to ownership and control.
The paper finds that:
For safety: Liberalisation of ownership and control, if accompanied by sensible pre-requisites, should have a positive effect on international safety standards; by offering up the prospect of greater market opportunities for airlines meeting the right standards, irrespective of the nationality of their owners, the incentives for countries’ safety authorities and their airlines to improve safety performance will be enhanced.
For airlines: Reform would facilitate cross-border investment, as global investors would gain greater access to foreign airlines. Improvements to airline efficiency in the form of lower financing costs and innovative management could be considerable. Furthermore, freer flows of capital should allow a more financially stable industry structure to emerge as structural changes, such as consolidation and the growth of airlines with a significant presence in more than one continent, are made easier.
For consumers: lower prices and greater choice should result, as greater consolidation, cheaper capital and better access to markets by efficient airline competitors should lead to more effective rivalry. Furthermore, multinational airlines may offer new routeing possibilities for business and leisure passengers currently impossible today under the existing nationality-based regulatory structure.
For employees: the experience of ownership and control liberalisation within Europe has shown that employees have nothing to fear from reform: a more flexible and responsive sector enabled by liberalisation should increase demand for the industry’s outputs, with positive effects on employment.
The paper does not attempt to tackle the much wider issue of aviation’s effect on the environment. However, the CAA is committed to the sustainable development of aviation, and is supportive of efforts to get the environmental framework right, so that aviation meets its full costs, including those related to the environment. The conclusions of this paper, if followed, would remove barriers to exit, encourage a better alignment of capacity to demand, provide easier access to capital for earlier fleet renewal, and therefore enhance the efficiency of the sector as a whole, something that may in itself bring some secondary benefits in terms of environmental impact.
The CAA’s Director of Economic Regulation, Dr Harry Bush, said: “This paper shows that aviation is far adrift from most other sectors of the global economy in retaining anachronistic controls on the nationality of airline ownership and control. Aviation must embrace reform of ownership and control rules if it is to move forward in a sustainable way. It is more than a decade since Europe liberalised ownership and control for airlines in its own backyard; it is time now to drive this change beyond the boundaries of Europe and to harness the sharper commercial disciplines and wider benefits that should result. In doing so, it is critical that safety standards are maintained, indeed enhanced. The CAA’s paper shows how this can be done.”
Alex Plant, Head of Economic Policy and International Aviation, added: “This paper dispels a number of the myths about ownership and control liberalisation, for example that it will hurt employees and damage safety, and shows that the opposite is closer to the truth. Reform can be a catalyst for even safer skies and, with the implementation of the right safeguards, it should be relatively straightforward to reap the benefits for the industry, its consumers and employees. If these steps are taken, truly international airlines should emerge that are better able to match the needs and expectations of passengers, and of the increasingly global organisations they serve.”
Notes to editors:
1. Ownership and Control Liberalisation: A Discussion Paper is available from the CAA website at www.caa.co.uk/cap769
2. The paper examines the evidence from a number of countries that have agreed Open Aviation Areas (OAAs), thereby loosening their controls on the ownership and control of airlines, including Australia and New Zealand, and those in the European Economic Area (EEA).
3. Historically, international aviation has been defined by restrictive bilateral agreements between countries that placed caps on capacity, frequency and pricing of services. Much progress has been made in recent years to remove these constraints through the implementation of ‘Open Skies’ agreements, pioneered by the US in the 1970s and 1980s. However, these agreements fall short of full liberalisation by retaining tight controls on the ownership and control of airlines and limiting the ability of airlines to offer ‘cabotage’ services (i.e. the ability for foreign owned carriers to pick up and drop off domestic passengers) – see Table 1.
4. The largest example of an OAA currently in operation is that which has existed in the European Economic Area since the market was fully liberalised between 1993 and 1997. Airlines can operate unlimited services between and within any of the member states in the OAA, and ownership and control is open to nationals of all Member States (i.e. an airline licensed in Europe must be majority owned by nationals of the European Economic area, in contrast to most countries where the airline must be majority owned by the specific licensing country). The relative freedom given to airlines and investors in Europe has been one of the main reasons for the emergence of innovative services in the region (such as no-frills carriers).
5. Moving from the old system of bilaterals and ‘Open Skies’ agreements poses some challenges to governments and regulators. However, the conclusion of the paper is that the transition can be managed with the introduction of a few carefully constructed safeguards. The CAA argues that these should ensure that the full benefits of ownership and control liberalisation are captured by the industry and its users (see Figure 1).
