The Aviation Industry Lecture 2 – International Aviation L02 PDF

The Aviation Industry Lecture 2 – International Aviation David Shum Course Overview 1. Introduction 2. International Aviation 3. The Airline Business 4. The Airport 5. Aircraft Manufacturers 6. Air Freight 7. Aviation and the Environment 8. Future Issues...

The Aviation Industry Lecture 2 – International Aviation David Shum Course Overview 1. Introduction 2. International Aviation 3. The Airline Business 4. The Airport 5. Aircraft Manufacturers 6. Air Freight 7. Aviation and the Environment 8. Future Issues 2 Content The Historical Perspective From “Regulation” towards “Deregulation – Open Skies” Freedoms of the air International Organisations 3  The History Perspective 1938 - 1958 The Growth years 1958 - 1978 Maturity: Jets arrive 1918 - 1938 The Formative Period 1978 - 1991 Liberalisation 1992 Onwards Towards “Open Skies” 4 1918 – 1938: Formative Period Aviation was mainly for regular air mail routes in the US. The service was initially conducted by the Post Office Department. Established contract air-mail routes: shorter feeder routes between various cities, and linked to the transcontinental Columbia routes ➔ Air Mail Act of 1920 ➔ Contracts were given to both airlines and aircraft manufacturers 1918 – 1938 Air Mail in US 6 1918 – 1938: Formative Period (ctd) Shorter feeder - feed traffic into the main-line route Source: Wensveen, John G., Air Transportation: A Management Perspective, 6th edition, Ashgate, 2007 7 1918 – 1938: Formative Period (ctd) Air Mail Act of 1934 The US government tendered the mail to the private sector ➔ a significant impact on the industry. Bidding of 1-year contract was structured to be more competitive, and former contract holders were not allowed to bid at all. The result was a more even distribution of the government’s mail business, and lower mail rates that forced the companies, and aircraft manufacturers, to pay more attention to the development of the passenger air transport. Lead to the separation of the airlines from manufactures. 8 1918 – 1938: Formative Period (ctd) Both the Boeing 247 and the DC-1 (Donald Douglas) had made their first flights during 1933. Airlines started to make large purchase of aircrafts. The first airway traffic control centre was formed in Newark, New Jersey, on December 1, 1935. It was initially operated by airline staffs, but was then took over by the Bureau of Air Commerce (now called the Federal Aviation Administration, FAA) 9 1938 – 1958: The Growth Years The establishment of the Civil Aeronautics Act of 1938: Created the Civil Aeronautics Authority (CAA), and began to certify new classes of flight personnel, i.e. flight radio operators, navigators, and engineers, etc., and have more concern in safety. Regulated passenger, freight and mail rates, schedules, promulgated safety regulations, supervised the financial arrangements of airline companies. Technological advanced were coming so fast and started to have high-performance, longer range aircraft, i.e. DC-4. Air freight started to be a viable business and have independent lines specialising in carrying on freight. DC-4 Takeoff 10 1958 – 1978: Maturity – Jets arrive Jet era, i.e. B-707, DC-9, etc. Air traffic control became mandatory and increased demand for further improvements. The short-range B737-100 was certificated in July 1967. In 1969, Boeing achieved certification for B747-100 to bring low cost travel to the masses ➔ can carry about 380 passengers, twin-aisle, mixed-class layout and a new term to commercial aviation: “Wide-body”. Technology improvement: flight recorders, weather radar, terrain-avoidance systems, etc. More important, airlines passed from a period of high risk to a period of virtually no risk at all, due to the improvement of safety. B707 landing 11 B747 1978 – 1991: Liberalisation Before 1978, despite the industry had growth of traffic, the airlines suffered due to the regulation on: ❑ Restrictions on entry to market Traditional Air Service Agreement (ASA): Exclusive rights granted to designated airlines Nationality clause Schedule of routes Determination of passenger fares & cargo tariffs ❑ Capacity controls in air transport 12 1978 – 1991: Liberalisation (ctd) In most traditional agreements, only one airline from each country was allowed to fly direct between the two countries. Regardless of whether one airline, or more than one, was designated by each country, all had to be “substantially owned and effectively controlled”, i.e. the majority of the ownership of the airline must be owned by either the government and/or nationals of the designating country. Public also suffered due to the regulation did not increase welfare: the major reason is too less capacity caused high fares. Insufficient economic regulation distorted competition, and lead to poor performance of airlines. 13 1978 – 1991: Liberalisation (ctd) Hence, the US government set out reduce regulatory controls ➔ the Airline Deregulation Act This involved the re-negotiation of bilateral ASAs with the aims of achieving the following objectives: 1. Greater opportunities for competitive pricing. 2. Elimination of restrictions on capacity, frequency and route operating rights. 3. Elimination of unfair competitive practices faced by US airlines abroad. 4. Multiple designation of US airlines. 5. Authorisation of more US cities as international gateways. 6. More competitive air cargo services Deregulation is the process of removing government-imposed entry and price restrictions on airlines. How Deregulation Saved the US Airline Industry 16 1978 – 1991: Liberalisation (ctd) Source: Morrison (2002) 17 1978 – 1991: Liberalisation (ctd) The timeline of liberalisation: 1. The US government offered foreign countries a number of additional gateway points for their airlines: March 1978: US-the Netherlands agreement End 1978: US-Germany agreement and US-Belgium agreement 2. Between 1978 – 1980, US entered new bilateral agreements with countries including Singapore , Thailand, Korea and Philippines. 3. June 1984: New air services agreement between the UK and the Netherlands and other European Countries adopted similar bilateral ASAs soon after. 18  1978 – 1991: Liberalisation (ctd) The timeline of liberalisation: 4. The European bilateral ASAs were similar to the US agreements but they also allowed open route access, i.e. they removed any controls on the points that could be served in each country by the other country’s airlines. 5. The impacts of these new, liberal agreements was dramatic: Fares dropped significantly and air traffic growth was stimulated. 6. The most dramatic impact of European liberalisation was the emergence and growth of low cost carriers, who opened new routes and created air travel markets that had previously not existed. 19 1992 towards “Open Skies” Open Skies is an international policy concept: calls for the liberalisation of the rules and regulations of the international aviation industry – especially commercial aviation – in order to create a free-market environment for the airline industry. Open skies policy has gone hand-in-hand with airline globalisation, i.e. by allowing air carriers unlimited market access to their partners’ markets and the right to fly to all intermediate and beyond points. 20 1992 towards “Open Skies” (ctd) September 1992 – the Dutch and US government signed the first “Open Skies” agreement … then the EU-US Open Skies agreement. The key elements of this “Open Skies”: Open route access – airlines from either country can fly to any point in the other with full traffic rights. Unlimited Fifth Freedom rights. Open access for charters. Multiple designation of airlines. No frequency or capacity control. No tariff controls (except if tariffs too high or too low) Airlines free to code share or make other commercial agreements. 21 1992 towards “Open Skies” (ctd) Example: U.S. airlines benefit from Open Skies - dramatically boosted service to Heathrow after U.S.-EU Open Skies 22 Source: ACI and Boeing (2016) 1992 towards “Open Skies” (ctd) At the same time, the EU’s internal market change brought the revolution in air travel. Free and unlimited rights for airlines to operate flights between EU’s countries. The evolution of European Union has benefit to the Single European Sky development. 23 Source: European Commission 1992 towards “Open Skies” (ctd) Benefits in Europe – Single European Sky (European Common Aviation Area – ECAA): More Intra-Europe traffic, free mobility Competition Lower fares More connections and more destinations 24 Source: European Commission  Future of the skies After the deregulation and liberalisation has taken place in the US and Europe (EU-US Open Skies Agreement and intra-Europe Single Sky). What will be the next of the open skies? The ASEAN Open Sky Policy / ASEAN Single Aviation Market Full liberalisation in Southeast Asian Countries any airlines designated by an ASEAN Member State is allowed to operate both passenger and cargo scheduled services between its home country and a point with international airport in another Member State, and then to a point with international airport of a third Member State, without limitations on capacity and schedule. (ASEAN, 2015) 26 Content The historical perspective From “Regulation” towards “Deregulation – Open Skies” Freedoms of the air International Organisations 27 Freedoms of the Air One of the main treaties that sets out the fundamental building blocks of air transportation regulation – the “rules of the road” – is the Chicago Convention in 1944. These “building blocks” are widely referred to as the “freedoms of the air”, and they are fundamental to the international route networks we have today. There are five basic freedoms that are, more or less, recognised by all ICAO member states (as defined in the Chicago Convention), two others widely regulated, and two more hardly to be accepted. 28 Freedoms of the Air (ctd) The freedoms of the air are a set of commercial aviation rights granting a country’s airline(s) the privilege to enter and land in another country’s airspace. In HK, air freedoms are signed by the Transport & Housing Bureau 29  Freedoms of the Air (ctd) 1st Freedom: The right to fly and carry traffic OVER the territory of another nation without landing. e.g. if CX flies from HK to Thailand over Vietnam airspace. 30  Freedoms of the Air (ctd) 2nd Freedom: The right to land in another nation for non- traffic-related purposes (technical stop), i.e. only for crew change or refuelling. e.g. A300 flies from Sydney to New York, need to refuel in Hawaiian. 31  Freedoms of the Air (ctd) 3rd Freedom: The right to drop off commercial traffic (passengers and cargo) from the home country to a foreign nation. e.g. CX653 carries PAX and CGO from HK to Bangkok. 32  Freedoms of the Air (ctd) 4th Freedom: The right to pick up commercial traffic in another nation and carry them back to home country. e.g. CX654 carries PAX and CGO from Bangkok back to HK. 33  Freedoms of the Air (ctd) 5th Freedom: “Beyond rights”; The right of a carrier from home country to land in a second country, then pick up passengers and fly on to a third country. e.g. KLM887 in COVID-19 (2020) flies from Amsterdam to Bangkok, picks up passengers, then continues to Hong Kong 34 Freedoms of the Air (ctd) In 5th freedom, country B must grant the carrier from home country the “beyond-point” rights to fly into country C. “Grantor” states (like B) have tended to view 5th freedoms as encroachments upon their “nature” third/fourth freedom rights. 35  Freedoms of the Air (ctd) 6th Freedom: The right to carry commercial traffic from a foreign state through the home country to a third state. e.g. SQ can flies passengers from Sydney (AUS) to London (UK) via its Singapore home. Widespread in Asia and Middle East: Thai Airways and Singapore Airlines carried traffic on the Kangaroo Route between Europe and Australia Japanese carriers carried traffic between Southeast Asia and the Americas Emirate carried passenger from Asia to Europe / Africa via Dubai’s home 36  Freedoms of the Air (ctd) 7th Freedom: The right to carry traffic from one nation to another nation without going through the home country. *** Rarely to be found in commercial airlines *** 37  Freedoms of the Air (ctd) - Cabotage 8th Freedom: A carrier is permitted to carry traffic between two points within the territory of a foreign nation (foreign domestic) as part of a service from the home country of the carrier. e.g. Delta Air Lines flies from LA (USA) to London (UK), then pick up passengers and drops them off in Manchester (UK). This is so called cabotage and almost no country permits it. Airline cabotage is the carriage of air traffic that originates and terminates within the boundaries of a given country by an air carrier of another country. Cabotage rights are usually reserved for national carriers only and very rarely granted to foreign airlines. 38  Freedoms of the Air (ctd) - Cabotage 9th Freedom: “Standalone" cabotage which a carrier of one country operates flights and carries traffic solely between two points in a foreign country. e.g. Ryanair flies between Berlin and Frankfurt. Or it is so called “Full-cabotage”. All European airlines are use this right to operate flights of intra-EU countries. 39 Exercises Search the flight numbers, find their routes and freedom of air: Route Freedom of Air SQ 26: , KL 888: , U2 5777: , U2 1192: , VA 218: , 41 Content The historical perspective From “Regulation” towards “Deregulation – Open Skies” Freedoms of the air International Organisations 42 International Organisations Major international organisations in air transport industry: International Civil Governmental Aviation organisations Organisation (ICAO) International organisations International Air Transport Association (IATA) Non-governmental organisations Airport International Council (ACI) 43  International Organisations - ICAO The International Civil Aviation Organisation, a UN specialised agency, is the global forum for civil aviation. ICAO has a sovereign body, the Assembly, composed of 193 countries (contracting states), and a governing body, the Council, made up of 36 contracting states. ICAO codifies the principles and techniques of international air navigation, fosters the planning, and development of international air transport to ensure safe and orderly growth. ICAO works to achieve its vision of safe, secure and sustainable development of civil aviation through cooperation amongst its member States. 44 International Organisations – ICAO (ctd) The ICAO Council adopts standards and recommended practices concerning air navigation, infrastructure, flight inspection, prevention of unlawful interference, and facilitation of border-crossing procedures for international civil aviation. In addition, the ICAO defines the protocols for air accident investigation followed by transport safety authorities in countries signatory to the Convention on International Civil Aviation, commonly known as the Chicago Convention. ICAO makes recommendations and sets practices which are (generally) followed by national civil aviation authorities. 45 International Organisations – ICAO (ctd) Six strategic objectives of the ICAO: 1. Safety (Enhancement of global civil aviation safety) 2. Security (Enhancement of global civil aviation security) 3. Environmental Protection (Minimise the adverse effect of global civil aviation on the environment) 4. Efficiency (Enhance the efficiency of aviation operations) 5. Continuity (Maintain the continuity of aviation operations) 6. Rule of Law (Strength law governing international on aviation) 46  International Organisation - IATA International Air Transport Association, IATA, is an association of international airline companies. IATA was founded in Havana, Cuba in April 1945. The modern IATA is the successor to the International Air Traffic Association founded in the Hague, the Netherlands in 1919 – the year of the world’s first international scheduled services. At it founding, IATA had 57 members from 31 nations, mostly in Europe and North America. Today, it has over 290 members (or 82% of total air traffic) from more than 120 nations in every part of the world. 47  International Organisation – IATA (ctd) IATA’s mission is “to represent, lead and serve the airline industry”: Representing: IATA seeks to improve understanding of the industry among decision makers and increase awareness of the benefits that aviation brings to national and global economies. It fights for the interests of airlines across the globe, challenging unreasonable rules and charges, holding regulators and governments to account, and striving for sensible regulation. Leading: IATA helps airlines by driving industry-wide programs that simplify processes and increase passenger convenience while reducing costs and improving efficiency. Serving: IATA ensures that people and goods can move smoothly around the global airline network, between multiple carriers and nations. 48 International Organisation – IATA (ctd) IATA primary purpose was to represent the interests of airlines and to act as a counter- weight to ICAO, which as an inter-governmental agency primarily concerned with government interests in aviation. IATA has been able to coordinate and standardise virtually every aspect of internal airline operation. 50 International Organisation - ACI Airport Council International, ACI, is an global trade representative of the world’s airports. ACI was established in 1991, and it is a community of airports. Compare with ICAO and IATA, ACI represents airports interests with Governments, airline associations, and regulators, develops standards, policies and recommended practices for airports, and provides information and training opportunities to raise standards around the world. 51 International Organisation – ACI (ctd) ACI divides into 5 regions – ACI Africa, ACI Asia-Pacific, ACI Europe, ACI Latin America-Caribbean, and ACI North America. ACI’s priorities: ACI is representing and advising its members on numerous areas of importance to the airport business. Key priority areas: 1. Safety 2. Security 3. Environment 4. Efficiency 5. Customer service 6. Economic development 52 Publication of IATA and ACI https://aci.aero/ https://www.aci-europe.org/ https://www.aci-europe.org/policy/position-papers.html 53 Publication of IATA and ACI (ctd) https://www.iata.org/publications/optin/Pages/login.aspx 54 References Doganis, Rigas, The Airline Business in the 21st Centurt, Routledge, 2001, Chapter 1 and 2. Wensveen, John G., Air Transportation: A Management Perspective, 7th edition, Ashgate, 2011, Chapter 2. European Commission (EC): https://ec.europa.eu/transport/modes/air/single_european_sky_en European Commission (EC): https://ec.europa.eu/transport/modes/air/25years-eu-aviation_en Morrison, S. Winston, C. (2001), C, Actual, Adjunct and Potential Competition, Estimating the Full Effects of South West, 239-256 Journal of Transport Economics and Policy Morrison, S. A. and C. Winston (2000), The Remaining Role for Government Policy in the Deregulated Airline Industry, in S. Peltzman and C. Winston, editors,Deregulation of Network Industries: What’s Next?,Brookings Institution, Washington DC, pp. 1-40. ACI and Boeing (2016), Airline strategies and business models 2016 Airline Planning Workshop 55