RESTRICTEDWORLD TRADE
ORGANIZATIONS/C/W/165
15 September 2000
(00-3678)
Council for Trade in Services Original:  English
COMMUNICATION FROM NEW ZEALAND
Developments in the Air Transport Services Sector
Introduction
1. Paragraph 5 of the GATS Annex on Air Transport Services provides that the Council for
Trade in Services shall review periodically, and at  least every five years, developments in the air
transport sector and the operation of the Annex with a view to considering the possible further
application of the GATS to air transport.  Members will meet on 28-29 September for the first of two
review sessions this year, which will focus on commercial and regulatory developments that haveaffected trade in air transport services since the entry into force of the WTO Agreement.
2. This paper is intended to facilitate discussion at the first review session.  Accordingly, it
focuses on developments in commercial air transport services as well as some of the services covered
by items (c) and (g) to (l) in the Secretariat’s informal list of issues - Job no. 2451 of 19 April.  All ofthese services are part of a growing sector which underpins, and is largely responsible for, the ever
increasing flow of global trade in goods and servi ces, including the rapidly growing tourism sector.
This, and an increasing recognition of the benefits of an efficient, reliable, and cost-competitive air
services sector, have placed new challenges on regulators.  An increasing number of ‘open skies’ air
services agreements has been a response.  Potentially even more significant for the global economy,
however, is the desire to move beyond the traditional bilateral system through the negotiation of
regional and multilateral air services agreements.
Commercial Developments
3. The significance of the transport sector, as a whole, to the growth of the global economy can
hardly be understated and is well documented.  Air transport services in particular are the conduit fortrade in high value goods, just-in time items, and perishables, and are the principal means of access
for the ever expanding number of tourists.
4. Perhaps the single most notable industry development of recent years has been the rapid
formation of global airline alliances.  This deve lopment should be viewed as a commercial response
to both the increasing privatisation of international airlines and a bilateral system of air services
agreements which, through the application of national ownership criteria, restricts broader integration.
The airline alliance system has effected a rapid growth in the number of code-share services
1.  The
                                                     
1
 A “code-share service" is a flight which carries the designator code of more than one airline, allowing each
airline to sell tickets on that flight.  In computer reservation systems, the flight would be separately listed under
each airline whose designator code appears on the flight.S/C/W/165
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search by airlines for partners to service markets where own-aircraft services2 with no code-sharing
support are not regarded as feasible is heavily shaped by the traditional system of bilateral regulation.
5. Services which exist to support air transport, such as air traffic control services and airport
management services, have continued to devolve from the control of governments. Similarly, groundhandling and aircraft repair and maintenance services have been separated from the core operation of
airlines.  Greater exposure to competition will better enable infrastructural services to cope with
projected growth in the air transport sector.
Regulatory Developments
Computer reservation systems6. Some countries require detailed provisions relating to computer reservation systems to be
incorporated as an article in air services agreements.  New Zealand does not favour such industry
specific regulation.  If there is a dispute over the operation of computer reservation systems in New
Zealand, generic competition law, the Commerce Act 1986 , applies.
Ground Handling Services7. Ground handling covers a range of services provided to airlines including refuelling, baggage
handling, catering, cleaning, waste disposal and water replenishment.  In seeking to differentiatethemselves from their competitors, airlines frequently highlight their unique aspects of service, style
and comfort.  Where an airline has no choice over its ground handling services provider, the quality of
product it wishes to offer passengers cannot be assured.  The supply of ground handling services to an
airline is little different from the supply of services to hotels and restaurants.  As Secretariat paper
S/C/W/163 notes, in-flight catering appears to be regulated in the same manner as all food serviceproviders.
8. There are no barriers to the provision of ground handling services in New Zealand.  New
Zealand’s model bilateral air services agreement allows designated airlines the right to perform their
own ground-handling in the territory of the other part y ("self-handling") or, at their option, to select
among competing agents for such services.  Designated  airlines also have the right, in the territory of
the other party, to offer their services as ground-handling agents to any other airline.  Where airportsafety considerations preclude self-handling, ground handling services are available on an equal basis
to all airlines; charges must be based on the costs of services provided; and such services must be
comparable to the kind and quality of services which would be available if self-handling were
possible.
Airport Management
9. As an essential element of a country’s infrastructure, airports require effective management,
and access to capital necessary to meet development and maintenance needs.  Countries, including
New Zealand, have responded to these requirements by  placing airports on a firm commercial footing
or opting to privatise. Airports - whether government controlled or privatised - are businesses, and
there are a number of companies specialising in airport management, e.g. British Airports Authority
Plc.  The spread of management expertise and access to wider sources of capital are benefits for the
economy as a whole.
                                                     
2
 An "own-aircraft service" is a flight for which the operator of the aircraft is also the provider of the service, but
not necessarily the only provider (for code-shared flights there is more than one provider of the service).S/C/W/165
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10. In response to projected growth in internationa l air transport (Boeing, for example, estimates
that the world airline fleet will increase from 13,670 aircraft in 1999 to 31,755 aircraft in 2019 3), new
airports are under construction or on the drawing boa rd, and existing airports are planning to expand
capacity.
Air Traffic Control Services
11. Essential to the operation of air services is the provision of adequate and efficient air traffic
control services.  Flight delays, the lack of a common air traffic control system within regions, and
system breakdowns are problems which have been well documented, potentially compromising
safety, adding to airline operating costs, and delaying passengers and cargo.
12. New Zealand’s air traffic control provider is the Airways Corporation of New Zealand
Limited, a state owned enterprise operated on a strictly commercial basis, paying tax and returning
dividends to the New Zealand Government.  The Corporation is looking to expand its business by
seeking opportunities internationally, including meeting the demands of airlines for consistent,
“seamless” levels of air navigation services across national boundaries.  In New Zealand, the AirwaysCorporation has a statutory monopoly over area-control services, approach control services and flight
information services.  Aerodrome control services and aerodrome flight information services fall
outside the scope of that monopoly.
13. Technology has made the provision of air traffic control services more contestable.
Consideration by South Pacific Forum members of the possibility of unified upper airspace
management in the region is evidence of this.
General Aviation
14. The aviation sector has extended its reach beyond traditional air transport services to other
services sectors.  The functions of general aviation are many and varied including aerial
photography/mapping, agricultural aviation, flight training , scenic flights, aircraft taxi services, traffic
surveillance, fire fighting and emergency services.  Significantly, these are services not traditionally
covered by bilateral air services agreements.  There are no economic barriers to a foreign enterprise
establishing general aviation operations in New Zealand.
Commercial Air Transport Services
15. A recognition of the impacts of the sector on traders and consumers has affected the
regulatory approach to a number of the elements contained in bilateral air services agreements
(ASAs).  At the same time, recent trends for the deregulation of airline ownership, for example,demonstrate a willingness to facilitate industry developments.
A more flexible airline ownership regime
16. Aviation is a highly capital intensive business.  Lack of adequate capital has been a cause of
failure for many airlines and the reason behind significant injections of public monies into others.
Opening the door to sources of foreign capital may ha ve averted some of these situations.  Since 1997,
New Zealand has, with 17 bilateral partners, successfully dispensed with the traditional criterion that
operating authorisation may be revoked where “substantial ownership” of an airline does not vest in
nationals of the designating party.  New Zealand’s preference has been for a “place of incorporation
and principal place of business” test, while retaining the criterion of “effective control”.  This
                                                     
3Boeing, Current Market Outlook , 2000.S/C/W/165
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formulation, by providing greater flexibility for airlines to access foreign capital markets, recognises
that the extent to which airlines are currently constrained in their access to global capital markets
(especially relative to other services sectors) affects their competitiveness and ability to expand.
17. Current international constraints are necessarily reflected in New Zealand policy for the
ownership of a New Zealand international airline, which requires substantial ownership and effective
control by New Zealand nationals.  Within this setting, 25% of a New Zealand international airline
may be owned by a single foreign carrier and 35% may be owned by foreign carriers in aggregate,
with a maximum overall foreign ownership level of 49%.
18. Acceptance of airlines jointly owned by a regional grouping of developing countries could be
particularly significant for regions of the world characterised by small capital markets. AnInternational Civil Aviation Organization (ICAO)  Assembly resolution that New Zealand co-
sponsored urges states to accept the designation of an airline substantially owned and effectively
controlled by nationals of one or more developing states belonging to the same regional economic
grouping for the purposes of exercising the air traffic rights of any state within the grouping.
 4
Multiple designation of airlines
19. Competition in air services is an essential element in spurring economy wide growth.
Necessary to such competition is the ability for new ai rlines to be able to operate alongside incumbent
carriers, thereby offering greater choice to consumers on a given route.  Some countries follow single
or dual designation policy (the latter may also specify that there be no more than one passenger and
one cargo carrier).  An article in Airline Business  of July 2000 compared two periods, 1966-1975 and
1986-1995, and found a clear trend away from single designation air services agreements towards
those providing for multiple or dual designation5.  Of New Zealand’s 45 ASAs, only five do not
provide for multiple designation.
Code-sharing, including third-country code-sharing20. Code-sharing is not only a widely used marketing tool, it has also enabled airlines to develop
new routes and sustain services on low traffic volu me routes.  Code-share services have directly
benefited both New Zealand and its international airline.
• Tourism is New Zealand’s largest export earner and has the potential to grow further, with
attendant employment benefits.  The negotiation of code-sharing arrangements by New Zealand
has enabled Air New Zealand to enter markets where considerable tourism potential exists, but
where own-aircraft services are not commercially justified.  A country’s airline also has an
incentive to promote that country within foreign markets.  Air New Zealand’s recently
introduced code-share services to Austria, Belgium, Ireland, Mexico and the Netherlands fall
within this category.
• Despite the fact that the United Kingdom-New Zealand market is one of New Zealand’s largest
passenger markets, British Airways, in a rationalisation of its route network, ceased own aircraftservices to New Zealand.  The airline now code-shares with Qantas, which means New Zealand
remains a destination in British Airways’ system and the airline has an incentive to continue
promoting New Zealand within the United Kingdom.  Code-sharing allows airlines to operate to
their comparative advantage and to the benefit of all.
                                                     
4
 ICAO resolution A24-12.
5
 “Freer skies?” by Earl Scott.S/C/W/165
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21. Third-country code-sharing recognises the reality that code-sharing between third and fourth
freedom carriers may not be practical.  A carrier of  one side may not want to operate on the route,
leaving the carrier of the other side, if it wishes to code-share rather than use its own aircraft, to find a
partner from a third-country that has the necessary rights.  Alternatively, the third and fourth freedom
carriers may be in rival alliances that preclude their co-operating.
22. Alliance arrangements that involve code-sharing are, in an increasing number of countries,
subject to the scrutiny of government competition authorities.  In seeking approval, a difficulty
confronting airlines can be incompatible approaches taken by the different competition authorities
involved.
Tariffs
23. The integration of the air transport services sector with the wider economy make airlines
highly susceptible to fluctuations in overall economic conditions.  The ability to respond rapidly to
changing demand and input costs can be essential to an airline’s financial well-being.  Governments
can assist by having no filing requirements.  The provision which deals with tariffs in New Zealand’s
model ASA expressly provides that prices for international air transport operated shall not be required
to be filed with the aeronautical authorities.  Th is approach has the twin benefits of reducing the
regulatory burden on airlines, and relieving government of having to devote considerable time and
resources to the administration of tariffs.
Non-scheduled (charter) services
24. In allowing more people to fly and at a lower cost, non- scheduled (charter) services have
been one of the major contributors to growth in world tourism.  Charter services have also assisted inthe development of particular regions.  The provision of capacity during peak seasons, and of capacity
over and above limits allowed under restricted air services agreements, are other advantages of non-
scheduled services.  The International Air Transport Association (IATA) reports that passenger
charter services grew by 10% in 1999, following a 1% fall in 1998.
6  In some instances, charter
carriers have evolved into low cost scheduled carriers.  Some major airlines have charter subsidiariesto cater for this niche market.
25. Rather than see non-scheduled carriers circumventing restrictions in air services agreements
applying to the operation of scheduled carriers, New Zealand prefers to remove the restrictions.
Nevertheless, New Zealand is willing to approve non-scheduled services for periods of up to six
months.
Cargo Services
26. Some countries, which are not yet ready to remove quantitative restrictions on passenger
services, have opted to negotiate cargo only “open skies” agreements.  Others, such as New Zealand
have sought greater access for air cargo services (such as seventh freedom rights) where passengerservices are constrained.  Dedicated freight services have quite different dynamics from passenger
services.  There may not be sufficient freight for an  aircraft to operate from A to B return.  To gain
sufficient freight, a circular routing involving a number of countries may be the only viable option.
                                                     
6
 Aviation Daily  newsletter, 31 August 2000.S/C/W/165
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Routes, capacity and traffic rights - “open skies” air services agreements
27. “Open skies” air services agreements are becoming increasingly common as countries seek to
maximise the downstream economic benefits air services can provide.
Open capacity, open routes, and a full exchange of fifth freedom rights mark the generally accepted
threshold for ‘open skies’ agreements.  Since 1997 , New Zealand has concluded ten “open skies”
agreements and has more in prospect.  In the three years following negotiation of an “open skies”
agreement with Singapore, in 1997, visitor arrivals to New Zealand from Singapore have increased at
an average rate of 12.8% per annum, compared with 2.1% average annual growth for the three years
prior.  The conclusion of an “open skies” agre ement with the United States in the same year
contributed to 10.4% annual growth in US visitor arrivals over the following three years, compared
with an average 1.6% annual decline for the previous three years.
28. Within an “open skies” agreement, New Zealand has been prepared to exchange seventh and
eighth freedom rights on a reciprocal basis.7  The latter has been agreed with Australia, Brunei
Darussalam and Ireland.  Open route and capacity arrangements, together with the availability of
traffic rights 1 through 8, enable airlines to provide the services traders and travellers require.  Among
the reasons New Zealand does not support restrictions on traffic rights are:
• Traffic rights restrictions prevent airlines from fully meeting their customers’ requirements.
Dual or multi destination tourism is an example.  A significant number of visitors to New
Zealand from North America, Asia and Europe, for example, combine New Zealand and
Australia in the same journey.  Traffic rights arrangements agreed between New Zealand and
Australia allow their airlines to compete in offering travellers this itinerary, making respectivetourism markets more attractive.
• Physical distance, and the seasonal nature of  some routes, can make fifth freedom rights
essential.  Services between New Zealand and Europe cannot be operated non-stop for example.
If passengers wish to disembark and contribute to the tourism industry of the intermediate stop,
the airline should be able to compensate by uplifting fifth freedom traffic to fill the vacated seats.
• Developmental routes may not be viable if solely reliant on third/fourth freedom traffic.
• An agreement that only provides for third/fourth freedom traffic, particularly on an unrestricted
basis, would be unbalanced in terms of opportunities if one partner enjoyed greater access tosixth freedom traffic.
Domestic Air Services
29. New Zealand also permits ninth freedom cabotage, and regards this as a matter of commercial
presence service supply (mode 3) rather than one involving traffic rights.  The current review should
not overlook the opportunity to consider domestic air services.  Access to capital and the opportunityto provide competitive air services are just as much issues in the domestic aviation market as they are
in the international market.
30. New Zealand’s decision to permit 100% ownership of domestic airlines enabled New
Zealand’s second domestic airline, Ansett New Zealand, to continue operating, thereby maintaining a
level of choice and degree of service to which New Zealanders have become accustomed.  (Earlier
                                                     
7
 Definitions for each of the eight freedoms are contained in Secretariat paper S/C/W/59, pp 20-21.S/C/W/165
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this year, the airline was purchased by a group of New Zealand investors and now operates as Qantas
New Zealand under a franchise arrangement with the Australian carrier.)
Multilateral Initiatives
31. The OECD has initiated work on the possible liberalisation of air cargo services, one aspect
of which is the drafting of a multilateral treaty covering air cargo.  Signatories would remove
constraints on the carriage of air cargo without prejudice to the restraints they may have on passenger
services.  Successful liberalisation in this area could create a forerunner to progress in passenger
services.  Despite the benefits to trade in goods that such an initiative would bring, however, many
countries have neither dedicated cargo airlines or airlines that have dedicated cargo aircraft.
Passenger airlines, for which the carriage of bellyhold cargo is a significant aspect of their business,could consider themselves at a disadvantage to dedicated cargo airlines who were able to operate
without constraints.
32. Regional air services agreements for passenger services already exist between members of the
European Union and of the Andean Pact, as one aspect of broader political and economicarrangements.  Evidence for a desire to move beyond the traditional bilateral system can be found in
the current discussions between Brunei Darussalam, Chile, New Zealand, Singapore and the United
States on a possible multilateral “open skies” air services agreement.
33. Drawing membership from across the globe, and with a proven capacity to reach common
agreement in other sensitive services sectors, the WTO is well placed to build on these developments.
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