RESTRICTEDWORLD TRADE
ORGANIZATIONS/C/M/49
1 December 2000
(00-5224)
Council for Trade in Services
REPORT OF THE FIRST SESSION OF THE REVIEW MANDATED
UNDER PARAGRAPH 5 OF THE AIR TRANSPORT ANNEX
HELD ON 28-29 SEPTEMBER 2000
Note by the Secretariat
1. The Council for Trade in Services held a meeting on 28 and 29 September 2000 devoted to
the review of air transport. The agenda  for the meeting is contained in document WTO/AIR/1387.
2. The Chairman proposed that the Council adopt the agenda as circulated.
3. The Council so agreed.
4. The Chairman opened the floor and recalled the terms of the mandate of the Council:  "to
review the developments in the air transport sector and the operation of the Annex with a view to
considering the possible further application of the Ag reement to the sector".  He recalled that the
actual scope of the Annex was defined by paragraph 2 of the Annex which excluded traffic rights and
services directly related to traffic rights and paragraph 4 which by exception to this exclusion
extended the scope of the General Agreement on Trade in Services to three subsectors:  aircraft repair
and maintenance services;  the selling and marketing of air transport services and computer
reservation services (CRS).
5. The Chairman noted that the Annex did not define the notion of "services related to traffic
rights" and the fact that some Members had take n commitments extending beyond the three explicitly
covered subsectors.  He noted also that there were a number of services ancillary to air transport about
which it might be asked if they were in fact directly related to the exercise of traffic rights and since
they were not already covered by the GATS.  He suggested therefore that one of the tasks of thereview should be to clarify the actual scope of the Annex before addressing the question of
maintaining or not the actual exclusion of traffic rights and of the services related to them.
I. EXAMINATION OF SUBMISSIONS BY MEMBERS
6. The Chairman invited the delegations that had produced submissions to introduce their
contributions.
7. The delegation of Poland stated that the air transport sector had undergone important changes.
The Aviation International Organizations especially ICAO and the European Conference of Civil
Aviation had actively responded to this rapidly changing civil aviation world:  they have undertaken,since the World Wide Air Transport Conference in 1994, many initiatives to assist the Member States
to move towards liberalization.  However, one had to  take into consideration the fact that the Chicago
bilateral regulatory system, based on the reciprocity clause, still existed.  Poland supported the work
on the improvement of GATS Rules concerning transport services in order to clarify their role in the
process of liberalization of the air transport sector.  The informal paper prepared by Poland listedbasic general questions which should be answered during the review.  These questions could also beS/C/M/49
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used as a framework of analysis during the aviation expert meetings.  Without an answer to these
questions it will be very difficult to expand the application of GATS Rules to the air transport sector.
8. The representative of New Zealand presented its paper on developments in the air transport
services sector (S/C/W/165).  Air transport services  are part of a growing sector which was largely
responsible for the ever increasing flow of global goods and services, including the rapidly growingtourism sector.  This and an increasing recognition of the benefits of an efficient, reliable and cost-
competitive air services sector had placed new charges on regulators.  An increasing number of "open
skies" air services agreements have been a response.  Even more significant however was the desire to
move beyond the traditional bilateral system through the negotiation of regional and multilateral air
services agreements.  For New Zealand, the discussions on the developments in the air transport
sector had to be considered essentially as the educational phase of the review.  This phase should
enable Members to better approach the second aspect of this review, namely the evaluation of theoperation of the Annex itself and the consideration of the possible further a pplication of the GATS in
this sector.
9. The significance of the transport sector as a whole to the growth of a global economy could
not be understated.  Air transport services in particular were the conduit for trade in high value goods,
"just in time" items and perishables, and the principle means of access for the ever expanding numberof tourists.  The most notable commercial development in recent years has been the rapid formation of
airline alliances.  This development should be viewed as a commercial response to both the increasing
privatization of international airlines and a bilateral system of air services agreements, which through
the application of national ownership criteria restricts border integration.  The airlines alliance system
has led also to a rapid growth in the number of code share services.  Services which exist to supportair transport, such as air traffic control services and airport management services have continued to
devolve from the control of governments, similarly ground handling and aircraft repair and
maintenance services have been separated from the core operation of airlines.  In New Zealand's view
greater exposure to competition will better enable infrastructural services to cope with projected
growth in the air transport sector.
10. More specifically, as far as Computer Reservation Systems were concerned, New Zealand did
not favour regulation through bilateral agreements but through competition law.  On  Ground handling
services, he underlined that where an airline had no choice over its ground handling service provider,
the quality of the product it wished to offer passengers could not be assured.  There were no barriers
to the provision of ground handling services in New Zealand and its model bilateral air service
agreement allowed designated airlines the right to perform their own ground handling in the territory
of the other party or, at their choosing, to select among competing agents for such services.
11. The supply of catering services to an airline was little different to that of the supply of
services to hotels and restaurants.  He noted the comment made in the Secretariat paper that in-flight
catering appeared to be regulated in the same manner as all food service providers.  As far as airport
management was concerned airports required effective management and an access to capital
necessary to meet development and maintenance needs.  Many countries including New Zealand hadresponded to these requirements by placing airports on a firm commercial footing or by opting to
privatise.  He noted the essential role of Air Traffic Control services to the operation of air services.
Flight delays, the lack of a common air traffic co ntrol system within regions and system breakdowns
potentially compromising safety, were the challenges to this sector.
12. On commercial air transport services, he noted that aviation was a highly capital intensive
business.  Lack of adequate capital had been a cause for failure for many airlines and the reason for
significant injections of public money into others.  Opening the door to sources of foreign capital may
have averted some of these situations.  Since 1997, New Zealand had  relaxed the traditional
"substantial ownership and effective control criteria" in 17 of its 45 bilaterals.   New Zealand's
preference has been for a place of incorporation and principal place of business test, whilst retainingS/C/M/49
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the criterion of an effective control.   He also noted that acceptance of airlines jointly owned by
regional groupings of developing countries could be particularly significant for regions  over the world
characterized by small capital markets, and that an International Civil Aviation Organization
Assembly Resolution that New Zealand cosponsored, urged States to accept the designation of an
airline substantially owned and effectively controlled by nationals of one or more developing statesbelonging to the same regional economic grouping for the purpose of exercising the air traffic rights
of any State within the grouping.
13. On multiple designation of airlines, he stressed that the ability for new airlines to be able to
operate along side incumbent carriers, therefore offering more choice to consumers on a given route,
was essential.  There has been a clear trend away from single designation air service agreements,
towards those providing for multiple designation or  dual designation.  Out of New Zealand's 45 air
service agreements, only 5 did not now provide for multiple designation.  On codesharing, including
third country codesharing, he noted that codesharing was not only a widely used marketing tool, but
that it has also enabled airlines to develop new routes and sustain services on low traffic volume
routes.  The negotiation of codesharing arrangem ents by New Zealand had enabled Air New Zealand
to enter markets where a considerable tourism potential exists, but where own-aircraft services are not
commercially justified.  Alliance arrangements th at involved codesharing were, in an increasing
number of countries, subject to the scrutiny of government competition authorities.  In seeking
approval, a difficulty that confronted airlines ha d been the incompatible approaches taken by the
different competition authorities involved.
14. On non-scheduled services, he noted that in allo wing more people to fly and at a lower cost,
non-scheduled services had been one of the major contributors to growth in world tourism.  Rather
than see non-scheduled carriers circumventing restrictions in air services agreements applying to the
operation of scheduled carriers, New Zealand had preferred to remove the restrictions and was willing
to approve non-scheduled services for periods of up to six months.
15. On traffic rights he noted that open capacity, open routes, and a full exchange of fifth freedom
rights marked the generally accepted threshold for "open skies" agreements.  Since 1997 , New
Zealand had concluded ten “open skies” agreements and had more in the pipeline.  Within an “open
skies” agreement, New Zealand had been prepared to exchange seventh and eighth freedom rights on
a reciprocal basis.  Among the reasons New Zealand does not support restrictions on traffic rights are
the following:
• They hampered dual or multi destination tourism;
• Developmental routes, seasonal routes, and long distance routes might not be viable if solely
reliant on third/fourth freedom traffic;
• An agreement that only provided for third/fourth freedom traffic, particularly on an unrestricted
basis, would be unbalanced in terms of opportunities if one partner enjoyed greater access to sixthfreedom traffic, for example by enjoying a favourable geographic location.
16. On domestic air services , New Zealand indicated that it also permitted ninth freedom
cabotage, and regarded 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 opportunity to provide competitive air services were
just as much an issue in the domestic aviation market as they were in the international market.  New
Zealand’s decision to permit 100% foreign ownership of domestic airlines enabled New Zealand’s
second domestic airline, Ansett New Zealand (now operating under a franchise of the name of QantasNew Zealand), to continue operating, thereby maintaining a level of choice and degree of service to
which New Zealanders have become accustomed.S/C/M/49
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17. Finally on multilateral initiatives, he noted the OECD work on the possible liberalisation of
air cargo services.  Evidence for a desire to move beyond the traditional bilateral system could also 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.  Drawing membership
from across the globe, and with a proven capacity to reach common agreement in other sensitiveservices sectors, the WTO was therefore well placed to build on these developments.
18. The representative of Chile introduced document S/C/W/166 "the evolution of air transport in
Chile, an example of openness".  He indicated that the deregulation process in Chile has been largely
due to the geographical situation of Chile as well as to the orientation of its economy towards external
trade.  This policy had generated a tremendous growth of the traffic.  According to the Chilean law on
commercial aviation, any company, foreign or national could offer air transport services, be them of
cabotage or international, without restrictions except technical and safety rules.  Nor was there anyaviation specific ownership limitation.  In terms of tariffs the Chilean aeronautical authorities could
only set tariffs when the freedom of tariffs did not exist in the territory of the bilateral partner.
19. The freedoms set by the Chilean legislation remained however, constrained by the reciprocity
principle which had effects on routes, capacities, designation and tariffs.  The main limitation,
especially for a geographically isolated country like Chile, was on fifth freedom. The constraint of thisframework had led airlines to look for concrete commercial solutions at the margins of the system, for
instance code-sharing agreements.  In Chile, these agreements were systematically authorized when
required by the Chilean company.  In addition, he noted that in Chile specialized air services, such as
inter alia fire-fighting and aerial surveying, were  not considered in any manner as the exercise of
traffic rights.  There were therefore no restrictions for foreign companies operating in Chile in thisarea except whenever a country imposed restrictions on the Chilean companies of the sector.  The
inscription of this freedom in the free trade agreements signed by Chile with Canada, Mexico and
Central America was an important step in this regard.
20. Chile considered that the actual bilateral system was progressively reaching its limits. The
lack of binding of measures, or ratchet effect, allowed open agreements to become restricted with thepassage of time.  Provisions which would allow rights to be bound could benefit companies, giving
them security to plan their operations in the long term and overcome the uncertainty generated by the
current system. Moreover, the lack of adequate dispute settlement mechanisms stood in the way of the
legal certainty required by an air services regime.  Indeed, history shows that no bilateral dispute has
ever been submitted to the dispute settlement m echanism contained in an agreement, the preference
being to exert political or economic pressure, or in many cases, simply to cancel the agreement.  It
would therefore be useful to examine how to impr ove legal safeguards, including resort to dispute
settlement systems such as that of the WTO.  It was worth noting in the Free Trade Agreements
between Chile and Central America, specific chapters on air transport were agreed that established the
principle of binding measures and making any disputes that may arise subject to the general dispute
settlement mechanism under the Free Trade Agreement.
21. The representative of Australia introduced its contribution "the mandated review of the GATS
annex on air transport services" (document S/C/W/167).  For Australia, the continuing liberalization
of international air services was inevitable.  In spite of its universality the bilateral system had
practical limitations that had become more apparent over the last 5 years.  Australia had supported
plurilateral and regional reform but was also well aware of the risks these agreements posed, as they
allow founder members to dictate the terms on which later rivals can join.  It was therefore importantfor States who may have reservations about entering plurilateral regional agreements to support a
substantive review of the air transport services annex.  Australia's proposal for the mandated review
focused on liberalising dedicated trade services, non-scheduled services, and ownership and control
provisions.  However, the most important thing is to take up the opportunities presented by the review
of the Annex, since if this chance was not taken up, by the time the mandated review would be dueS/C/M/49
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again, the decision on what will be the next step after the bilateral system would already have been
taken force.
22. The representative of the European Communities introduced document S/C/W/168 "the
review of the GATS Annex on air transport services".  He indicated that since the end of the Uruguay
round the European Communities had developed their capacity as a regional player.  It had now asingle market within the 15 Member states, agreem ents with Iceland,  Norway and Switzerland, and it
was also in the process of concluding an agreement with the 11 candidate countries for EC Accession.
This meant that in the coming years the European Common Aviation Area would comprise almost 30
countries and would be based essentially on the principles of the single market.
23. However, the European Communities recognised the limits of this regional integration and the
limits of the bilateral framework.  It was clear that air transport is an industry which is global by its
own nature.  Because of the restrictions of the bilateral system, airlines have to depend on commercialalliances, code-sharing, franchising, in order to try to meet this global demand. These alliances were
however fragile, not always economically viable and might have negative effects on competition.  So
the increasing use of these arrangements was a sign that pressure may be building form the industry
and from consumers to look more positively at multilateral liberalization of the sort already
experienced in telecommunications or other sectors.  Air transport was strongly integrated with manyactivities which were covered by multilateral disciplines.  This was obviously the case for all
activities related to the transportation of goods and passengers such as distribution, tourism, postal
and courier services.  At the same time, air transport itself depended on an efficient service
infrastructure, for instance, telecommunications, el ectronic commerce, or financial services.  The
review was therefore an opportunity to address the tension between an increasingly global demandand supply and the limitations of the current regulatory framework.
24. An important objective for this review would be to reach a better if not common
understanding of which services were related to the exercise of traffic rights and those which were
fully covered by GATS.  There was a broad range of services which could be considered to be
disconnected from the traffic rights which actually serve as supporting services.  In many domesticmarkets those supporting services were already fully liberalized.
25. On aircraft maintenance and repair, safety and regulatory convergence were questions to
address.  Hence the European Communities proposed to discuss in that respect the issue of mutual
recognition if appropriate.  On computer reservation systems and on selling and marketing, the
situation has evolved relatively substantially.  The traditional CRS as they were known to the
Uruguay Round negotiators did not seem to exist anymore since the ties with the airlines had been
reduced, and since CRS were also distributing now not only air transport services but all sorts oftravel related services.  The review might provide an opportunity to revisit definitions if appropriate.
The concentration in a handful of operators led also to the idea of exploring the merits of pro-
competitive principles being applied to this particular sector.  The implications of electronic
commerce needed to be studied and the positions expressed by the European Communities in the
context of the work programme on electronic commerce notably the principle of neutrality wereparticularly relevant for those subsectors.
26. On traffic rights, as the bilateral framework may have reached its limits ways should be
explored to overcome these limitations.  There were two main points in that regard.  The first one was
the question of transit, and that the review should  examine this in some detail in view of its
importance for the operation of the airlines. The second one was to look at some options in order toovercome the limits of cooperation arrangements, alliance, franchising and other arrangements.  At
this stage the European Communities had no firm views on any of these options.  One option was the
concept of conditional MFN or plurilateral MFN on which the European Communities would like to
seek views from other Members.  The second option was the idea of a cargo specific regime, also
mentioned by Australia and New Zealand.S/C/M/49
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27. The Chairman then opened the floor for comments on these presentations.  New Zealand
indicated that it considered that the questions raised  by Poland were worth addressing.  It indicated its
support for the idea put forward by Chile in para graph 11 of its document on the importance of fifth
freedoms rights and in paragraph 13 on the notion that access to the domestic air transport sector was
an investment issue or, in GATS terms, a matter of mode 3.  It also supported the idea expressed inparagraph 19 that the provision of ground handling services in the wider sense could be addressed
through the GATS concept of  commercial presence.  On the Australian contribution, New Zealand
indicated that it found the paper extremely useful and supported in particular the idea expressed in
paragraph 11 of a full review without any a priori exclusion as well as the accent put in paragraph 18
on the particular burden on developing countries caused by the restrictive ownership and control
provisions, a point also underlined by ICAO.  Finally, as far as the European Communities'
contribution was concerned, New Zealand also approved its general thrust with a particular accent onthe need for clarification of the actual scope of the annex expressed in paragraph 17 especially for
support services developed by airlines as stand alone subsidiaries.  A broader appreciation of services
which were indirectly related to traffic rights was also needed.
28. Egypt made preliminary comments.  First and foremost it had to be clear that the review
exercise was distinct from the negotiation process and that due consideration should be taken of the
impact on trade and development aspects for developing countries as agreed by the General Council.
Any suggested proposals for expanding the scope or the coverage of the annex should not prejudge a
Member's position on this issue.  Due account should also be taken of the resolution by the economic
commission of ICAO in its 31st session in 1 994, which tasked ICAO to develop recommendations
and proposals to meet the challenge facing internati onal air transport, responding to the internal and
external changes. According to th is resolution such arrangements should be based on general goals of
gradual, progressive, orderly and safeguarded changes towards market access and that interest of all
parties in ensuring their effective and sustained par ticipation in international air transport.  The same
resolution also requested the WTO and its Member States to accord due consideration to ICAO
constitutional responsibility for international air transport and in the meantime to promote continuedeffective cooperation among ICAO/WTO and other international inter-government organizations,
dealing with trade in services.  Egypt also expres sed its support to the views presented in Poland's
paper.  It concluded that it would be careful and cautious with regard to any ambitious proposal
departing from the provisions and conventions at the international level which were already regulating
this sector and, in particular, with regard to suggestions of expanding the annex of air transport.
29. Chile stressed the similarities in the documents presented.  Chile indicated that it had
concluded with Australia a "second generation" agreement including operational flexibility and ability
to operate through third countries.  It concurred with the point made in paragraph 19 of the New
Zealand document that cabotage was a commercial presence question.  Chile's policy was similar in
that regard.  For instance, a Peruvian owned company was operating cabotage services in Chile and
was benefiting from the general investment legislation and not from a specific bilateral air service
agreement between Chile and Peru.  He stressed also that a cargo liberalization could also benefitcombi-carriers as it may render a restricted passenger route economically viable that would not have
been so without unrestricted cargo rights.  Chile concurred to a very large extent with the point made
by the Australian document.  With regard to th e European Communities' document, Chile underlined
that the European liberalization was an internal one, but that on the external side there were various
policies, some restrictive, some liberal.  That is why Chile welcomed initiatives such as the draftTransatlantic Common Aviation Agreement or the fi rst agreement signed by the Community as such
with Switzerland.  Another point was the support by government through subsidies or the granting of
particular advantages such as route monopolies on the eve of privatization.  The review should lead to
transparency rules on that question with a further aim of a total elimination of such restrictions.
30. Switzerland indicated that it shared in general the goal of multilateralism, but that this
multilateralism could not be exclusive.  Bilateralism had its shortcomings in particular its relative
heaviness but it was far from having yet reached it s limits.  Its representative recalled that ICAO hadS/C/M/49
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stated that 157 or 85% of ICAO members were engaged in some kind of liberalization and that 97 of
them were parties to agreements aimed at establishing full market access.  Switzerland had concluded
bilateral open skies agreements and recognized the importance of regional multilateralism.  It
underlined that there was a dynamic of establishing liberalized trade blocks that it in turn would
establish bridges among them.  It underlined also that there was some kind of confusion betweenmultilateralism and WTO.  ICAO had made a multilateral attempt in 1994 about this and had failed
due to the lack of political will from many of its members.  Things had probably not changed much in
that regard, regardless of the forum, ICAO or WTO.  Switzerland also stressed the importance of the
ongoing work of the OECD on the liberalization of air cargo and its conceptual differences with the
GATS framework.  It also questioned the concept of "conditional MFN", and wondered if it was not a
bilateralism in disguise. With regard to the presentation of Chile he noted that Members were free
under the actual regulatory framework to take unila teral liberalization measures and did not need the
GATS for that purpose.  Finally, Switzerland underlined that its reservations were only on traffic
rights since it favoured a full and fruitful review of ownership and control provisions, on ground
handling and on other support services.
31. The United States indicated they would partic ipate fully in this review.  They indicated
however that, while specific proposals for amending the annex had already been suggested, they
would not have a position on this issue until after the review is completed.  They indicated also that in
their views the Council should review developments in  the air transport sector and the operation of the
annex before  considering the possible further application of the agreement in this sector.  On
developments in the sector the United States considered that the period since 1993 had witnessed
greater liberalization than any comparable period in the history of commercial air transport.  “Open-skies” agreements in full or staged had become the model for international aviation.  These
developments attested to the flexibility and adaptability of the bilateral system.  There was also wide
recognition that greater liberalization could be possible by extending open-skies principles on a
plurilateral or multilateral basis.  The word “ extending ” deserved emphasis, because each participant
should retain progress already made in bilateral and regional agreements. In this regard, the APEC airservices group work that was noteworthy, as well as the attempt by five APEC members to devise a
plurilateral air transport services agreement that would build upon the open-skies approach.  OECD
work on air cargo was a promising approach building on the fact that cargo liberalization has often
been achieved ahead of corresponding improvements in passenger regimes.  An important feature of
these and other plurilateral/regional initiatives that  have been proposed was that they provided for
accession by additional, like-minded countries.  The key was that the joining parties must embrace the
high standards of liberalization embodied in the agreements.  It was therefore not correct to label theseagreements as exclusive or restrictive because of the high standards required of participants.  These
various progresses demonstrated that no one proposal could realistically be called the last or only
opportunity to move forward.  The United States sup ported and participated in these efforts already
underway, and looked forward to considering serious ly any other proposals that might provide equal
or superior prospects for liberalization and growth in air transportation.
32. On alliances, the United States indicated that the U.S. Department of Transportation had
studied traffic and fares between the United States and Europe (available at:
http://ostpxweb.dot.gov/aviation/.). This study showed  that the growth of the transatlantic traffic
accelerated, from 5.2% for 1993 over 1992, to 9.9% for 1998 over 1997.  While many factors
contributed to this growth, it was clear that expansion by alliances, and stimulation by alliancecompetition, played a significant part.  The total number of city pairs served by the three main
alliances had grown from 6000 in 1992 to 14,200 in 1998.  From 1996, when the second and third
alliances obtained U.S. antitrust immunity, to 1998, average fares in transatlantic markets fell 13.7%
in markets with open-skies aviation agreements  while there was only a 2.7% decline in other markets.
33. Japan supported the point made by Egypt that that the review should be distinct from the
negotiation and shared the view expressed by the USA that a possible further application of the GATS
should be discussed at a later stage only after the completion of the review.  Japan underlined thatS/C/M/49
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ICAO was a competent forum for transport and therefor e welcomed its participation as observer to the
meeting.  As far as the cargo specific regime concept mentioned by New Zealand and the European
Communities was concerned Japan underlined that this seemed to be difficult to envisage in view of
the differing level playing that it would create between combi-carriers and all cargo carriers.
34. Canada indicated that it considered like Egypt, the US and Japan, that proposals for the
possible further application of the GATS to the sector would be best considered at the end of the
review process.
35. Senegal stated that the review on air transport should be distinct from the negotiations
underway as the terms of the review negotiations clea rly established it.  Senegal also stressed the role
of ICAO as the forum for matters relating to the ai r traffic sector.  Finally it supported the positions
expressed by Egypt.
36. The European Communities acknowledged the need expressed by Egypt to focus the review
on the relationship between development and air transport in general.  Their representative also
underlined that regional integration was in no way exclusive of liberalization on the multilateral level.
On conditional MFN, the European Communities indica ted that this was an issue or an idea that they
would like to explore with others while recognizing that it has plurilateral elements and that it could
only be a first step.
37. Jordan indicated its full support for the paper presented by Poland and the position expressed
by Egypt particularly on the importance and the constitutional role of ICAO in this matter.  Guatemala
expressed interest in the US bilateral agreements on maintenance and repair of aircraft (BASA)
mentioned in paragraph 33 of the Secretariat document and enquired about the conditions of
participation to these agreements.  It stressed also  that in spite of a regime that favoured foreign
investment and of an open sky policy Guatemala had not always drawn the full benefits of
liberalization as for instance alliance strategy has led one major foreign carrier  to stop its services.
38. Cuba stressed that even for repair, maintenance, sale and commercialization of air transport
and the CRS (Computerized Reservation Service), it was not absolutely clear as to exactly what the
definition and classification were in relation to what was covered by the Annex as regards trafficrights and services directly with traffic rights.  It  seemed that those three services could be considered
as being directly related to air traffic rights and covered by the GATS only by exception.  Therefore
even before considering including services such as cargo services and non-scheduled flights and non-
regular flights as well as other services which are perhaps not directly related to air traffic, a very
careful study of the repercussions of any proposal for the inclusion of a service or an activity in the air
transport sector in addition to those presently contained in the Agreement, should be undertaken,
bearing in mind the need for security in air traffic.  Cuba also recalled the 25 November 1999 ICAOresolution calling for the continued exclusion of traffic rights from the scope of the GATS in order to
ensure effective and sustained and continuing participation in international transport.  In addition the
notion of serviced directly related to traffic rights should be clarified.  Cuba noted also the importance
of MFN exemption in the sectors already covered.  The clarification of the actual scope was an
absolute prerequisite.  Finally, it indicated that  it  considered that the ICAO should continue to be seen
as an appropriate forum for analysing all these aspects and to work gradually and progressively.
39. Brazil indicated that it saw the review as an important opportunity for the exchange of
information on regulatory and economic developments between Members and international
organizations related to air transport services.  In this connection, it noted the relevance of discussing
matters related to the clarification of the scope of the Agreement, both in relation to the three servicesalready covered as well as to other services directly, or indirectly related to the exercise of traffic
rights.  With regard to the traffic rights, it considered that members should bear in mind the system of
bilateral reciprocity agreements in existence under the aegis of the ICAO.  As previous speakers, it
considered that this system, despite its flaws, was still far from being exhausted.  It supported theS/C/M/49
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points raised by Poland's contribution in that regard.  Finally, it indicated that it considered that, in
any event, any consideration on the expansion of the scope of the Agreement is an issue for a
negotiation and would have to await the conclusion of the examination of the developments of the
sector and of the operation of the Annex.
40. Korea underlined the complexities of the concrete modalities of liberalization:  factors such as
the volume of air traffic demand, the geographical conditions, the airport infrastructure and the slot
allocation had to be taken into consideration.  The question of the nature of the traffic rights also
arose:  were they tradable or not.  As of now traffic rights have been considered traditionally as a
national asset, not tradable, but one may reflect on the ways to make them tradable.  Korea considered
in that respect the EC paper as a useful one and considered that the paper from Poland also deserved
answers.  Finally Korea supported the positions taken by Japan and the United States related to the
importance of the review process.
41. Uruguay stressed that Members had to stick to the exact terms of reference provided in
paragraph 5 of the Annex, and to distinguish the re view from the negotiations.  It considered also
negotiations in terms of air transport services had to be maintained in the bilateral field under the
aegis of ICAO as this had been the case so far.
42. Hong Kong, China found particularly thoughtful the contributions from Australia and the
European Commission and stated it had an open mind on the scope of the air transport services
review.  Hong Kong, China was willing to talk about all aspects of air transport, but believed that this
should be done whilst respecting the agreed framework for the review.  The exercise was complex but
useful.  An important task was to seek to define clearly what constitutes air transport and air transport
related services and in particular to better define "services directly related to the exercise of trafficrights", as well as those services that were not so related and hence, potentially could be subject to
GATS disciplines.  In this regard Hong Kong, China fully agreed with paragraph 17 of the EC paper.
This paper had several other interesting features like comments on CRS and the concept of pro-
competitive principles which might be relevant in other aspects of air transport services.
43. Indonesia expressed deep concerns on the review and hoped that the discussion would clarify
the problems at stake.
44. The Chairman took note of the contributions and the comments made.
II. EXAMINATION OF THE DOCUMENTATION PREPARED BY THE
SECRETARIAT
45. The Chairman recalled that document S/C/W/163 only covered 7 of the ancillary services and
did not give a complete picture of the developments in the sector.  He indicated that further papers
would cover the developments in the remaining subsec tors.  He also stressed that this document had to
be read in conjunction with two earlier documents prepared by the Secretariat:  S/C/W/59 and
S/C/W/129.  He then opened the floor subsector by sector.
46. On maintenance and repair of aircraft, Korea  commented on paragraph 34 of document
S/C/W/163 by stressing that the strengthening of the US regulation on foreign repair stations was
laudable from the viewpoint of safety but that those measures should not act as trade barriers.  Inanswer to a request by Canada, the Secretariat clarified paragraph 19 on the growing importance of
mode 4 by explaining that there were numerous te mporary movements of engineers and technicians in
the sector, specialized companies in this area and that the internet had given new impetus to this
evolution.
47. On computer reservation services, New Zealand  found the description made by the Secretariat
on the evolution of classical CRS, on the electronic commerce impact and on the appearance of newS/C/M/49
Page 10
types of CRS providers extremely useful.  This raised a number of issues for Members to consider
during the review.
48. On both CRS and selling and marketing , the European Communities  suggested that Members
should look more closely at the definition under pa ragraph 3 of the Annex because it appeared from
the description of the current market situation that these definitions might need some updating.  Thechange from CRS distributing only air transport services to GDS (Global Distribution System)
distributing all sorts of travel services was an example of that problem.  Another point was that the
Secretariat description pointed at the fact that there was, in some cases, some overlap between selling
and marketing on the one hand and CRS on the other.  The European Communities were therefore
wondering whether this should not be addressed and was looking for views from other Members on
this question.  The implication of electronic commerce on these particular subsectors should also be
looked at.  Finally, the competition issue was particularly important in the case of computerreservation systems.  One possibility to deal with  them was to try to use as a concept the telecom
reference paper which had proved to be very efficient in the case of telecommunications and see or
explore whether a similar concept could be used in the case of this subsector.
49. On franchising, Tunisia
 questioned whether the conclusion drawn in paragraph 135, that there
was no linkage between franchising and traffic rights, was a hasty one and requested further
explanation by the Secretariat on that point.  The Secretariat replied that paragraph 135 was only one
of the hypotheses of classification of franchising services mentioned (an unidentified, unclassified and
uncommitted sector not directly linked to traffic rights), that there were two other hypotheses
mentioned in the paper:  franchising in the general sense of the CPC and selling and marketing, and
that the whole section on classification of franchising was written in the conditional tense.  TheSecretariat also explained that the reasons that had led to the conclusion that there was no relationship
with hard rights was that in practice the franchiser  gave its uniform and its livery to the franchisee in
the same manner that a fast food franchiser gives the right to use its logo and brand to a franchisee,
and that the customer did not know, because of this  appearance, who was really operating the flight,
the same way that it is ignorant as to whether the fast food restaurant is operated by a franchisee ordirectly.  In addition, the contract between the franchiser and the franchisee did not mention hard
rights or slots that remained the property of the franchisee.  Finally, in classification terms it was
worth noting that franchising in the CPC covered not only the distribution of goods but also the
distribution of any services which has led to the question of the coverage of franchising in air
transport.
50. Korea remarked that the only markets where franchising had been extensively practiced were
integrated air markets such as the United States ' or the European Community's market where the
concept of traffic rights did not exist in the first place, or did not exist any more.  Franchising did not
appear in international traffic because of the existence of a traffic rights regime.  This showed a direct
link between traffic rights and franchising.
51. Jordan indicated that in its internal legislation franchising was considered as a form of
codesharing and indicated that the problem arose from the fact that the definition of these concepts
and their relationship might vary from State to State.  The Secretariat clarified that there was no
universally agreed definition of franchising.  It recalled that although franchising and codesharing
were pursuing the same aim, maintaining the economic viability of a thin line, they were operationally
distinct since the franchised flight was operated under a single code whereas codesharing was
implying a dual code.  The Secretariat finally recalled that codesharing would be dealt with at a laterstage in its documentation.
52. The United States indicated that their legislation considered franchising as being a form of
codesharing.  They also indicated that this activity had been deregulated internally and that there was
therefore no more detailed regulatory oversight of the contracts.  There was however a requirement to
disclose the real operator of the flight for consumer protection reasons.S/C/M/49
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53. In a remark addressed to the United States, Chile noted that there were very few codesharing
agreements in the domestic market since codesharing is generally linked to international traffic and in
particular to the fourth and fifth freedom.  Hence, domestically speaking there was no codesharing but
contractual arrangements between airlines to operate certain routes or feed domestic passengers to
international routes.  The United States indicated that they made no legal distinction between
domestic and international codesharing in terms of disclosure requirements but that one of them
(international codesharing) was regulated and the other not.
54. Thailand stressed the liberalization efforts that it had undertaken since the end of the Uruguay
Round in terms of privatization, multiple designation, support services and participation with the
APEC work on the subject.  Nevertheless developi ng countries were struggling to maintain the
existence of their airlines in a highly capital intensive and a highly technological activity.  So far the
studies on the benefits of liberalization had only focused on the benefits for developed countries.More work was needed to assess the potential benefits or challenges of liberalization for developing
countries.  This comment was also valid for CRS and electronic commerce.
55. Singapore indicated it supported the liberalization of air services under the GATS and
favoured therefore a comprehensive and constructive review of the annex.
56. Norway indicated it was pursuing a common avia tion transport policy together with Denmark
and Sweden through the jointly-owned multinational airline SAS as well as with the European
Communities through the European Economic Area Agreement.  This policy was a liberal one with
the aim of negotiating as many "open skies" type air services agreements as possible.  Norway
supported generally any proposal with the aim of liberalizing the regime of world civil aviation whilst
bearing in mind that such liberalization must not affect safety in a negative manner.  Norway believesthat the best way to achieve it was to agree on multilateral and plurilateral agreements open for other
countries to join.  Therefore Norway looked forwar d to study any proposal table during this review to
enlarge the scope of the annex.
57. ICAO indicated that, in view of its global responsibilities, it had always monitored closely
developments in the air transport sector.  Since the 1994 World Wide Air Transport Conference
(ATRP), it had tracked down in particular the liberalization trends.  For instance the International Air
Services Transit Agreement which exchanges multilaterally the freedom of over flight and technical
stops had continued to grow in membership and was currently ratified by 118 states which is an
increase of 17 states in the past 5 years.  A lot of progress had been made in opening up this sector
through more liberal air services agreements and the rapid spread and implementation of
approximately a dozen regional agreements to liberalize air transport within groups of states.  More
than 70 so-called open skies agreements had also been concluded approximately a half of which werebetween developed and developing countries.  This was an accelerating and wide-spread trend:  no
less than 85% of ICAO's states were involved in some form of liberalization.  And not only was
market access opening up the sector but the competition, privatization and industry efficiency were
spreading the benefits of liberalization and regulato ry changes.  The key point to draw from these
trends was that this progressive liberalization was happening among states at a pace of their choosingwhich was essential in a sector where participation is a basic expectation and where there were many
markets and resources disparities.
58. Another area of change was that of foreign ownership in the airline industry.  As of
August 2000, at least 47 carriers had shareholders in foreign airlines, while over 130 airlines had
equity owned by foreign investors.  A number of countries, in recent years, had adopted new policiesand amended the rules regarding foreign investment in national airlines.  Change in this crucial area
had been relatively slow for historical reasons because of national strategic interest but nevertheless
progress was made.  The market-place had also been evolving.  In recent years, alliances, including
various cooperative arrangements, had become competitive, regulatory and market response to the
need for change.  By June 2000, there were more than 579 alliances among more than 220 airlines.S/C/M/49
Page 12
Within this global trend, there had been the devel opment of a handful of global alliances involving a
small group of carriers.
59. In answer to a request by New Zealand, the Secretariat  recalled the genesis of the air transport
annex.  The exclusion of traffic rights and services related to traffic rights was essentially motivated
by the will to maintain the existing framework of bilateral agreements.  However, Members favouringa more extensive coverage of the GATS had obtained from their negotiating partners a review clause
which led to the present exercise.  Air transport was the only sectoral exception from the GATT.  The
only other significant exceptions to the coverage of the GATS were the services provided in the
exercise of governmental authority which may be of interest for air navigation services and for any
governmental aviation services if the scope of the annex was to be expanded at some stage.  The
drafting of the actual coverage of the annex was imprecise since it did not define the services which
were related to traffic rights.  That was probably the reason why certain Members had takencommitments which extended beyond the three basically covered services of CRS, selling and
marketing and maintenance.  Another aspect of the drafting of the annex was that it presented the
coverage of those three services as an exception to the exclusion of services directly related to traffic
rights.  That is why the clarification of these uncertainties would be a very valuable outcome of the
review.
60. The Secretariat also recalled that an hypothetical expansion of the annex would not mean that
the sectors concerned would be liberalized, it would simply mean that the possibility would be open to
take commitments in these sectors.  In turn, those commitments would not imply wholesale and
instant liberalization:  they could be restricted, qualified and staged in many manners as has already
been seen in other sectors.
61. Another important point was that the GATS was in no way threatening the right for States to
regulate or to impose safety provisions.  The sect or would remain subject to any present or future
domestic regulation.  The WTO would not replace ICAO as the regulator of the sector itself, as it had
not replaced ITU for telecoms or WIPO for intellectual property.  GATS was simply concerned with
the access of foreign suppliers to a given market.
62. Answering a question posed by Brazil on the potential MFN effects of an expansion of the
annex, the Secretariat indicated the MFN question was at the core of the exclusion of hard rights.
There was a problem of combination with progress already achieved in the bilateral liberal
agreements since in any case, the intention could not be to have a multilateral regime more restrictive
than the preceding bilateral one.  The possibility of taking an MFN exemption for a newly covered
sectors could also be one way to address the problem.  For landing slots earlier work on the allocation
of scarce resources, such as frequencies in telecom, could prove useful.
63. In answer to a question posed by Australia, the Secretariat recalled that a unilateral
commitment in a sector not covered by the Ag reement would not be valid. The scope of the
Agreement could not be decided unilaterally.
64. In answer to a request by the European Communities, the Secretariat indicated that the list of
items in document Job No. 2451, followed in S/C/W/163 and in further Secretariat documents to be
issued, had been conceived as a continuum, starting with services explicitly covered by the annex,
ending with the hard rights clearly not covered by the annex and putting in the middle a series of
services that could either be regarded as being directly linked to traffic rights, or not.
65. The United States indicated that with regard to that list they considered wet leasing and
franchising to be a part of traffic rights.  Tunisia indicated that it considered wet leasing as an element
of traffic rights and air navigation services as a service provided in the exercise of governmental
authority and thereby excluded from the GATS.S/C/M/49
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66. The European Communities suggested that the Secretariat draft a paper indicating which
items were or were not related to traffic rights.  This proposal was supported by Australia and Chile,
and was opposed by Argentina, Japan, Uruguay and Mexico.  The Chairman stated that there was no
consensus on this proposal.
67. On freight forwarding and warehousing, Hong Kong, China  requested the Secretariat to
prepare for the next meeting a note on the OECD work on air cargo and related support services.  The
Secretariat undertook to provide that note.
68. On rental and leasing the European Communities  stressed that paragraph 167 of the document
stated the various objectives of the regulators in this area:  safety and economic consideration.  It
stressed that these were not conflicting objectives or that in other terms, the introduction into the
market of a foreign leased plane did not necessarily endanger safety standards.  It enquired about the
respective importance of the three categories listed in paragraph 168, i.e. bilateral agreementsrequiring a simple notification of the lease, agreements requiring an absence of economic benefits
linked to traffic rights of the lessor and agreements demanding the underlying traffic rights.  The
Secretariat undertook to provide this information in cooperation with ICAO.
69. No comment was made on catering services.  Finally the Secretariat gave an overview of its
future paper and the Chairman indicated that the next meeting would take place on 4 and 5
December 2000.
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