RESTRICTEDWORLD TRADE
ORGANIZATIONS/C/W/113
15 July 1999
(99-2929)
Council for Trade in Services Original:  English
COMMUNICATION FROM NEW ZEALAND, CHILE AND SINGAPORE
Air Transport Services
Discussion Paper
The attached paper has been received from the delegations of New Zealand, Chile and
Singapore with the request that it be circulated to Members of the Council for Trade in Services as acontribution to the discussion on Air Transport Services.
_______________S/C/W/113
Page 2
Introduction
1. Air transport services have experienced the most dynamic recent growth of all the sectors in
the vitally important transport industry.  The development of international air transport has been thedriving force behind the explosion of tourism into th e major international industry it is today (cited in
document S/C/W/51 as the world's largest industry, accounting for more than one third of the value of
total world-wide services trade).  Indeed S/C/W/59 cites scheduled passenger services in 1996 as
carrying 1,380 million passengers, with operating revenues of around US$ 271.5 billion.  Similarly,
over one third of the value of global manufactured exports are transported by air, with dedicated air
freight services estimated to be growing at a rate of 7-8 per cent per year.
2. The possibilities created by the expansion of air freight have helped underpin and respond to
the globalisation of production and distribution systems.  This has led to further integration into the
world economy of countries distant from major industrial centres and enhanced the demand for long-
haul services.  At the same time, it has coincided with and helped make possible the development of
leaner production cycles, including just-in-time inventory management.
Industry Developments
3. The air transport industry has introduced initiatives to respond to increasing demand for fast,
reliable and cost-efficient air transport to suit a globalized economy.  This is seen in the increasing
importance of commercial alliances, enabling airlines to offer a global service, while making fullest
use of the comparative advantages of different members in an alliance.  Third-country code-sharing
arrangements are often one element of commercial alliances and offer a practical means of developingexpanded service links or sustaining links on “thin” routes.  There has also been an expansion in the
role of dedicated freight operators and an increasing tendency to treat different service components,
including aircraft maintenance and ground services, as separate profit centres.
Regulatory Reforms
4. Developments in the sector have included changes in regulatory approaches to air transport
services.  As S/C/W/59 notes, the trend towards privatisation of airlines has strengthened and become
more general, to the extent that more than 70 per cent of airlines now have a majority of private
capital.  There has also been a tendency towards eliminating some of the more restrictive features of
traditional bilateral air services agreements including provisions predetermining capacity and those
requiring the filing and approval of tariffs.
5. At the most liberal end of the spectrum, is the new breed of agreements known as "open
skies" agreements.  There is, however, some variation in the degree of liberalisation these agreementscontain.  All these developments point to an increasing recognition of the economic importance of
efficient, reliable and cost-competitive air services and the role of permissive regulatory frameworks
in encouraging such services.
Air Transport Services and the GATS
6. The air transport sector as a whole is crucial to international trade and investment flows.  It is
therefore anomalous that the majority of this sector should currently lie outside the GATS.  A
multilateral commitment to the liberalisation of inte rnational air transport services would lead to
benefit for all our economies.
7. It is the case, however, that the practice of bilateral reciprocity which has traditionally
dominated air services agreements does not fit easily with the MFN principle underlying theS/C/W/113
Page 3
multilateral trading system. Most traditional bilateral agreements act to regulate and restrict the
performance of participants and do not encourage improved services through greater competition and
flexibility.  By focussing on reciprocity of opportunities, such agreements act to frustrate the potential
gains from comparative advantage.
8. These problems have led to an increasing interest, in recent years, in negotiating air services
rights in a different fashion - the trend towards "open skies" agreements.  New Zealand has been an
early advocate of this approach and has demonstrated a willingness to push out the boundaries of
liberalisation to the fullest extent possible by this means, for example by relaxing ownership
provisions and entering into seventh freedom and cabotage exchanges.
9. There are a number of other aspects of international air services which are also undergoing
important changes in approach.  These are:
• Airline Ownership.  Relaxation of foreign ownership rules allows access to new sources of
capital and can lead to improved service through the introduction of new technology and
management perspectives.  Such relaxation has, however, been constrained by the traditional
concept of “substantial ownership and effective control” which underpins airline designation
in traditional bilateral agreements.  To deal with this, a more modern approach has been found
in the “principal place of business” and “place of incorporation” test, while retaining
“effective control” provisions as a guard against “flag of convenience” carriers.
• Multiple Designation.  Restrictions on the designation of more than one national carrier which
may participate under an air services agreement can result in less frequent flights, reducedprice competition and less consumer choice.
• Code-Sharing.  This allows easy adaptation to changing market conditions.  In particular
third-country code-sharing is an important advance, especially as airline alliance agreementsmay preclude third/fourth freedom code-sharing.
• Air Cargo.  This is an important and growing area constituting both freight carried on
combined passenger/cargo services and dedicated cargo operators.  As S/C/W/59 notes, the
regulatory regimes applying in this area appear to be more liberal than for some other air
services activities, especially those relating to the carriage of passengers.
• Tariffs.  Pricing freedom gives service providers maximum flexibility to develop competitive
prices in line with market conditions.  There is therefore an increasing tendency to movetowards removal of tariff-filing requirements in recent air services agreements.
10. There are a number of “auxiliary services” additional to those listed in paragraph 3 of the
Annex on Air Transport Services which are of economic importance.  One of these is ground services
which can include activities such as refuelling, baggage-handling, catering, cleaning, waste disposal
and water replenishment.  It would be useful to discuss further a list of those services commonly
considered as “ground services” and how they fit in current GATS classifications, since some - eg,
catering - are already covered under other sections of the GATS classification.
Next Steps
11. Paragraph 5 of the Annex on Air Transport Services requires that the Council 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.
This review must therefore begin by 1 January 2000.S/C/W/113
Page 4
12. To assist in preparations for this review, we propose that the Secretariat examine the
classification  and GATS scheduling considerations involved in this area, in particular, how various
ground handling (supporting services for air transport - 746) and air cargo services (freight transport
by air - 732) are classified.  Given the different economic regulatory framework that currently applies
to scheduled international air transport there would also be value in examining the case for aclassification distinction between domestic and international transportation by air.
13. It would also be useful to have information on the work of other bodies (including ICAO, the
OECD and regional groupings, e.g. the APEC Air Serv ices Group), of relevance to this review.  In
addition, it would be helpful if the Secretariat were able to expand on the analysis in paragraphs 92-95
of S/C/W/59 (covering other elements in bilateral air services agreements) and to look at the
implications for international air transport services of any work being done on a multilateral approach
to competition regulation.
14. We also propose the development of a matrix comprising the various elements of air services
rights with respect to both passenger and freight transport, for example:
• ground-handling access;
• tariff regulation provisions;
• single or multiple designation of airlines;
• code sharing (including third-country);
• any limits on foreign ownership of airlines;
• capacity;
• routes;
• each of the first eight freedoms of the air
1.
This work would form the basis for members bein g asked to indicate their own policy approach in
respect of these different elements.
15. We propose that this background material be prepared for late this year.   Once this
background material is available, we propose that the mandated review process be launched late this
year under the auspices of the Services Council as provided for in paragraph 5 of the Annex on Air
Transport Services.  The question as to whether it may be desirable to task some other body to take
forward work on the review is one which could be addressed in the context of the organisationalstructures for resumed services negotiations - e.g., were a negotiating group on transport services to
be established there would seem to be a logic in it taking up air transport review work as well as other
matters covering all modes of transport.
__________
                                                     
1 See Chapter 4, “Manual on the Regulation of International Air Transport” Doc 9626, ICAO, 1996.