RESTRICTEDWORLD TRADE
ORGANIZATIONS/C/W/163
3 August 2000
(00-3257)
Council for Trade in Services
DEVELOPMENTS IN THE AIR TRANSPORT SECTOR SINCE THE CONCLUSION OF
THE URUGUAY ROUND
PART ONE
Note by the Secretariat
This Note has been produced at the request of the Council for Trade in Services in the
framework of the review of the Air Transport Annex which stipulates in paragraph 5 that "TheCouncil for Trade in Services shall review periodica lly, and at least every five years, developments in
the air transport sector and the operation of this Annex with a view to considering the possible further
application of the Agreement in this sector.".  The Secretariat has been asked through the Council for
Trade in Services to update document S/C/W/59, dated 5 November 1998 and document S/C/W/129,
dated 15 October 1999.
This Note addresses both the economic and regulatory developments in the sector, in both a
historical (1993) and contemporary (1999) framework.   Since the Annex provides no definition of the
sector, the paper tries to encompass all aspects of air transport and air transport-related services
following the model of the former Secretariat document S/C/W/59 on the same subject examined
during the exchange of information program in 1998.  It largely draws on this document as well as on
ICAO publications and in particular, the annual report " The World of Civil Aviation " (first edition,
1992).  Additional professional sources such as IATA documents and press sources have also been
used.
As indicated during the Council session held on July 2000, the Council requested due to time
constraints, that the document be in three parts.  Th e present first part will deal with items (a) to (g)
listed in document job n° 2451, dated 19 April 2000.
Due to the extensive subject matter, the paper is not meant to be exhaustive.  To the contrary,
in spite of the mass of documentation that was compiled and used, and the existence of an even wider
literature available, the paper shows a considerable lack of information as compared to what isavailable in the maritime transport sector or in the telecommunications sector.
1
This is true both for country-specific information (particularly for developing countries) and
for information on specific sectors or issues, such as leasing or ancillary services. This lack of
information is felt both on the economic side and on the regulatory side, but is particularly compellingon the regulatory side where apart from OECD countries virtually no information on national
regulatory regimes is available.
                                                     
1 For a comparison see for maritime documents S/NGMTS/W/2 and S/NGMTS/W/2/Add.1 to 37 and
for telecommunications S/NGBT/W/3 and S/NGBT/W/3/Add.1 to 39.S/C/W/163
Page 2
This Note uses the date of 15 December 1993 as a starting point since this is the date of the
finalization of the existing disciplines by the conclusion of the Uruguay Round, rather than the date of
the entry into force of those disciplines on 1st January 1995.  However, in certain instances such a
clear cut date did not make sense and has therefore not been used.  Similarly, in certain instances
historical data were only available on a wider time span (1991-1999) or on a shorter one (1995-1999)
and these have been used when considered relevant.
The structure adopted for this note is a sectoral one sub-divided when necessary by themes.
In each of the subsectors or themes, economic developments are addressed first, followed by
regulatory developments.
* * * * *S/C/W/163
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TABLE OF CONTENTS Page
I. AIRCRAFT REPAIR AND MAINTE NANCE ......................................................................4
1. Economic developments ........................................................................................................ ...4
2. Regulatory developments ...................................................................................................... ...9
II. COMPUTER RESERVATIO N SERVICES (CRS) ............................................................13
A. CLASSI CAL CRS ................................................................................................................ ....13
1. Economic developments concerning the classical CRS .......................................................13
(i) Concentration ............................................................................................................... ............18
(ii) An expansion fuelled by geographical extension and by an increasingly challenged
price model .................................................................................................................... ...........18
(iii) Extension to other le isure and travel areas ..............................................................................2 0
(iv) Initial public offerings and severing of the link with par ent carriers:......................................20
(v) Erosion of the predominant role of tradi tional CRS provider in the issuing of air
transport tickets and subsequent diversification into other electronic travel activities ...........21
2. Regulatory developments concerning classical CRS ...........................................................22
B. NEW FORMS OF CRS ............................................................................................................2 3
1. A brief history of on-lin e travel distribution:.......................................................................23
2. Analysis of the main types of   on-line booking providers....................................................24
(i) Virtual tra vel agencies..................................................................................................... .........26
(ii) Airline web-sites .......................................................................................................... .............27
(iii) Alliance web-sites ........................................................................................................ .............29
(iv) Multi-airl ine portals ...................................................................................................... ...........29
(v) Other types of providers .................................................................................................... .......32
III. SELLING AND MARKETI NG.............................................................................................32
IV. FRANCHIS ING................................................................................................................. .....33
V. SERVICES AUXILIARY TO ALL MODES OF TRANSPORT WHEN
DELIVERED IN AN AIR TRANSPORT CONTEXT (FREIGHTFORWARDING AND W AREHOUSING )...........................................................................40
VI. RENTAL AND LEASI NG SERV ICES ................................................................................43
A.
DEFINITION AND ASSESSMENT ..................................................................................................43
B. F INANCIAL LEASING .................................................................................................................47
C. O PERATIONAL LEASING ............................................................................................................49
VII. CATER ING................................................................................................................... ..........51
1. Economic Developments........................................................................................................ .51
2. Regulatory developments ...................................................................................................... .53
ANNEX - Regulation JAR-OPS 1.165 on LeasingS/C/W/163
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I. AIRCRAFT REPAIR AND MAINTENANCE
1. Economic developments
1. Aircraft repair and maintenance activities are defined in paragraph 6(a) of the Annex as
meaning "…such activities when undertaken on an ai rcraft or a part thereof while it is withdrawn
from service and do not include so-called line maintenance.".  This definition broadly corresponds
with what the industry calls "maint enance, repair and overhaul" (MRO).
2. MRO standards and procedures are very detailed due to the requirements that not only must
an aircraft be certified, but also every part the goes into an aircraft.  In both cases there are
predetermined repair and overhaul cycles for aircraft and life-span for parts (the number of times,
and/or the number of hours a part can be re-used, re-installed, or re-cycled before it is replaced).  The
pre-determination of these maintenance requirements for both new and old generation aircraft has
been through the cumulative experience of the "Maintenance Steering Group" (MSG).  This group
dates back to the late 50s and consists of experts from National Transportation Departments,manufacturers, and airline operators.  It is this group which created the standards for old generation
aircraft (e.g. DC-8s DC-9s,) checks (known as MSG-1) which are denominated by the letters A, B, C,
and D, and is a process driven scheduling for maintenance.  The directives that apply to the generation
of aircraft that include inter alia  DC-10. B-737 series, and B-747 series) are maintained under the
directives of MSG - 2.
3. However, due to both technological advancements and the continual search for cost reduction,
MSG has found that the same safety standards can be met or exceeded and the overall costs reduced
by modifying the C check and abolishing the D check for new generation aircraft (A-3 series, B-767
series).  These changes are found under MSG-3 whereby the aircraft are certified under the new
"Heavy Maintenance Visit" (HMV).  These are "task driven" procedures that have a predetermined setof maintenance checks occurring in numerical sequence (e.g. HMV-1, HMV-2…).  Each contains a
list of required procedures and by HMV - 6 the aircraft will have undergone repair and overhaul
equivalent to the old D check without being removed from operations for the same amount of time.
Anything over HMV 6 will have accomplished more than an standard D check.
4. The following table (Table 1) extracted from the ICAO annual compilation of airline
operating revenues and expenses shows a steady growth over recent years in the proportion of
maintenance and overhaul costs among total operating costs.
TABLE 1
Proportion of maintenance repair and overhaul costs in airlines operating expenses
1993 1994 1995 1996 1997 1998
10,1% 10,0% 10,5% 10,5% 11,0% 11,1%
5. In so far as this growth is significant, it probably has to be attributed to the tightening of
safety policies and even more to the tightening of their implementation, as described below in theregulatory developments section.  This growth is also a change when compared to the tendency
described in paragraph 10 of document S/C/W/59 that was based on a 1987-1995 series and a
different methodology. In any case, despite any direct impact on operating expenses, maintenance
remains a central preoccupation by the airlines because it determines aircraft availability.  This in turn
affects the revenue-generating ability of an airline.
6. Micro-economic data based on maintenance company's revenues seem to confirm the
expansion of this business during the 1993 to 1999 period.  Additionally, forecasts by independentS/C/W/163
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professional sources also project high growth rates into the future (2006).  In 1998, the turnover of the
sector grew as a whole by 8% (engine maintenance by 10% and 15% for other equipment).  The MRO
turnover of Rolls Royce increased by 50% between 1997 and 1999, and General Electric increased
from US$ 2.3 to US$ 5.5 billion between 1996 and 1999.  The International Transport Workers
Federation* (ITF) estimated the sector at US$ 25 billion in 1998 (US$ 22 billion for civilian, US$ 35
billion for military).  The consultants Frost and Sullivan* estimate a total market of 37 billion in 2006,whereas according to the manager of the MRO division of Rolls Royce the sector had already reached
US$ 42 billion in 1999.  Within the latter figure US$ 25 billion is attributed to engines, US$ 5.3
billion for line maintenance, US$ 4.2 billion for accessory overhaul, and US$ 7.5 billion for airframe
maintenance.  The industry journal Interavia * has forecast a total market of US$ 61 billion by 2005.
7. It should be noted also from the various breakdowns above that commercial aviation is not the
only customer of the MRO industry.  The military market is taking an increasingly important place as
air forces faced with budgetary constraints begin to outsource a part of their maintenance (recentoperations of that kind include contracts awarded by the air forces of the United States, UK, Italy,
South Africa, Belgium, New Zealand, Australia, I ndonesia, Colombia and United Arab Emirates).
8. General aviation is also an important client as for instance 500 new planes enter the market
every year in the United States.  As mechanics and engineers are paid less in the facilities dedicated to
general aviation than in the facilities dedicated to co mmercial air transport, it can be said that general
aviation is largely at the source of the labour shortage experienced by the sector in North America (a
4,000 persons deficit a year on a total workforce of 137,000 in the U.S. only) and in Europe at least.
Also the growing significance of general aviation as a MRO customer evidenced by the creation of a
joint-venture between Lufthansa Technik, Bomb ardier, and LBAS (Lufthansa Bombardier Air
Services) to maintain the business jets.  This particular segment of the market is undergoing dramaticgrowth due to the rapid expansion of factional ow nership programs (discussed in General Aviation
section below).
9. One may also note from these figure the economic importance (US$ 5,3 billion in one of the
breakdown) of line maintenance, which is currently excluded from the scope of the Agreement.
10. Table 2 below lists the top-ten MRO providers of 1997 by sales and by workforces. Please
note however, that this table is incomplete because it excludes engine manufacturers.  If these
manufacturers were included then GE would be number 1, and Pratt and Whitney number 3.  Table 2
also shows that there are different types of MRO providers and does not include Original Equipment
Manufacturers (OEM), who may be engine ma kers, aircraft manufacturers (Boeing's BOLD
subsidiary for instance), or avionics manufacturers.S/C/W/163
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TABLE 2
LEADING MROs*
Rank CompanyType of
Provider
***Sales 97
(US$ m) Workforce
1 Lufthansa Technik (GER) i 1,750 10,000
2 Air France Industries (F) ii 870 5,100
3 Sogerma (F) iii 685 3,700
4 SR Technics (CH) i 650 3,000
5 Singapore Technologies, incl Dalfort,
ST Mobile (SING)i 580 4,000
6 BFGoodrich Aerospace (U.S.) iv 400 3,700
7 Hong Kong Aircraft Engineering
(HK,C)I 312 4,500
8 FLS Aerospace (DK) iv 177 1,250
9 Aeronavali (IT) 163 1,500
10= Dee Howard (U.S.) 130 1,200
10= Precision Standard (Pemco) (U.S.) 130**3,000
11. Over the period 1993-1999, the market has seen a progressive consolidation in favour of
OEMs and the autonomous subsidiaries of airlines.  This category of global maintenance providers
includes:  Lufthansa, Swissair, Air France, Singapore Airlines, Cathay Pacific.  This consolidation has
been to the detriment of independent providers and of in-house maintenance divisions 2 especially in
airlines that have chosen to divest and to concentrate on their core transport business (such as BA) and
of smaller airlines that have reduced their in-house maintenance to use the facilities of their alliances
partners.  This latter phenomenon has raised concerns among airline unions, who fear in particular
that the concentration of the maintenance of certain types of aircraft in certain dedicated facilities may
translate into delocalization of jobs as well as the closure of in-house maintenance divisions or their
outsourcing to subsidiaries offering less social benefits.  In certain instances unions have been able to
impose a ceiling on outsourcing, as for instance in the case of United Airlines, where this ceiling is at20%.  A parallel phenomenon is the tendency of the major remaining actors to develop facilities in
countries with relatively lower labour costs such as Ireland for Lufthansa and Swissair (which jointly
own and manage Shannon Aerospace) or Philippines for Lufthansa;  Morocco for Air France
Industries, China for Cathay Pacific, Lufthansa Technik and SR Technics.  In the case of China
however, this can also be explained by the need to be present in a very rapidly expanding market.
12. Recent examples of the consolidation movement include the take over of TEAM Aer Li ngus
in 1998 by FLS (Denmark, independent provider), Flight Safety by Boeing, Cade Industries and
Sundstrand by United Technologies, National Airmotive by Rolls Royce, and Greenwich Air
Services, UNC, Aviall and Garrett Aviation Services by General Electric.
                                                     
*  Classified by overall sales figures, where available.  Services offered include heavy commercial air
transport MRO, and may include military aircraft.  Excluded are specialist engine-only and components
facilities.  Air-line owned MRO facilities are also not included, unless they have been spun off as independent
business units, and publish financial data.
** Reflects loss on closing facility in Copenhagen.
*** (i) airline subsidiaries;  (ii)  semi autonomous providers;  (iii) provider s linked to manufacturers;
and (iv) independent providers.
2  The proportion of in-house maintenance world-wide has fallen from 90% in 1970 to 73% in 1998,
Source:  Airline Business , September 1999S/C/W/163
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13. It is generally agreed that OEM will continue to grow, especially in the engines segment.
OEMs may even give or lease engines and draw their revenues from long term maintenance
contracts, while independent providers will probably have to concentrate on niche markets. This could
occur in diverse areas such as total support for start up (e.g. FLS-Easy Jet), aircraft painting, GPS
avionics, satellite enabled communications, passenger telephones, in-flight entertainment systems,
hush kits and conversion of older passenger planes into freighters.  In short, multi-year contracts andtotal support contracts with flat rates (allowing the planning of maintenance costs), are becoming a
common feature of the industry.
14. The various actors in the market tend to multiply  joint ventures in order to be present in all
segments and geographical zones.  The following typology of joint-ventures identifies the
geographical and sectoral tendencies, and include:
- joint-ventures between airlines which are members of the same alliances, for example
Star, Lufthansa Technik and SAS on CFM en gines;  Lufthansa Technik and United
on Boeing 777;  and Lufthansa Technik and Air Canada on Bombardier aircraft;
- joint-ventures between airlines of different alliances (Lufthansa Technik and SR
Technics in Shannon Aerospace;  Lufthansa Technik and Air China in AMECO;
Lufthansa Technik and Lan Chile;  Air Fr ance Industries and Royal Air Maroc;  Air
France Industries and TAP;  Air France Industries and Air Canada);
- joint-ventures between independent maintenance providers and airlines (SOGERMA
and Middle East airlines);
- joint-ventures between engine or equipment manufacturers and airlines (General
Electric and Asiana;  General Electric, All Nippon Airlines and IHI;  General Electric
and LOT; General Electric and EVA Air;  MTU and China Southern; MTU and
Canadian, SNECMA and Royal Air Maroc;   SNECMA and Sabena;  SNECMA and
China Southwest;  Rolls Royce and Cathay Pacific in HAES; Rolls Royce andSingapore Airways; Pratt and Whitney w ith GAMCO-Gulf Air;  Pratt and Whitney
and American Airlines;  Pratt and Whitney and Singapore Airlines; Allied signal and
Malaysian Air System);
- equipment manufacturers and aircraft manufacturers (Sextant Avionique and Airbus
in Beijing);
- airlines and aircraft manufacturers (Lufthansa Technik and Bombardier in LBAS);- joint-ventures between government, airlin es and aircraft manufacturers (Abu Dhabi
Government and Gulf Air in GAMCO;  Cathay Pacific, Singapore Airlines, Boeing,
Civil Aviation Authority of China, local government of Xiamen in TAECO).
15. The economic developments in the sector also exhibit regional variations.  In Europe, the
consolidation has been centered around airline subs idiaries (SR Technics, Lufthansa Technik and Air
France Industries) which have rapidly developed third party activities (up to 46% in the case of
Lufthansa Technik) through rationalizing activities on the basis of alliances, joint ventures and take-overs.  The independent providers have consolidated (e.g. FLS-Team) and many airlines have
downsized their in-house maintenance or concentrated their third party work on niches (e.g. British
Airways).
16. In North America and in the U.S. in particular, airlines have maintained strong in-house
maintenance divisions (the in-house proportion of maintenance is 85% in the United States where itstands at 73% world wide).  The only exceptions are being Southwest Airlines, and to a lesser extentS/C/W/163
Page 8
America West.  U.S. airlines tend to use third party MFOs only in the busiest periods.  Among the
factors explaining this tendency is the tightening of the FAA controls, the legal liability regime, and
the reluctance of the unions.  In the 1980's, many U.S. airlines tried to develop third party activities
and then withdrew from them.  Delta and United are now trying again to develop these activities
though not on a massive scale.  There remains however a strong sector of independent providers.  It is
worth noting also that largely because of the age of the domestic fleet, maintenance costs of U.S.airlines are on average higher than those of their international competitors:  for instance they reach
15% of the total costs at Northwest Airlines.
17. In Asia, until the recent financial crisis, all major airlines were investing heavily in in-house
maintenance facilities. Asia, and especially China, appear also to be the "promised land" for joint-
ventures as mentioned in paragraph 14.  Additionally, certain Asian maintenance companies have
begun investing on other continents (e.g. Singapore Technologies Aerospace in the United States with
the control of ST Mobile Aerospace Engineering and Dalfort Aerospace).
18. In Oceania, Air New Zealand Engineering Services (ANZES) has invested heavily in modern
equipment such as enterprise resources planning software, coordinated its maintenance activities with
the Australian parent company Ansett and invested in  China.  Apart from the various joint-ventures or
contracts mentioned above, it has proved impossible to gather any data in the specialized press or in
the studies of international organisations in Lati n America, Middle East, CIS countries, the Indian
sub-continent and Africa.
19. In terms of modes of delivery, mode 2 and mode 3 are essential for this activity, but
technological evolutions have also led to a growing importance of trade conducted electronically
under modes 1 and 2, while economic developments have made mode 4 more important than it used
to be.
20. Mode 2 is highly relevant because planes are a mobile asset which can be repaired anywhere.
Additionally, the advancement of mutual recognition and regulatory convergence in the developed
world, but also at universal level under the aegis of ICAO (see regulatory section below) has led to the
certification of a growing number of repair stations who serve mainly to foreign-based customers.  A
recent proposal to repatriate all maintenance of national planes to the national territory was notaccepted, inter alia  because it would have conflicted with a mode 2 commitment of the country
concerned.
21. As the sector is characterized by heavy investment with only long term return, mode 3 is also
essential, especially regarding the conditions attached to joint-ventures, as this is a very frequent form
of commercial presence in this sector.
22. Electronic trade has of course had an important impact over the last seven years on this high-
tech sector.  CD ROM and now on-line internet based databases have replaced the huge paper
documentation required and have allowed a constant updating, searches and in certain instances on-
line dialogue on technical questions with the editors of the documentation.  This dialogue can go as
far as tele-diagnosis.  For instance, Boeing's da ta base BOLD (Boeing On-Line Delivery program)
registers 20 million transactions a year.  Some of these transactions are devoted to the purchase of
parts but many are linked to consultation of the documentation and to exchanges of data between themaintenance provider, the airline and the aircraft or engine manufacturer.  These transactions help the
manufacturer to establish databases on the life span of parts, on trouble-shooting (helped by artificial
intelligence) and on predictive maintenance.  In a second stage, this facilitates the design of new parts
and speeds the regulatory process of approval.  Another example of these electronically enabled
feedback mechanisms is the CRMS (Collaborative Reliability Management System) put in place byEmbraer.  The U.S. Federal Aviation Administration and the European Joint Aviation Authorities areS/C/W/163
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now in the process of drafting rules that will manda te reliability feedback from the operators to the
manufacturers.
23. One of the most sophisticated electronic maintenance sites is certainly the one put in place by
General Electric.  This web-site contains the following functions:  data transfer, records management,
inventory control, on-line engine record and configuration management tools, self help support
including animated engines disassembly techniques, on-line training and three-dimensional rotatingviews of parts and components, "chat room", ordering of parts and verification of shipping status,
services bulletins, simulations allowing the calculation of the effects of potential upgrades in terms of
shop visits rate, cost of ownership and money saved ("what if ?" option), tele-diagnosis including
24 hour hot-line analyzing web photographs of damaged parts, trend analysis (comparing maintenance
performances of the fleet to the performance of competitor's fleets), frequently asked questions, data
bases with intelligent search tools and performance measurement in terms of costs and visits.
Internally the use of enterprise resource planning (ERP) software such as Baan and SAP is alsoincreasingly common.
24. In addition business to business (B2B) platforms have also developed in the maintenance
sector, especially for the sale of parts. This includes component manufacturers platform as well as
"neutral platforms", original parts as well as second hand parts, negotiated price systems as well as
reverse auction bids and clearing-house and inventory services.  Examples include:  Airliance (UnitedAirlines, Lufthansa Technik, Air Canada), Myaircraft.com (United Technologies Honeywell),
Aerospace.com (SITA and AAR corp.), Airbus, the association of BAE Systems, Boeing, Lockheed
Martin, Raytheon, and Commerce One and tradeAir.com
25. Finally, in terms of mode 4, the shortage of qualified personnel described above has triggered
the development of companies specialized in the re cruitment and placement of aviation engineers and
mechanics world-wide.  Those companies are experiencing at the moment double-digit growth.
PARC's aviation technical and maintenance division based in Ireland is a typical example with its 24
clients on four continents and a growth in 1999 of 22% in man-hours provided.
2. Regulatory developments
26. The main regulatory developments that have occurred during the period 1993-2000 are linked
to safety considerations, of which maintenance is an essential parameter.  However, these safety
regulations can have an impact on trade and have sometimes generated trade frictions.  In addition,
there have been instances where new regulations concerning the provision of maintenance services
has been inspired by pure economic reasons.
27. As far as safety and safety-related regulations are concerned, at a universal level, the major
development has been the inception of two major sa fety oversight programs by ICAO involving very
detailed audits of the national legislation and practices of Members regarding safety, including
maintenance.  Following the 1992 Resolution A29-13 on "improvement of safety oversight" which
recognized that the ICAO international safety sta ndards required effective government oversight for
their implementation, the ICAO Council agreed in 1994 to establish an ICAO safety oversight
program whose objective was to identify deficiencies through assessments decided on a voluntary
basis and to provide advice and assistance to enable States to implement the relevant ICAO StandardsAnd Recommended Practices (SARP).  A mechanism for the financial and technical contributions to
this program was set up in 1995 and the program effectively began operating in March 1996.  The
voluntary program ended in 1998 after having received 88 requests for audits and processed 67 of
them.  It was replaced on 6 May 1998 by the ICAO "Universal Safety Oversight Audit Program".
28. This new universal and compulsory program stemmed from the conclusions of the meeting in
November 1997 of Directors General of Civil Aviati on from 147 States.  They agreed on a set of five
recommendations to reinforce the ICAO safety oversight:S/C/W/163
Page 10
-  through regular, mandatory systematic harmonized safety audits;
- through the enhanced transparency of those audits;
- through the expansion of those audits to other areas of civil aviation having an impact
on safety such as air traffic services, aerodromes and support facilities and services;
and
- through the coordination of the ICAO oversight program with regional and national
oversight programs.
These recommendations were endorsed by the ICAO Assembly in September/October 1998
(Resolution A32-11).  A safety oversight audit unit was established to this end inside the air
navigation bureau of ICAO and this unit conducted 49 audits by the end of 1999 the objective
being to have assessed all ICAO Member States by the end of 2001.  No data are yet available
on the activity of the program in 2000.
29. As an element of support to this program and also as a result of the experience of its
International Aviation Safety Assessment program (IASA), the FAA has developed and promoted a
set of model civil aviation regulations largely based of the FAA regulations and the European Joint
Aviation Authorities3 regulations.  One of the eleven parts (part 6) of this model regulation is devoted
to maintenance.  The complete text of these model regulations can be found at the following
electronic address:  http://www.faa.gov/avr/iasa/calr.htm
30. In the United States, the Federal Aviation Administration put in place in 1992 an International
Aviation Safety Assessment program (IASA), which assesses the safety oversight of foreign carriers
serving, or willing to serve the United States and which can translate into limitation of services or
prohibition of servicing the United States in cases of non-compliance with ICAO standards.  It was
decided in 1994 to make those results public.
31. On several occasions, the application of this program has generated tensions with partner
countries, especially with those having signed a bilateral open skies agreement.  In May 2000, the
FAA changed its IASA regulations4 by reducing the number of categories for foreign airlines from
three (acceptable, conditional, unacceptable) to two (compliant, non compliant).
32. The regulatory convergence process, first with  the European Joint Aviation Authorities but
also with Canada, already described in document S/C/W/59, has intensified over the last years.  JAA
and FAA hold annual harmonization conferences and agreed in May 1997 on the Maintenance
Implementation Procedures (MIP) that will form the basis of agreements to be signed by the FAA and
each national aviation authority of the JAA.  From an operational point of view the differences
between their respective regulation FAR 145 and JAR 145 have been identified and the FAA has theauthority to grant JAR 145 approval of facilities located in the United States territory and participates
to joint JAA-FAA Maintenance International St andardization Teams which audit regularly on a
sample basis JAR 145 approved facilities.
33. The U.S. is also pursuing a policy of international cooperation and regulatory convergence on
a wider scale than the transatlantic cooperation.  Typically this involves the signing of Bilateral
                                                     
3 The Membership of the JAA is the following:  Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Iceland, Ireland, Italy, Luxembourg , Malta, Monaco, The Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland, and the UK.  The following countries are candidate Members:  Cyprus, CzechRepublic, Estonia, Hungary, Latvia, Moldova, Poland, Romania, Slovak Republic, Slovenia, The formerYugoslav Republic of Macedonia, Turkey.
4   Federal register, May 25, 200 volume 65, number 102, page 33751-33753.S/C/W/163
Page 11
Airworthiness Agreements (BAA before 1996) or Bilateral Aviation Safety Agreements (BASA since
1996) on technical cooperation and reciprocal airworthiness certification of civil aeronautical products
followed by Implementation Procedures on Airwor thiness agreements (IPA) and by Maintenance
Implementation Procedures agreements (MIP).  BASA have been concluded with Austria (1997),
Denmark (1998), France (1996), Ge rmany (1996), Ireland (1997), Malaysia (1996), Netherlands
(1995), Russia (1998), Sweden (1998), Switzerland (1996) and United Kingdom (1995), and areunder negotiations with Brazil, Canada, Italy, Norway, Spain and Thailand.  MIP have been signed
with France (1999), Germany (1997) and Ireland (1999) and IPA with Germany (1999), Malaysia
(1997) and Russia (1998)
5.
34. In a recent notice of proposed rulemaking6 the Federal Aviation Administration has opened
for comment a proposal for a complete rewriting of FAR145.  As far as foreign repair stations are
concerned the suggestion is to remove in nearly all instances the distinction between national and
foreign repair stations and to apply the same regime to them.  It is also proposed to create an advisorypanel to identify areas where foreign repair stations pose special issues with respect to oversight on
safety. Those proposals whose deadline for comment expired in December 1999 are presently debated
and face some criticisms by independent providers and small businesses on the ground of over
regulation.
35. In Europe, in 1994, the International Air Carrier Association (IACA) appealed to the
European authorities to curb, on the grounds of avia tion safety, the growing influx of low-cost flag of
convenience charter operators flying aircraft registered in countries where the government safety
oversight was felt to be less stringent.  In 1996 this public opinion campaign found an echo through
the adoption by the European Union of the Safety Assessment of Foreign Aircraft program (SAFA)
finally endorsed by the Council of Ministers in June 1997 whose philosophy is comparable to theIASA program.
36. The assessment will be mainly done through ramp spot checks and the enforcement of this
program has been delegated jointly to th e European Civil Aviation Conference (ECAC)
7 and to the
Joint Aviation Authorities, its final institutional sh ape remaining to be determined.  The system also
includes an exchange of information with the FAA and a recommendation for the Member States ofthe EU to include in their bilateral agreements a safety clause and the right to audit foreign carriers
contracted by European tour operators.  The Eu ropean Civil Aviation Conference has also signed in
May 1999 a memorandum of understanding with ICAO on safety oversight issues.
37. The Joint Aviation Authorities adopted in 1991 the JAR 145 regulations on the approval of
maintenance organizations.  Those regulations have already been revised once and are again in aprocess of consultation since the last quarter of 1999.  There are now 3,000 maintenance organizations
having obtained the JAR 145 certification, 1,750 in  Europe, 1,100 in North America and 150 in the
rest of the world.  JAA regulations on maintenance also include qualification and licensing regulation
(JAR 66), training regulation (JAR 147), specific  maintenance rules for aircraft not used for
commercial transport (JAR-M). The JAA organize multinational Maintenance Standardization Teams
(MAST) that jointly conduct audits in JAA Members territories as well as Maintenance International
Standardization Teams (MIST) that conduct jointly with FAA and Transport Canada sample audits on
                                                     
5  Situation as of 17 February 2000.  Source:  FAA website.
6 Docket n°FAA-199-5836, notice n°99-09, June 1999, part 145 review: repair station, see
http://www.faa.gov/avr/arm/n99-09.pdf, for foreign repair station see notably pages 9, 48-49, 59-63 and 76-79.
7  The membership of ECAC is the following:  Albania, Armenia, Austria, Belgium, Bulgaria, Croatia,
Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland,
Italy, Latvia, Lithuania, Luxembourg, Malta, Moldova, Monaco, the Netherlands, Norway, Poland, Portugal,Romania, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, the former Yugoslav Republic ofMacedonia, Turkey, Ukraine, and the United Kingdom.S/C/W/163
Page 12
JAA approved facilities outside the territories of JAA Members. The JAA countries signed in May
1996 an agreement with Canada.
38. In Latin America six Central American States concluded in June 1996 the Ilopango
Agreement which committed them to the adequa te implementation of homogeneous inspection
procedures for which the agreement established an Aeronautical Technical and Operational Inspection
Service to assist in the task.  Also in this region the Andean Committee of Aeronautical Authoritiesconducted in 1995 consultations with the United States on the implementation of the IASA program.
The Latin American Civil Aviati on Commission signed in September 1998 a coordination agreement
on safety oversight issues with ICAO.
39. In Asia, the transport ministers of the Member States of the Asia Pacific Economic
Cooperation (APEC) established in April 1996 a group of experts on aviation safety which issued five
recommendation in 1997.  Australia undertook in 1997 to harmonize unilaterally its safety rules with
those of FAA.
40.  As far as regulatory developments based on economic considerations are concerned, one may
note the recent directive by the Indian Civil Aviation Ministry requiring that all maintenance up to C-
checks (that is to say all except very heavy maintenance: D checks) must henceforth be carried out
domestically, a measure that is applicable to more than 150 aircraft and that has been based on
balance of payments and industrial considerations.
8
                                                     
8  See the electronic newsletter Aerosafety and Maintenance, Mac Graw and Hill Editors, 16 June 2000,
issue page 7 on http://www.awgnwews.com/cgi-binS/C/W/163
Page 13
II. COMPUTER RESERVATION SERVICES (CRS)
Computer reservation services (CRS) are defined by paragraph 6(c) of the Annex as "services
provided by computerised systems that contain information about carriers' schedules, availability,
fares and fare rules, through which reservations can be made or tickets may be issued.". They are all
dealt with in document S/C/W/59 paragraphs 17 to 30 and in document S/C/W/129, para 5, 19C(a),
19D(a), 20(a) and Annex 1, page 11.
In 1990-1993 when the Annex was elaborated, there was an absolute identity between CRS
services and CRS providers:  CRS services were  only provided by CRS providers, CRS providers
were only providing CRS services.  Between 1993 and 2000 this absolute identity has disappeared.
On the one hand, CRS providers have begun providing other services, such as non-air transport
bookings ("GDS" Global Distribution Services, whose classification remains an open subject) travel
agent services, computer services or even telecom services.  On the other hand, since the definition ofCRS is vague and does not demand for instance that the information contained in the system covers
all airlines, the activities of travel agents, airlines, airline alliances and others who have begun to offer
on-line bookings and tickets could possibly be classified as CRS services.
This double movement was already partially reflected in document S/C/W/59, where
paragraphs 17 to 19 and 24 to 30 were devoted to CRS services provided by CRS providers and
paragraphs 19 to 23 were devoted to emerging new forms of CRS services.  After nearly two years the
situation has evolved and clarified, and figures, data and forecasts are now available on these new
forms.  In the meantime the world of traditional CRS has undergone notable changes.  This section
will deal successively with the classical CRS and with the new forms of CRS:
A. CLASSICAL CRS
1. Economic developments concerning the classical CRS
The "classical" CRS can be described by the following table:
Figure 1
Client
(private or
business)
Airline
companyCRS
supplierTravel
agency
Price o f
ticketCommissionRetrocession
10-12$
per
ticketPath of the orde r
Remuneration of operatorsPrice of ticketS/C/W/163
Page 14The information contained in table n °1 page 8-9 of document S/C/W/59 can be updated and completed by the following table:
TABLE 3
SABRE GALILEO AMADEUS WORLDSPAN ABACUS
Foundation date 1946 - 1959 1971 (United's Apollo)
1987 COVIA
1990 Galileo
1993 General merger in Galileointernational1987 1982 (Delta-DATASII)
1976 (TWA -PARS)
1990 (Merger)1988
Revenues 1999 US$ 2.435 billion US$ 1.526 billion US$ 1.272 billion
Market share924% 28% 34% 13%
Initial share
holdersAMR corp.
(holding companyof American
Airlines)Aer Lingus, Air Canada, Alitalia,
Austrian, British Airways, KLM,Olympic, Swissair, TAP,
United-Airlines, US AirwaysLufthansa: 29.2%
Air France: 29.2%Iberia:  29.2%
SAS:  12.4%Delta
NorthwestTWACathay Pacific, Singapore
Airlines
Share holders asof July 2000100% public since
march 2000ongoingrepurchase planfor US$ 100
million73,2% public since May 1999
including 6,7% self control(former BA shares)remaining shares: United: 17,6%,Swissair: 7,7% Olympic, Air
Canada, Alitalia, Aer Lingus,
Austrian: 1,5%- repurchase plan for US$ 500m40% public
23,3% Air France18,3% Iberia18,3% Lufthansa (A shares)since Oct – Dec 1999
voting rights:
35,7% Air France, 27,9%Iberia, 27,9% Lufthansa,8,4% publicDelta: 40%
Northwest: 34%TWA: 26%All Nippon Airways, Cathay
Pacific, China Airlines, EVAAirways, Garuda, Hong KongDragon Air, Malaysian Airlines,Philippines Airlines, Royal
Brunei, Silkair, Singapore
Airlines: 65%Sabre:  35% since February1998
Intermediaryownership
movements18% sold to the
public in 199635% sold to the public in 1997 Replacement of SAS by
Continental in 1995China Airlines, Malaysian
Airlines, Philippines Airlines,
Royal Brunei:  1988-90,
Silkair:1990,Dragon Air, ANA 1992, Garuda1993, EVA Airways 1994
Number ofemployees10,000 2600 2,800 including majority
owned National marketingcompanies (NMC), 1700
without them3,200 Headquarters:  400
NMC: 450
                                                     
9 Source Amadeus, only four global players taken into account, one may hint at different results from other partial figures pres ented by the other CRS providers.S/C/W/163
Page 15SABRE GALILEO AMADEUS WORLDSPAN ABACUS
Number of air
booking 1999331.1 million  320.6 million 343.9 million
Value of bookings 71 bn $ 55 bn $
Number of travel
agencies connected47,000 41,000 48,500 18,000 9,300
Number of
terminals210,000 169.700 205,700
(134,300 in travel agencies
71,400 in airlines sales
offices of 114 airlines)23,300
Countries covered 45 107 134 thro ugh 67 National
marketing companies(NMC)60 18 (all in Asia) through 38
NMC
Cooperation withother CRSShare of 35% in
AbacusAbsorbed GETS in 1997 with a
system conversion staged on two
years (97-99)- absorbed system one in
1993
- joint-venture with Korea
airlines(Amadeus: 32%, KAL:68%) to operate the CRSsystem TOPAZ in Korea- System hosted and maintained
by Sabre system since 1997
after the termination of an
agreement with World span- 40% share in Infini (Japan-60% ANA) also a Sabreoperated system- joint-venture with Air India
and Indian Airlines (49%) and
Tata consulting services(2%)
Numbers ofairlines bookable440 537 505 527
GDS: non air
booking and
percentage of
total38.8 millions
10,8% of total
bookings29.3 millions
9,1% of total bookings28.8 millions
7,7% of total bookings
GDS: Number ofcar rentalcompaniesbookable and oftheir location50 companies 38 companies in 18,000 locations 48 companies in 23 500
locations44 companies in 17,300
locations50 companies
GDS: Number of
bookable
properties and ofbookable hotelscompanies45,000 properties 45,000 properties
225 companies51,300 properties
319 companies39,000 properties
200 companies50,000 propertiesS/C/W/163
Page 16SABRE GALILEO AMADEUS WORLDSPAN ABACUS
GDS: Other GDS
products350 tour operators Ferries, rail tour operators,
cruises, insurance27 tour operators, 49
special travel servicessuppliers
IT: provisionand/or
management of
airlines web-sitesUal.com, Sabena 55 80
IT:  provision
and/ormanagement oftravel agency web-
siteGetThere.com
Uniglobe.com3,162 Expedia
Price.line.com
IT:  provision andor management ofother travelvendors web-sitesWal-Mart
Expresso Group(e.viaggi.com)
IT:  managementof multi-airlinesportalsOn-line Travel Portal (OTP) Orbitz
IT: alliance
displays"Preferred Availability"
for Star"Alliance display" for Star "Worldspan alliance
display" for Skyteam and
qualiflyer"Alliance Manager" for
OneWorld and Star
IT: mobile
commercecooperations
10OracleSabre-Vodaphone,Travelocity–BTCellnetMotorola Nokia, Ericcson, Wideroe
IT: other IT
activities- Sabre E Market
place with Ariba(business tobusiness platform)- Encryptix (tickethome printing
systems)- Stamp.com and encryptix (ticket
home printing systems)- Shepherd systems (software forairlines)- Quantitude (telecom services forairlines )Cooperation with
Broadvision (softwareeditor) Hewlett Packard andBank of America
                                                     
10 i.e provision of airline information and booking on mobile telephone handset, personal digital assistants and notebooks.S/C/W/163
Page 17SABRE GALILEO AMADEUS WORLDSPAN ABACUS
IT revenues and
percentage of ITin total revenues ifavailableUS$ 1,865 billion
40% of totalrevenuesUS$ 650 million US$ 200 million
Travel agent
services: directly
owned (partiallyor totally) virtualtravel agenciesTravelocity.com
Preview.travel
11Trip.com12Amadeus.netVacation.com
13
Terra Networks
Travel agent
services:.directly
owned business
travel dedicatedcompaniesSabre Business
travel solutionJoint-ventures with SAP
systems
Nota bene:  A blank in this table does not mean that the CRS provider has no activities in the area concerned, but only that it  has proven impossible to gather the relevant data.
                                                     
11 About to be merged, 1.2 billion revenues, 17 million registered customers, 3rd largest e-commerce site.
12 3.5 millions registered users.
13 9,400 travel agencies in the US.S/C/W/163
Page 18
41. From Table 3 above and from information drawn from various sources (specialized press,
web-sites of those companies, ICAO) one may consider that five main evolutions have characterized
the classical CRS over the period 1993-2000:
(i) concentration;
(ii) an expansion fuelled by geographical extension and by an increasingly challenged price
model;
(iii) extension to other leisure and travel areas
(iv) initial public offerings and severing of the link with parent carriers;
(v) erosion of the predominant role of traditiona l CRS provider in the issuing of air transport
tickets and subsequent diversification into other electronic travel activities.
(i) Concentration
42. In 1994, Amadeus took over System One, a CRS owned by Continental and operated by
Electronic Data System.  The same year Air Canada and Canadian Airlines dissolved their partnership
in Gemini, Canadian joining the SABRE system while Air Canada joined Galileo.  In 1997 Galileo
took over GETS with a two-year conversion perio d.  The same year SABRE took a 35% participation
in Abacus International and replaced Worldspan as the operating system of Abacus.  Abacus itself
took a 40% share in the Japanese CRS INFINI  (the remaining 60% belonging to All Nippon
Airways).  In 1998 Amadeus took a 32% share in the Korean CRS TOPAZ (the remaining 68%
belonging to Korean Airlines) and became its operating system.  There had been talk in 1998 of a
merger between Amadeus and Worldspan but they seem to have been abandoned since.  Arthur
Andersen made an attempt to enter this market in 1998-1999 but withdrew.  EDS is still managing a
proprietary system for Continental but apparently w ithout plans of expansion.  This leaves for the
moment four global players (Sabre, Galileo, Amadeus and Worldspan), one strong regional actor
(ABACUS) and two notable local systems (Infini and Topaz), all regional and local actors being
somehow linked to the global players.
(ii) An expansion fuelled by geographical extension and by an increasingly challenged price
model
The following table gives an idea of the progressive geographical extension of CRS:
TABLE 4
1994 1995 1998
Countries with no CRS
available 56 55 45
Countries with one CRS
only 45 49 43
 Countries with two or
more CRS 82 81 97
Source:  ICAO
43. CRS services are now available in more than three-quarters of ICAO members.  In individual
terms Amadeus is the system covering the greatest number of countries (134) followed by Galileo
(107) Worldspan (60), SABRE (45) and Abacus (18).  The form of the coverage is also an interesting
feature: the CRS provider does not create a national marketing company in each and every country.
For instance Amadeus is covering its 134 countries with only 67 national marketing companies.  This
seems to show that mode 3 is not the only relevant mode for CRS but that mode 1 plays a central rolein countries where no national marketing companies has seen set up.  Symmetrically in the case of
Abacus, as one can see by the table above, 18 countries are covered by 38 national marketing
companies, which shows that there can be several national marketing companies in the same country.S/C/W/163
Page 19
44. The size of the respective markets is extremely variable as one can see by the following pie
chart.
The International Market of CRS
45. The U.S. market alone accounts for more than 30% of a market valued at US$ 5 billion a
year.  The only global data available on market shares (Amadeus 34 %, Galileo 28%, SABRE 24%,
Worldspan 13%), is limited to the four global players.  The precise methodological basis of this figure
is unknown and partial figures given by other CRS are inconsistent among themselves14.  Therefore,
one must take this figure with certain precautions.  The respective strength of the five  major players
on the regional markets is also extremely variable as shown by the following pie charts.
                                                     
14  The addition of the proportion of the booking claimed by each system is well over 120%.South Africa 8%
Africa/Mid East 4%
USA/CDI 31%
Asia/Pacific 23%
Europe 34%S/C/W/163
Page 20
46. All these companies have reported over the last seven years a regular expansion in their
number of bookings and in their revenues.  However, a large part of this growth in recent years is
linked to the geographical expansion described above, as new markets are growing much quicker than
mature ones.  Until recently, the pricing system of CRS, a flat fee of about US$ 10-12 per segment
booked, guaranteed to CRS an activity indexed on the volume of air traffic that was in any case
growing.  Even price competition among airlines did not have a negative effect on CRS: since the
CRS remuneration was a fixed sum transaction, competition merely contributed to raise the volume of
traffic and thereby CRS revenues.
47. This position may however change relatively rapidly.  Under the pressure of their customers
and of the regulatory authorities CRS have already progressively stopped charging fees on duplicate
and fictitious reservations.  Secondly, when acting as booking engines of new channels of distribution
(virtual travel agencies, airline web-sites, etc.) CRS fees are closer to the US$ 1 to 2 range than to
US$ 10-12 and the share of those channels is growing.  Finally as parent airlines have divested fromCRS they do not have the same interest in having CRS charging high fees.
(iii) Extension to other leisure and travel areas
48. Over the last ten years the CRS have transformed themselves into Global Distribution
Systems.  GDS activities are the extension of the CRS booking system to other types of transport such
as rail, ferry tickets or car rental, but also more widely to travel-related activities such as hotels,resorts, cruises, tour operator packages, or leisure activities such as opera, cinemas and theatre tickets,
or even to non-travel activities such as insurance.
49. For the three global CRS providers for which data are available this represents already around
10% of bookings (10,8% for SABRE, 9,1% for Galileo, 7,7% for Amadeus).  Those bookings are
growing three times quicker than air bookings for Galil eo, twice as fast for Sabre but only half as fast
for Amadeus although the offers of those three CRS are comparable as one can see from the relevant
rows of the general chart.
(iv) Initial public offerings and severing of the link with parent carriers:
50. The initial share holders, the state of play as 1 July 2000 and the intermediary movements of
stocks are described in the fourth, fifth and sixth columns of table 3.  The tendency is clearly to gopublic as two major players are already majority  owned by the public (SABRE 100% since March
2000, Galileo 73,2% since March 1999).  Amadeus is currently 40% public and intends to open its
capital up even more in the future.  Out of the major players, only Worldspan remains totally owned
by its airline founders, which is also the case for the regional player Abacus.  This represents a shift in
strategy for the airline founders and especially  for SABRE-AMR which was presented as the
archetype of the integrated company covering the whole spectrum: airline (American), CRS (SABRE)
and virtual travel agency (Travelocity).
51. Several factors have triggered that movement:
- the ownership of a CRS system has become less important as a means of channelling
clients with the progressive improvemen t of codes of conduct (U.S., EU, ECAC,
ICAO) that have forbidden certain unfair practices;
- the fashion has switched back to the concentration on the core business of air
transport;
- new channels of distribution have emerged that have diminished the weight of CRS
and that do need cash injections to be developed and airlines controlled.   This is theS/C/W/163
Page 21
case of multi-airlines portals (such as Orbitz or On-line Travel Portal), of virtual
travel agencies (such as priceline.com where airlines have taken stakes) and of the
airline and alliance web-sites (for more details on these new channels of distribution
see paragraphs 65-114).  The initial public offerings of CRS have given airlines an
opportunity to get the pay-back of their huge investment in the eighties, and to
generate the cash needed for these new investments.
52. One may also suspect that the airlines have tried to disengage themselves from a service
bound to decline with the emergence of new channels of distribution and the progressive capping of
fees. A final reason for spinning off, especially in  the case of SABRE, has been the fact that third
party clients, for IT software and outsourced systems management including web-sites, were reluctant
to give confidential information on bookings trends and profiles to a company owned by a competitor.
The spin-off resolves that problem.
53. The consequence of this movement is that "parent carriers of CRS" in the Codes and GATS
MFN exemption regulatory sense tend to become the exception.  There remains in most instances
only "participating carriers", and their obligations have in certain circumstances been lightened (see
paragraph 61).  It is also worth noting that as far as participating carriers are concerned significant
movements have taken place among CRS such as the recent switch of BA from Galileo to Amadeus.
(v) Erosion of the predominant role of traditional CRS provider in the issuing of air transport
tickets and subsequent diversification into other electronic travel activities
54. As one can see by the table 3, CRS providers have diversified massively and recently into
other activities.  One can attempt to draw a typol ogy of these diversifications by distinguishing
downstream and upstream diversification.
55. Downstream diversification is the fact of trying to get into direct contact with the customer,
individual or corporate, thereby bypassing the traditional intermediary of travel agencies.  All major
players have done so, to various extents.  The most  typical case is SABRE who pioneered the concept
of the virtual travel agency with Travelocity (1996),  the third biggest e-commerce site in the world
after its merger with preview travel, with 17 million registered users, US$ 1,2 billion revenues and a
32% market share among virtual travel agencies in the U.S. market.  SABRE Business travel solutiondedicated to corporate business enjoyed the same competitive edge. Since then Amadeus with
Amadeus.net, Vacation.com and Terra.networks and Galileo with Trip.com have followed the move.
As far as corporate customers are concerned Amadeus has reached an original agreement with SAP,
the most used Enterprise Resources Planning softwa re.  SAP R 3 software now contains built in travel
booking functionalities linked to Amadeus, thereby guaranteeing a constant flow of revenues toAmadeus.
56. Upstream diversifications are more heterogeneous.  Their common point is to use the
expertise gained by CRS in information technology management to offer materials, software,
outsourcing, or services to airlines, alliances, multi-airlines portal, travel agencies and distributors
such as Wal Mart in the area of travel distribution.  This ranges from takeover in hardware companies
producing home printing tickets systems (SABRE a nd Galileo - with Encryptix and Galileo with
stamp.com), to the creation of a company dedicated to the provision of telecoms services to travelvendors (Quantitude by Galileo), to the complete outsourcing of the information technologies system
(SABRE notably) to the provision and management of  web-site and booking engines to travel agents,
airlines, distributors, alliances, and multi airlines portals.  This represents already 40% of SABRE
revenues and a comparable proportion for Galileo, Amadeus and Worldspan are being one step behind
in that respect.S/C/W/163
Page 22
2. Regulatory developments concerning classical CRS
57. Regulatory intervention concerning CRS was traditionally governed by market access and
non-discrimination preoccupation, that is to say to avoid discrimination among carriers through unfair
display on the screens.  The various codes of conduct regulating to that aspect have been updated and
extended to new activities such as rail transport during the period.  In addition, competition and
transport authorities have also intervened in the area of pricing.
58. As far as the codes of conduct are concerne d, ICAO revised its 1991 Code of Conduct for
CRS in 1994 - 1996, notably to take into account the results of the Uruguay Round negotiations.  This
new code took effect on 1 November 1996.  The ma in changes are the expansion to non-scheduled
services and, if States deem it necessary, to new information systems such as the internet, stronger
measures to safeguard privacy of personal data, the prohibition of fictitious bookings, more specific
criteria on flight display order, provisions conc erning display and consumer information for code-
shared flights, suggested model clauses for bilateral agreements and market access and exemptionprovisions. Documents S/C/W/59 (page 11, paragr aph 27) and S/C/W/129 (Page 11, paragraph 5,
Annex 1) describe in more detail the content of this code.  At the end of 1999, 31 countries either
followed this code or had CRS regulations consistent or compatible with it.  It is worth noting that the
transitional exemption to the market access obligations required by two of those countries will expire
on 31 December 2000.
59. In the European Communities the code of conduct for CRS was amended by Council
regulation n°323/99 dated 30 April 1999.  The main changes are the inclusion of rail services in
principal displays for those vendors who wish to do so, and additional rules on the protection of
personal data, on the responsibilities of the subscribers, on fees and on billing data.  Those changes
were designed to be consistent with the revi sed ICAO CRS code of 1996.  In 1999, the Commission
fined Lufthansa for not having opened before December 1998 an electronic ticketing function
introduced in 1997.
60. The European Civil Aviation Conference also adopted a new code in June 2000 (ECAC/24
dated 29 –30 June 2000) replacing its 1994 code (CEAC/16-1), extending the provisions of the new
EU code to the whole European continent and incorporating the 1996 ICAO code provisions.
61. In 1997, the U.S. Department of Transportation in reviewing its CRS regulations, decided that
airlines which were not CRS owners need not participate at the same level in all CRS systems in
which they choose to participate.  In addition the DOT amended its rules to require each CRS vendor
to offer one display that lists flights without giving all on-line connections a preference over interline
connections.  It also prohibited systems from creating displays that neither use elapsed time as asignificant factor in selecting flights nor give single plane flights a preference over connecting
services.  The DOT extended the validity of its rules until 31 march 2000 in order to allow time for
completion of its review.
62. Canada adopted a comprehensive set of CRS rules in June 1995.  Australia amended in 1996
its code of conduct to require systems vendors to offer CRS access to subscriber groups using a
communication system different from that of the system vendor and to include more detailed
conciliation procedures for dispute settlement.
63. On pricing several airlines made complaints in 1994 to their regulatory authorities in the
European Communities and in the U.S. regarding the level and nature of booking fees charged by
CRS vendors resulting from duplicate and fictitious reservations.  In other terms, CRS were charging
a flat flee (generally US$ 2) for each segment booked even if it did not materialize in an actual
ticketing, as is often the case with precautionary multiple reservations.  In 1995, the EuropeanCommission issued a study on options for the funding of CRS booking and submitted to publicS/C/W/163
Page 23
debate.  As a consequence of the complaints made by airlines on the charging of fictitious bookings
the CRS vendors began tightening their charging policy by linking the charge to the issuance of the
ticket and by reprogramming the systems in order to  enhance the airline's ability to refuse bookings
which they regarded as unnecessary and to refuse booking for impracticable travel.  In 1996, the
European Commission drafted a Charging Principles Guidance Note in order to clarify some of issues
involved in CRS pricing, such as incentives for travel agents, passive and duplicate bookings,unfeasible segments, cancellations and higher functionality charges.
64. From a GATS point of view when acting in second line as a booking engine behind a travel
agency web-site, a distributor web-site, an airline web-site, an alliance web-site or a multi airline
portal, CRS providers are still providing CRS services.  But the question arises if the "frontlines"
providers cannot be qualified also as CRS services providers since they provide on-line bookings and
reservations.
B. NEW FORMS OF CRS
65. The present section will firstly attempt to trace back the history of the appearance of these
new forms of CRS, secondly try to draw a typology of those main new services providers and thirdly,
describe for each type the economic data available and the ongoing regulatory debate.
2. A brief history of on-line travel distribution:
66. In 1993, there were only three ways for customers to buy a plane ticket:
- either to go through a travel agent that would use its CRS provider to book and issue
the ticket;  or
- to call by phone the reservation center of an airline;  or
- to go to an airline sales office and buy a ticket from that airline.  In this latter case, the
airline would not use a CRS but access through its internal network to its inventory.
It would use a CRS for interlining i.e.  for ticketing connection flights on other
airlines, which explains why even airlines sales offices use CRS (see for instance the
number of terminals for airlines for Amadeus above).
67. Although there are no global figures available one can estimate from the respective numbers
of CRS terminals and from the statistics from various individual airlines that the first mode of ticket
emission (i.e. travel agent- CRS - airline) was largely dominant and represented more than 80 to 85%
on average of the tickets sold, direct sales by the airlines accounting for the remaining 15-20%.
68. The 1993 Air Transport Annex and more widely CPC/W/120 reflected that state of play by
defining three categories of service providers: travel agents, CRS and sales and marketing by the
airlines themselves.  This simple scheme has now exploded as many more actors and combinations of
actors now offer airline bookings.
69. Historically, if one excepts the geographically limited French experience of the minitel
15 one
can trace back the appearance of direct on-line bookings by the customer, by-passing the travel
                                                     
15 Degriftours minitel site  dates back 1991 and Degriftours, now n°1 of the virtual travel agencies in
Europe with a 15% market share still owes a large though declining part of its revenue to the minitel (333million French francs on 454 in 1998, 280 million on  580 in 1999, 150 million on 800 forecasted for 2000, the
remaining  coming form internet),the same could be said of the minitel site of Air France which with 4,5 million
visitors a year is the third largest minitel site of France.S/C/W/163
Page 24
agency as far as 1993, with the establishment of the ETDN (Electronic Ticket Delivery Network)
network by Galileo.
70. In 1995, five major airlines were already offering tickets via CD-ROM and diskettes to be
read on personal computers, while more than 100 airlines and the then five major CRS providers had
opened web-sites, like several travel agents groups and numerous individual agents although most of
those sites were initially limited to information of the consumer and not yet to on-line booking.
71. Yield management techniques began to be applied on the internet in 1996 through the auction
of a fixed number of seats or the offer of restricted discounts on certain flights and routes where
bookings were weak.  1996 is also the year of foundation of the two leading virtual travel agencies,
Expedia owned by Microsoft a nd Travelocity owned by SABRE.
72. In 1997, IATA, in view of the growing use of internet for airline booking (still representing
less than 1% of airline revenues but growing very fast) established a special code for electronic
reservations services providers which would enable airlines to readily identify such bookings.  In1997 - 1998 further refinements were added to certain of these web-sites such as accessing frequent
flyer accounts, redeeming mileage awards and tracing baggage.
73. In 1998, the first "name your price" service (a reverse auction system) was introduced by the
virtual travel agent Priceline.com.  The creation of alliances web-sites followed closely the
announcement of the various alliances (Star 1997, Qualiflyer, Oneworld 1998, Skyteam,1999-2000).The same year Expedia and Travelocity began extending their activities to the UK.  From a GATS
point of view this is an interesting element:  it shows that electronic commerce is not only, in the case
of travel distribution a question of modes 1 and 2 but that the legal and probably, financial and
marketing peculiarities of each market necessitate some kind of mode 3 presence.
74. In 1999, Alaska Airlines, followed by Continenta l, began to use internet for on-line check in.
The creation of multi-airlines portal was announced in 1999 in the United States (Orbitz) and in 2000
in Europe (On Line Travel Portal), in the U.S. again (Hotwire.com) and in Asia (still unnamed).
Finally, the same year IATA and IBM announced that they were working on the creation of a global
electronic system and common formats and machines allowing the interchange of electronic tickets.
3. Analysis of the main types of  on-line booking providers
75. Assessing the size of the global market for on-line air travel distribution and the respective
shares of the various kind of operators is a difficult task, like any attempt at describing of the new
economy: data are essentially available for the U.S. market, scarce for Europe and practically in-
existent for the rest of the world.  Market shares of individual companies or types of providers vary
greatly year after year.  Figures do not always distinguish airline bookings from travel bookings nordo they clearly indicate if they refer to the U.S. market, the world-wide market, or distinguish
necessarily the channels of distribution.  Past figures do not give a sound idea of this exploding
market since growth is exponential and since certain types of providers which are likely to capture in
the future an important share of the market, have either just become operational (alliance web-sites) or
are not yet operational (multi airlines portals). In addition certain types of currently dominant
providers like virtual travel agencies not owned by GDS, are economically fragile and may even
disappear since they follow the general business model of the new economy and have constantly madelosses since their creation.  One has therefore to have recourse to forecasts, which are of course
divergent in their methodological basis and in their results. With those methodological limitations in
mind the figures available are the following:S/C/W/163
Page 25
TABLE 5
1998 1999 2000 2001 2002 2003
Phocus wright:
On-line Travel
Worldwide7bn $ or 3% of
total travel of
which 73% ofairlines bookings20.2 bn $ or 8%
total travel of
which 63% ofairlines bookings
Phocus wright:European on-linetravel market200 EUR million 1.1 EUR billion 3.1 EUR
billion5.7 EUR
billion9 EUR
billion
Gartner group:On-line travel
worldwideUS$ 5 billion US$ 30
billion
Jupiter
communications:On-line travelworld-wideUS$ 2.2
billionUS$ 4.2 billion US$ 6.3 billion US$ 8.9
billionUS$ 12.6
billionUS$ 16.6
billion
76. The same sources have tried to trace and foresee the respective shares of  airlines and of
virtual travel agency in the market of on-line travel booking.  Their results can be summed up by the
following table:
TABLE 6
Travel agent
shareAirlines
sharesOthers16
1993 US General Accounting Office
(US market only, offline17)85% 15%18not taken into consideration
1996 US General Accounting Office -
(US market only, offline and on-line)75% 25%19not taken into consideration
1999 Phocus wright year book
(on-line market only, world-wide)52% 33% 15%
December 1999 Jupiter
Communications(on-line market only, world-wide)54% 46% not taken into consideration
2005-2006
Arthur Andersen60 % 40% not taken into consideration
77. To sum up those extremely heterogeneous figures and forecasts, one can say that the on line
travel market is expected to grow five to six fold  in the next five years, Airline bookings will still
constitute the majority of this market, but with a share declining from three quarters to two thirds.
78. As far as airline booking are concerned, airlines are expected to at least double (from 15-20%
to 40-50% ) their share in the distribution system, essentially to the detriment of travel agents.  Thismovement has already begun in the United States, where the number of travel agencies has begun to
decline and where although their revenues are still growing, travel agencies have lost, according to the
                                                     
16 Web-sites  of car rental companies, hotel chains and cruises and tour operators
17 GAO /RCED99-221"domestic aviation:  effects of changes in how airlines tickets are sold",
July 1999.
18  tickets offices, call centers.
19  tickets offices, call centers, first web-sites.S/C/W/163
Page 26
General Accounting Office, US$ 4,5 billions of commi ssion through capping over the last five years.
They have consequently begun to charge service fees to their customers as an alternative source of
revenues.
(ii) Virtual travel agencies
79. By this denomination one may regroup three of the cases listed and illustrated in document
S/C/W/59:
- case 2(a), page 5 (Virtual travel agency owned by a CRS e.g. Travelocity,
Amadeus.net, Galileo.com)
- case 2(b), page 6 improperly named then Electronic Reservation Services Provider
(pure virtual travel agency or travel-selling dedicated part of a web-site owned by
anybody else than a CRS or a physical travel agency be it by the public, by airlines 20,
by software companies by a distributor, by a bank, etc., e.g.  priceline.com, Expedia);
and
- case 3(c), page 7 (web-site of a physical travel agency, e.g.  Carlson.com).
80. The only economic difference separating those companies is that the agencies owned by CRS
do not have to pay, or do not have to pay to the same extent, the bookings to the CRS, which gives
them a competitive edge.  For the rest, they are a ll, or nearly all, "powered" by a CRS booking engine
and their contractual relationship with airlines is common: being seen as  rival in the conquest of low
cost distribution markets they suffer at least in the United States tougher conditions than their physical
counterparts in terms of number of passengers, flight segments, length of time they can hold a
reservation and payment.  In terms of remuneration their commissions stand at 5% (versus 8% now
for their physical counterparts) and are capped at US$ 10 per ticket, compared to US$ 50 on averagefor a domestic U.S. flight and US$ 190 on average for an international flight.
81. One may note that a movement of consolidation has already taken place.  In the United States,
the first five virtual travel agencies account for 73% of the gross travel bookings (Travelocity/
Preview:  32%, Expedia:  20%, Priceline.com 10%, ITN.net (GetThere.com): 7%, cheap tickets:  4%).
The movement is similar, though less advanced, in Europe where the six first account for 53% of themarket (Degriftour: 15%, Expedia.co.uk 14% , Ebookers.com 10%, Leisure.planet.com: 9%,
Lastminute.com 4% and Edreams 1%).  However, this movement may be reversible.  There may be
market exits and in a market grow ing five fold in a year (from 0.2 billion EUR in 1999 to 1.1 billion
forecasted in 2000 in Europe)
21 a new entrant in 2000, Edream, has managed to achieve a forecasted
1% share.
82. The economic characteristics of the sector are a mix a of CRS economy and new economy.
As for CRS, airlines, at least certain of them, invest heavily in those new businesses (for instance
United in Buy.travel.com or in priceline.com:  United American, US Airways, Continental,
Northwest, TWA, America West and Delta) in a move parallel to the investment in CRS twenty years
ago.  As for CRS, airlines plan to divest in the l ong term and argue that the management of the system
will be made by a neutral management team, guaranteeing equality of treatment even to non-equity
holder airlines.
83. At the same time on-line travel belongs typically to the new economy.  Although travel
distribution is reputed to be structurally more profitable than e-commerce of physical goods because
of the absence of warehousing, shipping and delivery costs, the profitability of the sector for non
                                                     
20  this refers to companies totally or partially owned by airlines such as priceline.com but not to airline
web-sites which are in a different economic and legal situations and are described  below.
21 source . phocuswright.com/events/liveurope2000/press/sileoS/C/W/163
Page 27
CRS-owned companies remain to be demonstrated while stock capitalizations reach heights without
comparison to those of the "physical" industry of air transport.  For instance the capitalization of
priceline.com had reached at a given point US$ 13 billion, more than the total of the capitalization of
United Airlines, Continental and Northwest, while the site has registered only US$ 35 million of
effective sales in 1999 and has accumulated lo sses of US$ 114 million since its foundation.
84. The regulators in the United States have already ruled twice on virtual travel agencies.  In
September 1996, the DOT refused to intervene against Expedia as requested by the travel agents
associations.  In April 1999, the DOT also dismissed a 1996 complaint of the Association of Retail
Travel Agencies (ARTA) on the sale of internet tickets below rates 22.
(iii) Airline web-sites
85. As of January 2000, according to an inquiry by Airline Business International and SITA, only
40% of the IATA airlines offered on-line booking facilities but 37% more were planning to do so in
the next two years.  The extent of this movement varies greatly from region to region.  It is achievedin the U.S. and nearly achieved in Western Europe and developed Asia Pacific and unequally
embryonic in the rest of the world. It is also worth noting that airlines do not rely on one web-site.
They segment it not only by type of business (low cost with auction, leisure, individuals, small
businesses, big businesses) but also by countries.  For instance, Air France has 36 different sites, of
which only five  allow on-line bookings.  The extent to which dedicated web-site entails an effectivecommercial presence in the country concerned remains unknown.
86. Low cost carriers tend to use internet booking to a much wider extent than traditional carriers.
For instance, where as in 1999 the proportion of on-line sales by U.S. airlines was between 3 and 5%,
Southwest had a 27% rate (but only 8% in1997 and 19% in 1998)  of on-line booking which in terms
of gross bookings led it to compete with US$ 877 million with Travelocity/ Preview (US$ 1,1 billion)and  Expedia (US$ 750 millions).  In Europe, Easy Jet is in a similar situation with 50% on-line
bookings in the first quarter of 2000 followed distantly by Ryan Air with 20%.  At the beginning of
1999, Delta went so far as to impose a systematic surcharge of US$ 2 for each ticket not booked on
internet but had to pull back in view of the hostility of travel agents.
87. All major airlines are nowadays announcing ambitious strategies and targets for their on-line
sales.  For instance, BA plans to raise the share of on-line tickets in its global sales from 2% in 1999
to 50% in 2003, or from £45 million in 1999 to £700 million in 2002.  Similarly Air France plans to
improve this figure from 5% in 1999 (a relatively high figure by international standards that can be
explained by the minitel experience) to 50% in 2005 and Iberia from 1% in 1999 to 30% in 2006.
Continental shows even more ambition by planni ng to triple in one year its e-sales, from
US$ 300 million in 1999, to US$ 800 to 1000 million in 2000.
88. Although these figures may look excessively optimistic, especially when one recalls that the 8
million visitors to the Swissair web-site in 1999 only translated into 10,000 bookings
23, they seem
corroborated by exponential past growth.  For instance the revenues of on-line booking for American
Airlines jumped from US$ 75 million in 1998 to US$ 575 million in 1999.
89. These ambitious targets can be explained by thre e main reasons.  First airlines realized very
quickly that internet was by far the cheapest channel of distribution available.  For instance a study byMerrill Lynch," E-commerce virtually there" dated April 1999 computed that the cost of processing a
                                                     
22 source: US general accounting office report  GAO /RCED99-221" domestic aviation: effects of
changes in how airlines tickets are sold", July 1999.
23 In the United States though, a more mature internet markets this ratio is approximately one to three.S/C/W/163
Page 28
ticket for America West was of US$ 6 on its own web-site, US$ 13 with the airline own reservation
services, US$ 20 through an independent travel agent and US$ 23 through a traditional travel agent.
Similarly Southwest Airlines, the main U.S. low cost carrier, considers that booking through its web-
site, costs ten time less than a booking through a travel agent, and five time less that a booking
through in house reservation staff (call center or ticket office) and in any case well under US$ 1 per
ticket.
90. Secondly airlines have used the web as a tool of yield management, as a way to sell at
marginal prices seats that would have otherwise remained empty.  The instantaneity, the possibility of
targeting certain customers ("push" technologies) and the possibility of holding auctions in addition to
the very low cost, make internet a perfect instrument for optimizing the load factor of planes.
91. Thirdly, after this initial discount orientation airlines have realized that the web was also the
ideal instrument to gather data on customers and then to analyze them through "web-mining"
techniques in order to identify customer preferences and practice personalised marketing.  This hascreated a complete new branch of yield manageme nt techniques known as CRM (Customer Relations
Management).  The mastering of these instruments is essential for airlines since they constitute a tool,
alongside frequent flyer programs and lounges, to develop loyalty from high contribution passengers.
That is why for instance, Delta has decided to apply those personalised marketing techniques first to
the 9% of passengers that generate 35% of its revenues.  From a regulatory point of view the use ofthose techniques may conflict in certain instances with regulations on data privacy protection but this
is a general problem for e-commerce and not something specific to air transport.
92. One can distinguish three types of airline web-sites:
(i) those which sell only the tickets of the company concerned;
(ii) those who sell also the tickets of allied companies (e.g. KLM); and(iii) those who sell tickets from many airlines or even car rental hotels and tour operators
(e.g Lufthansa Infoflyway or united.com) in an attempt to capture a bigger part of the
distribution market to the detriment of travel agents, other airlines and even CRS.
93. As far as this third type is concerned a typical example is the Lufthansa web-site Infoflyway
which already offers 500 bookable airlines and sells five per cent of  non–Lufthansa ticket a large
majority of which are also probably non-Star tickets.  Lufthansa has even gone further by spinning off
its IT activities in a subsidiary called Lufthansa e-Commerce, applying thereby the strategy already
followed for its maintenance and catering activities.  This new subsidiary is now actively seeking third
party customers.  United.com is another airline we b-site offering the whole gamut of world travel:
500 airlines, 45 car rental companies and 30,000 hotels, figures that are comparable to the offer of the
main GDS providers (see Table 3).
94. There are no detailed figures allowing a breakdown between the three types of airlines'
individual web-sites (mono-seller, alliance seller or universal seller) and it is also difficult to identify
as yet a tendency or a move between those three types.
95. The distinction between them may seem anecdotal but it makes sense in economic terms
(since commissions are exchanged in two of the cases) and even more so in regulatory terms and thisin a double manner. Firstly, while it is admitted that dedicated sites (selling one airline tickets or
alliance tickets) are by essence not required to be neutral, the question of the neutrality of the display
and of the implementation of the codes of conduct arises for individual airlines' web-sites selling
tickets from all airlines.  The regulators have not yet tackled this issue.
96. Secondly, when an airline is selling its own ticket it seems to qualify in GATS terms both as a
CRS provider and as selling and marketing provider since it sells directly it own tickets and therebyS/C/W/163
Page 29
falls into the definition of paragraph 6(b) of the Annex "opportunities for the air carrier concerned to
sell and market its transport services including al l aspects of marketing such as market research,
advertising and distribution.  These conditions do not include the pricing of air transport services nor
the applicable conditions"24.
97. When an airline is selling its partners tickets, it probably still qualifies as a CRS but the
question  arises if the tickets of its ally can be considered as its "transport services".  A common senseanswer would be to say no, but when examining the characteristics of the alliances (which will be
done in the second part of the paper), one realizes that they are increasingly integrated, that they
create positive gains that are more than the simple addition of the traffic of their Members, that there
are complex code-share agreements, and a common promotion of a brand and of frequent flyer
programs and that one can in the end measure precisely the financial benefits of the alliance.
Therefore cross selling tickets under a common brand may appear as another way of selling its own
services.  One may argue of course that the sectors of cooperation of the alliances are excluded fromthe scope of the definition of selling and marketing services since they touch upon pricing and
applicable conditions, but the scope of the alliances is wider than pricing and conditions (for instance
common marketing of a brand) and therefore the question remains posed.
98. When an airline is selling a ticket from a non partner  alliance it probably still qualifies as a
CRS but it is difficult to imagine how it could fall  under the actual definition of selling and marketing
services.
(iv) Alliance web-sites
99. Alliance web-sites are relatively heterogeneous.  As of 1 July 2000, only one, STAR
Alliance's allows direct booking on alliance partne rs while three others (Qualiflyer, Skyteam and
OneWorld) are just portals of entry sending the visitor through a hypertext link to the web-site of thepartner which may or may not comprise booking facilities, though these facilities are tending to
become increasingly common.  The Wings Alliance constitutes a particular case since it has no web-
sites of its own and has infact split its on-line bookin g facilities in two web-site one for the alliance
KLM-Northwest and one for the now defunct alli ance KLM-Alitalia, each one with common booking
facilities.  There may be other web-sites dedicated  to "one-to-one" alliances but to our knowledge thishas not yet been studied in detail.
100. From a regulatory point of view there is no problem of neutrality. The only legal problem
arising from a GATS point of view is to know if the common booking facility of an alliance web-site
can be considered to be covered not only by CRS commitments, but also by selling and marketing
commitments, since strictly speaking it is not the carrier itself (here Star instead of Lufthansa orVarig) that sells the ticket.  The same line of argument as above in the case of individual web-site
selling tickets from their alliance partner can be developed.
(v) Multi-airline portals
101. Multi-airline portals could be the next major development in the area of on-line travel
distribution. It is difficult, however, to formulate any forecasts in that respect since they have not
come yet into operation.  This is partly because of internal dissensions among carriers that are hesitant
to share confidential customer, pricing  and  sales information into a common system and partlybecause of the considerable opposition they face and of the regulatory hurdles this opposition has
created.
                                                     
24 This in itself creates a legal problem since the list of countries having commitments in CRS and in
selling and marketing are not identical, certain countries having commitments in selling and marketing but none
on CRS and symmetrically.S/C/W/163
Page 30
102. Multi-airline portals are designed by airlines to compete with travel agents, virtual or
physical, for the market of customers whose brand loyalty is weak and who look for a wider choice
than the one offered by airline or alliance web-sites.  They group airlines belonging to different
alliances and are up to now region based although the historically first one and most important, Orbitz
also gather associated airlines from other regions than North America.  Their main characteristics canbe summed by the following table:
TABLE 7
Grouping Orbitz (ex "T2") Hotwire.comOn-line travel
PortalAsian "T2"
(still unnamed)
Date of announcement Autumn 1999 June 2000 May 2000 July 2000
Date of planned entryin operationIntially summer 2000, postponed
to end 2000End 2000
 Founding membersUnited ,
Northwest,
Continental,
US air,America WestBA, Air France,
Lufthansa,
Alitalia , KLM,
Iberia ,SAS, AerLingus, Austrian,British Midland,FinnairCathay Pacific,
Quantas, Singapore
airlines, China
airlines, MalaysiaAirlines, RoyalBrunei Airlines, AirNew Zealand,Ansett Australia
and Asiana
Associated airlinesUS: American, US Airways,
ATA, Airtran, Hawaian, Midwestexpress, Midway ,Vanguard
Non-US:  Air Canada, Air
Jamaica, Air New Zealand,
Alitalia, All Nippon Airlines,Austrian , British Midland,COPA, CSA Czech, Iberia, KLM;Korean Airlines, Mexicana,Singapore, Varig
Operator Worldspan Amadeus Undecided
legal action under wayInvestigation by the US DOJ
antitrust division since May 2000
and by the US DOT since June2000
Other characteristicsNo auction,
carrier hiddenVoluntary
commitment ofnot sharingproprietary
informationTravel agent
associated
103. Orbitz being the oldest project is also the one that has triggered most opposition and hence
will be the regulatory test case.  The American So ciety of Travel agents (ASTA) lodged a complaint
with the Antitrust division of the DOJ in May 2000 while the Association of Retail Travel Agents
(ARTA) lodged a similar complaint in June with the DOT.
104. The internal rules of Orbitz stipulates that airline members will have the right to continue
having their own web-site but will be obliged to put their lowest internet tariffs on Orbitz .  The mainworry of ASTA is the special fares posted by airlines on Orbitz only.  Orbitz denies such charges byS/C/W/163
Page 31
arguing that it contractually requires the complete ne utral display of fares, that it will make its living
from commissions like other on-line and offline travel agent and has therefore no interest in seeking
to reduce those commissions, that there will be no collusion on the prices of the tickets thanks to built
in electronic firewalls that will prevent information sharing and finally that it will enjoy no exclusivity
on special web fares as companies will be free to offer the same discount tickets to other travel
agencies.
105. The European travel portal OTP is not yet under formal attack and to avoid it had promised
that its members would not share proprietary information.
106. In the case of the still unnamed Asia-Pacific multi-airlines portal, the founding airlines,
precisely again to avoid theses attacks, have indicated that they would associate travel agencies to the
business-to-business aspect of their project by en abling them to implement their customized private
label version of the services delivered by the site.  The concrete details of this association remain
however to be determined.  It is also worth noting that the two main Japanese airlines JAL and ANA,which have close relationships with travel agents are not among the founding members of the portal.
107. On the whole, the regulatory regime of on-lin e travel although probably more advanced than
in many areas of e-trade, remains largely embryonic as one can see for instance from the list of nine
pending dockets of the U.S. Department of Transport on petition, requests and notice of rule-making
contained in the Annex of the General Accounting Office Report "Domestic aviation:  effects ofchanges in how airline tickets ar e sold" (GAO /RCED99-221, July 1999).
108. However, this situation may change relatively quickly.  For instance, the U.S. department of
Transport has just issued on 24 July 2000 a supplement advanced notice of proposed rule-making on
Computer Reservation Services regulations (Federal Register, Volume 65, Number 142, Monday, 24
July 2000, proposed rule).  By this document, the DOT requires additional comments from interestedparties by September 2000 (comments) and October 2000 (reply comments) on the re-examination of
its CRS rules to take into account two major recent developments of the CRS industry already
outlined in the present paper:
- the reduction of the ties between the CRS systems and airline owners and;
- the development of internet distribution channels.
109. With regard to the reduction of the ties between airlines and CRS providers, the DOT goes as
far as questioning, at least academically speaking, the need for any remaining regulation.  As far as
internet is concerned, this document distinguishes two possible types of regulation:  on the one hand
proposals for regulating web-sites including those operated by on-line agencies and on the other hand
proposals for regulating the airlines use of the internet, both with respect to airline web-sites and thirdparty web-sites.
110. It notes also that no one has yet suggested that the DOT adopts rules governing web-sites
operated by individual airlines although some conte nd that the DOT should bar airlines from offering
fairs available only through their own web-site.  As an example of a possible regulation of internet
sites the DOT suggests that certain problems could be alleviated by barring airlines from seeking or
obtaining preferential displays or discriminatory fees.
111. The DOT also requires specific comments on multi-airline portals and asks interested third
parties to demonstrate why the rules should, or not, treat differently on-line travel agencies from
traditional travel agencies.  The DOT also asks interested parties to explain if and how the various
reasons for regulating traditional CRS providers remain valid, or not, for internet bookings.S/C/W/163
Page 32
112. On the whole it seems clear that at least for one WTO Member, the various regulatory
questions raised by the present paper in respect of new forms of CRS will be addressed soon.  This
process may however take a certain time since the first notice of proposed rule-making on the
question dates back to 1997 and has not yet materialized into an effective regulation.
(vi) Other types of providers
113. Document S/C/W/59 distinguished another catego ry of CRS  whereby an airline was  opening
its inventory directly to the travel agent and bypassing thereby the CRS provider.  This scheme is
illustrated below.
Figure 2
114. It seems that this scheme inaugurated by Continental has had no posterity since no other
mention of it appears in the specialized press over th e last two years.  The likely reason for that is that
this scheme offers less productivity gains than inte rnet ones, since it maintains one of the most costly
actors of the distribution chain, the travel agent.
III. SELLING AND MARKETING
115. To a very large extent the economic and regulatory developments in the sector of selling and
marketing have been covered above in the subsections dedicated to the evolution of the respectivemarket share of airlines and travel agencies (paragraph 75 above), to airlines web-sites (paragraphs 85
to 98), alliances web-sites (paragraphs 99 to 100) and multi airline portals (paragraphs 101 to 106).
They are dealt with in document S/C/W/59 paragraphs 31 to 36 and Annex 2, page 54 and S/C/W/129
paragraphs 19(a) and 20(b).
116. The distribution by the companies themselves of their tickets which can roughly be estimated
at 15-20 % of their total sales, continues to be 95% assured by call centers and ticket offices at
airports and city centers, except for certain low cost carriers, but as we have seen above this situation
is bound to change as airlines plan to at least double their direct sales and to switch to on-line sales for
at least thirty to forty percent of their sales in the next five years.
117. As far as the evolution of the activity is concerned one may note the development of
electronic ticketing.  Electronic ticketing is different from on-line sales:  it is a simple printable
confirmation or a reservation number that will al low check in without the cost of issuing and
processing a paper ticket.  There again the productivity gains are very notable since the processing
cost falls approximately from US$ 7-8 to US$ 1-2.  Not all on-line sales give rise to an e-ticket and
not all e-ticket are delivered following a an on-lin e sale, however they very often go together.
118. Introduced in 1994 by United, e-tickets have become the majority of the tickets delivered by
this airline at the beginning of this year.  E-ticke ting has met greater success in the United States than
in Europe partly because public trust in new technologies in higher in North America (the problem isClient
(private or
business)CRSTravel
agencyAirline
company
(e.g.:
Continental)S/C/W/163
Page 33
similar to the use of credit card numbers over the web) and partly because it creates a problem of
proof vis-à-vis  custom and immigration authorities which often demand proof of possession of a
return ticket (80 % of trips are domestic in the U.S. but 80% are international in Europe).
119. Moreover, they were not exchangeable among airlines a problem that will soon belong the
past since IATA  and IBM have been mandated to work on a computer system of inter-linability  with
common formats and even common reading machines.  Naturally because of its low costs thistechnique is widely used by low cost carriers.
120. As the definition of selling and marketing in the sense of the Annex includes also marketing,
market research and advertising one may note the development over the period 1993-2000 of
personalized marketing techniques such as customer relations management (CRM) and "web-mining"
(see above) as well as the growing importance of the promotion of the common brand of alliances.
All alliances are now announcing the formation of "c entral teams".  The question of the coverage of
the activities of these central teams by the definition of the Annex is now posed.
IV. FRANCHISING
Airline franchising is a commercial practice under which one airline ("the franchisee")
purchases the right to assume the public face or brand of another ("the franchisor"), together
with the brand's associated services, intellect ual property and know-how.  Elements of the
brand include aircraft livery and interior, crew uniforms, and flight designator code.  Services
include the sales and reservations operations of the franchisor, access to its frequent flyer
programme, and revenue accounting.  The franchisee airline abandons its own public identity
for all services operated under the franchise but continues to operate under its own AOC
(aircraft operating certificate) and to maintain its operational identity and independence.
In most cases the franchisee continues to make its own decisions on routes, schedules and
pricing, although there is normally an agreement not to compete head-to-head on the same
routes as the franchisor. ( OWNCO Report on Airline Franchising to ECOSTRAT Chairman
page  1)
121. Although franchising is an important and growin g sub-sector activity in air transport, the
industry participants do not follow a common, or legally defined framework.  According to
professional sources
25, there is no published or standardised framework for franchise agreements:
instead, each franchise arrangement is defined by the interested parties.  In other words, it is a contract
between two independent airlines that is ofte n, although not exclusively, created between an
international flag carrier (franchisor) and a smaller regional airline (franchisee).
122. Although there appears to be no globally accepted definition for a regional airline, there are
four general definitions in use.  The first three relate to aircraft size and the fourth to airports.  First, in
Europe, according to professional sources26, regional carriers generally operate aircraft having
between 19 and 150 seats.  Second, airlines with less than 100 seats are considered 'regionals' 27.  The
third, includes aircraft with between 19 and 100 seats28, and the last definition uses airport criteria.  A
'regional' airline will operate either between a secondary airport and a major hub centre, or it will
connect two secondary airports29.  It is important to note also, that these definitions apply to all
                                                     
25 Director of Air Transport Policy at the European Regional Airline Association) ERA.
26 Director of Air Transport Policy for the European Regional Airline Association (ERA).
27 Airline Business  (May 1998).
28 US Regional Airline Association (RAA)
29 Airline Business  editor, Kevin O'Toole (July 2000).S/C/W/163
Page 34
'regional airlines' whether they are wholly or partially owned airlines, independent regionals, or
franchise regionals.
123. While a franchise airline operates in the same market as a regional carrier, both types are
usually linked with a major airline.  Most often, regional franchise carriers operate feeder routes that
link smaller communities and secondary airports to the franchisor's international hub airport and do
not compete directly with the franchisor.  However, the regional franchise airlines may, and often do,operate across international borders (e.g. across European borders).  Additionally, a regional franchise
airline can be linked to the major carrier in remote locations, as the British Airways franchisee Comair
does in South Africa.  In both cases, the regional carrier (or franchisee) and the major airline
(franchisor) have commercial agreements that usually include inter alia : a single brand name, aircraft
livery, cabin interiors, crew uniforms, dual marketing codes, and CRS displays.
124. However, it is the commercial agreements between the franchisor airlines, the lack of equity
investment by the franchisor, and the subsequent in dependence of the franchisee, that distinguish the
latter from a regional subsidiary.  They also re main different insofar as equity investments are
concerned.  Regional airlines are usually partially or wholly owned subsidiaries of the national flag
carriers and are therefore under a relatively high level of control by the parent airline.  Franchisor
airlines however, rarely take any equity position in the franchisee.  Instead it is the franchisee which
pays the franchisor for the right to use the brand logo.  This gives the franchisee a significantly higherlevel of independence than a regional subsidiary.
125. It is therefore necessary to highlight that although in one sense a franchise airline is virtually
identical to a regional airline, it is the purpose of  the actual franchise that differentiates the two types
of corporations.  A franchise is ultimately for the dissemination of a brand identity to a broader
market and is therefore primarily a marketing tool not unlike other franchises (e.g. Body Shop,McDonalds etc).  A franchise does not alter underlying traffic rights for either corporate partner.  Nor
does franchising arbitrarily affect or alter established route structures. Moreover, franchising does not
change the number of slot allocations for either the franchisee or the franchisor and each must have
their own aircraft operating certificate (AOC).  In s hort, all the traffic right elements that exist for an
independent airline remain intact during the life of the franchise.  What a franchise does affect is theability of either party to penetrate new or otherwise unused markets to sell the brand name service.
This is true for both the core and periphery markets.  The same argument does not hold true for
wholly or partially owned regional airlines.
126. The 'regional subsidiaries' (like many franchisees) act as feeder airlines for national trunk
routes or international routes.  The aircraft are normally smaller in size (as mentioned above) and theflights are displayed in conjunction with the owner carrier on CRS displays.  One of the main
differences however, pertains to slot allocation.  The airport slots that are made available to the
regional carrier at hub centres are controlled by the parent airline, and flights are co-ordinated in
conjunction with the parent airline in hub-and-spoke networks, whereas franchise airline control their
own slot allocation and any co-ordination needs to be mutually acceptable between the independent
partners.
127. The reasons for developing franchises between airlines can be seen from both the franchisor
and franchisee perspectives.  Franchisor airlines gain economic benefits through increased efficiency
on route structures, through improved aircraft utilisation.  In other words, aircraft that were previously
used on thin or marginal routes can be reallocated to more profitable routes without discontinuing
service.  The franchisor also benefits from the continuation of feeder traffic that might otherwise be
taken over by a competitor airline.  The franchisee benefits economically from this arrangementthrough the use of a well known and established brand name, access to frequent flyer programs,
international passenger and cargo feed, and global distribution systems.  It must also be noted that
franchise airlines' aircraft livery is not necessarily limited to the franchisor brand.  In some cases theS/C/W/163
Page 35
franchise airline will maintain its own brand identity  or operate aircraft with both their own livery and
the franchisor's livery.  In the latter cases, the aircraft will operate specific routes under one brand
while maintaining their independent brand on others (e.g. Gill Airways, and Jersey European).
128. The recent study conducted by ECAC/CEAC and endorsed by DGCA/108 in December 1999
has examined the franchise airline industry throughout Europe to establish whether current regulations
and/or legislation covers adequately the franchise airline sector of the industry, and if franchisingaffects the level of competition on any given route.  The conclusions of this study indicate that "the
practice of airline franchising" does not contain elements that are not already covered by existing
regulations in the EU, and that there appears to be no significant alteration in competition on different
routes.
129. Due to the definitional similarities between 'regional' and franchise airlines, there is no
available data that addresses each type independ ently.  Nevertheless, in order to show how the
industry is structured, and provide a typology of the growth of the industry, the tables below havebeen compiled from various sources.  The largest regional airline industry is found in the U.S. market,
followed by Europe and then the rest of the world.  However, within the top 100 largest regional
airlines around the world there was, and still exists, a broad representation for all geographic
locations.  Table 8 - 11 provide annual comparisons of the regional airline industry between 1994 and
1999 (using the top 20 airlines in this category).  Table 12 shows which franchise operations are in thetop 100 regional airlines for 1999 and finally, Figure 3 highlights the linkages between 'regional'
airlines and the global alliances.
TABLE 8
Geographic representation of all regional airlines including franchise operations
1994 Passenger (000) Per cent of Global Market Number of Carriers
North America 57,861 55.9 35
Europe 27,120 26.2 36
Asia-Pacific 11,461 11.1 15
Latin America –Caribbean 5,624 5.4 10
Middle East –Africa 1,353 1.3 4
Total 103,419 100.0 100
TABLE 9
Geographic representation of all regional airlines including franchise operations
1999 Passenger (000) Per cent of Global Market Number of Carriers
North America 85,572 49.1 32
Europe 58,669 33.7 44
Latin America 14,504 8.3 8
Asia-Pacific 11,900 6.8 8
Middle East –Africa 3,480 2 8
Total 174,125 100 100
Source:  Airline Business data bank; and Airline Business  May 2000S/C/W/163
Page 36
TABLE 10
Top 20 Regional Airlines by Passenger numbers 1994
Rank
1994Airline CountryPassenger
Numbers 000's1 year
change %
1 AMR Eagle U.S. 11,841 13.7
2 USAir Express U.S. 5,471 3.4
3 Mesa Airlines Group U.S. 5,170 16.2
4 Merpati Nusantara Indonesia 4,153 73.4
5 Continental Express Airlines U.S. 3,933 -5.9
6 Air Canada Connectors Canada 3,700 42.3
7 Horison Air Industries U.S. 3,482 26.5
8 Comair U.S. 3,300 26.9
9 Atlantic Southeast Airlines U.S. 3,120 17.2
10 TransAsia Airways Taiwan 3,072 50.7
11 Air UK UK 2,605 17.7
12 Lufthansa CityLine Germany 2,260 11.9
13 SkyWest Airlines U.S. 2,064 26.4
14 Binter Canaarias Spain 2,000 3.7
15 Crossair Switzerland 1,970 13.2
16 Business Express U.S. 1,800 -11.2
17 Deutsche BA Germany 1,800 63.6
18 Express Airlines I Inc U.S. 1,800 5.9
19 ACES Colombia Colombia 1,794 12.4
20 Trans States Airlines U.S. 1,700 22.5
Source: Airline Business data bank.
TABLE 11
Top 20 Regional Airlines by Passenger numbers 1999
Rank
1999Rank
1998Airline CountryPassenger
Numbers
000's1 year
change
%Passenger
Traffic
(RPK)
millions1 year
change
%
1 1 American Eagle Airlines U.S. 11,458 0.1 4,375 9.7
2 2 Comair U.S. 7,032 13.9 4,076 22.2
3 3 Continental Express U.S. 6,687 18.5 3,462 37.6
4 4 Crossair Switzerland 5,990 10.9 3,088 21.0
5 11 Mesaba Airlines U.S. 5,452 32.4 2,338 30.7
6 6 Horizon Air U.S. 4,984 13.5 2,219 20.7
7 13 Atlantic Southeast Airlines U.S. 4,960 23.2 2,277 36.0
8 17 SkyWest Airlines U.S. 4,901 64.0 1,635 36.4
9 5 Luftansa CityLine Germany 4,900 11.4 3,043 9.8
10 14 TAM Regionais Brazil 4,900 24.4
11 9 UNI Airways Corp Taiwan 4,540 7.3 1,416 18.8
12 7 Mesa Airlines U.S. 4,530 4.7 2,317 23.4
13 8 KLM uk UK 4,113 -4.3 2,129 1.1
14 12 Air Canada Connector Canada 4,000 -0.9
15 10 Canadian Regional Airlines Canada 3,992 -4.6 1,850 -4.9
16 15 Rio-Sul Regionais Brazil 3,570 13.8 2,155 12.5
17 19 Air Wisconsin U.S. 3,372 18.4 1,838 30.3
18 21 Atlantic Coast Airlines U.S. 3,234 27.7 1,664 30.4
19 16 Piedmont Airlines U.S. 3,162 2.0
20 20 Delta Air Transport Belgium 3,137 22.6
Source:  Airline Business data bankS/C/W/163
Page 37
TABLE 12
Franchise airlines in the top 100 Regional Airline count.
Rank
1999Airline CountryPassenger
Numbers
000's1 year
change
%Passenger
Traffic
(RPK)
millions1 year
change
%
22 Jersey European Airways UK 2,832 33 870 5.1
26 British Regional Airlines UK 2,300 -0.4 843 -0.5
27 Brit Air France 2,300 52.7 1,415 133.9
34 Air Nostrum Spain 1,848 18.5
52 AZZURRAair Italy 960 92
54 Brymon Airways UK 922 20.7 384 14.3
62 Maersk Air UK 688 11.7 529 15.3
71 Proteus Airlines France 500
82 Gill Airways UK 322 -19.5 174 -20.2S/C/W/163
Page 38
(1): Not all franchise airlines are linked directly to a global airline alliance.   This chart represents only the top 100 regi onal airlines
and 6 extra franchise airlines.
(2): OneWorld Members Cathay Pacific, Finnair, and Lan Chile have no regional affiliates
(3): Other Qualiflyer members have no regional airlines
(4): Now fully owned by British Airways
Source:  Airline Business  May 2000;  OWNCO Report .LOW COST CARRIERS
EASYJET
TEA BASELKLM CITY H OPPER
KLM ALP S
KLM EXEL
KLM  UK
EUROWINGS
BRAATHENS  MALMO  AVIATIONKLM
EXPRESS  AIRLINES
MESABA  AIRLINESNORTHWEST
MINERVA  AIRLINES
AZZURRAIR
ALITALIA  EXPRESS
AIR NORMANDIEREGIONAL  AIRLINESALITALIA
COLGAN AI R
GULFSTREAM-INTERNATI ONAL
SKYWE ST AIRLINE S
CONTINENTAL  EXPRESSCONTINENTAL
AIR EUROPA  EXPRESSAIR EUROPEWORLDWIDE RELIABILITY
AIR NOSTRUM
BINTER  CANARIES
BINTER
BINTER  MEDITERRANEOIBERIA
AIRLINK
EASTERN  AUSTRALIA  AIRLINES
SUNSTATE  AIRLINES
SOUTHERN  AUSTRALIA  AIRLINES
AUSTRALIA AIR EXPRE SSQANTAS
AIR LIN GUS COMMUTE RAER LINGUS
AMERI CAN EA GLE
BUSINESS EXPRE SS
EXECUTIVEAMERICAN AIRLINES
AIR ATLANTI QUE
CROSS AIR
FLANDRE  AIR
MAERSK  AIR
BASE  AIRLINES
CITYF LYER  EXPRESS  (4)
BRITISH  MEDITERRANEAN
BRITISH  REGIONA L AIRLINES
BRYMON  AIRWAYS
LOGANAIR
SUN -AIR
COMAIR  (South Africa)
GB AIRWAYS
AIR NORMANDIE
FLANDRE  AIRAIR LIBERTEBRITISH AIRWAYSONEWORLD (2)
ATLANTI C SOUTHEA ST
COMAIR
SKYWE STDELTA
CITYJET
CORSE  MEDITERRANEE
CROSSAIR
BRIT  AIR
EUROWLINGS
GILL AIRWAYS
JERSEY  EUROPEAN
PROTEUS  AIRLINES
REGIONAL  AIRLINES
TYROLEAN  AIRLINESAIR FRANCE
AEROLITORALAEROMEXICOSKYTEAM
CROSS AIR
CROSS AIR EU OPE
PORTUGALIA
AIR LITTORALSWISSAIR
DELTA  AIR TRANSPORT
SCHREINER  AIRWAYSSABENA
PORTUGALIAAIR EUROPE
TAP AIR
EUROLOT
TASAWI  AIRLOTQUALIFLYER (3)
AIR WI SCO NSIN
ATLANTI C COAST
GREAT LAKE S
SKYWE ST
TRANS  STATEUNITED AIRLINES
IMPUL SE AIRLINE S
AEROPELI CAN
KENDELL AIRLINE S
SKY WE ST
SUNSHINE  EXPRESSANSETT
SILK  AIRSINGAPORE AIRLINES
AIRBC
AIR NOVA
AIR ONTARIOAIR CANADA
RIO-SUL
NORDESTEVARIG
AIR ST PIERRE
AIR ALMA
CALM  AIR
CANADIAN  NORTH
CANADIAN  REGIONAL
INTER -CANADIANCANADIAN AIRLINES INTERNATIONAL
AIR NELSON
EAGLE  AIRWAYS
MOUNT  COOKAIR NEW ZEALAND
TYROLEAN
LAUDA  AIRAUSTRIAN
AIR NIPP ONANA
AIR DOLOMITI
AIR LITTORAL
CIMBER  AIR
AUGSBURG  AIRWAYS
RHEINTALFLUG
CONTACT  AIRTEAM LUFTHAN SALUFTHAN SA CITYLINELUFTHANSASTAR ALLIANCEGLOBAL ALLIANCES AND REGIONAL/ FRANCHISE  AIRLINES (1)
(ALL FRANCHISE AIRLINES ARE IN BOLD )S/C/W/163
Page 39
130. Members may wish to consider the possible relevance of existing commitments with regard to
the question of airline franchising in view of three factors.
- the absence of any link between the franchising contract and the hard rights, as
explained above;
- the absence of any sectoral qualification in the CPC definition of franchising;- the role played by airline franchising for the selling and marketing of air transport
services both from the franchisor and the franchisee.
131. Franchising is a special case in section 4 "Distribution" of document MTN/GNS/W/120
because it is the only item that is not linked specifically to the distribution of goods.  Unlike the first
three items (commission agent, wholesale, or retail) it is not subdivided by type of goods sold butreferred through a correspondence with CPC 89290 to "royalties for the right to use similar exclusive
rights as above, not elsewhere classified owned by economic agents".  The items above themselves
refer clearly to goods and services (see notably the definition of trade mark in CPC 89220).
132. In other terms, whereas the distribution of services is not covered by CPC in general, the
franchising of services (for instance a dry cleaning chain or a restaurant chain such as Mac Donald's)is clearly covered by both provisional CPC and MTN.GNS/W7120.  This definition focuses on the
payments rather than on the contract between the franchisor and the franchisee but is clearly and
uniquely linked to this type of contract (see discussion of this point in S/C/W/37 "Distribution
services, background note by the Secretariat" dated 10 June 1998, paragraph 7).  The following
question therefore arises:  does the practice of franchising in air transport fall within the definition offranchising in general?
133. Franchising in air transport is a way for the franchisee to better sell its own services to
customers by attracting them through a famous brand and for the franchisor to sell its brand to
customers more widely.  It could therefore be deemed to fall within the definition of selling and
marketing  by the Annex ("opportunities for the air carrier concerned to sell and market freely its airtransport services including all aspects of marketing such as market research, advertising and
distribution").  There are already 36 commitments on the selling and marketing of air transport
services.
134. Such a "selling and marketing" qualification could be alternative or cumulative with the
preceding one (franchising).  The legal problems raised by cumulative qualifications andclassifications of services are not unknown to the sector of air transport services as one can see by the
development above on the new on-line channels of distribution which could probably be qualified
both as CRS and as selling and marketing services.  In addition, the question of the overlaps between
CPC (in this case franchising) and the transport Annex in particular is discussed in some detail
paragraphs 37-40 of document S/C/W/59.
135. Finally, Members may also wish to envisage the possibility of considering airline franchising
as a still unidentified, unclassified and uncommitted sector of services not directly related to trafficrights and therefore covered by the scope of the GATS.S/C/W/163
Page 40
V. SERVICES AUXILIARY TO ALL MODES OF TRANSPORT WHEN DELIVERED
IN AN AIR TRANSPORT CONTEXT (FREIGHT FORWARDING AND WAREHOUSING)
136. Freight forwarding and warehousing were dealt with in S/C/W/59, paragraphs 62 and 63,
because they are services auxiliary to all modes of transport, including air transport.  On reflection, it
appears  that it was a mistake, to include these services in a paper devoted to air transport services.  Itis certainly true that freight forwarders and warehousing companies provide services to the air
transport industry, as parts of the supply chain linking the manufacturer and shipper of goods with
their final destination, but they are not air transport services in themselves.  They are not cargo
carriers and their activities are not covered by air services agreements.  Each is a part of a larger
transportation industry network which includes trucking, shipping and rail transport as well as air
transport.  Other industries which provide essential auxiliary services to air transport include
insurance and tourist agencies, for example, but they certainly could not be considered part of the airtransport industry on that account.  Moreover, it would be systemically damaging if, by including
freight forwarding and warehousing in a survey of air transport services, we were to create any doubt
as to their coverage by the GATS:  such doubt might arise, if any service having an interface with air
transport were alleged to be an air transport service and therefore potentially covered by the exclusion
in the Annex - even though it could hardly be mainta ined that freight forwarding and warehousing are
"directly related to the exercise of traffic rights".
137. However, there are companies providing full lo gistical services, sometimes called Logistics
Corporations, which provide freight forwarding and warehouse services as part of a total package
which may include the carriage of goods by air.  These situations occur frequently in what is referred
to as multi-modal transport.  It should be made clear that some of these activities may well qualify asair transport services, whether or not they are "directly related to the exercise of traffic rights", but
that this would not remove freight forwarding and warehousing, and many other services performed
by such companies, from the scope of the Agreement.
138. In the provisional CPC freight forwarding and warehousing are classified in Division 74
"Supporting and Auxiliary Transport Services", not in Division 73 "Air Transport Services".  "Storageand warehousing services", sub-sections (7421), 74210  are described as "Storage services of frozen
or refrigerated goods", 74220 – "Bulk storage services of liquids and gases", and 74290 – "Other
storage or warehousing services".  Each sub-section and the explanatory notes apply to the type of
goods being stored, and the facility required to properly store the goods.  For any type of goods
stored, it would be feasible (if in some cases not very economical) to transport them by air.  The
differences between the storage facilities is directly related to the type of goods that would be stored
in them.  74210 requires specialised refrigeration capabilities, 74220 requires special handling and
storage for potentially "dangerous goods", and 74290 is a general goods warehouse.  No distinction is
made according to the mode of transport by which goods arrive at the warehouse.  The contracting of
such services by the shipper (manufacturer, producer etc) is commonly done through a freight
forwarder.
139. "Freight transport agency services" (CPC 7480, 74800) are described as "Freight Brokerage
services, freight forwarding services (primarily transport organisation or arrangement services on
behalf of the shipper or consignee), ship and aircraft space brokerage services, and freight
consolidation and break-bulk services."  The description of services does not include the actual
shipping or movement of goods by air (or any other means) for any of these service providers.
140. The logistics corporation also operates freight forwarding and warehousing services in the
traditional sense, but is likely to have extensive international affiliates and is often (although not
always) linked to cargo carriers by way of independent subsidiaries or long term contract agreements
with cargo carriers.  Conversely, cargo carriers, integrators, and postal operators may establishS/C/W/163
Page 41
independent freight forwarding subsidiaries, long term contractual agreements with independent
forwarders, or make equity investme nts in freight forwarding companies.
141. Freight forwarders contract with air carriers for the physical carriage of goods from
authorised operators (this is the same for shipping  companies) and normally do not effect any carriage
by air themselves.  Thus the traditional forwarder is ultimately an agent for shippers and the airlines,
and is therefore treated by regulators separately from air carriers.  Global operators or logisticscorporations go beyond pure freight forwarding and offer seamless services from point of origin to
destination.  Freight forwarding is often only one element in the corporate structure.  They may be
allied with, or form part of a group which includes, an air carrier.  The U.S. provides an example of
the regulatory differences between cargo operators (under bilateral jurisdiction) and those who are
separate but linked to air carriers.  "in order to conduct indirect air transportation activities (air cargo
forwarding and other charter activities other than as actual operators of aircraft) must obtain authority
from DOT (OECD - DSTI/DOT(99)1).
142. Below (Table 1) we have constructed a matrix that highlights the extent to which the
traditional freight forwarders have expanded the scope of their operations.  The table is not to be read
in a strictly comparative sense due to the lack of  base commonality in some of the figures.  Where
possible we have identified the specific freight forwarding numbers.  However, most corporations
consolidate their figures.  One might also argue that corporations like Nippon Express should beclassified with global integrators rather that freight forwarders, although a significant element of the
global operations do involve freight forwarding directly.S/C/W/163
Page 42
TABLE 13
Global freight forwarders/Logistics Corporations -1999
Number. of
CountriesNumber of
LocationsWarehousing
& distribution
centresEmployeesTotal Revenue
$US billions
except where notedHeadquarters
Danzas*135711
(312 owned
and operated)451
(every
Continent)4,9762.2
(1.96 freight
forwarding)
**Germany
Nippon Express
Worldwide
(includes all
corporatesectors)33 213 +64,00016.1
(1.78 freight
forwarding)Japan
Panalpina**** 65 312 11,0005.2 sfr billion
($1.73 freight
forwarding)Switzerland
Schenker***100
(freight
forwarding
only)1,000
(340 freight
forwarding
only)28,500
(6,600 freight
forwarding
only)5.2
(1.8 freight
forwarding)Germany
MSAS
(the maincomponent ofOcean
PLC)*****112675
(freight
forwarding
+460)+15,0001.11
(freight forwarding)UK
Kuehne &
Nagel80 5001.25 million
square metres
(5% of
operations)13,0006.6 sfr billions
($1.06 freight
forwarding)Switzerland
BAX 121 500 +7,600 1.8 U.S.
KWE 203 123 +5,100 Japan
Circle 100 300 4,900 814.1 millions
Exel Walsh
Western28 35,000 2.4Dublin
Ireland
* Danzas has been involved in a number of mergers and acquisitions over the past year and a half. 1) Danzas was
acquired by Deutsche Post in March 1999 becoming part the Deutsche Post World Net Group (Deutsche Post
Group had already acquired interests in DHL and various parcel delivery and logistics firms in Europe).  2) In
February 2000 Danzas acquired Air Express International (AEI),  the largest U.S. freight forwarder.
**The freight forwarding section of the entire group is called Intercontinental and has also made a number of
acquisitions since the beginning of 1999:  Hammond International Ltd in New Zealand, and the French projectforwarder Start SA.
*** November 2, 1999 it was announced that the Stinnes subsidiary Schenker AG, Essen/Germany, and the
Japanese Seino Transportation Co. Ltd., Ogaki agreed to form a strategic alliance for integrated logistics and
freight forwarding.  (Joint press release)
****  In July 1999 SRAir Logistics purchased 10% of Panalpina and together the two companies co-founded
SwissGlobalCargo.
*****  Ocean Group plc and Exel plc (formerly NFC plc) have merged.  The merger brings together Ocean,
MSAS and Exel.  The new company is called Exel plc.S/C/W/163
Page 43
VI. RENTAL AND LEASING SERVICES
A. DEFINITION AND ASSESSMENT
143. In addition to the information contained in S/C/W/59, paragraph 65 and in S/C/W/129,
paragraphs 6-7, 15(a), 19C(b), Annex 2 on pages 12-13, and Annex 6 on pages 25–27, Members
might wish to consider the following elements:
144. This activity is already the object of commitments (CPC 83104  rental and leasing of aircraft
without crew:  19 commitments;  CPC 734 rental and leading with crew: 4 commitments; CPC 81120
financial leasing services:  67 commitments).  Howeve r, partly due to uncertainties of terminology, it
could be argued that certain aspects are covered by the carve out of the Annex (see S/C/W/59,
paragraph 65).  That is why, as a preliminary to the description of the economic and regulatory
developments in this sector, it is useful to offer some definitions, mostly drawn from the ICAO study
on aircraft leasing (document EC2/82, LE 4/55-99-54, dated 14 May 1999).
145. The ICAO manual on regulations of international transport (document 9626) describes a
leased aircraft  as an aircraft used under a contractual leasing arrangement.  To charter  an aircraft
means that the entire capacity is hired or purchased by one or more entities who may resell it to the
public (this occurs most frequently in non-scheduled passenger operations, which is why they are
popularly known as "charter flights").  A blocked space agreement  is the contract by which an
operator leases only a part of an aircraft operating in a scheduled air service on a continuing basis (forexample, 15 seats on a specific flight during a season).
146. From an economic perspective the main division is between financial, capital leases and
operating leases.   The aim of financial leases is to avoid the substantial capital outlays and debts
required for the purchasing of an aircraft and to reduce taxation and other costs.  It has the appearance
of ownership by the lessee (lessee's logo, registration in the flag state of the lessee).  The lessor can bea bank, an export credit agency, a manufacturer or a long term lessor such as IFLC or GE.  Operating
leases are designed to meet an air carrier's need for additional aircraft, often on a seasonal or a
short-term basis.
147. From a regulatory point of view one can also distinguish the dry lease  i.e. the lease without a
crew and the wet lease  i.e. the lease with crew, and even the damp lease  i.e. the lease with partial
crew.  These definitions do not, however, have a universal acceptance.  The European Civil Aviation
Commission (ECAC), a pan-European organization, defines dry lease as the lease of an aircraft when
the aircraft is operated under the Aircraft Operating Certificate (AOC) of the lessee, whereas wet
lease is defined as the lease of an aircraft operated under the AOC of the lessor.  In turn, this
definition partially rejoins the distinction between financial and operating leases insofar as the lessorin case of a financial lease never has an operating certificate.
148. These overlapping and divergent economic and regulatory definitions make the gathering and
the reading of statistics on these activities diffic ult.  For instance, ICAO has collected in its annual
publication "The World of Civil Aviation" the following figures:S/C/W/163
Page 44
TABLE 14
1993 1994 1995 1996 1997 1998
Number of major
leasing companies40 40 36 34 40
Fleet owned by these
companies1,900 jets 1,820 1,740 1,760 2,140 2,200
Value of this fleet US$ 33 bn US$ 36 bn US$ 36 bn US$ 41 bn
Part of the fleet owned
by GE and IFLC57% 61% 60% 61% 60% 54.4%
Proportion of aircraft
owned or managed byoperating leasingcompanies in the totalnumber of commercial
Jet aircraft 17%(*) 16%(*) 14.2% 13,5% 16%
Proportion of western
built fleet directlyowned by airlines
-among which aircraft
leased to other carriersno data
no datano data
no data55.7%
no data55.7%
4.6%54%
no data50%
no data
Other types of leases no data no data not
computable35.4% not
computablenot
computable
(*) excluding China and CIS
149. One can see from this table that there are three main types of lessors:  "major leasing
companies", "carriers" (inter carrier market) and "others" meaning banks, export credit agencies and
manufacturers.  Complete figures are lacking for those categories and have even stopped being
collected for 1999.  The only complete year giving an idea of the total breakdown between these three
types of actors is 1996, where the major leasing companies accounted for 13.5% of the value of the
world western-built fleet, the inter-carrier market for 4.6% and the other financial lessors for 35.4%,the rest of the fleet (51.1%) being owned by the airlines themselves.
150. The major leasing companies such as IFLC and GE are operating on the two markets of
financial leases and operating leases but the distribution of their activities between the two respective
markets remains unknown.
151. A second table compiled on the basis of the ICAO leasing study figures gives a regional
breakdown and an idea of the evolution of the global leasing market between 1989 and 1998.S/C/W/163
Page 45
TABLE 15
Jet aircraft leased by airlines offering international scheduled services, 1989 and 1998
Number of Number of aircraft leased from
aircraft in
serviceairlines
without
leased
aircraftairlines with
leased
aircraftother
airlinesleasing
companiesOthers
(Manufacturer,
banks, etc…)TotalICAO
Statistical
Region
1989 1998 1989 1998 1989 1998 89 98 1989 1998 1989 1998 89 98
Africa 309 359 26 14 12 35 8 24 4 17 7 39 19 80
Asia/
Pacific1,012 1,971 19 15 20 55 13 58 32 209 36 255 81 522
Europe 2,791 3,589 23 46 36 113 49 115 52 536 108 684 209 1,335
Middle
East294 324 9 5 5 9 5 6 3 18 8 13 16 37
North
America4,014 4,945 9 6 26 38 104 30 155 504 125 199 384 733
Latin
America/
Caribbean495 765 14 9 26 44 15 27 48 299 58 186 121 512
TOTAL 8,915 11,953 100 95 125 294 194 260 294 1,583 342 1,376 830 3,219
Source:  ICAO, jp on-line-fleet international.
152. This table shows that in 1989 leasing was already a common practice as companies with
leased aircraft outnumbered companies within four out of the six regions.  In 1998, this was the case
for all regions and in some cases by substantial ma rgins.  As far as the respective shares of the
different types of lessors are concerned, one can note an important decline of the inter-carriers
markets (from 33% in 1989 to 8% in 1998), a growth of the share of leasing companies (from 35% to
49%) and a quasi-stability of the "other" lessors (1989:  41%, 1998:  43%).  In terms of regional
breakdown, one may note a substantial growth of the share of Europe where 41% of the leases were
found in 1998 (1989: 26%), a decline of North America (23% in 1998, 46% in 1989), a growth of theAsia Pacific region (from 10% to 16%) a quasi stability of Latin America (from 15% to 16%) and an
absolute stability of the Middle East and Africa (4% altogether).
153. The following table shows that developments in  developing countries have followed the same
pace as the global trend in respect of the number of airlines with leased aircraft, total aircraft leased
and aircraft leased from leasing companies.  In term s of aircraft in service the increase for developing
countries was however half the global increase.
TABLE 16
Developing country airlines with leased aircraft offering international scheduled services 1989
and 1998
Number of Number of aircraft leased from
Period aircraft in
serviceairlines
without
leased
aircraftairlines with
leased
aircraftother
airlinesleasing
companiesOthers
(banks,
etc…)Total
1989 1,789 62 58 32 108 68 208
1998 2,080 40 132 89 539 347 975
Change +291 -22 +74 +57 +431 +279 +767
Source: ICAO, jp on-line-fleet international.S/C/W/163
Page 46
154. In terms of planes leased the market has grown fourfold in nine years.  One may note
however that the North American figures are probably underestimated because of the difficulties in
identifying financial leases by "other" lessors.
155. Among the factors that have led to an increase in the use of leased aircraft in international
transport, the ICAO lists the following:  the high cost of new aircraft has encouraged the leasing
alternative for smaller as well as newly established air carriers;  established air carriers see leasingaircraft as a means of reducing costs and gaining tax benefits;  in certain circumstances the sale and
lease back of its own aircraft by an air carrier can reduce its debt level;  air carriers can meet seasonal
demand for additional capacity through leasing without incurring large capital outlays or debt from
purchasing aircraft;  leasing can permit air carriers, particularly smaller ones from developing
countries to operate unused traffic rights;  air carriers with excess or under-utilized aircraft and/or
crews can employ them through leasing to other carriers and leased aircraft can be used to serve
routes for which the air carrier does not own the appropriate equipment.
156. The following table gives an approximate idea of the impact of leasing on airlines' accounts:
TABLE 17
Number of
airlines
concernedSpending on flight
rental equipment
(US$ million)Spending on flight
rental equipment for
the 42 airlines
concerned in 1989 &
1997Total operating costs
for the 42 airlines
concerned in 1989 &
1997
(US$ million)
1989 97 airlines from
47 countries7,043 3,915 101,778
1997 106 airlines from
41 countries10,679 9,310 159,402
changes
1989-1997+52% +138% +57%
(Source:  ICAO leasing study)
157. This shows that for airlines using leasing sp ending on leasing has grown about two and half
times as fast as operating costs across the period.  However, this table reflects only the impact of
operating leases;  the impact of financial leases appears in the long term-debt item of the balance sheet
of air carriers, along with many other items and cannot be isolated as such.
158. The regulatory and economic context of financial leases and operational leases are extremely
different and should be treated separately.S/C/W/163
Page 47
B. FINANCIAL LEASING
159. Financial leasing seems, from an economic and regulatory point of view, to belong more to
the world of financial services than to the world of air transport.30  The main actors in this market, the
public export credit agencies ( U.S. Exim bank, Germany's Hermes, UK's ECGD, France's Coface,
etc.), the banks, the manufacturers and the major leasing companies work together on complex
financial schemes frequently involving the creation of specific structures.  The regulatory oversight ofthese activities is largely in the hands of national fiscal administrations and at multilateral level is
ensured by the Large Aircraft Sector Understanding concluded under the aegis of the OECD, which
limits the duration of the credit and the participation of export credit agencies.  Certain WTO
agreements such as the GATT, the Subsidies and Countervailing Measures Agreement and the
Agreement on Trade in Civil Aircraft contain rules relevant for those activities as three recent dispute
settlement cases have shown.
160. During the 1993/1999 period, the economic and regulatory developments of the sector have
been closely intertwined: under the pressure of the markets, States have created or allowed new
schemes that have been more or less successful and have been followed by similar schemes abroad.
Key elements of those schemes are the depreciation rules, the residual value of the assets, the
repartition of the risks and the bankruptcy rules.
161. One of the most popular schemes, the Japanese Leveraged Lease (JLL), ceased to exist in
1998 after a ruling from the Japanese national tax authority and was replaced in the second half of
1999 by the Japanese Operating Lease (JOL).  Users of these Japanese schemes include airlines such
as Iberia, SAS, Korean, Aer Lingus and Austri an.  Another classical scheme is the Enhanced
Equipment Trust Certificate (EETC) based on the securitization of the assets, which is frequently used
in the U.S..  The value of the contracts using this structure has amounted between 1994-1999 in the
U.S. to US$16 billion.  America West, Atlas Air Continental Airlines, Fedex, Northwest Airlines, US
Airways and United Airlines were among the clients.  This form is beginning to extend in Europe
where for instance Iberia concluded a US$ 190 million deal for six A320 at the beginning of the
year 2000.  Quantas and Ansett have also recently used similar schemes.  Other "tax based" leases
include ownership-FSC (of which British Airways and Cargolux have been clients) and "grand-
fathered deals" in France and Germany.  Another major development is the growing involvement of
aircraft manufacturers, who in order to attract or ders have begun giving Asset Values Guarantees
(AVG's).  The net exposure of the two main aircraft manufacturers is valued at US$ 25 billion.
162. In terms of volume the financial leasing activity is cyclical and linked largely to orders and
deliveries of aircraft.  In GATS terms, this is trade conducted essentially under mode 1 and mode 2 asplanes are mobile assets whose lease does not demand a commercial presence.
                                                     
30 It is worth noting that the CPC makes distinctions that apparently reflect perfectly the economic and
regulatory categories of financial leasing and operational leasing (dry and wet):
- CPC 81120 "financial leasing services" is defined as "leasing services where the term approximately
covers the expected life of the asset and the lessee acquires substantially all the benefits of its use and takes allthe risk associated with its ownership.  Exclusion:  operational leasing services are classified in Division 83
according to the goods leased ";
- CPC 83104 "leasing or rental services aircraft without operator" is defined as "renting, hiring or
leasing services concerning aircraft (e.g .  helicopters, aeroplanes) without operator;
- CPC 73400 "rental services of aircraft with operator: rental and leasing services of freight or
passenger-carrying aircraft (including helicopters) or of spacecraft of any type and for any purpose with
operator.  These services are generally supplied on a time basis and several different destinations are frequently
involved.S/C/W/163
Page 48
163. With regard to the leasing companies strictly  speaking the following table for 1999 gives the
ranking of the main companies (by fleet value).
TABLE 18
TOP 40 LESSORS – BY FLEET VALUE, 1999
Rank Leasing CompanyUS$
millionRank Leasing CompanyUS$
million
1. ILFC 19,133 21.  Itochu AirLease 704
2. GECAS 18,410 22.  BAe Asset Mgt – T/props 615
3. Flightlease 3,322 23.  Triton Aviation Services 598
4. Ansett Worldwide 3,162 24.  Sunrock Aircraft 589
5. Babcock & Brown 2,741 25.  Bavaria Fluggesellschaft 567
6. debis AirFinance 2,329 26.  Deutsche Structured Finance 520
7. ORIX Aircraft Corp 1,744 27.  Aviation Capital Group 519
8. Pegasus Capital Corp 1,730 28.  CIT Leasing 485
9. BAe Asset Management 1,701 29.  C-S Aviation Services 402
10. GATX Capital 1,688 30.  First Chicago Leasing 395
11. Airbus Asset Management 1,670 31.  SAAB Aircraft Leasing 359
12. SALE 1,344 32.  ATR Leasing 259
13. Boullioun Aviation 1,228 33.  ING Lease 253
14. The CIT Group 1,163 34.  Raytheon Aircraft Credit 218
15. Saab Aircraft Leasing 1,098 35.  Potomac Capital Leasing Group 204
16. Tombo Aviation 969 36.  Aircraft Financing and Trading 196
17. Finova Capital 968 37.  Arkia Leasing 147
18. UniCapital Air Group 862 38.  Dornier Aviation 126
19. Indigo Aviation AB 764 39. International Air Leases 118
20. Pembroke Group 724 40. US Airways Leasing & Sales 117
Source:  Airline Business , February 2000.
164. These 40 lessors account for a fleet of 3,800 aircraft worth US$ 74,5 billion, the bulk of that
fleet - 2800 planes - being passenger jet airliners which represent around a quarter of the world fleet
of western-built commercial jets.  Two U.S. companies, General Electric Capital Aviation (GECAS),
which absorbed Guinness Peat Aviation in 1993, and International Lease and Finance Company
(IFLC) have consistently dominated the market over the period.  Both groups have a fleet estimated ataround US$ 20 billion although GECAS owns twic e as many planes.  A dozen companies have
portfolios valued over US$ 1 billion and are controlled by much more geographically diversified
interests including Japanese, Australian, Singaporean, Dutch, French, UK, German, Spanish and the
United Arab Emirates interests to take a few examples.S/C/W/163
Page 49
C. OPERATIONAL LEASING
165. There are no specific statistics on operational leases.  The only statistical element available is
the following table compiled by ICAO on the use of wet-leased aircraft in international scheduled
services in 1997.
TABLE 19
Use of wet-leased aircraft, international scheduled services, 1997
Less than 25 departures/
year25 through 50
departures/yearMore than 50
departures/year Wet leases
Number of
wet leasesTotal km
flown
(thousands)Number of
wet leasesTotal km
flown
(thousands)Number of
wet leasesTotal km
flown
(thousands)
Airlines of
the same
State2 14 3 297 29 33,005
Airlines of
different
States15 317 7 720 60 55,751
Source:  ICAO Leasing Study
166. Of some 3,000 bilateral air services agreements only 41, involving 38 states, were found by
ICAO in 1997 to contain provisions on leased airc raft, three of which contained leasing clauses
dealing with safety aspects.  This means that in mo st instances leasing is regulated not at a bilateral
but at a national level.  However, there has recently been a renewed interest in multilateral rules on
leasing, be it in a plurilateral European cont ext (ECAC resolution No. 21-1, dated 3 July 1997 on
leasing, and Joint Aviation Authorities JAR-OPS 1.165 on leasing dated 1 March 1998) or atuniversal level in ICAO through the amendment of Article 83 bis of the Chicago Convention.  It is
also worth noting that common rules on leasing are one of the elements of the draft Transatlantic
Common Aviation Agreement (TCAA) which the Eu ropean airlines and the European Commission
would like to create in the future with the United States.
31
167. The regulation of leasing is justified by two types of preoccupation:  the first is safety, as
leasing from abroad creates a risk of introduction in a given market of planes whose safety oversight
is not up to the standard followed by the receiving state.  The second preoccupation is economics, asleasing could be a way for a third party lessor from country C to bypass a cabotage monopoly or the
limitations of the bilateral agreement between A and B.
168. Those regulations are relatively complex in their functioning and cover policies that range
from complete protectionism to relative liberalism.  For instance one may distinguish three types of
clauses related to leasing in bilateral agreements:
- the first requires simple notification of the lease to the competent authorities;
- the second authorizes the lease from a third party only on the condition that this third
party does not derive any economic benefit from the bilateral agreement;
                                                     
31 See "Towards a Transatlantic Common Aviation Area", Association of European Airlines policy
statement, September 1999, point 32-35 and a speech by Mr s de Palacio, European Commissioner for Transport.
at the "Beyond Open Skies" conference held in Chicago on 6 December 1999 on the web-site
http.\\www.eurunion/org/news/speeches/991206ldp.htmS/C/W/163
Page 50
- the third demands, in addition to the preceding conditions, "appropriate authority"
(i.e the underlying traffic rights) and reciprocity from the state of the lessor.
169. At national or plurilateral levels the main regulatory developments that have occurred during
the period 1993-2000 concern the European region, where two bodies with wider membership, but
working in close coordination with the EU, the Eu ropean Civil Aviation Co mmission (ECAC) and the
Joint Aviation Authorities (JAA), have adopted detailed regulations on the subject, respectively
ECAC recommendation on leasing of aircraft 21-1, dated 3 July 1997 and JAR-OPS 1.165-leasing,
dated 1 March 1998.
170. With respect to aircraft leasing in th e European Union, Council Regulation (EEC)
No. 2407/92 of 23 July 1992 on the licensing of air carriers, recognizes that leased aircraft may be
used to meet the requirement that an air carrier have one or more aircraft at its disposal, and allows a
Member State to waive the requirement to register an aircraft used by an air carrier on its nationalregister in the case of short-term lease agreements to meet temporary needs of the air carrier or
otherwise in exceptional circumstances.  The regulation requires prior approval for such agreements
and prohibits a Member State from approving agreements leasing aircraft with crew unless safety
standards equivalent to those for the issuance of national Air Operator Certificates are met.
171. In addition, by a European Council resolution dated 19 June 1995, the Council called on the
Commission to analyse inter alia  the current practice of Community air carriers as well as national
regulations and administrative procedures concerning the use of non-community resources, and if
necessary to draw up guidelines enabling the leasing provisions of regulation No. 2407/92 to be
uniformly applied.  This work is still underway but it can be reasonably said that work in ECAC and
JAA has partially fulfilled this mandate.
172. ECAC's Recommendation on Aircraft Leasing (E CAC No. 21-1, 2-3 July 1997) calls for prior
approval of all leasing arrangements, lists information to be submitted for such approval, and states
that Article 83 bis should normally be used for dry leases.  The Recommendation sets out a number of
specific conditions on wet leases (such as that they be time-limited and that consumers be informed of
their use prior to boarding) and conditions approval on the aeronautical authority's satisfaction that thelessor of a wet-leased aircraft meets safety standards equivalent to those which its own airlines are
required to meet under their Aircraft Operating Certificate.  The text of this Recommendation and a
more detailed analysis of it can be found in document S/C/W/129, pages 7 and 25-27.
173. Finally, the Joint Aviation Authority Regulation No. 1.165 regarding leasing adopted on
1 March 1998 distinguishes leases to or from other JAA state and leases to or from third countries.For leases to or from another JAA state the Regulation requires prior approval of the lease, except in
the case of wet lease out where the lessor remains the operator and therefore no authorization is
needed.  For the leases to or from a third country the approval of lease is conditioned on compliance
with safety, maintenance and operational JAR regulations and standards and by the transfer of
responsibility to the receiving state in the case of dry lease out.  The complete text of this provision
can be found in Annex 1 as an update of S/C/W/129.
174. The U.S. market is one of the major markets for leasing.  For wet leasing only, for instance, it
is estimated to amount to 40% of a US$ 4 billion market according to certain commercial sources.
32
Its legislation did not undergo major changes during the 1993-2000 period.
175. The wet lease out of a U.S. plane to a non-U.S. operator remains subject to approval by the
Department of Transportation, which in order to disclaim jurisdiction requires the demonstration that
the lessee will exercise the true operational control and safety responsibility, failing which the
                                                     
32 Source: British cargo alliance.S/C/W/163
Page 51
agreement is considered to be a charter agreement (part 218 of 14 CFR).  In addition, long-term leases
are subject to a specific prior authorization procedure following three criteria (conformity to any
bilateral agreement, existence of substantial reciprocity, absence of violation of these rules by the
lessor in the past (part 207.10 of 14 CFR)  Finally a specific authorization by the FAA is required to
ensure for all leases that the safety operational a nd airworthiness requirements of the United States
will be respected and in particular that each aircraft shall be maintained according to a programmeapproved by the FAA (FAR part 129).
176. For safety reasons the United States does not approve the wet lease of aircraft registered in
another state to its national carriers.
33
177. Unfortunately there are no similar regulatory data available for other countries and especially
for developing countries, even at ICAO level.  Members might wish to consider the usefulness of the
review of the air transport Annex of gathering such data on a country by country basis.
178. Finally at a universal level, in 1990 the ICAO Legal Committee undertook to resolve some of
the ambiguities related to the safety responsibilitie s arising out of certain situations involving leased
aircraft through an amendment to the Chicago Convention.  Article 83 bis on the transfer of certain
functions and duties.  This provision sets out a means of transferring, by agreement, all or part of the
duties and functions of safety supervision to the state of the operator (the lessee air carrier) under the
supervision of which the aircraft will be operated.  This provision entered into force on 23 June 1997 -that is to say in the middle of our period of reference 1993-2000 - through a protocol and will be
binding among the members of the protocol.  The text of this provision as well as a more detailed
analysis can be found in document S/C/W/129, pages 2 and 12-13.  These pages also contain a list of
the states having ratified the protocol as of 31 March 1999.  Since that date, the following countries
have also ratified the protocol:  Albania, Armenia,  Kyrgyzstan, Mongolia, Slovenia.  This brings the
number of ratifying countries to 119.
VII. CATERING
179. There is no specific CPC classification for airline catering services.  Sub-divisions 6421 and
6431 of the provisional CPC refer to the service of meals and beverages "in transport facilities",
instancing trains and ships.  They also cover air line catering.  They fall under Division 64, "Hotel and
Restaurant Services".  As stated in S/C/W59 para graph 67, it is questionable whether catering services
can be regarded as "directly related to the exercise of traffic rights".
1. Economic Developments
180. The catering services industry is an important sector in economic terms.  During 1999 the
global industry produced over 670 million meals for airline around the world, employed more than78,000 people, and generated approximately US$ 12 billion in gross revenue.  Airline catering is the
primary industry, although substantial earnings are generated through retail food outlets, catering
services (other than airlines), and logistics.
181. Until the early 1990s in-flight catering was usually an internal department of an airline, with
most airlines providing their own catering requirements.  However, independent and international
airline catering corporations also existed.
                                                     
33 Quote from paragraph 4.2 page 13 of the ICAO study on aircraft leasing EC2/82, LE 4/55-99/54,
dated 14 May 1999.  See also OECD "principles for the liberalization of air cargo" DSTI/DOT(2000)1, dated
2-6 June 2000, point 16 to 22 and footnote 3 and Airline Business International, June 2000, page 13.S/C/W/163
Page 52
182. Since 1992 there has been both significant revenue growth and consolidation of service
suppliers in the global market (see Table 20 below).  In 1992, the industry was valued at
approximately US$ 9 billion, and was dominated by  10 corporations (both airline and non-airline
operators).  Although the number of suppliers increased by 2 in 1993, from 1994 until 2000 the
absolute number of operators has decreased while the percentage of market share controlled by each
has increased significantly.  In 1993, 12 corporations controlled 60% of the world market, and by1996, 5 corporations controlled 60% of the market.  Based on early 2000 figures for 1999, the global
market has 2 dominant corporations controlling 56% of the market in a US$ 12 billion industry.
TABLE 20
Global Market Consolidation
Year % of Global Market Number of Corporations Value of Industry US$
1992 56 10 9
1993 60 12
1994
1995
1996 60 5
1997
1998 60 4
1999 56
742*
1212
*  The two largest inflight catering corporations are both independent subsidiaries of airline holding
companies.  LSG-Sky Chefs is part of the Lufthansa Holding AG corporate group and controls 34% of the
global market.  Gate Gourmet is an independent subsidiary of the Swissair Group (SAirGroup AG) andcontrols 22% of the global market.
183. Table 2 (below) provides an overview of the global market distribution for the largest seven
catering corporations around the world.S/C/W/163
Page 53
TABLE 21
Global Industry Leaders – Employment – Geographical spread
LSG
Sky
ChefsGate
GourmetAlpha
Catering
Services ServairJAL
Tokyo CPCSSATS
SIA Eurest Other
Market Share 34% 22% 4% 4% 4% 2% 2% 2% 26%
Turnover
(US$ millions)3,000 2,084 484 394
Country
Locations35+ 27 5
Production
Kitchens200 132 31 22
Airlines Clients 260 200+ 100+ 33
Meals per year
(millions)390 255 21 29 15
Employees 40,000 26,000 5,750 5,200
OwnershipLH/
OnexSair
GroupAlpha
AirportsAir
France
*Japan
AirlinesCathay
PacificGeneral
Food
Service
Headquarters Ger/
U.S.CH UK France JapanHong
KongSing-
aporeSweden
**
*    Servair is 78% owned by Air France
**  Eurest is a subsidiary of COMPASS Group PLC ( UK) which operate in over 70 countries world-wide.
2. Regulatory developments
184. In all the sources that have been located to date, there are no references or information about
regulatory standards in any geographical region or country.  Pending verification, in-flight catering
appears to be regulated in the same manner as all food service providers.
_____________________
Sources:
Inflight Asia  - May 2000
Airline Business  - January 2000
Les Echos - lundi  31 janvier 2000
Interavia  - July/August 1999
Airline Business - April 1999
ITF News  - no. 1/1999
Inflight Caterers  - 1998
International Inflight Food Services Association (http://www.ifsanet.com)
Annual Report 1999  - SAirGroup
Facilities 2000:  The Global Network of LSG Sky Chefs . - (http://www.lsg-skychefs.com)
Annual Report 1999  - Cathay Pacific
COMPASS GROUP PLC. - (http://www.compass-group.com/foodservice/global.html)
Provisional Central Product Classification .  United Nations.  Series M N. 77
(ST/ESA/STAT/SER.M/77)S/C/W/163
Page 54
ANNEX
Regulation JAR-OPS 1.165 on Leasing
Date:  March 1, 1998
(a) Terminology
Terms used in this paragraph have the following meaning:(1) Dry lease  - Is when the aeroplane is operated under the AOC of the lessee.
(2) Wet lease  - Is when the aeroplane is operated under the AOC of the lessor.
(3) JAA operator  - An operator certificated under JAR-OPS Part 1 by one of the JAA Member
States.
(b) Leasing of aeroplanes between JAA operators
(1) Wet lease-out.  A JAA operator providing an aeroplane and complete crew to another JAA
operator, and retaining all the functions and responsibilities prescribed in Subpart C, shall
remain the operator of the aeroplane.
(2) All leases except wet lease-out
(i) Except as provided by subparagraph (b)(1) above, a JAA operator utilising an
aeroplane from, or providing it to, another JAA operator, must obtain prior approval
for the operation from his respective Authority. Any conditions which are part of thisapproval must be included in the lease agreement.
(ii) Those elements of lease agreements which are approved by the Authority, other than
lease agreements in which an aeroplane and complete crew are involved and no
transfer of functions and responsibilities is intended, are all to be regarded, withrespect to the leased aeroplane, as variations of the AOC under which the flights will
be operated.
(c) Leasing of aeroplanes between a JAA opera tor and any entity other than a JAA operator
(1) Dry lease-in
(i) A JAA operator shall not dry lease-in an aeroplane from an entity other than a JAA
operator, unless approved by the Authority. Any conditions which are part of this
approval must be included in the lease agreement.
(ii) A JAA operator shall ensure that, with regard to aeroplanes that are dry leased-in, any
differences from the requirements prescribed in Subparts K, L, and/or JAR-26, are
notified to and are acceptable to the Authority.
(2) Wet lease-in
(i) A JAA operator shall not wet lease-in an aeroplane from an entity other than a JAA
operator without the approval of the Authority.
(ii) A JAA operator shall ensure that, with regard to aeroplanes that are wet leased-in:S/C/W/163
Page 55
(A) The safety standards of the lessor with respect to maintenance and operation are
equivalent to JARs;
(B) The lessor is an operator holding an AOC issued by a State which is a signatory to the
Chicago Convention;
(C) The aeroplane has a standard Certificate of Airworthiness issued in accordance with
ICAO Annex 8. Standard Certificates of Airworthiness issued by a JAA Member
State other than the State responsible for issuing the AOC, will be accepted without
further showing when issued in accordance with JAR-21; and
(D) Any JAA requirement made applicable by the lessee's Authority is complied with.
(3) Dry lease-out
(i) A JAA operator may dry lease-out an ae roplane for the purpose of commercial air
transportation to any operator of a State which is signatory to the Chicago Conventionprovided that the following conditions are met:
(A) The Authority has exempted the JAA operator from the relevant provisions of
JAR-OPS Part 1 and, after the foreign regulatory authority has accepted
responsibility in writing for surveillance of the maintenance and operation ofthe aeroplane(s), has removed the aeroplane from its AOC; and
(B) The aeroplane is maintained according to an approved maintenance
programme.(4) Wet lease-out.  A JAA operator providing an aeroplane and
complete crew to another entity and retaining all the functions andresponsibilities prescribed in Subpart C, shall remain the operator of the
aeroplane.
(d) Leasing of aeroplanes at short notice.  In circumstances where a JAA operator is faced with
an immediate, urgent and unforeseen need for a replacement aeroplane, the approval requiredby sub-paragraph (c)(2)(i) above may be deemed to have been given, provided that:
(1) The lessor is an operator holding an AOC issued by a State which is a signatory to the
Chicago Convention; and
(2) The lease-in period does not exceed 5 consecutive days; and
(3) The Authority is immediately notified of the use of this provision.
__________