WORLD TRADE
ORGANIZATIONS/C/W/181
27 November 2000
(00-5053)
Council for Trade in Services
EXCERPTS FROM THE OECD DOCUMENT
"PRINCIPLES FOR THE LIBERALIZATION OF AIR CARGO"
Note by the Secretariat
At the 28-29 September meeting of the Council for Trade in Services devoted to the review
mandated under paragraph 5 of the Air Transport Annex, the Secretariat was requested to make
available elements of the work undertaken in the OECD on the liberalization of air cargo.
The document attached provides excerpts from OECD document DST/DOT(2000)1, dated
6 June 2000 "Principles for the Liberalization of Air Cargo" and describes the main areas of work of
the OECD with regard to air cargo.
The following documents issued by the OECD, which are available on its website, are also
relevant:
- A very substantive background note:  "Regulatory Reform in International Air Cargo
Transportation", document DSTI/DOT(99)1, dated 7 April 1999 (103 pages);
- part two of the document "Principles for the Liberalisation of Air Cargo",
DSTI/DOT (2000)1, dated 6 J une 2000 containing on the one hand a draft protocol to
be inserted in bilateral agreements and covering only "doing business" issues and on
the other hand a draft plurilateral agreement on cargo services including hard rights
(33 pages);
- two documents containing detailed comments by OECD Member States, the industry,
the unions and the international organizations concerned1 on those draft agreements
arranged respectively by authors and by articles commented:  DSTI/DOT/RD(2000)1,
dated 18 September 2000 (49 pages)  and DSTI/DOT/RD(2000)2, dated
18 September 2000 (47 pages);
- the minutes of the last workshop held by the OECD and containing detailed
additional comments on the articles of the draft agreement:  document
DST/DOT/M(2000)1, dated 9 November 2000 (20 pages).
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1 Except the WTO.S/C/W/181
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I. ESSENTIAL PRINCIPLES FOR THE LIBERALISATION OF AIR CARGO
SERVICES
1. Liberalisation of market access
1. Currently, the air transport aspect of air cargo services is predominantly governed by
bilateral aviation agreements prevailing in all count ries limiting air carriers ability to respond to
market developments and to exploit the market potential by basing their operations on service demand
at a global level. They cannot plan international route structures and develop services in full
competition with each other (see 1999 OECD Study paragraphs 169-197).
(a) Air Traffic Rights
2. From a strictly economic “ideal” viewpoint, all categories of air carriers should be allowed
to make use of the full range of traffic rights and have the same opportunities for unimpeded routedesign and network operations. A level playing field for all categories of cargo service providers
should be created that allows them to respond adequately to the needs of the market.  However, it has
to be recalled that about 50 % of the overall amount of cargo is moved by air in “belly hold or combi
operations” undertaken pursuant to rights to carry cargo set forth in a world wide web of bilateral air
service agreements for passenger transportation. The ultimate goal is the removal of all remainingbarriers so that air carriers are able to carry out transportation operations on the basis of commercial
considerations alone. It does not seem politically feasible at this stage to alter existing bilateral air
services agreements governing passenger transportation which provide the legal basis for “belly hold
and/or combi cargo operations”.  Model provisions governing market entry and thus the pure
transportation aspects of cargo transported by air have therefore initially to be designed for all cargooperators.
3. Commercial operations should become more economically viable if all-cargo service
providers could exercise 5
th and 7th freedom traffic rights (carry freight between two countries on a
route with origin/destination in its home country; car ry freight between two countries by an airline of
a third country on a route with no connection with its home country). For 5th freedom rights to be of
practical value it is imperative that potential “beyond” countries also adopt liberal policies with
mirroring 5th freedom traffic rights. By granting 7th freedom traffic rights, traffic possibilities between
third countries could be improved, thus optimising carriers’ networks.
4. Awarding 5th and 7th freedom traffic rights would add flexibility to the planning of air cargo
services, and would take into account that air cargo traffic flows are often one way. Triangular
operations and better return traffic possibilities would address the “back-haul” issue and enhance the
economic and commercial efficiency in air cargo transportation.
5. By ultimately allowing cabotage operations (to carry freight within a country by an airline of
another country on a route with origin/destination in its home country), the market access for carriers
from abroad will be improved and will provide opportunities for better network building.
6. The ultimate goal, clearly, is the removal of all remaining barriers to all-cargo air carriers’
ability to serve markets on the basis of commercial considerations alone. Through gradually grantingthe full range of traffic rights, air cargo operations can be expected to become more competitively
supplied, freely networked, and more cost-efficient. By adopting such a liberal policy, providers of air
transport will gain better access to other countries’ domestic markets, and will be able to develop the
supply of services solely on the basis of technological and economic viability.  However, it is
achieved immediately. The gradual implementation of arrangements with a high degree of flexibility,S/C/W/181
Page 3
and an agreed timeframe for a transitional period until the full range of traffic rights can be made
available to all-cargo service providers, would be the most pragmatic solution. Governments
considering the liberalisation of air cargo services pursuant to an instrument, as envisaged in Part III
of this document, would have a menu of progressively open scenarios from which to choose.  Thus,provisions should be suggested for the authorising of fifth freedom and seventh freedom rights and
cabotage services.
7. Co-operation often serves as a substitute for mergers, acquisitions and cross-shareholdership
as these traditional forms of co-operation are restricted by the ownership and control regulations of air
service agreements. By jointly undertaking certain commercial activities, air carriers aim to rationalise
their operations and achieve network efficiencies by expanding their market coverage. The issue of
co-operative arrangements is not only relevant to cargo operations and combination services butequally to passenger air services. Combination carriers will continue to be subjected to traffic rights’
limitations that will not apply to all-cargo flights, however the opportunity to enter into co-operative
arrangements with other air carriers such as, but not limited, to code-share, to block space and to
franchise would facilitate market access by combination carriers.
8. Some potential contracting parties have already negotiated bilateral agreements between
them which are more liberal in some respects than the model contained in Part III of this document (or
indeed any model that would be likely to obtain widespread support).  It is therefore important that the
envisaged agreement contains an article whereby accession to a plurilateral agreement does not
represent a backward move for any Contracting Party.
(b) Right of Establishment
9. Traditional bilateral air service agreements require that the air carriers designated by a
contracting party be substantially owned and effectively controlled by nationals of that contracting
party.
2 This is done to safeguard essential safety requirements in order to avoid the emergence of
substandard air carriers.  Such requirements impede the flow of inward investment to contracting
states and thus inhibit the development of the air cargo industries – precisely the opposite of theresults the proposed principles are meant to encourag e. For international air cargo services to become
more efficient, restrictions on inward investment should be eliminated, and air carriers should be able
to determine their ownership and control structures freely, based on capital and strategic business
needs. This aim could be achieved by departin g in the following manner from the ownership and
control requirement entirely; first, a designated air carrier has to be incorporated and is required to
have its “principal place of business” in the territory of the Contracting Party that designates it; andsecond, it is required that the designated air carrier be appropriately licensed by the Contracting Party
that designates it.
10. Although the phrase “principal place of busin ess” exists in both the Chicago Convention and
EU law, there is no precise definition.  ICAO’s Air Transport Regulation Panel suggests that, in
assessing a carrier’s principal place of business, a state should take into account whether a carrier has
a substantial amount of its operations and capital investment in physical facilities in the designatingstate, pays income tax and registers its aircraft there, and employs a significant number of nationals in
                                                     
2 This principle, inter alia, was adopted by the EU in its regulation of 1 January 1993, and was
optionally suggested by ICAO in 1994. See ICAO, Report of the WorldWide Air Transport Conference on
International Air Transport Regulation: Present and Future, Doc 9644, AT Conf/4 (1994) (hereafter “ICAO
WWATC Report”), pp. 21-25).S/C/W/181
Page 4
managerial, technical and operational positions.  These criteria should be used to apply the concept of
“principal place of business”.
11. The requirement that each designated air carrier be licensed by the Contracting Party that
designates it means that the provision cannot lead to a “flag-of-convenience” syndrome.
12. The issue of “free-riding” by carriers whose governments have not accepted the market-
opening obligations assumed by the Contracting States may be a concern (see ICAO WWATC Report
at pp. 24-25).  The fear is that air carriers from  non-signatory States would merely establish new
headquarters in the territory of a Contracting Party and thus enjoy the benefits of the Agreement “free
of charge.”  One response is that such relocation is a non-trivial step for any air carrier to take, and
seems relatively unlikely until the Agreement has attracted a large number of Contracting States.
Another is that such a carrier might well put at risk its rights in third countries by so doing.
Furthermore to counter any risks arising from a possible emergence of  “flags of convenience”, safetyrules need to be tightened. In particular, rules concerning the acknowledgement of Air Operation
Certificates and Operating Licenses should be refined, strengthened and enforced.
(c) Operational Flexibility and Pricing Freedom
13. All cargo operators and, where consistent with existing bilateral air service agreements,
combination carriers shall enjoy full operational flexibility in order to exploit business opportunitiesand to enhance competition among air transportation providers.
14. Existing restrictions should be lifted as regards: i) operations – operation of flights in either
or both directions; combination of different flight numbers within one aircraft operation; omittance of
stops at any point or points – ii) frequency, type of aircraft and capacity to be used in conducting
transportation services; and iii) the change of aircraft on any flight as well as iv) commercialagreements with other carriers including but not limited to blocked space agreements, codesharing
and interline agreements.
15. Leaving pricing to be set by the marketplace without any governmental intervention would
certainly be the ideal economic solution; in fact air cargo service providers are already free to set
cargo prices in many countries so that the real world is ahead of the current traffic laws. However,given the long history of direct and indirect governmental involvement in pricing for air transportation
a widespread agreement to such a provision may prove very difficult. If considered necessary,
interventions by contracting parties should be limited to a bare minimum and should concern solely
the transparent and non-discriminatory application of national competition law.  Advance filing of
tariff changes can be a mechanism of anti competitive co-ordination or even cartelisation, as has, for
example, occurred in US passenger air transport.  Requiring advance filing could immunize such
conduct from prosecution under competition law.  Contracting parties shall not require advance filingof tariffs but may require notification to its aeronautical authorities.
(d) Leasing/Safety
16. It is well recognised that the leasing of aircraft is a common practice in the airline industry.
The leasing practice enhances the flexibility of the air transport industry for instance by developing
cargo operations with limited capital. Leasing bridges temporary shortages of capacity and can reducecost and debt levels. It can therefore contribute to the stiffening of competition because it allows
smaller cargo operators to enter a market, which would have not been feasible without a leased
aircraft.S/C/W/181
Page 5
17. For regulatory purposes it is important to distinguish between “dry leasing” where the lease
involves only the aircraft, and “wet leasing” where the aircraft, together with the crew, will be leased.
Despite some shared principles regarding the regulation of  “dry leasing”, a common approach on
how to deal with the approval of aircraft leasing has not yet emerged.  The regulatory framework can
be a source of significant uncertainty because regulations differ from country to country. Rules arediscriminatory, as some countries do not allow “wet-leased” aircraft from any third country but
benefit on a substantial scale from more lenient “wet lease” regulations in third countries.
18. Overall, regulators worldwide have imposed various conditions and limitations on the use of
leased aircraft. This can be exemplified by rules stating that in order to be licensed as an air carrier, a
company may be required to “own and operate” its own aircraft, and employ national citizens as
flying personnel. Effectively, the air carrier is prohibited to lease foreign registered aircraft but could
still lease aircraft owned/controlled by other national air carriers of the same country
3.
19. The air cargo industry seeks greater standardisation and more flexibility—for wet leases in
particular.  The establishment of simple, agreed standards is needed.
20. In order to achieve a level playing field for air cargo service providers on an international
scale, all cargo carriers should be authorised to contract freely for leasing operations with
domestic/local carriers abroad. Since combination carriers remain subject to air traffic rights
restrictions not applicable to all-cargo operators, “wet leasing” could be seen as one of the ways to
provide access by combination carriers to guarded markets for which they do not have underlying
route authorisation.
21.  “Dry leasing” does not usually give rise to safety or regulatory concerns when the leased
aircraft is registered in the State designating the air carrier.  On the contrary “wet leasing” raisesimportant safety issues, and has a social dimension as aircraft and personnel are licensed by third
party aviation authorities. Safety issues come up because the aircraft is registered in a State other than
the one designating the air carrier, and may be temporarily absent from the State of registry which is
responsible for safety compliance. Regulatory conc erns in certain countries originate from a notion
that air carriers providing the “wet leased” aircraft are, in fact, using traffic rights to which they maynot be entitled in their own right. Concerns have also been voiced about the impact of  “wet leasing”
on the labour market as flight crews oppose this, as they fear that core labour standards are being
lowered and/or their jobs are at stake.
22. Worries about leasing practices can be adequately addressed by ensuring that safety and
labour standards are clearly implemented and strictly met. To achieve this, the legitimate need of
Contracting States to be assured of the operational integrity of both dry leased and wet leased aircraft
registered in other countries has to be clearly recognised.  Furthermore, while recognising that not allsignificant participants in the international air transport sector are signatories to the Chicago
Convention (e.g., Chinese Taipei), it is imperative that an aircraft leased to designated air carriers or
other air cargo service providers of a Contracting State meet standards at least equivalent  to those
promulgated by ICAO.
                                                     
3 At the present time the United States prohibits its own airlines from using aircraft wet leased from
foreign airlines, a rule that other governments see as an unjustified barrier to their own airlines’ ability to do
business with U.S. carriers.S/C/W/181
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2. Liberalisation of Ancillary Services
23. Apart from market access issues, air cargo service providers are hampered by the regulatory
environment applied to ancillary services; i.e. se rvices considerably influencing the efficiency of
seamless services offered by air cargo service providers. Ancillary services cover, for example,
intermodal transportation, groundhandling, forwarding and warehousing as well as other issues relatedto air cargo business.  From the regulatory point of  view, the full range or selected ancillary services
can be raised in conjunction with market access issues or can be dealt with on a stand-alone basis.
24. A framework with transparent, non-discriminatory rules on ancillary services seems to be
necessary  to achieve a balanced, more efficient, broader and more innovative choice of the provision
of air cargo services which in turn will benefit industry, shippers and consumers on a global scale.
(a) Intermodal Transport
25. Today, virtually all sectors rely on intermodal transport services.  Air cargo in particular
depends to a large extent on other modes of transport since goods are transported from the producers
via airport-to-airport and are then channelled via diffe rent modes of transport to their final destination.
In addition, air cargo is carried partly by other modes due to geographical reasons or to accommodate
distribution networks. Air cargo transport serves as one piece in the logistical chain to ensure
relatively new services, such as time definite deliveries and door-to-door integrated services, whichare in high demand by shippers. The operation of intermodal transport services is therefore a unique
feature of the air cargo industry.
26. The intermodal nature of air cargo services is insufficiently recognised by the regulatory
bodies. A more common regulatory approach to intermodal issues should be striven for to counter the
uncertainties and achieve more coherence as well as predictability for air cargo service providers.
27. As a consequence, modal boundaries imposed on air cargo service providers should be
removed. All companies, whose transportation activitie s include air cargo, should be able to operate
intermodal transport services (notably trucking services) abroad.
28. By creating an air cargo policy framework that comprises liberalised intermodal services,
OECD economies can better facilitate the efficient, timely and safe movement and delivery of goods.The interlocking of modes of transport better responds to the changes in the global economy and
industry’s needs for seamless logistics, in partic ular in light of the growing e-commerce business.
Although the granting of intermodal (surface) delivery rights improves carriers’ market access, and
advances service quality, concerns related to competitive distortions in the upstream or downstream
markets need to be addressed by complementary strict competition rules.
29. One solution presenting “the smallest denominator approach” would be to allow all
companies whose transport activities include air cargo to be able to transport goods in connection withor in substitution of other modes of their own choice within a certain geographical limit from and to
the airport. This approach would take care of diverg ing regulations that apply to the different transport
mode operators. However, inserting a geographical limit is one form of market access constraint that
would impair air cargo service operators’ flexib ility and would incur substantial disadvantages in
terms of cost, distance, and delivery time trade-offs. Therefore, intermodal services should beliberalised without geographic limitations to support air cargo service operations.S/C/W/181
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(b) Ground handling
30. Ground handling services play a decisive role in the processing of air cargo.  Air cargo
service providers recognise these services as being one of the key determinants ensuring the
comparative advantage over other modes of transport. Ground handling services comprise inter alia
ramp-handling, surface transportation, parcel dispatching and storage. These services have a directimpact on handling times, cost and reliability of air cargo deliveries.
31. In many instances, impediments to ground handling services are a serious obstacle for the
air transport sector in general, and air cargo operators in particular, that can erode the competitive
advantage of air transport. Often, restrictions on self-handling, together with a legislated operator
monopoly, cause undue handling charges and low quality of handling services.
32. The existing differences in cost and quality of ground handling services are mirrored
through varying regulatory frameworks. While some bilateral agreements already contain liberalstandard ground handling clauses, a whole range of countries imposes restrictions on ground handling.
Whereas in certain countries airport ground handling services are supplied by a monopolist, others
have opted for competitive providers and some allow air carriers to perform their own ground
handling services and offer this service to other air carriers.
33. Ground handling operations at airports should be made available to all air cargo service
providers on an efficient, transparent, and non-discriminatory basis. Service providers should be
permitted to select among different alternative ground handlers. They should be able to choose freely
between providing their own ground handling, performing ground handling  with other air cargo
service providers, or selecting among competing ground handling service providers. Restrictions
should only be permitted for reasons of security or infrastructure constraints arising fromconsiderations of airport safety and should be applied on a non-discriminatory basis.
34. By introducing self-handling and/or competition among service providers, the swiftness of
ground handling operations will be enhanced, and will have a positive influence on cost and quality of
air cargo services.
(c) Diversification into other services
35. Any regulatory reform in the sector should take into account the need to establish a regime
which enables all categories of air cargo service providers to respond adequately to the needs of the
market. It is therefore important to give air cargo providers the opportunity to provide all kind of
services related to air cargo business such as warehousing, freight forwarding, express services and
any other related activity. Through this diversification, new forms of global cargo networks will be
developed and new innovative services can be offered in accordance with business needs and
technological strategies.
36. Business boundaries for air cargo service providers should be broadened and competition
rules and safety provisions, associated with the emergence of these forms of new business,
strengthened. Any abuse of a dominant market position is clearly objectionable and must be
adequately dealt with by the competition authorities whose objective should be to ensure that all air
cargo service providers compete on a fair and equal basis.S/C/W/181
Page 8
3. Trade Facilitation
(a) Customs
37. Industry experts have noted that customs clearance procedures account for as much as 20
percent of average transport time and 25 percent of average transport costs of imports in many
Member States.  While expedited customs clearance is a crucial issue for the express delivery servicesindustry, reductions in the time and cost of customs clearance will benefit all air cargo service
providers.
38. The prominent place in world trade and commerce enjoyed today by time-sensitive air cargo
transportation – transcending the mere provision of conventional transport and becoming
comprehensive providers of logistical services – has resulted in much greater pressure on customs
organisations to find additional efficiencies.  A set of Principles designed to assist the liberalisation of
air cargo services would therefore be incomplete without concern for the freedom with which theircargoes can move about, within the global tradin g system.  All commercial consignments crossing
national frontiers are subject to the combined requ irements of national regulatory regimes.  These
often draw their force and form from international conventions and other instruments.
39. The main constituent of these regulatory interventions is a set of Customs controls, mainly
directed to raise duties and taxes, enforce trade policy, interdict illicit drugs and collect statisticalinformation.  It has been thought necessary and useful, therefore, to include in these Principles a set of
Articles setting out certain basic elements of simplification of Customs procedures which are
especially important to the aviation industry which must offset the relatively high cost of their
services by relating origin-delivery timings as closely as possible to the key advantage of rapid air
movement.
40. The draft identical provisions contained in Part II and III are based on the World Customs
Organisation (WCO) Express Guidelines and the texts of the revised WCO Kyoto Convention and
some more detailed references in Annex 9 of the ICAO Chicago Convention, which is, itself, in the
process of review, to take account of Kyoto.
41. These proposals are restricted to a relatively small number of standards, mainly concerned
with those Customs interests attached to the relatively short time during which they have physical
control of the goods and aircraft.  In a modern Customs service such requirements are separated from
the complications of fiscal requirements, increasingly handled by post entry data submissions, from
approved company computerised systems.
42. Some account is taken, however, of the extra facilitation which may result for the air cargo
service provider if his customer is already entitled to premium Customs procedures, by reason of
high-quality compliance records or other stipulated qualification. The primary requirement is rapid,preferably immediate release of goods on arrival.  This has to take account of key Customs
responsibilities.  Provisions therefore call for appropriate, in practice automated, risk-management by
Customs and high-quality information and operational reliability from carrier and customer. At the
same time it is possible to reduce Customs intervention to a bare minimum for low-value
consignments which might yield revenue which is less than or only about equal to costs of collection.
43. An additional objective is the convergence of official controls.  All administrative
interventions can be made at the same time and place, ideally by a single agency, preferably Customs.S/C/W/181
Page 9
44. Aircraft, themselves, encounter few Customs problems, but there are frequent difficulties in
securing expeditious and trouble free delivery of spare parts.  The EU Commission has identified the
use of commercial certificates as a sound basis for Customs control. Substantial quantities of air
freight depart and arrive outside normal business hours.  It is essential that Customs attendance be
available on fair and equitable terms.
45. Finally, in many countries Customs inefficiencies are compounded and sustained by low
standards of professional integrity.  It is impossible to legislate for honesty, but an important primary
need is a clear, freely available statement of procedural requirements, with associated provisions for
an independent appeal tribunal.
4. Documentation
46. The sort of procedural reforms suggested under Customs should also be reflected through
“documentary” changes including risk-assessment, convergence of official controls and pre-arrivalnotice of intention to release. However, the term “documentation” is interpreted as any accepted
means of conveying a piece of information or set of data. It should be noted that neither the Chicago
nor the Kyoto Conventions define the term “document”.
47. It is essential to bear in mind that:
• virtually all Customs and other official control authorities still demand certain conventional
forms. Many developing countries remain highly dependent on prolix paper documentation.
• while advanced countries may have transferred most Customs entries to electronic media, all
sustain a possible requirement for supporting c onventional documents, such as an invoice or
certificate of origin. A new approach to the rapid clearance of urgently required spare parts is
particularly desirable.
• acute documentary problems, in international trade and transport, can always be traced to
procedural causes.
48. The procedural reforms suggested as interim until the coming into force of the WCO Kyoto
Convention must be echoed by radical “documentary” changes. However, further efforts will be
necessary to streamline documentary aspects given the rapidly growing e-commerce and the necessity
for the industry to respond to such developments.
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