WORLD TRADE
ORGANIZATIONS/C/W/185
1 December 2000
(00-5222)
Council for Trade in Services Original:  English
COMMUNICATION FROM NEW ZEALAND
The Review of the GATS Annex on Air Transport Services
The following communication has been received from the delegation of New Zealand with
the request that it be circulated to the Members of the Council for Trade in Services.
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Introduction
1. The air transport sector constitutes an anom aly under the GATS as the only services sector
subject to specific sectoral exclusions.  This situation grew out of the dilemma of reconciling thepractice of bilateral reciprocity which has traditionally dominated air services negotiations with the
MFN principle underlying the multilateral trading system.  This dilemma is not, however, unique to
air transport services.  Nor are a range of other regulatory issues which arise in this sector unique to
air transport services.
2. In recognition of this, paragraph five of th e GATS Annex on Air Transport Services provides
that the Council for Trade in Services shall revi ew periodically, and at least every five years,
developments in the air transport sector and the ope ration of the Annex with a view to considering the
possible further application of the GATS to the air transport sector.
3. New Zealand submitted a paper for the first review session which focussed on commercial
and regulatory developments in air transport services.
1  This second paper - submitted as a
contribution to discussion on the subject of operation of the Annex and the possible further
application of the GATS to the air transport sector - examines the current scope of the exclusion under
paragraph two of the Annex; the regulatory measures prevalent in the air transport and general
aviation sector; and their relationship to a GATS framework.  In doing so, it considers lessons which
can be derived from the successful integration under the GATS framework of other complex andcommercially important services sectors, such as telecommunications and financial services.
Operation and Scope of the Annex on Air Transport Services
4. Paragraph 2 of the Annex on Air Transport Services currently states that the GATS “shall not
apply to measures affecting:
                                                     
1 “Developments in the Air Transport Services Sector”, S/C/W/165 of 15 September 2000.  This paper
built upon previous contributions from New Zealand - namely, the joint paper from Chile, Singapore and New
Zealand entitled “Air Transport Services” (S/C/W/113 of 15 July 1999) and the New Zealand non-paper entitled
“Review of the Air Transport Annex” (Job No 753 of 10 February 2000).S/C/W/185
Page 2
(a) traffic rights, however granted; or
(b) services directly related to the exercise of traffic rights ...”5. The Annex contains a definition of “traffic rights”, but not of “services directly related to the
exercise of traffic rights”.  The language used in paragraph 2(b) does, however, provide some
guidance on the parameters for this present exclusion - the services in question must be “ directly
related” to the “ exercise  of traffic rights”.  This implies, therefore, that the supply of such services
necessitates the holding of designated traffic rights.  As a result, “services directly related to the
exercise of traffic rights” can be understood to mean those for which the services supplier would be
required to exercise its designated traffic rights to supply the service in question.
6. These parameters constitute a relatively straightforward test for determining whether or not a
service is “directly related to the exercise of traffic rights”.  Those services where the supply of such
service is constrained to the holder of the traffic rights are clearly “directly related to the exercise of
traffic rights”, whereas services able to be supplied by a range of services suppliers irrespective of
whether or not these suppliers are in a position to exercise traffic rights could not be argued to be“directly related to the exercise of traffic rights”.  Examples of such services which would fall into
this latter category are: services auxiliary to air transport (including ground handling services), airport
management services, air traffic control services, general aviation services, as well as domestic air
services.
7. Paragraph 3 of the Annex expressly confirms the GATS coverage of three auxiliary services:
namely, aircraft repair and maintenance services, the selling and marketing of air transport services
and computer reservation system (CRS) services.  There is, however, an unhelpful degree of
ambiguity in the drafting of this paragraph which might possibly imply that these three auxiliary
services might otherwise be considered to fall within the category of “services directly related to theexercise of traffic rights”.  This is clearly not the case in respect of at least two of these auxiliary
services and is highly doubtful in the case of the third.
8. Aircraft repair and maintenance is conducted by a variety of services suppliers - including,
but not limited to, airline companies (whether as part of the airline operation or as stand alone
maintenance subsidiaries) and engineering companies.  That these suppliers do not require traffic
rights to conduct such services is self-evident and is re-inforced by the definition in para 6 (a) of theAnnex which underlines that the repairs and maintenance in question are undertaken when the aircraft
has been withdrawn from service.
9. Similarly, computer reservation systems services  are provided by a wide range of suppliers -
sometimes with airline company investment, but as separate company structures.  The servicessupplied by these CRS companies do not require traffic rights for their provision.  Secretariat paper
S/C/W/163 and other Member contributions
2 document the fact that the trend in recent years has been
for airlines to divest themselves of many of these su bsidiary functions or alternatively to spin them off
into stand alone business units.
10. The one area of possible ambiguity in paragraph 3 relates to the selling and marketing of air
transport services.  Paragraph 6 (b) makes clear that this concerns sales and marketing by the air
carrier itself.  Where sales and marketing of air transport services is conducted by a third party it is
covered under the travel agencies and tour operators classification in the Services Sectoral
Classification List.3  An argument might therefore be made that an air carrier selling its own air
transport services would need to be in a position to exercise the necessary traffic rights to provide
                                                     
2 See, for example, S/C/W/165 of 15 September 2000 and S/C/W/168 of 26 September 2000.
3 Section 9.B of MTN.GNS/W/120, which contains a reference to CPC 7471, refers.S/C/W/185
Page 3
such services.  This may suggest that own sales by an air carrier are related to the exercise of traffic
rights.  Whether or not the provision of such a sales service can be considered to be directly related to
the exercise of these rights is less evident.
11. Aside, therefore, from the specific exclusio ns outlined in paragraph 2 covering the limited
area of those services only able to be supplied by the holders of traffic rights, all other air transport
services and general aviation and supporting services must be considered to fall within the scope of
the GATS, which covers measures affecting trade in services, including any service in any sector
except services supplied in the exercise of governmental authority.4
Regulatory Measures
12. Certain distinctions have been generally observed in the regulatory environments for differentareas of air transport and general aviation and supporting services.  The international transport of
passengers and freight has, by and large, been gove rned by the global network of bilateral air services
agreements.  By contrast, domestic air transport services are largely governed by national regulations
(the exception, of course, is the provision of such services by a foreign carrier as a leg of an overseasjourney, ie cabotage).
5  Other areas, such as general aviation services (eg scenic flights, flight training,
aircraft taxi services, traffic surveillance, aerial spraying) are also usually regulated at the national
level.  Some regulatory measures may be specific to the aviation sector, others may derive from more
general regulation.
13. In the case of supporting services, some provisions have traditionally been incorporated in
bilateral air services agreements, (eg the rights of air carriers in respect of “self-handling” and access
to groundhandling services).  Many other supporting services, however, lie outside the bilateral air
services framework (eg airport management).  Regulation concerning supporting services may be
specific to the aviation sector or be of a more general nature.  Recently, there has been a trend toaddress many of the regulatory issues in the sector through competition policy approaches - these
again can be sector specific or generic.
Relationship with the GATS
14. As with other services sectors, a large number of regulatory measures in the aviation sector
normally covered in either bilateral air services agreements or domestic regulatory frameworks wouldnot necessarily be affected by GATS disciplines.  These include:
• Safety and Aviation Security .  Most bilateral air services agreements contain provisions
covering safety and aviation security.  In a GATS context, Article XIV provides for general
exceptions including for measures taken by Members necessary to protect human life andhealth and necessary “to secure compliance with laws or regulations which are not
inconsistent with the provisions of the GATS including those relating to ... (iii) safety.”
Regulatory measures designed to ensure public health and safety are also a feature of many
other services sectors in which Members have made GATS commitments (eg construction
services or medical services).
• Immigration, Customs, Quarantine Laws and Regulations .  Bilateral air services agreements
often incorporate provisions confirming applicability of certain host state laws and regulations
(eg immigration, customs or quarantine regulations)  to aircraft, passengers, crew or cargo
                                                     
4 GATS Articles I.1 and I.3 refer.
5 New Zealand’s earlier paper , “Developments in the Air Transport Services Sector” (S/C/W/165 of
15 September 2000) made clear that New Zealand regards domestic air services as a matter of commercial
presence (mode 3), rather than one involving traffic rights.S/C/W/185
Page 4
while air carriers are entering, within or leaving the territory of the host State.  Similar
generally applicable domestic regulatory requirements operate in other services sectors.  The
GATS reaffirms the right of parties to regulate in pursuit of legitimate policy objectives.  If
they do not discriminate between domestic and foreign suppliers or constrain market access,
such generally applicable regulatory measures would fall under GATS Article VI.  Article VIestablishes principles in respect of such domestic regulation, including that it be based on
objective and transparent criteria and not be more burdensome than necessary.
• Tariffs .  There has been a significant move away from seeking to regulate tariffs in bilateral
air services agreements. Neither does the GATS seek to regulate prices.  Rather, GATS
Articles VIII and IX seek to address the competitive environment in which services suppliers
operate, in particular issues concerning monopolies, exclusive suppliers and business
practices which restrain competition.
• Customs Duties and Charges .  Bilateral air services agreements provide for the exemption
from customs duties and charges of the aircraft and certain aircraft stores intended to be used
solely in connection with the operation of the aircraft.  As this is a goods matter, there are no
comparable provisions in the GATS.  Article V of the GATT, however, covers the similar
situation of exemption from customs duties of goods, including transport vessels, in transit.
15. Other regulatory measures usually covered in bilateral air services agreements demonstrate
significant parallels with provisions under the GATS or other elements of the multilateral trading
system.  The following section examines these parallels:
• Designation and Authorisation .  Bilateral agreements routinely specify the means by which
air carriers will be authorised to exercise the rights conferred under the agreement.  This is
essentially a licensing requirement and is similar to other services sectors in which a license
may be required to provide the service in question.  The licensing of international airlines is
normally done for a number of reasons including ensuring compliance with intergovernmental
air services arrangements and allowing for a check as to whether safety criteria have beenmet.  With respect to a Member’s own international carriers, additional reasons can include
allocating air route and capacity rights and assessing whether relevant financial and services
performance criteria would be met.  Where the numbers of such licenses are limited, this
would need to be scheduled as a market access limitation.  Where licensing requirements are
non-discriminatory and do not impose a market access limitation, the Article VI principles of
objective and transparent criteria and not more burdensome than necessary would apply.
• Principal Place of Business and Effective Control .  The traditional means of establishing
eligibility of air carriers to obtain designation under a bilateral air services agreement has
been to apply a test of “substantial ownership and effective control”.  More recently, however,
in the interests of facilitating airline access to capital, there has been a trend towards replacing
this provision with a test based on “principal place of business or place of incorporation”,
while maintaining the effective control requirement to guard against flag of conveniencecarriers.  The GATS uses a broadly similar test of “constituted or otherwise organised under
the law of ... and engaged in substantive business operations” to define a legal person of
another GATS Member.
6  The GATS also provides examples where specific definitions have
been employed to cover the particular situation of different services sectors, as in the Annexes
on Financial Services and on Telecommunications.
• Establishment of Offices .  It is relatively common to have provisions regarding the
establishment of airline representative offices in bilateral air services agreements.  In a GATS
                                                     
6 GATS Article XXVIII (m) refers.S/C/W/185
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framework, the opportunity to establish a “commercial presence” (defined in Article XXVIII
(d) as meaning any type of business or professional establishment and including through a
legal person or a branch or representative office) would be a matter covered under a market
access commitment on the third mode of services supply.
• Ground Handling .  The issues addressed in bilateral air services agreements usually relate to
the ability of an air carrier to perform “self-handling” and/or the access on fair and non-
discriminatory terms to services provided by authorised ground handling operators.
Opportunities to perform “self-handling” or to establish a dedicated ground handling
operation would be covered in a GATS framew ork by the Article XVI and XVII provisions
on market access and national treatment and would be subject to specific commitments
scheduled by the Members for the provision of this service.  In situations where this kind of
market access was not able to be granted (eg airports with geographical space constraints), thequestion becomes one of the terms and conditions regarding access to and use of such
services.  In this context, the kind of Article XVIII commitments regarding port services
under consideration by Members in extended negotiations on maritime transport services in
1996 are of interest.  These consisted of an offer not to apply any regulatory measures that
would deny international maritime suppliers reasonable and non-discriminatory access tocertain important port services.
• Remittance of Earnings .  A common feature of bilateral agreements is a provision entitling
the airline concerned to remit earned funds.  The GATS features a similar provision in Article
XI on “Payments and Transfers”.
• Access for Airline Personnel .  Again bilateral agreements often feature provisions which
establish the conditions of access for airline personnel.  Under the GATS, mode four deals
with the presence of natural persons supplying a service.  Commitments relating to access by
airline personnel could therefore be negotiated under this mode.
• Competition Provisions .  It is not uncommon to see provisions in bilateral agreements to
ensure that requirements which unduly restrict the provision of competitive services shouldnot be applied.  The GATS too seeks to address certain competition issues through Articles
VIII and IX.  In specific sectors where particular competition issues arise (eg
telecommunications) more targeted approaches have been applied (eg through the reference
paper on basic telecommunications services).
• Scarce Resources, eg Landing Slots .  While not usually addressed in bilateral air services
agreements, questions related to scarce resources such as landing slots or access to airport
services at airports with geographical space constraints are very important issues for theaviation sector.  Here again there are instructive parallels with other sectors (eg radio
frequency spectrum in telecommunications or port facilities in maritime transport).  The
GATS framework has found ways to address these issues, eg the reference paper on basic
telecommunications services which specifies that procedures for the allocation and use of
scarce resources, including frequencies, be carried out in an objective, timely and transparentmanner.  (This was given effect by a number of Members through additional commitments
made under Article XVIII).  An additional commitment approach to addressing the problems
of scarce resource allocation in the air transport sector might build on these precedents and
seek to address any other pertinent matters (eg more specific provision of access opportunities
for new entrants).S/C/W/185
Page 6
Conclusion
16. It is clear from the foregoing that there are a number of aviation services on which Members
can, and in a few cases already have, taken market access and national treatment commitments under
the GATS.  These include services auxiliary to all modes of transport (including cargo handling andstorage and warehouse services); airport management services; general aviation services and other
supporting services for air transport.
17. It is also clear that the GATS framework provides a flexible mechanism capable of
accommodating the regulatory challenges across the full range of services sectors.  The GATS is not
all-encompassing - many areas currently regulated by governments or by intergovernmental
agreement (eg aviation safety and security) would not be affected.  Many other regulatory concernstraditionally addressed in bilateral air services agreements find close parallels in existing GATS
provisions or other elements of the multilateral trading system (eg the GATT).
18. This leaves the residual - but clearly very im portant - question of MFN treatment of traffic
rights.  As noted above, the MFN dilemma is not unique to air transport services and has been able tobe successfully resolved in similarly complex and important services sectors.  What is perhaps
particular to the air transport sector is the extent of the network of formal bilateral arrangements
governing traffic rights.  This suggests that a creative mechanism to effect a transition from a
predominantly bilateral reciprocity framework to a multilateral approach would need to be developed.
In this regard, the current trend towards the conclu sion of open skies agreements and their expansion
to take in multiple players (eg the recently concluded Multilateral Agreement on the Liberalization of
Air Transportation) serves as something of a “stepping stone” on which work in the WTO might seek
to build.
7
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7 The Multilateral Agreement on the Liberalization of Air Transportation can be viewed at:
http://www.state.gov/www/issues/economic/tra/001115_apec_opskies.html