RESTRICTEDWORLD TRADE
ORGANIZATIONS/C/W/200/Add.1
28 February 2002
(02-1009)
Council for Trade in Services
EXECUTIVE SUMMARY OF THE DOCUMENTS PREPARED FOR THE
THIRD SESSION OF THE REVIEW MANDATED UNDER PARAGRAPH 5
OF THE GATS ANNEX ON AIR TRANSPORT SERVICES
Addendum
This summary has been prepared at the request of the Council for Trade in Services.  It gives
an overview of the documents prepared by the Secretariat in the context of the review mandated by
paragraph 5 of the Air Transport Annex that deals with commercial air transport services.
(S/C/W/163/Add.2, paragraphs 153 to 201, S/C/W/163/Add.3, 4, 5 and 6).
I. FREEDOMS OF THE AIR
A. OPERATIONAL FREEDOMS
1. The International Civil Aviation Organization (ICAO) defines as operational freedoms "the
right or privilege, in respect of scheduled international air services, granted by one State to another
State or States to fly across its territory without landing" and "the right or privilege, in respect of
scheduled international air services, granted by one State to another State or States to land in its
territory for non-traffic purposes" (First and Second Freedoms).
2. These Freedoms are not generally dealt with in bilateral agreements, but in a quasi-universal
multilateral agreement, namely the 1944 ICAO International Air Services Transit Agreement
(IASTA).  The relevant provisions are, in essence, similar to those of Article V of the GATT on
transit. The IASTA has been ratified, as of 4 October 2000, by 118 States.  However, the fourcountries with the largest airspace (Canada, Brazil, Russian Federation and China) are not members of
IASTA.
3. In addition to IASTA, two provisions of the Chicago Convention, which has 185 members,
also regulate First and Second Freedoms.  Article 5 of the Chicago Convention grants to non-
scheduled flights, inter alia  First and Second Freedoms;  Article 15 of the Chicago Convention which
stipulates that  "No fees, dues or other charges shou ld be imposed by any Contracting State in respect
solely of the right of transit or entry into or exit from its territory of any aircraft of a contracting state
or persons or property thereon".
4. The question of transit through sovereign airspace has always been politically sensitive and
has led to three dispute settlement cases in ICAO, all of which were solved diplomatically.  Recently,the charging practices of the Russian Federation, particularly across Siberia and on routes between
Western Europe and the Far East, have been the object of repeated challenges and démarches  by
ICAO and WTO Members, including the European  Civil Aviation Conference (ECAC), European
Union Member States, and airlines.
5. Members may want to discuss the non-application of GATS in this area in view of:  (i) the
wider membership of WTO as compared to the IASTA;  (ii) an apparent discrepancy between theS/C/W/200/Add.1
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GATT rules applying to air transport of goods and the status under GATS of aircraft in transit;  and
(iii) the effectiveness of the dispute settlement systems of ICAO and GATT-WTO.
B. TRAFFIC RIGHTS
6. ICAO considers the Third to Eighth Freedoms to constitute "traffic rights".1
(a) Third and Fourth Freedom
7. The Third Freedom is defined by ICAO as "the right or privilege, in respect of international
scheduled air services, granted by one State to another State to put down in the territory of the first
State, traffic coming from the home State of the carrier".  The Fourth Freedom is, in turn, defined as
"the right or privilege, in respect of international air scheduled services to take on, in the territory of
the first State, traffic destined for the home State of the carrier".
8. Four main developments have occurred during the period under review (1993 to 2000):  (i)
the proliferation of new and revised routes within established markets;  (ii) a movement away from
the traditional single gateway format "from my major city to your major city and vice versa" towards
the exchange of additional gateways;  (iii) the increasing use of the "non-specific route format", i.e. of
clauses allowing traffic "from points in my country to points in your country" and (iv) the
multiplication of regional agreements that contain provisions granting Third and Fourth Freedom
rights (Andean Pact, CARICOM, Fortaleza Agreement, Banjul Accord, CLMV Agreement,COMESA, ACAC).
 2
(b) Fifth Freedom:
9. This Freedom is defined by ICAO as "the right or privilege, in respect of scheduled
international air services, granted by one State to another State to put down and take on, in the
territory of the first State, traffic coming from or destined to a third State".  Although availableinformation is fragmentary and difficult to interpre t, nevertheless, during the period under review, the
granting of Fifth Freedom rights seems to have been a relatively common feature, contained in
approximately 40 per cent of the bilaterals Air Service Agreements (ASA or bilaterals) concluded in
years with significant statistical data.  Fifth Freedom provisions are also contained in the regional
agreements referred to in paragraph 8.
(c) So-called Sixth Freedom
10. Rights beyond Fifth Freedoms are traditionally referred to as "so-called" 'x'th Freedoms, since
the 1944 Chicago Conference established only five Freedoms of the Air.  The Sixth Freedom is
defined as "the right or privilege, in respect of scheduled international air services, of transporting via
the home State of the carrier, traffic moving between two other States".  It is also known as "home-
land bridge".
11. A carrier's ability to provide a homeland bridge largely depends on the geographical location
of its State of origin, which has to be situated on a reasonably direct route.  In the past, many States
affected by potential or actual diversion of "their" traffic have sought to develop counter strategies,
but with limited success.  During the review period, observers noted that in an increasing (although
not specified) number of bilateral agreements the Sixth Freedom was explicitly authorized as "points
behind our country via our country to your coun try".  Among the regional agreements, only two
                                                     
1 Manual on the Regulation of International Air Transport (document 9626, page 4.1-5).
2ACAC:  Arab Civil Aviation Commission;  CARICOM: Caribbean Community;  CLMV: Cambodia,
Laos, Myanmar, and Vietnam;  COMESA:  Common Market for Eastern and Southern Africa.S/C/W/200/Add.1
Page 3
(Fortaleza & CLMV) reportedly deal with the Sixth Freedom rights and only one (Fortaleza)
explicitly.
(d) So-called "Seventh Freedom"
12. The Seventh Freedom is defined as "the right or privilege, in respect of scheduled
international air services, of transporting traffic between the territory of the granting State and anythird State with no requirements to include on such operation any point in the territory of the recipient
State i.e. the services need not connect to or be an extension of any service to/from the home State of
the carrier".
13. Among the 1,500 bilateral agreements deposited with ICAO, only one, New Zealand-
Brunei 1999, contains full Seventh Freedom rights for cargo and passengers.  Sixteen bilateral
agreements provide Seventh Freedom rights for a ll-cargo.  The European Union's Single Aviation
Market, as well as its planned expansions, provides for the Seventh Freedom.  The November 2000extension to the Australia-New Zealand Single Aviation Market (SAM) grants Seventh Freedom
rights for cargo services.  Finally, the Asia Pacific Economic Cooperation (APEC) Agreement also
foresees Seventh Freedom for cargo.  Its extension to passengers is possible in the form of an
additional protocol between interested parties.
(e) So-called "Eighth Freedom"
14. The Eighth Freedom or "consecutive cabotage" is defined as "the right or privilege, in respect
of scheduled international air services, of transp orting cabotage traffic between two points in the
territory of the granting State on a service which originates and terminates in the home territory of the
foreign carrier or (in connection with the so-called Seventh Freedom) outside the territory of the
granting state".
15. Among all bilateral agreements, only the 1999 New Zealand-Brunei grants this Freedom for
both passenger and cargo, but this possibility has not been exercised to date.  As far as regional
agreements are concerned, the Australia-New Zealand SAM and the European Union also allow for
the eighth freedom.
(f) So-called "Ninth Freedom"
16. The Ninth Freedom or "stand alone cabotage" is defined as "the right or privilege of
transporting cabotage traffic of the granting State on a service performed entirely within the territory
of the granting State".  No bilateral agreement registered in ICAO contains this Freedom.  However, it
is provided for in the European Union's Single Aviation Market (and its extensions) and the Australia-
New Zealand SAM.
II. MAIN FEATURES OF BILATERAL, PLURILATERAL AND MULTILATERAL
AGREEMENTS
A. 
DESIGNATION
17. Designation is the formal diplomatic notification by one State to another of the name of an air
carrier chosen to exercise market access rights received by that State under its Air Services
Agreement.  Depending upon the terms of the agreement, a designation may cover any or all market
access rights on a particular route, or a particular part of a route.  Single designation is the right todesignate only one carrier, dual designation up to two carriers, while multiple controlled designation
is the right to designate a specified number of carriers per route, per gateway or per route sector.S/C/W/200/Add.1
Page 4
Multiple unlimited designation is the right to designate any number of carriers.  In each case there is
an implicit right for carrier substitution.
18. Bilateral agreements usually contain the explicit right for one State to reject the other's
designation only on the grounds that the designated ca rrier is not substantially owned and effectively
controlled by nationals of the designating State.  Such provisions are important in the context oftransnational mergers.  Their use by bilateral partners have sometimes prevented mergers from
occurring, for instance, in the case of British Airways and KLM Royal Dutch Airlines.
19. A standard clause on designation has emerged over time.  It is based on substantial ownership
and effective control by the nationals of one State only.  Such clauses are generally rendered more
restrictive by the practice of single designation, which makes it easier for States to implement an
airline "balance-of-benefits" policy and prevent non-party State carriers from gaining, indirectly,
unreciprocated benefits.
20. Bilaterals still tend to be relatively restrictive, although market access has undergone some
degree of liberalization.  The criteria of substantial ownership and effective control have remained an
important feature, contained in 85 per cent of the agreements concluded and notified to ICAO
between 1993 and 1999.  However, other criteria have emerged, such as the "principal place of
business" (12 per cent of the same sample, involving essentially parties from the Far East andNorthern Europe) or the "community of interest" (1 per cent of the cases, primarily to the benefit of
multinational airlines).
21. The use of criteria other than "substantial ownership and effective control" has also been
considered at plurilateral and multilateral levels during the period under review.  In 1997, after careful
consideration of safety risks (e.g. proliferation of  flags of convenience) and other problems, the ICAO
Air Transport Regulation Panel recommended the broadening of ownership and control criteria.  It
suggested using the "principle place of business a nd permanent residence" criteria combined with a
"strong link to the designating carrier".  In 1998, the European Civil Aviation Conference established
a Task Force on Ownership and Control which produced a model article for Members' bilateral
agreements.  This model article focuses on a strong link between airlines and a designating Statethrough the incorporation and the principal place of business and the detention of an air operator's
certificate delivered by the State concerned.
22. The relaxation of designation restrictions began earlier than the open skies polices and the
conclusion of regional arrangements, but it has clearly been fostered by these two tendencies.
23. In the Open Skies Agreements (primarily with the US) the numerical limitation on the
number of designated carriers has been lifted, as have been restrictions on the routes each carrier is
allowed to operate.  Under these agreements, a designated carrier is able to operate betweenwhichever city-pairs it chooses.  In addition, carriers are permitted to carry from points behind, and to
points beyond.
24. Some regional agreements (CARICOM, COMESA, ACAC) also contain liberal designation
provisions (i.e. allowing for control "by one or more members or their nationals").  The European
Union's Single Aviation Market goes further by substituting "community ownership and control" for
"national ownership and control" in its Third Pack age.  In the New Zealand-Australia SAM and Open
Skies Agreements, under which carriers may operate within, behind, and beyond the other party's
territory, designation in the traditional sense has been abolished so long as the carriers remain owned
and effectively controlled by nationals of the two signatories.  In the Plurilateral Agreement between
five APEC Members, the Designation Article refers to "effective control," "incorporation in", and"principle place of business" by the designating State.  However, the underlying national legislative
conditions stipulating foreign ownership levels have not been altered, and continue to be set by eachS/C/W/200/Add.1
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State. The draft Transatlantic Common Aviation Ar ea (TCAA), as envisioned by the Association of
European Airlines, would also entail liberal designation provisions.
25. The choice of relevant criteria for a given agreement depends on policy objectives and
specific circumstances.  The same State may use various criteria with different bilateral partners and
may have different revocation/withholding policies depending on the identity of the carrier concerned.There is little documentation available on individual States' policies in this regard.
3
B. TARIFFS
26. A tariff is the price charged for the carriage of passengers, baggage or cargo (excluding mail)
and includes the conditions governing its availability and use in some States.  The term also refers to
the document containing prices and conditions that a carrier or its agent files (either in electronic or
paper form) with the competent regulatory authorities.  The term "fare" usually refers to the carriage
of passengers, while "rate" is a tariff for the carriage of cargo.  There are definitional variationsbetween States, however, reflecting the authoritie s' regulatory approach.  Governments with an
ambitious regulatory agenda are inclined to use a broad tariff definition while other governments are
inclined to use a narrower definition.
27. A tariff condition or rule is an integral part of the tariff and governs its applicability.  In
general, airlines include such conditions as a means of minimizing the revenue effects associated withlower-priced fares.  Full or normal economy fares are the lowest-priced fare which allows a passenger
maximum flexibility in terms of fare combination, refund, changes in itinerary and routing.  First class
fares and business/intermediary class fares are higher than a fully flexible or normal economy fare,
while special, discount or restricted fares are lower but have more restrictions.  Tariffs are usually
referred to as proposed tariffs, allowing air carriers to develop specific prices and conditions, eitherindividually or collectively.
28. The rates are submitted for approval to the governments concerned.  There are three main
forms of bilateral tariff regulation:  dual approval, country-of-origin and double disapproval.  In most
cases, under all three regimes, airlines serving a specific route submit tariffs for the city-pairs
involved to the respective authorities of the two States for approval.  When both governments must
approve a tariff before it can become effective, it is known as an agreed tariff or dual approval.  Under
a country-of-origin regime, each party controls fares and rates for traffic originating in its territory
(carried by airlines of either party).  The most liberal arrangement is double disapproval, in which a
tariff becomes effective automatically unless disapproved by both parties within a short, specified
period.  This mechanism is provided for in all open skies and in other liberal agreements.
29. Some States have begun to reduce substantially their national requirements for tariff filings.
The United States, for example, abolished all charter tariff and domestic scheduled tariff filingrequirements in connection with domestic deregulation in the early 1980s.  It has since unilaterally
eliminated scheduled international cargo tariff fi ling requirements and substantially reduced the
number and type of international passenger tariffs that must be filed.
30. The International Air Transportation Association (IATA), a worldwide non-governmental
organization that represents scheduled airlines, plays a specific role in "coordinating" fares and rateson a market-by-market basis within "traffic conferences" in order to establish "interline fares".
Interlining permits a passenger to purchase one tic ket using different carriers, pay in one currency,
and provides for baggage to be transferred from point of origin to destination.  Interline fares establish
a price for both the individual sectors and the sum of sectors.  However, they do not alter or reduce
                                                     
3 More information can be found in Peter van Fenema, "Ownership and Control:  Report of the Think
Tank, World Aviation Regulatory Monitor 2000", IATA Government and Industry Affairs Department.S/C/W/200/Add.1
Page 6
the ability of any one carrier to establish different fare structures or the flexibility of conditions for
tickets.  Tariffs developed through the IATA process are filed with the appropriate national
aeronautical authorities under applicable bilateral requirements.
31. Historically, there has been significant movement away from highly detailed tariff clauses to
almost complete freedom by carriers to set their own prices.  The trend of Tariff Articles until 1996has been to remove the States' control over the setting of prices charged on international routes.  In
open Skies agreements (post 1992), the airlines are able to set their own fare while retaining the
ability to resort to consultation in the event of disa greement.  Similar provisions are contained in other
plurilateral and bilateral agreements that are based on the open skies concept.  In short, airlines are
permitted increased freedom to set prices.
C. 
CAPACITY
32. In a regulatory context, capacity can be measur ed in terms of aircraft, passenger seats and/or
units of weight or space (e.g. tonne or cubic foot), as well as in terms of frequency of a particular
service.  In other cases (e.g. statistical comparison), air transport capacity may also be expressed in
terms of combined indicators such as seat-kilometres and tonne-kilometres.
33. Capacity plays an essential role in maintaining the profitability of routes.  National
governments generally view capacity in a broader context than air carriers.  Consequently, capacityregulation involves a wide spectrum of national interests extending beyond the economics of air
transport.  Historically, there has been a general movement away from very detailed capacity
regulations specified in bilateral articles to a more liberal approach where carriers are permitted to set
their capacity through the choice of aircraft used and subsequent variations according to operational
requirements.
D. G
ENERAL TREND DURING THE REVIEW PERIOD :  STEPS TOWARDS LIBERALIZATION
34. Liberalization is an accelerating trend.  ICAO has indicated that more than half of its
members are now party to some type of arrangement, whether bilateral or regional, towards full
market access.  The more liberal forms are traditionally called "open skies" agreements.  Except in the
United States where a standard open sky agreement exists, there is no clear definition.  Agreementsnot involving the United States have been so classified by ICAO if they have been inspired by a
similar philosophy and contain technical similarities.  However, some of these agreements are more
ambitious and may include the Eighth Freedom (cabotage).
35. The typical provisions of an open skies agreement are:  complete exchange of the five basic
traffic rights, free determination of capacity and frequency; 
 freedom of fares and rates (double-
disapproval exercised only if competition is threatened) and multi-designation.  As of November
2000, ICAO had listed 74 open skies agreements, of which 48 involve the United States and 54developing countries.
36. The liberalization process, however, extends well beyond open skies agreements.  ICAO has
drawn up a list of countries involved in "liberal agreements" (either bilateral or regional), which
contains 170 countries, 157 of which are ICAO Members.  In addition to open skies agreements the
list includes:  the European Common Aviation Area;  the European Union Expanded Agreements;  theAndean Pact
; the Arab Civil Aviation Commission;  the Central African Economic Union;
COMESA;  the "Yamoussoukro II" Agreement;  CARICOM;  the Banjul Accord;  the FortalezaS/C/W/200/Add.1
Page 7
Agreement;  the CLMV Agreement;  the Asia Pacific Economic Cooperation;  and the South Pacific
Forum.4
37. The level of implementation of these agreements remains diverse.  It should be noted,
however, that the ICAO list does not account for agreements which, while going beyond the classical
Bermuda-type provisions, are less liberal than open skies agreements (e.g. Japan-United States).
38. One of the most recent and most important developments is the Plurilateral Agreement signed
by "like minded" APEC countries on 1 May 2001 (Brunei Darussalam, Chile, New Zealand,
Singapore and the United States).5  It entails the exchange of the first Five Freedoms among
participants for passengers services and these five along with the Seventh Freedom for all cargo
services.  An additional optional protocol will allow embers to exchange passenger Seventh Freedom
and cabotage rights.  It also includes the right to multi-designate, and the choice between a narrow
(substantial ownership and control) or a wide (principal place of business) criterion for ownership.
39. Additional initiatives include a liberalization project by the United States with a number of
Caribbean States;  a common regional commercial air policy for South America and the draft
Transatlantic Common Aviation Area.  The latter would include not only the classical open skies
exchange of the first Five Freedoms, but also set the stage for negotiations on a shared and completely
open market environment.  This would include a fundamental change of ownership and control
legislation, if not the complete elimination of re strictions in this area. A broad framework for
harmonization and policy convergence would be devised for issues such as computer reservation
systems (CRS), code sharing, slots, state aid, bank ruptcy protection, leasing, competition rules, safety
standards, environmental measures and social policies such as flight time limitations and cabin crew
protection.
40. The TCAA is still at a formative conceptual state.  The European Commission has not been
given a mandate to negotiate it and the judicial action before the European Court of Justice, initiated
by the Commission against several Member States, is expected to be ruled upon by the end of 2002.
The latter action is targeted against open skies and staged liberalization agreements with the United
States which, in the Commission's view, have a negative bearing on the European single market.
41. The formation of regional systems has lead some commentators to imagine "bridged
liberalization scenarios".  Integrated regional mark ets would conclude agreements with each other and
create, in the long term, a wider plurilateral and possibly Air Service Agreements multilateral
framework.
42. Overall, it appears that structure and substance of ASAs are comparable to maritime or road
transport agreements.  Ownership provisions are also common in maritime and road transport
agreements, as are many other features (distinction between regular and occasional services,licences/designation, authorization of certain types of traffic on specified routes, sharing of capacity,
exclusion of third parties, and in certain instances, tariff filing and approval).
6  The only real
difference between these agreements, apart from their coverage by the GATS, resides in their
geographical extension.
                                                     
4For a detailed description of the provisions of these agreements see Tables 25 and 26 of
S/C/W/163/Add.2, dated 10 November 2000.
5 The Agreement was still in draft form when the underlying Secretariat document was issued in
November 2000.  It was therefore dealt with in a manner similar to the draft Transatlantic Common AviationArea.
6 See the European Conference of Ministers of Transport, CEMT/CM(97)21, 20 March 1997,
"Framework for Bilateral Agreements in Road Transport".  A similar compendium does not exist for maritimetransport.  However, relevant information has been forwarded to the OECD and is contained in the 1995-1996
replies to the Negotiating Group on Maritime Transport Services (NGMTS) maritime questionnaire.S/C/W/200/Add.1
Page 8
43. The simplification of bilateral agreements, the conclusion of open skies agreements, and the
trend towards integrated regional markets will contin ue to provide for a gradual narrowing of existing
regulatory discrepancies.  The in tent of ICAO to draft a template bilateral agreement for its 2003 Air
Transport Conference is further evidence of this trend.
III. TRANSNATIONAL OWNERSHIP
44. Transnational ownership was a marginal phenomenon before the 1990s and largely reflected
the legacy of former colonial or historical ties.  It has since become a relatively common feature of the
air transport sector, following the example of many  other corporate industries as a result of the
privatization of airlines, the emergence of global alliances, and the creation of regional aviation
markets.  Low ceilings on foreign ownership, howev er, have prevented transnational mergers and
acquisitions and thus, the formation of multinational corporations.  In turn, this has promoted other
forms of cooperation such as codesharing and alliances.
45. In early 2001, more than 57 carriers reportedly held shares in foreign airlines, and over
160 airlines had foreign equity ownership.  This trend is discernible in all segments of air transport
and all regions.  It also involves non-aeronautical actors such as banks and private investors.
46. Airlines have traditionally been subject to strict foreign ownership restrictions aimed at
ensuring that ownership and effective control remain in the hands of nationals.  The relevantdefinitions in national legislation are normally distinct from those used in designation provisions in
bilateral agreements.   Similarly, foreign investment in a national airline is normally governed by
domestic legislation, regardless of the designation provisions contained in bilateral agreements.
IATA and ICAO both appear to acknowledge this regulatory distinction through the separation of
national regulations and designation provisions in their questionnaires.  In the GATS Annex on AirTransport (paragraph 6, definition of hard rights) ownership and control are specified only with regard
to designation:  "traffic rights mean… criteria for designation of airlines, including such criteria as
number, ownership and control".
47. Traditionally, foreign ownership restrictions and effective control requirements are intended
to ensure that the flag carrier promotes national trade and tourism;  provides public service (domestictransportation);  creates employment;  spurs high-technology development;  contributes to foreign
currency earnings;  provides military/emergency transportation (domestic and international);  and
symbolizes national sovereignty and prestige.  These considerations have faded over the years.
According to ICAO, this is due to:  (a)  a changing global business and trading environment
(increasing multinational ownership in other services industries);  (b) increased competition;
(c) GATS obligations on foreign ownership;  (d) in ability or unwillingness of governments to fund the
capital needs of national carriers;  (e) better access to foreign management expertise through co-operative arrangements (e.g. codesharing, joint operations, etc.);  (f) a broader range of potential
investors facilitating privatization of government-owned airlines;  and (g) improved opportunities for
small airlines to survive in a competitive environment.
48. During the period under review, a number of countries have adopted new policies and
amended the rules regarding foreign investment in national airlines.  In many cases (China, Mexico,
Peru, Australia, New Zealand, Brazil, Bangladesh, Korea, Thailand) existing regulations were
relaxed.  In a few instances, however, ownership regulations have actually been tightened (India,
Russian Federation).  The relaxation of ownership legislation also remains a major policy goal for
ICAO.S/C/W/200/Add.1
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IV. COMMERCIAL COOPERATION BETWEEN AIRLINES
A. BILATERAL COMMERCIAL COOPERATION ("ONE TO ONE ")
49. Commercial cooperation is clearly an expandi ng phenomenon, involving airlines from all
segments of the industry, all sizes, and all regions.7  While traditional forms of cooperation have
focused on tariffs, costs, capacity and revenue sharing, modern alliances seek to develop possiblesynergies by exploiting complementarities of routes, structures and services.  ICAO calls attention to
factors such as:  globalization of business practices and attitudes;  market access constraints resulting
from the bilateral system;  liberalization trends at domestic and regional levels;  and commercial
incentives related to economies of scope and scale.
50. Codesharing agreements accounted for 74 per cent of the 579 agreements in existence in
July 2000.  From a regulatory perspective, codesharing is defined by ICAO as "the practice whereby
one carrier permits a second carrier to use its airline designator code on a flight, or where two carriersshare the same airline designator code on a flight".  As a result, passengers often fly on an airline
other than the one identified on the ticket.  Although the term "codesharing" does not appear in the
definition of hard rights in the GATS Annex on Air Transport, there is little doubt as to its exclusion
from the GATS.  However, while some countries require all carriers concerned to have the traffic
rights authority on all the segments involved, others require only the operating carrier to have suchauthority.
51. While the benefits of codesharing for the carrier are obvious ( inter alia  better display position
in computer reservation systems, inexpensive mark eting tool on routes not flown, possibly a viable
service where traffic volumes do not justify individual operations, feeder traffic, and increased market
access to points hitherto restricted by capacity provisions in bilateral Air Services Agreements) thebenefits for consumers and the effects on competition, prices and demand have initially been disputed.
Recent studies have taken a more positive view than initial surveys, as the former have considered
positive demand effects.  Also, codesharing could enable developing countries' airlines to participate
more economically and effectively in international ai r transport.  However, ICAO also says that the
practice has yet to take hold in a substantive way.
52. Codesharing in international markets, initially considered as an extension of domestic
codesharing, started to be regulated in the mid 1980s.  There were concerns in the US that
codesharing in the large domestic market could enable foreign carriers to market services as their own
without any equivalent benefits abroad.  Since 19 88, the United States Department of Transportation
(DOT) requires specific authorization for all codesharing operations.  Points served within the United
States have to be specified and included in the bilateral Air Services Agreements.  Other countries
followed this approach, in some instances requir ing both codesharing partners to have the underlying
authority, even on sectors where a carrier was not carrying any local traffic.  Under an alternative
approach, only the operating carriers must have the necessary traffic rights, especially on "gateway"
routes.
53. This is also the case for wet leasing, and blocked space arrangements.  The move by the
United States prompted some countries to secure  codesharing rights by incorporating a specific
provision in their bilateral Air Services Agreements.  The next step was to specify traffic rights for the
sole purpose of codesharing.  Between 1991 and 1993, specific codeshare rights for the carriers of
                                                     
7 ICAO distinguishes between the following types of cooperation:  codesharing;  blocked space;
capacity sharing;  joint service;  pooling;  franchising;  leasing (dry, wet or damp);  ground handling;  flightscheduling;  frequent flyer programs;  in-flight services and onboard equipment;  maintenance, repair andoverhaul services; joint fuel purchasing and insurance;  equity exchange;  joint ventures;  marketing;  airport
facilities;  joint use or interchange of personnel;  and management contracts.S/C/W/200/Add.1
Page 10
both sides were included in agreements between the United States and major traffic-generating
European countries (Germany, Netherlands and the United Kingdom).  However, this was the
outcome of specific negotiations and did not represent a systematic pattern of treatment.  No major
government has openly declared under which circumstances codesharing may or may not be used.  In
the case of the US, codesharing has become an element to be examined on a case-by-case basis withinthe framework of bilateral relationships.  A complic ating factor in international codesharing is the
involvement of a third country since it might be necessary for the codesharing partners to obtain
approval from three separate governments (or even more in the case of multi-stop flights).
54. Concerned that codesharing could undermine bilateral limitations on capacity control, some
countries have begun treating it as a specific traffic right, seeking bilateral concessions in exchange.
Some experts believe that this "quasi-traffic right" approach risks undermining the functioning of the
bilateral air transport system.  The application of frequency limitations to codeshare services andpotential connecting services could compromise in terline practices.  ICAO notes that codesharing
could be an area "particularly suited to a multilateral agreement" provided that all parties benefit.  The
challenge would be to ensure that codesharing, which presently exists in a narrow bilateral context for
the purpose of increasing market access, would not in fact be an impediment to any development of a
liberalized multilateral framework.
55. On the one hand, codesharing may enhance competition by engendering additional or better
services.  On the other hand, it may result in market concentration.  The United States DOT approves
codesharing arrangements only subject to a "public interest" test, whereby the public benefits must
outweigh the economic costs associated with a loss of competition.  International comity and foreign
policy considerations, such as reciprocity and the balance of benefits in a bilateral aviationrelationship, may also be considered.  The European Commission does not examine codeshare cases
per se,  but rather their impact on competition.  The European Union authorities also closely monitor
the display of codeshared services in computer reservation systems.
B. 
GLOBAL ALLIANCES
56. The advent of "global alliances" is one of the major commercial developments in air transport
of the last five to ten years.  Approximately 50 per cent of traffic is carried by the core members of the
five large alliances.  Alliance members sometimes operate under restrictive bilateral agreements
where designation, capacity, tariffs, frequencies and routes are restricted.  Since limitations on routes
and ownership continue, alliance members connect w ith each others' hubs creating global networks.
This is sub-optimal from an economic perspective.  Airline alliances are often accused of generating
anti-competitive effects.  However, this is not necessarily reflected in higher prices.8
C. OTHER FORMS OF COOPERATION
57. Airlines may also cooperate in distribution through CRS, participate in on-line travel agents,
operate common on-line sales portals and join forces in maintenance, repair and overhaul.  Recently,
eight British airlines have submitted a bid for 46 per cent of the United Kingdom's air traffic control
company, the National Air Traffic Services.9  Cooperation also extends to non-air transport
businesses.
                                                     
8 A recent study by the University of Illinois found that alliance partners charge on-line fares that are
approximately 25 per cent below those charged by non-allied carriers. The main source of this fare reduction isthe internalization of negative externalities arising from the uncoordinated choice of interline "subfares" inabsence of an alliance.
9 See document S/C/W/163/Add.2, paragraphs 87 and 88.S/C/W/200/Add.1
Page 11
58. The airline sector, like many other industries, is developing on-line sales and purchasing
platforms.  Some platforms extend beyond airlines, but are limited to the intra-industry sales.10  I n
addition, at least two specific business to busin ess (B2B) platforms are dedicated to procurement
including catering, groundhandling, fuelling and refuelling.  Such platforms are exclusive to airlines
and are subject to the scrutiny of competition authorities.
V. SLOT ALLOCATION
59. IATA defines a slot as " the scheduled time of arrival or departure available, or allocated to an
aircraft movement on a specific date at an airport." The availability of slots at an airport can be
affected by various physical constraints, such as capacity limitations of the runway(s), terminal(s),
boarding gates and air traffic control facilities.  Therefore, in situations where an airport becomes
congested and the demand for slots exceeds available supply, some type of rationing or allocation
mechanism is used.  To air carriers, slots are important not only for operational purposes (e.g. foraircraft, crew, and gate use scheduling), but also for commercial reasons (e.g. matching departure and
arrival times between disparate geographical points).
60. During the period under review, due to steadily increasing traffic, demand at most
international hub airports has exceeded capacity, which in turn has lead to discussions about how to
improve access without compromising safety standards.  Local residents, however, have urgedauthorities to limit traffic for environmental reasons (noise and air pollution).
61. The process of international slot allocation has remained unchanged while traffic flows have
increased and significant regulatory changes have  been implemented at the national/regional level
(primarily in the EU and US).  Traditionally, in ternational slot allocation has been coordinated by
IATA through bi-annual Scheduling Conferences.  The schedules are then made available to thepublic.  Any international airline whose home State is eligible for ICAO membership, is able to
participate in the Conferences.
62. Over the past ten years, there has been an increase in the number of airports that are
coordinated through the IATA Conference system in its various forms (full coordination throughout
the year, summer coordination, schedule facilitation).  The greatest number of fully coordinatedairports is located in Europe.  The 1993, the European Union's common rules on slot allocation led to
many additional airports being designated by national administrations and, therefore, are included in
the IATA system.  There has also been an increase in fully coordinated airports elsewhere,
particularly in the Asia-Pacific region in the second half of the period, reflecting strong traffic growth.
63. An important element in the system is the so-called principle of "historical precedence" or
"grandfather rights".  This refers to the right of a carrier to retain the slots held and used in the
previous equivalent season.  Schedule changes, including those required by new flights or services,are accommodated mainly through voluntary adjustments or exchange of slots between the airlines
concerned.  Apart from "grandfathering", there is a "use or lose" rule under which a carrier is deprived
of previously unused slots.  A third approach allows air carriers to exchange slots on a one-for-one
basis.  The worldwide membership of the Confer ence provides a unique forum to adjust flight
schedules at all affected airports as long as sufficient slots are available.  However, a system based on"grandfather rights" may result in new entrant airlines and new services not being accommodated at
airports that are particularly congested.  By the same token, certain types of operations (e.g. non-
scheduled flights, general aviation, or all-cargo services) have faced significant restrictions.
64. Although the IATA mechanism is generally endorsed, in some States with serious capacity
problems regulatory authorities have found it necessary to introduce additional measures to limit or
                                                     
10 See document S/C/W/163, paragraph 24.S/C/W/200/Add.1
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ration access.  In certain instances, priority for sl ots is given to international services with rights
granted under a bilateral Air Service Agreement over domestic flights.
65. The European Union Member States follow a code of conduct based on the IATA mechanism
(Council Regulation 95/93 "On Common Rules for the Allocation of Slots at Community Airports,"
dated 18 January 1993).  There are three main differences, however.  First, Member States are legallyobliged to play a role in deciding on the need for slot allocation.  Second, the Regulation establishes a
set of institutional arrangements and binding rules (bi-annual audit, coordinator, coordination
committee, definition of new entrants).  Third, it contains a further provision to facilitate new entrant
competition by creating slot pools from new slots, those returned voluntarily by airlines, and those
lost under the "use it or lose it" rule.  Half of the slots in the pool are allocated to new entrants.
66. In the United States, the High Density Rule (HDR) introduced in 1986 applies to two
international airports, Chicago O'Hare and New Yo rk-JFK (both of which are fully coordinated under
the IATA scheduling system) and two domestic airports, New York-La Guardia and Reagan
Washington National.  At other airports there are no slot allocation mechanisms;  airlines are only
required to submit their flight schedules.
67. The High Density Rule has retained some common features with the IATA and the European
systems.  It allows air carriers to exchange slots on a one-to-one basis and provides for new entrants.However, unlike the IATA and the EU systems, slots for international flights at high density airports
are directly allocated by the aeronautical authorities.  Slots for domestic flights at those airports may
be traded directly between carriers.  Slots for services classified as essential cannot be bought, sold or
leased.  The HDR also contains a reciprocity pr ovision similar to that of the European Union,
applicable to air carriers or commuter operator s of countries that provide slots to United States
companies on a more restrictive basis than the United States rule.  The HDR is considerably more
complex than either the IATA or the European Union systems.  It creates separate limits for different
categories of users within an overall limit on takeoffs or landings, described as Instrument Flight Rule
(IFR) operations per hour.  These limits vary from airport to airport.
68. Since April 2000, under Public Law 106-181, the United States Government is tasked to
determine the nature of slots and their saleability.  Slot rules will be eliminated by July 2002 for
Chicago O'Hare and by January 2007 for New York -La Guardia and NewYork-JFK.  International
slots at Chicago O'Hare became free as of 1 May 2000 subject to national reciprocity for foreign flag
carriers;  various measures have been implemented  to encourage new entrants, small aircrafts and
non-hub operations.
VI. SCHEDULED PASSENGER SERVICES
69. Scheduled international services are defined by  ICAO as a series of flights meeting all the
following characteristics:  passage through the air space over the territory of more than one State;
performed by aircraft for the transport of passengers, mail or cargo for use by the public against
remuneration;  operated to serve traffic between the same two points either (i) according to a
published timetable or (ii) so regular or frequent so as to constitute a recognisably systemic series.
70. With the introduction of liberal air policies, the distinction between scheduled and non-
scheduled air services has become increasingly blurred.  Within the EU, the Third Package of air
transport liberalization measures, approved in 1992, has effectively eliminated this regulatory
distinction.
71. Revenue passenger kilometres (RPKs) for scheduled traffic have increased sharply during the
period under review with significant variations.  The commercial air transport industry is extremelycyclical and the demand for air passenger travel is highly elastic.  This is particularly true for businessS/C/W/200/Add.1
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travel, which always takes place on scheduled services and is severely curbed during periods of
economic difficulty.  Although first and business class seats account for only 20 per cent of capacity,
they contribute approximately 80 per cent of the revenue.
72. Statistics show wide variations in terms of traffic growth and financial performance during
the period under review.
73. One of the major regulatory developments has been privatization almost exclusively in
scheduled passenger services.  Cargo services and passenger charter services, given their less
prestigious nature, in the past have generated considerably less government ownership, support and
intervention.  According to ICAO, of 611 airlines, 234 had initially a State shareholding.  Of these,
153 airlines have been the object of a privatization plan, which was completed in 80 cases between
1985 and 2000.
74. All airlines in North America and almost all major carriers in Latin America and the
Caribbean are fully or majority privately owned at present.  Over half the major Western European
airlines are privately owned, while most Eastern European carriers are majority state-owned, although
15 have been targeted for privatization.  In the Asia-Pacific region, partial or full privatization has
been announced by some 15 governments, while carriers in Japan, the Republic of Korea, Brunei
Darussalam, Malaysia, the Philippines, Australia, New Zealand, Hong Kong, China and ChineseTaipei are now privately owned.  In the Middle East and Africa, almost all national carriers remain
government-owned, although some 25 have been earmarked for privatization.
VII. NON-SCHEDULED PASSENGER SERVICES
75. Non-scheduled air services are defined as comm ercial services performed as anything other
than a scheduled service.  The international non-scheduled passenger market has grown significantlyand is in the process of consolidation.  The sector has become an integral part of a broader travel and
leisure industry and is often operated within vertically integrated conglomerates owning a broad
spectrum of companies.  For instance, in 1999 th e gross revenue of the European market amounted to
US$37.2 billion, generated by six multinational corporations.  Although vertically integrated travel
and leisure groups own charter airlines, charter travel is also an important aspect of scheduled airlineswhich may operate "charters" themselves or sell capacity to independent tour operators.
76. Charter flights are still regulated primarily at the national level, subject to Article 5 of the
Chicago Convention. This Article permits non-scheduled flights to overfly and land without
permission, but allows each Contracting State to determine the conditions under which they may pick
up or discharge passengers, cargo and mail.
VIII.  CARGO SERVICES
77. For the past decade, air cargo transport has grown faster in volume than air passenger traffic
and, according to industry forecasts, this trend is expected to continue.  Air cargo accounts at present
for about 2 per cent of all cargoes moved worldwide in terms of tonnage, but for well over one-third
of the value of world trade in merchandise.  Th e main flows are Europe-Asia (17 billion Freight Ton
Kilometres – FTK in 1996), United States dom estic (13 billion FTK), North America – Europe
(12 billion FTK) and Asia-North America (12 bill ion FTK), intra-Asia (5 billion FTK) and intra-
Europe (2 billion FTK).  The world air cargo market is forecast to increase three-fold over the next
fifteen years, with the largest growth being expected on the routes between Asia and Europe and
between Asia and North America.
78. The air cargo sector is less affected by national sensitivities concerning, for example, the
"nationality" of the carrier, recognition of the brand name, and "equal sharing" of passenger trafficS/C/W/200/Add.1
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between two countries.  Traditionally, cargo is c onsidered secondary to passenger services.  The so-
called combination carriers (scheduled passenger/cargo airlines) such as Lufthansa, Korean Airlines,
Air France, JAL, and United Airlines, carry cargo in the belly holds of their passenger aircraft, as well
as on board dedicated freighters.  Approximately 75 per cent of the world's air cargo (freight and
mail) measured in Freight Ton Kilometres, is carried by combination airlines in scheduled and non-scheduled operations.  About four-fifths of air cargo is estimated to be currently transported on
scheduled flights.
79. All-cargo airlines, such as Cargolux, Arrow Ai r, Nippon Cargo, Heavylift, operate scheduled
and non-scheduled (i.e. niche) services.  Integrated/express carriers, such as FedEx, UPS, DHL, TNT
operate their own aircraft on routes they select to fly, and hire other carriers' services for other
destinations.  The latter segment has developed particularly dynamically with 19 per cent annual
growth between 1992 and 1997.  While integrated/express carriers represented 5 per cent of theinternational freight and mail market in 1995, it is expected by Boeing to attain 37 per cent by 2015.
The market structure is relatively concentrated with the leading ten carriers accounting for 50 per cent
of total traffic.
11
80. Freight forwarders play an essential role in the industry.  They handled 60 million shipments
worldwide in 1996 and generated combined annual revenues of around US$45 billion.  The top 20forwarders, including Air Express International, Schenker, Kuehne & Nagel, Panalpina, Airborne
Express, and Burlington handle nearly half of total forwarding traffic.  From a regulatory perspective
the forwarders are seen as agents of the airlines.  On the operational side, the situation is becoming
more ambiguous.  Through leasing and, sometimes, operating aircraft, the forwarders act as virtual air
carriers;  they are not constrained by traffic rights.
81. Air cargo is governed by the traditional regulato ry regimes of air transport in terms of routes,
tariffs, capacity, designation, charter regime, predatory practices, competition policy, slots, and
ownership.  However certain specificities have developed over time.  Air mail has priority over
general cargo and passenger traffic under the UPU Convention.
82. In terms of routes, the present cargo regime tends to be more liberal than that for passenger
traffic.  Liberalization of cargo, starting with routes, has been used as a test case for wider bilateral
liberalization, notably by the United States.  The distinction between passenger and cargo operations
is not, however, widespread in Air Service Agreements.  It is promoted predominantly by countries
having a strong interest in developing the air cargo sector without nationality considerations.   Cases
in point are Australia's 'open skies' cargo policy, Canada's open airport policy for cargo at Montreal’s
Mirabel airport, and liberal cargo policies practiced by Mexico and India.  Certain types of routes and
Freedoms (notably Fifth and Seventh), while rarely given for passenger services, have been includedin recent open skies agreements for cargo.  The liberalization effects are limited by the fact, however,
that 60 per cent of cargo tends to be carried in the belly hold of passenger aircraft, which are subject
to more route restrictions.
83. Cargo carriers and express carriers are frequently in competition with passenger carriers to
obtain designation and have claimed that this is to their disadvantage.  As far as capacity is concerned,
in recent years, several Air Services Agreements incorporated more flexible capacity regimes, in
particular for the cargo sector.
84. On tariffs three regimes exist.  Firstly, there is the possibility of total freedom of rates.  This is
the case for express courier services and for "unilatera l tariffs, i.e. for tariffs not subject to an approval
requirement (e.g. Germany/United States).  A second regime is based on the regulatory approval of
                                                     
11 Lufthansa, Korean Airlines, Air France, Singapore Airlines, KLM, Japan Airlines, British Airways,
Cathay Pacific, Federal Express, China Airlines.S/C/W/200/Add.1
Page 15
rates; it is common outside the United States and the European Union.  In this case, the cargo tariffs
are agreed by the designated airlines, either bilaterally or multilaterally, through the Tariff
Conferences of IATA and filed for approval with governments.  If not disapproved, the rates become
applicable to all other carriers.  A third regime provides for maximum prices.  On routes to and from
the United States and within the EU, government approval for IATA agreements is usually associatedwith the requirement that the tariffs are subject to ce ilings and that every carrier is free to apply lower
rates.  On the whole, market considerations tend to determine air cargo rates.
85. Change of gauge ability is also essential for cargo operations.  Cargo carriage in the belly
holds of tourist charters is frequently prohibited, generating economic inefficiencies in particular on
North-South routes.  Strict implementation of tradit ional ownership and control rules may restrict the
use of leasing and, especially wet leasing (hiring with flight personnel) of foreign cargo aircraft.  This
practice is an important source of flexibility in the air transport industry in responding to seasonalpeakloads, and helping to develop cargo operations with limited capital.  Slots also raise specific
problems for air cargo.  Approximately 130 of the world's major airports are officially "congested",
which has forced a growing number of all-cargo airlines to develop operations out of "secondary"
uncongested airports.
86. The liberalization trend in the sector started in the United States with the 1977 Air Cargo Act
and the 1978 Air Deregulation Act for cargo operations.  These laws provided for the liberalization of
licencing, the opening of routes, the liberalization of rates, and the ending of cross-subsidies.  This
regulatory framework has not changed substantially during the period under review.  The European
equivalent to the United States Cargo Act is C ouncil Regulation No. 294/91.  Its main provisions,
which apply to both scheduled and non-scheduled services, are the liberalization of ownership rules(Community ownership replacing na tional ownership);  the granting of Third, Fourth and Fifth
Freedoms on all internal routes;  full operational flexibility in the form of unlimited frequency of
service, adjustment of capacity, type of aircraft, and change of gauge;  and rate freedom.  This
regulatory framework was partially superseded by the more liberal Third Package, in force as of 1
January 1993, and has not changed substantially si nce.  According to the OECD, the results of
European air cargo liberalization have remained limited due to the relatively small size of the market
and constraints imposed by heavy congestion and environmental restrictions.
87. The United States open skies policy always included cargo-related elements, such as
competitive ground support (self-handling, intermodal rights, user charges) and liberal treatment of
non-scheduled cargo services.  Among the cargo-specific provision of the various open skies
agreement are multimodal pricing (US-Netherlands 1992), Seventh Freedom rights and Intermodal
rights of cargo carrier (US Germany 1994).  Antitrust immunity has been granted in several cases(e.g. KLM-Northwest) and allows for joint-cargo service, cargo codesharing, and the coordination of
rates.
88. Other countries have also pursued open skies policies for all-cargo operations.  Cases in point
include agreements between Luxembourg and India, the Netherlands and Malaysia, and the five "like
minded" APEC Members.
IX. MULTIMODAL OPERATIONS
A. M
ULTIMODAL OPERATIONS FOR AIR CARGO
89. There are two main forms of cargo multimodal operations:  air-trucking and air-sea
movements.  Air-trucking consists of combination and air express carriers making use of surface
trucking for freight transportation.  Air-trucking was initially intended to overcome restrictions onFifth Freedom operations.  It is estimated that in the United States approximately 1,000 city-pairs areS/C/W/200/Add.1
Page 16
served by a total of 16,000 flights per week;  the comparable figures for Europe are 400 and 7,000,
respectively.
90. Air-sea transportation may prove an interesting option if a carrier has no traffic rights in the
country of origin of the goods.  In these cases, the merchandise is shipped to destinations where such
rights are available.  Air-sea transportation is particularly relevant for shipments between Asia-Pacificand Europe via the Gulf, and on some trans-Pacific routes.  In several countries, necessary licences for
road and rail haulage are sector-specific.  Such practices are costly and adversely affects multimodal
transportation.  Their economic impact was eased in the past by transporters (express carriers and
freight forwarders) contracting out to specialized carriers.  However, the ensuing costs have tended to
increase as multimodal transportation has become more technically demanding and challenging to
manage.
B. M
ULTIMODAL OPERATIONS FOR PASSENGER TRAFFIC
91. Multimodal activities in passenger transport seem to have been limited to two scenarios:
equity and management participation of airlines in land transport operators serving an airport;  and
railway and airline codesharing.  The latter is subject to regulatory regimes similar to airlines'
codesharing and so far has been pursued mainly in Europe.
__________