Communication from the Commission - Strengthening aviation relations with Chile
Date: 2005-09-05
Institutions: European Commission
Subjects: Chile, EU relations, air safety, air transport, association agreement, competition law, international negotiations, liberalisation of the market, transport regulations

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 05.09.2005 
COM(2005) 406 final 

COMMUNICATION FROM THE COMMISSION 

Strengthening aviation relations with Chile 

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1. 

INTRODUCTION 

Traditionally, international air transport is governed by bilateral agreements between 
individual  states.  However,  the  so-called  “open  skies”  judgements  of  5  November 
2002 of the European Court of Justice marked the start of an external aviation policy 
on Community level. 

As  outlined  in  the  Communication  “Developing  the  agenda  for  the  Community’s 
external aviation policy”1, agreements between the European Community and certain 
third  countries  will  have  the  substantial  added  value  of  creating  new  economic 
opportunities  by  opening  up  markets  and  promoting  investment  opportunities 
as  much  as  possible.  Furthermore,  such  agreements  will  be  the  best  way  to  ensure 
fair competition by promoting regulatory convergence. 

Therefore,  the  European  Commission  has  proposed  to  launch  targeted  negotiations 
seeking to achieve global aviation agreements in the major regions of the world, with 
the aim of strengthening the prospects for promoting European industry and ensuring 
fair competition, while at the same time helping to reform international civil aviation. 
In its Conclusions on external aviation relations, the Council has explicitly taken note 
of Chile as a potential candidate for a future request for comprehensive negotiating 
mandates.2 

Chile,  a  country  which  has  already  concluded  an  Association  Agreement  with  the 
European Community that will establish a free trade area until 2013, has requested to 
open  negotiations  of  a  comprehensive  air  transport  agreement  with  the  European 
Community.  With  its  market-oriented  economic  and  transport  policy  and  high 
regulatory  standards,  Chile  is  a  promising  candidate  for  a  new-generation  air 
transport agreement with the European Community.  

Furthermore,  Chile  has  demonstrated  its  willingness  to  reform  the  framework  for 
international  air  transport  jointly  with  the  European  Community  by  being  the  first 
country worldwide to sign a ‘Horizontal Agreement’ with the European Community 
in the field of air transport.3 

A more comprehensive air transport agreement with Chile would further strengthen 
the commercial and political ties between the EU and Chile. It will bring economic 
benefits  to  air  carriers,  airports,  passengers,  shippers,  the  tourism  industry  and  the 
wider  economy  in  both  the  European  Union  and  Chile.  Furthermore,  it  will  be  an 
excellent  starting  point  for  strengthening  the  aviation  relations  with  other  Latin 
American countries in the future. 

With  this  Communication,  the  Commission  therefore  recommends  that  the  Council 
authorises  the  Commission  to  negotiate,  on  behalf  of  the  European  Community,  a 

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COM (2005) 79. 
Council Conclusions of 27 June 2005 on developing the agenda for the Community’s external aviation 
policy. 
The  ‘Horizontal  Agreement’  replaces  provisions  in  the  bilateral  air  services  agreements  between  EU 
Member  States  and  Chile,  which  have  been  found  incompatible  with  EC  law,  with  a  Community 
agreement. 

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comprehensive  air  transport  agreement  with  Chile  aiming  at  market  opening 
and regulatory co-operation and/or convergence, notably in priority areas such as 
aviation  safety,  security,  environmental  protection  and  application  of  competition 
rules ensuring a competitive level playing field. 

Positive  relations  between  the  Chilean  aviation  authorities  and  the  services  of  the 
European Commission have been developed over the negotiations of the ‘Horizontal 
Agreement’  and  in  exploratory  discussions,  providing  an  excellent  basis  for 
entering into negotiations of an ambitious air transport agreement with Chile. 

2. 

THE  EXISTING  FRAMEWORK  FOR  AIR  SERVICES  BETWEEN  THE  EUROPEAN 
COMMUNITY AND CHILE 

2.1. 

Bilateral air services agreements between EU Member States and Chile 

Currently,  air  services  between  the  EU  and  Chile  are  governed  by  the  bilateral  air 
services  agreements  between  Chile  and  11  EU  Member  States.4  There  is  no  legal 
basis for air services between the other 14 Member States and Chile. 

The existing bilateral air services agreements establish an incoherent framework for 
air services between the EU and Chile. While some agreements are very liberal and 
do  not  impose  any  restrictions  on  flight  frequencies  or  route  schedules,  other 
agreements  provide  for  a  tight  regulation  of  key  economic  aspects,  such  as  the 
weekly  frequencies,  the  route  schedules  and  the  fares.  These  differences  in  the 
development of Member States’ bilateral air services agreements with Chile lead to 
inequalities in the opportunities available to Community air carriers. 

In  September  2004,  an  Agreement  between  the  European  Community  and  the 
Republic  of  Chile  on  certain  aspects  of  air  services  (‘Horizontal  Agreement’)  was 
initialled.5  The  ‘Horizontal  Agreement’  corrects  the  provisions  which  have  been 
found  incompatible  with  EC  law  in  the  existing  bilateral  air  services  agreements 
between  Chile  and  EU  Member  States.  In  particular,  it  replaces  provisions  that 
require air carriers to be owned and controlled by nationals of a given EU Member 
State with a ‘Community air carrier’ clause. Chile was the first country worldwide 
that  agreed  with  the  European  Community  on  a  ‘Horizontal  Agreement’  that 
establishes  a  non-discriminatory  legal  basis  for  air  services.  Upon  signature  of  this 
agreement,  Community  air  carriers  will  be  entitled  to  benefit  from  traffic  rights 
between  Chile  and  any  EU  Member  State  where  they  are  established.  Chilean  air 
carriers  will  be  subject  to  certain  provisions  of  Community  law  when  operating 
routes within the European Community. Due to the different bilateral arrangements, 
however, it was necessary to include a ‘no-circumvention’ clause in the ‘Horizontal 
Agreement’  in  order  to  avoid  a  possible  circumvention  of  the  existing  bilateral 
restrictions on traffic rights. 

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Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, the Netherlands, Spain, Sweden and 
the United Kingdom. 
COM (2004) 829, Proposal for a Council Decision on the signature and the provisional application of 
the Agreement between the European Community and the Republic of Chile on certain aspects of air 
services. The proposal was adopted by the Council on 27 June 2005. 

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2.2. 

Air transport policy in Chile – Pioneering the Liberalisation of Air Transport 

Chile  is  one  of  the  most  advanced  countries  with  regard  to  the  liberalisation  of  air 
transport. The Chilean air transport policy is based on the principles of free market 
entry, freedom of pricing, open skies and minimum government intervention. 

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There  are  no  limits  to  the  foreign  ownership  of  air  carriers  in  Chile.  In 
November  2004,  a  new  air  carrier  which  is  ultimately  owned  by  Spanish 
capital  received  the  necessary  authorisations  and  permissions  by  the  Chilean 
authorities to start domestic and international operations. 

There are no barriers to market entry for air carriers. Air carriers are authorised 
to operate if they have a valid Air Operators Certificate, affirming the ability to 
secure safe aviation activities, and if they comply with the necessary insurance 
requirements. 

Contrary  to  worldwide  practices,  Chile  allows  foreign  air  carriers  to  operate 
domestic flights, based on reciprocity. 

In  the  bilateral  relations  with  more  than  30  countries,  Chile  has  granted 
unlimited third and fourth freedom traffic rights.6 

International traffic rights are allocated in a public auction in case there is more 
than one applicant. Traffic rights are freely transferable between air carriers. 

Chile  is  a  signatory  of  the  Multilateral  Agreement  on  the  Liberalisation  of 
International  Air  Transportation  (MALIAT)  and  an  additional  Protocol.7  By 
virtue  of  the  MALIAT  and  MALIAT  Protocol,  Chile  grants  its  partner 
countries  not  only  unlimited  third  and  fourth  freedom  traffic  rights,  but  also 
unlimited fifth and seventh freedom traffic rights.8  

Chile  is  the  key  driver  of  the  ongoing  integration  process  of  Latin  American 
aviation markets. Chile is a signatory of the Fortaleza Agreement establishing 
open market access on sub-regional routes in South America.9 

If  the  application  of  competition  law  does  not  require  it,  Chile  does  not 
intervene  in  the  pricing  of  air  carriers.  The  pricing  on  non-competitive,  i.e. 
monopolistic  or  quasi-monopolistic  routes,  is  supervised  by  the  aviation 
authorities. 

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Third freedom is the right to carry passengers and/or freight from the home country to another country. 
Fourth freedom is the right to carry passengers and/or freight from another country to the home country. 
Other  signatories  of  the  MALIAT  Protocol  are  New  Zealand,  Singapore  and  Brunei.  The  MALIAT 
Agreement includes furthermore the US, Samoa and Tonga. 
Fifth  freedom  is  the  right  to  carry  passengers  and/or  freight  from  a  country  to  a  third  country  on 
services starting in its home country, e.g. a Chilean air carrier carrying passengers between Spain and 
Germany on a Santiago-Madrid-Frankfurt flight. Seventh freedom is the right to carry revenue traffic 
between two countries outside its home country, e.g. a Chilean air carrier carrying passengers between 
New Zealand and Brunei. 
Other  signatories  of  the  Fortaleza  Agreement  are  Argentina,  Brazil,  Paraguay,  Uruguay,  Bolivia  and 
Peru. 

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The  economic  liberalisation  of  the  air  transport  sector  has  been  accompanied 
by  strict  enforcement  of  safety  and  security  standards,  user  rights  and 
competition rules. 

The  airport  sector  is  open  to  private  investment.  European  investors  have  a 
30% share in the airport consortium operating Santiago International Airport. 

3. 

FURTHER  STRENGTHENING  THE  RELATIONS  WITH  A  PRIVILEGED  AND  RELIABLE 
PARTNER IN SOUTH AMERICA 

Chile  is  the  most  important  partner  of  the  European  Union  in  South  America.  In 
November 2002, Chile and the European Union signed an Association Agreement.10 
The  Agreement  establishes  a  political  and  economic  association  between  Chile 
and  the  EU,  based  on  reciprocity,  common  interest  and  on  the  deepening  of  the 
relationship in all areas of application. 

The EU-Chile Association Agreement will establish a free trade area in goods until 
2013.  Customs  duties  on  industrial  products  will  be  completely  eliminated  until 
2010. The Agreement also establishes a free trade area in services and provides for 
the liberalisation of investment.11 However, air transport services are not included in 
the scope of the EU-Chile Association Agreement.12 

The EU is the most important trade partner for Chile. In 2003, Chilean exports to the 
EU totalled € 7 billion. EU exports to Chile account for € 3 billion. Between 2001 
and  2003  alone,  merchandise  trade  between  the  EU  and  Chile  has  grown  by 
27%.  The  EU  is  the  main  investor  in  Chile  with  a  total  foreign  direct  investment 
stock of € 12.7 billion equalling 36% of total foreign direct investment. 13  

In March 2004, Chile has formally requested the opening of negotiations on a liberal 
aviation  agreement  with  the  European  Union.  Chile  has  reiterated  its  interest  in  an 
agreement that would encompass both liberalisation of market access and regulatory 
convergence  in  the  2nd  EU-Chile  Association  Council  in  May  2005.14  Opening 
negotiations in the field of air transport will further strengthen the economic and 
political links between the EU and Chile. As Chile has been the first country in the 
Southern Hemisphere to enter into an Association Agreement and to establish a free 
trade area with the EU, it is a logical consequence that Chile should also be among 
the first countries to enter into a comprehensive air transport agreement with the EU.  

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Agreement establishing an association between the European Community and its Member States, of the 
one part, and the Republic of Chile, of the other part - Final act, Official Journal L 352 , 30/12/2002 P. 
0003 – 1450. The Agreement entered into force on 1 March 2005. 
Art. 94 of the Association Agreement. 
Art. 95 (2d) of the Association Agreement. 
Source: Eurostat (2004). 
Joint Declaration of the 2nd EU-Chile Association Council, 26 May 2005. 

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4. 

ECONOMIC BENEFITS OF AN EU-CHILE AIR TRANSPORT AGREEMENT 

The total air traffic volume between the European Union and Chile is about 600.000 
annual passengers. Due to the geographic distance, a substantial share of passengers 
is carried on indirect flights via other Latin American countries. 

While the bilateral air services agreements between several EU Member States and 
Chile  do  not  impose  any  restrictions  on  the  number  of  flights,  the  most  important 
bilateral  markets  in  economic  terms15  are  governed  by  agreements  that  restrict  the 
ability of air carriers to offer air services according to the demand of passengers. The 
existing  restrictions  constrain  the  potential  growth  of  air  services  between  the 
EU  and  Chile.  Forecasts  predict  an  average  annual  growth  rate  in  air  services 
between the EU and Chile of 5.9% between 2004 and 200816. 

In recent months, air carriers from both the EU and Chile have indicated their interest 
in  entering  the  EU-Chile  market.  However,  the  existing  restrictions  in  the  bilateral 
agreements would not allow them to operate flights on a scheduled basis. Tourism 
flows between the EU and Chile have increased 50% between 1998 and 200417 
but  further  growth  of  the  tourism  market  could  be  hampered  by  the  existing 
restrictions in the air services agreements if no action is taken.  

Trade  flows  between  the  EU  and  Chile  have  increased  by  27%  between  2001  and 
2003 alone. Eliminating the existing restrictions on air services would facilitate an 
unconstrained growth of trade between the EU and Chile, particularly given the 
long distance and the substantial share of perishable goods in the trade relations with 
Chile. 

The lifting of restrictions could enhance market opportunities for Community air 
carriers. Released from the existing restrictions on the number of weekly flights and 
the routes, air traffic between the EU and Chile is likely to increase. The number of 
direct flights between the EU and Chile is expected to increase, allowing Community 
air carriers to increase their market share of the total volume of the EU-Chile market. 
A  further  liberalisation  and  the  resulting  increase  in  direct  flights  will  increase 
choice  for  European  passengers  and  shippers  for  flights  to  Chile,  an  important 
trading  partner  of  the  European  Union.  An  increase  in  air  services,  particularly  an 
increase in direct air services, will facilitate a further increase in trade and tourism 
flows between the EU and Chile. 

Since Community air carriers currently account for nearly two thirds of the passenger 
market  and  70%  of  the  freight  market,18  and  since  more  than  65%  of  passengers 
between  the  EU  and  Chile  are  European  residents,19  it  is  expected  that  the  major 

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Spain,  Germany  and  France account  for  more  than  90% of  the passenger  traffic  between  the  EU  and 
Chile. 
Source: IATA Passenger Forecasts 2004-2008. 
Source: Sernatur, Estadisticas de Turismo. 
Passenger market shares in 2004: Lan Chile 32%, Iberia 31%, Lufthansa 20%, Air France 12%. Freight 
market  shares  in  2004:  Lan  Chile  30%,  Iberia  22%,  Martinair  18%,  Air  France  13%,  Cargolux  10%, 
Lufthansa 7%. Source: Junta de Aeronautica Civil. 
Source: Sernatur (2005). 

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share  of  these  economic  benefits  would  be  reaped  by  the  European  airline 
industry, European consumers and the wider European economy.  

With its modern regulatory framework, Chile is an excellent candidate for deepening 
the aviation relations with the Community in an Open Aviation Area – both in terms 
of  market  access  and  in  terms  of  regulatory  cooperation.  An  enhanced  regulatory 
cooperation between the EU and Chile would facilitate further the air services 
between the EU and Chile. 

Maybe  even  more  important  than  the  direct  economic  impact  on  the  EU-Chile 
market  is  the  medium-term  impact  on  other  air  transport  markets.  The  economic 
benefits  of  open  international  aviation  markets  have  been  clearly  identified  in  a 
study conducted on behalf of the European Commission on the economic impact of 
an  EU-US  Open  Aviation  Area.20  Released  from  the  existing  restrictions  on  the 
number of weekly flights and flight routes, air traffic is likely to increase. With open 
market  access,  airlines  will  be  able  to  take  advantage  of  new  market  opportunities 
and  offer  air  services  on  the  routes  where  their  customers  demand  it.  Cross-border 
investment flows will bring further efficiency gains. 

In  the  longer  term,  an  EU-Chile  Air  Transport  Agreement  could  have  wider 
economic  implications  for  the  air  transport  between  the  EU  and  other  Latin 
American  markets.  Chile  is  the  main  driver  of  air  transport  liberalisation  within 
Latin America, both in political and commercial terms. Chile has already concluded 
the  most  liberal  bilateral  air  services  agreement  in  the  world  with  Uruguay,  which 
even  includes  access  to  domestic  flights.  Chile  has  recently  strengthened  its 
cooperation with both Argentina and Brazil in the field of air transport and signed a 
new  ‘open  skies’  agreement  with  Paraguay.  As  a  consequence,  Chile  has  relatively 
modern and liberal agreements with all Mercosur countries. Furthermore, Chile is the 
key  player  in  the  industry-driven  integration  process  in  Latin  America.  The  main 
Chilean  airline,  LAN,  has  established  affiliates  in  Peru,  Ecuador  and  Argentina.  In 
the longer term, an Air Transport Agreement with Chile could be expanded towards 
neighbouring countries in Latin America, increasing further the economic benefits of 
a comprehensive Air Transport Agreement with Chile. 

The  clear  potential  benefits  of  an  Open  Aviation  Area  Agreement  with  Chile 
have  been  confirmed  in  an  impact  assessment  study  by  independent  consultants. 
While the short-term economic benefits might be limited due to the low number of 
non-stop flights between  the Community  and Chile and  the already existing degree 
of  market  access,  there  are  nevertheless  commercial  benefits  for  the  EU  airline 
industry  even  in  the  short  term.  It  was  confirmed  that  the  regulatory  and  policy 
framework  for  air  transport  in  Chile  should  allow  the  Community  to  reach  without 
great obstacles a model agreement with Chile achieving greater levels of regulatory 
convergence  and  new  opportunities  for  EU  industry  and  users.  Furthermore,  the 
study  underlined  the  substantial  economic  benefits  in  the  longer  term  for  the 
European airline industry, air transport users and other economic actors, taking into 
account the implications for relations with other Latin American countries.  

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The  Brattle  Group,  The  Economic  Impact  of  an  EU-US  Open  Aviation  Area,  Study  prepared  for  the 
European Commission, December 2002. 

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5. 

CONCLUSIONS:  SUBSTANTIAL  ADDED  VALUE  OF  A  FUTURE  EU-CHILE  AIR 
TRANSPORT AGREEMENT 

A  modernised  framework  for  air  transport  between  the  EU  and  Chile  offers 
significant  new  opportunities  for  strengthening  air  transport  in  a  competitive  level 
playing field. Further to that, it will strengthen further the excellent commercial and 
political relations between the EU and Chile. 

The model of an air transport partnership between the European Union and Chile is 
inspired  by  the  ambitions  to  take  forward  an  agenda  for  reform  on  an  international 
level.  The  resulting  agreement  on  the  liberalisation  of  air  transport  between  the 
European  Community  and  Chile  would  establish  a  modern  framework  for  air 
services  between  the  EU  and  Chile,  with  market  access  as  open  as  possible  and 
regulatory co-operation and convergence. If successful, it could be the model for an 
extended air transport partnership with other countries in South America.  

The  negotiations  will  aim,  on  the  one  hand,  at  a  reciprocal  opening  of  market 
access. Air services between the EU and Chile are often operated on a one-stop basis 
via intermediate points which are significant markets in their own right, e.g. Brazil or 
Argentina. Therefore, fifth-freedom rights via such intermediate points are important 
to increase further the benefits of an agreement with Chile. Chile shares the objective 
of  air  transport  liberalisation  and  has  already  indicated  in  exploratory  talks  its 
willingness to grant cabotage rights, i.e. the right to operate domestic flights in Chile. 
Such  cabotage  rights  would  be  a  welcome  precedent  for  ongoing  Community 
negotiations with other third countries.  

The  reciprocal  opening  of  market  access  with  Chile  has  already  been  implemented 
by  some  Member  States.  Very  recently,  Finland  reached  an  agreement  with  Chile 
providing for full market liberalisation. However, other Member States have not yet 
reached an advanced degree of market access in their relations with Chile. Fourteen 
Member  States  currently  do  not  have  any  access  at  all  to  the  Chilean  market.  This 
incoherent and fragmented framework has led to inequalities in the opportunities of 
Community air carriers which are not consistent with the equal opportunities for all 
Community air carriers in the Single Market.  

A  comprehensive  air  transport  agreement  on  a  Community  level  would  make  the 
Community’s  aviation  relations  with  Chile  coherent  and  would  grant  equal 
opportunities  for  all  Community  air  carriers  for  air  services  to  Chile. 
Furthermore,  it  would  create  substantial  new  market  opportunities  for  air 
carriers in the 14 Member States that currently do not have any rights concerning air 
transport from and to Chile. An air transport agreement on Community level would 
give  smaller  carriers  the  possibility  to  extend  their  network  to  Chile.  While  traffic 
demand between several Member States and Chile might be too thin to make direct 
flights  commercially  sustainable,  air  carriers  would  have  substantial  benefits  by 
being allowed to code-share on their alliance partners’ flights to and from Chile. 

Open  aviation  markets  need  a  framework  that  ensures  fair  competition  and  high 
standards  of  safety,  security  and  environmental  protection.  Market  opening  and 
regulatory  co-operation  towards  convergence  go  hand  in  hand.  The  bilateral  air 
services  agreements  between  some  Member  States  and  Chile  have  granted  Chilean 
air  carriers  fully  open  market  access  while  not  adequately  ensuring  regulatory 

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convergence. A comprehensive air transport agreement with Chile on a Community 
level  will  equally  reinforce  high  standards  of  safety,  security,  environmental 
protection, passenger protection and other regulatory issues.  

With  regard  to  environmental  issues,  the  agreement  must  be  consistent  with  the 
Community’s  commitment  to  sustainable  development.  Apart  from  the  economic 
benefits highlighted above, the expected growth in air traffic also has unwanted side-
effects,  notably  on  the  air  quality  and  noise  levels  around  airports  and  through  the 
contribution  to  global  climate  change.  It  is  important  that  the  agreement  does  not 
restrict the EU’s ability to apply regulatory or economic instruments to mitigate these 
adverse effects.  

Safeguarding fair competition is a key issue in open aviation markets. By achieving 
greater  levels  of  regulatory  convergence,  a  comprehensive  air  transport  agreement 
between the Community and Chile will ensure a competitive level playing field to 
avoid  distortions of competition. Chile has strong competition authorities enforcing 
competition  rules.  There  is  no  government  support  to  the  airline  industry,  not  even 
after the industry crisis of 9/11. In aviation safety, Chile has an outstanding record in 
South  America  and  can  be  compared  to  European  standards.  As  a  consequence, 
based  on  the  current  level  of  enforcement  of  safety  and  security  standards,  of 
competition rules and air transport users’ rights in Chile, prospects for a high level 
of  regulatory  co-operation  and/or  convergence  between  the  Community  and 
Chile are excellent.  

In informal exploratory talks, Chile has confirmed its willingness to achieve a high 
degree  of  regulatory  convergence  with  the  Community  in  order  to  facilitate  air 
services  between  the  EU  and  Chile.  Such  a  regulatory  convergence  can  only  be 
achieved  on  Community  level;  the  bilateral  agreements  fall  short  of  ensuring  an 
adequate 
regulatory  cooperation.  An  agreement  will  establish  cooperation 
mechanisms  to  ensure  that  the  rules  of  the  agreement  are  respected  and  further 
developed.  

The substantial added value of an air transport agreement with Chile could be further 
increased by similar agreements with other countries in South America. Hence, the 
new partnership between the European Union and Chile should be a model for the 
region and open for other countries that might wish to join. 

In  light  of  the  above,  the  European  Commission  recommends  that  the  Council 
authorises  the  Commission  to  open  negotiations  with  Chile  with  a  view  to 
concluding a comprehensive air transport agreement. 

The  Commission  will  work  closely  together  with  Member  States  and  all  relevant 
stakeholders  in  further  developing  and  achieving  the  objectives  set  out  in  the 
negotiating directives. 

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