Research Proposal: Open Skies Agreements

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¶ … Open Skies Agreements on Domestic and International

Carriers

Current Status of International Open Skies Agreements

The Economic Impact of Open Skies Agreements

Open Skies Agreements: A Dual-Edged Sword

The aviation industry has suffered from a triple whammy during the past decade. Following the horsewhipping the industry received as a result of the terrorist attacks of September 11, 2001, a more recent global recession and skyrocketing energy costs have caused a number of legacy carriers to seek protection using Chapter 11 bankruptcy proceedings while others have simply folded. The current state of affairs, though, did not develop during the past decade alone, but is rather the results of almost a century's worth of increasing deregulation of the aviation industry in the United States. For instance, during the 30-year period from 1919 to 1949, a framework of international regulation emerged in response to the economic, technological and political developments that were taking place in air transport (Doganis, 2002). This framework was consistent and, generally speaking, global in its applicability to the aviation industry (Doganis, 2002). Moreover, during the post-World War II period from 1950 to the 1970s, this international regulatory framework was followed without significant changes; the framework was triangulated, being based on (a) bilateral air service agreements, (b) on inter-airline pooling agreements and (c) on the tariffs and pricing agreements that were agreed upon under the auspices of the International Air Transport Association (IATA) (Doganis, 2002). In sum, these three components served to define a highly regulated operating environment that was different from any other international industry and discouraged innovation and change; however, an analysis of U.S. international aviation policy in 1979 resulted in a number of liberalization policies that affected the economic regulation of international air services over the next 2 decades. According to Doganis, "This process of liberalization became more rapid after the mid-1980s when it was adopted by key European countries and eventually by the European Union" (2002, p. 26).

According to Juan (1997), an air transport specialist at the World Bank, in the era before the 1980s, air traffic between nations was controlled by narrowly defined bilateral agreements that stipulated the permissible capacities of passenger aircraft, the frequency of flights, and the type of passenger and cargo services that airlines could provide. One of the fundamental features of these bilateral agreements was the notion of a so-called "flag carrier," which could be an airline, either private or public, provided that its ownership was mostly domestic by which the respective nations would exercise the same rights that were received pursuant to the bilateral agreements (Juan, 1997). Indeed, Juan emphasizes that, "For almost four decades, for example, Pan Am was the world's most formidable flag carrier, enjoying a near monopoly on some foreign routes and sitting in on diplomatic negotiations between the United States and other countries" (1997, p. 141). This situation began to change during the last two decades of the 20th century, though, following the deregulation of the worst most lucrative air transport market in the domestic U.S. airline industry. During the heyday that followed deregulation, a number of new carriers entered the market, thereby increasing both competition and efficiency of the airlines (Juan, 1997). According to Juan, "Lower fares helped to lure more passengers, expanding the market. Deregulation in the United States proved a catalyst, in turn, for deregulation overseas. Although foreign governments feared the commercial ambitions of U.S. carriers, they feared the American competitive advantage even more and soon began looking at how to open up their own internal markets, especially in Europe and Latin America" (1997, p. 141).

Consequently, by the turn of the 21st century, there were, generally speaking, two different regulatory regimes in place that had global implications. In this regard, Doganis (2002) notes that a number of major routes to and from the United States, routes between the member states of the European Union, as well as routes between some European states or the United States and some Asian countries began to operate pursuant to so-called "open skies" agreements. Concomitantly, in other parts of the world, international air services were and continue to function pursuant to the traditional regulatory structure that emerged during the 20th century (Doganis, 2002). It must be pointed out, though, it is not a matter of a straightforward dichotomy of regulation. According to Doganis, "There are gradations in each of the regulatory regimes. Some traditional bilateral agreements are very restrictive while others are much more open and allow more effective competition" (p. 27). Likewise, in some deregulated markets (i.e., the European Union), the majority of restrictions on inter-airline competition have been removed as a result while in other there are some portions of the traditional regulatory system still in place (Doganis, 2002).

The so-called "open skies regimes" that have emerged progressively in some key markets since the early 1980s are described by Bilotkach (2007) as being one of the most important recent developments in international business. In this regard, Bilotkach emphasizes that, "The potential benefits of allowing the market forces to govern international aviation are enormous" (p. 505). For example, the European Union (EU) has projected that air traveling consumers will enjoy benefits as large as $5.8 billion annually from the creation of the currently negotiated "open aviation area" that includes North America, the EU, and the North Atlantic Ocean (Open skies and flights of fancy, 2003, p. 37). In this regard, the "open skies" agreement will make it possible for American and European airlines to fly from any airport in Europe to any in the United States and for American carriers to do the same in the EU; it is this aspect of the open skies agreements that are particularly troubling for pilots flying for American carriers since this trend holds the potential for making the low-cost European airlines more competitive against the American legacy carriers (Stephen, 2007). According to the U.S. Department of State (2009), though, the up-side to this trend towards open skies agreements is also worth noting: "Open Skies agreements have vastly expanded international passenger and cargo flights to and from the United States, promoting increased travel and trade, enhancing productivity, and spurring high-quality job opportunities and economic growth" (Open skies agreements, p. 2).

This laissez-faire approach to airline regulation, the State Department maintains, allows the invisible hand to regulate prices, and encourages innovation and competition in ways that are good for the economy as well as for consumers and businesses. By promoting competition, it is felt that innovation and efficiency will improve. In this regard, the State Department notes the manner in which these laudable goals are achieved: "Open Skies agreements do this by eliminating government interference in the commercial decisions of air carriers about routes, capacity, and pricing, freeing carriers to provide more affordable, convenient, and efficient air service for consumers" (Open skies agreements, 2009, p. 3).

The open skies regimes that have emerged in recent years have taken place during a period in which the airline industry has experienced the same effects of globalization as other industries. In this environment, the need for improved flexibility over the traditional regulatory approach has been cited by the State Department and numerous air transport analysts as being a positive trend. For instance, the State Department enthuses, "By allowing air carriers unlimited market access to our partners' markets and the right to fly to all intermediate and beyond points, Open Skies agreements provide maximum operational flexibility for airline alliances" (Open skies agreements, 2009, p. 3).

To date, the U.S. has entered into open skies agreements with more than 90 countries representing all regions of the world as well as all levels of economic development; besides bilateral open skies agreements, the U.S. has also entered into two multilateral open skies arrangement:

1. The 2001 Multilateral Agreement on the Liberalization of International Air Transportation (MALIAT) with New Zealand, Singapore, Brunei, and Chile, later joined by Samoa, Tonga, and Mongolia; and.

2. The 2007 Air Transport Agreement with the European Community and its 27 Member States (Open Skies Agreements, 2009).

Pilots currently employed by domestic airlines in the United States, though, provide another side to these trends. The history of open skies agreements in the U.S. may be a positive trend for some, but lately there have been talks to make unrestricted open skies or more agreements that could potentially benefit the consumer but as a pilot's perspective, this could hurt pay, quality of life and overall job security if other airlines from different countries are able to come to the states (and usually these other airlines are government supported) and fly routes our legacy carriers have done for years at cut-throat prices. As Smith (1999) emphasizes, "Such bilateral agreements often have the effect of propping up inefficient national carriers, shielding them from competition, while guaranteeing a certain proportion of landing and take-off slots" (p. 19). Taken together, the move towards less regulation can be viewed as a positive trend in some respects but policymakers are failing to take into account other issues that form… [END OF PREVIEW]

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