September 19, 2009
Developing Trade Rules for Services
While not directed at air transport services per se, Panagiotis Delimatsis et al.'s Developing Trade Rules for Services: A Case of Fragmented Coherence? (NCCR Trade Reg. Working Paper No. 38, Sept. 1, 2009) (available from SSRN here), provides some fascinating points of reflection for those concerned about the role of a multilateral forum like the WTO for trade in air transport services or whether trade in this sector ought to continue on a bilateral (or plurilateral) basis. From the abstract:
This paper presents the results of a four-year project tackling several issues relating to multilateral and preferential trade in services. One of the underlying organising principles of our research on services trade has been a presumed fault line between the innate coherence that is achieved through multilateral rules and commitments, on the one side, and the more inherently fragmented nature of preferential solutions or rules, on the other. Doubtlessly rooted in the way mainstream trade theorists and economists more broadly have long championed multilateralism over its peripheral brethren, such a perception proceeds from the assumed second-best nature of preferential, or non-WTO-centric, policy and rule-making approaches. Our key messages put forward concrete proposals to improve regulation of services trade. We find, inter alia, that: a) fragmentation is a source of policy and innovation apt to inform multilateral rule-making, while theatres at the periphery may yield superior outcomes or more politically palatable bargains; b) the adoption of a necessity test applicable across services sectors at the multilateral level would improve the quality of services trade regulation domestically; c) the current treatment of labour mobility under GATS is not conducive to an optimal global governance of migration; d) when examing likeness, both service-related and supplier-related factors have to be considered to decide whether there is competitive relationship in the marketplace; e) Overlapping multilateral and bilateral rules on investment blur the rights and obligations of domestic authorities and foreign investors in services; f) co-ordination between the WTO and arbitral panels so that similar principles are intepreted in a uniform manner can lead to a more coherent international investment framework in services.
Market Structure and Multiple Equilibria in the Airline Industry
Federico Ciliberto of the University of Virginia's Department of Economics has an interesting working paper up online from SSRN. See Market Structure and Multiple Equilibria in the Airline Industry (Working Paper, Oct. 1, 2007) (available here). From the abstract:
We provide a practical method to estimate the payoff functions of players in complete information, static, discrete games. With respect to the empirical literature on entry games originated by Bresnahan and Reiss (1990) and Berry (1992), the main novelty of our framework is to allow for general forms of heterogeneity across players without making equilibrium selection assumptions. We allow the effects that the entry of each individual airline has on the profits of its competitors, its "competitive effects", to differ across airlines. The identified features of the model are sets of parameters (partial identification) such that the choice probabilities predicted by the econometric model are consistent with the empirical choice probabilities estimated from the data.
We apply this methodology to investigate the empirical importance of firm heterogeneity as a determinant of market structure in the U.S. airline industry. We find evidence of heterogeneity across airlines in their profit functions. The competitive effects of large airlines (American, Delta, United) are different from those of low cost carriers and Southwest. Also, the competitive effect of an airline is increasing in its airport presence, which is an important measure of observable heterogeneity in the airline industry. Then, we develop a policy experiment to estimate the effect of repealing the Wright Amendment on competition in markets out of the Dallas airports. We find that repealing the Wright Amendment would increase the number of markets served out of Dallas Love.
September 18, 2009
GATS Air Transport Annex Review
With the World Trade Organization back in the news, blog readers may be interested in staying aprised of developments in the second review of the General Agreement on Trade in Services's Annex on Air Transport. A full website dedicated to the review is available here.
Of particular interest should be the extensive three-part series of review documents which chronicles global trade developments in the air transport sector. While some methodological issues have been raised over the course of the review, the WTO's Quantitative Air Services Review (QUASAR) offers the best analysis of global trends toward (or away) from air transport liberalization and provides a wealth of country-specific data on the types of air service agreements they have in force, their exchange of freedoms, and how different sectors of their air transport market are affected.
September 16, 2009
Indirect Taxes on International Aviation
Blog readers may be interested to read a recent working paper by Michael Keen and Jon Strand of the International Monetary Fund. See Indirect Taxes on International Aviation (IMF Working Paper No. 06/124, May 2006) (available through SSRN here). From the abstract:
This paper examines the case for internationally coordinated indirect taxes on aviation (as a source of general revenue-not (necessarily) as a source of development finance). The case for such taxes is strong: the tax burden on international aviation is currently limited, yet it contributes significantly to border-crossing environmental damage. A tax on aviation fuel would address the key border-crossing externalities most directly; a ticket tax could raise more revenue; departure taxes face the least legal obstacles. Optimal policy requires deploying both fuel and ticket taxes. A fuel tax of 20 U.S. cents per gallon (10 percent, at today's fuel prices, corresponding to assessed environmental damage), or alternatively ticket taxes of 2.5 percent, would raise about US$10 billion if imposed worldwide, and US$3 billion if applied only in Europe.
Bisignani at the International Aviation Club
Giovanni Bisignani, Director and CEO of the International Air Transport Association, urged U.S. President Barack Obama and his Administration to formulate a comprehensive aviation policy. See Giovanni Bisignani, Remarks to the International Aviation Club, Washington, D.C. (Sept. 15, 2009) (available here). Coincidentally, this came just a day after former American Airlines President and Charman Bob Crandall recorded his thoughts for the International Aviation Law Institute's Conversations with Aviation Leaders series that the U.S. direly lacked such a policy. See "A Conversation with Bob Crandall." However, Bisignani and Crandall would likely find little common ground on what such a policy would look like. On the matter of air transport liberalization, Bisignani stated:
Finally, we must cooperate with government to liberalize this crazy industry. It has been three decades since the US started the process with domestic deregulation. This crisis highlights that we must finish the job.
The US has always been a bastion for free markets. Your open skies vision changed the industry market by market. The US-EU agreement on open skies is a great example. It did not go as far as we wanted and outdated ownership restrictions remain. But it is an important step in the right direction creating new opportunities in the world’s largest aviation markets. Now we need a strong signal on liberalization by addressing ownership in the second stage.
. . .
Let me be clear. We are not asking for bailouts. But airlines need the freedom to operate like any other business. The ability to merge or consolidate across borders could be a lifeline particularly if the situation gets bloody later this year. Consolidation strengthened some European carriers -- Lufthansa with Swiss, Brussels, bmi and Austrian as well as Air France with KLM and an interest in Alitalia. Delta and Northwest are good examples on this side of the ocean.
But in a global business why restrict consolidation within political borders? Automobiles, telecoms and pharmaceuticals are all strategic industries benefiting from global capital. Why treat aviation differently? It does not protect jobs. About 200,000 US airline jobs disappeared after 9/11. A different approach is required.
See Bisignani, supra; cf. Robert L. Crandall, Remarks to the Wings Club, New York, N.Y. (June 10, 2008), reprinted at 8 Issues Aviation L. & Pol'y 9-19 (2008) (criticizing the U.S. open skies policy and offering support for maintaing tight caps on foreign ownership of U.S. airlines).
September 15, 2009
The Future of JAL
There has been a great deal of reporting in the papers concerning talks between Japan Airlines (JAL) and U.S. rivals Delta and American over a possible capital infusion to prop up the struggling Japanese carrier. See, e.g., Yoshio Takahashi, JAL Plans Job Cuts, Confirm Alliance Talks, Wall St. J., Sept. 15, 2009 (available here); Hiroko Tabuchi, Japan Airlines in Talks with U.S. Rivals, N.Y. Times, Sept. 14, 2009 (available here). The talks come amidst speculation that the United States and Japan are making progress on securing a new biltaeral air services treaty to replace their highly restrictive one. See 3 Av. L. Rep. (CCH) ¶¶ 26,366a et seq. (containing the U.S./Japan bilaterals and subsequent amendments). There is no word yet on whether the new agreement would fall within the conceptual framework of the U.S. open skies policy. See generally In the Matter of Defining Open Skies, 3 Av. L. Rep. (CCH) ¶ 26,960, at 23,901 (Aug. 5, 1991); see also U.S. International Air Transport Policy Statement, 60 Fed. Reg. 21,841 (May 3, 1995).
The establishment of a U.S./Japan open skies biltaeral may be critical to the success of talks between JAL and the U.S. carriers. As it stands, American's access into the Asian market depends on its codeshare arrangement with JAL as part of the oneworld alliance. American is therefore understandably concerned that Delta--one of its chief rivals and a member of SkyTeam--is apparently seeking to lure JAL away. However, JAL's participation in either oneworld or SkyTeam lacks the boon of antitrust immunity for the deal. As has been Department of Transportation policy since the early 1990s, antitrust immunity is only awarded to arrangements with carriers from States which have an open skies bilateral with the U.S. While it's possible that American is promising substantial funds for JAL simply to keep its codeshare deal alive, in all likelihood it is looking for a much deeper integration in the form of a fully immunized alliance. This would allow American and JAL to coordinate on routes, branding, and establish a mechanism for revenue sharing. At the same time, Delta could strengthen SkyTeam by adding JAL into the mix. Like American, it would still need antitrust immunity to take full advantage of JAL's participation.
Arguably, there is more at stake for American over the future of JAL than for Delta. Delta already has access to the Japanese market through Northwest Airlines. Bringing JAL into SkyTeam or even simply luring it out of the oneworld would devastate the alliance's (and hence American's) Asian market access. The other major Japanese carrier, All Nippon Airways, is already a member of the Star Alliance and would therefore not be a viable partner for American to court. JAL is reportedly seeking $2.5 billion in funds--a number American is unlikely to match given the present state of its balance sheets and the present downturn in demand for air transport services. It is possible that American could convince other oneworld partners, such as British Airways, to take a stake in JAL. However, they too are suffering under the present crisis and may not be keen on spreading their remaining capital too thinly.
Assuming that American and, potentially, some of its oneworld partners do take a stake in JAL on the grounds that the Japanese airline will further integrate itself into the alliance, it may be too little, too late. The 2009 FAA Reauthorization Act--which has already passed the House--contains a provision which would sunset all antitrust immunity for international alliances and potentially set the DOT's immunity powers on the road to extinction. This possibility may very well dissuade Japan from signing an open skies agreement with the U.S. Arguably, without the bait of antitrust immunity, the U.S. could not have secured its open skies relationships with the European Community, Canada, and Australia. If that happens, an ownership stake in JAL may fast resemble a familiar phenomenon in the airline industry: a bad investment.
A Conversation with Bob Crandall
The International Aviation Law Institute (IALI) conducted the third in its series of "Conversations with Aviation Leaders" yesterday as part of the Intitute's oral history project on airline deregulation. IALI's distinguished guest for yesterday's conversation was Robert "Bob" Crandall, former President and Chairman of American Airlines. Crandall led American Airlines through the turbulent period following deregulation to become one of the largest and most successful carriers in U.S. history. While initially opposed to airline deregulation, Crandall nevertheless found ways to help American thrive in the new competitive landscape by harnessing yield management to better price seats in relation to their value, developing the frequent flier program, and launching the computer reservation system Sabre. Though he retired from American in 1998, Crandall remains a strong voice in the airline industry. His speech calling for reregulation of the airline industry at the Wings Club in Washington, D.C. last year drew considerable attention and prompted Michael Levine, one the intellectual architects of deregulation, to answer Crandall's charges that deregulation amounts to a policy failure. (Both speeches were reprinted in Vol. 8, Issue 1 of IALI's biannual publication, Issues in Aviation Law and Policy.)
Crandall's interlocutor for the event was former U.S. Ambassador and current IALI Advisory Board Member J.D. Bindenagel. Bindenagel, who participated in the negotiations for the U.S./Germany open skies treaty, covered a broad range of topics during his three-hour conversation with Crandall. Everything from the political and social circumstances leading up to deregulation to business strategies in a competitive market and the current state of the U.S. domestic and international airline industry was covered. In addition to offering his own experiences of some of the key events leading up to and following deregulation, Crandall spoke candidly about what he sees as the failure of the U.S. to establish a coherent transportation policy which includes aviation. During the course of the discussion, Crandall also criticized the open skies policy, airline alliances, and the suggestion that there should be increased foreign investment in U.S. carriers.
The full three-hour interview will be accessible online for free through IALI's website in the next 10 to 14 days. Meanwhile, blog readers are encouraged to access and watch the Institute's two previous conversations with former Civil Aeronautics Board Chairman Alfed Kahn and Professor Michael Levine of NYU's School of Law. Both were instrumental in laying the intellectual ground for airline deregulation and have defended the shift in U.S. regulatory policy--albeit with some caveats--to this day. Both interviews can be accessed here.
September 14, 2009
On "Ties in the Sky"
Earlier this week, the Financial Times published an in-depth story on the history, development, and current state of the international airline alliance system. See Aviation: Ties in the Sky, Fin. Times, Sept. 9, 2009 (available here). The story also comes with an online interactive feature which allows users to explore the three major alliances: SkyTeam, Star, and oneworld. See here.
The article deserves attention, not least because it provides a concise iteration of the relevant legal and political conditions which have made alliances both possible and necessary. The linking of U.S. antitrust immunity with open skies bilateral agreements is an aerodiplomatic/aerolegal fact oftentimes passed over in the ever-growing popular literature on why these transnational joint ventures could be problematic. (For whom? Consumers? Regulators? Competitors unable to develop an alliance network of their own? These categories are often compacted by those who condemn these link-ups.) Without the bait of antitrust immunity, it is unlikely that the U.S. could have "lured" many important partners to accept the liberal trade provisions of open skies. As both American and United Airlines pointed out during the recently concluded Star Alliance immunity application proceeding before the Department of Transportation, there are still many aviation trading partners with which the U.S. has no open skies treaty. These include China, Japan, Russia, and Brazil. What are the chances that these global players will sing-on to open skies without the same coin of exchange U.S. partners Australia, Canada, and the European Community have received?
The airline industry is in turbulent times. No one denies this, just as no one concerned with air transport being allowed to operate as a truly globalized industry denies that it continues to labor under a suboptimal international regulatory schema. As the Financial Times properly points out, this schema forecloses alliance partners such as British Airways and American Airlines from truly rationalizing their costs and consummating a transborder merger. For dubious reasons rooted in national pride, misplaced security concerns, protectionism, and other causes, airlines remain "exceptional," that is, they remain subject to outmoded mercantallist mindset.
The airlines, through a mix of entrepreneurial ingenuity and commercial necessity, have forged comprehensive global route networks through the alliance system. They have moved ever closer toward providing global brands--SkyTeam, Star, and oneworld--which are available to almost any one, in any place, and at any time. Though still in its tender years, the alliance system is rapidly providing aviation's version of McDonalds, Burger King, and Starbucks: service providers with undeniable international recognition. Is this not what a globalized world enables? That one can be in any city in the world and know that the type of product and service they demand is there? Why is this acceptable for fast food and coffee and not air transport services?