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Anomalies in Airline Economics

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Abstract

The problem with air transport is that, while on the one hand it is a product, on the other hand regulations pertaining to this product may constrain its availability to the consumer by depriving him of the various choices of air travel he might have under a liberalized system. In other words, State policy and the protection of national interests take precedence over the interest of the user of air transport The aviation industry offers only one product to the ultimate consumer and that is the air transport product. One might well ask why this product is precluded from attracting untrammelled foreign direct investment (FDI) like others in the agriculture, textile manufacture and energy industries. There are three reasons for this.

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Notes

  1. 1.

    Convention Relating to the Regulation of Aerial Navigation, signed on 13 October 1919 (Paris Convention) 11L.N.T.S 173., Article 1.

  2. 2.

    Chicago Convention, supra, note 2 of the preceding chapter at Article 1.

  3. 3.

    Annan (1999).

  4. 4.

    Report of the International Law Commission to the General Assembly on the Work of the 1st Session, A/CN.4/13, June 9 1949, at 21.

  5. 5.

    One commentator aptly puts it that: “In 1609, the Dutch Jurist Hugo Grotius wrote, in Mare Liberum (free seas) that the oceans were international territory, and thus open to seafaring by anyone. More than three centuries later, in 1944, most of the world’s aviation powers came together in Chicago and established for aviation precisely the opposite principle…the Chicago Convention…specifically left the establishment of commercial traffic rights to be negotiated by governments on a market-to-market basis”. See Foreword by Jeffrey N. Shane in Havel (2009).

  6. 6.

    Chicago Convention, supra, note 2, Article 6.

  7. 7.

    It was Adam Smith who said: “a country which neglects or distrusts foreign commerce, and which admits the vessels of foreign nations into one or two of its ports only, cannot transact the same quality of business which it might do with different laws and institutions” Adam Smith, The Wealth of Nations, (1776) cited in Ferguson (2011) at 19.

  8. 8.

    See Piermartini and Rousová (2008).

  9. 9.

    Ownership legally defined is the exclusive legal title coupled with the legal right to possession, enjoyment of fruits and alienation of property. It is a collection of rights to use and enjoy property including the right to transmit it to others. See Black (1990) at 1106.

  10. 10.

    Lelieur (2003) at 3.

  11. 11.

    The International Air Transport Association, an association of air carriers, was formed in 1919 as the International Air Traffic Association. Encapsulated in IATA’s overall mission are 7 core objectives: to promote safe, reliable and secure air services; to achieve recognition of the importance of a healthy air transport industry to worldwide social and economic development; to assist the air transport industry in achieving adequate levels of profitability; to provide high quality, value for money, industry-required products and services that meet the needs of the customer; to develop cost effective, environmentally-friendly standards and procedures to facilitate the operation of international air transport; to identify and articulate common industry positions and support the resolution of key industry issues; and to provide a working environment which attracts, retains and develops committed employees.

  12. 12.

    Ibid.

  13. 13.

    In the United States, the Securities Exchange Act of 1934 defines “control” as follows:

    “The term “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise”. 49 U.S.C Section 1378(a)(4); The authority of the Department of Transportation under this provision was terminated as of January 1, 1989. 49 U.S.C Section 1551(a) (7).

    In Europe the term is defined as:

    a relationship constituted by rights, contracts or any other means which, either separately or jointly and having regard to the considerations of fact or law involved, confer the possibility of directly or indirectly exercising a decisive influence on an undertaking, in particular by: (a) the right to use all or part of the assets of an undertaking; (b) rights or contracts which confer a decisive influence on the composition, voting or decisions of the bodies of an undertaking or otherwise confer a decisive influence on the running of the business of the undertaking. See EU, Council Regulation 2407/92.

  14. 14.

    http://www.jurisint.org/doc/html/ins/en/2000/2000jiinsen90.html.

  15. 15.

    Manual on the Regulation of International Air Transport, ICAO Doc 9626 Second Edition 2004, at 4.4-2.

  16. 16.

    Ibid.

  17. 17.

    `Chicago Convention, supra, note 2 at Article 44 d).

  18. 18.

    Spence (2011) at 73.

  19. 19.

    Ferguson, supra note 7 in this chapter at 21–22.

  20. 20.

    Ibid.

  21. 21.

    Lyle (2011). See http://www.centreforaviation.com/analysis/american-airlines-goes-broke-can-a-national-airline-be-allowed-to-fail-63802.

  22. 22.

    In the 1990s, Brazil raised its ceiling on foreign ownership from 20% to 49.5%; Korea raised it from 20% to 49%; Peru increased it to 70%; Singapore government chose to abolish foreign restrictions so that investors could hold upto 100% in Singapore International Airlines. See Ionides, “Expanded Horizons” (Nov. 1999) Airline Bus. 36.; Australia and New Zealand both relaxed the their airline markets; Iberia Airlines owns and controls more than 60% of Aerolineas Argentinas and jeopardized Argentina-US bilateral agreement but US acquiesced to the Iberia-Aerolineas arrangement in exchange for greater traffic rights from the Argentinian government arguably providing proof that a liberal ownership works. See van Fenema (1998) at 65.

  23. 23.

    India is a good example. India’s Working Group on Civil Aviation (WGCA), comprising secretaries of various ministries, has reportedly proposed raising the foreign direct investment (FDI) limit in aviation to 49%. The members of the WGCA reportedly advised the Civil Aviation Secretary, who heads the group, that a 49% limit would be more attractive to foreign carriers than the currently floated 26% proposal. See Business Today/India Today, 03-Jan-2012. Also, Centre for Asia Pacific Aviation (CAPA) Regulatory Affairs Review, 4 January 2012.

  24. 24.

    The only down side to this scenario is that liberalization also carries certain risks which may be a cause for concern, such as: the potential emergence of “flags of convenience” in the absence of effective regulatory measures to prevent them; potential deterioration of safety and security standards with increasing emphasis on commercial outcomes; and possible flight of foreign capital which could lead to less stable operation. However, these are obstacles that can be obviated by stringent regulation and monitoring.

  25. 25.

    Root (1910) at 528.

  26. 26.

    In the aftermath of signature of a Treaty on Friendship, Commerce and Navigation with France, in 1796, John Adams said: “there is no principle of the law of nations more firmly established than that which entitles the property of strangers within the jurisdiction of another country in friendship with their own to the protection of its sovereignty by all efforts in his power”. Moore (1916).

  27. 27.

    Called the “Calvo Theory” this principle was established by Argentine Jurist John Calvo. See Dolzer and Schreuer (2008) at 12.

  28. 28.

    Neumayer and Spess (2005). Also, Elkins et al. (2006).

  29. 29.

    The Vienna Convention on the Law of Treaties, while recognizing treaties as a source of law, accepts free consent, good faith and the pacta sunt servanda as universally recognized elements of a treaty. Article 11 of the Vienna Convention provides that the consent of a State to be bound by a treaty may be expressed by signature, exchange of instruments constituting a treaty, ratification, acceptance, approval or accession, or by any other means agreed upon. See Vienna Convention on the Law of Treaties, United Nations General Assembly Document A/CONF.39/27, 23 May 1969.

  30. 30.

    Saluka v. Czech Republic, Partial Award, 17 March 2006.

  31. 31.

    ASEAN Agreement for the Promotion and Protection of Investments, 15 December 1987 27 ILM 612 (1987). See also, Yaung Chi Oo v. Myanmar Award, 31 March 2003, 8 ICSID Reports 463.,

  32. 32.

    Joe Mining v. Egypt, 19 ICSID Review-FILJ (2004) 486 para. 63.

  33. 33.

    CSOB v. Slovakia, 5 ICSID Reports 335.

  34. 34.

    Mihaly v. Sri Lanka, 17 ICSID Review-FILJ (2002) 142, para. 61.

  35. 35.

    37 ILM (1998) 1378.

  36. 36.

    OECD Draft Convention (1967) contained in ILM Vol. 29 (1990) at 565.

  37. 37.

    LG&E v. Argentina, Decision on Liability 3 October 2006 at para. 158.

  38. 38.

    Ronald S. Lauder v. The Czech Republic, Award, 3 September 2001, 9 ICSID Reports 66.

  39. 39.

    GATT (now World Trade Organization) is a multilateral body established in Geneva on 1 January 1948 on coming into force of the General Agreement on Tariff and Trade (GATT) negotiated and signed by 23 countries. GATT functions as the principal international body concerned with negotiating reduction of trade barriers and with international trade relations. While being an organization to which member States belong, where they could use it as a forum in which they can discuss and overcome their problems and negotiate to enlarge world trading opportunities, GATT is also a code of rules which is calculated to liberalize world trade. The Uruguay Round is the 8th round of multilateral trade negotiations held by GATT so far, and by far, one of the most complex. This round of negotiations is assisted by the Group of Negotiators on Services (GNS) which the GATT established in 1986 to follow the services negotiations. The GNS has drafted a detailed agreement comprising 35 articles and five annexes. See Abeyratne (1994a) at 2, for a discussion of the history of multilateral trade negotiations held by GATT.

  40. 40.

    Article III of GATT stipulates that the contracting Parties to GATT recognize that internal taxes and other internal charges and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as not to afford protection to domestic production. Furthermore, the provision also states that the products of a territory of any contracting Party imported into the territory of any other contracting Party shall not subject, directly or indirectly, to any taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting Party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in the Agreement.

  41. 41.

    NAFTA, Article 301.

  42. 42.

    See Article 1139 of NAFTA for a definition of investment.

  43. 43.

    For an in depth study on the principles of NAFTA see Abeyratne (1994b), pp. 115–136.

  44. 44.

    Brownlie (1990) at 433.

  45. 45.

    British Model Treaty, quoted in Dolzer and Schreuer, supra note 27 in this chapter at p. 153.

  46. 46.

    Dolzer and Schreuer, Id. at 153–154.

  47. 47.

    Moran (2011) at 70.

  48. 48.

    Proceedings of the International Civil Aviation Conference, Chicago, Vol.1, US Department of State:1948 at 11.

  49. 49.

    Shane (2005).

  50. 50.

    The seventh freedom of the air is the right or privilege in respect of scheduled international air services, granted by one State to another State, of transporting traffic between the territory of the granting State and any third State with no requirement to include on such operation any point in the territory of the recipient State. i.e. the service need not connect to or be an extension of service to/from the home State of the carrier.

  51. 51.

    The eighth freedom of the air is the right or privilege, in respect of scheduled international air services, of transporting cabotage traffic between two points in the territory of the granting State on a service which originates or terminates in the home territory of the foreign carrier or (in connection with the seventh freedom of the air) outside the territory of the granting State).

  52. 52.

    The ninth freedom of the air is the right or privilege of transporting cabotage traffic of the granting State on a service performed entirely within the territory of the granting State.

  53. 53.

    Supra, note 2 in the chapter “Anomalies in the Regulatory Structure”.

  54. 54.

    Id. Article 17.

  55. 55.

    International Law Association Helsinki Conference (1966), Report on Nationality and Registration of Aircraft with Special Reference to Article 77 of the 1944 Chicago Convention on International Civil Aviation, at 29.

  56. 56.

    The first use of aircraft registrations was based on the radio callsigns allocated at the London International Radiotelegraphic Conference in 1913. This was modified by agreement and published on April 23 1913. Although initial allocations were not specifically or exclusively for aircraft but were for any radio user, the Convention Related to the Regulation of Aerial Navigation which was held in Paris in 1919 made allocations specifically for aircraft registrations based on the 1913 callsign list. The agreement stipulated that the nationality marks were to be followed by a hyphen, then a group of four letters that must include a vowel (and for the convention Y was considered to be a vowel). At the International Radiotelegraph Convention at Washington in 1927 the list of markings was revised and adopted from 1928, and these allocations are the basis of the currently used registrations. The marking have been amended and added to over the years and the allocations and standards are managed by the International Civil Aviation Organization.

  57. 57.

    The expression “joint registration” indicates that system of registration of aircraft according to which the States constituting an international operating agency would establish a register other than the national register for the joint registration of aircraft to be operated by the agency. See Resolution Adopted by the ICAO Council on Nationality and Registration of Aircraft Operated by International Operating Agencies, 17th Meeting of the Council, Sixty-second Session, 14 December 1967, Appendix 1 at p. 5.

  58. 58.

    Id. 29–30.

  59. 59.

    Supra, note 57 in this chapter.

  60. 60.

    Air Transport Regulation Panel, Ninth Meeting, Montréal 10–14 February 1997, REPORT ATRP/9-4, 2–3.

  61. 61.

    Ibid.

  62. 62.

    Hill, Christopher. Maritime Law. Fifth Edition, LLP, London, 1998, at p. 24. It is noteworthy that Standard 3.1 of Annex 7 to the Chicago Convention requires that the nationality or common mark and registration mark shall be painted on the aircraft or shall be affixed by any other means ensuring a similar degree or permanence. This Standard also requires that marks be kept clean and visible by the operator at all times. See Annex 7 to the Convention on International Civil Aviation, Aircraft Nationality and Registration Marks. Fifth Edition: July 2003, at 2.

  63. 63.

    International Convention on Maritime Liens and Mortgages 1993, Articles 1 (a) and 2.

  64. 64.

    For a maritime analogy see Sohn and Gustafson (1984) at p. 3.

  65. 65.

    France v. Great Britain, Muscat Dhows Case (1916) Hague Court Reports 93, Permanent Court of Arbitration, 1916. See also Coles (2002) at 3 for a detailed discussion on the Muscat Dhows case.

  66. 66.

    Ibid.

  67. 67.

    Lauritzen v. Larsen, 345 U.S. 571 (1953).

  68. 68.

    http://www.intfish.net/treaties/genevahs.htm.

  69. 69.

    The Law of the Sea, Official Text of the United Nations Convention on the Law of the Sea with Annexes and Index, United Nations: New York, 1983. The United Nations Convention on the Law of the Sea (UNCLOS) comprises 320 articles and nine annexes, governing all aspects of ocean space, such as delimitation, environmental control, marine scientific research, economic and commercial activities, transfer of technology and the settlement of disputes relating to ocean matters.

  70. 70.

    Geneva, 7 February 1986.

  71. 71.

    Matlin, David. “Re-evaluating the Status of Flags of Convenience under International Law”, 23 Vand. J. Transnat’lJ. 1017, 1031(1990). The author emphasises that the Muscat Dhowns case and Lauritzen v. Larsen are compelling precedents leading to the principle that each state shall determine whether it will grant its nationality to a ship.

  72. 72.

    See the Geneva Convention, supra note 70, Article 5 (1).

  73. 73.

    See UNCLOS, supra note 69, Article 99.

  74. 74.

    Supra, note 70 in this chapter.

  75. 75.

    United Nations Convention on Conditions for Registration of Ships Id, Preamble.

  76. 76.

    See the Geneva Convention, supra note 70 Article 5 (1).

  77. 77.

    In its Report to the General Assembly, the International Law Commission in 1949 recommended a draft provision which required:

    Every State has the duty to conduct its relations with other States in accordance with international law and with the principle that the sovereignty of each State is subject to the supremacy of international law.

    Report of the International Law Commission to the General Assembly on the Work of the 1st Session, A/CN.4/13, June 9 1949, at 21.

  78. 78.

    Yearbook of the International Law Commission, 1976, Vol. II at 75 f. and ILC Commentary 2001 at 68. This principle has been accepted and affirmed in the courts. See in Re. Chorzow Factory (Jurisdiction) Case, (1927) PCIJ, Ser. A, no. 9 at 21. Also, Rainbow Warrior Case, 82 ILR at 499.

  79. 79.

    See Tetley’s Glossary of Maritime Law, Abbreviations, Definitions, Terms, Links and Odds’N Ends , which could be accessed at Prof. William Tetley’s homepage at http://tetley.law.mcgill.ca!maritime/glossarymaritime.htm#letter_s (last visit July 24, 2003). Regarding seaworthiness, it is important to note Prof. Tetley’s view that seaworthiness and importance to the law of the sea is a consistent thread in the fabric of maritime law. As a consequence, the issue of seaworthiness has a bearing on all maritime issues.

  80. 80.

    The issue of safety at sea is mainly covered by the International Convention for the Safety of Life at Sea, amended 1974, in force May 25, 1980.

  81. 81.

    Geneva Convention, supra note 70, Article. 12 which provides that every State shall require the master of a ship sailing under its flag, in so far as he can do so without serious danger to the ship, the crew or the passengers: to render assistance to any person found at sea in danger of being lost; to proceed with all possible speed to the rescue of persons in distress if informed of their need of assistance, in so far as such action may reasonably be expected of him; and after a collision, to render assistance to the other ship, her crew and her passengers and, where possible, to inform the other ship of the name of his own ship, her port of registry and the nearest port at which she will call.

  82. 82.

    Id, Articles. 13 and 14.

  83. 83.

    Id, Articles 24 and 25.

  84. 84.

    The Law of the Sea, Official Text of the United Nations Convention on the Law of the Sea with Indexes and Annex, Final Act of the Third United Nations Convention on the Law of the Sea, United Nations: New York, 1983. Also called the Law of the Sea Convention and the Law of the Sea Treaty, UNCLOS is the international agreement that resulted from the third United Nations Convention (Conference) on the Law of the Sea, which took place from 1973 through 1982. The Law of the Sea Convention defines the rights and responsibilities of nations in their use of the world's oceans, establishing guidelines for businesses, the environment, and the management of marine natural resources. The Convention concluded in 1982 replaced four 1958 treaties. UNCLOS came into force in 1994, a year after Guyana became the 60th state to sign the treaty. To date 155 countries and the European Community have joined in the Convention. The United States has signed the treaty, but the Senate has not ratified it.

  85. 85.

    Id. Article 94(1).

  86. 86.

    Article 94(2) provides that in particular every State shall: (a) maintain a register of ships containing the names and particulars of ships flying its flag, except those which are excluded from generally accepted international regulations on account of their small size; and (b) assume jurisdiction under its internal law over each ship flying its flag and its master, officers and crew in respect of administrative, technical and social matters concerning the ship.

  87. 87.

    Ibid Article 94 (2) (b).

  88. 88.

    Article 94 (3) provides that every State shall take such measures for ships flying its flag as are necessary to ensure safety at sea with regard, inter alia, to: (a) the construction, equipment and seaworthiness of ships; (b) the manning of ships, labour conditions and the training of crews, taking into account the applicable international instruments; and (c) the use of signals, the maintenance of communications and the prevention of collisions.

  89. 89.

    Article 94 (4) provides that such measures shall include those necessary to ensure: (a) that each ship, before registration and thereafter at appropriate intervals, is surveyed by a qualified surveyor of ships, and has on board such charts, nautical publications and navigational equipment and instruments as are appropriate for the safe navigation of the ship (b) that each ship is in the charge of a master and officers.

  90. 90.

    Supra, notes 54 and 56 in this chapter.

  91. 91.

    See Annex 7 to the Convention on International Civil Aviation, Aircraft Nationality and Registration Marks.Fifth Edition: July 2003, at 2.

  92. 92.

    Kasoulides (1989) at 551.

  93. 93.

    UNCTAD defined an open registry as “the conferment of national charter upon ships regardless of ownership, control and manning. Id. 546.

  94. 94.

    To register is to record formally and exactly in a book of public facts. The task of keeping a registry or record of such entries pertaining to ships is attributed to customs authorities. See Black (1990) at 1283.

  95. 95.

    “Flags of convenience” is a term derived from the maritime industry which denotes a situation in which commercial vessels owned by nationals of a State, but registered in another State, are allowed to operate freely between and among other States.

  96. 96.

    Infra, note 102 in this chapter and text in the article pertaining thereto.

  97. 97.

    This problem is currently being addressed separately by the ICAO Air Navigation Commission and the Council in association with the Unified Strategy to resolve safety-related deficiencies within the scope of Article 54 j) of the Chicago Convention, which requires the Council to report to States any infraction of the Convention, as well as any failure to carry out recommendations or determinations of the Council. See ICAO Air Navigation Commission working paper AN-WP/8015.

  98. 98.

    Lelieur (2003) at 83. For a contrary view see infra, text attached to note 104 infra in this chapter.

  99. 99.

    Id. 108. For information on the ICAO USOAP programme and a discussion thereof, see Abeyratne (2007), pp. 7–13.

  100. 100.

    It must be noted that in March 2006, ICAO and IATA agreed to share information from their respective audit programmes.

  101. 101.

    Inherent in the IOSA Programme is a degree of quality, integrity and security such that mutually interested airlines and regulators can all comfortably accept IOSA audit reports. As a result, the industry will be in a position to achieve the benefits of cost-efficiency through a significant reduction in audit redundancy.

  102. 102.

    Article 83 bis provides that, notwithstanding the provisions of Articles 12, 30, 31 and 32 a) (which have been discussed earlier in this article), when an aircraft registered in a contracting State is operated pursuant to an agreement for the lease, charter or interchange of the aircraft or any similar arrangement by an operator who has his principal place of business or, if he has no such place of business, his permanent residence in another contracting State, the State of registry may, by agreement with such other State, transfer to it all or part of its functions and duties as State of registry in respect of that aircraft. The State of registry shall be relieved of responsibility in respect of the functions The Protocol which amended the Chicago Convention with the introduction of Article 83 bis entered into force on 20 June 1997. By April 2008, 153 parties had deposited their instruments of ratification of Article 83 bis with the depository, ICAO.

  103. 103.

    Annex 8 to the Convention on International Civil Aviation, Airworthiness of Aircraft, Tenth Edition: April 2005, Standard 3.2.4.

  104. 104.

    Benoit M. Verhaegen, The Entry Into Force of Article 83 bis: Legal Perspectives in Terms of Safety Oversight, Annals Air and Sp. L. Vol. XXII Part II 1997, 269-283 at 273.

  105. 105.

    Ibid.

  106. 106.

    Resolution adopted by the Council on Nationality and Registration of Aircraft Operated by International Operating Agencies, supra, note 6., Appendix 1.

  107. 107.

    Ibid.

  108. 108.

    Resolution adopted by the Council on Nationality and Registration of Aircraft Operated by International Operating Agencies, supra note 6, Appendix 2.

  109. 109.

    Ibid.

  110. 110.

    Supra, note 105 in this chapter at p. 4.

  111. 111.

    A finance lease involves the substantial transfer of risks and rewards appurtenant to ownership, from lessor to lessee; and an operational lease keeps such risks and rewards within the lessor’s scope of legal status. A finance lease is calculated to amortize the lessor’s capital outlay and provide a profit at the end of the lease term with the lease payments received from the lessee. An operational lease does not amortize capital outlay at the end of the term and profits are derived usually after more than one lease term.

  112. 112.

    Wagland (1999) at p 22.

  113. 113.

    Beecham Foods Limited v. North Supplies (Edmonton) Ltd., [1959] 1 WLR 643.

  114. 114.

    Ballet v. Mingay [1943] 1.K.B. 281.

  115. 115.

    Lang v. Brown (1898) 34N.B.R. 492.

  116. 116.

    Bunker (1988) at p. 22.

  117. 117.

    Ibid.

  118. 118.

    Convention for the Regulation of Aerial Navigation, Paris 1919, Articles 5-10.

  119. 119.

    Convention on Offences and Certain Other Acts Committed on Board Aircraft, signed at Tokyo on 14 September 1963. See ICAO Doc 8364.

  120. 120.

    Id, Article 3.

  121. 121.

    ICJ Reports (1955) at 1.

  122. 122.

    Ibid at 3.

  123. 123.

    Donald H. Bunker, The Law of Aerospace Finance in Canada, supra note 36 in this chapter at p. 157.

  124. 124.

    Id at p. 288.

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Abeyratne, R. (2012). Anomalies in Airline Economics. In: Aeronomics and Law. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-28945-3_2

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