Journal of Air Transport Management 7 (2001) 43}50

Promoting trade in airline services

Peter Forsyth*
Department of Economics, Monash University, Clayton, Vic. 3800, Australia

Abstract

With recent developments in the airline industry, trade concepts (e.g. the nationality of the airline) are becoming increasingly
di$cult to de"ne. However, de"nitions are needed primarily when trade is to be restricted, and the appropriate de"nition depends on
the objectives of the aviation policy. Trade generally enhances overall welfare, though individual countries can lose out from it.
Current arrangements considerably restrict other than bilateral trade in airline services * this suggests that there may be signi"cant
gains from more open trade. Aviation policies, like other trade policies, re#ect a balance between consumer, tourism, airline company
and employee interests. This balance is changing in a number of countries, with the move towards open skies bilateral agreements and
domestic deregulation re#ecting a greater weight being put on consumer interests. Notwithstanding this, most countries are still
hesitant about moves towards freer trade. They support trade when it involves greater market access for their own carriers, but oppose
it when it involves their carriers losing market share. In this respect, aviation policies are similar to policies towards other sectors. The
bilateral system of agreements is consistent with greater freedom of trade, though it makes some aspects of trade liberalisation di$cult
to achieve. Some regional agreements, especially that in Europe, have been successful in achieving trade liberalisation. Signi"cantly,
these have included airline services with other sectors, enabling trade o!s between sectors.  2001 Elsevier Science Ltd. All rights
reserved.

1. Introduction possess market power, and use it to the detriment of their

The airline industry, while being distinctly interna-
tional in character, is one in which international trade is
tightly regulated. Most airline markets are limited to the
airlines of a select few countries, and most airlines have
access to only a restricted group of markets, those within
and surrounding their home country. When trade is
tightly constrained, there are usually signi"cant gains to
be made from liberalisation of trade. This is likely to be
so for airline services.
It is not di$cult to understand why countries are
unwilling to open up the airline markets they control, or
share control of, to more trade. Simple protectionist
reasons will be, as in other sectors, quite important.
Countries may wish to keep airline production and em-
ployment at home. Where routes are pro"table, possibly
because of regulatory restrictions, they will wish to keep
the pro"ts themselves, and not share them with other
countries (especially when the pro"ts are at the expense
of their own consumers). Some countries also fear domi-
nation of their routes by foreign carriers, which may
* Tel.: #61-3-9905-5476; fax: #61-3-9905-2495.
E-mail address: peter.forsyth@buseco.monash.edu.au (P. Forsyth).
travelers and shippers. Many countries remain quite pro-
tectionist, but others are now taking a broader view of
their aviation policy, and are re#ecting the interests of
their consumers and their tourism industries, as well as
the interests of producers, such as the airlines and their
employees. This is beginning to make a di!erence when
airline services trade issues are considered. Nevertheless,
most countries are unwilling to allow access to foreign
airlines in those markets they control, even if they give
consumer interests substantial weight when issues of
competition are being considered.
Airline services are also subject to very speci"c interna-
tional negotiating arrangements, namely the bilateral
system. This poses the question of whether the bilateral
system itself limits the scope for trade, or whether it is
consistent with more open trade if this is the objective of
the countries participating in it. Another question it
poses is that of whether there are alternative negotiating
frameworks which would result in more open trade and
greater gains from trade. There are several options;
regional and multilateral aviation agreements are pos-
sible, as are regional and multilateral agreements which
cover trade in a range of sectors, not just aviation. For
example, trade in airline services could be included in the
General Agreement on Trade in Services (GATS).

0969-6997/01/$ - see front matter  2001 Elsevier Science Ltd. All rights reserved.
PII: S 0 9 6 9 - 6 9 9 7 ( 0 0 ) 0 0 0 2 8 - 4
44 P. Forsyth / Journal of Air Transport Management 7 (2001) 43}50
To start with, the meanings of various terms, such as
open skies, competition and trade in airline services are
clari"ed; most attention will be paid to the last of these.
Next, the possible gains from trade in airline services
are examined, and following this, current barriers to
trade, and countries' aviation objectives are considered.
This paves the way for a discussion of how the bilateral
system "ts in with trade in airline services. Finally, how
moves beyond the bilateral system, such as regional and
multilateral arrangements, will impact on trade, are
examined.
2. Open skies, competition and trade
In discussions of airline liberalisation, the concepts of
open skies, competition and trade are all commonly
referred to; they are interrelated closely, though there are
important distinctions which must be made. Particular
attention is paid here to the concept of trade in airline
services.
Open skies is the most general of these terms. It refers
to airline markets where there is an absence of regulatory
controls. It could be applied to a bilateral agreement, in
which there are no capacity, entry or price regulations
which apply to airlines of the two bilateral partners
which do, or might, serve the route. The term could be
applied to a regional arrangement, such as European
open skies, or it could apply to a multilateral arrange-
ment if one were to come into being. It is important to
note that under open skies agreements, such as
open skies bilateral agreements signed by the United
States, there may remain some signi"cant restric-
tions. For example, cabotage is not permitted, and
airlines of countries other than the bilateral partners
are usually tightly constrained, if they are allowed to #y
the route at all. `Open skiesa agreements will typically
allow for more competition between the airlines of
the partner countries, and they may make more trade
possible.
Competition is a more speci"c concept which refers
to the market structure and rivalry between individual
suppliers in a market. Thus, on a route between two
countries, competition refers to the number of air-
lines which compete independently, and how they
compete. More airlines means greater competition,
though the ways in which they compete are relevant.
A small group of airlines may compete strongly between
one another or, perhaps more likely, they may recognise
their interdependence, and moderate the strength of their
competitive behaviour. Strong competition is desirable
because it induces airlines to keep prices down, and in
turn to ensure that their costs are no higher than they
need to be. Competition however does not imply any-
thing about which countries the competing airlines are
from.
Trade in airline services involves a situation in which
"rms from one country export services to buyers in
another country. Thus, on a #ight between Germany
and the US operated by the German airline, Lufthansa,
trade will take place when US citizens, or citizens of
countries other than Germany, are carried * Germany
exports airline services to the US and other countries.
Trade in airline services is peculiar in a number of
respects. The product is airline services (passenger
or freight) between two points (not necessarily in
separate countries). The countries at each end of
the route control the conditions under which trade
takes place, and determine which countries are allowed
to o!er airline services. If another country's airline
is permitted to o!er services on the route, there will be
an export of services, though unlike most trades, the
exporting country or its "rms will have little control over
the price at or conditions under which it exports the
service.
Much trade in airline services is bilateral in form. If
most of the users of the airline services between two
countries are citizens of those countries, there will be
trade when the airlines of one country sell to the citizens
of the other. There will also be trade when those airlines
#y citizens of other countries on the route. There is much
more scope for trade when an airline carries tra$c on
a "fth freedom or sixth freedom basis, since many of the
purchasers of the services it o!ers will come from coun-
tries other than its home country. However, these types
of tra$c are quite limited in most parts of the world; "fth
freedom rights are rarely granted except on a limited
basis, and the possibilities for sixth freedom tra$c are
constrained by geography.
De"ning trade in airline services is becoming more
di$cult with the developments taking place in the airline
industry, though this is re#ected in what is going on in
other sectors as well. The seller is ceasing to be always the
producer * one airline may produce the service, but
another airline may sell it to the passenger or shipper.
This happens with code sharing, where one airline oper-
ates a service but another includes it in its schedule and
sells it to the customer. Here both airlines contribute to
the production process, though the one which operates
the service contributes the greater part. With a code
share service, two countries may be exporting airline
services jointly.
Another complexity is that the nationality of an airline
is becoming more di$cult to determine. Until recently,
most airlines were owned, headquartered, and controlled
in a single country, did their major maintenance in that
country, and employed most of their sta! in that country.
This is ceasing to be the case. An airline may be head-
quartered in a country but be owned by foreign interests,
and it may employ sta! from a range of di!erent coun-
tries. It may obtain maintenance and information tech-
nology services from several other countries. In what
 P. Forsyth / Journal of Air Transport Management 7 (2001) 43}50
sense is it an airline of the country in which it has its
headquarters?
This is an important question when there are restric-
tions being put on trade in airline services, and on which
airline from which country can produce and sell parti-
cular services * as there are in most markets.
For regulatory purposes, there are ways to de"ne the
product and determine which country supplies it. For
example, it would be possible to de"ne the export of
airline services in terms of which country's airline oper-
ates or which country's airline sells the service, and to
determine which country the airline comes from in terms
of its ownership, headquarters or where it employs most
of its sta!. If a country is particularly concerned to
protect its airline production activities, it will de"ne na-
tionality accordingly. Thus, it may not be too concerned
about who owns the airline as long as it bases production
and employment within its borders. It will wish to restrict
other airlines on routes over which it has some control.
This country would reject code shares which result in
other countries airlines actually operating services. This
is similar to a country which protecting its manufactur-
ing industries and also encouraging foreign investment in
them. Alternatively, a country may be concerned about
airline pro"ts. Such a country will be concerned that the
airline selling services over which it has control are do-
mestically owned. Such a country may not be too con-
cerned about which country's airlines actually operate
the services. It may be quite happy to agree to code
shares which involve other countries' airlines operating
the services as long as the pro"ts from the route accrue to
its own airlines (as, for example, Japan does with some of
its pro"table routes).
Thus, we should not expect that one set of de"nitions
will suit all purposes. In some situations, ownership of an
airline may be more important than where it bases its
production, and in others the reverse. The nature of the
trade restrictions, and the de"nitions which accompany
them, will depend on what the country is trying to
achieve when it restricts trade. The problem of de"nitions
primarily occurs when there is an intention to restrict
trade in some way. If there were completely free trade in
airline and related services, all of these de"nitional ques-
tions would be irrelevant, since questions of nationality
do not arise when conditions under which a route is to be
served are considered.
Allied to trade in airline services is trade in services
which are purchased by the airline industry. These in-
clude maintenance, passenger and freight handling, and
information technology services. Some of these, unlike
airline services per se, are included within the General
Agreement on Trade in Services (GATS). Thus, one of the
key questions surrounding trade in airline services is
whether it can and should be included in the GATS (for
a discussion of aviation issues and GATS, see World
Trade Organization (1998)).
45
3. The case for trade
The case for trade is an old one, a simple one and
a robust one. If a country can supply a good or service at
a lower cost than another country can, it makes good
sense for the latter country to import the good or service
from the former. Airline services are fundamentally much
the same as any other goods and services. They are
currently treated in a very di!erent way, and are subject
to a unique system of regulation which incorporates
trade restrictions. Trade in airline services could be
opened up much more than at present, as, for example
shipping services are (international routes are fairly free,
though some countries restrict cabotage). Granted the
general case for trade, it is appropriate to test whether,
for a particular context, there are speci"c reasons for
moving away from free trade.
It is di$cult to think of any arguments to the e!ect
that the overall gains to the world (as opposed to indi-
vidual countries) would be greater under an environment
which restricts trade. If trade in airline services were
associated with trade in other goods and services, which
created negative externalities, there could be some case
for restriction. For example, airline services and tourism
are closely related; suppose that tourism is excessive
because too much tourism is creating congestion in cities
and damage to environmentally sensitive areas. One way
of restricting this tourism would be to restrict airline
services * this trade restriction could result in overall
world welfare. However, there would be better ways of
handling this problem * if it is tourism which is creating
congestion and damaging the environment, more direct
ways of controlling these externalities are preferable,
such as pollution controls or charges. Also, even if airline
services are to be restricted, it would still be desirable to
ensure that they are provided by the countries which are
most e$cient in doing so, and this will require trade in
airline services.
It is conceivable that individual countries could lose
from free trade in a service, such as airline services. The
optimum tari! argument is an accepted argument which
states that one country may be able to gain from restrict-
ing trade if it is able to raise the price at which its partners
purchase its exports. This can be applied to airline ser-
vices (see Clarke, 1998). Suppose a country is in a bilat-
eral arrangement with another, and that both countries'
airlines operate on the route. Suppose further that most
of the tra$c on the route comes from the other country.
It may be in the "rst country's interest to restrict supply
on the route, forcing up prices and increasing the pro"ts
of its airline at little cost to its own consumers. While it
will be in the interest of the other country to keep fares
low, it may not see it this way (it may be protectionist),
and the "rst country may be able to impose an optimum
tari! without retaliation. This could also be the case
where the users of the service come from many di!erent
46 P. Forsyth / Journal of Air Transport Management 7 (2001) 43}50
countries, and retaliation is not feasible. This situation is
rather like that of voluntary export restraints, whereby,
one country agrees to the request of another to restrict
exports to it, and charge the importing country more for
its exports. It can be argued that this is the case on the
Japan}Australia route, on which most passengers are
Japanese * it may be in Australia's interest to keep fares
high, since its airlines can pro"t from high fares.
One proviso to this argument is that regardless of the
restriction to supply, it will still be e$cient for the servi-
ces to be actually operated by the lowest cost supplier,
which ever country this may come from. If a lower cost
airline from another country could operate the service, it
would be in the "rst country's interest to allow it to do so
as long as it could reap the pro"ts from this happening.
Thus if a US airline could operate the Japan}Australia
route at a lower cost than the Japanese and Australian
airlines, and Australia could somehow gather the addi-
tional pro"ts from this airline, it would be in its interest
to allow it on to the market. In reality, this is often very
di$cult to achieve, and successful enjoyment of the
pro"ts will require preventing other countries' airlines on
to the route. Hence, when a US airline, Northwest,
attempted to enter the Japan}Australia route, it made
sense for Australia to try to block it, since it would simply
have diluted pro"ts going to Australian airline.
Even if free trade is in the interest of a country, it need
not follow that every move towards more trade, in the
context of an already restrictive environment, will be to
that country's bene"t. It could be that a route is tightly
regulated and is highly pro"table. These pro"ts will be
shared by the airlines on the routes, typically airlines
from the bilateral partners. While allowing airlines from
other countries to serve the route could be in the interest
of the country's consumers, it may not be in its overall
interest, since its airline pro"ts will be diluted. It will be in
the interest of the bilateral partners to restrict access to
their route by airlines of other countries, even if these
airlines could serve the route more e$ciently. US airlines
would very much like to serve the highly restricted and
pro"table intra-Asian routes; however, it makes sense
for Asian countries to restrict access to them, since
the US carriers will dilute the Asian countries' shares
of pro"ts. This is not a general argument against trade;
however it is a consideration which needs to be taken
account of when moves towards greater freedom of
trade are considered- there may be good reasons for
individual countries to oppose speci"c trade enhancing
proposals.
There are other non-economic arguments which are
sometimes used to justify airline trade restrictions. One of
these is the security argument * countries wish to have
airline industries which may provide transport in times of
con#ict. However, most of the discussion of airline servi-
ces trade centers on how the gains and losses from such
trade are shared- even if a country gains from free trade
in airline services, not everyone in it will be a gainer.
Trade policy will depend here, as in other sectors, on the
balance of these interests.
4. Trade barriers and policies
Trade barriers are still extensive in the airline industry,
though as the result of liberalisation, they have been
reduced somewhat. The bilateral system, while not
inherently trade restrictive, is the framework within which
most of the regulation of airline services takes place.
Most bilateral agreements provide only limited scope for
trade. Typically, they specify the conditions under which
airlines from the partner countries can operate and sell
services, and very often airlines from other countries are
not permitted into the market at all. Sometimes, some
limited "fth freedom rights may be granted. At other
times, geography may mean that airlines from non-part-
ner countries will be able to enter a market on a sixth
freedom basis. Countries are usually hesitant to grant
beyond rights. Even where liberal or open skies bilateral
agreements are concluded, for example, between the US
and its many open skies partners, trade is primarily
limited to bilateral trade between the partners.
There are other restrictions which are linked to those
which are present in the bilateral agreements. Airline
ownership is becoming an issue, and limits are being put
on ownership for purposes of participation in bilateral
trades. This is necessary to stop airlines from one country
getting around restrictions by establishing subsidiaries in
others, to access those countries' markets. Such restric-
tions are now beginning to restrict the corporate freedom
of airlines- for example, when airlines try to take equity
stakes in alliance partner airlines.
Access to airport services can also restrict the scope for
trade at the airline level. If an airline cannot obtain slots
to use a busy airport, it will be able to enter markets
which include that airport. Airport access is becoming an
increasingly important factor when bilateral agreements
are concluded (for example, when the US and Canada
concluded an open skies agreement } see Tretheway
(1997)). Finally, it is worth noting that most countries
prohibit access by foreign airlines to their domestic mar-
kets (though New Zealand allowed Ansett New Zealand,
which was owned by Australian and US interests, to
operate in its domestic markets, and Australia allows
Ansett Australia, now owned by New Zealand and
Singaporean interests, to #y within Australia).
Trade policies of countries are usually the outcome of
pressures from a range of di!erent interest groups. This is
true for policies as they impact on airline services trades.
There are groups with distinct and identi"able interests,
and somehow a balance between these competing inter-
ests is achieved. This balance can change over time, for
example, as consumer interests grow stronger.
 P. Forsyth / Journal of Air Transport Management 7 (2001) 43}50
The groups which are most relevant in the airline
services context are consumers, tourism industries,
governments, airline companies and airline employees.
Consumers normally want low fares. To this end, they
will favour competition and also trade. Home tourism
industries will favour low fares for tourists from other
countries, so that more tourists come and purchase their
products. Normally, tourism industries will support com-
petition and trade. However, in countries where most of
the tourism #ows are outward (such as Japan) the
tourism industry may favour high international fares, to
keep tourists at home. Governments may also be players
as well as disinterested referees. For example, a govern-
ment may be concerned about revenue #ows to itself,
perhaps in its role as an owner of an airline. Many
countries have recently privatised their airlines; in most
cases, their treasuries were more keen to maximise sale
proceeds than to promote liberalisation which would
lower pro"ts.
Producer interests are often lumped together, though
doing this is becoming increasingly inaccurate in the case
of the airline industry. In the days when more business
for the airline company meant more or higher paid jobs
for its workforce, there was a strong conformity of inte-
rest. These days, what is good for the company may not
be good for its workforce. For example, a company may
add to pro"ts by selling services on a code share basis
rather than by directly operating the service; their em-
ployees may lose out from this. The attitude of these two
groups towards trade issues will diverge, since it is in the
interest of the workforces (assuming they are home
based) to maximise production activity at home while the
airline companies can be expected to be more #exible
towards trade. Thus, they will support the opening of
trade if it enables them to take advantage of code sharing,
but they will oppose it if it results in a reduction in their
market share. They will also want access to new markets,
and will support opening up of markets they are current-
ly excluded from. Thus, US carriers support obtaining
beyond rights in Asia from Japan, but they are less keen
on promoting trade when it means allowing cabotage in
the domestic US market.
Changes taking place in the airline industry are also
impacting on airline attitudes to trade. It is no longer
simply a matter of market access that they are seeking.
While airlines naturally wish to preserve protection of
their own markets, they want more #exibility to operate.
Thus, they wish to take equity in, and possibly control,
airlines in other countries, to form alliances across coun-
tries, to contract out services when economic to do so
and to source inputs across the world as cheaply as
possible. To form themselves as international businesses,
airlines now wish for some of the trade restrictions which
limit their #exibility to be removed. Strategic alliances
are, in part, a response to trade restrictions, but as they
develop, they will lead airlines to seek greater #exibility
47
through the liberalisation of several of the barriers to
trade and investment.
The balance of interests has been changing, and this
contributes to the explanation of the liberalisation that
has taken place over the past few decades. Consumer
interests have become more important as governments
recognise that travelers are voters, and they have had an
in#uence on the open skies bilateral agreements which
have been concluded. Tourism interests are becoming
more vocal, and some countries, such as Australia, in-
clude them on their aviation negotiation teams. In some
cases, countries have permitted more trade, in the form of
greater access on bilateral routes to non-partner airlines,
re#ecting consumer interests. The demand for low fares
to Europe was a major reason why the Australian
government gave up on e!orts to restrict Asian airlines
from o!ering services on a sixth freedom basis on the
Australia}Europe routes (see Findlay, 1985, Chapter 2).
While consumer interests have become more impor-
tant, they have not yet featured prominently in pressure
for more open trade. Consumer interests have been keen
on competition, though they have not paid much atten-
tion to the possibilities for trade. Thus open skies bilat-
eral agreements typically do not open markets up to
more trade on a non bilateral basis, and most domestic
airline deregulations have limited competition to domes-
tically owned and operated airlines. This is not so sur-
prising when trade in other goods and services is
considered. The push to open markets normally comes
from producers, not consumers, who are more diverse
and are a much less e!ective lobby group than producers.
For example, Thai rice producers, not Japanese con-
sumers, are pushing for Japan to open its rice market,
and US and other agricultural producers press Europe to
open its markets for agricultural products. European
consumers seem much less interested, even though they
are the ones paying the higher prices. (In the 1990s
Australia tried to galvanise consumer interests in Europe
by pointing out how much extra they were paying for
food, but it had limited success.)
Hence, when it comes to airline services, most coun-
tries are not particularly supportive of trade which goes
beyond the bilateral level. This is true even for countries
which are liberal when it comes to competition issues,
such as the US. Thus the US opposes trade when it
would lead to a reduction of market share for US car-
riers, for example, in the domestic market or on interna-
tional routes which its airlines share with those of
bilateral partners. It is pro trade when it is a matter of
additional access by US carriers to routes they are re-
stricted on, such as beyond rights from Japan into Asia.
It could be that countries are now putting less weight on
airline companies' interests but they are still weighting
employee interests heavily * thus, they may willing to
accept a loss of airline pro"tability (say as a result of
domestic airline deregulation) but not the loss of airline
48 P. Forsyth / Journal of Air Transport Management 7 (2001) 43}50
jobs overseas. Few if any countries seem willing to pursue
pro trade policies, if these are against their producer'
interests, even though they are prepared to weight con-
sumer interests over producers in other situations. To
this extent, the strongest interest group support for more
open trade comes from producers seeking greater market
access.
5. Bilateralism and trade
At present, most international negotiation concerning
airline services takes place at a bilateral level. Are these
arrangements consistent with more open trade, and do
they promote such trade?
It is certainly possible for bilateral agreements to be
trade enhancing. Several agreements now being con-
cluded, especially those with the US as a partner, involve
open skies. While this does not mean free trade, it can
encourage more trade, especially bilateral trade. A liberal
or open skies agreement will give greater scope for the
country which can supply airline services more e$ciently
to gain a greater share of the tra$c, thus creating gains
from trade. Under restrictive bilateral agreements, the
capacity of each of the countries airlines may be predeter-
mined, thereby, limiting the scope for trade. Under open
skies, the lower cost airlines can win market share from
their competitors, and airlines from higher cost countries
have greater ability to subcontract operation of services
to airlines from lower cost countries.
In the longer term, open skies agreements may have an
impact on trade through another mechanism. If open
skies lead to competitive airline markets, and only mod-
est pro"tability of airlines, countries may be less inclined
to prevent entrants from other countries into the markets
they control. Currently, where markets are highly pro"t-
able, airlines and governments are reluctant to allow
other countries' airlines into the market to share the
pro"ts; thus, Asian countries do not want US airlines to
have access to pro"table intra-Asian routes. Lower fares
on direct routes need not always lead to greater reliance
on trade. Lower fares on a direct route may mean that
tra$c switches to it from less direct, but hitherto cheaper,
sixth freedom routes. There will be a reduction in
multilateral trade, though there will be an e$ciency gain,
since the previous trade pattern was the consequence of
arti"cial restrictions.
Nevertheless, even liberal bilateral agreements usually
leave many trade barriers in place. They typically do not
allow for airlines from non-partner countries to serve the
route. They rarely include domestic cabotage, and they
may not include much by way of beyond rights. They will
often fail to resolve airport access issues. Indeed, some
countries rely on airport access problems as a means of
reducing trade and competition when they are pressured
by their partners to be more liberal. Most of these are,
however, a matter of choice of the countries concluding
the agreements * they could, but do not wish to, include
such matters within a bilateral agreement. To this extent,
it is not bilateralism per se that is holding up movement
to greater scope for trade.
The bilateral approach to negotiation does make it
di$cult for more complex issues, involving more than
two countries, to be dealt with. If a country wants beyond
rights which it can exercise, it needs to negotiate with
other countries as well as the immediate negotiating
partner. Such pressures for more open trade as there are
tend to come from airlines seeking access to markets they
are currently excluded from, and this invariably means
routes on which their home country is not a direct
partner. Somehow, within its various bilateral agree-
ments a country must obtain rights for its airlines to #y
on routes which other countries control.
Bilateral negotiations need not be limited to only air-
line services; they may be broadened to include other
trades as well. This is sometimes done (though it is often
denied). Linking airline services to other trades has the
advantage that if both countries want concessions in
di!erent sectors, they may agree on a package which
delivers something on all sectors. It is easier to achieve
progress in negotiations if the range of options is not too
limited.
The overall result from several decades of bilateral
negotiations is that there is rather little scope for trade in
airline services other than bilateral trade. The contrast
with international shipping is stark; the lack of regula-
tions on a bilateral basis has led to extensive multilateral
trade. The aviation environment has come about partly
because countries have not sought to open up air-
line services to more extensive trade, but it may also be
partly because the system itself does not facilitate trade
liberalisation.
6. Beyond bilateralism
While the bilateral basis for airline trade services nego-
tiations will remain, there is scope for negotiations on
a broader basis. One possibility would be regional agree-
ments, and another would be for agreements between
countries with similar objectives. Finally, there are multi-
lateral possibilities.
There are some examples of `regionala agreements
under which groups of countries choose to liberalise
aviation services amongst themselves. Some of these are
really just bilateral agreements, such as those between
Canada and the US and between New Zealand and
Australia. The most important regional agreement is that
within the European Community. Members of the Com-
munity determined to include aviation along with other
sectors in moves towards liberalisation (Button, 1997).
This has resulted in signi"cantly greater competition and
 P. Forsyth / Journal of Air Transport Management 7 (2001) 43}50
trade (Civil Aviation Authority, 1998). Another form of
agreement would be that between a `cluba of countries
with similar objectives (see Productivity Commission,
1999a). Such a club need not have any regional basis,
though a regional club could be expected to be one with
a good deal of air tra$c between members. The problem
with the non-regional club option is that the members of
the club might be widely separated geographically, and
there might be little scope for additional tra$c and trade
at the air services level.
The advantage of the regional or club approaches is
that a wider range of options, involving trade in many
sectors and several countries, can be considered at the
same time. Where two countries may fail to agree, an
agreement between several may be feasible, especially
when each country involved has some market which it
would like more access to. A further advantage of a club
is that it could go further than a regional or multilateral
agreement if its members have similar objectives; there
need not be the problem of the convoy moving at the
speed of the slowest ship. As against this, regional and
multilateral approaches can involve more than one sec-
tor, and it is possible to trade concessions in one against
concessions in another. However, while it may be feasible
to form a club of countries which promote liberalisation
in airline services, it is likely to be much more di$cult to
form a club of countries which are seeking a similar
degree of liberalisation across a wider range of sectors.
The multilateral option is another, not necessarily mu-
tually exclusive, one. This could involve incorporation of
airline services more generally into the GATS. Currently,
few countries would support this, possibly because they
do not wish to be put under pressure to liberalise trade in
airline services. The multilateral approach does have
advantages. It involves a large group of countries with
a wide range of sectors to be considered, and thus, it
provides a wide range of possible trade o!s. A multilat-
eral framework limited to only air transport would be
unlikely to achieve very much, as there would be little
scope for trade o!s. There is an established negotiation
framework, which has been able to handle agreements
with very di!erent sectors in the past.
There also several limitations of the multilateral pro-
cess. It is complex, and results are slow in coming. There
is the possibility that the agreement "nally reached may
re#ect the position of the countries least prepared to
move * the lowest common dominator problem. This
will be less of a worry if all countries to the agreement
want something out of it, and are prepared to compro-
mise one some issues to get their way on others. A multi-
lateral agreement which covers a range of sectors holds
out more promise than one which is restricted to one or
a few sectors; for example, a multilateral agreement
which covers solely aviation.
It is also probably true that incorporating airline servi-
ces into a multilateral negotiations framework would be
49
quite di$cult. Airline services have developed in a very
di!erent way from other traded services, and there is an
established bilateral framework which is currently in use
and which is inconsistent, in many ways, with the ap-
proach to trade agreements currently adopted by the
WTO. As against this, however, there are other sectors
which each have their own peculiarities and pose particu-
lar di$culties, such as agriculture, which have been suc-
cessfully incorporated into the multilateral approach.
While incorporation of air transport into the arrange-
ments such as the GATS has some potential, it is likely to
be achieved only in the longer term.
The primary issue may be one of whether su$cient
countries see themselves as gaining enough from liberal-
ising trade in airline services to push for this to be put on
to the agenda. Agriculture gets put on the agenda when
agricultural producer countries see this as a way of ope-
ning up access to markets. It is producer interests, and
their search for markets, which forces the issue. With
airline services, it may be that too few countries see it as
in their airlines' interest to push for market access at the
multilateral level.
Countries will also see themselves as gaining from
trade liberalisation if they take a broader view of their
interests than they normally do. As mentioned, some
countries are taking note of consumer and tourism indus-
try gains when considering domestic aviation policy, and
when entering open skies bilateral agreements. While
producer interests are often dominant, this is not always
so; some countries are willing to reduce manufacturing
tari!s unilaterally, an action which results in the contrac-
tion of their industries. Information about the gains from
trade, such as that gained from models of liberalisation,
may help decision makers to take a broader view (see, for
example, Productivity Commission, 1999b; Gillen et al.,
1999).
Whichever ways in which airline services are opened
up further to trade, there are some cautions which need
to be taken into account. One concern is that of market
dominance. If a more liberal trade environment led to
a small group of mega carriers which dominated most
airline markets, there would be the risk of misuse of the
market power that these carriers would possess. Even if
mega carriers did not dominate, low-density markets
could still be dominated by a few carriers, with attendant
market power problems. To this end, any liberalisation
needs to be accompanied by monitoring of competition
policy aspects. Addressing market power problems in
a multinational environment could be di$cult.
Another caution concerns the tourism industry. Airline
services and tourism services are close complements.
Countries do possess market power in the sale of these; it
is this market power which enables them to regulate
international airline services as they do. If as a result of
some agreement, airline services are liberalised, it will still
be feasible for countries to exercise this market power at
50 P. Forsyth / Journal of Air Transport Management 7 (2001) 43}50
the tourism level. Thus, instead of regulating airlines and
keeping air fares high, they may switch to taxing tourism.
Both these have the a!ect of restricting trade in tourism
and aviation services. Thus, if aviation is to be included in
a negotiating framework, so too should tourism.
7. Conclusions
There has been considerable liberalisation of trade in
airline services over the past few decades. This has come
about through liberal bilateral agreements, such as open
skies agreements, through regional agreements, and
through carriers taking advantage of sixth freedom op-
portunities open to them. Notwithstanding this, trade in
airline services is still relatively restricted. Few products
are open for all countries to supply. Thus, there is scope
for more trade, and more gains from trade.
Protectionist arguments explain a lot. Countries are
keen to promote production of airline services by their
airlines and employment in the industry. They also wish
to enjoy the pro"ts to be obtained in markets which they
restrict competition in. However, several countries are
now taking a broader views of their aviation interests.
They are prepared to take into account, to some extent,
bene"ts to their consumers and tourism industries, and
balance these against bene"ts to producers. This is being
re#ected in open skies bilateral agreements, and in do-
mestic deregulations. In spite of this few countries are
particularly pro trade if it comes to a matter of home
country producers losing business to foreign producers.
Even those countries which have unilaterally lowered
tari!s for their manufacturing industries are unwilling to
let foreign airlines into their markets.
There are forces for change. Open skies may be limited
in themselves to bilateral arrangements, but they can
lead to pressure for opening up of related bilateral
markets. Also, producer interests are changing. Airlines
which are seeking to become global businesses are "nding
themselves constrained by the various restrictions on
trade and investment, and some are pressing for these to
be liberalised.
The form of the system of international regulation, the
bilateral system, does make a di!erence, but it is prob-
ably of much less importance than countries' objectives.
It is possible for there to be more scope for trade within
a system of bilateral agreements, though this system does
hinder the process of enhancing opportunities for trade
on a multilateral basis. Given most countries' objectives,
and that they are normally only pro trade when it is
a case of increasing market access or creating more
#exibility for their own airlines, going beyond the bilat-
eral system is a means of expanding the scope for trade.
Increasing the number of countries involved, through
a regional or multilateral agreement, can facilitate ope-
ning up markets, but it is especially important to expand
the range of possible trade o!s, by including more than
just aviation issues in negotiations. This is possible under
regional trade agreements but the greatest scope for trade
o!s occurs at the multilateral negotiations level. How-
ever this also happens to be the most di$cult level at
which to incorporate aviation negotiations, granted the
widely di!ering ways in which current aviation and gen-
eral trade negotiations are conducted.
For the short-to-medium term, the regional or club
basis probably provides the greatest scope for progress
towards liberalisation of trade, especially if trade in other
sectors is included. How much change such negotiations
e!ect depends on how keen countries and their airlines
are for access to new markets and for more #exible
arrangements, and how much weight governments give
to interests other than producer interests, such as con-
sumers and tourism industries.
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