Provisions of the Arab Civil Aviation Commission agreement

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Provisions of the Arab Civil Aviation Commission agreement
Benefits and obstacles to be expected from a
liberalisation process of the aviation market
by Frankie O’Connell
What is Deregulation?
Airlines disappointed in system prior to deregulation
Airlines wanted the freedom to set their own fares
Limited freedom of product differentiation
Had to be cost competitive
1st class
Business class
Economy class
On-time
Frequency
Baggage
Comfort
IFE/email
Lounges
Food
Schedules
Difficult to increase the number of aircraft, frequencies and routes
Number of airlines on a route was strictly controlled
Airlines had to cross subsidize profitable routes with unprofitable ones
Ability to function without government interference
The Effects of US Deregulation on Airlines
• The number of airlines rose from 36 in 1978 to over 120 by 1985
(230% increase in just 7 years)
• The top five airlines had accounted for 69% of the US domestic traffic in 1978
But by 2005 it had fallen considerably to 57% (Competition was Intense)
• Then there was a period of consolidation as the major airlines fought back
to regain market. By 1993, the top five carriers accounted for 70% of the
industry output
• The intense competition continued and many airlines failed.
From 1979–1999, 176 received operating certificate and only 37 (21%) of
those airlines are still operating today
• Created hub and spoke networks. The entry and exit of a competitor is heavily
influenced by the network of the home airline
• After 2001, The US airline industry went into meltdown. The cumulative
losses from 2001 – 2004 were $32.3 billion
The Effects of US Deregulation on Passengers
• Fares in the US domestic market fell by 40% from 1980 – 2005
• 60% of this fall was due to because of deregulation (Morrison & Winston, 1995)
• The US Department of Transportation estimates that passengers save
$19.4 billion per year, in lower fares because of deregulation.
The major effects on Passenger welfare
• Lower fares
• Higher number of frequencies
• Increased number of destinations
• Seamless travel - there was more collaboration with other airlines via alliances
• There were increased delays as more flights went through congested hubs
Morrison, S. and Winston, C. (1995). The Evolution of the Airline Industry, Washington D.C. The Brookings Institution.
Why Europe wanted deregulation
• Access to the market was severely restricted (Single designation)
• The capacity offered by each airline was restricted generally 50:50
• As late as 1997, out of 988 routes within the EU only 48 had multiple designation
• Of the 988 routes, only 88 allowed 5th Freedom traffic rights*
• The regulatory bodies of bilateral partners approved fares and there was NO
competition on price
• The airlines designated by a country had to be substantially owned and
controlled by it or by its nationals
• Many of Europe’s airlines received state aid: e.g. Air France $3.8 billion in 1994
(equivalent to 60 percent of the value of all of BA stock or the entire annual revenue of Singapore Airlines
*This freedom is also sometimes referred to as 'beyond rights‘. It is the right of an airline from one country to land in a second country, to then pick up
passengers and fly on to a third country where the passengers then deplane.
European Airline Deregulation (3 phases)
The three packages agreed by the European council of ministers
1st Package (1987-1989)
- It abandoned the equal sharing of capacity on routes served by airlines of the
two states.
- It facilitated the entry new airlines by opening up new market access
- Allowed agreements between community airlines relating to capacity, tariffs
co-ordination, revenue pooling, runway slot allocation, CRS and pax handling
2nd package (1990-1992)
- Further loosened constraints on pricing, capacity restrictions and market access
- The end of immigration and customs controls between the 12 states
Source: Council Directive of 14 December 1987 on fares for scheduled air services between Member States (87/601/EEC)
and Council Decision of 14 December 1987 on the sharing of passenger capacity on scheduled air services
between member states (87/602/EEC) Brussels: Commission of the European Communities
3rd Package 1993 - Onwards
(Full European Deregulation)
- Creation of an effective ‘ Open Skies’ policy within Europe such that the European
Community would become a single ‘domestic market’
- Airlines from member states can operate with full traffic rights on any route within
the EU without capacity restrictions
- Governments may impose restrictions only on issues such as the environment
- There are no price controls: Airlines can set their own fares and cargo tariffs (EU
regulations 2409/92)….This is why Ryanair can offer free flights
- The airline must be majority owned and controlled by any of the member states
or their nationals.
Ryanair Hubs
- Dublin
- Stockholm
Deutsche BA
Ryanair
KLM UK
- Shannon
- Frankfurt
- London Stansted - Milan
- London Luton
- Rome
- Brussels
- Brussles
- Barcelona
Source: CEC (1992) Council Regulation No. 2407/92 on licensing of air carriers; Council Regulation No. 2408/92 on access Community air carriers to intra community air
routes, and Concil Regulation No 2409/92 on fares and rates for air servives. Official Journal 24 August, Brussels: Commission of the European Communities
The growth of Europe’s low cost carriers 2000 - 2006
European Low Cost Routes 2000
European Low Cost Routes 2006
Scheduled annual passenger traffic between London and Venice
1986 - 2006 (Trendline extrapolated from 1997 to 2006)
1,000,000
900,000
800,000
700,000
600,000
500,000
400,000
300,000
Extrapolated
200,000
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
100,000
Source: UK CAA, 2007
Deregulation has created many opportunities
Change in traffic between the UK and Europe
1996 - 2005
The growth of low cost carriers in Asia, Europe and the US (Seat Capacity)
30%
25%
2001
2002
2003
2004
2005
2006
20%
15%
10%
5%
0%
Within Asia Pacific
Within Europe
Within US
This environment created many opportunities
The LCCs had a very positive impact on the local economic community
(Bypassing major
cities)
 Hotels
 Restaurants
 Car rental facilities
 Triggered the formation of new tourism related industries
At Cologne
(Bonn)
The average spending of each incoming passenger was
€285 per passenger per trip
Tourism
The region earned €147 million from having the extra air
traffic in 2003
Local Businesses
(e.g. Frankfurt Hahn)
The area surrounding Hahn reported an increase in the
number of businesses from 30 in 1996 to 103 by 2003
Source: http://www.elfaa.com/documents/ELFAABenefitsofLFAs2004.pdf
Intense competition as a result of deregulation
According to the European Commission, the number of scheduled airlines in Europe
increased dramatically from 1992 to 2006
Many new entrants types:Low cost carriers
Low cost carrier subsidiaries of Full service airline (e.g. Germanwings, BMI baby)
Traditional airlines rebranded as low cost carriers (e.g. Aer Lingus )
All business class airlines such as Eos, Silverjet and MaxJet
Regional airlines such as Lagun Air in Spain
Regional airlines which have been converted to low cost carriers, such as FlyBe
Independent charter airlines such as Air Finland
Yield decline of EU and US markets
(1993 - 2007)
100 $
#
)
95
$
)
#
#
#
#
#
90
#
#
#
#
#
80
75
70
#
#
$
6
#
5
Index
85
65
Source: IATA
#EU Short-haul
US domestic
7E
4
3
2
1
0
99
98
97
96
95
94
93
60
Load Factors of domestic and international airlines
78%
76%
74%
72%
International
70%
68%
Domestic
66%
64%
Source: IATA
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
62%
Multilateral Air Service Agreements and Arrangements
Name of agreement
Started Current participants
European Union 3rd Package 1993 29 states of EU plus Iceland, Liechtenstein
Norway and Sweden
Caribbean Community ASA
1996 Granada, Jamaica, Trinidad, Barbados, etc
Fortaleza Agreement
1997 4 principle members: Argentina Brazil, Paraguay Uruguay
5 Associates: Bolivia, Chile, Columbia, Ecuador, Peru
CLMV Agreement
1997 Cambodia. Laos, Myanmar and Vietnam
COMESA Air Transport
Liberalisation Program
1999 20 states of the Common Market for Eastern and
Southern Africa
Yamoussoukro II
1999 52 African states (was aimed at inaugurating an Open
Skies policy which would remove bilateral constraints & boost intra-regional traffic)
Asia’s (MALIAT) agreement
2001 Setting the framework to develop open skies in Asia
European-Mediterranean ASA 2005
EU and Western Balkans
EU and Morocco
2006 EU and 6 states (i.e. Crotia, Serbia, etc)
Moroccan Airport Traffic 1995 - 2006
10
Domestic
International
6
4
2
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Source: ONDA
1996
0
1995
Passengers (Millions)
8
• EU Open skies policy signed in December 2006
• 10 Million passengers planned to fly to Morocco by 2010
• Ryanair has sealed a deal with the Moroccan government to open
20 routes and carry one million passengers a year in five years time.
Egyptian Airport traffic 1997 - 2006
30
Millions of passengers
25
20
15
10
5
0
1997
1998
1999
2000
Cairo Airport
2001
2002
2003
2004
2005
2006
All Airports
Source: EHCAAN
• Traffic at Egyptian airports will have doubled from 13.5 million passengers in 1997
to an estimated 27 million by 2007
Deregulation of the Middle East market
The Middle East air transport system remains heavily regulated, with
substantial limitations on the allocation of traffic rights
Negotiation of traffic rights is conducted within a bilateral system
Constraints in the allocation of traffic rights have posed a substantial barrier
to the entry and growth of new carriers operating intra-regional routes
Air Arabia – being compelled to operate a less than daily service on the
majority of its routes.
However, Jordan, Bahrain, Morocco, Oman, Qatar, Kuwait and UAE have
An Open Skies policy with the US. Also open sky policies in UAE & Lebanon
Open skies could be critical to Jordan as Tourism has the potential to produce
up to 10% of Jordan’s GDP… (Currently only around 4%)
Liberalisation in the Saudi domestic market
• Saudi Arabia’s civil aviation administration stated that
13 companies were pursuing licences to operate as
national air carriers
• Only 2 licences were granted: Nas Air (Riyadh) and Sama (Dammam).
Both started operations in 2007
Route
Riyadh – Jeddah
Jeddah – Damman
Riyadh – Abha
Riyadh – Dammam
Riyadh – Gizan
Riyadh – Madinah
Damman – Abha
Damman – Gizan
Traffic (2006)
2,418,000
793,000
779,000
683,000
350,000
341,000
139,000
32,000
Sama Frequency
3
2
2
2
1
1
2
1
Deregulation of the Middle East market
the Intra-Arab Freedoms of the Air Programme amongst 16 member States of
the Arab Civil Aviation Commission (ACAC) (the Agreement on the Liberalization
of Air Transport between the Arab States was signed in 2004)
Its very similar to the EU’s 3rd package
 Establishing a ‘vast Arab free trade zone’ - fosters regional and
international economic development
 Frees the intra-regional movement of goods, individuals and capital
 Forms the justification for a regional deregulation of air services.
Signatory state
Bahrain
Egypt
Iraq
Jordan
Lebanon
Oman
Palestine
Source: AACO
Ratified?
No
No
No
Yes
Yes
No
Yes
Signatory state
Somalia
Sudan
Syria
Tunisia
Morocco
UAE
Yemen
Saudi
Ratified?
No
No
Yes
No
No
Yes
Yes
Yes
Provisions of the Arab Civil Aviation Commission agreement
(similarity to EU 3rd package)
Concerning:
ACAC Agreement
EU Council Regulation
Licensing & •Multiple air transport operating licenses • Multiple licenses granted to member
can be granted in each state.
states only if carrier is located in EU
Ownership
• Substantial ownership must be retained • Must be majority controlled, owned
by party countries or by its citizens
by member EU states/nationals
Granting of • Right to operate to any state
traffic rights • Right to operate from a 3rd state to 4th
• No Cabotage
Capacity
controls
Tariffs
• Capacity unrestricted
• Frequencies unrestricted
• Operate any aircraft type
• No restriction on fare
• Does not need the approval
of the Civil Aviation Authority
• Right to operate to any state
• Operate from a 3rd state to 4th
• Cabotage allowed
• Capacity unrestricted
• Frequencies unrestricted
• Operate any aircraft type
• No restriction on fare
• Does not need the approval
of the Civil Aviation Authority
Danger, Danger, Danger
Widebody capacity on order (August 2007)
120,000
Capacity (Seats)
100,000
A380
A350
A330/340
B787
B777
B747-800
80,000
60,000
40,000
20,000
.
0
Europe
- Air France,
- Lufthansa
- Virgin
Asia Pacific
Middle East
- Singapore
- Cathay Pacific
- Qantas
- Emirates
- Etihad
- Qatar Airways
Source: O’Connell Analysis from ACAS data
Airports in the Gulf and Development Plans
Cost
(US$ Billions)
Passenger
throughput
(Millions)
Passenger
capacity
(Millions)
Dubai (Expansion)
Dubai1 (New)
$ 4.1 billion
$ 8.2 billion
24.7
---
70
120
Doha (Expansion)
Doha (New)
$ 0.15 billion
$ 5.5 billion
7.4
---
12
50
5.4
20
13.3
25
Abu Dhabi (Expansion) $ 6.8 billion
Jeddah (Expansion)
Source: Airports Council International, AACO, ATI
$ 1.5 billion
The region must level the playing field. Is it too late?
Government support for Emirates, Qatar Airways, Etihad, etc
Massive aircraft orders and airport development
Aircraft loans backed by oil reserves
Qantas accused Emirates of basking in the support of the Government of Dubai
Yemenia’s chief stated at the AACO AGM in 2005 in Sana’a
‘There are some governments in this region who want to be all over the world map
‘There are heavily-subsidised airlines against which we cannot compete’
‘This assistance threatens carriers which are trying to operate commercially.
Action needed: If airlines become affiliated to the AACA treaty; then the major
carriers should NOT be allowed to setup bases outside of their sovereign state
Consolidation of the market.. Could two airlines from different states merge?
More problems for the region
Number of destinations served by Air Arabia and Jazeera (2003 – 2007)
40
34
35
32
30
25
23
19
20
15
15
13
10
5
5
5
0
2003
2004
Air Arabia
2005
2006
2007
Jazeera Airways
Source: Air Arabia, Jazeera Airways
• 58% of Air Arabia traffic is to Middle east countries: Wants more access
• Air Arabia will have 34 aircraft based at Sharjah by 2010
• Jazeera has 35 aircraft on order
Air Arabia’s break-even load factor and actual load factor
2005 - 2007
100%
80%
79%
77%
84%
80%
73%
70%
60%
40%
20%
0%
2005
2006
Break-even load factor
Source: Air Arabia
2007
Actual load factor
Conclusion
Deregulation has tremendous benefits
for passengers
• Reduce Fares
• Exponentially grow traffic
Deregulation will positively impact
the economy
• Significantly Increase tourism revenue
• Increase number of industries
• Increase the employment level
Deregulation will immediately and
dramatically increase the competition
between airlines
• Existing bilaterals will be eliminated
• Multiple airlines allowed on any route
• Charge whatever fare they want
• Multiple frequencies
• Deregulation is coming quicker than you think…. Will you be ready?
• Wise not to deregulate until the resources (i.e. Fleet, Management, Staff, IT,
Marketing, etc) is adequate enough to take on the competition. (Need Govt help)
• Wise to join an alliance as soon as possible or you will be left without any partner
• Big Question that you must now decide. Do you form a MEDA multi-agreement
pact or join the upcoming ACAC pact or stay independent?
Thank you very much, it was a pleasure

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