Foreign Ownersidp of Airlines and Korean Carriers
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0 FOREIGN OWNERSIDP OF AIRLINES AND KOREAN CARRIERS' STRATEGIES SHIN, DONG CHUN A Thesis submitted to the Faculty of Graduate Studies and Research in partial fulfillment of the requirements of the degree of LL.M. Institute of Air and Space Law Faculty of Law McGill University Montreal, Quebec, Canada Copy# November 1993 C November 1993, SHIN, DONG CHUN -i- c CONTENTS Page ACKNOWLEDGEMENTS V ABSTRACTS vi X TABLES xiv APPENDICES XV I. INTRODUCTION 1 IT. BACKGROUND AND lflSTORY 9 1. Evolution of the Concept of Nationality 9 (1) Relevant Cases 9 (2) Ships 10 2. Aircraft and Airlines 13 ( 1) Pre-Chicago Convention 13 (2) The Chicago Convention and Thereafter 14 (3) Nationality of Aircraft and Airlines 18 -ii- 0 III. NATIONAL LEGISLATION AND CASES IN THE U.S. 20 1. National Legislation 22 (1) The United States 23 (2) Canada 25 (3) The United Kingdom 27 (4) France 27 (5) Australia 28 (6) Japan 29 (7) Korea (South) 30 2. Cases in the U.S. 31 (1) The Numbers and Control Test 31 (2) The Anti-Trust and Public Interest Tests 34 IV. PRESSURES FOR CHANGES 44 1. Profitability of Airline Bisiness 44 2. Liberalization 48 (1) Deregulation in the U.S. 48 (2) Liberalization of International Air Transport 52 (3) Trade-in-Services 55 2. Globalization 57 ( 1) Privatization 57 -ill- 0 (2) Internationalization of Airlines 67 3. Regionalization 72 ( 1) Regional Blocs 72 (2) "Community Air Carrier" 75 V. IMPACT ON INTERNATIONAL AIR TRANSPORT 77 1. Bilateral System 77 2. Anti-trust 80 3. Other Policy Objectivs 82 4. Airline Alliances 84 VI. THE STRATEGIES FOR KOREAN CARRIERS TO ADAPT TO CHANGES 99 1. Legal Institution and Policy in Korea 99 2. Development and Current Situation of Air Transport in Korea 100 3. Current Situation of Airline Business 110 4. Considerations in Designing Alliances 112 5. Strategies for Airline Alliance VII. CONCLUSION 117 GLOSSARY 121 -iv- c APPENDICES 125 BffiLIOGRAPHY 142 -v- 0 ACKNOWLEDGEMENTS Civil Aviation became the most interesting subject for me since I joined the Ministry of Transportation of Korea in 1980. The work and study in the air transport field in Korea and Montreal, Canada afterwards for the last several years showed me a new world. We can see the realities of the world through the civil aviation. In particular, in order to understand air transport issues better, it requires a broader spectrum of knowledge of law, economics, trade, management, technology, etc. Accordingly all these things have been a challenge which I met with a sense of achievement and enjoyment. During the stay in Montreal, I was heavily indebted to many persons. First of all, my special thanks go to Dr. M. Milde and Prof. R. Janda, without whose unfathomable support I could not have taken up and finished this study in the Institute of Air and Law in McGill University. I also would like to extend my warm appreciation to Mr. Joseph R. Chesen, Mr. C. Dudley and Mr. Y.Z. Wang in the Air Transport Bureau of ICAO who rendered me invaluable support and guidance in tackling so many issues relating to the regulation of international air transport throughout my work with -vi- 0 them. No doubt my study could not have been conducted smoothly without the understanding and patience of my family. In all, I feel strongly that I will be able to escape from the strain of my indebtness to all the persons mentiond above, only through my continued concern with, and study of this field. -vii- ABSTRACT Foreign ownership is becoming a focal point through which the whole air transport system could be changed. As the environment surrounding air transport industry has been changing rapidly over recent years, many States are beginning seriously to consider changes to their existing legislation and policies regarding foreign ownership of airlines. The traditional concept regarding the nationality of aircraft and airlines has been that there should be a genuine or effective link between them. In particular, "substantial ownership and effective control" has worked as a key element in most bilateral and multilateral air transport ·arrangements. Winds of change are blowing hard. In the air transport industry, these changes are mainly derived from deregulation which was initiated in the U.S. and applied to its international aviation relations. The deregulation policy of the U.S. resulted in the concentration of air carriers through mergers and acquisitions, raising the concern that the air transport market would be dominated eventually by a few mega-carri.ers. In response to this new trend, many States have created various forms of regional cooperation such as the EC, ASEAN, Andean Pact, and Yamoussoukro Declaration. c -Vlll- 0 On the other hand, States are increasingly engaged in the privatization of their industries for many reasons (mostly political and economic), selling governments' stakes to private sectors including foreign nationals and companies. In the manufacturing industry, multinational corporations (e.g., mM, Coca Cola) can be easily established without much difficulty. Participanting countries in the Uruguay Round under the auspices of the GAIT basically agreed to apply some trade concepts and principles (e.g., most-favoured-nation treatment, national treatment, market access) to trade-in-services including air transport services. In this changing environment, air transport industry cannot go it alone any more with its own logic and principles such as States' sovereignty, the public utility concept of airlines, and reciprocal exchange of commercial rights. Moreover, the world air transport industry as a whole has been in a deep trouble since the late 1980s. Most airlines, with but a few exceptions, have been recording huge losses, mainly due to over-capacity and price wars in a world-wide economic recession. They must rely on various sources of financial aid including foreign capital in order to get out of this crisis. In all, the world's airlines need more foreign investment than ever before, and their governments are being pressed to change existing legislation concerning foreign ownership of airlines and to consider restructuring the whole system of international air transport. -IX- The change of rules and regulations regarding foreign ownership in many States will have a multi-faceted impact on the existing air transport system. These may include areas such as bilateral negotiations, application of anti-trust and competition laws, employment, and cabotage. However, it will expedite the process of globalization or multinationalization of airlines above anything else. Therefore more and more transnational alliances of airlines will be likely. The two Korean carriers (Korean Air, Asiana Airlines) are also meeting ever increasing competition and challenges in this same context. Their survival strategies may include regional cooperation, alliances with carriers in other countries and possibly mergers. But in this analysis, we opted for alliances as a better solution to meet global challenges, discarding the other alternatives because regional cooperation is not feasible in Asia and the Pacific for the time being, and a merger between the two carriers is hard to envisage and beyond our research purpose. -x- 0 La propriete etrangere est un foyer par lequel tous les systemes du transport aerien pourraient ~tre changes. Dans la mesure oil l'environnement de l'industrie du transport aerien a rapidement change depuis quelques annees, bien des Etats commencent serieusement a considerer des changements de legislation et de politique existantes concernant la propriete etrangere de compagnies aeriennes. Le concept traditionnel concernant la nationalite d 'aeronefs et de compagnies aeriennes est le suivant: il doit exister un lien veritable ou effectif entre eux. En particulier, la clause de "propriete substantielle et controle effectir' a fontionne comme un element clef dans la plupart des arrangements bilateraux et multilateraux du transport aerien. n souffle un vent violent de changements. Dans le domaine de l'industrie du transport aerien, ces changements ont principalement derive de la dereglementation qui a commence aux Etats-Unis et qui s'est appliquee aux relations internationales d'aviation. La politique de dereglementation des Etats-Unis a entraine la concentration de transporteurs aeriens dans le domaine de fusions et d'acquisitions en faisant venir l'idee que les marches du transport aerien seront eventuellement domines par quelques transporteurs importants. Faisant face acette tendance nouvelle, -Xl- plusieurs Etats cont forme les cooperations regionales de toute variete comme EC, ASEAN, Pacte d' Andean, Declaration de Yamoussoukro. Par contre, les Etats se sont de plus en plus engages dans la privatisation de leurs industries pour plusieurs raisons (lesquelles sont, pour la plupart, politiques et economiques) livrant les interets des gouvemements aux secteurs prives y compris les compagnies etrangeres et nationales. Dans le domaine de l'industrie de manufacture, les corporations multinationales (ex., IBM, Coca Cola) peuvent etre facilement etablies sans difficulte. Les pays qui ont participe au Uruguay Round sous les auspices du GATT ont fondamentalement consenti a !'application de quelques concepts et principes concemant les echanges (ex., traitement de la nation la plus favorisee, traitement national, acces aux marches) aux echanges de services y compris les services du transport aerien. Dans cet environnement changeant, l'industrie du transport aerien ne peut plus aller bien avec ses logiques et ses principes propres tels que: souverainete des Etats, concept d'utilite publique de compagnies aeriennes et echanges reciproques des droits commerciaux. De plus, l'industrie du transport aerien du monde dans sa totalite a connu une grande difficulte depuis la fin des annees '80'. La plupart des compagnies aeriennes ont subi des dommages considerables entrtines pour la plupart par les guerres de la surcapacite et du prix a l'epoque de la recession economique du monde entier. Elles -xii- doivent dependre des diverses sources d'aides fmancieres y comprie les capitaux etrangers pour sortir de cette crise.