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.

De toutes fac;ons, les compagnies aeriennes du monde ont maintenant besoin de plus d'investissements etrangers que dans le passe. Leurs gouvernements sont obliges de changer les legislations existantes concernant la propriete etrangere de compagnies aeriennes et de considerer la restructuration de tous les systemes du transport aerien international.

Les changements des droits et des reglementations dans plusieurs Etats concernant la propriete etrangere apporteront un impact de multi-phases sur les systemes existants du transport aerien. Cela pourrait inclure les domaines suivants: negociations bilaterales, application des droits de anti-confiance et de competition, emplois et cabotage. De toutes fac;ons, cela accelere particulierement les processus de globalisation ou de multinationalisation des compagnies aeriennes. ll semble done y avoir de plus en plus des alliances de compagnies aeriennes· dans cette direction.

Les deux transporteurs aeriens coreens (Korean Air, Asiana Airlines) aussi connaissent la competition croissante et luttent ensemble dans le contexte mentionne ci-dessus. Cette strategie de survivance pourrait inclure des cooperations regionales, des alliances avec les transporteurs aeriens d'autres pays et des fusions possibles. Mais, dans cette analyse, nous avons opte pour des alliances comme meilleures solutions qui -xiii-

0 peuvent faire face aux defis globaux ignorant les autres alternatives parce que la

cooperation regionale n'est pas possible en Asie et au Pacifique pour le moment et que

la fusion de deux transporteurs aeriens est difficile a predire et est en dehors du but de

notre travail. -xiv-

TABLES

Table 1 OWNERSHIP OF MAJOR AIRLINES

Table 2 GLOBAL COVERAGE

Table 3 SIZE OF THE GLOBAL ALLIANCES

Table 4 MAIN CODE-SHARING ACREEMENTS

Table 5 FREQUENT FLYER PARTNERSHIPS

Table 6 TRAFFIC AND FLEETS OF THE FOUR PARTNERS

Table 7 KOREAN CARRIERS' OPERATION

Table 8 FOREIGN CARRIERS' OPERATION TO AND FROM KOREA

Table 9 UNALlGNED CARRIERS

Table 10 LIST OF POTENTIAL PARTNER AIRLINES FOR KOREAN CARRIERS -xv-

APPENDICES

Appendix 1 British Airways I USAir Deal

Appendix 2 Consolidated Statement of Operations and Retained Earnings (AIR

CANADA 1992)

Appendix 3 Key Elements of the Agreement between KLM and Northwest

Appendix 4 Comparison between Third and Second Aviation Package

Appendix 5 Annex on Air Transport Services to GATS

Appendix 6 Regional And Trans-regional Intergovernmental Organizations

Appendix 7 Transnational Airline Alliances I. INTRODUCTION

One of the most interesting events in the air transport field has been drawing our attention again this year (1993), as a continuation of a story of last year. That is British

Airways' proposed investment in US Air, a carrier which has been losing a lot of money like most other U.S. carriers.

In December 1992, BA withdrew its application for the approval of its agreed deal with US Air which contained the proposed $750 million investment in the latter, amounting to 24% of US Air voting stock and 44% of total equity, and the right to elect

4 of 16 US Air directors.

The then U.S. Secretary of Department of Transportation (DOT), Mr. Andrew

Card expressed the willingness to approve the deal right after he heard about it in July

1992. However, the Big Three (i.e. American Airlines, United, Delta) lobbied fiercely against the deal, making use of all possible resources available to them for various reasons, one of which was that the deal lacked quid pro quo benefits for the U.S. side.

When DOT leaked the intention not to approve the application, BA had no choice but to withdraw the plan in December last year.

- 1 - BA and US Air struck a new deal recently which lessened the level of the investment of the former, to the extent that BA's voting interest would be capped at

19.9%, its total equity interest would be 24.6%, and BA could only have three of 16 board members with no veto rights. 1 Again the Big Three are opposing the new deal for the reason that DOT should set a comprehensive policy on foreign ownership before it approves any new proposed investment of foreign airlines in U .S. carriers. On 15 March

1993, DOT approved the first part of a three-stage deal temporarily with the condition that the bilateral air transport agreement should be renegotiated so as to give the U. S. carriers greater access to the U.K. market.

In contrast to BA/US Air case, DOT approved the Northwest/KLM? and

Continental/ Air Canada deals for different reasons, even though major carriers appealed against the decisions. In the meantime, BA succeded in a bid to acquire 25% equity of

3 Qantas , thus seeming to take one more step towards being a global carrier.

Apparently, any foreign investment in U. S. carriers has been well within the permissible limit set out in statutes. Nevertheless, DOT has extraordinary discretionary power in deciding cases, including power to consider international air transport policy objectives.

1 See Appendix 1.

2 Aviation Week &:. Space Technology, 15 Feb. 1993.

3 Interavia Air Letter, 18 Dec. 1992.

-2- Let us turn our eyes to other industries. U.S. and U.K. pharmaceutical companies can merge to form multi-billion-dollar international enterprises without question.

Australian companies buy European breweries as they please. U.K. supermarket chains buy French supermarket chains, apparently without restriction (subject, of course, to

European monopoly and foreign investment rules). 4

All of these activities are as central to their national economies as are airlines.

Most of them are far more labour-intensive (and, therefore, have a far wider economic impact on their respective communities) than are airlines. Yet, the possible sale of even a minority stake in a national airline to a foreign company, almost inevitably brings out the worst of xenophobic hostility. Why? What unique feature is there to US Air which is missing in SmithKline?

In most cases, it certainly is not the profits which are going to be repatriated to overseas owners, for there is far more profit in pharmaceuticals and in supermarkets than there is in airline operation. It cannot be the protection of home manufacturers, because airlines buy internationally and on specification these days, and rarely, if ever, make purchases on nationalistic grounds (if they did, they would probably lose even more money than they now do).

4 Flight International, 23 Dec. 1992, p.3.

- 3 - Before we embark on our journey, let me frrst explain the phenomenon of foreign investment in general (irrespective of the specific industry) in a global context. Foreign direct investment continues to gain importance as a form of international economic transaction and as an instrument of international economic integration. The world stock of foreign direct investment had reached $1.9 trillion in 1991, almost four times the level of 1980. Indeed, the rate of growth of world-wide outflows of foreign direct investment during the period 1986-1990 was three times that of world-wide gross domestic product, almost two and one half times that of world-wide exports and domestic investment, and somewhat faster than receipts of technology fees. The activities of some 36,000 parent transnational corporations (which may be briefly defined as those that own and control activities in different countries)5 and their interational production systems, consisting of over 170,000 foreign affiliates, have generated approximately $5.5 trillion in world-wide sales in 1990, compared to world exports of goods and services of $3.3 trillion ($2.2 trillion, excluding intra-firm trade). As a result, transnational corporations account for an increasing share and, in some cases, a substantial part of the assets, employment, domestic capital formation, research and development, sales and trade of many countries, and more so within selected (typically key) industries. Transnational corporations have become central organizers of economic activities in an increasingly integrated world

5 Peter J. Bucldey, The Future of the Multinational Enterprise, 2nd ed. (London: Macmillan, 1991). p.l.

-4- economy. 6 However, it is to be noted that those corporations exhibit certain characteristics which are attributable to their nationality .7

And what are the financial implications of foreign ownership of airline business, particularly on airline accounts (e.g., balance sheet, profit/loss account)? If foreign

investors injected new capital into an airline, and as a result the airline were able to decrease its debt the financial situation of the airline would improve. 8 On the other hand,

because of the obligation to pay debt promptly when due, companies with too much debt

often find they are in bankruptcy court. 9 So foreign investment is needed all the more for

cash-strapped carriers, especially where domestic investors are not willing to invest in

those carriers.

However, widespread and persisting legal and institutional barriers in most

countries still hamper foreign investment in airlines. Governments have offered several

reasons for retaining controls on foreign investment in airlines: 10

6 United Nations, World Investment Directory 1992: Foreign Direct Investment, Legal Framework and Corporate Data. New York, 1993.

7 p.31, supra note 5.

8 See Appendix 2 Air Canada's Consolidated Statement of Financial Position of 1992.

9 Paul V. Mifsud, "Foreign Investment in Air Transport in the Emerging Multinational Era", International Conference on Air Transport and Space Applications in a New World, Tokyo, June 2-5, 1993.

10 "Foreign Investment in Airlines: An ICC View", Commission on Air Transport (18 June 1993), International Chamber of Commerce, Annex to Document No. 310/411

-5- (i) National security interests;

(ii) Economic security (the reluctance to turn over the nation's principal

earner of foreign exchange and tourism, into foreign hands); in addition, there

is a concern, particularly in the developing countries, that the national carrier

could disappear if foreign interests took over; In some developed countries,

there has been concern that by investing in national airlines, foreign interests

could buy their way into the domestic market without offering equal access

(reciprocity) to their own markets;

(ill) Non-governmental groups, particularly labour unions, have opposed

foreign majority ownership of formerly domestic airlines, fearing that such

moves would lead to substantial job losses.

Hence, there are many questions to be answered in respect of foreign ownership of airlines.

Chapter IT is alloted to explaining the background and history of the concept

"nationality of airlines", particularly in relation to another similar concept "nationality of aircraft" from the 1919 Paris Convention11 to the present (still governed by the

11 The Paris Convention for the Regulation of Aerial Navigation, 13 Oct. 1919, 11 L.N.T.S. 173 [hereinafter cited as the Paris Convention].

- 6 - Chicago Convention). The latter concept might be helpful in understanding the current circumstances surrounding foreign ownership of airlines.

Chapter Ill introduces national legislation of several States (i.e. the U .S., Canada, the U.K., France, Australia, Japan, Korea) with regard to nationality of airlines and analyses relevant cases in the U.S.

Pressures for a change with respect to this issue and the necessity thereof as well are identified and elaborated in Chapter IV.

How might the change affect the various areas of international air transport? The answers, which are also regarded as the triggering factors contributing to increased

·market access to foreign countries, are attempted in Chapter V.

The sixth chapter of this thesis gives a brief history of development of air transport, analyzes the current situation of airline business in Korea, identifies legal institutions and policies whereby foreign investors may participate in equity and finally explores some possible strategies for Korean carriers (i.e. Korean Air, Asiana Airlines) to meet the changing environment, particularly in respect of foreign investment in airlines and alliance among airlines in a global context.

- 7- ll.BACKGROUND AND H~TORY

1. The Evolution of the Concept of Nationality

Issues regarding the ownership of airlines hinge on what nationality is.

Accordingly it is suggested that some relevant cases of historical significance be considered.

(1) Relevant Cases

(a) Individuals- Nottebohm Case

The decision in the Nottebohm case is a natural reflection of a fundamental concept which has long been inherent in the materials concerning nationality on the international plane. The recognition of the doctrine of the "effective link" is common

in connection with dual nationality, but the particular context of its origin does not obscure its role as a general principle with a variety of possible applications. 12

12 lan Brownlie, Principles of Public International Law, 4th ed., (Oxford; Clarendon Press, 1990}, p.407.

- 8 - Nottebohm was German by birth and was still a German national when he applied for naturalization in Liechtenstein in October 1939. He had left Germany in 1905, but maintained business connections with that country. As a consequence of naturalization in Liechtenstein he lost his German nationality. 13 The Court decided that the effective nationality was not that of Liechtenstein, but without characterizing the links with

Guatemala (where he had been settled for 34 years and carried on his activities) in terms of effective nationality.

(b) companies - Barcelona Traction Case

The Barcelona Traction Company was incorporated under Canadian law and had its registered office in Canada. The company was a holding company and formed a number of subsidiary companies for the purpose of developing the production and distribution of electric power in the Spanish province of Catalonia. Some of the subsidiaries were incorporated under Canadian law and had registered in Canada; the others were incorporated under Spanish law and had registered offices in Spain. The

Belgian contention was that by the outbreak of the Second World War, the share capital of Barcelona Traction was in large part held by Belgian nationals.

13 Guggenheim, ICJ Reports (1955). SS.

-9- As a result of the bankruptcy proceedings in Spain and the failure to negotiate a settlement, Belgium submitted the dispute to the International Court of Justice. 14

The Court reached the conclusion that Belgium had no capacity to espouse the claims of the Belgian shareholders in the company. The question was whether Canada was the national state of Barcelona Traction. The Court explained its view that Canada was the national state in these terms: IS

"In allocating corporate entities to state for purposes of diplomatic protection,

international law is based, but only to a limited extent, on an analogy with the

rules governing the nationality of individuals. The traditional rule attributes

the rights of diplomatic protection of a corporate entity to the state under laws

of which it is incorporated and in whose terrritory it has its registered office.

These two criteria have been confirmed by long practice and by numerous

international instruments ...... "

The Court rejected the analogy to the Nottebohm case as the genuine connection principle was applied in that case in the context of the naturalization of individuals.

(2) Ships

14 ICJ Report (1970), 3.

15 p.42., supra note.

- 10- In the maintenance of a viable regime for common use of the high seas the laws

0 of the flag and the necessity for a ship to have a flag are paramount. The act of

conferment of nationality (registration) is within the competence of states, but registration

is in principle only evidence of nationality, and valid registration under the law of the

flag state does not preclude issues of validity here. The Convention on the High Seas

of 195816 provides for the concept of a genuine link between the state and the ship, 17

which is repeated in essence in the UN Convention on the Law of the Sea of 1982.18

Even though there are some opposing views regarding a genuine link, 19 the

general opinion seems to remain the same. However, treaties may contain specialized

rules. In the I.M.C.O. Case'-" where Panama and Liberia had not been elected as

members of the Maritime Safety Committee and they and other states contended that the

proper test was registered tonnage and not beneficial ownership by nationals, the

International Court found that the reference in the Convention was solely to registered

tonnage.

16 UNTS, Vol. 450, p.ll.

17 Article 5, paragraph I. supra note.

18 United Nations Convention on the Law of the Seas (1982), New York, United Nations, 1983, Article 91.

19 The United States Department of State had adopted a position which involves interpreting the provision in such a way that the requirement of a genuine link is not a condition for recognition of the nationality of the ship but an independent obligation to exercise jurisdiction and control effectively. H. Meijers, The Nationality of Ships, (The Hap.e; Martinus Nijhoff, 1967), p. 225.

20 ICJ Reports (1960), 150; ILR 30. 426.

- 11- 2. Aircraft and Airlines

( 1) Pre-Chicago Convention

Since the early years 'of international air transport, States have perceived the nationality of airlines as integral to the operation of international air services. The pasic principle of exclusive sovereignty of States over the use of their air space was embodied in the 1919 Paris Convention and other various air treaties of the prewar period.21 This principle was confirmed by the 1944 Chicago Convention22 and reflected in other

Chicago instruments23 and in bilateral air transport agreements of the period after 1945.24

The original 1919 Paris Convention combined control of the nationality of airlines with controls over the nationality of aircraft. 25 Thus, aircraft had the the nationality of the State where they were registered and aircraft could be registered in a contracting

State only if fully owned by nationals of that State. The Paris Convention required that

21 See. e.g., the Pan-American Convention on Commercial Aviation (the Havana Convention), Feb. 20, 1928, 47 Stat. 1901, T.S. No. 840, 129 L.N.T.S. 223.

22 The Convention on International Civil Aviation, 1180, T.I.A.S. No. 1591, 15 U.N.T.S. 295.

23 The Interim Agreement on International Civil Aviation; The International Air Services Transit Agreement; The International Air Transport Agreement.

24 Most of bilateral air services agreements confirm in the preamble that both State parties to an agreement are also Contracting Parties to the Chicago Convention, the Article 1 of wbich declares the principle of complete and exclusive sovereignty of each State.

25 Articles 5 to 10 of the second chapter of the Paris Convention

- 12 - the president of the airline and at least two-thirds of its directors be of the same nationality and that the airline comply with all other conditions of the State where registration took place.

The 1929 Amendments to the Paris Convention deleted the conditions governing the nationality of airlines and the linkage between the nationality of airlines and the nationality of aircraft. The principle that aircraft have the nationality of the State of registry was retained, but the contracting States were allowed to enact national laws and regulations determining conditions under which the aircraft could be registered. The system of the Paris Convention became more flexible but the right of contracting States to impose national ownership or control conditions upon registration of aircraft was not disturbed.

(2) The Chicago Convention and Thereafter

The philosophy of the Chicago Convention on this subject followed the principles of the Paris Convention as amended. The Chicago Conference decided not to incorporate any provision on the nationality or ownership of airlines into the Chicago Convention itself, but instead to include such provisions in two other agreements developed by the

Conference, namely the International Air Transport Agreement26 and the International Air

26 1701, E.A.S. No. 488, 171 U.N.T.S. 387.

- 13- Services Transit Agreement. 27 Th two agreements contain identical language. Each contracting State has a discretionary power to withhold or revoke authorizations granted to airlines of another state if it is not satisfied that

11 substantial ownership and effective control are vested in nationals of that contracting

11 28 State ... •

However, the Chicago Convention has many provisions relating to the nationality

of aircraft and other relevant provisions, 29 and one of its Annexes is solely devoted to

international standards regarding aircraft nationality and registration marks. 3° Following

the example of the Chicago Conference, bilateral agreements on air transport of the post-

Chicago period included a clause on the "substantial ownership and effective control" of

airlines designated for the operation of agreed services although such clauses varied, to

some extent, in the language used. 31 Such language was also used in the Standard

Clauses for Bilateral Agreements developed in 1959 by the European Civil Aviation

Conference. The prevailing practice of States in this regard, however, seems to establish

Z1 1693, E.A.S. No. 487, 184 U.N.T.S. 389.

28 International Air Services Transit Asn;emeot, supra note, Art I, Para 5; International Air Transport Agreement, supra note, Art I, Para 6.

29 Chapter m (Articles 17 to 21) with the sub-title of nationality of aircraft; other relevant provisions such as Art. 12 (rules of the air), Art. 29 (documents carried in aircraft), Art. 31 (aircraft radio equipment), Art. 32 (licences of personnel), Art. 33 (recognition of certificates and licenses), etc.

30 Annex 7 to the Chicago Convention, International Standards, • Aircraft Nationality and Registration Marks•, 4th ed. 1981.

31 Many bilateral asn;emeots of the post-Chicago period included two sepatate provisions, one relating to withholding the operating permission or the exercise of the rights granted, the other to the revocation of a certificate or permit of the exercise of the rights granted. See ICAO Circular 63-AT/6, pp. 27-28, 35- 36 (1962).

- 14- a right of each bilateral partner to take certain measures if it finds that the substantial ownership and effective control of an airline designated by the State is not vested in this

State or its nationals, and this other State is unable to prove otherwise. 32

According to Bin Cheng, the bilateral provisions on substantial ownership have the effect of enabling the contracting States "to bar flags of convenience from international air transport". 33 As to the intended objectives of these provisions, the

United States delegation to the Chicago Conference referred to the problem of ex-enemy or present enemy States or nationals, implying that it would be undesirable should rights granted under the Chicago Convention to friendly States be passed into other hands without any control or possibility of intervention by the grantor State. 34

It is observed that the Chicago order in the air taken as a whole cannot be interpreted as an unequivocal endorsement of the idea of strictly national airlines. Two main ideas of the Canadian proposal have been fully reflected in the final text of the

Chicago Convention: nothing in the Convention shall prevent contracting States from

32 For example, the Civil Aviation Authority of the United Kingdom reached the conclusion under Section 65 of the Civil Aviation Act of 1982 that a holding by SAS of a maximum of 23.5% of the share capital (with corresponding voting rights) would not mean that BCAL ceased to be controlled by U.K interests. See Bemard Wood, "Foreign Investments in National Airlines and the Significance of the SAS/BCAL Decision, Air Law, Vol. XIII, 1988. pp. 138-141.

33 The "flags of convenience" or "open registry" is a concept which has traditionally been used in maritime transport. Bin Cheng, The Law of International Air Transport, (London: Stevens & Sons limited., 1962). p. 128.

34 Joseph Gertler, "Nationality of Airlines: A Hidden Force in·· the International Air Regulation Equation",J.A.L.C. Vol. 48. No.1, 1982, p.60.

- 15- constituting joint air transport operating organizations or international operating agencies or from pooling their services, and the ICAO Council may suggest, on its own initiative, that certain contracting States form joint organizations to operate air services on any routes or in any regions. Over the years following the Chicago Conference, ICAO

Assemblies and Councils have considered on a number of occasions questions relating

to joint air transport operating organizations and pooled services with respect to the

nationality of aircraft. The consolidated version of the ICAO Assembly resolutions

relating to this subject includes, apart from the directive for the Council to provide

assistance to States, an invitation to States to inform the ICAO about experiences

acquired in various forms of joint operation of international air services. 35 In December

1967, the ICAO Council adopted a resolution concerning nationality and registration of

aircraft operated by international operating agencies establishing the concept of "joint"

and "international" registration. 36

In the thirty-five years of the ICAO's existence, neither the Assembly nor the

Council has taken part in any action relating to Article 78 of the Chicago Convention.

In other words, it has never considered any initiative toward an active promotion of joint operating organizations to be appropriate. In its .1967 Summary of Material Collected on

Cooperative Agreements and Arrangements, the ICAO Secretariat stated that to date, there had been only two clear cases of advanced cooperation in ownership and operation

35 ICAO Doe 9275, Resolution Al6-33, at ID-9 (1978).

36 ICAO Doe 8900/2, Art. 77, at 1-6 (1967).

- 16- of a single airline by several States: the SAS Consortium37 and Air Afrique. 38 One other similar venture, East Africa Airways, ceased operations after several fairly successful years. Many other proposed joint ventures in other regions of the world so far have failed to materialize, but recently there have been some new initiatives in this area (e.g.,

Arab Air Cargo, Gulf Air). 39

(3) Nationality of Aircraft and Airlines

As observed earlier, the rules of the Chicago Convention on registration of aircraft do not link the national registration of aircraft to ownership by nationals of the

States of registration. Hence these provisions, by themselves, may be considered as having no impact on the question of nationality of the operator of the aircraft and, in commercial international aviation, on the nationality of carriers. The Chicago Convention

37 The Scandinavian Airlines System is consortium of three Swedish, Danish and NoiWeigian airlines based on an agreement of 1 Oct. 1950. The shares in the consortium are 317 for the Swedish company, and 217 each for the Danish and NoiWegian companies. Aircraft are contributed by the party to the consortium as capital, and aircraft acquired by the consortium are registered in individual countries in the proportion of their shares. See Nicolas Mateesco Matte, Treaties on Air - Aeronautical Law (Toronto; The Carswell Co. Ltd., 1981}, p.l8l.

38 1t was established in March 1961 as a joint corporation, with the partcipation initially of 11 African States. Aircraft owned by the corporation may be registered in one of the States or jointly. See ICAO Circular 84-AT/14, p.88 (1967). The airline is currently 80.2% owned by the ten African States (i.e. Benin, Burkina Faso, Central African Republic, Chad, Congo, Ivory Coast, Mali, Mauritania, Niger, Senegal), and 19.48% by SPAO (Societ6 de participation en Afrique et dans l'Ocean Indien). See World Airline Directory, March 1993, Flight International.

39 Arab Air Cargo was formed in August 1981 by the governments of Iraq and Jordan to provide charter services to Europe and the Middle East, while Gulf Air was formed in March 1950 and the carrier's shares have been held by the four Gulf States (i.e. Bahrain, Oman, Qatar, and the United Arab Emirates) in the Gulf region. See World Airline Directory, March 1993, ibid.

- 17- refers, of course, to the regime established by national laws and regulations"0 and thus c some attention must be given to these national regimes"1 and to their possible effects on

the national approach to the operation of international air services.

In 1955, ICAO undertook a survey of national legislation concerning registration

of aircraft in preparation for the meeting of its Legal Subcommittee on Hire, Charter and

Interchange of Aircraft. 42 The extracts from national laws which the ICAO collected

indicated a great deal of similarity in national policies in this matter. To obtain

registration, and the resulting nationality for an aircraft, certain conditions must be met.

Typically, aircraft must be owned by citizens or residents of the State of registry (or of

specified other States belonging to a certain group of States) or by corporations

established in that State and operating under control of its nationals.

The concept of registration under the Chicago Convention implies responsibility

and control of the State of registry over the ability of the aircraft and its operator to

operate flights safely and in compliance with applicable national or foreign technical,

operational and other regulations. The State owning the territory and air space where

international flights by foreign registered aircraft take place has a considerable interest

40 See the Chicago Convention, supra note, Art. 19.

41 See national legislation of Chapter m.

42 Regarding the studies and work in ICAO relating to joint air tranport operating organizations or international operating agencies, see Michael Milde, •Nationality and Registration of Aircraft by Joint Air Transport Operating Organizations or International Operating Agencies", AASS, Vol, X, 1985. pp. 133- 153.

- 18- in the registration and nationality of such aircraft. This interest is the source of a natural aversion on the part of the regulatory authorities to situations of confused responsibilities and unclear supervision over the performance of aircarft. Such uncertainty may arise in cases of leases, interchange of aircraft and similar transactions.

The amendments to the Chicago Convention adopted in 1980 at the 23rd Session of the ICAO Assembly in the form of proposed Article 83 bis of the Chicago

43 Convention , may solve some, but not all possible problems in this area. Proposed

Article 83 bis, which would apply when an aircraft registered in a contracting State is operated pursuant to a lease, charter or interchange by a foreign operator, would allow the State of registry to transfer all or part of its functions or duties to the operator's State of business or residence. However, the new formula would have a less certain effect as to who actually has the custody and control of a leased aircraft. In practice the custody and control question poses numerous problems but it is the type of arrangement, not necessarily the foreign registration of aircraft, which is the source of difficulties.

Moreover, proposed Article 83 bis will not be effective in the near future. The amendment procedures of the Chicago Convention require in this case ratification by ninety-eight ICAO contracting States.44 And States typically would need implementing legislation to be able to enter into the bilateral arrangements that Article 83 bis would

43 See ICAO Doe 9316 (1986), pp. 33-36.

44 Gerald F. Fitzerald, Q.C., "The Lease, Charter and Interchange of Aircraft in International Operations -Article 83 bis of the Chicago Convention on International Civil Aviation", AASL, Vol. VI. 1981. p. 64.

- 19- permit.45 These considerations suggest that national carriers will continue normally to

operate nationally registered aircraft. In spite of the proposed Article 83 bis of the

Chicago Convention, governments will prefer a fusion of the nationality of carriers and

the nationality of aircraft. Therefore, the broader effects of ownership conditions

controlling the registration of aircraft will not disappear easily.

45 Michael B. Jennison, "Bilateral Transfers of Safety Oversight will prove beneficial to all States", ICAO Journal, May 1993.

- 20- m. NATIONAL LEGISLATION AND CASES IN THE U.S.

1. National Legislation

Many States have developed techniques and procedures which result in a more open and direct control over the ownership of carriers operating in the national territory.

The traditional idea of national carriers has been bolstered by policies, laws and regulations of States both with respect to foreign carriers authorized to operate bilaterally agreed air services, and to carriers based in the national territory and deemed to be national carriers.

In spite of possible variations in general policies of States in air transport, the approaches to matters pertaining to the ownership or control of national airlines are still very similar. The main reasons for this, clearly enunciated or not, are not difficult to understand. In possible contrast to some other industries or economic activities, air transport has been identified as an area where States perceive their public interest to demand disallowance of any significant foreign involvement or control.

- 21- (1) The United States

The Federal Aviation Act defines a United States air carrier as "any citizen of the

U.S. who undertakes, whether directly or indirectly, by a lease or other arrangement, to engage in air transportation" .46 Thus, a U.S. air carrier must be a "citizen." of the

U.S. which is defined as:

(i) an individual who is a citizen of the U.S. or one of its posessions, or

(ii) a corporation or association created or organized under the laws of the

U.S. or of any State, Territory, or posessions of the U.S., of which the

president and the two-thirds or more of the board of directors and other

managing officers thereof are such individuals and in which at least 75% of

the voting interest is owned or controlled by persons who are citizens of the

U.S. or of one of its posessions.47

In interpreting the term "citizen", the Department of Transportation (DOT} and the predecessor economic regulatory agency, the Civil Aeronautics Board (CAB), construed the definitionallanguage relating to corporate structure as requiring not only that the requisite percentage of the U.S. voting interest be owned by U.S. citizens, but further, that there should be no foreign control of such carriers by a non-U.S. citizen.

46 49 U.S.C. Arts.l301-1601 (1976) (as amended).

47 Art. 1301 (13), supra note.

- 22- 11 Section 408(a) (4) makes it illegal .... for any foreign air carrier to acquire control, in any manner whatsoever, of any citizen of the U.S. engaged in any phase of aeronautics. 11 But Section 408(f) sets 10% as the level at which control is presumed and is therefore subject to governmental review and prior approval: "... any person owning beneficially 10% or more of the voting securities or capital, as the case may be, of an air carier shall be presumed to be in control48 of such air carrier unless the Board finds otherwise." In practical terms, the 10%, prior approval barrier in Section 408 applies only to foreign airlines or persons controlling foreign airlines.

Notwithstanding the increasing pressures for easing restrictions on foreign investment, there were a few attempts to further restrict foreign investor access to U.S. airines. For example, the House of Representative passed a bill on Nov. 11989 designed to limit foreign involvement in U.S. airline leveraged buyout.49 But the legislation failed to become law because of the Senate's refusal. And a Senate proposal was passed by the

Senate Commerce, Science and Transportation Committee on Oct. 5 1989, that did not reach the full Senate for action. 5° From the Administration side, the then Secretary of

Transportation, Samuel K. Skinner expressed the view that every transaction must be

48 With regard to the meaning of control, see the cases in the U.S. of this chapter.

49 H.R. 3443, lOlst Cong., 1st Sess., 135 Cong. Rec. H 7810-01 (1989).

so S. 1277, 101st Cong., 1st Sess., 135 Cong. Rec, S 7505-02 (1989).

-23- looked at on a case-by-case basis and that any legislation toughening the current law

should be vetoed. 51

However, many people concerned advocated a legislative proposal that foreign

investment should be allowed from twenty to forty percent of both the voting and non-

voting capital of a U. S. carrier, depending on the openness of their bilateral agreement

with the U.S.52

(2) Canada

The Aeronautics Act defines an "air carrier" as "any person who opeates

commercial air services", which means "any use of aircraft in or over Canada for hire

or reward". 53 The Air Carrier Regulations promulgated by the Canadian Transport

Commission further define a "Canadian air carrier" as "any air carrier that carries on

business principally in Canada and (a) is incorporated or registered in Canada, or (b) has

its head office in Canada. "54 Under Section 17(1) of the Aeronautics Act, no person shall

operate a commercial air service without a valid and subsisting licence if the Minister is

51 Pytte, "Anti-Lorenzo, Trump Fervor Fuels LBO Bill in House", Con. Q. Weekly Rep., Nov. 4 1989, p. 2939.

52 Jeffrey Donner Brown, " Foreign Investment in U.S. Airlines: What Limits Should be placed on Foreign Ownership of U.S. Carriers", Syracuse Law Review, Vol. 41, 1990, p. 1291.

53 The Aeronautics Act, R.S., c-A-3. s.l., Art. 3.

54 Air Carrier Regulations, Consol. Regs. Can., eh 3, No. 1 (1978).

- 24- not satisfied that the proposed commercial air service is and will be required by the present and future public convenience and necessity.

With respect to the nationalty of airlines, the National Transportation Act defines a "Canadian" as "a Canadian citizen or a permanent resident within the meaning of the

Immigration Act, a government in Canada or an agent thereof or any other persons or entity that is controlled in fact by Canadians and of which at least seventy-five per cent, or such lesser percentage as the Governor in Council may by regulation specify, of the voting interests are owned and controlled by Canadians". 55 However, as far as foreign investment is concerned, the Investment Canada Act stipulates that an investment to acquire control of a Canadian business in any manner falling into certain categories described by the Act is reviewable. 56

Canada's National Transportation Agency approved an American Airline's investment in Canadian Airlines and its parent company PWA Corp. in a ruling on May

27 1993, which said that the investment would be in the public interest and would not give effective control of Canadian Airlines to the U. S. interests. 57 Air Canada is asking the Canadian government to give it the same rights as its rival carrier in seeking foreign investments. According to the deal between the two carriers, American Airlines' parent

55 The National Transportation Act of 1987, Part ll, Sec. 67.

scs The Investment Canada Act of 1985, Part IV.

57 Commercial Aviation News, June 7-13, 1993.

- 25- company, AMR Corp. would invest Can$ 194.2 million in Canadian Airlines and it would give American Airlines 25% of the voting shares of Canadian and 33.3% of the equity. However, Air Canada is subject to special legislation, known as the Air Canada

Public Participation Act which was enacted in the process of the privatization of the airline. Under this Act, foreign ownership in Air Canada is limited to 25%, and the legislation stipulates that no one group can own more than 10% of Air Canada. 58

(3) The United Kingdom

The term "British airline" is defined in the Civil Aviation Act as "an undertaking having power to provide air transport services and appearing to the Civil Aviation

Authority to have its principal place of business in the United Kingdom, the Channel

Islands or the Isle of Man and to be controlled by persons who either United Kingdom nationals or are for the time being approved by the Secreatry of State for the purposes of this subsection. 59 As the EC adopted a new regulation regarding "community carrier", the current legislation is to be replaced by the EC regulation. 60

(4) France

511 The Air Canada Public Participation Act, Art.6 (1) (a) (An Act to provide for the continuance of Air Canada under the Canada Business Corporations Act and for the issuance and sale of shares thereof to the public [1988, c. 44, assented to 18th August, 1988].

59 The Civil Aviation Act of 1971, pt. I, Art.3(6) (as amended by the Civil Aviation Act of 1980), part Ill, Art. 12.

110 See Chapter IV 3 (2).

- 26- Under French law, the criteria for the determination of the French nationality of airlines seems to be established more specifically, without the flexibility reflected in the

British formula. In substance, the head office of the company must be in the French territory, at least one-half of ownership must be in French hands and the leading representatives as well as the majority of members of governing bodies must be French nationals. 61 The existing legislation is not effective with the introduction of the new EC regulation on "community carriers".

(5) Australia

A commercial air transport license or certificate normally is not issued to a person who is not a British subject ordinarily resident in Australia or a corporation substantially owned and effectively controlled by British subjects ordinarily resident in Australia.62 A

Foreign Investment Review Board controls foreign investment in Australian enterprises, including airlines. Since the Australian government announced a new aviation policy in

198~, it has been easing restrictions on foreign investment in Australian airlines. 64

61 Decret portant reglement d'administration publique et dkret en Conseil d'Etat, Art. R. 330-2.

62 Australian Air Navigation Regulation no. 322 (promulgated 1952).

63 Department of Transport and Communications (1987), Domestic Aviation: a new direction for the 1990s. (Statement by the Minister, 7 October). Canberra.

64 According to the aviation sectoral guidelines under the Government's Foreign Investment which were revised in 1991, foreign airlines flying to Australia can generally expect to acquire up to 2S% of the equity in a domestic carrier individually or up to 40% in aggregate provided the proposal is not contrary to the national interest.

- 27- (6) Japan

The Aviation Act as amended in 1991 does not directly stipulate nationality of airlines but only specifies the conditions necessary for registration of aircraft.

"One cannot register aircraft without belonging to one of following classes:

(i) One who has not the nationality of Japan;

(ii) Foreign country or its public entity;

(iii) A corporation which was established in accordance with the laws of a

foreign country;

(iv) A corporation, in which the above-mentioned (a), (b), or (c) is the

chairman thereof, or (a), (b), or (c) owns more than one-third of members of

board or voting rights. "65

Apart from this provision, the Minister of Transport should review the application of an enterprise to operate air transport services taking into consideration the following factors:

"(i) if new services meet public needs and interests;

(ii) if with the introduction of new services, capacity would not be in an

unreasonable proportion to traffic demand on the route;

65 Art. 4 of the Aviation Act as amended in 1991. -28- (ill) if the applicant is fit, willing and able to perform adequately new

serv1ces• .... tt66

In view of the fact that there are no specific provisions with respect to nationality of the airlines, it is assumed that Japan does not recognize the concept of .. flag of convenience", and therefore understood that the provision regarding nationality of aircraft is indirectly applicable to nationality of airlines. Moreover, the consideration of .. public needs and interests" could be an important factor in reviewing the application of new services by an airline which is partially foreign-owned.

(7) Korea (South)

Owing to similar regulatory environments in Japan and Korea (geographically being close, historically sharing similar cultural backgrounds, etc.), most of provisions in the aviation acts of both countries are much the same, except in a few cases. In respect of nationality of aircraft, the Korean Aviation Act has the same provision as the

Japanese one except that persons who do have not have Korean nationality can only own up to a half of stocks of a national carrier, or can account for up to a half of board members. 67 However, notwithstanding this provision, the current "Regulations on Foreign

66 Art. 101. supra note.

67 Art. 6 of the Aviation Act as amended on 14 Dec. 1991.

-29- Investment" restrict foreign investment in national carriers. 68 According to that regulation, scheduled and/or non-scheduled services, which are classified as a restrictive business, cannot be invested by foreign nationals or companies unless a specific guideline

2. Cases in the U.S.

(1) The Numbers and Control Test

Several administrative decisions illustrate some of the machinations the U.S. government has employed in determining whether or not a U.S. air carrier is, in fact,

10 a citizen of the U. S. within the meaning of the statute. In Wit/ye Peter Daetwyler , CAB decided that mere compliance with the technical requirements of the 1958 Act's defmition of "citizen of the U.S." will not qualify a corporation as a U.S. citizen when the potential for foreign control exists. This case focused on whether Daetwyler, a citizen of Switzerland, could actually be considered fit to control a U.S. air carrier. Daetwyler was one of three directors of a carrier corporation, and owned 25 % of the carrier's stock. As required by the 1958 Act, U.S. citizens owned the remaining 75% of the

68 Regulations on Foreign Investment (MOP Decree 93-3), Appendix 2, 1 March 1993 (the Ministry of Finance).

10 58 CAB 118 (1971).

- 30- carrier's stock, and U.S. citizens comprised two-thirds of the corporation's board of directors and other managing officers.

CAB ruled that because Daetwyler was in a position of control, the carrier did not qualify "as a citizen of the U.S." under the 1958 Act. The Board concluded that the

Section 101(13) definition of the U.S. citizen did not include a corporation meeting the bare minimum percent of ownership and directorship held by the U. S. citizens, where control in fact lies in foreign citizens.

DOT recently ordered a limitation of foreign control before allowing the purchase of a domestic airline in In re Aquisition of Northwest Airlines by Wings Holdings, Inc

1 (WingsP • DOT expressed significant concern over the degree of foreign participation in

Wings. Before permitting Wings to acquire Northwest Airlines, DOT required K.LM to relinquish its equity investment in Wings to the extent that it exceeded 25% of the total interest in Wings. KLM and other foreign investors owned less than 25% of voting stock, thereby appearing to fulfill the citizenship requirement of Section 101(16). However,

DOT was concerned with the potential for KLM to exercise control over Northwest through Wings.

In assessing what is considered to be actual control, DOT views debt agreements with foreign entities as standard covenents which are clearly aimed at protecting the

71 DOT Order No. 46371 (87-8-43). p.ll.

- 31 - regular operations of carriers. 72 DOT stated that a foreign entity poses citizenship

0 problems, even where the interest does not take the form of voting stock, particularly if

there are other ties to the foreign entity. DOT felt that since KLM held a 56.74% equity

interest in Wings, KLM had more incentive to participate in the business decisions of

Wings in order to protect KLM' s investment.

Before permitting the aqcuisition of Northwest by Wings, DOT ordered several

compliance measures by Consent Decree in 1989: i) termination of KLM's right to call

the committee to monitor the Northwest's financial affairs; ii) recusal of KLM's

representative on the board of directors in specific circumstances; and ill) Northwest's

agreement to file reports concerning changes of ownership of shareholders and

concerning its equity in Wings within a six-month petiod. These measures were

calculated to eliminate the possibility of actual control by the foreign non-voting

shareholder. 73

In the meantime, the U. S was easing access to its markets for certain foreign

carriers through policy such as the cities program. The concern that KLM might use its

investment in Northwest to gain indirect access to the U.S. market was becoming

irrelevant. As a result, DOT, in Jan. 1991, relieved Wings of its obligation to reduce

12 John T. Stewart, JR., "United States Citizen Requirements of the Federal Aviation Act- A Misty Moor of Legalisms or the Rampart of Protectionism", J.A.L.C. 1990.

13 Paul Mifsud, "The KLM/Northwest Airlines Case and General Principles Applicable to All Investments and Cooperative Arrangements between U.S. Air Carrier and Foreigners", Air Law, Vol. XV, No. 1, 1990.

- 32- KLM's share. With the 1991 amendment, DOT has given the industry a hint that the regulators can be flexible on the issue of control. 74

(2) Anti-trust and Public Interest Tests

Aside from the numbers and control tests described above, Section 408 transactions of which intended foreign investment will be a part, are subject to the antitrust and public interest tests. The anti-trust aspect appeared after the passing of the

Airline Deregulation Act of 1978. Before the passing of this Act, mergers and acquisitions enjoyed anti-trust immunity.

The role of the public interest in mergers and acquisitions is not absolutely clear.

General criteria can be found in Section 102 Declaration of Policy. Some of these are,

" the availability of a variety of adequate, economic, offcial and low-price services by air carriers and foreign air carriers, the placement of maximum reliance on competitive market forces and on actual and potential competition and the development and maintenance of a sound regulatory environment which is responsive to the needs of the public ... the domestic and foreign commerce of the United States Postal Service and the national defense"."

74 Paul V. Mifsud, "The Multinational Airline"- Airline Business Conference. London, 30 June- 1 July, 1992.

15 49 U.S.C.S.s. 1302.

- 33- In the Daetwyler case, CAB equated Congressional policy to the public interest:

" ... In addtion to the technical requirements of the Act, we believe that the

public interest criteria require our examination of the substantive effect of

granting an authorization under such circumstances in the light of

Congressional policy as reflected by the Act's provisions ... "76

However, in the analysis of cases involving foreign ownership, the anti-trust and public interest tests as applied to cases of the U.S. airlines merging or being acquired, seems to have been over-shadowed by the pre-ponderent numbers and control tests.

Perhaps, the reason for this is that because of the latter tests, few cases of foreign ownership got the CAB approval and there was no further need for CAB to even consider I whether there were anti-trust or public interest issues other than those of not wanting the

U.S. airline industry to be subject to foreign contro1.77

Apart from the equity investment in Northwest by KLM in 1989, KLM and

Northwest's commercial agreement18 is designed to provide a legal framework for the airlines to operate as though they were a single company. However, because the Federal

16 p.121., supra note.

77 Gerald M. F. Koo, "Foreign Equity Participation in the United States Airlines", McGill Thesis (LL.M), Institute of Air and Space Law, 1989. pp.35-36.

78 The Commercial Cooperation and Integration Agreement between Northwest and KLM signed on Sep. 9 1992.

- 34- Aviation Act precludes foreign airlines from owning more than 25% of voting shares and

49% of total equity of any US airline, KLM and Northwest's alliance ran a 'very real risk' that collaborative planning, scheduling, pricing and marketing or services could be challenged as being per se price-fixing and market allocation agreements between horizontal competitors, rather than the actions of a single enterprise. In that Commercial

Agreement, the two airlines put forward their arguments for antitrust immunity which the U.S DOT finally granted in January 1993.

The intention of the KLM-Northwest Integration Agreement is to establish a transnational global airline service while not at present altering the level of KLM investment in Northwest and keeping to the terms of the restrictions on foreign ownership of US airlines.

Until this agreement, KLM and Northwest's cooperation had stopped short of arrangements that could be subject to antitrust attack. Since KLM's initial equity stake in Northwest in 1989, the links between the two have included coordinating frequent flyer programmes, a limited amount of code-sharing and the setting up of Minneapolis/St

Paul - Amsterdam and Detroit - Amsterdam routes on a blocked-space code-share basis.

But to achieve a service that would allegedly bring genuine service and pricing benefits to consumers, the airlines required protection from US antitrust laws. Now that

KLM and Northwest have gained this immunity, there may be important consequences

- 35- for the whole of the U.S. aviation industry, particularly any potential U.S. - foreign airline alliance that would fail the foreign ownership restrictions.

However, KLM and Northwest's arguments for antitrust immunity summarised below under four main headings were closely connected with the recently-signed

U.S-Netherlands 'open skies' bilateral. 79

(a) The U.S-Netherlands open skies agreement and the Federal Aviation Act

The Act requires DOT to carry out its duties consistent with any treaty obligation the U.S. has. 80 In this case the U.S-Netherlands open skies agreement obliges the U.S

"to give sympathetic consideration to the concept of commercial cooperation and integration of commercial operations between the two countries' airlines, provided that such agreement conforms with applicable antitrust and competition laws. "81 KLM and

Northwest argued that this is exactly what the DOT did with Pan Am in 1988, when Pan

Am and Aeroflot sought antitrust immunity for a joint venture agreement. DOT ruled that the agreement was an extension of the U.S-USSR Air Transport Agreement,82 which required "cooperation in facilitating marketing programmes" and so gave its approval.

19 "KLM/Northwest AntitnJst Immunity: the Key to Link-up", The Avmark: Aviation Economist, Dec. 1992.

80 Section 1102(a), supra note.

81 Open-skies Agreement, Memorandum of Consultations between the U.S. and the Netherlands, Sep. 4 1992.

82 See ICAO Doe 9511, Digest of Bilateral Air Transport Agreements, 1988.

- 36- KLM and Northwest argued that if they were not granted immunity here the

0 ruling would violate the U.S -Netherlands open skies agreement, which clearly stated

that antitrust immunity will be given, as long as competition is not reduced.

(b) Section 412(a) of the Federal Aviation Act and DOT's precedents

Section 412(a), as amended by the Airline Deregulation Act, states DOT shall

approve inter-airline deals that are not against the public interest and do not violate the

Act, and shall not approve deals that substantially reduce or eliminate competition. 83

(i) Competition criterion

With regard to the second part of this section, the airlines argued that direct

competition between them is minimal at present - the only overlaps are the two

blocked-space code share flights from Minneapolis/St Paul and Detroit to Amsterdam.

While Northwest and KLM arguably compete in several U .S-Europe city-pair markets

through behind-gateway connections, neither carrier holds a significant share of the

overall North Atlantic market, 84 the carriers contended. They insisted that by joining

forces against the larger transatlantic carriers, 85 competition would actually increase.

83 Federal Aviation Act. Sec.1378.

84 KLM 10.6%, Northwest 3.7%, calculated from lATA Route Area Statistics and U.S. DOT Air Carrier Traffic Statistics Monthly.

85 e.g., BA, Lufthansa, American, Air France, supra note.

- 37- In any case the Department of Justice (DOJ) did not object to KLM's original

0 investment in Northwest in 1989, even after a full review that necessarily considered the

deal as if it represented a full merger of the two carriers. DOJ, according to the two

airlines, effectively concluded that a full merger of Northwest and KLM, which of course

could not be accomplished because of foreign ownership restrictions, would not

substantially reduce competition. Ex foniori, therefore, commercial and marketing

integration would not reduce competition.

Additionally, as the open skies agreement guarantees competition in the

U.S-Netherlands, the market will continue to grow and flourish.

(ii) Public interest criterion

The airlines argued that if the agreement did not reduce competition, but in fact

increased it, it was obviously in the public interest. Neither did the agreement violate

other parts of the Act, such as the U.S foreign ownership restrictions. The integration

agreement would not affect the foreign investment in Northwest nor its practical

structure/control of operations. The agreement and follow-up deals would be the result

of talks between two independent parties, neither of which was under any obligation to

accept proposals from the other. The agreement did not alter the fundamental fact that

Northwest would continue to operate under the control of U.S citizens.

- 38- (c) DOT's standards for discretionary antitrust immunity under Section 414

0 of the Federal Aviation Act

Section 414 of the Act states that exemptions can be granted from the antitrust

laws to agreements approved under Section 412 to the extent necessary to enable such

persons to proceed with the transaction, provided DOT finds an exemption is required

in the public interest. This decision is left to DOT's discretion.

Following deregulation, DOT's policy has been to withhold immunity approved

under Section 412 which does not reduce competition. To win discretionary immunity

in such cases, an agreement has to satisfy a two-part test; first, that immunity is required

by the public interest, and second, that the transaction would not take place without the

immunity.

(i) The public interest test

It was claimed that if allowed, the agreement would create stronger competition

in the markets served by KLM and Northwest, and in Northwest's case it would be well­

positioned to enter other European markets that might otherwise be closed by restrictive

bilateral agreements.

- 39- It was argued, in addition, that the agreement was in the public interest because

0 it would give full effect to DOT's open skies initiative. If immunity were not given here,

KLM and Northwest contended, it would discourage other European countries from

entering into open skies agreements.

(ii) The necessity of immunity test

The two airlines said that in most of the cases where DOT has withheld

discretionary antitrust immunity, it did so because antitrust risks were of such marginal

significance that there was little doubt the parties would still go forward with the deal,

particularly when most of them were longstanding industry agreements that were unlikely

to be given up.

When DOT believed the parties would not go forward with the deal in the absence

of immunity, discretionary antitrust immunity had been granted - as with Pan Am. KLM

and Northwest stated they had a more compelling case for discretionary immunity than

Pan Am had.

(d) Necessity of antitrust immunity to permit integration of commercial

operations subject to the foreign ownership restrictions

-40- The policy of withholding immunity unless there is strong evidence it is needed was based on the view that full antitrust exposure is consistent with deregulation, so that like any other industries airlines would be mindful of antitrust risks and act accordingly.

KLM and Northwest stated that immunity was needed in the airline industry because the F AA' s foreign ownership restrictions in effect prevents carriers from structuring their relationships as companies in other industries would do. In other industries, if two competing firms wanted to integrate operations they would merge or one would buy the other. They could then act as a transnational corporation without antitrust worries over internal corporate activity.

6 In a test case- Copperweld Corp. v Independence Tube Corp. (1984l - the U.S.

Supreme Court found that a firm cannot be liable under antitrust laws for conspiring with its wholly-owned subsidiary; action by the two in reality only comes from one, since they have a complete unity of interest. In this case, the Sherman Act87 does not apply to the coordinated activity that must be viewed as that of a single enterprise. 88

The Copperweld doctrine however does not apply to KLM and Northwest because

DOJ believes international Copperweld protection is applicable only where one firm has

811 467 US 752, 81 LEd 2d 628, 104 S Ct 2731 [No. 82-1260]

87 Art. 1.

88 Summary of Decision, supra note 86.

- 41- effective working control of another, or owns at least 50% of the other firm. While the interpretation in lower courts89 of the degree of ownership triggering the Copperweld doctrine has been varied, no court has ever found that an interest of less than 51 % was sufficient to bring the protection into play, even if the minority share in practice controlled the other company. Some courts have even refused Copperweld protection to firms with a majority stake in the other firm.

Therefore, as long as the current foreign investment restrictions on U. S. airlines of no more than 25% voting control and 49% equity control remain in force, Northwest and KLM, or any other U.S - foreign alliance, cannot obtain the protection under the

Copperweld doctrine. According to Northwest and KLM, the result is that all carriers that want to operate as a single entity are still exposed to antitrust laws as if they were horizontal competitors .... an anomalous result that can only be cured by the exercise of

DOT's discretion to confer antitrust immunity.

89 e.,., No. 76 c 4201. U.S. District Court. N.D. lllinois, E.D. June 21, 1982.

-42- IV. PRESSURFS FOR CHANGE 0

The regulatory environment surrounding international air transport has been

changing constantly. National regulation of international air transport is obliged to deal

with change. On the other hand, new policy initiatives, particularly when they are

introduced in a country that has a prominent position in international air transport, such

as the U.S., have significnat impact on the regulatory policies of other countries.

In this chapter, we will try to explain many changes in the environment facing the

airline industry which have occured since the U.S. introduced deregulation in domestic

air transport in 1978, and their significance, inter alia, for foreign ownership of airlines.

Even though there have been numerous analyses of these changes, we will undertake a

review using four main categories (i.e. profitability, liberaJ.ization, globalization,

regionalization).

1. Profitability of the Airline Business

What is the attraction in running an airline when it is at best only a marginally

profitable business? Despite years of air-travel growth, airlines as a whole rarely produce

healthy profit margins. According to the OECD, throughout the boom years of the

1980s, the combined operating profits of the world's airlines amounted to just 2.7% of

-43- revenues (and net results were only 0.9%). In the first three years of the 1990s the c combined losses of the world's airlines wiped out those meagre profits.

That disaster was due to more than just recession. The troubles began during the

Gulf war in early 1991, when the number of air passengers dropped by almost a third.

Ever optimistic, airlines betted on a recovery that summer and piled on extra flights. The

boom never came. When the recession hit in many economies, air travel slumped for

the first time ever. The losses then continued to build up in 1992. Even though ICAO

medium-term traffic forecasts for the airlines of the world predict 7. 3% annual growth

in scheduled pasenger traffic during 1993-1995,90 the members of the International Air

Transport Association (lATA), which represents most of the world's airlines, made a

combined net loss of $4.8 billion on just their international scheduled services in 1992

and will lose another $2 billion in 1993 in spite of steady of recovery in passenger

traffic. 91 And that leaves out much of the $5 billion or so that America's airlines lost in

their domestic market in 1992. In addition, it is alarming to see that thousands of

aircraft are being stockpiled in some deserts in the U. S. 92

The problem for airlines is that as travel has increased, the revenue earned from

it has not kept pace. The volume of an airline's business is usually measured in passenger

~ ICAO News Release, 9/93.

91 Financial Times, 19 Aug. 1993.

92 "Desert Store", Flight International, 23-29 June 1993.

-44- kilometres (the number of passengers multiplied by the distance they fly). The number c of cents earned in revenue from each passenger kilometre is known as an airline's

all-important "yield". From 1960 to 1990, Boeing estimates that the overall yield of the

world's airlines declined by 2.6% a year, from 19 cents per passenger kilometer to about

8 cents per passenger kilometer, at 1990 values.

93 Yields have fallen for many reasons, including: increase in unit operating costs ,

over-capacity in the market as a result of the aircraft ordering spree of the late 1980s,

94 unmatched by world economic growth in the early 1990s ; greater competition in

countries that have allowed it, especially America; the replacement of propeller aircraft

with jets; and, in recent years, the use of bigger airliners that can carry more passengers,

such as the Boeing 74 7. The savings that have resulted were passed on to passengers as

decreases in the inflation-adjusted price of air tickets. Of course, there is a notable

exception to this gloom. Southwest Airlines, the domestic carrier which has shunned the

mega-carrier hub-and-spoke route structure in· favour of its low-cost city-pair services,

has seen profits forge ahead, to an impressive US $103.6 million.95

93 "Sad State of the U.S. Industry", The Avmark Aviation Economist, Dec. 1991.

ll4 "Recovery Cancelled", Fli&ht International, 16-22 June, 1993.

95 "What is Really Wron& with America's Air Carriers or The Secret of Southwest Airlines", Morten, Beyer and Associates, March 1993, and "The Airline Dereplation Evolution Continues: The Southwest Effect", U.S. Department of Transportation, 1993.

- 45- With airlines earning less money from each passenger, it has become crucial to c fill as many seats as possible. This is one reason for the complaints that increased

competition has made flying less comfortable than it used to be. The greater efficiency

of the industry means that nowadays airports are busier and that the seat next to you on

the aircraft is far more likely to be occupied.

Filling aircraft seats profitably has not been easy most recently, however. lATA

calculates that on international services, the average load factor (the percentage of an

aircraft's seats occupied by passengers) fell from a high of 64% in 1989 to just over 59%

last year. Since 1990, that has been about two percentage points below the load factor

at which airlines would break even after interest payments. 96

As more airlines, and recently most airlines have been losing money, they are

seking new investors home and abroad. And as long as airlines cannot fmd generous

investors in domestic financial market, they cannot avoid looking abroad. Furthermore,

with the airline industry plagued by huge losses and recession, pressure built to

diagnose the fmancial crisis and seek solutions to it. For example, the U. S. and EC each

established special task forces during the first half of 1993. '11

2. Liberalization

96 The Economist, June 12th 1993.

-46- c ( 1) Deregulation in the U. S.

Deregulation of air transport is first and foremost a U.S. experience. Gradually,

other countries' domestic air transport industry, and ultimately the international industry,

felt the effects of the U.S. experience. Now international air transport as a whole is in

turbulence caused by the winds of deregulation in the U.S.

Deregulation in the U.S. was arguably inevitable. As airlines expanded and

matured, the need for their protective regulation diminished. By the mid-1970s, this

reduced need for regulation, combined with allegations of unduly high fares, excessive

profits, and allocative inefficiencies, contributed to a broadly-held laissez-faire attitude

in the U. S. that led to deregulation of the domestic air transport industry. Although it has

been argued that de facto deregulation had begun earlier, the process became official

when Congress passed the Airline Deregulation Act of 1978.98 The strict requirement

of public convenience and necessity, which had served to limit entry by new airlines and

the routes of existing airlines since 1938, was abolished in favor of the essentially pro

forma requirement that airlines be "fit, willing and able" to provide service. After 1983,

with the demise of the CAB, domestic fare control was completely abolished, and in

1984 the CAB itself was abolished, its remaining functions transferred to DOT.99

98 Pub. L, No. 95-504, 92 Stat. 1705 (1978) (codified as amended in 49 U.S.C. (1982)).

99 Bruce Stockfish, "Opening Closed Skies: The Prospects for Further Liberalization of Trade in International Air Transport Services", J.A.L.C. 1992. p.614.

-47- c Following airline deregulation100 in 1978, the structure of the airline industry as well as provisions in the CAB/DOT mandate suggest that CAB/DOT's task was the

management of a system of competition. The Policy Statement in Section 102 of the

Airline Deregulation Act was extensively revised to reflect the change of the airline

industry from a public utility to that of a primarily competitive industry. 101 In a pro-

competitive environment, the public need for air service should take priority over the

desire to minimize foreign entry (both as regards direct air services by foreign carriers

and foreign ownership by these carriers of U.S. airlines) if entry barriers entailed

restricting access to air service. Low cost air service such as that offered by foreign

carriers should be promoted by the regulator and not restricted in an effort to bolster the

profits of U.S. carriers. This trend of thought is very closely related to the U.S. "Open

Skies Policy".

The elimination of entry, pricing, route, and other restrictions that had prevented

or impaired competition102 among the U.S. airlines has radically transformed the air

transport industry in the U.S. Several new airlines entered the market shortly after the

removal of restrictions, but a rash of mergers, acquisitions, and bankruptcies resulted in

100 The key advocates of dere,Wation were former CAB Chairman Alfred Kahn, and his aide Michael E. Levine.

101 See the Airline Dere,Wation Act of 1978.

102 As to the meaning of "competition", there are many views and opinions including, 'fair', 'workable', 'free', 'effective', 'sensible', 'undistorted' (the Treaty of Rome), 'reasonable' (Article 44 of the Chicago Convention: "prevent economic wste by unreasonable competition"). See Henri A. Wassenbergh, "Open Skies" I Open Markets": the Limits to Competition", International Conference on Air Transport and Space Applications in a New World, Tokyo, 2-S June 1993.

0 - 48- a highly concentrated industry now dominated by three mega-carriers: American, United, c and Delta. In the absence of route restrictions, airlines have sought to maximize

efficiency by developing extensive hub-and-spoke operations. The result has been an

increased concentration of operations by a single airline at a few airport hubs, together

with the development of an extensive network of computer reservation systems (CRS)

and frequent flyer programmes. Ironically, this has led to a reduction in competition. 103

Not surprisingly, new carriers now find market entry a daunting proposition. 104

Consumers have gradually benefitted from reduced fares for discretionary travel between

large cities served by more than one airline. Conversely, many allege that in the process

fares have become inconsistent, incomprehensible, and even discriminatory. Moreover,

while some maintain that safety has not been compromised as a result of deregulation,

others argue that the intense competition unleashed by deregulation has deprived many

airlines of the resources necessary to maintain their aging fleets of aircraft properly. The

deregulation of the U.S. domestic market has therefore been marred by excessive

105 106 concentration, over-capacity, and price wars , with huge ensuing industry-wide losses.

103 There is as yet no conclusive evidence that hub-and-spoke systems produce economies, in other words that the system results in lower unit costs, and therefore potentially in low fares. See "The Real Benefits for Airlines and Passengers", The Avmarlc Aviation Economist, July 1990.

104 The critics of deregulation assert that air transport marlcets are not altogether contestable. See Jacques Pavaux, "The Lessons of US Airline Deregulation", ITA No. 54- March/April1989.

tos This was mainly attributable to Reagan and Bush Administration's laissez-faire policy. See Richard J. Fahy Jr., "Deregulation in the United States: Success or Failure?", International Business Lawyer, June 1988, p. 273.

106 See M. Brenner, "Airline Deregulation - A case Study in Public Policy Failure", Transport Law 1. Vol. XVI. 1988. c - 49- Already in 1987, the word "re-regulation" was beginning to surface. Paul c Dempsey is one of the outspoken proponents of re-regulation. 107 However, it will not

be easy to rebuild the framework of regulation that was dismantled in 1978. Michael E.

Levine asserted that the complexities and even imperfections of deregulated airline

markets as they have emerged should not obscure either the positive achievements of

deregulation (e.g., cost reduction, low fares) or the success of policy makers and

academics in predicting them. 108 The issue is now how to find the middle ground (or

'regulated deregulation') which will overcome the more serious problem areas of

deregulation, while leaving ample latitude for the exercise of management initiative and

creativity. 109

(2) Liberalization of International Air Transport

Domestic deregulation enjoyed initial success in the U.S. Now able to lower their

fares, airlines encouraged discretionary travelers to fill seats which might otherwise have

flown empty. With a spirit of competition and efficiency, American carriers rushed to

international air transport markets, recalling the "Open Skies" position taken by the U.S.

at the Chicago Convention. Accordingly, deregulation on international routes continued

107 See Paul Stephen Dempsey, •Airline Deregulation and Laissez-Faire Mythology: Economic Theory in Turbulence", J.A.L.C. Vol. 56, 1990, and "The State of the Airline, Airport & Aviation Industries", International Conference on Multilateral Aviation in the 1990s", Singapore, 22 Feb. 1993.

108 "Deregulation: Evidence from Eight Years' Experience", ITA, No.48, March/April1988.

IQI) M. Brenner, op. cit., p. 201.

-50- through a series of so-called "liberal" bilateral agreements which were subsequently c negotiated, commencing in 1978, with the Netherlands, Israel, Germany, and Belgium.

These new liberal bilaterals were characterized by their opportunities for pricing

flexibility, unrestricted capacity, multiple designation of airlines, access to interior U.S.

markets for foreign flag carriers, some new fifth-freedom rights for the U.S. flag

carriers, country of origin charter rules, and elimination of discrimination and unfair

methods of competition. While this approach succeded in removing restrictions on

competition for U.S. airlines in some of northern Europe, it met with serious resistance

in southern Europe, much of Asia and most of Latin America.

Probably the most significant liberalization developments outside the U.S. have

taken place within Europe, particularly in respect of the air transport liberalization

initiated by the European Community (EC). The regulatory protection that has

distinguished air transport from other industries has perhaps been most evident in the EC,

an environment where so many other barriers have fallen. The introduction of a common

air transport policy is expressly stated in the Treaty of Rome110 as one of the means of

establishing a common market, and substantial progress has already been made toward

the development of common, liberal air transport system within the EC.

110 Art. 74. -51- The most important development for the liberalization of air transport in the EC,

c however, is surely the passage of the Single European Act of 1987.U1 In preparation for

the institution of the Single Market on January 1, 1993, the EC adopted, in three phases

or "packages", a number of liberalizing measures concerning market entry, capacity

sharing, tariff approval, and the application of anti-trust provisions. 112

The three Liberalization Packages date back to Dec. 31 1987 when the first

Liberalization Package entered into force. A comparison of the important elements of the

second and third Liberalization Packages is attached as Appendix 4.

While deregulation may had been lasting effects in various domestic markets, the

process has not been as sucessfully transplanted to international markets. This is due in

large part to the difference in the nature of the two markets and the failure of the U. S.

to take into account the international implications of its attempts to push deregulation

unilaterally. In particular, representatives of the EC Commission have on several

occasions indicated their determination not to allow liberalization in the EC to have the

same concentrative results as deregulation in the U.S., 113 even though implementation

will not be easy .114

111 Single European Act, 1987 O.J. (L169) 1.

112 supra note 110.

113 John Balfour, •Airline Mergers and Acquisitions: What Controls does EEC Law provide?", Air Law, Vol. XV, 1990, p. 237.

114 Paul C. Jasinski, "Commentary", supra note, p. 253. 0 -52- The greatest shortcoming of international deregulation derives from the nature of

0 the international market itelf. In reality, there is no one market. Unlike the domestic air

transport industry which functions in a legally homogeneous environment, the

international industry must operate in several environments, each of which has distinct

national requirements and characteristics. Foreign markets are different in size, number

of points to be served, and number of airlines. As more attention began to be focused on

international deregulation, it met with resistance in many countries. 115 Free competition,

internationally, can only be sustained and thereby accepted, if the competitiors are more

or less of equal strength. Globally, States are not of equal aviation strength, however, 116

raising questions about a level playing field and safeguards. The great majority of

foreign airlines, at least, seemed to believe that their fate, by definition, could not be left

to the free and occasionally devastating forces of the marketplace. Moreover, States were

at various stages of domestic deregulation if they had begun the deregulation process at

all. Without a common free-market standard, then, it was unrealistic to expect universal

receptiveness to deregulation at the international level. The process was necessarily

restricted to a few like-minded States.

(3) Trade-in-Services

115 Bruce Stockfish, op. cit. p. 625.

116 Henri A. Wassenbergh, ROpen Skies" I "Open Markets": the Limits to Competition", International Conference on Air Transort and Space Applications in a New World, Tokyo, 2-5 June 1993. 0 -53- At a more universal multilateralleve1, 117 discussions at the Uruguay Round of the

0 General Agreement on Tariffs and Trade (GATT) have included very broad service-

related issues. It was initially contemplated that air transport services generally would be

covered, including matters relating to traffic rights such as routes, capacity, tariffs, etc.

But the latest draft of the Annex on Air Transport Services to the General Agreement on

Trade in Services (GATS) 118 released in Dec. 1991 does not cover all transport beyond

certain ancillary services such as aircraft repair and maintenance, selling and marketing

of air transport, and marketing of computer reservation systems (CRS), and it is unlikely

that further progress will be made in the liberalization of the international air transport

in general. 119 Nevertheless, the discussion of air transport matters in GATT has sounded

an alarm to the people involved in this area to the extent that they began to realize that

the air transport industry cannot any more be treated differently from other industries,

and that the current bilateral regime should be re-examined so as to adapt to a new

regulatory environment. For example, ICAO convened the Worldwide Air Transport

Colloquium in April 1992 under the theme of "exploring the future of international air

111 According to Prof. Henri A. Wassenberp, this is catogorized. as world-wide multilateralism tbat emcompasses a majority of States in the world, distinguished from regional multilateralism and plurilateralism placed in between. See "The Future of Multilateral Air Transport Regulation in the Regional and Global Context, AASL, Vol. Vlll, 1983.

118 See Appendix 5, and Mario A. Maroonini, "GATS and the Liberalization of Air Transport Services", ICC Commission on International Air Transport, Paris, 18 June 1993.

119 The application of unconditional MFN (most-favoured-nation) to air transport would rather hamper the attainment of a liberalized agreement. See Daniel M. Kasper, "The GAIT Approach: Applying the GAIT to Air Services; Will it Work?" ITA, No. 58, Nov/Dec. 1989. 0 -54- transport regulation "120 and is going to convene its 4th Air Transport Conference, which

will coincide with the 50th anniversary of the Chicago Conference held in 1944.121

Even though the GA 1T package would not have any significant impact on air

transport, the Agreement at GA 1T itself would give an impetus to the sluggish world

economy, by modifying global trade flows and existing transport patterns including air

transport. 122 This would facilitate the liberalization of the air transport system.

3. Globalization

(1) Privatization

The changing regulatory environment for air transport must be seen as a part of

a worldwide move towards "economic disengagement" ,123 a ubiquitous trend. A highly

relevant aspect of this trend towards economic disengagement is clearly the withdrawal

of governments from direct financial participation in airline ownership. In the recent past

some 30 airlines from all parts of the world have moved away from state ownership.

1211 Proceedings of the World-wide Air Transport Colloquium, ICAO (1992). Topics at the Colloquium. were i) bilateral and multilateral system, ii) group negotiations, ill) applicability of international trading concepts to air transport, and iv) foreign and multilateral ownership and control of airlines and access to domestic traffic.

121 ICAO State Letter EC 6/3 - 93/32.

122 Airline Business, Jan. 1993.

123 Stephen Wheatcroft, "Towards Transnational Airlines", Tourism Management. Dec. 1990. p.354.

0 -55- British Airways, Japan Airlines, Air Canada, Singapore Airlines, Aerolineas Argentinas,

Air New Zealand and Qantas are the most prominent examples of this change in industry structure. Recently most airlines in Eastern European countries as well as many airlines in Asia, Africa and Latin America have been pushing ahead with their privatization plans, having witnessed the failure of command economies almost everywhere. 124 But many governments, for the time being, are expected to retain a "golden share" with a right of veto on any operation as in other previous cases. 125

The reasons for privatization vary widely. 126 In some countries it is a matter of political philosophy. In other countries the primary concern of governments has been to escape the responsibility for massive new injections of capital for aircraft re-equipment in increasingly competitive markets. But, whatever the reasons, a long-term consequence of privatization is that one of the basic motivations for economic nationalism is removed

- governments no longer have a direct financial stake in the profitability of state-owned airlines. This is not to say that privatization automatically eliminates nationalism, but it will certainly help to reduce it and will therefore make possible a move towards multinational ownership of airlines, in other words, globalization.

124 Andreas F. Lowenfeld, •Competition in International Aviation: The Next Round", International Conference on Air Transport and Space Application in the New World, Tokyo 2-5 June 1993.

125 Aviation Europe, 3 June 1993.

1211 See "Introduction to Privatization", ITA, April, 1992. -56- The trend away from government ownership and control of airlines has accelerated sharply over the past years, reflecting a broader trend to towards privatization as well as the mounting fmancial burden of airline ownership.

There are now almost 40 airlines worldwide with plans to privatise completely or sell further shares to the private sector. 127 Of these, stakes in 14 carriers were offered to investors in 1992.

The largest grouping of potential sales is in Europe. The trend which failed to emerge following the privatization of British Airways in 1987 has now been resuscitated by mounting losses and events in Eastern Europe. Following CSA's (Czechoslovak

Airlines) deal with Air France, LOT Polish Airlines, Malev, Balkan Bulgarian and even

Tarom are essentially competing for the same funds. Some Western governments, such as Belgium's, remain willing to bail out their flag carriers until the political and economic climate improves. Further stakes in Lufthansa, SAS and KLM are likely to be offered, and even the French Government may try to place Air France shares with the private sector. 128 The slower pace of privatization in Greece and Portugal leaves the timetable for the sale of Olympic and TAP Air Portugal in some doubt.

127 Airline Business, Feb. 1992.

128 Flight International, 9-15 June 1993.

-57- The rapid growth of the Asia/Pacific market is matched by as many as 10 potential privatizations. Thai International and Philippine Airlines remain the strategic jewels for foreign airlines seeking a foothold in the Pacific. And though government bureaucracy and the instability of some domestic financial markets have already delayed the sale of Thai and Garuda, local investors are likely to take the financial burden while foreign airlines concentrate on commercial alliances.

In Latin America, the trend towards seeking outside airline investment has spread like a prairie fire following the sale of Aerolineas Argentinas to an lberia-led group in

1990. The Spanish flag has added a stake in Viasa to its books, and with the Mexican and Brazilian majors already under private control, consultants are lining up to value the region's smaller fry. The run of trade sales may now be exhausted, but the pace of liberalization, particularly in Peru and the other Andean Pact trading nations, has been followed by a surge of private investor interest in airlines.

The African carriers fall into two categories: those with something to offer and the majority for which privatization offers the only route to survival. Kenya Airways and

Nigeria Airways are the first to have taken a somewhat optimistic plunge, and the maturity of the South African stock market marks out SAA as the only certain success.

Two possible contenders, Ethiopian Airlines and TAAG Air Angola, have no plans at present. A number of relatively healthy carriers, including Zambia Airways and Air

Zimbabwe, are thought to be considering part-privatization, possibly as part of a

-58- consolidation process. The governments of Uganda and Liberia face little option but to seek an outside buyer for their carriers.

Table 1 shown below provides a full picture of the state ownership of airlines and privatization.

Table 1 OWNERSHIP OF MAJOR AIRLINES

region carrier government stake ownership details Europe Adria Airways 100 Socially owned, but controlled by Croatian Government Air Lingus 100 Air France Group 99.38 Banque National de Paris, which is 70% state-owned, is due to take an 8.8% stake. Air Malta 84.9 Alitalia 84.9 Publicly listed: 15.1% Austrian Airlines 51.9 Swissair owns 10%, and All Nippon and Air France hold 9% and 1.5%, respectively. Aviaco 100 Iberia owns 65% and state holding company INI 35%. Balkan Bulgaria 100 British Airways 0 Publicly listed since 1987. CSA Czechoslovak 100 (Now Air France stake)

-59- Cyprus Airways 80.46 Employee hold 0.85%. Publicly listed: 18.69%. Finnair 70.01 Publicly listed: 20.3%. Iberia lOO Held by state-owned INI. Icelandair 0 Now fully privatized, the Icelandic Steamship Company holds 34% while employees hold 23%. Publicly traded: 100%. JAT Yugoslave AL lOO Socially owned, but controlled by the Serbian Government. Likely to remain in Serbian control. KLM 38.2 Balanc listed on Amsterdam, Zurich, Brussels and New stock exchanges. Linjetlyg 25 States holding through SAS which owns 50%. LOT Polish AL 100 Lufthansa 59.16 The Federal Government owns 51.42%, local governments 4.44%, and other state concerns 2.3%. Publicly listed: 40.84%. Luxair 69.48 The Luxair Group holds the remaining 30.52%. Malev lOO Olympic Airways 100

-60- Sabena 88 Private institutions hold the remaining 12% SAS Group 50 Controlled by three holding companies, ABA (Sweden), DOL (Denmark), and DNL (Norway), each 50% owned by respective governments, with 50% publicly listed. ABA owns 42.9%, and DDL and DNL each hold 28.6%. Sterling Airwys 0 Swissair 20.4 The state's shares are registered; bearer shares with unidentified owners comprise 39.5%.Delta Air Lines owns 5% and SIA has a 2.7% stake. TAP Air Portugal lOO Turkish Airlines 98.7 The Public Participation Administration holds 49% as a prelude to full privatization; 1.3% is currently publicly listed. Latin Aerolineas 5 Iberia (30%) and America Argentinas Banco Hispano America (19%) hold control. Cielos del Sur has a 36% stake, and employees hold 10%.

- 61 - Aeromexico 20 The Prevolisin Group owns 60%, and employees own 20%. Banco mer, which holds the remaining 20%, is also being privatized. Aero Peru 100 Air Jamaica 100 Avianca 3 Aviateca 35 Bahamasair 100 BWIA Int'l 100 Cruizeiro do Sui 0.51 Owned by the Varig Foundation

Ecuadiriana i 100 LAB 100 LanChile 65 The govememnt stake is held through Corfo. SAS owns 35%, lcarosan 16.6% and employees hold 14%. Mexicana 40 Pluna 100 Transbrasil 0 Controlled by the Fontana Group. Varig 40 The Varig Employees Foundation cumently holds 87.6% of the shares. Publicly listed: 48.2%. VASP 30 Wagner Canhedo control ss 48%, and the emplyees organization Voe has 12%. The Sao Paulo state government retains 30%.

- 62- Viasa 40 Iberia has 45% stake, and Banco Provincial and Sociedad Financiera Provincial together hold 15%. The government is to sell half of its stake to employees. Middle Air Afrique 78.99 Air France now holds East& 15.75% through UTA. Africa Air Madagascar 89.58 Air France owns 3.48%. Air Mauritius 51 British Airways and Air France each hold 12.77%, and Air India has an 8.51% stake. Air Zimbabwe lOO Egyptair 100 El AI 100 Emirates 100 Owned by the Government of Dubai. Ethiopian Airlines 100 Gulf Air lOO The governments of Bahrain, Oman, Qatar and the United Arab Emirates each own 25%. Kenya Airways 100 Kuwait Airways 100 Middle East AL 71.51 Air France holds 28.49%. Nigeria Airways 100 Royal Air Maroc 94.03 Air France and Iberia own 3.97% and 2.0% respectively. Royal Jordanian AL 100 Saudi a 100

- 63- South African AW lOO Controlled by Transnet, the state transport company. Zambia Airways 100 Asia & Air India lOO Pacific Airlanka 100 Air New Zealand 0 Brierly Investments owns 35%. Qantas holds 20% and wants to buy American Airlines' 5% stake.JAL holds 5%. Publicly listed: 67.2%. Air Seychelles 100 All Nippon Airways 0.08 Top 10 shareholders own 21.66%. JAL holds 0.15%. Ansett 0 TNT and News Corporation each hold 50%. Asiana Airlines 0 Kumho Group 75.25%, Korean Development Bank 19%, Korean Long Term Credit Bank 5.75% Australian Airlines 100 Biman Bangladesh 100 Cathay Pacific 12.5 Swire Pacific owns 51.8% and the Hong Kong & Shanghi Bank 10%. The PRC's China International Trust & Investment company has 12.5%. Publicly listed: 25.7%. Garuda 100 Indian Airlines 100

- 64- Japan Airlines 0 Privatized in Dec. 1987. Japan Air System 0 Publicly listed since Dec. 1987. Korean Air 0 the Hanjin group is the majority shareholder. Malaysian Airlines 65.23 Publicly listed since Oct. 1985. Foreign Investors hold 18.22%, including 10% by the Brunei Investment Agency. Pakistan Int'l 58 Financial institutions and joint stock companies hold 37%; private individuals hold the remaining shares. Phillippine Airlines 100 The Department of Finance holds 80%; two government agencies hold the remainder. Qantas 15 BA acquired 25% of stakes in Qantas in 1993. Singapore Airlines 54.13 Government stake held through Temasek Holdings. Delta Airlines has 2. 76% and Swissair 0.62%. Publicly listed: 41.58%. Thai Airways Int'l 100

Source: Airline Business, Feb. 1992.

(2) Internationalization of Airlines

- 65- The widely perceived advantages of large scale or "critical mass" (i.e. a size sufficient to ensure independent survival and the ability to influence market conditions)129 in marketing have already produced major pressures towards concentration in the international air transport industry. The competitive threats posed by the large U.S. airlines, the so-called "mega-carriers", have forced airlines in other parts of the world, particularly in Europe, to rethink their future strategies and have led to many significant structural changes in the industry.

So far the moves towards concentration in the international airline industry have been largely limited to take-overs and mergers within a single country. But new forms of international joint ventures have been developed which have been the potential to lead to transnational mergers or take-overs.

The major airlines have poured billions of dollars into the development of computer reservation systems (CRS) and their associated communications networks. They have exploited the dramatic advances in technology and the remarkable reduction in the price of computer capacity to create new systems for the way that travel is packaged, priced, marketed, sold and delivered to passengers throughout the world. But, more significantly, marketplace pressures have pursuaded the airlines to move towards a complex system of agreements and cooperative arrangements between the various CRS networks. The close cooperation developed in joint CRS operations has already triggered

129 ICAO, Circular 237-AT/96. 1992. p.16.

- 66- code-charing and blocked space agreements which offer through services on two airlines. 130

Beyond these arrangements lie the major alliances by which airlines have created structural ties across a broad spectrum of activities and have pursued the joint planning of their services and coordinated development of their marketing. Almost all airlines now seemed to be involved in agreements of this kind. Many are based, like the British

Airways/United agreement, upon the synergies of complementary route networks. Others have a greater concern with the protection of markets than their expansion. But the most important of the alliances are those which appear to offer the potential for development into merged operations by transnational investments.

Without trying to predict the precise future shape of the international airline industry, it is clear that a number of groupings are taking shape which will play a dominant role in the decade ahead. Throughout the world there are many examples of cross-border airline investments. The world picture is summarized in Annex 7 which lists about 40 examples of transnational shareholdings.

Table 2 below identifies some global alliances, particularly matching partner airlines to each regions.

130 The Wall Street Journal, March 16, 1993.

- 67- Table 2 GLOBAL COVERAGE

North Transatlantic Transpacific Intra· Asia Intra·Europe Europe· America Asia

Global alHances

US Air BA Qantas Qantas BAfi'AT BA/Qantas Delta Delta/Swissa SIA SIA Swissair Swissair/S Northwest ir Northwest . EQA lA EQA EQA

Airlines with major niche position

American American United United United Air France Air Prance/Sa Air bena France Lufthansa Lufthansa Lufthansa JAL JAL/JAS JAL ANA ANA ANA

Air AC/CO AC/CO Canada/Conti -nental Alitalia Alitali/Malev Alitalia Iberia Cathay Cathay Cathay Pacific Pacific Pacific Korean TWA TWA Korean Korean Thai Thai Thai Garuda Garuda Garuda Ansett Ansett China China China MAS MAS MAS

Aer Lingus America West

Southwest

Note: Ranked by sales

- 68- Source: The Avmark Aviation Economist, Apri11993.

Table 3 shown below compares the size of each alliance in terms of sales, revenues and carried passengers. It is observed that each alliance wants to be bigger or at least equal in strength compared to others.

Table 3 SIZE OF THE GLOBAL ALLIANCES

Sales (US RTK (m) RPK (m) Pax (m) $m)

British Airways + Air Russia + 9,090 9,111 65,896 25.42 Deutsche 55.60 BA 6,514 5,400 54,877 3.15 US Air 467 182 2,143 4.53 TAT 3,099 3,904 28,836 7.35 Qantas + Air NZ + 1,169 745 7,643 96.05 Australian 20,338 19,342 159,395 192.10 SIA 4,146 2,460 15,163 7.98 Delta 10,063 11,248 108,383 74.19 Swissair 3,185 5,331 34,894 8.13 17,394 19,309 158,440 90.30 Swissair + CTA + Balair + 3,185 5,331 34,894 8.13 Crossair 13.90 SAS + BMA + Spanair + LAN- 5,807 1,847 15,416 2.83 Chile 8.22 Austrian 847 385 3,510 41.24 KLM + Air UK + Transavia + 4,189 1,988 28,736 74.32 Martinair Northwest 7,534 10,738 86,787 21,562 23,289 169,343 148.54 American 12,887 15,368 132,502 75.90 Lufthansa 9,746 9,376 52,344 29.50 22,633 24,744 184,846 105.40

- 69- Source: The Avmark Aviation Economist, April1993.

4. Regionalization

( 1) Regional Blocs

The "Single Aviation Market" has been in force from I an. 1993 within the of EC.

Furthermore, the EC agreed with EFI'A (the European Free Trade Association) States to form EEA (the European Economic Area)131 effective from 1993, thus likely enlarging the size of bloc. After the U.S. and Canada agreed in 1989 to establish a "free trade area", the U. S., Canada and Mexico have been negotiating for the purpose of creating

"North American Free Trade Area (NAFI'A)", although the draft agreement does not include so called "hard rights" of air transport services (i.e. traffic-rights-related issues) at this stage. In South America, the countries of Andean Pact agreed in 1991 to implement the "Open Skies Policy" in the sub-region and Australia and New Zealand have been negotiating a single aviation market under the "Closer Economic Relations

Programme". 132 In addition to above-mentioned blocs, there exist numerous regional or sub-regional economic groupings in the world which might be involved in negotiations

131 See Appendix 6.

132 Graham Evans, "Australian Views on Bilaterals and the Nationality of Airlines", Airline Business Conference, London, 30 June- 1 July, 1992.

- 70- of air services with other countries or blocs (e.g., Yamoussoukro Declaration, 133

ASEAN, Mercosur, CARICOM).

While there is still some debate within Europe about process and timing, there seems little doubt that the EC is working to a position where in the future non-European countries will be negotiating with Europe as a bloc rather than on a country-to-country basis. 134 This in turn could encourage other countries to form their own negotiating groupings. This would be all the more likely if Europe (EC or EEA) and North America

(NAFfA) were to strike a deal on mutual access to their respective internal markets.

The issue here is that if a bloc were to work as a fortress against third States or blocs, an enlarged bilateral regime resulting from bloc to bloc or States negotiation could have a negative impact on the liberalization of international air transport greatly different from their original objectives. m

133 See Joanny Guima, "Why Yamoussoukro?", ITA, No. 52, Nov./Dec. 1988.

134 The EC has developed policy objectives, i.e. the raison d'!tre to have negotiations with the third countries in matters of commercial air policy treated as part of the common commercial policy, the legality of which is based upon Article 113 of the Treaty of Rome: i) Decision on consultations between EEC­ Member States on air trasnport questions dealt with in international organizations and third States' relationship with the Member Sates, Decision 80/SO 1979.; ii) Recommendation for a Council DEcision Authorizing the Commission to open negotiations between the European Economic Community and EFTA Countries on scheduled Air Passenger Services, COM (90) 18 final, 14 Feb 1990.; ill) Proposal for a Council Decision on a consultation and authotization procedure for agreements concerning commercial aavation relations between Member States and third countries, COM (90) 17 final, 23 Feb. 1990.; iv) Communication from the Commission to the Council on Air Transport Relations with Third Countries, COM (92) 434 final, 21 Oct. 1992.

135 A similar analogy is found in the Speech by Arthur Dunkel, former Director General of GATT who emphasized that multilateralism and regionalism can support each other. Focus, GATT Newsletter, No. 99. May-June 1993.

- 71- In Asia there seems to be less enthusiasm for regional associations and indeed for airline consolidation. This may reflect the relatively strong recent fmancial performance of the larger Asian carriers, and a belief that they are already well placed to take advantage of the anticipated strong growth in the Asia-Pacific market over the next decade. Rather than observing consolidation, one notes that a number of new international carriers have emerged in the region, 136 probably for the same reason. This could change if developments in and between Europe and the U.S. shift the balance in the relative strength of the aviation industry structure in favour of these countries. In fact, a number of people have began to urge Asians to team up against other regional blocs. 137

Numerous intergovernmental organizations (regional and trans-regional) are listed at Appendix 6. Certain of these organizations, from time to time, or in a few cases on a continuous basis, participate in the regulation of international air transport. They typically do so by seeking consensus among member States and/or the use of regulations or directives on uniform approaches to policy matters of concern to them affective air services. Others may undertake or sponsor studies, the conclusions of which could affect international air transport regulation. Still others are not active in air transport matters, but could become active or may establish policies which affect such matters. 138

136 e.g., Asiana Airlines of Korea, Eva Airways of Taiwan.

131 Helene Meyer, "Asia's fears concerning the single European market", ITA Nov./Dec. 1989.

138 Manual on the Regulation of International Air Transport (to be published), ICAO.

- 72- (2) "Community Air Carrier"

The emergence of regional associations, and in particular the European Single

Market in parallel with a cabotage area covering the territories of member States has direct implications for the national ownership and control provisions of bilateral agreements. European r\lles on foreign investments are found in a Council Regulation of

1990 wherein the EC Council defined a "Community Air Carrier" as:

"an air carrier which has and continues to have its central administration and

principal place of business in the Community, the majority of whose shares

are and continues to be owned by member States and/or nationals of Member

States and which is and continues to be effectively controlled by such States

39 or persons. ttt

Moreover, the third package on liberalization of air transport contains provisions on the licensing of air carriers. It defines "effective control" 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

139 Council Regulation (EEC) No 2343/90 of 24 July 1990 on access for air carriers to scheduled intra­ Community air service routes and on the sharing of passenger capacity between air carriers on scheduled air services between Member States. Art. 2(e).

-73- law involved, confer the possibility of directly or indirectly exercising

decisive influence on an undertaking, in particular by:

(i) the right to use all or part of the assets of an undertaking:

(ii) rights or contracts which confer decisive influence on the composition,

voting or decisions of the bodies of an undertaking or otherwise confer

decisive inflence on the running of the business or undertaking. "140

In essence, foreigners can own up to 49.9% of an EC carrier's equity without affecting its status as a registered EC carrier. These new rules replace former national rules. If a non-EC carrier seeks an investment with an EC carrier, the EC will make a decision as to whether the investment will affect the EC carrier's status as a Community carrier. 141 Under such circumstances, the reciprocity issue could become a serious factor determining the outcome of the decision. It semes that with respect to licensing, the

European control test looks at who in fact and law has the actual right to make the significant decisions. By contrast, the U .S. control test turns on the mere possibility that a non-national may influence significant decisions. 142

140 Council Regulation (EEC) No 2407/92 of 23 July 1992 on licensing of air carriers. Art. 2.

141 Paul V. Mifsud, "Foreign Investment in Air Transport in the Emerging Multilateral Era, • op. cit., pp. 4-6.

t4l Id.

-74- V. IMPACT ON INTERNATIONAL AIR TRANSPORT

While foreign ownership of airlines is being strongly affected by the regulatory environment, the increasing trend toward easing restrictions on foreign ownership also affects various aspects of international air transport. With a broader spectrum of impacts on international air transport, increased ownership of airlines in more countries could trigger a fundamental change in the current regulatory regime which might lead to a new multilateral system.

It is quite difficult to probe every possible impact arising out of foreign ownership of airlines because domestic laws or regulations, differ widely from country to country.

Therefore, we will rather examine areas of international air transport, generic to many

States.

1. Bilateral System

The bilateral system or regime is often connected to the concept of fair and equal opprtunity for national carriers to operate (or compete), in other words reciprocity or

-75- mutuality of interests. 143 As explained in Chapter II, in virtually all bilateral air services agreements, 144 as well as in many multilateral air transport arrangements. 14.s there is an requirement that airlines be "substantially owned and effectively controlled" by the designating State or its nationals.

Thus, if a State should decide to allow foreign ownership of its international airlines to the point where its bilateral partners question the nationality of those airlines whether they can be the beneficiaries of those rights, the bilaterals would probably have to be renegotiated. 146

With the trends towards international privatization and the move to create a

"global airline", perhaps we will witness a change in the wording of nationality clauses in the long run. National laws can be altered and air services agreements can be re- written. Meanwhile, an infringement of the requirement for substantial ownership and effective control would, if not remedied, result in the loss of an operating permit and the consequential reduction in the value of an airline. As long as there is a tendency by contacting States to regard international routes and traffic as a potential commodity it can

143 Joseph Z. Gertler, "Self-Enforcement of Bilateral Air Transport Agreements", AASL, Vol. XN, 1989. p. 117.

144 J.G. Gadzik, "Nationality of Aircraft and Nationality of Airlines as Means of Control in International Air Transportation", I .A. C.L. Vol 25, 19S8. p. 7.

t4S See supra note 28.

146 For example, the Netherlands and the U.S. reached in Sep. 1992 an "open-skies a.ereement", the important element of which include such as open market, anti-trust exemption, code-sharin.e, free tariff settin.e and doin.e business issues, refectin& equity exchan.ee by KLM and Northwest.

-76- be expected that States will hardly relax the ownership and control requirements with

respect to designated airlines.

On the other hand, as is shown in the case of BA/USAir, a State may ask its

partner State to a bilateral agreement to allow its carriers more market access as a quid pro quo for investment of foreign airlines in national carriers.

However, if a State or like-minded States were to loosen the tight grip on foreign

ownership of international carriers for various reasons, such as urgent need for capital

injection into its bankrupt carriers, or a change of policy to treat air transport industry

the same way as other industries abandoning then what would happen to international

regulatory system, particularly bilateral air services agreements?

Perhaps like-minded States which have already permitted foreign investment to

the level it controls their airlines would get together and negotiate new liberalized air

services agreements (bilateral or multilateral) which would abolish the traditional clause

on ownership and control of airlines. This new multilateral arrangement would possibly

include a beralized formula of international air transport on various issues such as routes,

cabotage, capacity, pricing, code-sharing, etc. According to the Think Tank Report, a

new multilateral arrangement will be most likely to be initiated in the trans-Atalantic

market (beginning with the ares of all cargo services and charter flights. 147

147 "Free Trade in the Air: Report of the Think Tank on Multilateral Aviation Liberalization", Global Aviation Associates, Ltd., Jan. 1991.

- 77- In view of discrepancies in terms of development stage in each country~ the more probable prospect is that a hybrid system will emerge in a cautious manner whereby like- minded States pursue a liberalized regime whereas other States maintain the traditional bilateral approach. Under this new system, States or airlines outside the group of like- minded States would find themselves at a disadvantage and would want to join eventually. 148

2. Anti-trust

Many States have anti-trust or pro-competition statutes even though they generally provided the airline industry with anti-trust immunity for the reason that it was regarded as a public utility. Some of these States have begun to apply competition rules to international air transport including mergers and aquisition of airlines.

Thus, any airline of a foreign country wishing to participate in the ownership of a national carrier will be faced with the application of the anti-trust laws149 to its proposed merger or acquisition as well as to its business activity thereafter, particularly

148 "Airline Heads Sqgest Multilateral Agreements•, Aviation Week & Space Technology, July 14, 1993.

149 e.g., Section 408 of the Federal Aviation Act as amended, the Sherman Act and the Clayton Act in the U.S. and Articles 85 and 86 of the Treaty of Rome and relevant rules of the EC.

- 78- since the controls over the air transport industry have been eased and replaced by market forces. 150

However, international air transport is a commercial activity, and strongly differing views exist as to desirable levels of protection, competition and industry cooperation, together with comity in international relations. 151 Consequently, unilateral actions under competition law increase the potential for conflicts between and among

States. The unilateral regulation by one State of air services activities of an airline of another State by the application of competition laws not accepted by that other State increases the likelihood of disputes between them which adversely affect international air transport. 152

3. Other Policy Objectives

Many national policy objectives are to be affected by foreign ownership of airlines.

150 Jerry L. Beane, "The Anti·Trust Implications of Airline Deregulation•, J.A.L.C. Vol. 45, 1980. p.12.

I.SI Patricia Barlow' • Aviation Antitrust. International Consideration After Sunset ... Air Law. Vol. xn, No.2, 1987. pp. 82·83.

152 ICAO Circular 25-AT/85, Guidance Material on the Avoidance or Resolution of Conflicts over the Application of Competition Laws to International Air Transport. p.l.

-79- First, since the airline industry is a service industry, labour relations play a major role in its operation and structure, particularly in the post-deregulation era with the avalanche of mergers and acquisitions. Hostile takeovers, where they happened, did not make it any easier for employees of the target companies. 153 Union contracts were modified to suit the balance sheet. The need for employee protection most often arises in corporate re-organization resulting from mergers and acquisitions. Some of these

"labour protective provisions" include provisions for the integration of seniority lists, provisions for displacement allowances, travelling and moving allowances and even protection in real estate matters.

The acquiring company may not always consider such labour protection to be in the best interests of profitability and, may, therefore, be reluctant to provide them voluntarily. In such a situation, and in the absence of any negotiated agreement between the airline and its employees, the effects of tough labour groups may be tumultuous and disruptive to labour peace.

But, we must not forget there is another side of coin in this issue. When the national administration does not approve a deal involving foreign investment in one of its airlines, and when that airline is not salvaged by domestic investors, a more serious unemployment problem will inevitably arise. From the viewpoint of labour, it would be

1 3 ' In the U.S., the Railway Act (45 U.S.C., Sec. 151-163 (1982)) governs tabor relations in the airline and railroad to bargain over employee lay-offs. See Athanassios Papaioannou, "the Employer's duty to bargain over lay--offs in the Airline Industry: How the Courts have distorted the Railway Labor Act•, J.A.L.C., Vol.SS, pp. 939-1008.

- 80- matter of choice between a partial lay-off resulting from mergers or take-overs and massive unemployment following the demise of an airline.

Moreover, in addressing complex issues of foreign ownership of airlines, it is essential to keep in mind the technical, safety and maintenance requirements necessary to maintain a safe and efficient operating environment. Usually aircraft must have a certificate of airworthiness and all carriers are required to operate with a permit.

The question is who should ensure safe operations of multinational carriers.

Perhaps international organizations (e.g., ICAO, the Joint Aviation Authority in Europe) established by States which have interests in such airlines may undertake the job of overseeing airworthiness, operations and maintenance relating to safety.

The same considerations would apply to the application of environmental protection laws like those relating to engine noise and pollution levels.

4. Airline Alliances

( 1) Phenomena Associated with Airline Alliances

The factor that probably gives greatest impetus towards foreign ownership of airlines is increased access to the international market with the aim of providing seamless

- 81- customer service on a global scale. In particular, current airline alliances are in many cases a reaction to:

(i) the cessation of traffic growth at a rate greater than GNP growth in the

U.S. and Europe;

(ii) over-ordering of aircraft in anticipation of the retirement of older aircraft,

which has not happened and will not happen soon, because of financial

constraints;

(ill) a failure of many airlines to keep costs under control; and

(iv) unbrindled competition as a result of deregulation, leading to a suicudal

decline in yields. 154

One of the many recent consultancy reports on globalization listed the following

as key elements of alliances between airlines: schedule coordination, code sharing, joint

frequent flyer programmes, shared CRS systems, shared catering facilities, shared

maintenance facilities, shared ground handling.

First of all, many of airline alliances include code-sharing and blocked space

agreements as part of joint CRS operations whereby travellers can expect seamless

connections the airline partners provide. 155 Code-sharing enables airlines to offer

154 Samuel Mathew, "the Pacific Basin/South East Asia Perspective on Globalization•, Speech to Phoenix 2nd Annual Symposium, 22 April1993.

155 Jim Glab, "Cracking the Codes•, Frequent Flyer, May 1993.

- 82- connecting flights which appear to the public to be all on one carrier as both flights

numbers are prefixed by the same code. 156 In a code-sharing agreement157 the

participating airlines use the same flight number for connecting flights and this gives

them higher priority positions over interline connections in CRS displays. Blocked space

arrangements are a parallel concept of code-sharing where airlines add their code to

another carrier's flight and buy seats on its service. 158 One airline will lease a block of

seats on the services of another airline and will sell these seats as ~ extention of its own

services. For example, the US Air/BA code-sharing agreement allows BA to fly to 38

U.S. cities through Baltimore, Philadelphia and Pittsburgh. 159 And Qantas is leasing a

block of seats from American Airlines across the U.S. and the connecting flights are

marketed as a through flight by both airlines.

156 Linsey McNeill, "Maximum advantages from a minimum of investment", The Avmark Aviation Economist, April 1993.

u7 It is to be noted that in practice code-sharing agreements between airlines should be approved by the government which designated airlines.

158 supra note 156.

"'Aviation Daily, March 10, 1993.

- 83- Table 4 MAIN CODE-SHARING AGREEMENTS

Airline Code Operator British Airways TAT, Deutsche BA, USAir, City Flyer KLM Austrian, Cyprus, ALM, Air UK, Northwest Lufthansa VASP, LAB, TAM, Finnair, Canadian SAS Austrian, Varig Virgin Midway Express Air Canada Royal Jordanian, VIASA, LOT, Finnair, CSA, Canadian Sabena, Swissair, Iberia Varig, Qantas, Lufthansa Nothwest KLM, USAir, America West United British Midland, Ansett Air New Zealand Canadian, Qantas JAL Canadian, Varig, Air New Zealand, Swissair, Iberia, Aiitalia, Cathay, Thai, Qantas ANA SAS, Malaysia Qantas Air New Zealand, Australian, Canadian Iberia Carnival Airline

Note: Excludes regional/commuter carriers. Source: OAG

Table 5 below shows some frequent flyer partnerships among carriers, which have a strong tendency to become multi-airline programmes. 160

Table 5 FREQUENT FLYER PARTNERSHIPS

AA AC AS CO CP DL HP N TW UA us WN YX w AF X X X X AY X AZ X X

1110 Virgin Atlantic even offered free companion tickets on Virgin Atlantic to British Airways' U.S. based frequent flyer programme. Aviation Daily, May 2S, 1993.

- 84- BA X X X BM X EI X X IB X X KL X X X X X LH X X X X LO X OA OK X os X X SK X X X X SN X X X SR X X X X TP VS X

Note: AS =Alaska Airlines, HP= America West Airlines, WN =Southwest Airlines, YX = Midwest Express Airlines Source: The Avmark Aviation Economist January/February 1993

In addition to the above-mentioned cooperative arrangements between airlines, partner airlines are urged to make every effort to forge a stronger tie in order to gain a competitive edge over non-partner carriers, in the spirit of being in the same boat. In this way, there is a strong tendency for foreign ownership of airlines to strengthen airline cooperation, and the latter increasingly leads to the emergence of truly multinational mega-carriers. However, it is to be noted that foreign investment in and ownership of

- 85- airlines always involves the risk of losing profits as well as the possibility of earning money. 161

It should be added that foreign ownership of airlines seems to be at the forefront of making possible a shift in policy toward "cabotage". The Chicago Convention itself does not have any provision prohibiting cabotage. 162 A blurred distinction between national and foreign airlines might result in the facilitation of permitting cabotage to multinational airlines, even though there are still many obstacles to overcome in terms of trade, technology and safety. 163

(2) Some Questions Concerning Airline Alliances

The phenomenon of airline alliances gives rise to the following questions: what are the objectives airlines seek when they enter into alliances?; what makes for a successful alliance?; why do alliances fall apart?

(a) Development of Alliances

161 For example, KLM wrote off its entire equity investment of US$ 400 million in Northwest. Commercial Aviation News, May 3-9, 1993.

162 Art. 7 of the Chicago Convention provides for "Each contracting party shall have the right to refuse permission to the aircraft of other contracting States to take on in its territory passengers, mail and cargo destined for another point within its territory ...•. ". One interpretation on the application of Article 7 of the Chicago Convention would mean that if one State grants cabotage rights to aircraft of another State, it must do the same for any other (third) State, if such request is made. The other, less restrictive interpretation, would allow granting cabotage rights to only one other State, and perhaps even on a practically exclusive basis, provided however that such authorization would not be specified as exclusive. See Joseph R. Chesen, "The many thoughts on cabotage", ICAO Journal, Jan. 1992.

163 Matthew V. Scocozza, "EEC-US Aviation relations and cabotage", ITA, Jan./Feb. 1990

- 86- Alliances can be classified along two dimensions: geographic scope, and financial structure. This classification highlights the effects of globalization and deregulation in the industry.

Most early alliances were domestic in scope; and represented the initial consolidation of deregulated national market. This was apparent in the U. S. in the 1970s and 1980s and in Europe and Asia in the late 1980s and early 1990s. The next set of partnerships to emerge were in the form of regional alliances in Europe and Asia, as airlines attempted to consolidate their coalition across a broader market base in anticipation of further deregulation. Most of the more recent alliances have occurred in the international arena representing the beginning of globalization during the 1990s. As traffic flows expand, airlines have sought new ways to capture them and intercontinental alliances have resulted.

Most of domestic alliances began simply as cooperative agreements. However, over time mergers and acquisitions became more common, and national markets consolidated under the control of dominant carriers. Across the regional alliances, cooperation has taken many forms. It has ranged from the simple interlining of passengers, to taking equity stakes across national markets, as the regulations regarding foreign ownership of airlines have changed.

- 87- In the intercontinental arena, joint venture and non-controlling equity investments

0 are still the norm as merger and acquisiton activity is largely restricted by regulatory

barriers.

(b) Objectives of Alliances

To understand success, one must analyze the objectives behind airline alliances

and the degree to which each alliance type is currently fulfiling these objectives. Airlines

use alliances to address a variety of strategic objectives, which can be grouped into four

main categories: 164

(i) The most common alliance objective is traffic feed, both to increase load

factors and to improve yield or passenger mix;

(ii) The second most common reason is to achieve scale through the pooling

of resources across operational areas or cost centres (such as sales/marketing,

flight equipment, station and ground facilities, maintenance and purchasing);

(iii) The third most common objective is to access new markets .by tapping a

partner's unutiliseed route right or unused slots; 165

164 "The Secrets of a successful Liaison", The Avmark Aviation Economist, Jan./Feb. 1993.

165 Alliances may solve the over-capacity problem, by representing a way of enhancing networks without adding to the world's capacity glut. See"Keith McMullen, 'Questioning the Growth Imperative", The Avmark Aviation Economist, Dec. 1992.

- 88- (iv) And finally, airlines form alliances to defend current markets by playing

the role of 'gate-keeper' through managing seat capacity of shared operations.

What if financial control is not possible? As airlines seek partners outside their own borders financial control has become increasingly elusive because of regulatory restrictions. So airlines must seek non-financial means of gaining control. Control can be established through the management of the relationship (contracts and agreements) or through the creation of dependence (goals and interrelationships). Neither of these methods have financial control as a prerequisite.

(c) Alliances patterns

A realistic understanding of the relative power and objectives of any prospective partnership is essential to establishing control. Bearing that in mind, there are three ways166 by which partners can seek to achieve their goals: 167

166 The Avmark: Aviation Economist categorizes the role of an airline in an alliance into one of three types: i) as a leader; ii) as a joint partner in an equity swap agreement; and iii) as a junior partner to a mega-carrier. See "Surviving the new world order", April, 1993.

161 "The Secrests of a Successful liaison: review of 200 alliances", Boston Consulting Group, London, 1993. Prof. Tae Hoon Oum classified airline alliances into two types, one being "one mega-carrier creating an alliance network by aligning with several junior partners in each of the other continents", and the other being "an alliance among large senior partners, one from each continent, supplemented by regional feeder carriers within the continents as junior partners. See his paper "Strategic Airline policy in the Globalizing Airline Networks", Nov. 18, 1992.

- 89- (i) Shared Vision 0

Here the partners attempt to pursue a common long-term strategic objective by

complementing each other's strengths and weaknesses. This assumes that the partners are

of equal strength, and that the financial arrangement imparts no financial control to either

one of the partners. That is the traditional ideal model of an alliance as a balanced

partnership. In practice, it is the most likely to fail.

The global alliance of Singapore, Delta, and Swissair, typifies a shared vision.

Each airline holds equivalent dollar-based equity stakes in its partners, and they have set

out a broad range of initiatives on which they seek to cooperate. These include marketing

and technical initiatives, shared flight operations and shared facility arrangement. This

cooperation relies on each partner's equivalent strength and on openly sharing the

common goal.

CASE: Alcazar Project

On 27 Apri11993 the three European Quality Alliance (EQA) airlines- Swissair,

Austrian and SAS - and KLM issued a joint statement indicating thst they were planning

to create a single, integrated company. Such an airline would be the second largest in

Europe - with 63.2bn RPKs (Revenue Passenger Kilometers) it would be just slightly

- 90- behind BA on this measure, 30% ahead of the Air France Group and 66% bigger than

0 Lufthansa.. 168

The management company that has been recommended would be owned by the

four partners and would coordinate the carriers' operations and keep a single balance

sheet. SAS, Swissair, and KLM would each control 30% and Austrian 10%,

shareholdings comparable to their interests in their jointly-held insurance company,

Polygon. 169 The company would have its own name, and its logo would be combined

with each of the partners', which initially would retain their present names while

functioning as separate production units. All four would like the memorandum of

understanding concerning the founding of the company to be signed.

Although analysts are in agreement that the increasingly competitive environment

has made it essential for airlines to unite into such groups, the four carriers, which

together control 20% of the European market and have combined annual revenues of 14

billion $U.S, will still have to overcome numerous obstacles before they can become a

single entity. 170 SAS itself is an excellent illustration of the challenge: it took five years

to integrate the three Scandinavian carriers from which it was formed. There are

numerous potential points of contention, from the choice of a headquarters site and a

llill Keith McMillan, "European Quality Alliance: Out of its Niche*, the Avmark: Aviation Economist•, April1993.

169 ITA Press 191, 16-31 May 1993.

110 Id.

- 91- working language to the acceptance of more painful sacrifices, such as eliminating jobs,

0 giving up routes, breaking strategic alliances, and so on. Other major unresolved issues

hanging over the proposed partnership include the question of European Community

ownership, and national ownership laws in Austria and Switzerland, both non-EC

members. 171 The carriers must also have the blessing of Brussels. 172 And the new airline

would have to work out agreements allowing one of the partners to negotiate for the

entire airline. 173

Austrian, the smallest of the four, is frank about its fears of being marginalized

in the alliance and is concerned about the eventual loss of its "raison d'etre" --the East

European market -- which accounted for 381,733 passengers, or 20.7% of its total

traffic, in 1992. Even as the working groups were making known their conclusions, the

Austrian press was reporting that executives of the airline were meeting with their

counterparts at Lufthansa and Air France and All Nippon Airways. 174

Another problem, without doubt more troublesome, is the future of the strategic

alliances with U.S. carriers. They are conflicting- KLM is allied with Northwest, SAS

with Continental, 175 and Swissair with Delta -- and choices will have to be made, if only

171 Commercial Aviation News May 3-4, 1993.

112 The EC Regulation 2410/92 (O.J. No. L 240, 24 Aug. 1992, p.18.)

173 "SAS aims for survival", Air Transport World, March 1993.

174 "Four Into One will go- at a push", Airline Business, June 1993.

t7s Id.

-92- to comply with U.S. antitrust laws. KLM: which recently wrote off its investment in c Northwest, is moving ahead with the integration of their air and ground operations that

was begun earlier 1993. SAS, which wrote off its investment in Continental, just lost

its 18.6% stake in the carrier when Continental reorganized, but it has not taken any

steps to undo the close commercial ties it has established with the U. S. airline. Finally,

Swissair, which has a roughly 5% stake in Delta, is getting ready to launch several code-

sharing transatlantic flights with its partner. It believes that if the four have to choose a

single U.S. ally, it should be one of the "Big Three": American, United, or of course,

Delta.

Table 6 TRAFFIC AND FLEETS OF THE FOUR PARTNERS

Swissair SAS KLM Austrian passengers 1.5 14.5 8.2 3.1 (millions)* fleet** including 60 aircraft 169 aircraft 73 aircraft 30 aircraft wide-bodies 9 A310s 16 B-767s 10 A 310s 4 A310s 5 B-747s 26 B-747s 12 MD-lls 4 DC-lOs

* rounded 1992 results ** at the end of March 1993

Source: ITA Press 191, 16-31 May 1993.

- 93- (ii) Power play 0

This type of alliance is characterized by a strong partner that attempts to dominate

a weaker partner by using its relative power to gain effective control of the relationship.

CASE: Iberia and Latin American carriers

Iberia's activities in Latin America can be seen as a power play. Iberia clearly

recognized that its competitive advantage was its strength in the Europe to Latin America

sector. Its goal has been to use Miami as a hub to reach key points in Latin America. 176

In support of this objective it took advantage of privatization programmes in the region

to gain major non-controlling stakes in Ladeco (35%), Viasa (45%), and Aerolineas

Argentina (30%). While these are all minority equity stakes Iberia has effective control

over the airline's operations through an agreement to develop and manage the airlines and

it has the traffic system to enhance the network. Its goal is to strengthen leadership in

these sectors by rationalizing transatlantic service to Madrid eliminating duplication by

restructuring and managing inter-Latin American capacity and cooperating on distribution

systems, technical and maintenance contracts and training.

(ill) Percentage game (The converse of the power play)

176 "Corporate Strategy", The Avmark Aviation Economist, 1une 1992. c -94- With this gambit the weaker carrier attempts to improve its relative competitive c disadvantage by learning from its stronger partner.

CASE: Air France and CSA

CSA's sale of a 40% to Air France typifies a percentage game. The goals of this

alliance are a commercial and technical partnership. In this case, CSA has found a strong

Western European partner from which it hopes to obtain both the capital and skills that

will allow to compete in the future. CSA will receive a commitment to modernize its

fleet, improve its route structure and update its maintenance and operations facilities in

Prague. It will have access to Western management and the Amadeus CRS. In return

Air France receives access to CSA network giving it Eastern European traffic feed and

will gain facilities at Prague which it hopes to turn into Eastern Europe's major hub.177

(d) Control Implications

Creating control is important in all types of alliance. In the power play,

management control can be achieved by design and can be consolidated by making the

weaker carrier dependent on the stronger patner' s assets, systems, or personnel,

regardless of financial control. In the percentage game, management control can be

avoided by design and the weaker player can seek to create specific forms of dependence

m The Avmark Aviation Economist, Jan/Feb. 1993.

- 95- to maintain some degree of control. A shared vision is inherently unstable, as the

0 circumstances of either party change.

The potentially most difficult situation to manage is that of the weaker player in

a percentage game. There are a number of ways in which a weaker carrier can focus the

relationship on capabilities rather than assets. It can structure the partnership in a way

that enables it to share key capabilities, without necessarily transferring them. It can

develop its activities at multiple levels across multiple functions. Finally, it can limit the

partner's option by structuring the alliance in such a way that the risk of the partner also

allying with key competition is reduced.

It is also vital to understand the relative power of each partner to gauge whether

the alliance will be one of power play. As long as there are complementary goals, an

alliance between unequal partners can be easier to run than one based on perceived

equality. Control can then be established by creating or avoiding dependence, rather than

by purely financial structure. As such, success can be determined as much by the actual

process of establishing the relationship as by the resulting structure itself. 178

t78 Id.

- 96- VI. THE STRATEGIES FOR KOREAN CARRIERS

To this point we have analyzed the background and history of foreign ownership,

pressures for change caused by it, and its impact on air transport. The previous

chapters, in so far as they discuss the global context, are relevant and applicable to the

air transport industry of Korea. This chapter is mainly devoted to dealing with some

specific characteristics of Korean air transport, and to explore some possible strategies

which are relevant to the Korean situation meeting global challenges in this field.

1. Legal institutions and Policies in Korea

Apart from legislation mentioned in Chapter m, which dealt with foreign

investment in domestic carriers, the Antitrust and Fair Transactions Act and the Act on

Introduction of Foreign Capital are the main pieces of legislation which regulate mergers

and acquisitions of enterprises including those between domestic airlines, domestic and

foreign airlines. 179 To date, neither Act has been applied to air transport because of the

119 Sec 2 (prohibition of abuse of dominant position in the market), Sec. 3 (restriction of mergers and concentration), Sec. 4 (prohibition of cartels), Sec. 5 (prohibition of unfair practices) of the Act on Antitrust and Fair Trasnactions, as amended on 13 Jan. 1990 (Act No. 4198). Art. 7 (approval of foreign investment by the Ministry of Finance) of the Act on Introduction of Foreign Capital, as amended on 8 Dec. 1992 (Act No. 3691) • • - 97- In Oct. 1990, the Ministry of Transport announced ttThe Guidance for

International Operation of National Airlinestt. In principle, this guideline permitted KAL

to maintain its monopoly position on the long-haul international routes while giving

priorities to AAR on the short-and-medium haul international routes and allowing double

tracking on the high-density routes. Following this rule, AAR now operates 17

international routes to Japan, Singapore, Taiwan, Hongkong, Bangkok and U.S., while

KAL operates 56 international routes without any geographical limitation. It appears that

the separate operations of each carrier without any interlining might possibly hamper

higher growth. 184 The following table identifies the operating routes, frequency and

aircraft of the two carriers.

Table 7 KOREAN CARRIERS' OPERATION

ROUTES FREQUENCY AIRCRAFT KAL AAR KAL ~I Korea/J apan Seoulfi'okyo 21(1) 5 MD11, B747 B747, B747F Seoul/Osaka 14(2) B747, Ab6, B747F Seoul/Fukuoka 7 7 DCIO B767_ Seoul/Nagoya 7 7 B747 B767 Seoul/Niigata 4 B727

184 For example, in 1991, the load factors ofKAL fell to 67.7% from 73.3% in domestic market, and to 66% from 69.7% in international one. "Korean: still riding the Tiger", Air Transport World. June 1993. - 100- Seoul/Okinawa 3 B737 Pusan/Nak:asaki 2 F28

Seoul/Sapporo 7 DU.I Seoul/Sendai 5 B767 Cheju/Pusan/Sendai 2 B767 Seoul/Kagoshima 2 MD82 Seoul/Oiita 3 MD82 Pusan/Nagoya/Pusan/Cheju 6 AB6 Pusan/Fukuoka 3 3 DClO B737 Pusan/Fukuoka/Pusan/Seoul 4 DClO Seoul/Okayama 4 B727 Pusan/Osak:a 7 AB3 Cheju/Osak:a 1 AB6 Seoulffakamatsu 3 B737 Cheju/Osak:a/Seoul 6 AB6 Cheju/Fukuoka 5 B737 Cheju/Pusan/Nagoya 1 AB6 Cheju/Pusanfl'okyo/Pusan 6 AB6 Seoul/Kumamoto 1 F100 Seoul/Hiroshima 4 B737 small sum 25 routes 108 (3) 42 Korea/ Southeast Seoul/Hongkong 14(2) 3 AB6, B747, Asia B747, B767 MDll, B747F Seoul/Bangkok 7(2) 3 AB6, B767 AB3F Seoul/Bangkok/Singapore 4 3 AB6 B767 Seoul/Manila 3(1) AB6, AB6F Seoul/J ak:arta 2 AB6

- 101- Seoul/Honolulu/LA 3 DClO 0 Seoul/New York 10 2 B747 B747 Seoul/Chicago 3 B747 Seoul/Guam 4 B727 Seoul/San Francisco 2 B747 Seoul/Saipan 3 B737 SeoulN ancouverfl'otonto 3 B747 Seoul/LA/Sao Paulo 2 MOll Seoul/(Anchorage)/New (10) B747F York Seoulfl'okyo/(Anchorage)ILA (1) B747F Seoul/(Anchorage)ILA (9) B747F Seoui/(Anchorage)fl'oronto (1) B747F small sum 16 routes 49(21) 14 Total sum 64 routes (pax: 51, cargo: 19) 206(42)

Source: International Air Transport Division, Ministry of Transportation, Korea, 1992.

Table 8 below also identifies the routes and frequency of foreign carriers

operating to and from Korea.

Table 8 FOREIGN CARRIERS' OPERATION TO AND FROM KOREA

ROUTES FREQUENCY JAL Tokyo/Seoul 13(2) Tokyo/Komatsu/Seoul 1 Tokyo/Pusan 5

- 103- Osaka/Seoul 7 Osaka/Pusan 7 Fukuoka/Seoul s Hiroshima/Seoul 3 Fukuoka/Seoul 7 Nagoya/Seoul 7 Kumamoto/Seoul 1

Niigata/Komatsu/Seoul 1 i Kumamoto/Fukuoka 1 Nakoya/Pusan 7 13 65(2) JAS Tokyo/Seoul 7 ANA Tokyo/Seoul s NCA Tokyo/Seoul (2) CPA Hongkong/Taipei/Seoul/Hongkong 7 Hongkong/Seoul/Taipei/Hongkong 7 Hongkong/Seoul (1) 3 14(1) SWISS AIR Zurich/Bombei/Hongkong/Seoul 3 BAW London/Hongkong/Seoul 2 AFL Moscow/Seoul 1 Frankfurt/Moscow/Seoul 1 Khabarovsk/Seoul 1 Luxemburg/Moscow!Krasnoyask/Khabarovsk/Seoul (2) 4 3(2) LAI Rome/Hongkong/Seoul 2 NWA LA/Seattle/Seoul/Manila 3 LA/Seoul/Bangkok 3 LA/Seoui/Manila 1

- 104- NewYork/Detroit/Seoulrfaipei 7 Honolulurfokyo/Seoul 7 Guam/Seoul 7 NewYork/Seattle/ Anchoragerfokyo/Seoulrrokyo/ An 7 chorage/Chicago LA/SanFrancisco/ Anchoragerfokyo/Seoulrfokyo/ An (1) chorage/Chicago/Mineapolis New York/San (1) Francisco/ Anchoragerfokyo/Seoulrfokyo/ Anchorag e/chicago/Mineapolis Taipei/Seoul/ Anchorage/Chicago/NewYork (1) 10 28(4) THA Bangkok/Hongkong/Seoul 7 Bangkok/Seoul/LA 3 2 10 GIA J akarta/Singpore/Seoul 1 Denpasar/J akarta/Singapore/Seoui/J akarta/Denpasar 1 Jakarta/Taipei/Seoul 1 3 1 PAL Manila! Seoul 2 SIA Singaporerfaipei/Seoul 5 Singapore/SeoulN angconver 3 2 8 MAS Kualalumpur/Kotakinabaldu/Seoul 1 Kualalumpur/Kuching/Seoul 1 Kualalumpur/Seoul 1 3 3 QFA Sydney/Seoul 2 DLH Frankfurt/Seoul 3 Frankfurt/(Fairbanks)/Seoul (2)

- 105- 2 3(2) 0 AF Paris/Seoul 2 KLM Amsterdam/Seoul 2 UAL SingaporeiTaipei/SeouliTokyo/Hawaii 5 Manila/Seoui/San Francisco/Chicago 7 ManilaiTaipei/SeouliTokyo/Honolulu 2 Seoul/Tokyo/San Francisco 2 SeouliTokyo/NewYork 3 5 19 FDX Atalanta/Dallas/ AnchorageiTokyo/Seoul (7) New York/ Anchorage/SeouliTaipei/Hongkong (7) 2 (14)

11 OAT BangkokiTaipei/Seoul/Portalnd 7 UPS Anchorage/Seoui/Hongkong (6) Anchorage/Seoul (4) 2 (10) COA Guam/Seoul 1 Guam/Saipan/Seoul 1 2 2 VSP Rio de Zaneiro/Sao Paulo/LA 2 62 193(37)

*( ): cargo Source: International Air Transport Division, Ministry of Transportation, Korea, 1992.

Compared to routes and frequency enjoyed by Korean carriers (i.e. 64 routes, 206

frequencies), foreign carriers are operating on virtually the same number of routes and

frequencies (i.e. 62 routes, 193 frequencies). This may result from the bilateral air

~ 106- transport agreements to which Korea is a party, and which basically set forth the principle of fair and equal opportunity .185

As we see in the table shown below, Korean carriers have remained outside any international airline alliance. Taking into consideration the great advantages which global alliances may bring forth, both carriers will be pressured to join or establish some alliance, not only because of the global trend, but also from necessity.

Table 9 UNALlGNED CARRIERS

us European Asian Other Megas (Sales: US $5bn) American/CAI Air JAL United France/Sabena ANA Continental/ Air Lufthansa Canada Large TWA Alitalia Cathay Saudia regionals Iberia Korean Varig (Sales: US $2- Thai 5bn) JAS Garuda

185 See Standard Text of Bilateral Air Services Agreement of Republic of Korea. Most agreements which Korea concluded with foreign countries except with the U.S. provide for 50:50 capacity sharing principle.

- 107- Small America West Aer Lingus Ansett SAA regionals Southwest Finnair China Mexicana c (Sales: US$ Alaskan TAP MAS El Al 0.4-2bn) Olympic ANZ PIA Virgin PAL Air India THY Air China Gulf Air Aeromexico Indian Airlines Aviaco R. A. Moroc VASP Air Afrique Avianca

Source: The Avmark Aviation Economist, April1993.

3. Considerations in Devising Strategies

( 1) Designing a successful alliance

In designing the appropriate relationship, there are several considerations which

will help an airline to evaluate the potential partnership. Before entering into any

agreement an airline should understand the implications of each of these. 186

The difficulty lies in ensuring the appropriate balance of power to suit strategic

objectives and to achieve an optimal alliance structure. Since one airline is seeking to

dominate the relationship and the other is seeking to avoid being dominated and to learn

as much as possible, this inherent conflict must be carefully managed.

186 Review of 200 Alliances, The Boston Consulting Group, 1993.

- 108- The critical starting point is for an airline to examine carefully its own objective for the alliance. This analysis will produce a mixture of strategic and tactical objectives set within an appropriate time scale. As the airline begins to search for partners it must try to understand the prospective partner's motivation and objectives. This is critical to establishing the appropriate type of alliance for the partners in question. After the objectives are set properly, implementation will be facilitated by creating the appropriate structure and matrix to assess the performance of the airlines. Only by getting both the structure and the process right, can an airline minimize the risk of failure and improve its chance of success in fulfilling its alliance objective. 187

(2)Alliance guidelines

There are some simple guidelines which all airlines should consider when structuring these types of alliances. First of all, regardless of the type of alliance or size of the carriers, all airlines should carefully examine legal institutions and precedents in cases similar to that of the airlines concerned. For smaller carriers, the most important concept is to narrow the scope of their objectives. With a narrow scope of objectives, it will be possible for the less powerful partner to protect itself from domination, and will allow it to put in place process measurements to understand the benefits of the alliance.

These measures are not necessarily financial, but are measures that help the airlines to assess and manage the relationship.

187 Id.

- 109- If the airline in question is the more powerful of the two, then it can take a slightly different approach. While it is always in an airline's interest to define its objectives carefully, the more powerful partner should view the alliance from a portfolio perspective. Its goal should be to align itself with various partners that offer, in combination, the most potential for traffic feed, scale, access to new markets and defence of the current one. Therefore, while very specific measures are critical to assess the short-term benefit of the alliance, in these instances longer term measure are also important, and trade-offs in the choice of partners should be taken account of explicitly.

There are no universal structural models that can guarantee success. Rather, it is understanding the fundamental power relationship between the partners and the process by which an airline chooses its partners, and subsequently structures that relationship, which is critical to success.

Designing the appropriate type of alliance is essential.. The basic design can have the greatest impact on its eventual success or failure. The alliance must be tailored to suit the purpose and objectives of an airline's own strategy, as well as the power, nature and aims of the other party. If the purpose is ambiguous or misunderstood then the design is likely to be inappropriate and the chances of failure are high.188

4. Strategies for Airline Alliance

tsa Id.

- 110- ( 1) Regional Cooperation

Regional cooperation among the carriers in the Asia and Pacific region could be a balancing force towards the increasing competitive pressure from the existing mega- carriers and those that will emerge as a result of globalization.189 However, as the region basically lacks commonality due to geographical dispersion, has varying degrees of political and economic development, and is characterized by historical and cultural difference, it seems improbable that it will form a single regional alliance among carriers across the region. For example, Japan will not be likely to participate in a regional bloc which may involve bilateral negotiations with other countries or blocs, mainly because of its market size and the competitiveness of its carriers.

Notwithstanding the above, it cannot be denied that such fora as the Orient

Airlines Association (OAA) and the Association of South Pacific Airlines (ASPA) might be a good starting point for exploring a regional cooperation among carriers. In addition, recent moves towards frequent flyer programmes among carriers in the region190 might end up with an enlarged airline alliance. 191 In short, Korean carriers could and

189 Ali Ghandour, "Euroderegulation as seen by Asia •, Air Transport Conference, Lahore, Pakistan, 11-12 Dec. 1989.

190 Cathay Pacific Airways, Malaysian Airlines and Singapore Airlines recently established • Asia Frequent Flyer Pte", a joint venture to run the multiple-airline frequent flyer programme. Interavia Air Letter, 24 May 1993.

191

- 111 - would not actively pursue a regional cooperation as its main strategy given the present circumstances, but would not preclude that possibility in the future.

(2) Participation in Globalization

The basic concepts and principles relating to airline alliances already discussed could be applied to the case of Korean carriers. Our analysis here is based upon the assumption that K.AL and AAR will not be merged, that each carrier will pursue its strategy independently, and that the guideline of Oct. 1991 will be maintained for the time being. Some regional cooperation in the Asia and Pacific region will not be feasible and realizable for a considerable period of time, there is virtually only one option left, i.e. alliances with foreign airlines. The necessity for making alliances with foreign carriers is all the more relevant because of the restrictive nature of almost all of bilateral air trasnport agreements, the small size of domestic markets, and the existence of relatively independent management not connected with other foreign companies. The problem would come selecting the foreign airlines that would be partners for the two

Korean carriers respectively.

It would be preferable and desirable for the Korean carriers to select possible

192 partners based on the following criteria :

192 Recent Trends of Air Transport in the World and Korean Air's Strategy, Korea Maritime Institute, Jan. 1992. pp. 190-192.

- 112- i) carriers which have networks complementary to those of the Korean

carriers, thus excluding mostly major airlines based in Japan and South East

Asia, which compete position with Korean carriers;

ii) carriers which have market-dominating power and networks in a specific

region;

iii) carriers which have extensive distribution systems (CRS) and management

know-how;

iv) carriers which are stable in financial and managerial terms;

v) carriers which do not operate to Korea from more than one continent, or

if so, with the least frequency as possible; and

vi) one carrier in each continent if feasible.

Given the fact that the Korean carriers do not operate to Africa, possible partner airlines could be selected among those based in North America, Europe and possibly

South America. In AAR's case its possible partner would be confined to a few in North

America, taking into account the network available at the moment. Therefore we can make up a list of potential alliance partners for the Korean carriers by identifying possible carriers (shown in Table 10 ) which fit into each of the criteria as follows.

However, it is to be noted that there could be other alternatives or options from different points of view.

- 113- Table 10 LIST OF POTENTIAL PARTNER AIRLINES FOR KOREAN CARRIERS

criteria KAL AAR desirable undesirable desirable undesirable Criterion i) JAL, ANA, CPA ii) AA, BA Delta "") Delta, BA United iv) AA, BA Delta v) AA,BA AA vi) AA, BA, CPA, SIA, Qantas, Varig AA, Delta

The table above indicates that AA, BA, Qantas and Varig could be possible partners for KAL, whereas CPA, Delta culd be those for AAR. However, it is to be noted that as bigger carriers are more likely to choose a bigger carreir in a country or region, AAR would be in a relatively disadvantageous position in selecting its partner carriers.

- 114- VI. CONCLUSION

This thesis has examined a wide range of interlocking aspects of foreign ownership of airlines. No doubt international air transport is at a crossroads, and appears to be heading in a new direction.

But forces in favour of change may not have enough allies to surmount the fortress of traditional protectionism. The barriers to full-scale transnational mergers are formidable. Four will be particularly important. The first is the continuing influence of nationalism and the protection of national interests. Resistance to foreign ownership will die hard. A second obstacle is the human nature of managers. In any merger or takeover there are many losers, and the potential losers will always resist the proposed change.

A third barrier is the conservatism that holds that our way of doing it is best. This will be underlined in transnational mergers by the problems associated with differences in language and cultural behaviour. And fourthly there will be obstacles created by governments in their entirely laudable efforts to enforce competition rules and prevent anti-competitive behaviour resulting from concentration of market power. 193

193 Stephen Wheatcroft., op. cit.

- 115 - These obstacles may slow the progress toward multinational ownership in the airline industry. But the pressures that have now developed in favour of a transnational industry will be irresistable and it is very likely that the future will be dominated by a small number of large multinationals.

Perhaps the realistic approach before international air transport is totally liberalized, would be for like-minded States to devise a new liberalized multilateral arrangement enabling expanded foreign ownership of airlines. Such an arrangement would be adhered to later by other States, while less enthusiastic States could maintain the current bilateral regime. Of course, this approach depends on the willingness of partner States and a more liberal atmosphere in the air transport industry as a whole.

States are likely to ease their controls on investment by foreign carriers194 in recognition of the necessity and merits of such investment States concerned maintain a bilateral regime, they would most likely allow the relaxation of control on a quid pro quo basis, on the principle that market access should be reasonably proportionate to foreign ownership. 195 Consequently a conflict between the traditional concept of reciprocity and new ideas will continue to exist for a considerable period of time.

194 In July 1993, the U.S. "Commisssion to Ensure a Competitive Airline Industry recommended in its preliminary report to set a new ceiling on foreign investment in US airlines up to 49% of thier voting stock, provided that foreign investors are not governments. ITA Press, 195-196 01-31 August 1993.

t9S Joan M. Feldman, "Those Elusive New Directions", Air Transport World, July 1993.

- 116- In this global context, given relatively small market size and ever-increasing competitive pressure from foreign carriers, the future of the two-carrier policy of Korea does not seem to be that bright. However, a liberalized air transport system might bring a positive impact196 on the two Korean carriers if two conditions are fulfilled.

The first is that the Korean government should change its traditional bilateral air transport agreements into more liberal agreements, moving almost toward open-skies.

If the total cake expanded, all carriers concerned would benefit accordingly .197 Currently

Korea has concluded a liberal air services agreement only with the U. S. 198

The other condition is that the two carriers should sharpen their international competitive edge in various ways, such as using innovative cost-cutting management, expanding into new markets, and making alliances with foreign partners to secure more market access.

These two conditions might be seen as a prescription for the air transport industry as a whole, regardless of the number of carriers, size of market, etc. However, in order

196 Michael Levine, "How can the non-liberalized survive in a liberalizing air transport world?", ITA No. 60, Mar./Apr. 1990.

197 Moehamad Soepamo, "Responding to Global Challenges", ITA No. 60, Mar./ Apr. 1990.

1911 Bilateral Air Services Agreement was first concluded in 1957, and amended in 1979 at a time when Carter Administration applied its domestic deregulation to international scene (providing for free capacity, multiple designation, still with some restraints on market access for Korean carriers). Another amendment came in 1991, giving more market access to Korean carriers on the one side and allowing US carriers to have their own cargo terminal and to install CRSs in Korean market on the other side.

- 117- for Korean carriers to penetrate into foreign markets more effectively, they should be ready to open their own markets, for there is no such thing as one-way or one-sided benefits in the business world.

In all senses, the Korean economy including its air transport industry should get ready to be genuinely incorporated into the world economy. We cannot and should not deny the profound change that has been taking place rapidly over the last three decades

(i.e., globalization of the world economy). We should not avoid having a hard look at this reality, and confront the challenge as it is. Furthermore, we should adapt to this changing environment positively for our own benefit.

"When the sun is setting -

Winds of change are rising,

Promising a new day."

- 118- GWSSARY

Equity

A stockholders• proportionate share (ownership interest) in the corporation's capital stock and surplus]

Common stock

Class of corporate stock which represents the residual ownership of the corporation. Holders of common stock have voting powers and to participate in the prorfits of the corporation by way of dividends (but only after preferred stock holders have been paid their dividends.]

Voting interest

In corporations, this type of stock which gives the holder the right to vote for directors and other matters in contrast to non-voting stock which simply entitles the holder to dividends, if any]

Foreign direct in-vestment

An investment involving a long-term relationship and reflecting a lasting interest of a resident entity in on economy (direct investor) in an entity resident in an economy other than that of the investor. The direct investor's purpose is to exert a significant degree of influence on the management of the enterprise resident in the other economy. Foreign direct investment involves both the initial transaction between the two entities and all subsequent transactions between them and among affiliated enterprises, both incorporated and unincorporated. Foreign direct investment may be undertaken by individuals, as well as business entities.

Source: Black's Law Dictionary, 6th edition, (St. Paul: West Publishing Co, 1990)

Foreign-direct-in-vestment-flows

For associates and subsidiaries, foreign-direct-investment-flows consist of the net sales of shares and loan (including non-cash acquisitions made against equipment, manufacturing rights etc.) to the parent company plus the parent firm's share of the affiliate's reinvested earnings plus total net intercompany loans (short and long-term) provided by the parent company.

For branches, foreign-direct-investment flows consist of the increase in reinvested earnings plus the net in crease in funds received from the foreign direct investor.

Foreign-direct-investment flows with a negative sign (reverse flows) indicate that at least one of the components in the above definition is negative and not offset by positive amounts of the remaining components.

Equity capital

- 119- The foreign direct investor's net purchase of the shares and loans of an enterprise in a country other than its own.

Reinvested earnings

The part of an affiliate's earnings accruing to the foreign investor that is reinvested in that enterprise. lnlercompany loans

Short- or long-term loans from parent firms to affiliate enterprises or vice versa. In the case of banks, deposits, bills and short-term loans are excluded.

Foreign-direct-investmenl stock

For associate and subsidiary enterprises, it is the value of the share of their capital and reserves (including retained profits) attributable to the parent enterprise (this is equal to total assets minus total liabilities), plus the net indebtedness of the associate or subsidiary to theparent firm.

For branches, it is the value of fixed assets and the value of current assets and investments, excluding amounts due from the parent, less liabilities to third parties.

Total assets

Everything that an incorporated or unincorporated enterprise owns which has a monetary value. The characteristics of assets are their control by the enterprise, the expectation that they will provide future benefits to the enterprise and that they are the outcome of a prior event or transaction. Total assets may be tangible (with physical substance, such as land and buildings) or intangible (without physical substance, such as patents and rights granted by a Government).

Fixed assets are regarded as tangible assets with a useful life in excess of one year, which are used in the op eration of a business enterprise and subject to depreciation. Current assets, on the other hand are regarded as tangible assets with a life of one year or less which can be readily turned into cash, for example, bank deposits, bills receivable and securities.

Profit

Gross profit refers to total sales revenue less payments of wages, salaries, rents, costs of raw materials and other costs incurred in carrying out the operations of the enterprise. Net profit, on the other hand, refers to gross profit less interest on loans and depreciation.

Value added

The differenee at eaeh stage of production between the cost of a product and the cost of all capital and labour input or any other input used to make this product. It measures the value a eompany has "added" to the materials used in its production process.

- 120- Transnational Corporation

An enterprise irrespective of its country of origin and its ownership, including private, public or mixed, comprising entities in two or more countries, regardless of the legal form and fields of activity of these entities, which operates under a system of decision-making, permitting coherent policies and a common strategy through one or more decision-making centres, in which the entities are so linked, by ownership or otherwise, that one or more of them may be able to exercise significant influence over the activities of others and, in particular, to share knowledge, resources and responsibilities with the others.

In the above definition, the term "entities" refers to both parent enterprises, defmed below, and other enterprise.

For working purposes, the United Nations, Department of Economic and Social Development, Transnational Corporations and Management Division considers a "transnational corporation" to be an entity controlling foreign assets.

Parent enterprise

An incorporated or unincorporated enterprise (or group of enterprises) which has a direct investment enterprise operating in a country other than that of the parent enterprise.

Affiliote enterprise

An incorporated or urincorporated enterprise in which a foreign investor has an effective voice in management. Such an enterprise may be a subsidiary, associate or branch (defined below).

Subsidiary enterprise

An incorporated enterprise in the host country in which another entity directly owns more than half of the shareholders' voting power, or is a shareholder in the enterprise, and has the right to appoint or remove a majority of the members of the adm.ioistrative, management or supervisory body.

Associate enterprise

An incorporated enterprise in the host country in which an investor, together with its subsidiaries and associates, owns a total of at least 10 per cent, but not more than half, of the shareholders' voting power (the figure may be less than 10 per cent if there is evidence of an effective voice in management).

Branch

- 121 - An unincorporated enterprise in the host country which is one of the following: (i) a permanent establishment or office of the foreign investor; (ii) an unincorporated partnership or joint venture (defined below between the foreign direct investor and one or more third parties; (iii) land, structures (except structures owned by government entities), and/or immovable equipment and objects directly owned by a foreign resident; (iv) mobile equipment (such as ships, aircraft, gas or oil-drilling rigs) operating within a country other than that of the foreign investor for at least one year.

Joint venture

A joint venture involves share-holding in a business entity having the following characteristics: (i) the entity was established by a contractual arrangement (usually un writing) whereby two or more parties (the ventures) contributed resources towards the business undertaking; (ii) the venturers have joint control over one or more activities carried out according to the terms of the arrangements and none of the undividual investors is in a position to control the venture unilaterally.

A joint venture may take one of the following three forms.

(i} Jointly controlled entity: the joining together of two or more enterprises resulting in the creation of a third enterprise in order to undertake a specific business venture. It is not a continuing relationship like a partnership. A jointly controlled entity is established under contractual agreement whereby the parties to the agreement contribute resources towards the business undertaking. Both parties have control over the activities carried out according to the terms of the agreement and no party can control the joint venture unilaterally.

(ii) Jointly controlled assets: the coordinated use of parts of venturers' excisting enterprises to work on a common project. Such a joint venture does not form any separate entity, and operates with a loose organizational structure. The assets and expertise of each partner remain under the direct control of that partner.

(iii) Jointly controlled operation: the contribution of resources by venturers to a joint venture project which is managed by either one of the venturers or by a joint management team. In such a venture, a joint venture agreement defines the terms of the project, and each venturer possesses an undivided interest in the assets of the project.

Holding Company

A corporation that owns voting stock in another corporation and is able to influence its board of duectors, and therefore control its policies and management. A holding company need not own a majority of the shares of the corporation or be ilvolved in activities similar to those of the company it holds.

Source: Excerpts from World Investment Directory 1992: Foreign Direct Investment, Legal Framework and Corporate Data. United Nations, New York, 1993.

- 122- •~; .. ;1] ~·- APPENDICES

0 .,. ~~·- :it: t .2. ~ ' Appendix 1 IZ4.-' British Airways I USAir Deal

1992 Proposal Pennited by Law Voting Interest 21.8% of USAir voting 24% of USAir voting 25% of voting interest interest interst Equity Interest 19.9% of total USAir 44% of total USAir 49% of total equity equity equity Board Representation Right to nominate 3 of BA would have the right 5 of 16 directors (one- 16 USAir directors, to elect 4 of 16 USAir third maximum). subject to election by all directors. There also shareholders who are have been two entitled to elect interlocking directors. directors. BA's nominees are subject to some recusal requirements. Super-Majority and None BA would have had DOT suggested that Class Voting Rights board super-majority such rights raised an voting rights over issue of de facto control certain USAir under CAB/DOT managements decisions. interpretation of Sec. 101 (16). Senior Management None BA would have had DOT suggested that Selection board super-majority such rights raised a de voting rights over the facto control issue. selection and compensation of senior USAir managenment. Integration None BA and USAir had DOT suggested that the agreed to set of proposed integration integration principle to raised a de facto control be overseen by a joint issue integration committee.

Source: Aviation Daily, Feb. 11 1993.

- 125- 0 Appendix 2

Consolidated Statement of Operations and Retained Earnings

AIR CANADA 1992

December 31 (in millions) 1991 1990 Assets

Current Cash and short-term investments s 128 s 436 Accounts receivable 630 627 Spare parts, materials and supplies 172 204 Prepaid expenses 14 16 Deferred income taxes 34 28 978 I ,311

ProptrtJ and equipment (note 2) 3.234 2,557 Deferred charces (note 3) -!84 458 Investments and other assets (note 4) 225 253

14.921 $4,579

On behalf of the Board:

Claude I. Taylor, o.c. Chairman, President & Chief Executive Officer

John F. Fraser, O.C. Chairman, Audit Committee

- 126- 0

1991 1990 . Uabllities

C.mnt Accounts payable and accrued liabilities s 611 s 629 Advance ticket sales 192 227 Current portion of long-term debt 47 34 H50 890

l.tnJ·ttl'll ••" (note 5) 2.1:\o 1,350 Otlltr lonc·ttl'llla.IDtlts 75 89 Dtftrrtd credits (note 7) 251 418 .'dl2 2,747 MinoritJ Interest 5 10 Subordinated perpetual debt 834 834

Shareholders' equity Shirt capilli-common (note 9) 563 563 lttllntd tamlnp 207 425 770 988

$4,921 $4,579

Source: Excerpts from 1991 Annual Report, Air Canada

- 127- Appendix 3

0 Key Elements of the Agreement between KLM and Northwest

Northwest and KLM's marketing, sales and airline services agreement provides a framework for further talks which will create a 'seamless air transportation service'. The key areas of the agreement are:

1) A combined sales rorce Redundant sales operations will be closed down around the world and resources concentrated in markets where they will be most effective.

2) Coordinated pricing and inventory management This will allow common services to be developed and enable the airlines to promote and market the services of each other.

3) A coordinated planning schedule This will enable the airlines to maximise sales through a network that optimises connecting flights and uses the fleets as much as possible.

4) Revenue sharing and pooling Each airline will be fairly compensated for the value of its services and have an incentive to pursue sales and marketing initiatives for the benefit of both carriers.

5) Unified commission programmes More travel agent business will be won by giving their customers a greater range of schedule and routes. and offering agents commissions and commission overrides for combined bookings on the two carriers.

6) A seamless service Respective service standards will be harmonised so that operations are perceived by customers as a common enterprise.

7) Common advertising Advertising programmes will be drawn up to portray KLM and Northwest as offering one global transportation system.

8) Common branding A joint identity will be developed through common branding of aircraft exteriors and interiors, staff uniforms. ground facilities, etc.

Source: The Avmark Aviation Economist, Dec. 1992.

0 - 128- Appendix 4 0 Comparision between Third and Second Aviation Package

Third Package Second Package Effects Licensing of air carriers

Rules for economic and Nothing Very important technical fitness of air carriers Entitlement for undertaking to Will establish national be licensed as an air carrier monopolies. when fitness criteria are respected National ownership rules are Make easier to create new air abolished and Community carriers based on objective ownership criteria introduced. economic criteria. Rules for leasing of aircraft to The right of establishment will ensure that safety levels are be given a real meanibg for respected and that dumping of civil aviation. aircraft from third countries will not take place. Market Access

Any Community air carrier Receiving states obliged to The real introduction of the may operate between two accept a designated air carrier, freedom to provide services airports within the subject to certain multiple throughout the Community. Community. desigantion traffic thresholds, but full discretionary powers for whether or not an air carrier would be designated by its own government.

Full fifth (and seventh) Limitations on fifth freedom Important for freedom to freedom and absence of seventh provide services. freedom rights.

0 - 129- Domestic services included but No domestic air services Important inclusion but full limitations may be applied for included. effect not until 97.4 .1. 0 transitional period to domestic air carriers.

Traffic rights cover also No cabotage Freedom to provide services cabotage subject to a would not exist without trasitional limitation until cabotage. 97.4.1.

Public service obligations Public Service obligation but Improvement in view of the less developed. inclusion of domestic services.

Safeguards in order to be able Simpler safeguards and no Ensures safety without losing to deal with congestion intermodal coordination flexibility prolblems allowing inter alia for intermodal coordination.

Operational and traffic Same rules but no role for the Guarantee for air carriers distribution rules must be Commission from other Member States respected but possibility for Commission to intervene to avoid misuse.

No bilateral capacity Free capacity but only within a Important in order to ensure limitations. zone (60:40) and subject to that air carriers can take and approval of state of origin implement commercial dicisions.

Capacity safeguards in order Same to deal with catastrophic economic develepments.

All air transport services Only scheduled air services Important in order to ensure a included, both scheduled and level playing field where all non-scheduled. air carriers are treated equally.

0 - 130- Air Fares and Rates

c Free pricing Complicated mixture of nonal Allows commercial decison system, double disapproval and making of air carriersm. double approval for passeenger while free pricing for air cargo.

Limited possibilities for Replaces the zonal system etc. Introduces considerable Member States to intervene feedom for air carriers. against exessive basic (ecnonomy) air fares or a catastrophic downwards price development

Same possibilities for Limited possibilities for Important in onder to ensure Commission to intervene as Commission to intervene. smae application rules for Member States (also for throughout the Community. domestic services.

Source: The WCP Report: Aviation in the European Community. Dec. 1992.

0 - 131 - Appendix 5

0 Annex on Air Transport Services to GATS

1. This Annex applies to measures affecting trade in air transportation services, whether scheduled or unscheduled, and ancillary services.

2. The Agreement shall not apply to measurs affecting: (a) traffic rights however granted; (b) the supply of directly related services, when such measures would limit or affect the ability of parties to negotiate, to grant or to receive traffic rights, or which would have the effect of limiting their exercises. except as provided in paragraph 3 and 4 of this Annex.

3. The Agreement shall apply to measures affecting: (a) aircraft repair and maintenance services; (b) the selling and marketing of air transport services; (c) computer reservation services.

4. Each Party shall ensure that access to and use of publicly available services offered within or from its territory is accorded to air services providers of other Prties on reasonable and non­ discriminatory terms and conditions where commitments for such publicly available services have been made and unless otherwise specified in its schedule.'

5. The dispute settlement procedure of the Agreement shall not apply to the rights and activities described in paragraph 2. The dispute settlement procedures of the Agreement may be involved only where obligations or commitments have been assumed by the concerned Parties and where dispute settlement procedures provided for in bilateral air service agreements or under the Chicago Convention have been exhausted.

6. Air transport services, ancillary services and operation of this Annex shall be reviewed periodically or at least every five years.

7. Definitions: (a) "aircraft repair and maintenance services" mean activities required at a regular or ad hoc basis in order to guarantee the operational airworthiness of aircraft. These activities do not include aspects of maintenance related to ground-handling. (b) "selling and marketing of air transport services" mean opportunities for the air carrier concerned to sell and market freely its air transport services including all aspects of marketing such as market research, advertising and distribution. These activities do not include tariffs to be charged and thier conditions.

1 The content of this paragraph will depend on the outcome of the work relating to legal clarification of the definitions contained in Article XXXIV.

- 132- (c) "computer reservation sservices" mean services provided by computerised systems that contain information about air carriers schedule, availabilty, fares and fare rules through 0 which reservations can be made or ticket may be issued. (d) "traffic rights" mean the right for scheduled and non-schedukled carriers to operate from, to, within, or over the territory of a Party as well as points to be served, routes to be operated, capacity to be provided, tariffs to be charged and their conditions and number and ownership of airlines to be designated.

Source: GATT Secretariat (Draft 27.9.1992)

0 - 133- Appendix 6

Regional And Trans-regional Intergovernmental Organizations

REGIONAL INTERGOVERNMENTAL Indian Ocean Commission (IOC). Founded: ORGANIZATIONS 1982. Headquarters: Port Louis, Mauritius. Members: Comoros, France, Madagascar, Africa Mauritius, Seychelles.

Arab Maghreb Union (AMU). Founded: 1988. lake Chad Basin Commission (LCBC). Founded: Members: Algeria, Libyan Arab Jamahiriya, 1964. Headquarters: N'Djamena, Chad. Mauritania, Morocco, Tunisia. Members: Cameroon, Chad, Niger, Nigeria.

Central African Customs and Economic Union Mano River Union (MRU). Founded: 1973. (CACEU). Founded: 1964. Headquarters: Headquarters: Monrovia, Liberia. Members: Bangui, Central African Republic. Members: Guinea, Liberia, Sierra Leone. Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, Gabon. Niger Basin Authority (NBA). Founded: 1964. Headquarters: Niamey, Niger. Members: Benin, Council of the Entente (CE). Founded: 1959. Burkina Faso, Cameroon, Chad, Cote d'Ivoire, Headquarters: Abidjan, Cote d'Ivoire. Members: Guinea, Mali, Niger, Nigeria. Benin, Burkina Faso, Cote d'Ivoire, Niger, Togo. Organization for the Development of the Gambia Economic Commission for Africa (ECA). United River Basin (OMVG). Founded: 1978. Nations regional body. Founded: 1958. Headquarters: Dakar, Senegal. Members: Headquarters: Addis Ababa, Ethiopia. Members: Gambia, Guinea, Guinea-Bisseau, Senegal. 51 States of the region. Organization for the Development of the Senegal Economic Community of Central African States River Basin (OMVS). Founded: 1972. (ECCAS). Founded: 1981. Headquarters: Headquarters: Dakar, Senegal. Members: Mali, Libreville, Gabon. Members: Burundi, Mauritania, Senegal. Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, Gabon, Rwanda, Sao Organization for the Management and Tome and Principe, Zaire. Development of the Kagera River Basin (KBO). Founded: 1977. Headquarters: K.igali, Rwanda. Economic Community of the Great lAkes Members: Burundi, Rwanda, Uganda, United Countries (CEPGL). Founded: 1976. Republic of Tanzania. Headquarters: K.igali, Rwanda. Members: Burundi, Rwanda, Zaire. Organization of African Unity (OAU). Founded: 1960. Headquarters: Addis Ababa, Ethiopia. Economic Community of West African States Co-founder of the African Civil Aviation (ECOWAS). Founded: 1975. Headquarters: Commission (AFCAC). Members: 50 African Lagos, Nigeria. Members: 16 States of the States. subregion. Preferential Trade Area for Eastem and Southern African States (PTA). Founded: 1981.

0 - 134- Headquarters: Lusaka, Zambia. Members: 18 group, to be known as the East Asian member States of the subregion. Economic Caucus (EAEC), has been under 0 consideration to include the six ASEAN Southem African Development Community States, China, Japan and some other Asian (SADC). Founded: 1992 with same countries. headquarters and membership as, and as replacement for Southern African Economic and Social Commission for Asia Development Coordination Conference and the Pacific (ESCAP). United Nations (SADCC). Founded: 1980. Headquarters: regional body. Founded: 1947. Gaborone, Botswana. Members: Angola, Headquarters: Bangkok, Thailand. Members: Botswana, Lesotho, Malawi, Mozambique, Governments of 38 countries of the region, Namibia, Swaziland, United Republic of but not including those of certain West em Tanzania, Zambia, Zimbabwe. Asian countries which belong to ESCWA (see FORMAL TRANS-REGIONAL GROUPS). Southern Africa Transport and Communications Commission (SATCC). South Asian Association for Regional Founded: 1980 as a Sectoral Commission of Cooperation (SAARC). Founded: 1985. the SADCC with the same membership as Headquarters: Kathmandu, Nepal. Members: SAD CC. Headquarters: Maputo, Bangladesh, Bhutan, India, Maldives, Nepal, Mozambique. Pakistan, Sri Lanka.

West African Economic Community (CEAO). South Pacific Commission (SPC). Founded: Founded: 1959. Headquarters: Ouagadougou, 1947. Headquarters: Noumea, New Burkina Faso. Members: Benin, Burkina Caledonia. Members: 27 States/territories of Faso, Cote d'lvoire, Mali, Mauritania, Niger, the subregion. Senegal. South Pacific Bureau for Economic Cooperation (SPEC). Founded: 1971. Asia and the Pacific Headquarters: Suva, Fiji. Members: 15 States/territories of the subregion. Asia Pacific Economic Cooperation Council (APEC). Founded: 1989. Members: Europe Australia, Brunei, Canada, China, Indonesia, Japan, Malaysia, New Zealand, Philippines, Council of Europe (CE). Founded: 1949. Republic of Korea, Singapore, Thailand, the Headquarters: Strasbourg, France. Was United States and two non-State members. instrumental in establishment of the European No permanent secretariat. Civil Aviation Conference (ECAC). The Parliamentary Assembly of the Council of Association of South East Asian Nations Europe is the principal legislative body. (ASEAN). Founded: 1967. Headquarters: · Jakarta, Indonesia. Members: Brunei, Economic Commission for Europe (ECE). Indonesia, Malaysia, Philippines, Singapore, United Nations regional body. Founded: Thailand. 194 7. Headquarters: Geneva, Switzerland. Members: 34 States of the region. Asean Free Trade Area (AFTA). Regional trade accord being developed by ASEAN to European Economic Area (EEA). include its member States. A larger regional Relationship of the 12 EEC States and 6

- 135- EFTA States to facilitate the free movement Guyana. Members: Antigua and Barbuda, of goods, persons, services and capital The Bahamas (not a member of the Common 0 amongst them beginning in 1993. Switzerland Market), Barbados, Belize, Dominica, (an EFTA State) has not joined the EEA. Grenada, Guyana, Jamaica, Montserrat, Saint Christopher and Nevis, Saint Lucia, Saint European Economic Community (EEC). Vincent and the Grenadines, and Trinidad and Founded: 1957 under the Treaty of Rome. Tobago, Associate Members: British Virgin The EEC, together with the European Coal Islands, Turks and Caicos Islands. and Steel Community and the European Atomic Energy Community, constitute the Central American Common Market (CACM). three European Communities which are Founded: 1960. Headquarters: Guatemala increasingly referred to in the singular as the City, Guatemala. Members: Costa Rica, El European Community (EC). Headquarters: Salvador, Guatemala, Honduras, Nicaragua. Brussels, Belgium. Members: Belgium, The same group signed a framework free Denmark, France, Germany, Greece, Ireland, trade agreement with Mexico in 1992. Italy, Kingdom of the Netherlands, Luxembourg, Portugal, Spain, United Economic Commission for Latin America Kingdom. and the Caribbean (ECLAC). United Nations regional body. Founded: 1948. European Free Trade Association (EFTA). Headquarters: Santiago, Chile. Members: 40 Founded: 1960 under Stockholm Convention. States of the region. Headquarters: Geneva, Switzerland. Members: Austria, Finland, Iceland, Group of Three (G-3). Colombia, Mexico, Lichtenstein, Norway, Sweden, Switzerland. Venezuela.

Nordic CouncU (NC). Founded: 1952. Latin American Economic System (SELA). Headquarters: Stockholm, Sweden. Members: Founded: 1975. Headquarters: Caracas, Denmark, Finland, Iceland, Norway, Sweden Venezuela. Members: 25 States of Latin and three autonomous territories (Aaland, America. Faroe Islands, Greenland). Latin American Integration Association (LAIA). Founded: 1980 under Montevideo Latin America and the Caribbean Treaty. Headquarters: Montevideo, Uruguay. Members: Argentina, Bolivia, Brazil, Chile, Amazon Cooperation Council. Founded: Colombia, Ecuador, Mexico, Paraguay, Peru, 1978 under Amazon Pact. Members: Bolivia, Uruguay, Venezuela. Brazil, Colombia, Ecuador, Guyana, Peru, Suriname, Venezuela. Organization of Central American States (OCAS). Founded: 1951. Headquarters: San Andean Pact. Founded: 1969 under Salvador, El Salvador. Members: Costa Rica, Ca.rtagena Agreement. Headquarters: Lima, El Salvador, Guatemala, Honduras, Peru. Members: Bolivia, Colombia, Ecuador, Nicaragua. Peru, Venezuela.

Caribbean Community and Common Market (CARICOM). Founded: 1973 under Treaty of Chaguaramas. Headquarters: Georgetown, c - 136- Organiz.ation of &stem Caribbean States Economic and Social Commission for (OECS). Founded: 1981. Headquarters: Western Asia (ESCWA). United Nations Castries, Saint Lucia. Members: Antigua and regional body. Founded: 1973. Headquarters: Barbuda, Dominica, Grenada, Montserrat, Baghdad, Iraq (temporarily Amman, Jordan). Saint Christopher and Nevis, Saint Lucia, Members: governments of 13 countries. Saint Vincent and the Grenadines, British Virgin Islands. Economic Co-operation Organization (ECO). Founded: 1984 under the Treaty of Izmir. Permanent Secretariat of the General Treaty Headquarters: Tehran, Islamic Republic of on Central American Economic Integration Iran. Original members: Islamic Republic of (SIECA). Founded: 1960. Headquarters: Iran, Pakistan, Turkey. Expanded in 1992 to Guatemala City, Guatemala. Members: include Afghanistan, Azerbaijan, Kazakhstan, Belize, Costa Rica, El Salvador, Guatemala, Kyrgyzstan, Tajikistan, Turkmenistan and Honduras, Nicaragua, Panama. Uzbekistan.

Southern Cone Common Market International Islamic Organization (IIO). (MERCOSUR). Founded: 1990 under Founded: 1970. Headquarters: Jakarta, Mercosur Treaty. Headquarters: Montevideo, Indonesia. Members: 23 States. Uruguay. Members: Argentina, Brazil, Paraguay, Uruguay. Associate: Bolivia. League of Arab States (LAS). Founded: 1945. Headquarters: Cairo, Egypt. Members: 21 Arab States. The Council of Arab Middle East Ministers of Transport deals with civil aviation. Cooperation Council for the Arab States of the Gulf (GCC). Founded: 1981. Organization for Economic Cooperation and Headquarters: Riyadh, Saudi Arabia. Development (OECD). Founded: 1960. Members: Bahrain, Oman, Kuwait, Qatar, Headquarters: Paris, France. Members: 24 Saudi Arabia, United Arab Emirates. industrialized States.

Organization of American States (OAS). Founded: 1890. Headquarters: Washington, FORMAL TRANS-REGIONAL GROUPS D.C., United States. Members: 33 States of the Western Hemisphere. African, Caribbean and Pacific Group of States (ACP Group). Founded: 1975 under Organiz.ation of the Islamic Conference Lome Convention. Headquarters: Brussels, (OIC). Founded: 1971. Headquarters: Belgium. Members: 69 developing countries Jeddah, Saudi Arabia. Members: 46 States. which relate through this group to the European Community. INFORMAL TRANS-REGIONAL GROUPS Arab Common Market (ACM). Founded: 1964. Headquarters: Amman, Jordan. Cairns Group. Group of agricultural Members: Egypt, Iraq, Jordan, Libyan Arab exporting States. Members: Argentina, J amahiriya, Mauritania, Syrian Arab Australia, Brazil, Canada, Chile, Colombia, Republic, Yemen. Fiji, Hungary, Indonesia, New Zealand, Thailand, Uruguay.

- 137- Group of Eight (G-8). Group of States with interests in farm issues. Members: Argentina, 0 Australia, Canada, European Community, Finland, Japan, New Zealand, United States.

Group of Seven (G-7). Group of major industrialized States. Members: Canada, France, Germany, Italy, Japan, United Kingdom, United States.

Group of Seventy Seven (G-77). Group of developing States organized to promote their views on international trade and development in UNCTAD. Members: 127 States (originally established with 77 States).

Paris Oub or Oub of Paris. A forum for officials of creditor governments to collaborate on debt collection and debt forgiveness policies. The composition of the group is likely to vary according to the particular creditor States involved and the debtor States in question. Based in Paris, the "club" is run by the French Treasury.

Quadrilateral. A term applied to the four leading contributors to world trade (Canada, European Community, Japan, United States) in the context of world trade negotiations.

Triad. European Community, Japan, United States.

Source: Manual on the Regulation of International Air Transport (to be published), ICAO

0 - 138- Appendix 7 0 Transnational Airline Alliances Clrrfe(l ,...... ,.. het Clrrier Peltntr Cltrilt'l ,. ...,.. PICC Clrrilr ,. ., ...ltyil -.ultyil • ltyil ...uily .. ,....,,., urrilr fliW ,.....r(%1 urrier(t., .. u... American R Alrllici'OMIII Aloba 10 l.uflhiOII RC Continental 3D Atn.tlot ANAl Austrian R Air New Air Ceneda R Canadian AL M Zaeleml American 7.5 Finnair M BritishAW R Pan Am M Cathey R TNT JC Japan AL 7.5 Alroll•• Qantal R Oantas 19.9 R Air Afrtq111 Air Mauritanil 20 Malaysia AL R Air Botswana Namib Air R SIA R Air Canada Air NZ R R Jordanian R 8 Midland R Air Jamaica R Cathay R Air Zimbabwe R SIA R Varig R 1WA M Air Niugini Cathay R Air Europe/ILG Air Europa 25 PAL R AESPA l1 Oantas R AE Scand. 35 SIA R All Nippon M Air Pecifil Oantal 19.8 R NFD 49 AirUK KLM 14.9 M Air fnlnce Air Inter 37 M Air ¥1111111111 An sett 40 Air Air Zilnllellwll Air NZ R Madagascar 3.48 Qantaa R Air Mauritius 12.n R Aliura Air Ubtrte Austrian 1.5 Meridian• 25 Canadian Al R Alitalia An 1110 Euro Barlin 51 Canadian AL R lufthansa Coop,J lbtril M R Air Maroc M US Air M All Air Europe M i Thai lntl RC Nippon ! UTA 54.8 Aaroflot/ 9 R Air-lndia Air Mauritius 8.51 R Austrian TWA R Nippon Cargo 11.43 Air Inter Air France 37 M SAS M UTA 35.8 TWA R Air Jamaica Air NZ R AlM KLM M AirLanka Malaysia Al M Alohe Air Micronesia 10 Air liberte Alisarda American Aar lingus R Airlines of SAS 24.9 Air NZ 7.5 l Britain Cathay R Air Air France 3.48 Finna•r R Madagascar Air Mauritius R Malev R Air Mauritania Air Afrique 20 Oantas M UTA 20 SIA R Air Mauritius Air France 12.77 R AmeriuWnt An sett 20 Air Anntt Air Vanuatu 40 Madagascar R AW.st 20. Air·lndia 8.51 R Cook Is lnt M BritishAW 12.n Ladeco 25 Cathay R Polynesian Man lufthansa R TNT 50 Malaysia AL R An Alitalia 1110 SIA R Australian United R

This list is compiled from Airline Business sources. No list of airline marketing agreements can be comprehensive, but we have included those which have particular sigmficance or have been signed recently as part of the trend towards alliances and globalisation. Equity stakes are often held by and in parent companies; no distinction is made here. Voting rights can be different from financial shareholdings; it is the financial stakes which are listed here. Note that the International leisure Group, which owns Air Europe, owns stakes in its European partners via the Amsterdam·based holding company Airlines of Europe. Airlines of Britain Group comprises British Midland, Loganair, London City Airways and Manx Airways. We have not included consortium airlines as alliances. Existing consortia include Air Afrique, Gulf Air and SAS. Two consortia are proposed. Air Maghreb (Algeria, Libya, Mauritania, Morocco and Tunisia} and African Joint Air Services (Tanzania, Uganda and Zambiat. Key: • Planned; t Subject to regulatory approval; M =wide-ranging marketing alliance; R = route or market-specific alliance; J = joint venture; C = cargo; Man = management contract e Airline Business 1990 Carrier's PartH(s Peel Carrier Pertrler Carrie(l Paltrier'• het Carrier Paltrier ..hylll IM!Uhy ill ~M~Uitrl• '"l•hr ill carrier ('XI) ,.rtrler(%1 carrier t'XII ,'\ ..l'llllf '"' A.trilll Al. Air Fr1nce 1.5 ...... Malaysia R ANA/Aeroflot 9 R (contl Singapore R R Swisa~ir 10 Thei R Avieco Iberia &7 UTA llllir Swissair 48.9 &B Airwl'fl British AW 49 lritiahAW Air Mauritius 12.77 llnuiiC..o Lufthansa 100 Air NZ R lervicn Caledonian 100 GuH Air TWA R Canadian Al R" Hapag Uoyd lufthansa 10 Delta R Haweiien Japan Al 25 GB A1rways 49 lberie Alitalia M Maersk J Aviaco 67 SWA 20t Japan AL R United M R Air Maroc M British Midland Air Canada R Vwa 100 Caledonien AW British AW 100 llllerflug lufthansa 26 M,J Cenadien Aeroflol M JepenAirU... Air NZ 7.5 Airlines Air France R C&nadian Al R Alitalia R Clrthay R British AW R" OHL lntl S(m-) Japan At R . Garuda R lufthansa R Hawaiian 25 Midway R Iberia R SAS R Japan AS 9 Cerptux Lufthansa 24.5 Japan Asia 100 luxair 24.9 Dentes R CIIMy Pacific Air Canada R Southwtlt ·51 Air Mauritius R Swissaif R Air NZ R Thai lnd R Air Niugini R UTA R American R Japan Air Finnair R Dragonair 35 Man System Japan AL 9 Japan Al R JepenAiie Japan AL 100 Lufthansa RC KLM Air UK 14.9 M Maleysia AL R ALM M Condor lufthansa 100 Geruda R Continenul Air Micronesia 30 Martineir 29.8 SAS 9.9 M Nippon Cargo RC Cook Islands Ansett M NLM 100 M .....,...., Northwest 14.9 RC Cruniro Varig 100 SWA 20t CTA Swissair 38.2 SIA RC Delta BritishAW R Transavia 40 SIA 2.8 5 M Viase R · Swisaair 5 4.& M ICoreae Air Geruda R DHLIIIII Japan Al. 5(20". Ladect Anlltt 25 lufthanaa 5 (20". LM·CIIIIe SAS 30 Drago111lr Cetflty 35 Man Unlefln SAS 100 . Ealt·Wtll TNT 50 L1U LTE 25 bro Bertilt Air France 51 l.uflhe... AlrUnaus c France Lufthanu 49 Air France Coop,J Fianalf Aeroflot M Air Mauritius R American R Cenadian AL R JAS R Cargolux 24.5 SAS sur sur M Cathay RC Swissair M Condor 100 Geruda Japan Al R OHllntl s 120"1 KLM R Euro Berlin 49 Korean R Garuda R Lufthansa R German Cergo 100

Key: •Planned; t Subject to regulatory approval; M= wide-ranging marketing alliance; R" route or market· specific alliance; J = joint venture; C" cargo; llr- Man = management contract i:> Airline Business 1990 c - 140- c. m. ,...... Cenlet'l ,...... ,.. Pact Clnitr ,...... , Clrrler'l P1rt111r'1 Pact ...... ilyllt ...ilyta equilyia ,_ ....,,,..) ,.,...,,,.., Cll'riar 1411.) ~ Luftlllaa Hapag Uoyd 10 Sinppore Al. Air Canada R lcontl lnterflug 26 M,J Air Mauritius R Thai lntl R,RC Air NZ R l.ullair Cargolux 24.9 Air Niugini R M181'11l BritishAW J American R MaltysUI Al. Airlanka M Delta 5 2.8 Air Mauritius R Garuda R Air NZ R KLM RC Cathay R Malaysia AL R Gtrudt R Swissair 5 5 R Jordanian M Tradewinds 100 SIA R Sollelair Sabena lOO Thai lntl R SouthwestAL Japan Al 9 Maltv American R IJapenl Pan Am R Sptntir SAS 49 TNT JC Swisuir Austrian 10 TWA R Be lair 48.9 Mtrtilllir KLM 29.8 CTA 38.2 Mtddianl Alisarda 25 Delta 4.6 5 Mittwar Canadian AL R Finnair M Namila Air Air Botswana R JapanAL R NFD A of Europe 49 SAS 1.s• 7.s• M NippenCirgo All Nippon 11.43 SIA 5 5 Airll111s KLM RC Thai Air France RC NLMI KLM 1110 M lnlllmaticNIII Garuda R Ntdlerll ... JapanAl R Northwest KLM 14.9 lufthansa R,RC Pan Am Aeroflot M Malaysia AL R Malev R SAS M Philippine AL Air Niugini R TNT Aeroflot JC TWA R Ansett 50 Polyntsiln AL An sett Man East-West 50 Qantas Aerolineas R Malev JC Air NZ 19.9 R Tradewinds Pte SIA 100 Air Niugini R Transavia KLM 40 Air Pacific 19.6 R Trans European TEA Base! Air Zimbabwe R TEA France '? American Al M TEA UK ? Japan Al R Trans World Air Canada M Royal Air Air France M Air-lndia R M•roe All Nippon R Iberia M Gulf Air R Rapl Air NZ R Malev R Jordlnitn Malaysia Al M PAL R Sa•tnaWNtd BritishAW 20t USAir M Airli ... KLM 20t United Alitalia R Sobelair 100 Australian R SAS A of Britain 24.9 BritishAW M All Nippon M USAir Alitalia M Canadian AL R TWA M Continenti! 9.9 M UTA Air France 54.8 Finn air S10" S10" M Air Inter 35.8 LAN·Chile 30 Air Mauritania 20 linjeflyg 100 Garuda R Scanair 100 Japan AL R Spaneir 49 Varig Air NZ R Swiss air 1.s• 1.s• M Cruzeiro 100 Thai lntl M SAS R Varig R Viau KLM R Sca111ir SAS 100 V'Id Iberia 100

Key: • Planned; t Subject to regulatory approval; M = wide·ranging marketing alliance; R =route or market-specific alliance; J =joint venture; C = cargo; Man = managenent contract. 10 Airline Business 1990 c - 141 - c BffiLIOGRAPHY [Books and Materials]

An lATA White Paper. Air Transport in a Changing World. 1992. Boston Consulting Group, The Secrets of a Successful Liaison: review of 200 alliances, London, 1993. Bucldey, Peter J. The Future of the Multinational Enterprise, 2nd ed., London: Macmillan, 1991. Brownlie, lan, Principles of Public International Law, 4th ed., (Oxford; Clarendon Press, 1990). Cheng, Bin, The Law of International Air Transport, London; Stevens & Sons limited., 1962. Department of Transport and Communications (1987): Domestic Aviation: a new direction for the 1990s. (Statement by the Minister, 7 October). Canberra, Department of Transport and Communications. ICAO Circular 25-AT/85, Guidance Material on the Avoidance or Resolution of Conflicts over the Application of Competition Laws to International Air Transport. ICAO Circular 63-AT/6. ICAO, Circular 237-AT/96. 1992. ICAO Doe 8900/2 (1967). ICAO Doe 9275, Resolution A16-33. ICAO Doe 9316 (1986). International Chamber of Commerce, Foreign Investment in Airlines: An ICC View, Commission on Air Transport (18 June 1993), Annex to Document No. 310/411 Flight International, World Airline Directory, March 1993. Kahn, Alfred. The Economics of Regulation: Principles and Institutions. New York; Wiley, 1970-71. KAL, 10 year history of Korean Air. Kasper, Daniel M. Deregulation and Globalization. Cambridge; Ballinger, 1988. Korea Maritime Institute, Recent Trends of Air Transport in the World and Korean Air's Strategy, Jan. 1992. Matte, Nicolas Mateesco, Treaties on Air-Aeronautical Law, Montreal: IASL, 1981. Ministry of Transportation, Statistical Yearbook of Korea, Seoul, 1991. Meijers, The Nationality of Ships, The Hague, Martinus Nijhoff, 1967. Morten, Beyer and Associates, What is Really Wrong with America's Air Carriers or the Secret of Southwest Airlines", March 1993. Neal, A. D., The Antitrust Laws of the United States of America. Boston; Lexington Books, 1960. OECD, Deregulation and Airline Competition. Paris, 1988. Slot, P. J. and Dagtaglou, P. D., eds., Toward a Community Air Transport Policy. Deventer; Kluwer Academic Publishers, 1989. Taneja, Nawal K. Airlines in Transition. Boston; Lexington Books, 1981. -----·The Commercial Airline Industry. Boston; Lexington Books, 1976. The President's Air Coordinating Committee. Civil Air Policy. Washington, D.C. 1954. Transport Daily, Yearbook of Transort in Korea, 1992. Trethway, Michael W., ed. Airline Deregulation. Vancouver; UBC. 1986. c - 142- United Nations, World Investment Directory 1992: Foreign Direct Investment, Legal Framework and Corporate Data. New York, 1993. c ____,United Nations Convention on the Law of the Seas, New York, 1983. U.S. Congress Budget Office. Policies for the Deregulated Airline Industry. July 1988. U.S. Department of Transportation, The Airline Deregulation Evolution Countries: The Southwest Effect, 1993. U.S. Secretary of Transportation. A Statement of National Transportation Policy. Sept.17, 1975.

[Articles]

Balfour, John, "Airline Mergers and Acquisitions: What Controls does EEC Law provide?", Air Law, Vol. XV, 1990 Barlow, Patricia, "Aviation Antitrust- International Consideration After Sunset", Air Law, Vol. Xll, No.2, 1987. Beane, Jerry L., "The Anti-trust Implications of Airline Deregulation", Vol. 45, J.A.L.C. 1980. Brenner, M., "Airine Deregulation- A case Study in Public Policy Failure", Transport Law J. Vol. XVI. 1988. Brown, Jeffrey Donner, "Foreign Investment in U.S. Airlines: What Limits Should be placed on Foreign Ownership of U.S. Carriers", Syracuse Law Review, Vol. 41, 1990. Chesen, Joseph R., "the many thoughts on cabotage", ICAO Journal, Jan. 1992. Dempsey, Stephen, "Aerial Dogfights over Europe: The Liberalization of EEC Air Transport", J.C.A.L. 1988. ____, "Airline Deregulation and Laissez-Faire Mythology: Economic Theory in Turbulence", J.A.L.C. Vol. 56, 1990. ____, "The State of the Airline, Airport & Aviation Industries", International Conference on Multilateral Aviation in the 1990s", Singapore, 22 Feb. 1993. Evans, Graham, "Australian Views on Bilaterals and the Nationality of Airlines", Airline Business Conference, London, 30 June - 1 July, 1992. Fahy, Richard J. Jr., "Deregulation in the United States: Success or Failure?", International Business Lawyer, June 1988. Fitzerald, Gerald F. Q. C., "The Lease, Charter and Interchange of Aircraft in International Operations - Article 83 his of the Chicago Convention on International Civil Aviation", AASL, Vol. VI. 1981. Gadzik, J.G., "Nationality of Aircraft and Nationality of Airlines as Means of Control in International Air Transportation", 25 J.A.L.C. 1958. Gertler, Joseph, "Nationality of Airlines: A Hidden Force in the International Air Regulation Equation", J.A.L.C. 1982. ____, "Self-Enforcement of Bilateral Air Transport Agreements", AASL, Vol. XIV, 1989. p. 117. Guima, Joanny, "Why Yamoussoukro?", ITA, No. 52, Nov./Dec. 1988. Jennison, Michael B., "Bilateral Transfers of Safety Oversight will prove beneficial to all States", ICAO Journal, May 1993. c - 143- Kasper, Daniel M., "The GATT Approach: Applying the GATT to Air Services; Will it Work?" ITA, No. 58, Nov/Dec. 1989. 0 Koo, Gerald M.F., "Foreign Participation in the United States Airlines", McGill Thesis (LL.M), Institute of Air and Space Law, 1989. Levine, Michael E., "How can the non-liberalized survive in a liberalizing air transport world?", ITA No. 60, Mar./Apr. 1990. Lowenfeld, Andreas F., "Competition in International Aviation: The Next Round, International Conference on Air Transport and Space Application in the New World, Tokyo 2-5 June 1993. Marconini, Mario A. "GATS and the Liberalization of Air Transport Services, ICC Commission on International Air Transport, Paris, 18 June 1993. Mathew, Samuel, "the Pacific Basin/South East Asia Perspective on Globalization", Speech to Phoenix 2nd Annual Symposium, 22 April1993. Meyer, Helene, "Asia's fears concerning the single European market", ITA Nov./Dec. 1989. Mifsud, Paul V., "Foreign Investment in Air Transport in the Emerging Multinational Era", International Conference on Air Transport and Space Applications in a New World, Tokyo, June 2-5, 1993. ____, "The KLM/Northwest Airlines Case and General Principles applicable to all Investments and Cooperative Arrangements between the U.S. Air Carriers and Foreigners", Air Law, Vol. XV. No. 1. 1990. ____, "The Multinational Airline"- Airline Business Conference. London, 30 June- 1 July, 1992. Milde, Michael, "Nationality and Registration of Aircraft by Joint Air Transport Operating Organizations or International Operating Agencies", AASS, Vol, X, 1985. Oum, Tae Hoon, "Strategic Airline policy in the Globalizing Airline Networks", Nov. 18, 1992. Papaioannou, Athanassios, "the Employer's duty to bargain over lay-offs in the Airline Industry: How the Courts have distorted the Railway Labor Act", J.A.L.C., Vol.55, Pavaux, Jacques, "The Lessons of US Airline Deregulation", ITA No. 54- March/Apri11989. Pytte, "Anti-Lorenzo, Trump Fervor Fuels LBO Bill in House", Con. Q. Weekly Rep., Nov. 4 1989 Scocozza, Matthew V., "EEC-US Aviation relations and cabotage", ITA, Jan./Feb. 1990 Stockfish, Bruce, "Opening Closed Skies: The Prospects for Further Liberalization of Trade in International Air transport Services", J.A.L.C. 1992. Stewart, John T. JR., "United States Citizen Requirements of the Federal Aviation Act -A Misty Moor of Legalisms or the Rampart of Protectionism", J.A.L.C. 1990. Wassenbergh, Henri A., "Open Skies" I "Open Markets": the Limits to Competition", International Conference on Air Transport and Space Applications in a New World, Tokyo, 2-5 June 1993. -----• "The Future of Multilateral Air Transport Regulation in the Regional and Global Context, AASL, Vol. Vlll, 1983. Wheatcroft, Stephen, "Towards Transnational Airlines", Tourism Management. Dec. 1990. Wood, Bernard, "Foreign Investments in National Airlines and the Significance of the SASIBCAL Decision, Air Law, Vol. XIII, 1988.

[Periodicals and Newsletters]

- 144- Air Transport World Airline Business 0 Aviation Daily Aviation Europe Aviation Week and Space Technology Commercial Aviation News Economist Financial Times Flight International Frequent Flyer ICAO, Annual Report of the Council, 1991. Interavia Letter Journal of Commerce Official Journal of the European Communities. The Avmark Aviation Economist Travel Weekly The WCP Status Report: Aviation in the European Community Wall Street Journal

[Cases]

Barcelona Traction. ICJ Report (1970). I.M.C.O .. ICJ Reports, ICR 30. 426. In Acguisition of Northwest Airlines by Wings Holdings. Inc., DOT Order no. 46371 (87-8-43). Cop_perweld Corp .. v Inde_oendence Tube Corp., 467 US 752, 81 LEd 2d 628, 104 S Ct 2731 [No. 82-1260] In Willye Peter Daetwyer. 58 CAB 118 (1971).

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