ATCM-WP/13 TWELFTH MEETING OF THE AFCAC AIR TRANSPORT COMMITTEE (Dakar, Senegal, 30-31October 2012) Theme: Sustainability of Air Transport Agenda Item 5: Air Carrier Ownership and Control RELAXING THE RULES FOR AIRLINE DESIGNATION AND AUTHORISATION AND THE SIGNIFICANCE OF THE YD ELIGIBILITY CRITERIA (Presented by AFCAC) SUMMARY This paper provides Africa’s strategy for sustainability of air transport, through the harmonisation of the authorisation and designation of airlines based on a common set of criteria and the need for flexibility in order to facilitate African Airline access to international capital markets. The common set of criteria is based on the YD eligibility criteria. The benefit is to enable eligible African airlines the possibility to gain access to the international capital market, and also encourage cooperation via consolidation, mergers and acquisition as well as cross border investments. Action: Recommended action is stated in section 5 1. INTRODUCTION: 1.1 The substantial ownership and effective control provision, commonly found in ASA is not a provision of the Chicago Convention, but has its origin in the International Air Services Transit Agreement. Article I, Section 5 of the cited treaty establishes the right of each State to withhold or revoke a certificate or permit to an air transport enterprise of another State in any case where it is not satisfied that substantial ownership and effective control are vested in nationals of a contracting State. 1.2 With globalisation and liberalisation of the industry, in particular airline privatisation, alternative ownership and control models have emerged. The ICAO proposed clause for the designation of carriers however seem to be the most favoured (CONF/5-2003). The proposed clause permits designation subject to the requirement of incorporation, principle place of business and effective regulatory control as attributed to the designating State. 1.3 In practice, States have considerable latitude and discretion in the interpretation of what constitutes substantial ownership or interpreting what constitutes effective controli. To give meaning to the concept of effective control, the key question is who actually exercises a decisive influence on the airline, in particular (a) the right to use all or part of the assets of the airline (the financial test) and (b) on ATCM-WP/13 the composition, voting or decision making powers in the governing bodies of the airline, the management and the running of the airline (the management test). Hence some analysts posit that such provisions are just aero political clauses in ASAii , which in practice means that judgement is made according to the precise facts of every case, particularly in closed bilateral negotiations. For instance, the US has waived the nationality requirement for airlines registered in States that meet FAA category I safety/security requirements and that have concluded an “open skies” agreement with the US. 1.4 Given the prevalence of the traditional ownership and control criterion in BASAs, globally, airlines have also developed several cooperation and partnership strategies, as ways of going round the ownership restriction including global alliances, mergers and acquisition, joint ventures, minority ownership, franchise operations, subsidiaries, code-sharingiii and in some cases operation of multiple hubs. 1.5 Where ownership and control restrictions have been removed, there is evidence that the airlines, consumers and employees have benefited. For consumers, the possibility of closer integration between currently nationality-tied airlines and the emergence of new entrant airlines, all with better access to global capital sources, offers the potential for more competition, greater network connectivity and better value services to consumers. For airlines, access to foreign capital and management resources, combined with opportunities for restructuring, provides options already available to most other global industries, but denied to airlines. For employees, liberalisation of ownership and control rules should enable efficient airlines to grow, increasing sustainable employment opportunities. 2. OWNERSHIP AND CONTROL WITHIN THE YD REGULATORY FRAMEWORK 2.1 The Yamoussoukro Decision (YD) is the continental agreement with the aim of gradually liberalization of scheduled and non-scheduled intra African air transport; a Regulatory framework for intra-African air service agreement. Its provision on ownership and control, adopted the ICAO proposed clause in replacing “substantial ownership and effective control” by the concept of “principal place of business and effective regulatory control”. The importance of this provision lies in the opportunities it creates for increased access to international foreign equity participation in African airlines and the possibly of encouraging the restructuring of African airlines through cross border capital injection and consolidations. 2.2 Designation and authorisation: Article 6 of the Decision provides the right of States to designate in writing, (a) At least one airline to operate the intra-African air transport services, (b) The right to designate an Eligible Airline from another State party to operate air services on its behalf and (c) The right to designate an Eligible African multinational airline in which it is a stakeholder. 2.3 Revocation of authorization: Should a State Party (Article 6.5) be convinced that a designated airline does not meet the Eligibility criteriaiv (as defined in Article 6.9), it may refuse authorization. A State may also revoke, suspend or limit the operating authorisation of a designated airline of the other State Party when the airline fails to meet the criteria of eligibility (article 6.10) ATCM-WP/13 2.4 The YD eligibility criteria are also an important consideration in the designation of an African airline by an AU States in any ASA with an EU member State/States (http://au.int/en/dp/ie/sites/default/files/Guidelines-EN.pdf). The AU guideline specifies that an African State should designate an airline that meets the eligibility criteria set forth in Article 6.9 of the YD. The EU regulations on ownership and control are found in EU regulation 2407/92 and it requires that in order to obtain and retain an operating licence, an air carrier must be majority owned and effectively controlled by EU nationals. 2.5 Therefore making determination as to the Eligibility of a given airline is critical to the successful implement of the YD. Amongst its eight criteria, four have relevance to the subject matter of ownership and control, as follows: The airline should- Criteria (a): be legally established in accordance with the regulations applicable in a State Party to the decision. Criteria (b): have its headquarters, central administration and principal place of business physically located in the State concerned; Criteria (c): be duly licensed by a State Party as defined in Annex 6 of the Chicago Convention; and Criteria (g): be effectively controlled by a State Party. 3. MAIN CHALLENGES TO OPERATIONALISATION OF YD 3.1 An eligible African airline is akin to the concept of “a common or community carrier”, with the rights to operate within an Open Africa Aviation Area (OAAA). YD allows several possibilities for the designation of airline(s) for intra-African traffic as indicated in Article 2.2. However, there are regulatory challenges that demand further guidance materials to enable the fair application of these criteria. 3.2 Establishing “effective regulatory controlv”, is quite a complex issue with several considerations to be made. We have differences in applicable national regulations in the establishment of airlines, with many States still retaining the need for substantial ownership by nationals. Thus in applying criterion (a), a potentially eligible airline is de facto restricted to the applicable national regulations in cases where domestic regulations demand substantial ownership. To give recognition to the provisions in YD, Party States will need to amend their national laws in synchronisation with the eligibility criteria and designation provisions of the YD. 3.3 Also despite the YD criterion (g) on eligibility, the old model clause requiring substantial ownership or its variants can still be found in several intra-African States’ BASA, particularly Articles on designation and/or authorisation. 3.4 The use of traditional ownership and control criterion in BASAs, limit the opportunities of many undercapitalised African airlines access to capital markets. Carriers based in the US, the EU and other developed economies have well developed equity markets and can therefore access such capital domestically. The majority of African airlines do not have the same luxury of a developed domestic capital market, start-up airlines common in Africa have weak credit ratings and as a consequence, most African airlines face higher cost of capital. Guidance is required on how States can take advantage of the ATCM-WP/13 eligibility provisions in the YD, to enable States and their airlines exploit the available capital markets within the continent. 3.5 One of the noted impacts of the traditional ownership clause on airlines is the restriction imposed on cross border mergers and acquisition. Given the size and scale of many African airlines, consolidation is a necessary condition for the sustainable development of air transport in Africa. Despite the challenges, African airlines need to be engaged in similar cooperation strategies as indicate in paragraph 1.4