Ahmad Omid Tawakkoli An Evaluation of the Open Skies Policy in Afghanistan Evidence from the Afghan-UAE Air Service Agreement Volume | 002 Bochum/Kabul | 2016 www.afghaneconomicsociety.org An Evaluation of the Open Skies Policy in Afghanistan Evidence from the Afghan-UAE Air Service Agreement Ahmad Omid Tawakkoli Keywords: Open Skies Policy in Afghanistan, Afghan Civil Aviation, Airline Liberalization, Afghan- UAE Open Skies Agreement. 1- Abstract As a result of the liberalization and privatisation initiatives that took place in post-Taliban Afghanistan, the aviation industry also took steps toward practicing liberal environment of operations. As a particular example is the Afghan-UAE Air Service Agreement (ASA) signed in late 2013, which is an Open Skies Agreement (OSA): an agreement that calls for a total ban on any non-market intervention regarding airfares, capacity, frequency and/or number of designations from the side of eider parties. A comparative study of the Afghan-UAE route in terms of flight frequency and passenger flow 2013- 2015 with the Afghan-India route which is governed by a traditional frequency restricting ASA showed that, however, both routes expanded in both terms, the growth rate of included factors of the liberalized route does not exceed those of the traditionally governed one. Meanwhile, the study of the Afghan carriers’ position in the market showed that there is a consistent plummeting trend in Afghan companies share in Afghan-UAE route in terms of flight numbers and passenger load. While the Afghan-Indian route showed that overall, the Afghan companies’ position was improving in studied time periods. 2- Data Sources and Field Research The primary data source for this study is the consolidated data of flight frequency and passenger flow 2013-2015 with the distinction of the share of each involved carrier in two routes: Afghan-UAE and Afghan-India. These data are provided by the Afghan Civil Aviation Authority’s (ACAA) department of operations. Although, the above mentioned data provided meaningful sources for conducting the study, it lacked information regarding the applied average fares of each flight in respective time periods as well as some qualitative data that’s needed for discussions. 1 Therefore, regarding the prices and qualitative data, a questionnaire combined of three parts was designed. The first part aimed to provide mainly qualitative information on how involved carriers see different aviation policies. While, second and third parts aimed to provide mainly quantitative data regarding the Afghan-UAE and Afghan-India routes respectively. The designed questionnaire could provide project with some of the missing data. However, right after its conduction, it was understood that it had been very difficult to reach all involved carriers and/or to convince them to provide highly credible data regarding the average of fares in the targeted time span. Due to the absence of an organised database in some of these carriers, the problem was more severe in case of the data that had financial and time-series analytical nature. Finally, the main data source for empirical part of the study is the consolidated data of the flights frequency and passenger flow in both respective routes. While, some of the mainly qualitative data that came from interviews and questionnaires with officials and CEOs of carriers, are used for discussions and some relative deductions. 3- Context and Objectives of the Study Post-Taliban, the airline industry, like any other industry, has gone towards a more liberal attitude both in domestic and foreign markets. In international routes, Afghan government turned to either renegotiate some of its already existing ASAs or sign new air service agreements with respective states. Among all air service agreements Afghanistan has signed with other nations, the most focused government regulation is the ASA Afghanistan signed with the United Arab Emirates (UAE) in late 2013. Unlike other even most liberal agreements applied so far, the Afghan-UAE ASA has open skies policy specifications. i.e., no fare control, no limited frequency and capacity, allowed multiple designations and destinations. Therefore, the implementation of this liberal policy attracted other UAE based airlines to expand their operations in the market. This matter caused the already established Afghan carriers involved in this route to come across with intense competition pressure from UAE based airlines: airlines that are considered to be far more advanced both in technical and in business levels worldwide. While, there has been complaints from the side of the Afghan carriers that open skies policy is very destructive and not fitting one regarding the situation of Afghan aviation industry, aeronautical officials argue that the primary goal of this policy was to increase market efficiency through increased competition. 2 Therefore, as despite ongoing discussions and judgements regarding open skies policy, there was still a need to a comprehensive study that would bring about a base for these discussions, sort out the actual impacts the policy has had and evaluate them. Henceforth, this study generally aims to provide the following questions with meaningful and credible answers: - Does the open skies policy which is being practiced in Afghan-UAE route benefit passengers more than other policies? - How does the open skies policy affect the Afghan civil aviation industry? - Does the open skies policy benefit the Afghan economy as a whole? In the end, it is expected that this study would prevail needed information and judgement bases on the open skies policy in order to address the above mentioned research questions. 4- Theoretical Framework; Modelling Analysis The general framework of evaluating the aftermaths of a regulation in an economic sector is through defining the direction of the impact it might have. Usually, the primary base of the evaluation in this regard is the predefined expected outcomes from implementation of a specific regulation. This consensus can also be employed while evaluating the impacts of an OSA. The main expectation from open skies s that as it would relieve industry from restrictions, an increase in number of suppliers will increase competition and decrease air fares through a shrinking monopoly power and implementation of new cost-saving technologies (Alves & Forte, 2013; Winston & Yan, 2015). As argued above, for a general evaluation of an OSA, one can look upon the policy’s impacts on the fares, flight frequency and passenger flow (Winston & Yan, 2015; Intervistas-ga, 2006; Micco & Serebrisky, 2006). As based on its importance, this study alongside with the evaluation based on the standards mentioned above, will also include some descriptive comparative analysis of the Afghan civil aviation industry’s performance in both routes, one regulated by an OSA and the other subject to a non-OS agreement. Hence, in order to base the evaluation of the OSA in Afghanistan, a simple form of descriptive cross- section analysis is used which is based on the three years consolidated data of flights and passenger flow in both mentioned routes. While the main method would be a cross-sectional descriptive analysis 3 of the Afghan-UAE route, the production of foundations for this analysis is through a time-series analysis of each route individually. To formulize: % = 100 (Equation 1) −−1 −1 ∗ In equation above, % shows the percentage of yearly change in passenger flow in time t and route j. Passflowt j and Passflow t-1j are the number of passengers carried in the period t and before t in the same route. % = 100 (Equation 2) ℎ−ℎ−1 ℎ ℎ−1 ∗ In equation 2, % is the percentage of yearly changes in flight frequency of route j in period t. while, ℎ and are the number of flights occurred in the same route in time t and the timeℎ before t respectively.ℎ −1 Then, while equations above would provide time-series results in each individual route, these results are then employed in comparative cross-sectional manner for each respective factor in each time period. Finally, this part would allow one to evaluate OSA based on how it benefited passengers. In this part, factors Flight Frequency and Passenger Flow are chosen based on the rationale that a change in aviation regulation would directly affect these factors mainly through the price channel and these policy aftermaths are easy to trace also in the short run. In order to evaluate the policy from the national industry’s point of view, changes in the market share of Afghan carriers in terms of flight frequency and passenger flow is studied in each route and in each specific period. These figures in each individual route is then compared to show how the OSA is evaluated based on the changes in Afghan carriers’ position in OSA-subject route. Hence, % . = 100 (Equation 3) −−1 −1 In equation above,ℎ % . is the percentage∗ change in Afghan carriers’ share in terms of passengers in periodℎ t and route j. While, and are the number of passengers carried by these carriers in the same route in time t and the period−1 before t or the base time respectively. 4 % . = 100 (Equation 4) ℎ−ℎ−1 ℎ ℎ ℎ−1 ∗ In equation 4, % . is the percentage change in Afghan carriers’ share of flight frequency in time t ℎand routeℎ j. while, and are the number of flights operated by Afghan carriers in the sameℎ route and in time t ℎand the time− 1before t respectively. Regarding the choice of a comparative cross-section method in both evaluation standards, it should be said that in this case, conducting only a time-series analysis of the Afghan-UAE route would bring about results measuring the changes without considering any other exogenous factor that would had affected the whole industry. Therefore, choosing a comparative cross-section analysis of two selected routes, would force any exogenous factor to stay impartial, factors that affect both routes in a given point of time and in the same direction.