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Air Travel Center About This Website
In the shadow of World War II, free nations gathered in Chicago to lay a foundation for international air transportation. A number of nations, including the United States, argued for a multinational free-market environment. Others, and notably the British, argued for a more restrictive environment and their views prevailed. Today, international air transportation is among the most restricted forms of international commerce. Service is provided under bilateral agreements negotiated between the two nations served. Unlike the multilateral agreements of the World Trade Organization (WTO), international aviation services are banned unless authorized by these bilateral agreements.
While the Chicago convention failed to produce a free aviation market, it did create the safety and other regulatory infrastructure, which has enabled air transportation to transform the world’s economy in the jet age, bringing diverse peoples together, generating knowledge and understanding, inhibiting prejudice, catalyzing cultures, and stimulating commerce.
The bilateral air service agreements negotiated between nations traditionally seek a reciprocal balance of benefits for the airlines of both countries. As the United States had the largest domestic air travel market, and therefore more major airlines than other countries, it became increasingly difficult from the 1970’s onwards, for other countries to find benefits for U.S. carriers that balanced the benefit they sought for their own carriers in a new bilateral. The user – the air traveler and the shipper – and the economic needs of cities were not considered a serious factor until the formation of USA-BIAS became a balancing force in U.S. international aviation policy.
Bilateral agreements govern all economic aspects of the air service provided between two countries. The "restricted" agreement leaves governments regulating capacity, price, as well as the markets to be served. A "liberal" agreement tends to remove government restrictions on capacity and pricing but still defines which markets can be served. An "Open Skies" agreement essentially deregulates market aspects of the service to be provided between the two countries.
The first aviation bilateral agreement was negotiated between the United States and Great Britain and is known as "Bermuda 1". Negotiators from both sides were flown to the Island of Bermuda by the U.S. Army Air Corps and left there until they had hammered out an agreement.
Bermuda 1 became the template for many other bilateral agreements negotiated through to the early 1970’s.
In 1978 the United States and Great Britain negotiated a significantly different bilateral agreement, which expanded market access for the consumer but which still tightly regulated capacity, pricing, and other marketing factors. This agreement became known as Bermuda 2. Subsequently, a growing number of bilateral air agreements of a liberal nature were negotiated with other countries.
United States Airports for Better International Air Service (USA-BIAS)
In March 1988, four U.S. cities formed a coalition to seek greater access to the international air transport system in order to facilitate their economic growth. The existing bilateral agreements tended to limit service to traditional gateway cities whose commercial centers had been established by sea commerce in the previous century. In the United States, U.S. airlines had no incentive to serve new cities when the bilateral restricted their foreign competition from so doing.
In 1990, the U.S. Department of Transportation, in response to USA-BIAS member concerns, introduced the "Cities Program". This program enabled a foreign carrier to serve a U.S. city without negotiation of a new bilateral agreement provided a number of conditions were met. The two principle conditions were that:
no U.S. carrier was willing to serve the route; and a liberal air service agreement was already in place with the foreign country. The Cities Program thus became a precursor, and a stimulus for the next step – "Open Skies".
By October 1993, nine USA-BIAS cities had gained 17 new international services, generating more than $3.8 billion a year (1993 dollar values) in new economic activity and an estimated 83,000 new jobs.
In the early 1990’s, the United States negotiated a radical new "Open Skies" agreement with the Netherlands and this was followed in 1995 by an essentially Open Skies agreement with the Canadians. The Netherlands agreement probably was motivated largely by a U.S. desire to help Northwest Airlines (which was at the time in financial difficulties) through an alliance with KLM. However, the U.S.-Canadian agreement was driven by economic need argued by a coalition of approximately 40 U.S. and Canadian cities, a coalition coordinated on the U.S. side by USA-BIAS.
These agreements set a new standard for bilateral agreements in which market aspects were essentially deregulated so that the air carriers of the two nations were free to serve any points they wished in the other’s country, setting fares and service standards based on commercial considerations, not government regulation.
Air service rights under bilateral agreements are broken into a series of freedoms, defined in simplistic terms below.
The First Freedom is the freedom for a civil aircraft from Nation "A" to over-fly Nation "B".
The Second Freedom is the freedom for a civil aircraft from Nation "A" to make a non-traffic stop in Nation "B".
Freedom for a civil aircraft from Nation "A" to carry revenue traffic to Nation "B" is the Third Freedom and to carry revenue traffic back from Nation "B" to Nation "A" is the Fourth Freedom.
The fifth and subsequent freedoms relate to a service continuing beyond Nation "B" and are generally referred to as "Beyond Rights". Their definition varies somewhat.
The Fifth Freedom is the right for an aircraft from Nation "A" to set down and pick up revenue traffic in Nation "B" and carry Nation "B’s" traffic to a third Nation "C".
The Sixth Freedom, like the Fifth Freedom, invites the carriage of third Nation traffic. The Sixth Freedom is the right of an airline from Nation "B" to carry revenue traffic back from Nation "C" to Nation "A" via Nation "B".
During the 1970’s a Seventh Freedom was added to help Iceland. This enabled an airline from Nation "A" to provide scheduled service between Nations "B" and "C" without the flight also serving Nation "A". Today, Seventh Freedoms hold major potential significance for expanded service between Europe and North America.
Cabotage is the carriage of traffic between two points in one country by the airline of another country, i.e. a foreign airline providing domestic service in another country. "Cabotage" derives from maritime regulation and the French word for coastal trading in one country by coastal vessels registered in another.
Airlines are given the nationality of the country in which they are based and principally owned. The United States and many other countries have laws restricting the level of foreign investment in their carriers. The purpose of these laws originally was to prevent foreign interests getting control of a domestic asset which would be mobilized in time of war.
These restrictions mean that airlines, unlike other companies, cannot merge across national borders or use major infusions of capital from foreign sources, without the owner of the capital essentially surrendering all semblance of control.
In the U.S. at least, there is a subtle difference between foreign investment in a U.S. carrier and "rights of establishment", that is the right of a foreign airline to establish a U.S. domestic airline bearing the foreign carrier’s brand name and product standards using a mix of U.S. and foreign capital.
Airline flight numbers begin with two letters designating the airline – the airline’s code. When two airlines wish to link their services a bilateral agreement can provide authority for one airline to operate service under the code of another. For example, when a domestic carrier schedules a flight to connect with an international carrier, the service can be sold as a one-stop flight under the brand name of one of the two partners, normally the airline flying the international leg. (There also are domestic code shares between regional and major carriers.)
These code shares can facilitate the growth of international service by adding traffic to make a new international service commercially viable. Code shares can also be deceptive as they can imply a level of service not provided on the domestic leg of the flight or they can imply a higher frequency of service when both airlines place their own code and flight number on the same flight. Also, passengers expecting to fly under one brand find themselves flying on an aircraft operated by an airline they may never have heard of. However, code sharing has led to major airlines auditing their code share partner’s operating standards and in some instances requiring heightened safety and service standards.
The alliances go beyond code sharing as they seek to harmonize the route systems of several international airlines into a single worldwide network. In the United States, anti-trust immunity must be authorized by the Department of Transportation (in conjunction with the Department of Justice) before two or more airlines may discuss harmonized pricing and service standards. Similar restrictions can apply in other countries as part of national competition policies. For the United States, creation of an Open Skies bilateral is a required precursor to the grant of any anti-trust immunity to a U.S. and foreign carrier alliance, although a thorough competition analysis still is required.
