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The dance between BA and Qantas is over

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In Brief

The dance between BA and Qantas is over, at least for a while.

The dancers are looking at other partners: BA has a Spanish interest and Qantas is apparently (and wisely) scanning the Asian horizon – reports are that next on its dance card might be Malaysian Airlines.

In any other globalised sector, these choices would be up to the market but not in aviation where rights of access to markets are still negotiated bilaterally and the identity of airlines that get access to those rights depends on their ownership.

In many aviation agreements, the rights to fly between two countries are only given to airlines owned by either country.  Airlines of a third country are generally kept out. This is the case even in so-called Open Skies agreements.  They do lift limits on capacity offered by designated, that is, locally owned, carriers but don’t open markets to third parties.


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At the same time, competition is intensifying.  The contributors to increased competition are

  • rising traffic volumes and growth of networks, leading to competition between different routings (this effect is especially important for Australia located at the end of many long route structures, for example, into Europe or Asia)
  • competitive pressure associated with subsidies, government ownership, methods of bankruptcy protection and different tax regimes (these issues were stressed by the recent National Aviation Policy Green Paper), and because
  • better performance by airlines of some regions in which governments are moving faster to reform and creating the scope for their airlines to benefit from cooperation and cross-ownership, for example, in Europe.

But the options for adaptation to competitive pressures are constrained by the fear that any response involving new ownership structures will lead to a loss of access to markets.

Airlines should be allowed to merge, to capture the advantages they seek either in terms of the design of networks to suit customers or in the search for cost savings through relocation of their component activities.  But at the same time, the ownership rules need to be relaxed in the bilateral agreements.

At one level, this could be done by accepting flights operated by airlines based in, even if not owned by, nationals of the countries involved in an agreement.   But this would still be restrictive.

A better strategy is to give access to routes by airlines based in third countries.   These are called ‘seventh freedom rights’.

These options will also help ease the competition policy concerns about the mergers that we’d expect to occur, because their use reduces the barriers to entry into these markets.

Both options are canvassed in the Australian Green Paper.  It proposes that the Australian negotiators trade 7th freedom rights, ‘subject to a national interest test’.  It also proposes to ‘continue seeking incorporation of principal place of business criteria in bilateral agreements’.

These plans are welcome.  But the change will be slow and there is value in consistency in the approach.  International cooperation on a set of rules would help, including rules on subsidies.

Cooperation at a regional level is one option. And an association with ASEAN on these issues is worth thinking about.

The WTO and GATS offer an overarching set of principles on how to proceed, and there is no reason to continue to exclude ‘hard’ air transport rights from the WTO, which astonishingly continues to be case.

The bottom line – getting air transport inside the GATS is good for airlines because it gives them options for adjustment in challenging times.

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