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Copyright Information
Ensuring Global
Competitiveness in the
Airline Industry
by Francesco Fiorilli*
I. Introduction
The term "globalization" is defined as the increasing interna-

tionalization of markets for goods and services, the means of pro-
duction, financial systems, competition, corporations, technology,
and industries, which allows increased mobility of capital, faster
propagation of technological innovations, and an increasing inter-
dependency and uniformity of national markets.,
The emergence of such phenomena is usually attributed to the
opening of new markets to competition, the liberalization of
trade, the development of new rules for market access, and tech-
nological innovations, 2 including, of course, the development of
international air transport, which allows faster and cheaper
transactions on a global scale.
Strangely enough, however, the air transport industry, a major
catalyst of the globalization process, is still trapped in a thick net
of anachronistic bilateral (more or less) protectionist relations,
which prevents the establishment of a more solid and competitive
industry at the global level.
Indeed, under a system where governments trade, on a bilat-
eral basis, the rights (rectius "privileges") of airspace access, ox-
ymoronically called "Freedoms of the Air, "3 "the government
* The author holds a J.D. from the Catholic University of the Sacred Heart of
Milan, Italy, and a LL.M. (Hons.) Advanced Legal Studies in Air and Space
Law from the International Institute of Air and Space Law, Leiden University,
The Netherlands.
I UNITED NATIONS, MANUAL ON STATISTICS OF INTERNATIONAL TRADE
IN SERVICES Annex II, glossary (2002).
2 A. CHENG-JuI Lu, INTERNATIONAL AIRLINE ALLIANCES: EC COMPETI-
TION LAW/US ANTITRUST LAW AND INTERNATIONAL AIR TRANSPORT
pref., xxiii (2003).
3 ICAO, MANUAL ON THE REGULATION OF INTERNATIONAL AIR TRANS-
PORT ch. 4.1, ICAO Doc. 9626 (2nd ed. 2004).
102 Issues in Aviation Law and Policy [Vol. 11:1
barter, not the entrepreneurial acumen of airline managements,

has been the principal instrument of new transnational market
development in this most technologically precocious industry."4
Moreover, limitations placed both by air services agreements and
national legislation on the ownership and control structure of air
carriers prevent access to foreign capital, know-how, and technol-
ogy; inefficiently prevent airlines from exploiting commercial op-
portunities ensured by globalization; and, using the words of
Giovanni Bisignani (former Director General and CEO, Interna-
tional Air Transport Association (IATA)), put "flags on the tails of
our aircraft . . . so heavy they are sinking our industry."5
Somewhat recent developments in the air transport industry,
such as airline alliances, code-sharing agreements, mergers be-
tween airlines (although limited by nationality concerns), regional
initiatives among like-minded States, and so on, clearly show the
need to rethink and restructure international aviation so as to
open the global marketplace for international airline operations.
Although it was made more than sixty years ago, a statement of
the Canadian delegate, John Baldwin, at the ICAO Commission
on Multilateral Agreement on Commercial Rights, could still de-
pict the current problems in the air transport industry: "When we
inch forward where we could step forward, we are not carrying
out our obligations to the peoples of the world." 6
Leaving air transport economic regulation to market forces
does not mean removing any kind of control, but rather ensuring
through the ex post application of competition or antitrust re-
gimes that the market develops fairly and efficiently. Remarka-
bly, as recently underlined by Ulrich Schulte-Strathaus (Secretary
General, Association of European Airlines) at the International
Aviation Club in Washington D.C., the purpose of regulatory ac-
tivity is to "address imbalances, divergences of policies, and dis-
tortions to competition."7 Should this burden be left to unilateral
4 B.F. HAVEL, BEYOND OPEN SKIES: A NEW REGIME FOR INTERNATIONAL

AVIATION 9 (2009).
5 IATA, EcoNomics BRIEFING No. 7: AIRLINE LIBERALISATION, Fore-
word, at 3 (2007).
6 ICAO, Records of the Commission on Multilateral Agreement on Com-
mercial Rights in International Air Transport pt. 1, at 152, ICAO Doc.
5230, A2-EC/10 (Apr. 1948).
7 Ulrich Schulte-Strathaus, Secretary General, Association of European
Airlines, Address at the International Aviation Club of Washington: 2011:
A Year of Many Crossroads and a Year to Act, Not Delay (Jan. 18, 2011).
2011] Ensuring Global Competitiveness in the Airline Industry 103
initiatives - which could include extraterritorial applications and

could hide protectionist approaches - or should these issues be
addressed multilaterally or at least through a common approach,
thus creating a global level playing field coherent with air trans-
port's inherent "cosmopolitan mentalitd"?"
A. The Rise of Bilateralism
By the mid-1940s, traffic on the world's commercial airlines

had grown substantially; as World War II entered its final stage,
the international community started to become concerned about
the development of international air transport in the post-war
era, realizing the need for "multilaterally negotiated solutions to a
growing number of political, economic and technical problems."9
The International Civil Aviation Conference, held in Chicago
in November 1944, was perceived by many as an unprecedented
opportunity to create a "new world order . . . based on openness,
trade and mutual co-operation within a multilateral frame-
work."10 The Conference faced the confrontation of two political
attitudes, respectively supported by the two major aviation pow-
ers. The United States pressed for a laissez-faire philosophy and
free trade approach, based on unrestricted rights for airlines so as
to allow air transport services to be provided efficiently and eco-
nomically;II the final aim was a multilateral exchange of the five
"Freedoms of the Air."' 2 The United Kingdom pushed for the
8 A brilliant expression coined by Brian Havel. B.F. Havel & G.S. Sanchez,
Restoring Global Aviation's "Cosmopolitan Mentalit6," 29 B.U. INT'L L.J.
1 (2011).
9 P.S. Dempsey, Turbulence in the "Open Skies": The Deregulation of Inter-
nationalAir Transport, 15 TRANSP. L. J. 305, 310 (1987).
10 L. De Palacio, Speech at the Aviation in the 21st Century, Beyond Open
Skies Ministerial, Chicago: The TCAA - A Blueprint for the 21st Century
Chicago (Dec. 6, 1999), in 2 AIR & SPACE EUR. 15 (2000).
11 B. Stockfish, Opening Closed Skies: The Prospectsfor FurtherLiberaliza-
tion of Trade in InternationalAir Transport Services, 57 J. AIR L. & Com.
599, 603 (1991).
12 The use of the term "freedoms" has generated strong criticism. Indeed,
considering the sovereignty principle embodied in Article I of the Chicago
Convention, it would be more accurate to define them as privileges rather
than freedoms. Professor A.F. Lowenfeld even pronounced himself "of-
fended" by the use of the term "freedom" in the Chicago system, "because
the freedoms of international civil aviation seemed to be available for sale
or barter, not what one thinks of as a characteristic of freedom." See
HAVEL, supra note 4, at 104 n. 19. For a definition of the "Freedoms of the
Air," see ICAO, supra note 3.
104 Issues in Aviation Law and Policy [Vol. 11: 1
establishment of an international regulatory body to distribute in-

ternational routes and determine capacities, frequencies, and
fares, so as to guarantee that its air transport industry would re-
cover after World War II without having to face tough competi-
tion from its U.S. counterpart.' 3
Neither of the two approaches made its way through the Chi-
cago Conference; as a compromise, the economic regulation of in-
ternational air transport was left out of the Chicago
Convention.' For fear of being left out of the international air
transport market and fearing the monopoly/oligopoly of the
United States and the few other States capable of providing air
services, other States viewed the bilateral and reciprocal ex-
change of traffic rights as the only way to control the develop-
ment of commercial international air transport, while ensuring
their participation - actual or potential - in the market. Thus,
starting from these early developments, "the mission of every
country with an airline capable and desirous of handling transna-
tional services [has been] to facilitate its airline's access to foreign
markets, while simultaneously protecting its own market from an
influx of foreign carriers."' 5 To quote Professor Bin Cheng,
"every newborn "freedom of the air" [has become] in reality an
additional shackle on the right to fly of foreign carriers, to be re-
moved only at a price,"' 6 which usually includes broader political
and economic objectives.17
In the view of Henry Wassenbergh, Article 6 of the Chicago
Convention, providing that "[n]o scheduled international air ser-
vice may be operated over or into the territory of a contracting
State, except with the special permission or other authorization of
that State, and in accordance with the terms of such permission
or authorization," 8has become "the starting point for the present
restrictive bilateralism in the exchange of operational and traffic
13 Dempsey, supra note 9, at 312.

14 Convention on International Civil Aviation pmbl., opened for signature
Dec. 7, 1944, 15 U.N.T.S. 295 [hereinafter Chicago Convention].
i5 G. Porter Elliot, Antitrust at 35,000 Feet: The ExtraterritorialApplication
of United States and European Community Competition Law in the Air
TransportSector, 31 GEO. WASH. J. INT'L L. & ECON. 185, 186 (1997).
16 B. CHENG, THE LAW OF INTERNATIONAL AIR TRANSPORT 322 (1962).
17 K. Button, The Impacts of Globalisation on InternationalAir Transport
Activity 7, 8 (paper presented at the OECD/ITF Global Forum on Trans-
port and Environment in a Globalising World, Guadalajara, Nov. 10-12,
2008).
18 Chicago Convention, supra note 14, art. 6.
rights for international scheduled air services,"19 thus represent-

ing the charter of bilateralism. 2 0 Other commentators reach an
extreme conclusion by asserting that Article 6 "required a nation
seeking international air rights to negotiate bilaterally with the
target nation."2 ' With all due respect, such a conclusion is
incorrect.
Indeed, the Chicago Convention does not contain any reference
to the bilateral method of exchange of traffic rights; Article 6 sim-
ply requires States to obtain prior authorization from other States
to operate scheduled international air services, but it is silent on
whether such authorization should be granted unilaterally, bilat-
erally, plurilaterally,22 or multilaterally. 23 As correctly pointed
out, any invocation of the Chicago Convention as a basis for bi-
lateralism "may violate signatories' goal of sound and economic
airline operation" 24 established in its preamble.
Since the early protectionist agreements, which included price-
fixing, capacity and frequency limitations, and limitations on the
designation of air carriers, important steps forward have been
made toward an increasing liberalization of international air
transport services. Starting in 1992, for instance, the United
States, inspired by the important results of domestic liberaliza-
tion, has led such reform by developing the so-called Open Skies
model agreement, a renewed initiative "to temper the mercantil-
19 H. Wassenbergh, Parallelsand Differences in the Development of Air, Sea

and Space Law in the Light of Grotius, 9 ANNALS AIR & SPACE L. 163,
171 (1984).
20 Stockfish, supra note 11, at 606.
21 F. Allen Bliss, Rethinking Restrictions on Cabotage:Moving to Free Trade
in PassengerAviation, 17 SUFFOLK TRANSNAT'L L. REV. 382, 389 (1994)
(emphasis added).
22 Etymologically, plurilateral and multilateral are synonyms (from Latin
plures and multi, meaning "many"). Within the WTO, however, pluri-
lateral agreements have been defined as those agreements between a nar-
rower group of signatories than the WTO membership. See http://www.
wto.org/english/thewto e/whatis e/tif e/agrmlOe.htm. For the scope of
this article, reference to plurilateral agreements will be made to indicate
those agreements between more than two States, but considerably fewer
than the number of States parties to the Chicago Convention.
23 P.P.C. Haanappel, The External Aviation Relations of the European Eco-
nomic Community and the EEC Member States into the Twenty-First
Century, Part II, 14 AIR L. 122, 141 (1989).
24 R.D. Lehner, Protectionism,Prestige and National Security: the Alliance
Against Multilateral Trade in InternationalAir Transport, 45 DUKE L.J.
436, 457 (1995).
ism . . . of the original restrictive bilateral model," 2 5 so as to grant

contracting parties unlimited access to operate services to, from,
and beyond any point in each other's territory. However, still
blinded by the post-Chicago developments, States have failed to
fully interpret the signals coming from the market and to provide
adequate solutions. Indeed, despite the inspiring name given to
the United States' initiative, the skies are still (partly) closed off
by the inherent limitations of bilateralism, by restrictions on cab-
otage, and, more importantly, by restrictions on foreign owner-
ship of national carriers. 26 As Loyola de Palacio stated in her
speech at the 2001 IATA World Transport Summit in Madrid,
"Open Skies agreements do not really pave the way for responsi-
ble globalization, but continue to be bilateral in nature." 2 7
B. Nationality Requirements
Since the emergence of bilateralism in air transport relations,

ownership and control clauses have been included in the great
majority of air services agreements concluded by States, and we
still find them in the most recent and most liberal Open Skies
agreements. 28 The traditional text provides that:
[e]ach Contracting Party reserves the right to
withhold or revoke the privileges specified in . . .
the present Agreement enjoyed or to be enjoyed by
an airline designated by the other Contracting
Party . . . in any case where it is not satisfied that
substantial ownership and effective control of such
airline are vested in the Contracting Party
designating the airline or in nationals of such Con-
tracting Party. 2 9
25 HAVEL, supra note 4, at 13.

26 P. Mendes de Leon, Before and After the Tenth Anniversary of the Open
Skies Agreement Netherlands - US of 1992, 28 AIR & SPACE L. 280, 288
(2002).
27 L. de Palacio, Speech at the IATA World Transport Summit: Globaliza-
tion - The Way Forward (May 27-29, 2001).
28 See Agreement on Air Transport between the United States of America
and the European Community and Its Member States art. 4, Apr. 30,
2007, 2007 O.J. (L 134) 4 (EC) [hereinafter EU/U.S. Air Transport Agree-
ment], available at http://www.state.gov/documents/organization/114872.
pdf.
29 Civil Air Transport Agreement between the United States of America and
Japan art. 9(a), Aug. 11, 1952, 212 U.N.T.S. 27.
Under and by virtue of this clause, for instance, Japan reserves

the right to revoke the United States' designation of Delta Air-
lines to provide international air services under the agreement if
Delta is not substantially owned and effectively controlled by the
United States government or by American citizens.
The origin of nationality requirements is sometimes sur-
rounded by confusion and is the subject of much controversy in
air law debates. 30 Such confusion usually stems from the miscon-
ception that the Chicago Convention of 1944 is the source of the
traditional nationality clause. Nothing is more erroneous. The
Convention, with few exceptions, such as Article 7, Article 77 et
seq., and Article 81,31 and despite a few proposals advanced dur-
ing the Conference, 3 2 is not concerned with the nationality of air-
lines, but rather with the nationality of aircraft.33 The first
appearance of the nationality clause in post-World War II air
transport relations was rather in the other two instruments
adopted during the Chicago Conference, namely the International
Air Services Transit Agreement (Transit Agreement) and the In-
ternational Air Transport Agreement (Transport Agreement),
which contain this identical language: "[e]ach contracting State
reserves the right 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."34
The nationality clause as drafted in the Transit and Transport
Agreements is, however, more liberal, allowing every airline to be
"substantially owned and effectively controlled by the nationals
of any other contracting State, of which there were intended to be
30 P. Mendes de Leon, Establishment of Air Transport Undertakings - To-

wards a More Holistic Approach, 15 J. AIR TRANSP. MGMT. 96, 96-97
(2009).
31 These Articles make reference to an "airline of a State," but without defin-
ing the appropriate criterion to establish the link between the airline and
the State, which is thus left to national laws.
32 For a detailed analysis of these proposals, see Z.J. Gertler, Nationality of
Airlines: a Hidden Force in the InternationalAir Regulation Equation,48
J. AIR L. & Com. 51, 57 et seq. (1982).
33 P.P.C. Haanappel, Airline Ownership and Control, and Some Related
Matters, 26 AIR & SPACE L. 90, 91 (2001).
34 International Air Services Transit Agreement art. 1(5), opened for signa-
ture Dec. 7, 1944, 84 U.N.T.S. 389; International Air Transport Agree-
ment art. 1(6), opened for signature Dec. 7, 1944, 171 U.N.T.S. 387
(emphasis added).
many."35 The objective that States wanted to achieve at the Chi-

cago Conference by including a nationality clause in the two mul-
tilateral instruments is clear when taking into account the
political scenario at that time. At the time of World War II, the
world was split: Allied and neutral powers on one side, Axis pow-
ers on the other; only the former were invited and able to partici-
pate at the Chicago Conference. The United States delegation at
the Chicago Conference referred to the problem of ex-enemy and
present-enemy States or nationals, concluding that it would have
been undesirable if traffic rights that were granted to friendly
States were then passed into other hands without any control or
possibility of intervention by the grantor State. 36 Indeed, in the
light of the strong pre-war German participation in the owner-
ship and control of airlines operating in Latin America, the
United States wanted, to a certain extent, to develop a sort of
Monroe Doctrine specific to aviation.37
With specific regard to the development of the nationality
clause in the bilateral system, ownership and control restrictions
can also be found in the Standard Form of Agreement for Provi-
sional Air Routes (hereinafter "Standard Form") 38 adopted at the
Chicago Conference, although there is one important difference
when compared to the language used even in most recent bilater-
als. Indeed, Article 7 of the Standard Form provided that sub-
stantial ownership and effective control were to be vested in
nationals of either of the two parties concluding an air services
agreement.39 The same model clause was also included in the
Bermuda I agreement, 40 while its successor, the Bermuda II
agreement 41 - and the majority of bilateral air services agree-
ments today - provided for a more restrictive clause according to
35 P.P.C. HAANAPPEL, THE LAW AND POLICY OF AIR SPACE AND OUTER
SPACE - A COMPARATIVE APPROACH 146 (2003).
36 Gertler, supra note 32, at 61.
37 Id. at 62.
38 Standard Form of Agreement for Provisional Air Routes (1944), reprinted
in 39 AM. J. INT'L L. 111, 118 (1945).
39 Id. at 120.
40 Agreement Between the Government of the United States of America and
the Government of the United Kingdom of Great Britain and Northern
Ireland Relating to Air Services Between Their Respective Territories art.
6, Feb. 11, 1946, 3 U.N.T.S. 253.
41 Agreement between the Government of the United Kingdom of Great
Britain and Northern Ireland and the Government of the United States of
America Concerning Air Services art. 3(6), Jul. 23, 1977, 1978 U.N.T.S.
21.
which substantial ownership and effective control of the carrier

could only be vested in nationals of the designating State.42
Despite the above arguments, it should be acknowledged that
the nationality clause itself, as laid down in bilaterals, is not in-
herently restrictive; thus, in theory, it leaves room for flexible ap-
proaches. Indeed, each party is granted the right to revoke the
operating authorization of an airline designated by the other
party, and thus room for discretion is left to States in deciding
whether, and to what extent, to avail themselves of the provision.
Traditionally, there have been a number of deviations from the
restrictive enforcement of nationality clauses, of which Scandina-
vian Airlines System (SAS) 43 and Air Afrique 44 are the best-
42 P.S. DEMPSEY, PUBLIC INTERNATIONAL AIR LAW 559 (2008).

43 SAS is a "joint operating organization" of three Danish, Swedish, and
Norwegian airlines, based on an agreement dating back to 1950. Strictly
speaking, the multi-national ownership structure of SAS does not comply
with the traditional nationality requirement; nevertheless, the three coun-
tries, in their individual bilateral agreements, use a designation clause that
allows them to designate SAS to provide international air transport
services.
44 Air Afrique was established as a joint corporation, with the participation
initially of eleven African countries. The airline, which ceased its opera-
tions in 2002, was conceived as a common international airline, although
contracting States could entrust to it the operation of their domestic air
services as well. See Gertler, supra note 32, at 65 n.72. Another similar
example involves Gulf Air, an airline established in 1950 between
Bahrain, Oman, Qatar, and Abu Dhabi. See HAANAPPEL, Supra note 35,
at 146. In 1983, the 24th Session of the ICAO Assembly passed Resolution
A24-12 to ease the severity of the nationality clause for developing coun-
tries, inviting ICAO members to recognize a joint designation by several
countries of a single carrier owned and controlled by only one of those
countries or its nationals where that country is bound to the others in a
"community of interest." Several Member States of the Caribbean Eco-
nomic Community (CARICOM) used the ICAO initiative to designate
BWIA, substantially owned and effectively controlled by the Government
of Trinidad and Tobago, to serve their international traffic under the bi-
lateral agreements with the United States, United Kingdom, and Ger-
many, which accepted such designation. See B.F. Havel, A New
Approach to Foreign Ownership of Airlines, [2001-2004 Transfer Binder]
ISSUES AVIATION L. & POL'Y (CCH) 125,201, at 13,214 (2003). The im-
portance of the principle of "community of interest" in the development of
international air transport was confirmed in 2003 by the Fifth Worldwide
Air Transport Conference (ATConfl5). See ATConf/5 Declaration of
Global Principlesfor the Liberalization of InternationalAir Transport, in
ICAO, POLICY AND GUIDANCE MATERIAL ON THE ECONOMIC REGULA-
TION OF INTERNATIONAL AIR TRANSPORT 1-24, ICAO Doc. 9587 (3rd ed.
2008).
known examples.45 However, as correctly pointed out by Brian

Havel, ad hoc escapes from the traditional interpretation and en-
forcement of nationality clauses do not create the "regulatory cer-
tainty and predictability needed" 46 for an efficient and
sustainable development of international air transport towards a
more globalized dimension. Indeed, considering the high risks in-
volved, international airlines are not likely to engage in substan-
tial cross-border investment activities and/or cross-border
consolidations, unless they are one hundred percent sure that they
will not lose their traffic rights.
Limitations on foreign investment are also placed by domestic
legislation, which ensures compliance with nationality require-
ments laid down in bilateral agreements. While the right to re-
voke an airline operating authorization under the air services
agreements has proven, as illustrated supra, to be flexible, statu-
tory limits of national laws containing precise mathematic formu-
las prevent any liberal approach. In the United States, for
instance, the Federal Aviation Act of 1958 requires that an air
carrier apply for a "certificate of public convenience and neces-
sity" from the Department of Transportation in order to provide
scheduled or charter air transportation within the United States.47
Such certificate may only be issued to a "citizen of the United
States," defined by Section 1301(16) of the Act as:
(a) an individual who is a citizen of the United
States;
(b) a partnership each of whose partners is an indi-
vidual who is a citizen of the United States;
(c) a corporation or association organized under
the laws of the United States or a State, the Dis-
trict of Columbia, or a territory or possession of
the United States, of which the president and at
least two-thirds of the board of directors and
other managing officers are citizens of the
United States, which is under the actual control
of citizens of the United States; and in which at
least 75 percent of the voting interest is owned
45 Haanappel, supra note 33, at 95.

46 Havel, supra note 44, at 13,209.
or controlled by persons that are citizens of the

United States.4 8
Opponents to the uninhibited flow of investment capital in the
airline industry have developed their position on the ground (rec-
tius myth) that any change in the current system would have neg-
ative impacts on national security, national defense, employment,
competition, and so on. However, several studies 49 and several
commentators50 have clearly demonstrated how such arguments
are a mere expression of anachronistic national protectionisms,
inconsistent with the current needs of the industry.
II. Overcoming the Legacies of Bilateralism
A. The Airline Industry's Need for Change
The airline industry is usually defined as a capital-intensive in-

dustry with very high fixed costs, meaning that large investments
are needed in order to set up a company to provide air transpor-
tation, in an atmosphere where bilateral agreements, restrictive
government policies, and limited international traffic rights limit
the number of competitors. 5 ' Because of the ownership restric-
tions,52 companies are bound to look for major investments
within their jurisdiction; this is an extremely high burden, espe-
cially for developing countries. In the era when airlines were
State owned or subsidized, such restrictions did not create partic-
ular problems, because those airlines could always rely on their
governments' "deep pockets" to finance their (inefficient) opera-
48 49 U.S.C.A. § 40102(a)(15). The requirement of "actual control" was ad-
ded only by an amendment in 2004 in order to solve the interpretative
uncertainty caused by the "ownership or control of 75% of the voting in-
terest" requirement. For a detailed analysis, see HAVEL, supra note 4, at
139 n.182 et seq. and accompanying text.
49 See, e.g., UNITED STATES GENERAL ACCOUNTING OFFICE (GAO), AIR-
LINE COMPETITION: IMPACT OF CHANGING FOREIGN INVESTMENT AND
CONTROL LIMITS ON U.S. AIRLINES, GAO/RCED-93-7, at 50 (1992).
50 See, e.g., D.M. KASPER, DEREGULATION AND GLOBALIZATION: LIBERAL-
IZING INTERNATIONAL TRADE IN AIR SERVICES (1988); K. Bohmann, The
Ownership and Control Requirement in U.S. and European Union Air
Law and U.S. Maritime Law - Policy; Consideration;Comparison, 66 J.
AIR L. & CoM. 689 (2001); R.S. Holtan-Murphy, Flying the Unfriendly
Skies: Federal Aviation Regulations as Regulatory Takings, 2003 Wis. L.
REV. 699 (2003).
51 K.G. Debbage, The InternationalAirline Industry: Globalization,Regula-
tion and Strategic Alliances, 2 J. TRANSP. GEOGRAPHY 190, 191 (1994).
52 See supra note 29 and accompanying text.
tions; on the other hand, in a more and more privatized industry,

governments today create difficulties for private investors, thus
preventing the airline industry from developing efficiently.
Cross-border mergers and takeovers, a key feature of other indus-
tries' efficient development, are hampered, preventing the inter-
national air transport industry from becoming an "integral part of
the modern, global economy, both influencing and being influ-
enced by the pattern of economic development." 53
Bilateralism and nationality principles also prevent the airline
industry from benefitting entirely from economies of scale and
density affecting its structure.54 Indeed, airlines are prohibited
from establishing their networks according to their needs and po-
tential, and are limited to the traffic rights negotiated by their
States of nationality. In this regard, inefficiencies are double-
faced: on the one hand, they prevent airlines from developing ac-
cording to their potential and from ensuring adequate scale or
density benefits; on the other hand, they "encourage all States to
set up their own airlines irrespective of their traffic potential (a
drain on economy) and of the fact that they may not adequately
serve their national air transport interests (to consumers'
disadvantage). "
Faced with such limitations, along with the growing demand
for air services and increasing competition on the global level, air-
lines have been forced to look for alternative operating structures
in the form of alliances. The benefits of this approach are that
airlines "can integrate networks of products, services and stan-
dards and eliminate the unnecessary duplication of costs,"5 6 thus
providing more efficient services in more markets. Indeed, by
forming alliances, airlines are able to access more foreign points
and therefore feed more traffic through their hubs and effectively
compete in the global market. Although alliances have become a
common practice in the airline industry, ranging from mere code-
53 ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

(OECD), THE FUTURE OF INTERNATIONAL AIR TRANSPORT POLICY: RE-
SPONDING To GLOBAL CHANGE 8 (1997).
54 B. VASIGH, K. & T. TACKER, INTRODUCTION To AIR TRANS-
FLEMING
PORT ECONOMICS: FROM THEORY TO APPLICATIONS 99-100 (2008).
55 S. Tiwari & W.B. Chick, Legal Implication of Airline Cooperation:Some
Legal Issues and Consequences Arising from the Rise of Airline Strategic
Alliances and Integration in the InternationalDimension, 13 SING. ACAD.
L.J. 296, 308 (2001).
56 CHENG-JUI Lu, supra note 2, at 5.
2011]1 Ensuring Global Competitiveness in the Airline Industry 113
sharing agreements to recent so-called "metal neutrality"57 alli-

ances, they still are, and always will be, a second-best solution;58
"the operating efficiencies that make sense and a structure that
makes sense, is to allow to carriers to merge."59
Ultimately, it is clear what the market needs and what path
should be followed in the future by the air transport industry.
Concepts such as "passengers, cargo and mail destined to a par-
ticular State or leaving that State are the birthright of the na-
tional carrier of that State,"60 are nothing but an obsolete burden,
preventing the sound and economic development of international
civil aviation.6'
The underlying question is: should every State be allowed to
have its own airline waving the national flag across the globe,
without taking into account its efficiency or inefficiency and
without allowing more efficient carriers, irrespective of their na-
tionality, to perform the same kind of service, for the benefit of all
air transport stakeholders? National pride and protectionism still
pervade (unfortunately) the industry, based on a probably errone-
ous interpretation, driven by States' sovereignty-obsessed poli-
cies, of the preamble of the Chicago Convention according to
which "international air transport services may be established on
57 See U.S. DOT, Joint Application of American Airlines, British Airways,

Finnair,Iberia,Royal JordanianAirlines under 49 USC §§ 41308-41309
For Approval of and Antitrust Immunity for Alliance Agreements, Dkt.
No. DOT-OST-2008-0252, Order to Show Cause, at 3 (Feb. 13, 2010);
SkyTeam Antitrust, Dkt. No. OST-2004-19214, Order to Show Cause, at
2, 30, 37 (Dec. 22, 2005):
[A]n industry term meaning that the partners in an alliance are
indifferent as to which operates the "metal" (aircraft) when they
jointly market services. Without a metal neutral sales environ-
ment, the partners have a strong economic incentive to book pas-
sengers on their own aircraft in order to retain a larger share of
the revenue for themselves, which may not be in the best interest
of the consumer or the alliance as a whole. Metal neutrality may
be achieved through revenue and/or comprehensive benefit shar-
ing arrangements.
Id.
58 C. Findlay & D.K. Round, The "Three Pillars of Stagnation": Challenges
for Air Transport Reform, 5 WORLD TRADE REV. 251, 258 (2006).
59 HAVEL, supra note 4, at 163, citing Airline Commission Proceedings, re-
marks of Commissioner Felix G. Rohatyn, Lazard Frares & Co., Chair-
man of Financial Issues Team (1993), at 221.
60 R. Abeyratne, Trade in Air Transport Services: Emerging Trends, 25 J.
WORLD TRADE 1133, 1136 (2001).
61 Chicago Convention, supra note 14, pmbl.
the basis of equality of opportunity."6 2 Indeed, having equal op-

portunity is a different concept than the actual ability to have
national carriers providing air transport services. In addition, the
same preamble continues, stating that international air transport
services should be operated "soundly and economically." 63 How
could an inefficient service, justified by the mere equality of op-
portunity, stand under such a concept?
Article 44(f) of the Chicago Convention mandates to ICAO to
insure that "every contracting State has a fair opportunity to op-
erate international airlines," to "meet the needs of the people of
the world for . . . efficient and economical air transport" 64 and to
"[p]revent economic waste caused by unreasonable competi-
tion." 6 5 Accordingly, a constructive interpretation of the above
provisions would conclude that the right of a State to have an
active role (i.e., having its own national carrier) in the operation
of international air transport services should be promoted and/or
guaranteed only when such services could be operated efficiently
and economically. Indeed, this is (or should be) the philosophy
behind any competition or antitrust law regime: not allowing new
entrants in the market at all costs, but rather promoting competi-
tion when it would result in more efficient and economic services
for consumers.
Overall, the removal of bilateralism and nationality restrictions
would indeed create advantages for the whole industry: States
would have a greater choice of carriers which they could desig-
nate to use their traffic rights; States without a national airline
could designate foreign carriers or alternatively attract a foreign
carrier to set up a subsidiary in their territory, thus participating
more efficiently in the development of international civil aviation;
airlines would be allowed to enter more markets, creating more
efficient networks in accordance with their needs and capacity;
and new services would be facilitated. 66
Despite all the efforts, the aviation industry in the 1940s was in
its infancy and therefore was not ready to "make a step for-
ward."67 Today, the industry itself is asking to make this step
62 Id. (emphasis added).
63 Id.
64 Id., art. 44(d).
65 Id., art. 44(e).
66 Tiwari & Chick, supra note 55, at 310.
67 Although it was made more than sixty years ago, a statement of Canadian
delegate, John Baldwin, at the ICAO Commission on Multilateral Agree-
forward. The following analysis focuses on the options available

to help the industry to become an integral part of the globalized
economy.
B. A Global Multilateral Exchange of Traffic Rights
Multilateralism still remains the primary objective of the Chi-

cago Convention, as confirmed by an early resolution of the Pro-
visional International Civil Aviation Organization (PICAO),
stating that "a multilateral agreement on commercial rights in in-
ternational civil air transport constitutes the only solution com-
patible with the character of the International Civil Aviation
Organization created at Chicago."68 Notwithstanding the relaxa-
tion of bilateral protectionism through more recent Open Skies
agreements, there is still a fundamental difference between "bilat-
eral freedom" and multilateralism: with the former, the "Parties
bilaterally undertake offering to air carriers, designated by them,
the possibility to freely compete;" 69 with the latter, the "Parties
withdraw from the marketplace and let the carriers, licensed and
authorized by them, take care themselves of their competitive
possibilities."70 Wassenbergh compares the 1992 Open Skies
Agreement between The Netherlands and the United States with
the multilateral common EU market to better illustrate the differ-
ences: under the Open Skies agreement the two governments "re-
main responsible to create the freedom of operation for their
designated air carriers as agreed upon;"' under the common EU
market "the governments of the Member States simply have relin-
quished their economic control over the airline industry, be it
only as far as the operations of their air carriers within the Union
are concerned, leaving it to the forces of the market place." 72
The benefits of multilateralism are multiple:
ment on Commercial Rights, could still depict the current problems in the
air transport industry: "When we inch forward where we could step for-
ward, we are not carrying out our obligations to the peoples of the world."
ICAO, supra note 6, at 152.
68 PICAO, Resolutions Adopted by the Interim Assembly, May 21-June 7,
1946, PICAO Doc. 1837-A/46, at 5 (1946).
69 H. Wassenbergh, Commercial Aviation Law 1998, Multilateralism Versus
Bilateralism,23 AIR & SPACE L. 22, 23 (1998).
70 Id.
71 Id. (emphasis in original).
72 Id. (emphasis in original).
* All producers could compete on an equal eco-

nomic footing from a trade rules perspective,
since all airlines would have access to networks
of competitive scale and scope; 73
* The market would provide concomitant benefits
to aviation consumers and to producers of other
goods and services for whom air transport is an
important intermediate service, by allowing them
access to the maximum possible choice in secur-
ing air transport services. Indeed, due to the en-
try of new players in the market, consumers
would have greater choice, and higher levels of
competition are likely to reduce fares and tariffs;
and
* It would minimize "accidental" advantages and
disadvantages of production and consumption
which have their origins in political geography.
Producers, consumers, and airline operators
around the world could benefit from services
provided by airlines based in countries with com-
parative advantage in airline operations but little
trade leverage. 74
In 2006, Rush O'Keefe, general counsel of FedEx Corporation,
called for a new Chicago Convention "to address the remaining
issues of aviation liberalization in an aviation-specific forum."75
Despite being a remarkable proposal, lessons from the past have
taught us that such an approach would be time-consuming and
dangerous, 76 bearing the risk of "re-institutionalizing the basic en-
73 According to economic theory, in economies of scale the average cost of

production decreases as a result of increasing the scale of production of
goods or services; in economies of scope the average total cost of produc-
tion decreases as a result of increasing the number of different goods or
services produced.
74 M.E. Levine, Scope and Limits of Multilateral Approaches to Interna-
tional Air Transport, in OECD, INTERNATIONAL AIR TRANSPORT: THE
CHALLENGES AHEAD 76 (1993).
75 International Aviation Law Institute, DePaul University College of Law
& Chicago Council on Global Affairs, Sustainable Aviation Policiesfor
America and the World: A Leadership Summit, at 15 (Oct. 19, 2006), avail-
able at http://lawprofessors.typepad.com/aviation/files/aviation summit
2006 synopsisO219.pdf.
76 Levine, supra note 74, at 78.
gineering principles of the old bilateral systems," 7 even more so

today under the legacy of years of bilateralism, which has proven
to be an excellent system to protect States' sovereignty obsession,
rather than the air transport industry's interests.
As an alternative, discussions in the aviation industry have fo-
cused on whether the exchange of traffic rights could be effi-
ciently brought under the umbrella of the World Trade
Organization's (WTO) General Agreement on Trade in Services
(GATS).7 8
1. General Agreement on Trade in Services
The GATS is one of the Annexes to the Agreement Establish-

ing the WTO. 79 It entered into force in January 1995 as a result
of the Uruguay Round negotiations to provide for the extension
of the multilateral trading system to services.80 All Members of
the World Trade Organization are signatories to the GATS and
must assume the resulting obligations.8 ' The GATS consists of a
framework agreement, sectorial annexes, and associated exemp-
tions, together with national schedules of commitments. 8 2 An-
nexes contain ad hoc regulations that amend the scope and
application of the General Agreement for specific services. 8 3 The
exceptionalism of air transport, due to the pervasiveness of ex-
isting regulation, has led negotiators to limit the GATS scope of
application through the Annex on Air Transport Services to so-
called "soft" rights, comprising computer reservation systems in
air transport, aircraft repair and maintenance, and selling and
marketing of air transport services.8 4 The Annex also carves out
a general exemption from the scope of the Agreement covering
"traffic rights, however granted" and "directly related activities
78 General Agreement on Trade in Services, Apr. 15, 1994, Marrakesh
Agreement Establishing the World Trade Organization, Annex IB, 1869
U.N.T.S. 183; 33 I.L.M. 1167 [hereinafter GATS].
79 Marrakesh Agreement Establishing the World Trade Organization, Apr.
15, 1994, 1867 U.N.T.S. 31874.
80 WTO, INTRODUCTION To GATS, http://www.wto.org/english/tratop e/
serv e/serv.e.htm (last visited July 10, 2011).
81 Id.
82 R. Ebdon, A Consideration of GATS and of its Compatibility with the
Existing Regime for Air Transport, 20 AIR & SPACE L. 71, 72 (1995).
83 See, e.g., supra note 78, Annex on Air Transport Services, Annex on Fi-
nancial Services, and Annex on Telecommunications.
84 Abeyratne, supra note 60, at 1145.
which would limit or affect the ability of parties to negotiate,

grant or to receive traffic rights or which would have the effect of
limiting their exercise."85
The GATS system itself does not necessarily liberalize sectors
under its umbrella.8 6 Indeed, every Member State is allowed "to
take unilateral commitments on specific market-opening initia-
tives, so that the pace of any liberalization is clearly within [its]
sovereign remit."87 As discussed infra, this feature is one of the
main stumbling blocks to the multilateral liberalization of traffic
rights under the GATS umbrella.
A detailed analysis of the agreement falls outside the scope of
the present study88 However, it is essential to address one of the
core principles of the GATS system, namely the Most-Favored
Nation principle (MFN), and the impacts it would have in the
liberalization of international air transport services.
The MFN, which is included in Article II(1) of the GATS,
reads: "With respect to any measure covered by this Agreement,
each Member State shall accord immediately and unconditionally
to services and service suppliers of any other Member State treat-
ment no less favourable than it accords to like services and ser-
vice suppliers of any other country."89
The wording of the Article clearly explains the lack of enthusi-
asm of the international aviation community towards the GATS
and its decision to exclude traffic rights from the system. The
MFN is indeed a non-discrimination principle, which in practice
makes the most liberal concessions available to any other member
State of the WTO; a principle which stands against the regulation
of international air transport as it exists today. Through bilater-
alism, States look for reciprocity; States look for concessions from
their counterparts that can compensate their grant of traffic
rights. Under the GATS regime, for instance, if the United States
and the European Union were to negotiate an Open Aviation
Area, they would be obliged to extend the same liberal treatment
to every GATS Member State, even the most protectionist States.
85 Id.
86 W. Hubner & P. Sauv6, Liberalization Scenarios for International Air
Transport, 35 J. WORLD TRADE 973, 977 (2001).
88 For a detailed analysis see HAVEL, supra note 4, at 526 et seq.; Hubner &
Sauv6, supra note 86; Abeyratne, supra note 60.
89 GATS, supra note 78, art. 2(1).
The above example clearly indicates the inherent difficulties in

applying the GATS system to air transport "hard rights." As pre-
viously mentioned, the system itself does not liberalize the air
transport market, but leaves to every State to decide the pace of
its liberalization. In a market with harmonized liberalization
commitments, the MFN does not create particular difficulties;
this is not, however, the case of international air transport, where
"the application of MFN treatment might seriously disadvantage
those who do open up their markets by making them vulnerable
to predatory attacks by those whose markets remain protected."90
In this regard, Jeffrey Shane commented that "a multilateral
agreement predicated on MFN would engender excessive caution
on the part of governments otherwise inclined to be generous in
extending market access opportunities."9 1 On the other hand, the
so called free-riders, namely those countries taking advantage of
other countries' liberal policies, would abandon or refrain from
any liberalization process in their own market, while enjoying un-
conditional access to more liberalized foreign markets. 9 2
Overall, the outcomes of the GATS system as it stands are
quite clear: instead of promoting the hoped-for global liberaliza-
tion of the air transportation market, such process could be seri-
ously undermined.
Nonetheless, the GATS provides itself certain instruments to
eliminate or at least reduce the free-riders problem. The second
paragraph of Article 2 provides that "[a] Member may maintain a
measure inconsistent with paragraph 1 [the MFN provision] pro-
vided that such a measure is listed in, and meets the conditions
of, the Annex on Article II Exemptions."93
In practical terms, in the air transport market, this article
would allow States to exempt certain bilaterals, most likely the
most liberal ones, from the application of the MFN principle.
However, while exemptions provide a certain flexibility within
application of the strict MFN rule, as one commentator pointed
out, the underlying risk is that States would rush toward exemp-
90 Hubner & Sauv6, supra note 86, at 977.

91 ICAO, World-Wide Air Transport Colloquium (Apr. 6-10, 1992) [1.15],
quoted in J. Platt, European Community Cabotage, 22 TRANSP. L.J. 61, 81
(1994).
92 See also P. MENDES DE LEON, CABOTAGE IN AIR TRANSPORT REGULA-
TION 65 (1992) (discussing the interpretation of Article 7(2) of the Chicago
Convention).
93 GATS, supra note 78, art. 2(2).
tions, thus "mak[ing] MFN [and the whole GATS system!] seem
superfluous. "94
Some scholars,95 together with the International Chamber of
Commerce,96 argue that the MFN clause could be ad hoc modi-
fied so as to be applied conditionally, based upon mirror reciproc-
ity, with a view towards a fuller application of the GATS at a
later stage. Accordingly, every WTO Member would be required
"to offer to all members the elements of its most favorable bilat-
eral agreement, on the basis of mirror reciprocity."9 7 For in-
stance, in a case where State A and State B have a liberal air
services agreement, while State A and State C have a restrictive
agreement, State C would be entitled to have same liberal access
to State A as soon as it becomes as liberal as State B. Other com-
mentators also suggest that the same result could be achieved
through a "sectoral Understanding, open only to those WTO
Members who would be willing to open up those rights on a re-
ciprocal basis to others who subscribed to that understanding," 98
relying on some precedents in the WTO for such an approach, for
instance in the field of government procurement. 99
Despite being brilliant proposals, it is clear that such modifica-
tions would stand against the inherent philosophy of the GATS
system, which should be maintained intact as far as possible. The
same results could indeed be achieved outside the GATS frame-
work through regionalism and plurilateralism, bringing together
groups of like-minded States with similar market structure and
political will. If developed efficiently, such an alternative system
would have the benefit of reducing the differences between
States' air transport policies, thus preparing the field for a future
inclusion of air transport "hard" rights in the GATS system.

95 Id. See also V. Rodriguez Serrano, Trade in Air TransportServices: Liber-
alizing Hard Rights, 24 ANNALS AIR & SPACE L. 199, 213-14 (1999).
96 International Chamber of Commerce, Committee on Air Cargo Transport,
ICC Policy Statement: Air Cargo and the WTO, ICC Doc. No. 322-3/5
Rev. 3, 5 (1998).
97 Id.
98 Hubner & Sauv6, supra note 86, at 979.
99 Id.
C. A Phased Multilateralism Starting from Bilateralism
From the previous analysis it is clearly understood that, despite

all efforts, the bilateral system is well-rooted in the current inter-
national air transport system. The more the proposed changes
depart from the system, the more difficult it will be to find an
agreement, or even a compromise.
In chemistry, certain substances, called catalysts, if added into
a system, have the ability to bring about or to speed chemical
reactions. In a different scenario, although it might be considered
a "romantic" view, actions taken by major aviation players could
have the power to provoke a chain reaction in air transport rela-
tions on a global scale. Experiences from the past clearly demon-
strate this assumption. For instance, the Bermuda I agreement
between the United States and the United Kingdom became the
model for bilateral negotiations on a global scale; the first Open
Skies agreement, concluded in 1992 between the U.S. and The
Netherlands, brought the air transport industry into a new era of
liberal air transport relations. Apparently, every time such a
chain reaction has been provoked, there have always been two
"catalysts": the United States and Europe. Indeed, their historical
importance in air transport is undisputed (although today, Middle
East and Asian carriers are becoming more important).
1. EU/U.S.
In September 1999, the Association of European Airlines

(AEA), conscious of the role of the two aviation powers, pub-
lished a policy statement entitled Towards a TransatlanticCom-
mon Aviation Area (TCAA).oO Notably, the AEA envisioned a
"new, modern regulatory framework for international air trans-
port"'0 ' which would have been "suitable for gradual application
worldwide;"10 2 a system "intrinsically different from that underly-
ing conventional aviation bilaterals.11o 3 In what way was this
proposal different from even the most liberal Open Skies agree-
ment? All the air carriers of the TCAA would have been granted
unrestricted commercial opportunities to fly to any point within
100 AssOCIATION OF EUROPEAN AIRLINES (AEA), ToWARDS A TRANSATLAN-

TIC COMMON AVIATION AREA (1999).
101 Id. at 1.
102 Id. at 3.
103 Id. at 5.
the TCAA, including points within the same domestic jurisdiction

(i.e., cabotage),104 and all restrictions on ownership and control
within the TCAA would have been lifted, thus allowing them "to
balance out natural disparities in market opportunities . . . by
permitting carriers to migrate where sufficient opportunities are
available."l05
In her speech at the international conference "Aviation in the
21st Century, Beyond Open Skies" the then-EU Commissioner,
Loyola de Palacio, notably observed that "the two most important
air transport markets in the world, the U.S. and the EU, should
take the lead," 0 6 because any agreement of this type between the
two aviation powers "would have a major impact all over the
world."07 The benefits deriving from the establishment of a
TCAA were also welcomed by air carriers: Lufthansa's CEO ex-
pressed that the TCAA was "the only way to make some pro-
gress," 08 while the president of KLM stated that any failure to
move beyond bilateralism would liken air transport to "a movie
industry doomed by its governments to produce only silent
movies."'"0
Unfortunately, ever since the beginning of the negotiations be-
tween the European Union and the United States in 2003, it was
clear that the agreement would not result in the hoped-for estab-
lishment of a TCAA. The agreement reached in 2007, despite
some developments, was still well-anchored to the old bilateral
tradition. 0 The agenda of the so-called "Second Stage Negotia-
tions" still left some enthusiasm about the possible outcomes.
Havel, in his book Beyond Open Skies, analyzed in detail the
structure of the agreement, the possible improvements, and its
possible effects on international air transport relations."'
Unfortunately (yet again), the Second Stage Agreement,'12
reached on March 25, 2010 did not make significant progress,
104 Id. at 7.
105 Id. at 8-9.
106 De Palacio, supra note 10, at 16.
107 Id.
108 J. Ott, Aviation Summit Yields EU Planfor Open Market, 151 AVIATION
WK. & SPACE TECH. 43 (1999).
109 Id.
Io EU/U.S. Air Transport Agreement, supra note 28.
III HAVEL, supra note 4, at 517-88.
112 Protocol to Amend the Air Transport Agreement between the United
States of America and the European Community and Its Member States,
thus attracting critics from the International Air Transport Asso-

ciation and other commentators." 3 Nevertheless, as clearly ex-
pressed by U.S. negotiator John Byerlyl1 4 during the 22nd
European Air Law Association Conference, because further de-
velopment is in both parties' interest, they will sooner or later
come to this point." 5
Overall, it must be concluded that, without criticizing the nego-
tiators and their results, the agreement represents a missed oppor-
tunity to boost changes in the international air transport market
scenario. This conclusion is particularly true when taking into
account a specific provision of the EU/U.S. Agreement, i.e. Arti-
cle 18(5), providing that:
The Parties share the goal of maximizing the
benefits for consumers, airlines, labor, and commu-
nities on both sides of the Atlantic by extending this
Agreement to include third countries. To this end,
the Joint Committee shall work to develop a propo-
sal regarding the conditions and procedures, in-
cluding any necessary amendments to this
Agreement, that would be required for third coun-
tries to accede to this Agreement.16
In a TCAA framework, such a clause would permit third coun-
tries to join the agreement. Accordingly, a group of like-minded
States would bring air transport relations into a new globalized
dimension through phased plurilateralism, in the same fashion as
some commentators suggested through the application of a condi-
tional MFN principle under the GATS system." 7
June 24, 2010, 2010 O.J. (L 223) 3 (EC), available at http://www.state.gov/

documents/organization/I 43930.pdf.
113 Press Release, Int'l Air Transp. Ass'n, IATA Statement on US-EU Agree-
ment (Mar. 25, 2010), available at http://www.iata.org/pressroom/pr/
Pages/2010-03-25-0 1.aspx.
114 Former U.S. Deputy Assistant Secretary of State for Transportation
Affairs.
'15 F. Fiorilli, Report on the 22nd Annual Conference of the EALA, 36 AIR &
SPACE L. 173, 173-74 (2011).
116 EU/U.S. Air Transport Agreement, supra note 28, art. 18(5).
2. EU/Canada
I informed the EU Ministers today that the nego-

tiations have been finalised. The new agreement
makes the EU-Canadamarket one of the most open
in the world and is a milestone for EU-Canada
relations. It will be key in further stimulating
EU-Canadatransatlantictrade. It is groundbreak-
ing in the aviation world as the agreement includes
all possible aspects of aviation, including
investment. 118
Antonio Tajani11
The EU/Canada Air Transport Agreementl 20 had been initialed
on November 30, 2008 in London and was politically endorsed by
the EU-Canada summit on May 6, 2009 and signed on December
17-18, 2009. The European Parliament on March 24, 2011 gave
its consent to the agreement, which was the final step in the pro-
cedure. It represents indeed a groundbreaking agreement in the
aviation world and is being construed to finally establish an Open
Aviation Area between Canada and the European Union. The
agreement, however, does not pursue this final objective through
a "big-bang" approach, but rather through a phased approach,
linking the opening-up of the market to a progressive relaxation
of ownership and control restrictions.
Phase One of the agreement began immediately after the agree-
ment was concluded. Foreign ownership of airlines on both sides
is limited to 25 percent (the statutory foreign investment restric-
tion in Canadian legislation). Regarding traffic rights, airlines
have unlimited freedom to operate direct services between any
point in Europe and any point in Canada, without limitations on
the number of airlines which each Government can designate,
and without restrictions on frequency. Cargo airlines will have
the right to fly onward to third countries. Passenger and combi-
118 Press Release, Europa, Breakthrough in EU-Canada Negotiations on Far
Reaching Aviation Agreement, IP/08/1914 (Dec. 9, 2008), available at
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1914.
119 Former EU Commission Vice-President responsible for transport.
120 Agreement on Air Transport Between Canada and the European Commu-
nity and Its Member States, Dec. 17, 2009, 2010 O.J. (L 207) 32 (EC)
[hereinafter EU/Canada Air Transport Agreement], available at http://ec.
europa.eu/transport/air/international aviation/country-index/doc/canada
finaltext agreement.pdf.
nation service are not expressly granted fifth and sixth freedom
rights, although the agreement leaves this issue to previously ne-
gotiated bilateral agreements with single Member States, which
de facto could grant such freedoms.121
Phase Two begins when Canada takes the necessary steps to
enable EU investors to own up to 49 percent of a Canadian car-
rier's voting equity. In terms of traffic rights, Canadian airlines
will be afforded intra-Union fifth freedom rights, while both par-
ties' all-cargo airlines would be granted the right to operate sev-
enth freedom services between points in each other's territories to
third countries. In fact, Canada introduced this possibility in
March 2009.122
Phase Three begins once both sides enable investors to incorpo-
rate and control new airlines in each other's markets, thus grant-
ing freedom of establishment to each other's citizens. For
example, Lufthansa would be allowed to create a Canadian sub-
sidiary to serve the intra-Canadian market - and vice versa. In
principle, a Lufthansa Canadian subsidiary could also be desig-
nated by the Canadian government to serve international routes
to and from Canada, subject of course to the acceptance of third
countries of the foreign ownership and control structure. The
third phase grants unlimited fifth freedom rights for passenger
and combination services.
Phase Four will enter into force once both parties allow 100
percent cross-border ownership of their airlines by the other
party's nationals. Annex II, providing for the phased approach,
will cease to exist and therefore full freedom to operate to, from,
beyond, and within each party's territory will be granted.
When and whether these objectives will be achieved, and
whether or not they would create some "reactions" in the interna-
tional scenario, is difficult to predict. Nevertheless such initiative
shows that, although slowly, the needs and the priorities of the air
carriers are making their own way through diplomatic air trans-
port relations. As mentioned earlier, however, steps forward
within the bilateral system are only a first step towards the
globalization of international air transport economic regulation.
121 Id., Annex 2, sec. 2(a)(iii).

122 K.S. Desay, Airline Ownership Restrictions, MAYER BROWN LEGAL UP-
DATE, Apr. 2011, at 3.
In this study, the analysis of EU/U.S. relations and that of EU/

Canada have been discussed ad seriatim for a specific purpose.
The three markets are close to each other, not only in geographi-
cal scope, but also from a regulatory and market point of view.
Despite the continuous resistance of U.S. negotiators (rectius
Congress) to the removal of bilateralism's legacies, it is concluded
that the walls are about to fall.123 Should the benefits of the EU/
Canada agreement be extended to the neighboring United States
under a plurilateral agreement, creating a tri-party Open Avia-
tion Area, it would likely (the author contends surely, although in
political relations unpredictability is the rule) provoke changes in
the world marketplace. It does not necessarily mean that other
countries will have to join the EU/U.S./Canada "club," especially
considering still ongoing divergences in market structures and
market policies; rather, States will look for other partners -
mainly neighboring countries sharing similar values, policies, and
market structures - to integrate their markets and become
stronger at the international level.
D. RegionalismIPlurilateralism as a Model to Go "Beyond

Open Skies"
1. Past and Recent Examples
Regionalism and plurilateralism are by no means new concepts

in the international air transport arena. Even within the PICAO,
discussions arose about whether limiting the territorial scope of a
multilateral agreement would have facilitated States in reaching
some sort of agreement in the exchange of traffic rights. In par-
ticular, during the failed 1946 discussion on the development of a
multilateral agreement on the exchange of traffic rights, the
United Kingdom notably recognized that "[t]he application of
[the] principle of international cooperation and . .. representation
would be easier, if we consider the application by regions rather
than by the entire world."24 Later, other proposals in this direc-
tion were advanced by the international community.125 For in-
123 See Statement of John Byerly at the 22nd EALA Annual Conference, in
Fiorilli, supra note 115.
124 PICAO, Commission Number 3 of the First Interim Assembly, Discussion
on the Development of a Multilateral Agreement on Commercial Rights in
International Civil Air Transport, PICAO Doc. 2089 - EC/57, 26 (1946).
125 Stockfish, supra note 11, at 643 (1991).
stance, in 1980 The Netherlands advanced a proposal for a

plurilateral agreement bringing together a group of like-minded
States,126 which, however, failed due to fears of losing market
share by air carriers of other European countries.127
In recent times, the most prominent example of plurilateral/re-
gional integration is the unification of the European air transport
market in 1992.128 Removal of restrictions on traffic rightsl29 and
on national ownership and control within the EU, thus creating
the concept of "Community Carrier,"130 have generated enormous
benefits in terms of traffic and competition. Between 1993 and
2007, the number of airline routes that were created increased 170
percent, the number of routes with two or more competitors in-
creased 300 percent, and the market share of low cost carriers
grew from one to 27 percent.' 3 '
Another example of regional/plurilateral integration is the Mul-
tilateral Agreement on the Liberalization of International Air
Transportation, concluded in 2001 by the United States and Asia-
Pacific Economic Cooperation (APEC) members Brunei, Chile,
126 H.A. Wassenbergh, A New PlurilateralApproach to International Air
TransportRegulation, in INTERNATIONAL AIR TRANSPORT IN THE EIGHT-
IES 205 (H.A. Wassenbergh & P. van Fenema eds., 1981).
127 Stockfish, supra note 11, at 643-44.
128 Liberalization was achieved progressively, beginning in 1986, through the
"three packages," culminating in Council Regulation No. 2407/92 of 23
July 1992 on licensing of air carriers, Council Regulation No. 2408/92 of
23 July 1992 on access for Community air carriers to intra-Community air
routes, and Council Regulation 2409/92 of 23 July 1992 on fares and rates
for air services. The three packages were ultimately replaced by Council
Regulation No. 1008/2008 establishing common rules for the operation of
air services in the Community. All are available at http://eur-lex.europa.
eu/en/index.htm.
129 Cabotage restrictions were not removed until 1997.
130 Council Regulation No. 1008/2008 defines a "Community air carrier" as
"an air carrier with a valid operating licence granted by a competent li-
censing authority in accordance with Chapter II," Article 2(11); under
Chapter II, Article 4 an undertaking can be granted an operating licence
provided that "Member States and/or nationals of Member States own
more than 50% of the undertaking and effectively control it, whether di-
rectly or indirectly through one or more intermediate undertakings, except
as provided for in an agreement with a third country to which the Com-
munity is a party."
131 J.R. Bonin, Regionalism in International Civil Aviation: A Reevaluation
of the Economic Regulation of InternationalAir Transport in the Context
of Economic Integration, 12 SING. Y.B. INT'L L. & CONTRIBUTORS
113-14 (2008), citing EUROPEAN COMMISSION DIRECTORATE-GENERAL
FOR ENERGY AND TRANSPORT, FLYING TOGETHER: EU AIR TRANSPORT
POLICY 5 (2007).
New Zealand, and Singapore.13 2 The agreement however, is less

innovative in its scope than the European Union integration. In-
deed, one commentator concluded that "despite the exultant
tone . . . the new agreement essentially stitched together the con-
tent of the individual bilateral open skies agreements and applied
it multilaterally."' In two main aspects, the agreement differs
from the idea of an Open Aviation Area: first, restrictions on cab-
otage remain in place; second, nationality clause restrictions, al-
though relaxed, remain in place. 1 34 The agreement substitutes the
traditional ownership test with incorporation and principal place
of business in the State of the designating party, but leaves the
"effective control" standard in place. De facto, movement of capi-
tal within the region is still restricted, considering that investors
are not likely to make important investments in another nation's
carrier without being able to exercise control over it.
2. Pros and Cons
The benefits of a plurilateral approach are many. First, it

would enable a small group of like-minded States - even non-
contiguous ones - with similar aeropolitical will to reach an
agreement with limited associated bargaining costs. Indeed,
when the number of parties is relatively small, "adjustments can
be made relatively quickly, with a low cost of renegotiation."l35
The other benefits arising from the non-geographical scope of a
plurilateral agreement derive from the fact that it would not be
necessary to "persuad[e] reluctant potential partners who happen
to be geographically contiguous to enthusiastic ones." However,
the risks are also many, thus requiring careful consideration.
Plurilateral agreements among non-contiguous States could cre-
ate tensions with contiguous States not sharing the same liberal
policies.' 3 6 In addition, the "withdrawal of a state from a noncon-
tiguous group of states may have the effect of making the geo-
graphic configuration of the remaining states commercially
132 Multilateral Agreement on the Liberalization of International Air Trans-
portation, May 1, 2001, 2215 U.N.T.S. 35 [hereinafter MALIAT], availa-
ble at http://www.maliat.govt.nz/agreement/index.shtml. After signature,
Cook Islands, Mongolia, Samoa, and Tonga acceded to the agreement.
Peru acceded but then withdrew.
134 MALIAT, supra note 132, art. 2(5), 3(5).
136 Id.
unviable."l37 For instance, a plurilateral agreement between the

EU, Singapore, and New Zealand could become commercially
unviable should Singapore withdraw from the agreement, since
no direct flights between EU and New Zealand could be operated
and thus the viability of the plurilateral agreement would depend
on the grant of beyond rights by other States "on route."
The regional approach also has several benefits. Indeed,
within economically integrated regions, "relaxation of national in-
terests becomes easier"' 38 because "much of the political give-and-
take . . . would already have taken place in the negotiations to
form the broader regional market."' 3 9 In addition, geographical
contiguity would help air carriers to better plan their networks,
especially in a hub-and-spoke system. Traffic through the region
would become the carriers' domestic market, providing the neces-
sary amount of feed traffic for extra-regional flights.140
Arguments against regionalism or plurilateralism are based on
the belief that they would create trading blocks, with a high level
of competition within the block but with great barriers for those
outside the block,1 4 1 and with new interests that would impede
extension of their membership.142 Whether it would happen is
difficult to predict, but the European experience stands against
such arguments: despite the creation of a unified trading block,
the TCAA initiative shows to a certain extent the willingness to
open its doors to foreign counterparts. In particular, with regard
to the impeded extension of membership, logic and politics would
indeed lead to the opposite conclusion: since the "bargain" will
take place between trading blocks, an extended membership basis
would give a trading block more bargaining power. With regard
to the great barriers for those outside the block, although it is true
that single States could have difficulties when "trading" with re-
gional blocks, such difficulties would push them to look for other
partners around the globe to set up their own trading block.
In the long run, the markets would be able to structure them-
selves in a similar way "such that there [would] be a fuller ex-
change of rights on a bilateral, or even further multilateral,
137 Id.
138 Bonin, supra note 131, at 120.
140 Id.
141 Hubner & Sauv6, supra note 86.
142 Findlay & Round, supra note 58, at 264.
basis."1 4 3 As these regional blocks would begin to grow and link-

up, the removed or reduced differences would create a truly inter-
national level playing field to make the "step forward" towards
multilateralism.
E. Moving Beyond the Nationality Clause
Arguments against restrictions on foreign investment have al-

ready been illustrated at the beginning of this section. What re-
mains to be seen is how a move beyond the nationality clause
could be made.
1. Safety
Whatever the form and pace of liberalization of ownership and

control, "conditions for air carrier designation and authorization
should ensure that safety remain paramount."l 44 The economic
needs of airlines are without any doubt important for the sound
and economical development of international air transport; how-
ever, a far more important and strict requirement for the opera-
tion of air services is their development in a "safe and orderly
manner."114 The current system based on nationality of airlines,
despite being anachronistic in terms of economic results, "ha[s]
been successful in ensuring that flags of convenience have not en-
tered aviation."146
Complete removal of ownership and control restrictions "could
open up opportunities for airlines regulated by countries with
lower safety standards to fly services between and within other
countries."14 7 Indeed while ICAO is in charge of providing the
aviation community with common safety standards, States still
retain different levels of safety standards.14 Two arguments are
usually made to show that flags of convenience are not likely to

144 Conclusions, Model Clauses and Recommendations of the Fifth World-
wide Air Transport Conference, in ICAO, supra note 44, app. 4, at A4-3.
146 Y.C. Chang & G. Williams, Changing the Rules - Amending the National-
ity Clauses in Air Service Agreements, 7 J. AIR TRANSP. MGMT. 207, 208
(2001).
147 U.K. Civil Aviation Auth., Ownership and Control Liberalisation: a Dis-
cussion Paper ch. 5, at 7 (Oct. 2006).
148 I. LELIEUR, LAW AND POLICY OF SUBSTANTIAL OWNERSHIP AND EFFEC-
TIVE CONTROL OF AIRLINES: PROSPECTS FOR CHANGE 82 (2003).
happen in aviation: first, that the choice of the country of registry

is usually based on whether the country is able to ensure attrac-
tive and profitable traffic rights, and not on factors such as costs
and safety standards;14 second, that major airlines would not ex-
pose themselves to bad publicity by re-registering in States with
perceived lower safety standards. 5 0 However, both arguments
exhibit weaknesses, especially considering the increasing liberali-
zation of the air transport market.
The risk of flags of convenience, however, does not mean that
other instruments aside from the nationality requirements could
prevent or even reduce them. One of the options available would
be that of liberalizing nationality clauses selectively, i.e., only for
countries in whose safety standards there is confidence.' 5 ' In-
deed, such an approach would not be new to aviation. When en-
tering into negotiations with its potential Open Skies partners,
the United States has always relied on U.S. Federal Aviation Ad-
ministration audits of these countries' safety oversight: only part-
ners meeting "category 1" safety standards, i.e., compliance with
minimum internationalstandards, have been able to sign Open
Skies agreements. 1 52 A similar approach has been adopted in the
European Union, by conducting inspections of third country air-
lines: the EU air carrier blacklist bans unsafe carriers' operation
in Europe. The inherent risks, however, relate to the possible
abuses of safety audits to pursue political rather than safety
objectives. In order to avoid such abuses, another option would
be granting more powers to ICAO to police the application of its
standards by particular States.15 3
2. Link Between an Airline and a State
Protection of safety can thus be ensured only by establishing a

genuine link between an air carrier and the State responsible for
supervising it. The starting point should be the magna charta of
international civil aviation, the Chicago Convention. As dis-
cussed in the first section of the present study, nationality clauses
included in bilateral agreements are the result of State sover-
eignty-obsession rather than the Chicago Convention itself. The
149 Bnhmann, supra note 50, at 727. See also LELIEUR, supra note 148, at 84.
150 U.K. Civil Aviation Auth., supra note 147, ch. 4, at 1.
151 Id., ch. 5, 1.
152 Id.
153 See also U.K. Civil Aviation Auth., supra note 147, ch. 4, at 2.
Convention, however, refers to the concept of "airline of a State,"

although without establishing the criteria to identify it. 154 Article
81 of the Convention reads:
All aeronautical agreements which are in exis-
tence on the coming into force of this Convention,
and which are between a contracting State and any
other State or between an airline of a contracting
State and any other State or the airline of any other
State, shall be forthwith registered with the
Council. 155
Article 7 also refers to the concept of "airline of a contracting
State"; however, this concept is not defined and is left to national
laws. Pablo Mendes de Leon notes that within the Chicago Con-
vention, the only mentioned criterion to establish the link be-
tween an airline and a State is the "principal place of business."'1 6
Indeed, Article 83bis of the Convention reads:
[W]hen an aircraft is registered in a contracting
State ... by an operator who has his principalplace
of business or, if he has no such place of business,
his permanent residence in another contracting
State, the State of registry may, by agreement with
such other State, transfer all or part of its functions
and duties as a State of registry. . . .157
Nevertheless, the "principal place of business" criterion is sur-
rounded by controversy, lacking a commonly accepted definition.
Many countries define the "principal place of business" as the
place where a company is incorporated, where its head office and
senior management are located.15 8 De facto, such definition
means that an airline could be incorporated in country A and
have its main operational center in country B. Such uncertainty
could blur the lines of responsibility and accountability for safety
supervision among the States involved.
154 Mendes de Leon, supra note 30, at 97.

155 Chicago Convention, supra note 14, art. 81 (emphasis added).
156 Id.
157 Id., art. 83bis (emphasis added).
3. ICAO Fifth Worldwide Air Transport Conference
The ICAO Fifth Worldwide Air Transport Conference pro-

vided a solution to remove these uncertainties by introducing the
requirement of State "effective regulatory control," so as to ensure
that safety oversight is exercised by the State where the airline
has its principal place of business. For the sake of clarity, the
Conference also suggested common criteria to determine the
"principal place of business" and "effective regulatory control":
Evidence of principal place of business is predi-
cated upon: the airline is established and incorpo-
rated in the territory of the designating Party in
accordance with relevant national laws and regula-
tions, has a substantial amount of its operations
and capital investment in physical facilities in the
territory of the designating Party, pays income tax,
registers and bases its aircraft there, and employs a
significant number of nationals in managerial, tech-
nical, and operational positions.
Evidence of effective regulatory control is predi-
cated upon but is not limited to: the airline holds a
valid operating licence or permit issued by the li-
censing authority, such as an Air Operator Certifi-
cate (AOC), meets the criteria of the designating
Party for the operation of international air services,
such as proof of financial health, ability to meet
public interest requirement, obligations for assur-
ance of service; and the designating Party has and
maintains safety and security oversight program-
mes in compliance with ICAO standards.15
In addition, the Conference developed a model clause to be in-
troduced at States' discretion in their air transport agreements:
Article X: Designation and Authorization
1. Each Party shall have the right to designate
in writing to the other Party [an airline] [one or
more airlines] [as many airlines as it wishes] to op-
erate the agreed services [in accordance with this
159 ICAO, supra note 44, app. 4, at A4-4.

Agreement] and to withdraw or alter such

designation.
2. On receipt of such a designation, and of ap-
plication from the designated airline, in the form
and manner prescribed for operating authorization
[and technical permission,] each Party shall grant
the appropriate operating authorization with mini-
mum procedural delay, provided that:
a) the designated airline has its principal place of
business [and permanent residence] in the territory
of the designating Party;
b) the Party designating the airline has and
maintains effective regulatory control of the airline;
c) the Party designating the airline is in compli-
ance with the provisions set forth in Article (Safety)
and Article (Aviation security); and
d) the designated airline is qualified to meet
other conditions prescribed under the laws and reg-
ulations normally applied to the operation of inter-
national air transport services by the Party
receiving the designation.
3. On receipt of the operating authorization of
paragraph 2, a designated airline may at any time
begin to operate the agreed services for which it is
so designated, provided that the airline complies
with the applicable provisions of this Agreement.160
Despite the efficiency of this solution in tackling safety con-
cerns within the bilateral system, adjustment would be needed
when implemented within a regional or plurilateral Open Avia-
tion Area (OAA). The philosophy behind an OAA is to grant the
airlines of Member States the freedom to provide air services
within the whole region, thus in principle having "substantial
parts of their operation" in more than one State. Safety authori-
160 Latin American Civil Aviation Commission, Agenda Item 27: Regulation
of internationalair transport services, and outcome of the fifth Worldwide
Air Transport Conference, Designation, Ownership and Control A-1
(ICAO Assembly, 35th Session, Economic Commission, Working Paper
No. A35-WP/259 EC/40, 2004), available at http://www.icao.int/icao/en/
assembl/a35/wp/wp259_en.pdf.
ties based in one country would have difficulties closely monitor-

ing an airline's operations throughout the whole region.' 6' In this
scenario it would be mandatory to have close cooperation among
national safety agencies in the region or to create a common
safety authority following the example of the European Aviation
Safety Agency (EASA). It is thus mandatory that States, if and
when they decide to create an OAA, and/or States wishing to join
a plurilateral OAA, meet common safety standards.
62
4. Free-Riders
In the GATS paragraph, supra, the main criticisms of the MFN

principle have been directed toward the free-riders problem,
reaching the conclusion that it would indeed undermine the liber-
alization of air transport on a global scale. The same concerns
also apply to the relaxation of foreign investment restrictions: un-
conditional removal of such restrictions would disincentivize "il-
liberal" countries from removing their own restrictions.
Accordingly, the same solution suggested for the GATS system 63
could be applied, mutatis mutandis, in this context by limiting the
removal of foreign investment restrictions to those countries will-
ing to grant similar concessions.
5. Consequences for External Relations
The last paragraph addresses the most delicate concern related

to the relaxation of foreign investment. Although the Fifth World
Wide Air Transport Conference articulated that "there is a wide-
spread support by States for liberalisation, in some form, of pro-
vision[s] governing air carrier designation and authorisation,"l64
at the same time there are various approaches to, and different
paces of, change.165 Therefore, countries willing to liberalize for-
eign investment restrictions could face the opposition of illiberal
countries, which would invoke bilateral nationality clauses to
withdraw traffic rights.

162 For an excellent analysis of the "free-rider" issue in the bilateral context,
see P. van Fenema, EU Horizontal Agreements: Community Designation
and the "Free Rider" Clause, 31 AIR & SPACE L. 172 (2006).
164 ICAO, supra note 44, app. 4, at A4-3.

A global approach would be the only fully efficient solution.

However, the ongoing differences between countries make this
option less likely to happen. In a plurilateral OAA, member
States have stronger bargaining power and thus will be more
likely to "impose" their will on their counterparts. In this respect,
the European Union stands as an example: although not without
difficulties, Member States and the European Commission on
their behalf are amending their bilateral agreements to include
the recognition of Community carriers. The major difficulties
arise from bilateral and/or unilateral removal of foreign invest-
ment restrictions. Convincing respective counterparts will surely
be a tough process. Nevertheless, it is submitted that, as in the
liberalization of traffic rights, major aviation powers could have a
catalyst effect on the global market, inducing the whole aviation
community to change, or at least to accept other countries' relax-
ation of, foreign investment rules.
F. Conclusions
This section demonstrates that nothing in international air law

prevents States from overcoming the barriers raised by the bilat-
eral system as developed in the post-Chicago Convention era. To
achieve this objective, States have at their disposal several instru-
ments and paths to follow. Which of them will be chosen is
merely a matter of political or strategic decision-making. The
pros and cons of each specific instrument, and relative amend-
ments made to overcome possible difficulties, have been discussed
supra. Ultimately, it is of fundamental importance that, whatever
path is followed, the safe development, a key objective of the Chi-
cago Convention, and the liberalization of international air trans-
port are not undermined. However, it is also of fundamental
importance that these two objectives are not used (or abused) as
an excuse, hiding behind a veil of unjustified protectionisms.
III. Competition Law Enforcement: The "Invisible" Barrier To

Globalization
In a truly liberalized aviation market, air carriers will be able

to compete in the global marketplace, free from government in-
tervention. In such a framework, a priori regulations will be re-
placed by ex post control of national competition authorities,
which will have to ensure fair levels of competition and prevent
possible abuses in the market. Lacking an international competi-

tion law regime and international enforcement procedures, com-
petition law enforcement bears the risk of becoming a valid
means for States to protect national interests, thereby undermin-
ing the essence of global liberalization. A truly globalized indus-
try requires global competitiveness. Such global competitiveness
would be (or actually is) undermined by unilateral measures, es-
pecially when applied extraterritorially to tackle issues which are
global by nature. These concerns are addressed infra.
A. The Enforcement of Competition Laws in a

Transnational Industry
While most of the world's antitrust systems share common fea-

tures - such as the prohibition on certain horizontal agreements
between firms, abuses of market power, and the control of merg-
ers and acquisitions - there are also many differences.'66 Regard-
ing the air transport industry, because of its inherent cross-border
dimension, the most important difference relates to how transna-
tional competition issues are handled by national competition law
authorities. On one hand, some States deal with these matters
unilaterally, meaning that they export their domestic competition
laws into other jurisdictions (so-called extraterritorialism) - an
approach that, as will be further discussed, raises several con-
cerns. On the other hand, other States prefer a more balanced
solution by adopting bilateral, regional, or global approaches
when dealing with such issues.' 6 7 Problems arising from unilat-
eral approaches are twofold: first, the enforcement of different
competition regimes on the same conduct creates conflicts be-
tween countries involved (unless an agreement is reached be-
tween authorities involved); second, they place excessive burdens
and cause extreme difficulties for firms, due to the application of
more than one competition regime to their transactions. As nota-
bly pointed out by Maria da Cunha, General Counsel of British
Airways, "there is . . . a need for coordination between competi-
tion authorities in different jurisdictions in order to avoid costly
overlapping proceedings."168
166 M.M. DABBAH, THE INTERNATIONALISATION OF ANTITRUST POLICY 2

(2005).
167 Id. at 4.
168 Fiorilli, supra note 115, at 177.
In this respect, the EU has recently attempted to tackle this

issue in bilateral negotiations with its counterparts, in particular
Canada 69 and the U.S. For instance, Annex 2 of the EU/U.S. Air
Transport Agreement,170 captioned "Cooperation with Respect to
Competition Issues in the Air Transport Industry," establishes a
positive comity between the two competition authorities (i.e.,
DOT and European Commission), based in particular on consul-
tations about and notifications of respective proceedings,71 aim-
ing at:
1) enhancing mutual understanding of the applica-
tion by the Participants of the laws, procedures and
practices under their respective competition re-
gimes to encourage competition in the air transpor-
tation industry;
2) facilitating understanding between the Partici-
pants of the impact of air transportation industry
developments on competition in the international
aviation market;
3) reducing the potential for conflicts in the Partici-
pants' application of their respective competition
regimes to agreements and other cooperative ar-
rangements which have an impact on the transat-
lantic market; and
4) promoting compatible regulatory approaches to
agreements and other cooperative arrangements
through a better understanding of the methodolo-
gies, analytical techniques including the definition
of the relevant market(s) and analysis of competi-
tive effects, and remedies that the Participants use
in their respective independent competition
reviews. 172
However, the more that an industry becomes globalized and
the more that competition issues transcend national borders, the
more that competition regimes and their enforcement need to be
harmonized on a level higher than bilateral negotiations.
169 See EU/Canada Air Transport Agreement, supra note 120, art. 14 ("Com-
petitive Environment").
170 EU/U.S. Air Transport Agreement, supra note 28.
171 Id., Annex 2, art. 4.
172 Id., Annex 2, art. 2.
1. Extraterritorialism
Under public international law, a corollary of the fundamental

customary principle of State sovereignty is the principle of territo-
riality, according to which a State is competent to enact and en-
force law within its national boundaries.17 Consequently, any
attempt to assert jurisdiction over acts committed extraterritori-
ally would in principle infringe the sovereignty of other countries,
thus resulting in a violation of public international law. 74
Notwithstanding this basic rule, public international law has
developed some exceptions to extend States' jurisdiction beyond
national boundaries in certain limited circumstances.17 5 For in-
stance, in the S.S. Lotus case, the Permanent Court of Interna-
tional Justice recognized that under customary international law
a State has the right to extend its jurisdiction over its nationals
abroad. 176 Other exceptions consider the jurisdiction over of-
fenses abroad to be directed toward a country's national security,
jurisdiction over acts committed abroad harming a country's na-
tionals abroad, and the so-called "objective territoriality princi-
ple" granting jurisdiction over physical conduct commenced
outside the boundaries of a country but concluded within its terri-
tory.' 7 7 There have been no exceptions formulated to include ju-
risdiction over acts committed beyond national boundaries
involving foreign individuals. Indeed, as argued in the present
study, the application of national laws to such circumstances
could hide, by its very nature, protectionist purposes, to the detri-
ment of foreign individuals and to the benefit of national
interests.
Notwithstanding these considerations, some authors argue that
public international law offers some room for maneuver.17 8 The
rationale of such a position lies again in S.S. Lotus in which the
Court stated:
[f]ar from laying down a general prohibition to the
effect that States may not extend the application of
their laws and the jurisdiction of their courts to
173 DABBAH, supra note 166, at 160.
174 Id.
175 Id.
176 S.S. Lotus (France v. Turkey), 1927 P.C.I.J. (ser. A) No. 10.
178 B. ZANETTIN, COOPERATION BETWEEN ANTITRUST AGENCIES AT THE
INTERNATIONAL LEVEL 7-8 (2002).
persons, properties and acts outside their territory,

[public international law] leaves them in this re-
spect a wide measure of discretion which is only
limited in certain cases by prohibitive rules;1 9
however, the Court failed to clearly define such limits.
Accordingly, States have developed the so-called "effects doc-
trine,"so deriving from the aforementioned principle of objective
territoriality. However, as one author correctly pointed out, its
recognition has not been under public international law, but
rather in the jurisprudence of certain countries.' 8 '
2. Conflicts of Jurisdiction
As briefly outlined supra, every conduct within one territory

could potentially extend its effects in several jurisdictions. Ac-
cording to the "effects doctrine," all the States affected by a con-
duct taking place outside their borders could claim jurisdiction
over such conduct by applying their national laws. The complex-
ity of this situation arises from the following: the system world-
wide is quite fragmented due to the fact that not every country
has its own competition law system; even where these systems
exist they are far from being harmonized; even where the systems
are harmonized, the applications could differ.182 The global level
playing field would indeed be undermined. For instance, a
merger between Lufthansa and British Airways could have po-
'9 S.S. Lotus, supra note 176, at 19.

181 D. Gerber, The ExtraterritorialApplication of German Antitrust Law, 77
Am. J. INT'L L. 756, 791 (1983). One of the most famous court decisions in
this respect is the U.S. Court of Appeals for the Second Circuit Alcoa deci-
sion (United States v. Aluminum Co. of America, 148 F.2d 416 (1945)).
"Any state may impose liabilities, even upon persons not within its alle-
giance, for conduct outside its borders that has consequence within its
borders which the state reprehends." Id., reported in T. HILLER,
SoURCEBOOK ON PUBLIC INTERNATIONAL LAW 276 (1998). See also A.
DE MESTRAL & T. GRUCHALLA-WESIERSKI, EXTRATERRITORIAL APPLI-
CATION OF EXPORT CONTROL LEGISLATION: CANADA AND THE USA 17
(1990) (asserting that there is no consensus as to the effects doctrine as a
source of jurisdiction). See also K.M. MEESSEN, EXTRA-TERRITORIAL JU-
RISDICTION IN THEORY AND PRACTICE 67 (1996) (outlining the potential
conflict with the well-established principle of State sovereignty).
182 M. Matsushita, Globalizing the World Economy and Competition Law and
Policy: The Need for InternationalCooperation,in INTERNATIONAL AND
COMPARATIVE COMPETITION LAW AND POLICIES 257 et seq. (Y. Ching
Chao ed., 2001).
tential effects in every country of the world, considering in partic-

ular their extensive network structure. In such a scenario, the
two carriers would have to face potentially costly proceedings in
different jurisdictions where national competition authorities
would enforce their competition regimes to better reduce negative
effects within their markets and for their nationals. Overall, lack-
ing coordination, the transaction between the two carriers would
be impossible because of the potentially different conditions at-
tached by respective authorities. The recent air cargo fuel
surcharges cases, 183 involving major airlines such as Lufthansa,
British Airways, Japan Airlines, and Cathay Pacific illustrate the
difficulties related to the enforcement of competition laws in
transnational transactions: the air carriers involved have been
facing costly overlapping investigations and proceedings in differ-
ent jurisdictions, such as the EU, U.S., Australia, and South Ko-
rea, among others, where national competition authorities have
reached different conclusions related to respective air carriers'
amounts of responsibility.' 84
3. The Use of Competition Policy as a Means of

Protecting National Interests
Of course, the above example might seem exaggerated, but it

still demonstrates how dramatic the consequences would be if
competition law enforcement were used as an ex post protection
of national interests in such a transnational industry. Although
the following would raise some criticism from the Europeans, the
never-ending complaints about the alleged anti-competitive posi-
tion of the Gulf carriers (i.e., Emirates, Etihad, and Qatar Air-
ways) could clarify the above conclusion. To avoid any
misunderstandings, this study is not attempting to support either
of the two parties, but rather to depict the status quo and draw
some conclusions from it.
183 The air carriers involved have been charged with price fixing of fuel
surcharges during the period between 1999 and 2006. See Press Release,
Europa, Antitrust: Commission Fines 11 Air Cargo Carriers EUR 799
million in Price Fixing Cartel (Nov. 9, 2010), available at http://europa.eul
rapid/pressReleasesAction.do?reference=IP/10/1487.
184 K. Willis, Flying into Turbulence, S. CHINA MORNING POST, June 20,
2011, available at http://www.afawings.com/news/industry-news/318-fly-
ing-into-turbulence. The author provides a detailed overall picture of the
fines assessed against airlines involved in different jurisdictions.
The ongoing debate during the latest International Air Trans-

port Association General Meeting in Singapore June 5-7, 2011
provides a perfect summary of the ongoing discussion between
European and Canadian carriers on the one side, and Gulf carri-
ers on the other. The arguments of the European carriers revolve
around the allegation that the Gulf carriers enjoyed government
support amounting to subsidies. Ulrich Schulte-Strathaus, Secre-
tary General of the Brussels-based Association of European Air-
lines, concluded that the three Gulf carriers represent a new kind
of competitive threat incompatible with the existing aviation or-
der; in particular he observed that these carriers are "owned by
their respective governments and operated as an instrument of
national strategy,"'1 5 and are "integrated vertically across com-
merce, tourism and foreign policy."'8 6 On the other side of the
fence, Gulf carriers protect their business model by claiming that
their only sin is to be efficient and successful, "run in a proper
way with high utilization."18 7
Analyzing the arguments objectively, both are valid to a cer-
tain extent. From the European perspective, the fact that the
three big Gulf carriers serve three different major hubs that are
located, at the farthest, 230 miles apart (the farthest being Doha
airport, served by Qatar Airways) - with more wide-body seats
on order than the entire U.S. industry has in its current fleet'88 -
understandably raises several competitive concerns. From the
Gulf carriers' perspective, despite the arguments of being owned
by the government, it is true that they have been operated as effi-
cient market-oriented businesses. For instance, Emirates' profits
have been sufficient to pay for all the investment in its fleet and
repay its loans over the past decade. Moreover, contrary to
widely held belief, Emirates does not receive government support
through subsidies or other financial interventions, but has in fact
paid out annual dividends to the Dubai government totaling
US$1.6 billion since 2002.'18 Interestingly, Willie Walsh, chief ex-
185 U. Schulte-Strathaus, Speech at the International Aviation Club, Wash-

ington D.C.: 2011: A Year of Many Crossroads and a Year to Act, Not
Delay (Jan. 18, 2011).
186 Id.
187 S. Govidasami, IA TA: Gulf Arguments Rumble On, AIR TRANSP. INTELLI-
GENCE NEWS, June 7, 2011, available at http://www.flightglobal.com/arti-
cles/2011/06/07/357652/iata-gulf-argumentsrumble-on.html.
188 Schulte-Strathaus, supra note 185.
189 Explaining Dubai's Aviation Model, OXFORD ECON., June 2011, at 7-8.
ecutive of IAG, the parent company of British Airways, voiced

support for the Gulf carriers: "We've competed with Emirates for
26 years and I've got no problems with the way they operate; if
there is an issue, it is one of jealousy." 90
This study is not the appropriate forum to decide who is wrong
and who is right, or whether the truth stands in the middle.
What is sure is that, if the European carriers are correct, calling
for their governments to provide them support to unilaterally
block the Gulf carriers' anti-competitive behavior is not the
proper answer for an issue which is global by nature, considering
in particular national (rectius regional) protectionist interests that
could be hidden behind competition law enforcement; if the Gulf
carriers are correct, then the European carriers should stop ask-
ing their governments to punish the "bad guys," but rather push
their governments to create an efficient level playing field which
could provide them with enough capital resources and enough
market access at the global level. Indeed, as Giovanni Bisignani,
former chief executive of IATA, said during his organization's
most recent annual meeting: "[i]ncreasing tensions around the
rapid growth of the Gulf carriers must be resolved. The solution
to call in governments as advocates, or as referees, has not
worked. And it won't. As responsible leaders of this global in-
dustry, we must find a fair and reasonable way forward
ourselves."191
B. ICAO and OECD Guidelines
Both ICAO and the Organization for Economic Co-operation

and Development (OECD) have traditionally understood the pos-
sible problems arising from national enforcement of competition
law in industries that are inherently transnational. In its 1997
study addressing the future of international air transport, the
OECD notably addressed that, in an international airline indus-
try characterized by cross-border cooperation, joint ventures, and
alliances, "the need for consistency and predictability in the appli-
190 I. Gale, Western Airlines Encouraged to Embrace Competitionfrom Gulf,

THE NATIONAL, June 7, 2011, availableat http://www.thenational.ae/bus-
iness/aviation/western-airlines-encouraged-toembrace-competition-from-
gulf.
191 G. Bisignani, Speech at the IATA 67th Annual General Meeting in Singa-
pore: State of the Industry (June 6, 2011), available at http://www.iata.org/
pressroom/speeches/Pages/2011-06-06-01 .aspx.
cation of competition rules has greatly increased"l 92 because "un-

clear and conflicting competition rules may create uncertainty
regarding the extent to which co-operative activity is lawful,
thereby compromising the efficiency of the restructuring pro-
cess."l 93 Indeed, "compliance with two or several sets of rules can
expose airlines to substantial additional cost,"l 94 in particular
when they affect the formation of global networks, cross-border
mergers, and the development of global alliances. Under the
OECD's view, the more global an industry becomes, the more a
clearer definition of responsibilities regarding specific issues of
competition policy is needed: increased transparency regarding
the criteria to meet antitrust regulations, but also regarding im-
plementation of national competition rules, may help increase the
consistency of competition policies globally. One possible path to
this longer-term situation may be through the initial deepening of
regional arrangements; another possible path would be a multi-
lateral one that builds upon existing codes and practices.19 5 Ac-
cordingly, the OECD has recommended two solutions that are
deemed to be essential for sustainable development of air trans-
port towards globalization: in the short term "in cases of overlap-
ping jurisdiction among several authorities, they should seek
without delay consistent analytical approaches and remedies,"l 96
although its current feasibility is at least debatable; in the long
term, "convergence of national competition policies and enforce-
ment practices, which is already under way in the OECD area,
[should] continue."19 7
ICAO has also been keen to provide guidelines to solve con-
flicts over the application of competition laws to air transport
that could undermine the scope and the pace of its global liberali-
zation. The main principle underlying ICAO guidelines is that, as
briefly discussed in the present section, one State's unilateral reg-
ulation of the conduct of an airline of another State by the use of
competition law enforcement not accepted by other States (i.e.,
extraterritorialism) "increases the likelihood of disputes between
192 OECD, supra note 53, at 113.

193 Id.
194 Id.
195 Id. at 129.
196 Id. at 18.
197 Id.
them which could adversely affect international air transport."'98

According to ICAO, when a State is implementing its competition
laws, policies, and practices, full and sympathetic consideration
should be given to the views expressed by any other State or
States whose significant international air transport interests
might be affected, and should have regard to international com-
ity, moderation, and restraint.199 In addition, where the competi-
tion laws, policies, or practices of States are such that they might
give rise to actual or potential conflicts in their international air
transport relations, "consultation should take place among those
States to seek an understanding on what competition laws, poli-
cies and practices shall be applied in such relations so as to pro-
vide airlines with as much legal certitude as possible and to avoid
potential conflict as much as possible." 200 Within the bilateral air
transport relations framework, ICAO also suggests that when a
potential conflict arises over one State's application of its compe-
tition laws, policies, and practices to matters related to the opera-
tion of an air transport agreement with another State, the States
concerned should use their agreed bilateral process of consulta-
tion before taking any unilateral action which might aggravate
the conflict. 20 1 The same principle, brought to a higher level,
should also govern competition law enforcement within a pluri-
lateral or multilateral framework.
C. Conclusions
The national enforcement of national competition laws on an

inherently transnational industry gives rise to clear problems.
However, difficulties in reaching a global agreement establishing
an international competition law regime require finding a solu-
tion within the current framework. In this respect, avoidance of
unilateral discriminatory enforcement would at least guarantee
airlines a level playing field similar to the one that would be ob-
tained under an international standardized regime. Accordingly,
it is essential that national competition authorities comply to the
highest degree with the guidelines drafted both by the OECD and
198 Guidance Material on the Avoidance or Resolution of Conflicts over the

Application of Competition Laws to InternationalAir Transport, inICAO,
supra note 44, app. 2, at A2-1.
199 Id., guideline B.
200 Id., guideline C.
201 Id., guideline F.
ICAO in compliance with the fundamental principles of interna-

tional and positive comity.
IV. Concluding Remarks
More than sixty years ago, the fathers of the international avia-
tion regime envisioned the importance of international air trans-
port in "creat[ing] and preserv[ing] friendship and understanding
among the nations and peoples of the world"202 and in
"promot[ing] .. . cooperation between nations and peoples upon
which the peace of the world depends." 20 3 Driven by such ideals
they tried to create a multilateral framework in which every air-
line would have been granted the right to freely compete in the
international market, to a pace driven by their entrepreneurial
acumen. Unfortunately their mission failed.
This failure led States to develop their sovereignty obsession so
as to build an intricate system of bilateral grants of traffic rights
(interpreted as properties of the State concerned) which devel-
oped air transportation according to political principles instead of
market principles. Despite this unfortunate evolution, multilater-
alism and globalization of the international air transport market
still remains the objective of future development, particularly in
an era during which trade barriers are falling in an increasing
number of industries.
However, today, more so than in the past, multilateralism can-
not be reached by using a "big bang approach" because the lega-
cies of bilateralism are firmly rooted in the industry. A new
Chicago Convention would be time-consuming and dangerous,
bearing the risk of reinstitutionalizing the basic engineering prin-
ciples of the old bilateral system. The exchange of traffic rights
under the GATS umbrella, and the application of the MFN prin-
ciple thereto, carries the risk of undermining the global liberaliza-
tion process, considering States would enjoy the most favorable
treatment granted by other States without being required to liber-
alize their own markets. 204
A phased multilateralism, evolving from bilateralism via pluri-
lateralism or regionalism, seems to be a more feasible and effi-
cient solution. However, without catalysts that are able to boost
203 Id.
204 See supra Pt. H(A), para. 2.
such changes on a global scale, the process is less likely to be suc-

cessful. Major players in international air transport, in particular
the United States and European Union, should thus take the lead
toward such developments.205
More urgent reforms are needed in the field of foreign invest-
ment restrictions under national laws and bilateral agreements.
Faced with increasing costs and challenges, and faced with, for
instance, increasing investment in the field of environmental pro-
tection, airlines desperately need more fluid access to foreign cap-
ital. As demonstrated, foreign investment restrictions have no
legal basis in the international air law regime and the reasons that
justified them in the early days of the air transport industry are
mere anachronistic myths today. Those who oppose any liberali-
zation of the current system argue that any change toward a more
liberal regime bears the risk of undermining the safe and econom-
ical development of international air transport. However, as pre-
viously demonstrated, instruments may be implemented to
prevent such unfortunate consequences. 206
The more that international air transport is left to market
forces, the more competition or antitrust regimes play a funda-
mental role in ensuring its fair and efficient development. An in-
herently transnational industry, such as the air transport
industry, requires global approaches. However, due to the lack of
an international competition body and code, the protection of
competition is left to national authorities enforcing their national
competition regimes. It has been demonstrated that the system as
it stands carries the risk of national protectionism being hidden
behind decisions of national competition authorities. 20 7 There-
fore, compliance with guidelines drafted both by ICAO and
OECD, inspired by the fundamental principles of international
and positive comity, is essential to ensure a globally level playing
field in international air transport.
The instruments necessary to overcome, or to adapt, the bilat-
eral system to current needs, are already there, or at least are
ready to be developed. Future developments mainly depend on
States' political will, which is always true for international rela-
tions. Nevertheless, aviation scholars, professionals, and stake-
holders must take an active role in "educating" their respective
205 See supra Pt. II(A), para. 3 & 4.

206 See supra Pt. II(A), para. 5.
207 See supra Pt. III, para. 1.
governments to ensure that air transport, a major player in the

globalization process, itself becomes globalized.

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Bluebook 21st ed.

ALWD 7th ed.

APA 7th ed.

Chicago 17th ed.

McGill Guide 9th ed.

AGLC 4th ed.

MLA 8th ed.

OSCOLA 4th ed.

The term "globalization" is defined as the increasing interna-

barter, not the entrepreneurial acumen of airline managements,

4 B.F. HAVEL, BEYOND OPEN SKIES: A NEW REGIME FOR INTERNATIONAL

initiatives - which could include extraterritorial applications and

A. The Rise of Bilateralism

By the mid-1940s, traffic on the world's commercial airlines

establishment of an international regulatory body to distribute in-

13 Dempsey, supra note 9, at 312.

rights for international scheduled air services,"19 thus represent-

19 H. Wassenbergh, Parallelsand Differences in the Development of Air, Sea

ism . . . of the original restrictive bilateral model," 2 5 so as to grant

Since the emergence of bilateralism in air transport relations,

25 HAVEL, supra note 4, at 13.

Under and by virtue of this clause, for instance, Japan reserves

30 P. Mendes de Leon, Establishment of Air Transport Undertakings - To-

many."35 The objective that States wanted to achieve at the Chi-

which substantial ownership and effective control of the carrier

42 P.S. DEMPSEY, PUBLIC INTERNATIONAL AIR LAW 559 (2008).

known examples.45 However, as correctly pointed out by Brian

45 Haanappel, supra note 33, at 95.

or controlled by persons that are citizens of the

II. Overcoming the Legacies of Bilateralism

A. The Airline Industry's Need for Change

The airline industry is usually defined as a capital-intensive in-

tions; on the other hand, in a more and more privatized industry,

53 ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

sharing agreements to recent so-called "metal neutrality"57 alli-

57 See U.S. DOT, Joint Application of American Airlines, British Airways,

the basis of equality of opportunity."6 2 Indeed, having equal op-

forward. The following analysis focuses on the options available

B. A Global Multilateral Exchange of Traffic Rights

Multilateralism still remains the primary objective of the Chi-

* All producers could compete on an equal eco-

73 According to economic theory, in economies of scale the average cost of

gineering principles of the old bilateral systems," 7 even more so

1. General Agreement on Trade in Services

The GATS is one of the Annexes to the Agreement Establish-

which would limit or affect the ability of parties to negotiate,

The above example clearly indicates the inherent difficulties in

90 Hubner & Sauv6, supra note 86, at 977.

94 HAVEL, supra note 4, at 532.

C. A Phased Multilateralism Starting from Bilateralism

From the previous analysis it is clearly understood that, despite

In September 1999, the Association of European Airlines

100 AssOCIATION OF EUROPEAN AIRLINES (AEA), ToWARDS A TRANSATLAN-

the TCAA, including points within the same domestic jurisdiction

thus attracting critics from the International Air Transport Asso-

June 24, 2010, 2010 O.J. (L 223) 3 (EC), available at http://www.state.gov/

I informed the EU Ministers today that the nego-

121 Id., Annex 2, sec. 2(a)(iii).

In this study, the analysis of EU/U.S. relations and that of EU/

D. RegionalismIPlurilateralism as a Model to Go "Beyond

1. Past and Recent Examples