Towards a Single Arab Aviation Market

Table of Contents

EXECUTIVE SUMMARY

List of Figures

List of Abbreviations

Acknowledgements

1. INTRODUCTION
1.1 Objectives:

2. LITERATURE REVIEW
2.1 The Chicago Convention
2.2 Open Skies
2.3 The US Experience in Air Transport Liberalisation
2.4 The European Experience of Air Transport Liberalisation

3. AIR TRANSPORT IN THE ARAB WORLD
3.1 Damascus Convention
3.2 Challenges to Arab Integration
3.3 Privatisation
3.4 Low Cost Carriers
3.5 Outlook

4. THE GULF COOPERATION COUNCIL (GCC)
4.1 History of Aviation in the GCC
4.2 Aviation in the GCC Today
4.2.1 Saudi Arabia
4.2.2 The United Arab Emirates (UAE)
4.2.3 Qatar
4.2.4 Kuwait
4.2.5 Bahrain
4.2.6 Oman

5. WEAKNESSES OF AND THREATS TO THE GCC AVIATION MODEL
5.1. The Euro-Mediterranean Agreement
5.2. Scope for gains from a single GCC aviation market
5.3 Risks of GCC Single Market

6. CONCLUSIONS

ANNEX 1

ANNEX 2

WORKS CITED

Executive Summary

The benefits of liberalisation of air transport appear obvious. In all cases, it has led to increased growth in traffic, increased employment, and economic growth. For the consumer, it resulted in lower fares, more destination choices, and more frequencies. For the airlines, it removed constraints on their schedules, allowing for optimal efficiency. For the airports and ground handlers, it meant more aircraft landings that needed more fuel and more catering. This had benefits to the wider economy and increased overall prosperity. The creation of the Single European Aviation Market in 1993 led to an average annual growth rate in traffic between 1995 and 2004 that was almost double the rate of growth in the years 1990 to 1994. This produced about 1.4 million new jobs¹.

This paper examines the state of liberalisation within the Arab World and discusses how it can move towards a single air transport market. It shows what regional liberalisation has meant for the American and European air transport industries. It shows how much there is to gain from regional liberalisation and some of the threats and costs of delaying it further.

There are currently two ways in which such an ambitious goal may be achieved. Either through the Arab Civil Aviation Commission which is part of the Arab League, or through sub-regional integration with the States of the Arabian Gulf taking the first step.

This paper concludes that the Arabian Gulf States, represented by the Gulf Cooperation Council (GCC), are in an excellent position to realize the benefits of air transport liberalisation. This can then be built upon to include other Arab countries towards the ultimate goal of a single Arab aviation market.

List of Figures

Figure 1.1: Arab Air Transport Market Passenger Traffic

Figure 1.2: Arab Travel Market Passenger Numbers, Growth, and Share of Total Traffic - 2009

Figure 1.3: Active Fleet within the Middle East 2002-2007 and the Backlog of Aircraft on Order

Figure 1.4: Number of Passengers at Most Arab Airports in 2011

Figure 2.1: Air Transport Liberalisation in Europe: Key Indicators

Figure 2.2: LCC Penetration in Europe: 2001 to 2010

Figure 3.1: Arab Countries Average Real GDP Growth in 2010 - 2011

Figure 3.2: Flight Comparisons

Figure 3.3: Aviation Policy in the Arab World

Figure 3.4: Middle East LCCs: April 2012

Figure 3.5: LCC Capacity Share (%) of Total Seats within and to/from Middle East: 2003 to Mar 2012

Figure 4.1: Number of Passengers at Most Arab Airports in 2011

Figure 4.2: GCC Airport Capacity

Figure 4.3: Dubai’s Civil Aviation Structure

Figure 5.1: Middle East Airlines Load Factor (2004)

Figure 5.2: The Growth of Europe’s Low Cost Carriers 2000-2006

List of Abbreviations

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Acknowledgements

First and foremost, thanks and praise to God the almighty for the successful completion of this dissertation.

I would like to express my sincere thanks and appreciation to each of: Captain Abdulrahman Al Gaoud, former Undersecretary of Civil Aviation Affairs for the Kingdom of Bahrain, Engineer Samer Al Majali, former CEO of Gulf Air and former Chairman of the IATA Board of Governors (2008-2009), and Mohamed Saleh Fakhri, former Commercial General Manager for Qatar Airways for providing me with valuable insights and information that greatly aided my understanding of the overall subject area.

I would also like to thank my Course Director and Supervisor, Professor Roger Wootton, whom without his help and guidance, this project would not have been possible.

Finally, I would like to thank my parents and my wife for all their love, support and encouragement.

1.Introduction

For the purposes of this study, the terms “Middle East” and “Arab World” are used interchangeably and comprise of all Arabic speaking countries as defined in the section “Air Transport in the Arab World”.

The Middle Eastern airline industry is characterised by increasing growth and world class fleets and airports. The bulk of this growth is in international traffic to and from the Arab World (figure 1.1). Traffic within the Arab world and domestic traffic are not growing at the same rate. Domestic traffic actually shrank between 2008 and 2009 while intra Arab World traffic grew by a mere 1.9% (figure 1.2), a number not reflective of the relative economic prosperity of the Middle East in general and the Gulf Cooperation Council (GCC) specifically. The Middle Eastern airline industry also, unfortunately, has a reputation for limited transparency and government subsidisation of some national airlines. Bilateral agreements still dominate inter-Arab relations, effectively stifling intra regional growth.

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Figure 1.1: Arab Air Transport Market Passenger Traffic

Source: Arab Air Carrier Organisation (AACO). Arab Air Transport Statistics 2010.

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Figure 1.2 Arab Travel Market Passenger Numbers, Growth, & Share of Total Traffic - 2009

Source: Arab Air Carrier Organisation (AACO). Arab Air Transport Statistics 2010.

Another indication of how skewed the Middle East is towards international traffic is the makeup of the region’s fleet. As shown in figure 1.3, the narrow body fleet was relatively unchanged from 2002 to 2007, while the number of wide body aircraft increased by 50%². The Boeing General Market Outlook (2007) indicated that around 39% of the world’s fleet is composed of wide body aircraft. The Middle East, however, is highly unusual in that around 57% of its aircraft are wide bodies³. Most of this fleet is geared towards international, sixth freedom traffic between Europe/North America and Asia/Australia. This proves that the Middle East, as a region, has a large untapped potential of short haul, intra regional flights, that would generate increased traffic and various economic benefits, eventually leading to greater prosperity.

Figure 1.3: Active Fleet within the Middle East 2002-2007 and the backlog of aircraft on order

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Source: Journal of Air Transport Studies⁴

On the brighter side, lots of positive developments have taken place within the past decade beginning with the adoption of a unilateral open skies policy by the Kingdom of Bahrain in 2001, and ending with the signing of the Damascus Convention, a multilateral agreement on the liberalisation of air transport between Arab countries in 2004. Despite this relative progress, national agendas continue to govern the civil aviation sector leaving lots of room for further integration and the realisation of combined economic benefits for the Arab world. So why hasn’t intra Arab traffic grown as much as its international counterpart? Why is Dubai Airport the busiest and not Cairo or Jeddah, with their far bigger populations (figure 1.4)? It all has to do with the liberalisation of air transport and moving away from the traditional protectionist stance that causes overall stagnation and underdevelopment of the sector. How liberal is air transport in the Arab World today? How can further liberalisation be realised? These are the questions that this study attempts to answer in the following pages.

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Figure 1.4: Number of Passengers at Most Arab Airports in 2011

Source: AACO⁵

1.1 Objectives:

The objectives of this report are to measure the current degree of liberalisation in the Arab World and to explore ways in which further liberalisation may be realised.

- By studying how liberalisation was achieved by other regions.
- By identifying the barriers to Arab regional liberalisation.
- By outlining the benefits, costs, and risks of regional liberalisation.
- By identifying the negative consequences of delayed liberalisation.

2. Literature Review

To begin discussing liberalisation of air transport, a discussion of the current regulations applied globally is needed. Most notable is the Chicago Convention which, to this day, governs the air transport of most of the world.

2.1 The Chicago Convention

Signed in Chicago in 1944 by 52 states, the Convention on International Civil Aviation, also known as the Chicago Convention, set the basis of International Civil Aviation between nations. With its ratification, the International Civil Aviation Organisation (ICAO) came into being as a specialised agency of the United Nations linked to the Economic and Social Council (ECOSOC).⁶

It was most succinctly described by Brian Havel (2009) in that, “All commercial international air passenger transport services are forbidden except to the extent that they are permitted”⁷. Also, as described by Jeffry Shane, from the U.S. Department of Transportation, “The Chicago Convention specifically left the establishment of commercial traffic rights to be negotiated by governments on a market-by-market basis.”⁸ What resulted is a piecemeal system of thousands of bilateral agreements between individual countries that specifies which airlines, which routes, what capacity, and what prices will be allowed. Traffic rights were described in the Chicago Convention as “freedoms of the air” that give access to national airspace with various degrees of freedom. They range from landing and picking up passengers and cargo and going back to the home country (third and fourth freedom), to allowing the pickup of passengers and cargo to another country, (fifth and sixth). An explanation of these freedoms is provided in annex 1. Thus, governments rather than airlines have control of where to fly.

Most notable restrictions of the Convention are cabotage restrictions, and the nationality rule. Cabotage restrictions restrict all foreign airlines from traffic rights on domestic routes. This virtually guarantees national airline monopolies in domestic markets which may lead to complacency in service levels. The nationality rule reserves the right to use these bilateral agreements solely for airlines that are majority owned by nationals of the signatory countries. Therefore, foreign majority ownership of airlines is not allowed, preventing any consolidation and disturbing the economic efficiency within the industry.

Historically, the main reasons behind these restrictions were security concerns that foreigners will fly over classified or restricted areas and that an airline with traffic rights might be taken over by a foreign non-friendly airline. These arguments have much less validity in today’s globalised economy. The telecommunication industry poses a greater security threat than the airline industry. With its sophisticated satellites and social media; it can expose much more than an airplane flying over. Yet, the telecommunications industry is more liberalised than the air transport industry. Other network industries that have commercial freedoms include banking, electricity and gas, and media.

2.2 Open Skies

Realising the rigidity of the global bilateral system, the US invented the concept of “open skies” in the early nineties. This concept sought to stretch the current system to its maximum freedom without changing the legal framework of the Chicago Convention. It entails allowing access to all cities in a country without limits on frequency. It has multiple designation of carriers that can use these freedoms and usually allows fifth freedom rights. There are no pricing restrictions on airlines.

Open skies still does not allow cabotage routes and does not allow foreign ownership of airlines due to the nationality rule. By signing open skies agreements with other countries, the US managed to secure rights to pick up passengers from one signatory country to another (fifth freedom right), while excluding foreign airlines to serve its huge domestic market because of the cabotage rule. These fifth freedom rights would allow United Airlines, for example, to pick up passengers at London as an extension of its New York/London service and carry them onward to other EU destinations like Frankfurt or Rome. In contrast, EU carriers are not allowed to carry passengers between US cities because of cabotage restrictions. To exercise their fifth freedom rights, they can only deplane US passengers in Canada, Mexico, or any other country outside the US domestic market.

It is a common misconception that open sky agreements mean full liberalisation and create a truly competitive market. Although they are a step in the right direction, there is still no freedom to acquire foreign capital because of the nationality rule, and domestic routes are still off limits because of the cabotage rule. Nothing in these agreements prevent a country from signing them and then limiting access to its airport because of congestion, or from overcharging airlines because of a monopoly in its airport and its ground handling services. In the end, open skies is an extension of the Chicago Convention which seemingly prevents the creation of a truly integrated market between sovereign states.

2.3 The US Experience in Air Transport Liberalisation

The first deregulation of air transport took place in the United States with the passing of the 1978 Airline Deregulation Act by the US congress. Before that, air transport was heavily regulated by the Civil Aeronautics Board (CAB), the Department of Transport today (DOT). They controlled which airlines gained access to which markets and they set the fares. This system was seen as inefficient and too protective of incumbent carriers. Market entry was very limited, keeping costs and fares artificially high.

[...]

¹ The Economic Impact of Air Service Liberalisation. Rep. InterVISTAS-ga2, n.d. Web. 17 Jan. 2013. ii

² O'Connell, John F., and George Williams. "Air Transport Development in the Middle East: A Review of the Process of Liberalisation and Its Impact." Journal of Air Transport Studies 1.1 (2010): n. pag. Web.

³ Ibid.

⁴ O'Connell, John F., and George Williams. "Air Transport Development in the Middle East: A Review of the Process of." Atn.aero. Journal of Air Transport Studies, Jan. 2010. Web. 2 Mar. 2013. <http://www.atn.aero/content/jats/jats11.pdf>.

⁵ "2012 Annual Report." AACO: Arab Air Carriers Organization. N.p., n.d. Web. 01 Feb. 2013.

⁶ "Convention on International Civil Aviation - Doc 7300." Convention on International Civil Aviation - Doc 7300. ICAO, n.d. Web. 12 Feb. 2013.

⁷ Havel, Brian F. "Airspace Sovereignty: The Ontology of the Chicago System." Beyond Open Skies: A New Regime for International Aviation. Austin: Wolters Kluwer Law & Business, 2009. 103. Print.

⁸ Havel, Brian F. "Foreword by Jeffrey N. Shane Undersecretary of Transportation for Policy, U.S. Department of Transportation (2003 - 08)." Beyond Open Skies: A New Regime for International Aviation. Austin: Wolters Kluwer Law & Business, 2009. 103. Print.