TOWARDS A MORE LIBERAL APPROACH TO THE MEXICAN AIR TRANSPORT INDUSTRY
The bilateral aviation agreement between Mexico and the USA, which will take effect on January 1, 2016, is a very important step towards a more liberalized air transport industry; however, an open skies agreement would boost even more the economies of the two North American partners.
The execution of open skies agreements by the United States of America (USA) with over 100 partners around the world represents a liberal approach policy adopted by such country as far as the operation of air transport services is concerned. Many states have signed open skies agreements with the USA, including several Latin American countries. However, Mexico has not reached an agreement of this nature yet. As the countries with an executed open skies agreement have obtained many benefits, this paper supports the idea that Mexico, in the short-term, should sign an agreement of this type with its North American business partner.
The air transport industry is a global undertaking. The Chicago Convention of 1944 set the basis for the international regulation of air transport. As the Chicago Convention of 1944 was adopted during a difficult period of time for the entire world, the countries decided to close their airspaces for security purposes. This is why at the domestic level states are in charge of establishing policies and dictating rules for the operation of air transport services.
Civil aviation agencies all over the world maintain a strict control on airlines. The obvious control and regulation can be clearly understood because of the need that air services be supplied under high standards of safety.
From 1938 to 1978 the airline industry was highly regulated, particularly in the USA. The rational for such a strict regulation was the idea that this field was constantly under threat of excessive and destructive competition.
During that period of strict regulation, governments tended to protect national airlines in trouble by offering them new routes or by helping them to merge with airlines in better financial conditions. The change from a regulated to a deregulated industry was inspired by academics that criticized the air transport business because they considered that the high regulation of the industry occasioned inefficiency and wastefulness of resources1.
In the late seventies, the USA started to gradually implement a liberalizing policy. This policy consisted of opening up air markets through the execution of bilateral agreements, the so-called “Open Skies Agreements.” This policy coincided with the relaxation of economic barriers in the operation of air transport services.
States discuss with their peers the economic provisions and other requirements that will rule the operation of air services over their territories. They do so by negotiating and executing bilateral agreements. Open skies agreements are an expression of a more liberal version, albeit not absolute, of bilateral agreements amongst states.
Bilateral agreements usually contain—in greater or lesser extent—the following provisions:
• Capacity, that is the number of seats and space available in aircrafts,
• Number and names of airlines designed,
• Ownership and control requirements. That is, the percentage of equity that nationals or citizens of the state designating the airline—or the sate itself— must hold in the capital stock of a given undertaking. Control usually refers to the requirement that the administration of an airline should be vested in the number of directors necessary to reach the percentage required to have influence in running such an airline.
Mexico and the USA reached a new bilateral aviation agreement, albeit not an open skies agreement. Last November 21, 2014, the Department of Transportation of the USA and Mexico’s Department of Communications and Transports announced that an agreement had been reached between the said countries in order to amend the existing aviation bilateral agreement entered into by and between the said countries on August 15th, 1960.
According to the above-mentioned announcement, this agreement (which will take effect on January 1, 2016) will bring many benefits for USA and Mexican air carriers, because the document provides them with unlimited market access and more flexibility as far as price setting is concerned.
The modernized bilateral agreement eliminates multiple barriers as to the number of airlines providing air services to passengers in USA-Mexico City markets. Therefore, the entrance of new carriers that may operate air services in the said markets is likely. Likewise, existing airlines may offer new services to destinations that they probably had not considered before.
Cargo carriers will also benefit from the new agreement by having the possibility to expand the services they offer to new destinations, and to provide services from the USA to Mexico and beyond Mexico to other endpoints.
Finally, although both the USA and Mexico have not yet negotiated an open skies agreement, the new document will offer air carriers of both sides of the border the opportunity to expand their services and will boost price competition by airlines.
OPEN SKIES AGREEMENTS
Open skies agreements do not represent the total liberalization assumed by the USA with respect to its partners for the operation of air services. Still, these types of agreements contain certain restrictions such as the establishment of ownership and control requirements, cabotage, seventh freedom limitations [for instance, under this seventh freedom Aeroméxico would be permitted to carry traffic between Atlanta (USA) and Amsterdam, in the Netherlands, on a service which has no relation to a point in Mexico], and commercial restraints, among others.
However, open skies agreements do have multiple benefits for air carriers seeking operating optimization through the coordination of efforts with other airlines. Foreign carriers whose designating states have executed open skies agreements with the USA can obtain antitrust immunity from alliances and other types of cooperation agreements. The rule is that the USA must firstly have an open skies agreement in full force and effect with the designating state so that the airlines of the designating state may obtain antitrust immunity for implementing an intended alliance or another type of cooperation agreement.
In that way, after the execution of an open skies agreement, a cooperation arrangement amongst airlines—that in principle would have produced anticompetitive effects—can receive antitrust immunity by the US Department of Transportation.
As an example, the Mexican flag carrier Aeroméxico intends to execute a joint venture agreement with its Sky Team partner Delta2. For such purposes, antitrust immunity needs to be granted by the US Department of Transportation. However, as mentioned above, this can be achieved only if Mexico signs an open skies agreement with the USA.
There are certain liberalizing elements in open skies agreements, such as:
Multiple designations of air carriers between the contracting states.
• The freedom to set fares subject to certain limitations established in domestic regulations to prevent monopolistic practices.
• Prevent capacity limitations.
• A further liberalization as far as charter flights, cargo and computer reservation systems are concerned.
• More freedom to provide support services in airports located in the other contracting state.
• Freedom of the airlines of each contracting party to operate air services between any points in the countries of the contracting states3.
In Latin America many countries have executed open skies agreements with the USA: Costa Rica, Guatemala, Honduras, Nicaragua, Panama, Uruguay, Paraguay, Chile, Brazil, Argentina, Colombia and Perú. Surprisingly, as of the date of this paper, Mexico has not yet signed an open skies agreement with the USA. Certainly, Mexican airlines and cargo carriers would benefit from the execution of an open skies agreement between Mexico and the USA. More domestic airlines will be designated by the Mexican government to operate air services between points of the contracting parties (with certain restrictions such as cabotage). This will be an important incentive for private investors to participate in the Mexican air transport industry, because they will be confident that as the USA-Mexico air market would be opened up, then more business opportunities would arise. The Mexican tourism industry would be enhanced as well by offering American and Mexican passengers more options of transportation to visit emblematic places on Mexican soil. This, of course would create more job opportunities for Mexican citizens. Ultimately, passengers would be the main receivers of the benefits produced by an open skies agreement. This would allow passengers of both countries to (i) pay more affordable fares, and (ii) choose within a wide variety of airlines, routes and destinations in the territories of the contracting parties.
The liberalizing open skies policy implemented by the USA in the late seventies has brought multiple benefits for its partners. Many countries in Latin America have already executed open skies agreements with the USA. However, Mexico has not executed an agreement of this nature with its North American business partner. The bilateral aviation agreement between Mexico and the USA, which will take effect on January 1, 2016, is a very important step towards a more liberalized air transport industry; however, an open skies agreement would boost even more the economies of the two North American partners.