Bilateral air service agreements and open skies agreements in aviation

Open Skies Agreement

Impact of open skies agreements

The role of aviation in the globalization process has been very significant and important since the aviation industry can easily bring businesspeople together, enhance the movement of high-value, time-critical products and contribute in the process of expanding travel and tourism. Significant growth in the aviation industry was realized during the Second World War with the development of warplanes which were vital in the war. At the end of the war, many countries had a lot of aircraft which had to be used and the alternative was civil aviation. At this time countries were still suspicious of each other and were not comfortable allowing planes from other countries in their airspace. Since using planes within the borders of a single country does not make any economic sense it became necessary for countries to come up with a way of expanding their operating areas which led to several agreements between countries which were in form of bilateral air service agreements between two countries which later expanded into multilateral air service agreements, these agreements later led to another form of agreement known as open skies agreement.

The question at this point would be; what is the difference between bilateral air services agreement and open skies agreement? In order to answer this question it is necessary that the two terms are defined and their contents well understood. A bilateral air services agreement is a liberalization of aviation services between two states in form of a contract between the concerned states. Traditionally such an agreement intends to create a reciprocal balance for airlines of both countries in terms of benefits since it allows launching of commercial flights covering passenger and cargo transport of both countries. It is important to note that such an agreement can also be made to include transportation of military personnel between the contracting states. Open skies agreement on the other hand is a policy of an international nature which aims at liberalizing rules and regulations which govern international civil aviation. Such a policy will create a free market for the airline industry since it is especially meant for commercial aviation and always aims at achieving the following objectives; liberalizing international aviation markets rules and minimizing government intervention, and adjusting the system under which permission is granted to military and state-based flights. An example of such an agreement is one signed between the United States and Canada in 1995. It should be noted that for open skies agreements to take effect there must an existence of bilateral air service agreements, in fact, open skies agreements are usually a replacement of bilateral air services agreement. Therefore the major differences that can be pointed between bilateral air services agreement and open skies agreement include the fact that the former involves only two countries and focuses on aviation services only while the latter is of an international nature and covers a number of countries and involves liberalization of aviation services as well as markets rules and regulations.

Impact of open skies agreement

Open skies agreements have a definite impact on the commercial air transport market, airline competition strategies and even to the global economy. The very nature of open skies agreement will ensure that the number of carriers designated by a country, the number of flights, the routes flown by the flights and the type of aircraft used by an airline are not limited. The provisions for open routes also permit carriers on to third-country markets; all these features directly influence the international aviation industry. The impacts are both of an economic and operational nature.

Impact on airline competition strategies

All airlines employ different strategies which are influenced by factors such as the type and size of market they are operating in, the players or competitors in that market and the existing restrictions in the air transport industry among others. The aim of every strategy that an airline employs is beating competition and increasing its market share. There is a relationship between the market share and profitability and since the ultimate goal is to achieve profit then the market share must be checked and corrected. With open skies agreements airlines are able to access a wider market which in most cases comes as an advantage. For instance, with a larger market access smaller firms are in a position to avoid larger firms by focusing on smaller markets or niches that are of little or no interest to larger firms, this way they will be able to escape the stiff competition that they would otherwise face from the larger firms (Kasarda and Green, 2005). The one disadvantage with open skies agreements is that it opens access of a country's market to other firms that may come and stiffen the competition and may drive some airlines out of business. This simply means that open skies agreements will require airlines to adopt new strategies that would be able to keep the afloat in the new commercial environment.

Impact on global economy

The global economy is a summation of the economies of the various countries and states that make up the whole world, this implies that an effect on the economy of a single country will have ripple effect on the global economy. Generally open skies agreements translate to economic benefit to the regions involved and a significant creation of new jobs and these benefits spread globally. Such agreements will create a transport system that is more reliable and efficient thereby increasing worldwide productivity through the reduction of distances between manufacturers, suppliers, and customers. This efficient transport system also translates to an improved efficiency in the supply chain by enabling firms' manufacturing processes to be faster and just-in-time. By the number of flights increasing it means the passenger and cargo traffic will as well increase which results into indirect and catalytic benefits beings realized in local economies of the countries involved (Hertel, 1997) and in the global economy as a whole. It should be noted that businesses in most countries rely on efficient air transport system with almost a quarter of the sales being dependent on air transport since an efficient air transport enables businesses to reach a wider market, an efficient air transport system will therefore increase the business efficiency for businesses worldwide and also enable cost reduction.

As mentioned before the agreements will lead to increased cargo traffic between the countries which means that hubs will be required to serve both the local market and to connect it to the global market. This will call for significant investments in such hubs which will mostly be done by the cargo carriers and these should be capable of carrying high-value express cargo. The traditional bilateral air service agreements do have some restrictions that prevent foreign airlines to invest in foreign hubs, however, with the open skies agreements such restrictions do not exist and an airline will be able to fully exploit its investments in a foreign country thereby facilitating service between preferred cargo airports. The provision of such agreements also promote cargo services by guaranteeing access to customs facilities and processing, offering a range of ground-handling options, and availing surface transportation necessary for flights. Such provisions enable cargo carriers to efficiently monitor and control cargo from their point of departure to their final destination. This will enhance faster and safer delivery of cargo translating into value-added service to customers.

The benefits derived from the development in the international air transport is not limited to air services industry alone but spreads to cover several service providers, labor market, manufacturers, and the general economy of a state or country (InterVISTAS-ga, 2006). These benefits are felt through multiplier effect with the benefits starting from the communities in the proximity of the airports spreading further into other regions. Business and leisure travels will require services offered by other industries such as the hotel industry and tourism industry. Such demands have the ability of leading to the emergence of new industries in a region and give an area the opportunity of competing economically on a global scale.

Conclusion

Generally air transport agreements liberalize the aviation market and close the gap that exists between aviation and trade and investment within the countries concerned. The benefits of such agreements are felt across all industries that depend on international air transport. The agreements also form the foundation for future closer integration of airlines and investment; also airlines find a way of expanding their routes both regionally and globally. Expansion of the air transport industry leads to higher competition between the airlines which motivate airlines to come up with better and unique strategies. The overall impact of this is development in the global economy due to a wider commercial air transport market.