Summary Report on Co-operative Arrangements Prepared by Canada

Introduction

At the meeting of the APEC Transportation Working Group in March 2000, each economy was invited to make a submission on each of the eight recommendations of the 1995 Air Services Group report. Canada assumed responsibility for co-ordinating responses to recommendation 7, "airline co-operative arrangements". Airline co-operative arrangements include such practices as code-sharing, alliances, block-space sharing, joint operations, and "wet-leasing".

Canada received comments from Australia; Brunei Darussalam; Canada; Chile; China; Hong Kong, China; Japan; Republic of Korea; Mexico; New Zealand; Singapore; Chinese Taipei; the United States and Vietnam on various aspects of co-operative arrangements for air services. This Report summarizes their comments.

In general, all responding economies thought that airline co-operative arrangements were beneficial to their air transport sectors. Some economies identified substantive or procedural concerns that had arisen during the process of implementing various sorts of arrangements. Nonetheless, no economy believed that that these concerns could not be resolved, nor did any believe that these drawbacks outweighed the benefits flowing from adopting co-operative arrangements.

In some cases, economies mentioned that they have just recently embarked on including provisions allowing co-operative arrangements in bilateral air agreements. Others chose to stress the significance of such arrangements for their national airline industries.

Most economies chose to comment on co-operative arrangements in relation to code-sharing or alliances. Contributing economies tended not to comment on block space arrangements, joint operations or wet leasing (unless to note that they did not permit the latter). Only one economy stated that its most common form of co-operative arrangement was block-space sharing, rather than code-sharing.

Implementation and Regulatory Oversight

All respondents stated that they permitted code-sharing in some form. Code-sharing on a Third and Fourth Freedom basis by designated carriers seems to be the most common and the least problematic. Arrangements for other forms of code-sharing (e.g. by third countries or undesignated carriers) are more diverse, and subject to a range of different arrangements. These regimes vary from fully open ones, through case-by-case to highly restrictive.

A number of economies indicated that they have no particular laws or agreements covering code-sharing with other modes of transport. However, only one economy stated that its laws specifically prohibit such arrangements; most stated this is a purely commercial matter for individual operators.

Requirements that are common to all economies allowing code-sharing include: the airline(s) involved must hold the underlying route rights; the airlines must meet international safety standards; and where permitted in the case of third countries, the latter must also authorize code-sharing on its portion of the specified routes.

Some economies are willing to allow code-sharing without capacity constraints, particularly for the non-operating partner. Others set limits for all participants. In the case of route rights, some bilateral agreements provide wider access for code-shared services than for direct operations.

Some economies require filing of co-operative arrangements for approval prior before giving effect to them. Others merely require filing for purposes of information.

Some economies choose to regulate code-sharing and alliance arrangements through the application of their general competition laws. In such cases, the relevant competition authority must be satisfied that each arrangement on balance contributes net economic benefits that outweigh any loss of competition resulting from the arrangement.

Advantages

Airlines have used co-operative arrangements to expand their networks without incurring the major sunk costs associated with operating additional aircraft. This has allowed airlines to test and develop new routes and obtain economies of scope and density. Some economies noted that formal code-shared services were the only form of service that their bilateral agreements allowed between them.

Airline co-operative arrangements can also permit increased flexibility to respond to public demand, offering consumers a wider choice of fares, frequencies, connections and other options than would otherwise be available.

Airline co-operative arrangements allow carriers to maintain a presence in markets where it may not be commercially sustainable for them to operate services in their own right. Airline co-operative arrangements have also been important in larger economies, as they allow international airlines to maintain a presence at smaller regional centres on routes that would not otherwise have been viable. As these markets develop, carriers that have been able to maintain a presence as code share partners are at a commercial advantage when considering a move to operating services in their own right.

International airlines have used co-operative arrangements to combine their international networks with the domestic networks of alliance partners in foreign jurisdictions. Code-sharing likewise promotes synergies between the domestic and international operations of national carriers, by feeding passengers from their alliance partners' networks onto their domestic routes.

Disadvantages

The drawbacks to co-operative arrangements identified by contributing economies can be divided into those of policy and of implementation.

Economies mentioned two distinct policy-related drawbacks to co-operative arrangements.

First, some economies may view unrestricted code share rights as posing a competitive threat to their national airline(s).

Secondly, one economy noted that removing restrictions on airline co-operative arrangements in an identical manner with all partner economies would run counter to the stated assumption that liberalizing restrictions is intended to member-economies' airlines with fair and equitable opportunities. The significant differences between the individual circumstances of individual economies mean that the bilateral frameworks for co-operative arrangements inevitably must vary from partner economy to partner economy.

Various economies identified three specific difficulties that can arise when implementing airline co-operative arrangements: they can be difficult to administer when capacity is predetermined; they can lead to consumer deception; and they have the potential to be anti-competitive.

One economy recounted that it has tried a number of methods for counting code-shared seats to ensure that the airlines marketing them are within overall capacity entitlements, and found none of the methods to have been entirely satisfactory. Fixing the amount of capacity available for airline co-operative arrangements results in very cumbersome methods of counting and attributing every seat, particularly on routes to offshore hubs. Capacity-based approaches also prevent airlines from using their fleets efficiently as fixed seat code-share provisions are not able to accommodate differing seating configurations, and "free sale" seats are not generally available on a code-share basis. These restrictions reduce the opportunity for passengers to take advantage of the efficiencies that airline co-operative arrangements offer, and therefore detract from the public benefit that could be derived from them.

This economy further stated that frequency limits can enable one airline to tie up capacity through airline co-operative arrangements and prevent competing national airlines from obtaining capacity to operate in their own right.

One solution has been to allow designated airlines to market any number of seats on aircraft operated by other airlines. This approach is simple to regulate and allows carriers maximum flexibility to engage in commercial co-operation. Overall access to a given market is still controlled through the capacity provisions applied to the operating airlines.

While airline co-operative arrangements can extend the range of options available to consumers, there must be safeguards in place to ensure that consumers are aware of what they are buying. Some economies solve this difficulty by including a provision in bilateral agreements that airlines must include provisions to ensure that consumers are fully informed about the services offered. This is done through a requirement for the airlines to make it clear to the purchaser at the point of sale, which airline will be the operating airline on each sector of the service. Some arrangements also require the airline to make its contractual relationship to the purchaser explicit.

Finally, some economies noted that airline co-operative arrangements carry the risk of anti-competitive behaviour - in particular price-fixing - which prevents the benefits of lower costs from being passed on to the consumer. This is particularly the case when the participating airlines are allowed to set fares or tariffs jointly or to share the revenues from the operations, or where market access is restricted.

Economies deal with anti-competitive behaviour in different ways. One stated that aeronautical authorities are best placed to regulate through applying conditions for approving co-operative arrangements. Some economies have empowered their competition authorities to review the operation of co-operative arrangements, to ensure that airlines do not use their arrangements to the detriment of consumers. One economy stressed that it is important to ensure that liberalized airline co-operative arrangements are accompanied by liberal market access provisions, including third country code-share access.

One economy identified an additional factor that could impede the successful development of co-operative arrangements: incompatible computer systems used by the partner airlines.

Suggestions from Contributors

All economies that provided comments indicated that they intend to include co-operative arrangements in bilateral agreements where they are absent and to extend their scope where provisions already exist.

One economy stated that APEC should give due consideration to encouraging and promoting air services that would assist the development of less-densely populated and less developed cities in APEC, when encouraging members to promote airline co-operative arrangements.

Two other economies commented that extending code-sharing to include other modes of transport should become common practice, and both now include this in their model text for co-operative arrangements.

15 September 2000