Journal of Air Transport Management 7 (2001) 207}216

Changing the rules*amending the nationality clauses in air services

agreements
Yu-Chun Chang, George Williams*
Air Transport Group, College of Aeronautics, Cranxeld University, Cranxeld, Bedfordshire MK43 OAL, UK

Abstract
Airlines are not able to conduct their business in the same way as other global transnational industries. They are inhibited by the
foreign ownership restrictions in Air Services Agreements and national laws. This paper reviews the background of nationality clauses
and the current regulations in the EU, US and Asia-Paci"c. It analyses the pros and cons of ownership rules, the bene"ts and risks of
foreign investment, and the motives for foreign investment in the EU and Asia-Paci"c. It also assesses the prospects for change in
ownership rules under multilateral and plurilateral proposals.  2001 Elsevier Science Ltd. All rights reserved.
Keywords: Air Services Agreements (ASAs); Ownership rules; Nationality clauses; Mergers

1. Historical background
Fifty two nations attended the International Civil Aviation Conference in Chicago in November 1944 and
discussed the foundations for the future growth and regulation of the industry after World War II. A consequence
of this meeting was that each country's airspace became
one of its valuable natural resources. The &Chicago Convention' was signed on 7 December 1944 and contained
de"nitions of sovereignty, territory and cabotage (in Articles 1, 2 and 7, respectively).
At the Chicago Conference, the US had di!erent views
to those of South American countries about foreign
ownership and control limitations. In the event, the delegates decided not to add any nationality clauses into the
Convention itself, but instead opted to include them in
two subsidiary accords reached at the Conference,
known as the Two Freedoms and Five Freedoms Agreements (Havel, 1997).
Each contracting State reserves the right to withhold or revoke a certi"cate or permit to an air transport enterprise of another State in any case where it is
not satis"ed that substantial ownership and e!ective
* Corresponding author. Tel.: #44-1234-754239; fax: #44-1234752207.
E-mail addresses: y.chang.1998@cran"eld.ac.uk (Y.-C. Chang),
g.williams@cran"eld.ac.uk (G. Williams).

control are vested in nationals of a contracting State,

or a case of failure of such air transport enterprise
to comply with the laws of the State over which it
operates, or to perform its obligations under this
Agreement.

2. Air Services Agreements (ASAs)

2.1. Key elements of ASAs
There are four key elements in most bilateral air services agreements. The "rst is market access. Usually, a limited number of points/routes and air freedoms are
speci"ed (3rd and 4th and occasionally 5th) for each
airline listed in the annex. This element determines the
geographical limits of the market for an airline. The
second is designation and involves each country nominating one, two or more than two carriers, to operate any
agreed international route(s). Designated airlines usually
must be under the substantial ownership and e!ective
control of nationals of the designating states. This element decides how many players there are in the market.

 It is possible for a country to designate any airline it wishes to

operate a particular route, but the other party in the bilateral agreement has right of rejection, if the airline is not substantially owned and
e!ectively controlled in the designating state.

0969-6997/01/$ - see front matter  2001 Elsevier Science Ltd. All rights reserved.
PII: S 0 9 6 9 - 6 9 9 7 ( 0 1 ) 0 0 0 0 7 - 2

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Y.-C. Chang, G. Williams / Journal of Air Transport Management 7 (2001) 207}216

The third is capacity. This limits the service frequency or

number of seats that each airline can provide. This element is in#uenced by airport slots availability and will
determine the market size for airlines. The last element is
tari!s. Regimes vary from being very restrictive (double
approval) to very liberal (double disapproval).
From the above, it is clear that the degree of constraint
in an ASA will decide whether a market is monopolistic,
duopolistic, oligopolistic or strongly competitive, and so
directly a!ect airlines and consumers. Not surprisingly,
bilateral ASAs invariably take time for countries to
negotiate.
2.2. National regulation in selected countries
As mentioned above, there are important links between ASAs and the ownership of airlines. States regulate
air carrier ownership at the international level primarily
in terms of the discretionary criteria contained in ASAs.
At the national level, air carrier regulation, in terms of the
amount of foreign ownership permitted, is embodied in
national law, which can have implications both for the
discretionary criteria in ASAs and for other aspects of
international air transport (International Civil Aviation
Organisation, 1996).
Table 1 lists the ownership and e!ective control regulations that apply in the Asia Paci"c Economic Cooperation (APEC) region. It is clear that the airline ownership
rules of the US and Canada are particularly restrictive,
with each setting a 25% limit on foreign equity. By
contrast, Chile has as its only requirement that a designated airline should have its principal place of business in
the country.

Table 1
Status of foreign ownership restrictions in APEC Economies
Country

Status of foreign ownership restriction

Australia

49% for international airlines

100% for domestic airlines
25% of voting equity
35%
Designation as a Chilean carrier (domestic or international) has principal place of business as the only
requirement.
Requires airlines designated under bilateral agreements to be substantially owned and e!ectively
controlled by the other Party.
One-third
50%
45%
49% for international airlines
100% for domestic airlines
Requires substantial ownership and e!ective control.
27.51%
One-third
30%
25% of voting equity

Canada
China
Chile

Indonesia

Japan
Korea
Malaysia
New Zealand
Philippines
Singapore
Taiwan
Thailand
US

Source: Asia Paci"c Economic Cooperation (1998). Secretariat's Paper, Annex 1, APEC Air Service Group Meeting, 25}26 February,
Singapore.

Australia's limit was revised in 1999.
Korea's limit was revised from 20% to 50% in 1998.
Malaysia's limit was revised from 30% to 45% in 2000.
New Zealand's limit for domestic carriers was revised in 1988 and its
international limit was revised in 1996.
In the US, an airline must meet two statutory tests to ensure that
control of the airline is held by US citizens. First, at least 75% of the
airline's voting stock must be held by US citizens. Second, the airline's
president and at least two-thirds of its board of directors and key
management o$cials must be US citizens. The Federal law does not
specify any limits on foreign investment in non-voting stock or limits on
the provision of debt "nancing (General Accounting O$ce, 1992).

2.3. The pros and cons of ownership rules

The right to designate airlines enables a government to
safeguard its sovereignty. Most States set up their own
airlines in order to exercise the tra$c rights exchanged
with other countries. National airlines bene"t from the
nationality clauses, but their strategies are limited by the
ownership rules.
On one side, there are some advantages for governments to keep ownership rules. Firstly, they can protect
national interests. All States view aviation as vital to their
national economic well-being. Most regard it necessary
to support and sustain their own airlines. They also see
airlines as useful for security reasons. Often they are keen
to ensure that particular routes are served (perhaps to
encourage tourism). Secondly, they can enable a govern-

 Both the US and Canada require that at least 75% of the voting
interest is owned or controlled by persons who are citizens of the US
and Canada respectively.

ment to exercise control over its national airline,

enabling it to pursue its aviation policies and other key
objectives. Thirdly, they can protect national airlines.
One feature of the international regulatory system is that
it allows very little scope for trade in airline services. Any
routes between two countries are normally dominated by
airlines from those countries. As a result, the nationality
clauses in ASAs protect national airlines from competing
carriers based in third countries. Lastly, they prevent the
emergence of #ags of convenience. The current regulatory system is built on the concept of airlines having
a clear national identity and has been successful in ensuring that #ags of convenience have not entered aviation.
Changing the ownership rules may lose this protection
from #ags of convenience, with companies able to escape
safety regulations and labour laws.
On the other side, there are also some disadvantages
for governments retaining ownership rules. Firstly, States

Y.-C. Chang, G. Williams / Journal of Air Transport Management 7 (2001) 207}216

without an international airline of their own usually have

been unable to designate airlines from third countries to
exploit their tra$c rights. Secondly, it limits the amount
of capital airlines can obtain from other countries. Thirdly, it prevents carriers merging with or taking over other
carriers in other countries. US carriers have been able to
strengthen their positions through merging with other
domestic carriers, leading to huge local networks. Airlines in Europe, Asia and Latin America are unable to
grow in this way. Lastly, some routes will lack competition. An example of a restrictive bilateral adversely a!ecting consumers is the one between the Philippines and
Australia. Philippine Airlines halted all #ights to Australia in June 1998 due to a "nancial crisis. At present, the
only designated airline operating between the two countries is Qantas. The Philippines Government cannot designate another country's airline, such as Singapore
Airlines, to #y from Manila to Australia. If another
carrier came to the rescue of Philippine Airlines and
acquired a majority shareholding, the problem would
still remain, unless the Australian Government was willing to amend the bilateral.

3. The matter of foreign ownership

Given the need for #eet renewals and other investments, including IT, many countries are thinking about
allowing foreign shareholdings in their airlines. As it
seems likely that foreign investment will play a more
signi"cant role in the airline industry, it is important to
analyse what bene"ts and opportunities this will bring. It
is also important to know what risks and dangers are
likely to result.
3.1. Benexts and opportunities of foreign shareholdings
Easing the access to much needed capital is one of the
signi"cant advantages for a host country. Governments
often state that they "nd "nancing of their airline's expansion di$cult. For the less prosperous countries, or
countries faced with economic crises (like those in Asia in
1997), it may be di$cult to get "nance from domestic
investors. Few individual investors will have su$cient
capital to invest and there will be few industrial companies with spare funds to invest in a somewhat risky
enterprise, such as an airline. These countries could sell
their airlines to foreign investors. This was the policy
pursued by Korea, Malaysia and China, when they
changed their foreign ownership limits in order to attract
capital from new and larger sources.

 BWIA is one exception to this case. The US, Canada and Germany
allow Barbados to designate BWIA even though it is substantially
owned by the Trinidad and Tobago government.

209

Access to capital has prime importance in those countries that have had a state-owned airline in a loss-making
position for a long period. Some of these countries are no
longer able to subsidise their ine$cient airlines, especially in a liberalised marketplace. This has been the case
in several European countries, such as Belgium, Portugal
and Spain. The Belgium Government sold a 49.5%
shareholding in its national airline Sabena in 1995 to the
SAirGroup and the Portuguese Government recently
sold a 20% shareholding in its #ag carrier TAP Air
Portugal also to the SAirGroup. The Spanish national
airline, Iberia, is now partially owned by British Airways
(9%) and American Airlines (1%).
The entry of foreign-owned airlines to a home market
will create competitive incentives for both existing airlines and new entrants to diversify services and o!er
di!erent products. Services developed in foreign countries may be emulated. For example, travellers in Australia are obtaining bene"ts from the development of low
cost airline services by British-owned carrier, Virgin
Blue. In June 2000, a price war began in Australia, with
a one-way Sydney}Brisbane ticket falling from its typical
level of A$350 (US$ 202) to as little as A$33, the promotional fare Impulse has charged on the route (Ionides,
2000).
Foreign investment, apart from providing a "nancial
#ow, also brings with it the transfer of technology, knowledge, skills and other sources that represent a foreign
airline's intangible assets. Participation of foreign airlines
in the management of an ine$cient airline may introduce
innovative ideas and change management habits. This
will stimulate and revitalise existing airline managers,
encouraging them to adjust to a more competitive environment and thus, lead to a more e$cient distribution of
corporate resources and better ways of providing services. This is likely to prove to be the case with China
Airlines, which intends to sell more than 30% of its
shareholding to a foreign airline, in order to improve its
safety management.
When a national carrier is owned by a mega-carrier,
not only will it get bene"t from the mega-carrier's
strength, but there is also the possibility that the major
airport of the host country will become an inter-continental hub or gateway. For example, Oneworld alliance
partners are keen to obtain a shareholding in Malaysia
Airlines in order to gain a dominant position at Kuala
Lumpur Airport, and Star Alliance partners want to get
a shareholding in Thai Airways to secure their intercontinental hub at Bangkok Airport.
In addition to the above, there are also some bene"ts
and opportunities for the investing countries. As air freedoms are still heavily regulated by ASAs, acquiring
equity in an airline from another country is one of the
best ways to access a restricted market. This has been the
case for Singapore Airlines, which acquired a 49%
shareholding in Virgin Atlantic in order to access the

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Y.-C. Chang, G. Williams / Journal of Air Transport Management 7 (2001) 207}216

Trans-Atlantic market. Strategic alliances can also

bene"t. At present, foreign involvement in the AsiaPaci"c region is not large, though it is growing.
Equity investments may help airlines to develop strategic
alliances. A small equity investment in a listed airline
is more of a gesture of good faith than a binding
commitment. A large investment, such as that of British
Airways in Qantas, represents a much stronger
commitment, since they are harder to reverse and are
usually associated with some say in management. If an
overseas airline is able to gain an equity stake in an
airline of the region, they become a more attractive
partner.
A third bene"t may come in the form of slot acquisition. Given the grandfather rights system of allocating
airport slots, purchasing an airline is one of the best ways
of obtaining these scarce resources. Lufthansa's decision
to acquire a 20% shareholding in British Midland may
well have been motivated by a desire to gain more slots at
Heathrow. Another potential bene"t comes in the form
of providing feed tra$c to a home hub. Some carriers
have been keen to acquire airlines in other countries for
this purpose. For example, KLM purchased Air UK to
connect passengers from a large number of regional airports in the UK with their intercontinental #ights. Finally, a policy to ease ownership rules is often
accompanied by a liberalising of other market restrictions. Developed countries with small populations, or
countries that are isolated, have tended to have a more
liberalised approach to their airline markets, in order to
expand the networks of their national airlines. This was
the reason why the Netherlands and Singapore Governments signed liberalised ASAs with the US in 1978. The
same reasoning has been behind the decisions of Australia and New Zealand to form a single aviation market,
which will allow their citizens to invest in each other's
airlines.
3.2. Risks and dangers of foreign shareholdings
There are also some potential risks and dangers associated with foreign investment. By investing abroad,
foreign airlines may in#uence directly macro economic
variables, such as capital formation, employment, tax
revenues and trade. Indirectly, foreign investment may
also in#uence the structure of the host economy, as well
as the conduct and performance of local-owned carriers.
Increasing foreign ownership in an existing "rm has been
the subject of heated debate in both developing and

 This policy has not been adopted by all isolated countries, however.
Island communities, such as Mauritius and the Seychelles, with long
established, high value, tourist markets have been keen to ensure that
the bene"ts of such remain local.

developed countries. Governments are afraid that foreign

acquisition of local airlines will not provide bene"ts in
terms of higher employment, investment and productivity. Instead, the foreign owner may lay o! sta!, cut
non-commercial routes and merge local o$ces. In the
US, the major block to changing foreign ownership rules
is the Department of Defence (DoD). The DoD relies on
US commercial airlines to supplement its own airlift
capacity in peacetime and during emergencies, and considers the airlines a vital tool for maintaining national
security. The major link between US airlines and military
is the Civil Reserve Air Fleet (CRAF) program. DoD
o$cials are concerned about the e!ect of increasing
foreign investment on the willingness of US airlines to
continue participating in the CRAF program, especially
if foreign control were to be allowed. (General Accounting O$ce, 1992).
Due to cultural, economic and environmental di!erences, taking-over and integrating a business in di$culty
can be both expensive and time consuming. This was the
experience that the UK &no frills' carrier easyJet had
when it took over the failing Swiss charter airline TEA
Basle (now renamed easyJet Switzerland). Strong opposition can be expected from labour unions. Some airlines
have already su!ered strike action by their labour forces,
making it more di$cult to restructure an acquired airline. The other risk is strong competition from the local
carrier. British Airways' investments in German carrier
DBA and in French carrier Air LiberteH provoked aggressive responses from the respective #ag carriers. Both
airlines have not performed well since being owned by
BA, as a result of the strong competition they faced from
Lufthansa and Air France. DBA was forced to review its
network and cut some international routes, only achieving its "rst break-even in 1999. As for Air LiberteH , BA
sold it in the early part of 2000 to SAirGroup carrier
AOM.
From the above, it is clear that foreign investment will
bene"t some sectors, but will be a risk to others. Therefore, it is important to analyse what will be changed and
which parties will be in#uenced by foreign investment. It
is also important to decide what policies host governments and would-be host governments should adopt to
capture the bene"ts, avoid the dangers and maximize the
contribution of foreign investment. Table 2 provides
a summary of the possible changes that may result from
foreign investment.
3.3. Foreign investment in the EU
The Third Package of liberalising measures implemented in the EU in 1993, aside from opening up
cross-border and domestic markets, removed national
ownership restrictions. When a company satis"es certain
"nancial and technical "tness criteria, it is entitled to be
licensed as an air carrier and as such can operate services

Y.-C. Chang, G. Williams / Journal of Air Transport Management 7 (2001) 207}216

Table 2
Possible changes resulting from foreign investment
Item
Market structure
Services

Competition

Network
Airports
Slot ownership

Hub
National airlines
Strategies

Finance

Foreign airlines
Airline globalisation

Alliances

Governments
National economy

Changes

Airline services might be increased, if a new

carrier sets up or a local carrier is taken over
by a foreigner.
If a new carrier sets up or a local carrier is
taken over by a foreigner, a competitive
market is inevitable due to the desire to increase market share.
Some uncommercial routes might be closed if
a carrier was taken over by a foreign airline.
If the ownership of a carrier changes, its airport slots will change ownership as well, due
to grandfather rights.
An airport's position might be changed, if it is
a hub of a foreign-owned airline.
In order to compete with a foreign-owned
airline, a local carrier's strategies should be
adjusted.
If a national carrier was purchased by
a foreign airline, its "nancial situation will
improve.
As mergers and acquisitions become more
prevalent, the mega-carriers will become more
powerful.
As foreign investment is allowed in more
countries, the airline alliances pattern will
change.
As an aviation market grows with the help of
foreign capital, it will bene"t tourism and
business activities.

Source: compiled by the authors.

wherever it wants within the Union, making its own

decisions on capacity and fares. These rights can be
exercised by any European Community citizen throughout the whole of EU without discrimination on the
grounds of nationality.
Given that many governments still view their #ag
carriers with national pride, it is interesting to analyse the
reasons why certain European states have been willing to
sell stakes in their airlines to other carriers. Whilst it is
undoubtedly true that a key policy objective in the drive
to establish a Single Market in Europe has been

 Cabotage was implemented on 1 April 1997.

 The European Commission only sets principles against abnormal
development.

211

Privatisation, it is clear that many smaller states have

been reluctant to adopt the strategy with respect to their
national airlines. Only very recently, for example, has the
Portuguese Government sold a shareholding in its #ag
carrier. Poor "nancial performance has been the primary
driver in the privatization of most of these state assets.
(Table 3 lists the other possible motives.) The case of
Sabena, the Belgian #ag carrier, is particularly interesting. Being in close proximity to countries with larger,
more powerful, airlines made Sabena's existence precarious. In 1995, Swissair concluded an agreement with
the Belgian Government to buy a 49.5% shareholding in
the airline, laying the foundation for closer ties between
the two companies. More recently, Swissair has announced its intention to increase its stake in Sabena to
85%. This is of great signi"cance, if it is realized it will be
the "rst time that one of Europe's #ag carriers will have
fallen into majority foreign ownership. The implications
for the bilateral agreements that Belgium has with third
countries will be of considerable signi"cance, as the carrier designated to operate services by the Belgian Government will for the "rst time not be substantially owned
and e!ectively managed by nationals. The motives for the
major EU #ag carriers purchasing shareholdings in other
European airlines are summarized in Table 4.
3.4. Changing the rules in selected Asia-Pacixc countries
Although foreign investment has its risks, some countries have already changed their ownership rules in order
to help with the restructuring of their airlines. As the
political, economic and geographical environment varies
between countries, it is interesting to know the background and motives why governments want to change
national laws which have existed for decades.
The Australian Government's decision to relax the
limit on foreign investment in its international carriers
preceded the privatisation of its airlines. The change
allowed up to 49% foreign investment in total, with
a single foreign carrier holding limited to 25% and total
foreign carriers to 35%. Qantas's Oneworld alliance
partner, British Airways, purchased a 25% stake in the
airline in 1993. The sale was subject to conditions to
ensure that the majority ownership and control of Qantas remained in Australia. The Australian Government
then sold the remaining 75% of Qantas in a public #oat
in July 1995 (Productivity Commission, 1998). Recently,
Qantas Airways' chairman Margaret Jackson called for
the Australian Government to ease ownership regulations on the carrier to allow it to have more international
investors. Due to the 49% foreign ownership restriction,
with 25% owned by British Airways, only 24% is available for foreign institutions.
Despite the restrictions placed on its international
carriers, Australia changed its ownership rules to allow
foreigners to own 100% of domestic airlines. The change

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Y.-C. Chang, G. Williams / Journal of Air Transport Management 7 (2001) 207}216

Table 3
Main reasons for the sale of stakes in EU national airlines
Airlines

Limited home market

Access to capital

Incentives to management

Sabena
TAP Air Portugal
Iberia
Austrian













Strengthen the
position of airports





Source: compiled by the authors.

Table 4
Motives for European national airlines' acquisitions in neighbouring
countries
Airline stakeholder

Partner

Purpose of ownership

British Airways

Deutsche BA (100%)
Air LiberteH (70% in 1999, 0% in 2000)
Iberia (9%)

To access the German domestic market

To access the French domestic market
To strengthen the Oneworld alliance

KLM

KLM uk (100%)
Braathens (30%)

To feed KLM in Amsterdam

To serve the Scandinavian regional market

Lufthansa

Luxair (13%)
Lauda Air (20%)
Air Dolomiti (26%)
British Midland (20%)

To
To
To
To
To

SAirGroup

Austrian Airlines (10%)

Sabena (49.5%)
Air Europe (49.9%)
Air Littoral (49%)
LTU (49.9%)
Volare (34%)
AOM (49%)

To access slots at Vienna

To obtain Sabena's network from Brussels
To access Italy's charter market and acquire some scheduled services
To access the French domestic market
To access the German charter market
To serve the regional market in Italy
To access the French domestic and overseas territories markets in
the West Indies, Indian Ocean and Paci"c, Australia and Central
America
To access the Portuguese domestic market and international #ights
to South America

TAP (20%)
SAS

Spanair (49%)
Air Botnia (100%)
British Midland (20%)

To
To
To
To

feed Lufthansa services from Luxembourg

feed Lufthansa services from Vienna, Salzburg and Milan
serve northern Italy and neighbouring countries
acquire Heathrow Slots
feed Lufthansa services from Manchester and London

link over 100 cities to Spanish destinations

serve the Finnish market
acquire Heathrow Slots
feed SAS services to the UK

Source: compiled by the authors.

allowed Qantas's international competitor, Air New Zealand, to purchase all of its domestic rival, Ansett Australia. The British owned carrier Virgin Blue has recently
commenced Brisbane}Sydney, Brisbane}Melbourne and
Brisbane}Adelaide services.
In June 1986, the Air Services Licensing Act 1983 was
amended by the New Zealand Government to remove
speci"c restrictions on overseas investments in domestic
airlines. Policy guidelines were issued to the Overseas
Investment Commission (OIC) that up to 50 percent
investment by foreign airlines was acceptable. In February 1988, the Government approved a temporary

increase in Ansett Australia's shareholding in Ansett

New Zealand to 100 percent, provided a return to 50
percent occurred within two years if a suitable New
Zealand shareholder could be found. In September 1988,
the Government decided to remove the previous 50 percent limit on investment by foreign airlines and the OIC
is now able to approve 100 percent investment by any
foreign carrier in domestic airlines. Despite changing the
regulations for domestic carriers, the New Zealand Ministry of Transport announced in September 1996 that its
international airline foreign shareholding limits were to
be harmonized with those of Australia. As a result, Air

Y.-C. Chang, G. Williams / Journal of Air Transport Management 7 (2001) 207}216

New Zealand was allowed to increase the proportion of

its B shares, those that can be owned by foreign nationals, from 35% to 49%. According to the following statement, the main reason behind the change is clear.
The additional capital resources that are needed for
Air New Zealand to expand to become a major airline
player in the region are simply not available in New
Zealand and it would be holding the company back,
2(New Zealand Ministry of Transport, 1996).
In 1998, South Korea's second national carrier,
Asiana, was su!ering badly as a result of an economic
downturn in the country. The Korean Government announced that the foreign ownership limit would be increased from 20% to 50%, in order to provide Asiana
with a much-needed cash injection.
In addition to Australia and South Korea, the
Malaysian Government has recently given permission for
the foreign shareholdings limit in Malaysia Airlines to be
increased from 30% to 45%, easing the way for a foreign
carrier to take a strategic stake in the company. Chinese
regulatory authorities are also considering a proposal to
raise the ceiling on foreign investment in the country's
airlines to 49% from the current 35%, in a move designed to draw more cash into the industry.
The main motive for countries such as China, Korea
and Malaysia receiving foreign investment, is to cover the
losses incurred by their national airlines, given the di$culty they have in getting such "nance from domestic
investors. For the investing countries, the main motive
for changing ownership rules is to liberalise the aviation
market.

4. Ways to change the rules

Changing the current regulations implies di!erent consequences to di!erent interest groups. The US Administration continues to pursue a restrictive stance on this
issue mainly for national defence reasons. The DoD
could prove to be the biggest block to calls for changes in
airline foreign ownership rules. Its "rm stance seems to
come as a surprise to many interested parties from other
parts of the world.
While the global debate continues, some organisations
have already proposed ways forward to reform the
ownership regulations. The Association of European Airlines (AEA) presented a policy statement entitled &Towards a Transatlantic Common Aviation Area (TCAA)'
at the Beyond Open Skies conference held in Chicago in
December 1999, in which it called for permission for
cross-border mergers and acquisitions within a TCAA. It
also called for cabotage rights in the US for EU carriers,
because this would reciprocate US carriers' rights to

213

serve the intra-European market. Other organisations

such as the General Agreement on Tari!s and Trade
(GATS) in the World Trade Organisation (WTO),
International Civil Aviation Organisation (ICAO),
European Civil Aviation Conference (ECAC) and
APEC have also established working groups to discuss
the issue.
4.1. ICAO
In the "eld of multilateral aviation the most important
development since the Uruguay Round was the approval
on 30 May 1997 by the Council of ICAO of six recommendations by an expert group dealing with the regulation of air transport. The group was created following the
world conference on air transport in November}December 1994. Its recommendations take the form of model
clauses which ICAO Members are recommended to use
in their bilateral agreements.
Recommendation ATRP/9-4. The Panel recommends:
that states wishing to accept broadened criteria for
air carrier use of market access in their bilateral and
multilateral air services agreements agree to authorize
market access for a designated air carrier which:
(m) has its principal place of business and permanent
residence in the territory of the designating State, and
(n) has and maintains a strong link to the designating State.
In judging the existence of a strong link, a State should
take into account whether the designated air carrier has
a substantial amount of its operations and capital investment in physical facilities in the designating State,
whether it pays income tax and registers its aircraft there,
and whether it employs a signi"cant number of nationals
in managerial, technical and operational positions.
Where a State believes it requires conditions or exceptions concerning the use of the principal place of business
and permanent residence criterion based on national
security, or for strategic, economic and commercial reasons, this should be the subject of bilateral or multilateral
negotiations.
In the event, ICAO members were unable to reach
agreement on the recommendations and so there has
been no change to the existing designation arrangement.
This highlights the di$culties of achieving change
through multilateral agreement.
4.2. ECAC
In 1999, an ECAC Working Group agreed a more
liberal form of words covering ownership and control of
airlines for use in bilateral discussions, which has been
recommended for adoption by the Directors General of

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Civil Aviation of ECAC member states (European Civil

Aviation Conference, 1999).
The agreement is not binding on ECAC members
however, who remain free to maintain the restrictive
clauses of the Chicago Convention, or to adopt even
more liberal clauses as the basis for their own bilateral
negotiations. The ECAC proposal is limited to bilateral
agreements between states outside the EU, or between an
EU state and a non-EU state. Meanwhile, the EU is
discussing ownership and control issues with 10 countries in Central Europe. The proposed ECAC model
clause is as follows:
Each Contracting Party may refuse to grant an
operating authorisation or may impose such conditions as it deems necessary on the operations of a designated airline, in any case where the said Contracting
Party is not satis"ed that the airline:

registered in the EU and US. For example, Virgin Atlantic could set up a domestic airline in the US, to provide
seamless service for their Trans-Atlantic passengers. British Airways could #y from their subsidiary Deutsche
BA's base in Munich to the US. Lufthansa could #y from
Heathrow to the US, as they already own 20% of British
Midland and so have access to su$cient slots. KLM
could #y to the US from Stansted Airport using KLM
uk's or Buzz's slots. It is not surprising therefore why
major European carriers have been keen to acquire other
European carriers.
On the US side, given the size of its domestic market
and the outcomes of its &Open Skies' policy, it is also not
surprising that the government has been keen to preserve
the status quo. Hence, their unenthusiastic response to
the TCAA proposal.
4.4. Plurilateral clubs

(i) is incorporated and has its principal place of

business in the territory of the other Contracting
Party; and
(ii) holds a current Air Operator's Certi"cate issued
by the aeronautical authority of the other Contracting
Party.
4.3. TCAA
In September 1999, the AEA presented a new policy
statement on a &Transatlantic Common Aviation Area'.
In order to extend the scope of application of Community legislation, it advocated the Single European Aviation
Market as one that could provide a sensible basis for the
development of a multilateral approach to transatlantic
services. The overall objective is to reform regulation in
the two largest air transport markets, the US and the EU,
by replacing the current fragmented regulatory regime
with one that will allow airlines in these two regions to
have the freedom to adapt their structures and operations to normal commercial practices. The essential core
features of a TCAA are summarised in Table 5.
Assuming a TCAA is approved, it will mean that all
eight air freedom rights could be exercised for carriers

APEC's role in the liberalisation of air services arrangements is potentially very signi"cant. In the 1994
Bogor Declaration, the leader of APEC made a commitment to achieving free and open trade and investment for
industrialised economies in 2010, and for developing
economies by 2020. Some steps to liberalise Air Services
have been proposed. The formation of a &plurilateral
club' involving like-minded Economies is one of them.
The idea is that any three or more like-minded APEC
member economies could initiate co-operative arrangements with each other, so as to accelerate the liberalization of air services within the region. Such a &plurilateral
club' would be arranged so that those economies that are
not yet ready to participate could join at a later date
(APEC, 1999). For example, New Zealand has already
signed liberalised agreements with "ve other APEC
countries: Singapore, Malaysia, Brunei, Chile and the
US. New Zealand's standard approach for air carrier
ownership and control is that:
(a) the airline is incorporated and has its principal
place of business in the territory of the Party designating the airline; and

Table 5
Essential core features of a TCAA agreement
Core features

Objectives

The freedom to provide services

All airlines of the parties to the TCAA will have unrestricted commercial opportunities to
conduct the business of air transport anywhere within the TCAA.
Cross-border mergers and acquisitions within the Common Aviation Area will be permitted.
Traditional government regulation of market entry, access and pricing will be replaced. The
parameters used and the procedures followed will determine anti-competitive behaviour.
To harmonise policy on leasing to the highest possible degree taking into consideration
economic as well as safety considerations.

Airline ownership and the right of establishment

Competition policy
Leasing of aircraft

Source: compiled by the authors.

Y.-C. Chang, G. Williams / Journal of Air Transport Management 7 (2001) 207}216

(b) e!ective control of that airline is vested in the

Party designating the airline, nationals of that Party,
or both.
The New Zealand}Singapore agreement permits
greater #exibility in foreign ownership. It removes the
requirement for majority national ownership of carriers,
although it still retains the requirement for national control. New Zealand also has a very liberal arrangement
with Australia under the Single Aviation Market, which
provides for unrestricted capacity to, from and within
each country, including cabotage (Productivity Commission, 1998). Recently, Australia and New Zealand have
formally inked a long-awaited &open-skies' air services
agreement that allows airlines from both sides to operate unlimited services between and beyond the two
countries.

4.5. Multilateral open skies agreement

In November 2000, US, Brunei, Chile, New Zealand
and Singapore Governments signed a new multilateral
&Open Skies' agreement at a meeting of the APEC group
in Brunei. The multilateral agreement substantially liberalises traditional ownership requirements, thus, enhancing foreign carriers' access to outside investment.
The relevant article concerning designation and authorization states that:
(a) e!ective control of that airline is vested in the
designating Party, its nationals, or both;
(b) the airline is incorporated in and has its principal
place of business in the territory of the Party designating the airlines.
It is especially signi"cant that the US signed this agreement. The US currently has Open-Skies agreements with
50 aviation partners. The Open-Skies policy was announced by the Clinton Administration in 1992 and
involved unlimited 5th freedom rights and unregulated
fares. However, a strict ownership limit on carriers was
maintained. The decision of the US Government to replace the nationality clause in its Open-Skies agreements
with some of its aviation partners, represents a highly
signi"cant step forward.

4.6. GATS
The GATS was agreed as part of the Uruguay Trade
Round which established the WTO and came into force
on 1 January 1995. The GATS is a liberalising mechanism for all trade in services, with an objective to provide
a discipline for removing measures that restrict trade in
international services.

215

During the Uruguay Round, it was felt that air transport is characterised by speci"c features that would not
allow the WTO member countries to unconditionally
extend the application of the GATS main provisions to
these services. Therefore, air transport services have been
almost totally excluded from the GATS Agreement. The
present coverage of air transport by the GATS results
from paragraphs 2 and 3 of the Annex on Air Transport
Services (hereafter the Annex).
2. The Agreement, including its dispute settlement procedures shall not apply to measures a!ecting:
(a) Tra$c rights, however granted; or
(b) services directly related to the exercise of tra$c
rights, except as provided in paragraph 3 of this
Annex.
3. The Agreement shall apply to measures a!ecting:
(a) Aircraft repair and maintenance services
(b) The selling and marketing of air transport
services,
(c) Computer reservation system (CRS) services.
Under the WTO, signatories are required to treat the
products and services of other countries on a non-discriminatory most favoured nation (MFN) basis. The
MFN principle means that tari!s applied by WTO members are relatively transparent and generally apply uniformly to imports from all other WTO members. In
aviation terms, open skies to one would mean open skies
to all. WTO was seen as a possible vehicle for the liberalisation of ownership restrictions. This reciprocity mechanism of GATS is one of the main reasons why the US
DOT and the country's other main players do not want
to use GATS to liberalise air transport. However, the
history of international telecommunications illustrates
that nations can move quickly to achieve a multilateral
and liberal agreement when they realise the advantages.

5. Conclusions
While foreign ownership rules have protected national
airlines, they have limited the strategies of governments
whose #ag carriers have been in trouble. Governments
often state that they "nd the "nancing of their airlines'
expansion di$cult. They may also believe that their carriers will perform more e$ciently under private ownership. Without the removal of restrictions on ownership
and e!ective control in bilateral agreements, however,
foreign investors are prevented from purchasing a majority shareholding in an airline.
Although nationality clauses were removed in the EU
Third Package, non-member states in Europe are not
subject to this change. Therefore, the potential for
a European carrier to build up a large local market base,
through merger and acquisition, comparable in size to
that of their US competitors, is limited. The TCAA

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Y.-C. Chang, G. Williams / Journal of Air Transport Management 7 (2001) 207}216

would harmonise the present bilateral agreements between the US and EU countries. While the broader
concept exists in the EU and in some of the recent
intra-regional agreements, it seems to be anathema to US
carriers, as well as to labour unions and Congress, due to
concerns over sovereignty and defence. Therefore, one
solution may be for the EU to "nd an alternative way to
establish a Common Aviation Area, for example, by
linking up with like-minded countries "rst, such as
Australia, Canada, New Zealand and Singapore.
The past few years have seen a substantial increase in
foreign investment in airlines. This re#ects the growing
globalisation of the industry promulgated by air transport liberalisation. Restrictive foreign ownership rules
clearly no longer satisfy the demands of today's marketplace. Removing the nationality clauses in bilateral ASAs
is a vital step towards achieving a truly competitive
global airline industry. The ICAO suggestion that the
&substantial ownership and e!ective control' clause common in bilaterals, be replaced by &the principal place of
business' is one that should increasingly "nd favour with
governments.

Acknowledgements
The authors would like to thank Mr John Macilree,
principal adviser, air services team, New Zealand

Ministry of Transport, for providing the information on

foreign ownership change in New Zealand.

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