IMAGINE you were CE of McDonald’s and you planned to set up shop in SA for the first time. However, before you were allowed to enter the South African market, you were told that local franchise Steers should be allowed to set up shop in US at the same time. Also, Steers should be able to sell the same number of burgers in the US that McDonald’s sells in SA. On top of that, Steers’ US operation can never be owned by anyone but South Africans.
Bizarre, I hear you say. While the example may be oversimplifying the situation, it describes the environment in which airlines have had to operate for the past 65 years.
The industry is regulated by a series of bilateral air service agreements between countries, which dictate where airlines are able to fly, when and how often. They also lay down strict regulations on ownership.
When the Chicago Convention was signed in 1944, governments intended signing a multilateral agreement that allowed airlines the freedom to operate where and how they pleased. But, with the Second World War still raging in many parts of the world, the signatory governments, fearful of enemy attacks from above, felt that they needed to control who flew over their territories. So the complex bilateral system was born.
While that decision may have made sense then, it certainly does not now.
Giovanni Bisignani, CE of the International Air Transport Association (Iata) summed up the airline environment perfectly last week, when he said airlines were probably the biggest facilitator of global trade, yet were themselves not able to trade freely.
Bisignani was in Montebello, Canada, for Iata’s Agenda for Freedom Summit, a forum that aims to drive liberalisation in the industry. The US, Chile, Malaysia, Panama, Singapore, Switzerland, the United Arab Emirates (UAE) and the European Commission — making up 60% of the global industry — signed a document committing themselves to further open their skies to competition.
Around the world, governments are slowly prising open their markets. The best example is the open skies agreement between the European Union (EU) and the US signed last year, which led to British Airways launching OpenSkies, an airline that operates between Paris and New York.
Even in Africa, progress is being made by individual governments towards liberalisation, overtaking the 20-year-old Yamasourko Declaration and the subsequent Yamasourko Decision, the continent’s first attempt to open up the skies. Gabon and the US have granted full access to their respective markets, as have Morocco and the EU.
So what is all this fuss about liberalisation? Here in Africa, the aviation sector is still largely over-regulated and underserviced — a situation that stifles economic growth. Many African cities are still not accessible by air, while in others the cost of the average airline ticket is outrageously high. A move to liberalisation will change all that, a fact that is sinking in with many African governments.
A study by Intervistas, commissioned by Iata ahead of the Agenda of Freedom Summit in Canada, illustrates the point clearly. It looked at the potential effects of liberalisation in 12 markets (Australia, Brazil, Chile, India, Mauritius, Morocco, Peru, Singapore, Turkey, the UAE, Uruguay and Vietnam) and concluded that liberalisation of both market access and ownership and control would increase annual gross domestic product (GDP) in the 12 economies by 0,86% (67,6bn).
Intervistas believes free-market access alone in the 12 economies would generate 1,5- million jobs and add 42,1bn in GDP, while reducing average fares by 22%. Removing limits on ownership and capital flows would hold further benefits.
Just imagine the benefits in the far more regulated environments that prevail in many African countries. A great example of the benefits that can be derived from liberalisation is here in SA, which in 1992 opened the skies to domestic competition. It was a decision that has led to the healthy competition we now have in our local market with South African Airways (SAA) , the previously dominant state-owned carrier, competing with low-cost airlines such as k ulula and .
The advent of domestic competition has driven down the cost of air travel, seen huge growth in passenger numbers, opened new destinations never before serviced by airlines and offered consumers more choice. Liberalisation created more jobs and stimulated the economies of secondary cities in SA.
SA’s airlift strategy, signed off by the Cabinet in 2006, is likely to have a similar effect on SA’s access to the rest of the world. The strategy takes a more open approach to market access and the Department of Transport has in the past few years renegotiated dozens of these agreements, allowing foreign carriers far more access to SA, creating more options and opening new destinations to South Africans. The agreements also no longer favour SAA and, in many cases, open up routes to any airline that wants them.
Unfortunately, the fruits of these negotiations have not been fully exploited as airlines, stung by the economic downturn, were less inclined to open new routes. However, as the economy recovers, so will new destinations open up to South Africans.
Liberalisation goes beyond market access. Issues of ownership and capital flows may be more tricky to unwind, with governments worldwide keen to protect their own industries. But it is a step that must be taken.
Here, too, we have seen some progress. In Africa, an increasing number of governments realise that they don’t have to own their own airlines and have called in outside help. Several South African airlines are close to concluding agreements with African governments to operate carriers in their countries.
Imminent deals include in Malawi and SA Express in the Democratic Republic of Congo . Similarly, Nigerian carrier Arik has been approached by west African countries to operate an airline on their behalf.
However, with most governments still insisting on a golden share, capping foreign ownership, these transactions tend to be slow in coming to fruition and are often bogged in red tape. Nevertheless, once concluded and the new airlines take to the skies, the economic and other benefits will be enormous, opening up Africa for business.
In SA we have seen a reluctance to sell SAA, the government seeing the airline as a strategic asset to drive its trade and tourism ties with key nations. But these strategic imperatives can be addressed in other ways. The Mpumalanga Tourism and Parks Agency’s contracting of airline group Comair to serve Kruger Mpumalanga International Airport, is a fine example. The agency has secured contracts with key tourism groups around the world to ensure the flights are filled, making the route viable for Comair.
If the government had not been too particular about the ownership of SAA, it may have relied on a large airline such British Airways or Lufthansa to invest in the airline and perhaps prevented some of the financial pain SAA has endured in recent years.
Liberalisation will not be achieved overnight and it will be unequal and patchy. And yes, governments do need to ensure that their industries do not find themselves shortchanged by liberalisation.
But as the airline industry continues to struggle for survival, it is only through liberalisation that the sector will ultimately thrive, free to find its own markets. A new era in global aviation is dawning and those governments that do not join the swing to open skies will miss out on the economic benefits that liberalisation will bring.
n Baumann is aviation and tourism editor.
‘Many African cities are still not accessible by air, while in others the cost of the average ticket is outrageously high’