Slow at best

Borthwick, speaking at a CAPA aviation conference in Sydney, said there was certainly a lot of discussion around, if a more liberalized system was to come, what safeguards would be needed to guard against unfair competition. “And that was before we even got on to ownership and control provisions. So, I think it’s fair to say that if you are holding out hope for a multilateral solution to replace the bilateral solution, I’m not sure if it’s going to happen in my lifetime. But maybe one of the graduates who’s just joined the Department will get to see that happen. Given we are stuck with the bilateral system we just need to make the best of it that we can.”

And that, says Borthwick, is exactly what Australia is doing, although sometimes it’s not easy. “I think what we are seeing at the moment is that the current appetite for liberalization could probably be best described as uneven. And I think this is reflective of some of the attitudes around global trade more generally. Certainly, we’re seeing some regions looking to liberalize quite significantly, if you look at Latin America, Asia and the Middle East for example. They are probably what you would call progressive in terms of their attitude towards liberalization. But at the same time developed markets such as the U.S. and Europe are showing signs of turning inwards and looking to provide more active support in a regulatory sense for their airlines against some of their primary competitors.” His comments are echoed by the director general of the International Air Transport Association (IATA), who has repeatedly voiced the same concerns since taking charge of the global airline body in September last year (2016).

For Australia, however, making the best of an outdated system has had its ups and downs.

Last December it did reach a landmark open skies agreement with China after many years of incremental progress. “In the case of China, the agreement they signed is the first ever open skies style agreement China has signed with anyone. That’s reflective of the strong market between our two countries. And certainly, we’ve seen a significant increase in the number of Chinese airlines servicing the market but also a significant increase in the number of destinations served and we have seen Australian airlines also taking advantage in their services as well.” Similar to the China deal, Australia also achieved an open skies style arrangement with Taiwan and it has made some progress in other markets.

“We have updated our arrangements with Fiji, Italy and Greece. I wish I could say Fiji and Italy represented the sea change in liberalization but I think it’s fair to say that it is incremental at best. Nevertheless, it does expand the opportunities available for our airlines to expand in the market. We are also opening up new markets and over the last six months we’ve done new arrangements with Israel, Columbia, Cyprus and Kiribati, which might not be high on the list of people’s tourist destinations but it is important revenue opportunity for our airlines and yet again opens up prospects for connectivity.”

Not so successful have been negotiations with Hong Kong which, although it is part of China, still handles its own bilateral arrangements. “Our arrangement with Hong Kong is amongst our most restrictive, notwithstanding that we continue to try and engage Hong Kong to liberalize the market. And I think what we have seen through the agreements that we have put in place with China, Taiwan and others, what we are effectively saying to Hong Kong is: we will continue to liberalize around you and you will lose market share. And that is what’s happening.” Analysts do point out that one of Hong Kong’s problems is a congested airport at which slots are a scarce commodity and even it if did agree to an open skies arrangement, airlines would be unable to take full advantage. That will all change when the new third runway, now under construction, is completed around 2023.

Borthwick says people often make the mistake of trying to inject logic into the bilateral issue. “Negotiations are an illogical process. For example, if you take a country like Fiji which is heavily reliant on inbound tourism yet needs to balance that with its investment in Fiji Airways. We have a situation wherein Australian (airlines) want to expand into Fiji but are unable to do so.”

Another area where little progress is being made is the question of airline ownership and control. Most governments still insist that airlines be majority controlled by their nationals. This is the reason why the likes of AirAsia and even Qantas have entered joint ventures around the region to expand their reach through virtual subsidiaries which are actually majority-owned by local entities, although in reality the strings are pulled elsewhere. Borthwick says it is an extremely difficult issue to address. “Probably at least half of them (Australia’s bilateral air service agreements) are still based on the old ‘substantial ownership and effective control’ criteria as opposed to the more progressive ‘principal place of business’ criteria. Certainly, the Australian government’s policy is to include in our bilateral air service agreements ownership and control criteria based on principal place of business. Not everyone agrees with that approach.

Some of our key markets – United States and Japan for example – are still wedded to the substantial ownership and effective control criteria. It’s fair to say that while our preference is to include the more liberal criteria in our bilaterals, the Australian government chooses to regulate its airlines as it sees fit and domestically airlines, other than Qantas, can be up to 100% foreign owned subject to Foreign Investment Review Board considerations. But the 49% cap for international airlines remains in place through the Air Navigation Act.”

At the same time, Australia strives to prepare for a different future, he says. “Our policy approach is we put the liberal arrangements in our bilaterals but reserve the right to regulate our own airlines differently. And that’s an area where certainly the movement internationally has been slow at best. Certainly, we are trying to position our bilateral air services agreements in a way that should the time come when governments decide to lift investment restrictions on airlines the bilaterals would take account of it. So as a result, some of these changes we are making in the bilaterals (now) have no immediate practical effect.”

Borthwick says that in the twelve months ended May Australia continued to see good growth in the international passenger and freight business. “Certainly, passenger movements were up about 7 per cent and freight movements up about 4.5 per cent and the implication is these figures will continue to grow. What it highlights is the need to ensure the right settings are in place to ensure our bilaterals are an enabler of growth and not an impediment. The continued strength of the market is dependent on us getting the right bilaterals in place and certainly we have been successful over the last twelve months in liberalizing some of our key markets. With some of the recent success we actually went through a symbolic milestone in that we now have more than 100 bilateral arrangements in place.

And of these, open skies or open capacity arrangements, cover each of Australia’s top five source markets for visitors and there is still room for growth in virtually all of those markets. We continue to make progress on liberalization and I would still argue that we are amongst the most liberal aviation nations in the globe. There are limits to how far and how quickly we can go and it does very much depend on the willingness of the other party to negotiate with us.”

The overarching goal? “To increase global aviation liberalization while at the same time trying to protect our national interest. I wish there was an easy way to explain what that means. Obviously, we try to support the entry of Australian airlines into foreign markets and negotiate to remove barriers that potentially prevent that access. And we prioritize our bilateral air service negotiations to try and make sure we have the aviation capacity necessary to meet future demand. It is within this context that we continue to progress liberalization and update our air services agreements so we work closely with our bilateral partners to ensure we have the capacity and flexibility for airlines to operate the services that they want to operate in markets.”