Open Skies in the LAC Region

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Milo Strickland
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1 Open Skies in the LAC Region An Opportunity or a Risk? Prepared for: ACI-LAC Montego Bay, Jamaica September,

2 INTRODUCTION Traditional stakeholder opinions about Open Skies are often in conflict, creating tension for regulators AGAINST FOR Home Country Airlines Unions REGULATOR Airports Hotels & Tourism Chamber of Commerce Ministry i of Commerce Exporters/Importers 1

FOR Home Country Airlines Unions REGULATOR Airports Hotels &

3 CASE STUDIES Chile s government mandated goal of establishing open air service relationships has lead to rapid passenger growth Since 1989, Chile has officially sought to establish greater openness in bilaterals Argentina 1981 No net growth 1990 Passenger growth from just over 100k to 1,100k Open Skies Signed 2010 USA 1989 Passenger growth from just under 200k to almost 700k Progressively liberal bilateral agreements signed 1999 Open Skies Signed 2010 Total Int l 1989 Passenger growth from 925k to 5,014k % of the total international growth took place in two markets: Argentina and the USA US and Argentina Other bilateral partners Number of bilateral agreements Share of total 1989 to 2010 growth Source: ICAO Data, Sept 2011; IATA; Ley de Aviación Comercial de Chile, 1979 and recent amendments 2

liberal bilateral agreements signed 1999 Open Skies Signed 2010 Total Int l 1989 Passenger growth from 925k to 5,014k 2010 37% of the total international growth took place in two markets: Argentina

4 CASE STUDIES Andean Community opted for a complete open skies policy Markets experienced a boost, airline experience mixed Only full open skies agreement in the region, established 1991 Included unrestricted 3 rd, 4 th and 5 th freedom rights for scheduled passenger/cargo and non-scheduled cargo flights Difference pace of liberalization in different countries Colombia, Venezuela advanced quickly; Peru, Bolivia and Ecuador opted for a gradual/partial opening The policy had a significant impact on aviation in the sub-region Some carriers ceased operations, while others benefited VIASA and AeroPeru ceased operations Avianca increased market shares in the region + 60 Note: Venezuela was originally part of the agreement but withdrew in 2006, Mercosur has an open skies agreement limited to secondary airports with insignificant traffic, no open skies agreement of any kind exists in the Caribbean Sources: ICAO, Andean Community website 3

quickly; Peru, Bolivia and Ecuador opted for a gradual/partial opening The policy had a significant impact on aviation in the sub-region Some carriers ceased operations, while others benefited VIASA

5 CASE STUDIES In contrast to Caribbean region, US has signed Open Skies with countries in Central America since However, the large US carriers have a minority share in these markets Central America Caribbean Seats per wee ek Total Market US carriers US Signs agreements with Guatemala, El Salvador, Panama, Honduras, Nicaragua and Costa Rica Seats per wee ek Total Market US carriers US Carriers Capacity share % % Since the agreement was signed with the Central American countries in 1997, COPA and TACA Airlines have expanded and maintained a healthy 30% capacity share between the two airlines on these routes 4

Guatemala, El Salvador, Panama, Honduras, Nicaragua and Costa Rica Seats per wee ek 000 450 400 350 300 250 200 150 100 50 0 Total Market US carriers US Carriers Capacity share 1995 68% 2011 83%

6 CASE STUDIES Several Caribbean states have opted for extra-regional liberalization regional traffic remains heavily restricted Open Skies agreements with multiple states outside the region Jamaica aims to finalize deals with Switzerland, Turkey and Brazil among others Barbados agreement with the United States is not in effect at this point In the meantime, regional protectionism persists: REDjet example LCC startup has struggled to obtain landing rights Now given permission establish connections between Barbados, Trinidad, Guyana, Jamaica and Antigua Continued protectionism keeps fares artificially high and limits potential traffic growth Note: IATA traffic growth forecasts predicts Central America to grow twice as fast as the Caribbean 5

protectionism persists: REDjet example LCC startup has struggled to obtain landing rights Now given permission establish connections between Barbados, Trinidad, Guyana, Jamaica and

7 CASE STUDIES Emirates expansion in Germany illustrates the benefits of liberalization for competitive carriers from small countries Bilateral agreement in mid-1990s entitled Emirates to 3 freely chosen destinations in Germany In 2002, Emirates was granted a 4 th destination Current service to (as of September 2011) Frankfurt (2x daily with 777s) Munich (2x daily with 777 and A330) Dusseldorf (2x daily with 777 and A330) Hamburg (2x daily with 777s) Emirates is seeking to gain access to 2 additional destinations (Berlin and Stuttgart) 100,000 80,000 60,000 40,000 20,000 German ministry of transport has so far rejected 100% Lufthansa s s general concern about losing traffic 79% 80% on important routes to Asia and Africa to Emirates 60% The Hamburg-Jakarta example shows Emirates role in what Lufthansa considers its backyard 40% Source: OAG, IATA PaxIS On this route, both carriers offer 1 daily frequency with a transfer at their respective hub (e.g FRA and DXB) - 20% Monthly One-way seats (September of each year) EK (Germany) LH (UAE) LH (DXB) 2002: 4 th EK destination % Market shares on example route (Hamburg Jakarta) EK 9% 7% 3% 1% KL 6

(2x daily with 777 and A330) Hamburg (2x daily with 777s) Emirates is seeking to gain access to 2 additional destinations (Berlin and Stuttgart) 100,000 80,000 60,000 40,000 20,000 German ministry of

8 HOW TO HANDLE HOW TO CALCULATE THE BENEFITS AND RISKS Use airline industry data and modeling techniques to quantify the effect of liberalized bilaterals/open skies on Each airline from each country in the affected markets For each route that may be affected Use standard industry techniques to model the Economic Impact of additional air service for each community including Employment Visitors Residual Spending Economic Investment Upside and downside for home country airlines Are they healthy today? Is there a reason to give them favored treatment? Make an analytical case for the right level of bilateral opening 7

model the Economic Impact of additional air service for each community including Employment Visitors Residual Spending Economic Investment Upside and

9 CONCLUSION Open skies generally lead to significant traffic increases while other effects vary from one country to another Open skies lead to substantial increases in capacity and stimulates demand growth Competitive airlines from small countries can benefit from access to larger markets Open skies do not necessarily lead to a crowding out of local carriers by foreign competitors Protecting unhealthy airlines by resisting open skies just delays inevitable it failure and deprives the country of vital air service, visitors and commerce 8

access to larger markets Open skies do not necessarily lead to a crowding out of local carriers by foreign competitors Protecting

10 THANK YOU! 9

Obtaining Finance in Latin America and the Caribbean 1

Obtaining Finance in Latin America and the Caribbean 1 World Bank Group latin America and the Caribbean Series Note No. REV. 8/14 Basic Definitions Countries surveyed in and how they are grouped for analysis: