Essay on "Open Skies Agreement Impact"

Essay 5 pages (1965 words) Sources: 5

[EXCERPT] . . . .

Open Skies Agreement

Impact of open skies agreements

The role of aviation in the globalization process has been very significant and important since the aviation industry can easily bring businesspeople together, enhance the movement of high-value, time-critical products and contribute in the process of expanding travel and tourism. Significant growth in the aviation industry was realized during the Second World War with the development of warplanes which were vital in the war. At the end of the war, many countries had a lot of aircraft which had to be used and the alternative was civil aviation. At this time countries were still suspicious of each other and were not comfortable allowing planes from other countries in their airspace. Since using planes within the borders of a single country does not make any economic sense it became necessary for countries to come up with a way of expanding their operating areas which led to several agreements between countries which were in form of bilateral air service agreements between two countries which later expanded into multilateral air service agreements, these agreements later led to another form of agreement known as open skies agreement.

The question at this point would be; what is the difference between bilateral air services agreement and open skies agreement? In order to answer this question it is necessary that the two terms are defined and their contents well understood. A bilateral air services agreement is a liberalization of aviation services between two states in form of a contract between the concerned states. Traditionally such an agreement intends to create a reciprocal balance for airlines of both countries in terms of benefits since it allows launching of commercial flights covering passenger and cargo transport of both countries. It is important to note that such an agreement can also be made to include transportation of military personnel between the contracting states. Open skies agreement on the other hand is a policy of an international nature which aims at liberalizing rules and regulations which govern international civil aviation. Such a policy will create a free market for the airline industry since it is especially meant for commercial aviation and always aims at achieving the following objectives; liberalizing international aviation markets rules and minimizing government intervention, and adjusting the system under which permission is granted to military and state-based flights. An example of such an agreement is one signed between the United States and Canada in 1995. It should be noted that for open skies agreements to take effect there must an existence of bilateral air service agreements, in fact, open skies agreements are usually a replacement of bilateral air services agreement. Therefore the major differences that can be pointed between bilateral air services agreement and open skies agreement include the fact that the former involves only two countries and focuses on aviation services only while the latter is of an international nature and covers a number of countries and involves liberalization of aviation services as well as markets rules and regulations.

Impact of open skies agreement

Open skies agreements have a definite impact on the commercial air transport market, airline competition strategies and even to the global economy. The very nature of open skies agreement will ensure that the number of carriers designated by a country, the number of flights, the routes flown by the flights and the type of aircraft used by an airline are not limited. The provisions for open routes also permit carriers on to third-country markets; all these features directly influence the international aviation industry. The impacts are both of an economic and operational nature.

Impact on commercial air transport

Air transport is commonly used for long distance movement by passengers and goods which mostly involve moving across borders, therefore, commercial air transport feel the direct effect of open skies agreements. When a state or a country that was previously not having open skies agreements with others does eventually have one then literally the commercial air transport industry of that country will be exposed to millions of additional potential passenger and have a wider market than before. With regard to this it can be stated that the agreement increases competition and enhances generation of productivity gains. The increase in competition will lead to lower airfares, wider choice for consumers, new direct jobs, growth in businesses dealing in aircraft and computer, and also an upsurge of foreign direct investment within those countries (Hertel, 1997). It is also common for such agreements to influence other countries to join or form such agreements with other countries opening their markets further, for instance the open skies agreement between United States and EU is said to have led Canada to negotiate for such an agreement with EU while at the same time the United States also sought for more market from China and Japan (Alford and Champley, 2007).

There are specific benefits that the air services sector can derive from open skies agreements, for instance, the rules that govern air services arrangements will be unified and will replace the multiple national-level rules for passenger and air cargo routes within the countries involved, these rules will thus be more acceptable and easier to apply internationally. Such agreements also have a possibility of simplifying the law issues that control the operation of passengers and cargo in the non-open skies which leads to a further rationalization of the industry, e.g. airlines will have a wider range of partners with whom they can form partnerships or co-brand and a variety of passenger and cargo hubs to choose from, and an improvement in their operational efficiency (Kasarda and Green, 2005). The other benefit to airlines would be unrestricted access to other markets that may be busier and better which would otherwise be limited to local airlines. The open skies agreement will lead to deeper alliances between airlines thus improving the cooperation between them, when such alliances take due consideration of markets competitiveness then it would be possible to achieve price and schedule coordination by the airlines with the aim of reducing costs resulting into reduced airfares (Brueckner and Whalen, 2000).

Impact on airline competition strategies

All airlines employ different strategies which are influenced by factors such as the type and size of market they are operating in, the players or competitors in that market and the existing restrictions in the air transport industry among others. The aim of every strategy that an airline employs is beating competition and increasing its market share. There is a relationship between the market share and profitability and since the ultimate goal is to achieve profit then the market share must be checked and corrected. With open skies agreements airlines are able to access a wider market which in most cases comes as an advantage. For instance, with a larger market access smaller firms are in a position to avoid larger firms by focusing on smaller markets or niches that are of little or no interest to larger firms, this way they will be able to escape the stiff competition that they would otherwise face from the larger firms (Kasarda and Green, 2005). The one disadvantage with open skies agreements is that it opens access of a country's market to other firms that may come and stiffen the competition and may drive some airlines out of business. This simply means that open skies agreements will require airlines to adopt new strategies that would be able to keep the afloat in the new commercial environment.

Impact on global economy

The global economy is a summation of the economies of the various countries and states that make up the whole world, this implies that an effect on the economy of a single country will have ripple effect on the global economy. Generally open skies agreements translate to economic benefit to the regions involved and a significant creation of new jobs and these benefits spread globally. Such agreements will create a transport system that is more reliable and efficient thereby increasing worldwide productivity through the reduction of distances between manufacturers, suppliers, and customers. This efficient transport system also translates to an improved efficiency in the supply chain by enabling firms' manufacturing processes to be faster and just-in-time. By the number of flights increasing it means the passenger and cargo traffic will as well increase which results into indirect and catalytic benefits beings realized in local economies of the countries involved (Hertel, 1997) and in the global economy as a whole. It should be noted that businesses in most countries rely on efficient air transport system with almost a quarter of the sales being dependent on air transport since an efficient air transport enables businesses to reach a wider market, an efficient air transport system will therefore increase the business efficiency for businesses worldwide and also enable cost reduction.

As mentioned before the agreements will lead to increased cargo traffic between the countries which means that hubs will be required to serve both the local market and to connect it to the global market. This will… READ MORE

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