Asia Pacific Air Transport: Challenges and Policy Reforms 9789814414203

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Asia

•

PacificA lr

Transport

The Singapore National Committee for Pacific Economic Cooperat ion (SINCPEC) is Singapore's national charter in the Pacific Economic Cooperation Council (PECC). SINCPEC is a tripartite organisation consisting of academics, government officials and businesspeople. SINCPEC has been active in the Trade Policy Forum, the Pacific Economic Outlook Project, the Transpottation Task Force, the Task Force on Financial Market Development and the Human Resource Development Task Force. The Australia-Japan Research Centte (AJRC) is responsible for a hi-nationally funded research program established to enhance understanding of both countries' strategic interests in the Asia Pacific economy and Asia Pacific economic cooperation. The AJRC fonns part of the Research School of Pacific and Asian Studies at the Australian National University. An active program of conferences, seminars and publications serves as a forum for dialogue on the Centre's ongoing projects and as a vehicle for dissemination of the Centte's research results. The AJRC collaborates on research activities and training with over 30 major institutions throughout the Asia Pacific region. The Chartered Institute ofTranspott (CIT), a professional body for those engaged in transpott, was formed in the UK in 1919 and received a royal charter in 1926. The Singapore Group was set up in 1971 and became a National Council in 1991. CIT Singapore has a membership of about a thousand and regularly organises professional courses, conferences, seminars and talks. It also publishes a journal and research papers relating to transport. The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organisation in 1968. It is a regional research centre for scholars and other specialists concerned with modem Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute's research programmes are the Regional Economic Studies Programme (RES, including ASEAN and APEC), Regional Strategic and Political Studies Programme (RSPS), Regional Social and Cultural Studies Programme (RSCS), and the Indochina Programme (ICP). The lnstirute is governed by a twenty-two-member Board ofTrustees comprising nominees from the Singapore Government, the National University of Singapore, the various C hambers of Com· merce, and professional and civic organisations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the lnstirute's chief academic and administrative officer.

!SEAS Series on APEC

Asia acific

rans

Challenges and Policy Reforms Edited by

Christopher Findlay Chia Lin Sien Karmjit Singh

Published under the auspices of

Australia-Japan Research Centre (AJRC), Chartered Institute of Transport (CIT), Singapore National Committee for Pacific Economic Cooperation (SINCPEC) by INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 119596 Internet e-mail: [email protected] World Wide Web: http://www.iseas.edu.sg/pub.html All rights reserved. No part of this publication may be reproduced, stored in a retrieval gystem, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies.

© 1997 Institute of Southeast Asian Studies, Singapore

Cataloguing in Publication Data Asia Pacific air transport: challenges and policy reforms/edited by Christopher Findlay, Chia Lin Sien and Karmjit Singh. (!SEAS series on APEC, 0217-7264; 3) 1. Aeronautics, Commercial- Government policy- Asia. 2. Aeronautics, Commercial-Government policy- Pacific Area. 3. Airlines- Asia. 4. Airlines-Pacific Area. I. Findlay, Christopher C. (Christopher Charles). II. Chia, Lin Sien. Ill. Karmjit Singh. N. Series 1997 sls97-94341 DS501 15991 no. 3 ISBN 981-230-002-3 (soft cover) ISBN 981-230-004-X (hard cover) ISSN 0217-7264 The responsibility for facts and opinions expressed in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the AJRC, CIT, SINCPEC or ISEAS. Copy-edited by: Pam Hewitt. Typeset by Minni Reis. Printed in Singapore by SNP Printing Pte Ltd.

Contents Introduction

ix

Christopher Firulla.y, Chia Lin Sien and Karmjit Singh Part One:

1

Overview

Challenges and opportunities for Asian airlines and governments

1

Tae HoonOum Part Two:

2

Policy issues

Air traffic congestion and infrastructure development in the Pacific Asia region

23

Paul Stephen Dempsey and Kevin O'Connor 3

Privatisation in Asia Pacific aviation

48

Peter Forsyth

4

Impediments to liberalisation in Asia Pacific international aviation

65

Michael Tretheway 5

Multiple designation policy in Korea

74

]ongseok Kim 6

Multiple designation policy in Australia

84

Christopher Findlay and David Round

7

Air transport policy in Japan: limited competition under regulation

106

Hirotaka Yamauchi Part Three: Regional initiatives

8

The Asia Pacific airline industry: prospects for multilateral liberalisation

123

John Bowen

V

9

Canada-US Open Skies

154

Michael Tretheway

10

Developments in the European Union: lessons for the Pacific Asia region

170

Kenneth Button 11

Flying towards a single aviation market across the Tasman

181

Christopher Findlay and Christopher Kissling

vi

Glossary

192

Acronyms

196

Index

199

Figures Figure 1.1

Cost competitiveness: Major Asian carriers

Figure 1.2

Input price: Major Asian carriers

6 8

Changes of shares in domestic market, Japan, 1984 and 1994

112

Percentage of passengers by market structure, Japan, 1986-94

113

Relationship between real unit cost and available tonne kilometres

114

Silkair's network in the East and Southeast Asian region

131

Air transport routes from East Malaysia, by density of services

137

Figure8.3

Cross-border air services in Southeast Asia, 1979

138

Figure 8.4

Cross-border air services in Southeast Asia, 1996

139

Figure 0.1

Air transport freedom rights

Figure 7.1 Figure 7.2 Figure 7.3 Figure 8.1 Figure 8.2

193

Tables xiii

Table 1

Air transport reform strategies

Table 2.1

Major airport development and expansion projects, 1996

25

Table 2.2

Asia Pacific airports: measures of traffic capacity

30

Table 3.1

Airline privatisation, 1985-95

52

Table 5.1

Frequency allocation scheme under guidelines for supervision and development of multiple national carriers

81

Ansett's shares of Australian capacity, July 1996

89

Table 6.1

vii

Table 6.2

Market share of Australian carriers on multiple designation routes, 1994, 1995

89

Table A7.1

Summary of estimated parameters

119

Table 8.1

Passenger traffic growth on Asian NIE flag carriers

126

Table 8.2

New entrant airlines in the Asian NIEs

128

Table 8.3

Recent airline privatisations in the Asian NIEs

132

Table 8.4

Summary of airline alliances involving NIE airlines

144

Table 9.1

Market share of Canadian carriers, 1989

158

Table 9.2

American airline hubs, 1991

161

Appendices

viii

36

Appendix 2.1

Airport construction projects

Appendix 7.1

Statistical analysis of airlines' cost levels

119

Appendix 8.1

Selected airline alliances by NIE carriers, 1996

146

PREFACE

This collection of papers grew out of a conference in July 1995 organised by four national committees of the Pacific Economic Cooperation Council - Australia, Chile, Korea and Singapore. The purpose of that meeting was to review the challenges and opportunities in regulatory reform in the air transport sector in the Asia Pacific region. The main aim was to make a contribution to the discussion of these issues that was taking place in the APEC process at that time. The conference was hosted by the Singapore National Commitee for Pacific Economic Cooperation (SINCPEC) and we thank its chairman at the time, Dr Lau Teik Soon, for his support. David Parsons, then Director General of the PECC Secretariat, and Betty Chin, from the SINCPEC Secretariat, also provided the project with valuable support. SINCPEC distributed a summary report of the July 1995 meeting which was prepared by representatives of the four national committees. It was then proposed to take advantage of the papers prepared for the meeting to develop a longer manuscript which dealt with some of the issues in more detaiL This book is the result. A eo-host of the July 1995 conference was the Chartered Institute of Transport of Singapore. The conference programme was prepared by a joint committee of the two organisations whose members included Chia Lin Sien, Betty Chin, Donald Wyatt, Lim Ho Hup, Karmjit Singh, Ivan Neo Sekkok, Aric Oh, and K. Raguraman. We wish to th:ink. in particular Dr Raguraman for his inputs into the planning of the conference. Our thanks also go to Far East Organization and the Singapore Tourist Promotion Board for sponsoring the event. The manuscript was prepared for publication at the Australia-Japan Research Centre (AJRC), the Australian National University. We thank the Centre's Executive Director, Professor Peter Drysdale for his support and Denise Ryan who managed the project. We also thank the Director of the Institute of Southeast Asian Studies, Professor Chia Siow Yue, for her interest in the project.

Christopher Findlay, Chia Lin Sien and Karmjit Singh

ix

AUTHORS John BoWEN received his PhD in geography from the University of Kentucky in 1993. He has taught at tertiary institutions in the United States and Singapore. From 1994 to 1997, he worked as a marketing analyst with Singapore Airlines. His publications include several articles concerning air transport liberalisation in Asia Pacific. Kenneth BlrrroN was head of the OECD Project on International Aviation and is currently Distinguished Research Professor at the Institute of Public Policy at George Mason University. CHIA Lin Sien PhD, FCIT is a senior member ofstaff of the Department of Geography, National University ofSingapore. He is a member of the Advisory Panel of the Chartered Institute of Transport, Singapore. Paul Stephen DEMPSEY is Professor of Law, Director of the Transportation Law Program, and Associate Director of the Intermodal Transportation Institute at the University ofDenver. He is also Vice Chairman and Director of Frontier Airlines, Inc. Christopher FlNOLAY is Associate Professor of Economics at the University of Adelaide and also an Associate of the Australia-Japan Research Centre at the Australian National University. Peter FoRsYrH is Professor of Economics and Chair of the Department ofEconomics at Monash University in Melbourne. Jongseok KIM is Research Fellow and Head of the Aviation and Maritime Department of the Korean Transport Institute and is Coordinator of the PECC's Transport Task Force. Christopher KlssUNG is Foundation Professor ofTtansport Studies at Lincoln University in Canterbury, New Zealand, and Immediate Past Chair of the Chartered Institute of Transport in New Zealand as well as Convenor of the New Zealand PECC Committee on Transport. Kevin O'CoNNOR is an Associate Professor in the Deparrment of Geography and Environmental Science at Monash University. His research interest focuses upon development and change in metropolitan areas. His emphasis upon airlines and airporrs reflecrs the role that these play in shaping the business context of today's major cities. Tae Hoon OuM is Van Dusen Professor of Management in the Division ofTransporration, Logistics and Public Utilities in the Faculty of Commerce and Business Administration at the University of British Columbia. David ROUND is Associate Professor of Economics at the University of Adelaide, an Associate Commissioner of the Australian Competition and Consumer Commission and is currently Chairman of the (Australian) Employment Services Regulatory Commission. Karmjit SINOH is Assistant Director of Corporate Affairs at Singapore Airlines. He has served with the airline since 1974 in a variety of managerial capacities covering planning, aviation fuel, administrative services, apron services, security, public affairs, aeropolitical and regulatory affairs. He has also served in government committees on foreign affairs and defence as well as on community relations. He participated in the GATS delibe.rations on air transport services in 1991. He is a Fellow and Chairman of the Chartered Institute of Transport in Singapore. Michael TRETHEWAY is Vice President, Marketing, at Vancouver International Strategic Services, the marketing and strategic planning subsidiary of the Vancouver International Airport Authority, and also adjunct Professor at the Faculty of Commerce, University of British Columbia. Hirotaka YAMAUCHI is an Associate Professor in the Faculty of Commerce at Hitorsubashi University. His main research fields are transport economics and the economics of regulation. He has published widely on air transport issues. X

Introduction CHRISTOPHER FINDLAY, CHIA L IN SIEN AND l

a--

0

;;·

Table 2.2

Ff$

Asia Pacific airports: measures of traffic capacity

0

No. of runways

Auckland Bangkok Beijing Guangzhou Hong Kong Jakarta Kuala Lumpur Manila Tokyo NRT Seoul Shanghai Singapore Sydney Taipei Note: Source:

1 2 2 1 1 2 1 2 1 2 1 2 2 2

Primary runway length

3,673m 3,700m 3,800m 3,380m 3,332m 3,660m 3,477m 3,354m 4,000m 3,600m 3,200m 4,000m 3,962m 3,660m

Number of international terminals

1 1 1 1 1 1 2 na 2 2 1 2 1

1

No. of aircraft positions

16 67 na na 48 108 22 na 87 76 na na 61 22

Peak hour terminal traffic'

1,020 3,110 na na 4,740 2,783 1,340 na 4,620 1530 na na 1,220 2,240

No. of airlines using airport 25 61 31 12 43 27 27 31 52 29 15 54 53 24

No. of No. of % growth 1986-1991 weekly peak day movements Passenger Freight aircraft aircraft departures 925 1,417 461 483 1,092 1,286 928 586 1,298 1308 403 1,207 2,261 676

270 320 na na 323 290 250 na 290 na na na 534 154

20.8 14.8 na na 10.7 3.9 11.2 na 8.7 14.8 na na 10.3 10.3

7.3 14.5 -7.2 22.0 9.6 18.4 19.2 na 14.5 11.1 11.8 na 9.9 8.3

* Number of people in terminal during peak hour. Chinese Taipei PECC (1993) Asia Pacific Airport Survey. Triple-T Task Force, Transportation, Telecommunications and Tourism, Taipei: Chinese Taipei Pacific Economic Cooperation Committee.

> ::;·

~ '8?. 9

I»

:= ~

~ ~

0..

"'0

2..

~·

:x:J ~

0'

~

Policy issues

1,800 ha at Jakarta. The capacity for maintenance is also very variable, with a large area reported for both Sydney and Tokyo, but a small area shown for Hong Kong. That survey information indicates that airport capacity is uneven throughout the region. The unevenness reflects the history of construction. The better overall situation at Tokyo and Singapore reflects the decisions in those cities to build modem facilities in the 1970s. The pressure on Hong Kong relates to the limits provided by its city and water edge site, which is merely an upgraded wartime facility, soon to be replaced. The locally focused picture of facilities provided by the airport survey has been complemented by research carried out by the Air Transport Action Group (1995). That analysis views the airports of the region as a network, and shows the scale of inter-city traffic, and the concentration of aircraft movements at certain times of the day and along certain corridors. The survey makes it clear that although the total traffic at an airport may be less than its annual planned capacity, but if movements are concentrated into a few hours in the day, then pressure on capacity can be a serious problem. Research by the Air Transport Action Group shows that the capacity constraints of the region are substantial. There were eight city-pairs in the region with more than a million passengers per day (the equivalent of seven flights per day every day of the year by a 747). Several of the routes rank among the busiest in the world. The reorganisation of airline schedules in favour of hub-and-spoke operations and the expansion in intra-regional traffic is reflected in the high share of passengers recorded in transit. The report shows as many as 4 7 per cent of the 5.6 million passengers using Kuala Lumpur were in transit in 1993. The inter-continental links create capacity problems at certain times of the day because airlines schedule flights to fit into arrival times and curfews at European or North American destinations. In some Southeast Asian airports, there are 18 to 20 flights per hour on routes to the United States (around 5 pm) and to Europe (at 11 pm). The combination of the inter-continental (hub) and intra-regional (spoke) traffic has both spread and lifted the size of those peaks, and Hong Kong runs close to its declared capacity of 30 aircraft movements per hour between noon and 4 pm, while Bangkok has peaks in the mid afternoon and around midnight. These peaks in aircraft movements translate into large numbers of people, especially as intra-regional as well as intercontinental traffic is now almost all in wide-body aircraft. In Tokyo, the size of the early afternoon peak passenger movement almost doubled between 1990 and 1994. The concentration effect is also felt on particular routes. For example, airspace south of Japan handled 222 aircraft on a 'typical busy day' in 1994, with peak traffic of 28 per hour, while in the South China Sea region, 137 flights per day were recorded with a similar peak hour movement (Air Transport Action Group 1995). Hence air space and airport capacity in Pacific Asia have begun to be strained as airline linkages reflect the steady growth of intra-regional economic linkages, and their role in global trade and investment. These constraints 31

Asia Pacific Air Transport: Challenges and Policy Reforms

have already begun to be felt at certain times of the day, and along certain routes and will soon become serious, making it difficult for the region to meet its predicted growth patterns. The focus of the capacity problem in the southern part of the region has always been on Hong Kong. The long-term commercial significance of Hong Kong was given a boost as it became a gateway to a rapidly-developing China during the 1980s. That role strengthened its attraction for the world's airlines; in addition, the character of world air routes makes it one of the few places in Southern Asia that is within non-stop distance to major cities in both Europe and North America. In short, it is a major global hub, with a substantial amount of inter-regional traffic. Its original airport had a maximum slot-controlled utilisation rate of 28 flights an hour, although it sometimes reached 36, making it one of the most congested airports in the region. As will be discussed below, the new airport will ease the problems of the old site, although, as the Pearl River Delta region attracts more traffic to an expanding set of airports, regional problems of air congestion and management could replace local airport capacity concerns.

Evaluation of capacity provision in Pacific Asia There are three broad responses to the capacity problems of the Pacific Asian region. The first could be called replacement. This provides new, larger and more sophisticated facilities to replace those that have served well beyond their initial planned capacity. As an example, Hong Kong is belatedly following the example set by Tokyo and Singapore. A second response could be deemed competitive. Recogn ising that new, large scale airports are essential for cities and regions to compete in the global economy, places like Osaka, Seoul and Kuala Lumpur have built or are building new facilities. The third is provision: the construction of international standard capacity where it did not exist before, as in China and Indonesia. These three responses will change the face of intra-Asian aviation in the next twenty years, and could also reshape the position of some of the cities in a global context. This section evaluates these approaches in the context of the region's development, as outlined in the first section of the chapter. Details of responses to the problem in Japan, Macau, Hong Kong, Malaysia, Korea, Thailand and other economies in Pacific Asia are listed in Appendix 2.1.

Air capacity constraints Perhaps the most important dimension of the three responses to the capacity problem in the region is that they are almost all taking place within the narrow corridor of traffic that was earlier identified as a key feature of the region. Projects from Seoul in the north, through Shanghai and Eastern China, into the Pearl River Delta, down through coastal Vietnam and including Kuala Lumpur and Medan are aligned on a narrow axis. Even if this vision is extended to include Taipei and Subic Bay, it does not widen the corridor vety much. The region may

32

Policy issues be successful at creating additional ground capacity at individual sites, but this may be won at the cost of serious air capacity problems in the immediate future. The Pearl River Delta provides a good illustration of the issues that will need to be addressed. This region sits astride the north- south axis of the region, providing a meeting place for intercontinental traffic travelling from Europe across Northern Thailand, north from Australia and New Zealand, and south from Japan, North America and some trans-polar European routes. At the same time, the area provides a focus for intra-Asian traffic, as Korean, Japanese, Taiwanese and Singaporean investors and managers move to production sites and projects across the region. Its position is reflected in its air traffic growth: Young (1993, p. 14) has observed that 'statistics on both ... air passenger traffic and civil aviation routes ... more than doubled ... between 1985 and 1991 '.In addition to a special location in terms of aviation traffic, the Pearl River and its estuary has a population of 62 million people. Apart from the new facilities at Hong Kong and Macau, already discussed, a number of new airports have been built or are planned for this area. Guangzhou's Baiyun Airport already handles 10 million passengers a year. A new facility will be built in stages on 10 square miles with the first phase due to be completed in 2005, and having the capacity to handle 27 million passengers (Brower 1995). Zhuhai, on the west bank of the Pearl River, opened a new airport in 1995, with a longer runway (at 4,000 metres, the longest in China outside Tibet) and double the terminal space of Macau, as well as some of the world's most modem technology (Smith 1995). Shenzhen, on the eastern bank, opened a new airport, Huangtian, in 1991, and it is already China's fifth busiest airport in terms of passenger volume, and the fourth busiest in aircraft movements. Airport proponents predict that with such an enormous regional population base, the airports will complement, rather than compete with each other (Donoghue 1995), although Yeung (1993, p. 14) suggests the region is 'faced with the prospect of having too many large airports'. Perhaps the sharpest sense of the problems of air space capacity of the region can be gauged from observations by senior Hong Kong air traffic controllers discussing the problems of dealing with the typhoon season (Adcock 1995). On one occasion, closure of the Hong Kong airport led to diversion of aircrafr to other regional airports, but surplus parking capacity in Taipei, Manila and Bangkok was quickly filled, so that south-bound traffic was diverted to Japanese destinations, while east-bound flights were held up in India. Eventually, flights were held at origins across the globe. This shows how tight the planning of landing slots and parking spaces is in the region. That problem can only be exacerbated by the additional traffic that the new capacity will attract. The Provisional Airport Authority's John Mok predicted, 'that the airports planned in Hong Kong and in the Southern China region will, in all likelihood, serve their own specialised markets, ultimately working in harmony rather in competition with each other' (Mok 1993).1n contrast, Yeung (1993) quotes a study that raises questions about the possible duplication and efficiency of having four international and 33

Asia Pacific Air Transport: Challenges and Policy Reforms

four regional airports within a 200 square kilometre area. It is not clear what mechanisms exist to achieve the 'harmony' that is desired. It is possible that air space management problems could be serious, as the approach paths to the facilities in the Pearl River Delta will overlap. The difficulty with improving air space management is that it calls for international cooperation and agreement. The European experience has shown that is difficult to achieve. New technology that allows more planes to be managed in a given amount of air space has been developed (Meredith 1995), but it calls for satellite systems that span the air space of a number of nations. Differences in levels of development and ideology with in Pacific Asia make the achievement of the necessary collaborative structure unlikely in the short-term. In short, although capacity additions and improvements are undoubtedly needed in several locat ions, the region will need to move quickly to more sophisticated regional approaches to air space management to keep up with the rate of growth of air traffic in the region.

Internwdallinks The regional perspective that is needed to address the Pearl River Delta could also be applied in some locations to the intermodal integration of the new facilities. One way of reducing air space congestion over hub airports is to divert more short-haul traffic to road or high-speed rail networks. This approach has been used at Frankfurt, and also applies in the case of Osaka. The consideration of high-speed rail systems in Asia has been limited to Japan and Korea, yet those systems could play a significant role in a number of inter-city links, especially in China, as noted in Rimmer's (1991) research. To date, investment has favoured road systems (Yeung 1993). Better rail and fast-ferry links between some cities (for example in the Pearl River Delta) could also reduce short-haul air traffic, just as a better standard road link between Kuala Lumpur and Singapore has slowed the growth of traffic on that route. These approaches await a multinational approach, possibly orchestrated by the APEC transport ministers. Where planning difficulties are serious, a common response is to move to locations where no opposition is expected. In the case of Osaka, this drove up construction costs, which have to be passed on to airlines, and could discourage the use of the facility by some carriers. This approach also makes it difficult to make the links with other modes of transport that are essential for high standard operation. In this respect, the Pacific Asia experience has not been good, with several of the new airports not being connected to mass transit systems. A better effort in that regard seems to have been made with the next generation of facilities, with Hong Kong and Osaka leading the way. These integrated facilities recognise Meredith's (1995) comment that ground links are important in the passenger journey, and they need to have the same effective capacity as the airways and airport. In the past, the latter have attracted more attention than the formeL >

34

Policy issues

Regulatory issues Shifting the focus away from airport capacity opens up consideration of the regulatory arrangements between the nations of the region. Japan and Korea have been able to reduce the bulking of traffic on the Seoul-Tokyo route by a simple shift in arrangements about visas for travel between the two countries. This spread the load among other city-pairs. A change in political attitudes between Taipei and China could reduce the bulking of traffic on the Taipei-Hong Kong route. Regulatory change could also increase traffic, however. For example, removal of the difficult and expensive visa requirements for a number of countries (including Vietnam and Cambodia) associated with membership of ASEAN, could lead to more travel to these countries. In the aviation arena, changes in bilateral arrangements could provide greater flexibility for carriers to operate on major routes, some of which could stagger flights across the day and could spread the pressure on some of these routes. Bilateral liberalisation may also stimulate more traffic, however, and therefore more congestion. Current opinions are conservative, as illustrated by Cathay's negative reaction to Qantas moving Hong Kong passengers on routes to Singapore and Bangkok. Japan, too, hopes to reduce the 'beyond rights' of US carriers, created under an old bilateral. However, the US carriers can also be seen as providing additional capacity on what are already very crowded routes, so that a change in the bilateral could constrain the provision of services. Peak demand pricing of air traffic and airport fees could also help to flatten the demand for slots, thereby enhancing the use of existing capacity more efficiently. These few examples illustrate that better management of existing resources, rather than just funding additional construction, could improve capacity in the region.

Rationing space The experience with the provision of additional capacity in Pacific Asian nations has provided lessons in planning and cost management. In some locations, governments have had a difficult time managing airport expansion projects in the face of determined local opposition. At Osaka and Bangkok, small groups of residents were able to divert construction plans, while at Narita and Sydney, local opponents influenced the use of the facility. These outcomes suggest that governments have problems grasping the significance of major international airports, and achieving the best outcomes for nations and regions. Airport planning may need to look beyond additional capacity as the sole solution, and consider a number of pricing and other measures to ration space, and distribute demand away from the peak periods. It is likely that this approach could help in a number of locations, though in most cases, new capacity is needed. In a number of nations, governments are looking at privatisation of airports. This raises questions about financing, links between the methods of finance and the cost that airlines (and hence passengers) will bear to use the facilities, as well as whether the facility will be finished within budget and on

35

Asia Pacific Air Transport: Challenges and Policy Reforms

time, and can be operated at its most effective rate. Private firms, driven by a profit motive, often produce a product (here, airport services) with fewer employees, and greater economy and efficiency. The privatised British Airports Authority has proved that real estate and concessions can be developed into a significantly enhanced revenue stream. For a private company to be involved in the const11,1ction of new facilities, however, it would need to be certain that local political problems will not restrict construction or operation. Hence privatisation still requires a strong role for government in the long-term strategic planning of airports. Certainly that has been the experience in the examples reviewed above. Privatisation of airports is discussed by Forsyth in Chapter 3.

Summary The Pacific Asian region reflects some of the better examples of local scale airport planning in the provision of new airport capacity (Singapore), and has also shown that a high pressure facility can be operated safely and efficiently (Hong Kong}. It is now going through an era of airport construction, at a scale and rate not experienced before in world history. Time will tell whether these new facilities, both large and small, can be managed in a way that delivers what the Pacific Asian air traveller requires: ease of connections to a wide choice of destinations at the best possible price in terms of landing fees and other charges. Pacific Asian nations have had less experience in managing facilities in a regional context but, as reflected in the air space issue, this may be the most important step toward addressing capacity issues in the immediate future. Other aspects of this problem of meeting the capacity constraint include: •

an assessment of the impacts of an economic regulatory system;

•

a perspective on the efficient use of intermodallinks;

•

the application of alternative devices for rationing space; and

•

the costs and benefits of airport privatisation.

Appendix 2.1 Airport construction projects Dempsey, Goetz and Szylibwicz (1996) assembled a range of information on new airport construction as part of an analysis of the new Denver International Airport. That approach has been used to provide information on the construction activity and plans for new airports in Pacific Asia, which is outlined below.

Osaka Kansai Airport Japan's Ministry of Transport began to study the possibility of building a new international airport in the Kansai region in 1968. Cabinet approved the initial 36

Policy issues

Kansai airport plan in 1984. One of the fundamental problems confounding pub, lie officials in Japan is the inability to condemn land under eminent domain power, and purchase it for fair market value. Traditional farmland is valued by its owners well beyond its economic value, and many farmers resist all efforts to purchase their property. Moreover, as is true in most industrialised countries, Japan is noise sensitive. Efforts to expand the existing airport were resisted by local residents for the same reasons people everywhere resist additional airport infrastructure- noise and fear of accidents. In Osaka, the land, safety and noise problems were only resolved by building an airport at sea. Kansai was originally planned to be only one kilometre offshore, on solid sea bed. But fishermen protested, and the airport island was moved an additional five kilometres, above a seabed consisting of 20 metres of alluvial silt and mud. Construction began in 1987, and Kansai International Airport opened on 4 Sep, tember 1994 after delays cause by sinking landfill (Moorman 1994).

Finance The Kansai International Airport Company (KIAC) was formed in 1994 to supervise construction and manage the airport. Kansai International Airport was Japan's first airport to have been built and operated by a private firm and funded commercially. Kansai was originally projected to cost 1 trillion yen, or about US$7.7 billion. 1 The national government was to invest US$546 million, and local governments and private investors invested US$137 million, with a further US$6 billion to be borrowed (Brown 1987). Ultimately, however, the govern, ment of Japan provided two,thirds of the funding, local governments provided one,sixth, and about 1,000 local businesses contributed one,sixth. KIAC is saddled with US$15 billion in debt, and needs about US$i million a day to service the debt. The airport made a loss of more than US$200 million in its first six months of operation. As a consequence of the cost overruns associated with the construction problems, Kansai will levy some of the highest airport charges in the world (Ott 1993). Airlines face charges of about US$24 a tonne, or nearly US$9,673 as a landing fee for a 747 (the same level as Narita, which currently imposes the world's most expensive airport landing fees, and about five times greater than landing fees at New York's John F. Kennedy International Airport). Jet,way and baggage handling fees will also be among the highest in the world, along with rental rates on concessionaires. Lassiter (1994) estimated a cup of coffee might cost US$1 0, while the passenger airport departure tax is US$26 (the world's high, est).

Capacity Although the new airport has but a single 3,500 metre (11,400 feet) runway, it is ultimately expected to be able to handle up to 454 arrivals and departures a day, accommodating 68,000 passengers and 3,000 tonnes of cargo. Ultimate capacity 37

Asia Pacific Air Transport: Challenges and Policy Reforms

is 160,000 take-offs and landings, transporting 30.7 million passengers and 1.4 million tonnes of cargo per year. Because aircraft approaches are over the ocean, Kansai is Japan's first 24-hour-a-day airport. This will greatly enhance cargo utilisation, for cargo landings can be cleared at night and transported through Japan when highway traffic is light, thereby saving warehousing expenses (Black 1994). Original projections of 600 flights per week, made when the Japanese economy was robust, have been revised. The airport opened at about two-thirds of its original capacity expectations, with 337 international weekly flights (compared with 630 when the airport achieves full operation), and 469 domestic weekly flights (Black 1994). That is still40 per cent above the capacity of ltami, the airport it replaced, which had serious capacity limitations because of noise slot controls. ltami will remain open for domestic operations, although flights will be reduced from 340 to 121 a day. Nevertheless, airport officials have concluded they need to begin planning airport expansion almost immediately. The conventional approach would be to expand the island by 1,730 acres to add two new runways (one parallel and one cross-wind) and a second terminal building. T he cost would be a staggering US$21.4 billion. A less conventional alternative would be to connect 200 steel containers, each measuring 1,000 by 200 feet (or 200,000 square feet), to form a floating runway. This alternative would cost an estimated US$17 billion (Fiorino 1994).

Landside links The airport island is linked to Osaka by a four kilometre double-decker six-lane highway/railway truss bridge. Thus, Kansai Internat ional Airport has highway, light rail and express ferty connections to the Shinkansen. The train runs directly into the terminal, allowing passenger movements from the airport to Osaka city centre in 29 minutes. A marine terminal will allow a 28 minute highspeed passenger boat service between the airport and Kobe. Air terminals will be established in Kyoto, Osaka and Kobe to allow passengers to check in before reaching the airport. Kansai serves Osaka, Kobe and Kyoto, which are, respectively, western Japan's major distribution centre, Japan's largest port, and one of the nation's leading tourist destinations.

Macau International Airport Macau is 70 miles south-east of Guangzhou, in mainland China, and 40 miles from Hong Kong, in the Pearl River delta region. The last scheduled air service to Macau was in 1940, involving flying boats. With the Portuguese colony not scheduled to revert to China until 1999, much capital has been transferred from Hong Kong, creating an economic boom. Not until recently did Macau have either the need or the ability to construct an airport. Macau International Airport (MIA) was built by the Sociedade do Aeroporto lnternacional de Macau, otherwise known as the Macau Airport Corn38

Policy issues

pany (CAM), a consortium formed by a German-Portuguese consortium of Siemens and Soares de Costa, which holds a 25 year franchise to develop and operate the airport. Comtruction began in January 1992, but a number of design changes delayed offshore financing. The truly amazing thing about MIA is its modest cost {less than US$1 billion), in part attributable to using low-cost labour from mainland China. By virtue of the fact that the airport is in the bay, noise impacts on residents are anticipated to be modest, raising the possibility of 24 hour operation (Donoghue 1995).

Finance The US$912 million airport was financed through an agreement with the Banco Nacional Ultramarine, the Banco Comercial de Macau, and financial institutions in New Zealand and Australia. The CAM, which holds the 25 year concession on the airport, is owned 5 1 per cent by the Macau government, 33.3 per cent by Hong Kong's Stanley Ho's STDM (Ho also owns all nine Macau casinos, the hydrofoil shuttle from Hong Kong, the sea terminal, and accounts for 25 per cent of Macau's gross domestic product), and 22 per cent by other investors (Donoghue 1995). A concern in both Macau and Hong Kong is the reversion of the colonies to China in 1999 and 1997, respectively. The 25 year concession granted to CAM was an attempt to assure some stability. Mainland Chinese approval of airport financing of MIA was without incident, unlike the reservations Beijing raised with respect to Hong Kong's new airport. Moreover, with Hong Kong reverting two years earlier, Macau will be able to assess how China's ascendancy to political dominance affects the economic environment. MIA will be operational before reversion, while Chek Lap Kok will be open only after Hong Kong reverts to China in July 1997.

Capacity MlA has a 3,360 metre runway with CAT II ILS equipped access. It is anticipated that the new airport will handle 2.7 million passengers during its first year of operation, rising to four million by the year 2000, and six million by the year 2010. But delays of construction of Hong Kong's new Chek Lap Kok Airport suggest that these numbers could be revised upward, and CAM anticipates that the MIA could gain up to 15 per cent of Hong Kong's passenger traffic (World Airport Week 1995). The initial annual capacity ofMIA is 4.5 million passengers, adequate to handle any spillover (Donoghue 1995). A second phase of the airport opened in 1996, and is focused on developing Macau's potential as a cargo hub and as an aircraft maintenance facility. Site preparation on a 10,000 square-metre cargo terminal began in 1995, while the apron area for aircraft parking was doubled, which should allow capacity of 160,000 tonnes of cargo per year. The anticipated tripling of cargo volume by the year 2011 will require more land reclamation, to be completed by 2001. A second 39

Asia Pacific Air Transport: Challenges and Policy Reforms

terminal is scheduled for the year 2010. Landing fees will be set at an average of the five busiest airports in the region. It is anticipated that the landing fee for an Airbus A320 will be US$730; the passenger departure tax will be US$16 (Avia-tion Daily 1995).

Landside links A new four-lane bridge links the island ofTaipa to the Macau peninsula, making MIA about a ten-minute drive from downtown Macau. A second inter-island bridge is under construction to handle airport traffic. The north airline terminal will include a ferry terminal for transfer to Hong Kong and mainland China. It is anticipated that highway and railway lines will link the airport to the Zhuhai special economic zone and Guangzhou. The railway station, located west of the air terminal, blocks expansion in that direction. Dramatic improvements in rail and road infrastructure planned in the Pearl River basin should feed traffic into Macau Airport (Paisley 1995).

Hong Kong Chek Lap Kok Airport A new airport was announced for Hong Kong by British Governor Sir David Wilson in late 1989 (the same year as the Tiananmen Square crackdown in Beij ing) as a means of boosting confidence in Hong Kong's economy. The master planning for a new airport began in 1990 and was completed two years later. Site reclamation began in 1993. The new Hong Kong (CLKA) airport is integrated into Hong Kong's comprehensive intermodal Port and Airport Development Strategy (PADS) which includes ten core projects, from new mass transit lines to serve the seaport and airport, a new city, new roads and bridges, container terminals, and of course, the new airport (Darmody 1993). The new airport was planned by the Provisional Airport Authority (PAA), an independent corporation operating under commercial principles and owned by the Hong Kong government. It was in effect a collaborative venture of the departments of Civil Aviation, Highways and Territory Development, as well as the Mass Transit Railway Corporation, the Hong Kong Legislative Council, the Airport Committee of the Joint Liaison Group (with China), the Airport Consultative Committee, and the airlines. Chek Lap Kok is the 20th Century's largest civil aviation project. When completed, the 4.82 square mile island site will be four times the size of Kai Tak, and twice the size of Osaka's new Kansai Airport. The island will be large enough for two 3,800 metre long runways with a 1,525 metre separation. The project will also include the world's largest railway suspension bridge. Of the airport's 1,248 hectares, 938 were reclaimed from the sea and 310 from levelling Chek Lap Kok and Lam Chau Islands. Site preparation by the consortium that won the contract -Japan's Nishimatsu, Britain's Costain, America's Morrison Kundsen, Holland's Ballast Nedam, Belgium's ]an De Nul, and China's Harbour Engineering- cost US$1.26 billion and involved the largest fleet of dredgers the world has ever

40

Policy issues

seen. Much of this effort was directed at overcoming the problem created by soft mud.

Finance Darmody (1993) reported that the airport was expected to cost US$8.7 billion. However, with the additional suspension bridges, tunnels, highways, high-speed rail, and ocean terminal facilities, the total cost of the overall project will exceed US$20 billion. After delays due to disagreements about financing arrangements, an agreement was reached, centring on the degree of reliance on borrowed capital. Planning was also delayed as China complained that it had neither been consulted on the desirability of a new airport, nor been included in the decisionmaking process. It objected to what it perceived to be an excessively costly facility (Becker 1995). As noted above, only 40 per cent of the price tag of about US$20 billion is for the airport itself. The remaining funds are earmarked for the 1.5 kilometre rail and roadway suspension bridge, a 33 kilometre airport express rail line, and a third harbour tunnel for Hong Kong Island. Approximately 30 per cent of the cost will be raised from tenants, franchises and air traffic control charges. Aeronautical charges, expected to be triple those of Kai Tak, will provide 40 per cent of the airport's revenue. The Hong Kong government put up US$4.5 billion in cash for the airport, and US$2.9 billion for the airport railway. The airport and railway each will borrow US$1.4 billion from banks, to be repaid in 2001, four years after the airport is scheduled to open (The Economist 1994).

Capacity CLKA will open with only one runway, although its location suggests 24 hour utilisation. First year volume at CLKA is anticipated to be 28 million passengers and 1.4 million tonnes of cargo, and Chek Lap Kok is expected to take as many as 43 movements an hour, extending the peak hour capacity of the original facility by 50 per cent (Mok 1993). By the year 2002, the new airport is expected to handle 35 million passengers a year. A second runway is planned to be commissioned in 1999, so that CL~s ultimate capacity is anticipated to be 87 million passengers and 9 million tonnes of cargo annually (Darmody 1993).

Landside links A transportation centre adjacent to the terminal building will contain arrival and departure platforms for the high-speed rail to the city's urban and business districts. More than 40 per cent of the airport's passengers are expected to arrive and depart by rail. Bus, taxi and car hire links to the city, by tunnel, as well as across the suspension bridge will connect to the city's highways. A ferry terminal will also provide sea access to Hong Kong island, Macau, and points along the coast of southern China and the Pearl River estuary (Mok 1993).

41

Asia Pacific Air Transport: ChaUenges and Policy Reforms

Kuala Lumpur Sepang International Airport In 1991, the Malaysian government unveiled a plan to build the new Kuala Lumpur International Airport (KLIA) 66 km south east of Kuala Lumpur, the nation's capital, at a projected cost ofUS$7.4 billion. It would replace the international operations of Subang Airport (22 km south-west of Kuala Lumpur), which has become increasingly congested despite terminal expansion and runway extension (Hill1993).

Finance Sepang Airport is managed by the Public Works Department of the Malaysian federal government. The airport is being financed primarily by governmentguaranteed unsecured bonds. KLIA also can access a 61.5 billion yen Japanese government loan. The design and construction of the airport's main terminal, contract pier and baggage handling system will be built by Perspex, a joint venture of four Japanese companies, at a cost of US$670 million.

Capacity H ill ( 1993) reports that Phase 1 of KLIA included two parallel runways capable of handling simultaneous wide-bodied aircraft take-offs and landings, main and satellite terminals, with a capacity of up to 25 million passengers a year. With 25,000 acres, the airport has sufficient room for expansion to five runways, which will raise capacity to 45 million passengers a year. Engineering problems, caused by peat swamp and marine clay on the alignment of the second runway, led to a decision to open the airport with only one runway.

Seoul Yongjong Korean International Airport The new Korean International Airport (KIA) will be built on reclaimed land between Joungjong and Yongyu Islands near lchon, 52 km west of Seoul. A new airport is needed at Seoul because the existing facility at Kimpo Airport (which opened in 1958) will reach capacity by 1997. Kimpo handles 86 per cent of Korea's international traffic, and 39 per cent of its domestic traffic (Shin 1993). A feasibility study for a new airport was conducted in 1989-90. The site at Yougjongdo was selected in 1990, a master plan finalised in 1992, and ground breaking begun in November 1992. The initial phase of the new airport is anticipated to be completed in 1999, and the airport will be operational in the year 2000.

Finance The Korean Airports Authority will raise US$2.36 billion, (or 47 per cent of the funds to be spent on airport facilities) from operating profits, loans, bonds and

42

Policy issues sale of land at the prepared site. The government will also provide US$2.38 billion in subsidies to meet the costs of airport access and site preparation. Private sector investment to build the cargo terminals and other secondary facilities will comprise 5 per cent of the total expenditure of the project (Airports 1995).

Capacity The new airport's original master plan included a single 3,750 metre runway equipped with CAT-iliA navaids equipment. It will be capable of handling 170,000 aircraft movements, 1.7 million tonnes of cargo, and 27 million passengers annually. Two additional runways have since been added to the plan to handle the anticipated 10 per cent annual growth in traffic. Four or five runways may be built for ultimate completion in the year 2020, enabling the airport to handle 100 million passengers by the year 2020. The cargo terminal will be 175,000 square metres, expanding ultimately to 805,000 square metres, and will be capable of handling 7 million tonnes of freight (Shin 1993 ).

Landside links A new 54.5 km expressway, a high-speed railway and a suspension bridge is being built to link the airport with Seoul's industrial area and its seaport. The upper level of the 5.1 km suspension bridge will be used for automobiles and trucks, while the lower level will be used for rail traffic. The rail line will link with the Seoul-Pusan high-speed railway (Shin 1993).

Bangkok Nong Ngu Hao International Airport The Second Bangkok International Airport (SBIA) at Nong Ngu Hao is designed to relieve capacity constraints at the existing airport at Don Muang, which is expected to exceed its current capacity before 2000. The airport is being built 30 km east of central Bangkok, near the Bangkok- Pattaya highway. The project has had a difficult planning history, with problems at the site, as well as difficulties in determining the scale of expenditure given plans to extend the existing airport (Airports Authority of Thailand 1994). Don Muang's international terminal will be doubled in size, and its domestic terminal will be tripled, raising capacity to 25 million by 1997, three years before SBIA opens (Aerospace 1993). This additional capacity at Don Muang led the Airports Authority of Thailand to limit the new airport to a single phase project.

Capacity The first phase of the new airport will have two 3,700 metre runways, and will accommodate 30 million passengers annually. The second phase calls for a second pair of runways to be built, along with a second terminal, including a concourse parallel to the main terminal, connected by an underground people 43

Asia Pacific Air Transport: Challenges and Policy Reforms

moving system. The airport is projected to be able to handle 38 million passengers in 2010, and 100 million when fully built in 2023.

Landside links Bangkok's existing airport has notoriously poor road access, and the new facility will be served by a new highway system. However, it is likely that Don Muang will become the nation's primary domestic airport, while SBIA will be the international airport, so that new road links will be needed to connect both facilities.

Other airport projects in the Asia Pacific region Elsewhere in Pacific Asia, a large number of smaller projects are under way, adding and renovating terminals, providing additional runway or standing capacity and, in a number of places, providing new facilities where none existed before. One different outcome is at Subic Bay in the Philippines, where the large ex-military facility will be used as a commercial airport. A significant initial tenant will be Federal Express, which is building an Asian hub on that site. Some of the former air bases in Vietnam may also be used as commercial airports in the near future. Completely new facilities are also planned in both China and Indonesia. The need for facilities in China has been based largely on opportunities created by opening its doors to foreign investment. That process has created a steady expansion in air traffic as project planners and investors, followed by production managers and buyers move in and out of China on a regular basis. To get some idea of the scale of this activity, China's passenger and cargo volume grew by 28 per cent in 1991, by 33 per cent, in 1992, and by 20 per cent in 1993. As noted above, Hong Kong has felt much of this pressure, although the activity has begun to spread to a set of other airports in the Pearl River Delta. The eastern emphasis in China's development has led to rapid expansion in Shanghai, which could begin to exert influence as a new gateway to China once a new international standard airport is fully operational. That infrastructure will allow it to take advantage not only of an accessible position in a densely settled part of China (and build on a commercial heritage that in the past was superior to that of Hong Kong), but also take advantage of a few hours' shorter flying time to North American cities. If current plans are fulfilled, by 2000, eastern China will have 22 new airports, while ten more will have been expanded and upgraded (Trautmann 1993). Flynn (1993) has provided what she indicates is not a comprehensive list of projects, which includes upgrades at Beijing, Fuzhou, Gaoqi and Guangzhou, and new facilities under construction at Fuzhou, Wuzhou, Sanya and Hangzhou. In other places, new facilities have recently been completed (Shenzhen) or are under consideration (Guangzhou and Shanghai). This rapid growth has placed enormous strain on the capital requirements of the commercial aviation sector,

44

Policy issues and caused serious safety and operational problems. China has concluded that its airlines and airports need capital and operational expertise, and has recently opened both to foreign investment (Woodward 1995). Indonesia presents a different problem for the planning of airport infrastructure. In essence, air services are a central part of an effort to maintain the national cohesion of a nation spread across an archipelago. Currently facilities on many of the smaller islands do not allow night-time or large aircraft operation, limitations made more troublesome by tropical weather conditions. Regional development considerations are also prominent, as the government is keen to realise opportunities, especially in tourist locations outside crowded Java. As an example, an international standard airport is planned for Lombok, which will act as an another focus for international tourists in the eastern part of the country. Runways at Medan, Ujung Padang and Batam will be extended to accommodate 747 400s over the next five years, spreading capacity around the nation. These plans also include Surabaya in eastern Java (Asia Today 1995, p. 15).

Note

*

Part of this research was supported by an Australian Research Council grant on Business Travel and Air Transport. Amanda Darby helped with a literature review and revision of drafts of the paper. Colleagues at the Centre for Transportation Research at the University of Denver provided comments on the initial ideas for the paper.

References Adcock, R. J. (1995) 'Impact of regulatory systems on trade in air transport services', paper presented at PECC Air Transport in the Asia- Pacific: Challenges and Opportunities and Options Conference, 9-11 July.

Aerospace (Singapore) (1993) 'Fewer arrivals so airport faces scale-down', September. Air Transport Action Group ( 1995) 'Asia/Pacific air traffic growth and constraints', prepared for Air Transport Action Group by International Air Transport Association, Geneva, Switzerland. Airports (1995) 'Korea seeks further U.S. participation in new airport', Airports, 20 June.

45

Asia Pacific Air Transport: Challenges and Policy Reforms

Airports Authority of Thailand (1994) Second Bangkok International Airport

Implementation Programme. Aviation D~Uly (1995) 'Macau's First Airport to Open November 9', 28 July. Becker, S. (1995) 'Airports: Chinese Opera', Far Eastern Economic Review, 6 April. Black, A. (1994) 'Trade and Tourist boom from new airport', International Press Service Network, 9 September. Brower, H. (1995) 'Mainland adds, upgrades airports', Travel Weekly, 17 August. Brown, D. (1987) 'Japanese building international offshore airport to serve Osaka', Aviation Week and Space Technology, 13 July. Chinese Taipei PECC (1993) Asia Pacific Airport Survey, Triple-T Task Force Transport, Telecommunications and Tourism, Chinese Taipei Pacific Economic Cooperation Committee, March. Chong, F (1995a) 'How Singapore is shaping its external economy in Asia', Asia Today, 13 April, pp. 5-9. - - (1995b) 'How Singapore banks are carving their niche in the regional market', Asia Today, 13 May, pp. 5-8. Clark, G. L. and W. B. Kin, eds (1995) Asian NIEs and the Global Economy, Johns Hopkins University Press. Clarke, R. A. (1995) 'Air transport system congestion in East Asia', Transportation Quarterly, 49(3), pp. 31-42. Darmody, T. (1993) 'The design and development of world class airports', paper presented to the IBC International Conference on Airport Development and Expansion, Hong Kong, 28 October. Dempsey, P., A. Goetz, and J. Szlibwicz (1996) Denver International Airport: Lessons for the 21st Century, New York: McGraw Hill. Donoghue, J. A. (1995) 'The Pearl-Y gateways', Air Transport World, 1 February. Economist (1994) 'Fasten your seat belts', Economist, 12 November. Fiorino, F. (1994) 'Airline outlook yen for growth', Aviation Week and Space Technology, 5 September. Flynn, A. (1993) 'Airport construction craze', China Business Review, 20(3), p. 17. Hardeman, T. (1993) 'The necessity for new airports in Asia-Pacific', paper presented to the IBC International Conference on Airport Development and Expansion, Hong Kong, 28 October. Hill, L. (1993) 'Asia's newest dragon', Air Transport World, 1 September. Lassiter, E. (1994) 'Japan to open much-delayed Kansai Airport', Travel Weekly, 29 August. Meredith, J. (1995) 'Room to boom', Airline Business, January.

46

Policy issues Mok, J. ( 1993) 'The development of Hong Kong's new international airport', paper delivered at International Conference on Aviation and Airport Infrastructure, Denver, Colorado, 8 December. Moorman, R. (1994) 'Osaka to me', Air Transport World, 1 October. O'Connor, K. (1995) 'Airport development in Southeast Asia', Journal of Transport Geography, 3(4), pp. 269- 79. -

( 1996) Airport Development: A Pacific Asian Perspective, Built Environment, forthcoming.

O'Connor, K. and D. Edgington (1991) 'Producer services and metropolitan development in Australia', in P. W. Daniels, ed., Services and Metropolitan Development: International Perspectives, London: Routledge. O'Connor, K. and A. Scott (1992) 'Airline Services and Metropolitan Areas in the Asia Pacific Region 1970-1990', Review of Regional and Urban Deve/.-. opment Studies, 4, pp. 240- 53. Ott, J. (1993) 'Kansai sets highest fees', Aviation Week and Space Technology, 25 October. Paisley, E. (1995) 'On a wing and a prayer', Far Eastern Economic Review, 5 May. Rimmer, P. (1991) 'Megacities, multi layered networks and development corridors in the Pacific Economic Zone: the Japanese ascendancy', in T. Hutton, ed., Conference Papers on Transporta.tion and Regional Development, presented at the third Annual Conference of the Pacific Rim Council on Urban Development, Vancouver, Centre for Human Settlements, University of British Columbia, Vancouver. Shin, J. H. (1993) 'Airport developments in Korea', paper delivered at International Conference on Aviation and Airport Infrastructure, Denver, Colorado, 8 December. Singapore Transport and Logistics ( 1995) 'Regional briefs: Vietnam - Finding Money to Upgrade Airports', Singapore Transport and Lagistics, 3, p. 38. Smith, C. (1995) 'Zhuhai Airport opens to uncertain future', Asian Wall Street journal, 31 May. Transport Canada (1996) 'The Greening of Aviation', 13. Trautmann, P. (1993) 'The need for airport infrastructure', paper delivered before International conference on Aviation and Airport Infrastructure, Denver, Colorado, 5 December. Woodward, P. (1995) 'Flying Higher: Foreign investment should help China's airline industry take off', China Business Review, 22( 4 ), pp. 9- 11. World Airport Week (1995) 'Macau air officials see bulk of first year traffic coming from Kai Tak', World Airport Week, 23 May. Yeung, Y. M. ( 1993) 'Infrastructure development- the Southern China experience', Department of Geography Occasional Paper 118, Chinese University of Hong Kong.

47

3.

Privatisation in Asia Pacific aviation PETER FoRSYTH

Introduction Over the past ten years there has been considerable privatisation activity in the aviation sectors of the countries in the Asia Pacific region. A number of companies, mainly airlines, have been privatised, and more privatisations have been planned. This is part of a general trend. There has been a worldwide move towards privatisation in the aviation industry during the decade, and within the region, there have been many instances of privatisation in other sectors. Accompanying this, there has been greater involvement by the private sector in infrastructure provision. Notwithstanding this, not all countries have joined this push towards privatisation; a number of lower income countries have done little by way of privatisation, and kept their aviation industries under government ownership. Given the strength and breadth of the trend, it is perhaps more interesting to ask why some countries have not been privatising, rather than why others have been. A range of issues arise with privatisation in aviation, understood here to encompass airlines and airports. There are issues of motivation; why some countries have chosen to privatise while others have not. Then there are questions of the effects; has privatisation made a difference to performance? Privatisation has implications for the ways the industry is organised; for example, it may influence the willingness of governments to liberalise international aviation regulation. Finally, privatisation will raise a number of problems which will have to be resolved; this is especially true for airports. It is not possible to answer all of these questions definitively, as there is little by way of evidence on how privatisation has affected performance. For the purposes of this paper, the 'Asia Pacific' region is understood broadly. It includes Asia, along with Oceania, and the Pacific countries of North and South America.

48

Policy issues

The international background to privatisation The interest in privatisation around the world can be traced back to the development of an explicit pro-privatisation policy in Britain in the early to mid 1980s. There have been some cases of privatisation which predated this policy (for example, that of Korean Air Lines in the 1960s) but the British experience captured the interest of countries around the world, and set them thinking about the possibilities for privatisation. There are a few examples of privatisation before the mid 1980s, but there are very many after that time. In the initial stages of privatisation in Britain, attention was directed towards enterprises which could operate in a competitive environment, such as airlines. The carrier British Airways was one of the first enterprises identified for privatisation. As it turned out, various difficulties emerged, and it was not privatised until1986. In the meantime, privatisation of some of the utility companies, such as British Telecom, had commenced. One reason for the delay was the poor financial performance of British Airways. The government wished to sell it after some years of profitable operation, so that it could convince markets of its prospects, and thus obtain a higher price for it. Prior to sale, new managers undertook a thorough rationalisation of the airline, improving its efficiency and turning it around from being a loss maker to one of the world's more profitable airlines. The British experience was noted by many countries, and most considered that their flag carriers would be suitable enterprises to privatise. Some countries have followed Britain's lead and instituted thorough policies of privatisation, while others have been more selective. There have been some airline privatisations in Europe, but much of the privatisation activity has occurred in Asia, Australasia, and South America. (Most of the airlines of North America were already private.) While many countries have been quick to follow the British lead in privatising their airlines, they have been much slower to follow the British experience in privatising airports. In 1987, Britain privatised the British Airports Authority, which operates the main London airports, along with several regional airports. British Airports is now a public listed company, which is subject to regulation of prices. Vienna Airport has also been privatised, and Australia is now in the process of privatising its major airports. Some other countries have considered airport privatisation, though they have not yet gone ahead with it. Other countries have sought to make their airports more commercially oriented. New Zealand has corporatised its major airports, though it has not privatised them. There are several possible rationales for privatisation of airlines and airports. In the British case, three important factors were revenue, efficiency and union power. When a government sells an enterprise, it gains a cash sum for the proceeds. This may be attractive, especially if it sees itself as facing budgetary stress. Another reason for privatisation is one of efficiency; a government may

49

Asia Pacific Air Transport: Challenges and Policy Reforms

believe that the private sector will operate an airline or airport more efficiently. This reason was a factor behind the British government's decisions. A third significant, though underplayed, reason for privatisation in Britain was a desire to alter the balance between labour union and other interests in the economy. It was believed that private firms would be less yielding to union pressure than government firms, and that privatisation would contribute to the weakening of union power. On top of these reasons, there was a desire in Britain for 'small government', and privatisation was seen as a way of lessening government involvement in industries which could be left to the private sector.

As against these considerations, there can be problems with privatisation. In particular, private monopolies can perform poorly if left unchecked. In the airline case, markets can be open and relatively competitive, or they can be tightly regulated. Privatisation into regulated markets can pose problems; these are discussed later in this paper. Airports, by their very nature, have considerable market power; they are usually locational monopolies. They have the ability to impose charges which are well above costs and it is this monopoly aspect that has made most countries reluctant to privatise their airports. It is possible to address the monopoly problem through price regulation, as has been done in Britain. However, most countries have not seen the advantages of privatisation of airports as outweighing the disadvantages. Even in the United States, most airports are owned and operated by various levels of government, or by government authorities.

Of the various reasons for privatisation, not all are likely to be of equal importance. Few countries put the same emphasis on reducing the power of labour unions as did the Thatcher government in Britain. Many governments are attracted by the revenue consequences of privatisation. Selling off an enterprise gives the government a cash injection, and also means that it does not have to concern itself with the problem of fmancing its expansion (something which may be a real consideration for Asian governments with rapidly expanding airlines and airports). However there are no real long-term financial benefits from privatisation. Fundamentally, all that it does is transform one asset (an enterprise) into another (cash). It does not make the government any better off (unless the new private owners are able to make the airline more efficient). There is even a danger that the cash inflow may create a false illusion of budgetary improvement. For this reason, countries like Australia are not now counting the proceeds from privatisation as revenues in the budget. For economists, the main test of privatisation is in its impact on the efficiency of the enterprise. Supporters of privatisation argue that private owners will be i:nore effective than governments in inducing managements to maximise profits and minimise costs. There is considerable debate, both in aviation and other contexts, as to whether this is really the case, and whether privatisation does lead to efficiency improvements.

50

Policy issues With airlines, there is some evidence in support of the claim that privatisation directly or indirectly leads to improved performance. Firstly, before an enterprise is sold, its government owners may pay much more attention to profitability than they had before, since they will be interested in obtaining a good price. There are several examples of where governments prepare their airlines for privatisation, and achieve higher profits by improving efficiency. Secondly, in relatively competitive markets, inefficient private airlines cannot survive, though inefficient government owned airlines can, since their losses can be covered by their owners. On average, private airlines may be more efficient than government airlines because the least efficient private airlines are forced out of the market. The empirical evidence is broadly consistent with the hypothesis of superior private efficiency in the airline case, though the tests are far from rigorous. Thus, for example, comparisons of productivity between government and privately owned airlines more often indicate superior private performance than the reverse (Findlay and Forsyth 1984; Oum 1995). This could be due to factors other than government ownership, which correlate with it (for example, the US airlines, which are privately owned and are relatively efficient, also operate in more competitive environments than do most government owned airlines). There is also some evidence that airlines which are privatised perform well in productivity terms both immediately before and after privatisation. British Airway's productivity growth in (roughly) the pre-privatisation period (1977-88) was about average (Barla and Perelman 1989; Distexhe and Perelman 1994), while its productivity growth in the post privatisation period was significantly higher than average (Oum and Yu 1995). Before privatisation, it was recognised that the productivity performance of BA was poor, and that there was ample scope for catch up. Not all airlines improved their productivity growth performance after privatisation; Singapore Airlines did not (Oum and Yu 1995). This might be because Singapore Airlines was already a productive airline, and the scope for catch up was not great.

Patterns of privatisation in the Asia Pacific region There has been considerable privatisation activity in the region over the past ten years (see Jaggi and Morgan 1996 for a review of aviation policies in the region). Prior to 1985 there were isolated instances of privatisation, for example of (the then) Korean Air Lines, but most privatisation has taken place in the years since. Table 3.1 sums up the picture. Major airlines in existence in the region are listed, and their ownership (public or private) is given. The percentage government shareholding in 1995 is also given and airlines for which there has been a significant shift in ownership are identified. In some cases, this shift is clear. For example, Qantas was fully privatised over the period. For others it is not. For example, in 1985, the Japanese government only held a minority shareholding in Japan Air Lines, but it was regarded as the dominant owner.

51

Asia Pacific Air Transport: Challenges and Policy Refonns

Table 3.1

Airline privatisation, 1985-95

Country

Airline American A'lines Aeromexico AeroPeru Air Canada Air China Air Lanka Air New Zealand Air Nugini Air Pacific Air India All Nippon Airways Ansett Australia Avianco Biman Bangladesh Canadian Air lnt'l Cathay Pacific Airways China A'lines Continental A'lines Delta Air Lines Garuda HAL (Hawaiian) Indian A'lines Japan Air Systems Japan Airlines Korean Air Ladeco LanChile Malaysia A' lines Merpati Mexicana Northwestern A'lines Pakistan Int'l Philippine A'lines Qantas Royal Brunei Saeta Air Ecuador Singapore Alines Thai Int'l United A'lines Vietnam A'lines Sources:

52

USA Mexico Peru Canada China Sri Lanka New Zealand Papua New Guinea Fiji India Japan Australia Colombia Bangladesh Canada Hong Kong Taiwan USA USA Indonesia USA India Japan Japan Korea Chile Chile Malaysia Indonesia Mexico USA Pakistan Philippines Australia Brunei Ecuador Singapore Thailand USA Vietnam

OwnershiQ 1995 1985 Private Public Private Public

" " "" "" " "

"" " "" "" " "" " " "" """ """ "" " "" " " " "" "" " " "" " "" "" " "" " "" " "

Flight International March 1985; Airline Business December 1995.

20% 100% 100% 100% 79.6% 100%

100%

100% 100%

30% 30% 35% 57.4% 33% 75% 100% 54% 93.7% 100%

Policy issues

In 1995 the Singapore government still maintained a majority shareholding in Singapore Airlines, but the airline can be regarded as substantially private. In the Oceania region, all the larger airlines are now privately owned. Some smaller airlines, such as those of Papua New Guinea, and Fiji, along with airlines of the Pacific island nations, remain mainly government owned. In the Pacific South American states, most of the airlines have been privatised, and in North America, Canada and Mexico have privatised their airlines. In Asia there is a mixed situation. There have been several privatisations, though there remain a considerable number of government owned airlines. There are intentions to privatise some of these. There are clear patterns in the Asian situation. All of the airlines which have been privatised are relatively large, and most are quite successfuL Further, there is a strong correlation between per capita income levels and private ownership. In the richer countries in the region, such as Japan, Korea, Singapore, Taiwan, Malaysia, along with the colony of Hong Kong, all the airlines are privately owned. By contrast, there are few examples of private ownership of airlines in the poorer countries (this has not always been the case; for example, Air India used to be owned by private interests). Possible reasons for this are explored in the next section. A further development has been the introduction of additional, private, airlines. The region is moving away from the situation where there is one government owned, 'flag' carrier operating on all the international routes from a country. New private airlines, such as Asiana in Korea, Sempati in Indonesia and Dragonair in Hong Kong have been permitted to compete on international routes. Other countries, such as Japan and Australia, have moved to multiple designation, and permitted privately owned domestic airlines to fly international routes. Allowing more competition in this way is not privatisation as such, but it does lessen the dominance of the public flag carrier. Most of the examples of multiple designation have occurred in countries which either have no public airline (the United States, Korea, Hong Kong), or which had a public airline which they were in the process of privatising. There are several forms that privatisation might take: an airline might be listed on the stock market, it might be sold to industrial groups in the home country, or it might be sold to strategic shareholders. Within Asia, and to an extent in South America, there seems to be some preference for selling to groups with extensive investments in a range of industries within the country. This is true for Korea, Malaysia and the Philippines. Some Asian airlines are listed on the stock market, such as the Japanese airlines and Singapore Airlines. Privatisation opens up the possibility of foreign investment in airlines. This may be simply through direct investment by shareholders through the stock market; there are substantial overseas shareholdings in airlines such as Singapore Airlines and Qantas. Airlines are forming strategic alliances, and one form these take is holdings of equity. Thus, Singapore Airline's partner, Delta has 53

Asia Pacific Air Transport: Challenges and Policy Reforms

shareholdings in it, and it has shareholdings in Delta. In other cases, the shareholding is one way; for example, British Airways has a stake in Qantas, and Qantas until recently had a stake in Air New Zealand. The Spanish Airline, Iberia, has significant investments in a number of South American airlines, including Ladeco of Chile. Countries often impose limits on foreign investment in their airlines. Foreign investment is now beginning to pose questions of national airline ownership for purposes of international regulation. While there has been considerable interest in airline privatisation in the region, there has been much less interest in privatisation of airports. This is not surprising granted the complexity of some of the issues it raises (these are dis~ cussed later). While countries such as Singapore have given some consideration to airport privatisation, at the moment only Australia is following the example of Britain and fully privatising its major airports. There may be more scope for private participation in airports through contributions to new or expanded airports rather than by simple sale of existing airports. Within the region, there is more interest in private investment in infrastructure, such as through BOT (build, operate and transfer) schemes. Under these schemes, private firms build a facility, operate it for a number of years under conditions specified by the government, and later transfer it to the govern~ ment. Bogota Airport in Colombia is currently being extended using a BOT framework (Juan 1996).

Airline privatisation: motivations and consequences Airline privatisation in the region is part of a general, worldwide trend, and it is difficult to be certain of exactly why a particular country privatised its airline. In most cases, several reasons will interplay with one another. As mentioned above, there are several countries which have not privatised their airlines; perhaps it is more interesting to examine why these have not followed the trend. Revenue and efficiency reasons are no doubt partial explanations of some countries' privatisations. Governments often state that they will find financing of their airlines' expansion difficult (for example, the Australian government, which is hardly cash starved, quoted this as a reason for privatisation of Qantas). Governments may also believe that airlines will perform more efficiently under private ownership. One reason for this might be that airlines are now operating in more competitive and rapidly changing marketplaces, and private ownership is likely to make them more flexible and quicker to adapt to new circumstances. Governments also sometimes have difficulties in getting their enterprises to per~ form, and sell them off in the hope that private owners can do better. In the case of airlines, a negative reason may be important one for privati~ sation. Put simply, the original reasons for public ownership may now seem weaker, and the government may feel it is able to divest itself of its airline. Governments owned airlines, and fostered the development of the airline industry, for several

54

Policy issues

reasons. They sought prestige, they saw airlines as useful for security reasons, and they were keen to ensure that particular routes were served (perhaps to encourage tourism). For many countries, these considerations are now much less important. It is becoming clear that if a country does wish to pursue certain aviation objectives, it is often sufficient that it regulate air transport; it does not need to be an operator itself. Another consideration is that airlines can operate successfully in both regulated and competitive environments. As long as the airline's operation is moderately efficient, it can cover its costs. Many internat ional routes are still regulated, giving the airlines serving them a measure of protection . For many though not all countries, it is possible to have viable private airlines which do not require subsidy from the government. Governments are ceasing to see airlines as enterprises which require continuing subsidies, which in turn require close government involvement, perhaps through ownership. It is interesting to note the countries which have not been privatising their airlines. Most of the larger airlines in the region, which tend to come from the more prosperous countries, have been, or are to be, privatised. To date, it is the less prosperous countries which have not been privatising. These countries tend to have less efficient airlines, which are less able to compete effectively. Their financial performance is often ertatic or sometimes chronically poor. Lossmaking airlines are not easy to privatise, especially when potential buyers see efficiency improvements as difficult to effect. Less prosperous countries are more likely to have conflicting objectives for their airlines. They may be keen for them to operate loss-making routes, for example , as a means of stimulating tourism. (This is a consideration in the South Pacific. See Forsyth and King 1996.) They may also regard them - probably inaccurately - as sources of foreign exchange, and wish to see them operate on a larger scale than private owners would be prepared to countenance. A further factor explaining the reluctance to privatise may be financial. Less prosperous countries tend to have thin capital markets, and it may be difficult to sell them to domestic investors. Few individual investors will have much to invest, and there will be few industrial companies with spare funds to invest in somewhat risky enterprises such as airlines. Such countries can sell their airlines to foreign investors, but most are reluctant to see control of their aviation industry pass to foreigners. Significantly, few airlines from the poorer African countries have been privatised either. It is too early to be anything other than impressionistic about the performance of the privatised airlines. Some, such as Singapore Airlines and Qantas, have been good financial performers since they were privatised. Others have been less impressive, but it must be remembered that efficiency is not the only determinant of profitability. Japan Air Lines has not been highly profitable, but it faces the disadvantages of high Japanese input costs, and a high yen. High

55

Asia Pacific Air Transport: Challenges and Policy Reforms

profitability need not be the outcome of privatisation; it might be that only the profitable airlines are privatised. It is even more difficult at this stage to evaluate the efficiency or productivity performance of the privatised airlines. Again there is a problem of distinguishing cause and effect. Further, rigorous studies of productivity tend to appear only with a lag of a few years. In general, the privatised airlines tend to be relatively efficient ones, such as Japan Air Lines and Singapore Airlines. The productivity growth of these airlines since privatisation does not seem to have been remarkable (Oum and Yu 1995), but they were already quite productive, and the scope for catch up was limited. It will be important to evaluate the post privatisation performance of airlines in the region, but it is too early to make definitive statements. One consequence of privatisation of airlines in the region is that it has opened them up for strategic investment. There is a well known trend towards global alliances in the airline industry, and the megacarriers are waking up to the fact that the aviation market in the region is now very large, and is growing rapidly. At present, their involvement in the region is not large, though it is growing. Equity investments are not essential for airlines to develop strategic alliances. There are many examples of fully government owned airlines forming alliances. However, they help. Small equity investments in listed airlines, such as Delta's in Singapore Airlines, are more of a gesture of good faith than a binding commitment. Large investments, such as that of British Airways in Qantas, and that of Qantas in Air Pacific, represent a much stronger commitment, since they are harder to reverse, and they are usually associated with some say in management. If overseas airlines are able to gain an equity stake in an airline of the region, it becomes a more attractive partner. The airline itself may find its own options for alliances with airlines beyond the region are enhanced if it can offer equity swaps with potential partners; the fully government owned airline cannot do this. Foreign investments in an airline raise the question of the nationality of the airline, and this can have consequences for regulation. At the national level, governments may impose restrictions on the extent of foreign investment in airlines, just as they do for firms in other industries, such as media. In principle, these restrictions are easy for governments to change if they see fit. The Australian government increased the allowable foreign stake in Australian airlines when it decided to privatise Qantas; this would have increased the price it obtained. Airlines are sometimes treated as a special case for foreign investment, unlike most other industries. There is an important way in which international airlines differ from most other firms. They often operate in markets which are jointly regulated by the home country government and by its partner countries on the routes they fly. This regulation may be restrictive, and it may enable high

56

Policy issues profits to be earned on some routes. One country cannot change this regulation unilaterally. Thus, when a foreign firm buys a stake in an international airline, it will be buying a stake in the rents from regulation of the country's air routes. Some of the gains or losses from changes in this regulation will accrue to the foreign investor. A foreign investor which has just paid a high price for a stake in an airline which operates on tightly regulated, profitable, routes will lose out if these routes are liberalised. It can be expected to put strong pressure on the government not to liberalise. It is not clear exactly how this will affect the government's willingness to liberalise. On the one hand, it may be more willing to liberalise - at least some of the losses from liberalisation will be faced by foreigners, who are not voters. On the other hand, domestic losers are easier to compensate, and they are not likely to provoke diplomatic reactions. Where countries alter their aviation poli, cies in ways which adversely affect the commercial interests of other countries, these countries are quick to respond at a governmental level. On several occa, sions when Britain sought to alter the access of US airlines to London Heathrow A irport, or the prices paid for such access, the US government intervened at a diplomatic level. It has yet to be seen how substantial foreign investment would affect a government's freedom of manoeuvre in aviation negotiatiorn. Suppose foreign interests invested heavily in the major Japanese airlines. How free would the Japanese government be to liberalise its regulation of international aviation (which creates airline profits at the expense, mainly, of Japanese travellers)? Privatisation has consequences for regulatory policy even when there is no foreign investment. This is because changes in regulation create winners and losers, and privatisation changes who these winners and losers are. When tight regulation of aviation markets is relaxed, it will usually be the case that airline profitability falls, and the owners of the airline are the losers. If the government owns the airline, it will be the loser. The question arises of what values the government will put on losses to its own revenues relative to losses faced by shareholders in an airline (some of whom at least will be voters). The answer, in part, will depend on the budgetary situation of the government. If this is very tight, it will be more sensitive to its own revenue losses. In such a situation, the government will be more willing to liberalise if it does not own the airline. It is possible to identify three distinct phases over which this relationship will change. The first phase is the pre,privatisation period, the second is the imme, diate post,privatisation period, and the third is some time after privatisation. In the pre,privatisation period, a government will be very conscious of the effects of regulation on its own revenues. It realises that tight regulation means a higher sale price for its airline. No doubt it will have advisers stressing this point; even normally market oriented treasury departments will be keen to achieve a high sale price. While most governments do not actually tighten regulation, they

57

Asia Pacific Air Transport: Challenges and Policy Reforms seek to lock current regulation into place. They will not be receptive to suggestions for liberalisation.

In the immediate-post privatisation phase, governments will be somewhat locked into current regulatory policies. It would be technically feasible for a government to sell an airline, and then soon after, undertake an unexpected liberalisation. However, this would be a clear breach of faith with the buyers of the airline, with whom it had recently contracted. Most governments which are privatising airlines are also privatising several other enterprises, many of which are regulated, and whose value depends on the regulation. While it will get away with the unexpected liberalisation once, it will weaken its position for further privatisations, since potential buyers will fear that it will behave opportunistically again. Thus, at least for some time after privatisation, the government, will be somewhat locked into the current level of regulation. Even if it has foreshadowed liberalisation before sale, it will be under strong pressure not to go ahead with it. No doubt buyers will argue that 'conditions have changed for the worse' since the sale. Over time, the government will become less committed to the buyers of the enterprise (many of whom will have sold out of it anyway), and it will regain its flexibility over regulatory policy. Governments which value their own revenues more than those of others in the economy will be more willing to embrace liberalisation than they would be if they still owned the airline (though private airline interests can be very strong pressure' groups). Several of the countries whose international aviation is dominated by private airlines have been amongst the early ones to allow additional private airlines, and to move to multiple designation. These include the United States, Korea and Hong Kong. While this is not a large sample, it suggests that after a period, privatisation may make a government more comfortable with liberalisation.

Airport privatisation: issues and problems Most airports around the world are owned by governments; national governments, state or regional governments and local governments. Until recently, the only examples of private ownership were of small, usually dedicated purpose, airports. This is changing. In 1987, the British government privatised the British Airports Authority (BAA), which owns and operates the London airports and several other large airports. Vienna Airport has also been privatised. While private ownership of whole airports is still rare, there are several examples of private ownership of terminals, sometimes by airlines. The privatisation of airports has become an issue in some countries in the Asia Pacific region. One country, Australia, is privatising its major airports, while others are considering doing so. Funding considerations may lead governments to examine privatisation; many cities in the region have airports which will soon prove inadequate, and expensive extensions or new airports will be needed. Governments will find it attractive to let the private sector provide the funds for such 58

Policy issues

investments. They will also be attracted by the high sale prices they can receive if they privatise their existing airports. Airport privatisation does pose a number of complicated issues that will need to be resolved. Firstly, while the cash flows from airports are good and reliable, this is because they possess considerable monopoly power. This poses the question of how they should be regulated. Secondly, many of the bigger airports are now facing heavy and rapidly growing demand, and this creates the problem of congestion. Delays can be reduced by rat ioning devices, such as h igh prices or slot allocation, and they can be reduced by building expensive new capacity. Thirdly, airports are associated with environmental problems, such as noise. These put limits on the effective use of existing airports, and make finding acceptable sites for new airports very difficult. Fourthly, airports involve very large capital outlays and, for this reason, private involvement is appealing. However, if new airports are built, it usually takes a very long time before they can generate large cash flows. This is a powerful disincentive for private investment. There are also issues of weakened incentives to invest under price caps. Finally, one of the main reasons for privatising enterprises is to achieve operating efficiencies. With capital intensive investments like airports, the scope for these may be limited, though there may be gains on the retailing side of airports. The first of these aspects makes airports attractive to privatise, but difficult to control once privatised. Airports are like other monopoly utilities, such as water. They have considerable market power, and produce stable revenues. A large airport can be guaranteed to produce a comfortable profit. Private investors are happy to buy into airports. Governments wh ich sell them can get large capital sums, though they do give up reliable revenue streams in the future. Left to themselves, private airport owners will use their monopoly power to raise prices. The elast icity of demand by airlines for airport use is very low, since they must use an airport to produce their services, and there are very few airports which compete directly with each other (airports in the same general vicinity may compete to be hubs, but for most airports the traffic they attract is that which wishes to leave or come to the city which they serve). Airports can raise their prices to levels which permit extremely h igh profits. This might not be the case if the airlines which used the airport possessed countervailing power. In almost all cases, this is not the case. To possess such power, the airlines would need to have a monopoly over traffic to or from the airport, and not compete amongst themselves, nor fear competition from other airlines entering the market. New Zealand has corporatised its major airports, and it does not regulate them explicitly, relying on negotiat ions between airports and users. However, it needs to be noted that the airport owners are government authorities, not profit oriented private owners, and there is the ever-present threat 59

Asia Pacific Air Transport: Challenges and Policy Reforms

of direct regulation should negotiation break down. Where airports are priva~ tised, there is a recognition that regulation will be needed if the use of the air~ port's monopoly power is to be avoided. When Britain privatised its major airports, it chose to regulate them using price caps; other countries like Australia look set to follow suit. Price caps are extensively used in the utility industries in Britain, and they are being used in the United States and Australia. An initial overall price level is set for the air~ port, perhaps based on pre~privatisation prices, and it is allowed to alter prices over time according to a set rule. For example, it may be allowed to increase prices by the change in the general price level, less a factor 'X' (hence the term CPI~X regulation). This factor could be positive (to allow for productivity increases) or negative (to enable the regulated firm to recoup the cost of meeting higher environmental standards). The firm can keep any profits it earns, which gives it an incentive to keep costs low. The allowable prices do not depend on the firm's actual costs, so that inefficiencies are not built into the price structure. In general, this approach works reasonably well, but there are specific prob~ lems which have arisen in the BAA case. Price caps give an incentive to cut costs but also quality (see Rovizzi and Thompson 1992; Armstrong, Cowan and Vickers 1994). The recognition of this has led airlines using the British airports to ask for higher allowable prices for the airports, on condition that BAA invests in new terminal facilities. Choice of the level of charges raises a number of issues. For example, a country may be inclined to set low charges in the hope that these may facilitate the development of the airport as a hub, thereby bring additional business to the home country. Alternatively, a country may observe that most of the users of its airport are foreign airlines carrying foreign nationals. It may be tempted to set high prices since its nationals are not paying. Congestion can pose problems for airports regardless of their ownership, but it poses additional problems when the airport is private. This is because some methods of controlling congestion can conflict with price regulation. Put simply, if congestion is to be reduced by price methods, this involves setting high prices to discourage excessive use of the facility. However, the objective of price regula~ tion is to keep prices low. An airport which faces considerable excess demand would need to set prices very high indeed to eliminate congestion. Furthermore, efficient rationing prices would need to vary significantly from time to time, being high in peaks and low in the off~peak periods. It would be difficult to design a price cap which gives the airport appropriate incentives to vary its price levels efficiently. Busy airports really pose two distinct, though related, problems. The first is to determine the optimal use of the airport (or the number of slots that can be made available for use in a particular period). There is a trade~off between con~ gestion and allowing more flights to use the airport. The second concerns how best to ration this available capacity (how to allocate the slots). If the airport is price regulated, it will not have an incentive to solve the first problem 60

Policy issues

efficiently; it will make higher profits if it maximises throughput and allows too much congestion. Ultimately, the regulator will have to determine the appropriate capacity to allocate. If prices are not to be used to allocate the capacity, the regulator will need to oversee the allocation process. One option is to give the slots to the airlines, perhaps on the basis of previous use. There is no reason to suppose that this will be a particularly efficient approach, but it can be made efficient if a secondary market for slots is developed, and airlines trade them freely. If this occurs, those with the greatest willingness to pay for the slots will end up with them. In London, there are capacity restrictions and there is a 'grandfathering' of rights to slots. (There are also arbitrary restrictions on which airlines can use the popular airports.) This system has the desirable effect of avoiding what could become massive congestion. However, the process of allocating rights does not appear very satisfactory, in the absence of an efficient market for slots. Giving slots away has the advantage of imposing minimum disruption. The original users are the beneficiaries; the airlines capture the profits from the airport facility having limited capacity, not the airport. If the regulated prices that the airport is allowed to charge are adequate, this may not be a problem. However, it is possible that the airport may not be able to fund expensive further extensions to capacity, and in the long term, airlines, and in particular their passengers, may lose out through chronic under-capacity.

An alternative option is for the slots to be auctioned, perhaps by the regulator. Under this option, there is efficiency in that the airline prepared to pay the most to use a slot gets it. Compared with the previous option, airlines lose and the airport regulator {probably a government authority) gains. Auctions have often been suggested for airports, but rarely used. One difficulty with them is that use of different airports is interdependent, and this makes bidding complex (an airline needs to get a slot at both origin and destination airports). Recently auctions have been tried in the United States, and they seem to be workable (Starkie 1994). Whichever approach is adopted, it is possible to restrict use of an airport to levels which minimise congestion, and to allocate the available capacity efficiently. It is also feasible to do this for a private, price-capped airport. The government now has a major role as a regulator; it still has to resolve the problems it resolved as an owner before privatisation. Another class of problems arises from the environmental aspects of airports. Airports generate externalities, such as noise. A privately owned airport will have no incentive to take these into account. These externalities will influence the efficient level at which the airport is to operate, and the appropriate mix of traffic. Thus they might be taken into account through curfews, controls on noisy aircraft and through charges based on the noisiness of the aircraft. Furthermore, noise aspects will need to be taken into account when the site of new facilities is being determined. Noise considerations may dictate that sites

61

Asia Pacific Air Transport: Challenges and Policy Reforms

which are less attractive on other grounds be accepted. Investment in new facili, ties may be brought forward so that noise at older facilities can be reduced. These considerations arise whether the airport is publicly or privately owned; the process of privatisation brings them into focus. Granted there are externali, ties, there will need to be a regulator, external to the airport, which determines the controls, charges and advises on location. Obtaining an efficient pattern of investment in airports under private own, ership poses some problems. One problem is that revenues from new airports may be slow in coming, and private investors may not be willing to supply the 'patient capital' needed. This problem will be compounded if a new airport has been approved because of environmental problems with the old airport, but airlines still prefer to use the more convenient old airport. The regulator will need to set in place incentives to induce the airlines to switch to the new airport. Furthermore, many investments in mature airports are not so much capac, ity increasing as quality improving. These will be warranted as the airport serves more traffic. A private airport will be uninterested in making such investments, since it will gain little additional revenue from them. Ultimately, it will be nee, essary for the regulator to broker an agreement between the airport and airlines about the appropriate level of investment and airport charges. Privatisation of airports raises a number of problems, though these can be addressed. It may be questioned what the gains from privatisation are. Normally, privatisation is advanced on grounds of increased productive efficiency. In the case of airports, a high proportion of costs are capital rather than operating costs, and the scope for productive efficiency gains may be relatively small. Privatisa, cion of airports, in the sense of sale of the enterprise, may be a less attractive option than opening up the various operating aspects to private involvement. There are several aspects of airport operation that private firms may perform well (see Juan 1996). They can operate terminals, and achieve their potential in retail, they can build and operate runways, and many services can be contracted out. It is possible that the productive efficiency gains from privatisa, cion can also be reaped by extensive reliance on the private sector (as happens in several airports, such as Hong Kong's Kai Tak airport). Investment policy, and ownership of the main facilities may be best left to the public sector. It is yet to be seen which approach works best. Whichever approach is taken, the govern, ment will still have a detailed role. If it is not an owner/decision maker, it will be a regulator which has to become closely involved in a number of detailed aspects of airport investment and operation.

Conclusions There has been a trend towards privatisation in Asia Pacific aviation over the past decade, and this has reflected what has been going on in aviation elsewhere and in other industries. Most of the activity has been in airlines rather than

62

Policy issues airports. Some patterns emerge; the clearest one is that it is the more prosperous countries in the region that have been privatising their airlines. Less prosperous countries tend to have less efficient and fmancially viable airlines, have broader objectives for their flag carriers, and less developed capital markets. Thus they seem less interested in privatising their airlines. Privatisation of airlines has several implications. It opens up possibilities for direct foreign investment in ai~lines, and facilitates the globalisation of the industry. Large airlines from outside the region are becoming interested in form, ing alliances and investing in the region, a large and rapidly growing one which they have rather ignored. Privatisation has implications for regulatory policy, though these are mixed. At the time of privatisation and soon after, privatisation is likely to lead to reluctance to liberalise. Over time, it can lead to countries being more relaxed about liberalisation. Privatisation of airports is much less common in the region than it is else, where. This is probably because of the monopoly, regulatory and externality prob, lems it poses, along with complications for investment policy. There is scope for private involvement in airports, to foster productive efficiency, though this may not take the form of outright sale of airports. Airports can contract out services, allow private terminals with retail developments, and contract with private firms to fmance and build runways. These may be as effective as outright privatisation. Whichever approach is taken, governments are likely to retain an extensive role either as owner/decision makers or as regulators.

References Airline Ownership Survey (1995) Airline Business, December, pp. 54-56. Armstrong, M., S. Cowan and J. Vickers (1994) Regulatory Refarm: Economic Analysis and British Experience, Cambridge, Mass: MIT Press. Barla, P. and S. Perelman (1989) 'Technical efficiency in airlines under regulated and deregulated environments', Annals of Public and CooperatitJe Econom, ics 60, pp. 61-80. Distexhe, V. and S. Perelman ( 1994) 'Technical efficiency and productivity growth in an era of deregulation: the case of airlines', Swiss Journal of Economics and Statistics, 130(4), pp. 669-89. Flight International (1985) World Airline Directory, 30 March. Findlay, C. and P. Forsyth (1984) 'Competitiveness in internationally traded services: the case of air transport', Working Paper No. 10, ASEAN-Aus, tralia Joint Research Project, Kuala Lumpur and Canberra. Forsyth, P. and J. King (1996) 'Competition, cooperation and financial perform, ance in South Pacific aviation', in G. Hufbauer and C. Findlay, eds, Flying 63

Asia Pacific Air Transport: Challenges and Policy Reforms

High: Liberalising Aviation in the Asia Pacific, Washington and Canberra: Institute for International Economics and Ausrralia-Japan Research Centre, pp. 99-176. Jaggi, G. and G. Morgan (1996) 'Recent civil aviation experience', in G. Hufbauer and C. Findlay, eds, Flying High: Liberalising Civil Aviation in the Asia Pacific, Washington and Canberra: Institute for International Economics and Ausrralia- Japan Research Centre, pp. 137- 212. Juan, E. (1996) 'Airport privatisation: Latin American lead', Airline Business, May, pp. 52-56. Oum, T. H. (1995) 'A comparative study of productivity and cost competitiveness of the world's major airlines', Discussion Paper No. 363, Institute of Social and Economic Research, Osaka University, Osaka. Oum, T. H. and C. Yu (1995) 'A productivity comparison of the world's major airlines', Journal of Air Transport Management, 2(3/4), pp. 181-95. Rovizzi, L. and D. Thompson (1992) 'The regulation of product quality in the public utilities and the citizen's charter', Fiscal Studies, 13(3) pp. 74--95. Rowley, A. (1985) 'Private Affair in Asia', Far Eastern Economic Review, 25 July, pp. 63-70. Starkie, D. (1994) 'Developments in transport policy: The US market in airport slots', Journal of Transport Economics and Policy, September, pp. 325-29.

64

4. Impediments to liberalisation in Asia Pacific international aviation M ICHAEL T RETHEWAY

Introduction In recent years, a number of different 'open skies' air treaties have been signed. •

Legislation in the European Union (EU) is phasing in the creation of a single air market among its 15 member states, with some non-EU nations participating as well. This regime includes cabotage rights as well as country-to-country air travel. Fifth freedom rights to those outside the region are not included. (See Chapter 10 by Button.)

•

Canada and the United States signed an open skies bilateral air services agreement in February 1995. This is the single largest bilateral air market in the world, and after a three-year phase-in provides carriers with unlimited 'transborder' freedoms to serve cross-border city-pair markets, to determine capacity and schedules and to set prices. Cabotage and fifth freedom rights were not included. (Details are presented by Tretheway in Chapter 9.)

•

Australia and New Zealand have been involved in negotiations towards a single aviation market. (See Chapter 11 by Findlay.)

•

T he United States has undertaken a series of negotiations with a number of European nations (and now Asian and Latin American nations) to establish open skies bilateral air services agreements. These treaties typically provide for unlimited fifth freedom rights, although cabotage is excluded.

These and other initiatives show a willingness by at least some governments to contemplate regulatory liberalisation of international services. The fastest growing air markets in the world are in the Asia Pacific region. Growth rates for travel within East Asia, from East Asia to Europe and from East

65

Asia Pacific Air Transport: Challenges and Policy Reforms

Asia to North America are forecast to grow at rates much greater than the North American domestic markets. For US carriers, the ten-year period from 1985 to 1994 saw almost no growth in domestic airline travel, with almost all growth for the US carriers accruing in international air markets. The question naturally arises as to whether more liberal arrangements should or can be undertaken in the Asia Pacific region. Experience has shown that bilateral air treaty systems are expensive to administer, especially in high growth markets. Treaties must be frequently negotiated, and since this is done on a bilateral basis, this implies significant burdens on governments and carriers alike. Air travel is necessary for supporting the high rates of real economic growth in the region. To many it seems ironic that the liberal trading arrangements between many of the Asian economies are not supported by liberal air services. In contemplating liberalisation in the Asia Pacific region, it must be recognised that there are significant differences between Europe and North America. These differences are due to institutional arrangements as well as economics. This chapter examines the differences, and considers the obstacles which may prevent liberalisation in the region. The chapter begins with a discussion of the basis on which air services are traded, and examines the historical reasons for the existing regime. It then goes on to examine the economic requirements for inducing nations in the region to adopt more liberal air services arrangements.

Trade in air services: comparative advantage versus reciprocity In the past two hundred years, economists have developed the principle of comparative .advantage, which underlies free trade. The principle indicates that nations will tend to specialise their production of goods and services and trade for what they do not produce. Theory has claimed this results in a higher level of well-being for each nation than would be the case if each were self-sufficient. Comparative advantage/free trade is the conceptual underpinning of many trade agreements, including the General Agreement on Trade in Services (GATS), the North American Free Trade Agreement (NAFTA), the Treaty of Rome and the like. This concept is in direct contrast to the principle of mercantilism which dominated international trade in the previous era. Air transportation services have thus far generally been excluded from the comprehensive free trade agreements. While some technical matters are included in the GATS world trade agreement, it is an excluded economic sector. The NAFTA agreement between Canada, Mexico and the United States excludes air transport. Initially, the Treaty of Rome, setting up the European Economic Community (today known as the European Union), was not applied to air services.

66

Policy issues

Instead, in the post-Second World War era, air transport has been traded on the basis of bilateral reciprocity. This has two elements: •

trade in air services is allowed only if the airline(s) of one nation receive an equal share of the market with the airline(s) of the other nation, hence reciprocity; and

•

this comparison is made for each possible pair of countries, not for international markets as a whole, hence bilateralism.

The reciprocity concept has often further been narrowed to reciprocity in outcome, not reciprocity in opportunity. A consequence of bilateral reciprocity is that further gains from trade are made possible only when each countty gains equally. Trilateral arrangements where A gains more than B in the AB market, but B gains in the BC market and C in the AC market are not possible. Furthermore, comparative advantage is of course excluded. Each nation will provide an amount of international air services roughly proportional to the relative size of the air markets it participates in. It is not possible to have a subset of nations specialising in the efficient provision of air services while importing other goods and services in which other nations specialise. This results in a dual loss: both in the air services market as well as gains from further specialisation in other markets. To the economist, bilateral reciprocity is suboptimal. It frustrates gains from comparative advantage and it has high administrative costs. It is much more efficient for a nation to negotiate one or a few comprehensive multilateral trade agreements than to negotiate and regulate separate treaties for each good or service with each possible trading partner.

Reasons for bilateral reciprocity Bilateral reciprocity existed in the period between the two world wars, but it was in the 1944-46 period that its principles became entrenched. There were a number of reasons at that time which made it a favourable option for nations in spite of the potential gains from comparative advantage/free trade. Today, we should examine each of these to see if the rationale is still relevant. •

At the time of the 1944 Chicago Convention, the United States dominated the world in terms of transport aircraft - both production capability and inventory of operable airplanes. In a free trade environment the United States could be expected to dominate the world airline industry due to a short-term strategic advantage. Thus reciprocity was chosen. However, these fears should now be diminished. While the United States is still a major force in the world airline industry due to the size of its domestic market and its longer experience with deregulated market conditions, it can no longer dominate the world. 67

Asia Pacific Air Transport: Challenges and Policy Reforms

•

'Airlines are infant industries and therefore need protection'. This argument is difficult to rationalise today, as airlines are a mature industry in most nations.

•

'A national airline is needed to show the flag'. While it is easy for a market economist to dismiss this argument, objectives such as promotion of tourism may be legitimate goals. Examples such as Air Seychelles' success in promoting inbound tourism seem to support this argument. However, there are many examples of nations without national airlines. Bermuda has no national airline, yet tourism is its largest industry. Most tourists to the ivory and gold coasts of Africa are carried on European charter carrier services.

•

'National airlines support national aircraft: industries'. This argument can be used by only a few nations in the world, mostly developed nations. The only cases one can think of for this argument involve short-range aircraft, such as those produced in Brazil and Indonesia, but these aircraft are unlikely to be involved in international air services.

•

'National airlines are needed to reduce balance of payments deficits'. This argument has never been particularly convincing. For most nations, aircraft: purchase, fuel and financing involve substantial foreign cash outflows, leaving only a small portion of the airline dollar at home. Further, to the extent that national airline policies result in higher prices and/or reduced services, inbound tourism, convention travel and some types of business travel are reduced, resulting in reduced foreign cash inflows. If the balance of payments argument were legitimate, then one would have to apply it to a large number of other industries as well.

•

'Nations wish to have access to aircraft: in times of national emergency, and the presence of a domestic air carrier achieves this goal'. While ability to second aircraft in national emergencies is theoretically sound, in practice one finds it difficult to give an example of a nation seizing aircraft rather than purchasing services. This argument seems to be relevant only to the case of war. However, since the Second World War, it is difficult to find examples of nations seizing aircraft: rather than chartering them. Wars such as the Korean, Vietnam and Gulf conflicts witnessed chartering rather than seizure. Regional conflicts also seem to rarely seize aircraft. Nevertheless, this may be a legitimate argument for reciprocity, and perhaps the only one.

While some other types of argument might be made, the conclusion seems to be that there were legitimate reasons for opposing comparative advantage/free trade in the immediate post-war era, but these reasons generally no longer apply. We are thus faced with how to make a transition from bilateral reciprocity to free 68

Policy issues

trade. While the reasons for the existing regime may have evaporated, powerful vested interests have been nurtured over the years, making transition difficult.

The value of a win-win solution After more than fifty years of bilateral reciprocity, making a change may be dif, ficult. Airlines and their employees have benefited from the existing regime. (Those nations with a comparative advantage in international air transport car, riers and potential employees in these nations have not benefited to the extent they are capable of; nor have employees of other industries which would be developed under comparative advantage.) Unfortunately, as is usually the case in free trade arguments, those who will be hurt are readily identified and concen, trated, while those who would gain cannot be identified in advance. A nation will only give up bilateral reciprocity if it has something to gain from free trade. One way to achieve the required gains is to keep the principle of reciproc, ity, but to move it into a multilateral context. Here, nation A may be willing to move to a three,nation negotiation if it gains enough in trade with country B to offset any losses it may suffer with respect to country C. While trilateral or other trade gains are difficult to identify, a regional air services agreement may offer some hope for reform. Another possibility is for nations to give greater weight to the gains of consumers. In general, carrier interests have dominated international air policy decisions in most countries. However, even in countries where cartiers do not have a comparative advantage in international air transport, gains to consumers, tourism and other industries dependent on affordable air transport may outweigh any cartier loss. Thus, the move to consumerism may create a basis for moving away from bilateral reciprocity. Perhaps the easiest means to move towards free trade is to include trade in other goods along with aviation reform. This is essentially the principle underly, ing the Treaty of Rome. Nations in the EU cannot opt out of the common mar, ket for an individual industry. Either they are in for the whole package, including aviation, or they are completely out. This makes it much easier to adopt free trade, as no matter how inefficient a nation is, there will always be something in which it has a comparative advantage. Unfortunately, except for special cases such as the EU, it is difficult to get nations to agree to put air transport into a package of industries which will move to free trade. Any country or region wishing to move towards freer trade in air transport should therefore consider the following recommendations: •

Researchers should quantify the gains to individual nations which would result in a move towards free trade in air transport. The measure, ment of these gains should include effects on dependent industries, such as tourism, as well as in other economic sectors which would expand as comparative advantage forces exerted themselves.

69

Asia Pacific Air Transport: Challenges and Policy Reforms

•

Regions may wish to consider a move towards regional free trade in air services. This may be especially useful if a region with relatively balanced and matched air carriers are present. Specifically, initially excluding the United States from a regional agreement could be useful in creating a group in which no one country or carrier would automatically dominate from the first day of free trade.

•

Consumer interests need better representation in the policy formation environment. In Europe, governments funded user advocacy groups in the years prior to the EU open skies arrangements and these voices were influential in bringing about real change.

•

Air transport could be linked to other industrial or service sectors which would benefit from freer trading arrangements. This makes the comparative advantage effects somewhat easier to identify for individual nations.

Impediments in the Asia Pacific region Air transport excluded from trade package with other goods and services The European Community was able to liberalise regional air transport because this service was included in the package of all goods and services. Once it was established that the Treaty of Rome applied to air transport within the European Union, nations found it in their own self-interest to adopt liberalisation. The cost of non-adoption was the withdrawal of aU the other trade benefits of the common market. The Asia Pacific region has no equivalent to the Treaty of Rome. Trade in air transport services is not linked to trade in any other goods or services. Thus, to proceed towards free trade, each nation will have to gain from liberalisation. This is a difficult criterion to achieve.

Alliances , consumerism and economic/demographic change The experience of the 1995 Canada- US Open Skies Agreement is examined in more detail in Chapter 9. It is argued there that the agreement was obtained due to the mutual gains to airlines from the rationalisation of route systems and the greater weight put on consumer interests. Does the Canada-US experience have any relevance to the rest of the Asia Pacific region? Consumer interests are manifesting themselves in the region but they are still not as strong as those found in North America or Europe. At this point, equity alliances are rare and not particularly strong within the region. Qantas has had a minority stake in Air New Zealand but the arrangement could not be described as cooperative. The Air New Zealand-Ansett Australia agree70

Policy issues

ment is too recent to have had any impact. Delta and Singapore have had an alliance which has resulted in some success but otherwise alliances and the asso, dated rationalisation of route systems are not a major factor in the region. Perhaps the one factor which is applicable to the region is economic growth and demographic changes. Throughout the region there has been strong eco, nomic growth resulting in simultaneous or more rapid growth in air transport. Many nations have not allowed their bilateral air services arrangements to keep pace with the economy, and changes are usually reactive rather than proactive. One can make the argument that air transport and other facilitating infrastruc, ture industries should be allowed to grow in anticipation of economic growth rather than in response to it. Even here there may be resistance to liberal arrangements. Because it is not possible to fly non,stop from Australia to Europe, Qantas has built a substan, tial presence in Bangkok and Singapore, using these as hubs to connect various points in Australia to various points in Europe. Once a significant presence is established, it is natural and economic to connect these hubs to other stations in Asia which it serves. Its strong presence in the markets to Hong Kong has resulted in a dispute berween Australia and Hong Kong, with the latter attempting to restrict its fifrh freedom traffic. Fifth freedom rights for centrally located states such as Hong Kong have little attraction. From their advantageous geographic position, they can link up most of the region via third and fourth free, dom traffic. Carriers confined to the periphery of a region will be at a great disadvantage under a bilateral reciprocity arrangement, and could have much to gain from free trade. Thus, gainers under the current regime could be relative losers under a liberal regime. Only if market growth is of such a strong magnitude that all carriers can be winners will the deadlock be broken. While growth is strong in the region, it is not clear that it is strong enough to overcome the molecular bonds of bilateral reciprocity.

Is there a path to liberal air transport ? From the above discussion, it should be clear that there is no easy path to free trade. Bilateral reciprocity is firmly entrenched. Unless all nations can be convinced that there are gains from free trade, change is unlikely. How can gains for all nations be found? There are four paths which can be followed, either individually or in concert. (See also Chapter 9.)

Link trade in air services to trade in other goods and services This is the classic approach for achieving free trade. When trade negotiations are confined to a single good or service, the principle of comparative advantage, by definition, cannot be exploited. Europe successfully used this technique of linking sectors to achieve its regulatory liberalisation. As the Asia Pacific Economic

71

Asia Pacific Air Transport: Challenges and Policy Reforms

Cooperation (APEC) forum pursues free trade on a wide front, air transport should be included in the package, rather than isolated from it and treated separately.

Document consumer gains In North America, and to a large extent in Europe, it was consumer interests which provided the impetus to liberalise. At present, relatively little is known of the potential gains from open airline markets to consumers, tourism industries, and high tech industries reliant on air transport, for example. Efforts to realistically document potential gains from liberalisation, such as those being pursued by the OECD, Australia and Canada, should be contemplated for this region. The information can be used to motivate consumers to voice their interests, as well as to educate governments as to the sum total of national interests in air transport matters.

Identify areas where gains are large and start by liberalising these areas Air cargo has often been identified as an area where carrier interests would be least harmed by liberal arrangements. Air cargo users, unlike air passengers, make large purchases of services and thus have amassed knowledge of how to work within the system to obtain lowest cost. To a large extent, air cargo markets are already competitive. Freight forwarders and large shippers transship freight from one gateway to another to seek the lowest cost to the ultimate destination. If cargo rates from Kagoshima to New York are high relative to Seoul-New York, then freight forwarders will transship all but the most time-sensitive shipments to Seoul. Liberalisation of air cargo would be less harmful to national carriers due to the smaller role it plays in the total revenues of an airline. This could be an area where industrial benefits from liberalisation are strong, with significant benefits in other sectors of the economy. Air cargo liberalisation might be especially beneficial to the least developed economies. Another area with potential is simply to create a regime with unlimited third or fourth freedom rights. Many bilateral pairs in the region are severely constrained. An open third or fourth regime could create gains for a significant number of nations. Perhaps nation A has been opposing further bilateral expansion with nation B fearing it will lose out. On the other hand, it might covet third or fourth freedom rights with nation C, which in turn might gain with nation B.

Divide and conquer: sub-regional arrangements The United States has been notorious for using this strategy in the European market. Here, a small group of nations which believe they will benefit from free trade with each other negotiate a liberal air services regime. As they develop the market and achieve gains from free trade, it is likely they would start to divert

72

Policy issues traffic from higher cost (or lower service) gateways nearby. This would then create an economic interest in the nations suffering diversion to participate in the arrangement as well. In Europe, when the EU created the single air market, nonEU European nations realised they needed to participate in the market as well. To do otherwise would result in significant diversion. The key to this strategy is a group of sufficient mass to threaten other nations. Each defection from bilateral liberalism to the group further strengthens it, adding to the economic pressure for others to join. Defining a critical group is no easy task. Certainly, it must have a sufficient number of centrally located partners to both benefit from freer trade as well as to threaten non-members. With regard to threatening other nations to join a free trade treaty, one involving only Australia and the United States is unlikely to worry Japan and Hong Kong. On the other hand, one involving China and the United States would have dramatic implications for many other nations. One approach to identifying potential blocks would be to search the existing bilateral treaties systematically to find where fifth freedom rights already exist. If nation C has granted nation A rights from B to C, then an AB arrangement would more likely threaten nation C. With respect to gains from trade, a small group of high-growth economies with noticably constrained air services and relatively well-matched carrier sizes may be a logical starting point.

Notes

*

At the time this chapter was written Tretheway was on leave from the University of British Columbia, serving as Special Advisor to the President of the Vancouver International Airport Authority. All views expressed in this paper are those of the author alone, and do not necessarily represent the views of the Airport Authority or the University. Tretheway is currently Vice President, Marketing, with Vancouver International Strategic Services, a subsidiary of the Vancouver Airport Authority. This paper was written in early 1996.

1

The failure of the Chicago Convention to establish any third, fourth or other traffic freedoms necessitated a bilateral regime. Many of the early bilaterals established reciprocity. In the interwar period, while bilateral reciprocity existed in some markets, in others there was almost complete freedom of the air. The South American market, for example, was largely developed in this period by US and German airlines.

2

One factor complicating the liberalisation of air cargo is the growth of the so-called integrated carriers. Since only a handful of carriers are integrated, and since these are largely US carriers, there are concerns regarding market dominance. 73

5.

Multiple designation policy in Korea }ONGSEOK KIM

Background Korean Air (KAL), a private company, was formed in 1969 when the publicly owned monopoly airline Korean National Airlines (KNA) was privatised. KAL has grown rapidly since then alongside the growth in the Korean economy. KAL was not challenged by competition until 1988. Under the Korean Aeronautics Law (enacted in 1961, last revised in December 1991) new entrants are allowed provided they can demonstrate: •

coincidence with public interest;

•

sufficient demand;

•

the ability to adhere to safety codes; and

•

managerial competence.

However, entering the industry has proved to be a political game because of the subjective nature of these criteria. The entrance of the second carrier, Asiana Airlines, has resulted in several changes in the air transport industry of Korea. One, the structure of the market has become more competitive. Two, interaction in the market and thus the strategic behaviour of the carriers has become more important - both carriers recognise this fact. Three, the performance of the market has varied in many ways. In principle, there is no limit to the competition in domestic markets between KAL and Asiana. Pricing is almost free. The number of routes served by each carrier has expanded faster than when KAL monopolised the market. There are more flights per route when the traffic of the two carriers is combined. KAL alone has increased its frequencies more rapidly than when it held the monopoly. During the 1980s, KAL added only two new domestic routes, making a total of 15. Since the entry of Asiana, nine more routes have been added. Total flight frequencies have also increased from 68,000 in 1988 to 98,000 in 1989.

74

Policy issues KAL was responsible for half of the increase, which represented a 20 per cent increase in KAL flights compared with 1988 figures. Overall, the two carriers have boosted frequency and competition in route expansion. On the whole, the entry of a competitor into the airline industry has produced many positive results in domestic services. New markets have opened and frequency competition is noticeable. Without the second carrier, there may have been fewer routes, higher prices and fewer markets. Domestic consumers have therefore benefited. It is not yet clear whether the airlines are earning economic profits or not. Asiana has recorded a huge deficit, in the order of tens of millions of US dollars, since its inception in 1988, and went into the black for the first time in 1994. Curiously enough, however, there has been no apparent price competition considering that pricing is almost free, at least in a downward direction. Before 1992, prices were set by the Korea Civil Aeronautics Board (KCAB). In 1992, the KCAB replaced its system of fare approvals with fare reporting. Prices were set at a level which fully compensated for the costs (full cost pricing) under which the supposed total costs were divided by the total distances flown, and the thus-obtained unit costs per kilometre, with some mark-up, determined the unit price per kilometre. The route distance multiplied by this unit price was used as the fare level for a particular route. After the last nominal price increase to 87 Won (about US$0.11) per kilometre in 1991, prices were pegged at that level for almost four years until January 1996. Despite the shift to a reporting system, there has been no price competition since 1992. An explanation for this result is that the second carrier, Asiana, has taken the role of the follower. The optimal strategy on its part is to follow KAL's lead in letting real prices drop (nominal prices have stayed about the same). If KAL recognises this and acts as the leader, the result will be no price competition in nominal terms. From the perspective of the leader, it is rational to keep the real prices down to restrict the growth of the competitor, and for Asiana it is rational to follow the downward movement of prices in real terms. This strategy is backed by a calculation that otherwise it will lose its market share and be excluded from the market. Thus, from the perspective of a leader and follower framework, it is rational for each carrier to keep real prices down. Price discrimination also has not been practiced by KAL or Asiana in domestic markets. This may be a consequence of the reluctance of passengers to accept non-uniform prices for what amounts to the same service. Also, the companies are not accustomed to price discrimination in terms of their management and information skills.

On 1 February 1996 KAL, the apparent leader, dropped its domestic airfares by 5 per cent uniformly over all routes. In terms of the second explanation for the apparent cap on the domestic airfares, the price reduction will not greatly affect the market. Asiana will not lose much of its share even if it does not respond by lowering its own prices in the same manner as KAL. 75

Asia Pacific Air Transport: Challenges and Policy Refonns

Multiple designation policy The advent of the second national carrier in Korea was motivated neither by economic efficiency arguments nor by an argument about the distributional effects of a monopoly. Rather, potential competitors, eager to enter the industry, pressured politicians for a licence to operate. For this reason, no specific policy aims were identified in the announcement that the second carrier would enter the market. It was not until later that the government began to search for a policy direction by stipulating the roles of the two carriers in the market and competition between them. To accommodate the two carriers into the international air transport system, the government prepared regulations governing the allocation of international routes and frequencies between the carriers. At first, the government tried to segment the markets so that competition between them was minimised. One strategy would have been to give a smaller market to the entrant and to secure the rest for the incumbent. The conflicting objectives of the two carriers were not, however, resolved by market segmentation. The incumbent did not want to give up even a proportion of its routes and the entrant was not satisfied with a small portion. Restrictive bilateralism, the prevalent method used to regulate the exchange of international traffic rights between the two countries, dictates specific routes, tariffs, frequencies and the number of carriers entitled to fly as well as operational restrictions. If a government wants to have multiple national carriers launching international flights, it has to set a rule for the allocation of earned traffic rights. The Korean Government made such a rule in 1990, the 'Guidelines for Supervision and Development of the Multiple National Carriers' (GSD). The rule was an attempt on the part of the government to coordinate the interests of the two carriers under the constraints of bilateralism.

1990 guidelines Under the 1990 GSD, the conditions for multiple tracking were such that if either the incumbent carrier were operating five flights per week with a capacity of a Boeing 747 and an average load factor of more than 70 per cent, or if the annual number of passengers on a route exceeded 150,000, then the second carrier could launch operations in competition with the first carrier. Area restrictions were set out so that the incumbent, KAL, was allowed to fly all over the world and the entrant, Asiana, could only operate over the United States, Japan, Southeast Asia and Southwest Asia. Under the conditions for multiple tracking, three flights per week were to be allocated to the late-comer with the subsequent frequencies to be equally distributed between the two carriers. New routes were to be equally allocated between the two carriers, but routes between Korea and Japan and between Korea and Southeast Asia were to be distributed on a 2:1 basis (one for KAL, two for Asiana). 76

Policy issues Flights into 'communist countries' including the Commonwealth of Independent States, China, Laos, Cambodia and Vietnam were not subject to the general rule mentioned above and, as needs arose, a special ruling was to be made to cover these routes. The GSD also specified that if the entitled carrier did not use its allocated route right, it was to be automatically handed over to the other carrier. Overall, the 1990 GSD attempted to accommodate not only the interests of KAL but also those of Asiana. The latter wanted to fly into as many profitable or potentially profitable routes as possible and the former wished to retain as many monopoly routes as possible. However, the area restriction on Asiana, the unresolved issue of operations into communist countries and the changes in traffic volume on several international routes were controversial. Contentious regions included Southeast Asia, Europe and Australia, where the number of Korean tourists has dramatically increased since 1990. Asiana wanted to fly all over the world. The carrier argued that the GSD did not allow leapfrogging over its competitor, KAL, and that the economic fate of the company was dependent not only on its efficiency but on the market opportunity given by the GSD. Further, it argued that the GSD did not allow fair competition between the two carriers and that KAL was protected by the GSD regardless of its productivity. For its part, KAL claimed that the destructive competition between the two carriers would deprive it of its competitive edge in fighting foreign carriers on a equal footing in an increasingly competitive and harsh international aviation environment. Faced with the dissatisfaction of both airline companies, the government revised the GSD in 1994. The decision was triggered by the unresolved issue of flights into China. Asiana claimed that since it was disadvantaged in international operations, it should be the major beneficiary of new routes. The dispute led to careful scrutiny of the 1990 GSD, resulting in its revision.

1994 guidelines Under the revised guidelines, conditions for multiple tracking differ by route length. For a second carrier to enter long haul international routes, the guidelines require that the number of passengers should exceed 210,000, or more than five flights per week with the equivalent capacity of a Boeing 747 and an annual average load factor of more than 70 per cent. In cases of short and medium haul international routes, multiple tracking requires the number of passengers to exceed 180,000, or seven flights per week with the capacity of a Boeing 767 and a load factor more than 70 per cent. The former restrictions on Asiana's flight operations were abolished and it can now fly anywhere, subject to the provisions of bilateral agreements. The special treatment afforded to routes to communist countries under the 1990 GSD was also abolished. The new GSD stipulates that the new routes are to be allocated on an equal basis between the two carriers and allows more favourable treatment of Asiana on some routes. 77

Asia Pacific Air Transport: Challenges and Policy Reforms

Under the 1994 guidelines, the number of frequencies allocated to the entrant varies, depending on those of the incumbent airline. The more frequencies the incumbent exercises, the more frequencies are allocated to the newcomer. The revised GSD allow carriers to exchange traffic rights and voluntary exchanges to be endorsed. This has not yet happened, although one can envisage a situation where the airlines decide to swap routes to maximise profits. Under the current rules, however, they then face the risk of the entry of a third airline. In the absence of perfect information about the costs of other airlines, this may mean that trading rights are not exchanged. Both sets of guidelines cover route and frequency allocations in the international market but make no specifications with respect to regulations and pricing for domestic flights. These issues are covered by the aforementioned Korea Aeronautics Law. According to .the Law, each carrier must obtain permission from the Ministry of Construction and Transportation (MCT) for each domestic route it wants to operate. Exit from the market also requires governmental approval. A business proposal must be submitted to the government, containing the desired routes and frequencies. Until now, all proposals have been approved, subject to airport capacity. A particular problem in Korea is that many local airports are owned by the military. Because of the difficulties in coordinating civilian access with military use, the military does not wish to see any expansion of domestic flights using its infrastructure.

Airfares Airfares and tariffs must be reported to the government to be deemed valid in the domestic market. They were regulated by the government until1992 when the approval system was changed to a reporting system. According to the Aeronautics Law, the Korea Civil Aviation Development Association, an intermediary agency funded by the Korea Airport Authority (KAA) and the two Korean carriers, can assume the role of reporting fares and tariffs on behalf of the carriers. In essence, the Law does not discourage collusive behaviour by the airlines in the domestic market. A permission system whereby fares proposed by airlines can be rejected if both governments do not approve them operates in international markets. At present this system appears to be ineffective but it is retained in the event that the Korean government is required to operate a double disapproval system on fares according to bilateral commitments.

Airports There are currently 14 airports in Korea available for civilian use. The Korea Airport Authority (KAA) is the public body in charge of operating and managing all airports. Ten of them are under the control of the military. Both the 78

Policy issues

military and civilians share use of the facilities, but civilian operations are hampered by military ones. To obtain slots at these airports requires consultation with the military. Furthermore, most have only one runway with a distance of less than 3,000 metres. This factor further restrains full utilisation of the airlines' fleets. Regular international. flights operate to Seoul (Kimpo Airport), Pusan (Kimhae Airport) and Cheju Island (Cheju Airport). Kimpo A irport is highly congested and, as of 1995, the other two international airports are not widely connected with foreign cities.

Competition in international markets: effects of multiple tracking Contrary to the domestic market where there is no apparent restriction in competition between the two carriers, international markets are intrinsically not procompetitive. International route rights are obtained through negotiations with the other party countries. Once the agreements are made, there is little freedom on the part of a single government to make operations on them competitive. This situation may be reinforced by other protective measures such as directional fares agreements or price discrimination in terms of origins of passengers. Thus, a passenger whose origin is in Korea cannot buy an air ticket in the United States where prices are cheaper for the same air service between a point in Korea and one in the United States. This kind of price discrimination is reinforced by the fact that national traffic is captive to the flag carriers due to patriotic attitudes, language problems and cultural differences, and these factors can be overcome only through frequent overseas travel and exposure to foreign cultures. These obstacles suggest that the only option for procompetitive action is multiple tracking. The new entrant, Asiana, made its first international flight in 1989 on the route between Seoul and Tokyo. Since then, it has expanded its international routes. In 1994 it operated as many as 20 routes, operating 30 per cent of a total of 67 routes. Of these, eight routes are operated by both national carriers. Thus 12 per cent of all routes are multiple tracking routes. Since 1991 when KAL monopolised the international markets, there has been a reverse in the declining market share of passengers in and out of Korea held by Korean airlines. Since then, the combined market share of the two national carriers has continuously risen, reaching 62.7 per cent in 1994. The combined market share in terms of the number of frequencies shows a similar trend. In addition to these improvements in market shares, many new international markets have been created. Thirty new routes were created from 1988 to 1994, a rate 4.3 times higher than for the same time span to 1987. The total number of passengers increased by 10 per cent annually, or by 60 per cent since 1989. The performance of the national carriers has obviously been boosted by the 1988 lifting of the previous internal ban on international travel and the continuous increase in the real per capita income of Koreans. Using an econometric model, Kim, Lee and Lee (1993) showed that the effect of the removal of the travel ban was to create up to an additional 1.5 million passengers per annum. 79

Asia Pacific Air Transport: Challenges and Policy Reforms

This result needs careful interpretation since it combines the effects of the entrance of a new carrier and the lifting of the travel ban. Only the effect due to the increase in real income is controlled. Overall, the policy of multiple tracking has contributed to the improved performance of the combined national carriers in terms of number of routes, passengers and cargo and the combined market share of the national carriers in the international markets surrounding Korea. What is not certain is its effect on prices. No official data on international prices are available although one would hope that multiple tracking has induced some competitive pricing behaviour. This brings us to a review of the current issues in the GSD.

Current issues Pricing is still under government jurisdiction unless the relevant bilateral air service agreement dictates otherwise. In other words, the Korean government must approve the submitted prices if they are to be valid. The regulation of pricing may deter effective price competition, at least for passengers originating in Korea. The strengthened criteria for double tracking effectively deter competition between the national carriers. Around 10 per cent of the total international routes operated by them are monopolies, and this percentage increases in terms of the number of people carri~d. The minimum number of 210,000 passengers necessary for the entrance of a new carrier on the long haul routes is an effective barrier to entry, compared with the 1990 GSD threshold of 150,000. Even with a rapid annual growth rate of 10 per cent, it would take eight years for an international route with a 100,000 passenger level to exceed the 210,000 passenger limit. If the lower threshold were applied, it would take only five years. This means that competition comes three years later and the incumbent of the route can enjoy monopoly profits over this period. Moreover, the existence of the threshold provides an incentive to keep passenger numbers just below the threshold by refusing to take bookings or by overbooking. Alternatively, prices can be increased to a level high enough to deter passengers who would otherwise be accommodated. These strategies have actually been adopted on some international routes. Furthermore, the criteria may be quite misleading since the number of passengers willing to take a flight is a function of prices as well as of incomes. The growth rate of traffic on a route could be maintained below a critical level for a long time through manipulating prices wh ile th e incumbent extracts monopoly profits. The modem marketing technology of any sophisticated computer reservation system allows this to occur. The 1994 GSD revised the rule for distributing frequencies between the two carriers in the case of multiple tracking in such a way that the entrant must be given different frequencies depending on those already exercised by the incumbent while it remains the monopolist. The frequency allocation scheme of the new GSD is set out in Table 5.1. 80

Policy issues

Table 5.1 Frequency allocation scheme under guidelines for supervision and development of multiple national carriers

Frequencies of incumbent

23

Frequencies of entrant

2

3

4

5

6

7

8

9

Total

32

33-27%

30-27%

Share of >22% frequencies held by entrant

29-26% 29- 26%

28-26% 28-26%