A typical open skies agreement is signed by and between the aeronautical authori- ties of the parties concerned—whether bilateral or multilateral—and each Party confers on the other Party’s airlines: the right to fly across its territory without land- ing; the right to make stops in its territory for non-traffic purposes; and the right to operate international air transportation services between points on specified routes and any other rights stipulated in the agreement. Parties may operate flights in either or both directions and combine different flight numbers within one aircraft opera- tion. The singularly important provision, which makes the open skies agreement deviate from the typical bilateral (or multilateral) air services agreement which imposes restrictions on the uplift and discharge passengers freight and mail from a grantor State is that the former grants the airline of the other Party the right to serve behind, intermediate, and beyond points and points in the territories of the Parties in any combination and in any order (e.g. under the United States/United Arab Emirate open skies agreement Emirates can carry passengers from India, through to Dubai and London into New York with full rights); omit stops at any point or points; trans- fer traffic from any of its aircraft to any of its other aircraft at any point; serve points behind any point in its territory with or without change of aircraft or flight number and hold out and advertise such services to the public as through services; make stopovers at any points whether within or outside the territory of either Party; carry transit traffic through the other Party’s territory; and combine traffic on the same aircraft regardless of where such traffic originates without any geographic or direc- tional constrains or imposed requirements. Usually an open skies agreement
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ineluctably requires that such operations pass through the home base of the airline.
In other words, a carrier cannot exercise seventh freedom78 traffic.
An open skies agreement usually prohibits cabotage traffic.79 However, on any city pair or segments of the routes, as stipulated in the agreement, any airline of a Party may usually operate international air transportation services without any limi- tation as to change, at any point on the route, in type or number of aircraft operated, provided that, [with the exception of all-cargo services,] in the outbound direction, the transportation beyond such point is a continuation of the transportation from the homeland of the airline and, in the inbound direction, the transportation to the homeland of the airline is a continuation of the transportation from beyond such point.
A typical open skies agreement would also have a provision to the effect that the airlines of each Party will have the right to establish offices in the territory of the other Party for the promotion and sale of air transportation and be entitled, in accor- dance with the laws and regulations of the other Party relating to entry, residence, and employment, to bring in and maintain in the territory of the other Party manage- rial, sales, technical, operational, and other specialist staff required for the provision of air transportation.
Each airline would also have the right to perform its own ground-handling in the territory of the other Party (“self-handling”) or, at the airline’s option, select among competing agents for such services in whole or in part. The rights would be subject only to physical constraints resulting from considerations of airport safety. Where such considerations preclude self-handling, ground services would be available on an equal basis to all airlines; charges would be based on the costs of services pro- vided; and such services would be comparable to the kind and quality of services as if self-handling were possible.
Another provision often found in open skies agreements is that an airline of a Party may engage in the sale of air transportation in the territory of the other Party directly and, at the airline’s discretion, through its agents, except as may be specifi- cally provided by the charter regulations of the country in which the charter origi- nates. Each airline would have the right to sell such transportation, and any person would be free to purchase such transportation, in the currency of that territory or in freely convertible currencies. The airlines of each Party would be permitted to pay for local expenses, including purchases of fuel, in the territory of the other Party in local currency. At their discretion, the airlines of each Party may pay for such expenses in the territory of the other Party in freely convertible currencies according to local currency regulation.
78 The right or privilege, in respect of scheduled international air services, granted by one State to another State, of transporting traffic between the territory of the granting State and any third State with no requirement to include on such operation any point in the territory of the recipient State, i.e. the service need not connect to or be an extension of any service to/from the home State of the carrier.
79 Traffic between two points in the territory of the granting State on a service which originates or terminates in the home country of the foreign carrier.
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In operating or holding out the authorized services under the Agreement, any airline of one Party may enter into cooperative marketing arrangements such as blocked-space, code-sharing, or leasing arrangements, with an airline or airlines of either Party; an airline or airlines of a third country provided that all participants in such arrangements hold the appropriate authority and meet the requirements nor- mally applied to such arrangements.
3.10.2 Meaning and Purpose of Open Skies
An open skies agreement is calculated to increase competition among carriers by increased efficiency and cost reduction, thereby bringing down market prices with the ultimate objective of giving the customer increased availability of air transport services at reasonable prices and value for money.80 In many instances such agree- ments increase the number of airlines in a given route or market operating in liberal- ized market conditions. Under open skies agreements, airlines have more flexibility to restructure their fleets and schedules and engage in code share agreements with other carriers to optimise revenues and operations. A corollary would be the increase in the number of routes and number of flights between points, and increasing con- nectivity. Liberalization under open skies brings in cost reduction and effective gains for carriers. One commentator has categorically stated that the trend towards a very liberal open skies international regime is unstoppable,81 which implicitly gives the industry the assurance that the problem would solve itself in the years to come. Others have vigorously advocated that, as a panacea to the problem of rigid regulation, market access in air transport should be in the domain of a liberalized international regime. While the former view cannot be disputed, the latter approach brings to bear the compelling need to address the issue squarely, both in terms of whether the desirable approach would be to bring the industry from the current bilateral structure of air services negotiations into a more generalized regime and if so, what the modalities of such an exercise might entail. As to the former, it is largely a matter of political will. The latter would need some discussion on the legalities involved.
Although admittedly some States are giving effect to the liberalization of air transport by entering into open skies agreements with each other (nationally and regionally), it must be noted that reciprocal open skies policies are only cosmeti- cally liberal, as they are almost always carefully crafted with every consideration
80 “A study released in May by the Brookings Institution found U.S. travelers already save an aver- age of $4 billion per year because of Open Skies agreements—including those that have allowed the Middle East carriers to offer so many new flights to the U.S. The researchers estimated travel- ers could save an additional $4 billion annually if the U.S. reaches new deals with more countries, including those with a “significant amount of U.S. international passenger traffic.” One such des- tination? China, where treaties still limit the number of flights between the nations”. See Sumers (2015).
81 Doganis (2001), p. 11.
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being given to protecting one’s interests while at the same time taking care not to jeopardize such interests through open, untrammelled competition. One way to approach this issue might be, again with the political will of States, to revise Article 6 of the Chicago Convention, from its negative position to a positive one, where the provision could permit airlines of States to freely operate air services into the terri- tories of each other, subject to the requirement that States whose airlines are seeking to operate services should convince the State which agrees for such operation that such services would benefit all concerned, including the consumer, while at the same time giving the latter the right to refuse if there is no convincing for such operations. This would not only preserve the bilateral element as a last resort, but would also encourage competition and, above all, bring some universality to the concept of liberalization which is much vaunted but rarely put in practice.
As already stated, an open skies agreement usually does not represent a complete agreement and therefore may result in asymmetry of gains for one Party or another.
Often when a dispute under an open skies agreement arises, the solution sought is political and therefore various other factors of economic relevance come into focus, leaving an aggrieved Party no recourse to ensuring of fair and equal opportunity to compete.82 The law offers only stricto sensu application of the contractual terms which does not help in ensuring the objectives of the Pareto optimal agreement.83 The Theory of Contracts brings in the psychological and sociological factors of a contract that could provide an equitable base and an alignment of conflicting inter- ests for open and untrammelled competition under an open skies agreement. A clas- sic example offered by the Theory of Contract is the principal-agent relationship where the principal has no control over the agent’s commercial management of a contract that could adversely affect the other party to the contract. Here, analogi- cally, the government is the principal and the airline would be the agent. This can be directly applied to the open skies situation where the government of a State signs an open skies agreement with another government but the agreement is implemented by the airlines which have a position analogous to that of an agent. The principle propounded by the Theory of Contract in this case is called paying for performance where an airline unduly benefitting from a legal but asymmetrical practice could be held accountable to the government. Enforcement of an open skies agreement is the responsibility of a State Party which has to monitor investments relating thereto and the effects of such agreement on all parties to the agreement.84
The air transport industry is large—accounting for almost 1% of the GDP of the United States and Europe85—and also capital intensive and complex. In most devel- oped States, control over fares, capacity and market access which were originally under the purview of States have been given over to their national carriers, which devolves upon those States increasing responsibility to ensure that their carriers do not unfairly affect their competitors. The ICAO Model Bilateral Air Services
82 Abeyratne (2016), pp. 191–206.
83 Supra, note 3.
84 Schwartz and Scott (2003), p. 19.
85 Button (2008), p. 8.
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Agreement (BASA) recommends that the Parties should inform each other about their competition laws, policies and practices or changes thereto, and any particular objectives thereof, which could affect the operation of air transport services, while identifying the authorities responsible for their implementation. BASA also recom- mends that the Parties to the agreement should, to the extent permitted under their own laws and regulations, assist each other’s airlines by providing guidance as to the compatibility of any proposed airline practice with their competition laws, poli- cies and practices. A sociological approach to the open skies concept, as contained in the theory of Contracts could address any imperfections of implementation of an open skies agreement where the parties could bargain over the ex ante surplus from the relationship so that the expected utility levels could be resolved through endog- enous factors.