It’s Time to Set Air Cargo Free

There are widely differing views within the airline industry and among the world’s political leaders concerning changes that would liberalize air cargo traffic rights. Some fear that more liberal rights would threaten national sovereignty, remove protection enjoyed by national carriers, and eventually lead to domination of the commercial skies by a few mega-carriers from the most economically developed nations.

And yet it is obvious to most knowledgeable participants in the commercial aviation industry that changes are necessary to correct the present restrictive system which, in many cases, limits growth and stifles economic development. Air cargo, while accounting for only 2% of transportation of goods by weight, accounts for more than 40% by value.

We now live in a world where the components of a product might be manufactured in Malaysia, China and Mexico, then assembled in the U.S.A. for shipment to markets in Europe. National pride or prejudice play little part in the location or outsourcing decisions by manufacturers. Production or assembly facilities are built, or relocated on short notice to those countries with the lowest costs and best access to the most efficient transportation options.

Most elements of the freight transportation industry can respond to such shifts without restriction. Container ships sail to any ports they choose, and no one is surprised that a Danish shipping line moves goods from Singapore to the U.S., or from South Africa to Australia. Freight forwarders have also grown into global entities, operating with little restriction in all parts of the world.

The transportation of air cargo, by contrast, is still influenced by regulations set forth in the Chicago Convention of 1944 when almost all airlines were national flag carriers, and the air cargo industry was still in its infancy. The rules established then favoured limits that confined carriers to operating services to and from their home country. Fifth freedom rights were few and far between, and sixth and seventh freedoms and open skies were still in the future.

Where air traffic rights have been liberalized, it has resulted in more capacity in the market, lower rates, and increased commercial opportunities and economic development. The US domestic market is an excellent example where express carriers such as FedEx and UPS have developed hub and spoke systems that have set the standards for all other document, small package and freight operations.

Another example is the European Union’s Common Aviation Market, completed in 1997, which allows member states to have mutual cabotage rights. This has led to a multitude of new air carriers, shipping systems and logistics solutions.

So why should the whole world not enjoy these benefits? Opponents to the idea argue, that with 50% of air cargo carried in the bellies of passenger aircraft, a separate agreement for all-cargo carriers could be perceived to favour freighter operations over combination carriers. Liberalization of passenger traffic rights is an altogether more complex and emotional issue, involving such issues as language, culture, and national pride. An all-cargo agreement would be easier to reach, but would it be fair?

Carriers of smaller or developing countries worry that a liberalized world would be dominated by a few large carriers. There is already the example of the big express operators - FedEx and UPS from the U.S. and DHL from Europe - who have skilfully used the existing bilateral system to create global networks. Would a liberalized air cargo world mean that mainstream air cargo would be similarly dominated by a few large carriers, and would individual countries lose some control over their own international trade?

Last but not least, the question of the large internally-liberalized US aviation market comes to mind. The US government has been a champion of cross-border liberalization, signing almost 60 “open skies” agreements with other nations in the past decade. But it still vigorously resists opening its own domestic market to international competition. Since 40 percent of global air cargo travels within or to/from the US, many non-US carriers regard this as unfair and hold it as a key goal of liberalization. For US operators and officials, on the other hand, this is seen as an entirely separate issue from the liberalization of international routes.

Despite such reservations, we believe that the issue of liberalization can no longer be ignored, and was extensively discussed at the TIACA Annual General Meeting in February 2003. As a result, we presented a position paper at the ICAO conference on liberalization in March. The paper pointed out that air cargo was a major employer worldwide, a vital component of world trade, and an engine for economic growth. It further suggested that the freedom of world trade can no longer be considered without also considering more liberalization for cargo.

The position paper particularly addressed the issue of all-cargo carriers versus combination carriers. True, an all-cargo agreement could favor the freighter operators, but they currently have a handicap in the market having to pay for all their flight costs with cargo alone.

Combination carriers, by contrast, can treat cargo as a zero marginal cost because without cargo they would still operate passenger services. Yet aircraft such as the B777 and A340 can still carry huge amounts of cargo in their bellies. Freighter operators consistently complain that the viability of their operations is undercut by low cost belly operations. A liberalized regime for all-cargo flights might help redress the balance.

Another point we made to ICAO was that while the passenger business is generally bi-directional - most passengers return to their starting point - cargo is not. Freighter routes are often imbalanced, with the transpacific being a good example. While there is strong demand for cargo from Asia to the U.S., freighter operators can barely meet costs for the opposite direction; in some instances, the westbound flight might even have to be subsidized by the eastbound flight. The answer to this dilemma is to allow more triangular or round-the-world routings, something that liberalization would permit. Like shipping lines, air cargo carriers should be free to adapt their services to global trade flows.

Last but not least, we feel that the current situation aggravates the overcapacity problem in air cargo because it is a form of protection for inefficient operators. Artificial devices such as slots, fuel and handling costs can be used to bolster favored operators, encouraging carriers to acquire capacity that they could never justify in an open market situation. In a liberalized world, all operators would compete on a level playing field.

Using these arguments, we urged ICAO member states to implement as soon as possible the reduction or elimination of constraints imposed on all-cargo carriers. Furthermore, as a minimum first step, member states should separate all-cargo and passenger rights. ICAO for its part responded by recommending that members consider air cargo for “accelerated liberalization and regulatory reform”, and proposed the text to that effect in an Annex on Air Cargo Services for inclusion in future air service agreements.

What are the chances of this approach succeeding? What is the way forward? Many models have been proposed. The European Commission’s plan for a Transatlantic Common Aviation Area (TCAA) effectively merges the US domestic and EU liberalized market. This initiative is supported by the Association of European Airlines, and was given a recent boost by the decision of EU member states to grant the Commission a negotiating mandate on this issue. An advantage or disadvantage of the European model, depending on one’s viewpoint, is that unique among international air service arrangements it includes domestic (cabotage) routes.

However, TCAA is not purely a European idea. Australia and Canada are two countries that have already indicated interest in joining a TCAA-type arrangement. Thus a successful agreement between the U.S. and Europe could create a snowball effect of liberalization all around the world. But if they cover both passenger and cargo issues, Common Aviation Area negotiations are likely to be long and arduous. It would be easier to negotiate a liberalized Common Aviation Area for cargo first, as cargo airlines are mainly privately owned, and as such far less tied up with national interests than passenger flag carriers. We therefore urge that the U.S. and EU handle traffic rights for all-cargo carriers and passenger operations separately in their upcoming air services negotiations in October 2003.

At the ICAO conference, other views on the way forward were also expressed. Singapore in its submission called for the phased multilateral or plurilateral liberalization of third to seventh freedoms for all-cargo services through modification of existing bilaterals. Countries could simply agree to exempt freighter operators from certain restrictions that apply to passenger carriers, it suggests.

India in effect did exactly that in the mid 1990s. Realizing that 40 percent of its exports by value went by air, and noting their importance in its economy, India unilaterally declared open skies for all cargo flights. In its ICAO submission it urges other countries to simply follow suit. A similar milestone agreement was concluded between China and Australia in August 2003 with liberal arrangements for passenger services and all restrictions lifted on freighter operations between and beyond the two countries.

There are also countries that support rapid liberalization for cargo, but take a more cautious approach. South Korea notes the possibility of discord between freighter and belly cargo, and also worries that freeing fifth and seventh freedom rights too quickly could cause imbalances between different national airlines. It therefore proposes freeing only third and fourth freedom rights initially (that is, giving carriers the right to fly unlimited numbers of cargo flights to and from their home countries), possibly freeing fifth to eighth freedom rights later.

U.S.A. also puts its weight behind a possible separate arrangement for cargo, stressing only on its existing open skies model and leaving out the vexed issue of domestic rights or cabotage. Among the points it makes is that the current open skies model already includes the possibility not just for fifth but seventh freedom rights - that is basing aircraft in the other partner’s country and operating routes that originate from there. Carriers that have taken advantage of this include Martinair of Holland and Avialeasing of Uzbekistan, both of whom now operate cargo flights from US airports to Latin America under seventh freedom rights.

Another organization that strongly supports liberalization for cargo is Airports Council International, which represents large and small airports around the world. It points out that freeing cargo would provide an important boost to secondary airports, relieving pressure on capacity-constrained hubs, and making more efficient use of scarce airport capacity in general.

With globalization here to stay, international markets will become more closely integrated necessitating the need for world trade across foreign routes to synchronise global commerce. Now that progress has been made at ICAO, we look forward to further developments and will continue to lobby governments to that effect.

TIACA will monitor the response from member states to ICAO’s call for liberalization of all-cargo traffic rights. If response is tepid, TIACA will continue to work through all available channels to encourage agreement that will free air cargo operations from its present restrictions for global economic development.

This is only the start of the process, we believe, not just for the air cargo industry, but for shippers, consumers and everyone in the world who relies on a prosperous trade industry for their livelihoods. And that includes the big multinationals as well as farmers and small and medium enterprises. It is now time to set air cargo free for the benefit of all.