Latin America: the impact of open skies April 2000

The US government’s active global pursuit of open skies aviation agreements has met with considerable success in Latin America and the Caribbean. No less than 12 countries in that region have signed such agreements in the past three years, accounting for almost 30% of the worldwide total of 42 secured by the US.

The idea was easier to introduce to a region that had eagerly embraced the free–market system, even to the extent of allowing flag carriers to fail — a concept that has been totally unpalatable in Europe. Many countries had already deregulated domestic markets and Peru had even granted cabotage rights to foreign operators. All flag carriers in Latin America had been privatised by 1996.

But the biggest incentive has been to secure better access to the US and ensure longer–term survival through alliances with the US majors, which have expanded aggressively in Latin America since the early 1990s.

TACA went to great lengths to persuade six Central American governments to sign open skies ASAs with the US in 1997, because without such agreements its code–share alliance with American stood no chance of being approved by the regulators. And LanChile lobbied its government to agree to open skies as it wanted to secure antitrust immunity in the US for its alliance with American.

However, in recent months the DoT’s open skies efforts in Latin America have suffered several setbacks. First, in October El Salvador requested new bilateral talks as it wants to modify its open skies ASA to include a mechanism for dealing with unfair competition. This followed TACA’s complaint to the DoT that Continental had flooded the Central American market with extremely low, unpublished "net fares" that were draining off important ethnic traffic from TACA.

Then in late January the Argentine government announced that it would not ratify the open skies ASA signed in December, to enable Aerolineas to restructure itself with the protection of the existing highly restrictive bilateral. The new ASA would have phased in an open skies regime by June 2003.

Although Colombia agreed to a new ASA in mid–March that will allow additional service to be phased in over 30 months, it was not the open skies deal that the US had been hoping for. And there is no sign of major countries like Brazil or Mexico being willing to open up their skies.

Argentina’s current stance is understandable in the light of Aerolineas' blight. The heavily indebted carrier, which lost about $125m last year, plays a vital role in linking different parts of a vast country. A thorough one–off financial restructuring (if accomplished) seems the smartest thing to do after all the half–hearted attempts made in the past decade.

While American’s relationship with Aerolineas is up in the air at present (after its bid to buy the carrier over 10 years was turned down), it seems likely that Aerolineas will have to forge some kind of an alliance with one of the US carriers simply because the US market is so important. This will bring the subject of open skies back to the negotiating table.

However, it is a point of concern for the US that the new government, which took office in December, has signalled a tougher approach to foreign ownership and bilateral negotiations. Aerolineas' struggles have sparked a political debate and moves in favour of protecting national enterprises — something that could influence thinking in other Latin American countries.

These developments come at a time when the US government seems more determined than ever to press for open skies. In December the DoT held a major international conference on that subject in Chicago and published a new report hailing the benefits of open skies to consumers. In a subsequent speech to the WTO, Transportation Secretary Rodney Slater talked of hopes that the entire US–Latin America region would have a liberalised aviation regime by 2005, to coincide with the aim to create a free market in the Americas.

According to Slater, by 2010 Latin America and the Caribbean will be a larger market for the US than Europe and Asia combined. US–Latin America routes, the world’s fastest–growing aviation market in the 1990s, already generate more O&D traffic than US–Europe routes. The region offers vital growth opportunities for the "big four" US carriers — American, United, Continental and Delta.

Many now view open skies regimes as inevitable. So how should Latin American countries balance the arguments for and against, and what should they press for in negotiations with the US?

Some timely insights and advice on this subject came recently from Bob Booth, president of consultancy firm AvMan and a prominent expert on Latin American aviation, in a report titled "Impact of open skies between the US and Latin America".

The report illustrated that the effects of US–Latin America open skies ASAs are likely to be very similar to those of the US domestic deregulation — increased competition, lower air fares, significant traffic growth, airline failures, industry consolidation and hub domination — but that the playing field is definitely not level.

Even without open skies, the US majors have achieved dominance in Latin America because of their size, domestic feed, lower costs, powerful FFPs and sophisticated yield management systems. They are able to put in more capacity, frequencies and lower fares. They already control more than 60% of US–Latin America and 75% of USCaribbean traffic.

Unrestrained competition could have dire consequences for Latin American operators that lack the domestic feed and have typically 30% higher unit costs, "substantially" lower yields, 30% older fleets and relatively weak balance sheets. The report cautions that countries should "enter open skies with open eyes" and realise that their flag carriers may not be able to survive.

Of course, the problem of relying on foreign operators is that "if a specific market is not profitable, they will pull out without giving it a second thought", as has often happened in the Caribbean and most recently in Peru and Venezuela.

Nevertheless, the benefits of signing an open skies agreement are believed to outweigh the disadvantages and risks. Without an open skies agreement, a Latin American carrier may miss an opportunity to participate in global strategic alliance, let alone an alliance with a US carrier. But the latter is considered to be absolutely vital in an open skies environment.

The AvMan report recommends that countries negotiating open skies ASAs with the US seek to incorporate the following as part of the talks:

• Antitrust immunity in the US

This is extremely important as it will enable alliance partners to fully coordinate their operations and prices. Without antitrust immunity, they could coordinate schedules but would not be able to even discuss fares.

Of the US–Latin America alliances, only LanChile and American have so far secured antitrust immunity, though the US–Argentina ASA (now on hold) makes such as provision for Aerolineas/American. TACA and American were initially told that there was no way they could get antitrust immunity, but the US government seems to have revised its position as in late March the two submitted their application.

This suggests that antitrust immunity may be more freely available as part of an open skies ASA, but the parties must obviously ask for a provision to be included.

• Phased-in agreements

Any open skies ASAs should be phased in over a number of years to give Latin American carriers time to prepare for unfettered competition with the US majors. Recent examples include bilaterals with France and Argentina.

• Language to deal with unreasonably low fare levels

The US government has always resisted the inclusion in bilaterals of any mention of unfair competition and certainly not "predatory pricing". The problem foreign carriers face, when filing complaints through the regular DoT channels, is that their cases do not get the congressional support that, say, Frontier gets when it files a complaint about United. TACA’s complaints about Continental did not get very far at all (though Continental has apparently voluntarily cleaned up its act).

Consequently, Robert Papkin of the Washington law firm Squire, Sanders & Dempsey, which represents TACA, recommends two things. First, Latin American countries should try to include language in the ASA’s pricing provision to deal with "unreasonably low fare levels" that could undermine the economic viability of their carriers. This would give foreign governments the opportunity put some political pressure on the US government to deal with any complaints filed to the DoT.

Second, since the US is likely to resist any such language in the bilateral, Papkin suggests that countries should strengthen their own legal mechanisms for dealing with unfair competition and predatory pricing. Many countries in Latin America do not yet have effective antitrust authorities, with Chile being an exception.

• Ownership and control issues

These should be clarified in an ASA to enable national carriers to seek foreign investors while maintaining their nationality. For example, the US–Argentina ASA went quite far in expanding the circumstances of foreign ownership and control.

• Waivers for "Fly America" traffic

Obtaining waivers to carry US government- funded traffic, which under the 1975 "Fly America Act" must normally travel on US carriers, can help level the playing field in an open skies environment. The matter must be dealt with in the context of ASA negotiations.

The AvMan report also recommends negotiating US immigration pre–clearance facilities in Latin American capital cities, which would enhance hub operations in those countries for both national and US operators. And any open skies agreements should, of course, include 7th freedom cargo rights for Latin American carriers.