Chapter 2 Six Air Agreements

Introduction

2.1                   The following six Air Transport Agreements were tabled together on 1 November 2012:

• the Air Transport Agreement between the Government of Australia and the Government of the United States of America (Washington, 31 March 2008);
  
  
• the Exchange of notes amending the Air Transport Agreement between the Government of Australia and the Government of the United States of America (not yet signed);
  
  
• the Exchange of Notes Constituting an Agreement to further amend the Schedule to the Agreement between the Commonwealth of Australia and Japan for Air Services, done at Tokyo on 19 January 1956, as amended (not yet signed);
  
  
• the Agreement between the Government of the Republic of Kenya and the Government of Australia relating to Air Services (Nairobi, 24 May 2012);
  
  
• the Agreement between the Government of Australia and the Government of the Republic of Palau relating to Air Services (Koror, 2 May 2012); and
  
  
• the Agreement between the Government of Australia and the Government of the Democratic Socialist Republic of Sri Lanka relating to Air Services (Colombo, 3 May 2012).

2.2                   While two of these Air Services Agreements are amendments to existing Agreements, all six Air Transport Agreements have a similar basis and purpose.

Background

2.3                   An Air Service Agreement is an Agreement providing for the operation of commercial scheduled air services between the countries Party to the Agreement.[1]

Air Service Agreements are negotiated to permit and facilitate the operation and development of international air services between countries. Under the framework of the Chicago Convention of 1944, which provides the overarching framework for international civil aviation, international airlines cannot service a market between two countries without the framework of an air services agreement.[2]

2.4                   The Air Service Agreements under consideration here are all made pursuant to the Convention on International Civil Aviation, which entered into force for Australia in 1947.[3]

2.5                   Finally, as is standard practice with Air Service Agreements made by Australia, the arrangements contained in these Agreements are applied through non-legally binding memoranda of understanding until the proposed Agreement has been given force.  In effect, this means that the arrangements have already been in place for some time.  For example, the provisions of the Agreement with the United States (US) have been in place since 2008.[4]

Overview and national interest summary

2.6                   The Agreements under consideration here contain a basic set of provisions that are common to most Air Services Agreements negotiated by Australia.  In addition, each of the Agreements differs in some respects from the others.

2.7                   The basic set of provisions the Agreements have in common will be discussed below.  This will then be followed by a discussion of the provisions specific to each individual Agreement.

2.8                   The Air Transport Agreement between the Government of Australia and the Government of the United States of America and the Exchange of notes amending the Air Transport Agreement between the Government of Australia and the Government of the United States of America are dealt with in a single National Interest Analysis.  For the purposes of this discussion, the two United States Agreements will be considered together and referred to as the ‘Air Transport Agreement with the United States’.

Basic provisions common to all Agreements

2.9                   The purpose of each Agreement is to allow the airlines of each Party to the Agreement to schedule air services carrying passengers or cargo between the two Parties.[5]

2.10               Each Party agrees to permit the airlines of the other Party the right to overfly the territory of the Party and to make stops in its territory for non traffic purposes, such as refuelling.[6]  However, each Agreement prohibits airlines from one Party from operating domestic services within the borders of the other Party.[7]

2.11               In relation to airlines that wish to fly between the Parties to an Agreement, each Party designates airlines to operate the agreed services.  In relation to a designated airline, the Agreement stipulates that:

..the other Party must grant the necessary authorisations provided that the airline being designated complies with the conditions for ownership and control set out in the proposed Agreement, holds necessary operating permits, and meets the conditions the Party normally applies to the operation of international air transport. It is also a condition of granting authorisation to a designated airline that the Party designating the airline complies with the safety and security provisions of the proposed Agreement.[8]

2.12               In addition, each Party is required to recognise certificates of airworthiness issued by the other Party in relation to airlines designated by that Party.  However, each Agreement contains a caveat that the standards under which the certificates are issued must comply with the standards established by the International Civil Aviation Organisation (ICAO),[9] and each Party is required to advise the other Party of any differences between its national regulations and the standards of the ICAO.[10]

2.13               Designated airlines must observe a Party’s domestic laws and regulations in relation to the operation and navigation of aircraft while they are within the territory of that Party.[11]

2.14               Each Party to an Agreement undertakes to protect the security of civil aviation from acts of interference as defined in the multilateral conventions relating to aviation security.[12]

2.15               Designated airlines of one Party are entitled to establish and conduct business in the territory of the other Party.  Specifically, designated airlines are permitted to:

• establish offices;
  
  
• bring or employ staff;
  
  
• sell air transport services to the public;
  
  
• perform ground handling;
  
  
• use the services of other businesses or airlines to conduct their business;[13]

  and

• establish arrangements for air or land transport connections with their international flights.[14]
  
  

2.16               Designated airlines are also permitted to import stores and equipment necessary for the conduct of their business without having to pay customs duties and related charges.[15]

2.17               The Agreement permits each designated airline to have a fair and equal opportunity to compete in providing international air services.  The Agreement provides that each Party can take appropriate action within its jurisdiction to eliminate barriers to fair competition.[16]

2.18               Each Agreement provides a dispute settling mechanism on matters that are not related to the setting of airfares and have not been resolved through consultation, negotiation or mediation. Disputes of this sort are arbitrated by a three person panel.  Often the result of the arbitration is final and binding.[17]

Specific provisions in each Agreement

2.19               Each of the Agreements under consideration contain provisions specific to that Agreement.  In general, these provisions relate to the routes designated airlines can fly, the capacity levels for each service, and whether designated airlines are permitted to operate on domestic routes.  The specifics of each Agreement are set out below.

The Sri Lanka Agreement

2.20               The Agreement between the Government of Australia and the Government of the Democratic Socialist Republic of Sri Lanka relating to Air Services (the Sri Lanka Agreement) replaces an existing treaty from 1950, the Agreement between the Government of the Commonwealth of Australia and the Government of Ceylon for the Establishment of Air Services.[18]  The Sri Lanka Agreement is based on an Australian model Air Services Agreement.[19]

2.21               The Sri Lanka Agreement will permit the designated airlines of Australia and Sri Lanka to provide services on specified routes between the two countries.[20]  The list of specified routes is contained in Annex 1 of the Agreement.[21]  There is no limit to the number of airlines that can be designated by each Party.[22]

2.22               Designated airlines can only provide services subject to capacity limits agreed between the Parties to the Sri Lanka Agreement.  The capacity limits are set by less than treaty level Agreements, which are not publicly available.[23]

The Air Transport Agreement and Exchange of Notes with the United States

2.23               As indicated earlier, the two treaty actions with the United States are being considered together for the purposes of this inquiry.  The two treaty actions are proposed to be brought into force at the same time.[24]

2.24               The Air Transport Agreement with the United States replaces a previous Agreement, the Agreement between Australia and the United States of America relating to Air Services, signed in 1946.[25]

2.25               The Agreement is not based on Australia’s model Air Services Agreement.

Open skies

2.26               Unlike the other Agreements being considered here, the Air Transport Agreement with the United States is based largely on an ‘open skies’ principle, which provides for unlimited services between any destination in Australia and the US.[26]  Specifically:

Each Party shall allow each airline to determine the frequency and capacity of the international air transportation it offers under Annex I or Annex II based upon commercial considerations in the marketplace. Consistent with this right, neither Party shall unilaterally limit the volume of traffic, frequency, or regularity of service, or the aircraft type or types operated by the airlines of the other Party, except as may be required for customs, technical, operational, or environmental reasons under uniform conditions consistent with Article 15 of the Convention.[27]

2.27               Australian practice has not been to pursue the open skies model as an end in and of itself but:

to pursue liberalised markets that still provide airlines with rights well in excess of their commercial plans so that their judgements are based not on government regulations to which services they will provide, but purely on commercial considerations.[28]

2.28               The United States has over 100 open skies agreements with countries around the world, and the UAE and other Gulf States also have a policy of using open skies agreements. As well as the agreement Australia has with the United States, it also has an open aviation agreement with New Zealand and open capacity agreements with the UK and Singapore.[29]

Foreign ownership

2.29               The Agreement covers airlines which are designated by the respective governments. Only airlines which are substantially owned and effectively controlled by a party to the agreement may be designated. Currently there are three airlines per party operating between the respective countries covered by this Agreement.[30]

2.30               This treaty has been instrumental in increasing the number of airlines flying between the parties. The inclusion of Delta Airlines for the US side and Virgin Australia would have been unlikely without this Agreement:

Prior to the negotiation or implementation of this treaty there were restrictions on the amount of capacity that could be operated between Australia and the US that would have effectively limited the number of airlines that could operate. This treaty removes that restriction. It was instrumental in enabling Virgin to commence operations. In the absence of the agreement it is unlikely that Virgin would have commenced.[31]

Dispute resolution

2.31               The Exchange of notes amending the Air Transport Agreement between the Government of Australia and the Government of the United States of America deals specifically with the dispute settling mechanism discussed earlier.  The text of the main body of the Agreement was agreed in 2008, but the dispute settling mechanism was not finalised until 2010.[32]

2.32               In 2008, the US view on the dispute resolution clause was at odds with Australian government policy positions and discussions stalled. Concerns were around arbitration and the extent to which arbitration would be binding.  The remainder of the Agreement was finalised to the extent that airlines could take advantage of the commercial entitlements flowing from it, while dispute resolution discussions continued.[33]

2.33               The compromise that was reached in 2010 was for an arbitration process without legally binding provisions.

What it does provide for is that if a party fails to comply with an arbitration order there is a right for the other side to suspend access to all rights under the agreement as a means of retaliation, if you will, or of seeking to force the other side to comply. The distinction is around the question of it being a legally binding dispute resolution process.[34]

Freight task

2.34               The Agreement allows for either party to operate into the other country and then on to a third country without having to return to the point of origin.  The NIA explains that this Agreement:

… provides Australian airlines with the freedom to operate cargo services between the territory of the US and a third country without needing to serve a point in Australia. The proposed Agreement increases the opportunities for the Australian business interests, in particular the tourism and export industries, to develop and market new products and allows Australian airlines to compete for US government procured transportation services.[35]

2.35               This also gives American carriers increased opportunities for services direct from any point in the Asian hub back to Australia.

2.36               Analytical work undertaken by the Australian Government and a range of international organisations, companies and foreign governments has highlighted that ‘the opening up of freight markets has tended to act as a catalyst to permit further growth in the market’.[36]

2.37               Particularly in the freight market, the freedom to pursue commercial opportunities without being constrained or restricted by the availability of rights has been very important.

Most of the freight routes that operate in and out of Australia—and it is a pattern globally as well—do not tend to operate as a ‘backwards and forwards between two points’ route. They tend to operate as large, round-the-world, circular routes, following the flow of trade. The rights that were made available under the agreement are, for example, used by Australian carriers to access the China-US freight market and other global markets like that.[37]

U.S. Government procured transportation

2.38               This Agreement allows Australian airlines to compete for US government procured transportation services.[38]

The US ‘Fly America Act’ usually requires US Federal government employees to travel where possible on US carriers when their flight is funded by the US government. However, under Article 14 of the proposed Agreement, Australian airlines are also entitled to carry US government travellers and transport cargo for US government agencies, where the travel is between a point in the US and a point in Australia or between any two points outside the US, thus giving Australian airlines access to the US government travel market.[39]

2.39               The only transportation exempt from the provisions of Article 14 is that which is obtained or funded by the (US) Secretary of Defense or the (US) Secretary of a military department.[40]

Subsidised airlines

2.40               Article 3 of the treaty allows each Party to ‘designate as many airlines as it wishes to conduct scheduled international air transportation in accordance with this Agreement’[41]. In relation to the differences between free trade and fair trade, the Committee was interested in how the treaty handles situations where airlines may have been subsidised or bailed out by governments after becoming uncompetitive, uneconomic or filed for a Chapter 11 bankruptcy.[42]

2.41               In response, it was agreed that the question of state aid to airlines is a difficult issue around the world. The requirements that exist in this Agreement are that ‘airlines must be substantially owned and effectively controlled by nationals of the designating country’. The Agreement does not judge the commercial standing of airlines when designation is permitted, and nor does it go into permitting either side to make judgements about whether or not the airline is being supported by a state.[43]

2.42               Whilst countries take a variety of approaches to dealing with states that are alleged to heavily subsidise their airlines, the most common way is through the negotiations. It goes to the level of access to that airline that may or may not be provided to the country under the Agreement. Although the issue remains largely unresolved, ‘there is work and constant discussions in ICAO around how you try to ensure fair competition’.[44]

2.43               Australia undertakes these negotiations on an agreed mandate, developed after a range of consultations with interested parties on how the negotiations should take place. The views of Australian airlines are taken into account however most comments that are put forward are generally commercial-in-confidence.[45]

Following the outcome of talks we formally indicate the outcome to all of our stakeholders. I think it is fair to say that the conclusion of the Open Skies agreement with the United States was welcomed by a majority or our stakeholders as something that was overdue.[46]

Safety audits

2.44               Article 6 says that each party is required to recognise the other’s airworthiness and regulatory regime, but is entitled to ask for consultation to ensure safety and compliance with the Convention on International Civil Aviation, done at Chicago on 7 December 1944.[47]

2.45               The US Federal Aviation Administration (FAA) International Aviation Safety Assessments Program focuses on a foreign country’s adherence to applicable international standards and recommended practices established by ICAO.

That Program does not involve an assessment of foreign operators or maintenance organisations per se, although in the course of assessing the foreign country’s oversight activities, the FAA may visit operational and maintenance facilities within the foreign country. The Civil Aviation Safety Authority (CASA) does not undertake a similar program.[48]

2.46               On the other hand, CASA assesses the safety of foreign operators and aircraft in Australia utilising a range of methods, including regular inspections of foreign aircraft operations at Australian airports to ensure operators adhere to the international standards established by ICAO.

Increased surveillance of particular aircraft operators is undertaken when CASA believes it necessary, utilising a range of different surveillance mechanisms. CASA liaises regularly with foreign safety regulators on matters of mutual concern and interest. One of the factors that CASA may take into account in its assessment of a foreign operator is the standard of oversight provided by foreign regulators over that operator. In assessing maintenance facilities in foreign countries that carry out maintenance on Australian aircraft in those countries, CASA routinely undertakes inspection visits to those countries.[49]

Amendment to the Japan Air Services Agreement

2.47               As the title suggests, the Exchange of Notes Constituting an Agreement to further amend the Schedule to the Agreement between the Commonwealth of Australia and Japan for Air Services, done at Tokyo on 19 January 1956, as amended (not yet signed), hereafter referred to as the ‘Amendment to the Japan Air Services Agreement,’ amends the Schedule to the Agreement.

2.48               The Schedule to the Japan Air Services Agreement determines the origin and destination points in each Party between which designated airlines are permitted to fly.[50]  Effectively, the Schedule is an equivalent of Annex 1 of the Australian model Air Services Agreement, discussed in relation to Sri Lanka above.

2.49               The Schedule has been amended on a number of occasions since the Japan Air Services Agreement was first signed.  In this instance, the National Interest Analysis (NIA) indicates that:

The proposed amended Schedule provides for a more liberal route schedule that allows airlines to serve more flexible combinations of routes between points in the other country and any intermediate and beyond points. The proposed amended Schedule also sets out the traffic rights that can be exercised (i.e. the setting down and uplifting of passengers and cargo).[51]

2.50               As with all the other Agreements with the exception of the US Air Services Agreement, services on the agreed routes are subject to capacity restrictions, which are agreed using less than treaty level status Agreements.[52]

2.51               While the Japan Agreement is not one of Australia’s model Air Services Agreements, all other provisions are in essence the same as those contained in the model Agreement.[53]

The Kenya Agreement

2.52               The Agreement between the Government of the Republic of Kenya and the Government of Australia relating to Air Services (the Kenya Agreement) is the first such Agreement between Australia and Kenya. As such, it introduces the possibility of international air travel with passengers or cargo between Australia and Kenya.[54] The Kenya Agreement is based on the Australian model Air Services Agreement.[55]

2.53               The Kenya Agreement is similar to the Sri Lanka Agreement, and so will permit the designated airlines of Australia and Kenya to provide services on specified routes between Australia and Kenya.[56] The list of specified routes is contained in Annex 1 of the Agreement.[57]

2.54               There is no limit to the number of airlines that can be designated by each Party.[58] Designated airlines can only provide services subject to capacity limits agreed between the Parties to the Kenya Agreement. The capacity limits are set by less than treaty level Agreements, which are not publicly available.[59]

The Palau Agreement

2.55               The Agreement between the Government of Australia and the Government of the Republic of Palau relating to Air Services (the Palau Agreement), like the Kenya Agreement, is the first Agreement of this sort between Australia and Palau.[60]

2.56               As the Palau Agreement is also based on the Australian model Air Services Agreement, most of the comments made above in relation to the Kenya Agreement apply equally to the Palau Agreement.[61]

2.57               Of particular note in relation to the Palau Agreement is the fact that the preceding less than treaty status Memoranda of Understanding (MoU) has been in place since 2004, a period much longer than any of the other Agreements being considered here.[62]

Reasons for Australia to take the proposed treaty action

2.58               In relation to all the Agreements considered here, the NIAs stress the benefits to Australian travellers and businesses resulting from the liberalisation of air services introduced by these Agreements.[63]  However, given that these Agreements have been in place for a number of years as less that treaty level MoU, the benefits should arguably already be showing themselves.  The NIAs do not contain any statistical or anecdotal evidence of the success or otherwise of the MoUs in liberalising services between the Parties to these Agreements.

Implementation

2.59               The legislation relevant to these Agreements is:

• the Air Navigation Act 1920;
  
  
• the Civil Aviation Act 1988; and
  
  
• the International Air Services Commission Act 1992.[64]
  
  

2.60               The NIAs indicate that the Agreements will not require amendments to any of these Acts.[65]

Costs

2.61               According to the NIA, the proposed Agreements will impose no direct financial costs on the Australian Government.[66]  Similarly, no financial implications for state and territory governments are expected.[67]

Conclusion

2.62               The proposed set of Agreements grants access for Australian airlines to the aviation markets of the countries in question and allows for the establishment of air services in those countries.  In the case of the US, the proposed Agreements will allow air services to operate between Australia and the US under an ‘open-skies’ framework.

2.63               These Agreements will enable airlines of Australia and the countries in question to provide services between any point in Australia and any point in those countries, based on capacity levels decided from time to time between the aeronautical authorities of the various Parties.  It is expected that Australian travellers and Australian businesses, particularly in the tourism and export industries, will benefit from this proposed set of Agreements through the opening up of increased commercial opportunities.

2.64               As noted above, these Agreements have already been in place for a number of years as MoUs and thus the treaties here are providing a more formal and legal foundation to already existing arrangements.  This being the case the Committee is, however, disappointed that the NIAs do not contain any statistical or anecdotal evidence of the success or otherwise of the MoUs in liberalising services between the Parties to these Agreements.

2.65               Nonetheless, given the increasing amount of air travel and trade conducted by air transport, it is appropriate that treaty level agreements are put in place to facilitate this increased activity and help ensure that appropriate safety, logistic and commercial standards are being met.  The Committee supports the set of Agreements and recommends that binding treaty action be taken.

Recommendation 1
	The Committee supports the Exchange of Notes, done at Tokyo on [TBA] 2012, constituting an Agreement to further amend the Schedule to the Agreement between the Commonwealth of Australia and Japan for Air Services, done at Tokyo on 19 January 1956, as amended and recommends that binding treaty action be taken.

Recommendation 2
	The Committee supports the Agreement between the Government of Australia and the Government of the Republic of Kenya relating to Air Services and recommends that binding treaty action be taken.

Recommendation 3
	The Committee supports the Agreement between the Government of Australia and the Government of the Republic of Palau relating to Air Services and recommends that binding treaty action be taken.

Recommendation 4
	The Committee supports the Agreement between the Government of Australia and the Democratic Socialist Republic of Sri Lanka relating to Air Services and recommends that binding treaty action be taken.

Recommendation 5
	The Committee supports the Air Transport Agreement between the Government of Australia and the Government of the United States of America (Washington D.C., 31 March 2008) and recommends that binding treaty action be taken.

Recommendation 6
	The Committee supports the Exchange of notes amending the Air Transport Agreement between the Government of Australia and the Government of the United States of America and recommends that binding treaty action be taken.