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Liberalization in Aviation Policy Presented to the Confederation of Mozambican Business Associations (CTA) Trade and Investment Project Andy Ricover December 15,2005

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Liberalization in Aviation PolicyPresented to the Confederation of Mozambican Business Associations (CTA)

Trade and Investment Project

Andy RicoverDecember 15,2005

2

Formal policyInstitutional framework

Effective policy

Current effective policy

Function of two factors

3

Current effective policy (continued)

• Function of two factors―There is written policy―But the institutional arrangement can

condition the real applicable policy

4

Current formal policy—Legal framework

• Resolution 40/2002, May 14th - replacing 5/96 April 2nd―Does not deal with access to market (5/96 did) ―Domestic market: to “adjust number of operators to

demand”

• Regulamento 39/98, August 26th―Defines access to market:

Regular international (intercontinental and regional) Regular domestic Nonregular

―Route allocation to new operator after “listen” to incumbent

5

Current formal policy—Regular-Int’l operations

• Access to market―Designated in the BASA (bilateral air services

agreement)―Selected by tender

• Regime―Exclusive rights for 10 years (renewable by tender)―Intercontinental: single designation―Regional: one operator per route―Provision for multiple designation, subject to public

interest

6

Current formal policy—Regular-domestic operations

• Access to market―Concession

• Regime―By route―By tender―5 year periods (renewable)―Subject to public interest: exclusive rights

7

Current formal policy—Nonregular operations

• Access to market―By obtaining a licence compatible with

service

• Regime―By tender―In addition to regular services

8

IACM IACM ADM ADM LAM et al IACM

Ministry of Transport & Communic.

Accidents investigation

RegulationPolicymaking Operation

ATC Airports Airlines

Current institutional framework—Bodies and functions

9

Institutional framework—Competences of IACM

• According to Decree 41/2001―Concentration of functions

Regulate procedures of policy application and legal framework (Art. 6: 1.a & n)

Technical regulation (Art. 6) Accidents investigation (Art. 6, g)

―Creates conflict of interest―Allows policymaking through regulation

10

Civil Aviation Board

autonomous bodies(arm’s length from the government)

IACM ADM ADM AirlinesAccidents

Investigation Board

ParliamentMinistry of

Transport & Communic.

Accidents investigation

RegulationPolicymaking Operation

ATC Airports Airlines

Proposed institutional framework—Bodies and functions

11

Current effective policy

• Consequence of formal policy and institutional framework―Formally protective of LAM, considered of “national

interest” Restrictive access to international markets Semi-restrictive for domestic markets

―Informal protection Difficulties in obtaining nonregular/special permits Price control Scheduling regulations (SAA should depart 90’ away from

LAM)

12

Seven operators

LAM

Air Corridor

MEX

STA

SAA

TAP

Pelikan Air

Intl Intl RegReg DomDom

√ √ √

Current situation—Operators

13

Current situation—Airport infrastructure

• 3 international airports―Maputo, Beira, Nampula

• 6 main airports―Inhambane, Quilimane, Tete, Lichinga,

Pemba & Vilanculus (by traffic)

• 10 secondary airports• 6 military• Plus almost 300 landing strips

14

Current situation—Airport infrastructure (continued)

• Operated by ADM• No prospects of private sector participation

(PSP)―Failed ACSA deal for MPM―Doubtful financial feasibility for whole group

• However―No capacity/operational constraints―Market is NOT a function of infrastructure

15

Policy background—Freedoms of the air

• 1st—The right to fly over another country without landing

• 2nd—The right to make a landing for technical reasons in another country without picking up/setting down revenue traffic

• 3rd—The right to carry revenue traffic from your own country A to the country B of your treaty partner

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Policy background—Freedoms of the air (continued)

• 4th—The right to carry traffic from country B back to your own country A

• 5th—The right of an airline from country A to carry revenue traffic between country B and other countries, such as C or D.

• 6th—The use by an airline of country A of two sets of 3rd and 4th rights to carry traffic between two other countries but using its base A as a transit point

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Current situation—Int’l carriers

• LAM―LIS: code share with TAP

• TAP―LIS: x 2 via JNB – without traffic rights (no

5th freedom)

• Poor offer

• Little competition

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Current situation—France

• BASA from 1991: 2x PAR-MPM―No interest―Presence of AF in TNR and Reunion―AF/KLM through Kenya Airways―7 freqs a JNB―Camores

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Current situation—Portugal

• BASA from 1977 with modifications―Single designation: designed for TAP―TAP: largest European presence―3 freqs a LIS (2 via JNB on one way only)―Interest in 5th freedoms in the region (not

allowed today)

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Current situation—South Africa

• BASA from 2003―Single designation: for LAM & SAA―Price control―Points in MOZ to CT, Durban, JNB, Nelspruit and

Lanseria―Points in RSA to Beira, MPM, Nampula, Pemba,

Vilanculos

• Effective―11 frequencies MPM-JNB (now requesting to 14)―3 freqs to JNB-Nampula―MPM - Vilanculos

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Current situation—Tour operators/special

• Policy―Limited entry points

• Technical―Delays in issuing permits―No reliability in response time―Often not granted without explanation

22

Current situation—Poor int’l connectivity

JNB

VNX

MPM

LIS

DAR

POL

BEW

LLW / BLZ

HRE

NBO

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JNB

VNX

MPM

LHR

LIS

HRELAD

NBO

DAR

POL

BEW

LLW / BLZ

Liberalized situation—Improved int’l connectivity

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Liberalized situation—Int’l carriers

• LAM―LIS with JNB and LAD (Luanda) by use of 5th

freedoms―HRE (Harare), DAR (Dar es Salaam) and

NRO (Nairobi) with 5th freedoms―And same with LHR (Heathrow) and LIS, 5th

freedoms

• TAP―LIS with JNB by use of 5th freedoms―LAD with 5th freedoms granted

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Liberalized situation—Int’l carriers (continued)

• BA―LHR/LGW – MPM – JNB (with Comair)―and LUN (Lusaka)

• Virgin―LHR – MPM – JNB (with SAA)―and LUN

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Current situation—Regional carriers

• LAM: JNB• MEX: DAR• SAA: JNB• KIA: HRE NBO• Pelikan: VNX• Air Corridor: BLW?• Poor offer• Little competition

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Liberalized situation—Regional carriers

• LAM: JNB & others, HRE, DAR & NRE with 5th freedoms

• SAA: JNB• Pelikan: VNX• Air Corridor: BLW?• Kulula: JNB & others• 1Time: JNB & others• Air Corridor: JNB & others• Comair: JNB & others

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JNB

VNX

MPM

LHR

LIS

HRELAD

NBO

DAR

POL

BEW

LLW / BLZ

Liberalized situation—Improved connectivity

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Liberalized situation—Improved int’l connectivity

• Will open alternatives entry points/routes

• Increasing competition

• Improving quality of service

• Facilitating entry for new services (LCC)

• Reducing prices

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Cents of US$ / mile (excursion return fares), by city pair distance

Air fares from Johannesburg

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Cents of US$ / mile (excursion return fares), by city pair distance

Air fares from Maputo

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Excursion and LCC return fares, cents of US$ / mile

Domestic fares Air Corridorfrom MPM Y class RT excursion RT miles $/mls (Y) $/mls (exc) AirlinesBeira 322 252 528 0.61 0.48Quelimane 410 321 830 0.49 0.39Nampula 504 412 800 0.63 0.52Pemba 555 438 975 0.57 0.45from Beira Y class RT excursion RT miles $/mls (Y) $/mls (exc) AirlinesQuelimane 220 172 170 1.29 1.01Nampula 322 252 410 0.79 0.61Pemba 403 318 580 0.69 0.55Maputo 322 252 528 0.61 0.48

LCC fares in RSAfrom JNB RT miles $/mls AirlinesEast London 127 597 0.21 KululaEast London 125 597 0.21 1 TimeCape Town 325 874 0.37 KululaDurban 98 352 0.28 KululaPorth Elizabeth 153 658 0.23 Kulula

Lowest available domestic fares in two markets

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Excursion and LCC return fares, cents of US$ / mile

Lowest available domestic fares in two markets (continued)

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Traffic drivers—Domestic market

• Foreign traffic―Reliability―Offer―Tourism infrastructure―price

• Local traffic―Price―Price―Price

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Traffic drivers—Int’l market

• Foreign traffic―Offer―Development of the domestic market―Price

• Local traffic―Price as a fx(offer)

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Domestic market is not self sustained: local population can hardly

support the system

Domestic market depends on the

international inflow

International inflow is restricted to protect

LAM

LAM fails to exploit the opportunity & no other carriers can try

International market remains undeveloped

Domestic market does not get international

inflow

A vicious cycle

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Trigger: liberalization policy develops the international market

Increases inflow of passengers into

the domestic network

Efficiency and low prices drives

tourism & investment

Increase of foreign traffic into domestic market

Gained support on the domestic market

Increases international traffic

The virtuous cycle

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Needed reforms

• Liberalization of the international traffic―Boost offer―Lowering prices―Increase inflow into domestic market

• Ease technical barriers in the local market―Increase providers / offer―Promote investment in tourism―Generate more demand―Which brings more international pax

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Needed reforms (continued)

• LAM Competitiveness Program―Restructuring reform

Adapt to the new challenges: business plan Reallocation of resources Capacity building program

―Management options Change in ownership structure (PSP) Management contract

40

Obrigado