An aircraft cannot enter any country’s airspace as it pleases; every country is sovereign over the airspace above its territory. So whose permission does an aircraft flying from Ankara to Paris need to pick up passengers in Vienna on the way? In this lesson we examine, step by step, what the economic regulations that restrict or free airlines’ decisions are, how the bilateral agreements governing international air transport came about, the eight traffic rights, market access and market entry regulations, and why airport slots are so valuable.

Note on the period: The agreements, institutional structures and country ratios described in this lesson belong to the period in which the source was published; the current situation should be followed through the official sources of the relevant authorities.

What will you learn in this episode?

• To define regulation and economic regulation and list the aims of regulation
• To explain how the Paris Convention and the Chicago talks led to bilateral agreements
• To explain the features and parts of bilateral air services agreements and the principle of reciprocity
• To define the eight traffic rights and distinguish the three forms of the 5th freedom with examples
• To explain the difference between market access and market entry with the concepts of designation and ownership and effective control
• To define an airport slot and explain why it acts like a market entry regulation

Summary of this episode

1. Regulation and economic regulation

Definition (regulation): Regulation is a set of rules with a legal basis, designed by a public authority empowered by the state and monitored for compliance, in order to steer, limit or encourage the actions of businesses and to set their rights, limits and obligations.

Definition (economic regulation): The economic regulations that affect airline business are rules and sanctions that aim to control or steer the structure of the industry or airlines' behaviour in the market that has economic consequences.

Explanation: Airlines cannot take and implement decisions with economic consequences just as they wish; the national and international rules they are subject to can limit these decisions, steer them or leave them completely free.

Aims of regulation: ensuring that flights are safe and secure, protecting social welfare and national interests, supporting certain regions and sectors such as tourism, meeting transport needs in natural disasters and protecting passenger rights.

Why is it regulated internationally? Because air transport can cross national borders within minutes, it is one of the leading sectors regulated at international level, both technically and economically. This lesson deals with regulations that have economic consequences.

Layers of regulation: The law draws the basic framework, the regulation sets the details and the instruction shows what is to be done and how in practice. Civil aviation authorities design economic regulations and handle licensing and flight permit procedures.

2. From Paris to Chicago

The Paris Convention (1919): The basis of today’s order lies in the Paris Convention signed in 1919. This convention declared airspace a natural resource by granting contracting states national sovereignty over the airspace above their land territory.

Its result: The commercial use of a country's airspace by foreigners is subject to that country's permission.

The Chicago talks (1944): As international flights developed, the need for a multilateral agreement arose, and in 1944 52 countries met in Chicago. Three economic issues were on the table:

• the mutual exchange of market access rights (air traffic rights),
• the control of flight frequency and capacity,
• the control of passenger and cargo fares.

Two approaches: The view led by the USA and supported by some countries with small domestic markets argued for free regulation of international markets, while some European countries, led by the United Kingdom, wanted strict regulation to protect their own transport systems.

Consequence: No multilateral consensus was reached on the three economic issues; the convention focused mainly on safety and technical matters. The most important outcome of Chicago was the founding of the International Civil Aviation Organization (ICAO) and the adoption of the annexes regulating safety. The first two traffic rights were accepted multilaterally (International Air Services Transit Agreement) and an agreement text defining five traffic rights was put forward; the 6th, 7th and 8th traffic rights came into use later.

How was the gap filled? The gap on economic issues was filled by three mechanisms: bilateral agreements, IATA’s fare-setting processes, and pooling and revenue-sharing agreements between airlines.

3. Bilateral air services agreements

Definition: Agreements that make air transport possible between two countries and regulate the market between them are called Bilateral Air Services Agreements (BASAs). In the terminology of Türkiye’s Directorate General of Civil Aviation (SHGM) they are referred to as “Air Transport Agreements”.

Why did they emerge? When no multilateral consensus was reached in Chicago, countries had to negotiate economic issues bilaterally among themselves.

Principle of reciprocity: Reciprocity is the basis of these agreements, and rights are usually shared equally between the two countries.

Legal standing: International agreements rank above national regulations; according to the source, for a BASA to enter into force in Türkiye it must be approved by the Grand National Assembly of Türkiye.

Who signs them? BASAs are signed by states; airlines have no authority to sign. However, an airline wishing to enter a new market can apply to its own authority to request an agreement with that country; state policies can also start the process.

Parts: The agreements usually consist of three parts:

• part one: taxation, customs, fund transfers, airport charges, capacity and tariffs,
• part two: market access rights,
• the last part: confidential provisions, if any.

Scope: BASAs essentially regulate scheduled transport.

Comparison (bilateral and multilateral): In a bilateral agreement two countries agree; the best-known example of multilateral agreements, where more than two parties agree, is the common market formed by European Union countries.

4. The main components of regulation

Explanation: Among the many regulatory subjects listed by ICAO, the four components that affect airline management most are market access, market entry, capacity and price. Ownership and effective control and slot regulations are seen as sub-components of market entry. Partnerships are left outside this scope because they are considered a tool for coping with regulation. (Capacity and price are covered in Week 6.)

5. Market access

Definition: Market access is the regulation that determines between which country and airport pairs flights can be operated; it is the precondition for an airline to enter a market.

Its result: Airlines of two countries without a BASA between them cannot operate scheduled flights between these countries.

Route schedule: The points granted access are listed in the annexes of the agreement; SHGM calls this part the “route schedule”.

Memorandum of understanding: Because changing the agreement itself takes a long time, the parties can change access points when needed by signing a memorandum of understanding (MoU).

Measuring strictness: Strictness in market access is measured by the number of markets granted access. If the number of markets is limited to one or a few, the regulation is strict; if the parties can operate flights between any points they wish and the 5th freedom is explicitly granted, the regulation is liberal.

6. The eight traffic rights

Definition: Traffic rights are eight options that determine how flights between countries can be operated:

1. Flying over a foreign country without landing (transit flight right),
2. Landing for technical reasons without a commercial purpose (for example refuelling),
3. Carrying passengers, cargo and mail commercially from one's own country to the other country,
4. Carrying passengers, cargo and mail commercially from the other country to one's own country,
5. Carrying traffic between two foreign countries on a flight that starts or ends in one's own country,
6. Carrying traffic between two foreign countries via one's own country,
7. Carrying traffic between two countries outside one's own country,
8. Carrying traffic within another country's domestic market (cabotage right).

Why are the 3rd and 4th freedoms the most basic? They are based on the logic of reciprocity: the demand between two countries is created by these two countries together, so the right to carry it also belongs to their airlines.

Why is the 5th freedom different? The 5th freedom goes beyond this logic, because a third country comes into play.

Example: An airline registered in Türkiye may want to add Vienna as an intermediate point on the Ankara–Paris route, drop some passengers from Ankara in Vienna and carry passengers from Vienna to Paris. If Austria and France allow it, Türkiye obtains the 5th traffic right.

Why is it rarely granted? Türkiye makes no direct contribution to the demand between Vienna and Paris; the countries concerned want to offer the benefit of this demand to their own airlines.

Three forms of the 5th freedom:

• intermediate points: Vienna in the example,
• beyond points: extending the Ankara–Paris route to London,
• behind points: the airline's country lying between two foreign points, as in the Baku–Ankara–Paris example.

The 6th freedom: The airline acts as a bridge by combining the 3rd and 4th freedoms it holds with two separate countries via its own country. In this way it can raise its load factor and revenue and lower its unit cost; however, this right is seen as disputable under the essence of bilateral agreements.

Comparison (5th and 6th freedoms): Under the 5th freedom the flight starts or ends in one's own country and carries traffic between two foreign points along the way; under the 6th freedom passengers travelling between two foreign countries are carried by connecting through the airline's own country.

7. Market entry: designation and ownership and effective control

Definition: Market entry regulates how many airlines from the parties can enter a market opened by access, and which characteristics these airlines must have.

Comparison (access and entry): Market access opens or closes the market in general (“between which points?”); market entry determines who and how many airlines can enter that market (“which airlines?”).

Designation: If only one airline is allowed, the country names the airline that will use this right and notifies the other party; this procedure is called designation.

From strict to liberal: Designating only one airline is the strictest option, allowing two airlines is more liberal and having no limit on the number is the most liberal.

Ownership and effective control — definition: It is the regulation that determines which country's nationals must hold “a substantial part” of the airline's ownership and the effective role in its management; it is the key characteristic required to enter a market.

What does a substantial part mean? Each country sets the share of voting rights itself; in the period when the source was published this threshold was 75% in the USA and 51% in European Union countries.

Why is effective control in management required separately? It concerns the nationality of the senior managers who take strategic decisions; because even if ownership is national, management by foreigners would weaken the airline's national character.

Its strictness: Ownership and effective control is the most strictly kept economic regulation worldwide; the only place where it is completely free on a multilateral basis is the market among European Union countries. Still, in some liberal markets it has begun to be considered sufficient for the airline's principal place of business to be in the other party's country instead of nationality.

8. Airport slots

Definition: An airport slot is an allocation that gives an airline the right to land and take off within a given time period and to use all airport services related to these operations.

Slot regulations: They are the set of rules on setting, allocating, transferring and cancelling the number of slots.

Where do they apply? Slot rules apply only at airports and in time periods where demand exceeds capacity.

Why does it act like market entry? Although a slot is not formally a market entry regulation, its effect is similar: even a designated airline may not actually be able to enter the airport if it cannot find a slot.

Why is it valuable? The number of slots obtained and their position in the day is a resource valuable enough to give an airline a competitive advantage. Example: An airline with slots at the morning hours preferred by business travellers has a much greater advantage on the same route than a rival that can only find a midnight slot.

In short

Because no multilateral consensus was reached in Chicago, the economic rules of international air transport are set by bilateral agreements between countries. These agreements are based on the principle of reciprocity; traffic rights and the route schedule regulate between which points flights can be operated (market access), while designation and ownership and effective control rules regulate which airlines can fly (market entry). At congested airports, slots become a valuable resource that determines whether a market can actually be entered.

Key concepts

• Economic regulation: The set of rules and sanctions that aim to control or steer the structure of the industry or airlines' behaviour with economic consequences.
• The Paris Convention (1919): The agreement that granted countries national sovereignty over the airspace above their land territory and declared airspace a natural resource.
• The Chicago Convention (1944): The international talks that reached no multilateral consensus on economic issues but led to the founding of ICAO and the adoption of the safety annexes.
• Bilateral Air Services Agreement (BASA): An agreement signed by states that makes air transport possible between two countries and regulates the market of this country pair.
• Principle of reciprocity: The usually equal and mutual sharing of rights between two countries in bilateral agreements.
• Traffic rights: Eight rights that determine how flights between countries can be operated; the 3rd and 4th are the most basic and the 8th is the cabotage right.
• The 5th traffic right: The right to carry traffic between two foreign countries on a flight that starts or ends in one's own country; it has intermediate, beyond and behind point forms.
• Route schedule: The part of a BASA that lists the points granted market access.
• Memorandum of understanding (MoU): A document used to change access points without changing the agreement itself.
• Market access: The regulation that determines between which country and airport pairs flights can be operated.
• Market entry: The regulation that determines how many airlines can enter a market opened by access and which characteristics they must have.
• Designation: A country naming the airline that will use the market entry right and notifying the other party.
• Ownership and effective control: The regulation that determines which country's nationals will hold a substantial part of the airline's ownership and the effective role in its management.
• Airport slot: An allocation giving the right to land and take off in a given time period and to use all related airport services.

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Sources used:
Gerede, E. (2016). Havayolu işletmeciliğini etkileyen ekonomik düzenlemeler. E. Gerede ve A. E. Demirci (Ed.), Havayolu Yönetimi (3. Ünite) içinde. Eskişehir: Anadolu Üniversitesi Yayınları.

📚 Academic Use Note: This content is a supporting learning resource prepared with reference to a published course text; it does not replace textbooks, lecture notes or your instructor's teaching. The sources to be used for exams and assessments are your course's official curriculum and the sources recommended by your instructor. The simplifications and interpretations in the narration are for teaching purposes; TT Institute Academy cannot be held responsible for any consequences arising from possible errors, omissions or outdated information. The legal regulations, institution names and ratios in this lesson belong to the period in which the source was published.

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