key: cord-0072628-4qpiie4h
authors: Lee, Jae Woon
title: Government Bailouts of Airlines in the COVID-19 Crisis: Improving Transparency in International Air Transport
date: 2021-11-18
journal: nan
DOI: 10.1093/jiel/jgab035
sha: 95c8d0cac834dfc387297da6076f7c9e6a4ded44
doc_id: 72628
cord_uid: 4qpiie4h

Coronavirus disease 2019 (COVID-19) presents the airline industry with unprecedented challenges that constitute no less than an existential threat. Given airlines’ importance in the economy, which includes providing connectivity, preserving jobs, and supporting related sectors, many governments have given local airlines enormous financial support since early 2020. Although it is well understood why many governments cannot allow their major airlines to shut down, the ongoing massive government bailouts can distort competition in the airline industry. This article analyzes various government bailouts of airlines in the COVID-19 crisis and discusses how these bailouts are creating a growing problem with fair competition in the international air transport market. While examining the unique regulatory framework of international air transport, the article recommends multilateral, bilateral, and unilateral rule-based approaches that can better serve economic governance of international air transport in the post-COVID-19 era. Although this article does not suggest major legal reforms, which would be too ambitious and unrealistic at this stage, transparency can be significantly improved through the recommendations provided here.

The coronavirus disease 2019 (COVID-19) pandemic hit the aviation industry hard, if not the hardest of all industries. In 2019, aviation's global economic impact was USD 3.5 trillion with 4.5 billion passengers carried, USD 6.5 trillion worth of cargo handled, and 46.8 million commercial flights scheduled. 1 But in 2020, aviation's global economic impact more than halved as we witnessed a USD 1.8 trillion decline in economic activity supported by aviation. 2 The cargo business has survived the crisis much better than the passenger business. While the global air freight markets showed that demand for air cargo decreased by 10.6% in 2020, 3 global passenger traffic decreased by 60% in 2020, compared to 2019 levels. 4 For an international traveler, the fear of getting infected with COVID-19 during air travel or in a foreign country is one deterrent, but mandatory quarantine is a more significant barrier. In a survey by the International Air Transport Association (IATA), 83% of respondents said they would not travel if it required quarantine. 5 With the vaccine rollout and increased testing capacity, airlines are calling to replace quarantine requirements with digital health passports that would store passengers' vaccine and testing histories. 6 However, it is expected that governments will not move fast until they regain enough confidence to roll back quarantine and other border controls. 7 Thus, the harsh reality has pushed back expectations of a meaningful recovery in global travel anytime soon. 8 With the direct impact of COVID-19 and the slow recovery, airlines face an existential threat. This capital-intensive and labor-intensive industry continues to incur high fixed and variable costs including aircraft leases, airport parking, and employee wages despite the devastating market conditions. Since almost no airlines could survive without financial support amid the COVID-19 slump, airlines have been calling on governments for enormous bailouts, and states have been taking drastic measures. There is ongoing debate as to whether, to what extent, and how long governments should bail out the airline industry. 9 Regardless of the debate, the diverse forms of bailouts at a wide range of scale have a profound effect on the ecosystem of the airline industry.

This article aims to analyze government bailouts of airlines in the COVID-19 crisis, to identify problems resulting from those bailouts, and to recommend better economic governance of the airline industry. The following analysis starts by briefly introducing the governance structure of international air transport in Section II and the current international conventions relating to airline subsidies in Section III. Section IV provides useful insights on government bailouts of major international airlines, and Section V discusses how the bailout has changed the landscape of the international aviation market and how favoritism has grown during the COVID-19 slump. Section VI provides recommendations for better economic governance of the aviation market, and Section VII concludes.

International aviation is recognized as a field in which multilateralism works relatively well. 10 Since multilateral coordination makes the operation of air travel more efficient, all states have an incentive to cooperate. 11 This explains why the International Civil Aviation Organization 3 IATA, '2020 Worst Year for Air Cargo Demand Since Performance Monitoring Began', https://www.iata.org/en/pressroom/ pr/2021-02-03-01/ (visited 25 September 2021). 4 ICAO, 'Effects of Novel Coronavirus (COVID-19) on Civil Aviation: Economic Impact Analysis' , https://www.icao.int/ sustainability/Documents/COVID-19/ICAO_Coronavirus_Econ_Impact.pdf (visited 25 September 2021). 5 IATA, 'Steps Forward for Testing to Reopen Borders Without Quarantine' , https://www.iata.org/en/pressroom/pr/2020-11-23-02/ (visited 25 September 2021). 6 IATA, 'IATA Travel Pass Initiative' , https://www.iata.org/en/programs/passenger/travel-pass/ (visited 25 September 2021). 7 Bloomberg, 'Brace Yourself: Long-Haul Travel May Not Get Going Until 2023', https://www.bloomberg.com/news/ articles/2021-02-04/put-away-the-suitcase-vaccines-won-t-bring-back-overseas-travel (visited 25 September 2021). 8 Ibid. (ICAO), the United Nations' special agency, has sponsored so many multilateral aviation law treaties and why a large number of states are parties to those treaties. 12 Starting with the Convention on International Civil Aviation (Chicago Convention 1944), the overarching treaty for international aviation that also created ICAO, many multilateral treaties related to aviation safety, aviation security, and airline liability have received strong support from states. However, the economic governance of air transport by multilateral treaties has never been successful. This topic dates back to 1944, a year before the end of World War II, when the International Civil Aviation Conference was held in Chicago. On the invitation of President Franklin D. Roosevelt, states gathered to discuss the principles and methods of adopting a new aviation convention. 13 Although much of the Chicago Conference turned on the question of how to govern the multilateral exchange of economic rights for international air transport, states were unable to reach a meaningful compromise. 14 This is illustrated by Article 6 of the Chicago Convention, which confirms that there are no universal freedoms and that 'special permission or other authorization' is required for international air transport.

Apart from the Chicago Convention 1944, states at the Chicago Conference adopted two separate and distinct instruments: the International Air Services Transit Agreement (often called the 'Transit Agreement') and the International Air Services Transport Agreement (also called the 'Transport Agreement'). Largely because the Transit Agreement does not grant any commercial rights (only dealing with the freedoms of overflight and technical landing), the number of contracting states is relatively high, at 133 states. 15 On the other hand, there are only 11 contracting states to the Transport Agreement, which involves commercial freedoms, meaning that it has had little practical significance. These commercial freedoms include the freedom to take on and put down passengers and cargo (or both) between home state and other states as well as the freedom to access to the third country but are only in effect vis-à-vis the 11 parties.

Since 1944, when the states attending the Chicago Conference failed to agree upon a comprehensive multilateral solution to the economic governance of international aviation, commercial rights for international air transport have been negotiated largely on a bilateral basis. 16 The USA and the UK succeeded in reaching an agreement in 1946 in Bermuda; this protectively written bilateral air services agreement (ASA), the so-called Bermuda type 1 agreement, became the prototype for many bilateral ASAs throughout the world. 17 ASAs stipulate mutual restrictions on market access that include the designation of airlines by other states, nationality requirements for designated airlines, the routes that designated airlines are entitled to fly, frequency, and capacity. 18 Since the late 1970s, when 'deregulation' and 'liberalization' became key words in international air transport, ICAO has made several attempts to initiate global multilateral governance of the economic aspects of air transport. 19 However, ICAO could not build sufficient consensus on international economic rules for air transport that a majority of countries would be willing to adopt. Most recently, ICAO's Air Transport Regulation Panel, at a meeting in April 2019, concluded that international agreements on market access and air cargo liberalization could not be developed in the short term. 20 In the 1990s, there was an opportunity to establish global governance of air transport with the General Agreement on Trade in Services (GATS) under the World Trade Organization (WTO). However, the Annex on Air Transport Services excluded traffic rights and services directly related to traffic, the core of the air transport services, 21 and confirmed that GATS would not revoke or otherwise affect bilateral ASAs to which a member state was a contracting party. 22 There are three main reasons why coverage of air transport services was avoided when GATS was finalized in 1994. First, the Uruguay Round negotiators understood that international air transport was governed by an intricate system of then over 3500 bilateral ASAs based on a reciprocal exchange of rights between states. 23 Second, the principles of non-discrimination under the WTO system (most-favored nation (MFN) treatment and national treatment) contrasted with the existing bilateralism in air transport based on bilateral reciprocity. 24 Application of MFN to the air transport sector would effectively mean that if traffic rights were granted to one party under the WTO agreement, all parties to the agreement would enjoy the same benefits or rights, which was considered to be 'radical reform' . 25 It was also widely held at the time that implementing MFN could hold back the ongoing liberalization of air transport between likeminded states. 26 Third, neither states nor airlines wished to see a dual regulatory regime emerge for air traffic rights, in which some states applied GATS obligations while others held to existing bilateral ASAs. 27 In other words, both ICAO and WTO had chances to assume global governance of air transport, but states decided to use ASAs as the principal instruments for dealing with the economic aspects of air transport.

The economic aspects of air transport are excluded not only from multilateral aviation treaties but also from Free Trade Agreements (FTAs). Air transport was not included in the FTA that the USA and Canada signed on 3 October 1987, one of the first bilateral FTAs, even though it was then 'the most liberal agreement between the most cordial of trading partners' . 28 Although air transport has never been treated by governments as an ordinary part of international trade, the correlation between FTAs and ASAs has been noted. For instance, the Association of Southeast Asian Nations (ASEAN)-China FTA was the explicit justification for the ASEAN-China Regional Air Services Agreement that was subsequently adopted in 2010. The 2007 ASEAN-China Aviation Cooperation Framework stated that the ASEAN-China Regional Air Services Agreement should be concluded by 2010 'to support the realisation of the ASEAN-China Free Trade Agreement in 2010 [and] to implement the agreement thereafter in line with the establishment of the ASEAN-China FTA' . 29 The ASEAN-China Free Trade Area came into effect on 1 January 2010, and the Air Transport Agreement between ASEAN and China was adopted in November 2010. 20 International air transport has stood outside of the body of foreign investment law, too. 30 Since 1990, the field of foreign investment law has expanded dramatically. Although there are more than 3300 entries in the directory of investment treaties, 31 investment treaties generally exclude air transport activities from their coverage. 32 In brief, global economic governance is limited in the field of international air transport. Neither ICAO nor the WTO possesses a regulatory mandate with respect to the economic aspects of air transport, although the author will suggest that ICAO could play a revitalizing role in Section VI.

One may expect the WTO, as primary organization for subsidies disciplines, would regulate airline subsidies even if indirectly. However, government bailouts of airlines are doubly exempt from the WTO rules. First, as noted above, air transport services are excluded from GATS. Second, subsidies to service sectors are excluded from the WTO rules. Thus, the issue of fair competition by state-subsidized airlines is not squarely confronted at the WTO, in stark contrast to the aircraft manufacturing sector. 33 Article XV of GATS discusses subsidies to the service sector generally without setting out specific rules and simply proposes developing multilateral disciplines on such subsidies in future negotiations. However, no meaningful progress has been made so far. After examining the multiple factors affecting the negotiations on subsidy disciplines in the service sector, Sauvé and Soprana predict that the WTO members are unlikely to reach a consensus on this matter anytime soon. 34 In the context of the COVID-19 crisis, it is worth noting the view of Horlick and Clarke, who wrote about subsidies after the financial crisis in 2007-09. They argue that '[even] if there had been any rules disciplining subsidies in the financial services sectors, they would have been ignored, as the disciplines on domestic subsidies for goods were often ignored during the crisis' . 35 Although we cannot completely rule out the possibility of the WTO playing an expanded role on governments' financial contributions, in all likelihood, there will be no change to the current framework in the near future.

There are some openings, however, for addressing such issues in other fora, including those noted above, given their foundations for concepts and information sharing.

Although ICAO has only played a limited role in the economic sphere of international air transport thus far, the Chicago Convention empowered the ICAO Council to 'request, collect, examine and publish information relating to the… particulars of subsidies paid to airlines from public funds' in Article 54 paragraph (i): 30 Article 54 (Mandatory Functions of Council) The Council shall: … (i) Request, collect, examine and publish information relating to the advancement of air navigation and the operation of international air services, including information about the costs of operation and particulars of subsidies paid to airlines from public funds. 36 The origin of this language is unknown, and there is no record so far of the ICAO Council making a decision under paragraph (i) of Article 54. 37 However, Allan I. Mendelsohn, a former US Deputy Assistant Secretary of State (Transportation Affairs), argues that 'the framers of the Chicago Convention … expressly desired and authorized the international community to keep careful track of "the particulars" about what subsidies were paid by which governments' . 38 Indeed, the language of Article 54 paragraph (i) is straightforward and clearly charges ICAO with monitoring subsidies to airlines. However, the ICAO Council's monitoring function has been dormant since 1944.

In addition, the ICAO Council has notable permissive functions under Article 55 of the Chicago Convention. The Council may conduct research into all aspects of air transport, communicate the results of its research to the contracting states, and facilitate the exchange of information on air transport between contracting states. 39 The Council may also study any matters affecting the operation of international air transport and submit related plans to the ICAO Assembly. 40 Similar to the monitoring function, however, the ICAO Council has not proactively used its research function thus far.

One practical difficulty is that there is no widely accepted legal definition of 'subsidy' in the context of airlines. Although the 1995 Agreement on Subsidies and Countervailing Measures (the SCM Agreement) defined a subsidy for the first time in the history of the General Agreement on Tariffs and Trade and WTO, the SCM Agreement applies only to subsidies on trade in goods and does not apply to subsidies to service providers and consumers. Thus, it is not applicable to airlines' air transport services. But since the SCM Agreement undoubtedly is the most authoritative multilateral agreement in the area of subsidies, its definition and interpretation of subsidies undoubtedly provide a useful guideline. 41 To borrow the definition of the SCM Agreement, airline subsidies are a financial contribution by a government or direct government intervention in the market that serves to benefit the airline.

Under which circumstances the SCM Agreement applies to state-owned enterprises is a hotly debated question in legal academia. 42 Nonetheless, the WTO Appellate Body in US-Large Civil Aircraft (2nd complaint) notes that 'one of the examples of a "direct transfer of funds" given in Article 1.1(a)(1)(i) [of the SCM Agreement] is that of "equity infusion", which refers to situation in which a government "purchases" something (i.e. shares in a company)' . 43 Similarly, the WTO Appellate Body in Korea-Commercial Vessels concluded that debt-for-equity swaps are a financial contribution under the SCM Agreement. 44 Thus, equity infusions and debt-forequity swaps by a 'government or any public body' can be a 'financial contribution' that meets the definition of subsidy under the SCM Agreement. In the absence of a clear definition of airline subsidies, the SCM Agreement and its interpretations can shed light on the question of definition. 45

Government bailouts have not fallen under the scope of ASAs with a few exceptions. When the USA and the UK adopted the first bilateral ASA in 1946 (an agreement whose language was subsequently followed by many bilateral ASAs throughout the world), 46 they did not address fair competition. 47 In the 1960s, however, language about fair opportunity, which broadly includes the concept of subsidies, began to regularly appear in ASAs. 48 Typical wording is that '[T]here shall be a fair and equal opportunity for the designated airlines of both Contracting Parties to operate the agreed services on the specific routes between their respective territories' . 49 It is important to note that this language originated in the Preamble of the Chicago Convention, which uses the words 'equality of opportunity' . The 'fair and equal opportunity' clause was understood merely to mean the balanced operation under equal circumstances by airlines from the contracting states.

In the early 1990s, a new perspective on bilateral ASAs was offered through what are called open skies agreements. The pioneering agreement was concluded between the USA and the Netherlands in 1992. 50 Since 1992, more states have started to shift from a protectionist aviation policy to a more liberalized stance by concluding open skies ASAs. The open skies regime removes restrictions on market access such as routes, capacity, and frequency. As the market was being deregulated, the principle of fair competition became more important. Consequently, the 'fair and equal opportunity' clause was replaced with new wording: 'fair and equal opportunity to compete' . Typical language is as follows: '[E]ach Party shall allow a fair and equal opportunity for the airlines of both Parties to compete in providing the international air transportation governed by this Agreement ' . 51 Under open skies ASAs, therefore, the focus is no longer ensuring that each side has the same number of available air services but rather considering whether each side has fair and equal conditions under which they may operate their services. 52 In other words, the key question is whether there is a level playing field. 43 ; see also para 7.420 ' …Equity infusions and debt-for-equity swaps have the same effect, in the sense that equity changes hands against consideration in both cases (and subsidization arises if the amount of consideration is less than the market would have provided). Also, a debt/equity swap comprises an element of equity infusion. ' 45 Lee, above n 41, at 903. 46 Since the early 2000s, the European Union (EU) has openly objected that the current ASAs are not capable of dealing with concerns about subsidies. Under this position, the EU started to amend bilateral ASAs by inserting a specific subsidy provision that was first adopted in its agreement on air transport with the USA in 2007. 53 Article 14 of the Agreement (Government Subsidies and Support) explicitly discusses airline subsidies. In brief, the Agreement recognizes that government subsidies can adversely affect international air transport competition and authorizes parties to submit 'observations' to one another if either party considers or provides a subsidy with potential or actual adverse effects. However, the Agreement does not provide any measure for redress. In other words, the only option is carrying out negotiations through 'observations' unless the aggrieved party were to take the route of arbitration or termination. 54 The EU-Canada Air Transport Agreement, signed in 2009, deals with airline subsidies more comprehensively in Article 14 (Competitive Environment). 55 If one party has concerns about the effects of a subsidy, it can refer those to a Joint Committee that is to be established under the Agreement. If no consensus is reached in the Joint Committee, the aggrieved party may take unilateral action. Paragraph 5 of Article 14 states that '[A]ny action taken pursuant to this paragraph shall be appropriate, proportionate and restricted with regard to scope and duration to what is strictly necessary. It shall be exclusively directed towards the entity benefiting from the conditions' . Even though the EU-USA and EU-Canada ASAs include subsidy-specific provisions, they are exceptional, together with the ASEAN-China ASA, which will be discussed separately in Section VI. Most ASAs do not address subsidies directly and only contain the vague 'fair and equal opportunity' clause.

Many countries have provided pandemic-related government support to their airlines since early 2020. These governments' financial support can be broadly categorized as follows: (i) loans and loan guarantees, (ii) equity acquisitions, (iii) hybrids (a mix of debt and equity financing), (iv) wage subsidies, and (v) flight subsidies. There are also indirect financial assistance measures such as tax exemptions, tax deferments, and waivers of airport-related charges. Some governments have taken more than one measure. To be clear, the categorization in this section is not complete, and the list of bailout cases is not exhaustive. Since there is no centralized source of information (an issue that will be discussed in Section V), the bailouts are ongoing, and some cases are not covered in the English-speaking media or legal circles, the author acknowledges that cases tend to be underreported. It is also beyond the scope of this article to provide a detailed analysis of the different types of financing provided by government or government-backed financial institutions; however, the information below provides a useful snapshot of the diverse bailouts that governments have been funding.

The most accessible form of external finance is a loan from a financial institution. Larger companies (such as airlines) that need more loan capital can also tap the loan capital markets for funds in a normal situation. However, the COVID-19 crisis affected the airlines' credit rates, 53 Air Transport Agreement Between the United States of America and the European Community and Its Member States and they needed immediate financial support to stay afloat. Thus, multiple governments have decided to extend loans or guarantee loans in different forms to the airline industry or specific airlines through state-owned banks or state-owned development banks (See Table 1 ).

State ownership is a common practice in the airline industry. In a 2016 study conducted by ICAO, 225 of 395 airlines (57%) worldwide were wholly or partially state-owned (27% and 30%, respectively). 56 In the past two decades, however, privatization has been one of the main factors driving the restructuring of the global aviation industry. 57 Facing unprecedented challenges during the COVID-19 crisis, many airlines either became state-owned for the first time or saw governments increase their stake in response (See Table 2 ).

Some governments bailed out their airlines in the form of 'hybrid' instruments that combine features of both debt and equity (See Table 3 ). These instruments have grown so complex that it has become virtually impossible to classify them consistently. 58 Broadly speaking, however, convertible bonds and debt-for-equity swaps were used in the bailout. Under a convertible bond scheme, the government is given bonds upon providing cash capital. These bonds are usually limited by a maturity period. During the maturity period 56 (e.g. 10 years), the government will receive periodic interest payments. The government can choose to convert the bond into stock during that period; otherwise, it will be paid the face value of the stock or the principal (with the exception of Singapore Airlines, which issued 'mandatory convertible bonds'). That choice will depend on the value of shares at the end of the maturity period; that is, if the value of the promised number of shares is higher than the total loan, it is likely the government will convert those bonds. In essence, conversion occurs when the company performs well. A debt-for-equity swap is a way to restructure the debts of a financially distressed company. 59 It presupposes that the company is not economically distressed but merely financially distressed. 60 Even if an airline is cash-flow insolvent, it can still be economically viable and thus worth saving.

One of the main goals of government bailouts of airlines is protecting the jobs that airlines provide. As a labor-intensive industry, major airlines have tens of thousands of employees. Before COVID-19, 3.6 million people worked for airlines. 61 In the USA alone, airlines cut 90,000 full-time positions in 2020. 62 Wage subsidies have been implemented in two ways. Some governments have given airline employees subsidies directly. For instance, Singapore, Hong Kong, and Denmark have taken this approach (See Table 4 ). Other governments have taken the indirect approach of financially supporting airlines on the condition of keeping employees on the payroll. The US Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the most noteworthy. This $2.2 trillion economic stimulus bill was enacted in response to the economic fallout of the COVID-19 pandemic. The CARES Act authorizes the US Department of the Treasury to provide up to $32 billion to compensate aviation industry workers and preserve jobs. 63 Funds received by these airlines and contractors under the program must exclusively be used to continue the payment of employee wages, salaries, and benefits. 64 In exchange for funds under the program, airlines were prohibited from laying off or involuntarily furloughing workers before the end of September 2020. 65

Ensuring essential connectivity during the pandemic is another goal for government bailouts of airlines. Since the number and frequency of aviation connections are strongly correlated with economic growth, national air transport development policies are often centered on ensuring domestic and international aviation connectivity. 66 Apart from the economic rationale, many governments subsidize airline connections to nonprofitable destinations to provide essential services under public service obligations. 67 Hence, some governments provided flight subsidies to maintain essential connectivity during the pandemic (See Table 5 ).

The ongoing government bailouts have more significant implications for the international aviation market than domestic aviation markets. Despite their obvious connections, the international aviation market and domestic aviation market have a significantly different regulatory structure. Two regulatory hurdles for domestic aviation markets are 'nationality rules' and the prohibition of cabotage rights. Nationality rules stipulate that an airline must be substantially owned and effectively controlled by the citizens of the airline's home state. 68 Most countries prohibit cabotage or foreign airlines moving passengers or cargo between two points within their territory. One exception is the EU, which created a single aviation market through adopting a series of laws that allow EU community carriers to exercise the same rights as national carriers. 69 For the rest of the world, foreign airlines cannot enter domestic aviation markets. Thus, the level of competition in domestic aviation markets is predominantly determined by the sector-specific regulations of the respective government. The competitive dynamics of the international aviation market are different from those of domestic aviation markets, and the international aviation market is more competitive than domestic aviation markets. Although an ASA decides the level of competition (i.e. the number of airlines and the number of flights that may operate agreed-upon services between the two states), a passenger can take transfer flights. For instance, although direct flights between Singapore and London are regulated by the UK-Singapore ASA, there are multiple options for traveling from Singapore to London on other airlines (e.g. via Dubai, Doha, Paris, Amsterdam, or Bangkok). Therefore, massive government bailouts can make winners and losers in the international aviation market. While airlines with strong government support can survive or even grow in the COVID-19 slump, airlines that do not receive (sufficient) financial support will struggle to overcome the distortion of the competitive conditions.

The competitive dynamics of the international aviation market explain why countries that contain international aviation hubs have proactively bailed out their national carriers. For instance, when Singapore Airlines received SGD 19 billion worth of assistance, the financial assistance given by other governments paled in comparison. The CEO of Temasek, an entity wholly owned by the government of Singapore that holds a majority of Singapore Airlines shares, said, 'This transaction will not only tide SIA [Singapore Airlines] over a short term financial liquidity challenge, but will position it for growth beyond the pandemic' . 70 Indeed, a study by Abate, Christidis, and Purwanto confirms the close relationship between governments' financial support and the international passenger market in those countries during the COVID-19 crisis. The study shows that countries that rely on international passengers for revenue and traffic tend to provide more government aid while countries that generate most of their passengers and revenue in the domestic market do not appear to provide much aid. 71 Since domestic passenger flights are in general free from quarantine requirements, bigger domestic aviation markets have the advantage of recovering before international borders are fully opened. 72 By the same token, countries and airlines that heavily rely on international passengers will have to prepare for COVID-19 to have a longer impact.

Of the government bailout measures previously discussed, state ownership, either by direct equity acquisition or by hybrid approaches, can make the government more interventionist. It is important to recall that the airline industry has largely been in the process of privatization since the 1980s. Under the view that state ownership would lead to inefficiency and a greater likelihood of failure in competition with private firms, 73 many of the world's formerly stateowned airlines privatized. 74 To a certain extent, however, COVID-19 is reversing that trend by revitalizing state ownership of national airlines.

A difficult question for governments is how to maintain fair competition in moments of heightened nationalization. Governments are under pressure to shield airlines in which they hold equity from competition to make those airlines profitable. Favoritism for state-owned airlines is expected and could lead governments to discriminate against foreign airlines as well as domestic airlines in which they do not hold a stake. 75 The issue of 'competitive neutrality' could have significant implications on competition in the aviation market. The Organisation for Economic Co-operation and Development (OECD) defines competitive neutrality as 'a legal and regulatory environment in which all enterprises, public or private, face the same set of rules, and government ownership or involvement does not confer unjustified advantages on any entity' . 76 Although a full analysis of competitive neutrality is beyond the scope of this article, it is worth noting that the OECD Council recently adopted the 2021 Recommendation on Competitive Neutrality. 77 In essence, governments' increasing interventions could make business less dynamic, and favoritism could distort competition. Regardless of the actual distortion, this is very likely to prompt foreign states or airlines to claim that government interventions distort fair competition, claims that will be denied by the other side. The fundamental problem is uncertainty about which laws or principles apply to this issue. Since governments' financial support to the airlines remains untouched by rule-based measures (except in the EU, as discussed in the following section), this could become a more serious problem. While noting such challenges, the next section will make practical recommendations.

When the international aviation market eventually rebounds, the various pandemic-related government bailouts will cause controversies. One of the major problems with the government bailouts of airlines is the lack of transparency. There is no centralized place for other governments and the public to access information, which is scattered and often underreported. As a consequence, controversy about the facts (i.e. whether and to what extent the airlines in question have received bailouts from their governments) is expected in the future. A similar controversy was observed in 2015 when US carriers accused Gulf carriers of receiving subsidies. As there is no neutral body or authoritative organization to examine the factual grounds of airline subsidies, such conflicts continue until the relevant parties reach a bilateral compromise. 78 ICAO is the best-positioned organization to serve as a central repository for this information. Not only does it have a mandate under the Chicago Convention, but it also has considerable experience with requesting, collecting, examining, and publishing information from member states in other fields, such as aviation safety. 79 Notably, ICAO has taken the lead in responding proactively to COVID-19. Among other activities, the ICAO Council, through the Council Aviation Recovery Task Force, adopted a report and recommendations for helping the aviation sector make a better recovery. 80 Indeed, the COVID-19 crisis should be seen as an opportunity to design better governance for the future aviation market, and ICAO should take the helm on the issue of government bailouts by activating Chicago Convention 1944 Article 54 paragraph (i).

To be clear, the Chicago Convention 1944 cannot completely solve the unfair competition problems arising from the subsidies. The Chicago Convention is silent on what steps ICAO or member states can take when they find subsidies. However, vesting ICAO with the responsibility of regularly monitoring all forms of alleged and actual subsidies provided to airlines by governments around the world would significantly increase transparency.

As discussed in Section III, nearly all ASAs do not have a subsidy clause but only the ambiguous 'fair and equal opportunity' clause. The COVID-19 pandemic presented the aviation industry 77 with unprecedented challenges and, at the same time, provided an opportunity to review what changes may be needed in the aviation market. For a more rule-based approach, government negotiators should add a subsidy-specific clause to ASAs. The best practice among current ASAs is the Air Transport Agreement that China and the ASEAN adopted in 2010. Specifically, Article 10 (Safeguards) of the Agreement stresses the transparency of subsidies: 2. The grant of state aid and/or subsidy shall be transparent among the Contracting Parties, and shall not distort competition among the designated airlines of the Contracting Parties. The Contracting Parties concerned shall furnish other interested Contracting Parties, upon their requests, with complete information on such grants and any revision to or extension of such grants. Such information shall be treated with the utmost sensitivity and confidentiality. 81 Essentially, this approach is two-fold: information sharing needs to be transparent, and subsidies must not distort competition. 82 Thus, a subsidy is allowed as long as it is granted transparently and its level does not jeopardize other airlines of the contracting parties. Rather than rejecting all subsidies and thereby encouraging secretive behavior and misunderstanding, the states are encouraged to communicate with each other about the exact nature of their subsidy programs. Support for dialogue enables better understanding between parties, which leads to better solutions. In addition, this provision implies that transparency can deter unfair subsidies in the international aviation market.

Most recently, the EU-Qatar Air Transport Agreement, which was initialed in March 2019 but has yet to be published, made a significant step forward by including definitions of discrimination and subsides. 83 Gergely notes that provisions on fair competition in the Agreement are in line with EU laws on subsidies, state aid, and competition. 84 Interaction between the EU's rules and bilateral ASAs to which the EU is a party will be further examined in the section below.

C. Unilateral: the 'Brussels effect' in international air transport Anu Bradford, the author of The Brussels Effect: How the European Union Rules the World, defines the 'Brussels effect' as 'the EU's unilateral ability to regulate the global marketplace' . 85 There are two variants of this: the de facto Brussels effect, which describes how global companies respond to EU regulations by adjusting their global conduct to EU rules, and the de jure Brussels effects, which refers to the adoption of EU-style regulations by foreign governments. 86 The broader definition of the de jure Brussels effect includes 'the diffusion of EU norms through international treaties and institutions' . 87 The Brussels effect has been particularly powerful in the field of aviation regulation. Two good examples are the application of the EU Emissions Trading Scheme (EU ETS) to international aviation and the EU's action in the area of air passenger rights. 88 The EU ETS, which is 'a cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions', 89 was a catalyst of the Carbon Offsetting and Reduction Scheme for International Aviation, a global market-based scheme developed by ICAO in 2016. 90 Since the EU enacted EU 261/2004, 91 a regulation that deals with compensation and assistance for passengers who are denied boarding or whose flight is cancelled or delayed for a long time, more and more states have been adopting passenger protection laws, which many jurisdictions have modeled on EU 261/2004. 92 Along with environmental protection and consumer protection, fair competition is another well-established norm in the EU. The EU debate on fair competition in international air transport was linked to the objective of establishing a single aviation market. 93 One of the reasons the EU gradually liberalized its air transport sector from 1987 to 1997 was to enable the heavily subsidized national flag carriers to restructure their operations before competing on a level playing field. 94 Article 107 of the Treaty on the Functioning of the European Union generally prohibits state aid for specific undertakings with multiple exceptions. The main purpose of Article 107 is to maintain fair competition between the EU member states.

Recognizing that EU airlines compete with airlines from outside the bloc that benefit from subsidies, the EU introduced Regulation 868/2004, 95 which aimed to protect EU airlines against such subsidies. Modeled on the SCM Agreement, the essential requirements for action were the existence of a subsidy and consequent injury to the EU airline industry. However, it is both difficult to detect a subsidy and extremely complicated to prove injury. These practical difficulties explain why Regulation 868/2004 did not have a meaningful effect. 96 In the 15 years that the Regulation was in force (i.e. from 2004 until 2019, when it was eventually repealed), it was never applied. 97 Regulation 868/2004 was replaced by Regulation 2019/712, which entered into force on 30 May 2019. 98 Although Regulation 2019/712 was not intended to deal with pandemic-related subsidies, it has become highly relevant in the post-COVID-19 era. Regulation 2019/712 addresses several deficiencies of Regulation 868/2004. 99 One important innovation is that Regulation 2019/712 regulates its interface with the ASAs concluded by EU member states (or the EU as a party) with non-EU countries. Unlike Regulation 868/2004, which gave priority to ASAs, Regulation 2019/712 gives the European Commission discretion to either conduct an investigation under the Regulation or to address the issue in the context of its ASA with the non-EU country concerned.

Proceedings of the International Conference on Civil Aviation

Public International Air Law (Montreal: Institute of Air and Space Law, 2008) 25, 29. 15 For the details, see Jae Woon Lee

Diederiks-Verschoor, An Introduction to Air Law, 9th revised ed. (Alphen aan den Rijn: Kluwer Law International, 2012) 48. 19 ICAO has held six Air Transport Conferences

International Air Law and ICAO

Unravelling Open Skies

Chicago Convention Article 55 (c)

Chicago Convention Article 55 (d)

Airline Subsidies: Can the Law Play a Role in Regulating Them?' 52

Making the WTO (Not So) Great Again: The Case Against Responding to the Trump Trade Agenda Through Reform of WTO Rules on Subsidies and State Enterprises

Disciplines on State-Owned Enterprises in International Economic Law: Are We Moving in the Right Direction?' 19

Regulating the Visible Hands: Development of Rules on State-Owned Enterprises in Trade Agreements

Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy, Subtitle B-Air Carrier Worker Support, Section 4112

Understanding the Impact of Liberalisation in the EU-Africa Aviation Market

Determinants of European PSO Airline Efficiency -Evidence from a Semi-Parametric Approach

The Emerging Lex Aviatica

Singapore Airlines to Issue S$5.3 Billion in New Equity and Raise up to S$9

Government Support to Airlines in the Aftermath of the COVID-19 Pandemic

Privatising the UK's Nationalised Industries in the 1980s

ASEAN Multilateral Agreement on the Full Liberalisation of Passenger Air Services, signed in Brunei Darussalam on 12

Each Contracting Party shall have the right to withhold, revoke, suspend, impose conditions on or limit the operating authorisations with respect to an airline designated by another Contracting Party temporarily, should there be reasonable ground to believe that unfair or anti-competitive practices related to paragraphs 1 and 2 of this Article committed by a Contracting Party or its designated airline seriously affect the operation of its designated airline

European Commission

The Brussels Effect: How the European Union Rules the World

• Government Bailouts of Airlines in the COVID-19 Crisis

What Does Europe Do About Fair Competition in International Air Transport? A Critique of Recent Actions

EU Emissions Trading System

Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA)

establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights and repealing Regulation (EEC) No 295/91 O

Global, Regional and National Air Passenger Rights -Does the Patchwork Work?

concerning protection against subsidization and unfair pricing practices causing injury to Community air carriers in the supply of air services from countries not members of the European Community

European Parliament and Council Regulation (EU) 2019/712 of 17 April 2019 on safeguarding competition in air transport and repealing Regulation (EC) 868

Lykotrafiti argues that Regulation 2019/712 and fair competition clauses in ASAs are 'interlocking', which is to say that the Regulation reinforces compliance with the fair competition commitments in the ASAs and, in the event of default, with the relevant enforcement mechanisms and redressive measures. 100 Considering the EU's clout in international air transport, Regulation 2019/712 could add to the Brussels effect. In doing so, the goal should be to maintain fair competition rather than to protect EU airlines. The legitimacy of the EU regulations affecting aviation, such as EU ETS, passenger protection, and the state aid rules, stems from the EU's strictness towards its own airlines. 101

It is well understood why governments have supported the airline industry during the COVID-19 slump. Connectivity is essential for trade and for the flow of people, and it will also be vital in repairing the economic and social damage that COVID-19 has caused. Apart from airlines' role in economic development, to a lesser extent, there is a notion that national carriers have played an important symbolic role. 102 For both economic and noneconomic reasons, many governments cannot allow their major airlines to shut down. Nevertheless, competition in the international aviation market can be distorted by the ongoing massive government bailouts, and governments should strike a balance between financial support to the airline industry and the need to maintain competition.Sauvé and Soprana concluded back in 2018 that 'prospects for the adoption of multilateral disciplines on services subsidies are generally grim', 103 and COVID-19 made those prospects even grimmer. Nevertheless, government bailouts of airlines are not (and should not) be entirely unregulated. Rule-based approaches with institutional mechanisms should be implemented to maintain fair competition in international air transport.To sum up, ICAO has a mandatory obligation to collect and publish information relating to airline subsidies, which could include most (if not all) bailouts that airlines have been receiving. ICAO's monitoring function should be reactivated. Bilateral ASAs will continue to be the principal regulatory framework for international air services. The new subsidy clause in ASAs can serve as a mechanism for reinforcing transparency. EU Regulation 2019/712 has the potential to augment the Brussels effect in international air transport in the post-COVID-19 era. This article does not recommend major legal reforms, which would be too ambitious and unrealistic at this stage. That said, transparency can be significantly improved by the recommendations provided. Transparency, a key principle of the system of trade, makes trade relations more predictable and legally certain and gives regulatory authorities more accountability and legitimacy. 104 100 Ibid, at 857-58. 101