24 October 2011

Lex Aviatica

'The Emerging Lex Aviatica' by Brian Havel & Gabriel Sanchez in (2011) 42(3) Georgetown Journal of International Law 639-672 argues that -
Since the advent of international commercial air travel, every airline has been straitjacketed by treaty-based restrictions which mandate that, in order to be eligible to provide international air services on behalf of its home state, it must be owned and controlled by citizens of the home states (or by the home state itself). This citizenship “purity” requirement, commonly referred to as the “nationality rule,” is reinforced by national laws requiring substantial (share) ownership and effective control of national air carriers by the home state or its citizens. The combined effect of these treaty and national law restrictions has been to prevent airlines from merging across borders or from establishing subsidiaries in other states. Consequently, airlines are locked out of transnational capital markets at a time when the global operating environment (including oil price spikes and lingering demand weakness in the wake of the Great Recession) has never been more challenging. In this Article, we identify an emerging normative transition, which we dub the “lex aviatica,” that is attempting to displace the treaty-based nationality rule. This transition is rooted in an evolving consensus among airlines and sympathetic government officials. Thus, in contrast to its conceptual antecedent, the “lex mercatoria,” through which the merchant class consciously broke with the common law, the emergent lex aviatica suggests a lawmaking process where not only is the state no longer the sole actor or regulator, but there is an appreciably more open-textured collaboration between merchant and state. The Article analyzes how this normative transition could transform the global regulatory order for international aviation, liberating commercial and investment opportunities that will allow the industry that globalized the world to become global itself. ...

Under a right of establishment regime, a state would no longer demand that an airline incorporated and having its principal place of business in its territory should also demonstrate the “purity” of its national ownership profile before being authorized to provide domestic or international services. But neither would airlines throw off all permanent regulatory connections to states, or procure phantom licenses from states in which they do little or no business — a crack in the commercial order that allowed flags of convenience to destabilize the global shipping industry.

Instead, each airline company will show a real regulatory link — a “strong link” or “corporate affinity” — to a state which provides the airline’s license and imposes safety and security oversight as well as labor, taxation, immigration, environmental, and other regulatory requirements. At minimum, affinity would be demonstrated by familiar corporate law tests like principal place of business, place of incorporation, place of central administration, and place of permanent residence.

The right of establishment can be exercised by any foreign national to acquire (or merge with) an airline in another state, or to set up a subsidiary of a foreign airline in another state, so long as the airline acquired or set up in the other state submits to the regulatory jurisdiction of that state.135 In a post-national regulatory environment, airlines may well have corporate affinity with several states and therefore require multiple licensing, or the parent company may hold a principal affinity with a single state and operate elsewhere through subsidiaries which themselves have an affinity with other states. The lex aviatica will evolve new models of airline licensing to reflect this altered commercial paradigm.

British Airways, exercising its new right of establishment, could organize a subsidiary in the United States (“BA-America”). BA-America would be a U.S. company licensed to provide both domestic (cabotage) and—post-nationality clause—international services under U.S. bilaterals. Additional ASA requirements, in particular that airlines have their principal place of business in and receive operating authority from the states which designate them to provide services under the treaties, would already be satisfied as a matter of corporate affinity. Or, under the same right of establishment, British Airways could acquire or merge with a standing U.S. air carrier, say its oneworld alliance partner American Airlines, without risk to the combined entity’s eligibility to serve international routes. Either option would allow British Airways to add a sizeable North American infrastructure to its longstanding European brand presence.

Even after the nationality rule has withered away, trade in air services would still be dominated by a bilateral system where traffic rights are assigned by sovereign fiat. While states have largely accepted the desideratum of more liberal external air transport policies, they have not yet stepped away from their directive role in bilateralism and toward multilateral fora such as the WTO.139 We are not convinced, however, that a razing of the bilateral system is needed before significant air transport globalization can occur. If the nationality rule is toppled by an emerging lex aviatica, the bilateral treaty system will, even without further change, be converted into a more spacious realm of investment and market opportunities. After all, as we have mentioned, if airlines are allowed to set up operations in strategically selected foreign states under nondiscriminatory legal regimes, they will be able to consolidate the bilateral market access opportunities negotiated by those states in order to build substantial transnational route networks.

Under bilateralism, for example, a merged multinationally owned airline comprising American Airlines, British Airways, and Japan Air Lines would still have substantial global reach across the European, North American, and Asia-Pacific markets. And the global marketplace would behave no differently in those circumstances than its domestic counterpart. Rival carriers in these regions would seek other merger partners or takeover targets in a bid to rationalize costs, pool resources, or combine route networks. Carriers with more modest ambitions would continue to serve regional networks or to provide point-to-point service on selected high-density long-haul routes. The commercially transformative difference would be that, released from the grip of the nationality rule, airlines could join the world’s other global manufacturing and service industries in using rights of establishment to circumvent national barriers to free trade. Abolition of the nationality rule, in fact, would also be a cost-efficient policy for states which are unwilling to tear down the entire bilateral system at the same time.
They conclude that -
The lex aviatica has emerged from the blended work of an engaged community of airline leaders, state officials, commentators, and other stakeholders. Its Grundnorm, borrowed from one of IATA’s populist shibboleths, is “airlines doing business like any other business.” To that end, this emerging normative order has destabilized the nationality rule in bilateral air services treaties, and has suggested a replacement paradigm that respects the regulatory role of the state using a right of establishment. Some of the lex aviatica is law already (where states have waived the nationality clause, or modified their inward investment rules, for example), but a good deal of it is law-in-themaking. As with its conceptual progenitor, the lex mercatoria of the medieval merchant class, it reflects a deep dissatisfaction with the burden of a commercial and regulatory environment that cannot sustain the needs of its principal participants. And like the lex mercatoria, this evolving post-national body of law is multipolar in its origins; there is no single authority or government responsible for its promulgation, but there are evident signs that some of the world’s most economically powerful states are actively contributing to its development. We cannot predict when we will cease speaking of the lex aviatica as a process of coming-to-be.

As with so many international legal endeavors, it remains at some appreciable risk of political reversal. But the transformative promise of the lex aviatica, its Aristotelian dynamis, will be to bring global air transport regulation into harmony with the industry’s natural cosmopolitanism.