RESTRICTEDWORLD TRADE
ORGANIZATIONS/C/W/166
15 September 2000
(00-3675)
Council for Trade in Services Original:  Spanish
COMMUNICATION FROM CHILE
The Evolution of Air Transport in Chile – an Example of Openness
The following communication has been received from the delegation of Chile with the request
that it be distributed to the Members of the Council for Trade in Services.
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A. INTRODUCTION
1. Paragraph 5 of the Annex on Air Transport Services of the General Agreement on Trade in
Services (GATS) provides that the Council for Trade in Services shall review periodically, and atleast every five years, developments in the air transport sector and the operation of the Annex with a
view to considering the possible further applicati on of the Agreement in this sector.  The purpose of
this document is to describe developments in the se ctor in Chile following the entry into force in 1979
of the Civil Aviation Act, which established an Open Skies policy, with particular emphasis on
developments in the last five years.  The aim is to highlight the progress that has been achieved inliberalization of the sector, while at the same time reflecting the impediments occasioned by the
current system which hinder further progress.
B. 
A LIBERAL AIR POLICY
2. In the mid-1970s, Chile switched to a free-market economy open to the world, from which no
sector, particularly air transport, was excluded.  The country's geographical position requires fast low-
cost routes, both internally and externally.  The development of an economy based on foreign trade
requires means of transport to match the country's export capacity.  For that reason the air cargo sectorin Chile grew in tandem with the growth in exports, particularly for such products as fresh fish, grain,
fruit and vegetables, which require rapid transport to consumer markets which, in Chile's case, are
very far away.  At the same time, however, this  economic model was accompanied by a growth in
imports, a good percentage of which came in by air.
3. A legal framework was likewise established to allow competition between airlines, both
foreign and domestic, the only way in which a country of the size and location of Chile could
maintain links with the world.  This legal framewor k ensures that the operation of enterprises is based
on commercial market considerations.
4. The Civil Aviation Act (Decree No. 2564 of 1979) allows domestic and foreign companies to
offer both local or international air transport se rvices.  That means that any foreign or Chilean
enterprise may offer such services without any rest riction, other than those of a technical and safety
nature.S/C/W/166
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 Cabotage
5. This legal regime has allowed domestic traffic in Chile to grow by 1,000 per cent between
1979 and 1999, to over 3.2 million passengers a year.  In the 1990s alone, domestic traffic grew by an
annual average of 18 per cent.  This has not only allowed the development of centres of productive
growth in previously isolated areas, but has shrunk distances in a country over 4,000 kilometres long,and at tariffs that allow a growing number of people to use this form of transport.  Furthermore, the
merging of three private airlines with a fourth - Peruvian-owned - airline which recently commenced
operating, plus several regional companies, shows the dynamism of the sector.
Index of Domestic Passengers
(Base 1971 = 100)
01002003004005006007008009001000
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99International traffic
6. Internationally, there is one exception to this unfettered freedom and that is the reciprocity
established under bilateral agreements or in bilateral practice.  Thus, foreign companies can operate
these services to the extent that their States affo rd similar conditions to Chilean airlines.  As can be
imagined, this only happens in a few cases:  those countries with which there are Open Skies
agreements, and even in those cases, there are some restrictions.
7. In short, despite the benefits, the protectionist policies of certain countries, reflected in the
bilateral agreements, have limited the freedom of the skies contained in Chilean legislation.
8. Nevertheless, the Chilean experience and the development of its air industry have shown that
the greater the degree of openness, the greater the pace at which traffic grows.  Despite the limitations
of the bilateral system, to which we shall refer below, international traffic grew by 1,650 per centbetween 1979 and 1999, to over 3 million passengers a year, against a population of 14.4 million
people.S/C/W/166
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Index of International Passengers
  (Base 1971 = 100)
01002003004005006007008009001000
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 999. While the figures for passengers are telling, those for international cargo traffic are even more
so.  This has grown by more than 8,000 per cent since 1979, and according to figures from the
Santiago Chamber of Commerce, 8 per cent of Chilean exports leave by air, a figure which rises to
16 and 20 per cent respectively in the case of exports to the United States and the United Kingdom.According to the same source, air freightage accounts for only 3 to 9 per cent of the value of exports,
while in some industrialized countries this figure is as much as 57 per cent.
Index of Cargo-Tonnes   (Base 1971 = 100)
0200400600800100012001400160018002000
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99S/C/W/166
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Bilateral agreements
10. Chile has signed air services agreements with the majority of countries in the Latin American
region, the United States, Oceania and many European and Asian countries.  However, the approach
taken by most of these agreements is to restrict routes, capacities, designations and/or tariffs.  It has
only been possible to conclude Open Skies agreements with a few countries, while with others thereare fairly open regimes;  but restriction, limitation and reciprocity generally prevail.
11. Limitations on "fifth freedom" rights continues to be the main impediment to airlines
expanding their operations along market lines.  Because of Chile's geographical position,  these rights
are needed in many cases to support certain routes economically, especially within the continent.
However, not only are Chilean companies prevented from offering daily services, but the airlines of
certain countries are able to justify daily flights to  Chile on the basis of "sixth freedom" traffic which
is very often not covered in the bilateral agreements.  What Chilean companies are asking for is to begiven the same conditions as domestic companies in those countries.
12. In the light of this situation, the law provides for tendering for frequencies among Chilean
companies.  If by application of reciprocity or a bilateral agreement there are fewer frequencies than
domestic companies interested in operating them, they are allocated by the aviation authority by
public tender.  The same applies in cases of single designation, a form which is declining.  In addition,considering that the public interest is satisfied when a route is operated and the users have the benefit
of the service, the law provides for the abandonment of slots.  That means that if an airline ceases to
use a frequency for over six months, it is declared abandoned and the aviation authority will assign it
to another operator.
13. Ownership of airlines and aircraft.  Chilean legislation does not establish any particular
limitations on foreign investment in the air transport sector, which is governed by the general rules on
foreign investment.  Indeed, the law provides that Chilean aircraft are aircraft belonging to Chilean
natural persons or legal persons constituted in Chile under Chilean law and which have their principal
domicile and real and effective headquarters in Chile.  For all that, the aviation authority may allow
the registration of aircraft belonging to foreign natural or legal persons, provided that they have orexercise an employment, profession or permanent occupation in the country and in any case,
registration may be allowed for aircraft operated, in whatever capacity, by a Chilean airline.
14. Chile has tended towards ownership clauses which enshrine the principle of the place where
the airline is constituted and has its seat and effective control, as set out in the agreement with
New Zealand.  Indeed, in a recent Open Skies agreement, the designation of airlines in which theState had a holding was expressly prohibited, thus reaffirming the subsidiary role of the State in
economic affairs as laid down and guaranteed by the Chilean Constitution.
Tariffs
15. Chilean law lays down that the State, via the aviation authority, may only set tariffs when the
provisions of another country precludes freedom of tariffs.  In other words, the ideal is that tariffs
charged by airlines are fixed by them in line with market considerations.  Notwithstanding theforegoing, practice has shown that provisions are needed in bilateral agreements to guarantee this
freedom, and thus protect consumers from predatory practices or those due to the dominant position
of an airline.
16. Cooperation agreements between companies.  The development of the industry has demanded
flexibility from the aviation authorities, especially  with respect to forms which are not recognized in
bilateral agreements, for example code-sharing operations.  The Chilean authority has recognized that
these cooperation agreements benefit domestic companies by allowing them to develop new services
and/or access to places where physically or economically it would not be possible or profitable, withS/C/W/166
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consequent benefits for passengers.  To that end, it authorizes such operations, even when they are not
contemplated in bilateral agreements or in the ab sence of such an agreement, when the interested
Chilean company so requests.  Nevertheless, it has also emerged in practice that these forms can lend
themselves to abuse, such as codes shared with co mpanies in third countries.  The idea has therefore
been taking shape that if such operations are to be authorized, all operators on the route concerned
must have traffic rights.
Air cargo
17. The particular nature of air cargo has allowed greater liberalization which could form the
basis for agreeing multilateral rules in this area, as currently being discussed in the OECD.  States
have recognized that the sector is important for export growth, and that lack of openness, and thus
ultimately of adequate routes to consumer markets, can create major bottlenecks.  That is why Chile
has adopted an even more outward-looking stance in this area, as have several other countries, in
some cases granting "seventh freedom" rights.  There are even examples where the liberalization ofcargo on certain routes has allowed the development of combined cargo/passenger services which
otherwise would not have been economically viable or on routes where there are no traffic rights for
passenger operations.  The development of the sector in Chile has allowed one of its companies now
to become a major world player, and the main foreign cargo operator in Miami, United States.  The air
cargo sector, in our view, is one of the areas where the GATS could have a much wider scope, asubject which we will pursue in the next special session on air transport.
Non-scheduled services
18. In Open Skies systems, the difference between scheduled and non-scheduled operations
(charter) is irrelevant.  However, in the absence of such regimes, the experience of certain countries
which have based a major part of their development on tourism, shows that the greater the flexibilityfor the operation of non-scheduled flights, the greater the flow of passengers and the greater the
benefit for the hotel and tourist services sectors and attractions in general.  For this reason, there are
major opportunities for making progress in multilateral open systems in this subsector which has few
ramifications and gives rise to few objections.
Services excluded from the Annex
19. Chile has made commitments in the three sectors excluded from the Annex, which in our
view are not part of air transport, although they are closely linked.  These are, in general, services
dominated by the third mode of supply (commercial presence) and thus, not subject to major
limitations in Chile, being mainly governed by th e rules on foreign investment.  The same applies to
certain services, some of which are contemplated in the Annex like those directly related to the
exercise of traffic rights, such as ground handling (including catering, refuelling and baggage-
handling).  These are also services that are generally supplied by the third mode of supply.
Nevertheless, many bilateral agreements include clauses on the right of airlines to develop such
services, and also supply them to third parties, even though the right to carry on any economic
activity, including that one, is enshrined in our Constitution.
Specialized air services
20. Owing to its geography and type of productive activities, Chile is a country which requires
certain air services, such as forest fire-fighting, fisheries and mining prospection, and aerial spraying
among others, which in any case do not come under the exercise of traffic rights, according to the
definition in the GATS Annex.  While Chile has developed an export capacity in some of thesespecialized air services, there are also times when national supply is not sufficient to satisfy the
demand for this type of services.  Under the Civil Aviation Act, no limits have been imposed on the
operation of foreign aircraft, except in cases where Chilean aircraft have been restricted.  An
important step in this subsector was the commitment in the free trade treaties which Chile signed withS/C/W/166
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Canada, Mexico and Central America allowing persons and companies from those countries to supply
specialized air services in Chile without any limitations other than those of safety, and the same
applies to Chilean companies or persons in those countries.  This, therefore, will be an incentive for
joint investment and forms of cooperation between companies in different countries.  It should be
noted that glider-towing and parachuting services  are excluded from this limitation, since in Chile
these are only offered, on a non-profit basis, by aviation clubs to their members.
Airport infrastructure
21. The rapid development of the air services sector has had a major impact on the infrastructure
of Chilean airports, which was designed in the 1960s.  The 1990s saw the beginning of privatization
of the construction and administration of both passenger and cargo air terminals, and at present seven
airports, including that of Santiago, are operated under licence by the private sector, in some cases,
through joint ventures involving foreign companies.   The licensing programme involves investments
of some US$130,000,000.  This has made it possible to improve airport services, comfort and safety
considerably, and to make significant fiscal savings, while new runways and terminals are planned,
which will be wholly executed by private companies.
22. While air traffic control will continue to be the responsibility of the technical authority,
developments in the sector have made it necessary to invest heavily in state-of-the-art equipment andthere is already talk of introducing satellite navigation systems.  Navigational aids have been
modernized in other airports of the country, and not just Santiago, which because of its weather
conditions, already has systems that allow operations with zero visibility.  All this represents major
opportunities for foreign companies specializing in this area.
Death throes of the bilateral system?
23. The difficulty of achieving greater degrees of liberalization at the bilateral level has led to a
search for new means of achieving that objective, such as the regional initiatives in MERCOSUR and
APEC.  In short, States which have outward-looking policies are committed to Open Skies
agreements, while those which maintain restrictions do not wish to progress.  But apart from thisreality, experience shows that the system of negotiation, conceived in the 1950s, is not ideal.  The lack
of binding of measures, or ratchet effect, allows open agreements to become restricted with the
passage of time.  While this tool has been used as an element of negotiation, including of open
markets, provisions which allow rights to be bound could benefit companies, giving them security to
plan their operations in the long term and overcome the uncertainty generated by the current system.
24. Moreover, the lack of adequate dispute settlement mechanisms stands in the way of the legal
certainty required by an air services regime.  Indeed, history shows that no bilateral dispute has ever
been submitted to the dispute settlement mechanism contained in an agreement, the preference being
to exert political or economic pressure, or in many cases, simply to cancel the agreement.  It would be
useful to examine how to improve legal safeguards, including resort to dispute settlement systems
such as that of the WTO.
25. In the Free Trade Agreements between Chile and Central America, specific chapters on air
transport were agreed.  These take up the provisions of the current bilateral agreements, establishing
the principle of binding measures and making any disputes that may arise subject to the general
dispute settlement mechanism under the Free Trade Agreement.  These are small steps which may
help to open up air traffic regimes.
26. Finally, experience shows that the separation of  technical and commercial factors facilitates
liberalization in the air services sector.  In Chile, this separation has existed for more than 50 years.
The technical aspects come under the responsibility of the Directorate-General of Civil Aviation,
under the supervision of the Air Force, while those of a political/commercial nature come under theS/C/W/166
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responsibility of the Civil Aviation Board in the Ministry of Transport, whose Council includes
representatives of the Ministries of Foreign Affairs, Public Works and Planning and of the Presidencyof the Republic, one of them the Director of the National Tourism Service.  This ensures that their
decisions are appropriately independent and that they consider all aspects involved.
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