The Trans-Pacific Partnership's Dramatic Impact on International Aviation
On February 4, 2016, the world witnessed Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam—nations that comprise 40 percent of the world's GDP—sign the Trans-Pacific Partnership ("TPP" or "Agreement"). Because of its size and scope, many consider the deal to be history's most progressive and ambitious. Today, while each member nation works toward ratification, the world eagerly awaits the TPP's impact.
The TPP's drafters have consistently promised that the Agreement would break new, unique ground. They stated that new global trading rules would expand market access for businesses across the Pacific and strengthen protections for intellectual property, labor, and the environment. They also stated the world would see dramatic changes in industries such as apparel and textiles, financial services, telecommunications, and electronic commerce. To promote trade within these industries requires the movement of people and goods across borders using transportation-related services. The TPP, then, will be inextricably linked to the aviation industry.
By its text, the Agreement does not seek to regulate air services. Air services are, in fact, carved out of the Agreement to respect existing bilateral air-transport agreements between member nations. However, the TPP's indirect and far-reaching effects on the aviation industry will be unmistakable and inevitable. With significant growth so far in the services and goods sectors, this has proven true. The future will be no different.
The TPP's Impact on Aviation
Airlines have already experienced substantial growth in international air travel involving Asian-Pacific countries. One billion passengers travel on average to, from, or within Asia annually. Industry analysts expect this number to increase by 100 million annually for the foreseeable future. With the TPP's signing, this trend will continue as demand increases for more and better services in the region.
Several airlines have already embraced the TPP's potential. In July 2015, with TPP negotiations still underway, Air Canada added a Vancouver–Brisbane route. Air Canada's president and CEO, Calin Rovinescu, explained that the addition anticipated the TPP—so the airline could increase its presence in the Asian-Pacific market in light of growing trade and travel with North America. Singapore Airlines followed suit in January 2016, when it announced the addition of a Singapore–Canberra–Wellington route. In March 2016, United Airlines and Air New Zealand also announced a new nonstop route from San Francisco to Auckland in addition to a joint venture and revenue-sharing agreement.
For aviation-industry product manufacturers, similar opportunities have arisen. On May 23, 2016, with President Barack Obama and Vietnamese President Tran Dai Quang as witnesses, VietJet, a low-cost international Vietnamese airline, signed two deals worth more than $16 billion with America's two largest aerospace manufacturers. To provide more flights and better quality services to domestic and international travelers, VietJet purchased 100 737 Max 200 planes from The Boeing Company and $3 billion in PurePower Geared Turbofan™ engines from Pratt & Whitney.
While new planes and better engines will help VietJet accomplish its goals, the contracts have larger implications. Alongside the TPP, they evidence growing cooperation between nations. Fifty years ago, few (if any) individuals would have predicted that the United States and Vietnam—two war enemies locked in stalemate—would one day shake hands over a landmark trade agreement. The countries' bridging previously irreconcilable differences signals an exciting new era. The TPP will ensure cooperation between member nations and create dramatic economic opportunities for the aviation sector.
The TPP's Future Impact on Aviation
When the TPP is ratified, the Asian-Pacific market will open wider, and the aviation industry will undergo even more changes. The Agreement will increase trade, commerce, and foreign investment. People and goods moving across borders with fewer restrictions will increase demand for flights and aviation services. Two sectors especially will experience growth surges: (i) air services and (ii) aircraft and aircraft component part manufacturing.
Increased Demand for Air Services. The Agreement will create an increased demand for air services to and between member nations. The TPP creates specific rules to facilitate and expedite entry of business persons into party nations, and increased foreign investment between member countries will stimulate service industries such as travel and tourism. Competition between airlines will heighten to capture larger market shares. Consumers will benefit from cheaper fares, better flight options, and more routes. The increased demand for air services will be especially prevalent between Asian-Pacific carriers since half of the world's air traffic growth over the next two decades will come from the Asia-Pacific region.
Increased Demand for Aircraft and Aircraft Component Parts. Growth in airlines and flights will increase the demand for aircraft and aircraft component parts. The TPP, which phases out tariff and non-tariff trade barriers, will also lead to increased air cargo traffic.
In the United States, aircraft and aircraft parts currently rank in the top three exports to eight of the TPP's member nations. The world's total air traffic is predicted to double by 2030. Asian-Pacific countries will need about one-third of all new aircraft produced worldwide to keep pace. Thus, contracts like those between VietJet, Boeing, and Pratt & Whitney may well become commonplace.
The TPP's reduction of tariff and non-tariff barriers will also streamline movement of aviation parts and strengthen aviation businesses' supply chains. Component parts will move across borders faster and easier. Eliminating non-tariff barriers will further level the playing field for member countries' aviation manufacturers. Before the TPP, countries with lower labor and environmental regulations undermined other markets with more stringent standards by drawing trade and investment away from those markets. Eliminating barriers to trade will allow aircraft and component part manufacturers to meet demand more easily and competitively in the Asia-Pacific region.
Finally, trade growth will translate into higher demand for air cargo services. Noting that "slack trade growth" was partially responsible for weak growth following the global economic downturn, Boeing's July 2015 forecast predicted steady and growing air cargo traffic through 2016—something that the TPP's passage will bolster.
The TPP presents great opportunities for the aviation industry—even before ratification. Business leaders, sensitive to the changing times, have already begun honing their strategies to take full advantage of these opportunities.
The TPP's goals of harmonizing inconsistencies, encouraging transparency, and promoting fairer trade may take time to accomplish, but its goal of increasing access to member nations' markets will not. Increasing free trade between nations will inevitably and substantially benefit the aviation industry, regardless of whether the TPP explicitly addresses aviation. From travel and tourism, to manufacturing and shipping, the TPP will drive the aviation industry substantially upward.
For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com/contactus/.
John D. Goetz
Sarah L. Thompson
This post is based on the authors' paper published in the Spring 2016 edition of Issues in Aviation Law and Policy. The full article can be found here. The authors gratefully acknowledge the assistance of Jennifer J. Yeung in drafting this piece.
Jones Day prepares summaries of significant antitrust enforcement, litigation, and policy events as a service to clients and interested readers, to provide timely insight on antitrust and competition law developments relevant to business, but not as legal advice on any specific matter. Please visit our Publication Request form to add your name to our distribution list.