Introduction
Air transport plays a significant role in the economic growth of any state both directly and indirectly since it has the ability of boosting growth in other sectors of the economy. In the years before second World War, air transport was seen as the only option through which a country could prove its military powers because airplanes were considered to be fast and could, therefore, cause fast and massive effects when used.
Nowadays air transport provides quick transport of goods and services from one destination to another and it has made navigation an easy task than it was before. However, air transport operates within a framework of regulations that are meant to outline how various functions should be carried out. This framework is within the Chicago convention that was signed in 1944 and has various implications for the air transport sector.
Chicago Convention
International airline service providers require agreements in order to operate in various countries. These agreements, which are mostly referred to as bilateral air service agreements, contain provisions on the exact route that can be served by the airline service provider including the cities that the airline can fly to in the country.
On top of that, the agreements give details on the number of flights per given period that can be permitted as well as the number of passengers that can be transported between the bilateral partners.
It should be noted that the amount of luggage that can be carried is also determined by these agreements. Additionally, the ownership structure that is required for an airline to operate is outlined by the bilateral agreements as well as the number of airlines to be operated by the bilateral partners (Rhoades 2008).
The bilateral agreements originated in 1944 when various stakeholders from the airline transport sector met in Chicago, United States of America and came up with the Chicago Convention, a framework under which the bilateral agreements are formed.
During the years before the Second World War, the airline sector was highly protected by various governments which wanted to use the airlines for their political and economical gains, while the interest of the general public was nonessential to them (Wensveen 2011).
During this period, technology was a bit low and the advantages of airlines were not much, but technology improved during the war because each country wanted to protect its citizens and this led to emergence of planes that were more faster and could cope with adverse conditions better than the ancient ones.
This meant that communication, navigation and airport traffic facilities needed to be improved (Rhoades 2008). Technology required some agreements in order for airlines to operate efficiently without exploitation, and the Chicago convention provided the framework through which negotiations could be carried out.
Significance of the Chicago System
It is in the aftermath of the Chicago system that the airline transport started embracing some form of liberalization, which has led to much advancement in this sector. Due to the agreements that have been reached between countries and various airline service providers, many restrictions which were present earlier on have been eliminated, thus liberating the sector of air transport (Schlumberger 2010).
Different forms of liberalized agreements in place so far include agreements which contain several designations with or without limitations on the route to be covered, as well as freedom to determine the capacity and expanded traffic rights.
On top of that, the Chicago system has enabled the introduction of the free pricing regime which allows airlines to match their prices to the costs that they incur, while the criteria for airline ownership which was limited before has been broadened.
On the same note, technological advancements are easily incorporated in the earlier agreements since the Chicago system allows for amendments which can be done as often as technology improves.
This has allowed for recent technological improvements like computer reservation systems, airline code sharing, aircraft leasing and intermodal transport to be incorporated in agreements that were reached before this technology was developed.
Similarly, the Chicago Convention has also led to globalization of the airline transport by providing a level ground on which negotiations can be carried out thus, eliminating the possibility of one party taking advantage of the other.
Technology, economic factors, political issues and social-cultural aspects of life need to be transported from one point to another in this era of globalization, and airline transport plays an essential role in accomplishing the task of transportation. On the same note, it should be noted that air transport enhances mobility of commodities and human beings, which largely impacts on the process of globalization (Wensveen 2011).
It is the air transport, in its years of liberalization, that has made the world such a technological village where the advancements in one area can easily be transported to another place thus causing development even in places where technological advancements are rare.
Advantages of the Chicago System
The impacts of the system differ in various markets, but generally, the system has brought more good effects which have helped in propelling the airline industry to greater heights witnessed today. To begin with, competition has increased since Chicago system brought about liberalization in the airline industry. Because of liberalization, there has been reduction in restrictions that hindered route entry and service capacity.
Both of these, coupled with reduction in the constraints of pricing has brought about increase in airline traffic. Consequently, efficiency has improved besides competition becoming effective, which allows the airline operators to provide services at much lower costs therefore, leading to reduction in prices that customers are charged.
At the same time, in an industry where competition is high, each firm strives to improve the quality of its products in order to gain the market share. Since the inception of the Chicago system, competition has led to improved service quality in the airline industry, which is depicted by the increased flight frequency and frequent flier programs (Schlumberger 2010).
On the same note, liberation which is a result of Chicago system enables the airline operators to optimize their network configuration by improving technology to link small areas to their main airports thus, expanding their area of coverage.
Due to high growth rate in the airline industry, which has been facilitated by the Chicago system, labor demand in the airline transport sector has increased significantly. Consequently, the number of people employed to work in the airline sector has tremendously grown as compared to time before the Chicago system was implemented thus, by extension, this has led to improved living standards of people.
It should be noted that this does not necessarily mean that only those who reside near the airports have profited from the increase in employment opportunities, but also people from all parts of the world because the airline operators have also increased their demand for outsourced labor (Rhoades 2008).
It is important to note that employment and demand for goods and services have a rather direct relationship because when employment level increases, then more people get money to spend; therefore demand increases. For that reason, the increase in employment opportunities in the airline industry has increased the average income of people in different countries, therefore, increasing the demand for goods and services.
The system has also enabled the airline operators to improve their efficiency in production because increased competition compels each firm to ensure that it is the best in the industry, and this can be achieve through offering quality services at affordable prices.
On the same note, optimization of the routes that are served by each airline is ensured since the providers want to maximize the income from each of opportunity available. Additionally, pricing strategy is enhanced thus, increasing efficiency in output as well as the average load factor.
The agreements reached under the Chicago system are sometimes more relaxed and less restrictive, therefore, encouraging free or less restricted flow of people and commodities from one place to another thus boosting trade and improving economic performance in general (Wensveen 2011).
It should be noted that, increase in airline capacity increases quantity of commodities that can be transported leading to increased market for firms due to the ability of exporting more goods thus, increasing supply which in turn leads to increased economic growth because of high demand for products and services.
In conjunction with that, some sectors of the economy highly depend on the movement of people from one place to another, for example, hotel and tourism sectors. Therefore, the improvement in passenger service in the air industry has encouraged people to travel for leisure thus boosting the demand for the hotels, while at the same time increasing the number of tourists thus boosting the economy.
It should be noted that, for useful trade to take place, then supply chain management is paramount to ensure timely delivery of raw material and finished products to various markets. Bilateral agreements have helped to increase the destinations that are covered by various airlines, therefore, helping in improving mobility and the speed of movement between any two or more destinations in the world.
This has led to enhanced supply chain management by ensuring that technology, labor and capital are delivered in time to places where they are required (Rhoades 2008).
On the same note, the increase in international trade due to advancement in international air transport increases domestic output, which leads to increased demand for air transport services both within the country and outside. This also leads to expanded market for local air transport providers, thus, contributing to economic growth through expansion of the local airlines.
Additionally, due to the Chicago system, that has led to more trade agreements between various airline service providers and multiple economies, air traffic has increased tremendously thus increasing the activities that are carried out, and this in turn increases the level of income for the airlines.
Consequently, the net profits of the airline service providers has increased because other than the increase in revenue, there has been a significant decrease in average costs due to economies of scale (Schlumberger 2010).
At the same time, the increase in competition required increase in efficiency; therefore in a move to motivate their employees the aviation firms introduced performance payments and bonuses, thus increasing employee income. Similarly, the need to provide the best services in the industry has made aviation firms to invest in research and development leading to advancement in technology.
Increase in the traffic of airline activities means that supporting industries that offer goods and service to the airline industry have also expanded because of increase in demand.
Demand for fuel, catering services for employees of the airlines and cleaning services will increase therefore increasing supply for the same services. In this way, the airline industry not only increases employment opportunities in the air transport industry, but also in the whole economy through ripple effects.
In addition to that, Chicago convention also brought about deregulation, which led to changes in the way that airlines operated and emergence of new system of operation. In the new system, one airport was designated as the primary point where flights from other parts of a given region converged.
This made capacity utilization to increase because passengers were consolidated once they were at the main airport, referred to as the hub, thus reducing the number of empty spaces per flight (Wensveen 2011). On the same note, there has been emergence of low-cost carriers that fly to most regions a strategy that has proofed less costly to implement for airlines, and this has helped in the reduction of fare.
Over the years, integration of the airport differentiation system, hub-and-spoke system, and the point to point system has helped in the accommodation of both the economies of scale and the advantages of pricing.
Of importance to note also, is the fact that various countries which embraced the idea of better negotiations earlier and reduced restrictions on air transport have recorded improved economic growth.
The Netherlands, which is among the countries that opened their skies earlier, was able to gain economically from the airline operations making it the European aviation hub (Rhoades 2008). This has led to many aviation firms locating their essential offices in the country, thus boosting the economy of the country.
On the same note, Chicago system allowed for more negotiations which for years now have increased formation of alliances that allow operations to take place between various countries without capacity, frequency and pricing constraints. With the allowance that airlines get through quality negotiations, they are able to improve their flight plans and rationally coordinate their activities, thus offering better connections (Wensveen 2011).
Efficiency has improved thus increasing traffic and this has led to increased marginal revenue and reduction in marginal cost due to the combination of economies of scale, economies of scope and density economies which are essential in cost reduction. It is also paramount to note here that when airlines are able to reduce their marginal costs, they find it worthy to reduce their fares, thus increasing demand for air services.
Negative Impacts
Though Chicago convention brought about positive impacts in the air transport industry, it also came with various negative impacts which brought various problems in the air transport industry.
Due to the rights given to each country, under the Chicago convention, to totally own and protect its air space, protectionists emerged and prevented entry of other firms into internal routes which were instead allocated to national airlines and flag carriers.
In most instances the national airlines or the flag carriers, as they were known, were used for political reasons and selfish motives by the people in power thus the issues of the common citizen were negated (Schlumberger 2010). On the same note, lack of competition in these protected regions led to lack of ingenuity thus, technologically these countries lagged behind.
Similarly, cost of operation in the protected areas remained high, thus making it economically unviable for the airlines to operate though they still operated due to government subsidies.
On the same note, the Chicago convention does not define the exact type of negotiation that should be carried out or the limits of the negotiation that any airlines could engage in. Consequently, even in the event when political forces are favoring the discussions, the method of negotiations ends up being long and consumes a lot of time.
Additionally, negotiations are mostly characterized by failures and some difficulties in agreements which make the process even lengthy thus, causing delays and sometimes complete breakdown of the negotiations (Wensveen 2011).
On top of that, there were a lot of competition problems as each country implemented constraints to hinder entry of foreign firms into its air space. To begin with, in the early years of the Chicago convention increase in competition was followed with the need to reduce costs of operation and at the same time increase efficiency.
This led to reduction on labor demands, which meant that job opportunities in the airline transport sector decreased. Besides, people who were already in the sector lost their jobs as firms implemented cost reduction measures. In addition to that, the increase in popularity of the air transport has lead to decrease in demand for water transport which was used to transport some commodities to far places.
Light mass commodities which were hitherto transported by water started being transported by the faster and more convenient air transport which could deliver the commodities to their destinations fast and at a fair price, unlike water transport.
In conjunction with that, as the rate of expansion in the airline services is increasing and the number of flights, quantity of commodities transported and the number of customers expand,the airports expansion is not coping with the speed. This has led to airport congestion, which has in turn increased the number of air flights that are delayed, thus causing inconvenience to customers (Rhoades 2008).
On the same note, the freedom of negotiations have allowed the sprouting of many airlines thereby increasing competition, and though competition is healthy to the economy, it has led to decline in performance of once big air lines thus, contributing to their failure.
Conclusion
The Chicago system has helped in rationalizing the air transport industry by providing the framework within which negotiations are carried out, thus allowing for liberalization in the industry.
However, the results were not only positive because the convention, by giving countries exclusive rights to determine which airline operates on their air space, allowed the states to implement protectionist policies which limited improvement of the air transport industry in these countries.
Nevertheless, agreements that have been reached within the framework of the Chicago convention has helped in boosting the economies of various nations either directly, through offering employment opportunities to the local citizens, and indirectly through assisting other sectors of the economy to grow.
References
Rhoades, DL 2008, Evolution of International Aviation: Phoenix Rising, Ashgate Publishing Ltd, Farnham.
Schlumberger, CE 2010, Open Skies for Africa: Implementing the Yamoussoukro Decision, World Bank Publication, Washington.
Wensveen, JG 2011, Air Transport: A Management Perspective, Ashgate Publishing Ltd, Farnham.