Bilateral Agreement between U.K and Pakistan
Flights from major international airports in the U.K. to Pakistan are regulated by a Bilateral Agreement between the two countries. The government negotiates routes for its country and then distributes these to the airlines of its choice. Usually airlines have to submit an application detailing why its proposed service is in the best national interest. This creates a barrier to entry which is difficult to overcome. In addition, landing and take-off slots at London Heathrow and London Gatwick are difficult to obtain creating another barrier to entry. These barriers to entry give a strong advantage to existing airlines. However, U.K. and Pakistan governments have been negotiating possible liberalization of skies. If this happens, we expect to see additional capacity out of Heathrow to Pakistan which may have an impact on yields.
Open Skies for Regional Airports
UK – Pakistan have Open Skies agreement, under this agreement all international flights from all the regional airports in the U.K. (London Stansted, Birmingham, Manchester, etc.) are regulated by this Agreement with Pakistan which enables all airlines of each country to operate an unlimited number of flights between these airports and any Pakistan international airport. Saif Air will therefore be able to benefit from this Agreement by starting its flights from London Stansted and Manchester to Islamabad and Lahore. Saif Air will still have to apply for the routes but these will be automatically granted.
Other Licensing Requirements
Saif Air is a British registered company and its principal place of business is in England. Under European Community Law, every air transport undertaking with its registered office and principal place of business in a Member State of the European Union must hold an operating licence granted by that Member State in accordance with the EC Licensing Regulation (Council Regulation EEC No: 2407/92). In the United Kingdom the grant of operating licences is delegated to the Civil Aviation Authority. While the EC Market Access Regulation (Council Regulation EEC No: 2408/92) provides that all holders of EC operating licences have the right (virtually unrestricted) to operate any services between any two points in the European Community ("community carriers") it leaves the rights of Community carriers to operate to points outside the EU unaffected. Community carriers require to be separately licensed by their states to perform such services according to the requirements of bilateral air services agreements between the Member States which licences them and the relevant states outside the European Union.
The bilateral air service agreement between the U.K. and Pakistan is quite restrictive, but the proposed route London Stansted and Manchester - ISB/LHE is available under it. An application from Portuguese Airline (AOC holders) will need to be made to the CAA of the United Kingdom for a route licence following the grant of which the U.K. government (the Department of the Environment Transport and the Regions or "DETR") will be asked to designate the applicant (Portuguese Airline),(i.e. by diplomatic note inform the Pakistan government [Department of Transportation or "DOT"] that the applicant has been designated for service under the bilateral by the U.K. government).
The requirements of an EC operating licence are quite onerous and include the issue by the CAA of an Air Operators Certificate (AOC) and demonstration to the CAA's satisfaction of stringent financial fitness requirements (which require it to be demonstrated that the applicant can discharge its financial obligations in its business for the first two years and this without any revenue for the first three months). For a new airline, these requirements (particularly the AOC requirements which relate to safety and technical competence) can take many months to process. Because Saif Air wishes to commence its services on a third party European airline, it has therefore contracted with an existing EU AOC and operating licence holder (Portuguese Airline) to operate the services on its behalf until such time as its own operating licence is granted.
While it is permitted to enter into such an operating agreement, it is a requirement of U.K. law that an undertaking which makes seats available on an aircraft (or holds itself out as being able to make seats on an aircraft available) while not the operator of the aircraft, must (except in certain circumstances which will not apply to Saif Air) be licensed. The applicable licence is an Air Travel Organiser's Licence (ATOL), the primary purpose of which is to protect the consumer who has advanced moneys to a seat provider in advance of receiving evidence of his contract with the actual operator.
Because of the hybrid nature of the operation, the CAA can apply the financial fitness standards of the EC licensing regulation to Saif Air even during the period when it holds an ATOL (the financial fitness standards for which are somewhat different).
This "hybrid" arrangement whereby a new airline operation commences through the combination of an ATOL (held by Saif Air pending grant of its own operating licence) and an operating agreement between Saif Air and an existing EU operator is somewhat frowned upon by the European Commission (although it is not technically contrary to relevant EC legislation). While a number of U.K. airlines have commenced service in this way, the U.K. CAA now looks for a commitment to work towards the grant of an operating licence as soon as possible.
Saif Air has selected Portuguese Airline as the operator of the initial services. This airline will be required to apply to the UK Civil Aviation Authority for the route licence for the London Stansted/Pakistan route and seek designation by the U.K. government. Once application has been made to the CAA it will be published in the CAA's Official Record after which there will be a 21-day period for objections to be lodged. Only other U.K. operators have the right to object but, given the CAA's pro-competitive licensing policy and the availability of this route under the U.K./Pakistan bilateral, it is not anticipated that any such objector would come up as currently there is not a single airline from the UK operating on our proposed routes. Generally, we would not expect any other U.K. carrier to behave in such a manner.
Assuming there is no objection, Portuguese Airline will be able to proceed after a 21-day period to grant of the licence by the CAA (who will wish to ensure that Portuguese Airline is financially fit to operate the route—this depending to a large extent on the financial arrangements between Saif Air and Portuguese Airline). Following grant of the route licence to Portuguese Airline, the process of designation by the U.K. government can be completed in a matter of days and it is not anticipated that the process of grant of a landing/traffic rights by the Pakistan DOT would occupy any substantial passage of time.
On the grant of its own operating licence, Saif Air would apply for its own route licence, having agreed with Portuguese Airline that they would apply for its own route licence to be revoked at the appropriate point. It is also agreed that Portuguese Airline will hand over all slots in the UK and Pakistan.
Saif Air will apply for an ATOL in time to be ready to sell with the appropriate lead time. On grant to it of its operating licence the ATOL will be revoked.
The U.K./Pakistan bilateral requires fare to be filed and approved by the governments. Saif Air' fares will be substantially below those of their competitors at the outset. While this will obviously be of concern to those competitors, it is not expected that they will succeed in persuading their governments to disallow them. Nevertheless, they may try to squeeze a new carrier like Saif Air out of the market by lowering their own fares. Whether such price pressure is lawful will depend on the application of general principles of anti-trust/competition law, but these principles are well known to the competitors concerned who will be well aware of the consequences of proceeding unlawfully.