Countries sign agreements with another which allow their flagged
airlines to operate to each other's territory. The architecture for such agreements originate in 1944, when the
International Civil Aviation Organisation defined the 'eight
freedoms'. At the time aviation was considered a service that needed considerable inter-governmental cooperation, as airplanes were (and still are) considered extra-territorial jurisdictions of the countries they are flagged under.
First Freedom: The right to overfly another country enroute to another; since the cold war this right is almost universal and overflights are only needed from an operational perspective. Recently North Korea granted airlines first freedom rights to cross its country - beer money for Kim Jong Il.
Second Freedom: The right to land in another country enroute to another for technical reasons only.
Third Freedom: The right to carry passengers/cargo from the home country to a foreign country.
Fourth Freedom: As per the third freedom, except it covers services from a foreign country to the home country.
Fifth Freedom: Like the example above, to carry passengers/cargo from the home country to a foreign country and any other foreign country along the way, and to carry passengers/cargo from intermediate points, and any of these routes back to the home country.
Sixth Freedom: The uncommon right to carry passengers/cargo from two foreign destinations, stopping over in the home country. For example, Aeroflot had services from Western Europe to Japan via Moscow.
Seventh Freedom: The even rarer right to carry passengers/cargo between two foreign destinations without following/preceding a sector to/from the home country. One example is Brussels Airlines flying between Geneva (in Switzerland) and Marseilles (in the European Union).
Eighth Freedom: Or ‘cabotage’, the very rare right to fly domestic routes within a foreign country. Following the collapse of Ansett, sixteen foreign airlines were given permission to carry passengers domestically in Australia until Qantas and Virgin Blue could respond with sufficient capacity.
Despite air travel being highly commercialised, Air Service Agreements (ASAs) are negotiated by aviation or transport ministries, instead of trade officials like other commercial activities. Air transport services are excluded from the General Agreement on Trade and Services (GATS). They have been criticised for being cumbersome and rigid, as some agreements go into considerable detail, right down to the number of flights per week, aircraft that can be used etc.
However, the United States and other countries have been moving to more flexible arrangements since 1978 (when the United States removed regulations on its domestic operations). It has been promoting Open Skies agreements as a template, that basically includes everything upto the fifth freedom, and which allows a lot more flexibility for airlines to add or remove capacity without requiring an ASA to be renegotiated. The fifth freedom rights is quite useful to the United States, as it allows American airlines to fly the lucrative Asia - Japan routes.