On April 30, 2007, in Washington, D.C., officials from the United States and European Union signed a comprehensive, first-stage Air Transport Agreement that removes competition-strangling government regulations on trans-Atlantic air travel, liberalizes traffic rights for all EU and U.S. carriers, increases airline competition and, above all, gives travelers a much wider range of choices in air travel.
The pact, also known as the “Open Skies” agreement, will allow EU airlines to fly from any city in the 27-nation bloc to any city in the United States and vice versa. It’s designed to bring free market economics to the commercial aviation industry, which, since the 1940s, has been hamstrung by a cumbersome regulatory regime that in this era of globalization has became obsolete, according to officials.
“This is a historic, precedent-setting agreement,” said Tom Engle, director of aviation negotiations at the U.S. State Department. “It took a long time to negotiate and has strong U.S. industry support. It is pro-growth, pro-consumer and pro-competition.”
“[The agreement] represents a major victory for passengers and shippers on both continents,” added Carol Hallett of the U.S. Chamber of Commerce. “We look at this as being very beneficial for the global economy. Alleviating barriers to air transport, passengers and cargo is crucial to fostering economic growth in the U.S. and around the world.”
“This is not a perfect deal by any means, but increased market competition is something we really need,” said Sally McNamara, a European policy analyst with the Heritage Foundation. “With more choices for the consumer, airfares should be a lot cheaper.”
In fact, according to a BBC news report, the EU estimates that consumers could see a total of up to billion in economic benefits as a result of the deal. Also, the Open Skies agreement could generate 26 million more airline passengers over the next five years and create up to 80,000 new jobs in the European Union and United States.
Under the legal framework for international civil aviation established at the Chicago Convention of 1944, traffic rights and airfares have been controlled by the government. Both EU and U.S. officials have long recognized the need to increase trans-Atlantic air competition and replace the many bilateral agreements that existed between the United States and individual EU countries with one comprehensive agreement.
The United States currently has bilateral agreements with 21 of the EU’s 27 countries, and these agreements have created a confusing legal thicket. Open Skies would supersede those agreements and “would establish legal certainty where legal jeopardy reigns today,” said John Byerly, the State Department deputy assistant secretary for transportation affairs and the lead U.S. negotiator for the Open Skies pact.
Under the old rules, an EU airline could only fly to the United States from its country of origin. Under Open Skies, all EU carriers may fly to any U.S. city from any European city, and reciprocal rights are also extended to all U.S. carriers.
Open Skies also opens up coveted takeoff and landing slots at London’s Heathrow Airport to any U.S. or EU carrier. Under the existing rules, these slots were restricted to four carriers: British Airways, Virgin Atlantic, American Airlines and United Airlines. Delta Air Lines, which feeds more U.S. passengers to Europe than any other carrier, views access to a Heathrow slot as pivotal to its plans in the European market.
“Access to Heathrow has always been a priority for Delta,” said Kent Landers, director of external communications for Delta. “More than one-third of all premium traffic from New York goes through London,” he added, noting that “Delta is moving aggressively to expand service to Europe.”
Also recognizing the bottom-line boost that Heathrow represents is Continental Airlines, which has announced plans to inaugurate flights between Houston and London before the summer of 2008. It is likely that other carriers will follow suit.
Aside from the direct impact on carriers and their customers, the Air Transport Agreement accomplishes a number of other goals, including enhanced regulatory cooperation in the areas of competition law, government subsidies, the environment, consumer protection and security.
The agreement, however, does not replace existing U.S. law regarding limits on foreign ownership of U.S. air carriers—a sore spot for the EU side. Under those limits, a foreign airline or other investor may hold up to 49.9 percent of the total equity in a U.S. airline provided that it does not own more than 25 percent of the carrier’s voting stock. U.S. investors on the other hand are free to own up to 49 percent of the voting stock of an EU airline.
Opposition to U.S. ownership limits has been particularly strong at British Airways, which not only wants the ownership restrictions decreased, but traffic rights relaxed even further to allow EU carriers to operate within the United States. The right of a foreign airline to provide service within a foreign country is known as “cabotage.” British Airways Chairman Martin Broughton, among others, argues that Open Skies creates an uneven playing field in favor of the United States because U.S. carriers under the agreement may fly between any two cities within the EU, while the EU does not enjoy the same privilege in the United States.
EU Council President Wolfgang Tiefensee, one of the EU signatories to the agreement, told reporters that Open Skies was a good first step, adding, “We want to further liberalize trans-Atlantic air services. The objective of the negotiations will therefore be additional traffic rights and fewer restrictions on European ownership and control of U.S. carriers. We hope these negotiations will soon be successful.”
As the lead U.S. negotiator in the agreement talks for nearly four years, Byerly of the State Department understands as well as anyone the benefits of Open Skies and the complexities of the remaining issues to be worked out. “This pro-competition, pro-consumer agreement could be a model for other countries around the globe that have been reluctant to liberalize their agreements,” he said.
“We expect a wider range of air services between the EU and U.S.,” he added. “Aer Lingus has already announced it will add routes between Europe and additional American cities, such as Washington, San Francisco and San Diego. Michael O’Leary, chairman of Ryanair, has announced his company will buy new planes and indicated airfares could go as low as in a new business model in which there would be charges associated with luggage handling and other ancillary services. Virgin Atlantic is looking at increased service to the States from additional cities in Europe.
“Open Skies gets government out of the business of regulating aviation and setting fares,” Byerly continued. “Under the agreement, airlines will no longer need to apply to government to change fares on certain EU-U.S. routes. The U.S. will grant blanket open skies authority to both sides’ airlines. However, regulations regarding air security, the environment, these will remain, but the economic micromanagement, that’s gone.”
But will expanded services stress the aviation system to the breaking point? “Infrastructure pressures are already there,” said Byerly. “It’s not as if we are going to see hundreds of additional flights. Heathrow is already at near capacity with a fixed number of slots. I expect we’ll see a variety of arrangements regarding slots, leasing arrangements between existing and new users, new alliances, and exchanges of slots during different times of the day.
“We need a lot of work to handle the huge surge in user demand on the aviation system that will be created by this agreement,” Byerly explained. “The air traffic control system is already approaching the saturation point in some areas. We need to modernize by going to a system based on satellite navigation. It’s a huge challenge in the U.S. and EU.”
Regarding the issues of foreign ownership limits and cabotage, Byerly pointed out that the agreement only explains current U.S. law—“it does not change existing law, however. Any change would have to be enacted by statute. The agreement calls for second-stage negotiations to begin within 60 days after this agreement goes into effect March 30, 2008. We fully expect the foreign investment cap will be discussed, but Congress will have to be involved in any change.
“Our statutes don’t allow cabotage, which is a difficult issue where change is unlikely,” Byerly admitted. “Concerns about this come from labor, among others. To allow cabotage, some argue, would be as if you had a power plant in Indiana fully owned by a foreign company and subject to foreign, not U.S., law. Cabotage would mean a foreign air carrier could operate in effect as a U.S. domestic airline but under foreign government regulation.”
In response to complaints that the agreement overly favors the United States in the area of traffic rights by barring cabotage here but allowing U.S. carriers to fly between EU member states, Byerly countered: “It’s a misconception that the agreement is between the U.S. and the European Community only. It’s a ‘mixed agreement’ with the EU and its member states, because the competence on the EU side is split between the Community and the member states. To lump the EU states together as if they were one country is not legally correct.
“Before the agreement we had divergent rights based on our bilateral agreements with 21 of the 27 EU countries. Now we have equal rights and equal opportunity across the board,” he added.
Under Open Skies, a joint EU-U.S. committee is being set up to negotiate remaining regulatory issues, according to Byerly, who noted that the U.S. Department of Homeland Security will be handling future discussions on security.
Byerly envisions that the agreement will set in motion a chain reaction in which the entire global aviation system will become one of open skies. “[I]t’s time to begin dismantling the shackles of economic regulation inherent in the thousands of bilateral agreements between countries around the globe,” he said.
About the Author
Alan B. Nichols is a contributing writer for The Washington Diplomat.