Global Deregulation. Takes Off

orldwide, the air transport industry is a major factor in the economic health of nations. There are hundreds of airlines the world over, and they operate tens of thousands of aircraft. Over 2 billion passengers travel on the world’s airlines, with projected increases worldwide in the coming years. Over 40 percent of the world’s manufactured exports travel by air, and in 2006 the air transport industry provided, directly and indirectly, 29 million jobs for the global work­force.1 North American airlines carry about 40 percent of the world’s air passengers, with European carriers accounting for 26 percent, and the Asia/Pacific region’s airlines at 24 percent. Latin American, Middle Eastern, and African carriers account for the remainder.

The aviation transport industry generates wealth, employment, taxes, tourism, and related benefits for each nation with a viable air trans­port system. It is obvious, therefore, that it is in the national interest of such countries to be and remain competitive in the global air transport mar­ket. As we have seen, the airline industry has his­torically been regulated internally by their home governments and, except for the United States, state-owned airlines have been the general rule. Regulation of international air transport has been accomplished as a part of international relations
primarily by means of the bilateral agreement for­mat between nations. Prior to the Airline Deregu­lation Act of 1978 in the United States, therefore, regulation by governments around the world, supplemented by the traffic coordination activi­ties of the International Air Transport Association (IATA), had maintained a more or less stable mar­keting environment in international aviation.

For more than a third of a century in the United States, the cost benefits to air travelers and shippers directly attributable to the com­petitive influences of deregulation have been apparent. The number of enplanements and the number of flights have greatly increased as many more people have taken to the air as the primary means of travel. Although not all of the changes produced by deregulation have been positive (notably the lowering of airline employee wages, crowded airplanes, and long lines) competition in the airlines is here to stay.

We saw in the last chapter how the Airline Deregulation Act has had a ripple effect through­out the world, with the new competitive system brought by the American statute becoming a fact of life for airlines to be dealt with on an inter­national basis. We saw also how difficult it was for the Europeans to break away from their long – held belief in the state-ownership of domestic
airlines and how painful it was to come to grips with the practicalities of global competition, in spite of the fact that this is what their own law required under the Treaty of Rome.

While this was going on in Europe, the United States in 1992, took measures, to force the issue internationally. The United States Department of State announced the policy of “Open Skies,” which is designed to make inter­national travel more seamless and less controlled by nation-states.

Open Skies embraces full deregulation of inter­national air transportation. This concept includes:

1. Unrestricted access to airlines to operate between international gateways by way of any point and beyond to any point (outside of the destination country) at the discretion of airline management

2. Unrestricted service opportunities, so that airlines are free to decide the frequency, capacity, and equipment necessary to service market demand

3. Freedom of airlines to set prices

Still not included as a part of Open Skies are cabotage rights (freedom to serve domestic traf­fic within the United States from another U. S. city) and foreign control of U. S. airlines (this maintains the current limitation of foreign owner­ship of U. S. carriers).2

The policy of the United States, as estab­lished by the Department of Transportation and the State Department, does support liberaliza­tion of long-standing cabotage rules and the long-standing policy restricting foreign owner­ship of U. S. airlines. The U. S. Congress, on the other hand, has failed to approve any change in these constraints to full deregulation. In 2006, in fact, the United States Congress was opposed to increasing foreign ownership of U. S. airlines,3 and still is today. This disagreement over the future of airline deregulation is an example of the Constitutional separation of powers. In this case, the rift pits the policy-making prerogatives of the Executive Branch against the law-making prerogatives of the Legislative Branch and the requirement that the Senate ratify all treaties.

The policy of the United States also calls for the end of subsidies by foreign governments to national airlines, including state ownership, pro­tectionism, or financial assistance of any kind, since these activities produce market-distorting results in a competitive system.

Within the European Union, the separate governments of the Member States historically insisted on retaining their individual rights to negotiate and enter into old-style bilateral traffic agreements as they chose, particularly with the United States. The European Commission, on the other hand, insisted that the right to negotiate and sign international traffic agreements lay with the EU, not the individual Member States.

Relying on its prior success at consolidating powers, the Commission in 1995 began to lobby hard for authority to regulate all bilaterals affect­ing the EU nations. The Transport Commissioner of the EU threatened to bring the issue before the European Court of Justice. When that threat failed, the Commission sued six Member States.4 That lit­igation was halted by agreement between the Com­mission and the defendants, but when Member States continued to pursue unilateral talks with the United States on the terms of bilaterals, the Com­mission again sued, this time adding Germany and the United Kingdom to the original six defendants.5

A standoff ensued on this issue in the EU. For a time the issue appeared to have been rel­egated to secondary importance, and EU Member States continued to negotiate directly with the United States in Open Skies bilaterals. France and the United States, for instance, signed an Open Skies agreement in January 2002, which con­tained the standard freedoms enumerated above.

In 2002, however, the European Court of Justice ruled that the practice of EU Member States separately negotiating bilaterals directly with the United States was incompatible with EU law. The Court did not, however, strike down the existing bilaterals, so international traffic continued under those preexisting agreements.

This uneasy situation persisted until the “break­through” occurred in 2006, discussed below.