Breakthrough-Open Skies Agreement between the United States and the European Union

The decision of the European Court of Justice in 2002, holding that bilaterals between Member States and the United States were in violation of EU law, posed a significant problem for the EU States, as well as for the United States. It did, however, provide an opportunity to pressure the United Kingdom into finally seriously addressing the issue of globalization and relaxation of the constraints imposed by Bermuda 2.

In 2006, agreement was reached between negotiators for the U. S. and the EU for an Open Skies agreement for all EU Member States, including the U. K. Open Skies agreements are, technically, treaties between nations and, as such, in the United States these agreements must obtain Senate approval. The Senate that year refused to approve the Open Skies agreement that had been negotiated, primarily on the basis that the agreement would have relaxed the law (enacted by the entire Congress) applicable to foreign ownership of U. S. airlines.

The negotiating teams went back to work, and in 2007, a new Open Skies agreement was reached, but this time the ownership rules were preserved, as well as historical cabotage restraints.9 This new Agreement was signed on April 30, 2007, by the representatives of the EU and by the U. S. Department of State. The Agreement was originally slated to go into effect in October 2007 but, due to objections posed by the U. K., the effec­tive date was moved back to March 30, 2008. This was, in part, to allow Heathrow airport to complete new terminal construction to enlarge its facilities in anticipation of the significant increases in traffic that the Agreement will cause.

The Agreement also contained exit provi­sions that allowed the EU to renounce the agreement in 2010 if the issues of cabotage and airline ownership had not been liberalized. This Agreement went into effect in March of 2008.

The EU has voiced one additional complaint. They say that the United States has the better part of the deal since U. S. airlines are permitted to fly into any EU country and then fly from that country into any other EU countiy. Although U. S. airlines may not fly from one point in any one EU country to another point in that same countiy, U. S. airlines do have a sort of cabotage right if the EU is considered a single sovereign entity. For instance, a U. S. air­line will be permitted to land at Heathrow, pick up passengers and fly on to Paris, while an EU airline, landing at JFK, will not be permitted to proceed with passengers to Dallas, or any other U. S. city.

The right of the EU to renounce the Agree­ment in 2010 gave rise to continued negotia­tions on the issues that remained unresolved in the 2008 Agreement. The EU wanted unlimited rights to fly intra-United States (cabotage) and they wanted liberalization of ownership rights in U. S. airlines to allow foreign majority owner­ship. Although there are good arguments on both sides, no agreement has been reached.

Some believe that foreign investment in U. S. airlines could enhance the financial condition of domestic airlines, take advantage of larger route networks and their economies of scale, as well as improve the level of service. Others fear that foreign ownership would bring a loss of jobs and control, and perhaps the disappearance of some U. S. air­lines. Such a revision of United States law would certainly alter or eliminate cabotage and would seriously affect the ability of the country to com­mand the participation of U. S. airlines in times of emergency or national need. Bob Crandall, formerly CEO of American Airlines, poses the question of why any foreign airline or group would actually want to own an American airline, given their proven poor financial track record, the high level of compe­tition, and the slim profit margins that exist for even profitable airlines in this country. He also poses the answer: Foreign ownership would be used by for­eign interests only for the purpose of access to U. S.

markets, which doubtless are vast, and to control airline transportation to and from the United States. Under his view, domestic airline service would sig­nificantly deteriorate under such a system.

A second-stage EU-U. S. Open Skies Agree­ment was signed in March 2010, but it did not con­tain the cabotage and airline ownership rights sought by the EU. The new arrangement does provide means for cooperation on competition, environmen­tal issues, labor standards, safety, and security. It will also give airline alliance partners greater flex­ibility in service areas.10 The Fly America Act which requires all travel funded by the United States gov­ernment to be on a domestic airline, is not applicable since it contains an exception for flight on airlines associated with nations that have a bilateral or multi­lateral agreement with the United States.

The 2010 amendment goes only so far as to commit the parties to engage in a process of reforming airline ownership and control rules, promising a quid pro quo for allowing majority ownership in each group’s airlines.

By 2011, the United States had concluded Open Skies agreements with over 100 countries. Although global liberalization began with the Airline Deregulation Act of 1978, it was difficult to actually achieve a common policy of liberal­ization within Europe, even after the founding of the European Union. Through steady pressure by the institutions of the EU, and the Open Skies accords that have been put in place by the United States and the EU, there is a shared appreciation for the benefits that accrue from the elimination of trading and operating constraints.

Traffic growth after liberalization averages between 12 percent and 35 percent according to a recent study,11 and in some cases has reached nearly 100 percent of the pre-liberalization rates. As an example, liberalizing 320 specific country pair bilateral contracts specified in the study would produce 24.1 million full-time jobs and generate an additional $490 billion in GDP (corresponding to an economy almost the size of Brazil).

While we have analyzed the results of these policies within the United States as a result of

deregulation, examples of similar global effects include the growth of international services to secondary airports in the United Kingdom (Man­chester, Birmingham, and Glasgow), the growth of Dubai as a major international hub, domestic deregulation in India, and the putting in place of the EU’s Single European Market, resulting in the growth of low-cost carriers such as Ryanair and Easyjet. Significant examples of other sym­biotic traffic relationships include United Arab Emirates and Europe, Malaysia and Thailand, and Australia and New Zealand. Please refer to Figure 40-1 for a chart depiction of the number of seats worldwide supplied by low-cost car­riers. Cooperation between countries utilizing these anticompetitive techniques also results in sharing the ideas and effects of improved envi­ronmental measures, such as noise reduction, improved fuel efficiency, and reduction of emis­sions, as well as efficient air traffic management.