07 March 2007 - The United States and European Union last week reached a tentative agreement on a new air services pact that could take effect as early as October, although history shows there may be many more twists and turns before a long-awaited "Open Skies" deal between the world's two largest aviation regions comes into force.
After years of negotiations, the transatlantic accord has the potential to dramatically alter commercial aviation competition and therefore many corporate travel programs: Airlines that once were marginally relevant to transnational companies could become key players; global alliances that in many ways still are infants would more closely coordinate commercial sales activities; and corporate air travel costs that have risen in recent years should, according to the European Commission, decline amid the greater competition resulting from liberalized air traffic rights.
"If ratified, this agreement would open up the transatlantic market equally to all airlines," said Jacques Barrot, European Commission vice president and transport commissioner, during a speech last week. "That means that any airline--European or American--can fly any route between any city in Europe and any city in America."
The last time such an interim deal was negotiated, in November 2005, leaders on both sides proclaimed it a landmark agreement that would forever expand and improve commercial aviation across the Atlantic. By the middle of last year, however, that deal was jeopardized when the
Bush Administration could not win support for a proposal to loosen foreign ownership limitations on U.S. airlines--something EC negotiators considered a pre-requisite to finalizing Open Skies.
The newest draft agreement, according to Barrot, includes "elements that could be used to restore a proper balance of interests." The full text has not been made public and many interested parties were withholding judgment until after reviewing the details.
The degree to which the relaxation of U.S. foreign ownership laws is envisioned by the new deal is unclear, though published reports suggested foreign investors could, in certain cases, own more than 50 percent of a U.S. carrier. According to an EC statement, the agreed-upon text includes "an additional protocol on ownership, investment and control" and "the development by the E.U. and the U.S. of a common understanding of the criteria used in making decisions in airline control cases."
"In one respect, there is disappointment," Barrot said. "We wanted to agree on changes in the law to completely liberalize ownership of airlines between the European Union and the United States ... While the U.S. itself is not ready to participate in a revolution in cross-border investment, we have persuaded them not to block our progress towards that goal."
Also unclear is the true impact, if any, of changes to the Fly America Act, which essentially requires travel paid for by the U.S. government to be handled by U.S. carriers, whenever possible. According to E.C. information, the new agreement includes "a number of access rights" for European airlines eyeing passengers and cargo covered by that program. "Such rights have never previously been granted by the United States."
British Airways chairman Martin Broughton in a speech last week described those access rights as "miniscule concessions dressed up as significant breakthroughs." European carriers, he said, would have approval to serve U.S. government traffic on only the lowest-volume routes, "which means, for example, that no routes at all from Washington, DC are included."
In addition to provisions from the November 2005 pact, the newest deal, according to E.C. information, also includes "seventh freedom rights" for E.U. airlines, allowing them to operate flights between U.S. and non-E.U. cities; "franchising and branding" rights meant to "enhance legal certainty in the commercial relations" between airlines; antitrust immunity provisions "to facilitate the development" of airline alliances; joint aviation security; and "technical cooperation in relation to climate change." The text also "foresees a mechanism to guarantee" a second-stage agreement that would lead to an "Open Aviation Area" spanning E.U. and U.S. markets.
The contentious issue of access to London Heathrow Airport was not specifically addressed in E.C.'s publicly circulated documents though the language implied, and various published reports suggested, that more airlines--in addition to American, British Airways, United and Virgin Atlantic--would have opportunities to operate at the key facility.
The new deal will be subject to an approvals process on both sides, starting on 22 March at an E.U. Council of Transport Ministers meeting. "I will ask the transport ministers from around Europe to look hard at this deal," Barrot said. "In particular, I will ask them to focus on the question of consumer interests and general economic benefits."
For example, E.C. estimated that by replacing bilateral agreements between the U.S. and individual European countries with the new framework, "we can already obtain a reduction in the cost of tickets for companies and private customers, with consolidated economic benefits of between €6.4 and €12 billion over a period of five years." E.C. also predicted an additional 26 million annual transatlantic passengers in that time and 80,000 new jobs spread across the U.S. and E.U.
The deal, which also would require U.S. congressional approval before the scheduled 28 October activation date, already elicited both positive and negative responses.
"Our initial reaction is that there seems to be a substantially improved balance in the wording of the agreement," said Association of European Airlines secretary general Ulrich Schulte-Strathaus. "Bearing in mind that this is the eleventh round of these talks, it is clear how delicate the negotiating process has been. Some fairly fundamental issues needed to be resolved."
U.S. Secretary of Transportation Mary Peters provided no details in a prepared statement, but said, "Our agreement will offer more choice and convenience to American consumers, promote new growth in our aviation industry and support our continued economic expansion."
Others were downright opposed to the specifics of the new deal, notably British Airways, which presumably would face much stiffer competition at its London Heathrow base. BA's Broughton, who said "we have more skin in this game than anyone," suggested the agreement resembles "a U.S.-model Open Skies agreement," not an "open aviation area based on the model in the E.U. internal aviation market."
By excluding "cabotage" from the draft, Broughton continued, the United States would reserve its large, domestic market solely for U.S. carriers. "It's no access to the U.S. domestic market for E.U. airlines, and virtually full access to the E.U. single market for U.S. airlines," he said. "Settling for a U.S. model Open Skies deal now would be selling Europe short."
British Transport Secretary Douglas Alexander echoed those concerns in a speech yesterday. "The deal on the table falls short of providing the kind of access to the US market that a number of E.U. carriers would like," he said. "If a U.S. carrier can operate from New York to London and on to Frankfurt, but an E.U. carrier can't operate from London to New York and on to San Francisco, then there remains work to be done."
