Back to the table

As the groundwork is laid for a new round of transatlantic talks on open skies, there is some hope that progress can be made, despite the many obstacles still to be overcome

As they jetted off to Washington in early September to lay the groundwork for a new round of talks on a transatlantic open aviation area, the team of Brussels bureaucrats was in a sober mood. The party was worried that the US Department of Transportation would have its hands full dealing with the more immediate impact of Hurricane Katrina rather than a deal that would pave the way for a new era in transatlantic aviation. “The appetite has certainly not increased,” said one senior European Commission (EC) negotiator in the aftermath of the storm that hit the US Gulf Coast.

Despite these challenges, the feeling on both sides is that after nearly three years of hard negotiating, there is a deal to be done. Formal talks between US secretary of transportation Norm Mineta and the EC’s transport commissioner Jacques Barrot are expected in the near future, possibly towards the end of October. “We understand that Mineta is pretty keen to get substantive talks going again,” says Peter McClymont, industry and government affairs manager at the UK’s bmi.

Behind the scenes, the two sides have been holding so-called technical talks, designed to work towards regulatory convergence. “These have been quite open and frank,” says McClymont. Most believe that the talks have also covered some of the more substantive issues.

If the October talks go ahead, these will be the first top-level negotiations since May 2004. Back then a deal that had been brokered by Barrot’s predecessor Loyola de Palacio and Mineta was rejected by key European member states. The US side recognised the need to replace nationality clauses with European Union (EU) carriers to comply with a 2002 European Court of Justice (ECJ) ruling that deemed nationality clauses illegal.

However, Washington refused to budge on the key issue of foreign ownership restrictions, currently set at a ceiling of 25%, with any change needing the approval of Congress.

Essentially, Brussels went for a quick deal, but some member states, notably the UK, felt the EC had gone too far, and that it was better to hold back from giving the USA what it wants and wait for a more comprehensive agreement.

Consultation exercise

Some in Europe felt there was a lack of consultation on the part of Brussels. “There was a lot of bad feeling over the way it was handled,” says one seasoned observer. For its part, the EC seems to feel it could have managed the relationship with member states more effectively. “Something in the process made them hesitant to leap forward,” says one key official. “I don’t know whether it was the political environment or the speed of the process. But I think the lesson is you can all move only when you move together.”

Right from the start, a feature of the talks has been that the US side has most of what it wants already, having struck open skies deals with all but a handful of EU member states. However, that handful includes the UK, the key gateway to North America. The UK-US Bermuda II bilateral restricts access to London Heathrow to just two carriers on each side – British Airways and Virgin Atlantic Airways from the UK and United and American Airlines from the USA.

Despite the rise of rival European hubs such as Paris Charles de Gaulle, Heathrow remains the pre-eminent airport for transatlantic routes. The UK accounted for 38% of the Europe-USA market capacity in September 2005, according to OAG figures, with the vast majority of this traffic going through London. Adding to the attractiveness of Heathrow is a high proportion of yield-friendly premium traffic.

The UK is also central to the other main item on the US wish list, fifth freedom rights for US cargo carriers from non-US open skies countries. FedEx would be the main beneficiary of this, as at the moment it is hampered by its inability to directly feed its London Stansted hub, its second largest European base. FedEx chairman Fred Smith is well connected to the White House, and some believe his influence on the administration will be a major bonus going forward. “They punch much harder than any of the passenger carriers at the moment,” says one observer.

Legal pressure

Also putting pressure on both sides to do a deal is the ECJ ruling on nationality clauses. This looms large in the background of the talks, as it effectively means that the bilaterals the USA has with member states are illegal unless they are amended to comply with the ruling. The EC has threatened to force the states to tear up their US bilaterals if the impasse drags on. Many think it is unlikely that Brussels would take such action against its main trading partner, given the danger of a retaliatory response. However, the EC warns that its patience on this issue is starting to wear thin.

“We are under pressure to comply with the decision on the ECJ – this cannot be delayed any longer,” says one senior Brussels official. He warns that the prospect of the EC going for the nuclear option of ordering member states to terminate their US air service agreements should not be ruled out. “This is not so unlikely in our book. It has been two years and there has been no follow-up, no tangible change. The legal problem still exists.”

In the UK, bmi, currently excluded from the Heathrow-USA market under Bermuda II, is fully aware of the implications of the ECJ ruling for the UK-US bilateral. “We have made it pretty clear to the secretary of state for transport that we expect the UK to do something about this,” says McClymont.

These issues still remain at the core of the discussion – so what has changed this time round? Well, there is no US presidential election looming, as was the case last year. Indeed, few observers were expecting a concrete deal in 2004. Some speculate that the reason the EC came so close to signing a deal which did not tick some key European boxes was de Palacio’s wish to leave office with her name on an agreement.

Perhaps the key change, and the reason why many are optimistic that a deal can be struck, is that the US appetite for a deal appears to have increased. Airlines and the administration are making it clear that they are in favour of changing the ownership and control rules. “I believe the US administration wants to do a deal. It fits in with their broader open skies policy,” says McClymont. “It fills the gaps – the UK being an obvious one.”

Others also detect a mood for change in the USA. “There is movement in America,” says Andrew Cahn, director of government and industry affairs at BA, noting how enthusiasm for a deal has increased. “We have won the intellectual argument.” He adds: “They are much more likely to do something useful if they themselves think it’s the right thing to do.”

The most vocal of the US carriers in support of reform has undoubtedly been United Airlines, where chairman Glen Tilton, a straight-talking Texas oilman, has made clear his view that the ownership restrictions are, in reality, a further burden on an already struggling US airline industry. Speaking in April this year, he warned: “As the global aviation industry is revolutionised around us, the USA and its major air carriers run the risk of being marginalised and left behind.”

Michael Whittaker, vice-president alliances and international affairs at United, says that the carrier sees the changing of foreign ownership rules as part of a broader campaign to complete the deregulation process. Tilton was instrumental in getting the US airline trade body, the Air Transport Association to endorse the raising of the ownership limit to 49% from 25%, but Whittaker explains that, as far as United is concerned, this is only the start. “Really, we need to go to 100%,” he says. Pointing to the oil and gas industry, he notes that if BP can buy Amoco, then there is really no reason why similar cross-border mergers cannot take place in the airline industry.

Whittaker adds that the ability to attract fresh foreign capital is becoming increasingly urgent. He says that while there is actually plenty of money available to US airlines, most of it tends to be speculative. “In the USA at the moment we are lacking in long-term strategic investors,” he warns, adding that a lifting of ownership restrictions would have a stabilising affect on the industry.

Investment criteria

The need for fresh capital could take on a much more urgent need if a US carrier should be threatened with Chapter 7 liquidation. Indeed, in the event of a European white knight offering to come in and invest in a carrier in these circumstances, observers expect that the whole process would be rapidly speeded up. “Congress would agree it tomorrow if this was the scenario,” says Charlie Hunnicutt, partner at Washington-based law firm Troutman Sanders.

However, with the chances of a major going into Chapter 7 still very much an outside bet, a change in ownership and right of establishment legislation will simply have to wind its way through Congress, where there is some opposition to change. The main concerns come from the military and labour unions. “The fact is there are some legitimate labour concerns,” says Hunnicutt. He points to the worry that US workers would be usurped by cheaper labour from overseas.

Pressure against giving up ownership also comes from the military, with its familiar concerns about the Civil Reserve Air Fleet that provides airlift for US defence forces from civil aircraft. However, a similar situation in the maritime sector, whereby shipping companies APL and Sealand have been taken over by foreign companies, has been resolved through ships continuing to operate under US flags despite foreign ownership.

Common goal

In spite of these issues, it is clear that both the Europeans and the USA are now pushing in the same direction – towards a deal. “The economic benefits are clear to both sides. You don’t have to persuade anymore – they are a given,” says Hunnicutt. The issue now, is how to get there.

A key question is whether the Europeans should take a leap of faith and agree a deal that would open up Heathrow and give cargo fifth freedom rights, and essentially puts its trust in the USA to deliver on the key issues such as ownership and control. Most agree that putting some form of conditions in a deal that would make implementation of the agreement on the European side dependent on Congress agreeing to change the ownership and control legislation is likely to backfire. “Congress would see that as the Europeans holding a gun to their head,” warns Hunnicutt.

But, some on the European side are still wary of giving up their main bargaining counters without a concrete deal in place. “There is no point in rushing to a bad deal,” says BA’s Cahn.

“A limited deal would open up the European market, and then where would the pressure [on the USA] come from?” asks Barry Humphreys, director of external affairs and route development at Virgin Atlantic. “We would prefer a big deal,” he says.

Some, such as the French and Dutch, are more in favour of an early harvest, mindful of the need to protect Air France-KLM’s position. Others, such as the Irish and Spanish, are looking to increase the opportunities for their carriers in the North American market. Germany, one of the Europe’s big hitters, has been cautious about giving the EC too much reign in the negotiations with Washington. But even so, some see a danger of the UK being isolated, and Brussels itself seems pretty confident that it can do a better job of selling a deal. “I think if you ask many member states their opinion, the answer would be different this time round,” says one Brussels official.

If the Europeans do have to take a leap of faith on the issues of Heathrow and cargo fifth freedom rights, it seems likely that the US side will have to accept that extra slots at Heathrow will not be part of the deal and carriers will have to take their chances in the grey market. “International guidelines on slot allocation are based on grandfather rights,” points out bmi’s McClymont. “Very few carriers around the world would support the requisition of slots.” Cahn says the issue of giving up slots is simply not on the agenda. “I draw a parallel with the UK bilateral with India. They [India] began by saying we have got to have slots. This was eventually dropped, yet Jet Airways has managed to get four daily slots at Heathrow.”

Few are expecting Mineta and Barrot to find solutions to all these issues in October – but even so, there appears to be a chance of some real progress being made. And the industry could do with some good news right now.

COLIN BAKER/LONDON

Europe and USA liberalise third-country bilaterals When talks on a transatlantic common aviation area started in 2003 they were billed as a chance for Washington and Brussels to set a liberalisation template that others could follow. That is not quite how things have panned out. While talks between the two parties have proved to be slow ­going, both have been forging deals with other third countries. On the European side, Brussels has negotiated a number of “horizontal” agreements, whereby a clause is inserted in bilateral agreements stating that designated carriers should be from the European Union, rather than any single member state. This brings the agreements in line with a 2002 European Court of Justice ruling that nationality clauses were illegal. So far, the European Commission (EC) has made most progress on Europe’s southern and eastern borders, and aims to establish a common aviation area between these regions and the community by 2010. Brussels now has 20 people working on liberalising bilateral agreements with third countries. At the same time, the EC has been talking to major trading partners, such as Australia, China, India and Russia about negotiations to strike liberal ­European-wide air service agreements. Some suspect that the transatlantic is not far from the minds of European negotiators in the drive for liberalised EU-wide agreements with third countries. “This creates momentum around the USA,” says Geert Goeteyn, Brussels-based partner at Howrey Simon Arnold and White law firm. Not that the USA has been idle, however. It too has been pushing for open skies deals with trading partners, and signed its latest such agreement with Thailand in September. However, the USA failed to persuade Hong Kong to agree an update to the 2002 bilateral earlier this year, which would have allowed US carriers to fly beyond the Chinese gateway. Observers have noted the irony of the fact that in this case it was the USA taking the lead in pushing for liberalisation – a contrast to the situation with Europe, at least until fairly recently. The USA has, however, also agreed an open skies deal with India earlier this year and is looking to strike a deal with Japan. The move towards a more liberal aviation environment will not happen overnight even outside the transatlantic region – as demonstrated by the failure of the UK to get India to accept the idea of the “EU carrier” concept in its recent updated bilateral negotiations.

Source: Airline Business