Brussels and Washington are striving to impose their own blueprints for reform of the the international aviation system
At long last, the European Commission (EC) is finally on the verge of sitting down to negotiate an aviation agreement with the USA. For the best part of a decade Brussels has been angling for a mandate to talk on behalf of the European Union (EU). With that finally granted earlier this year, the start of those talks is only a matter of weeks away. But when the two sides do sit down to talk they face a crowded and often contentious agenda. Finding common ground could be the first challenge.
The two sides are scheduled to meet in early October and again before the end of the year, but little is expected from these initial skirmishes, which will be held at civil servant rather than political level.
Much of the early play is down to Brussels. It is the EC which has been driving to get the talks started and has made no secret of its broad ambition to brush aside the traditional bilateral to create a new open aviation area across the North Atlantic. That long-term vision has garnered support from at least some of Europe's flag carriers, but has distinctly failed to gain purchase in Washington.
Brussels itself recognises that there are major hurdles that would need to be overcome if Washington is to be tempted away from the open skies model which has served it well over the last decade and is already safely in place across much of Europe and indeed the world.
Even the EC's immediate shopping list is guaranteed to make for some lively negotiating. That includes: loosening of ownership and control restrictions; cabotage on domestic flights; a reform of the wet-lease system; and an end to the Fly America programme that restricts US government employees to US carriers.
Multilateral approach
US officials have not detailed their position, maintaining a public posture that they are open to a number of potential models. However, in public pronouncements, they have repeatedly sung the praises of the multilateral template pioneered in the Kona Accord between six countries within the Asia Pacific Economic Cooperation (APEC) forum.
The agreement is based on existing open skies bilaterals and contains some progressive elements. It eliminates the traditional ownership provisions found in most bilaterals and creates a multilateral process for such issues as accession, amendments, a dispute-resolution mechanism and outside relationships.
Jeff Shane, the US undersecretary of transportation for policy, has raised APEC in recent discussions of the multilateral approach. "The APEC agreement represents a new and simplified way to extend the benefits of liberalisation to more markets, one that we hope will become much more common in the future," he says.
Kona also offers an optional protocol that lets members exchange seventh- freedom passenger and cabotage rights, a feature that Shane calls a "club within a club". Brunei, New Zealand and Singapore have already signed on to this protocol.
But many in Europe see the agreement as little more than an extension of US open skies, with the USA as the dominant partner. "It is a two-way street being approached from one direction," says Chris Tarry, consultant at CTAIRA.
However, with US open skies deals already in place with all but four of the EU member states, the EC has few persuasive bargaining chips. The main exception is, as ever, access to London Heathrow. Under the existing UK-US Bermuda II agreement, transatlantic access to Europe's major gateway is restricted to two carriers on each side.
Andrew Cahn, director of government and industry affairs at British Airways, says the UK flag carrier would be prepared to see Heathrow used as leverage to win a comprehensive agreement with the USA, but does not want to see Brussels throw away its trump card too cheaply.
In the past, UK-US negotiations over access to Heathrow have broken down due to the UK insistence that open skies was linked to antitrust immunity for the BA alliance with American Airlines. That in turn has led to demands for BA to relinquish slots at Heathrow which the UK flag carrier has steadfastly declined to do. Cahn is adamant that BA will still not consider giving up slots to pave the way for a transatlantic deal. In any case, he adds, such slot discussions are not within the Brussels remit.
If access to Heathrow were thrown open, there would be little chance of new US entrants securing any major haul of slots at the heavily congested airport through the usual allocation process. Purchasing slots on an active "grey" market could be possible if expensive. Formal rules on slot trading are currently still bogged down in Brussels.
However, it is possible that the global alliance groupings could provide a solution. Star, in particular, has ambitions to create its own terminal at Heathrow building on the presence of bmi british midland and Lufthansa. Under an EU-US deal any European carrier would presumably be able to serve the transatlantic out of Heathrow.
BA would also have a stronger case for its own transatlantic antitrust ambitions. Cahn gives little away on BA's thinking, other than to point out that there is no antitrust filing currently on the table and that BA is prepared to play for time. "Let's see how the negotiations go," he says. "In the fullness of time, this may be a possibility."
Stepwise approach
Not all in Europe think that the EC should take an aggressive open stance. KLM chief executive Leo van Wijk argues that the EC should concentrate on easing mergers within the EU by lifting the nationality restrictions embedded into the existing national bilaterals. The EC should take what he describes as a "step-wise" approach leaving the more contentious issues for a later date.
Geert Goeteyn, a Brussels-based partner with law firm Howrey Simon Arnold & White, says that smaller states, which face the prospect of their flag carriers being gobbled up in any consolidation, are likely to be still more cautious.
Cahn, however, is adamant that the EC should take an all-or-nothing approach. "We would like the EC, having achieved its mandate, to go for a proper aviation agreement," he says. "The concept of a limited agreement is a dangerous idea. If it's not in the first slate of the agreement, then you're not going to get it at all."
Much will depend on how the EC's negotiating position develops. Brussels says that while it is prepared to be "pragmatic", it stresses that the EC is looking for a "real deal".
Ending the nationality restrictions in existing European bilaterals would seem to be a minimum requirement for Brussels. It was, after all, the European Court of Justice ruling on this issue last November that led to the mandate. Some open skies pacts allow such rights for all-cargo carriers, and the OECD, the club of industrialised nations, has since early 1999 been working on proposals for regulatory reform in air cargo, proposals that Washington aviation lawyer and former State Department official Allan Mendelsohn says could easily be the basis for a passenger agreement by straightforward adoption.
The DoThas suggested that its open skies deals already contain the potential to bypass national borders as shown by the Kona Accord. However, laying the groundwork for possible Congressional opposition to change, the USHouse of Representatives, in recent action, has told the Department of Transportation (DoT) to "formally define fifth freedom and seventh freedom consistently for both scheduled and charter passenger and cargo traffic". Resolutions such as this are non-binding, but tend to carry great weight, and House aides says the measure is intended to close loopholes under which charter flight operators have exercised local-traffic rights.
Ownership rules
The issue of foreign ownership already appears stalled in Congress despite the wide attention given to Transportation Secretary Norman Mineta's request in June that Congress raises the ownership level to 49% from its 25% limit, matching the current position in the EU. The provision has not been included in either the Senate or the House versions of the pending FAA bill, which Mineta says should be its legislative vehicle. Senator Ted Stevens, the powerful Alaskan legislator who controls the appropriations process, has committed to limiting foreign ownership, and on the House side, aides to Transportation Committee chairman Don Young, another Alaskan, say he shares some of the objections.
Although Virgin Atlantic's Sir Richard Branson has said in public that he is committed to establishing a carrier in the USA, his aides concede that he may not be able to do so as quickly as vowed.
The toughest political challenge to opening up the transatlantic could come from the US unions. Organised labour has gained new sympathy in Congress after the executive pay scandals. The unions are the key to short-term changes, says Dorothy Robyn, the Brattle Group consultant who was the Clinton White House adviser on aviation issues. Their interests will extend to issues of cabotage and wet leasing, she adds.
The Air Line Pilots Association (ALPA) has concerns about wet leasing, especially in cargo operations, according to ALPA attorney Jonathan Cohen. If the US government were to allow unrestricted wet leasing, it will effectively permit a ready-to-use strikebreaking workforce for US carriers to use internationally, the pilots say. However, EU carriers do not face similar blanket restriction, but are allowed to wet lease on a temporary basis. The US could harmonise its regulations with those of the EC. These rules fall under the purview of FAA which could rewrite its regulations without seeking legislative approval, although Congress could intervene.
ALPA and other labour groups have also warned that they would fight unlimited cabotage. The overwhelming preference of alliances, however, has been for their overseas partners to feed directly into their hubs without domestic stops except for "technical" stops that do not allow for local traffic.
Another point of political contention on the negotiating agenda comes in the form of the Fly America provision. Although Congress has not moved to alter the provisions that limit government travel and most postal shipments to US flag carriers, it is explicitly based on the rationale that foreign carriers enjoy an unfair advantage though state subsidies. That position would now seem outdated.
Whereas in the 1990s it was the USA complaining about European hand-outs, the pendulum has swung firmly the other way. While Brussels is clamping down on state aid, and has made it clear it is prepared to see flag carriers collapse rather than be shored up by public funds, it has been a different story in the USA.
Since the 11 September terrorist attacks, the USA has reimbursed carriers by almost $8 billion for revenues losses directly attributed to the attacks and for security costs. On top of this there have been almost $2 billion in loan guarantees and Washington has covered war risk insurance. The latter has provoked European cries of unfair subsidy and formed a justification for its own insurance support. Whether such aid is distortive, the counter charges are enough to sour EU-US aviation relations and slow down negotiations on any transatlantic deal. However, the US Congress is unlikely to offer any direct aid again.
As state aid leaves the picture, the rationale for Fly America loses strength, and foreign flag carriers could bid competitively for the contracts under which US government traffic moves. Separating Fly America from Department of Defense airlift rules, which also exclude foreign flag carriers, could allow progress.
Liberal Europe?
Although the USA is coming in for much criticism from those eager to see a more liberalised market, Earl Scott, president of Aero-Accords in Seattle, points out that the Europeans are not always as open as they like to make out. Preliminary analysis by Aero-Accords of bilaterals between European states and the rest of the world, show that 43% designate a single rather than multiple carriers. Half equally designate a single gateway.
"With about half of all the current European bilaterals allowing only single designation, and each including ownership clauses, I am not sure why all the discussion about the USA's multiple-designation and ownership clauses is taking place," says Scott.
The EC has agreed to let member states renegotiate bilaterals with countries other than the USA, on condition that they work closely with Brussels, and, of course, replace the nationality clause with an EU clause.
Technically, a new EU-US agreement need not spell the end of the existing bilateral system, although it would represent the biggest change to the international landscape since the Chicago Convention was signed in 1944. In reality, the tone of any new EU-US agreement will set the agenda for the shape of liberalisation to come. The stage is set for a battle of wills between the world's two major aviation blocs. The jury is still out on what will emerge, but the going could still be slow.
REPORTED BY COLIN BAKER IN LONDON AND DAVID FIELD IN WASHINGTON
Source: Airline Business
