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EU-US open skies. An opportunity too great to miss.

20-May-2008

As the US and EU negotiators settle back in to write up their reports on last week’s open skies talks in Slovenia, there will be mixed feelings and probably some disappointment that more positive steps were not achieved. But the emotion of surprise will not be among them.

This was never going to be a walk in the park. It was only by a near miracle that the first step in open skies actually occurred last month. The hope then was that the resulting momentum would help carry the process forward to 2010, as airlines leapt to take up new opportunities – and the public benefited. Certainly airlines have already responded favourably, with new access to London Heathrow for US carriers a vital breakthrough.

Much of the potential outcome over the next two years revolves around rules governing foreign ownership of airlines, both in the US and under bilateral agreements. The US has the sovereign right to dictate what happens domestically with ownership and control of airlines registered there – currently a maximum of 25% voting rights and 49% equity, rarely enough to interest a serious buyer, especially one who wants to exercise de facto control.

And, behind those rules, there is a serious and disparate lobby of reactionary loom-smashers in the US, led by unions who have often shown themselves capable of blindly opposing any change, even – or especially - where the alternative is oblivion.

A recent investment exception was Lufthansa’s 19% purchase of JetBlue, a toe in the water which has little downside for the European airline and has helped the US carrier. But initiatives in buying into US airlines in the past, where these restrictive rules applied, have not met with success, notably SAS’ unhappy minority purchase of Continental in the 1980s, a prime example of the risks of subsidiary rights.

And the burlesque surrounding Virgin America’s establishment as a domestic operation last year would have made a third world government blush. The prospect of foreign de facto control of a domestic airline, intended to stimulate domestic travel and give US consumers new options, was simply too much for the array of vested interests.

It has been against this background over the past few decades that US negotiators have pursued global liberalisation on international routes, generally quite out of step with philosophical underpinnings at home. So, where a prospective US-EU agreement depended so centrally on accepting the Europeans’ wholly appropriate request for a relaxation of domestic ownership and control rules, the outlook appeared bleak.

Meanwhile, elsewhere in the world, many of the early recipients of the US liberalisation missionaries’ messages have themselves moved on. It is now becoming commonplace in Asia for example for governments to overlook the “control” element of bilateral ownership and control restrictions, permitting foreign investments of 49% ownership, with full voting rights and no questions asked.

A simple majority of national ownership, even where it in practice does not deliver control, is enough. Why? There is a simple answer: because everyone benefits from it. Even the Asia Pacific region’s incumbent legacy airlines have gone from strength to strength in this environment. And thousands more jobs have been created, to the extent that there is now a gross skills shortage.

Most significantly, even conservative (on ownership and control) governments such as Japan, China and Korea have nodded at this development, albeit without formally endorsing it. They share an implicit recognition that multilateral acceptance of relaxed ownership rules will occur only after global warming has made the issue academic. So this sort of bilateral change became acceptable in the new environment.

The US negotiators, knowing they had little home support at tabloid level for relaxation of ownership rules, went into Slovenia with a creative initiative to embrace as many foreign governments as possible through a programme of mutual bilateral harmonisation – the same way as the US and the UK first spread their standard bilateral air services principle 60 years ago. Nothing could make the potential global implications of trans-Atlantic agreement more apparent.

The European team, unbriefed on this approach, has apparently seen it as a diversion. That is a pity, as it looks as if this is one avenue by which the US negotiators might be able to paint their detractors at home into a corner. It is not the only option, but it points to a need for each side to be sensitive to the other’s domestic constraints.

Indeed the omens are not good. On the European side, Daniel Calleja, a prime mover, appears likely to be handing over to a new Transport Commissioner allied to Italy’s Prime Minister Mr Berlusconi, whose government is currently trying to prop up the near-defunct Alitalia. And time is passing.

But it is unthinkable that this remarkable joint initiative should be allowed to falter. The whole logic of rationalising across the Atlantic, at a time when many US airlines are staring down the barrel of instant decline, should be overpowering. For both sides and their airlines, the opportunities are great. Failure to grasp this golden chance would be simply unforgivable.


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