Challenges to airline liberalisation. Mindset changes needed: CAPA Americas Summit (VIDEO)


Tentative approval was finally granted by the Us DoT for Norwegian Air International to introduce long haul, low cost service from Europe to the US. Even though the opponents have successfully lobbied legislators to introduce prohibiting legislation, this was a milestone in the contentious debate about open skies agreements, as well as the intricacies of labour law and foreign ownership requirements. There was a lively debate on this topic at CAPA's Americas Aviation Summit, under the guidance of CNN anchor, Richard Quest.

However, in the larger scheme of liberalisation Norwegian’s victory is a small step in what appears to be a long journey for a mindset change: to create new paradigms in the rapidly changing global aviation industry. In the US aviation landscape the easing of foreign ownership restrictions remains a non-starter, which means that joint ventures will continue to serve as stand-ins for cross-border ownership. As the status quo remains, and members of large global alliances holding anti-trust immunity dominate markets such as the trans-Atlantic, Norwegian’s ability to inject low cost competition is welcome, and a logical development.

As American, Delta and United continue to press their case for consultations on open skies agreements with the UAE and Qatar, the US government is in no hurry to make rash decisions about the merits of the claims by the 'Big 3'.  The US administration holds a crucial position for ensuring that the overarching benefits of open skies are not jeopardised as it evaluates the opinions of all stakeholders in the subsidy debate.

"The Witches’ Brew: Alliances, equity, JVs and protectionism".
Panel discussion at CAPA Americas Aviation Summit, led by CNN anchor, Richard Quest

Source: CAPA TV

US regulators ultimately decide: NAI is qualified to launch flights from Europe to the US

It took Norwegian more than two years to win tentative approval for a seemingly routine route request to serve the US from Europe: services by a company holding an Irish operating certificate – Norwegian Air International. US labour groups mounted fierce opposition to Norwegian’s application, questioning the legality of the company’s initial plans to employ crews from Asia on the flights.

Speaking at the recent CAPA Americas Aviation Summit (prior to DoT’s tentative approval for Norwegian), the Air Line Pilots Association (ALPA) Executive Administrator, Rick Dominguez, explained that the association has no opposition to Norwegian securing an air operating certificate in an EU country. However, he reiterated the union’s argument that Norwegian’s application should not violate Article 17 bis of the EU-US Open Skies agreement. This states that, 'the opportunities created by the Agreement are not intended to undermine labour standards or the labour-related rights and principles contained in the Parties' respective laws'.

See related report: Norwegian Air Shuttle renews its attempt to obtain US flights for NAI. Part 1: the arguments

Mr Dominguez remarked that Norwegian has now said that it would employ pilots and cabin crews from Europe and the US, and “[we] would love to see them put that on paper”.

Joining Mr Dominguez in a panel discussion was the Delta Air Lines’ General Counsel, Peter Carter. Delta, along with American and United, joined ALPA in opposing Norwegian’s request. Mr Carter remarked that Delta was “supporting our friends at ALPA”, and he reiterated the argument that, “we don’t as an industry, want to end up like the maritime industry where we have flags of convenience”.

The DoT consulted with the US Department of State and Department of Justice, and ultimately determined that Article 17 bis “does not afford an independent basis for rejecting an application that is otherwise qualified to receive a permit”.

The US government weighs value of open skies and evaluates subsidy allegations

Norwegian’s application was engulfed in the larger open skies debate ignited by American, Delta and United over their claims of unfair government subsidies awarded to Emirates, Etihad and Qatar. The dynamics pitting the Big 3 against the Gulf 3 are different from the opposition to Norwegian’s expansion, which was centred on labour contracts. 

However FedEx, which has opposed the Big 3’s efforts to open government-to-government consultations on open skies pacts with the UAE and Qatar, is concerned that a pattern is emerging: a “continuing march towards trying to do things that would restrict competition in a market place across the Atlantic, where the three alliances control almost 90% of the traffic,” FedEx Express General Counsel, Rush O’Keefe, told the CAPA audience.

Evaluation of the Big 3’s subsidy claims by the US government continues, and now, with DoT tentatively granting Norwegian Air International’s application, questions are arising whether American, Delta and United will ultimately be successful in their anti-subsidy campaign.

The US Department of State deputy assistant secretary for transportation affairs, Tom Engle, has the view that the allegations contain more than recommending consultation on open skies agreements with the UAE and Qatar. “Some of them [the allegations] are highly controversial,” he stated, adding that the government does not apologise for the length of time it is taking to review the allegations.

Mr Engle stressed that there will be no rush into decisions on “this kind of thing” when the overriding principle “has to be the importance of preserving open skies benefits that have been of such value to this industry”. Clearly the government is giving equal attention to the arguments of American, Delta and United and the counter-points offered by those entities opposed to the anti-Gulf stance; these include FedEx, jetBlue and Hawaiian.

It is not clear how a change in the US Presidential administration will affect the review of subsidy claims made by the Big 3. Mr Carter of Delta stated in a CAPA TV interview that the airline was firmly committed to the issue. He said that Delta and its partners would raise the subsidy issue with the next administration if the current administration of President Obama did not make a decision about the subsidy allegations.

See related report: CAPA Americas Summit: Latin America remains promising as open skies drives US international growth

Delta predicts that jetBlue will change course once it engages in JVs of its own

Another by-product of the Gulf airline debate is the scenario that jetBlue and Hawaiian join forces to push the US government into conducting regular reviews of the immunised trans-Atlantic JVs created by members of the three large global alliances, and Delta and Virgin Atlantic. Data from CAPA and OAG show that for the week of 18-Apr-2016 members of those joint ventures control more than 80% of the seats between the US and Western Europe.

Percent of one-way seats held by alliance joint venture partners between the US and Western Europe for the week of 18-Apr-2016

oneworld SkyTeam Star
American 13% Air France 5% Lufthansa  Group 9%
British Airways 12% Alitalia 2% United 14%
Iberia 2% Delta 15%  
  KLM 3%  
Total 27% Total 25% Total 27%

jetBlue and Hawaiian believe that immunised joint ventures are a hindrance to competition and consumer choice.

See related report: Hawaiian Airlines and jetBlue combine to oppose the Big 3’s Gulf campaign and challenge closed JVs

Mr Carter of Delta — an airline that holds antitrust immunity with its SkyTeam partners Air France-KLM and Alitalia — obviously counters that argument, touting falling fares and the seamless experience for passengers. “I think jetBlue will change its tune when it has a partner and wants to enter into a joint venture", he stated. Hawaiian’s geographical location creates some challenges for establishing a joint venture, but over time both jetBlue and Hawaiian will find themselves participating in immunised partnerships, Mr Carter concluded, saying, “I think that is where the market will go for both of them”.

Arguably the creation of joint ventures was facilitated by strict ownership laws in many countries, including the US. Foreign ownerships appear to be one area where Delta and FedEx, which fall on opposite sides of the Gulf debate, have similar views.

“I think the rules around foreign ownership would be fascinating to take a deep look at”, Mr Carter said. The origins of current foreign ownership laws are in the Paris and Chicago Conventions, he said. However, Mr Carter highlighted the current situation in Brazil as an example of a region where easing of ownership restrictions could be beneficial.

The aviation industry is no longer healthy in Brazil, “and they don’t have the capital in Brazil to support that particular industry,” Mr Carter added, continuing, “Why shouldn’t Delta be able to buy a Brazilian airline? ... No other industry I am aware of has these limitations”.  Delta has increased its equity stake in Gol from 3% to 9%, and has also agreed to guarantee USD300 million of the Brazilian airline’s debt. Gol has posted losses since 2011, and in the middle of Brazil’s recession is working with two advisory firms examining ways to maximise its capital structure and review its aircraft lease obligations under existing contracts.

FedEx Express has long supported more relaxed foreign ownership rules, said Mr O’Keefe.  He also offered an example of missed business opportunities created by tight ownership restrictions. At present FedEx has to contract with a Canadian airline – Morningstar Express – to move cargo on intra-Canada flights. If FedEx owned Morningstar it would still be required to comply with Canadian labour law, he explained. However, there are “huge efficiencies to be gained by FedEx being able to own it, and control and operate it”, Mr O’Keefe stated. A recent review of Canada's Transportation Act recommended 100% foreign ownership of Canadian cargo airlines.

A lack of consensus on foreign ownership renders the issue status quo 

During the EU-US open skies negotiations, the EU pushed for loosened foreign ownership restrictions on US airlines, but the issue drew staunch opposition from labour groups. In the final agreement, the US pledged to seek eased restrictions on foreign ownership, but no timetable for a revision of ownership laws was established.

The arguments offered by labour groups against the easing of foreign ownership restrictions rest on an inability to negotiate with an entity that is allocating flying, said Mr Dominguez. He cited 28 different labour laws in Europe that allow companies to “labour-shop”, which is a problem, he said.

In the opinion of Bob Coffman, the government affairs representative of the Allied Pilots Association, representing American’s pilots, there is no structure in place to “look at social and human values across the globe the way capital is protected”. Mr Coffman said, “we may very well get there” with respect to transborder investments in airlines without limits, but there must be a willingness to have dialogue on the impact for the work place.

Mr Engle of the Department of State stated that there is no national consensus on foreign ownership: “I try to take a pragmatic approach and focus on liberalising things elsewhere”.

A mindset change is necessary to reach the next stage of liberalisation globally

The DoT’s drawn-out process in tentatively approving Norwegian’s application reflects the need for a mindset change among all global aviation stakeholders as the borders that once divided various aviation regimes dissolve or become blurred.

A necessary element for a healthy aviation industry in the future is a collective consensus that further liberalisation is a positive contribution to the global aviation business. All the important stakeholders understand that conclusion in theory, but there are legitimate and complex concerns that need to be addressed. A commitment to understanding and resolving those complexities is the next step toward reaching the global potential of the aviation business.

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