Norwegian Air Shuttle furthers its struggle to make legitimate use of EU-US open skies rights


Norwegian Air has attempted again to gain DoT approval. Norwegian Air Shuttle's long haul operations, which were launched in 2013 and struggled through 2014, are now flourishing. Routes to the US from London Gatwick, outside the airline's home market, have been added to its Scandinavian-based long haul operation.

However, the long haul network is lopsided, with Bangkok the only destination that is not across the Atlantic. The background is complicated, but this is in large measure due to the imbalance in traffic rights available to it as a Norwegian operator in an EU country. It has waited for more than two years to receive a US foreign carrier permit for its Irish subsidiary, Norwegian Air International, but has been met with intransigence from the US Department of Transportation.

Ever innovative, Norwegian is now having another go, making an application for a US permit with another new subsidiary, Norwegian Air UK, in Dec-2015. Predictably, labour organisations and Norwegian's main Scandinavian competitor SAS have already raised objections to this latest (inevitably legitimate) attempt to operate within the EU-US open skies agreement. The Department of Transportation must not allow itself again to be hijacked by anti-competitive factions.

NAUK gives Norwegian a wider range of traffic rights from the UK

Norwegian received a UK Air Operator Certificate (AOC) on 29-Oct-2015, and an Operating Licence on 13-Nov-2015. Norwegian Air UK (NAUK) applied to the US Department of Transportation for an "exemption and foreign air carrier permit" on 11-Dec-2015.

NAUK's parent company, Norwegian Air Shuttle, is of Norwegian nationality. It therefore has access to intra-EU traffic rights (due to Norway's membership of the European Common Aviation Area), and to EU-US traffic rights (the EU-US open skies agreement also covers Norway). Under its Norwegian licence, it has been able to operate routes from the UK to other countries in Europe and transatlantic flights to the US.

However, before obtaining a UK licence, Norwegian could not operate from the UK to destinations in Asia, South America and Africa. Opening traffic rights with a wide range of nations in this way, under the UK's bilateral agreements , was Norwegian's motivation for obtaining a UK licence.

Norwegian carries almost 4 million UK passengers annually

The Norwegian Group is now the 11th biggest airline group in the UK by seats. It is the number three operator at London Gatwick by seat capacity (week of 11-Jan-2016, source: OAG).

London Gatwick Airport airlines by share of seats 11-Jan-2016 to 17-Jan-2016

When it received its UK licence, Norwegian said that it had ten aircraft (10% of its total fleet of 99 aircraft at end 2015) and more than 400 flight personnel based at Gatwick, having established a base there only in Apr-2013. It carried 3.9 million UK passengers to 34 global destinations in the 12 months to Sep-2015, and expects the total carried to and from Gatwick in 2015 to be nearly 3 million.

UK is Norwegian's second biggest country for international seats

According to OAG data for the week of 11-Jan-2016, the UK accounts for almost 14% of Norwegian's international seat capacity, second only to the 19% accounted for by Norway. Norewegian's Gatwick base is its largest outside Scandinavia by seats and frequencies. This provides it with a solid base of traffic on which to build a bigger long haul network from the UK, which has the largest long haul market in Europe.

Norwegian currently operates four US routes from Gatwick: Fort Lauderdale, Los Angeles, New York and, as a summer only market, Orlando. It will launch Gatwick-Boston in Mar-2016, and Gatwick-Oakland in May-2016. In addition, it operates across the Atlantic to San Juan in Puerto Rico (launched Nov-2015).

Norwegian now has 13 long haul destinations in total

Norwegian's long haul network, which is based in the three Scandinavian capital cities as well as at Gatwick, has grown fairly rapidly since its launch in 2013. It now includes eight destinations in the US, two others in North America (the US Virgin Islands and Puerto Rico), two in Latin America (Guadeloupe and Martinique) and one in Asia Pacific (Bangkok).

Spurred on by its long haul network reaching profitability earlier than expected (a positive net contribution is expected to be generated for 2015, helped by lower fuel prices), Norwegian announced an order in Nov-2015, for an additional 19 787-9 aircraft. This brings its total orders for the variant to 30 and, added to its current long haul fleet of eight 787-8s, this will take Norwegian's widebody fleet to 38 by 2020.

See related report: Norwegian Air's new Dreamliner order will give it 38 widebodies by 2020. 3Q2015 profit doubles

NAUK applied for a US permit in Dec-2015

Although, as noted above, the parent operation enjoys EU-US traffic rights (under which it has established its UK-US routes from Gatwick), on 15-Dec-2015 Norwegian applied for a US foreign carrier permit for NAU, its UK-based operating company UK.

This application, for a EU-designated airline, was made under the EU-US open skies agreement. This agreement effectively allows any airline licensed by an EU country to fly from anywhere in the EU to anywhere in the US, without restriction.

Such applications are routinely made on both sides of the Atlantic, most recently weighted more towards the European side. For example, in recent months Lufthansa low cost subsidiary Eurowings, LCC SunExpress (a joint venture between Lufthansa and Turkish Airlines), and Spanish airline Evelop have been granted foreign carrier permits by the US Department of Transportation (DoT).

According to a document filed by Norwegian with the DoT on 11-Jan-2016, the DoT has granted such rights to at least 64 European airlines since the open skies agreement was signed in 2008, and the average time for granting these applications was 53 days (the shortest was three days, and the longest was 316 days).

A US permit would give Norwegian greater efficiency in its UK long haul operations

If it is granted a US foreign carrier permit, thereby receiving EU-US traffic rights, NAUK will then be able to operate both to the US and to other long haul destinations in other continents under the UK's bilaterals, and under a single AOC. Without a US foreign carrier permit for its UK subsidiary, the Norwegian Air Shuttle group can still operate all of these routes, but it must use its Norwegian AOC to the US and its UK AOC to other long haul destinations.

The need to operate under two different AOCs from the same base would reduce its operational flexibility and efficiency, since it would not be able to deploy the same aircraft and crew on a transatlantic flight as, for example, on a flight to Asia or South America. Moreover, Norwegian labour laws governing the parent airline, operating under a Norwegian AOC, are more restrictive than are allowed under UK laws, and lead to higher costs .

Norwegian's Irish subsidiary, NAI, has not yet received a US permit

For similar reasons, Norwegian set up an Irish subsidiary, Norwegian Air International (NAI) in 2013. It applied to the DoT for a US foreign carrier permit for NAI in Dec-2013, but, more than two years later, has not yet received a decision. A delay of this length is unprecedented, and follows strong lobbying against NAI's application by a number of US airlines and airline labour organisations, in partnership with some European legacy airlines.

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

Although NAI's application has not been rejected, the absence of a decision means the absence of a foreign carrier permit and the absence of traffic rights conferred under the EU-US open skies agreement for the Irish designated subsidiary of the Norwegian group.

However, this has not entirely deterred Norwegian in its long haul expansion. It continues to operate to the US, both from Scandinavia and the UK, with full rights under its Norwegian licence. Moreover, it has continued to add routes and to help to grow the market.

See related reports:

SAS & Norwegian Air set to take market share in Scandinavia-US market as United and Delta pull out

Norwegian Air Shuttle's attempt to obtain US rights for NAI. Part 2: Traffic impact on competitors

Indeed, the inflexibility forced on it by being prevented from using a single AOC to operate both to the US and elsewhere has led to Norwegian concentrating its long haul expansion on the US. This focus on the US has also partly been the result of the lack of overflight rights through Russian airspace on potential routes to Asia, but Norwegian has found the transatlantic market to be receptive to its long haul product, in fact.

Norwegian tries again with the DoT, from a different angle

Nevertheless, Norwegian's wider long haul ambitions would be facilitated if it could obtain a US foreign carrier permit for an EU-based subsidiary. One of the perceived objections to such a permit being granted to the Irish based NAI, among many, was that it did not have any flights operating from Ireland. It now plans to launch a Cork-Boston service in May-2016, but this is a relatively small move.

The establishment of NAUK, and its application for a US foreign carrier permit, give it another bite at the cherry. As outlined above, the UK operation is substantial, and NAUK's labour contracts will be governed by UK labour laws.

NAUK's application is opposed by labour organisations and SAS

However, Norwegian's application for a US foreign carrier permit for its UK operation has been swiftly met with the same objections from many of the same entities as were used to block the path for NAI.

A large number of US labour representative bodies (Allied Pilots Association, the Air Lines Pilots Association, the Transportation Trades Department, the Transport Workers Union of America, AFL-CIO, Association of Flight Attendants-CWA, International Association of Machinists and Aerospace Workers), as well as the European Cockpit Association and the airline SAS, have all filed comments opposing or questioning the application.

As was the case with the NAI application, those objecting to NAUK's application cite Article 17 bis of the EU-US Open Skies agreement as their principal justification. This clause stresses the social dimension of the agreement and the benefits of high labour standards, noting 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". Norwegian's critics claim that its practice of employing cabin crew from low wage economies outside the EU undermines labour standards.

NAUK may hire crew in a number of different ways

The joint filing to the DoT by many of the labour organisations noted above complains that "NAUK's application contains no information as to the employment arrangements that will apply to the pilots and flight attendants who will staff the aircraft that NAUK intends to use to serve the US".

It points out that NAUK may hire crew directly, from a UK hiring agency, or from non-EU hiring companies that employ the crew on extra-European contracts, "as it is currently done by Norwegian and NAI".

Yes, it may. And that is the point: the verb used in the filing means that it is permitted to do so. There is certainly nothing in the EU-US agreement to deny this, a point that has been pursued robustly by the EU.

The SAS filing, in support of that made by the labour organisations, called NAUK's application "minimalist", adding that it was "strikingly similar" to that NAI's application. SAS said, "That application was controversial because NAI's employment model for its US-EU long-haul flights relied on pilots and cabin crews employed by non-European crew staffing companies with employment contracts based on Asian law".

SAS agreed with the labour unions that additional information on NAUK's employment model should be provided. It is paradoxical that an employer that has been on a long term search for lower unit costs should side with labour organisations that are seeking to restrict labour flexibility in the industry.

So far, no other airline has filed an objection to NAUK's application, although three US airlines (America, United and Delta) and two of Europe's big legacy groups (Air France-KLM and Lufthansa) joined SAS in opposing NAI's application. It may be only a matter of time - a matter that has been sadly stretched to date.

NAUK's application has also received support

NAUK's application has received support in filings made by FedEx, Atlas Air, the US Travel Association, the Port of Oakland, The Maryland Aviation Administration, the Greater Orlando Aviation Authority and the Washington Airports Task Force. The FedEx filing summed up the essence of the streamlined approval procedure introduced by the EU-US open skies agreement:

"The parties to the US-EU agreement, including both the US and the UK, agreed that their airlines should not file extensive documentation anymore, because the decision of the certifying authorities deserved mutual respect. The parties directly addressed whether each side should probe deeply into the determinations of the other side and the decision was made not to do so. Instead, an abbreviated format was specified by the Department. As the Department itself said: "Under this arrangement, the US Department of Transportation uses determinations made by aeronautical authorities of Member States on the fitness and citizenship of their air carriers, rather than basing these findings on detailed evidentiary submissions filed by applicant EU air carriers... ""

As the FedEx filing pointed out, Norwegian Air UK has been authorised and recognised by the UK Civil Aviation Authority. As such, it is entitled to the rights and privileges of the US-EU agreement, and must conform with the responsibilities imposed. Under the agreement, the US is not permitted "to second guess that conclusion or to add new requirements," said FedEx. The air freight operator continued, giving its main reason for supporting the application:

"FedEx is intervening in this matter not in defence of the subject carrier, but in support of the basic principle that the US should honour its agreements. This agreement should not be diminished by those who would read into it new unilateral requirements ex post facto to serve anti-competitive goals."

Both NAI and NAUK should be granted US permits without delay

Article 17bis of the EU-US agreement is there to safeguard airline workers on both sides of the Atlantic from disreputable employment practices. It is not there as an excuse to delay or deny legitimate applications from recognised EU airlines that have been approved in every respect by their national aviation regulators.

As CAPA observed in its Jun-2015 analysis of NAI's renewed attempt to have its application processed:

It has never been the case, since the advent of the open skies era, that an airline legitimately operating under the laws of a country that is party to an air transport agreement with the US can be denied rights either because it has employment policies that make it more competitive than US airlines, or because it has not pre-negotiated its labour contracts with US pilot representatives.

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

The long delay in approving NAI's application does not reflect well on the political independence of the DoT with respect to the free trade principles behind the EU-US open skies agreement.

The calculated inaction only serves to restrict competition and to deny consumer choice. If the application is not compliant with the agreement, why has the DoT not flatly rejected it?

DoT should not further tarnish its reputation by sitting on its hands again, in determining NAUK's application. There can be no good reason for failing to approve both applications without delay.

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