Reaction to the US-EU Open Skies expansion: Warm in the US, cool elsewhere

The US Department of Transportation and US airlines are hailing the open skies agreement reached by the US and European Union to expand Open Skies between the two regions. But the International Air Transport Association (IATA) said it once again sidestepped one of the biggest issues facing airlines today – the ownership issue.

“It is disappointing that, at this critical time, we did not make significant progress on the issue of ownership,” said IATA’s Director General and CEO Giovanni Bisignani. “The agreement was not a step backwards, but it did not move us forward. The long-term financial sustainability of the industry is dependent on normal commercial freedoms. I urge both governments to keep this on the radar screen for urgent follow-up.”

But its US counterpart congratulated the “visionary leadership of the US and EU negotiating teams.” US airlines probably knew that cracking the ownership question was a non starter for Congress, especially in an election year. And, in the meantime they are looking to worldwide alliances to accomplish as much as possible without waiting for legislation.

Unions see ownership changes as a threat to jobs. Congress has cited national security issues which has been roundly rejected by the Department of Defense, but is also keenly interested in assuaging unions this year. Still, it is the elephant in the room that must ultimately be addressed if US airlines are to remain competitive. The regulatory constraint handicaps airlines, the only international players unable to tap into normal cross-border investments and ownerships that have built some of the largest companies in the world.

The Memorandum of Consultation on the Second Stage Open Skies agreement was reached well ahead of the Nov-2010 deadline, with observers saying it is unlikely the two sides would reach agreement because of the intractable ownership issue which limits foreign ownership of US airlines to well below 50%.

The agreement expands the historic 2007 open skies pact and was reached after eight rounds of talks including the most recent round in Brussels, said DOT in yesterday’s announcement. The new agreement makes permanent the terms of the 2007 agreement, eliminating restrictions on services between the US and EU member states. It allowed airlines from both sides to select routes and destinations based on consumer demand for both passenger and cargo services, without limitations on the number of US or EU carriers that can fly between the two parties or the number of flights they can operate. 

It also deepens US-EU cooperation in aviation security, safety, competition, and ease of travel, said DOT in its announcement, adding it provides greater protection for US carriers from local restrictions on night flights at European airports. It also includes a ground-breaking article on the importance of high labour standards in the airline industry.

IATA noted that it also reaffirms the International Civil Aviation Organization (ICAO) is the "proper venue" to tackle environmental issues. 

“Today’s agreement strengthens our already close aviation relationship with our European partners,” said US Transportation Secretary Ray LaHood. “President Obama promised European leaders that we would reach an agreement this year, and today we fulfill that promise.”

US carriers positive

Continental also weighed in, saying it "congratulates the US government on concluding phase two open skies negotiations with Europe. Continental supports aviation liberalization, which allows for more competition in the marketplace, gives airlines the opportunity to expand and generate jobs, and gives consumers more travel choices. Continental believes close coordination and cooperation with the European Union on aviation matters is important to the U.S. and international economies."

And, fellow Star Alliance Partner United was also supportive: "United fully supports this important milestone that reinforces the strong bond that exists between the US and EU, promises greater cooperation on environment, security, competition and other important areas and believe it should serve as model in other regions of the world," said Glenn Tilton, United Airlines chairman and CEO. "United applauds negotiators on both sides of the Atlantic for their leadership and vision."

“This agreement will produce significant new consumer benefits in the trans-Atlantic market, as the commercial and operational freedoms it provides drive both increased competition and more service improvements,” said ATA President and CEO James May. “This agreement is a win-win on both sides of the Atlantic. It reinforces the strong bond between the United States and the European Union, and promises still closer cooperation on environmental, security and other important concerns while fostering greater competition. This is a historic milestone for aviation liberalization – and those responsible for this achievement deserve everyone’s thanks and appreciation.”

Airports Council International-North America President, Greg Principato, applauded agreement, stating it "builds and improves on the ground-breaking first stage air transport agreement reached in 2007”. ACI-NA welcomed the "improved regulatory cooperation on security, safety, competition, environment, air traffic management, facilitation and other issues, enhanced liberalization, and strengthening of the US/EU aviation relationship and market promoted by the second stage agreement."

Less enthusiasm in Europe, but still a positive lead for global aviation

Across the Atlantic, where there had been some hope of signs of a softening in the US attitude towards foreign ownership relaxation, the response was more muted. British Airways stated it was disappointed with the ownership provision and called on both sides “to honour the firm commitments they have made in this agreement to further liberalisation, and to redouble their efforts going forward”.

Virgin Atlantic, according to a Bloomberg report, stated the agreement “falls somewhere short” of the commercial and ownership freedoms it desires and expressed its hope the commitments agreed “will mean that the European Commission, EU Member States and US government lose no momentum in removing the remaining barriers to full market access”.

Nevertheless, the European Commission VP responsible for Transport, Siim Kallas, welcomed the preliminary agreement as "a major step forwards" that sees both sides agreeing to “increase regulatory cooperation, and remove the barriers to market access that have been holding back the development of the world’s most important aviation markets”.

But there is more work to do. European Union spokeswoman, Helen Kearns, stated, "whatever majority ownership threshold the US Congress permits, the EU will reciprocate". That is a negative for all concerned, as further opening of the European market to US airlines will remain on hold.

Nonetheless, the bottom line is positive. The new regime is a major step forward in liberalising aviation access and offers a signal to others that ambitious "multilateral" opening of markets is possible. That this second stage has been achieved without prolonged grandstanding on each side relieves concerns, which at one stage even appeared to contemplate an unravelling of the 2007 agreement.

It should be seen therefore as a major step in the right direction. The next big step is to relax ownership rules; so long as the US maintains its current defensive approach, many other countries continue to take the lead from this restriction. Until cross border relationships are made easier, the industry can not hope to rationalise in any serious way.

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