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

On 1-Jun-2015, Norwegian made another attempt at asking the US Department of Transportation (DOT) to allow its Irish-registered subsidiary, Norwegian Air International (NAI), to operate transatlantic routes under the EU-US open skies agreement. NAI's case, filed in Dec-2013 and completed in Feb-2014, has been pending for longer than any other such application.

To address its opponents' stated concerns that NAI is a "flag of convenience", whose only purpose is "social dumping", Norwegian now says that it will employ pilots and cabin crew only from Europe and the US. If there was a clear reason to deny the application, surely this would have been decided by now. Many informed parties, including the European Commission, the lead negotiators of the EU-US agreement, consumer and trade organisations and competitor airlines do not believe that there is such a reason.

Meanwhile the DOT has allowed itself to be hijacked by the anti-competitive agenda of the Big Three US airlines and a number of labour unions. In this report, we outline the arguments surrounding this case. In a second part, we will look at the impact of Norwegian's transatlantic operations on competitors' traffic share.

NAI's plea at the start of Jun-2015 that the US Department of Transportation make a decision came 15 months after its original application. It sparked a series of responses from both opponents and supporters. Most of the arguments on both sides are well worn and it seems that the latest development has merely further entrenched the respective views.

NAI offers advantages in labour and aircraft deployment

The advantages to Norwegian of pursuing its NAI strategy are twofold and both would facilitate a more efficient, lower cost operation. First, it would have greater flexibility in its recruitment of crew, both in terms of their country of origin and their contractual terms, than it would by operating a Norway-registered airline on the Atlantic. Second, it would be able to serve both parts of its long haul network - transatlantic and from Europe to Asia - under traffic rights vested in the same operator, thereby increasing the flexibility in its deployment of aircraft and crew.

Although Norway is not an EU member state, it is included in the EU-US open skies agreement. This means that Norway-registered airlines have the same rights to the US from Europe as do airlines registered in EU countries. However, traffic rights to Asian countries are only as negotiated by Norway, which may not be the same as for EU member states and do not provide Norway's airlines the rights to fly from anywhere in the EU.

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Existing arrangements are time limited

Currently, Norwegian is operating long haul routes through its Norway-registered subsidiary Norwegian Long Haul. Its Irish-registered Boeing 787 aircraft are, in effect, wet-leased to Norwegian Long Haul and the Norwegian authorities allow the use of non-EU cabin crew by dispensation.

However, these arrangements are time limited and, although they may be extended at the discretion of the Norwegian government, cannot continue indefinitely. Without the granting of a US foreign carrier permit to NAI, Norwegian will eventually be forced to operate its long haul routes only with crews from Norway employed under that country's labour laws. Norway is one of Europe's (and the world's ) highest wage economies and not an ideal base for low cost airline operations.

Norwegian has many supporters…

Norwegian's view, that there is no legal basis to deny NAI - an EU domiciled and registered airline - is supported by no less an institution than the European Commission itself. The 2007 EU-US Open Skies agreement provides that any airline registered and approved by an EU member state may be granted traffic rights to fly from anywhere in the EU to anywhere in the US.

In addition to support from the European authorities and Ireland's Director General of Civil Aviation, Norwegian has been backed by a number of US airports, including Orlando Aviation Authority, the Port of Oakland and Denver International Airport. The application has also received support from organisations such as Travellers United, a consumer lobby body, and the trade bodies the American Society of Travel Agents and the US Travel Association.

But it is not just airports, consumers and the travel trade, all of which stand to benefit from additional traffic and choice. Also vocally in favour of Norwegian in this quest are OpenSkies, the Paris-based subsidiary of IAG, which is a competitor on transatlantic routes, and US freight operators FedEx and Atlas Air.

Moreover, three former US secretaries of Transportation (Andrew Card, Norman Mineta and Mary Peters) have backed NAI. The three said in a filing with the DOT in Jul-2014 that NAI "satisfies all legal and regulatory requirements contained in US law and the binding US-EU Open Skies Agreement", adding that "opponents are using the opportunity of Norwegian’s application as a means to block competition and deny choice to consumers in transatlantic air travel."

… in addition to opponents

NAI's application for a US foreign carrier permit has been vocally opposed by a number of members of the US congress, groups representing airline labour and by certain competitor airlines. Most notable among the competitors that oppose the application are the Big Three US airlines (America, United and Delta), two of Europe's big legacy groups (Air France-KLM and Lufthansa) and Norwegian's major Scandinavian competitor SAS. Labour groups that oppose NAI's application include the US pilot representative bodies ALPA and the Allied Pilots Association, the Southwest Airline Pilots Association, US cabin crew union APFA, Scandinavian cabin crew union PARAT, the European Transport Workers Federation and the European Cockpit Association.

Their chief stated concern is that, in attempting to operate transatlantic routes with an Irish-registered airline, Norwegian will be able to circumvent labour protection laws that apply in Norway.

Article 17 bis of the EU-US open skies agreement is at the centre of opponents' arguments

Norwegian's opponents cite Article 17 bis of the EU-US Open Skies agreement as the principal justification for their call upon the DOT to deny NAI's application. 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.

Nevertheless, the two officials that originally led the EU-US open skies negotiations, John Byerly on the US side and Daniel Calleja on the EU side, publicly supported the European Commission's Director of Aviation and International Transport Affairs comments in Jul-2014 that Article 17 bis does not provide a legal basis for unilaterally denying an application for a US foreign carrier permit, adding that any unilateral decision to deny an application using Article 17 bis runs against the letter and spirit of the EU-US agreement.

Indeed, the fact that the DOT has not actually rejected NAI's application on this basis, but has merely sat on it without making a decision for 15 months (compared with an average processing time of 55 days for similar applications, according to Norwegian), suggests that it is far from certain of a legitimate basis for any such rejection. Instead, the lobbying of powerful interest groups, motivated by a desire to restrict competition, has frozen the DOT into inactivity, which has the same practical effect as denying NAI's application.

Norwegian's offer to employ only European and US crew on transatlantic routes has not satisfied its opponents

Norwegian also still insists that there is no legal basis for the use of Article 17 bis to block NAI's application objection. However, in an attempt to prompt the DOT into a decision, it has sought to address its opponents' accusation regarding the undermining of labour standards by voluntarily offering to employ cockpit and cabin crew only from Europe and the US on NAI's transatlantic flights. It will do this except "if compelled by extraordinary and unforeseen operational reasons".

This does not seem to have appeased Norwegian's opponents. For example, the Southwest Airlines Pilots Association commented in a submission to the DOT that, although it plans to use US and European pilots, "NAI has not addressed which labour laws it intends to apply […] or even the basic terms under which they will be employed". SAS said that Norwegian would still be "using an Irish license to avoid Norwegian labour laws and social insurance obligations".

Objections to NAI are misplaced

Setting aside the question if what any of this has to do with pilots working for Southwest Airlines (other than that the domestic US aviation industry as a whole stands to benefit from additional traffic feed if there are more international airlines operating to the US), these objections appear to be fundamentally misplaced.

The observations noted above of both SAPA and SAS are undoubtedly true. Norwegian has not announced all the terms of its proposed labour contracts, but neither is it under any obligation to do so, under local laws or bilateral agreement terms. It is also true to say that Norwegian wishes to build a business that is competitive and is not hindered by Norwegian labour costs. This is a legitimate aim, especially in a global industry in which profitability is far from guaranteed.

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While its opponents' comments may be true, they should not form a basis for denying NAI's application. NAI is legitimately registered in Ireland, a member state of the European Union with a long and honourable track record in aviation oversight. The open skies agreement with the EU does not give the US government, its airlines or representatives of its labour groups the right to override Ireland's ability to oversee Irish airlines in accordance with the relevant Irish laws.

Atlas Air made this point in an Aug-2014 filing with the DOT: "NAI's opponents have twisted the wording of the Agreement to argue that the Department should constrain labour practices that the civil aviation authority of the applicant's own homeland has not found objectionable".

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. As Travellers United asked in its submission of 10-Jun-2015, "since when has the DOT determined what labour laws should control which airlines?".

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