Delay Could Wreck Open Skies Deal
Oxford Analytica 09.22.06, 6:00 AM ET
The European Union's Council of Ministers will be asked next month to ratify the U.S.-EU Open Skies Air Services Agreement. The two sides reached a tentative agreement in November 2005. However, opposition in the United States has led Congress to cut key provisions and could prevent EU ratification.
Following the 2002 ruling by the European Court of Justice outlawing all existing bilateral air services agreements with the United States, the European Commission has been seeking a comprehensive regime to meet the court's demands. A tentative agreement was reached in November:
--The EU wanted to open the U.S. market by winning so-called "cabotage" rights, the ability to operate inside the U.S. market with no restrictions. Failing this, the EU wanted the United States to drop its strict foreign ownership requirements. The EU airline industry would also benefit from an end to national designation of air routes limiting access to named national carriers.
--U.S. supporters of Open Skies wanted to gain better access to key European airports and were also keen to see overseas capital invested in an ailing U.S. airline sector. The U.S. administration rejected the EU's demands for cabotage and only made a limited offer on foreign ownership liberalization of U.S. airlines.
On the European side, airlines that stood to gain from the agreement welcomed the accord. However, others were less enthusiastic:
--Virgin Atlantic Airways has called the ownership offer a transparent device to fool the EU into agreeing to an unbalanced deal.
--British Airways in particular was disappointed with the agreement. However, BA has expressed interest in forging closer links with its alliance partner, American Airlines, a subsidiary of AMR, but only if it has more influence over strategy and operations.
--Aer Lingus Group wants to build up Dublin as a transatlantic hub. Widening its long-haul network is its best hope of boosting the value of its planned floatation.
--The British Airports Authority was badly hit by last month's security clampdown. BAA fears that with an Open Skies agreement, it could not cope with demand.
While the tentative agreement was regarded as a relatively modest proposal, its U.S. supporters felt that it would signal a new direction for international air transport and would challenge government subsidies.
U.S. critics of the deal include a coalition of airlines and labor unions, with the active support of several key congressmen. Opponents of the agreement contend that it will have deleterious consequences for U.S. safety and security, as well as the economic and strategic effects of diluting U.S. sovereign control over domestic airlines.
Egged on by opponents, Congress has vetoed changes to foreign ownership provisions. In this context, the Department of Transportation has delayed its plans to loosen foreign ownership rules.
This delay threatens the whole Open Skies agreement, since European negotiators have made it clear that the ownership rule is a prerequisite to signing the deal. However, the Department of Transportation remains hopeful that a final Open Skies agreement with Europe can be struck toward the end of this year.
EU Transport Commissioner Jacques Barrot is also optimistic that the EU's Council of Ministers will ratify the Open Skies agreement next month despite the U.S. administration's stance on airline ownership. The commission was surprisingly unwilling to press the United States on cabotage.
Failure to confirm the Open Skies agreement would be highly damaging to the transatlantic air transport market and would also delay a much-needed rationalization of the EU airline industry. However, the most likely outcome is that the council will ratify the existing agreement next month and hope to secure more concessions at a later date.
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US protectionism. While the tentative agreement was regarded as a relatively modest proposal, its US supporters felt that it would signal a new direction for international air transport and would challenge government subsidies -- such as UK government protection of BA's position at Heathrow. The proposals received strong support from American Airlines, Delta and Hawaiian Airlines, as well as Boeing and several US airports.
The US critics of the deal comprise a coalition of airlines and labour unions, with the active support of several key Congressmen. Continental Airlines was particularly exercised by the agreement, threatening legal action to block it. Opponents to the agreement contend that it will have deleterious consequences for US safety and security, as well as the economic and strategic effects of diluting US sovereign control over domestic airlines (see UNITED STATES: Congress considers trade restrictions - March 22, 2006). The unions were especially suspicious that loss of control would further weaken of their collective bargaining power.
Egged on by opponents to the agreement, Congress has vetoed changes to foreign ownership provisions, refusing to dilute the 25% cap on foreign ownership. Protectionist sentiment has been fuelled by the fallout from the Dubai/P&O ports affair (see UNITED STATES: Ports row reveals Republican divisions - March 6, 2006). In this context, the Department of Transport (DoT) has delayed its plans to loosen foreign ownership rules, in order to give itself more time to win congressional support.
Outlook. This delay threatens the whole Open Skies agreement, since European negotiators have made it clear that the ownership rule is a prerequisite to signing the open-skies deal. However, the DoT remains hopeful that a final Open Skies agreement with Europe can be struck towards the end of this year.