Forecast: Opaque Skies

The US proposal to loosen the rules on foreign investment in US carriers -an administrative proposal that’s been put forth in lieu of changing the law itself – is now key to unlocking a new US/EU aviation relationship. The principle negotiators of possible transatlantic open skies said late Friday they had agreed to end restrictions on where airlines could fly, on nationality clauses and other restrictions after two years of talks toward an EU/US open skies deal. But they insisted that the tentative agreement, possibly effective in time for the 2006 fall season, would rest on progress on the ownership-rules reinterpretation.

The tentative agreement would create a single “open skies” treaty for the entire 25-nation European bloc, clearing the way for carriers such as the Air France-KLM Group fly to any US city from any European city, and it removes limits on the number of carriers that can fly between the US and London’s Heathrow Airport, the world’s third busiest. It also would end restrictions on the types of equipment airlines can use and on prices they can charge.

Daniel Calleja, the European Commission director for air transport, told reporters in a conference call that the European transport ministers will await the outcome of the US foreign ownership proposal before acting on the tentative pact. Calleja said that if the outcome is “positive”, he expects all 25 nations to approve the preliminary accord. The US ownership proposal is open for comment and consultation until early January.

John Byerly, the State Department official who is the chief US negotiator, was enthusiastic about the possible competitive benefits of the deal, saying a deal would “open the gates for vigorous competition.” It would be followed by a second-stage agreement to address any other issues that arise. The first stage deal also establishes a dispute-resolution panel to address questions of capacity restrictions or excess capacity; side deals tentatively agreed upon would significantly advance transatlantic cooperation on aviation security issues, clearing the way for harmonising of rules. Significantly, the agreement does not require any US changes in rules on military airlift obligations of carriers or on the so-called Fly America rule. This last mandates that government travelers use US-flag carriers but has been interpreted to allow federal flyers to use foreign code-share partners when they book through a US alliance member. Both policies have been highly contentious.

But Byerly stressed that the framework did not include a “Heathrow carve-out” and that carriers would still have to obtain slots there. Heathrow of course has been the single largest obstacle in the past two years of US/EU negotiations, and the pact does not explicitly address the UK scheduling regime. Although a de facto slot market exists, the carriers thirsty for Heathrow access say it is hardly an open or thriving market, and Continental, Delta, and Northwest would still have to buy, bargain, beg, or negotiate their way into LHR.

The silence on Heathrow would leave undisturbed the incumbents there, American, United, British Airways and Virgin Atlantic, but the two UK-flag carriers were wary of the deal. “Nothing has fundamentally changed”, Virgin Atlantic chief executive Steve Ridgway said in a statement. Andrew Cahn, the director of government and industry affairs for British Airways, said, “Right now, the US proposal falls short of the legislative solution that could have delivered a very real transformational change to the restrictive ownership and control rules”.

Cahn’s stance points up the central fact: the entire package rests on the US Transportation Department’s proposal to relax the investment rules, a proposal that is not a statutory change or a rewrite of the law. The DoT undertakes to make as liberal as possible a regulatory interpretation of the existing 25% limit by formalising guidelines and recent precedent. But the DoT offer does not offer the certainty of new legal language-which only the Congress can offer. And in the nearly three years since Transportation Secretary Norm Mineta asked Congress to consider changes to the law, nothing has happened except for a minor tightening of the legal language and senatorial statements that the books were closed.

The ownership-and-control proposal has attracted opposition not just from labour, as anticipated, but from a wide swath of the lower chamber, the House of Representatives, where a strong declaration of opposition came Friday from 75 members, including 22 Republicans nominally aligned with the Bush administration. While paying an obligatory nod to liberalisation, their letter says the investment proposal is “a backdoor effort to accomplish what the Department (of Transportation) has failed to accomplish by legislation”. The signers, including one respected authority, former aviation subcommittee chairman Jim Oberstar, say the DoT “has overstepped its authority in this proposal with its revised interpretation” of the rules of ownership and control. Interestingly, the Democrats’ objection is similar in language and thesis to objections raised by Continental, and is signed by numerous members of the delegation from New Jersey – where Continental has its Newark hub. Still, Byerly and Calleja were optimistic that the case would be won when the parties weigh the benefits to the $18 billion transatlantic market and the 750 million citizens of 26 countries compromising the larger market.

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