The decision by the European Court of Justice on open skies poses a severe challenge to the culture of bilateral air service agreements

The European Court of Justice (ECJ) finally delivered its long-awaited verdict on open skies in early November. The case dates back to 1997, when the European Commission (EC) challenged the right of seven member states, Austria, Belgium, Denmark, Finland, Germany, Luxembourg, and Sweden, to make open skies agreements with the USA, as well as the more restrictive US-UK bilateral which allows only two carriers from each country to serve London Heathrow. The EC argued that these went against the principle of the single European market and that the authority to agree such deals should rest with Brussels.

The ECJ rejected the EC's basic argument that it had competence over bilateral agreements on behalf of the entire European Union (EU). However, the court has held that exclusive nationality provisions contained in the bilaterals infringe the fundamental principle in European law, that there should be no discrimination on grounds of nationality.

Most bilaterals state that only carriers that are majority-owned in the state that is granting the rights can operate on the routes in question. However, the ECJ holds that this infringes the right of European companies to establish bases in any other EU countries.

Nationality clauses lie at the heart of bilaterals and without them the value of the agreements is questionable. Brussels hopes that this will persuade the member states to grant Brussels the right to negotiate on behalf of the European Union (EU) as a whole.

However, the USA is sceptical of this idea, preferring to do business on a state-by-state basis. The official US position is that the court ruling will "have no significant practical effect on airline operations". A US official says it is up to the individual EU states to give the EC authority to negotiate on their behalf or negotiate new agreements themselves within the limits set by the ECJ.

Indeed, as an alternative to handing the negotiating mandate to Brussels, member states could chose the latter option. The USA may also see this as a preferable alternative to negotiating with the EC. "I think the USA would be concerned about negotiating with the EU as a whole," says Stephen Dolan, senior associate at law firm Norton Rose. "They have an incentive to try and maintain the current bilaterals with the nationality clause renegotiated."

Through the back door

This scenario leaves open the possibility that carriers from member states which have not signed an open skies agreement with the USA, or from the UK, which has a highly restrictive bilateral, would be able to gain access to the USA through the back door.

Washington could try to negotiate a clause in the bilaterals which states that carriers could only gain access to the USA if their government had bilaterals as liberal as the state from which they intended to fly. If this fails, Dolan warns the USA could threaten the bilateral rights of any country where a carrier from an EU state without open skies tried to gain access through a third country. "If push came to shove, the USA would be prepared to shove," he believes.

For the time being, however, all sides are still taking in the implications of the ruling. "The question now is what will be the outcome when someone challenges the bilaterals," says Geert Goeteyn, partner at law firm Howery, Simon, Arnold & White. He says that while applications will be assessed on a case-by-case basis, it is likely that a carrier will need to show that it already has a presence in that country that is "more than temporary".

As a possible scenario, he says a carrier would notify the relevant civil aviation authority of its desire to become a designated carrier to New York. If this was refused, it could appeal but it would need to prove that the refusal was made on the grounds of nationality.

This could make it difficult for carriers to gain rights out of London Heathrow to the US, the most lucrative transatlantic route. It could mean that non-UK carriers wishing to operate this route would need to prove to the UK's civil aviation authority that they should replace one of the incumbent carriers - something that is likely to be very difficult. Goeteyn says it may be easier to challenge the bilateral system in a state which already has full open skies.

In the meantime, it is clear that although it may not be dead, the old bilateral system faces challenges that could open up the way to a long-awaited consolidation within the European airline industry.

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Source: Airline Business