Europe and USA prepare for Open Skies Round Two

European and US negotiators are preparing to put their gloves back on for round two of transatlantic Open Skies talks. With the issue of US ownership restrictions continuing to loom large, and with environmental concerns growing, it looks set to be a tough fight

In the early hours of Sunday 30 March, Continental Airlines Flight 28 from ­Newark, New Jersey touched down at London Heathrow, marking the beginning of a new era in transatlantic aviation that will open up unprecedented opportunities for European and US carriers to compete.

With the first phase of the European Union-US Open Skies agreement fully implemented, attention is now firmly focused on the second-stage negotiations, scheduled to begin in mid-May in Ljubljana, Slovenia. A list of key ­discussion areas has been drawn up, starring the lingering and as-yet unresolved issue of ownership and control restrictions on US ­airlines, which Europe desperately wants to see lifted. The big question is will the two sides be able to work through their differences and hammer out a meaningful Phase Two deal this time around? If not, will the benefits secured under Phase One really be ­withdrawn, sending everybody hurtling back to square one?

Europe made it quite clear that it did not achieve what it set out to achieve in the first phase of Open Skies by inserting a "get-out" clause into the accord, which allows individual EU member states to withdraw traffic rights if no Stage Two agreement can be reached by mid-2010. A second-stage deal is important for Europe because it wants to see total liberalisation of the transatlantic market, so that European carriers can operate domestic flights within the USA and invest freely in US airlines with no limitations. Neither of these goals was met in the first round of talks and Europe will be pressing hard to achieve its aims in round two.

"On the European side, we would have liked to have gone further than what was achieved," says Daniel Calleja, director of the European Commission's air transport directorate and Europe's lead Open Skies negotiator. "What we want is a transatlantic common aviation area and this wasn't achieved in the first stage."

John Byerly, US deputy assistant secretary of state for transportation affairs and the USA's chief negotiator on Open Skies, says he is approaching the next round of talks "in a positive frame of mind", and adds: "It would be premature before second-stage negotiations have begun to be predicting and speculating on the consequences that might occur if ­negotiations don't yield the results required."

But Calleja stresses that while the idea of traffic rights being withdrawn is undesirable, it remains a very real possibility. "The agreement says we will review progress 18 months after second-stage negotiations begin, and if within 12 months of that no progress has been made each party can withdraw," he says. "This is not a threat, it is a mechanism. Will it happen? I think we'll have to see. I don't think it should be ruled out - it may have to be used. The best outcome is to have a second-stage agreement but if that doesn't happen, other options will have to be considered."

"Whether the US will bend on ownership I don't know, but the genie is out of the bottle now" Nigel Turner chief executive bmi

Despite the existence of this clause, however, some in the airline industry are doubtful that it would be possible to reverse the progress made under Phase One of Open Skies. For instance, Nigel Turner, chief executive of UK carrier bmi - which has yet to take advantage of the opportunities afforded to it by Open Skies, despite possessing an enviable portion of Heathrow slots - says: "Whether the US will bend on ownership I don't know, but the genie is out of the bottle now and it would be hard to put it back in."

Delta Air Lines executive vice-president network and revenue management, Glen Hauenstein, agrees with Turner that the genie is now well and truly out of the bottle. "There has got to be a stick and carrot in any agreement but it's hard to believe that any rational government would withdraw the rights secured. The threat will get people to the negotiating table but it's unrealistic to believe that we'll take a step backwards," he says.

Delta took immediate advantage of Open Skies by launching flights from Heathrow to Atlanta and New York JFK the day after the agreement took effect. It will also share revenues and costs on Air France-KLM's new service from Heathrow to Los Angeles under a joint venture agreement signed between the carriers in October 2007. Air France-KLM deputy chief executive Pierre-Henri Gourgeon also doubts that Open Skies could ever be ­reversed, citing pressure from passengers as a major factor. "I think the customer will want to keep the situation as it is - I don't see a ­return to the former situation being accepted by customers," says Gourgeon.

Another doubter is Ed Wytkind, president of the transportation trades department of the USA's largest labour federation, AFL-CIO. Wytkind says of Europe's "get-out" clause: "We dismiss those threats as old style bully tactics. The EU has a huge stake in this - I don't believe they would withdraw rights."

One of the most contentious issues to be discussed in Stage Two talks is that of ownership and control restrictions on US carriers, which Wytkind's organisation will be fighting fiercely to keep in place as Europe presses for total liberalisation that would sweep away the current 25% US foreign ownership cap and allow European carriers to invest freely in their counterparts across the Atlantic. EU carriers have a 49% foreign ownership limit, but Europe is not merely looking for US restrictions to be raised to the same level, as Calleja explains: "Europe would like to go further than 49% - we would like to do away with these restrictions that don't exist in other ­sectors. In the future there will be more and more co-operation between carriers so it would make sense to ease restrictions."

But persuading the USA to ease ownership restrictions - let alone wipe them out altogether - will be no easy feat, as Europe discovered in the first round of talks. A notice of proposed rulemaking put forward by the US Department of Transportation in 2005, which aimed to revise the way in which foreign investors could involve themselves in the day-to-day operations of US carriers - without even touching the 25% ownership limit - was withdrawn in December 2006 after facing strong opposition in the US Congress.

AFL-CIO's Wytkind believes it was the "strong public outcry by our members that convinced Congress" to vote against the proposed rule, and says the labour federation "intends to be very active" in making its opposition known this time around. "European carriers want to blow a hole through our control standards," says Wytkind. "I don't think the largest aviation market in the world should be sold off to foreign interests who just want to prey on the market and take over. We've been continuing very aggressive ­dialogue with members of Congress."

The political influence of the unions in the USA is not something that should be underestimated - particularly in an election year. "It is a mistake to say that liberalisation of ownership and control is a simple issue," says Byerly. "There are concerns about military preparedness, homeland security issues, and there are very strongly held views by airline labour groups that there are dangers to them. For those who advocate changes, they need to put forward a positive case."

The state of the US economy will also have an effect on how talks progress, according to Ian Giles, a competition lawyer with law firm Norton Rose: "From a political perspective, the US will not want to see the creation of global carriers unless it feels its airlines are the hunters, not the hunted, and if its airlines are in trouble financially that won't happen."

The EU will be under considerable pressure of its own from European carriers that want to see real progress on the issue of ownership and control. One strong advocate of liberalising ownership is British Airways chief executive Willie Walsh. "I believe anybody who is genuinely concerned about progress, who genuinely wants to see ­liberalisation and de-regulation, should be optimistic and not accept barriers being put in the way," says Walsh. "The restrictions we have in place today may have been valid back in the '60s but they should've been gone in the '70s. They've no place in economies and ­businesses in this day and age."

Walsh believes that "the politicians really did sell themselves short" in the first stage of Open Skies and "they need to be ambitious in the second stage because they have declared themselves to be ambitious". He adds: "It's too important an issue to play games with and given that both parties have committed to further progress, as an industry we should make sure that they deliver on that. The first stage doesn't deliver the consumer benefit - what delivers the consumer benefit is the second stage negotiations. That, to me, is the big prize and they should get on and make progress."

"I disagree that the big issue is ownership and control...the environment is at least as important" John Byerly US deputy assistant secretary of state for transportation affairs

But despite the furore kicked up by the ­political hot potato that is ownership and control, Byerly is keen to point out that there are other issues to focus on in second-stage talks. "Priority issues will be the expansion of traffic rights, questions of investment and the implementation of environmental constraints," he says. "I disagree that the big issue is ownership and control. From a US perspective, the negotiations have to address all concerns and the environment is at least as important."

The environment is shaping up to be another political hot potato in the second-stage talks. The EU could use Phase Two negotiations to bring up its plan to include foreign airlines in its emissions trading scheme from 2011/12, although it will not be possible to raise this issue before the plan has passed through the EU legislative framework.

"The emissions trading scheme is still being discussed internally in the EU and it is an issue that will have to be addressed by EU legislation, but if this allows for commercial negotiations the emissions trading issue could be raised in Open Skies talks," says Calleja. "It is a possibility for later on, but it can't be discussed in opening talks." The USA has ­already voiced its opposition to Europe's plan to unilaterally impose its emissions trading plan on foreign carriers, and has threatened to take legal action against the proposal.

Another thorny issue stemming from environmental concerns that the US side plans to raise in second-stage talks is the implementation of night flight restrictions in Europe, which it sees as having negative consequences on competition. "A growing concern is the proliferation of night flight curfews at EU airports, for example Frankfurt," says Byerly. "This will deny carriers on both sides the ability to provide the commercial express delivery services that customers demand, and there are huge implications for competition. It is with dismay that we see night flight restrictions expanding." Byerly adds that there should be a "rigorous, careful analysis - not just the banning of flights".

Calleja points out that the issue of night flights is "very sensitive in Europe because airports are very close to cities". He says decisions to implement restrictions are taken at a local level by local authorities under a "balanced approach" process: "It is very difficult for this to be discussed [in Open Skies talks]. I don't see how we could have concessions ­because it's an issue for local authorities. I ­understand that the US wants to raise this issue and we will examine their concerns."

Two other areas for discussion are security and access to government financed air transport, such as the USA's Fly America programme. On the former, Calleja believes that "co-operation is extremely important", and "we should continue trying to work together to have compatible standards" in order to avoid "cumbersome double-checking" of ­security details. On the latter, Europe will be seeking greater access to the market for transporting US government employees. "In the first stage it was agreed that European carriers would have the possibility to participate [in Fly America], which before was reserved for US carriers," says Calleja. "It's possible for ­Europe on cargo and on some city pairs that aren't granted to US carriers, but we want more possibilities for EU carriers."

Following the first round of second-stage talks in May, another round of talks will take place this autumn. "During this year we will have a lot of technical work to do, identifying issues and priorities," says Calleja. But he adds that "it will be 2009 before negotiations become more active" due to the US presidential elections, which take place in November.

Whatever the election outcome and however the negotiations progress, the two Open Skies talks appear to be entering round two with a sense of optimism. "The US is absolutely committed to making a success out of negotiations," says Byerly. "There is a full plate of issues to deal with and failure is not an option. I think we can succeed, but it will be hard work." Calleja says he is "eager to start" and "confident that we're going to move our agenda forward".

But both are realistic in their expectations for what could be a difficult battle. "These will be complex negotiations. We're moving into important subjects," says Calleja. Adds Byerly: "This is a challenging and serious process and it's not going to be achieved overnight. It will involve multi-year negotiations, vigorous discussions and close study."

VIDEO: Delta and Air France discuss their new joint venture as the EU-US Open Skies agreement comes into force: flightglobal.com/airfrancedelta

Key Elements

Open Skies - Phase One

Key components of the first stage of the agreement are:

• Every US carrier can fly to any city in the EU and every EU carrier can fly to any city in the USA
• London Heathrow-USA market opened up to other EU and US carriers previously restricted to British Airways, Virgin Atlantic, United and American Airlines
• EU and US airlines can operate between the EU and the USA without restrictions on the number of flights and routes
• Airlines on both sides can enter co-operative agreements, including franchising and leasing
• Joint Committee established through which the EU and the USA can resolve questions arising from Phase One

Open Skies - Phase Two

Key areas for discussion in second-stage negotiations:

• Further liberalisation of traffic rights, for example allowing EU carriers to operate domestic flights in the USA
• Additional foreign investment opportunities relaxing airline ownership and control restrictions
• Increased access to government financed air transport, for example, the Fly America programme
• The environment how to limit the negative impact of additional flights on the environment
• Security increasing co-operation between the EU and the USA on security-related issues

Source: Airline Business