Talks between the European Union and the USA on an Open Aviation Area failed to achieve a breakthrough last year. With US elections now out of the way, there is a chance of making progress if a phased approach can be agreed, writes Geert Goeteyn, Brussels-based partner at Howrey Simon Arnold and White law firm

The airline industry is at a crossroads. There is a widely held view that the only way to ensure its long-term viability is to free it from its regulatory shackles. This would allow airlines access to foreign capital and enable mergers and acquisitions between airlines from different countries to take place without any risk of losing traffic rights.

One would therefore expect broad support for the European Union (EU) /US Open Aviation Area (OAA) initiative. However, progress in the EU/US negotiations has been disappointing. US enthusiasm for the project has always been muted. The OAA concept goes beyond the US Open Skies model; it aims to create a single EU/US aviation market with no cabotage or foreign ownership limitations, and no fly-US policy for USA government officials.

Moreover, certain powerful vested interests are weary of the OAA. Labour is afraid that it would result in job losses and the outsourcing of US airline jobs to low wage European countries. The Pentagon has national security concerns, arguing it needs access to US airline capacity for airlift of US army personnel and equipment. Some of these concerns are unfounded, while others can be overcome. However, the political sensitivity and symbolic value of these issues is such that it may be difficult for the USA to accede to the EU's demands.

The difficulty is exacerbated by the fact that, apart from unrestricted access to London Heathrow, the European Commission (EC) holds few cards. The close involvement in the negotiations of the 25 member states, each with their own agenda, further complicates the situation.

In June 2004, the Council of Ministers rejected a proposal to proceed with a two-step approach. An initial agreement would have granted EU carriers the right to offer flights from anywhere in the EU to anywhere in the USA and would have raised the foreign ownership limit from 25% to 49% (the current EU level). In return, an Open Skies type arrangement would have been extended to all 25 member states. The agreement would have also included a commitment to negotiate a more extensive deal. Cabotage, however, was excluded, as was the right of establishment for EU carriers (impossible given the 49% foreign ownership cap).

The Council of Ministers deemed the proposal to be lopsided. It extended the Open Skies model to the whole of the EU, opening up, most importantly, Heathrow, without any guarantees (beyond a commitment to negotiate) of a wider agreement in future. In short, the council feared the USA would "bag Heathrow and run". Its principled stance for a liberalised and open EU/US market may at first glance seem laudable. However, the opposition of some EU member states had more to do with old-fashioned protectionism than free-market principles.

A number of EU countries want an all-inclusive deal, including elements such as cabotage, knowing full well that this is unacceptable to the USA. Unsurprisingly, the UK leads this group, trying hard to safeguard the privileged access to US routes enjoyed by British Airways and Virgin Atlantic at Heathrow.

Other concerns, however, are more justified. The limitation of foreign ownership to 49% still seriously hampers EU/US consolidation and prevents the establishment of EU-controlled subsidiaries in the USA. Also, the EU is understandably reluctant to give up its trump card so early on in the negotiation process without guarantees of further concessions.

So what next? Realistically, a phased approach has the most chance of success, and the acceptance of a deal that largely builds on the June 2004 proposal may well be the only achievable first step. However, for that to be acceptable to the EU, such an agreement would need to have strong(er) safeguards for the good faith negotiation of a wider agreement at a later stage, including, in particular, a mutual abolition of foreign ownership and control restrictions.

Certain elements may play in the EU's favour. Contrary to last year, there is no US election looming and the Republican party controls both the House and the Senate. This may make politically sensitive concessions easier. Also, if (and this is a big if) the current review of the slot regulation is concluded successfully, allowing secondary trading at congested airports, the ability of US carriers to obtain slots at Heathrow may increase, making unrestricted access to the airport even more valuable.

However, the EU must remain level-headed. One can doubt the wisdom of the EC's renewed pressure on the member states to terminate their current bilaterals. Not only is the EC's stance legally questionable - termination is not necessarily required to comply with the Open Skies judgements - politically, this step is deplorable. It is more likely to lead to litigation delaying the negotiations, than spurring the USA and member states on to reach an agreement.

Moreover, if the member states were to terminate their agreements, the US administration may consider revoking the antitrust immunity granted to a number of alliances because the Open Skies arrangements on which they are based would no longer be in place.

Provided there is a common vision of the end goal and sufficient safeguards to keep both parties around the table through the different stages of the negotiations, there is an opportunity to finally rid the aviation industry of an outdated structure which has held it back for far too long.

Source: Airline Business