Unopen Skies

The quest for Open Skies between Europe and the US has been a battle fought long and hard over many decades by national airlines from both continents and their respective governments. The desire to constrain market forces and preserve the status quo, provided by a system of protectionist bilateral trading agreements, has been hard to overcome, despite many of the airlines asserting their belief in competition.

The very use of the terms ‘Open Skies’ and ‘Freedoms of the Air’, while implying an environment of unfettered market forces, has in reality meant restrictions. So why has it taken so long to achieve a genuine ‘Open Skies’ in such a high profile industry?

Just over 60 years ago, a group of allied nations met in Chicago to try to agree a trading framework for international air services. Their objective was a multilateral treaty with all parties agreeing to the same set of terms and conditions.

While the US wanted as few restrictions as possible on their airlines flying to and from other countries, other nations with more limited resources held the opposite view.

As a consequence, the Chicago Convention of 1944 left the matter of trade in air transport services to individual government negotiations. Agreement was reached on only the first two of the inappropriately named ‘Freedoms of the Air’, the right to overfly and the right to land for technical reasons, such as refuelling). All the rights relating to the carriage of pasengers, freight and mail were left to bilateral negotiations.

As a result, thousands of bilateral agreements were established over the following decades. Initially, most were of a very restrictive nature, usually allowing only one airline from each side to operate a limited number of flights between a specified set of cities.

The fares that were charged, although set in collaboration by the operating carriers, had to be formally approved by both governments before being offered for sale. Competition played no real part in these highly orchestrated arrangements.

An early exception to the norm was the deal reached in 1946 between the UK and US, usually referred to as ‘Bermuda 1’. Aside from the inclusion of some fifth freedom rights, which allowed a designated airline to carry traffic beyond the bilateral partner’s country to a third country, there were no limits on the capacity that could be operated by the nominated airlines.

This bilateral, very liberal in contrast with the rest, lasted until 1977. It was replaced by the ‘Bermuda 2’ agreement, which in many respects was much more restrictive. Aside from the US giving up many of their fifth-freedom rights from the UK to other parts of Europe and further afield, capacity limits were introduced.

Limited capactiy was a result of the dramatic increase in the number of seats available arising from the replacement of narrow-bodied aircraft like the Boeing 707 and Vickers VC-10 with the Boeing 747 and Douglas DC-10, and from the pioneering success of Freddie Laker in setting up his DC-10 Skytrain services from Gatwick to New York and Los Angeles.

In terms of US policy towards air transport at the time, Bermuda 2 was curious, to say the least. Set against the complete deregulation of its domestic air market the following year and the considerably liberalised agreements reached with the Netherlands and Singapore (also in 1978), the deal with the UK seemed a return to the past.

While Bermuda 2 remains in force nearly 30 years on, it has been subject to a number of revisions that over time have increased the permitted seat capacity, the number of city-pairs served and the number of carriers designated to provide services.

What has not changed, however, is that only two carriers from each side can operate scheduled services to the US from Heathrow.

The new EU–US deal will of course bring an end to this restriction, which has so infuriated bmi and the US carriers currently prohibited from flying to the US from the UK capital’s major airport.

Following the successful deregulation of its domestic market, the US has sought to liberalise its international air services. In 1992 it established its first ‘Open Skies’ deal with the Netherlands and now has close on 80 such agreements in place.

Prior to the accession of the ten new Member States in May 2004, eleven of the then 15 EU countries had established Open Skies deals with the US. Part of the attraction for Member States agreeing to an Open Skies bilateral was the granting of anti-trust immunity for airline alliance members.

Without it alliance partners were highly restricted in the collaborative action in which they could engage. So while Star alliance members Lufthansa and United Airlines could engage in collusive activities to reduce costs and enhance revenue as a result of an Open Skies deal between Germany and the US, oneworld alliance partners British Airways and American Airlines could not.

While the US ‘Open Skies’ deals convey the impression of complete freedom, there are restrictions in terms of the so-called ‘Freedoms of the Air’ that may be exercised. In particular, the right to operate domestic services in a foreign country does not feature.

In 1993, however, all the bilateral agreements between the member states were replaced by a single multilateral arrangement, which provided appropriately licensed carriers based in the EU with complete freedom to operate anywhere they wished within the Community.

The Third Package of Air Transport Liberalisation measures created in effect a single market for air transport. The national ownership and control requirement contained in the bilateral agreements no longer applied, as all airlines based in the EU were now Community carriers with Community Law prohibiting any form of discrimination between them.

The bilateral arrangements in place between the member states and so-called ‘Third Countries’ did contain national ownership and control requirements. The tortuous process of getting the member states to amend their bilateral agreements with Third Countries began, as had the liberalisation process within the EU, with a Decision of the European Court of Justice.

In 1998, the European Commission took eight member states (Austria, Belgium, Denmark, Finland, Germany, Luxemburg, Sweden and the UK) to the European Court of Justice for establishing bilateral agreements — all Open Skies deals apart from the UK — that discriminated against other EU airlines.

The ruling of the Court in November 2002 effectively forced the hand of the Council of Ministers, who in June 2003 granted a mandate to the European Commission to begin negotiating a bilateral agreement with the US on behalf of all the member states. The recently announced deal between the EU and US is the culmination of those negotiations.

An earlier arrangement agreed in 2005 between the Commission and US negotiators did not find favour with the Council of Ministers.

The first stage of the deal now reached becomes effective in March 2008, five months later than originally planned, and permits any EU or US airline holding an appropriate operator’s licence to operate services between any city in the EU and any city in the US.

Unlimited third, fourth and fifth freedom- rights feature, and the US has accepted the Community air carrier concept, but some key issues that BA and Virgin had wanted included right from the outset in the package have been left to a second stage.

A number of additional elements were added to the 2005 agreement, including: an additional protocol on ownership, investment and control; the unilateral granting to the EU by the US of seventh-freedom passenger traffic rights to a number of non-EU countries; a number of access rights for Community carriers to the US Fly America programme; rights in respect of franchising and branding; and provisions on anti-trust immunity.

Negotiations on the second stage agreement will focus on: the further liberalisation of traffic rights; additional foreign investment opportunities; the effects of environmental measures and infrastructure constraints; further access to government-funded air transport; and wet-leasing. If the second stage negotiations fail to deliver, then member states have the right to suspend certain traffic rights granted to US carriers.

Not surprisingly, after eleven rounds of negotiations the Commission are very pleased that a deal has been reached. Commission Vice President, Jacques Barrot, asserts that the new bilateral is ‘… good for passengers and good for airlines; it is good for the European Union and its individual Member States, for the United States, and for the entire transatlantic economy.’

This miraculous perception of the deal is not the view however, of all the parties involved. Willie Walsh, BA’s CEO, stated “Given that this agreement gives American carriers open access to London Heathrow airport — the prize they have sought for the last 30 years — why should the US suddenly offer concessions in subsequent negotiation?’

However, for Air France - KLM bosses, Jean-Cyril Spinetta and Leo Van Wijk, the deal provides ‘… a long-overdue, stable legal framework’. In their view, without it the Commission would have to take legal action against the Member States, creating ‘... a period of major uncertainty for our industry and our customers’. A not unreasonable perspective, perhaps.

Dr George Williams is Reader in Airline Economics Department of Air Transport Cranfield University