Open Skies: EU-US Air Transport Agreement

As if those employed by our air carriers did not have enough to worry about, it seems one more thing can be added to the list. You might have read the European Union (EU) aviation people are pressing to complete an Open Skies Air Transport Agreement with the United States. This has been going on since 2003. Many believe that an Open Skies agreement is nothing more than an attempt by the EU to exercise control over U.S. air carrier activities by, among other things, gaining ownership interests in our air carriers.

The EU consists of 27 countries (member states) that now have strong political clout with our government. The aviation arm of the EU wants access to our huge passenger and cargo market and more importantly, the right to buy into and control our carriers. They have achieved some of what they want so far, but not all. Think of it, Air France owning a majority stake in your employer. Outsourcing, big time!

Stage I agreement signed

The initial agreement called Stage I, was signed on April 30, 2007 by Condi Rice, secretary of state and Mary Peters, secretary of transportation and by the EU Council president and the EU VP Transport. It is planned to be effective on Oct. 28, 2007. This is the start of the winter travel season and the pact is designed to lower fares for all. (As if they are not low enough!) We’ll see. But, there are other important conditions agreed to that will affect whether or not the deal continues on at all.

The EU VP for Transport has stated: “the objective of (Stage II) negotiations will be additional traffic rights (for EU) and fewer restrictions on European ownership and control of U.S. carriers.” The EU’s intentions are stated very clearly.

The most significant issue to completing the deal in Stage II is the EU’s attempt to include an opportunity for its member states to gain a controlling interest in U.S. carriers. The ownership interest issue was removed from the original proposed deal by our State Department after much objection by our industry. Believe it or not, our State Department was agreeable to the proposal by the EU in some respects. But if it weren’t for the strong objections of our industry and the Congress our generous State Department might have come close to giving the EU what they wanted.

We should hope that our State Department does not agree to any proposal that might allow a controlling interest in our carriers to be purchased by any of the EU member states. I and many others believe it would be the end of our air carrier structure as we know it today … which seems to be the obvious intent of the EU managers.

Many believe that it is insane for our government to change the ownership rules to give foreign investors the power to make financial and control decisions that would have any possibility of shifting airline maintenance jobs, among others, to the foreign companies.

Threats by EU

Obviously, there may be advantages on both sides that would allow for a bigger and better air transport business, but the United States appears to have much to lose and not much to gain by agreeing to share ownership in its companies with failing or non-profitable EU carriers. The EU attempts to threaten our industry by saying that EU courts have declared our bilateral agreements, that define the various arrangements between the United States and many of the foreign EU member states, are illegal under their EU laws. They claim that these bilateral agreements must be set aside and replaced with the new EU drafted agreement. You can imagine what that means. Why our State Department seems to be hell-bent on marginalizing our air carriers and the people who work there, is difficult to understand. Is this part of the globalization theme running through much of our government today?

Give away our factories and manufacturing capability, our automobile industry, our machine tool manufacturing and steel industry, etc., and now our major transportation industry. Soon our country will do nothing but sell hamburgers and pizza, say some of our more caustic pundits.

Stage II discussions to start before October 2007

Of course the Stage II agreement has not happened yet, and hopefully will not happen at least in the form that the EU would like to have. They are set to begin during the months of July and August. Stage I is bad enough. Foreign attempts at investment in U.S. aviation has been ongoing for some time. After all, few foreign air carriers are profitable and some can never be profitable without drastic changes. (Remember, many are run by governments.) Fortunately, thanks to strong opposition from your labor unions and our Congress this has not happened so far. But watch out for what’s coming down the road.

With the advent of the new Congress, the ownership issue is bound to be contentious and it could threaten the Stage II talks and perhaps halt the Stage I agreement. The EU included language in the Stage I agreement that says if progress on the Stage II negotiations (the ownership issue) is not completed within a definite time-frame then each Party would have the right to suspend rights. This would appear to be a threat to cancel the Stage I agreement completely if progress could not be made on the ownership issue. Great! Let it happen. They can start all over again. This deal, as it now stands, is so good for the EU that they will go forward no matter what!

The EU keeps pushing for access and wants the present 49 percent foreign investment limit lifted. They slip these provisions in with other issues such as regulatory expansion (its called “harmonization” by our FAA), air carrier security, and the very touchy issue of cabotage, which means access to U.S. routes, i.e., the ability to fly between two cities within the United States. The Stage I agreement grants EU carriers the ability to fly between U.S. cities. This is scheduled to start in October of this year. Look out!

One of the recent attempts at compromise on the investment issue is to allow foreign airlines to gain in excess of 49 percent stock interest but it would be non-voting stock. Thus theoretically still preventing a controlling interest. Many say this is nothing more than a fiction that would eventually open the door to direct majority control. I believe it.

The issue of ownership and control is a major one for U.S. carriers. If a U.S. major carrier were to be controlled by a foreign carrier this would threaten not only jobs but could combine to create a profitless entity that might fail. What many do not realize is that right now we have more air carrier capacity than we can use. Even with a predicted jump in passengers there still remains a huge surplus of carrier capacity which sucks the profit out of the whole operation. The arrival of many EU carriers competing for the U.S. market will only add to the excess capacity and no doubt force the bankrupcy of some more U.S. carriers and more likely some EU carriers.

Floodgates are opening

Stage I Agreement Summary Re: Market Access (approved and signed by all parties April 30)

  1. Community carrier concept permitting EU airlines to operate to the United States from any point in the EU.
  2. Removal of all restrictions on international routes between the EU and United States and routes beyond the EU and the United States.
  3. Removal of all restrictions on 7th freedom flights for all-cargo services by EU airlines but no additional 7th freedom all-cargo rights to U.S. airlines.
  4. Removal of all restrictions on pricing on all routes between the EU and the United States, but with a derogation to maintain the prohibition on price leadership by U.S. airlines on intra EU routes.
  5. Unlimited code sharing between EU, U.S. and third countries airlines.
  6. Creation of new opportunities for EU airlines to wet-lease aircraft to U.S. airlines for use on international routes between the United States and any third country, which was previously prohibited by the FAA.

These provisions of the just-signed Stage I agreement, only deal with market access. There are other titles in Stage I that deal with regulatory co-operation, safety, competition, government subsidies and support, customs duties, environmental issues, and establishment of a joint committee to resolve interpretation or application questions that arise regarding the agreement. Many agree that this agreement is bad for the United States and more importantly, bad for jobs and labor in the United States.

Regulatory control

None of our government representatives seem to have even considered the effect on regulatory control by our FAA on the expected flood of foreign carrier aircraft flying around in our country. They are going to be able to fly anywhere and everywhere in the United States. Who will be inspecting them for safety? FAA? We don’t have enough inspectors to do this now on our own aircraft. Will we invite the European Aviation Safety Agency (EASA) into our country to aid us in doing this job? Will we have EASA permanently on duty in the United States? This I predicted some time ago in an article describing the EASA, which continues to grow in size within the EU.

For the next several months it will pay to watch what goes on in Washington and Brussels. It will have a huge effect on U.S. air carriers and could pave the way for the globalization of the U.S. business and have far reaching other regulatory impact.

Comments to aerolaw@att.net.

Stephen P. Prentice is an attorney whose practice involves FAA-NTSB issues. He has an Airframe and Powerplant certificate and is an ATP rated pilot. He worked with Western Airlines and the Allison Division of GMC in Latin America, servicing commercial and military overhaul activities and is a USAF veteran. Email: aerolaw@att.net

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