The U.S.-EU Aviation Agreement: A Progress Report

Released by the U.S. Department of Transportation Office of Public Affairs

I want to thank the organizers and co-sponsors for the invitation to participate in this wonderful occasion – a celebration of the International Institute’s Twentieth Anniversary. And I can imagine no better theme for that celebration than competition and globalization.

Twenty years ago, the twelve original Member States of the European Community had yet to adopt the Single European Act, mandating a unified internal market by 1993. Adoption of the first liberalization package for air transport was even further away. Deregulation in the United States was only in its eighth year. While the U.S. had forged liberalized bilateral agreements with a number of our trading partners, we were still half a dozen years away from our first open-skies agreement, with the Netherlands. A mandate allowing the European Commission to negotiate about air transport with third countries belonged to the realm of speculation.

In 1986, the airline business was good, globalization was gathering speed, and hopes for more aviation competition at the regional and intercontinental levels were growing. But the world had accumulated over 40 years of experience with the restrictive bilateral system along with deeply-rooted traditions, ingrained habits, and protected interests. In other words, it is not surprising that it has taken us another 20 years – the life of the Institute -- to arrive at the present point. The U.S.-EU Air Transport Agreement negotiated last November between the world’s two most highly developed aviation markets is in many ways the culmination of aspirations for a liberal regime that go back to the 1944 Chicago Conference. If approved, the Agreement will be a departure point for even broader and deeper liberalization.

Why a U.S.-EU aviation agreement?

The Agreement could have a profound impact in reshaping trans-Atlantic aviation. Business travelers, tourists and shippers potentially will be able to choose from the whole panoply of U.S. and European airlines, since the agreement will authorize every EU and every U.S. airline:

• to fly between every city in the EU and every city in the United States, including opening up operations between the United States and the United Kingdom;

• to operate without restrictions on routes or capacity, including unlimited rights to fly beyond the EU and U.S. to points in third countries;

• to set fares freely in accordance with market demand; and

• to enter into cooperative arrangements with other airlines, including code sharing and leasing.

U.S. acceptance of the "EU airline," a key objective on the European side, means that consolidation of the EU airline industry will be able to proceed unimpeded by nationality-based restrictions.

The Agreement will also enhance the quality of trans-Atlantic cooperation in the areas of safety and security, competition law and policy, government subsidies and support, environment, and consumer protection.

For all of those benefits, the Agreement represents only a first stage of opening markets and enhancing cooperation. The EU and the United States have agreed to begin a second stage of negotiations within sixty days of the effective date of the Agreement.

This Agreement, in other words, has the potential to fundamentally transform the framework within which transatlantic air services operate, increasing dramatically the quality of competition in the market and benefiting consumers and communities on both sides of the Atlantic, in ways that transcend anything achieved through our existing open-skies accords.

Completion of the U.S.-EU Agreement would not only enhance airline competition across the Atlantic, it would set a new standard for liberalization around the world. By honing the competitive strength of U.S. and European airlines alike it would demonstrate the folly of protectionism and loosen its grip on markets everywhere.

What If We Fail to Adopt the New Agreement?

In November 2002, the European Court of Justice rendered a watershed aviation decision. Because the individual open-skies agreements forged by Member States with the United States all incorporate the traditional nationality clause – reserving the rights established in those agreements exclusively to airlines of the contracting states – the Court held that those agreements contravene EU law, which contemplates open access for all EU carriers at gateways throughout EU territory. According to the ECJ, in other words, the Dutch are not allowed to be party to an agreement that permits only U.S. and Dutch airlines to serve the U.S. from Amsterdam. Other EU airlines must enjoy those same opportunities.

Because the Commission has an obligation to enforce ECJ’s decisions, that one calls into question the durability of the open-skies agreements that already govern commercial air services between the United States and its fifteen EU open-skies partners.

The U.S.-EU agreement negotiated last November abolishes the nationality clause and thus, in a single stroke, addresses completely the requirements of the 2002 ECJ decision. As I indicated a moment ago, it permits any EU carrier to serve the U.S. from any EU gateway – not just gateways in its own home state. In other words, the agreement redraws the map of available trans-Atlantic routes completely from day one, and immediately brings trans-Atlantic aviation relationships into harmony with the Treaty of Rome.

But what happens if the new agreement is not adopted? The Commission has indicated that, because of the ECJ’s decision, the status quo isn’t acceptable. That means it will almost certainly have to take action against the current open-skies agreements. Open-skies agreements provide vastly expanded markets for airlines, newer and better air services at affordable prices, economic prosperity for airports and their communities, new customers for manufacturers and shippers – a host of vital economic benefits.

The truth is, however, that a failure to adopt the new U.S.-EU agreement would actually be a "triple-whammy." That’s because, if we lose the open-skies bilaterals, we face the very real prospect of dismantling the cross-border alliance structure upon which so much international aviation competition is based today. That is because the antitrust immunity that facilitates the efficient operation of many of the current alliances is necessarily predicated on the underlying open-skies agreements. Without legally secure open-skies agreements and the guaranteed open entry that they deliver, it is very difficult for regulators to justify a grant of immunity from antitrust enforcement to airlines who are potential competitors.

In summary, it is fair to say that there are compelling reasons to favor adoption of the new U.S.-EU agreement, and equally compelling reasons to avoid the consequences of not adopting it.

NPRM on "actual control" of U.S. airlines

U.S. legislation limits foreign citizens to ownership of no more than 25 percent of the voting shares of a U.S. airline. Not more than a third of the senior officers and directors of a U.S. airline may be foreign citizens, according to the statute. No changes have been proposed in the underlying legislation.

In that sense, the proposal would not make it possible for offshore investors to invest more money or acquire more voting shares in a U.S. airline than is currently permitted. Instead, the underlying objective is to ascertain whether facilitating more meaningful participation in management might encourage investors overseas at least to invest what the law allows. They certainly aren’t doing so today in large numbers.

The proposal has some other important features that I should mention. It would reserve to U.S. citizens all decisions relating to aviation safety, security, and support for the programs of our Department of Defense. Moreover, the greater scope for participation in airline governance would be available only to citizens of countries that have entered into open-skies agreements with us and that permit equivalent investment opportunities to citizens of the United States. The latter element is of particular importance, because it carries with it the prospect of a global aviation marketplace in which capital flows far more freely than today, and in which international airline joint ventures become far more interesting and robust.

Secretary of Transportation Norman Mineta authorized issuance of the notice of proposed rulemaking in keeping with DOT’s statutory obligation to foster a safe, healthy, and competitive airline industry – one that will remain capable of supporting U.S. economic growth. Moreover, DOT has a continuing obligation to ensure that regulatory restrictions on otherwise conventional corporate behavior continue to be justified as a matter of sound public policy. The last quarter-century of aviation policy in the U.S. has been characterized by a steady reduction in government intrusion into commercial decision-making and an increasing reliance on market forces. In seeking public comment on a proposed updating of a 66-year-old interpretation of our governing legislation, in other words, DOT was doing what regulatory agencies are supposed to do.

This was by no means the first time DOT has proposed or supported liberalizing our restrictions on foreign investment in U.S. airlines. The Department supported legislative changes in the early 1990’s and again early in this decade that would have increased the 25 percent ceiling on foreign-owned voting shares to 49 percent. Those proposals never got to the voting stage in Congress. Nor is it clear that those changes, if adopted, would have produced any different behavior in the marketplace. Foreign investors would still have been minority shareholders and would still have been relegated to a wholly passive status. The change probably wouldn’t have made any difference to offshore investors. We believed, in deciding to issue the pending rulemaking proposal, that our interpretation of the statute, rather than the statute itself, might be the more significant impediment to increased interest on the part of offshore investors. That is the proposition that the rulemaking seeks to test.

The point of this discussion is to underscore the important domestic policy reasons for launching the rulemaking proceeding. Yes, we know that the outcome may well affect EU transport ministers’ decision regarding the U.S.-EU aviation agreement, but we would continue to pursue the initiative even if it became clear for other reasons that the U.S.-EU agreement was beyond reach.
State of Play

The proposal has been the focus of far more controversy in the U.S., frankly, than we had anticipated. Members of Congress have expressed concerns. Some question whether it would be possible to square the proposed rule with the statutory requirement that U.S. citizens remain in "actual control" of U.S. airlines. Others ask whether a change this significant is properly the subject of rulemaking, as opposed to legislation. Labor unions worry that the proposed changes would lead to a loss of American jobs.

Because the rule is still pending, this is neither the time nor place to respond to those concerns. Because they are felt so deeply, however, DOT is exploring whether some further period of review might be justified. Secretary Mineta met recently with Senate leaders and had a productive discussion of options for facilitating a better understanding of the proposal and its implications. If we pursue such an option, it means that the final outcome might be postponed for a number of weeks. In that case, the Council of Ministers might wish to postpone its consideration of that outcome until its fall gathering in October. We should all have a clearer sense of the timetable very shortly.

Secretary Mineta and his team remain committed to completing this important rulemaking proceeding. We have benefited greatly from the comments that we received in January, and we look forward to sharing the results of our deliberations once the process is finished. I am hopeful that we will soon be able to advance the process in a manner that is responsive to the comments we have received and respectful of our partnership with Congress.
Thank you for the opportunity to share these thoughts with you this morning.