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U.S.-EU Air Transport Agreement

John R. Byerly, Deputy Assistant Secretary for Transportation Affairs
Remarks at the Institute of International and European Affairs
Dublin, Ireland
May 8, 2008

Thank you for inviting me to participate in this important conference. Precisely a week from today—on May 15 in Slovenia—we will open the second stage of U.S.-EU air transport negotiations. It’s a perfect time to look back at what we’ve accomplished and also to look ahead to the challenges before us. I’m especially pleased to be in Ireland, delighted to see so many Irish friends again, and honored to have the opportunity to speak at the Institute of International and European Affairs.

It’s appropriate to recognize and thank the Institute for the important role it played in our air transport negotiations. The Institute hosted a seminal conference on aviation liberalization in February 2005 that helped us regain our footing, reopen talks later that year, and map a route to success. When I spoke at that Conference, my remarks included references to George Bernard Shaw and James Joyce. Having worked literary allusions into the first draft of my remarks for today, I discovered that they were all from English poets. So, I set about finding something from and about Ireland and came upon two quotations that seem particularly apposite.

The first—and this will come as no surprise—is from George Bernard Shaw: “People,” he wrote, “are always blaming their circumstances for what they are. I don’t believe in circumstances. The people who get on in this world are the people who get up and look for the circumstances they want, and, if they can’t find them, make them.”

The second quote is from the American modernist poet, Marianne Moore, who wrote: “I am troubled, I’m dissatisfied, I’m Irish.”

Being dissatisfied with the world as it is and creating the “circumstances they want” may or may not be an inherent Irish characteristic. But these were hallmarks of the remarkable contributions of Ireland during the first-stage negotiations. No country did more to make the Air Transport Agreement a reality. Your vision, your leadership, and your hard work made all the difference. And, I hope, the principle of taking dissatisfaction as a starting point and working for better circumstances will, once again, be a guiding principle in the second stage of negotiations.

Tom Lynch asked me to comment on what we have achieved with the first-stage U.S.-EU Air Transport Agreement and then offer an American perspective on the second stage. That’s a tall order for twenty minutes, but I promise to leave plenty of time for questions, comments, and discussion.

So, straight to the first issue: what, in fact, have we accomplished with the Air Transport Agreement that was put into effect just six weeks ago, on March 30, 2008? Lest Elizabeth Barrett Browning turn over in her grave, I will not pose the rhetorical question: “O, Air Transport Agreement, how do I love thee? Let me count the ways.” It is, nevertheless, a bit perturbing that some have engaged in what Alexander Pope called “damning with faint praise,” suggesting that the benefits of the Agreement are paltry and that the four-year negotiating saga represents a “missed opportunity.”

The truth, as I see it, is that the transatlantic market has been transformed in astounding ways by the Agreement—and with astoundingly positive results for consumers, shippers, and communities on both sides of the Atlantic. Here in Ireland, the Agreement, including the special transitional annex for U.S.-Irish air services, has allowed Aer Lingus to ensure its place among leading transatlantic air carriers, opening new routes to Washington, San Francisco, and Orlando; inking a deal with JetBlue; and, just last month, announcing an extensive codeshare agreement with United.

Moreover, U.S., Irish, and other European airlines wishing to fly between the United States and Ireland are no longer constrained by the Shannon stop requirement. Continental Airlines, for example, has added a second non-stop flight to Dublin, while maintaining its daily service to Shannon. Each of these important steps will link our two countries and peoples even more closely together. In fact, European Commission Vice-President Jacques Barrot stated on March 30 that Ireland is “one of the best-placed European states to benefit” from the Agreement. “The result of Open Skies,” he said, “is that the frequency of flights between Ireland and the US goes up from 119 per week to 146 per week.” The door is thus wide open to airlines that wish to fly between our countries. We will watch with enormous interest to see which low-cost airline—be it Ireland’s Ryanair or an American carrier such as Southwest or JetBlue—will be the first to take advantage of this opportunity.

Across the Irish Sea, at London-Heathrow, we’ve witnessed a market opening like no other in aviation history, a miracle that many considered impossible: Where once only four airlines were allowed to offer air service—and even then, only to some cities in the United States—today a free market thrives. New transatlantic service—service previously outlawed under Bermuda 2—is being offered from Heathrow:

  • by Air France to Los Angeles;
  • by American Airlines to Dallas and Raleigh;
  • by British Airways to Dallas and Houston;
  • by Continental to Houston and Newark;
  • by Delta to Atlanta and New York;
  • by Northwest to Detroit, Minneapolis, and, very soon, Seattle;
  • by United to Denver; and
  • by US Airways to Philadelphia.

Furthermore, the Bermuda 2 prohibition that required FedEx to fly its aircraft half-empty from London to its hub at Paris is now gone. The result: better service for customers in the UK and on the European Continent, cost-savings for FedEx, and a reduced carbon footprint as aircraft are used more efficiently.

Perhaps the most novel development under the Agreement is British Airways’ plan to operate to New York from Paris and Brussels and potentially from more cities on the European Continent. I, for one, am not surprised that, yes, an Irishman, Willie Walsh, is the driving force. Dissatisfied with the market as it is, he has set about creating the “circumstances he wants” to offer BA’s customers. I won’t complain that Willie Walsh appropriated the name “Open Skies” for this new airline—in fact, I look forward to getting my monthly royalty checks in the mail. (Just kidding.)

Seriously, such creative new service is exactly what we sought with the U.S.-EU agreement: whether the carrier is European or American, consumers are the real winners. Consumers are also the winners with the start of new codeshare service that was previously not authorized by restrictive bilateral agreements, including to and from Spain, Greece, and the UK, with carriers as diverse as Aer Lingus, Air France, American, bmi, Delta, KLM, Northwest, and United.

Many ask whether ticket prices have dropped? It’s too early in the implementation phase to make authoritative statements. But experts in the field have told me privately that pressures to cut prices are already evident, particularly for business fares in previously restricted markets and also in the important area of corporate contract fares.

As an example, the New York Times of April 13 described a growing list of discounted business class fares in the transatlantic market, including offers from Air France, British Airways, Lufthansa, Continental, Swiss, and Silverjet. New air service and lower prices, however, are not the end of the success story. Let me list some other positives:

  • The U.S. Department of Transportation, for the first time, has given a green light to U.S. airlines to use foreign aircraft with crew on international air service, including aircraft from European airlines.
  • The U.S. General Services Administration has promulgated guidance that allows EU airlines direct access to certain U.S.-Government procured air transport, so-called Fly America traffic.
  • As a final example, the U.S. Transportation Security Administration and the European Commission have recently signed a formal “Working Arrangement” on airport assessments that moves us an important step forward on the path to one-stop aviation security.

Well, in the end, I guess I did “count the ways” we ought to love the new agreement. It’s making a difference—a big difference—in transatlantic aviation to the huge benefit of consumers, shippers, workers, and communities. And at a time when it appears to be taboo in many quarters to use the term “free trade,” we should be reassured by the consensus across the Atlantic—and, indeed, with all 91 countries with which the United States has Open Skies agreements—that “free trade” in aviation services is a win-win for all concerned: pro-consumer, pro-growth, pro-competition.

Let me turn now to the second-stage negotiations. If there is one message I wish to convey here in Dublin, it is that the United States approaches the second-stage negotiations with commitment and enthusiasm. We see the talks as an opportunity to deepen and to broaden the scope of aviation liberalization. We’re aware of the challenges, of course, and no one should expect results overnight. The negotiations will require both sides to focus on what matters most and what’s achievable. It’s certainly premature for gloom-and-doom predictions about what will happen if the negotiations don’t yield the specific outcomes demanded by some. Let me emphasize that there are no predetermined results in the negotiations, no winks or nods about where we’ll come out.

I’d like to mention some of the issues that will be on the table, but I suspect that the discussion period will be the best opportunity to go into greater depth. In the area of traffic rights, we start from the fact that the first-stage agreement already secures for both sides’ airlines unrestricted first, second, third, fourth, fifth, and sixth freedom rights. EU airlines have unrestricted cargo seventh-freedom rights while U.S. carriers enjoy more limited opportunities. That’s an imbalance in the Agreement that we will aim to address.

Environmental constraints on the exercise of traffic freedoms may well be matters we’ll have to tackle in the second stage. For now, we believe that the active discussions underway in the International Civil Aviation Organization (ICAO) are the right place to tackle the question of aviation greenhouse gas emissions. This is a global issue in a global industry that calls for a global solution.

But I should add that the United States has a compelling story to tell about our performance in aviation emissions. Compared to 2000, U.S. commercial aviation is moving 12% more passengers and 22% more freight while burning less fuel and reducing carbon output by a million tons. In fact, between 2000 and 2006, aviation CO2 emissions in the United States actually declined by about 4%. And we continue to make improvements to maintain that trend.

How about another environmental issue, airport noise? We had hoped to put this matter to bed in the first-stage agreement, where both sides committed explicitly to implement the so-called “balanced approach” to noise management.

Endorsed by consensus at ICAO and incorporated in a European Community directive, the “balanced approach” requires a careful evaluation, including cost-benefit analysis, of the full range of measures for dealing with airport noise before a decision is made on operational restrictions such as night curfews. Alternative measures include land-use planning, alternate flight paths, and the use of insulation for homes near airports.

Unfortunately, our concerns are growing about the commitment in parts of the EU to good-faith compliance with the “balanced approach.” Night flight restrictions at the airports in Oporto, Frankfurt, and Brussels, for example, appear to have been implemented or proposed based on political considerations, not the “balanced approach.”

For the present, we have raised our concerns in the Joint Committee that is overseeing the implementation of the Air Transport Agreement. But I can’t preclude that the United States may seek more systemic, procedural commitments from the EU in the second stage. These could include a requirement to change EU legislation to replace the noise directive with a more easily enforceable noise regulation.

The negotiations may well consider a range of other issues, but let me focus on the issue that consistently garners the most attention: the question of liberalizing opportunities for the ownership and control of airlines.

There are, from our perspective, two distinct aspects of investment liberalization. The one most commonly mentioned—certainly here in Europe—involves liberalizing the rules that limit the ownership and control of European and American air carriers. I’ll turn to this aspect in a moment.

But I first wish to draw attention to a second objective of investment liberalization that we can and should advance in the second stage. The longstanding bilateral system for exchanging aviation rights is built around the so-called “nationality clause”: the standard provision in bilateral air services agreements whereby the rights that one country grants to airlines of the other country are limited solely to airlines that are “substantially owned and effectively controlled” by nationals of that other country. For example, only airlines substantially owned and effectively controlled by nationals of India are entitled to operate to the United States under the U.S.-India Open Skies air transport agreement, and vice versa.

This fundamental—indeed, almost defining—element of the bilateral system has long been recognized as a major legal barrier to significant cross-border investment, not to mention cross-border airline mergers. In the first-stage Air Transport Agreement, we took a first step toward dismantling this barrier. Specifically, the United States pledged not to exercise its right to bar air services under bilateral agreements with 10 countries in Europe that are not members of the EU as well as 18 African countries on the grounds that control of airlines designated by these 28 countries is vested in EU nationals.

In the second-stage negotiations, we should go much further in pulling down the “nationality clause” barrier to cross-border investment and airline management. This should be done on a reciprocal basis to the benefit of EU, U.S., and third-country airlines and investors.

Finally, what about the expected European proposal to change U.S. laws that today limit foreign ownership of U.S. carriers to 25% of voting stock and prohibit “actual control” by foreign citizens? We approach this issue with an open mind. There are potential plusses for both sides’ economies in expanding investment opportunities on a reciprocal basis and enhancing the ability of airlines to serve a global market. The Department of Transportation made this clear in December 2006 when withdrawing the rulemaking on the interpretation of the “actual control” requirement in U.S. law. DOT wrote:

[T]here are significant benefits to be realized by liberalizing and rationalizing our domestic investment regime for U.S. air carriers. … [W]e need a way to enable strategic investors ‘interested in long-term gain, not short-term arbitrage’ to participate more meaningfully in the decision-making of U.S. carriers. …[This] would permit our carriers to catch up with increasingly competitive and financially stronger foreign airlines.”

If, however, the U.S. Government, including the U.S. Congress, is to be persuaded to amend the law, the proponents of change—including the European Union but also private sector stakeholders—will need to make the case and explain the benefits in clear and convincing terms.

The negotiations will also need to tackle several serious concerns. These include:

  • the role that U.S. airlines play in America’s national defense under the Civil Reserve Air Fleet (CRAF) program;
  • homeland security issues made all too real on September 11, 2001, when terrorists used four U.S. civilian aircraft as their weapons of choice; and
  • the concerns of airline labor about upsetting the balance of power between management and unions.
  • Moreover, there is a serious question whether rights on paper for U.S. citizens to invest in European airlines would be guaranteed in the real world—concerns that have only been magnified by the recent thrust and parry over the fate of Alitalia.

Are the second-stage negotiations an impossible task? In my view: no, they are not. But the task will be challenging. Luckily, we have the invaluable experience of the first-stage agreement where four years of hard work, commitment, and vision allowed us to achieve a miracle. And in Daniel Calleja and his colleagues from the Commission, Member States, and European industry, the EU has an exceptionally able negotiating team.

We will certainly count on Ireland to play, once more, a central role in the quest for further liberalization. Recalling Marianne Moore and George Bernard Shaw: Let us all be Irish, let us all take our dissatisfaction and create the circumstances that we want for global aviation. Thanks very much for the opportunity to speak before the Institute. I look forward to a great discussion. Thank you.

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