International aviation agreements: the pursuit of truly open skies
Case study: US-EU open skies policy
I. Identification1. The Issue
In November 1944, 53 countries convened in Chicago to discuss the formation of the world’s first governing aeronautical committee with the goal to oversee the creation and management of international aviation agreements between nations. During this historic meeting, the US recommended the establishment of multilateral open skies to minimize quotas and limitations that could lead to cartels and oppress the rights of passengers to purchase service in a competitive marketplace. The byproduct of this summit was the drafting of the Convention of International Civil Aviation, which was signed by 32 countries (ICAO, 2005).This revolutionary agreement established the permanent International Civil Aviation Organization (ICAO) in order to secure international cooperation and the highest uniformity in regulations and standards, as well as procedures and organization regarding civil aviation matters (ICAO, 2005). Ultimately, the ICAO was tasked to oversee bilateral and open skies agreements between sovereign nations for passenger and cargo air travel. According to the ICAO, the benchmark Bermuda Agreement between the United States and the United Kingdom, signed in 1946, was the first of almost 4,000 bilateral air transport agreements signed and registered with this organization as of today (ICAO, 2005).
The concept of international bilateral aviation agreements has greatly evolved since its inception at the Chicago Convention. The initial bilateral agreement between the US and the UK established the framework and precedent for today’s international bilaterals. Although often referred to casually as open skies agreements, bilateral agreements allow for restricted flight frequencies, city pairs, and aircraft between two countries. By contrast, true open skies agreements reduce government interference in the commercial decisions of airlines, allowing them to set schedules and establish market-oriented service for consumers (see Table 1). Using the lessons learned from the US/UK agreement, the US concluded its first-ever open skies agreement with the Netherlands in 1992, and now has 67 such agreements with countries around the world. Toady, open skies agreements foster synergies between airlines through code sharing and alliances, increase yields and passenger loads, and heighten competition resulting in greater consumer choice for air travel.
Countries around the world have begun to realize that liberal aviation agreements have a significant impact on trade, investment, cultural exchange, and tourism between signatory parties. Recently, the growth of low-cost carriers and overcapacity in today’s airline industry has reinforced the need for further liberalization of international air travel beyond that permitted by traditional bilateral agreements. For this reason, traditional bilateral aviation agreements are out of date and governments are starting to move toward agreements with country blocks rather than individual nations to create open skies between geographic regions.
Table 1: Key difference between traditional bilateral agreements
and open skies agreements
Type of agreement Service capacity Service frequency Fares Extended traffic rights Traditional bilateral agreement Restrictions on which airlines can operate Restrictions on what markets airlines may serve/number of flights that can be flown Restrictions on pricing Restrictions on operations to and from additional countries Open skies agreements No restrictions on the number of airlines that may operate, nor restrictions on what markets airlines may serve No restrictions No restrictions on pricing Allowance for open rights to and from additional countries (Source: GAO, 2004, p. 11)
In order to ensure the sustained growth and success of the international airline industry, governments should adopt aviation policies conducive to open skies agreements that further liberalize air travel beyond existing restrictive bilaterals. The liberal aviation agreements inspired by the Chicago Convention of 1944 have had a significant impact on trade, investment, cultural exchange, and tourism by facilitating the movement of people around the world. The 2003 signing of the open skies agreement between the US and the Philippines further supports this idea and highlights the importance of efficient transportation for tourism. An article in the Manila Times (Oct., 2003) reported, “the Open Skies Agreement could promote more positive images for our country, with more advertising campaigns portraying the country as an ideal destination, which could lead to higher tourism revenues.”
2. Description
The European Union understands the importance of open skies agreements. EU Transport Minister, Jacques Barrot, has vowed, “to create by 2010 a ‘common aviation area’ including the EU, the North African countries, the Balkans, and the nations in Eastern Europe,” (Buck, 2005, p. A5). The EU is also determined to force its member nations to abandon existing bilateral agreements with the US, recently ruled to be in violation of the exclusive powers of the EU, in favor of one blanket open skies policy between the two continents (Browne, 2005).
Discussions regarding the establishment of a common aviation area between the US and the EU have not advanced beyond preliminary talks and both parties hope to reach an accord in the near future. This case study focuses on current negotiations toward an agreement, examines the benefits to a US and EU-block agreement versus aviation agreements with individual member states, and analyzes the specific issues complicating open skies negotiations, such as cabotage, antitrust immunity, and foreign ownership restrictions. These factors, as well as the impact this type of agreement will have on trade, cultural exchange and, ultimately, tourism, between the US and EU are evaluated and considered in order to make valid recommendations for an effective framework approach to open skies policies.
3. Related Cases
International Air Transport Association website. www.iata.org
International Civil Aviation Organization website. www.icao.org
“Open Skies and Open Gates,” by J.F. Nolan, P.C. Ritchie, and J.E. Rowcroft (2001).
“Who Soars in Open Skies? A Review of the Impacts of Antitrust Immunity, and International Market Deregulation on Global Alliances, Consumers, and Policy Makers,” by Andrew Stober (2003).
“The Impact of Market Liberalization on the Formation of Airline Alliances,” by Zhi H. Wang and Michael Evans (2002).“Transatlantic Aviation: Effects of Easing Restrictions on US-European Markets,” US
Government Accountability Office (2004). http://www.gao.gov/new.items/d04835.pdf4. Author and Date
Brian Beall
Master of Tourism Administration candidate
Department of Tourism and Hospitality Management
The George Washington University
600 21st Street, NW
Washington, DC 20052
bbeall@gwu.edu
May 3, 2005II. Policy Implications
5. Social
An open skies agreement between the US and the EU would result in additional competition and lower fares for consumers in the transatlantic market. This would lead to increased trade, tourism, and cultural exchange through travel. An open skies agreement may negatively impact airline employees should it call for a change in foreign ownership restrictions. The EU is pushing for the elimination of the 25 percent ownership maximum of US airlines by foreign carriers. Assuming EU airlines were permitted to buy US carriers, American jobs could be lost to European counterparts and vice versa as corporate and frontline jobs are shipped abroad.
The establishment of a transatlantic open skies agreement is also a diplomatic issue with social policy implications. For this reason, open skies negotiations are handled by the US Department of State, as well as the Department of Transportation.
6. Environmental
The increase in commercial aviation traffic that could result from an open skies agreement between the US and the EU may have a negative impact on the environment surrounding airports. Communities may respond by limiting capacity at local airports to combat additional air and noise pollution.
In terms of a specific environmental issue, the abundance of planes traversing the skies has led to greenhouse warming. Airplane contrails generate cirrus clouds, which reflect the sun’s rays and warm the atmosphere (Eliot, 2005). As this is mostly the result of new and popular fuel-efficient aircraft, which produce less heat and a cooler mixture of exhaust air conducive to contrail formation, governments should consider the environmental impact of more commercial aircraft in the transatlantic market.
7. Economic
An EU-block open skies agreement with the US could lead to increased competition, which will potentially result in a reduction in transatlantic airfares. This will encourage higher levels of travel between the US and Europe and generate greater economic activity for national economies.
8. Antitrust Issues
All open skies agreements or other types of market access liberalization initiatives must be accompanied by measures to prevent anticompetitive behavior and dominance by a single carrier.
9. Suggested Interventions
The US and EU governments must take steps in negotiating a new open skies agreement to ensure that the policy accounts for potential negative social, environmental, economic, and antitrust implications, which could prove detrimental to a liberal aviation agreement if not adequately considered. The impact of an open skies agreement on all stakeholders must be studied and evaluated..
III. Legal Clusters10. Discourse and Status/Policy Issue
The US currently has bilateral aviation agreements with 15 countries in the EU (see Table 2), the first of which was signed with the Netherlands in 1992. According to the GAO, “the US-EU market grew from 28 million annual passengers in 1990 to over 51 million passengers by 2000, representing the most important international market for US airlines. British Airways is the largest carrier in the US-EU market, followed by American, Delta, and United Airlines,” (GAO, 2004, p. 11). Consumers and airlines have benefited greatly from open skies agreements in the transatlantic market. These agreements have led to increased passenger levels, as well as to the development of airline alliances, such as the Star Alliance, founded by United Airlines and Lufthansa, and Skyteam, headed by Delta and Air France. As a result, transatlantic passengers have more choice for travel and have benefited from lower international airfares.
Although the growth in transatlantic air travel over the past ten years has been positive, there is room for improvement in US-EU aviation policy. For instance, the US does not have open skies agreements with 10 EU member nations, including its largest aviation partner, the UK (Table 2). The current bilateral agreement between the US and the UK, referred to as the Bermuda 2 agreement, limits service between the US and London Heathrow airport to two airlines from each country. Under this agreement, American Airlines and United Airlines may serve twelve specified US cities non-stop from Heathrow, while British Airways and Virgin Atlantic may offer non-stop service to eleven cities, plus other US destinations where there is no US competitor.
The issue of access to Heathrow is a major point of contention in the current US-EU-block open skies negotiation, as US carriers like Delta, Northwest, Continental, and US Airways, would like access to Heathrow. This particular London airport accounted for the highest percentage of US-EU passengers of any European airport between 1990 and 2002 (GAO, 2004, p. 15). Because of the hesitation to surrender slots at Heathrow to more than two US transatlantic competitors, the UK has been reluctant to relinquish negotiating power to the European Commission for the creation of the US-EU common aviation area for fear for losing this authority.
Table 2: EU member states with US open skies agreements
EU countries with US open skies agreements Portugal, France, Luxembourg, the Netherlands, Germany, Denmark, Sweden, Finland, Poland, Czech Republic, Slovakia, Austria, Italy, Malta EU countries with traditional US bilateral agreements or no agreements Spain, the United Kingdom, Ireland, Greece, Cyprus, Lithuania, Latvia, Estonia, Hungary, Slovenia Realizing its lack of control and regulation over existing open skies agreements, the European Commission brought eight member countries before the European Court of Justice in 2002. The Commission alleged bilateral agreements violate European law because they contain nationality clauses whereby only national companies in the signatory countries can benefit from the agreement. Furthermore, the Commission believes that it should be responsible for the negotiation of agreements on behalf of member states as a single market.
Following litigation, the court ruled that member countries’ bilateral agreements with the US were in breach of European law and only the EU has the right to negotiate over certain aspects of aviation policies with countries outside the EU. This deals specifically with airport landing and take-off slots and computerized booking systems (Browne, 2005). As of today, the Commission has infringement proceedings pending against 20 of the 25 EU nations, indicating this is a highly contentious issue for 21st century international aviation negotiations.
Because the European Commission would like to nullify existing bilateral aviation agreements between its member states and the US, it is crucial that it expedite a new EU-US open skies agreement to create a common air space between the two continents. As the European Commission’s vice president has expressed, “international air traffic regulations are in need of modernizing. By creating a single aviation market (see Diagram 1), The European Union has opened up new opportunities for airlines and passengers. Common markets have yet to be created between the European Union and third countries” (Browne, 2005).In June 2003, the European Council, composed of representatives from each member state, convened to issue an EU mandate to negotiate the creation of a common aviation area with the US, which included terms to liberalize the EU-US market, as well as remove restrictions on foreign investment in airlines between the EU and US (GAO, 2004, p. 2). The discussions with the US began in October 2003 but stalled after both parties failed to reach an agreement on cabotage, the right of foreign carriers to operate another country’s domestic routes.
Diagram 1: A new open skies agreement could result in more
EU-US international routes.
(Source: GAO, 2004)
(Source: GAO, 2004)
11. Forum and Scope/Existing Policy Framework
CCurrently, the US has bilateral open skies agreements with 15 EU member states, the first of which was signed with the Netherlands in 1992. These agreements are exclusively between the US and individual signatory European nations. The US has restrictive bilaterals with five EU countries, with strict limitations on city-pairs and frequencies. Furthermore, the present open skies and bilateral agreements between the US and EU have strict limitations on foreign ownership, as well as fifth and seventh freedoms. The US only permits foreign ownership of its airlines up to 25 percent, while the EU would like to see this maximum eliminated. Fifth freedom rights allow US carriers to sell tickets to a city in Europe and then from that city in Europe to points beyond Europe. For instance, Northwest Airlines, as permitted by the US-Netherlands open skies agreement, sells tickets from Minneapolis to Amsterdam, and from Amsterdam to Mumbai. Seventh freedom rights allow airlines to operate another country’s domestic routes. This is not permitted by any of the current US-EU open skies or bilateral agreements.
According to the US Department of State, open skies agreements liberalize international air travel by minimizing government intervention. The key provisions of open skies agreements establish the framework for all negations and include:
US Department of State Fact Sheet, January 31, 2001 (Fact Sheet, 2005)
12. Decision Breadth/Stakeholders/Policy ActorsThe stakeholders in open skies agreements are numerous, and include the European Commission, EU member state governments, the US government, airline passengers, and local economies that benefit from increased commercial air travel.
13. Legal Standing/Legal Regulatory Framework/Suggested Policy Intervention
The European Commission and the US government must work to reach an agreement on the formation of a common transatlantic aviation market. This will help increase competition between the US and EU, which will result in added consumer choice, lower airfares, and a rise in transatlantic trade and tourism. Because trade in international tourism is an export for destination countries, an increase in travel to the US and EU will assist in the overall balance of trade.
IV. Trade Clusters
14. Type of Measure: N/A
15. Relation of Trade Measure to Environment/Tourism Impact:
Open skies agreements have affected tourism through the reduction in airfares between the US and signatory EU nations. Between 1996 and 1999, airfares between countries with open skies agreements dropped an average of 20 percent, compared to a 10 percent fare decrease in non-open skies markets (GAO, 2004, p. 22). In addition, the airline alliances that have grown from open skies agreements have been motivated by US airlines interest in capitalizing on the increase in international tourism and the globalization of business (Stober, 2003, p. 117).
A US-EU open skies agreement would open new national markets not currently covered by this type aviation agreement, such as Spain and the United Kingdom. The increase in competition typical of open skies agreements would allow for further development of alliances and a reduction in transatlantic airfares, resulting in increased tourism arrivals.
16. Trade Product Identification/Trade and Services
Open skies agreements between the US and EU cover the trade of services in the form of transatlantic air travel. Tourism as a trade in services is being negotiated by the World Trade Organization under the GATS (General Agreement on Trade in Services).
17. Economic Data
The US and EU governments should develop strategies to examine the economic impact of a common transatlantic aviation area on local communities and the rate of international tourism arrivals.
18. Impact of Trade Restriction
Current restrictive bilateral agreements between the US and EU nations, such as Spain and the United Kingdom, do not allow for free competition and are not in the best interest of consumers.
19. Industry Sector
The US-EU open skies agreement concerns the transatlantic sector of the international airline industry, as well as international tourism involving air travel to destinations.
20. Exporters and Importers:
V. Macro/Environmental Clusters/Tourism Policy Clusters
21. Environmental Problem/Environmental Aspects
The increase in commercial aviation traffic that could result from an open skies agreement between the US and the EU may have a negative impact on the environment surrounding airports.
In terms of a specific environmental issue, the abundance of planes traversing the skies has led to greenhouse warming. Airplane contrails generate cirrus clouds, which reflect the sun’s rays and warm the atmosphere (Eliot, 2005). As this is mostly the result of new and popular fuel-efficient aircraft, which produce less heat and a cooler mixture of exhaust air conducive to contrail formation, governments should consider the environmental impact of more commercial aircraft in the transatlantic market.
22. Resource and Impact
Airports currently operating at capacity, such as London Heathrow, may have difficulty immediately accommodating additional demand for service by consumers and airlines. Facility and infrastructure overcapacity can be a significant barrier to the success of open skies agreements.
23. Urgency and Lifetime/Urgency and Policy Review
The European Court of Justice’s recent ruling that existing individual open skies agreements between 15 EU member states and the US are in violation of EU law creates a sense of urgency to reach a new policy agreement, which will have a major impact on tourism policy and planning.
24. Substitutes/Alternative Policies
The US-EU open skies agreement is an alternative to existing individual open skies agreements between the US and 15 EU member states, as well as existing restrictive bilateral agreement between the US and Ireland, Greece, Spain, Hungary, and the United Kingdom. This agreement would also extend to the five EU countries without any current form of US aviation agreement, including Cyprus, Estonia, Latvia, Lithuania, and Slovenia.
VI. Other Factors
25. Culture
Certain EU member states are reluctant to surrender negotiations to the European Commission for fear they will lose restrictive clauses designed to protect national carriers. This is the case in the UK, where the British government tightly controls slot allocation at London Heathrow airport to protect the interests of its national carriers, British Airways and Virgin Atlantic Airways.
26. Trans-Boundary Issues
A US-EU open skies agreement would guarantee US carriers fifth freedom rights, which would allow US airlines to sell seats from the US to any EU country and then beyond to a non-EU nation (GAO, 2004, p. 27).
27. Rights
The issues of nationality clause, which specifies the countries that can participate in an open skies agreement, and access to London Heathrow airport, the most highly demanded European airport for transatlantic travel, have complicated efforts to agree on a US-EU common aviation area.
28. Relevant Literature
Nolan, J.F., P.C. Ritchie, J.E. Rowcroft (2001). Open Skies and Open Gates. Transportation, 28.2, 119-135.
Stober, Andrew (2003). Who Soars in Open Skies? A Review of the Impacts of Antitrust Immunity, and International Market Deregulation on Global Alliances, Consumers, and Policy Makers. The Journal of Air Transportation 8.1, 111-133.
Wang, Zhi H. and Michael Evans (2002). The Impact of Market Liberalization on the Formation of Airline Alliances. The Journal of Air Transportation 7.2, 26-52.
VII. Conclusion
29. Policy Implications
A common aviation area between the US and the EU would provide US airlines with additional traffic rights and access to restricted markets, such as Spain and the UK. This would open up airports like London Heathrow to airlines other than those specified by current restrictive bilateral agreements. U.S airlines would also gain fifth freedom rights to all 25 EU countries should the open skies framework be extended to all member states, following the removal of the nationality clause (GAO, 2004, p. 27). Fifth-freedom rights would allow US airlines to sell seats from the US to any EU country and then beyond to a non-EU nation (GAO, 2004, p. 27). US airlines would also receive the opportunity to extend code-sharing agreements to countries like Greece and Spain, whose bilateral agreements with the US currently prohibit this type of service.
European airlines would also greatly benefit from a US-EU common aviation area. An open skies agreement would allow them to restructure their transatlantic service, and airlines like Lufthansa would be able to serve points in the US from any EU city (see Diagram 1). Furthermore, the elimination of the nationality clause would permit EU airlines to base airport operations in neighboring countries (GAO, 2004, p. 30).
According to the GAO, the elimination of the nationality clause restriction would have the following effects:
(GAO, 2004, p. 34)Lastly, consumers would enjoy numerous benefits from a US-EU common aviation area. Under an open skies agreement, airlines on both sides of the Atlantic would be in better positions to respond to market forces and consumer demand. As airlines would work to strengthen their transatlantic routes and services, consumers would have more choice for air travel and the increase in competition among airlines would result in lower airfares. The reduction in travel costs would stimulate travel demand and potentially tourism arrivals in US and EU destinations.
30. Recommendations
An examination of the potential implications of a common aviation area policy between the US and the EU demonstrates that an open skies agreement extended to all EU member states is in the best interest of airlines and consumers. An open skies agreement would increase transatlantic competition, resulting in additional choice of service for consumers and lower airfares. In the long-term, open skies will expand current levels of US-EU trade, tourism, and cultural exchange. Although it is likely that once an open skies agreement is reached that there will be capacity constraints, which will limit immediate growth at airports like London Heathrow, over time, the benefits to this agreement will overshadow initial challenges. Therefore, it is recommended that the US and EU rekindle efforts to reach an agreement on the terms of a common aviation area and continue the pursuit of viable open transatlantic skies
31. References
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Buck, Tobias (2005, March 2005). EU seeks to boost share of air travel with Russia and
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(2001, 31 January). Open skies agreement highlights. Retrieved March 19, 2005, from
http://www.state.gov/e/eb/rls/fs/208.htmStober, Andrew (2003). Who Soars in Open Skies? A Review of the Impacts of Antitrust Immunity, and International Market Deregulation on Global Alliances, Consumers, and Policy Makers. The Journal of Air Transportation 8.1, 111-133.
US Government Accountability Office. (2004). Transatlantic Aviation: Effects of Easing
Restrictions on US-European Markets. Washington, DC. Retrieved March 19, 2005, from http://www.gao.gov/new.items/d04835.pdfWang, Zhi H. and Michael Evans (2002). The Impact of Market Liberalization on the Formation of Airline Alliances. The Journal of Air Transportation 7.2, 26-52.
(2003, October 10). Why Open Skies can be good for us. Manila Times. Retrieved
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