commentary

Business Travel Executive

April 2007

Insight: Open Skies

Born Again

By Kevin Mitchell

I had an opportunity to speak with Paul Mifsud, vice president of government and legal affairs, USA, for KLM Royal Dutch Airlines, about the recently-concluded US-EU Open Skies agreement. Mifsud is the preeminent expert, having been knighted by the Queen of the Netherlands for his significant contributions to air trade liberalization. 

Q: In the largest possible context, why does this air transportation trade issue matter? Why is the recent negotiation breakthrough important?

A: Well, if you look at the global economy today, you can quickly see that aviation is an important vehicle for servicing it. Yet, ironically, aviation is relegated to some ancient treaties and obligations that make it all but impossible for today’s airlines to fully participate in the global economy. You can go all around the world and buy Coca-Cola or Budweiser beer, but you can only buy air transportation on American airlines to and from the United States.

Q: What is the historic context of this issue?  What are the key milestones to date?

A: The regulation of aviation is governed by the Chicago Convention. At the end of World War II, in 1944, the nations of the world got together and wrote up a convention for the governance of the economic exploitation of aviation. At that time, Europe was just coming out of World War II, and everybody was interested in rebuilding their industry. So it was a structure created for the purpose of rebuilding airlines after World War II.

That same structure has been in place since 1944. Just before the US went into deregulation of its aviation industry in 1978 -– it was the year before, in 1977 –- the British government forced the US government to accept a very restrictive version of that 1944 agreement. And for the last 30 years, efforts to change that agreement have proved to no avail. We are now on the eve of perhaps taking the next step forward.

Q: Who are the industry and government participants in this that have vested interests in the outcome and what are those interests?

A: Well, we can start with the United States and Europe. Our government and Europe’s government recognize the need to liberalize and get rid of some of these archaic regulations having to do with aviation. So at that level, both Europe and the United States are motivated. There are also the US carriers.  Under the existing regime, only four carriers are allowed to serve Heathrow airport, two from the US and two from the UK. And those carriers have -– well, somewhat different interests than the rest of the industry, who would like to participate in that market and into a broader US/European market.

Labor also has a stake in this, and has been very aggressive in trying to preserve the status quo, particularly US labor.  Ironically, European labor is in favor of the deal.

Q: Paul, with all that as background, then, can you provide us with your analysis of the tentative agreement that’s been reached? 

A: The most important thing from the European perspective is that the US has agreed to give recognition to all European airlines to operate, instead of just from their home countries, from any European country. In other words, they’re going to treat European airlines as though they were from the “country of Europe.” This is a major step forward, and something that was required under a recent litigation between the Community and the member states.

With that comes the possibly for any Community carrier to fly between any point in the European Union, a market of almost 400 million people, to any point in the US without any restrictions on pricing or capacity. In addition, it includes the possibly to operate beyond the European Union and the United States toward third countries, and it has the possibly for EU airlines to operate all-cargo flights beyond the United States. In other words, they don’t have to originate in the European countries. They can originate in the United States. This is the first time a major deal like this has been done; it’s unprecedented.

They’re also creating a regulatory convergence mechanism. A committee will be set up after this agreement, and the US and Europe are committed to trying to make their regulations together, or take into account the interest of both sides before implementing new regulations.

As respects the specifics of investment, this has been severely limited as a result of US labor activity and actions by Congress, who got caught up in the idea of foreign ownership in the Dubai ports case that you may remember from last spring.  As a result, the US Congress almost stopped the US from going further at all. The US has promised to keep pushing on foreign ownership in subsequent phases of this agreement, within the existing law –- so nothing’s really changing in terms of existing law -– the US will recognize the rights of ownership, investment and control of US airlines by EU investors in accordance with the law, but also in a way that will allow them to have prompt decisions and transparent processes. They’re also going to have rights in the area of foreign investment outside the community, so that while the EU is pursuing a more aggressive foreign investment policy in the rest of the world, the US is prepared to accept and recognize many of those foreign investments that may be coming, particularly from places like Africa and the Middle East.

Q: So there’s a lot of detail here.

A: It’s a very detailed agreement. It is the first essentially multilateral agreement in a world that has up until now been governed by bilateralism. It’s important to keep in mind that we’re only talking about a first step. If this agreement goes forward, it will be the first step towards a much broader agreement that ultimately is envisioned to change the foreign ownership rule, and to try to bring aviation into line with most other industries around the world today.

Q: And if this works, with the US and EU comprising 60 percent of the world’s market, it’s likely to be a catalyst for additional advancement. Yes?

A: That’s right. There’s almost 700 million potential passengers here.

Q: Does the so-called convergence committee have precedent elsewhere in commercial aviation between our respective governments?

A: No, it doesn’t. It represents the first time that our governments are going to have a formalized structure for introducing new regulations that have an impact in the area of security, safety, antitrust law and consumer law. Instead of having one government set a certain set of regulations and then the other government set up contradictory or redundant legislation, they’re looking towards discussing legislative proposals together before they enact them.

Q: What’s been the response of the stakeholders thus far within Europe and over here in the United States to the Open Skies agreement?

A: Well, over here in the United States, I think there’s been general support.  There is the exception of, as I mentioned earlier, labor that is of course concerned because it means change. They’re fighting the change aspects of this, and came out with a policy against it specifically last week. Continental Airlines has been resisting the changes in foreign ownership, and people thought that they were resisting it in order to stop this deal from going forward, but lately they have come around and are now saying that they see the benefits of this deal and support it.

So, among the US industry, I believe there’s close to universal support, some more aggressive than others. In Europe there’s similarly a fairly broad universal support, with very aggressive support coming from Spain and Ireland, who see it as essential to their aviation structure. But there is also support from the usual allies, like the Dutch and the French. In fact, Air France KLM came out with a specific press release last week supporting it.

Opposition has come, not unexpectedly, from the British.  Both British Airways and Virgin have been very aggressive, both privately and in the media, trying to undermine the deal and trying to stop it from going into effect.

Q: Do they have the juice to stop it?

A: Well, that’s the $64 question. There’s a meeting in Europe on March 22 where the EU ministers will meet and decide whether or not to accept this deal. Under the EU rules, the vote that’s required is what they call a qualified majority.  Each member state has a weighted vote, and if you have -– with your weighted vote, if you have a qualified majority, the resolution should pass. Under that system, it would appear now that there will be a qualified majority to pass this.

However, under EU rules, if a nation says, this is in our vital interest and we refuse to sign it, they can hold it up. This is a device not usually used, not often used at all, and we’re hopeful that the British wouldn’t want to use it here. Certainly there’s an opportunity here for the EU, the US, and the British to make a compromise in the next coming days.

Q: So how do you feel about this? Are you optimistic? What’s your projection?

A: I’m optimistic. I think that there’s a 70-80 percent chance that this will be approved. We haven’t heard a definitive statement yet from the Germans. You may know that the last time these negotiations came to a Council vote, it was rejected. And at that time it was because of a coalition between the Germans and the British. We know that during this six-month period we have Angela Merkel, the Chancellor of Germany, and she has put on her agenda improving relations with the US. Since the trade rounds at Doha don’t look like they’re going to be able to make much progress in this Congress, this open skies deal provides an ideal vehicle for moving forward -– showing movement between the US and Europe in the April summit meetings.