The EU-US open sky agreement: a decisive first step

While recently Air France and Alitalia – two major European transporters- have been struggling to convince EU Competitions hector Neelie Koes to let them merge, the European Commission found an agreement with the US to regulate transatlantic air traffic. Negotiations started in 2003 but the solution was found only a few weeks ago in the midst of a peculiar worldwide situation for aviation.

Air traffic growth for both passenger and freight stems from the evolution of the global Gross Domestic Product. A growth of 5.1% in the number of international air passengers between 2007 and 2011 has been forecast [1], while as far as freight is concerned, the International Air Transport Association is expecting 4.8% growth during the same period of time. Both trends seem positive but it should be noted that the growth is lower than during the period 2002-2006. Additionally, Europe and the US have a GDP growth rate expected to be below the world average. The future of air traffic companies is not quite grim yet, but it is still very volatile due to its sensibility to worldwide GDP growth and to the fact that current EU and US growth forecasts look far from good when brought into a global perspective.

Until two weeks ago, rules regulating air traffic between the EU and the US were defined using national agreements . A first group of EU Member States [2] had bilateral agreements with the US which gave EU airlines the right to fly without restriction on capacity or pricing to any point in the US, but only from their own country. A second group [3] was restricted to a certain number of weekly frequencies or a certain number of airlines. Finally, the others [4] had no legal basis at all for direct flights from and to the US.

The EU-US agreement Open Skies contains numerous positive steps but four seem decisive in the future of the worldwide air traffic.
– Recognition of all European airlines as a “Community air carriers”: all European companies are classified identically without discrimination based on their country of origin (if in the EU)
– Flights possible between any point in the EU to any point in the US: the airliners will be able to fly from any European airport to any US destination
– Flights possible beyond the US towards third countries: European companies will also be allowed to go beyond the US and provide destinations using the US as a stopover. Operating of cargo flights between the US and third countries: freight will follow the same above-mentioned rules as passenger traffic.

This will allow for travelling from any European airport to any US airport with any European or US company. This major improvement will equalise the rights of all EU Countries who previously did not have a bilateral agreement with the US and enhance the destination possibilities for many Europeans.

Some other key elements of the agreement provide for cooperation in fields such as security, safety and environment (among others).
– Security: the EU and the US will work towards compatible standards and practices for entering territories in order to facilitate air regulation
– Safety: setting up of consultation procedure on safety concerns on either side, and recognition of the development of safety responsibilities at EU level.
– Environment: the US airlines may be subject to taxation of aviation fuel on routes between Member States.

This agreement represents only a first step in the process of mutualisation of the European and US sky. Both the EU and US agreed in setting up a second phase of negotiations after May 2008 aimed at tackling the following issues: facilitating the foreign investment, fostering the development of liberalisation, furthering access to Fly America [5], favour the wet-leasing but also environmental and infrastructure constraints.

Inside the numerous reasons detailed by the Commission, we can recognise two elements pushing forward towards a common agreement between the EU and the US. The first one deals with the economic benefits that the EU will get back. “An open EU-US aviation would, during the first 5 years, stimulate more than 25 million additional EU-US passengers, generate more than € 15 billion benefits for consumers and create 80,000 new jobs in the EU and US combined.” The economic motivation is evident in a European Union whose economy is far from being flourishing.

The second argument is legal: 16 European countries have bilateral agreements with the US which differ from one to another (and 11 countries have no agreement). Those agreements interfered with the European law and a mandate for negotiations with the US was granted by the Council. This happened after the European Court of Justice ruled in cases brought by the Commission against eight Member States that had concluded bilateral agreements with the US [6]. The Court of Justice found that the bilateral agreements touched on certain matters of EU competencies and undermined the right of establishment set out in the Treaty by reserving traffic rights for airlines controlled by their own nationals.

The negotiating mandate was about remedying the elements existing in the bilateral agreements which were not in accordance to EU law and ensuring that no discrimination was done between airlines on the basis of nationality. The agreement should have also created a single market for air transport between the EU and the US including the domestic markets of both areas. The objective was to establishing an Open Aviation Area (OAA) between the EU and the US. The legal motivation triggered the negotiation process.

The EU Commission is reproducing the mechanism of the European Single Sky which success has provided the European citizen with a wider offer at a lower the price and created significant evolutions in the air traffic market. The main reason was the progressive deregulation which allowed to the former companies to adapt their structure and the new competitors to enter the market “easily”. Will the agreement concluded by Vice-president of the European Commission Jacques Barrot reproduce the phenomena seen with the Single Sky to a broader level?

The first consequence of the Single European Sky was the opening of new routes between airports unconnected before. This increased noticeably the access to some destinations by reducing the travelling time thanks to direct links. New companies with innovative business models utilised this opportunity to enter into the market of passenger air traffic. Will this happen again with the EU-US open skies agreement?

The business model of European Low Cost companies corresponds to a particular situation created by this specific deregulation operated for the Single European Sky. Pretending that the business model which made the success of many companies in Europe could be extended to trans-Atlantic flights doesn’t add up. The economic conditions applied for long flights are too different from the intra-European ones to fully copy the current model (where the duration of flights directly impacts the overall productivity).

But as the Single European Sky allowed creating new air traffic opportunities and business models, the EU-US Open Sky agreement will create new possibilities of development. If new business models are discovered, the EU-US Open Skies agreement could provide the legal frame for developing new air routes.

The second consequence of the Single European Sky was the decrease of travel costs for passengers. Due to the deregulation, the competition between air traffic companies increased. The latter affected the pressure on the companies and the previous monopolies have been challenged, provoking an overall price decreased. Will this be possible for flights between EU and US? The increase of competition added to the deregulation will create favourable conditions for a decrease of the prices although many factors can interfere in such scenario.

The development of alliances in the last years (Star alliance, Sky Team and Oneworld) demonstrate the tendency for the companies to search for synergies. Beyond the alliances, we can consider that the path of air traffic companies at the European level is going towards more integration (see what happens with Alitalia). Nevertheless, companies inside the alliances are more based on their complementariness than on their similarities (geographical presence, fleet…). Consequently, the increasingly easy access to new airports and routes will surely create new opportunities of integration among those alliances. As for the Single European Sky, the new EU-US agreement will surely create significant evolutions among the air traffic companies.

The EU-US Open Skies Agreement will create a lot of new opportunities for both air traffic companies and passengers but this step is still far from creating a real Single EU-US Sky. A lot should be done to harmonise standards and to develop the necessary fields directly impacted by air traffic (environmental, safety…). The European Commission has thus launched an important project which has to be supported but needs to be further developed.