The politics of change: prospects for the second stage of U.S./EC Air Services negotiations

By Brian Havel

Airneth Fellow Column
May 2009
By Brian F. Havel

The system of bilateral air services agreements which evolved over 60 years ago from the Chicago Convention on International Civil Aviation needs to be discarded. This is not, I believe, a controversial statement, although that does not mean that the world is a great deal closer to abolishing the bilateral system than when I first proposed authentic air transport liberalization in my 1997 work, In Search of Open Skies. In the decade since then, the U.S. “open skies” policy has become virtually normative for international civil aviation but also, I believe, ultimately inadequate. While the open skies policy tested the elasticity of the Chicago system, it retains that system’s two most conspicuously restrictive elements: it continues to exclude foreign airlines from domestic air service (“cabotage”) and prohibits foreign citizens (and their airlines) from owning and controlling national air carriers (the “nationality rule”). The European Community’s pursuit of an “open aviation area” with strategic partners, in contrast, has challenged the old bilateral model, and open skies itself, with a “thicker” understanding of liberalization that would remove caps on foreign ownership and control of airlines and strike down cabotage restrictions.

The 2007 U.S./EC Air Transport Agreement proved to be something of a halfway house between the two sides’ aeropolitical approaches. The United States modified the pure form application of the nationality rule by recognizing the EC legal construct of the “Community air carrier,” while the Community agreed to defer its vision of an open aviation area at least until a “second stage” of treaty negotiations could be concluded. Among the topics identified in Article 21 of the Agreement for second stage consideration, further liberalization of traffic rights and investment opportunities will be central to overcoming the Community’s understandable disappointment that the first stage did not radically shift the basic premises of Chicago bilateralism. In my new book, Beyond Open Skies, I lay out some ambitious ideas for a liberalizing second stage agenda—ideas which challenge the Chicago system’s orthodoxy of managed trade in air services but which are less likely to be realized in the midst of a worldwide economic crisis in which protectionist fears are resurgent. On the assumption that readers of this column are (generally) open to an authentic liberalization of international air services, I will not restate my case here. Rather, I will offer some broad observations on some of the political challenges to globalizing the world’s most visible service industry.

The phrase “authentic liberalization,” in fact, carries a redundancy: liberalization is neither authentic nor inauthentic, it is a continuum or a process that leads ultimately to a new paradigm of competitive behavior where a balance of benefits is replaced by a balance of opportunities. In any event, air transport liberalization, like the period of restrictive bilaterals that preceded it, is essentially a political process. That process has been supported by successive U.S. Administrations, but it has not been completed. If liberalization continues to be a political goal, therefore, the United States will need to be in the vanguard, persisting with the removal of limitations on foreign ownership and control and the abolition of vestiges of protectionism such as cabotage and the Fly America program. In this view, liberalization will not mean more open skies bilaterals within the framework of the Chicago system; it will require a much more fundamental recasting of the regulation of international air transport. By lifting restrictions on capital inflow and providing for a right of establishment to foreign nationals, this restructuring would deliver important benefits that are unavailable under today’s open skies regime, including the ability to consolidate across national lines and, relatedly, to more efficiently allocate capacity. It would also give the industry the opportunity to move beyond the inefficient and unstable business model of the alliance (a business model made necessary, in fact, by the nationality rule and cabotage). But U.S. policy, as far as can be determined in these early months of the Obama Administration, does not seem ready to grasp the mantle of radicalism and still leans toward the “balance of benefits” expectations of the Chicago system.

In imagining an open aviation area, the European Community is not interested in a further balance of benefits struck through traditional bilateralism; led by the European Commission, the Community is seeking a fundamental change in the regulatory paradigm for international aviation. Nevertheless, although the Commission has earned the authority to serve as the one-stop negotiator with the United States, it remains in an unresolved tension with the European Council of Ministers and the individual Member States as to the ultimate assignment of responsibility for the Community’s external aviation relations dossier. The Commission remains determined, in any event, to secure a second stage agreement that unlocks the internal (domestic law) and external (bilateral treaty) bolts of the nationality rule and that has aeropolitical demonstration effects that sway not only the rest of the world but also the Commission’s political masters in the Council of Ministers. The United States, in contrast, has taken the position that the second stage agenda—and especially the pivotal questions of the nationality rule and cabotage—is not only complicated but also legally difficult, and shows no sense of urgency in resisting the continuing opposition to full liberalization shared by vocal factions in Congress and by the labor unions. The United States sees the 2007 Agreement as a reasonable balance of interests; were it not for the treaty-mandated second stage negotiations and the looming threat of an EC suspension of rights granted in the first Agreement, the United States would most likely rest content with the new rights (especially full access to London Heathrow) that it won in the first stage.

In the first half of 2009, both sides must reassess their positions against the backdrop of a global recession. The Obama Administration—which has just finished its first 100 days in office—has promised labor unions that it will not upset the status quo on cabotage or the nationality rule. To the contrary: newly proposed legislation attached to the 2009 Federal Aviation Administration Reauthorization Act seeks to intensify the impact of the nationality rule by foreclosing foreign nationals from holding significant management positions in U.S. airlines. Moreover, other components of this legislation could spell the end of airline alliances—which have served as an innovative, but ultimately second best, commercial solution to the prohibitive effect of the nationality rule on crossborder mergers. Publicly, the European Community insists that its commitment to further liberalization is unwavering and yet the evidence is not so sanguine: the economic crisis is making European governments more protectionist and has even prompted the European Commission to seek suspension of the “use or lose” rule for takeoff and landing slots at EU airports in order to protect incumbents in a tough operating environment. None of these political indicators points the way toward liberalization. Rather, we are seeing a “circling of the wagons” as both sides wait out the current economic turmoil. 

For more than six decades, the air global transport industry has had to endure government custody of its entrepreneurial instincts. Working within this coercive paradigm, the airlines have nonetheless developed innovative business models (such as alliances) and have expanded their services and benefits to consumers. Moving forward toward authentic liberalization in the second stage of U.S./EC negotiations should not be impossible, but the pace will be slower than the Europeans might have expected when they signed the 2007 Agreement. The threat of suspension in 2010 may yet spur changes in the U.S. approach, but the early signs are not propitious (most especially the proposed new rules restricting the management role of foreign nationals). A third or even a fourth stage of negotiations (neither of which is excluded under the terms of the 2007 Agreement) may prove unavoidable. For now, once again the airlines on both sides of the Atlantic must continue to accept that politics, not commercial ambition, remains the final arbiter of change in the global air transport industry. 

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