THE U.S.-EU AVIATION AGREEMENT: A PROGRESS REPORT
Jeffrey N. Shane
Under Secretary for Policy
U.S. Department of Transportation
Conference Celebrating the Twentieth Anniversary of
the International Institute of Air and Space Law,
Leiden University
The Hague
April 24, 2006
I want to thank the organizers and co-sponsors for the invitation to participate
in this wonderful occasion – a celebration of the International Institute’s
Twentieth Anniversary. And I can imagine no better theme for that celebration
than competition and globalization.
Twenty years ago, the twelve original Member States of the European Community
had yet to adopt the Single European Act, mandating a unified internal market by
1993. Adoption of the first liberalization package for air transport was even
further away. Deregulation in the United States was only in its eighth year.
While the U.S. had forged liberalized bilateral agreements with a number of our
trading partners, we were still half a dozen years away from our first
open-skies agreement, with the Netherlands. A mandate allowing the European
Commission to negotiate about air transport with third countries belonged to the
realm of speculation.
In 1986, the airline business was good, globalization was gathering speed, and
hopes for more aviation competition at the regional and intercontinental levels
were growing. But the world had accumulated over 40 years of experience with the
restrictive bilateral system along with deeply-rooted traditions, ingrained
habits, and protected interests. In other words, it is not surprising that it
has taken us another 20 years – the life of the Institute -- to arrive at the
present point. The U.S.-EU Air Transport Agreement negotiated last November
between the world’s two most highly developed aviation markets is in many ways
the culmination of aspirations for a liberal regime that go back to the 1944
Chicago Conference. If approved, the Agreement will be a departure point for
even broader and deeper liberalization.
Why a U.S.-EU aviation agreement?
The Agreement could have a profound impact in reshaping trans-Atlantic aviation.
Business travelers, tourists and shippers potentially will be able to choose
from the whole panoply of U.S. and European airlines, since the agreement will
authorize every EU and every U.S. airline:
* to fly between every city in the EU and every city in the United States,
including opening up operations between the United States and the United
Kingdom;
* to operate without restrictions on routes or capacity, including unlimited
rights to fly beyond the EU and U.S. to points in third countries;
* to set fares freely in accordance with market demand; and
* to enter into cooperative arrangements with other airlines, including code
sharing and leasing.
U.S. acceptance of the “EU airline,” a key objective on the European side, means
that consolidation of the EU airline industry will be able to proceed unimpeded
by nationality-based restrictions.
The Agreement will also enhance the quality of trans-Atlantic cooperation in the
areas of safety and security, competition law and policy, government subsidies
and support, environment, and consumer protection.
For all of those benefits, the Agreement represents only a first stage of
opening markets and enhancing cooperation. The EU and the United States have
agreed to begin a second stage of negotiations within sixty days of the
effective date of the Agreement.
This Agreement, in other words, has the potential to fundamentally transform the
framework within which transatlantic air services operate, increasing
dramatically the quality of competition in the market and benefiting consumers
and communities on both sides of the Atlantic, in ways that transcend anything
achieved through our existing open-skies accords.
Completion of the U.S.-EU Agreement would not only enhance airline competition
across the Atlantic, it would set a new standard for liberalization around the
world. By honing the competitive strength of U.S. and European airlines alike it
would demonstrate the folly of protectionism and loosen its grip on markets
everywhere.
What If We Fail to Adopt the New Agreement?
In November 2002, the European Court of Justice rendered a watershed aviation
decision. Because the individual open-skies agreements forged by Member States
with the United States all incorporate the traditional nationality clause –
reserving the rights established in those agreements exclusively to airlines of
the contracting states – the Court held that those agreements contravene EU law,
which contemplates open access for all EU carriers at gateways throughout EU
territory. According to the ECJ, in other words, the Dutch are not allowed to be
party to an agreement that permits only U.S. and Dutch airlines to serve the
U.S. from Amsterdam. Other EU airlines must enjoy those same opportunities.
Because the Commission has an obligation to enforce ECJ’s decisions, that one
calls into question the durability of the open-skies agreements that already
govern commercial air services between the United States and its fifteen EU
open-skies partners.
The U.S.-EU agreement negotiated last November abolishes the nationality clause
and thus, in a single stroke, addresses completely the requirements of the 2002
ECJ decision. As I indicated a moment ago, it permits any EU carrier to serve
the U.S. from any EU gateway – not just gateways in its own home state. In other
words, the agreement redraws the map of available trans-Atlantic routes
completely from day one, and immediately brings trans-Atlantic aviation
relationships into harmony with the Treaty of Rome.
But what happens if the new agreement is not adopted? The Commission has
indicated that, because of the ECJ’s decision, the status quo isn’t acceptable.
That means it will almost certainly have to take action against the current
open-skies agreements. Open-skies agreements provide vastly expanded markets for
airlines, newer and better air services at affordable prices, economic
prosperity for airports and their communities, new customers for manufacturers
and shippers – a host of vital economic benefits.
A failure to put into effect the U.S.-EU agreement, therefore, would result in
what we on the other side of the Atlantic call a “double-whammy”: First, we
don’t get the new template for international aviation embodied in that
agreement, nor any of the incremental competition that it would have engendered,
nor any of the economic benefit that would have resulted from that additional
competition, nor any of the long-overdue structural change within the industry
that might have been possible. Second, we might well lose the fifteen bilateral
open-skies agreements that we already have, together with the important economic
benefits that they have produced.
The truth is, however, that a failure to adopt the new U.S.-EU agreement would
actually be a “triple-whammy.” That’s because, if we lose the open-skies
bilaterals, we face the very real prospect of dismantling the cross-border
alliance structure upon which so much international aviation competition is
based today. That is because the antitrust immunity that facilitates the
efficient operation of many of the current alliances is necessarily predicated
on the underlying open-skies agreements. Without legally secure open-skies
agreements and the guaranteed open entry that they deliver, it is very difficult
for regulators to justify a grant of immunity from antitrust enforcement to
airlines who are potential competitors.
In summary, it is fair to say that there are compelling reasons to favor
adoption of the new U.S.-EU agreement, and equally compelling reasons to avoid
the consequences of not adopting it.
NPRM on “actual control” of U.S. airlines
As everyone knows who has paid even cursory attention to these developments, the
EU ministers’ assessment of the new agreement will depend in part on the outcome
of a U.S. Department of Transportation proposal to broaden the ability of
foreign investors in U.S. airlines to participate in the airline’s commercial
management. The intent of the rulemaking is to see whether changing a regulatory
prohibition on such participation that dates back to 1940 might attract more
investment in U.S. carriers by enabling foreign investors to protect their
investments more effectively.
U.S. legislation limits foreign citizens to ownership of no more than 25 percent
of the voting shares of a U.S. airline. Not more than a third of the senior
officers and directors of a U.S. airline may be foreign citizens, according to
the statute. No changes have been proposed in the underlying legislation.
In that sense, the proposal would not make it possible for offshore investors to
invest more money or acquire more voting shares in a U.S. airline than is
currently permitted. Instead, the underlying objective is to ascertain whether
facilitating more meaningful participation in management might encourage
investors overseas at least to invest what the law allows. They certainly aren’t
doing so today in large numbers.
The proposal has some other important features that I should mention. It would
reserve to U.S. citizens all decisions relating to aviation safety, security,
and support for the programs of our Department of Defense. Moreover, the greater
scope for participation in airline governance would be available only to
citizens of countries that have entered into open-skies agreements with us and
that permit equivalent investment opportunities to citizens of the United
States. The latter element is of particular importance, because it carries with
it the prospect of a global aviation marketplace in which capital flows far more
freely than today, and in which international airline joint ventures become far
more interesting and robust.
Secretary of Transportation Norman Mineta authorized issuance of the notice of
proposed rulemaking in keeping with DOT’s statutory obligation to foster a safe,
healthy, and competitive airline industry – one that will remain capable of
supporting U.S. economic growth. Moreover, DOT has a continuing obligation to
ensure that regulatory restrictions on otherwise conventional corporate behavior
continue to be justified as a matter of sound public policy. The last
quarter-century of aviation policy in the U.S. has been characterized by a
steady reduction in government intrusion into commercial decision-making and an
increasing reliance on market forces. In seeking public comment on a proposed
updating of a 66-year-old interpretation of our governing legislation, in other
words, DOT was doing what regulatory agencies are supposed to do.
This was by no means the first time DOT has proposed or supported liberalizing
our restrictions on foreign investment in U.S. airlines. The Department
supported legislative changes in the early 1990’s and again early in this decade
that would have increased the 25 percent ceiling on foreign-owned voting shares
to 49 percent. Those proposals never got to the voting stage in Congress. Nor is
it clear that those changes, if adopted, would have produced any different
behavior in the marketplace. Foreign investors would still have been minority
shareholders and would still have been relegated to a wholly passive status. The
change probably wouldn’t have made any difference to offshore investors. We
believed, in deciding to issue the pending rulemaking proposal, that our
interpretation of the statute, rather than the statute itself, might be the more
significant impediment to increased interest on the part of offshore investors.
That is the proposition that the rulemaking seeks to test.
The point of this discussion is to underscore the important domestic policy
reasons for launching the rulemaking proceeding. Yes, we know that the outcome
may well affect EU transport ministers’ decision regarding the U.S.-EU aviation
agreement, but we would continue to pursue the initiative even if it became
clear for other reasons that the U.S.-EU agreement was beyond reach.
State of Play
The proposal has been the focus of far more controversy in the U.S., frankly,
than we had anticipated. Members of Congress have expressed concerns. Some
question whether it would be possible to square the proposed rule with the
statutory requirement that U.S. citizens remain in “actual control” of U.S.
airlines. Others ask whether a change this significant is properly the subject
of rulemaking, as opposed to legislation. Labor unions worry that the proposed
changes would lead to a loss of American jobs.
Because the rule is still pending, this is neither the time nor place to respond
to those concerns. Because they are felt so deeply, however, DOT is exploring
whether some further period of review might be justified. Secretary Mineta met
recently with Senate leaders and had a productive discussion of options for
facilitating a better understanding of the proposal and its implications. If we
pursue such an option, it means that the final outcome might be postponed for a
number of weeks. In that case, the Council of Ministers might wish to postpone
its consideration of that outcome until its fall gathering in October. We should
all have a clearer sense of the timetable very shortly.
Secretary Mineta and his team remain committed to completing this important
rulemaking proceeding. We have benefited greatly from the comments that we
received in January, and we look forward to sharing the results of our
deliberations once the process is finished. I am hopeful that we will soon be
able to advance the process in a manner that is responsive to the comments we
have received and respectful of our partnership with Congress.
Thank you for the opportunity to share these thoughts with you this morning.
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Briefing Room
