Select Committee on European Union Seventeenth Report

CHAPTER 4: position of the united states

77.  It is the practice of the United States Government to give evidence only to the US Congress. The Committee regrets that US airlines felt unable to respond to the Call for Evidence. We understand current financial pressures on the US airlines may have pre-occupied senior management and that, in any case, the ECJ judgments are primarily an EU problem, not an US one. However, a United States government's view of the ECJ judgments was sketched out on 8 November 2002 by the Assistant Deputy Secretary of Transportation, Mr Jeffrey Shane, at an American Bar Association forum in Florida.[59] He described his remarks as "a first reaction and largely a personal one", and then proceeded to analyse what he thought the ECJ judgments amounted to. In his view,:

"the European Court of Justice rendered what American callers would call a "surgical" decision…it did not strike down the bilateral agreements that were the subject of the Commission's complaint. Nor did the Court prohibit EU Member States from continuing to discuss negotiations with the US in their own right. The Court certainly did not—and indeed could not—confer competence on the Commission to conduct negotiations with the US, a political decision that can only be taken by the EU Council of Ministers."

Mr Shane pointed out that the only areas which the ECJ judgments dealt with were those described earlier in this report, namely, the "nationality" or control and ownership clause and the intra-European pricing provisions and computer reservations systems. Mr Shane drew a parallel between the EU concept of relevant competence and the US doctrine of pre-emption: the well established principle that state governments are prohibited from legislating with effect to any general subject area "occupied"—and thus pre-empted—by the Federal Government.

Intra-EU Route Pricing and Computer Reservation Systems

78.  In dealing with the Court's objections to intra-European pricing provisions and computer reservation systems, Mr Shane argued that US airlines do not "price lead" on the fifth freedom aspect of their bilateral alliances with EU airline partners. He added that "no US airline owns a computer reservation system solely in its own right". More importantly, however, in the course of his speech he said that "some of our "open skies" agreements even include an explicit statement acknowledging that in the event of a conflict between EU rules and the rules set forth in the agreement, our EU partners will have to abide by the EU rules."

"Nationality" Clause

79.  On the issue of the "nationality" clause, Mr Shane said that, "the offending nationality provisions are permissive. In other words they do not require the US to reject a carrier originating flights to the US from a country on the ground that it isn't owned and controlled by citizens of that country though that right does exist. Indeed, the US from time to time has waived its objection under such clauses in the interests of ensuring fuller participation in the aviation market by certain trading partners and to encourage competition." Then, as if to underline that the US was not overly concerned by the EU requirement to amend the "nationality" clause, Mr Shane pointed out that the United States had already entered into a multi-lateral "open skies" agreement with four partners in the Asia/Pacific economic cooperation forum—Brunei, Chile, New Zealand and Singapore. Peru acceded to the agreement earlier this year.

"That agreement is notable for its departure from the conventional approach to airline nationality. The agreement expressly prohibits any signatory country from objecting to operations by any airline that has its principle place of business in the country from which its flights originate on the grounds that it is not owned by citizens of that country."

The phrase in italics above is significantly more restrictive than the Commission's view which only requires EU carriers should be "established" in another Member State in order to be designated.[60]

EU Denunciation of Bilateral ASAs

80.  The US State Department on 20 November 2002 said:

"the European Court of Justice's decisions do not call for European Union Member States to denounce these agreements. The Court also ruled against the Commission's assertion that Member States lacked competence to negotiate agreements. Instead, the Court found that our agreements are consistent with EU law, except in three areas. We see no utility in denunciation of our aviation agreements. The United States is prepared to discuss with the European Union Member States on a bilateral basis how to accommodate the European Court of Justice's specific legal findings. Such discussions can occur without denunciation."

81.  What comes across clearly here is that the United States appears to believe that its "open skies" model of partial liberalisation effectively serves its interests and it would not wish to see these denounced by the 11 EU Member States[61] who have "open skies" ASAs with the United States. In the course of oral evidence, the Committee became aware that the United States authorities had already written to the seven "open skies" EU Member States who were found in default by the ECJ offering revised articles for their ASAs with a form of words to take account of the requirement to bring the "nationality" clause into conformity with the TEC. It is significant that the United States Government did not seek to initiate such negotiations with the United Kingdom. The inference that the Committee draws is that the United States sees the existing network of "open skies" ASAs (of which it has 59 world-wide) as very much in its interests and will wish to preserve the model.[62] On the other hand the European Commission sees this US concern to preserve the "open skies" ASAs as an effective pressure point to force the United States into substantial negotiations with the European Community acting as a bloc.

Limits on Foreign Ownership and Control

82.  Under US law, at least 75 per cent of the voting stock of a US airline must be owned or controlled by US citizens, and the president and two thirds of the board of directors of the carrier must be citizens. Administrative decisions by the Civil Aeronautics Board of the United States, and later by the Department of Transportation, have interpreted this law to require that the airline must be under the actual control of US citizens (i.e. the airline must have US ownership and control).[63] (It should be noted that similar constraints on ownership and control apply in the EU: EC rules require carriers obtaining their operating licences in Community States to be majority-owned and substantially controlled by those (i.e. Community) States or their nationals).

Fly America Requirements

83.  Most US Government commercial air transport requirements, domestic as well as international, must take place on US airlines. This includes the transport of US Government personnel and cargo as well as most items handled by the US postal service (the latter is covered by a separate statute). On international flights, foreign code-share partners of US flag carriers can transport US Government personnel, cargo and mail under the US carriers code on routes covered by their code-sharing agreement. In practice, any movement of passengers or cargo, including that of contractors, that is in anyway connected with US Government affairs has to take place on US airlines or on non-US airlines that have code-sharing agreements with US airlines. The cumulative impact of the "Fly America" policy is to reserve for US airlines a significant share of trans-Atlantic traffic.[64]

Civil Reserve Air Fleet (CRAF)

84.  The Civil Reserve Air Fleet (CRAF) is a critical component of America's military readiness. Under the CRAF programme, US commercial air carriers pledge to provide military air lift in a defence emergency in exchange for exclusive access to US Government peacetime business. Department of Defence officials fear that allowing foreign investors to acquire US air carriers would jeopardise the military's dependable access to this emergency capability. The Department of Defence's concerns rest on three assumptions:

·  US air carriers are more dependable than foreign air carriers;

·  if a foreign entity bought a US air carrier it would operate as a foreign carrier;

·  if the US Government changed its statutory policy to allow foreign ownership of US carriers it would open itself up to problematic transactions.[65]

Anti-Trust Immunity

85.  Under US anti-trust legislation, any agreements between major suppliers/producers of goods or services relating to price levels or to output or production levels may be considered anti-competitive and in breech of the anti-trust rules. Code-share and related agreements which involve joint control of frequencies or capacity offered between the airlines in an alliance would fall foul of the anti-trust rules unless given explicit exemption by the relevant US Government Department.

86.  The rationale for granting exemption is that because of the "open skies" agreement, there is freedom for other airlines to enter the markets on which the alliance partners code-share, and possibly agree frequencies. In practice, the US Department for Transportation has recommended anti-trust immunity to airlines of those states that have agreed to sign "open skies" ASAs with the United States.

87.  Some witnesses have pointed out that denunciation of "open skies" bilaterals by Member States, as demanded by the Commission, would lead to loss of anti-trust immunity for major alliances, notably those between Lufthansa/SAS and United, KLM and North West, Air France/Alitalia and Delta. However, from its discussions in Washington, the Committee concluded that this is not necessarily so. Following investigation of an alliance by the Department of Justice and the Department of Transportation, immunity is granted through a Federal Government Order. Such Orders have no provision for automatic cancellation. The Department of Transportation would have to take positive action to cancel existing anti-trust immunities.

The Brattle Report

88.  The European Commission asked the Brattle Group, a respected US consultancy,[66] to examine the economic impacts of an EU/US open aviation area. The Brattle Group produced its report in December 2002. The report comes to the conclusion that full liberalisation would benefit both the United States and the European Union. It analysed the restrictions mentioned above, but concluded that none of the fears expressed either by the industry, the US Department of Defence, or the labour unions, provided a sufficient reason for resisting liberalisation. One critic questioned the extent to which benefits would necessarily follow from liberalisation on the grounds that the methodology used was perhaps more appropriate to smaller organisations. But he did not contest the assumptions arising from the report that liberalisation would bring economic benefit to all parties. However, it appears from the report that a significant part of the benefits of full liberalisation could be achieved through extending US "open skies" agreements in Europe to include the four EU Member States with which US "open skies" agreements do not exist, and particularly the United Kingdom.

US Attitudes to an EU/US Agreement

89.  The main constraints were deemed by the authors of the Brattle Report not to be economic or security, but rather political. There has been, hitherto, resistance from the labour unions, as well as from the Department of Defence, and it was in order to assess how immutable these obstacles might be that the Committee travelled to Washington between 12 and 13 March 2003. The Committee held informal talks with officials in the Department of Transportation and the Department of Justice, and with senior management in American Airlines, Northwest Airlines, Delta Airlines, the Air Transport Association of America, and the authors of the Brattle Report.

90.  The US aviation authorities as was evident from the speech by Mr Shane quoted earlier (para 67) would welcome the opening of discussion with the European Commission on liberalising air services between the EU and the US. While it may be difficult to reach agreement on some of the issues, the launch of discussions would compel the US government, the airlines and the labour unions to face up to the issues that have to be resolved.

91.  US international airlines appear in general to welcome EU/US discussions. Some to whom the Committee talked in Washington felt that US airlines had much to gain from further liberalisation through the free flow of capital, the creation of more stable market-based alliances, increased access to Heathrow and so on.

92.  A major obstacle to full liberalisation is the opposition of the organised labour and some members of both sides of Congress. Labour opposition could be reduced, if airlines made a concerted effort to explain and argue for the potential benefits of liberalisation as had been done when the first "open skies" agreements were signed. But in the present crisis, when airline executives are preoccupied in trying to win wage and productivity concessions from their unions, they do not want to use up political capital in arguing a case for further liberalisation.

93.  The US view in general was that a staged approach was more likely to succeed than trying to reach agreement on all issues at once.

94.  On foreign ownership of existing US carriers, moving from 25 per cent to 49 per cent was seen as possible, but majority ownership would meet stiff opposition. Conversely, several people the Committee talked to felt that the "right of establishment" might be conceded in future negotiations. This would enable non-US airlines or companies to set up US based airlines operating under US safety regulations and employment laws. It was suggested to the Committee that this might be more readily accepted by the unions since it would generate local employment, than would opening up domestic cabotage to foreign carriers.

95.  The Committee found little support for the continuation of the ban on inward wet-leasing of aircraft, particularly if those aircraft were EU-registered since safety standards within the EU were mutually accepted by the US and increasingly harmonised.

96.  The Committee found a positive response to the concept of harmonising the objectives of competition rules on both sides of the Atlantic. The Department of Transportation (in the case of aviation policy), and the Department of Justice and the European Commission have worked closely on many mergers and, with a few exceptions, have usually come to similar conclusions. They have already been working closely to try and harmonise both the objectives of US anti-trust and EU competition policies and the criteria used to assess anti-competitive actions or mergers.

The Committee's Views

97.  The Committee felt that it was important to seek as wide a reading of the United States' position as possible, because although the ECJ judgments require EU Member States to bring their ASAs into conformity with Community law on those issues referred to in the judgments, the ASAs also involve the agreement of the bilateral partner, namely the United States. The United States' first reaction was to argue that denunciation of existing ASAs was unnecessary, and that the United States was prepared to negotiate bilaterally in order to amend existing ASAs where necessary to conform to the ECJ judgments. The US willingness to open negotiations on these points is understandable: the "open skies" agreements which create some international liberalisation, but which in effect protect the huge US domestic market in a number of ways, are valuable to the United States. They enable the US airlines to exploit the fragmentation between EU Member States, and thus maintain their dominance in the world aviation market.

98.  While in Washington, the Committee heard an American willingness to look at a negotiation that would aim to deal with more substantial restraints such as cabotage, ownership and control, the "Fly America" policy and the CRAF. The Committee was also told that the United States government and airlines could see advantage in a fully liberalised Trans-Atlantic Civil Aviation Area. A number of our interlocutors suggested that all the issues listed above could form part of an EU/US bloc to bloc negotiation.

99.  However, a number of issues would require legislative action in the United States: the "Fly America" policy, possibly cabotage, but particularly, ownership and control of US airlines. While the airlines themselves might see benefit in seeking new sources of finance, the truth is that at present it is unlikely that Congress would wish to take appropriate legislative action. US concerns are focused on the economic downturn and on the difficult financial position of US airlines, notably United, which has already filed for bankruptcy, and according to press reports, American Airlines appears to be close to doing so.[67]

100.  There is also a question of whether the objections that have been hitherto voiced by the American labour unions, in particular, the American Pilots' Association, could be overcome as easily as many commentators, including BA and Virgin Atlantic, think. The US airlines are themselves engaged in difficult negotiations with the unions over staff reductions and various other retrenchments, and are unlikely to want to spend negotiating capital on an issue which is not a matter of overwhelming priority to them.

101.  The Committee, therefore, came to the conclusion that while the United States government would not object to entering full negotiations for a open aviation area, the difficulties in the way of a successful negotiation within the next two to three years will be considerable and should not be underestimated.

59   Appendix 7. Back

60   Q 183. Back

61   All EU Member States except Greece, Ireland, Spain and the UK (but the US has also concluded "open skies" ASAs with non-EU States-Iceland, Norway and Switzerland). Back

62   Q 336. Back

63   The Brattle Report 1.3 pages 1-7 Back

64   Supplementary written evidence from BA, page 62. Back

65   The Brattle Report, Executive Summary part iv, page x Back

66   The Economic Impact of an EU-US Open Aviation Area-a report by the Brattle Group, commissioned by the European Commission and published December 2002 ([email protected]). Back

67   The Financial Times, Comment and Analysis, March 26 2003. Back

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