Select Committee on European Union Seventeenth Report

CHAPTER 5: Cargo And Wet Leasing

An Uneven Market

102.  In dealing with ASAs between EU Member States and the United States, it is often easy to overlook the role that all-cargo airlines play in contributing to the economies of both areas. However, for the cargo operators, the market is even more slewed in favour of the Americans than is the case with passenger airlines. The reason is that the US refusal to cede cabotage rights means that non-US cargo airlines are virtually locked out of the US market which represents over 40 per cent of the world's cargo traffic. Through their "open skies" agreements, the Americans are able to utilise the fifth freedom rights obtained from European States to establish global cargo services.

103.  In the case of passenger airlines, access to the internal American market can, subject to granting of anti-trust immunity, be reached indirectly through an alliance with an American passenger airline. This has had the effect of making US cabotage rights a less important objective for passenger airlines: few want to establish themselves in the United States to compete with the US domestic operators, and the advantages of the alliance system enables them to reach destinations from which they would normally be debarred.

Bermuda 2 and its Effect on the Competitiveness of United Kingdom Exporters

104.  The Committee also received evidence from an American freight operator urging the United Kingdom to abandon the current restricted agreement (Bermuda 2) and to go for an "open skies" agreement similar to those between the United States and France and Germany. The advantage for the US company is that the acquisition of the fifth freedom rights from an "open skies" US/UK ASA would enable the company to expand its global network. The argument it uses to bring pressure upon HMG is that "we cannot serve UK companies that want to export as efficiently as we serve those in "open skies" countries such as France and Germany. We believe that this impairs the competitiveness of British exporters, particularly to fast-growing markets such as Asia". The company argues that, by moving to an "open skies" agreement, air express and freight markets between the United Kingdom and Asia would receive a boost of 6 per cent. The company claims that by concluding an "open skies" agreement with the US, "the UK would add 108,000 jobs in the general UK economy by 2005." The company implies that if decisions "over the US/UK aviation relationship are left to the European Commission, the timeline for the UK to benefit from better access to cargo/express services will be delayed by many years".[68]

A "Mini Deal"

105.  A major European company which operates a cargo/express service from the United Kingdom is seeking the help of the Department for Transport to obtain cabotage rights for the carriage of domestic intra-US material from various US airports to support a new trans-Atlantic scheduled all-cargo service from a number of European airports, including some in the United Kingdom, to various US airports. This company expresses concern that the Department for Transport is contemplating a "mini deal" whereby passenger traffic rights for an additional British carrier to fly to the US would be exchanged for fifth freedom rights for FedEx to Europe from the United Kingdom. If such a deal were agreed, it would have seriously harmful effects for a European express cargo carrier unless balancing cabotage rights in the US were guaranteed. This company, therefore, argues that Member States should denounce existing ASAs with the United States and give the EU Commission a mandate to negotiate a trans-Atlantic common aviation area.

A Mandate for the Commission?

106.  The Civil Aviation Authority (CAA) confirm this judgment, arguing that the United Kingdom all-cargo airline industry is small in comparison to that of the United States. US cargo carriers already have extensive operations, not only across the Atlantic, but also within Europe. Therefore, a bilateral liberalisation of all-cargo services between the United Kingdom and the US along the lines of the US "open skies" model would give US cargo airlines further flexibility to mount operations within Europe, but would yield little or no practical benefit to United Kingdom all-cargo carriers.

"The EU acting as a whole seems more likely to be able to secure a broader liberalisation that would establish a more level playing field for UK all-cargo carriers than would any individual Member State."[69]


107.  Wet-leasing is the hiring of an aircraft complete with crew, maintenance and insurance by one airline (the lessor) to fly on the routes of another airline (the lessee). The US is the world's biggest lessor of wet-lease aircraft (many for all-cargo operations), generating more than $1 billion a year from wet lease contracts in Europe. Under US regulations European airlines are denied access to wet-lease to the US market.

108.  There are differences between the EU and the US in the policy they adopt towards wet-leasing of aircraft. Under EU legislation, EU carriers are permitted to wet-lease aircraft from non-EU airlines, either on a short-term basis to meet temporary needs, or otherwise in exceptional circumstances. US airlines are therefore able to wet-lease their aircraft to EU carriers albeit within certain restrictions. The US, on the other hand, places a blanket prohibition on US carriers wet-leasing aircraft from non-US carriers. The aim originally was to protect US consumers from foreign registered aircraft that might not meet US safety standards. Wet-leasing is of interest to both passenger and cargo carriers, but United Kingdom all-cargo airlines are particularly active in this area. The United Kingdom has long sought to persuade the US to relax its restrictions on wet-leasing in bilateral negotiations, but without success. As the CAA notes, "a bilateral "open skies" agreement between the US and the United Kingdom seems unlikely to achieve any change in the US restrictions" on wet leasing.[70]

The Department for Transport's Response

109.  When the Minister gave oral evidence to the Committee on 24 February 2003, the Committee raised the allegation that the Department for Transport might be involved in a "mini deal" offering increased traffic rates for United Kingdom airlines from Heathrow to the US in return for fifth freedom rights for FedEx. The Minister agreed that discussions had taken place. Asked if this deal would not unreasonably increase FedEx's market dominance, the Minister argued that he had a duty to look at the interests of the United Kingdom economy as a whole—"whether having a wider range of freight flights in and out of the UK would be to the benefit of the competitiveness of the UK economy and UK industry".

110.  The Committee was left with the distinct impression that the strength of European air cargo operators did not rate the same measure of importance for HMG as passenger airlines.[71] The Minister was quick to remind the Committee that passenger-carrying aircraft also carried cargos. The Committee is unable to assess the wider economic interest to the United Kingdom involved in balancing passenger airline and air cargo routes, but was sufficiently concerned by the evidence presented to urge the Government to bear carefully in mind the interests of all-cargo services and the separate issue of wet-leasing. Given that a bilateral negotiation has so far been unable to achieve any advances in these areas, the Committee concludes that the all-cargo airlines and the leasing industry would benefit only from a full liberalisation of aviation between the US and EU. We therefore recommend that the Government bear these interests specifically in mind for any mandate to the Commission to negotiate the wider open aviation area.

68   Written evidence from Fedex. Back

69   Supplementary written evidence from the CAA, page 33, paragraph 4. Back

70   Supplementary written evidence from the CAA, page 33, paragraph 6. Back

71   See also House of Lords Hansard, 25 November 2002, Cols 560-561. Back

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