Gloss wears off bilateral US air deals

Date: 21/05/1998

Bruce Barnard
HOPES of a rapprochement between Brussels and Washington are rising as the European Commission prepares to cut a deal with British Airways and American Airlines over their controversial alliance.

However, transatlantic aviation relations are set for a prolonged period of turbulence as US regulators chew over the BA/AA deal and demand a bilateral 'open skies' accord with the UK as the price for their approval.

The Commission will announce whether it is satisfied that BA and AA have met its competition concerns in June and will also rule on the second big transatlantic partnership between Lufthansa and United Airlines.

The high-profile BA/AA case has marked a high and a low for the Commission.

It has strengthened the hand of Competition Commissioner Karel van Miert because the airlines and their highly-paid lawyers and advisers now hang on his every utterance.

The flurry of protests from Washington, including an angry note from a top US official questioning the Commission's methodology, demonstrated that Van Miert's opinions matter.

But it has diminished the standing of Transport Commissioner Neil Kinnock, the, who is powerless to stop the British government from striking a bilateral aviation deal with Washington to sweeten the US regulators who will examine the BA/AA alliance later in the year.

Kinnock is already embroiled in a legal spat with EU member states which have signed bilateral accords with the US and recently saw France agree a five-year pact with Washington.

However, the tide shows signs of turning amid growing suspicions among European airlines that they have been 'ripped off'. The bigger carriers have been denied the right to roam the giant US market, the world's largest, while the smaller ones fear being squeezed out in their home markets.

Kinnock may not have convinced EU governments to let him negotiate on their behalf, but a growing number of airlines from the big alliances are rooting for more power for the Commissioner.

The Commission will go through the ritual of asking Union transport ministers next month to broaden its current negotiating mandate with Washington from tame regulatory matters to key issues including traffic rights, capacity and market entry.

Normally, Kinnock could expect a polite rebuff or a diplomatic request for more time or information, or both.

He may be spurned again, but the changing sentiment in the European industry has bolstered his chances of success.

Pressure for change is coming mainly from the 180-billion-ecu-a-year air cargo industry, which is tired of playing second fiddle to the more politically powerful passenger sector.

United Parcel Service, the giant US parcel delivery firm, recently called for an EU-US air cargo pact. Support for a transatlantic initiative has also come from European all-cargo carriers and executives at top EU airlines heavily committed to freight, including KLM and Lufthansa.

The Europeans warn, however, that any accord must tip the balance more their way to wipe out the advantages gained by the US when it cut open skies deals with smaller EU nations.

Meanwhile, the independent British air cargo industry fears it will be sacrificed to help BA get US approval for its partner-ship with AA.

The massive American air cargo sector has developed within “a totally protected market”, according to the British consultancy Apollo Aviation Advisory Ltd. Now Washington wants London to grant it short-haul fifth freedom rights, opening up the whole of the European market without giving British carriers reciprocal rights in the US.

Political sentiment is also changing within the Union.

While the UK will be forced into a fresh bilateral accord with the US to help BA, it does not share the previous administration's ideological aversion to an EU-wide mandate for the Commission. France remains the institution's main adversary, but it risks being outvoted by EU transport ministers in June.

Giving Kinnock a fresh mandate would enable the Commission to call the bluff of the US, which has scorned the EU for failing to talk about 'real' issues like traffic rights and capacity.

However, Frederik Sorensen, head of air policy at the Commission, warns that even if the institution was given a comprehensive mandate, efforts to strike an EU-US deal could soon get bogged down because of Washington's refusal to put foreign ownership limits and cabotage on the table.

In the meantime, he warned an international air cargo industry gathering in Paris earlier this month, the US “will divide and conquer” the EU.

Washington is convinced that Union governments will rebuff the Commission, not least because of strong French opposition. “Mr Sorensen's authority is short of his vision,” said Susan E McDermott, assistant director at the US department of transportation.

She concedes that Washington's hands are tied over foreign ownership of US airlines and cabotage as its negotiators are forbidden to discuss these issues by statute. But she claims that the governments which cite these difficulties are generally those most opposed to open markets.

McDermott nevertheless praises the EU for creating the only genuinely liberalised multinational air transport market, and European airlines argue it is time for the Union to use this as a lever to prise open the US market.

Meanwhile, Washington is fast ceding the moral high ground gained from a 20-year start on the EU in airline deregulation.

Southwest Airlines, the spectacularly successful low-cost Texan carrier, is usually cited as evidence of the benefits to the industry and consumers alike of US open skies. Yet fares are only low on routes where it operates. Elsewhere, new carriers cannot break into the market, there is virtually no competition and fares are soaring. The cost of a one-way business ticket surged by 16&percent; last year and is still rising. Ticket restrictions, once limited to Europe, are now common across the US.

Although the US department of transportation launched an assault on anti-competitive practices last month, critics claim it will simply reintroduce regulation - the very charge it levels against Van Miert.