EU airlines call for level playing field

Date: 25/11/1999

By Renée Cordes

WHEN aviation industry representatives from around the world meet in Chicago next month, Europe's airlines will make their strongest pitch ever for closer US-EU ties in regulating - and opening up - the sector.

The 27-member Association of European Airlines (AEA), which represents all the major European carriers, is calling for a common set of rules which would supersede the current fragmented regulatory regime dominated by a patchwork of bilateral pacts.

"We have a multilateral trading system and not a bilateral trading system," says the AEA's deputy secretary-general Kees Veenstra. "You get a much more level playing field if you put all the rules and regulations into one pot and give everyone equal opportunities in the market."

The group's proposal for a transatlantic common aviation area, which has already won the support of new Transport Commissioner Loyola de Palacio, urges full harmonisation of regulations and a step-by-step relaxation of regulatory barriers, such as those governing competition, aircraft ownership and leasing. The plan also foresees the creation of a single, independent body to police the industry.

As far back as 1996, EU leaders gave the European Commission a mandate to negotiate with the US on a common aviation area. While little progress has been made towards achieving that goal so far, Europe's airlines and policy makers are optimistic that Washington may finally be ready to listen as the trend towards global alliances gathers pace.

"As long as it continues to be in our interest, we will work with bilaterals," said a US diplomat. "But we certainly are not wedded to this idea if the trend is towards multilateral agreements."

Although the US has yet to give a formal response to the AEA's proposal, airline officials are optimistic of finding a sympathetic audience in Chicago.

The US Department of Transportation has invited ministers and industry officials from more than 100 countries to discuss the critical issues facing the sector in the 21st century. While those attending the conference are not expected to reach formal conclusions, European delegates regard the meeting as the first major opportunity to convince their US counterparts to allow airlines flying from one continent to the other to operate with as few restrictions as possible.

"In the world of air transport, where the most sophisticated techniques of modern science have been concentrated, management and regulation is still governed by antiquated systems which are not yet aware of the need for close, multinational cooperation among all the players," De Palacio told airline executives recently.

The campaign to lay down a common set of rules comes as an increasing number of carriers worldwide are banding together in alliances to expand their networks without making sizeable capital investments. In return for teaming up with partners, airlines can build global brands - such as One World and Star - and cut costs in the long term.

"Because of the increased cooperation among airlines, there is a need for the regulatory authorities to cooperate as well," argues Emmy Koridima of the law firm Oppenheimer, Wolff & Donnelly.

Partnerships range from simple code-sharing arrangements - such as the one announced by British Airways and American Airlines earlier this month - under which carriers operate some flights jointly, to KLM and Alitalia's ground-breaking, fully-fledged merger.

Most alliances, stymied by regulatory hurdles and differences in the approach taken by anti-trust authorities in the US and the EU, fall somewhere in between.

But differing - and often contradictory - conditions attached to airline ownership, the treatment of partnerships, the nature of remedies applied, and aircraft leasing make it difficult for carriers to draw up long-term business plans.

The EU, for example, restricts foreign ownership of domestic airlines to 50%, while the US has a 25% threshold. The two sides also use different criteria to judge potential alliances, with the EU often requiring carriers to surrender take-off and landing slots and reduce the frequency of flights while the US requires anti-trust immunity. This immunity is granted only if the foreign carrier's home country has an open-skies agreement with Washington.

"It is apparent that in applying their basic principles to particular circumstances, the EU and the US may reach different conclusions," says the AEA. "The extra-territorial effect of these conclusions creates serious difficulties for commercial operators subject to both of them."

No one is perhaps more aware of the confusion which this can create than the German airline Lufthansa.

In July 1998, the Commission asked Lufthansa, SAS and United Airlines to surrender about 100 slots, mainly at Frankfurt, and to reduce the frequency of flights between Frankfurt and Chicago as well as Washington. But the Commission has yet to deliver its final verdict on the alliance, long after the airlines were granted anti-trust immunity by the US.

Lufthansa is among those airlines pressing for better international cooperation when it comes to alliances. "The bilateral agreements lack perspective for the next five to ten years," says Ulrich Schulte-Strathaus, the airline's vice-president for international relations. "Alliances are, per se, not restrictable to bilaterable relationships."

He cites as an example the fact that if United and Lufthansa wanted to operate flights to and from Moscow, this would not fall within the scope of the bilateral agreement between Berlin and Washington. "We know that alliances are here to stay," he says. "We are trying to pave the way for a regulatory framework to keep alliances competitive."

But differences in approach on either side of the Atlantic will not be ironed out overnight. The Commission has been waging a battle for years against open-skies agreements between individual EU member states and the US, claiming that these arrangements put European industry at a disadvantage and hamper the creation of a genuine single market in aviation.

"I can only regard the continued dependence on bilateral negotiations with a mixture of sadness and irritation," said former Transport Commisioner Neil Kinnock, who launched legal action against eight member states which have signed open-skies pacts with the US while he was in charge of the dossier.

As the Commission awaits the European Court of Justice's verdict on those cases, officials plan to push the US even harder to make the rules governing transatlantic air traffic as uniform as possible - except perhaps for traffic rights, which will probably continue to be negotiated separately. "For 50 years we have lived with a pattern that no one has really questioned," says one EU source. "Now we are noticing that in different areas, the comfort level with the existing regulatory framework is disappearing. The time is ripe for change."

When aviation representatives from around the world meet in Chicago in December 1999, Europe's airlines will make their strongest pitch ever for closer US-EU ties in regulating - and opening up - the sector.