Open skies nears final chapter

Date: 04/04/1996

By Tim Jones

WASHINGTON is doing Neil Kinnock's work for him.

For more than a year, the Transport Commissioner has been trying to entice member states into allowing him to negotiate an 'open skies' agreement with the US on their behalf.

Transport ministers have listened with an often sympathetic ear, then promptly gone away to negotiate bilateral agreements with the US, allowing American carriers favoured access to their airports and winning much-sought-after access to US airports away from New York in return.

Kinnock's long-game strategy - combining threats of legal action with carefully collected evidence and simple pleading - seemed to be getting nowhere fast until Washington started to move in for the kill. Having arm-twisted the German government into a deal in February, the US won a pledge from the French last week to begin bilateral talks soon, and is now talking to the Spanish, Italian and Portuguese authorities.

With the UK proving the hardest nut to crack, the open skies saga seems to be entering its final chapter.

Until the end of last year, the US had only managed to win open skies deals with countries with minor aviation markets - including Austria, Belgium, Denmark, Luxembourg, Sweden, Finland, Iceland, Norway and Switzerland - accounting for just 20&percent; of transatlantic traffic.

But their real targets in this giant market of nearly 40 million passengers a year were the UK, Germany and France.

The Europeans should have seen this coming. When President Bill Clinton took office in 1993, he brought with him an entourage of 'strategic traders' - officials who believed that future US prosperity depended largely on prising open previously protected markets.

The 'crowbar' method has been used to open Japanese auto markets and browbeat the Chinese into clamping down on software piracy. European civil aviation will not escape and the Americans' leverage will be their powers of legal 'life or death' over global alliances.

These alliances are becoming increasingly vital for European airlines. Hurtling towards full internal market liberalisation in 12 months' time, notoriously loss-making carriers such as Iberia, Alitalia and Air France need the friendly embrace of a money-spinner. Even strong airlines such as British Airways, Lufthansa and KLM are increasingly striking coalitions as the global aviation market gets tougher.

Yields (the revenue received for each mile a passenger is carried) are said to be in long-term decline and this requires relentless cost-cutting by airlines. Mutual equity partnerships and 'code-sharing' - where airlines effectively share passengers - allow carriers to reduce the number of planes flying a route.

Apart from this simple saving, alliances can allow airlines to coordinate capacity, pricing and scheduling. But the more close-knit these partnerships become, the more liable they are to face legal action for acting in an anti-competitive fashion.

Since they are barred from merging by laws capping foreign investment in airlines, carriers want the freedom to behave as a single economic entity in sensitive areas such as tariffs or capacity without exposing themselves to civil litigation.

To avoid this and get the most out of their alliances, the airlines need anti-trust immunity from the US Department of Justice - and the Americans know this.

“We are clearly aware that the potential for anti-trust immunity has proven to be an incentive for foreign nations to open their markets to US carriers, to the substantial benefit of US consumers,” Mark Gerchick, deputy assistant secretary for aviation and international affairs at the US Department of Transportation, told a conference two weeks ago.

The oldest of the open skies agreements, that between the US and the Netherlands in 1992, is seen as a model by other European states. All the usual formal restrictions on fare-cutting and capacity were abolished and, soon afterwards, KLM won anti-trust immunity for its alliance with Northwest Airlines.

Since then, Amsterdam's Schiphol has surpassed Charles de Gaulle Airport as the fourth largest European gateway.

The German government has been (and still remains) one of Kinnock's strongest allies in favour of a joint negotiating approach. But even Bonn could not say no when Lufthansa went to the government and warned that its alliance with United Airlines could be at stake unless a deal was cut.

The German national carrier is aggressively pursuing transatlantic alliances, culminating in the signing of a code-sharing agreement with Air Canada last week. The German government could not sit back and wait for an EU-US open skies deal to safeguard Lufthansa.

The failure of the British government to offer any more than minimal extra US carrier access to the world's largest airport, Heathrow, at the end of last year was met with a threat: improve the offer or any attempt by British Airways to strike a code-sharing agreement with American Airlines or increase its 25&percent; stake in USAir - both of which were under consideration - would be refused.

The same cajoling will be used against the Italian, Spanish and Portuguese governments. Alitalia and TAP are known to be seeking international partners, and Iberia announced only last week that it was in negotiations with a big and profitable foreign airline.

Another approach was needed for Air France as it is not involved in any partnership talks, although American Airlines has often been seen as a possible ally.

When Air France applied to increase its summer flights to the US by 170,000 seats to take advantage of the Atlanta Olympics and the weakness of the US dollar against the franc, Washington declined.

“Their logic was impeccable,” said a Commission official. “The French were isolated and were not looking for foreign cooperation, so use another method: reduce their traffic rights.”

It worked. The French government, after retaliating briefly, agreed to US demands to begin negotiations on a new bilateral civil aviation agreement to replace the deal abandoned four years ago.

This has all been ammunition for Kinnock. While member states may win concessions from the Americans over landing rights, they will never win a balanced agreement on competition policy while anti-trust immunity can be granted as part of a bilateral trade deal.

When he meets Transportation Secretary Federico Peña soon, Kinnock will press for a balanced EU-US agreement on - among other things - allocating slots, raising thresholds for foreign ownership, harmonising the definition of when an airline is truly bankrupt and when it is entitled to subsidies, and ensuring free competition on reservation systems.

The Commissioner is slowly bringing member states on board. While several governments are not wholly convinced, they have started running through Kinnock's draft mandate chapter by chapter. Only in London, where the objections have much more to do with parliamentary arithmetic and principle than arguments over Commission competence, does Kinnock continue to run into problems.

But nobody should forget that transport negotiation mandates can be agreed by qualified majority voting. As Washington piles on the pressure, Neil Kinnock is looking increasingly like a winner.