Transatlantic air accord stalls as protectionists delay talks

The European Commission has long been pressing for an agreement between the EU and US to open up their respective markets for passenger air transport.

Such an 'open skies' agreement has been touted as a unique opportunity to introduce greater competition that would drive down prices for consumers while ensuring more effective co-operation on safety and security issues. After years of stalling, the two sides have over the last 12 months moved to the brink of an agreement. But last month negotiations crash-landed when the House of Representatives of the US Congress voted against a change in federal law that would have enabled EU investors to increase their stake in US airlines.

The European Commission is now watching anxiously to see if the Bush administration can push through a new rule on foreign investment, a prerequisite for a deal, before EU transport ministers meet in October to vote on US proposals. "As far as we understand, the US administration is still working on it and is hoping to produce a final rule. The timing is in the hands of the US," says Francis Morgan, a member of the private office of Jacques Barrot, the European commissioner for transport.

"We have the potential for a really good agreement that would bring great benefits," he says. "We hope that all elements come together and we get a great package that is acceptable to everyone."

John Byerly, the US deputy assistant secretary of state for transportation, who led the American negotiating team, says: "This agreement, if signed, will make aviation history. By creating an open international market between all of the European Union and the United States, free of restrictions on where, how often, and at what prices airlines may fly, we can set an example for the rest of the world."

Under the agreement, airlines from both territories would have free access to airports on either side of the Atlantic. Currently, EU airlines flying to the US can only depart from airports in their home countries. If a deal were struck, they could fly from any point in the EU to anywhere in the US. Freedom to set routes would be subject only to agreements with individual airports. If member states approve the deal this year, it could be in effect by the opening of the 2007 summer season.

Quoting from a report issued by a US consultancy firm, the European Commission believes that the deal would boost passenger numbers by 17 million annually, bring consumer benefits worth at least $5 billion (€3.92bn) a year and generate more employment. EU and US leaders pledged continued support for the agreement at last month's Vienna summit, but without the necessary changes in US equity legislation, there are fears that some EU states, which already have separate agreements with the US, could reject the deal in October, adding potentially another two years' delay to negotiations that have been going on since 2003.

The main reason why Congress blocked changes to rules on foreign investment in airlines would appear to be a fear of job losses. Supported by the unions, a large number of Democrats voted for a one-year delay on the US department of transport proposals for legislative changes. Companies, including Continental Airlines, which fear excessive foreign influence over airlines in the US, supported them.

"In opening the market, the agreement...ends protections in older bilateral agreements that have benefited some players in the past," says Byerly. "Their opposition to the agreement is not surprising but should not be allowed to stand in the way of benefits for consumers...and our broader economies."

The proposed amendments to the 1940 federal law would have lifted the 25% ceiling on EU investment to 49%, though ownership of voting shares would still be limited to 25%. EU investors would have an increased say on issues such as the choice of routes and aircraft purchasing. The EU is now keen to see the investment issue resolved by a committee of congressional negotiators.

"We'll have to see how the US administration takes things forward in the next few months. We're waiting to see the final result. It is important that the content is useful to European airlines," says Morgan.

Access for US airlines to London's Heathrow airport is a key concern of US negotiators, admits Byerly. "Although I prefer to focus on the enormous benefits of the new agreement," he says, "it's fair to say that a failure to move forward this year would leave existing agreements and air services in a legal vacuum."

This, he says, could destabilise the market, "while offering solace to those airlines that benefit, at the expense of consumers, from protected markets such as London-Heathrow".

The deal would scrap rules that only allow four airlines - British Airways, United Airlines, American Airlines and Virgin Atlantic - to fly between the world's busiest airport and the US. Part of the reason why US companies such as Continental Airlines oppose the deal is also because they doubt whether Heathrow would ever be truly open. "Heathrow is a very busy airport. What we have in place in the EU is an equitable system for distribution of slots available for everyone to use," says Morgan.

The European Commission has long been pressing for an agreement between the EU and US to open up their respective markets for passenger air transport.