CHAPTER 4: position of the united states
77. It is the practice of the United States Government
to give evidence only to the US Congress. The Committee regrets
that US airlines felt unable to respond to the Call for Evidence.
We understand current financial pressures on the US airlines may
have pre-occupied senior management and that, in any case, the
ECJ judgments are primarily an EU problem, not an US one. However,
a United States government's view of the ECJ judgments was sketched
out on 8 November 2002 by the Assistant Deputy Secretary of Transportation,
Mr Jeffrey Shane, at an American Bar Association forum in Florida.
He described his remarks as "a first reaction and largely
a personal one", and then proceeded to analyse what he thought
the ECJ judgments amounted to. In his view,:
"the European Court of Justice rendered what
American callers would call a "surgical" decision
did not strike down the bilateral agreements that were the subject
of the Commission's complaint. Nor did the Court prohibit EU Member
States from continuing to discuss negotiations with the US in
their own right. The Court certainly did notand indeed
could notconfer competence on the Commission to conduct
negotiations with the US, a political decision that can only be
taken by the EU Council of Ministers."
Mr Shane pointed out that the only areas which the
ECJ judgments dealt with were those described earlier in this
report, namely, the "nationality" or control and ownership
clause and the intra-European pricing provisions and computer
reservations systems. Mr Shane drew a parallel between the EU
concept of relevant competence and the US doctrine of pre-emption:
the well established principle that state governments are prohibited
from legislating with effect to any general subject area "occupied"and
thus pre-emptedby the Federal Government.
Intra-EU Route Pricing and Computer
78. In dealing with the Court's objections to
intra-European pricing provisions and computer reservation systems,
Mr Shane argued that US airlines do not "price lead"
on the fifth freedom aspect of their bilateral alliances with
EU airline partners. He added that "no US airline owns a
computer reservation system solely in its own right". More
importantly, however, in the course of his speech he said that
"some of our "open skies" agreements even include
an explicit statement acknowledging that in the event of a conflict
between EU rules and the rules set forth in the agreement, our
EU partners will have to abide by the EU rules."
79. On the issue of the "nationality"
clause, Mr Shane said that, "the offending nationality provisions
are permissive. In other words they do not require the US to reject
a carrier originating flights to the US from a country on the
ground that it isn't owned and controlled by citizens of that
country though that right does exist. Indeed, the US from time
to time has waived its objection under such clauses in the interests
of ensuring fuller participation in the aviation market by certain
trading partners and to encourage competition." Then, as
if to underline that the US was not overly concerned by the EU
requirement to amend the "nationality" clause, Mr Shane
pointed out that the United States had already entered into a
multi-lateral "open skies" agreement with four partners
in the Asia/Pacific economic cooperation forumBrunei, Chile,
New Zealand and Singapore. Peru acceded to the agreement earlier
"That agreement is notable for its departure
from the conventional approach to airline nationality. The agreement
expressly prohibits any signatory country from objecting to operations
by any airline that has its principle place of business in
the country from which its flights originate on the grounds that
it is not owned by citizens of that country."
The phrase in italics above is significantly more
restrictive than the Commission's view which only requires EU
carriers should be "established" in another Member State
in order to be designated.
EU Denunciation of Bilateral ASAs
80. The US State Department on 20 November 2002
"the European Court of Justice's decisions do
not call for European Union Member States to denounce these agreements.
The Court also ruled against the Commission's assertion that Member
States lacked competence to negotiate agreements. Instead, the
Court found that our agreements are consistent with EU law, except
in three areas. We see no utility in denunciation of our aviation
agreements. The United States is prepared to discuss with the
European Union Member States on a bilateral basis how to accommodate
the European Court of Justice's specific legal findings. Such
discussions can occur without denunciation."
81. What comes across clearly here is that the
United States appears to believe that its "open skies"
model of partial liberalisation effectively serves its interests
and it would not wish to see these denounced by the 11 EU Member
who have "open skies" ASAs with the United States. In
the course of oral evidence, the Committee became aware that the
United States authorities had already written to the seven "open
skies" EU Member States who were found in default by the
ECJ offering revised articles for their ASAs with a form of words
to take account of the requirement to bring the "nationality"
clause into conformity with the TEC. It is significant that the
United States Government did not seek to initiate such negotiations
with the United Kingdom. The inference that the Committee draws
is that the United States sees the existing network of "open
skies" ASAs (of which it has 59 world-wide) as very much
in its interests and will wish to preserve the model.
On the other hand the European Commission sees this US concern
to preserve the "open skies" ASAs as an effective pressure
point to force the United States into substantial negotiations
with the European Community acting as a bloc.
Limits on Foreign Ownership and
82. Under US law, at least 75 per cent of the
voting stock of a US airline must be owned or controlled by US
citizens, and the president and two thirds of the board of directors
of the carrier must be citizens. Administrative decisions by the
Civil Aeronautics Board of the United States, and later by the
Department of Transportation, have interpreted this law to require
that the airline must be under the actual control of US citizens
(i.e. the airline must have US ownership and control).
(It should be noted that similar constraints on ownership and
control apply in the EU: EC rules require carriers obtaining their
operating licences in Community States to be majority-owned and
substantially controlled by those (i.e. Community) States or their
Fly America Requirements
83. Most US Government commercial air transport
requirements, domestic as well as international, must take place
on US airlines. This includes the transport of US Government personnel
and cargo as well as most items handled by the US postal service
(the latter is covered by a separate statute). On international
flights, foreign code-share partners of US flag carriers can transport
US Government personnel, cargo and mail under the US carriers
code on routes covered by their code-sharing agreement. In practice,
any movement of passengers or cargo, including that of contractors,
that is in anyway connected with US Government affairs has to
take place on US airlines or on non-US airlines that have code-sharing
agreements with US airlines. The cumulative impact of the "Fly
America" policy is to reserve for US airlines a significant
share of trans-Atlantic traffic.
Civil Reserve Air Fleet (CRAF)
84. The Civil Reserve Air Fleet (CRAF) is a critical
component of America's military readiness. Under the CRAF programme,
US commercial air carriers pledge to provide military air lift
in a defence emergency in exchange for exclusive access to US
Government peacetime business. Department of Defence officials
fear that allowing foreign investors to acquire US air carriers
would jeopardise the military's dependable access to this emergency
capability. The Department of Defence's concerns rest on three
· US air
carriers are more dependable than foreign air carriers;
· if a
foreign entity bought a US air carrier it would operate as a foreign
· if the
US Government changed its statutory policy to allow foreign ownership
of US carriers it would open itself up to problematic transactions.
85. Under US anti-trust legislation, any agreements
between major suppliers/producers of goods or services relating
to price levels or to output or production levels may be considered
anti-competitive and in breech of the anti-trust rules. Code-share
and related agreements which involve joint control of frequencies
or capacity offered between the airlines in an alliance would
fall foul of the anti-trust rules unless given explicit exemption
by the relevant US Government Department.
86. The rationale for granting exemption is that
because of the "open skies" agreement, there is freedom
for other airlines to enter the markets on which the alliance
partners code-share, and possibly agree frequencies. In practice,
the US Department for Transportation has recommended anti-trust
immunity to airlines of those states that have agreed to sign
"open skies" ASAs with the United States.
87. Some witnesses have pointed out that denunciation
of "open skies" bilaterals by Member States, as demanded
by the Commission, would lead to loss of anti-trust immunity for
major alliances, notably those between Lufthansa/SAS and United,
KLM and North West, Air France/Alitalia and Delta. However, from
its discussions in Washington, the Committee concluded that this
is not necessarily so. Following investigation of an alliance
by the Department of Justice and the Department of Transportation,
immunity is granted through a Federal Government Order. Such Orders
have no provision for automatic cancellation. The Department of
Transportation would have to take positive action to cancel existing
The Brattle Report
88. The European Commission asked the Brattle
Group, a respected US consultancy,
to examine the economic impacts of an EU/US open aviation area.
The Brattle Group produced its report in December 2002. The report
comes to the conclusion that full liberalisation would benefit
both the United States and the European Union. It analysed the
restrictions mentioned above, but concluded that none of the fears
expressed either by the industry, the US Department of Defence,
or the labour unions, provided a sufficient reason for resisting
liberalisation. One critic questioned the extent to which benefits
would necessarily follow from liberalisation on the grounds that
the methodology used was perhaps more appropriate to smaller organisations.
But he did not contest the assumptions arising from the report
that liberalisation would bring economic benefit to all parties.
However, it appears from the report that a significant part of
the benefits of full liberalisation could be achieved through
extending US "open skies" agreements in Europe to include
the four EU Member States with which US "open skies"
agreements do not exist, and particularly the United Kingdom.
US Attitudes to an EU/US Agreement
89. The main constraints were deemed by the authors
of the Brattle Report not to be economic or security, but rather
political. There has been, hitherto, resistance from the labour
unions, as well as from the Department of Defence, and it was
in order to assess how immutable these obstacles might be that
the Committee travelled to Washington between 12 and 13 March
2003. The Committee held informal talks with officials in the
Department of Transportation and the Department of Justice, and
with senior management in American Airlines, Northwest Airlines,
Delta Airlines, the Air Transport Association of America, and
the authors of the Brattle Report.
90. The US aviation authorities as was evident
from the speech by Mr Shane quoted earlier (para 67) would welcome
the opening of discussion with the European Commission on liberalising
air services between the EU and the US. While it may be difficult
to reach agreement on some of the issues, the launch of discussions
would compel the US government, the airlines and the labour unions
to face up to the issues that have to be resolved.
91. US international airlines appear in general
to welcome EU/US discussions. Some to whom the Committee talked
in Washington felt that US airlines had much to gain from further
liberalisation through the free flow of capital, the creation
of more stable market-based alliances, increased access to Heathrow
and so on.
92. A major obstacle to full liberalisation is
the opposition of the organised labour and some members of both
sides of Congress. Labour opposition could be reduced, if airlines
made a concerted effort to explain and argue for the potential
benefits of liberalisation as had been done when the first "open
skies" agreements were signed. But in the present crisis,
when airline executives are preoccupied in trying to win wage
and productivity concessions from their unions, they do not want
to use up political capital in arguing a case for further liberalisation.
93. The US view in general was that a staged
approach was more likely to succeed than trying to reach agreement
on all issues at once.
94. On foreign ownership of existing US carriers,
moving from 25 per cent to 49 per cent was seen as possible, but
majority ownership would meet stiff opposition. Conversely, several
people the Committee talked to felt that the "right of establishment"
might be conceded in future negotiations. This would enable non-US
airlines or companies to set up US based airlines operating under
US safety regulations and employment laws. It was suggested to
the Committee that this might be more readily accepted by the
unions since it would generate local employment, than would opening
up domestic cabotage to foreign carriers.
95. The Committee found little support for the
continuation of the ban on inward wet-leasing of aircraft, particularly
if those aircraft were EU-registered since safety standards within
the EU were mutually accepted by the US and increasingly harmonised.
96. The Committee found a positive response to
the concept of harmonising the objectives of competition rules
on both sides of the Atlantic. The Department of Transportation
(in the case of aviation policy), and the Department of Justice
and the European Commission have worked closely on many mergers
and, with a few exceptions, have usually come to similar conclusions.
They have already been working closely to try and harmonise both
the objectives of US anti-trust and EU competition policies and
the criteria used to assess anti-competitive actions or mergers.
The Committee's Views
97. The Committee felt that it was important
to seek as wide a reading of the United States' position as possible,
because although the ECJ judgments require EU Member States to
bring their ASAs into conformity with Community law on those issues
referred to in the judgments, the ASAs also involve the agreement
of the bilateral partner, namely the United States. The United
States' first reaction was to argue that denunciation of existing
ASAs was unnecessary, and that the United States was prepared
to negotiate bilaterally in order to amend existing ASAs where
necessary to conform to the ECJ judgments. The US willingness
to open negotiations on these points is understandable: the "open
skies" agreements which create some international liberalisation,
but which in effect protect the huge US domestic market in a number
of ways, are valuable to the United States. They enable the US
airlines to exploit the fragmentation between EU Member States,
and thus maintain their dominance in the world aviation market.
98. While in Washington, the Committee heard
an American willingness to look at a negotiation that would aim
to deal with more substantial restraints such as cabotage, ownership
and control, the "Fly America" policy and the CRAF.
The Committee was also told that the United States government
and airlines could see advantage in a fully liberalised Trans-Atlantic
Civil Aviation Area. A number of our interlocutors suggested that
all the issues listed above could form part of an EU/US bloc
to bloc negotiation.
99. However, a number of issues would require
legislative action in the United States: the "Fly America"
policy, possibly cabotage, but particularly, ownership and control
of US airlines. While the airlines themselves might see benefit
in seeking new sources of finance, the truth is that at present
it is unlikely that Congress would wish to take appropriate legislative
action. US concerns are focused on the economic downturn and on
the difficult financial position of US airlines, notably United,
which has already filed for bankruptcy, and according to press
reports, American Airlines appears to be close to doing so.
100. There is also a question of whether the
objections that have been hitherto voiced by the American labour
unions, in particular, the American Pilots' Association, could
be overcome as easily as many commentators, including BA and Virgin
Atlantic, think. The US airlines are themselves engaged in difficult
negotiations with the unions over staff reductions and various
other retrenchments, and are unlikely to want to spend negotiating
capital on an issue which is not a matter of overwhelming priority
101. The Committee, therefore, came to the
conclusion that while the United States government would not object
to entering full negotiations for a open aviation area, the difficulties
in the way of a successful negotiation within the next two to
three years will be considerable and should not be underestimated.
59 Appendix 7. Back
Q 183. Back
All EU Member States except Greece, Ireland, Spain and the UK
(but the US has also concluded "open skies" ASAs with
non-EU States-Iceland, Norway and Switzerland). Back
Q 336. Back
The Brattle Report 1.3 pages 1-7 Back
Supplementary written evidence from BA, page 62. Back
The Brattle Report, Executive Summary part iv, page x Back
The Economic Impact of an EU-US Open Aviation Area-a report
by the Brattle Group, commissioned by the European Commission
and published December 2002 (firstname.lastname@example.org). Back
The Financial Times, Comment and Analysis, March 26 2003. Back