Table of Contents. Part I: History of the transatlantic aviation regime, focusing on U.S. and E.U. deregulation.

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1 The Future of Commercial Aviation Movement towards Liberalization of the Commercial Aviation Industry: A Comparative Analysis of the European Union and the United States of America Abstract: Page 2 Table of Contents Part I: History of the transatlantic aviation regime, focusing on U.S. and E.U. deregulation. Page 3: The Roots of Global Aviation: The Chicago Convention Page 4: Convention on International Civil Aviation- Chicago Convention Moving Toward Deregulation Page 5: U.S. Deregulation Page 6: E.U. Deregulation Part II: An explanation of the current foreign ownership rules and regulations Page 8: U.S. Foreign Ownership Rules Page 10: European Rules for Foreign Ownership Part III: Discussion of U.S. and EU concerns regarding changing the foreign ownership requirement Page 12: Conflict with U.S. and E.U. Law Page 14: Key Issues Relating to Changes in Foreign Investment Laws Domestic Competition Page 14: National Security Page 16: International Alliances Part IV: An overview of the E.U. s all-inclusive goal for a Transatlantic Common Aviation Area and the step-by-step approach of the U.S. Open Skies Initiative Page 17: Split in Vision: Different Perspectives on the future of Aviation market Page 17: U.S. Open Skies Agreement

2 Page 18: Step-by-Step Approach to Liberalization Major Issue with Open Skies Agreements Page 19: E.U. Transatlantic Open Aviation Area Agreement Proposed Transatlantic Open/Common Aviation Area Agreement TCAA) Page 21: TCAA Conflicts with the Chicago Convention Part V: A final assessment: Towards a compromise. Conclusion: Page 21 Page 22: Notes Page 25: Works Cited Abstract This research papers offers an analysis of the U.S. and E.U. contribution to the creation of the international aviation industry. The focus will be movement towards liberalizing the foreign ownership requirements for airlines and examining factors that may affect the future shape of the international commercial aviation industry. This paper will argue that the strict foreign ownership requirements and nationality test that exist in every single bilateral treaty in existence today are counter-productive. Both sides recognize this fact; the central issue is how best to proceed with the process of liberalizing the international aviation market. The most equitable solution is for the EU and the U.S. to continue working towards the goal of complete liberalization within the well defined trading blocks; similar to the E.U. proposed Transatlantic Common Aviation Area. However, the U.S. Open Skies approach of step-by-step ensures that decisions made are well advised and take into account the concerns and interests of all parties involved. Part I presents the history of the transatlantic aviation regime, focusing on U.S. and E.U. deregulation. Part II presents an explanation of the current foreign ownership rules and regulations. Part III discusses U.S. concerns over changing the foreign ownership requirement, 1

3 while Part IV offers an overview of the E.U. s all-inclusive goal for a Transatlantic Common Aviation Area and the step-by-step approach of the U.S. Open Skies Initiative. Finally Part V offers my assessment of the compromise toward which the two sides should work. The Roots of Global Aviation: The Chicago Convention The legal foundation on which international air travel was built upon was derived through a series of multinational conferences and conventions held shortly after the first Paris Congress. In 1913, France and Germany signed an agreement to create the first true aviation industry, though it quickly expired during World War I. 1 Following the war, several countries adopted the 1919 Paris Aeronautical Convention, in which the signing states agreed to the principle that each state should maintain sovereignty within its own airspace. 2 The byproduct of the Paris Convention was the International Convention on Air Navigation, which was to be a multinational governing body for aviation travel. Although the Paris Convention was a critical early step in the aviation regime, without the support of the United States, a key driver in the formation of the aviation industry, the International Convention on Air Navigation ultimately failed 3 1 Open Skies at a Cross-Roads: How the United States and European Union should use the ECJ Transport Cases to Reconstruct the Transatlantic Aviation Regime. Northwestern Journal of International Law and Business,; Fall 2003; 24, 1 2 Hubbard, Buckles, & Weckenmann. Chapter 3: Aviation and the Law. 3 See Open Skies note 1 2

4 The Second World War was a powerful catalyst for the technical development of the airplane. 4 A vast network of passengers and freight carriage was in place due to World War II. However, there were many obstacles, both political and economic, to overcome for air transport to support and benefit a world at peace. The United States took the initiative, starting in 1944, by conducting exploratory discussions with other allied nations to develop an effective strategy 5. On the basis of these talks, 52 States met in Chicago in November In the subsequent weeks, the delegates formulated a new international civil aviation regime, taking into account their own national interests and concerns. The outcome was the Convention on International Civil Aviation, also referred to as the Chicago Convention. 7 Convention on International Civil Aviation The participants of the Chicago Convention each had their domestic interests and concerns. The United States, coming off the heels of victory in World War II, saw itself in an excellent position to exploit this new aviation industry since most of the aircraft used during the war would eventually be converted to carry civilian passengers. The U.S. pushed for a laissez-faire regime, which would allow U.S. carriers to capitalize on their impending competitive advantage. 8 However, to protect itself, the U.K pushed for the creation of the International Civil Aviation Organization (ICAO), which would monitor competition and protect the world s airlines from one another. 9 4 ICAO Charter document 5 ICAO Charter document 6 ICAO Charter document 7 ICAO Charter document 8 Andras Vamos-Goldman, The Stagnation of Economic Regulation under Public International Air Law: Examining its Contribution to the Woeful State of the Airline Industry, 23 TRANSP. L.J. 425, 431 (1996). 9 Vamos-Goldman, p

5 The resulting Chicago Convention represented a compromise between these two positions. First, by granting one another the first two freedoms i, the right to fly across each others state without landing, and the right to land for non-traffic purposes, the signatories laid the foundation for a laissez-faire world market. 10 While states reserved their right to grant full commercial access to foreign carriers, they could not bar foreign carriers from flying over their airspace or from landing for refueling and maintenance; a provision that would give all carriers theoretical access to the world's airspace. Second, to satisfy the United Kingdom and its allies, the Chicago Convention created the ICAO, which would be granted limited supervisory power within the aviation industry. 11 The Chicago Convention consists of 96 articles that establish the privileges and restrictions of all Contracting States, and provide for the adoption of International Standards and Recommended Practices regulating international air transport. 12 The foundation of the Convention acknowledges the principle that every State has complete and exclusive sovereignty over the airspace above its territory and provides that no scheduled international air service may operate over or into the territory of a Contracting State without its previous consent. 13 Once the Chicago Convention took effect, states who wished to increase their access to foreign markets began to sign bilateral agreements granting reciprocal rights of access to specified points of entry. 14 The first major bilateral agreement was between U.S. and the U.K. in 1946 and was called the Bermuda I agreement. The Bermuda I Agreement became the example 10 Ruwantissa I.R. Abeyratne, Would Competition in Commercial Aviation Ever fit into the World Trade Organziation? 61 J. Air Law and Com. 793, 802. n See Vamos-Goldman, note 3, at Chicago Convention Text 13 ICAO, see note 2 14 Abeyratne, note 5, at 802 4

6 from which thousands of aviation agreements were signed throughout the next thirty years thereby creating an aviation network which remains the basis of the modern regime. 15 Moving Toward Deregulation: U.S. Domestic Deregulation Prior to the Chicago Convention, competition within domestic markets was completely government regulated. The U.S. aviation industry was placed under the control of the U.S. Civil Aeronautics Board ("CAB"), which was given the power to control routes and fares within the domestic market, and could accept or reject fares set by the IATA on international routes. 16 During the 1970s, however, CAB studies revealed that rigid price restrictions had gradually caused the airline industry to become unprofitable. 17 To remedy this problem, Congress passed the Airline Deregulation Act of 1978, which relaxed air transport restrictions in favor of a freer market. 18 As deregulation began to take effect in the U.S. market, several waves of expansion and consolidation eventually led to an oligopoly. 19 According to the Brattle Group Report, post-deregulation U.S. carriers were generally more efficient than foreign carriers and the deregulation movement began to spread to foreign markets. 20 The European Community ("EC"), the largest foreign market for U.S. carriers, seemed the most likely to follow the U.S. lead. However, because the Member States' domestic markets 15 Adam L. Schless, Open Skies: Loosening the Protectionist Grip on International Civil Aviation, 8 Emory Int l L Review. 435, 440 (1994) 16 Angela Edwards, Comment Foreign Investment in the U.S. Airline Industry: Friend or Foe Last accessed Jan 10, See Schless, note 14 at Seth M. Warner. Comment, Liberalize Open Skies: Foreign Investment and Cabotage Restrictions Keep Noncitizens in Second Class, 43 American U. Law Review. 277, 286 (1993) 19 Eli A. Friedman, Comment, Airline Antitrust: Getting Past the Oligopoly Program, 9 U. Miami Business Law Review, 121 (2001) 20 Brattle Group Report to EU Commission 5

7 were often too small to justify self-regulation, European deregulation could only take place through a lengthy and complicated EC wide process. 21 European Deregulation The foundation for the European Community airline deregulation was the 1957 Treaty of Rome, the first installment of the future EC Constitution, which had given the EC the authority to create "the framework of a common transport policy." 22 The common transport policy was limited to rail, road, and inland waterway transport, but stipulated that the Council of Europe ( the Council ) could extend the transport policy to maritime and aviation transport by unanimous vote. 23 The passage of the Single European Act ( SEA ) in 1987 was the final thrust for EC airline deregulation. 24 The stated goal of the SEA was to create a common market across the EC, by lifting all barriers to trade across the Member States. 25 To this end, the SEA amended the Treaty of Rome in order to strengthen the EC's ability to direct common policies, including a common transport policy, for the EC at large. Perhaps the most significant change was the Council's decision-making process, which was altered from a unanimous voting system to a qualified majority voting system. 26 This removed the veto power of individual Member States, enabling the Council to adopt more stringent regulations against the Member States and forcibly 21 Romina Polley, Defense Strategies of National Carriers, 23 Forham Int l Law Journal. 170, 178 (1999) 22 Matthew Driven, Liberalization and Privatization in European Community Air Transport Law, Int l Legal Perspective, Spring 1994, at Jurden Basedow, Airline Deregulation in the European Community-Its Background, its flaws, its consequences for E.C.-U.S. relations, 13 J. L & Com 24, 251 (1994) 24 See Basedow, note Moritz Ferdinand Scharpenseel, Consequences of E.U. Airline deregulation in the context of the Global Aviation Market, 22 NW. J. Int l Law & Business. 91, 95 (2001) 26 Driven, note 15, p. 99 6

8 deregulate the EC internal market, including the aviation sector. 27 Formal E.C. airline deregulation occurred in 1993, when the remaining barriers to a free aviation market were removed. 28 It was not until late 1997 that E.U. Member States' airlines had been granted full cabotage within the collective European Union, or the right to fly internal domestic routes within a foreign country, thereby creating the second largest aviation area after the United States. 29 Part II: Current U.S. and E.U. foreign ownership rules and regulations Due to the deregulation of both the E.U. and U.S. domestic markets, the transatlantic market began to improve as well. Passengers carried on transatlantic flights between the EU and the US now represents approximately 14% of all passengers carried by air. The large percentage is partly because transatlantic travel connects the world s two largest domestic air transport markets; the European and the U.S.; 28.4% and 41%, respectively. 30 However, the case of this paper will highlight that the strict foreign ownership requirements and nationality test that exist in every single bilateral treaty in existence today are counter-productive. Both sides recognize this fact; the central issue is how best to proceed with the process of liberalizing the international aviation market. U.S. Foreign Ownership Rules 27 Dennis A. Duchene, The Third Package of Liberalization in the European Transport Sector: Shying Away from Full Liberalization, Transportation Law Journal. 119, 128 n. 23(1995) 28 European Council Regulation 2407/92, 2408/92 and 2409/92 29 See Scharpenseel, note 18, p Martin Staniland, Transatlantic Air Transport: Routes to Liberalization European Policy Paper No. 6, P. 11 7

9 According to the GAO report about Foreign Investment in U.S. Airlines, Congress first enacted citizenship requirements for U.S. airlines with the Air Commerce Act of That act required that U.S. citizens own at least 51 percent of any individual aircraft in order for it to be registered in the United States. Under the Civil Aeronautics Act of 1938, Congress required that U.S. citizens own or control at least 75 percent of the voting interests of U.S. airlines. This restriction on ownership has remained in all future legislation regarding airlines that operate within the U.S. The Federal Aviation Act of states that to operate as a U.S. airline, an entity must obtain a certificate of public convenience and necessity or an exemption from the certification requirement from Department of Transportation (henceforth known as DOT). A prerequisite for obtaining such authority is U.S. citizenship. The Federal Aviation Act defines a citizen as an individual, a partnership whose members are U.S. citizens, or a corporation or association organized under U.S. law where at least 75 percent of the voting interest is owned and controlled by U.S. citizens. The law also specifies that the President, as well as at least two-thirds of the Board of Directors of the corporation, must be a U.S. citizen. The current statutory amended provisions governing ownership requirements for U.S. airlines are: 1102(a), which limit the issuance of authority to perform air transportation as an air carrier to a citizen of the United States, 40102(a)(2), which defines air carrier as a citizen of the United States undertaking to provide air transportation, 40102(a)(15), which defines citizen of the United States in the case of a corporation as a corporation organized under the laws of the United States, or a State of which the president and at least two-thirds of the board of directors and 31 GAO Report: U.S. General Accounting Office. Commercial Aviation: Issues Relating to Foreign Investment and Control of U.S. Airlines, GAO-04-34R.Legislative Report Briefing for the Subcommittee on Aviation. Washington D.C., 2003: GAO, Federal Aviation Act of 1958, Pub L. No , 72 Stat

10 other managing officers are citizens of the United States, and in which at least 75% of the voting interest is owned and controlled by persons that are citizens of the United States. 33 In practice, DOT has interpreted control to mean that U.S. citizens must make day-to-day management decisions, even if there is substantial foreign investment in the airline. Currently, no US domestic carrier is more than 20% foreign owned. 34 That is, the law has been construed as requiring actual control of the enterprise to rest with U.S. citizens. A corollary rule is that there can be no semblance of control over a U.S. airline by foreign citizens. The control rule is probably the more important feature of the overall framework relating to foreign ownership. 35 European Rules for Foreign Ownership As stated earlier, the Treaty of Rome was the beginning of Europe s evolution into a single community of member states promoting the free movement of goods, services and labor across national borders. For the aviation industry in Europe, this meant an end to the limitations imposed by a member state, preventing competition or capital from entering into their own domestic markets. This is particularly important because every country in Europe owned its national flagged airline 36. Allowing other competitors into their domestic markets would allow for direct competition to their nationally owned carriers. Nonetheless, in the interest of creating a single Europe, the ownership and control requirements were revised to allow cross-border investment amongst E.U. Member states. 33 Brattle Group Report to EU Commission, Appendix II 34 GAO Report, see note Mr. Jeffrey N. Shane Under Secretary of Transportation Policy, Department of Transportation remarks at the 25th Annual FAA Aviation Forecast Conference in March For example Alitalia, 62.5% owned by the Italian Treasury. Also, AirFrance, Lufthansa and British Airways are over 75% owned by their respective governments. 9

11 Under EU law, only Community carriers may fly on routes within the European Union. To qualify as a Community carrier, an airline must have its principal place of business and registered office within a Member State. 37 Ownership and Control Requirements, found in Article 4 of EC Council Regulation No 2407/92, states the following: Article 4(2) provides that the holder of an operating license (a license necessary by any air carrier that wishes to provide air transport services) must be owned and continue to be owned directly or through a majority ownership by member states and or nationals of members states. It shall at all times be effectively controlled by such states or such nationals. Article 4(4) provides that any undertaking which directly or indirectly participates in a controlling shareholding in an air carrier must also meet the requirement of 4(2). In the E.U. s case, effective control is interpreted to mean that at least 51% of voting stock is in the hands of EU nationals. Professor Staniland from University of Pittsburg notes the EU rule is more liberal from the point of view of foreign investors than that currently in US law, which requires 75% national ownership. 38 Article 2(g) of Council Regulation No 2407/92 defines control as follows: Effective control means a relationship constituted by rights, contracts or any other means which, either separately or jointly and having regard to the considerations of fact or law involved, confer the possibility of directly or indirectly exercising a decisive influence on an undertaking, in particular by: the right to use all or part of the assets of an undertaking; and rights or contracts which confer a decisive influence on the composition, voting or decisions of the 37 Policy Statement: Commission on Air Transport. Foreign Investment in Airlines: an ICC View (1994) 38 Martin Staniland, Transatlantic Air Transport: Routes to Liberalization European Policy Paper No. 6, P

12 bodies of an undertaking or otherwise confer a decisive influence on the running of the business of the undertaking. 39 Part III: Concerns about changing the foreign ownership requirement Over the last 20 years, there have been academic conferences, roundtable discussions, government commissions and reports as well as airline reports which argue that long overdue change is needed to the current policies that limit foreign ownership of commercial airlines. In the Commission on Air Transport policy paper, it states that Chicago Convention of 1994 and the principle of national sovereignty over a country s airspace had two consequences: one was that airlines had nationalities and that governments were given the central role in negotiating route rights; the other was a series of national laws limiting foreign ownership or control of carriers. 40 The Commission policy paper argues the text of the Chicago Convention is neutral on the subject of foreign ownership. Article 77 of the Chicago Convention expressly permits operations involving joint or coordinated efforts among airlines to provide air service. 41 Article 6 of the Chicago Convention standard bilateral form, permits either party to withhold or revoke a certificate or permit to an airline where it is not satisfied that substantial ownership and effective control are vested in nationals or either party to this agreement 42 The Chicago Convention permits each signing state to legally restrict competition within the domestic area. This restriction has disallowed market forces to determine who can sell the product, based not on efficiency and productivity but instead with government regulation, specifically through Article 6 and 7 of the Chicago Convention. 39 EC Council Regulation No 2407/92 40 Commission on Air Transport. Foreign Investment in Airlines: an ICC View. Policy Statement 41 Commission on Air Transport, Policy Statement. See note Commission on Air Transport. Policy Statement. See note 39 11

13 Conflict with US and EU Law The nationality or citizenship requirement for airlines comes into question as the EU has now transformed itself from a land of 25 separate nations into one single community of member states. Current EU law affirms that all members of the EU cannot discriminate against another member state for entrance into its own domestic market. Meaning, Spain cannot prevent Romania from owning or operating an airline within Spain. The E.U. allows for the seamless movement of goods, services and people as well as capital investment and ownership rights. Previously in regards to air travel, each member state would negotiate bilateral treaties with other countries individually. With the new EU laws regarding competition, the citizenship/nationality ownership rule cannot be applied to countries within the EU. The nationality and citizenship requirement could only be applied to Non-EU air carriers. An issue arises on how the U.S. would treat an EU airline, whose ownership may be vested with one or more E.U. citizenship. The U.S. with its bilateral Open Skies Agreements would become the legal barrier preventing a company, for example Air-Slovenia, from operating routes originating in Portugal to the U.S. The Open Skies Agreement with Portugal only covers airlines owned and controlled by a Portuguese citizen. Air-Slovenia, having European citizenship, under the current U.S. law, would not meet the ownership requirement to provide air service between Portugal and the U.S. However, under Ownership and Control Requirements, contained in Article 4 of EC Council Regulation No 2407/92, Air-Slovenia would be legally permitted to fly any route within the E.U., but not to third party states. The European Council of Ministers, in an effort to gain control over negotiating aviation regulations and treaties with other countries outside the EU, took its case to the European Court 12

14 of Justice (ECJ). It won a Mandate 43, giving it the right to negotiate on behalf of the entire EC on the issue of foreign ownership requirements for Non-EU airline carriers. Now the EU possesses greater leverage at the negotiation table against the U.S, by speaking in one voice as one community, the EU hopes to push for greater liberalization of the overall aviation industry through a relaxation of current ownership requirements. Nonetheless, these control measures were put in place for legitimate reasons. Economically and politically, each country wanted to protect their domestic aviation market and domestic carriers from becoming controlled by foreign entities. Key Issues Relating to Changes in Foreign Ownership Requirements Domestic competition: From the beginning, every country wanted to protect their domestic markets and domestic carriers while exploiting opportunities to enter into international markets. However, no country would allow new entrants into their domestic market without reciprocity, in the sense that access should be granted equally. This does not work particularly well for the airline industry, mainly because the U.S. and the E.U. possess the largest markets in the world, currently accounting for 55% of all commercial air traffic. 44 Both the U.S. and the E.U. stand to lose more than they could gain by allowing foreign carriers access into their lucrative domestic aviation markets. Due to the dire financial situation that the commercial aviation industry finds itself in, airlines are seeking additional capital investment to provide operating funds to survive the reduced passenger traffic and revenues and to avoid bankruptcy. The governments are beginning 43 Henri Wassenbergh A Mandate to the European Commission to Negotiate Air Agreements with Non: EU States: International Law verse EU Law. Air & Space Law Vol 28/3 June Martin Staniland, Transatlantic Air Transport: Routes to Liberalization European Policy Paper No. 6, P

15 to recognize this fact. As such, the Department of Transportation believes that the ability to access international capital markets is even more valuable to the airlines in the current economic environment. 45 Stated another way, both the U.S. and E.U. recognize that the current regulation regarding foreign ownership is preventing much needed capital investment and overdue restructuring in an industry teetering on the brink of bankruptcy. National security The United States Department of Defense (henceforth referred to as DOD) views liberalization of the foreign ownership requirements as a threat to the national security of the U.S. The DOD relies on the Civil Reserve Air Fleet 46 (henceforth referred to as CRAF) program to enhance the airlift capabilities of the armed forces. CRAF is considered a critical component of America s military readiness. According to the Brattle Group report, under the CRAF program, U.S. commercial air carriers pledge to provide military airlift in a defense emergency in exchange for exclusive access to $2 billion in U.S. government peacetime business. 47 DOD officials fear that allowing foreign investors to acquire U.S. air carriers would jeopardize the military s dependable access to this emergency capability. There is the potential for U.S. air carriers owned by foreign entities to refuse to participate in the CRAF program or not allow aircraft to be used if they disapprove to the military objective. The most recent usage of the CRAF program occurred during the preparation phase of Operation Iraqi Freedom. Almost 100 aircraft were used to transport troops and cargo to the Middle East region during If 45 GAO Report on Airline Industry 46 Executive Order No , 16 Federal Register 1983 (Feb 28, 1951) and reaffirmed by the National Airlift Policy, National Security Decision Directive 280, June 24, Brattle Group Report to EU Commission 48 CRAF Activation Announced from the United States Department of Defense No (703) (media) IMMEDIATE RELEASE February 8, 2003 (703) (public/industry) 14

16 those carriers that participated in the CRAF were owned by foreign entities and did not agree with the U.S. for unilateral military action against Iraq, they could have prevented the military from using the CRAF program. However, this point is weakened on the knowledge that the DOD currently has the Maritime Security Program (MSP) and the Voluntary Intermodal Sealift Agreement (VISA) program. 49 These programs call for selected shipping companies to carry cargo in times of military conflict for the Armed Forces of the U.S. In exchange, the shipping companies are contracted for peacetime cargo shipping. For the VISA program, Maersk, a Danish-owned shipping company, handles more than 50% of all DOD peacetime cargo. 50 International Alliances Bilateral open skies agreements between the United States and many EU member states have improved the access, level of integration, and volume of travel across the Atlantic Ocean. Due to the restrictions on ownership and investments, international alliances (and code shares) are used to circumvent the various restrictions that limit airline integration and efficiencies. 51 Michael Whitaker, Vice President of United Airlines says alliances do not allow carriers to achieve the integration benefits that would flow from the full integration that would arise from permitting large foreign equity shares in U.S. carriers. He further explains, that while alliances have brought significant benefits to carriers and travelers, allowing foreign ownership offer the possibility of achieving additional price, service and efficiency improvements by encouraging 49 John Graykowski Open Aviation for a Global Industry: Removing the Last Barrier to Airline Competition (August 2003) Note: These selected companies must receive Top Secret National Security Clearance 51 Brattle Group Report to EU Commission 15

17 the free flow of capital, permitting alliance deepening and facilitating the exchange of expertise and technology. 52 Part IV: An overview of the E.U. s all-inclusive goal for a Transatlantic Common Aviation Area and the step-by-step approach of the U.S. Open Skies Initiative Split in Vision: Different Perspectives on the future of Aviation market Despite the success of airline deregulation in their domestic markets, and the benefits from partial liberalization of the transatlantic market, the U.S and E.U. still maintain substantial controls on transatlantic competition and investment in aviation through ownership regulations of airlines. Currently, foreign investment limits are capped at 49.99% in the E.U. and 25% in the U.S. 53 This section will outline the two perspectives and proposed solutions to bringing the aviation industry in line with today s globalization movement. U.S. Open Skies Currently the bilateral agreements negotiated by the U.S. are called open skies agreements. Pioneered by the Bush Administration in 1992, then Secretary of Transportation Andrew H. Card Jr. announced a plan designed to liberalize to the maximum extent the aviation markets between the U.S. and Europe. 54 Specifically, Secretary Card states that we will now offer to negotiate open skies agreements with all European countries willing to permit U.S. carriers essentially free access to their markets. 55 This statement was an attempt by the 52 Michael Whitaker, Vice President of United Airlines remarks 53 Camesasca, P., Goeteyn, G., Soames, T., European Aviation Law: New Wings Unfolding Air & Space Law,Air & Space Law, Vol. 29/2 (April 2004), page Angela Edwards, Comment Foreign Investment in the U.S. Airline Industry: Friend or Foe see note See note 54 16

18 U.S. government to open its domestic market on the basis of reciprocity with its European counterparts. According to current Undersecretary of Policy in the U.S. Department of Transportation, Jeffrey N. Shane, the open skies agreements mean more service to more cities around the country, creating jobs, enhancing efficiency, and providing travelers with a variety of new travel options. Among a number of important innovations in that accord was an agreement by the U.S. to treat E.U. airlines not as national carriers allowed to fly to the U.S. only from their individual home countries, but rather as E.U. carriers eligible to originate flights anywhere in E.U. territory to any point in the U.S. and beyond. 56 He also remarked about the irrationality of continued restriction of foreign ownership of airlines in a global market. The U.S. Open Skies step-by-step approach is seen as the best possible resolution to reaching the goal of eventual liberalization of the commercial aviation industry. Step-by-Step Approach The Open Skies policy enables countries to negotiate bilateral agreements that essentially deregulate international travel between the U.S. and the other country. The typical agreement allows U.S. carriers to fly from the U.S. to any point in the other country, with beyond rights and no restriction on fare or frequency of service while granting reciprocal rights to the other country s carriers. 57 Instead of completely opening up the domestic market to foreign competition and investment, the U.S. government seeks a slower, step by step approach to liberalization. As such, the U.S. is unwilling to relinquish regulatory control over its own market, unless there is a comparable advantage gained for its domestic carriers in the international market. 56 U.S. Urges More Liberalization In Air Services with China, EU Airport Council International-North America Air Services Seminar- Remarks by Jeffrey N. Shane, Under Secretary for Policy, DOT Dec Kenneth J. Button, Opening U.S. Skies to Global Airline Competition CATO Institute p. 5 17

19 Article Three of the Open Skies agreement is the core issue regarding the attempts to limit the liberalization of the aviation industry. It stipulates that governments will determine which carriers are allowed to provide air-service on international routes, based not on safety requirements or service and capacity capabilities. Instead air carriers will be chosen based upon political and diplomatic means. Furthermore, Article 3(2)(a) restates the ownership requirement for U.S. carriers, stating they must be controlled and owned by U.S citizens, or the foreign carrier must be owned by a person or company of that country s citizenship. Article 3(2)(a) reinforces the Federal Aviation Act of 1958, limiting the access for foreign investors to U.S. carriers and preventing competition within the U.S. domestic aviation market. ii One major complaint about the open skies agreements is that they stop short of complete liberalization. Professor Button from George Mason University points out that by shielding its own domestic market from competition; the U.S. has weakened its case for international air transport liberalization. 58 In particular, the Open Skies Agreements deny any person or corporation not of U.S. citizenship the ability to own and control an existing U.S. domestic air carrier, or establish a new one, a stipulation better know as the right to establishment. Furthermore it places restrictions on important traffic rights, such as a foreign carrier s right to provide domestic service, know as cabotage. 59 The E.U. had issues with the U.S. negotiating open skies agreements with certain member states, effectively gaining quasi-cabotage rights within Europe. Jacob Warden from Northwestern University School of Law acknowledged that although U.S. carriers could not fly true domestic routes within Member States (i.e. Paris to 58 Kenneth J. Button, Opening U.S. Skies to Global Airline Competition CATO Institute p Brattle Group report to EU Commission 18

20 Marseille), they could establish cross-border hub and spoke networks (i.e. creating a hub in Frankfurt, with spokes to Paris and Marseilles). 60 E.U. Transatlantic Open Aviation Area Agreement Since solidifying into a community represented as one legal entity, the E.U. is seeking an all in one solution for liberalizing the international aviation industry. Referring back to the Mandate 61 awarded to the European Commission by the European Court of Justice, it also gave the EC the power to negotiate, in consultation with a special committee appointed by the Council, a comprehensive bilateral agreement aimed at creating an Open Aviation Area, within which E.U./U.S. air transport would be fully liberalized. 62 The E.U. was now in position to put forth a comprehensive plan to achieve their desired goal of gaining broad access into the domestic and international markets in the U.S. The U.S. was willing to grant access to individual countries on the basis of reciprocity while the E.U. seeks to create an agreement that would bridge the gap left by the Open Skies Agreements. The proposed solution was the Transatlantic Open/Common Aviation Area Agreement (henceforth referred to as TCAA), which by definition, would eliminate all restrictions on foreign ownership and combine the deregulated U.S. domestic market with the liberalized E.U. single market to create a free trade area in air transport. 63 In the article titled, European Aviation Law: New Wings Unfolding it suggests that the proposed TCAA would eliminate the regulatory barriers that currently impede consolidation between E.U. and U.S. carriers and would enable 60 Warden, Northwestern Journal of International Law & Business; Fall 2003 page Henri Wassenbergh A Mandate to the European Commission to Negotiate Air Agreements with Non: EU States: International Law verse EU Law. Air & Space Law Vol XXVIII/3 June Air & Space Law, Vol 29/2 (April 2004), see note European Union Factsheet: Transatlantic Open Aviation Area Agreement~Launch of EU/US Air Services Negotiations. 19

21 significant re-structuring to take place within the aviation industry. 64 Compared to the Open Skies Agreement, the TCAA would eliminate any restriction for investors or airlines from operating within the Common Aviation Area. E.U. nationals or companies from any Member state can buy or set up an airline in any other Member State. 65 If adopted, the TCAA would become the essence of true globalization. TCAA Conflicts with Chicago Convention The proposed TCAA directly conflicts with Article 7 of the Chicago Convention which prevents cabotage, it states: Each state shall have the right to refuse permission to the aircraft or of other contracting States to take on in its territory passengers, mail and cargo carried for remuneration or hire and destined for another point within its territory. Each state undertakes not to enter into any arrangement which specifically grant any such privilege on an exclusive basis to any other State or an airline of any other State, and not to obtain any such exclusive privilege from any other State 66. Due to the national security, safety oversight and domestic carrier competition concerns, the drafters of the Chicago Convention made cabotage illegal. Instead, the Chicago Convention left the decision to the individual members to determine the restrictions that could be placed on airlines to conduct business within the domestic markets of other member nations. The degree of change is from one extreme, the Chicago Convention that limited access and allowed for bilateral agreement, to the opposite extreme, the TCAA and unlimited access and free movement of capital and services. With the proposed TCAA, these restrictions embedded in the framework 64 Air & Space Law, Vol. 29/2 (April 2004), page 132. see note note Brattle Group Report to EU Commission 66 Chicago Convention Charter 20

22 of the current aviation market since its inception, would be completely removed. One option to ensure the legality of the TCAA would be to amend the Chicago Convention, introducing a change to Article 7 and its restriction on cabotage. Part V: An assessment of the compromise towards which the two sides should work. Conclusion The most equitable solution is for the E.U. and the U.S. to continue working towards the goal of complete liberalization within well defined trading blocks, similar to the proposed TCAA. The U.S. approach of step-by-step ensures that decisions made are well advised and take into account the concerns and interests of all parties involved. The right of establishment clause, which designates that any company must register within the country it wants to operate in, could provide the protection the U.S. seeks against foreign control of the domestic market. The deregulation of the U.S. aviation market in 1978 and the E.U. market in 1997 unlocked great benefits for end-consumers. 67 Similar results can be expected with the elimination of restrictions for foreign ownership. Through this research, it was uncovered that the political fears of foreign domination and the desire to protect their domestic markets from foreign competition are what prompted the drafters of the Chicago Convention to erect barriers to entry that would stand for over 50 years. 68 The industry needs capital to flow freely and flexibility for operations as we move into the 21 st Century. The Open Skies Agreements and the TCAA offered to open up the air transport industry in slightly different fashions. Other suggestions, such as the DOT proposal to raise the ownership requirement from 25% to 49%, to bring it in line with current EU legislation, does not 67 Benefits include lower fare, more options (competitors to choose from), and more offers for destinations along with high frequency of service. 68Angela Edwards, Comment Foreign Investment in the U.S. Airline Industry: Friend or Foe see note 30 21

23 offer a comprehensive, viable option to amend the problems crippling the aviation industry. Investment restrictions are a sensitive subject, but given the vital contribution that air service makes to our economies and to our daily lives, we must begin looking at ways for airlines to have increased access to the pool of global capital. 69 The best solution for liberalizing the commercial aviation industry is to have the TCAA as an ideal model for which to strive for, but maintaining a step-by-step approach towards that end. End Notes i First Freedom - The right to fly and carry traffic over the territory of another partner to the agreement without landing. (Almost all countries are partners to the Convention but some have observed this freedom better than others. When the Korean airliner lost its way over Soviet air space a few year ago and was shot down, the Soviet Union (among other offenses!) violated this First Freedom.) Second Freedom - The right to land in those countries for technical reasons such as refueling without boarding or deplaning passengers. Third Freedom - The right of an airline from one country to land in a different country and deplane passengers coming from the airline s own country. Fourth Freedom - The right of an airline from one country to land in a different country and board passengers traveling to the airline s own country. Fifth Freedom - This freedom is also sometimes referred to as 'beyond rights'. It is the right of an airline from one country to land in a second country, to then pick up passengers and fly on to a third country where the passengers then deplane. An example would be a flight by American Airlines from the US to England that is going on to France. Traffic could be picked up in England and taken to France. Sixth Freedom - The right to carry traffic from one state through the home country to a third state. Example: traffic from England coming to the US on a US airline and then going on to Canada on the same airline. 69 Remarks by Leo Mullin, U.S. Secretary of Transportation. June 2, 2003 at IATA 57th Annual General Meeting 22

24 Seventh Freedom - The right to carry traffic from one state to another state without going through the home country. Example would be traffic from England going to Canada on a US airline flight that does not stop in the US on the way. Eighth Freedom - This is also called cabotage and almost no country permits it. Airline cabotage is the carriage of air traffic that originates and terminates within the boundaries of a given country by an air carrier of another country. An example of this would be an airline like Virgin Atlantic Airways operating flights between Chicago and New Orleans. source: ii The major issue concerning the Open Skies Agreements is Article Three. Under the heading Designation and Authorization it states: 1) Each party shall have the right to designate as many airlines as it wishes to conduct international air transportation in accordance with this Agreement and to withdraw or alter such designations. Such designations shall be transmitted to the other Party in writing through diplomatic channels, and shall identify whether the airline is authorized to conduct the type of air transportation specified in Annex I or in Annex II or both. 2) On receipt of such a designation and of applications from the designated airline, in the form and manner prescribed for operating authorizations and technical permissions, the other Party shall grant appropriate authorizations and permissions with minimum procedural delay, provided: a) Substantial ownership and effective control of that airline are vested in the Party designating the airline, nationals of that Party, or both; 23

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26 10. Duchene, Dennis A., The Third Package of Liberalization in the European Transport Sector: Shying Away from Full Liberalization. Transportation Law Journal. 119, 128 (1995) n Edwards, Angela, Comment Foreign Investment in the U.S. Airline Industry: Friend or Foe, Emory Int l L Review: (1995) n. 2 Last accessed January 10, European Commission on Aviation. Ownership and Control Requirement-Article 4 of EC Regulation No. 2407/92. European Commission. Brussels: E.C., Executive Order No < Last accessed January 28, Federal Aviation Act of 1958, Pub L. No , 72 Stat Friedman, Eli A., Comment, Airline Antitrust: Getting Past the Oligopoly Program, U. Miami Business Law Review, 121 (2001) n GAO Report: U.S. General Accounting Office. Commercial Aviation: Issues Relating to Foreign Investment and Control of U.S. Airlines, GAO-04-34R.Legislative Report Briefing for the Subcommittee on Aviation. Washington D.C., 2003: GAO, Graykowski, John E. In support of Fiscal Year 1999 Authorization for the Maritime Administration Committee on National Security U.S. House of Representatives, October source - < 18. Horn, J., Moselle, B, Reitez, J., Robyn, D. "The Economic Impact of an EU-US Open Aviation Area Report to the European Commission Directorate-General Energy and Transport by the Brattle Group, December Hubbard, Buckles, & Weckenmann, Survey of Aviation Law < Last accessed January 10, " ICAO: What it is, What it Does." FICSA Magazine, (2002): < Last accessed January 28, Polley, Romina, Defense Strategies of National Carriers. Forham Int l Law Journal. 170, 178 (1999) n Rowell, David M, Freedoms of the Air : < Last accessed December 10, Scharpenseel, Moritz Ferdinand, Consequences of E.U. Airline deregulation in the context of the Global Aviation Market. Northwest Journal of International Law & Business. 91, 95 (2001) n

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