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End to Open Skies in the US?

09-March-2015
09-March-2015 12:53
in Aviation and Travel
by Christopher McCarthy

4KBW, Chambers of Lawrence Power looks at the challenges to Open Skies policy by major US airlines.

 

Open Skies policies have been developed bilaterally and internally in the US for a number of years. The US airline industry was deregulated by Congress in 1978, in the EU however intra-EU markets deregulated more slowly with key reforms being completed in 1997. Notwithstanding, the structure of US and EU markets are strikingly similar, with large legacy “pre-reform” carriers and the newer low-cost no-frills airlines. For example, Delta and Southwest in the US or KLM/Air France and Ryanair in the EU.

Open Skies agreements were, to some extent, foreseen as far back as 1944 with the introduction of the Chicago Convention. Many states now have agreements which may go as far as to determine the number of flights operated by certain carriers, or even to the level of fares to be charged. US major carriers have successfully fought tooth and nail for agreements which were “antitrust immunised” in other words, pricing or transport agreements which would otherwise be illegal under US law.

Since liberalisation US carriers have leveraged all these powerful advantages and a profitable air travel system is without a doubt a national interest. We only have to look at the debate surrounding the expansion of London airports to see the importance of air travel in economic development.

The benefits of these agreements are obviously keenly felt amongst consumers who have access to more routes and inter-connections, frequent flyer programmes, better pricing and customer-service oriented business models. However, airlines shareholders’ have also benefited from these liberalisations in increased profitability and brand awareness.

Not to mention Open Skies has ushered the increase in travel and tourism jobs, better cargo routing and general economic development, a recent study on the impact of air service liberalisation found that traffic growth after Open Skies’ agreements averaged between a 12 to 35% increase. One simulation regarding the US and EU air service agreement (looking at the US-UK market) found that it would produce an almost 29% increase in traffic. Bringing over 100,000 new jobs and roughly an incremental GDP impact on both the US and UK of roughly $7.8 billion. The US State Department has also quoted that the Memphis-Shelby County Airport Authority in 2005 concluded that the direct service between Memphis and Amsterdam on KLM has a $120 million annual impact in Tennessee and supports 2200 local jobs.

Recently however major US carriers have been lobbying in Washington and with the EU over perceived challenges and threats from foreign carrier entrants. In particular current applications from low-cost long haul Norwegian Air International to enter the US markets from hubs in Ireland and from the increase in flights from government subsidised Middle Eastern airlines have met with much consternation among the big carriers. They cite foremost the unfair competitive advantages entrants can take advantage of and pilots’ unions are equally unenthusiastic about perceived threats to internal markets and conditions.

It has yet to be seen how the US or EU legislators will deal with the concerns of the major US carriers have in relation to Open Skies agreements. Like with most things, a balance must be struck between liberalising markets and keeping the playing field level when airlines take advantage of the benefits of Open Skies agreements. We await in the short term the result of Norwegian’s application for further entry into the US Market and how far the US or EU government are going to reform current arrangements.

Please enjoy other articles from 4KBW’s Aviation Team in particular the impact of the latest decisions regarding interest and limitation periods.

 

Christopher McCarthy

 

© 2015 Chambers of Lawrence Power, 4 King’s Bench Walk, Temple, London, EC4Y 7DL. Tel: 020 7822 8822.  www.4kbw.net  email jr@4kbw.net