European Affairs

Future of “Open Skies” in Peril? New Carriers from Norway and Gulf Spark Debate     Print Email

Brian BearyA battle is raging in the world of commercial aviation that is pitting legacy European and American airlines against newcomers eager the shake up the market. The United States and European Union must decide whose side, if any, to take, all the while avoiding the unraveling of existing Open Skies agreements that were concluded to foster greater competition.

The spotlight is shining on an effort by the low-cost carrier, Norwegian, to crack open the transatlantic market, and on a bid by Persian Gulf carriers, Emirates, Etihad and Qatar Airways, to grow their share of inter-continental passenger traffic.

At an aviation industry conference on March 17, Doug Parker, CEO of American Airlines, warned that the Gulf carriers “threaten our future” due to “the uneven playing field that exists.” He alleged that the three state-owned companies have received more than $40 billion in public subsidies since 2004, making it increasingly hard for US carriers to compete. “European carriers are getting squeezed out of their own market” too, he added. Emirates, Etihad and Qatar have been growing rapidly, flying passengers to Asia, Australia and across the Atlantic by offering cheap, conveniently-connected alternatives to legacy carriers. Emirates, for instance, which uses Dubai as its main hub, operates a direct flight from Milan to New York with tickets from about $800 per return trip and is adding two or three new US destinations a year.

At the same conference, Etihad CEO James Hogan hit back against Parker's accusations, saying “the world's two largest airline markets, the US and EU, are closed,” with governments “giving their own airlines a huge advantage in scale and in scope.” Hogan said that many legacy European and American carriers have benefited from years of government bailouts, tailor-made bankruptcy protection regimes, tax breaks on fuel purchases, and immunity from anti-trust law. While Etihad is government-owned, he noted “that's how most airlines started and how many airlines still operate today.” Since being founded in 2003, Etihad has been “a David who's been fighting a Goliath,” he claimed. As for the subsidies claim, he said 76 financial concerns provided more than $10.5 billion to Etihad in loans and that the firm complied with international financial reporting standards.

In Brussels, the Gulf carriers were a hot topic at a lunch of EU transport ministers on March 13. Supporting Europe's legacy carriers were France and Germany, which urged the European Commission to “adopt a common strategy to put an end to these practices.” The practices they were referring to were the alleged subsidies outlined by American, Delta and United in a 55-page report their CEOs presented to senior Obama administration officials in January. The US administration gave a first response to this in March, relaying some 20 questions to the US carriers seeking clarification of the claims. A Department of Transportation (DOT) spokesperson said: “we are taking the concerns raised by some of our US passenger carriers seriously and are in the process of reviewing the report.”

The European and American markets have witnessed substantial industry consolidation in recent years via mergers and takeovers. American, Delta and United now control the lion's share of the US market, while the dominant players in Europe are Air France, which merged with Dutch KLM; and Lufthansa, which took over Austrian Airlines and Swiss and owns 45 percent of Brussels Airlines. British Airways has merged with Spain's Iberia to form IAG but the latter's CEO, Willie Walsh, is striking a different tone to Air France and Lufthansa and declining to join the anti-Gulf campaign.

Successive US administrations, Democrat and Republican, have negotiated 114 “Open Skies” agreements with foreign governments since the 1990s. By abolishing limits on the number and frequency of destinations that airlines can serve, these agreements have let newcomers like the Gulf carriers into the market. Their success has raised eyebrows, especially after the November 2013 Dubai Airshow where Emirates, Etihad and Qatar between them placed orders for several hundred wide-bodied planes, including Boeing's 777X and the Airbus' double-decker 380. With wide-bodied planes used mainly for intercontinental flights, it was clear from these orders that they were harboring ambitions of greatly expanding their market share. One market that will remain shut to them, however, is US domestic flights, which are firmly ring-fenced from all foreign competitors, including European ones.

The European Commission, for its part, has immersed itself into the legally complex and diplomatically painstaking task of coordinating the patchwork of aviation agreements concluded between individual EU member states and third countries, with EU-wide “Open Skies” agreements. The brightest jewel in the Commission's crown is the EU-US “Open Skies” agreement first concluded in 2007, with a protocol added in 2010. This is now under threat due to a campaign from the legacy carriers. In December 2013, Norwegian, a low-cost European carrier founded in 1993, applied to the US administration for an operating permit for its newly-created affiliate, Norwegian Air International (NAI). Norwegian hopes, via NAI, to expand its share of the transatlantic air passenger market. In early 2014, Norwegian got permission from the Irish authorities to use Dublin airport as NAI's seat. The company wanted to have an EU base as this lets it benefit from the numerous “Open Skies” agreements that the EU has concluded with third countries (Norway is not a member of the EU).

Norwegian mistakenly thought that the requisite operating permit from the U.S. Department of Transportation (DOT) would soon arrive. Under the EU-US Open Skies agreement, decisions to grant permits taken by one EU country's authorities are supposed to be processed without any undue delay by the US authorities and vice versa. But NAI's business model – headquarters in Dublin, flights to operate from London Gatwick, cabin crew hired under Singaporean contracts with some staff domiciled in Bangkok (another hub) – led to accusations it was creating 'flags of convenience' and engaging in social dumping (using cheaper labor than at their operating site). The management of the legacy carriers joined forces with their labor unions, peppering the DOT public docket with assertions that the NAI business model breached article 17 bis, which says the “Open Skies” agreement should not be used to lower labor standards.

Norwegian has had its defenders: the European Commission, US cargo carrier Fedex which relies heavily on “Open Skies” accords to grow its business, the airports NAI would serve, and Ireland, NAI's seat. The two men who negotiated the original EU-US Open Skies agreement, John Byerly for the US, now retired from the State Department but lobbying for Norwegian and Emirates, and Daniel Calleja at the European Commission, both strongly back Norwegian. Speaking at the National Press Club in February, Byerly said the EU-US agreement's article 17 bis that he negotiated was never intended to empower the US administration to act like a unilateral labor tribunal. Byerly also noted sarcastically, in response to the social dumping claim, that the average salary of Norwegian's pilots, at $160,000 a year, was “not exactly a Bangladeshi sweatshop wage.”

Contrary to dozens of other applications processed by the DOT under the EU-US accord, the NAI application is pending fifteen months after being submitted. An industry source closely following the dossier attributed the delay to pressure from the White House, which in turned is responding to pressure from labor unions, one of President Obama's core constituent bases. Whatever the reason, the DOT’s refusal to even give a time-line for taking a decision has incensed the European Commission, leading it to officially declare the US in breach of the Open Skies agreement by the delay.

Meanwhile, the US DOT along with the EU Commissioner of Transportation are trying to figure out what to do with the Gulf carriers. Speaking to reporters after a keynote speech at the aviation conference, American Airlines CEO Doug Parker said he wanted the US government to put a freeze on authorizing new routes for Gulf carriers until “consultations” were completed. The US has an “Open Skies” agreement with the United Arab Emirates (home of Emirates and Etihad) since 1999 and one with Qatar (home of Qatar Airways) since 2001. The legacy carriers and labor unions have embarked on a wide-reaching campaign against the Gulf carriers, which includes a website and various print, radio and television ads. Opponents of that campaign say it threatens to reverse the decades-old, bipartisan open skies policy but supporters deny this, insisting they support open skies too, but just want to ensure a “level playing field.”

In Brussels, the top EU official handling the issue is transport Commissioner Violeta Bulc, a Slovenian only in the job since November. Bulc said she would ask the EU member states to give her a mandate by the end of 2015 to negotiate an EU-wide air transport agreement with the governments of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE. The big question is which direction will this mandate go? Will Bulc push for a more protectionist regime, restricting access that government-subsidized Gulf carriers have to the EU, in response to Franco-German demands? Commission sources say that Bulc will more likely use the subsidies questions as leverage to negotiate a better deal, for instance, by calling for a transparency clause that requires airlines to disclose their sources of financing. However, given the Commission's longstanding attachment to the liberalization agenda, she will probably push for an agreement that is more liberalizing than protectionist. The intentions of the Obama administration are less clear. The DOT spokesperson said “we are in the early stages of thoroughly reviewing the matter in close coordination without inter-agency partners, the Departments of Commerce and State.” At the Aviation Summit, Etihad CEO Hogan made a case for market opening, arguing “liberalization encourages new market entrants who act as catalysts for growth.” The challenge for Hogan and his fellow newcomers will be to persuade the governments of the EU and US to continue along the liberalizing path despite the risk of a further erosion of the legacy carriers' market shares.

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