Saturday, March 7, 2009

Slouching Toward Protectionism

The House Transportation and Infrastructure Committee approved the FAA Reauthorization Act of 2009.  Section 801 of the bill, as discussed last week on the blog, could foreclose to foreign citizens all middle and upper management positions in U.S. airlines.  The provision, which was first made part of the stillborn 2007 FAA Reauthorization Act by Rep. James Oberstar, is clearly antithetical to the U.S.'s pursuit of "Open Skies" and is more than enough to warrant alarm among EU leaders looking to enhance the 2007 U.S./EC Air Transport Agreement.  Now Rep. Oberstar has gone a step further, attaching his proposal to sunset antitrust immunity for transnational airline alliances to the FAA legislation.  The result is a protectionist package which could set air transport liberalization back decades.

It is difficult to discern just what Rep. Oberstar is trying to achieve.  If his concern is primarily that antitrust immunity has anticompetitive effects, then he should push for what the airlines truly need: the ability to execute transnational mergers.  But as Section 801 makes plainly clear, Rep. Oberstar has no interest in opening up U.S. carriers to foreign investment or even substantial foreign involvement.  International airline alliances have been the industry's ingenious (albeit unstable) response to nationality restrictions; take them away and the airlines are back to the "good old days" of interlining agreements which are both inefficient and costly to consumers.  Equally troubling is that U.S. airlines may lose many of their hard won traffic rights into the EU.  Under the 2007 agreement, the Community or, perhaps, the individual Member States acting unilaterally, may suspend rights if they are not satisfied that sufficient progress has been made toward a second stage agreement.  There is likely nothing the U.S. could offer its primary aviation trading partner to compensate for the loss its carriers' capacity to form strategic partnerships. 

Those entertaining the notion that Rep. Oberstar's proposals are either prudent or wise ought to reflect on the now-defunct air services agreement signed between the U.S. and the United Kingdom in 1977 (commonly referred to as "Bermuda II").  Seen as the high water mark of British protectionism, Bermuda II imposed artificial and highly politicized controls on fares, routes, and capacity and kept London Heathrow locked to all but two American carriers.  Only with the signing of the 2007 U.S./EC agreement was Bermuda II fully overcome.  U.S. airlines cannot afford to operate under these constraints again and yet Rep. Oberstar's own brand of protectionism may lead to reinaugurating them as normative for international civil aviation.  At that point the transatlantic marketplace becomes the theater for an aviation trade war: U.S. airlines will be the casualties and consumers the collateral damage.

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