Monday, March 29, 2010

First Thoughts on U.S./EU Protocol

Whatever merits possessed by the brand new "second stage" Protocol to the 2007 U.S./EU Air Transport Agreement, they are overshadowed by the inability of the parties to reach a concrete deal on lifting U.S. foreign ownership restrictions for airlines. At the same time, to be fair, it is worth mentioning that few (if any) really believed the U.S. was prepared to endow EU Member States or their nationals with substantial investment rights. The Democrats are beholden to labor and labor has made it loud and clear that liberalizing crossborder airline investment is not in their interests. What were U.S. negotiators supposed to do? They couldn't very well promise the Europeans rights they had no authority to give. As for the EU, it could have tried to play hardball. Perhaps issuing a notice of suspension this November would have woken Congress up. Or maybe it would have sparked an aviation trade war that would have been needlessly destructive to both sides' airlines.

Now the threat of suspension is gone. If the Protocol is adopted by the EU Council of Ministers in June, Article 21 of the 2007 Agreement, which contains the suspension clause, see earlier discussion of the clause here, will be deleted and replaced with new provisions which condition additional traffic rights for both parties on each side taking further action to meet the other's demands. For the EU, once it takes the necessary legislative steps to give the European Commission authority to oversee (and potentially revoke) night flight restrictions at EU Member State airports, EU airlines will be given seventh freedom rights for passenger and combination passenger/cargo service from five points in the U.S. So, for example, Lufthansa could operate a stand alone Chicago/Sao Paulo service if the new rights are triggered. For the U.S., once it provides EU Member States and their nationals the right to own and control its air carriers, U.S. airlines will receive seventh freedom passenger and combination service rights from five points in EU territory.

Will this contingent exchange of new traffic rights for additional concessions work? Given the priority the U.S. assigned to the night flight restrictions issue during the negotiating rounds, it would have made more sense for the EU to hinge reforming its night flight rules on being granted further U.S. investment opportunities. As it stands, the U.S. has very little incentive to take bold action on foreign ownership when all that awaits are limited seventh freedom rights--rights which U.S. air carriers are unlikely to use so long as they have alliance partners to help them provide worldwide service.

Unlike the 2007 Agreement, the Protocol provides no timetable for future negotiations. The U.S. could take no action on foreign ownership rights for a decade and risk nothing. In the meantime, the EU continues to pursue comprehensive air services agreements which envision full crossborder investment opportunities and the right of both parties to establish new airlines in the other's territory. As "progressive" as the first U.S./EU Agreement was when it was signed just three years ago, it could quickly look like a dinosaur if the EU continues to find success in providing authentic liberalization with global partners such as Canada, Australia, and its regional neighbors.

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