Wednesday, March 31, 2010

Illegal Aid for Air France?

Irish low-cost carrier Ryanair filed suit against the French Government earlier this month on the grounds it provided illegal State aid to Air France-KLM.  See Heather Smith, Ryanair Sues French Government Over Air France Aid, Irish Independent, Mar. 31, 2010 (available here).  Air France filed a seperate complaint before the European Commission, alleging that Ryanair receives illegal aid from French regional airports.  See Peppi Kivinemi, Air France Files Complaint at EU Against Ryanair, Dow Jones Newswires, Mar. 11, 2010 (available here).

Neither carrier is a stranger to State aid charges.  Since 2004, Ryanair has been in frequent contention with the Commission concerning special tax breaks, landing fee reductions, and other compensation the airline receives in exchange for providing scheduled service to regional airports across the EU.  See earlier blog posts on Ryanair here, here, and here.  In 1991 and 1994, the French Government injected billions of dollars in aid into its compagnie nationale.  While the transactions received scrutiny from the Commission, both were ultimately cleared.  See Andrew Marshall et al., EC Caves In Over Air France State Aid, Independent (London), July 28, 1994 (available here).

March 31, 2010 | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 30, 2010

Antitrust: A Game of Two Sides

Prof. Brian Havel is featured in this month's Airline Business article, "Antitrust: A Game of Two Sides" by David Knibb (available here).  From the summary:

With alliances seeking anti-trust immunity on their Atlantic and Pacific networks, regulators and airline lawyers have their hands full. But what is the framework for these complex investigations and how do you please every jurisdiction?

March 30, 2010 | Permalink | Comments (0) | TrackBack (0)

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.

March 29, 2010 | Permalink | Comments (0) | TrackBack (0)

Friday, March 26, 2010

More from Havel on U.S./EU Protocol

Prof. Brian Havel is quoted in today's story from the Chicago Tribune on the new protocol to amend the 2007 U.S./EU Air Transport Agreement.  See Julie Johnsson, Latest U.S.-EU Airline Deal Likely to Keep Mergers on a Similar Path, Chi. Tribune, Mar. 26, 2010 (available here).

March 26, 2010 | Permalink | Comments (0) | TrackBack (0)

Havel on U.S./EU Second Stage Protocol

Prof. Brian Havel was quoted in today's story from the Financial Times on the new protocol to amend the 2007 U.S./EU Air Transport Agreement.  See Pilitia Clark, Washington Wins Battle of Open Skies, Fin. Times, Mar. 26, 2010 (available here).

March 26, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 25, 2010

U.S./EU Second Stage Protocol Documents

The United States and European Union announced the completion of their second stage talks to their 2007 Air Transport Agreement.  The latest round of negotiations resulted in a new Protocol which amends and replaces part of the 2007 Agreement.  Copies of the Protocol, along with supporting documents, are attached below:

Please check the blog tomorrow and next week for further links and commentary on this important development in international aviation law and policy.

March 25, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 24, 2010

Havel on Boeing/Airbus Ruling

Prof. Brian Havel, Director of the International Aviation Law Institute at DePaul University College of Law, was quoted in the Chicago Tribune's story on yesterday's ruling from the World Trade Organization on subsidies granted to Airbus by European Union Member States.  See Julie Johnsson, Boeing and U.S. Score Big Trade Victory Against Airbus and EU, Chi. Tribune, Mar. 23, 2010 (available here).

March 24, 2010 | Permalink | Comments (1) | TrackBack (0)

Tuesday, March 23, 2010

WTO Rules on Boeing/Airbus Dispute

Earlier today, the World Trade Organization issued its full ruling on the United States' claim (brought on behalf of Boeing) that European aircraft manufacturer Airbus received over $200 billion in illegal subsides from the European Union.  See Christopher Drew & Nicola Clark, W.T.O. Affirms Ruling of Improper Airbus Aid, N.Y. Times, Mar. 23, 2010 (available here).  Though the ruling won't be made public for several months, it appears that only a fraction of the aid Airbus was alleged to have received violated WTO law.  An EU counterclaim concerning illegal U.S. aid to Boeing is still pending.

Blog readers interested in the dispute may wish to consult earlier entries dealing with the Boeing/Airbus dispute: "Preliminary Observations on the Boeing/Airbus Dispute"; "Backgrounder on Boeing/Airbus WTO Dispute"; "EU Will Have to Wait for Boeing Ruling"; and "Havel on Boeing/Airbus Dispute."

March 23, 2010 | Permalink | Comments (0) | TrackBack (0)

Saturday, March 20, 2010

Air Canada Says "No" to Competition

Who is afraid of a little competition?  Air Canada, perhaps.  Earlier this week Calin Rovinescu, CEO of Canada's flagship carrier, issued a series of vitriolic statements against Middle Eastern airline Emirates' call for Canada to provide it with additional traffic rights.  See Nicolas Van Praet, Emirates Aims to Dump Surplus Capacity on Canada, Vancouver Sun, Mar. 15, 2010 (available here).  According to Rovinescu, "Emirates' real aim is to dump its excess capacity resulting from too many wide-body aircraft commitments, including A-380s, into the Canadian market, just as it has elsewhere in the world."  Further, Rovinescu claimed that Emirates, "as a state-owned carrier with access to virtually unlimited capital . . . would siphon passengers from other carriers who are making connections en route and connect them through its Dubai hub instead."

Even if Rovinescu's rhetoric rings with truth, should consumers traveling to, from, or beyond points in Canada care?

First, suppose that Rovinescu is correct and Emirates possesses excess capacity, it does not follow that the carrier is going to "dump" services into the Canadian market in any economically precise sense.  Similar to the concept of predatory pricing in antitrust law, dumping refers to the practice whereby a foreign firm (or firms) sells its goods or services at a price below what it charges for the same goods/services in its home and/or third country markets.  No showing has been made that Emirates plans to do this.

Second, even if Emirates engaged in dumping, any loss sustained by Air Canada would be outweighed by the surplus given to airline consumers.  Passengers flying to or from Canada would have access to more flights to or from more destinations, and with potentially cheaper prices than Air Canada is capable of providing.

Third, dumping is similar to, but not synonymous with predatory pricing, i.e., selling below marginal cost.  Again, there is no evidence that Emirates would sell air services to consumers at a loss.  It would be an irrational tactic anyway.  Were Emirates capable of driving competitors out of certain markets with predatory prices, the carrier would still have to recoup its losses at a later date by resetting its prices to a supracompetitive level.  All that would do, however, is attract other carriers back into those markets to take advantage of the new price structure.  Eventually, rates would be competed down to the competitive level, leaving Emirates to either eat the losses it sustained during the predatory period or forcing it to reengage in predation to again drive out competitors.  All during this time, though, consumers would benefit by having access to cheap airfares.

Fourth, Emirates' ownership profile should be a non-issue.  If Emirates is able to compete down prices on certain routes because of its deep (State) capital reserves, it would again be consumers which reap the benefits.  As Paul Krugman is said to have once quipped, the best policy response to foreign State subsidies is "to send a thank-you note to the embassy."  Quoted in Alan O. Sykes, International Trade: Trade Remedies, in Research Handbook of International Economic Law 62, 106 (Edward Elgar Publishing 2007). 

Given Air Canada's primacy of place in influencing Canadian air transport policy, see, e.g., Michael E. Levine, Why Weren't the Airline Reregulated?, 23 Yale J. on Reg. 269, 294-95 (2006), it seems unlikely that Canada will accede to Emirates' demands.  The "benefit" is that Air Canada will be able to keep itself afloat in markets where it lacks a bona fide competitive advantage; the "cost" will be felt by consumers.

March 20, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 18, 2010

How Do Firm Financial Conditions...

Blog readers may be interested in a new working paper on financial distress and bankruptcy in the airline industry.  See Gordon M. Phillips & Giorgio Sertsios, How Do Firm Financial Conditions Affect Product Quality and Pricing? (Working Paper, Mar. 16, 2010) (available from SSRN here).  From the abstract:

We analyze the interaction between firm choice of product quality and pricing decisions with financial distress and bankruptcy in the airline industry. We consider an airline's choice of quality and price as dynamic decisions that trade-off current cash flows for future demand from consumers. We examine how airline mishandled baggage, on-time performance and pricing are related to financial distress and bankruptcy, controlling for the endogeneity of financial distress and bankruptcy. We find that an airline's quality and pricing decisions are differentially affected by financial distress and bankruptcy. Product quality decreases when airlines are in financial distress, as financial distress reduces a firm’s incentive to invest in quality. In addition, firms price more aggressively when in financial distress consistent with them trying to increase short-term market share and revenues. In contrast, in bankruptcy product quality increases relative to when the firm is in financial distress.

March 18, 2010 | Permalink | Comments (0) | TrackBack (0)

Flying With Heavy Loads

Blog readers may be interested in a new working paper from Ranadeva Jayaskera, "Flying With Heavy Loads" Capital Structure Considerations for the US Airline Industry (Working Paper, Feb. 18, 2010) (available from SSRN here).  From the abstract:

The paper discusses a hidden aspect of a firm’s capital structure through the use of a real options application. It is applied to the US airline industry, characterized by over levered balance sheets, and financial distress. The paper introduces the notion of “financial flexibility”, defined as the freedom (or flexibility) enjoyed by a conservatively geared firm to respond quickly and secure positive NPV projects, as opposed to an over levered firm. This ‘flexibility’ is then valued as a real option using a model based on arithmetic Brownian motion involving a path dependant option pricing framework. It analyses the implications of debt financing in the US airline industry and develops a capital structure model that incorporates the value of ‘financial flexibility’ enjoyed by conservatively geared carriers. In its application to South West Airlines the paper concludes that the optimal capital structure – if the value of financial flexibility is incorporated - should move closer to the origin. A methodology of integrating the value of financial flexibility into the traditional theories of capital structure is proposed and demonstrated that (at least) in the US airline industry, failure to do so can result in a significant misstatement in a firm’s value and its optimal capital structure. This paper makes two key contributions. The notion of valuing financial flexibility as a real option has been introduced previously by Beneda and Nelson (2003). However their quantification of the option value is through a standard Black Scholes equation where the underlying assumptions are not valid in quantifying a real option of this nature and this paper addresses this issue. Furthermore the paper applies the concept of financial flexibility specifically to the US airline industry and develops a conjecture on how this can be incorporated into the traditional theories of capital structure, another contribution to the academic literature.

March 18, 2010 | Permalink | Comments (1) | TrackBack (0)

Wednesday, March 17, 2010

Challenging the EU ETS

Last December, the Air Transport Association, along with U.S. air carriers American Airlines, Continental, and United, filed a legal challenge to the United Kingdom's Aviation Greenhouse Gas Emissions Trading Scheme.  See Press Release, ATA, Application of the EU ETS to US Airlines (Dec. 16, 2009) (available here).  The case has since been referred to the European Court of Justice for resolution. 

The U.K. law implements part of the European Union's controversial regulation which will bring all airlines flying to or from its territory under an emissions trading scheme (ETS) beginning January 1, 2012.  See Commission Decision 2009/339/EC, 2009 O.J. (L 103).  Under the ETS, airlines will have their emissions "capped" at 97% of their 2004-05 levels; the cap will be lowered to 95% in 2013; and the airlines will be forced to purchase 15% of their allowances (carbon credits) under the cap at auction.  Carriers which have experienced growth since 2004-05 will have to purchase additional allowances, either from another airline or industry which is also covered by the EU's ETS. 

U.S. airlines are understandably displeased with the ETS.  Since they will have to purchase at least 15% of their allowances from an EU Member State (the purchase percentage is subject to rise after 2013), carriers have complained that the ETS violates the Chicago Convention's restrictions on the types of fees and duties which may be imposed on international civil aviation.  See Convention on International Civil Aviation, art. 15, opened for signature Dec. 7, 1944, 61 Stat. 1180, 15 U.N.T.S. 295; see also "Guest Post: Frans Vreede on the Dutch Ticket Tax" (elaborating on the scope and applicability of Chicago Convention Article 15).  U.S. airlines have also criticized the ETS for compelling them to effectively subsidize EU Member States by forcing the carriers to purchase emissions allowances.  Nothing in the ETS mandates that the rents captured from the ETS will even be applied back to aviation. 

The extraterritorial application of the ETS raises additional issues under the Chicago Convention.  Article 1 of the Convention codifies the customary international law principle that States have exclusive sovereignty over the airspace above their territories.  Yet the ETS covers emissions which are released outside the geographical space of the EU.  As the ATA puts it:

For example, for a flight of a U.S. carrier from Dallas to London, the proposed legislation would regulate the emissions from that flight on the ground and as it takes off in Dallas, as it flies over Texas, Oklahoma, Missouri, Illinois, Indiana and Michigan, within U.S. offshore territory, over Canada and the Atlantic Ocean. Thus, the EU ETS provisions would regulate the entire flight, even though the flight would be in EU airspace for only a tiny fraction of the journey.

See Press Release, supra.

ETS coverage also extends to emissions released over international waters.  This, according to the ATA, interferes with the International Civil Aviation Organization's designated authority to regulate international aviation over the high seas. See Chicago Convention, supra, art. 12.

It will be interesting to see what (if any) limits the ECJ may place on the EU's authority to impose its ETS on non-EU carriers.  While climate change remains an important political issue in the EU, the agenda for a global solution to the problem has lost considerable steam after the failure of last December's Copenhagen Climate Conference to produce an international accord.  The 1997 Kyoto Protocol to the U.N. Framework Convention on Climate Change recognizes ICAO "as the global instrument for developed countries to pursue a limitation or reduction of greenhouse gas emissions from international civil aviation."  See Press Release, ICAO, Kyoto Protocol Emphasizes ICAO's Role in Addressing Greenhouse Gas Emissions from International Civil Aviation, PIO 25/97 (Dec. 12, 1997) (available here).  Despite this, in 2007 the EU entered a reservation to an ICAO resolution which reaffirmed the organization's singular role in finding an international response to the aviation emissions issue before proceeding to pass its aviation ETS rules.  See ICAO, Consolidated Statement of Continuing ICAO Policies and Practices Related to Environmental Protection, app. A, Assemb. Res. A36-22 (2007), compiled in Assembly Resolutions in Force, at I-54, ICAO Doc. 9902 (Sept. 28, 2007).  If the ECJ should strike down or significantly curtail to the scope of the ETS, will the EU be willing to continue cooperating with ICAO on an authentically global response?  A lot will likely depend on how quickly the ECJ acts.  With ICAO's 2010 Triennial Meeting set to take place this September, many eyes will be on the EU when the topic of climate change inevitably comes up.  A victory or loss before the ECJ could dictate the tone of the meeting.

March 17, 2010 | Permalink | Comments (1) | TrackBack (0)

Tuesday, March 16, 2010

More on the Suspension Clause

As discussed previously on the blog, seeNext Round of U.S./EU Talks,” one of the action items for the ongoing United States/European Union second stage negotiations is the modification or elimination of their 2007 Air Transport Agreement’s suspension clause. Under Article 21(3) of the Agreement, 2007 O.J. (L 134) 4, the U.S., along with any individual EU Member State, may suspend some (or all) of the treaty’s rights if they are dissatisfied with the progress of negotiations after November of this year. (Note: The right of an individual EU Member to suspend rights pertaining to its own territory is a post hoc interpretation by the EU Council of Ministers. Cf. European Commission, COM (2009) 229 final (May 15, 2009)). The ostensible reason for the suspension clause was to ensure the U.S. would stay committed to further liberalization in order to “balance out” concessions. Critics, primarily from Spain and the United Kingdom, charged that the 2007 Agreement provided greater benefits to U.S. airlines, specifically unrestricted access to London Heathrow, while failing to provide comparable concessions to EU airlines such as cabotage rights and foreign investment opportunities.

Whether or not the 2007 Agreement lacks parity is a complex question that can be addressed another time. The more immediate question is what, if anything, ought to be done concerning the 2007 Agreement’s suspension clause. Presumably, neither party desires an aviation trade war. If the U.K., for example, were to return Heathrow to the status quo ante the 2007 Agreement and limit access to only United Airlines and American Airlines, the U.S. could quickly retaliate by rescinding the oneworld Alliance’s recently won (tentative) antitrust immunity. Even if the U.S. refuses to budge on cabotage and foreign investment (which appears to be the case given the current political climate in the U.S.), EU airlines already have a considerable amount of time and resources invested in the current state of concessions. Every major EU carrier—Air France-KLM, British Airways (BA), Iberia, and Lufthansa—are part of a transatlantic airline alliance; all of them provide scheduled services to points in the U.S.; and none of them are looking to return to the days of tightly managed bilaterals with highly circumscribed traffic rights. All of them likely desire more concessions from the U.S. at some point in the future, but surely they, along with negotiators in the EU, know that a trade war would retard progress toward deeper liberalization.

Despite the potentially disastrous consequences which could follow an invocation of the suspension clause, eliminating it entirely is easier said than done. In the context of negotiations leading up to the 2007 Agreement, allowing for ex post suspension secured ex ante concessions. The U.K. (and perhaps Spain) would not have supported the 2007 Agreement had the suspension clause been absent. The U.K.’s reasoning is simple to understand: by assenting to the Agreement, it was sacrificing certain competitive advantages for its flag carrier (BA) in the form of increasing competition between points in the U.S. and Heathrow. The political costs were simply too high unless the U.K. could hold out the possibility that there was more to come for its flag carrier, specifically cabotage and foreign ownership rights. Why would the U.S., which may not be interested in acquiring further concessions from the EU, agree to allow the suspension clause? The political costs were comparably lower. U.S. airlines were poised to benefit under the 2007 Agreement; removing access restrictions at Heathrow and other airports in the EU created new commercial opportunities. While ex post suspension looms, the ex ante concessions for U.S. airlines—which included more than just Heathrow access—made the tradeoff palatable.

Now that both sides are back to the negotiating table, why would the U.K. and other Member States agree to allow the suspension clause to be modified or removed? Removal, though desirable from the standpoint of maintaining commercial certainty, seems unlikely. If the competitive position of BA or other major EU carriers diminishes under the 2007 Agreement, invocation (or threat of invocation) of the suspension clause will appear politically attractive. This is especially true if the EU Member States no longer believe there is any real possibility that the U.S. will make further concessions necessary to enhance EU carriers’ competitiveness. Further, the suspension clause is already in; getting it out—which appears to be more a U.S. priority than an EU one—will require new concessions from the U.S. But, as noted, the U.S. is not interested in making the sorts of concessions certain EU Member States (and their airlines) appear most interested in. The EU Member States have no immediate reason to accept removing the suspension clause.

Modification remains possible, however. The earliest the suspension clause can be invoked is November 2010. If notice of suspension is given at that time, the earliest any suspension would take effect is at the start of the International Air Transport Association’s March 2012 Traffic Season. See Agreement, supra, art. 21(3) (stating that a notice of suspension “shall take effect no sooner than the start of the [IATA] traffic season that commences no less than 12 months after the date on which the notice of suspension was given”). One possibility is that the U.S. could offer a new timetable for further negotiations in exchange for delaying the right to invoke the suspension clause, perhaps for an additional three year period. This would help maintain commercial certainty for both parties’ airlines and perhaps remove some of the latent hostility which accompanies the suspension threat. A similar possibility is that the time between a notice of suspension and the suspension’s effect could be expanded with the requirement that consultations and further negotiations, perhaps through the Agreement’s Joint Committee, would have to take place first. This would provide another avenue for keeping up negotiations, albeit under an ominous cloud.

March 16, 2010 | Permalink | Comments (0) | TrackBack (0)

Saturday, March 13, 2010

Slot Allocation at Congested Airports

For blog readers fluent in Portugese, Alessandro V.M. Oliveira of the Latin American Center for Transportation Economics has a new article on airport slots available online.  See Slot Allocation at Congested Airports and Its Impacts on Airline Market Power, 4 Revista de Literatura dos Transportes 5 (2010) (available from SSRN here).  From the abstract:

This study aims to analyze the impact of the dominance of essential facilities on market power, and thus on the generation of competitive advantage for the firms holding them. By using a conduct parameter framework, I model the behavior of oligopolistic firms under conditions of product differentiation - on the demand side - and a range of patterns of strategic interaction - on the supply side. Through structural estimation it was empirically investigated the emergence of market power due to the dominance or concentration of departure and landing slots at two major airports of Brazil.

March 13, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 11, 2010

FAA Reauthorization Poised to Move Forward

After spending months in limbo, the 2009 FAA Reauthorization Act is set to move forward for consideration after Tennessee Senator Bob Corker stated he would no longer stand in the way of the bill.  See Bill Theobald, Sen. Corker Releases Hold on Bill Affecting FedEx Labor, Tennessean, Mar. 10, 2010 (available here); see also Elise Foley, FedEx Warns Congress Not to Pass UPS Bill, Politico, Mar. 11, 2010 (available here).  Corker, along with fellow Tennessee Senator Lamar Alexander, had opposed to the bill due to a controversial provision which would move FedEx from its current coverage under the Railway Labor Act to the union-friendly National Labor Relations Act.  Though it's unclear at this point what sort of deal may have been struck in the Senate, according to Corker's office, the FAA Act will no longer carry the FedEx labor provision.

While today's news is undoubtedly good for FedEx, it may put a dark cloud over other parts of the air transport industry.  As discussed last year on the blog, see here, here, and here, the FAA Reauthorization Act, H.R. 915, 111th Cong., contains provisions which would would sunset all antitrust immunity for international airline alliances three years after enactment (sec. 426(e)); tighten the statutory requirement that domestic airlines be under the "actual control" of U.S. citizens by excluding foreigners from "control[ing] all matters pertaining to the business and structure of the air carrier" (sec. 801); and mandating twice-yearly inspections of foreign repair stations by FAA personnel (sec. 303).

All three provisions have been heavily criticized by officials from the European Union and its Member States.  In particular, the changes to the antitrust immunity law, which could compromise the operations of global airline alliances, and the tightening of the "actual control" requirement for U.S. airline ownership is seen as an affront to the ongoing negotiations between the U.S. and EU for a second stage accord to build on their 2007 air services agreement.  The FAA Act's inspection requirements concerning foreign repair stations has also come under fire as a needless expenditure of time and monetary resources. 

March 11, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 10, 2010

Next Round of U.S./EU Talks

After failing to finalize a new agreement in Madrid last month, negotiators from the United States and the European Union will meet in Brussels on the 22nd of this month to try and forge a second stage agreement which builds on their landmark 2007 aviation treaty.  See Doug Cameron, New EU-US Aviation Talks Planned for March 22, Dow Jones Newswires, Mar. 10, 2010 (available here).

At this point in the negotiating process, it is becoming clear that there will be no substantive progress made on relaxing U.S. foreign ownership and cabotage restrictions.  There is, to put it mildly, no political will in the U.S. to undertake such radical action.  This leaves the EU in a tight spot since ownership and traffic rights were supposed to be central to the second stage negotiations.  See [U.S./EU] Air Transport Agreement, 2007 art. 21, O.J. (L 134) 4.  In 2007, Douglas Alexander, the United Kingdom's former Transport Secretary, declared that his country would withdraw traffic rights granted under the 2007 agreement if "the Americans [fail] to act in relation to stage two."  See Michael Harrison & Stephen Castle, Heathrow Scramble Starts as EU Agrees to Historic "Open Skies" Deal, Independent (London), Mar. 23, 2007, at 54.  (That is, if the U.S. failed to finalize a fully liberalized air services agreement with the EU.)  Of course, the U.K. may be singing a different tune now that its flag carrier, British Airways, has managed to secure (tentative) antitrust immunity from the Department of Transportation to deepen its cooperation with American Airlines and Iberia as part of the oneworld Alliance.  Any act of suspension from the U.K. would likely be met with termination of the alliance's immunization.

This leaves open the question about what can be achieved as part of the second stage.  The U.S. has stated that it remains dissatisfied with night flight restrictions at certain Member State airports and the EU's plan to bring U.S. airlines under its emissions trading scheme starting in 2012.  To make progress on those issues, the U.S. will have to bring something to the negotiating table.  But what does the U.S. have left to give?

Perhaps now is not the time for either party to expect substantive concessions.  That doesn't mean the negotiations have to end in failure, however.  It has been suggested that one area where the two sides could lay the groundwork for future progress is by abolishing the 2007 agreement's provision for unilateral suspension of traffic rights.  See Air Transport Agreement, supra, art. 21(3).  Under this provision, the U.S. or any EU Member State is entitled to give notice after November of this year that it will suspend some (or all) of the traffic rights contained in the 2007 agreement.  For example, the U.K. could reinstate its pre-2008 restrictions on U.S. carrier access to London Heathrow and allow only American Airlines and United access rights while the other 26 Member States continue to honor the U.S./EC air services agreement.  (This is distinct from the 2007 agreement's termination provision which can only be triggered by the Member States acting in tandem.  See id. art. 23.) 

Though some believe that neither party would be so foolish as to actually suspend concessions and thus instigate an aviation trade war, the very possibility of suspension creates an unnecessary air of commercial uncertainty--and even a little bit of latent hostility.  Air carriers on both sides of the Atlantic have been hit hard by the global economic crisis.  Many of them have made provisions for the future in order to survive, including forming cooperative joint ventures and reducing capacity in relation to expected demand in the transatlantic market.  Such measures will only be effective if neither side's airlines lose traffic rights or are compelled by regulators to cease cooperating through their respective alliances.  Removing the 2007 agreement's suspension clause helps ensure that the airlines' strategic planning will not be compromised by impulsiveness from either party.  The agreement's aforementioned termination provision supplies both sides a way out in the remote chance their relations suffer a severe setback.

Additionally, the U.S. and EU can look to ways to strengthening the Joint Committee formed by the 2007 agreement.  See Air Transport Agreement, supra, art. 18.  If the world's two largest aviation powers have any hope of one day creating a truly open aviation area, they will need to be prepared to deal with a plethora of regulatory harmonization issues in areas such as antitrust, safety, security, and the environment.  The U.S. and EU could begin the process of making provisions for this deep level of cooperation now so that when the liberal winds of change start blowing, they will be prepared to capitalize on an authentically open market.

These modest advances will not mark the end of U.S./EU negotiations, of course.  If the suspension threat is removed, both parties can continue to strengthen their aviation ties and push for more substantive advances in the years to come.  It's important to bear in mind that it took near two decades from the time when the U.S. launched its open skies aviation policy to the time it finalized a deal with the EU.  Many political, legal, and economic changes had to occur first.  While the airline industry may be growing impatient with the pace of liberalization, none would likely disagree that the present state of global aviation relations represents an exponential improvement over the days of managed trade and unbridled protectionism which were the hallmarks of international aeropolitics for most of the twentieth century.

March 10, 2010 | Permalink | Comments (0) | TrackBack (0)

Commission on the Verge of Approving oneworld

According to a number of stories out today, the oneworld Alliance is on the verge of winning an antitrust exemption from the European Commission to cooperate closer on marketing, pricing, routes, and revenue sharing following the alliance's agreement to surrender slots at some of the world's busiest airports.  See, e.g., James Kanter, E.U. Signals Approval for Larger Alliance, N.Y. Times, Mar. 10, 2010 (available here); Terry Maxon, European Regulators Say American Airlines, Partners Have Offered to Give Up London Flights, Dallas Morning News, Mar. 10, 2010 (available here).   

The Commission, which opened an investigation into the alliance last year, recently issued a series of objections to the link-up.  In response, the alliance offered a series of concessions.  According to the Commission:

The commitments proposed by the parties are primarily aimed at enabling competing airlines to start operating on the affected routes by lowering barriers to entry. Concretely, they offer to make available landing and take-off slots at London Heathrow or London Gatwick airports on routes to Boston, New York, Dallas and Miami. On the London-New York city pair, the parties also propose to provide the competitor with operating authorisations at New York JFK airport.

In addition, British Airways, American Airlines and Iberia undertake to provide access to their frequent flyer programmes on the relevant routes, allowing passengers of the qualified new entrants to accrue and redeem miles on the parties' frequent flyer programmes.

The parties also propose to allow fare combinability and offer special prorate agreements in relation to the routes of concern, which would enable competitors to offer tickets on the parties' flights and facilitate access to connecting traffic.

See Press Release, European Commission, Antitrust: Commission Market Tests Commitments Proposed by BA, AA and Iberia Concerning Transatlantic Operation, IP/10/256 (Mar. 10, 2010) (available here).

With the oneworld Alliance receiving tentative antitrust immunity last month from the Department of Transportation, the European Commission's investigation remained the last regulatory hurdle for the joint venture to clear. 

The timing of the decision should not be ignored.  U.S. and EU negotiators are scheduled to meet later this month in Brussels to continue their second stage air transport negotiations.  A positive decision on oneworld from the Commission complements the DOT's approval which, as discussed previously on the blog, see "The Aeropolitics of the oneworld Order," was apparently timed to lead into the two sides' mid-February talks in Madrid. 

March 10, 2010 | Permalink | Comments (0) | TrackBack (0)

Monday, March 8, 2010

Eastern Airlines Moving Closer to Alliance Membership

According to a story out yesterday, China Eastern--one of China's three largest carriers--will soon announce its decision to join one of the three major worldwide alliances.  See Patricia Jiayi Ho, China Eastern to Join Alliance, Wall St. J., Mar. 7, 2010 (available here).  China's other two major airlines, Air China and China Southern, are already members of the Star Alliance and SkyTeam, respectively.  That would seem to make the oneworld Alliance the obvious choice, though China Eastern is remaining tight-lipped pending its final decision.

Regardless of its decision, for the time being China Eastern's alliance membership will be limited to a codeshare relationship.  China has yet to finalize an open skies agreement with the United States, thus leaving its carriers ineligible to deepen their alliance relationships with U.S. partners to include close coordination on routes, pricing, and revenue sharing under a grant of antitrust immunity from the Department of Transportation.  Under longstanding DOT practice, such grants are only given to carriers from States which have signed a liberal bilateral with the U.S.  While the most recent amendment to the U.S./China air services agreement requires the parties "to [begin] negotiat[ing] an agreement and timetable for the full liberalization of their bilateral air transport market" by March 25 of this year.  See Protocol to Amend the Agreement Between the Government of the United States of America and the People’s Republic of China Relating to Air Transport, art. 5 (July 9, 2007) (available here).

At this point it remains too early to tell what (if any) progress will be made in future U.S./China aviation talks.  Undoubtedly, China will be paying close attention to both ANA and JAL's ongoing antitrust immunity proceedings before the DOT.  If both airlines are able to win immunity for their joint ventures with U.S. partners, it may help spur the Chinese Government to negotiate a new bilateral that provides its own carriers the opportunity to forge comprehensive alliance relationships.  That assumes, of course, that China is willing to place the commercial interests of its carriers before any nationalistic desire to protect its market from additional foreign competition.

March 8, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 4, 2010

Bearing All the Hallmarks of Oppression

Blog readers interested in labor issues should make a point to read Michelle O'Sullivan & Patrick Gunnigle's Bearing All the Hallmarks of Oppression: Union Avoidance in Europe's Largest Low Cost Airline, 34 Labor Stud. J. 252 (2009) (available from SSRN here).

Ryanair is now Europe’s largest low cost airline. It is also one of the most controversial, due to its outspoken boss, its cost containment strategies and its hostile relations with organised labour. Ryanair has consistently denied accusations that it is anti-union, stating that it respects the right of workers to organise and even claiming to be a champion of its employee’s right to non-unionisation. However, this claim does not hold up in the face of extensive evidence of union suppression. This paper addresses such evidence, particularly the various methods by which Ryanair have avoided and suppressed unions. In Ireland, Ryanair successfully crushed an organising campaign by the country’s largest union, the Services, Industrial Professional and Technical Union (SIPTU), after a lengthy and bitter strike. The only other union continuing to challenge Ryanair is the Irish Airline Pilots Association (IALPA). However, its efforts recently suffered a major setback when the Supreme Court ruled that Ryanair’s non-union ‘Employee Representative Committees’ were a form of collective bargaining, allowing the company to affirm its non-union status.

March 4, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 3, 2010

Alliance Loyalty

There is an interesting story online from USA Today on consumer loyalty to airline alliances and the place of these joint ventures in the commercial future of international air transport.  See Dan Reed, More Travelers Loyal to Alliances, Not Airlines, USA Today, Mar. 3, 2010 (available here). 

March 3, 2010 | Permalink | Comments (0) | TrackBack (0)