Open Skies Agreements on Domestic

¶ … Open Skies Agreements on Domestic and International

Carriers

Current Status of International Open Skies Agreements

The Economic Impact of Open Skies Agreements

Open Skies Agreements: A Dual-Edged Sword

The aviation industry has suffered from a triple whammy during the past decade. Following the horsewhipping the industry received as a result of the terrorist attacks of September 11, 2001, a more recent global recession and skyrocketing energy costs have caused a number of legacy carriers to seek protection using Chapter 11 bankruptcy proceedings while others have simply folded. The current state of affairs, though, did not develop during the past decade alone, but is rather the results of almost a century's worth of increasing deregulation of the aviation industry in the United States. For instance, during the 30-year period from 1919 to 1949, a framework of international regulation emerged in response to the economic, technological and political developments that were taking place in air transport (Doganis, 2002). This framework was consistent and, generally speaking, global in its applicability to the aviation industry (Doganis, 2002). Moreover, during the post-World War II period from 1950 to the 1970s, this international regulatory framework was followed without significant changes; the framework was triangulated, being based on (a) bilateral air service agreements, (b) on inter-airline pooling agreements and (c) on the tariffs and pricing agreements that were agreed upon under the auspices of the International Air Transport Association (IATA) (Doganis, 2002). In sum, these three components served to define a highly regulated operating environment that was different from any other international industry and discouraged innovation and change; however, an analysis of U.S. international aviation policy in 1979 resulted in a number of liberalization policies that affected the economic regulation of international air services over the next 2 decades. According to Doganis, "This process of liberalization became more rapid after the mid-1980s when it was adopted by key European countries and eventually by the European Union" (2002, p. 26).

According to Juan (1997), an air transport specialist at the World Bank, in the era before the 1980s, air traffic between nations was controlled by narrowly defined bilateral agreements that stipulated the permissible capacities of passenger aircraft, the frequency of flights, and the type of passenger and cargo services that airlines could provide. One of the fundamental features of these bilateral agreements was the notion of a so-called "flag carrier," which could be an airline, either private or public, provided that its ownership was mostly domestic by which the respective nations would exercise the same rights that were received pursuant to the bilateral agreements (Juan, 1997). Indeed, Juan emphasizes that, "For almost four decades, for example, Pan Am was the world's most formidable flag carrier, enjoying a near monopoly on some foreign routes and sitting in on diplomatic negotiations between the United States and other countries" (1997, p. 141). This situation began to change during the last two decades of the 20th century, though, following the deregulation of the worst most lucrative air transport market in the domestic U.S. airline industry. During the heyday that followed deregulation, a number of new carriers entered the market, thereby increasing both competition and efficiency of the airlines (Juan, 1997). According to Juan, "Lower fares helped to lure more passengers, expanding the market. Deregulation in the United States proved a catalyst, in turn, for deregulation overseas. Although foreign governments feared the commercial ambitions of U.S. carriers, they feared the American competitive advantage even more and soon began looking at how to open up their own internal markets, especially in Europe and Latin America" (1997, p. 141).

Consequently, by the turn of the 21st century, there were, generally speaking, two different regulatory regimes in place that had global implications. In this regard, Doganis (2002) notes that a number of major routes to and from the United States, routes between the member states of the European Union, as well as routes between some European states or the United States and some Asian countries began to operate pursuant to so-called "open skies" agreements. Concomitantly, in other parts of the world, international air services were and continue to function pursuant to the traditional regulatory structure that emerged during the 20th century (Doganis, 2002). It must be pointed out, though, it is not a matter of a straightforward dichotomy of regulation. According to Doganis, "There are gradations in each of the regulatory regimes. Some traditional bilateral agreements are very restrictive while others are much more open and allow more effective competition" (p. 27). Likewise, in some deregulated markets (i.e., the European Union), the majority of restrictions on inter-airline competition have been removed as a result while in other there are some portions of the traditional regulatory system still in place (Doganis, 2002).

The so-called "open skies regimes" that have emerged progressively in some key markets since the early 1980s are described by Bilotkach (2007) as being one of the most important recent developments in international business. In this regard, Bilotkach emphasizes that, "The potential benefits of allowing the market forces to govern international aviation are enormous" (p. 505). For example, the European Union (EU) has projected that air traveling consumers will enjoy benefits as large as $5.8 billion annually from the creation of the currently negotiated "open aviation area" that includes North America, the EU, and the North Atlantic Ocean (Open skies and flights of fancy, 2003, p. 37). In this regard, the "open skies" agreement will make it possible for American and European airlines to fly from any airport in Europe to any in the United States and for American carriers to do the same in the EU; it is this aspect of the open skies agreements that are particularly troubling for pilots flying for American carriers since this trend holds the potential for making the low-cost European airlines more competitive against the American legacy carriers (Stephen, 2007). According to the U.S. Department of State (2009), though, the up-side to this trend towards open skies agreements is also worth noting: "Open Skies agreements have vastly expanded international passenger and cargo flights to and from the United States, promoting increased travel and trade, enhancing productivity, and spurring high-quality job opportunities and economic growth" (Open skies agreements, p. 2).

This laissez-faire approach to airline regulation, the State Department maintains, allows the invisible hand to regulate prices, and encourages innovation and competition in ways that are good for the economy as well as for consumers and businesses. By promoting competition, it is felt that innovation and efficiency will improve. In this regard, the State Department notes the manner in which these laudable goals are achieved: "Open Skies agreements do this by eliminating government interference in the commercial decisions of air carriers about routes, capacity, and pricing, freeing carriers to provide more affordable, convenient, and efficient air service for consumers" (Open skies agreements, 2009, p. 3).

The open skies regimes that have emerged in recent years have taken place during a period in which the airline industry has experienced the same effects of globalization as other industries. In this environment, the need for improved flexibility over the traditional regulatory approach has been cited by the State Department and numerous air transport analysts as being a positive trend. For instance, the State Department enthuses, "By allowing air carriers unlimited market access to our partners' markets and the right to fly to all intermediate and beyond points, Open Skies agreements provide maximum operational flexibility for airline alliances" (Open skies agreements, 2009, p. 3).

To date, the U.S. has entered into open skies agreements with more than 90 countries representing all regions of the world as well as all levels of economic development; besides bilateral open skies agreements, the U.S. has also entered into two multilateral open skies arrangement:

1. The 2001 Multilateral Agreement on the Liberalization of International Air Transportation (MALIAT) with New Zealand, Singapore, Brunei, and Chile, later joined by Samoa, Tonga, and Mongolia; and.

2. The 2007 Air Transport Agreement with the European Community and its 27 Member States (Open Skies Agreements, 2009).

Pilots currently employed by domestic airlines in the United States, though, provide another side to these trends. The history of open skies agreements in the U.S. may be a positive trend for some, but lately there have been talks to make unrestricted open skies or more agreements that could potentially benefit the consumer but as a pilot's perspective, this could hurt pay, quality of life and overall job security if other airlines from different countries are able to come to the states (and usually these other airlines are government supported) and fly routes our legacy carriers have done for years at cut-throat prices. As Smith (1999) emphasizes, "Such bilateral agreements often have the effect of propping up inefficient national carriers, shielding them from competition, while guaranteeing a certain proportion of landing and take-off slots" (p. 19). Taken together, the move towards less regulation can be viewed as a positive trend in some respects but policymakers are failing to take into account other issues that form the "big picture" involved in ways that will adversely affect airline staff morale and operational efficiency among U.S. domestic carriers are at period in the industry's history when these factors are already beleaguered by downturns in the global economy, increasing competition from international carriers, and the aforementioned high costs of energy.

Chapter 2: The Impact of Open Skies Agreements on Domestic and International Carriers

Under an open skies agreement, both signatories to the agreement enjoy open access to international airline routes between the two countries as well as eliminating virtually all domestic restrictions on international carriers (Lick, 1998). In an effort to develop more closely integrated pricing and route schedules, signatories to these agreements typically also seek to gain immunity from national antitrust laws (Commercial aviation: Legacy airlines must further reduce costs to restore profitability, 2004). The U.S. Department of Transportation reviews these types of airline alliances from an antitrust perspective and refuses to approval an alliance without a reciprocal open skies agreement with the foreign airline's home nation (Schlangen, 2000). These are important considerations for domestic carriers because the international market is currently more lucrative than domestic air routes (Moylan, 2005). In this regard, Moylan advises, "This is partly due to increasing globalization of business, the rise of the middle class in other nations like India, strong leisure travel, and a lack of low-fare carriers who have transatlantic routes. Therefore, the United States is desperate to negotiate open skies pacts with other nations" (2005, p. 37).

By eliminating restrictions on the prices airlines are allowed to charge, the frequency wit which airlines are permitted to fly to the alliance country, and the type of aircraft airlines are allowed to use, open skies agreements are regarded as the framework that is required to help provide the flexibility needed for these carriers to remain competitive (Moylan, 2005). According to Moylan, pursuant to an open skies agreement, air carriers from either country are allowed to fly from any city in one country to any city in the other country. Currently, the United States has open skies agreements with almost one hundred other countries and continues to hammer out agreements with the remaining European Union states (Moylan, 2005).

According to McQuaid (2007), the United States has entered into agreements with some other countries that are not regarded as being open skies agreements per se. "For example," McQuaid notes, "the United States signed an aviation pact in July 2004, with China that increased flights between the two countries from 54 to 249 over 6 years" (p. 664). In addition, the agreement between the United States and the United Kingdom is not an open skies agreement strictly speaking; however, travel between the two nations is controlled by a similar bilateral air services agreement that is known as Bermuda II (McQuaid, 2007). The provisions of Bermuda II allow nonstop service to London from 26 gateway cities in the United States; however the agreement stipulates that just American Airlines and United are allowed to provide service to Heathrow Airport but this agreement does not restrict U.S. airlines from flying to London's Gatwick Airport (McQuaid, 2007).

The provisions the fairly restrictive Bermuda II agreement experienced a partial easing in 1995; at that time, airlines of both the United States and the United Kingdom were granted unlimited access between any set of airports, with the notable exceptions of London Heathrow and Gatwick; at that time, United Airlines also received Chicago-London rights (the Economic Impact of Air Service Liberalization, 2007). Not surprisingly, these changes results in a continuous increase in air services and traffic. According to the study, "The Economic Impact of Air Service Liberalization" (2007), "Since 1995, traffic between Chicago and London has more than doubled. Services have expanded at Manchester, Birmingham and Glasgow, while Bristol and Edinburgh have emerged as trans-Atlantic gateways. The economic benefits have been significant. By 2004, the additional traffic and services generated 9,197 full-time jobs in the United States and over 16,700 in the United Kingdom" (p. 18). During the 12-year period from 1995 to 2007, the gross domestic product of the United States also increased by $747 million and the United Kingdom experienced an almost one billion dollar ($970 million) increase (the Economic Impact of Air Service Liberalization, 2007, p. 18).

The changes implemented in U.S.-U.K. routes as a result of policy revisions in Bermuda II can be easily discerned from Figures 1 and 2 below.

Figure 1. Nonstop U.S.-UK Routes (Excluding Heathrow and Gatwick) as of May 1994.

Figure 2. Nonstop U.S.-UK Routes (Excluding Heathrow and Gatwick) as of May 2006

Source: The Economic Impact of Air Service Liberalization (2007)

Based on the foregoing trends, it is reasonable to posit that further relaxations in the regulatory framework governing U.S.-U.K. air travel will have further positive impacts on the economies of both countries during a period when such improvements are desperately needed. Based on a simulation of a complete liberalization of the U.S. And the European Union, the analysts at InterVISTAS-ga2 emphasize that air traffic between the two continents would increase a whopping 29%. According to this study, "The increase would derive in part from lower fares, and in part from allowing any U.S. city to obtain nonstop service to London's Heathrow or Gatwick airports. The economic benefits of this liberalization would be substantial. Over 117,000 new jobs would be created, and incremental GDP would approximate $7.8 billion" (the Economic Impact of Air Service Liberalization, 2007, p. 18). Since the United States currently has open skies agreements in place with the countries that Delta and Northwest service pursuant to the SkyTeam alliance, it is improbable that any merger attempts between the two carriers would result in antitrust concerns in the serviced countries; even in the event three were some antitrust issues raised, though, foreign governments will probably just require any new merged entity to forfeit some routes or airport slots, comparable to the requirements needed for approval of the Air France-KLM merger (Baker, 2004).

As noted above, open Skies agreements provide a flexible framework for international aviation markets and restrict governmental oversight to a bare minimum; the provisions of open skies agreements, though, are applicable to passenger and cargo air transportation and include both scheduled and charter services. Some of the key provisions of open skies agreements to which the United States is currently party to include those described in Table 1 below.

Table 1

Key Provisions of Open Skies Agreements

Provision

Description

Free Market Competition

No restrictions on international route rights; number of designated airlines; capacity; frequencies; or types of aircraft.

Pricing Determined by Market Forces

A fare can be disallowed only if both governments concur -- "double-disapproval pricing" -- and only for certain, specified reasons intended to ensure competition.

Doing Business Protections

Examples of these include:

1. All carriers of both countries may establish sales offices in the other country, and convert earnings and remit them in hard currency promptly and without restrictions.

2. Carriers are free to provide their own ground-handling services -- "self handling" -- or choose among competing providers. Airlines and cargo consolidators may arrange ground transport of air cargo and are guaranteed access to customs services.

3. User charges are non-discriminatory and based on costs.

Cooperative Marketing Arrangements

Airlines may enter into code-sharing or leasing arrangements with airlines of either country, or with those of third countries. An optional provision authorizes code-sharing between airlines and surface transportation companies

Provisions for Consultation and Arbitration

Model text includes procedures for resolving differences that arise under the agreement.

Liberal Charter Arrangements

Carriers may choose to operate under the charter regulations of either country.

Safety and Security

Each government agrees to observe high standards of aviation safety and security, and to render assistance to the other in certain circumstances

Optional 7th Freedom All-Cargo Rights

Provides authority for an airline of one country to operate all-cargo services between the other country and a third country, via flights that are not linked to its homeland. Seventh freedom operations often take place among global all-cargo air carriers and are very infrequent in passenger operations.

Source: Open Skies Agreement Highlights Fact Sheet, Office of Aviation Negotiations, Bureau of Economic, Energy and Business Affairs, Washington, DC (2009, January 30) at http://www. state.gov/e/eeb/rls/fs/2009/119760.htm; the Economic Impact of Air Service Liberalization (2007), p. 134.

Chapter 3: Current Status of International Open Skies Agreements

The United States, the United Kingdom and the European Union, or course, are not the only countries actively pursuing open skies agreements and their use is becoming increasingly commonplace on all continents of the world. The most current statistics concerning the number of such open skies agreements in place around the world (as of April 2009) are shown in Tables 2 through 9 and Figures 3 through 10 below.

Table 2

Open Skies Agreement in Africa

Year

Month

Entity

Total # Open Skies

2008

May

Kenya

92

2007

February

Liberia

77

2006

May

Chad

74

2006

February

Cameron

73

2005

October

Gabon

70

2005

May

68

2004

May

Gabon

62

2004

March

Madagascar

61

2002

June

Cape Verde

58

2002

June

Uganda

57

2000

December

Senegal

52

2000

November

Benin

51

2000

October

Rwanda

49

2000

October

Morocco

48

2000

August

Nigeria

47

2000

May

The Gambia

46

2000

March

Ghana

44

2000

February

Burkina Faso

43

2000

February

Namibia

42

1999

November

Tanzania

38

Figure 3. Number of Open Sky Agreements: Africa

Table 3

Open Skies Agreements in Asia

Year

Month

Entity

Total # Open Skies*

2008

October

Laos

94

2005

May

Maldives

67

2005

January

India

65

2004

July

Indonesia

63

2001

November

Sri Lanka

56

1999

April

Pakistan

33

1998

April

Korea

30

1998

June

Malaysia

24

1997

March

Taiwan

16

1997

February

Brunei

15

1997

January

Singapore

14

Figure 4. Number of Open Sky Agreements: Asia

Table 4

Open Skies Agreements in Australia/Oceania

Year

Month

Entity

Total # Open Skies*

2008

February

Australia

89

2006

February

Cook Islands

75

1998

May

New Zealand

23

Figure 5. Number of Open Sky Agreements:

Table 5

Open Skies Agreements in Central America/Caribbean

Year

Month

Entity

Total # Open Skies*

2002

October

Jamaica

59

1998

December

Netherland Antilles

28

1998

July

Aruba

25

1998

May

Nicaragua

22

1998

April

Costa Rica

21

1998

April

Honduras

20

1997

April

El Salvador

19

1997

April

Guatemala

18

1997

March

Panama

17

Figure 6. Number of Open Sky Agreements: Central America/Caribbean

Table 6

Open Skies Agreements in Europe

Year

Month

Entity

Total # Open Skies*

2009

October

Armenia

93

2008

March

Bulgaria

91

2008

March

Croatia

90

2007

June

Georgia

88

2007

April

United Kingdom

87

2007

April

Spain

86

2007

April

Slovenia

85

2007

April

Lithuania

84

2007

April

Latvia

83

2007

April

Ireland

82

2007

April

Hungary

81

2007

April

Greece

80

2007

April

Estonia

79

2005

November

Bosnia-Herzegovina

72

2003

September

Albania

60

2001

October

France

55

2001

May

Poland

53

2000

October

Malta

50

2000

March

Turkey

45

2000

January

Slovak Republic

41

1999

December

Portugal

40

1998

November

Italy

32

1998

February

Uzbekistan

29

1998

December

Romania

27

1996

February

Germany

12

1995

December

Czech Republic

11

1995

May

Austria

10

1995

May

Belgium

9

1995

May

Denmark

8

1995

May

Finland

7

1995

May

Iceland

6

1995

May

Luxemburg

5

1995

May

Norway

4

1995

May

Sweden

3

1995

May

Switzerland

2

1992

September

Netherlands

1

Figure 7. Number of Open Sky Agreements: Europe (top five)

Table 7

Open Skies Agreements in the Middle East

Year

Month

Entity

Total # Open Skies*

2007

April

Cyprus

78

2007

May

Kuwait

76

2001

September

Oman

54

1999

October

Qatar

37

1999

May

Bahrain

35

1999

April

United Arab Emirates

34

1996

November

Jordan

13

Figure 8. Number of Open Sky Agreements: Middle East

Table 8

Open Skies Agreements in North America

Year

Month

Entity

Total # Open Skies*

2005

November

Canada

71

Figure 9. Number of Open Sky Agreements: North America

Table 9

Open Skies Agreements in South America

Year

Month

Entity

Total # Open Skies*

2005

May

Paraguay

66

2004

October

Uruguay

64

1999

August

Argentina

36

1998

May

Peru

31

1998

October

Chile

26

Figure 10. Number of Open Sky Agreements: South America

Source of tabular data: Office of International Aviation (2009, April 5) at http://ostpxweb.dot.gov/aviation/X-40%20Role_files/bilatosagreement.htm; figures based on tabular data.

Although the United States has fewer North American open skies agreements (i.e., 71) than a number of other countries, these agreements are entirely with Canada and represent reciprocal agreements for major air routes while those in place in Asia, Africa and Europe, for example, may include higher percentages of regional carriers that are devoted to either passenger or cargo traffic.

Chapter 4: The Economic Impact of Open Skies Agreements

Domestic deregulation has made the traditional restrictive bilateral agreements that control air travel between nations obsolete. In the place of these traditional regulatory frameworks, the open skies agreements have removed restrictions of flights as well as expanded the rights that participating countries' air carriers enjoy under the so-called "six freedoms" (Juan, 1998). The fundamental changes that have taken place in the air transport industry that resulted from deregulation of the industry and the introduction of open skies agreements has been an important component in contributing to the healthy growth that has been experienced in international trade, tourism, and cross-border investment in recent years (Juan). During the period from 1980 to 1995, for example, tourism air travel increased by 200%, an increase that had enormous economic implications worldwide (Juan). According to this World Bank analyst, "As of 1994, the tourism industry employed 10.6% of the world's workforce, generated 10.2% of the world's gross national product, and accounted for 10.9% of total consumer spending" (Juan, p. 143).