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John Byerly - Liberalizing Transatlantic Aviation

Liberalizing Transatlantic Aviation: The Case for Stability, Expansion, and Vision


John R. Byerly, Deputy Assistant Secretary for Transportation Affairs, Bureau of Economic and Business Affairs
USA-BIAS Conference
Washington, D.C.
October 14, 2005


Thank you for including me in this important and timely conference. USA-BIAS deserves our gratitude for organizing the morning's impressive program. I'm honored to share the podium with Angelos Pangratis, Deputy Head of the EU Delegation in Washington.

The conference is important because policy-makers and aviation stakeholders on both sides of the Atlantic face critical choices that will shape the world of aviation for years to come. Today's presentations and discussion make clear the importance of what's at stake and, I believe, point us in the right direction. I commend Ken Button, whom I have known and admired for over a decade, and his colleague, Jonathan Drexler, for their valuable contribution to our understanding of the advantages of liberalizing the transatlantic air market: not only tens of thousands of jobs but the vitality of high-technology, "knowledge" industries that are indeed the future of successful modern states. No country is more keenly aware of this reality and challenge than Ireland: I thank Fred Sørensen and Alan Dukes for their compelling insights on the benefits that Open Skies would bring to the Irish economy.

To say that this conference is timely is, of course, an understatement. At 5: 30pm this evening I'll board a flight from Dulles to Brussels where, on Monday, we will restart formal negotiations for a first-step, comprehensive air services agreement between the United States and the European Union. The negotiations this fall are the last clear chance to achieve an historic breakthrough in transatlantic aviation before storm clouds gather on the European legal horizon in 2006.

Before turning to international aviation, however, let me say a few words about matters closer to home. I'd like to salute Louis Armstrong New Orleans International Airport as well as the many, many airlines -- both passenger and cargo -- that rendered heroic service after the devastation wrought by Hurricane Katrina. Notwithstanding considerable damage, the airport functioned as a hospital and command station in the crisis. Other airports rendered invaluable assistance. Airlines, including foreign carriers, accepted the challenge of ferrying the sick and homeless to shelter and transporting relief supplies and essential equipment. And to the flight crews and mechanics and dispatchers and all the other employees who toiled so many hours to help -- thank you. As one who has worked with the aviation community for many years, I wasn't surprised that you stepped forward to assist. That said, I was enormously proud to witness the commitment, the humanity, and the can-do spirit that have always made working with you such a privilege.

Our airports and airlines, of course, are normally a very competitive bunch. That's the way we want it: through vigorous competition consumers are offered choice, new products, and better prices. The U.S. aviation community is united in seeking to expand the principle of competition --clearing away market-restricting impediments to air services -- with every aviation partner around the globe. We have succeeded in our Open Skies policy precisely because we have worked together. Government, airports, airlines, and labor have forged a partnership, built consensus, and marched forward.

It would be easy enough for me to rehash "what went wrong" in the U.S.-EU negotiations that started in October 2003 and stalemated, to our disappointment, in June 2004. That's when EU member states rejected the proposed agreement that we had worked out in six formal rounds of talks with the Commission. But rather than dwell on the past, I want to focus on the future and what we can accomplish in the talks that begin next week. I'll stress three themes: stability, expansion, and vision.

First, stability: something that matters so much after the body blows to aviation of the past five years, from the terrorist attacks of 9/11 to SARS, from the implosion of the dot.com bubble in early 2001 to the explosion in fuel prices more recently. A first-step U.S.-EU agreement can and must put transatlantic aviation relations on a sound footing, escaping the legal turbulence that followed in the wake of the November 2002 judgments of the European Court of Justice. Those judgments, as you are aware, found certain provisions of existing bilateral agreements, including standard nationality clauses, inconsistent with European law. The draft agreement presented to EU member states by Commissioner De Palacio in June 2004 would have remedied these inconsistencies immediately, fully, and permanently. This aspect of the June 2004 draft agreement -- acceptance of the so-called "European carrier concept" -- remains part of our proposal to the EU.

It is time now to act. The Commission has made crystal clear that, in the absence of an agreement in 2005, it will take legal action to force the termination of all existing bilateral air services agreements with the United States. Were this to happen, existing grants of antitrust immunity would be immediately threatened and with them the transatlantic alliances that are an essential element of modern aviation. This is the gathering storm I mentioned earlier. We should chart a course to safe skies this year.

But we should also chart a course that carries us beyond today's horizon to a world of expanded aviation opportunities, for us and for Europe. The United States has made clear its willingness to do so, to expand liberalization beyond the traditional Open Skies framework. This includes extending to European carriers what Under Secretary of Transportation Jeff Shane has rightly called an unprecedented and transformational grant of rights: namely, rights to serve the U.S. market from every point in the EU, irrespective of which country's nationals own and control the carrier. As Jeff explained so clearly in a speech several months ago:

Under our current bilateral relationships, every U.S. carrier can serve -- with a few well-known exceptions -- every point in Europe from any point in the U.S. Carriers in Europe, however, can only serve U.S. cities from their country of nationality. In other words, at the present time, no EU carrier has the ability under the current bilateral agreements to do what every U.S. carrier can do: connect any point in the U.S. to any point in Europe for any purpose --combination or cargo. The reason for this disparity in respective opportunities, of course, is the famous nationality clause

Recognition of the airlines of Europe as "EU" carriers -- able to fly to the U.S. from any gateway within the EU -- would eliminate, at a single stroke, the entire morass of nationality-based restrictions that limit the scope of every EU airline's operations. It would bring Open Skies opportunities in the U.S. to every EU airline not already benefiting from an Open Skies regime. And, by eliminating current bilateral ownership and control restrictions, it would facilitate for the first time a reorganization of the EU airline industry's structure.

Let me add to Jeff's summary that this U.S. offer creates valuable new opportunities for airports and communities -- in the United States and in Europe. An airport or city that seeks new transatlantic service will have new airlines that it can approach with a proposal to start flights. With every EU airline authorized to serve every U.S.-EU city-pair, the gates are open to initiative, innovation, and imagination.

For our part, we will insist that, in addition to maintaining all the traffic rights that we secured in bilateral Open Skies agreements with fifteen EU member states, a U.S.-EU agreement must expand Open Skies to the remaining ten countries. And lest there be any misunderstanding, this includes full fifth freedom rights, both within and beyond the EU. Any other result -- some quirky concoction one might call Open Skies Lite Plus --makes no sense and is an absolute non-starter.

The expanded rights in a U.S.-EU agreement will mean change -- but clearly change for the better. Yes, it's possible that carriers that today enjoy the ability to charge supracompetitive fares due to protectionist limits in older bilateral agreements -- for example, the two-carrier restriction at Heathrow -- may find it uncomfortable to face new competition. American carriers will also face potential new competition from European airlines empowered by the EU carrier concept to serve new transatlantic routes. New forms of competition and novel challenges to old business practices, however, were part and parcel of U.S. deregulation in 1978 and of the three "packages" of liberalization that created the internal EU aviation market for EU carriers in the 1990's. Such change is desirable, healthy, and overdue.

Let me turn to the third theme: vision. As the record of negotiations makes clear, the United States is ready, willing, and able to go beyond Open Skies to address some priority issues important to Europe. Let me name a few examples from the list of "beyond Open Skies" provisions that a first-step U.S.-EU agreement would include:

* At European request, we have added new articles on state aids, on the environment, on consumer protection, and on formal cooperation between DOT and DG-COMP on airline competition issues; * We have made changes to our traditional safety article in response to European proposals and indicated our willingness to enhance aviation security cooperation. Indeed, finding new, mutually agreed language for a security article will be an important focus of our work in Brussels next week; * We have agreed to include authorization for EU airlines to provide aircraft with crew to U.S. carriers for international operations, subject to appropriate measures to protect aviation safety and legitimate labor interests; * We have accepted the EU proposal for a Joint Committee to review implementation of the agreement and have worked out a detailed charter to guide the Joint Committee's work; and * We have agreed that a first-step agreement will be just that: a first step coupled with a commitment to resume negotiations at an early date, with an established agenda and a target date for completion of a second-step accord.

At the conclusion of the recent EU Transport Council meeting, Council President and UK Secretary of State for Transport Alistair Darling endorsed, on behalf of his colleagues, a "staged" agreement that is "balanced" and that "deliver[s] real benefits to both sides." It is precisely a balanced, mutually beneficial agreement that is within our grasp this fall, during the UK Presidency of the European Union. Some might find it ironic but I would instead see it as fitting that the United Kingdom, representing America's largest transatlantic market, should play a leadership role in achieving a success that will carry us well beyond the parameters of traditional Open Skies and give impetus to a partnership with Europe for future progress that can lead the world to greater reliance on market forces in aviation.

No speech on the U.S.-EU negotiations would be complete without a few words on the important issue of ownership and control. The possible expansion of opportunities for foreign participation in the U.S. airline industry is, from my perspective, an issue that we Americans must examine based on whether it makes sense for us, balancing the clear advantages of increased access to capital and business know-how against concerns about safety, security, and the essential role that U.S. carriers play in the national defense. Let me say publicly what we have recently told our colleagues at the Commission:

* The Administration is actively considering options to increase the opportunities for U.S. carriers to obtain foreign capital and to have greater involvement with citizens of countries with which we have an Open Skies relationship. * This is being considered at a senior level and as a matter of priority among all interested agencies in the Executive Branch. * The Administration is aware of the keen interest of European parties in this issue. What is important, however, is to emphasize that this issue is being considered by the Administration on its own merits and cannot be linked to air services negotiations.

So what is our mission in Brussels beginning Monday? Four rounds of informal discussions with Commission experts earlier this year have defined the framework for renewed formal negotiations. There is consensus between us that much of what we achieved in the months prior to June 2004 is still valid and will form the basis for any U.S.-EU agreement. The United States is prepared to work hard to address three areas -- state aids, cooperation between competition authorities, and security -- with respect to which the EU seeks some changes. Highly problematic will be the European Community's desire to deviate from the longstanding principle that fuel used for international aviation should not be taxed -- a principle anchored in the Chicago Convention and every one of our bilateral air services agreements. We will also need to work out a number of legal and drafting issues, including an arbitration article, language on entry into force, an article on provisional application pending the lengthy EU ratification process, and texts to address the complex questions involved in a so-called mixed agreement: an agreement between, on the one hand, the United States and, on the other hand, the European Community and each of the twenty-five member states.

And the prospects for success? I will not use the word "optimistic"-- that characterized my perception in the spring of 2004, before it became apparent how discordant at that time were the interests and relationships among the Commission, member states, and European stakeholders. Let's say instead that I'm "hopeful" -- for four reasons.

First, we have clear direction to reach an agreement from on high, beginning with the U.S.-EU Summit in June 2003 and underscored in the two succeeding summits between President Bush and his European Community counterparts. Our instructions, as expressed in 2003, are to use this "historic opportunity to build upon the framework of existing agreements with the goal of opening access to markets and maximizing benefits for consumers, airlines, and communities on both sides of the Atlantic."

Second, we have been assured by Commission Vice President Barrot that he has the support of the entire Council of EU transport ministers for resuming negotiations within the framework we have developed in recent months. Although there can be no guarantee of success, we believe that both sides are prepared to forge a deal.

Third, I am convinced of the negotiating skill, command of subject matter, and personal commitment of our EU partners, led by Air Transport Director Daniel Calleja.

Fourth, and most important of all, I'm hopeful because the time is now so clearly ripe for taking a major first step forward. Because, as this morning's presentations made clear, liberalization of the transatlantic aviation market is:

* vital to the interests of European and American consumers and shippers; * key to the further development of European and American airports and communities; * essential for the expansion of modern, knowledge-based industries in Europe and in the United States; and * fundamental to the future health of a shared transatlantic and global economy.

Thank you for your attention. It's an honor and a pleasure to participate in today's conference.

Released on October 14, 2005


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