The decades-long process of liberalization of air transportation entered another historic phase last week when a new “open skies” agreement came into effect between the U.S. and the European Union. Negotiations had been going on for several years but were always stumbling on the sensitive issue of foreign investment in American airlines, which cannot go over 25% at present. A year ago, the two parties decided to go forward with a limited, but still ground-breaking agreement, with this and other undecided issues being postponed to a second round of negotiations that will start on May 15.
This is certainly a watershed in the development of a globalized air transport industry. We can already envisage that, one day, it will transcend the regulations and national barriers that have defined it – and constrained its growth potential – for so many decades. This open skies accord truly opens the way to airlines becoming just another industry like all others, instead of being treated as symbols of national sovereignty with all the restrictions that go with this status. Combined with the increased market presence of low-cost carriers over the past two decades, these flexible arrangements, if they were copied elsewhere, would open endless opportunities for the expansion of international business, trade and tourism around the world.
The agreement is significant in many ways. From now on, the several treaties that were signed over the years between the U.S and European countries have been replaced by one covering all 27 members of the Union. Any airlines from the European Union will be able to fly from any city on the old continent to any American airport in an unrestricted fashion, whereas before they could only fly from their home country to certain agreed-on airports in the U.S.
The most coveted airport in Europe, Heathrow, could only be used until now by two British and two American companies -British Airways, Virgin Atlantic, United and American – to connect the two continents. This restriction has also been scrapped. Air France/KLM became the first European carrier to exploit the treaty on April 1 with a new flight from London to Los Angeles.
One obvious consequence of this new flexibility will be to open several new trans-Atlantic routes between various points previously unserved, increase competition on those that are already well-served, and eventually bring down airfares – or at least prevent them from being raised as much due to the increase in oil prices. A European Union study estimated last year that over five years, this would bring about an increase in the annual traffic between the U.S. and Europe from about 50 million passengers today to 75 million. Over the same period, consumers would save as much as 12 billion euros or US$19-billion.
Another aspect of the treaty that will have important long-term ramifications is that it recognizes the acquired rights of airlines (landing rights, access to routes, etc.) from different countries after they merge or after one buys another.
For example, when Air France merged with KLM, or when Lufthansa bought Swiss International Airlines, it was not automatic that the new parent company could benefit from the same access to the American market that its divisions had enjoyed before. Rights are negotiated between countries and have always been assigned to carriers controlled by interests in that country. Mergers or takeovers taking place in the new unified European market – or between an EU airline such as Lufthansa and a non-EU European one like Swiss – simply did not fit into the old way of doing things. Now however, these international rights will not have to be renegotiated and will be transferred unaltered to the new corporate entity.
This liberalization process will be further advanced if the new round of negotiations, which should extend until 2010, ends on a successful note. It would mean that a British carrier could establish a fully-owned subsidiary in the U.S., whereas now, the Virgin Group is limited to controlling only 25% of the shares of Virgin America. It would also allow airlines from one continent to fly between two cities on the other, which is not possible today.
For obvious reasons, Canada, with its small market, cannot be left out of such developments and is now at a disadvantage. Canadian travellers, airlines and airports are not at this moment in a position to benefit to the same extent from this new flexibility between the two continents. Ottawa began negotiations on a similar treaty with the European Union last November and the EU commissioner for Transport, Jacques Barrot, repeated his wish last week that they could come to a positive conclusion some time next fall.
As it has done with our neighbour to the south, an open skies treaty with Europe would help intensify our relations with the continent to which we are historically closest, reduce the cost of trading and doing business, and benefit the whole economy. A better access to the vast European market would more than compensate for the increased competition that Canadian carriers would face at home, something many Canadian travellers will welcome anyway. There is simply no downside to a treaty that will clear the trans-Atlantic sky of all the unnecessary regulations and restrictions that clutter it.
Pierre J. Jeanniot is the former CEO of Air Canada and International Air Transport Association, the Chairman of Thales Canada Inc. and the Jinmag Inc. He’s also an Associate Researcher of the Montreal Economic Institute.