Aviation Week & Space Technology Login|Subscribe |Register As Alliances Evolve, 'Open Aviation Area' Talks Begin By David Bond November 16, 2003 Convergence An American Bar Assn. panel on aviation issues before Congress was drawing to a close Nov. 6 in Washington when the moderator, Will Ris, an American Airlines senior vice president, asked one last question--whether the Air France-KLM near-merger would pose concerns on Capitol Hill. KLM operates between New York Kennedy and Amsterdam, Ris noted, and so does Air France's antitrust-immunized SkyTeam partner, Delta. Might Air France's relationship with Delta and its potential control over KLM affect Delta-KLM competition in ways the U.S. wouldn't want? That kind of concern hadn't surfaced yet in Congress, replied David Schaffer, staff director and senior counsel at the House Transportation aviation subcommittee. He speculated that the issue might be "too complicated" for the Hill. Actually, it gets much more complicated than Ris' description. KLM's antitrust-immunized U.S. partner is Northwest, which has a non-immunized code-share partnership in many U.S. domestic markets with both Delta and Continental. Continental isn't a member of any of the big international alliances, although it might join SkyTeam. It happens that Ris' airline, American, and British Airways are the biggest members of Oneworld, the only international alliance denied antitrust immunity across the Atlantic by U.S. regulators. Both American and BA think the Air France-KLM deal gives SkyTeam enough additional advantage to warrant reconsideration of the denial, even though U.S.-U.K. market restrictions that led to it haven't changed. And Lufthansa's passenger-airline CEO, Wolfgang Mayrhuber, sees Air France-KLM the same way--because of it, restrictions on Lufthansa's Star Alliance antitrust immunity with United should be waived. Additional food for thought--an Orbitz check on Nov. 7, the day after the bar association panel, showed that a Nov. 14-21 JFK-Amsterdam round trip would cost $423 on Delta and $1,196 on KLM/Northwest. When a single development like Air France-KLM complicates international aviation's established business and regulatory framework this much, the framework itself needs a fresh look. The need is urgent, because more aviation consolidation is expected as the industry adapts to economic pressures, the continuing build-up of alliances and the relaxation of government regulation during the past decade. And in a convergence of change, the fresh look is emerging. Even as Air France and KLM were putting the finishing touches on their deal, the U.S. and European Union were starting talks intended to create a North Atlantic "open aviation area" that would remove key restrictions on how airlines do business. The European Commission sought and won a mandate to negotiate such a regime after the European Court of Justice found that nationality provisions of current open-skies aviation agreements between the U.S. and individual European nations violate EU treaties. The U.S. and EU are entering the open-area talks with dramatically different concepts, and the international aviation industry is virtually unanimous that it will be hard to find an agreement. Many in the U.S. see an open aviation area as little more than a multilateral open-skies regime, like the Asia Pacific Economic Cooperation (APEC) agreement between the U.S. and six other countries. In Europe, however, the U.S. open-skies framework is considered less than open with respect to airline ownership and control, and the right to establish an airline anywhere in the aviation area. Under the EU's single aviation market, which took effect in 1993, European airlines can operate freely in all member nations. A carrier needn't be owned or controlled by citizens of the country in which it is established. It can fly cabotage routes that never touch its home soil. These freedoms are absent from U.S. open-skies agreements, and Europeans will advocate them for the open aviation area. Cabotage is a red-flag issue to U.S. pilots and other labor groups, who believe the U.S. aviation market is the most valuable in the world and shouldn't be "given away." If a foreign carrier could sell tickets for travel between New York and Chicago, U.S. jobs would be lost, pilots argue, and benefits to a U.S. carrier operating in Europe wouldn't be comparable. Some analysts believe the negotiators will be able to finesse cabotage. If a European airline could establish a wholly owned unit in the U.S., or take control of a U.S. carrier, it wouldn't need cabotage. But the ownership and control issues face obstacles, too, mainly political. Foreign ownership of a U.S. carrier is limited by law to 25%, so if the U.S.-EU talks agreed on liberalization, Congress would join the conversation. Schaffer, the aviation subcommittee staffer who thought Air France-KLM wasn't having much impact on Capitol Hill, predicted a political firestorm for liberalizing ownership. The Bush administration already has proposed increasing the foreign-ownership limit to 49% but isn't pressing the issue, conceding instead that it needs to do more spadework. Going beyond 49% and ceding control would raise "the same emotional issues" as cabotage, Schaffer said, with a similar result. "You would get very vigorous opposition," he predicted, "and I'm not sure you could pull it off." This leaves negotiators with the knowledge that however difficult the open-area issues are to them, they will be even more difficult if and when an agreement enters the U.S. political arena. Schaffer, who works for the Republican side of the aviation subcommittee, said success will depend on winning or defeating labor. Roger EWROPS