#

NEW EU – USA AIR TRANSPORT AGREEMENT - Is Turkey EU´s next target?

 

Hamit Osman OLCAY*

On March 30, 2007, within the scope of the “EU – USA Summit”, the signing ceremony for the EU-USA Air Transportation Agreement took place in Washington D.C. US Secretary of State Rice, US Transport Secretary Peters, German Federal Minister of Transport, Building and Urban Affairs Tiefensee, EU Commission Vice-President and Transport Commissioner Jacques Barrot were present at the ceremony. The agreement, called “Open Skies Agreement”, is hailed as an important achievement in further liberalising the Trans-Atlantic aviation market. The agreement is the result of negotiations held between the parties since 2003, and is characterised as the “First Stage”. (1)

Following its approval by the US Senate, the agreement is due to enter into force on 30 March 2008. Other benefits notwithstanding, the agreement is expected to provide for a %34 increase in trans-Atlantic air passenger traffic, generate up to $16 billion in economic benefits over five years and create a total of 80.000 new jobs on both sides of the Atlantic, according to EU Commission news released on March 2. (2) 

As is known, economic relations between the US and EU form the largest trade and investment partnership in the world. The volume of trade in 2003 comprised more than US$ 725 billion worth of goods and services. In the same year, the US had US$ 785 billion of direct investment in the EU while the EU invested just over US$ 1 trillion in the US; a total of over US$ 1.8 trillion. (3) 

The Story So Far:

Along with the development of aircraft capable of crossing the Atlantic, the transportation of passengers and goods by air became a lucrative business. Following the end of WW-II, USA and the United Kingdom; two countries which at the time possessed such aircraft, realized that they had to protect their respective fledgling internal aviation markets and to regulate cross-Atlantic flights, signed a Bilateral Air Transport Agreement on the island of Bermuda (henceforth called the Bermuda I Agreement) on February 11, 1946. That agreement, which was highly restrictive at the insistence of the British negotiators who feared that the US demands for a “free-for-all” agreement would lead to the then financially and operationally superior US airlines’ total domination of the global air transport industry, was the world’s first bilateral air services agreement.

The renegotiation of the Bermuda I Agreement took place again in Bermuda, and a new “open skies” agreement (Bermuda II) was signed by the parties on July 23, 1977. This agreement was a less restrictive than the earlier one it replaced, but was widely regarded as a highly restrictive agreement that contrasts with the principle of “open skies” against the background of continuing liberalisation of the legal framework governing the air transport industry in various parts of the world. The agreement allowed for “dual designation”, allowing only four airlines in total from the US and UK to operate flights between London Heathrow and continental USA. The two British carriers were British Airways and Virgin Atlantic, while the US carriers were specified as American Airlines and United Airlines. At the insistence of the UK, the Bermuda II contained clauses that made it illegal for any airline operating scheduled flights between UK and the US to resort to predatory pricing or capacity dumping.

The trend for further liberalising air services continued internationally. Driven by its booming airline industry, the USA began concluding “Open Skies” agreements with other countries in 1979. Most of these air services agreements include provisions for:

1. Free Market Competition: No restrictions on international route rights; number of designated airlines; capacity; frequencies; and types of aircraft.

2. 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.

3. Fair and Equal Opportunity to Compete: All carriers – designated and non designated- of both countries may establish sales offices in the other country, and convert earnings and remit them in hard currency promptly and without restrictions. Designated 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. User charges are non-discriminatory and based on costs; computer reservation system displays are transparent and non discriminatory.

4. Cooperative Marketing Arrangements: Designated airlines may enter into code-sharing or leasing arrangements with airlines of either country, or with those of third countries, subject to usual regulations. An optional provision authorizes code-sharing between airlines and surface transportation companies.

5. Provisions for Dispute Settlement and Consultation: A model text includes procedures for resolving differences that arise under the agreement.

6. Liberal Charter Arrangements: Carriers may choose to operate under the charter regulations of either country.

7. 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.

8. Optional 7th Freedom All-Cargo Rights: Provide 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.

Starting from 1992, the US began concluding air services agreements with EU member states as well. The EU Commission, arguing that these agreements contained provisions contrary to the European Single Market and especially to the “Third Package” of 1992  (4), which applied the principles of the Single Market programme to the aviation industry, instigated legal action against the UK, Belgium, Denmark, Germany, Luxembourg, Austria, Finland and Sweden at the European Court of Justice (ECJ) (5) , on grounds that it alone had exclusive competence to negotiate international air services agreements with third countries.

In its ruling of 5 November 2002, the ECJ delivered its judgments on the compatibility of the Open Skies agreements with EC law. (6)  In brief the ECJ;

• Rejected the EU Commission’s argument that it had exclusive competence to negotiate air services agreements,

• Held that the nationality provisions contained in the current air services agreements infringe the EC law principle of freedom of establishment, thereby recognising that the Commission had limited exclusive powers,

• Rejected the argument made by some Member States that restrictions of ownership and control of air carriers as contained in air services agreements were justified by public-policy reasons.

• The EU Transportation Council meeting in June 2003 allowed for the EU member states and the Commission agreed on the modalities (7)  to solve the issues identified by the ECJ. Two methods were identified for amending the existing bilateral air services agreements: either bilateral negotiations between each member state concerned and its partners, amending each bilateral air services agreement separately, or the negotiation of single “horizontal” agreements, with the Commission acting on a mandate of the Member States of the EU. Each “horizontal” Agreement aims at amending relevant provisions of all existing bilateral air services agreements in the context of a single negotiation with one third country. Between June 2003 and September 2007, the method of separate bilateral negotiations has led to changes with 51 States, representing 101 bilateral agreements corrected. Under the second option, horizontal negotiations have led to changes with 9 States, representing an additional 461 bilateral agreements. (8) 

The Commission, with the mandate given to it by the Ministers of Transport during the above-stated meeting, began negotiations with the US. Following 11 rounds of negotiations, the parties were able to reach consensus on a draft agreement as early as November 2005. But its signature was put on hold by European Member States that linked the deal to changes in US airline ownership rules and carbon emission trading. The US Department of Transport put forward a proposed rule that would have allowed international investors more input in the marketing, routing and fleet structures of US airlines, but withdrew in December 2006 in the face of harsh congressional, labor and industry opposition.

After much effort on the US side to alleviate the concerns of its domestic opposition, an additional three rounds of negotiations at the beginning of 2007 produced a final draft text which was initialled by the two sides and was subsequently approved during the EU Ministers of Transport meeting on 22 March 2007. The US-EU Air Transport Agreement was finally signed in Washington on 30 April 2007. It must be noted that this agreement is considered as the conclusion of “First Stage” negotiations; with a series of second round negotiations expected to begin in early 2008. A provision in the agreement allows for the EU Commission to suspend the implementation of all or parts of the agreement upon a request from a Member State, should the parties not be able to reach consensus in these “Second Stage” negotiations until 2009.

The main elements of the US-EU Air Transport Agreement are as follows: (9) 

1. Traffic rights and commercial-operational matters

• “Community carrier” concept permitting EU airlines to operate to the US from any point in the EU

• Removal of all restrictions on international routes between the US and EU, and routes beyond the US and EU. Removal of all restrictions on pricing on all routes, except for US carriers which cannot price-lead on intra-EU routes.

• Removal of all restrictions on 7th freedom flights for ll-cargo services operated by EU airlines but no additional 7th freedom all-cargo rights for US air carriers. 7th freedom rights for passenger services for EU airlines only, between the US and any point in the European Common Aviation Area (ECAA) (10) .

• Rights to enter into franchising and branding arrangements with other airlines or companies.

• Commitment of the US authorities to provide fair and expeditious consideration of antitrust immunity application (ATI) and assurance that Community airlines qualify for ATI under the agreement.

• Unlimited code sharing between US, EU and third country airlines.

• Creation of new opportunities for EU airlines to wet-lease (aircraft and crew) aircraft to US airlines for use on international routes between the US and any third country, which was previously prohibited by the FAA.

2. Ownership and Control

• As much as %25 of voting equity be EU investors and/or %49.9 of total equity of a US airline shall not be deemed to constitute control of that airline.

• Ownership of %50 or more of the total equity be EU nationals shall not be presumed to constitute control of that airline, subject to a case-by-case analysis.

• Guarantee of fair and expeditious consideration of any transaction involving investment by EU nationals in US airlines.

• Right of reserve granted to the EU to limit investments by US nationals in the voting equity of a Community airline.

3. Regulatory Co-operation

• Co-operation in developing common rules in the fields of security, safety, competition, environment.

• Ability to raise concerns about government subsidies and support.

• Mutual commitment to enhance co-operation in the areas of climate science research and technology development that would enhance safety, improve fuel efficiency and reduce emissions in air transport.

• Establishment of a Joint Committee which will be responsible for resolving questions in relation to the interpretation or application of the agreement.

4. Other Issues

• Creation of new rights for EU airlines to carry certain categories of US Government-financed traffic under the “Fly America” programme, with a commitment to pursue further access in the future.

• Provisions facilitating the combination of air services with surface transportation providers in both cargo and passenger fields.

• US acceptance to guarantee European computer reservation systems (CRS) providers the right to operate in the US.

• The provisional application of the agreement from 28 October 2007.

Possible implications for the Turkish aviation industry

Turkey concluded a bilateral air services agreement with the US on 2 May 2000 in New York. This agreement, based on the “Open Skies” approach entered into force on 13 August 2001 lacks most of the provisions on regulatory co-operation, market access and investment found in the new US-EU Air Transport Agreement. However, it still is an agreement quite liberal in nature, and would not warrant any renewal from the US perspective for the time being.

On the other hand, the EU Commission is of the opinion that Turkey’s bilateral air transport agreements with key Member States incorporate discriminatory clauses and in line with the Commission’s Directive no. 847/2004, has requested from several Member States to renew their agreements with Turkey. The Commission alternately seeks to conclude a “horizontal agreement” with Turkey. These attempts have been previously rejected by Turkey on grounds of political and economic reasons, and of the fact that Turkey does not accept the International Court of Justice’s juridical authority in matters relating to the interpretation and application of the horizontal agreement.

Having concluded an agreement with the US, it is most likely that the EU would now focus its attention on Turkey which possesses one of the largest airspace in Europe, taking into account of Turkey’s air navigation services and the dynamism of her air transport industry. Here below are some basic facts and figures for Turkey in this field 11.

• The Flight Information Regions (FIRs) controlled by Istanbul and Ankara Air Control Centers (ACCs) cover an area of approximately 982.000 square kilometers.

• Overflights over Turkey amounted to 203.000.

• Overflights were mainly carried out on the North-South and East, Southeastern-North, Northwestern axes.

• Turkey collaborates closely with EU Member States in European institutions such as the European Civil Aviation Conference (ECAC), European Agency for the Safety of Air Navigation (EUROCONTROL), Joint Aviation Authorities (JAA).

• Close to 40 Turkish companies operate in the field of air transportation, including air taxi and cargo operations.

• Airport operations render economic gains as well. There is a strong incentive to privatize most of the available 34 airports currently meeting civilian and military needs.

• International and domestic passenger traffic amounted to 54.5 million %49 of these passengers were transported by foreign carriers.

• Charter flights accounted for %64 of outbound air transport. • International and domestic freight comprising of cargo, baggage and mail reached 1.250.000 tons in %47 of international freight was carried by foreign carriers.

These facts and figures are indicative of Turkey’s unique location and the scope of air transport related economic activities. In face of the ongoing mergers between airline companies in Europe, Turkey’s aviation market presents many opportunities yet to be tapped by European investors, especially in the fields of air transport and airport privatization. However, common sense dictates that before allowing such investments, the development of the fiscal structures and capabilities of Turkish air transport companies as well as the profitability of the remaining airports need to be addressed.

Reference

1) Full text of the agreement may be downloaded from the website of the Directorate-General of Energy and Transport of the Commission, at http://ec.europa.eu/transport/air_portal/
international/pillars/global_partners/us_en.htm

2) Ibid.”Open Sky: Jacques Barrot welcmes the draft aviation agreement reached by the EU-US negotiatrs.” Mr. Barrot is currently Vice-President of the European Commission, Commissioner for Transport.

3) As quoted by Mr. Daniel Calleja, Director for Air Transport Directorate of the Energy and Transport Directorate General of the European Commission, in his speech at the international Aviation Club, Washington D.C., 16 November 2004.

4) See: Regulation (EEC) No 2407/92 on licensing of air carriers (Official Journal L240 of 24.08.1992, p.1), Regulation (EEC) No 2408/92 on access for Community carriers to intra-Community air routes (OJ L240 of 24.08.1192, p.8) and Regulation (EEC) No 2409/92 on fares and rates for air services (OJ L240 of 24.08.1992, p. 15).

5) cases C-466/98, C-467/98, C-468/98, C-469/98, C-471/98, C-472/98, C475/98 and C-476/98 against the United Kingdom, Denmark, Sweden, Finland, Belgium, Luxembourg, Austria, Germany.

6) Full text of the judgments of the European Court of Justice can be found at

http://europa.eu.int/eur-x/lex/LexUriServ/LexUriServ.do?uri=CELEX:61998C0466:EN:HTML

7) 11322/03 AVIATION 137 RELEX 202 USA 55 Council decision on authorizing the Commission to open negotiations with the United States in the field of air transport, 9 July 2003.

8) As published at the website of the Directorate-General of Energy and Transport of the EU Commission, section “Horizontal Agreements”.

9) Information Note: Air Transport Agreement between the EU and US, Directorate-General of Energy and Transport of the EU Commission, 6 March 2007, p.6-9

10) The European Common Aviation Area comprises, in addition to the EU Member States, Albania, Bosnia and Herzegovina, Croatia, Iceland, Macedonia, Montenegro, Norway, Serbia and the UN Interim Administration Mission in Kosovo.

11) DHMİ 2005 İstatistik Yıllığı, Devlet Hava Meydanları İşletmesi Genel Müdürlüğü “Annual Statistics Yearbook 2005”, State Airports Administration

* Daire Başkanı, Havacılık Dairesi, Dışişleri Bakanlığı