Open Skies Agreements on Domestic Research Proposal

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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.

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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.....

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