Commentary

Nothing to Fear from Open Skies with European Union

This article was published in The Hill on Oct. 1, 2003.

This fall, trade representatives from the European Union (EU) and the United States will try to hammer out a broad, air-transportation agreement intended to promote greater choice and competition for fliers and cargo jetting back and forth between the two economic powerhouses.

The talks may not generate sexy, front-page headlines, but they will benefit consumers and, perhaps just as important, should position American carriers to gain a strong, profitable foothold in a liberalized U.S.-EU air market.

A series of “Open Skies” treaties between the United States and individual European countries governs U.S.-European commercial air service. The treaties, some of which date to the late 1970s, cover such matters as access to routes, capacity, flight frequency and fares.

For instance, European carriers may fly to the United States from their home countries — Lufthansa cannot make a “two-hop” flight, with a stop at Heathrow to take on more passengers. European carriers are prohibited from offering domestic flights within the United States, while U.S. carriers are permitted to offer a limited slate of intra-European flights.

The degree of permitted market freedom varies widely across the different pacts between the United States and individual European nations. Last November, the European Court of Justice ruled that the unevenness of the separate treaties violates the EU Community Law, thus opening the way for this fall’s effort to negotiate a general “Open Aviation Area” agreement.

European carriers, having undergone significant deregulation under the EU, want to continue that for trans-Atlantic flights. They are eager for the removal of the two-hop restriction and may even aspire to provide domestic service in the United States. U.S. airlines, in turn, are eager to provide an extended flight schedule within Europe.

History shows that when U.S. airlines have greater freedom to compete with their European counterparts for trans-Atlantic customers, the Americans do very well.

Academic research into the market between 1984 and 1990 shows that European airlines in the six countries with the most liberal bilateral air-service agreements — Belgium, Denmark, France, Germany, Spain and the Netherlands — lost market share to their American rivals while European airlines in the six most restrictive countries — Greece, Denmark, Italy, Portugal and the United Kingdom — gained share against the constrained Americans.

Why? One reason is that American carriers generally provide more efficient, less expensive service than their European rivals. Researchers Paul Seabright and Charles Ng, in a 2001 academic article, found that public ownership and the market power of European airlines appeared to result in significantly less productivity than their U.S. counterparts.

European airlines have considerably higher labor costs than the Americans.

Seabright and Ng’s paper noted that, of the 12 major European carriers they studied, pilots earned an average annual income of $151,200; cabin-crew members earned $48,500 and other personnel averaged $46,000. In comparison, the eight American carriers they studied paid an average of $110,500 a year to pilots, $30,700 to crewmembers and $37,000 to other personnel.

In exchange for the higher pay, the European airline workers were less productive, according to Seabright and Ng. The Europeans averaged 1.33 million revenue-passenger kilometers per employee, compared to 1.93 million for the Americans.

The American carriers are further aided by their size versus European rivals. The world’s four largest airlines — American, United, Delta and Northwest — are U.S. fliers, and two others, Continental and US Airways, are among the top 10. In comparison, only two EU airlines (British Airways and Lufthansa) are in the top 10. The Americans’ size enables them to better take advantage of economies of scale, negotiate with various suppliers, leverage capital and gain a forum for their concerns among policymakers.

Those facts strongly suggest that American carriers would benefit from an increase in their ability to offer trans-Atlantic and intra-European flights. Those benefits are especially appealing now, when several major U.S. airlines are suffering from excess capacity and large amounts of red ink on their balance sheets.

But will U.S.-EU liberalization provide opportunities to European airlines that would offset the advantages to the Americans? The likely answer is no.

European airlines interested in providing domestic service within the United States would face a steep learning curve because the U.S. market is significantly different from the intra-European market. Europe does not have as complex a hub-and-spoke system of air traffic movement as the United States, and few intra-European flights are more than 90 minutes long. The European airlines will likely have to hire American managers and consultants to better embrace the U.S. market, and that will require time and money.

Indeed, instead of challenging the American carriers head on within the United States, the European airlines probably would be more interested in mergers, joint-ownership arrangements and partnerships with U.S. airlines. Such activities could provide benefits to all involved parties. Federal studies of previous alliances, such as USAir-British Airways and Northwest-KLM, showed that the involved airlines gained market share while consumers benefited from better choices.

Experience and research suggest that American consumers and the U.S. aviation industry have much to gain from liberalization of the U.S.-EU air-travel market. At a time when passenger air travel is still recovering from Sept. 11 and U.S. carriers continue to struggle financially, the opportunity for such gains is especially appealing. But to achieve those gains, American negotiators must be bold in their dialogue and U.S. policymakers must use the talks as an opportunity to strip away long, outdated European and American barriers to foreign airlines.

Thomas A. Firey is managing editor of Regulation magazine, published by the Cato Institute.