Posts Tagged ‘Open Skies’
The Headline: Two of the worlds largest economies liberalise air bi-laterals
- The Fine Print – Concessions and Quid Pro Quos
- Is it a Win/Win?
- Overall: A good news story
Coming in a close second in aviation headlines, behind the excitement of the first 787 taxi tests, was the news that over the weekend, Japan and U.S. reached a historic open skies agreement, which replaces the more restictive agreemnt put in place in 1952, and re-negotiated with limits in 1998.
This new agreement allows for an open bi-lateral between the two nations for the first time, with only a few caveats. I think the fact that the Japanese delegation chose to stay on beyond the 11 a.m. deadline on Friday was testament to how close an agreement was for both parties.
The Fine Print
Of course this was a negotiation, and as such there were some concessions. Japan’s request for ATI and Joint Venture (JV) fast-tracks for their carriers went unresolved. In my analysis the Japanese delegation was pragmatic about their ability to walk away with ATI agreements in hand, but have put in place contingencies in the deal on this key point. After all, any keen observer of the U.S. aviation sector could see that the long delayed AA/BA ATI applications has been held up for some time and there is little sign of hope inside the Washington beltway for progress.
What carriers on both side gain is a liberalisation on the ability to operate flights based on consumer demand, and the removal of some pricing restrictions. From the U.S. side, only four slots at the new Haneda (HND) were secured, and the window for their use is at off-peak night hours, where customer demand is yet to be measured.
Access to HND is good news for the US- but the Japanese still walk away no worse for the wear. Macquarie, JAL, and the other key shareholders of Haneda were not building the new runway and facilities as decor. The Japanese government in particular has indicated its desire to develop international, particularly Asian traffic, through this strategically placed airport.
Is it a Win-Win?
In our view, Japan may well have come out these negotiations in a slightly stronger position. Gaining unlimited access to US markets and still keeping premium time slots at HND and NRT or themselves- even if they gave the US an additional 15 minutes on their ops window. That is the headline- but the Japanese way would to be gracious and move along with their win.
What should the US be proud of? The lobbying pressure alone from the Texas Congressional
delegation on this at the Department of Transport (DoT) and Department of State (DoS) level has been intense- and impressive. It shows how very much the US wanted this to be a US “win”. With Oberstar desire to muddy the waters on the powers of the Department of Justice (DoJ) and DoT to take independent ATI decisions- the power of the TX delegation becomes very important. What will we do if/when Hutchinson leaves her seat? She is one of the airlines, and consumers, best mates in DC. Regardless of what I think of the rest of her politics, she is good for US Commercial Aviation.
Overall it is good news for two of the largest, developed, economies
So overall, a good week for Japanese-American relations; There is no reason why two of the largest developed economies in the world should have open bi-laterals and to this observer- this is nothing but positive news for both Prime Minister Hatoyama and the Opposition Democrats, as well as the Obama administration.
In Todays Issue:
- - The Bullet
- - Summary of the Key Findings
- - Carbon Emissions: A Damning Indictment
- - The “Open Skies”?
- - TWC’s Take on the Report
- - Who says politics can’t be funny
This morning, The U.K House Of Commons Transport Committee published its initial findings to the Government on their enquiry “The Future of Aviation”. The enquiry began in late February of this year with a broad scope to elicit information from the public, the industry, and other interested parties on the Future of UK Aviation.
Committee Chairman Louise Elleman MP, said in a statement, “Aviation is an important part of the UK economy, both in the south east of England, and in the regions.”
The Committee goes on to say that the Government’s long term basis of Aviation Policy- a 2003 white paper- “continues to provide a sound basis for aviation policy but warns the Government that it must update its assessment of the economic value of aviation for the UK economy regularly to ensure its figures are subject to independent external scrutiny.”
Carter Stewart, Managing Director of TWC Aviation, a London-based Aviation Consultancy agrees. “We believe that the overall net economic contribution of aviation to the U.K. has been under-valued by the Government by as much as £800M GPB annually”
The Key Findings of the Report: Overall Good News for the Industry
In summary the statement from The Committee makes the following additional recommendations:
The Committee supports the Labour Government’s London Heathrow expansion proposal; but calls into question the Stansted expansion and instead suggests London Gatwick may be more appropriate.
While The Committee “recognises the importance of Air Passenger Duty (APD)” it suggests that the Government needs to be “mindful of the vulnerability of the aviation industry in the current economic climate.”
Carbon Emissions: A Damning Indictment of the EU – Sane Words to the Industry
The report could not be complete without also addressing the issue of Carbon Emissions and noise pollution. The Commitee says in their report that aviation should not be “demonised or assigned symbolic value beyond its true impacts.” It went on to comment that they had concerns that “The EU Emissions Trading Scheme has an appaling track record and may prove insufficient to to drive investment into low carbon aviation”
Regarding Carbon Emissions, the report sets forth a “number of principles that should be applied in this area.” It also refers us to the publication of the UK Climate Change report that is due to be published on Tuesday, 08 December. They also called on industry to “sensibly reduce its greenhouse gas emissions over the coming decades.”
The “Open Skies?”
“Discussions to extend the Open Skies agreement are ongoing between the European Commission and the US Federal Aviation Administration. This might allow further access to EU and US markets. The asymmetric nature of the Open Skies agreement is disadvantageous to the UK economy and particularly to the UK regions, and should be renegotiated at the earliest possible opportunity.”, the report says.
The report also reiterates MPs previous calls for the ATOL levy to be increased and extended to include all international flights. Currently, ATOL is only applied on package holidays from the U.K.
It also asks The Government to clarify the “basis of its claim that an additional £10 bn could be raised if VAT and Fuel duty were applied to Aviation.”
The key conclusion is clear. ”We beleive that the aviation industry is a very important to the UK Economy. Therefore we find it unsatifatory that the Government leaves such a key industry to the vagaries of the market.”
Our Take of the Reports Findings
“Overall we believe that the report is a good news story for both the industry and consumers,”, Stewart says. “At this critical economic time for our country the aviation industry, and airline consumers, have been suffering at the hands of the taxman disproportionately to other industries.”
“In a recent speech to The UK Aviation Club in September, The Lord Adonis defended the recent APD increase by saying it was ‘a matter of published policy’ and as a result ‘it would not be changed.’ I am glad to see members of the Transport Committee are calling into question the potentially damaging effect this policy has on UK airlines and airports to compete with other European rivals.”
“One of the most telling items from our perspective is the language used around the US Open Skies agreement.”, says Carter Stewart. ”With talks between the US and Japan about to start today this is not the ideal moment for a key U.S. shortfall to come into such scrutiny. We agree that US liberalisation promises have failed to truly materialise for the UK, and promises about foreign ownership are key”
“With US carriers vying for ownership and control deals with JAL, I simply hope that the Japanese keep in mind the key points of reciprocity in their agreement and have clear understanding and timetables from the outset.”, Stewart says.
“It is also refreshing to see MPs pushing back on behalf of the industry and consumers by demanding clearer answers on proposed estimates on tax revenue from VAT on tickets and fuel levies”, Stewart says.
Todd Koonce, Manager of Technical Operations at TWC Aviation believes that the report does hit some of the right notes about aircraft technology. “It is obviously to everyone’s benefit to phase in more efficient aircraft as soon as is financially and operationally viable. The key issue for many carriers has been the delivery delays of these very aircraft, like the 787 and A380, from the manufacturers themselves.
“I also believe that for short-haul segments, the efficiencies of turbo-prop aircraft have been overlooked by the airlines. There is also a public perception that regional jets are somehow safer, and more comfortable, when there is an argument to be made that latest generation of turboprops could offer lower emissions and better operating margins.”
Proof Positive of Humour in Politics
For those of your interested in the initial white-paper, here is a little bit of the background and history.
H.M. Government has for some time used a white paper entitled “The Future of Air Transport”, published in 2003, as the basis of U.K. Government Aviation policy. Ironically, it was then Alistair Darling, then Minister of State for Transport (and now current Chancellor of the Exchequer) who introduced the reports findings to the House of Commons on 23 of July 2002. Even at that time, then Minster Darling was making a case that the U.K. needed to keep pace with capacity demands, and understood the importance of our air gateways which needed to compete with the increase in market share by Continental European airports.
What a difference a few years, and a change to Chancellor can make.
(A full text of his statement to the House in 2003 can be found here, at the 1530 time marker.
Why AA/BA Antitrust Immunity Makes More Sense now than ever…
When American Airlines (AA) and British Airways (BA) filed for antitrust immunity in 2002 there was little hope that an agreement could be reached with the US and EU Regulatory authorities. New entrants into the EU-US market were prohibited, and AA and BA were opposing businesses nearing an effective monopoly hold on daily departures between Heathrow and the US.
In 2007, the first phase of the new EU-US Open Skies accord was reached. Since then several new entrants have started flights in this lucrative market. This agreement has allowed these new market entrants to fundamentally change the competitive landscape at Heathrow and other airports throughout the EU. Ultimately the passengers now have a wider choice of carriers, service levels, and new non-stop destinations than ever before. As a result, consumers on both sides of the Atlantic should urge their lawmakers to approve the AA/BA application for immunity.
The Opposition from Virgin
In spite of these competitive changes some consumer groups, and competitors such as Virgin Atlantic (VS), vehemently oppose the proposal. Virgin Atlantic claim that if the deal were to be approved that AA/BA would have a “stranglehold on London Heathrow-US services, and be able to coordinate schedules enough to inflate demand, and as a result also inflate fares. While the anti-trust immunity would arguably have some impact on frequency and schedule as the two carriers coordinate, in the end consumer demand and pressure from new competitors will keep fares in check and provide passengers an alternative choice of carriers on a scale not previously available.
Since the implementation of the Open Skies agreement, we have seen many carriers such as Air France, Delta, and US Airways, and Northwest begin to challenge the established carriers in the Heathrow-US market. While the economic downturn has temporarily scaled down the expansion efforts of some like Air France, these are an example of the healthy competition that comes from open markets. Since then Congressman Orbester has made his protectionist position clear via US HR 831, while UK Transport Minister Hoon Geoff Hoon stopped short of threats to dissolve the current EU-US open skies agreement as he reinforced European calls for further liberalisation in stage two talks during a speech to the International Aviation Club in Washington two weeks ago.
Hoon indicated that if no second-stage agreement is reached next year, either party has the right to withdraw traffic rights secured under phase one – an option highlighted by previous UK transport officials but not by Hoon. It was the stance of his predecessor Ruth Kelley the former Transport Minister.
During the meeting of aviation professionals Hoon said that “[we] should stay clear of retaliation,”. “I have no doubt the United States should not be afraid of opening up its aviation business to further competition.”
In our opinion it is entirely likely that with the European and Local elections in June, and current turmoil over UK domestic policy issues such as MP’s expenses, and the recent defeat in the House on the issue of Gurkha’s, it is possible that this Labour Government, and its ministers, will not be present around the final negotiating table.
In his speech Hoon indicated that protectionism offers cold comfort in an economic downturn. That same day United States Congressman James Oberstar (D-MN) was receiving an award for “service to aviation’ while at the same time being the main architect of H.R. 831 calling for limited the power of the DoJ and calling for tougher reviews, restrictions, and rollbacks on airline alliances and
What is the rest of the world doing?
In a related story, Canada raised it’s foreign-ownership limits this week to just short of 50%, while Inida continues to liberlise it’s foreign ownership criteria.
Another concern for the UK, and EU, is the US reaction to including commercial flights in the EU carbon emissions scheme, which we at TWC have lobbied against.
The New Threat at Heathrow
There is also a serious potential contender in the London-US market. BMI (BD) and their majority owner Lufthansa have been raising their profile to business travelers over the past few months As Heathrow’s second largest airline could direct links to US be far off? Lufthansa’s recent increase in its BMI stake is further evidence of the emerging strength and competition in the Heathrow market by the Star Alliance, who already operate with antitrust immunity.
The past few years have also seen some important experimentation with trans-Atlantic links between other London airports, such as Stansted and Luton, with mixed results. Fairly radical change came at Gatwick as a near mass exodus of carriers shifted their Gatwick operations to Heathrow soon after the final agreement on Open Skies was in place. Virgin Atlantic also has a unique opportunity to redefine the overall London-US airport experience as it leads a consortium proposing the purchase of Gatwick Airport from the British Aviation Authority (BAA). If it succeeds in its bid, they will have the opportunity to potentially shift consumer preference away from Heathrow with a superior airport experience.
We agree that consolidation is no silver bullet, and it will not solve any carriers problems overnight. That said, we feel that there is no cogent argument for opposing the AA/BA request for the same immunity that has been granted many other alliances in the EU and US already. We believe that its approval will level the playing field between the airline alliances, increase competitive pressures, and ultimately benefit consumers as a result.
After lobbying from Alaska Air and other labour groups, it would appear that Congressman Oberstar (Democratic Congressman and Chairman of the House Transportation Committee) has requested that U. S. Transportation Secretary LaHood look into the “nationality” of Virgin America for potential violations of U.S. foreign ownership rules.
We find this ironic, given today’s news from the G20 summit in our own hometown. While protesters went about their business in the Square Mile, down in the Docklands something truly important was happening. In the final communiqué the G20 found common ground, in principle, against trade barriers. We predict that we will see implicit ripple effects onto Open Skies Mark II as a result. We also think that a US Congressman would be more concerned with American jobs being lost vs. the blatant protectionist politics and his obsession with HR 831.
Ironically, the Virgin issue has very little to do with HR831, as it is a stand-along player that Oberstar is righteously trying to protect against what his calls ‘whiny’ legacy airlines.
Perhaps we should all think this through to its logical conclusion? In our opinion both Oberstar is missing the point. We are talking about American jobs here, and it is my sincere hope that the legislators of both Houses from California and New York will be so kind as to remind the Congressman of that pertinent fact.
In addition, is it possible that while the investors may have indeed decided to extract some of their remaining investment from this venture, that perhaps they still retain critical voting rights as part of the contract’s structure? I am no lawyer, but what I do know is this: The Virgin Group and its CEO are both known quantities to me personally, and I would not underestimate how particularly adept they are at doing their jobs.
While we understand the position of Alaska Air, we are a bit more puzzled by the reaction of some of the labour unions who are exercising their muscle on this issue as well. While I appreciate that times are tough, but I have to wonder if ALPA be singing a different tune if Virgin America’s pilots were dues paying members?
Oberstar has missed the fundamentals. We live in a global economy now, and airlines are on the front line. They are our physical lifeline to the new global economy, a tangible manifestation of the reality of international commerce, trade, and leisure.
At TWC we will continue to use our resources to highlight what we interpret as the dangerous brand of political protectionism practiced by the Chairman of the US House Transportation Committee.
Disclaimer: The author holds no current positions or active contracts with any of the carriers mentioned in this blog.
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