Europe declares open skies pacts illegal

Court ruling granting Brussels power to negotiate air traffic rights could pave way for airline mergers

The aviation industry has been thrown into flux after a top European legal official declared yesterday that all bilateral air traffic agreements between member states and the US were illegal.

Even though Britain has failed to conclude an "open skies" deal with the US, it was also hit by the move, as its 1977 Bermuda II agreement, which governs UK-US air travel, was said to infringe European law.

Ahead of a European Court of Justice ruling on the legality of these agreements, which have been challenged by the European Commission, the Advocate General, Antonio Tizzano, said that open skies and Bermuda II went against the founding principles of the European Union. The move could pave the way for the creation of a single EU-US aviation market and kick off a series of European airline mergers.

"This is a vital question of competitiveness of our [European] industry," said Loyola de Palacio, the EU's transport commissioner. "The bilateral agreements prevent intra-European mergers."

The Commission took eight member states to the European Court in 1998 ­ the UK, Denmark, Sweden, Finland, Belgium, Luxembourg, Austria and Germany ­ over the aviation agreements they had separately concluded with the US. Yesterday's opinion came ahead of the final court ruling, which is expected in the next few months. The Advocate General advises the European court on legal points and in 80 per cent of cases, the subsequent court ruling agrees with his guidance.

Existing open skies arrangements are aimed at liberalising air traffic between the US and a single European country and allow a US carrier to form an alliance with an airline from that country without coming up against antitrust law. However, they stop short of full liberalisation and therein lies the clash with European law.

Mr Tizzano's objections rested on two counts. Firstly, he said "nationality" clauses in these deals, which made them solely bilateral agreements, discriminated against other member states and so acted against free trade within the union. "All the defendant member states have infringed the community principle of freedom of establishment by maintaining or inserting the nationality clause in the open skies agreements," the Advocate General said.

Secondly, the states, excluding the UK, broke the rules over air fares and computerised reservations systems, as there are common European rules on these issues that were by-passed. "In matters covered by the common rules, member states may not under any circumstances conclude international agreements: any steps taken would be incompatible with the unity of the market," Mr Tizzano said.

Brussels had told the court that it had the automatic right to negotiate international treaties such as open skies. However, Mr Tizzano rejected this part of the Commission's argument. If the court upholds this point, Brussels will have to go to member states to win a mandate to negotiate a new blockbuster open skies deal with the US that seeks to create one aviation market between the US and Europe.

Furthermore, existing open skies agreements have been an impediment to European airline mergers, as routes are bound up with airlines' nationality.

Losing that nationality, through a takeover by an airline with another nationality, means losing vital routes. This is one of the main points that scuppered the on-off merger talks between BA and KLM. An over-arching liberalisation agreement would remove this problem, as it would do with any nationality clauses.

Chris Humphrey, the manager of government and external affairs at Virgin Atlantic, said: "This [Tizzano opinion] dramatically increases the clout of Europe in negotiations. The US can no longer divide and rule. The existing open skies agreements are purely for the benefit of US carriers, not their European partners."

In dealing with individual member states, American negotiators were able to dominate and played European countries off against one another. The whole of Europe and the US are roughly equal-sized markets. And, with Europe speaking with one voice, it should, in theory, be able to get a better deal.

However, the complexity of such a deal and the factious nature of Europe will present massive hurdles to the establishment of a new Europe-US civil aviation relationship.

While Virgin said yesterday that Mr Tizzano's pronouncement was welcome and could lead to a mega-deal within a couple of years, British Airways did not appear to know what to make of it, while BMI British Midland was against the idea. Vested commercial interest was, of course, asserting itself.

Sir Michael Bishop, BMI's chairman, said: "There is a window of opportunity which will last three or four months for the UK to conclude an open skies deal before authority passes to Brussels.Once the Commission takes over the job of negotiating open skies it could take 10, 15, or who knows, even 20 years before an agreement is signed."

The eventual prize of a blockbuster agreement is large. In theory, it ought to create a completely open market between the US and Europe in aviation, meaning that a European carrier such as BA could operate in the US domestic market ­ flying, say, from Houston to Seattle.

The existing aviation arrangements are expected to stay in place while a new deal is worked out but that leaves the sector in a state of legal limbo. An airline disadvantaged by the old open skies rules could take its own legal action against nationality clauses, without waiting for the new mega-deal. If BMI is right, the upshot of yesterday's decision is an impasse and the maintenance of the status quo.