Speculation and uncertainty over what Brexit may mean for the US-EU Open Skies agreement in future
Date added: 29 June, 2016
The EU–US Open Skies Agreement is an open skies air transport agreement between the European Union and the United States. It became effective in March 2008, and it allows any airline of the EU and any airline of the US to fly between any point in the EU and any point in the US. It allows US airlines to also fly between points in the EU, but EU airlines cannot fly between points in the US. For the UK, the Open Skies agreement opened up transatlantic opportunities to Heathrow, whereas the previous bilateral deal gave access only to American Airlines, British Airways, United Airlines and Virgin Atlantic. But with the UK Brexit vote, the future of the Open Skies Agreement is uncertain. What happens next could take months or years to work out. In theory, if the UK is out of the EU, it would be out of Open Skies and have to renegotiate a bilateral with the US – which could mean airline access limits. In reality, that scenario is highly unlikely, because if the UK decides to join the European Common Aviation Area, like Norway and Iceland, which gives access to the Single Aviation Market. It is likely that the UK will do whatever it takes to continue unfettered access to both the EU aviation market and the US aviation market. However, the attractiveness of increased liberalisation, in many industries, may be reducing. There may be less trust in future of open markets. Uncertainty will continue …
Effects on air passenger demand in future for Heathrow or Gatwick?
The EU–US Open Skies Agreement is an open skies air transport agreement between the European Union and the United States. The agreement allows any airline of the European Union and any airline of the United States to fly between any point in the European Union and any point in the United States. Airlines of the United States are also allowed to fly between points in the European Union. Airlines of the European Union are also allowed to fly between the United States and non-EU countries like Switzerland. The treaty disappointed European airlines as it was tilted in favour of United States airlines: while they are allowed to operate intra-EU flights, European airlines are not permitted to operate intra-US flights nor are they allowed to purchase a controlling stake in a US operator.The Agreement replaced and superseded previous open skies agreements between the US and individual European countries.
The initial agreement was signed in Washington DC on April 30, 2007. The agreement became effective March 30, 2008. Phase two was signed in June 2010.
Among questions being asked in the air transport industry since last week’s shock Brexit referendum result is what does the UK’s divorce from the European Union mean to the US-EU Open Skies aviation agreement?
Unlike the immediate financial tremors that followed the referendum, when the pound tanked after the British voted 51.9% in favor of leaving the EU, effects on the UK’s global trade agreements will take longer to percolate.
For one thing, formal divorce proceedings can’t even begin until after the UK invokes the now infamous Article 50 clause that is the trigger for an EU member country to begin exit negotiations. And with even some of the pro-Leave campaign leaders now saying they are in no hurry to pull that trigger, existing trade agreements could remain for months, certainly, and maybe years.
So it is with the US-EU Open Skies agreement. This historic air transport treaty, signed in 2007, permits any airline in the EU to fly to any point in the US and vice versa. The agreement was particularly significant for the UK because it opened up transatlantic opportunities to London Heathrow, whereas the previous bilateral gave access only to American Airlines, British Airways, United Airlines and Virgin Atlantic.
Heathrow’s runway and slots capacity constraints still limit Heathrow access, but US-EU Open Skies at least opened the door to competition.
In theory, that door could close once the UK is no longer part of EU and, by extension, no longer party to the transatlantic Open Skies treaty. In theory, the UK would need to renegotiate a bilateral with the US and that could take us back to the days of airline access limits.
In reality, that scenario is highly unlikely. Even if a US-UK agreement has to be forged, the expectation is that it would be a liberalized, Open Skies treaty. Such an agreement may not even be necessary if, as some believe, the UK opts to take up membership in the European Common Aviation Area. Norway and Iceland are ECAA members and it gives them access to the Single Aviation Market.
This is why, for example, Norwegian Air Shuttle has been able to establish a low cost carrier unit in Ireland – an EU country – and is entitled to fly between Ireland and the US under the US-EU Open Skies agreement. However, despite acknowledging there is no reason to deny Norwegian a foreign air permit, US regulatory authorities have dragged their heels for well over two years and still not given final approval – much to the annoyance of European Commission regulators.
While the Brexit vote and the US-UK air transportation relationship may seem separate from the Norwegian situation, they are linked in one important way.
The general thinking is that the UK’s unrestricted access to the EU aviation market, and by proxy the US aviation market, is so important that one way or another, the UK will negotiate continued unfettered access to both.
The problem with that belief is that it is based on logic. And if logic were the compelling argument, the UK would have voted to stay in the EU and all talk on new aviation agreements would be moot.
Logic is not the plat du jour. On global trade fronts, retreats into national protectionism are becoming more visible.
Example number one in this industry: the attempt by US major airlines to revisit the US Open Skies agreements with the UAE and Qatar once the success of the Gulf carriers looked like presenting more competition than the US carriers had anticipated.
Example number two: the US’ long delay in granting a permit to Norwegian Air. Labor groups on either side of the Atlantic have been active voices protesting against the Gulf carriers and Norwegian, scaremongering about job losses and even, however baseless, safety.
IATA produced an excellent, cool-headed examination last week of the potential aviation implications of Brexit, which we reported here and which you can read in full here. The UK, IATA points out, has been a prominent proponent of some European initiatives such as liberalized market access and airspace reform.
But more than 17 million Brits voted against unrestricted access to the general European market. If there is fear of market liberalization in general, it’s difficult to see why there would be acceptance or understanding of aviation liberalization in the specific. More worryingly, those who led the Leave campaign could paint aviation liberalization in the same lost-jobs-at-home terms as those in the US have painted their Gulf and Norwegian competitors. As it happens, Norwegian also has a UK unit that is hitting similar roadblocks encountered by its Irish sister. There is a very real danger that such blocking tactics by the US, despite the transatlantic agreement, will arm those who are left to forge the UK’s new trade deals with accusations that the US does not uphold its Open Skies obligations, so what’s the point?
In other words, the UK referendum echoes a global fermenting mistrust of liberalization and open market and yes, it could have long-term negative outcomes on what has been one of air transport’s most significant and stimulating phenomena.
With Britain’s EU exit, open skies have become partly cloudy
By Robert Silk (Travel Weekly)
If the U.K. tips into a recession, British Airways is vulnerable and so is transatlantic partner American Airlines.
Great Britain’s pending exit from the EU creates new challenges in international aviation. But it’s far too soon to say what impact Brexit will ultimately have on U.S. air travel.
“This is all going to take a long time. The immediate impact is it just got a little cheaper to go to Europe a lot cheaper to go to the U.K.,” said Seth Kaplan, managing partner of the newsletter Airline Weekly.
Indeed, data on Monday showed that following Great Britain’s June 23 Brexit vote, which sent the pound sterling to a 31-year low, airfares had dropped as much as 6% between U.S. hubs and London, according to the website FareCompare.
That’s good news for U.S. travelers, of course, but Brexit has been bad news for stockholders. Shares at American, Delta and United were all down at least 5% on Monday following even steeper declines on Friday. The airlines aren’t yet speculating on how Brexit will impact them over the long run. United, Delta and American played it safe in statements they issued.
“It is too early to say what the results of the vote mean for aviation in the U.K., one of the world’s leading air markets, in the long term,” Delta said. “It’s business as usual for the foreseeable future for Delta’s flights between the U.S. and Britain. Delta remains committed to the U.K. market.”
Analysts expect the airlines will wait until their second-quarter earnings calls next month to offer more insight on Brexit.
Still, conventional wisdom is that American could be the most affected among the three legacy U.S. carriers. American operates 25 flights per day between the U.S. and the UK, more than its competitors. And American’s extended route network is tied into a joint venture with British Airways, the U.K.’s largest carrier.
“American Airlines relies on British Airways connections via London Heathrow to countries such as India, South Africa and Sweden that American Airlines does not serve directly from the United States,” wrote analyst West Coast Growth Picks in a column for the website Seeking Alpha.
“The vast majority of these flights are targeted at British traveling between the U.K. and these countries with some seats sold to American Airlines passengers looking to connect to these countries via London. If a U.K. recession caused British Airways to either reduce or eliminate service to some of these destinations, it would affect the network that American Airlines is able to offer its customers.”
Delta is also closely tied into the U.K. The Atlanta-based carrier has a joint venture with Virgin America, of which it owns 49%.
What impact Brexit has long-term on aviation will in significant part be determined by how the U.K. negotiates new aviation agreements with the U.S. and European Union. Under the current open skies agreement between the U.S. and EU, U.S. and British carriers can fly freely between the U.S. and any country in the Eurozone. Kaplan said that such rules could very well remain in place under a deal with Great Britain. But he noted that there are scenarios in which U.K. carriers would end up with more limited access to EU skies.
“There are already voices in Europe saying they should punish the U.K. to show that they can’t have the milk without buying the cow,” he said.
Under a worst-case scenario, Kaplan said, the U.K. could return to 2008, before the U.S. and Europe completed their open skies agreement, when only four carriers were allowed to fly between Heathrow in the U.S.
Complexities could also remain even if Great Britain successfully negotiates a deal in which it retains full open skies benefits within the U.S. and Eurozone.
For example, Norwegian Air Group, which is fighting for a controversial permit to fly to the U.S. from an Ireland-based subsidiary, says it needs the Irish entity to more easily expand its route network beyond the U.S. and Europe to South America, Asia and Africa than it can from its Norway-based Norwegian Air Shuttle.
The reason is because while Norway is a signatory to the EU open skies agreement, it, unlike Ireland, is not a member of the EU.
Barry Humphreys, a U.K.-based aviation analyst, said he doesn’t see extended route networks being a significant issue for U.K. airlines and their partners due to the extensive bilateral agreements Great Britain already has in place with nations outside the EU.
But he said one impact Brexit could have is on the European open skies debate regarding the Gulf carriers Emirates, Qatar and Etihad. As in the U.S., those rapidly expanding carriers have drawn criticism from some European airlines for allegedly accepting government subsidies in violation of aviation agreements. However, while powerhouses Lufthansa and Air France are pushing the EU to get tough on the Gulf carriers, International Airline Group, which includes British Airways, has vocally supported open markets.
“If the U.K. exits that debate, the conversation is going to swing very strongly,” Humphreys said.
Increased restrictions on the Gulf carriers at their European hubs could impact their route networks into the U.S.
Drawbacks aside, Brexit isn’t without potential silver linings when it comes to U.S. aviation, according to a note prepared June 24 by Hunter Keay of Wolf Research.
Keay wrote that if Great Britain’s exit from the EU portends an increase in nationalistic policies, it could lead to Heathrow being closed off to rapidly growing Middle Eastern airlines — for example, Emirates, Etihad and Turkish. It might also raise more questions about Norwegian’s plan to use the Irish entity to operate cheap transatlantic flights.
“Thinking two steps down the road, we see scenarios that could very easily result in clear positives for U.S. airlines at [Heathrow],” Keay wrote.
The US-EU Open Skies agreement comes into play; an egg that will be hard to unscramble
As noted in the introduction to this report, the North Atlantic open skies agreement has become so entrenched in the operations of European and North American airlines that it is almost inconceivable that anyone (except perhaps some pilot unions with particular agendas) could wish to see it unravel.
Technically the agreement is still being applied provisionally, so that withdrawal of any party can allow the pre-existing bilateral agreement to apply – in this case the so-called Bermuda 2 Agreement of 1976 between the US and the UK. But, as the US negotiator (now independent of the US government) responsible for the EU-US talks, John Byerly says, “it is impossible for me to believe that this is really what would happen in the real world”.
The various parties’ interests have become so entwined that there would at least be more losers than winners if the status quo were to be disrupted. There is little prospect that any party would wish to rock the boat while the Brexit process is being followed, a potentially lengthy period. The anti-trust immunised JVs of the major alliance partners are dependent, from a US perspective, on continued open skies.
Theoretically the UK could be extricated from that, but London Heathrow is the prime premium market, will always be an important gateway to Europe, and there would be considerable pain for any airlines unable to use the open skies umbrella for their alliance strategies.
Delta Air Lines in particular has a bilateral stake with its 49% ownership of Virgin Atlantic, possible only thanks to the existing open regime. This level of ownership could be at risk if a more restrictive regime applied.
But risks there are – and uncertainty, for months to come
There can be no guarantee of restoration of the status quo once the fragile buds of liberalisation are disturbed. In each of these cases maintaining equilibrium involves risks. There can be no guarantee of restoration of the status quo once the fragile buds of liberalisation are disturbed.
Typically, opening of markets is not an intuitive activity, but is only achieved by meticulous and time consuming negotiation, where partners are willing to forgo the (apparent) safety of the status quo for a leap of faith to a better system.
Yet that is the only way markets and society can adapt and improve. Today, all of these liberal ideals are under attack. The motives may be misguided, and almost invariably are, but they can contain powerful and destructive forces, as Brexit and recent US political events illustrate so clearly.
Once the careful process unravels, the outliers can become revitalised. Vested interests re-emerge, and they are many and varied; legal challenges on esoteric points can be revived (eg the US and other pilot associations against Norwegian‘s US-Ireland services); extensive delays can create uncertainty which undermine innovation and investment. Protectionism is a highly infectious disease.
Airlines: Brexit’s Just One More Thing To Worry About
By Ben Levisohn 27.6.2016 (Stocks to Watch)
Airlines like American Airlines (AAL), Delta Air Lines (DAL), and United Continental (UAL) have been unable to convince investors that they’re no longer the risky stocks of the past and Brexit won’t help the cause. Deutsche Bank’s Michael Linenberg and team explain why Brexit could by bad news for American Airlines, Delta Air Lines, and United Continental–and a reason to favor Southwest Airlines (LUV) and JetBlue Airways (JBLU):
With the International Air Transport Association (IATA) warning about a “permanent downward shift” in UK passenger volumes of 3% – 5% by 2020 following the Brexit vote, US airlines with exposure to the UK – American Airlines, Delta Air Lines and United Continental – not surprisingly incurred share declines of 8% – 11% on Friday (no airline matched the 22.5% decline in International Consolidated Airlines Group shares). While we continue to believe that London will remain a major O&D market for the foreseeable future, the vote to leave the EU does create uncertainty with respect to near-term demand for air travel to/from the UK as well as how the UK will feature in a revised EU – US Open Skies accord. Given that the UK market for 2016 represents 6.3% of American’s capacity, 5.4% of United’s and 2.8% of Delta’s (6.7% if you give Delta Air Lines credit for half of Virgin Atlantic’s US – UK capacity), we see potential downside EPS risk, and therefore, maintain our Hold ratings on the shares of the Big 3. We continue to favor domestic names such as Southwest Airlines, Spirit Airlines (SAVE) and JetBlue Airways which should gain from a favorable leisure/discretionary travel outlook.
Shares of American Airlines have dropped 5% to $25.69 at 12:35 p.m. today, while Delta Air Lines has fallen 4.6% to $33.59, United Continental has plunged 7.2% to $38.09, Southwest Airlines has declined 3.4% to $37, JetBlue Airways has slipped 1.8% to $15.19, and Spirit Airlines is off 3.1% at $41.06.
