THERE has been much chatter among frequent flyers in London this week about a front-page splash in the Financial Times claiming that British negotiations with America to replace the EU-US Open Skies Treaty are in trouble:
The US is offering Britain a worse “open skies” deal after Brexit than it had as an EU member, in a negotiating stance that would badly hit the transatlantic operating rights of British Airways and Virgin Atlantic. British and American negotiators met secretly in January for the first formal talks on a new air services deal, aiming to fill the gap created when Britain falls out of the EU-US open skies treaty after Brexit, say people familiar with talks.
The talks were cut short after US negotiators offered only a standard bilateral agreement. These typically require airlines to be majority owned and controlled by parties from their country of origin.
Such limits would be problematic for British carriers as they have large foreign shareholdings. Under existing arrangements, UK-based airlines are covered by the open skies treaty that requires them to be majority EU owned.
One person attending the London meetings to “put Humpty Dumpty back together” said: “You can’t just scratch out ‘EU’ and put in ‘UK’.” A British official said it showed “the squeeze” London will face as it tries to reconstruct its international agreements after Brexit, even with close allies such as Washington.
The article goes on to say that the Americans want to roll back some parts of the EU’s open-skies treaty, which it claims is the most liberal deal ever agreed to by Washington. Under this agreement any EU-owned and -controlled airline is allowed to fly between any two airports in Britain (or Europe) and America. If a special deal is not signed before Brexit, some flights between Britain and America could be grounded after Brexit. Britain and America would return to the Bermuda II agreement dating from the 1970s. This would limit flights between Heathrow airport in London and America to two British carriers (historically British Airways and Virgin Atlantic) and two American carriers (previously American Airlines and United Airlines). It would also mean that only British and American majority owned and controlled airlines could fly between other airports in Britain, such as Gatwick, and the United States.
The rub, the article claims, is that the Americans want a stricter definition of British ownership and control. EU rules are currently laxer than in America about what this means. For instance, Virgin America, an airline that had Richard Branson of Virgin Atlantic as a minority shareholder, had its operating licence there blocked for several years as the American authorities thought the British billionaire would have too much influence over the firm. If he was an American in Europe he would have had no such trouble. But under the stricter rules proposed by the Americans, IAG, the owner of British Airways, might not have enough domestic shareholders to count as British. Meanwhile, Virgin Atlantic might not have enough either if a proposed deal for Mr Branson to sell 31% of his shares to Air France-KLM, a European airline group, goes through. Norwegian, an upstart that is ramping up flights between London Gatwick airport and America, could also lose its rights as it is mainly owned by investors from Norway.
In theory, all three airlines could lose their flying rights after Brexit if a special deal is not done. But in practice this is extraordinarily unlikely, both sides tell Gulliver. And to say that the Americans at the end of the day want a less liberal deal is stretching the truth somewhat. The American aviation and aerospace industries are keen for an open-skies agreement to continue. All three want to keep their landing rights in Heathrow and therefore do not want a return to the situation under Bermuda II. In recent years American and Delta have also signed extremely profitable joint-venture agreements with British Airways and Virgin respectively, which would have to be abandoned under competition law if open skies were to end. Boeing, an American planemaker that the Trump administration is keen to help, also has an interest in the status quo continuing. British Airways, Virgin Atlantic and Norwegian are all big customers for its airliners.
If Britain does lose any flying rights after Brexit, aviation historians say, it will ultimately be its own fault. If the country does not strike a trade deal with America or the EU after leaving the bloc, it can fall back on a basic level of access for its exports set by the World Trade Organisation (WTO). But there is no such agreement for aviation, which relies on bilateral treaties between countries to agree on which airlines can fly between their airports. When the WTO’s predecessor was set up, the Americans wanted open skies around the world and it was the British who demanded the exclusion of aviation. British negotiators, led by John Maynard Keynes, an economist, were worried about American airlines dominating the industry and their threat to the viability of air routes from London to the colonies. If Britain had not sought to mollycoddle its aviation industry in the past, its airlines would not have to worry so much about Brexit today.