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When the United States and European Union first signed their Open Skies aviation agreement in 2007, the U.S. airlines got the better of the deal, winning immediate access to European markets in return for promises for concessions in the future. European airlines, such as British Airways, warned that this made them hostages to fortune. As it turns out, they were right. The U.S. once again is giving in to protectionist tempation. President Obama should quickly change course and move toward truly free skies.
On March 25, American and EU negotiators signed a draft agreement on the second round of Open Skies negotiations, which purports to open both markets to foreign competition. Unfortunately, real progress has been stymied by America’s refusal to commit to relaxing its outdated ownership laws, which limit foreign ownership of voting equity in American airlines to a mere 25 percent.
These Cold War-era restrictions significantly hamper competition. Landing slots at airports are a very scarce commodity due to local zoning regulations. At U.S. airports, American airlines typically own around 90 percent of slots, in contrast to big European hubs like Heathrow, where only 38 percent of the places are owned by British airlines. This makes it very difficult for foreign-owned airlines to establish adequate feeder routes. As a result, the only way for foreign airlines to successfully compete in America is to merge or form joint ownership agreements with U.S.-based airlines. This strategy has been successful and beneficial for passengers, but it is severely curtailed by the current foreign ownership cap.
So what alleged threats would increased foreign ownership pose? American opponents of reform argue that liberalizing the airline market would hurt worker welfare and jeopardize safety. Those arguments are misleading, for several reasons.
First, most U.S. pilots and airline staff are paid less than their European counterparts, so their jobs are unlikely to be jeopardized. Market liberalization would help consumers by leading to more affordable fares. Consumers would then be able to spend the money saved on travel on other products and services, benefitting the U.S. economy and creating jobs elsewhere. In fact, lower prices might bring new customers who cannot currently afford to fly into the market, and encourage existing customers to fly more often, thus creating more jobs in the airline industry.
Safety concerns are also overblown. Domestic safety standards are regulated by the Federal Aviation Administration regardless of ownership. Government regulations aside, airlines have strong incentives to keep up safety and security standards due to tort liability and concern over reputation. Value Jet took such a public beating after its 1996 Everglades crash that it ended up changing its name. Its successor, AirTran, hasn’t had a major accident since.
Opponents of deregulation in the 1970s voiced similar concerns. They argued that if the Civil Aeronautics Board were to no longer set prices—which it did at exorbitant levels—safety standards would deteriorate. In fact, deregulation allowed the development of the hub-and-spoke system, which increased capacity, resulting in lower prices for consumers without any compromises in safety.
The Obama administration is doing American consumers no favors by shielding domestic carriers from foreign competition. Consumers only stand to gain from doing away with the current ownership cap, which restricts competition and tarnishes America’s reputation as a defender of free markets—which in turn undermines America’s ability to advocate for open markets abroad.
Taxpayers would benefit as well. By freeing up capital and allowing foreign companies to buy into U.S.-based airlines, Congress would reduce domestic carriers’ reliance on taxpayer support, thus reducing the likelihood of future bailouts.
To date, the Open Skies negotiations have been a victory for domestic carriers, not for American consumers. It’s a sad day when the notably bureaucratic, slow-moving, protectionist European Union acts as a better champion of American consumers’ interests than anyone in Washington.