Fordham International Law Journal Volume 23, Issue 6 1999 Article 16 Deregulation of Air Transport Agreements Robert Wolfger∗ ∗ Copyright c 1999 by the authors. Fordham International Law Journal is produced by The Berke- ley Electronic Press (bepress). http://ir.lawnet.fordham.edu/ilj Deregulation of Air Transport Agreements Robert Wolfger Abstract This essay briefly discusses the reality that I have experienced in air transport for some time. In this field, the world is still ruled by bilateral air transport agreements. Such bilateral agreements are even in force in Europe. This essay asks several questions. First, what does successful dereg- ulation in Europe really mean? Would deregulation be successful if many low-cost carriers flew throughout Europe and carried mostly point-to-point traffic from point A to B? I personally think that very few routes are suitable for this point-to-point traffic. DEREGULATION OF AIR TRANSPORT AGREEMENTS Dr. Robert Wolfger* Thank you for making it possible for me to take part in this Symposium. Normally, it means trouble for an airline when it is surrounded by so many lawyers. It means trouble because for many airlines, economic considerations, in whatever form, come first, and then competition law may hit. I represent a national airline here. Austrian Airlines is fifty- one percent owned by the Austrian state, a small state. Within this small state, there is limited competition. On the other hand, Austrian Airlines is a very small airline with only a two per- cent market share in Europe. In absolute size, Austrian Airlines ranks forty-ninth in the world. Austrian Airlines has a limited number of aircraft, and has shown positive results for a couple of years now. Shortly before this meeting, Dr. Romina Polley asked me if I was offended after reading her presentation. I told her that I was used to the arguments she used in her Essay. Having been with Austrian Airlines for almost twenty years, I know about the past fairly well, and I follow present developments closely. I started with market research, worked in personnel administra- tion for some time, and have been with international relations for fourteen years, which means, in the first instance, care for government relations. I must admit that we have very good rela- tions with the Austrian government. I have to admit as well that when Lauda Air-now our daughter company-was owned by Lufthansa, Lauda Air had even better relations with the Austrian government. Let me talk briefly about the reality that I have experienced in air transport for some time. In this field, the world is still ruled by bilateral air transport agreements. Such bilateral agree- ments are even in force in Europe. For example, there is still a bilateral agreement between Germany and Austria, which has not been canceled but has, to a great extent, been overruled by the three European liberalization packages and the declaration of applicable competition laws to air transport within the Euro- * Head of International Relations for Austrian Airlines. S209 S210 FORDHAMINTERNATIONALLAWJOURNAL [Vol. 23:S209 pean Union ("EU"). Not much more than ten years ago, traffic between Germany and Austria was nearly reciprocally allocated to Lufthansa and Austrian Airlines by means of a so-called pool agreement. We sat together every other month in a relaxed at- mosphere, talked about figures, talked about costs, and how to allocate the revenues between us. There was an agreement to share the revenues-in principle, half and half. Of course, Luf- thansa had much more revenue than we did, as we were a small airline, and therefore the payments resulting from that pool agreement flew in our direction. Although the pool payments had a limitation of one percent of the revenues of the paying partner, we received about seven million Austrian shillings every season for conceding that Lufthansa was allowed to offer some more seats to Austria than we did to Germany. That is over. That is finally over within the European Economic Area. It is still the case, however, between the EU and other coun- tries of the world. Not long ago, I returned from bilateral nego- tiations with Israel. There is a bilateral agreement between Aus- tria and Israel, just as one is in effect between Germany and Israel-an air services agreement of a rather pre-deterministic type. This agreement stipulates that every airline that is desig- nated on each side has, on principle, the right to offer fifty per- cent of the capacity, but only one airline on each side should be designated for offering this capacity. This agreement also stipu- lates that both designated airlines must agree on their capacity to be offered in advance, and if the airlines agree, then the re- spective governments would give their consent. Within this bilat- eral agreement, Austrian Airlines transports more passengers than El Al. Within this environment, adding frequencies be- tween Austria and Israel is hardly possible. For years, there has been a pool agreement between El Al and Austrian Airlines. Even if code sharing is offered, or eventually the pool payment might be raised, one never takes for granted that the partner will agree to that capacity increase. That is air traffic under a bilat- eral agreement, especially one with a predetermination clause. The same scenario goes for Russia, with the new Eastern Eu- ropean countries, and still with almost all Central European countries. It is also the case for most of the air traffic between Europe and Latin America, and between Europe and Asia. Be- tween Austria and Tokyo, one cannot offer the capacity accord- ing to market needs. There is a limitation to the capacity the 2000] DEREGULATION OF AIR TRANSPORT AGREEMENTS S211 other partner, or the other party, is ready to grant to you. It is a built-in limitation, as it is not only the one party in Europe that can liberalize or deregulate. There is also the other party that has a say in bilateral agreements. If the European Commission ("Commission") obtained an unlimited mandate to negotiate with these countries, then I fear that from some countries, which are not as liberal regarding air traffic as in our part of the world, we would get much less than we have now. Let me discuss, as an example of an air transport agreement that had some importance for Austrian Airlines in the past, the air transport agreement between Austria and Spain. Normally, the annex to a rather liberal agreement says that the designated airlines of Spain are allowed to fly from any point in Spain to any point in Austria, and the designated airlines of Austria are al- lowed to fly from any point in Austria to any point in Spain. This air transport agreement, however, was not that liberal. It said that the designated airlines of Spain could serve any point from Spain to Vienna, and the designated airlines of Austria could do so from any point in Austria to Madrid. One can already see from this formula, however, that the chances are not evenly dis- tributed because Spain has so many interesting points for an air- line, while Austria has, at most, only Vienna and Salzburg to of- fer. Graz, Klagenfurt, and Linz might not have been so attractive for new air services within these agreements. Even with such an air transport agreement the points are limited, and in this situa- tion, they were even more limited. The designated airlines of Spain flew from two limited points in Spain-Madrid and Barce- lona-to Vienna, while the Austrian airline was allowed to fly from points in Austria (the only economically reasonable point was Vienna) to Madrid. I do not think that this was fair, but it was, let us say, a reciprocal formula and logically clear: from points here to one point there-the reciprocal way. So Iberia was allowed to fly from Madrid to Vienna, from Barcelona to Vienna, from Malaga to Vienna, from wherever in Spain they wanted to Vienna, and we were allowed to fly from Vienna to Madrid, from Graz, Klagenfurt, Linz, and Salzburg to Madrid. If, under a pre-determinative type of agreement, one finds such a situation, then the small country normally, through repeated negotiations, can negotiate more points in the other, larger country. So, after a while, we were allowed to get Barcelona, to get Malaga, and even a fourth point. We got a little bit more S212 FORDHAMINTERNATIONALLAWJOURNAL [Vol. 23:S209 than a logical formula of reciprocity would permit. Now, if one takes all the European countries, especially the small ones, nego- tiating in the same way with Spain, they often got more rights than they deserved out of these reciprocal agreements. I think this is still the case between smaller countries in Europe and larger third countries, where the governments still show a rather restrictive attitude. This conclusion is even valid if we consider the relations be- tween single European countries and the United States. Many European countries have concluded Open Sky agreements with the United States, which mainly offer every European country such an Open Sky agreement. I must say that for Austria, this Open Sky agreement might be the optimum it could get. I sup- pose that for the German carriers, the Open Sky agreement be- tween Germany and the United States might also offer the best available chances. I don't know if the Dutch agreement is suffi- cient for the Dutch carriers, but for the Spanish and Portuguese carriers, I also suppose that such an agreement would be enough. For most of the European carriers, an Open Sky agree- ment with the United States might be the best they could get.