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Competition in the air

The accord between the European Union and the United States on the liberalisation of the market in transatlantic aviation, which accounts for 60 per cent of the world’s air traffic, entered into force recently. The “open skies” agreement heralds a common external policy on air transport for the EU’s 27 states, replacing many bilateral pacts with the U.S. The deal, which is expected to raise about €12 billion in savings, generate over 80,000 jobs, and reduce air fares, is less ambitious than what was anticipated after protracted negotiations over the distribution of flying rights and restrictions on investment and ownership. It allows the U.S. and EU airlines to operate between any pair of cities in the two regions and onwards to third destinations. However, while the U.S. carriers are authorised to fly within the EU, save between two points in a single member state, their EU counterparts have no reciprocal rights to U.S. domestic routes. Another potential avenue for greater competition following the new pact is London’s Heathrow Airport — it accounts for 40 per cent of European flights — as the restriction of flights between Heathrow and the U.S. to four carriers under the 1977 Bermuda Agreement will now be superseded. But then, incumbent airlines from Heathrow have grandfather rights to about 97 per cent of the runway slots and it is unlikely that the scenario will change in the near future. Moreover, the American Congress’s unwillingness to relax the current 25 per cent cap on foreign investment in U.S. carriers has been countered with a similar hitherto non-existent restriction by the EU.

The agreement does not address the decades-old fuel tax exemption for transatlantic flights, and environment groups are concerned over this lacuna cancelling out reductions from emissions trading, and over the overall impact on CO2 emissions of the expected increase in the number of flights. Arguments that transatlantic aviation accounts for merely three per cent of global pollution, and that competition will redistribute rather than increase flights in this mature market, are hardly convincing. The EU is committed to promoting competition as a means to enhancing overall prosperity and has, in recent years, demonstrated global leadership in fashioning a strategy for combating global warming. The bloc is therefore well placed to strike the difficult balance between sustaining growth and protecting the environment and to bring the U.S. on board on the issue.

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