a

GAO

United States Government Accountability Office

Report to Congressional Requesters

July 2004 TRANSATLANTIC 

AVIATION

Effects of Easing 

Restrictions on 

U.S.-European 

Markets

GAO-04-835
www.gao.gov/cgi-bin/getrpt?GAO-04-835.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact JayEtta Z. 

Hecker, (202) 512-2834, heckerj@gao.gov. 

Highlights of GAO-04-835, a report to

congressional requesters 

July 2004

TRANSATLANTIC AVIATION 

Effects of Easing Restrictions on U.S.-

European Markets 

Open Skies agreements have benefited airlines and consumers. Airlines 

benefited by being able to create integrated alliances with foreign airlines. 

Through such alliances, airlines connected their networks with that of their 

partner’s (e.g., by code-sharing agreements), expanded the number of cities 

they could serve, and increased passenger traffic. Consumers benefited by 

being able to reach more destinations with this “on-line” service, and from 

additional competition and lower prices. GAO’s analysis found that travelers 

have a choice of competitors in the majority of the combinations of U.S.-EU 

destinations (such as Kansas City-Berlin). 

The Court of Justice decision could alter commercial aviation in four key 

ways. First, it would essentially create one Open Skies agreement for the 

United States and EU, thereby extending U.S. airline access to markets that 

are now restricted under traditional bilateral agreements. Notably, more 

U.S. airlines would gain legal access to London’s Heathrow airport, which is 

restricted by the U.S. agreement with the United Kingdom. Second, it would 

also allow EU airlines to operate into the United States from airports outside 

their own countries. Third, for EU airlines, a revised agreement could 

alleviate some obstacles to merging with other EU carriers or creating 

subsidiary operations in other countries. Finally, the possibility that EU 

airlines might move some operations into other EU nations raises concerns 

about which EU nations’ regulatory and legal systems would govern. 

U.S. airlines and consumers are likely to benefit from the elimination of the 

nationality clause, but the benefits may not be realized in the near term. Both

U.S. consumers and airlines would benefit from gaining access to markets 

restricted under bilateral agreements, especially London’s Heathrow airport, 

though capacity considerations there are likely to postpone and limit such 

access. Consolidation within the EU aviation industry could occur, with the 

effect on U.S. consumers varying, depending on whether consolidation 

creates additional competition or reduces it in particular markets. EU 

airlines could begin new transatlantic service in countries other than the 

airline’s own, which would provide consumers with additional competitive 

choices (see graphic). However, those airlines would likely face difficulties 

in competing successfully at another airline’s hub. 

A new Open Skies agreement could result in more international routes. 

Transatlantic airline operations 

between the United States and 

European Union (EU) nations are 

currently governed by bilateral 

agreements that are specific to the 

United States and each EU country. 

Since 1992, the United States has 

signed so-called “Open Skies” 

agreements with 15 of the 25 EU 

countries. A “nationality clause” in 

each agreement allows only those 

airlines designated by the signatory 

countries to participate in their 

transatlantic markets. 

In November 2002, the European 

Court of Justice ruled that existing 

Open Skies agreements were illegal 

under EU law, in part because their 

nationality clauses discriminated 

against airlines of other EU 

nations. The United States and the 

EU have been negotiating revisions 

to these agreements. Experts agree

that removing the nationality 

clause is central to any new 

agreement. GAO was asked to

report on (1) how prevalent Open 

Skies agreements are and what 

their effects on airlines and 

consumers are, (2) what the key 

ways that commercial aviation 

between the United States and the 

EU could be changed by the Court 

of Justice decision are, and (3) how 

the elimination of nationality 

clause restrictions might affect 

airlines and consumers. GAO’s 

work included both analyzing data 

on transatlantic air service and 

evaluating information from and 

positions of industry officials, 

subject-matter experts, and 

stakeholder groups. GAO is 

making no recommendations. 
Page i GAO-04-835 Transatlantic Aviation

Contents

Letter 1

Results in Brief 4

Background 7

Open Skies Agreements Have Benefited Consumers and Airlines by 

Removing Restrictions on International Air Service 12

Addressing the European Court of Justice Decision Will Affect 

Commercial Aviation in Four Key Ways 23

U.S. Consumers, Airlines, and Labor Groups May All Benefit from 

Changes in Agreements, Although Extent of Benefits Is Uncertain 

and Gains May Not Be Realized Immediately 34

Concluding Observations 52

Agency Comments and Our Evaluation 54

Appendixes

Appendix I: Scope and Methodology 56

Appendix II: Air Freedoms 60

Appendix III: Cargo Carriers 61

U.S. Cargo Carriers Have Increased Their North Atlantic Operations 

Since Open Skies 61

Fifth Freedom Rights 62

Lack of EU Enforcement Ability on Noise Regulations May Affect 

U.S. Cargo Carriers 63

Appendix IV: Current International Airline Alliances 65

Appendix V: Air France-KLM Merger 66

Appendix VI: GAO Contacts and Staff Acknowledgments 67

GAO Contacts 67

Acknowledgments 67

Tables Table 1: Changes in Domestic U.S. and EU Aviation Markets and 

Employment 8

Table 2: Summary of Key Differences between Traditional Bilateral 

Agreements and Open Skies Agreements 11

Table 3: U.S.-EU Markets Served with Nonstop, Single-Connection 

or Double-Connection Flights 20

Table 4: Changes in Average Fares in Transatlantic Markets, 1996 

versus 1999 23
C ontents

Page ii GAO-04-835 Transatlantic Aviation

Table 5: Comparison of Dominant Carrier’s Scheduled Seat 

Capacity With That of Next Largest Airline at Major EU 

Airports 45

Figures Figure 1: Largest U.S. and EU Airlines, Based on Percentage of 

Total U.S. - EU Traffic Carried, 2002 12

Figure 2: EU member states with Open Skies agreements 14

Figure 3: Illustration of How Alliance Networks Link Markets 17

Figure 4: Customers in the Kansas City to Berlin Market Have 

Multiple Trip Options 21

Figure 5: Most US-EU Markets Served by Three or More 

Competitors 22

Figure 6: Comparison of Total Runway Capacity and Demand at 

Heathrow, Summer 2004 Demand for Arrivals 27

Figure 7: Potential effect on transatlantic service with the removal 

of the nationality clause restrictions 30

Figure 8: Top EU markets based on total percentage of U.S.- EU 

passenger traffic from 1990-2002 36

Figure 9: Change in Nonstop City Pairs and Average Aircraft 

Capacity Across the North Atlantic 43

Figure 10: Freighter Operations for All Carriers Flying Between the 

United States and the EU, 1990-2002 62
C ontents

Page iii GAO-04-835 Transatlantic Aviation

Abbreviations

EU European Union

DOT Department of Transportation

DOJ Department of Justice

State Department of State

UK United Kingdom

Heathrow London Heathrow Airport

KLM KLM Royal Dutch Airlines

DG TREN European Union Directorate General Transport and Energy

DG COMP European Union Directorate General for Competition

BACK BACK Aviation Solutions

FAA Federal Aviation Administration

AEA Association of European Airlines

UPS United Parcel Service

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-04-835 Transatlantic Aviation

United States Government Accountability Office

Washington, D.C. 20548

A

July 21, 2004 Letr

The Honorable John McCain

Chairman

The Honorable Ernest F. Hollings

Ranking Minority Member

Committee on Commerce,

 Science, and Transportation

United States Senate

The Honorable Trent Lott

Chairman

The Honorable John Rockefeller

Ranking Minority Member

Subcommittee on Aviation,

Committee on Commerce,

 Science, and Transportation

United States Senate

Since the late 1970s, commercial aviation within the United States and the 

nations that form the European Union (EU)1

 has become substantially 

deregulated, creating greater competition, lower fares, and significant 

increases in passenger traffic. Commercial aviation between the United 

States and the EU is not deregulated to the same degree. Since 1992, 

however, the United States has signed what are called “Open Skies” 

agreements with a number of EU nations. These bilateral agreements seek 

to create a more deregulated transatlantic environment between the two 

nations signing the agreement by reducing or eliminating operating 

restrictions on the airlines of either nation. This means that any airline 

licensed by either nation can offer service between the two nations. This 

same relaxation of restrictions does not extend, however, to airlines 

licensed by other nations. Under what is called the “nationality clause,” the 

right to provide nonstop service between a point of origin in one nation and 

a destination in a second nation is limited to airlines that are owned and 

1

The European Union was initially established with 6 countries under the Treaty of Paris 

(1951) and the Treaty of Rome (1957), which set the ground rules for the European Union. 

These founding treaties have since been amended by the Single European Act (1986), the 

Treaty of the European Union (Maastricht 1992), the Treaty of Amsterdam (1997), and the 

Treaty of Nice (2001). The EU now has 25 member countries. EU countries have reached 

EU-wide agreement in certain policy areas and operate as a single economic market. 
Page 2 GAO-04-835 Transatlantic Aviation

controlled by citizens of the two nations signing the agreement, thereby 

effectively excluding other EU airlines from providing competing service.2

In November 2002, the European Court of Justice, the EU body responsible 

for interpreting European law, ruled that seven existing Open Skies 

agreements and the bilateral agreement between the United States and the 

United Kingdom violated EU law. In particular, the Court of Justice found 

that the nationality clause illegally discriminated against airlines from other 

EU nations because it excluded them from entering the transatlantic 

aviation market between the two nations that had signed the agreement. In 

June 2003, the European Council, composed of representatives from each 

member state, issued a mandate to the European Commission to negotiate 

with the United States on the creation of an Open Aviation Area, which 

provides for the liberalization of the U.S.-EU market, including the removal 

of restrictions on foreign investment in airlines between the EU and the 

United States.

In October 2003, the United States and the EU opened negotiations. 

Industry experts and stakeholders we spoke with agreed that resolving the 

nationality clause was the key issue. However, in June 2004, the European 

Council rejected a draft agreement being negotiated by the United States 

and the EU Commission. The European Council stated that further efforts 

should focus on “more balanced market access provisions” than were 

included in the draft agreement. U.S. officials interpreted that as referring 

to a desire by EU carriers to gain more direct access to the U.S. domestic 

aviation market. Further contacts are being considered. U.S. and EU 

officials stated that current agreements remain in effect. There is no set 

time frame for when the matter must be settled.

Changing the agreements to remove the nationality clause restrictions 

carries implications for U.S. and EU airlines, airline passengers, and other 

stakeholders within the airline industry. These negotiations thus represent 

an opportunity to examine the current agreements and their effect on the 

U.S. airline industry, as well as the implications of potential changes to 

those agreements. You asked us to report on the potential implications of 

changes in these agreements. We examined the following questions:

2

Under current Open Skies agreements, airlines are allowed to provide service from other 

“Open Skies” nations into the United States; however, such flights must be continuations of 

flights that originate in the airline’s home country.
Page 3 GAO-04-835 Transatlantic Aviation

• How prevalent are Open Skies agreements between the United States 

and EU nations, and what has been their effect on airlines and 

consumers? 

• What are the key ways that commercial aviation between the United 

States and the EU could be changed by the Court of Justice decision? 

• How might the elimination of nationality clause restrictions in any new 

U.S.-EU agreement affect airlines and consumers?

To examine the prevalence and effect of Open Skies agreements on airlines 

and consumers, we reviewed prior research from a variety of organizations, 

including the U.S. Department of Transportation (DOT), and we analyzed 

DOT data on passenger traffic from 1990 through 2002. To determine the 

key issues related to the European Court of Justice’s decision, we 

interviewed officials from five major U.S. and eight major EU airlines; DOT; 

the U.S. Department of State (State); the European Commission 

Directorates General for Competition, Employment, and Transport; U.S. 

and EU labor unions and associations; and EU airports, as well as officials 

of EU aviation trade associations. To determine how the absence of the 

nationality clause restrictions might affect airlines and consumers, we 

interviewed industry experts about the likely outcome of removing the 

nationality clause restrictions, and used prior research to highlight any 

potential benefits or barriers that airlines and consumers would face. We 

also analyzed available data on capacity constraints at EU airports and the 

effect of opening transatlantic markets on labor. We assessed the reliability 

of the various data sets analyzed throughout the report and determined that 

they were sufficiently reliable for our purposes.

We recognize that other important factors must be carefully examined 

when analyzing international aviation. For example, issues relating to 

safety and security regulatory oversight are obviously critical to any 

comprehensive analysis of air transportation. Because of the magnitude of 

these issues, however, we agreed with your staff at the outset that they 

were beyond the scope of this report. In addition, while the EU mandate 

called for the creation of a more open aviation market (including issues 

such as foreign ownership restrictions and access to domestic markets), 

both U.S. and EU officials acknowledged that addressing the Court of 

Justice ruling and resolving the nationality clause issue were both 

priorities, and we therefore focused our report on the issues linked to the 

ruling only. We also agreed to exclude from this report several other related 

issues – such as requirements that U.S. government employees and others 
Page 4 GAO-04-835 Transatlantic Aviation

using U.S. government financed foreign air travel to use U.S. airlines.3 For 

additional information on our objectives, scope, and methodology, see 

appendix I. We conducted our work from October 2003 through July 2004 

in accordance with generally accepted government auditing standards.

Results in Brief Starting in 1992 with the signing of the first of 15 Open Skies agreements 

between the United States and EU nations, both consumers and airlines 

have benefited from the removal of government restrictions on 

international aviation. With one notable exception, the United States has 

Open Skies agreements with the EU countries to which most transatlantic 

passenger traffic flows. The exception is the nation that is the single largest 

transatlantic market in terms of passengers and flights—the United 

Kingdom (UK). Under the U.S.-UK agreement, only two U.S. airlines have 

access to London’s Heathrow airport, the major gateway to the United 

Kingdom and the largest EU airport for transatlantic passengers. Available 

research indicates that U.S. airlines profited from Open Skies agreements 

by establishing more integrated alliances with EU airlines. Consumers 

benefited from Open Skies agreements because they allowed airlines and 

alliances to provide on-line service to more locations at cheaper fares. Our 

analysis of scheduled service for May 2004 showed that the majority of 

possible U.S.-EU markets were served with no worse than two-stop flights. 

Moreover, travelers had a choice of competitors, with the majority of 

markets being served by three or more airlines (or alliances).4

 

Addressing the findings of the Court of Justice decision could change 

commercial aviation between the United States and the EU in at least four 

key ways. They are as follows:

• Extension of U.S. airlines’ Open Skies traffic rights to the entire EU. If 

the rights available to both U.S. and EU airlines under the 15 current 

Open Skies agreements were extended to the entire EU, U.S. airlines 

would gain equal legal access to and between EU nations that still have 

restrictive bilateral agreements. However, significant capacity 

3

The Fly America Act, 49 U.S.C. App. 40118, as implemented in General Services 

Administration regulation 41C.F.R. section 301-10.131 et seq., requires federal employees 

and their dependents, consultants, contractors, grantees, and others performing U.S. 

government financed foreign air travel to travel by U.S. airlines.

4

In the airline industry, a market has been defined as scheduled airline service between a 

point of origin and a point of destination. 
Page 5 GAO-04-835 Transatlantic Aviation

constraints and restrictions at a number of airports in these nations are 

likely to limit the airlines’ ability to make use of this new access, at least 

in the near term. Some of those rights may have greater implications for 

cargo carriers than passenger airlines. (Cargo issues are discussed in 

greater detail in appendix III.)

• Extension of traffic rights for EU airlines. Removal of the nationality 

clause restrictions would mean that the United States would recognize 

all EU airlines as “European Community” airlines. With this recognition, 

all EU airlines would gain the right to operate into the United States 

from EU airports outside of their home countries. For example, Air 

France, which currently can operate direct nonstop service only 

between U.S. and French cities, could legally provide nonstop service to 

the United States from any city within the EU.5

 EU airlines from 

countries with restrictive bilateral agreements, such as Spain, Greece 

and the United Kingdom, would also gain further access to U.S. markets.

• Internationalization of airline operations within the EU. To the 

extent that nationality-based restrictions would be removed, EU-based 

airlines would be able to move their operations to other EU member 

states and still provide service to the United States—for example, by 

merging with or acquiring another airline, creating a subsidiary, or 

moving an existing base of operations.

• Continued regulatory oversight. The possibility that EU airlines might 

relocate into other EU nations raises issues about which nation’s legal 

and regulatory system would apply, particularly regarding safety, 

security, and labor law. U.S. and EU labor groups have questioned 

whether EU airlines, in attempting to reduce costs to improve their 

overall competitiveness, would relocate operations to nations with 

lower wages or labor standards.

Based on past experience with the U.S. aviation market, the opinion of 

industry experts, and our analysis of available data, U.S. consumers and 

airlines are likely to benefit if nationality clause restrictions are eliminated 

5

Under current Open Skies agreements, Air France is allowed to provide service from other 

“Open Skies” nations into the United States; however, this service must be a continuation of 

a flight that originates in a French city, flies to a city in another EU nation, and then 

continues on to a destination in the United States. (The right to conduct such connecting 

flights are included within the Open Skies agreements.) The same is true for other airlines 

that are owned and controlled by citizens of Open Skies nations.
Page 6 GAO-04-835 Transatlantic Aviation

between the United States and the EU, but the benefits may not be realized 

for some years and will depend in part on the business strategies that U.S. 

and EU airlines choose. 

• U.S. airlines and consumers could gain additional access to London’s 

Heathrow Airport. Experts and officials expect that more U.S. airlines 

would seek to provide nonstop service from their hub airports into 

London’s Heathrow Airport. Both consumers and “new entrant” airlines 

(those that would gain access to the airport) could benefit from the new 

service. Access to Heathrow by other U.S. airlines would provide 

consumers with greater choice, service from more U.S. destinations, 

and possible competitive pressures on price. New entrant airlines 

would benefit from being able to carry passengers into a valued 

destination. However, because of capacity constraints at Heathrow, it 

may be some time before these potential benefits for U.S. airlines and 

passengers emerge. 

• EU airlines could launch competitive transatlantic service from an 

airport now dominated by another EU airline. For example, Lufthansa 

Airlines might decide to initiate nonstop passenger service between 

Paris and Miami—a market now generally divided between Air France 

(with its alliance partner Delta Air Lines) and American Airlines. Airline 

officials said that they would be unlikely to establish a significant 

presence at another airline’s hub, however, because of operating and 

marketing barriers to establishing competitive service there. 

• Consolidation within the EU aviation industry could increase. Ending 

nationality clause restrictions would remove a barrier to consolidation 

of the EU aviation industry, because airlines would no longer have to be 

concerned about whether a merger would jeopardize traffic rights that 

are granted under current agreements. Mergers could potentially affect 

U.S. consumers in a positive way if such consolidation would create an 

additional competitor or provide access to new “on-line” service. 

However, mergers can also have negative effects if, by combining into 

one airline, the number of competitors in a market falls. Although 

industry experts and officials anticipate that EU airlines will merge, they 

did not agree on the timing and nature of any additional consolidation. 

• EU airlines could relocate to other EU nations with lower wage costs.

While increased competition is likely to force airlines to become more 

cost-efficient, we did not find substantial evidence to indicate that 

airlines would consider such relocations in the near term. Airlines 
Page 7 GAO-04-835 Transatlantic Aviation

would still need to locate operations based on where passenger demand 

exists, rather than on where the lowest wages could be paid. However, 

the 10 newest EU nations, which joined the EU in May 2004, have an 

average gross domestic product that is 40 percent of the average for the 

15 other EU countries, so the possibility for such actions cannot be 

dismissed.6

 Because transnational unions do not currently exist within 

the EU, organized labor has raised concerns about how employee rights 

could be protected were companies to relocate to or form subsidiary 

operations in other EU countries.

Background

U.S. and EU Domestic 

Airline Markets Are Largely 

Deregulated

A dominant theme of the commercial airline industry in the United States 

and the EU in the past 2 decades has been one of decreased government 

economic regulation. This development began in the United States with 

passage of the Airline Deregulation Act of 1978, phasing out federal 

regulation of rates, routes, and services for domestic airlines. EU aviation 

deregulation began in 1987 and led to the creation of a single European 

aviation market.7

 In 1993, the EU efforts mirrored U.S. deregulation by 

removing all government restrictions on routes, fares, and capacity, as well 

as barriers to cross-border investment of European airlines. By 1997, the 

EU removed the final operating restriction by allowing cabotage within the 

EU. Deregulation has allowed substantial growth in both U.S. and EU 

airline operations and passenger traffic, with consumers on both sides of 

the Atlantic benefiting from decreased fares and increased service. As 

6

European University Institute, Enlarging the European Union: Achievements and 

Challenges (Mar. 26, 2003).

7

Prior to the establishment of a single EU internal market, European aviation was governed 

by individual bilateral agreements between pairs of European nations. These bilateral 

agreements normally restricted the airlines that could provide service, the number that 

could provide service, the level of service, and the fares airlines could charge. European 

deregulation included eventual “cabotage rights” that allowed any EU airline to provide 

domestic service within any EU member state. (Cabotage refers to operations in which an 

airline of one country operates flights and carries traffic solely between two points in a 

foreign country.) The EU has international agreements with three other European countries. 

It has a bilateral air services agreement with Switzerland providing for comprehensive 

liberalization of air services, except cabotage, and through the European Economic Area 

Agreement, Iceland and Norway are fully included in the EU air transport market, including 

cabotage. 
Page 8 GAO-04-835 Transatlantic Aviation

airline operations and passenger traffic grew, U.S. and EU aviation industry 

employment increased as well (see table 1). 

Table 1: Changes in Domestic U.S. and EU Aviation Markets and 

Employment

Source: GAO analysis of data from DOT, Air Transportation Association, and Association of European Airlines.

a

Based on data from 25 Association of European Airline members.

 bBased on data from 15 Association of European Airline members.

c

Pilot compensation percentage changes do not reflect possible changes in negotiated work rules. 

According to Air Inc.’s 2004 U.S. Airlines Salary Survey, work rules include, among other things, the 

maximum number of hours worked per month, payment for hours above the maximum, and number of 

vacation days.

d

Yield is an industry term denoting the price (in cents) a revenue passenger pays to fly one mile. Yield 

does not include aviation taxes, which are remitted directly to the taxing authority and never recorded 

in carrier financial statements.

e

Comprehensive yield data for all EU carriers is not available. 

Open Skies Agreements 

Extend Partial Deregulation 

to Transatlantic Routes

For many decades, international air service has been governed by aviation 

agreements that are based on the principle that nations have sovereignty 

over their airspace. This sovereignty is defined by nine “freedoms of the 

air” that have developed over time to outline possible aviation rights 

between countries.8

 During a 1944 international civil aviation convention in 

Chicago, the participating countries decided that international aviation 

would be governed by negotiated bilateral aviation agreements that specify 

“traffic rights,” such as the number of airlines that can operate between 

markets, the airports from and to which they operate, the number of flights 

Type of change

U.S. since deregulation 

(1978-2002)

EU since deregulation 

(1993-2002)

Annual average percentage change 

in revenue passengers enplaned 3.3% 6.1%a

Annual average percentage change 

in number of pilots 3.9% 3.7%b

Annual average percentage change 

in pilot compensation/expensesc 3.4% 3.1%b

Annual average percentage change 

in real (or inflation adjusted) airline 

yieldsd -2.7% N/Ae

8

These traffic rights and nine freedoms are shown in appendix II. 
Page 9 GAO-04-835 Transatlantic Aviation

that can be provided, and the fares that airlines could charge. These 

aviation rights, including the right to prevent foreign airlines from cabotage 

operations, have been the basis for international aviation. 

Under traditional bilateral agreements, air services can only be offered by 

airlines that are licensed and designated by the two countries that sign the 

agreement. To be licensed to provide commercial air services, an airline 

must meet various legal and regulatory requirements. Among these 

requirements are citizenship and control tests, which require that an airline 

be majority-owned and effectively controlled by citizens of the licensing 

country.9

 In the United States, the airline must also meet economic fitness 

and safety requirements. EU law establishes a framework for the granting 

of airline licenses and air operators certificates,10 but all Community 

airlines licensed by EU member states in accordance with EU law are 

permitted to provide transport throughout the EU. The process by which 

countries indicate which airlines are authorized to provides service under 

the agreements is called “designation.” Designation has traditionally 

indicated that the country making the designations will ensure appropriate 

regulatory oversight. This responsibility extends to ensuring that the airline 

complies with international civil aviation safety and maintenance 

standards.11

Open Skies agreements are a particular kind of bilateral agreement. They 

remove the vast majority of restrictions on how airlines of the two 

9

The U.S. permits up to 25 percent foreign ownership of voting stock in U.S. airlines (49 USC 

40102); the EU permits up to 49 percent foreign ownership of its airlines. The administration 

has proposed raising the existing U.S. limits to match the EU’s. 

10Under these common rules, all air carriers licensed in the EU are considered to be 

“Community carriers” and have equal rights. Through their agreements with the EU, 

Switzerland, Norway, and Iceland have aligned their licensing systems with Community law.

11In the United States, once licensed and designated, an airline still must receive 

authorization from DOT to operate in specified international markets before it can provide 

the service. A foreign air carrier of a sovereign state desiring to conduct foreign air 

transportation operations into the United States files an application with the DOT for a 

foreign air carrier permit. Consistent with international law, bilateral agreements normally 

provide that a partner country must meet International Civil Aviation Organization (ICAO) 

safety oversight standards as a condition for service by its designated airline. FAA is also 

responsible for safety oversight of U.S. airlines and for ensuring that foreign countries 

comply with the ICAO standards. To assess a country’s ability to meet this standard, the FAA 

established the International Aviation Safety Assessment (IASA) program in 1992. This 

program focuses on ensuring that a foreign country adheres to international standards and 

recommended practices for aircraft operations and maintenance established by the ICAO. 
Page 10 GAO-04-835 Transatlantic Aviation

countries signing the agreement (signatory countries) may operate 

between their respective territories. For example, they remove prohibitions 

on the routes that airlines of the signatory countries can fly, or the number 

of airlines that can fly them.12 These expanded operational rights represent 

significant alterations to the traditionally more restrictive bilateral 

agreements that specified service frequency, capacity, routing, and pricing.

While they granted more rights to airlines of the signatory countries, Open 

Skies agreements, through the nationality clause, allow the U.S. 

government to block airlines of other countries from these rights. For 

example, while both Germany and France have Open Skies agreements 

with the United States, the German-based carrier Lufthansa is not 

permitted by either France or the United States to operate flights between 

France and the United States, without it being a continuation of a flight that 

originates in Germany.13 Yet according to DOT officials, if it is deemed “not 

inimical” to U.S. interests, DOT can waive the ownership and control 

requirements. For example, DOT officials stated that, under the 

multilateral Open Skies agreement signed with Brunei, Chile, New Zealand, 

and Singapore, it applied a more flexible definition of the nationality clause 

for nations covered by the agreement and focused on ensuring that the 

airlines covered by that agreement are “effectively controlled” by nations 

that signed the agreement.14 Table 2 summarizes some of the key 

differences between traditional bilateral agreements and Open Skies 

agreements.

12While Open Skies provides expanded traffic rights, airlines may be limited in exercising 

these rights due to restrictive bilateral agreements with other nations. For example, Russia 

might not allow a U.S. carrier to pick up passengers in Frankfurt and carry them on to 

Moscow, even though the U.S. Open Skies agreement with Germany would permit such 

operations to points beyond Germany.

13In addition to these nationality restrictions, both Open Skies agreements and traditional 

bilateral agreements permit one country to deny permission to operate to airlines 

designated by the other country if those airlines are not substantially owned and effectively 

controlled by its citizens. However, some Open Skies agreements do allow cargo carriers to 

operate seventh freedom rights.

14The Multilateral Agreement on the Liberalization of International Air Transportation was 

signed in 2001. Since then, Peru, Tonga and Samoa have also acceded to the agreement.
Page 11 GAO-04-835 Transatlantic Aviation

Table 2: Summary of Key Differences between Traditional Bilateral Agreements and Open Skies Agreements

Source: GAO analysis of U.S. Department of State and U.S. Department of Transportation data.

a

Governments are allowed to restrict operations at airports due to environmental regulations. For 

example, 44 EU airports reported having night flight restrictions.

The U.S.–EU market grew from 28 million annual passengers in 1990 to 

over 51 million passengers by 2000, representing the most important 

international market for U.S. airlines. British Airways is the largest carrier 

in the U.S.–EU market, followed by American, Delta, and United Airlines 

(see fig. 1). Neither U.S. nor EU low-cost carriers currently offer 

transatlantic services.15

Type of agreement Service capacity Service frequencya Fares Extended traffic rights

Traditional bilateral 

agreements

Restrictions on which 

airlines can operate

Restrictions on what 

markets airlines may serve 

and the number of flights 

that can be flown

Restrictions on pricing Restrictions on 

operations to and from 

additional countries

Open Skies agreements No restrictions on the 

number of airlines that 

may operate

No restrictions on what 

markets airlines may 

serve

No restrictions No restrictions on pricing Allowance for open rights 

to and from additional 

countries

15For additional information on the operations and recent financial success of low-cost 

airlines, see U.S. General Accounting Office, Commercial Aviation: Despite Industry 

Turmoil, Low-Cost Airlines Are Growing and Profitable, GAO-04-837T (Washington, D.C.: 

June 3, 2004).
Page 12 GAO-04-835 Transatlantic Aviation

Figure 1: Largest U.S. and EU Airlines Based on Percentage of Total U.S. - EU Traffic 

Carried, 2002

Open Skies 

Agreements Have 

Benefited Consumers 

and Airlines by 

Removing Restrictions 

on International Air 

Service

Consumers and airlines have benefited from Open Skies agreements that 

the United States has signed with 15 individual EU member nations. The 

number of such agreements has grown over time, although 10 EU member 

nations, including the largest U.S. aviation partner, the United Kingdom, 

still have more restrictive bilateral agreements or no agreement at all. Open 

Skies facilitated the formation of more integrated international alliances 

between U.S. and EU airlines, which allowed the airlines to expand their 

networks and provide competitive service for more passengers to more 

locations at cheaper fares. As a result, U.S. passengers have been able to 

pay less to reach most EU destinations, significantly increasing passenger 

traffic. 

0

3

6

9

12

15

Percentage

Source: GAO analysis of DOT data.

British Airways

Amercian

Continental

US Airways

Air France

Northwest

Virgin Atlantic

Lufthansa

United

Delta

12.6

9.4 9.3 9.2 9.0

7.0 6.7

6.1 5.8

4.1
Page 13 GAO-04-835 Transatlantic Aviation

The United States Has Open 

Skies Agreements with the 

Majority of EU Nations 

Since signing the first Open Skies agreement with the Netherlands in 1992, 

the United States has entered into agreements with 15 of the 25 EU nations 

(see fig. 2). The United States signed nine of these agreements by 1996. 

Since then, the United States has signed Open Skies agreements with six 

EU member states: Italy, Malta, Poland, Slovakia, Portugal, and France.16

16In May 2004, 10 European nations were accepted into the EU: Cyprus, Czech Republic, 

Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. Czech Republic, 

Malta, Poland, and Slovakia had already signed Open Skies agreements with the United 

States prior to their entry into the EU.
Page 14 GAO-04-835 Transatlantic Aviation

Figure 2: EU Member States with Open Skies Agreements

While the majority of EU member states have signed Open Skies 

agreements, 10 EU member states maintain bilateral agreements that are 

more restrictive than Open Skies agreements or have no aviation 

agreement with the United States. The United States does not have any 

Austria

'95

Sweden

'95

Lithuania

Latvia

Estonia

Czech

Republic

Poland

'01

Portugal

'99

Italy

'98

Malta

'00

'00

Luxembourg

'95

United

Kingdom

Netherlands

'92

Denmark

'95

Belgium

'95

France

'01

Germany

'96

Finland

'95

EU countries with Open Skies agreements (with year passed)

EU countries with traditional bilateral agreements or no agreements

Non-EU countries

Non-EU countries that have signed agreements with EU to

be included in EU aviation market

Source: GAO.

Slovakia

Iceland

Ireland

Switzerland

Slovenia

Greece

Cyprus

Hungary

Spain

Norway

'95
Page 15 GAO-04-835 Transatlantic Aviation

aviation agreement with Cyprus, Estonia, Latvia, Lithuania, and Slovenia. 

EU member states that have traditional bilateral agreements include 

Greece, Ireland, Spain, Hungary, and the United Kingdom. For the five 

countries with bilateral agreements but without Open Skies, the types of 

restrictions vary from agreement to agreement. For example:

• The U.S.–Spain agreement does not permit U.S. airlines to code-share17

with any of their EU partners from intermediate points elsewhere in 

Europe. For example, United Airlines cannot place its code on any 

Lufthansa flight from Germany to Spain. The resulting “interline” service 

tends to be both more expensive and more inconvenient than 

code-shared routes, placing them at a competitive disadvantage.18

• The agreement with the United Kingdom, commonly referred to as 

Bermuda 2, restricts service between the United States and London’s 

Heathrow airport to two airlines from each country—at present, 

American and United from the United States, and British Airways and 

Virgin Atlantic from the United Kingdom. In addition, the agreement 

limits nonstop service into Heathrow by U.S. airlines to 12 specified U.S. 

cities. UK airlines can operate from Heathrow to 11 specific cities, plus 

other cities where there is no U.S. airline competitor. Despite these 

restrictions, London’s Heathrow airport (Heathrow) accounted for the 

highest percentage (over 20 percent) of U.S.–EU passengers of any 

European airport between 1990 and 2002. 

17“Code-sharing” refers to the practice of airlines applying their names—and selling tickets 

via reservations systems—to flights operated by other carriers.

18Interline fares are most frequently the sum of the fares charged by each airline for its 

segment of the itinerary. Even when tickets are purchased well in advance to take advantage 

of possible airline discounting, such fares tend to be considerably higher than on-line fares 

from the same origin to the same destination. 
Page 16 GAO-04-835 Transatlantic Aviation

Open Skies Agreements 

Enhanced Creation of 

Airline Alliances and 

Subsequent Expansion of 

Airline Networks

Open Skies agreements greatly changed how U.S. and EU airlines provide 

international service. The change centers on the alliances that various U.S. 

and EU airlines have formed with each other.19 Operating in an alliance 

allows an airline to greatly expand its service network, without having to 

increase the number of routes it flies using its own aircraft. In the simplest 

case, an international code-sharing alliance links the route network of one 

airline with the route network of another, forming an end-to-end alliance 

with little overlap (see fig. 3). In this way, alliances have allowed airlines to 

expand the number of markets that received “on-line” service between the 

U.S. and EU.20 Airline passengers prefer this type of “seamless” service, 

compared to interline service, because it allows the convenience of single 

ticketing and check-in, among other things. 

19Many industry experts consider alliances as a second-best option to full mergers, because 

alliances do not allow the airlines to achieve the full range of cost savings through 

operational efficiencies that could be possible through a merger. Current restrictions on 

foreign ownership and control limit the extent to which airlines can pursue international 

mergers.

20On-line service provides passengers with connecting flights without requiring them to 

change airlines. Similar conveniences can be obtained between two airlines that have 

“interline” agreements. Although interline agreements do not incorporate fare coordination, 

they may provide for the mutual acceptance by the participating airlines of passenger 

tickets, baggage checks, and cargo waybills, as well as establish uniform procedures in 

these areas.
Page 17 GAO-04-835 Transatlantic Aviation

Figure 3: Illustration of How Alliance Networks Link Markets

Alliances greatly increase the number of markets that can be served on-line 

because they connect locations that were otherwise served only by one of 

the alliance airlines. This concept, illustrated in figure 3, allows networks 

to serve “behind-and-beyond” markets. Transatlantic flight occurs between 

what are called “gateway” airports, such as Atlanta and Paris. A “behind” 

point is a location that feeds passenger traffic into the gateway airport on 

one side of the Atlantic, while “beyond” points are those destinations that 

can be reached once a passenger has traveled to the gateway airport on the 

other side of the Atlantic. For example, Kansas City, Missouri, and Berlin, 

Germany, constitute a “behind-and-beyond” market. Neither city has 

nonstop transatlantic service, so passengers from either destination must 

first fly to a gateway airport. A passenger originating a trip in Kansas City 

would have to take a flight into a gateway airport (such as Atlanta), 

connect to a transatlantic flight to an EU gateway (such as Paris), and then 

connect onto a flight to Berlin.

Most major U.S. airlines that provide transatlantic service (American, 

Delta, United, Northwest, US Airways, and Continental) belong to 

Source: GAO.

Both U.S. and EU carriers

fly transatlantic flights

U.S. carriers

fly U.S. flights

EU carriers

fly EU flights
Page 18 GAO-04-835 Transatlantic Aviation

international alliances with other airlines, including many from the EU. To 

more closely integrate scheduling and pricing, alliance partners may 

request that they be given immunity from national antitrust laws, which 

would otherwise prohibit potential competitors (i.e., the alliance partners) 

from coordinating pricing and services.21 DOT has granted antitrust 

immunity to most of the alliances that U.S. airlines have with EU airlines. 

Beginning with Northwest and KLM Royal Dutch Airline (KLM) in 1993, 

DOT approved antitrust immunity for U.S. airlines with 18 international 

alliance partners. Yet not all alliances have received antitrust immunity. 

U.S. policy stipulates that only airlines from countries that have signed 

Open Skies agreements with the United States can receive antitrust 

immunity.22 The efforts to obtain antitrust immunity for an alliance between 

American and British Airways has twice failed, in part because the United 

States was unable to obtain an Open Skies agreement with the United 

Kingdom and the airlines were not willing to cede Heathrow slots as 

required by competition authorities. American and British Airways are 

limited in the number of markets in which they can code-share, and are not 

permitted to coordinate market scheduling and pricing in the same way as 

other airlines that do have antitrust immunity. (See appendix IV for 

summary information of the major international alliances.)

Consumer Benefits Have 

Resulted from Expanded 

Alliances and Networks

Various studies have found that the alliances and expanded networks 

created since the first Open Skies agreements have produced significant 

benefits for consumers. Two studies conducted by DOT found that the 

21U.S. law gives the Secretary of Transportation the authority to grant immunity from U.S. 

antitrust laws to agreements in foreign air transportation. In general, the antitrust laws are 

designed to protect consumers by prohibiting competitors from colluding and engaging in 

such anticompetitive behavior as jointly setting prices (commonly referred to as “price 

fixing”). The Secretary may grant immunity if an agreement is in the public interest and is 

necessary to permit implementation of an approved cooperative agreement. The 

Department of Justice (DOJ) role is advisory, and its analysis is performed pursuant to the 

Sherman Antitrust Act and the Clayton Act, which set forth antitrust prohibitions against 

restraints of trade. For the European Union, the Directorate General Competition (DG 

Comp) is responsible for enforcing Articles 81 and 82 of the EC Treaty, which prohibit 

activities that fix prices, limit production, or exercise market dominance to distort 

competition.

22While the signing of an Open Skies agreement does not guarantee that airlines from 

signatory nations will be granted antitrust immunity, Open Skies is now a requirement for 

antitrust immunity. For example, DOT approved antitrust immunity for the alliance between 

Delta Air Lines and Air France after France signed an Open Skies agreement with the United 

States in 2002.
Page 19 GAO-04-835 Transatlantic Aviation

development of alliances in transatlantic markets led to consumer benefits 

in the form of more competitive service and more extensive networks.23 

We found that international network airlines serve the majority of U.S.-EU 

city-pair markets with no worse than double-connection (i.e., two-stop) 

on-line service. Based on scheduled flights for May 2004, 83 percent of the 

possible U.S.–EU markets (5,165 of 6,210) were scheduled to receive 

on-line service with nonstop, single-connection or double-connection 

service.24 More than half of those markets were served by nonstop or 

single-connection flights. Table 3 summarizes the connectivity of major 

U.S.-EU markets. (Additional markets may also have received on-line 

service, but the service would have required more than two connections 

and would thus be excluded from our analysis.) 

23DOT, International Aviation Developments: Global Deregulation Takes Off (Washington, 

D.C.: Dec. 1999) and Transatlantic Deregulation: the Alliance Network Affect 

(Washington, D.C.: Oct. 2000).

24We limited our analysis of scheduled service to airports serving larger communities in both 

the United States and EU. In the United States, we included only airports defined as Large, 

Medium, or Small hubs. Large hubs are statutorily defined as having 1 percent or more of all 

annual passenger boardings at primary U.S. airports, medium hub airports as having 

between 0.25 percent and 0.99 percent of boardings, and small hubs as having between 0.05 

percent and 0.249 percent of boardings. In the EU, we included only airports defined as 

Category 1, 2, or 3 hubs. The Airports Council International defines Category 1 airports as 

having more than 2 million boardings per month, Category 2 as having between 1 million 

and 2 million boardings per month, and Category 3 as less than 1 million boardings per 

month. For additional information on this analysis, see appendix I.
Page 20 GAO-04-835 Transatlantic Aviation

Table 3: U.S.-EU Markets Served with Nonstop, Single-Connection or 

Double-Connection Flights

Source: GAO analysis of Sabre, Inc., May 2004 airline schedule data.

a

We categorized markets based on the best level of service, which generally refers to the fastest 

possible service (i.e., having the least number of connections). Markets were placed in a single 

category. For example, although several airlines offer connecting service between Chicago and 

London, because other airlines serve that market with nonstop flights, we categorize it as a nonstop 

market.

In addition, consumers in most U.S.-EU markets have a choice of service 

from more than one competing airline or alliance. Figure 4 illustrates that 

consumers flying between Kansas City and Berlin have four different 

competitive alternatives. In the 174 nonstop markets, 71 percent have at 

least three airlines providing either nonstop service or competitive 

single-stop service.25 In markets where the best level of service is one-stop 

or on-line single connections, over 85 percent have at least three 

competitors, and in markets where the best level of service involves two 

connections, 60 percent have three or more competitors (see fig. 5). 

Best level of 

service scheduled

Number of 

markets

Percentage of 

markets Example of market served

Nonstop 174 3.4% New York–London (Heathrow)

Single connection 2,640 51.1 Kansas City–Atlanta–Paris

Double connection 2,351 45.5 Oklahoma City –Chicago – 

Copenhagen–Helsinki

Total 5,165 100.0%

25In our analysis of the number of competitors serving particular markets, we first 

determined the best level of service available in each market and then calculated the 

number of competitors in each market. For example, in any given market, competing 

airlines may offer nonstop, single-connection, or double-connection flights. The 

double-connection would not be considered a truly competitive alternative to the nonstop 

flight. However, single-stop service may be considered a viable competitive alternative. 

Thus, Continental, American, and Delta, which all offer single on-line connections between 

San Francisco and Frankfurt, would all be considered competitors to United, which offers 

nonstop service. In this case, we categorize the San Francisco–Frankfurt market among the 

nonstop markets, and count it as having four competitors. Similar to definitions used in the 

past by DOT and the Department of Justice, we defined an airline as being “competitive” in a 

market if it provided at least 10 percent of scheduled capacity. If alliance partners with 

antitrust immunity both served a market, we combined their capacity and identified the 

alliance (not individual airlines) as being one competitor. (For additional information, see 

app. I.)
Page 21 GAO-04-835 Transatlantic Aviation

Figure 4: Customers in the Kansas City to Berlin Market Have Multiple Trip Options 

.

Northwest/KLM United/Lufthansa

Delta/Air France American/British Airways

3

Kansas City (MCI) to Detroit (DTW)

Detroit (DTW) to Amsterdam (AMS)

Amsterdam (AMS) to Berlin (TXL)

1

2

3

Kansas City (MCI) to

Chicago-O'Hare (ORD)

Chicago-O'Hare (ORD) to

Frankfurt (FRA)

Frankfurt (FRA) to Berlin (TXL)

1

2

3

Kansas City (MCI) to Atlanta (ATL)

Atlanta (ATL) to Paris-DeGaulle

(CDG)

Paris-De Gaulle (CDG) to Berlin

(TXL)

1

2

3

Kansas City (MCI) to Chicago-O'Hare

(ORD)

Chicago-O'Hare (ORD) to LondonHeathrow (LHR)

London-Heathrow (LHR) to Berlin

(TXL)

1

2

3

1

2

3

1

2

3

Source: GAO analysis of Sabre, Inc., May 2004 scheduling data.

2

1

3

1

2
Page 22 GAO-04-835 Transatlantic Aviation

Figure 5: Most U.S.-EU Markets Served by Three or More Competitors 

Between 1996 and 1999, according to DOT, within Open Skies countries, 

fares dropped an average of 20 percent, compared to a 10 percent fare 

decrease in non-Open Skies markets (see table 4). These differences are 

consistent across the various categories of markets, such as 

gateway-to-gateway markets and behind-beyond markets. Much of the 

decrease has been attributed to the incentive for alliances to offer 

lower-priced on-line service rather than the higher-priced interline

0

15

30

45

60

75

90

Percentage

Source: GAO analysis of Sabre, Inc., May 2004 scheduling data.

Nonstop Single connections Double connections

2.0

27.0

71.0

3.0

10.0

87.0

22.0

18.0

60.0

1 Competitor

2 Competitors

3+ Competitors
Page 23 GAO-04-835 Transatlantic Aviation

connecting service.26 DOT officials noted, however, that little if any 

analysis of changes in airfares and service has been completed that would 

examine any changes in the market since September 2001.

Table 4: Changes in Average Fares in Transatlantic Markets, 1996 versus 1999

Source: DOT.

Note: Fares are not adjusted for inflation.

Addressing the 

European Court of 

Justice Decision Will 

Affect Commercial 

Aviation in Four Key 

Ways

Industry and government officials with whom we spoke generally said that 

the Court of Justice decision–particularly as it relates to likely changes in 

the existing nationality clause in the Open Skies agreements and the 

bilateral agreement with the United Kingdom–will affect commercial 

aviation in at least four key ways, depending on the eventual outcome of 

negotiations between the United States and EU.27 These experts agree that 

complying with the Court of Justice decision will require that 

nationality-based restrictions be eliminated. The four key areas raised by 

potential changes to the nationality clause are closely intertwined and are 

as follows:

• A new U.S.–EU agreement that would address the nationality clause 

issue would likely supersede the five existing restricted bilateral 

agreements and also would become effective in the five EU nations 

26Prior to alliances, passengers could travel between two smaller markets using two 

different airlines that did not offer any coordination of schedules or pricing. Each airline 

priced its own segment of the trip, to maximize its own profits without considering the 

opportunities for both carriers to jointly profit. The lack of coordination also required 

separate ticketing and baggage processing. As airlines began code-sharing, they offered 

coordinated on-line services with conveniences preferred by passengers. 

Type of market

Behind–beyond 

markets

Behind–gateway 

markets

Gateway–beyond 

markets

Gateway–gateway 

markets

Average for 

all market 

categories

Open Skies markets -23.9% -19.9% -24.8% -17.0% -20.1%

Non-Open Skies markets -13.2% -14.6% -15.8% -5.1% -10.3%

27As indicated by the European Council’s rejection of the June 2004 draft agreement, 

additional issues can be linked to the new accord, such as changes in limits of allowable 

foreign ownership of U.S. airlines or providing EU carriers with cabotage rights within the 

United States. 
Page 24 GAO-04-835 Transatlantic Aviation

where no agreement currently exists. It would thus provide U.S. airlines 

with expanded legal traffic rights (i.e., rights to operate between two 

destinations) into what are now restricted markets. However, capacity 

limitations at certain key airports might restrict U.S. airlines’ ability to 

exercise this new right. 

• Eliminating the nationality clause restrictions means that the United 

States would recognize all EU airlines as “European Community” 

airlines. These airlines, which currently can provide transatlantic 

passenger service only between the United States and airports in their 

own country, would have the ability to provide service between the 

United States and any EU country. 

• Because nationality-based restrictions would no longer apply, one major 

barrier to European transnational mergers would no longer exist. 

EU-based airlines could more freely consolidate, create subsidiary 

operations, or relocate their businesses to any location within the EU 

without jeopardizing their rights to fly to the United States.

• The increased operating flexibility that EU airlines would receive raises 

questions as to which EU member state’s regulatory oversight and labor 

laws should apply in particular situations. If an EU airline moved its 

operations to (or established a subsidiary carrier in) another EU 

country—perhaps to take advantage of lower wages or other cost 

savings—questions are likely to arise as to which member state’s 

regulatory framework and labor laws would apply.

U.S. and EU officials agree that both sides must eventually reach some 

agreement on resolving the nationality clause issue in order to comply with 

EU law. However, there is no set time frame for when the matter must be 

settled. In November 2002, the EU called for member nations to renounce 

their Open Skies agreements with the United States, but did not pursue the 

request in response to receiving a negotiating mandate. It is uncertain how 

a prolonged inability to remedy the nationality clause issue might affect 

U.S. and EU commercial aviation, in part because such issues have never 

arisen before. 
Page 25 GAO-04-835 Transatlantic Aviation

Extension of Open Skies 

Model Would Provide U.S. 

Airlines with Additional 

Traffic Rights

U.S. airlines would gain expanded legal traffic rights under a new U.S.-EU 

agreement. According to U.S. and EU industry and government officials, a 

new agreement would supersede and be binding on all EU member states, 

thereby removing most remaining traffic right restrictions.28 Because the 

Open Skies agreements between United States and 15 member states have 

already effectively eliminated traffic restrictions in those markets, there 

would be no significant gains in traffic rights for U.S. airlines, although EU 

airlines would gain expanded traffic rights or operations to and from those 

countries. However, U.S. airlines would gain rights to serve markets, from 

which they had been previously restricted, with the other 10 EU countries. 

Extending the Open Skies framework and rights to all EU member states 

would be necessary in order to prevent a critical imbalance of economic 

rights from developing that would place U.S. airlines at a potential 

competitive disadvantage. Unless Open Skies rights were extended to all 

EU nations, any country with which the United States now has a more 

restrictive bilateral agreement would be able to benefit from rights 

negotiated by other countries without itself having to negotiate for those 

rights. In other words, those countries (and their passengers and airlines) 

would benefit from the actions of others without “paying” for them–an 

outcome known as “free riding.” A free-rider scenario would occur 

between the United States and EU if an airline from a non-Open Skies 

country were able to operate from an Open Skies country to circumvent 

restrictions in the home country’s bilateral agreement. For example, a UK 

airline could originate a flight in France with a commuter aircraft, change 

to a wide body aircraft at London’s Heathrow airport, and then continue on 

to the United States to a point not designated under Bermuda 2 with 

hundreds of additional passengers. This would put U.S. airlines at a 

competitive disadvantage because the current bilateral agreement with the 

United Kingdom prevents any U.S. airline from flying similar routes.

U.S. Airlines Would Gain Access 

to Restricted Markets

One key operational right that U.S. airlines would gain is full legal nonstop 

access to all markets in the 10 countries with which the United States still 

has more restrictive bilateral agreements or no agreements. The most 

noteworthy of these 10 is the United Kingdom, because of the amount 

and value of passenger traffic that moves between the two countries. 

Bermuda 2’s limits on competition disproportionately affect U.S. airlines 

because the United Kingdom successfully negotiated for additional traffic 

28The EU mandate does not include negotiating new route rights beyond the EU.
Page 26 GAO-04-835 Transatlantic Aviation

rights in the early 1990s. Partly as a result, between 1992 and 1996, the UK 

airlines’ share of the U.S.-UK market rose from 49 percent to 59 percent.29 

Today, UK airlines still provide more service in the U.S.-UK market, 

especially into Heathrow. As of May 2004, British Airways and Virgin 

Atlantic scheduled a total of 43 daily nonstops from Heathrow to the United 

States, compared to 28 daily nonstops offered by American and United.

While a new U.S.-EU agreement could eliminate the legal restrictions on 

the number of U.S. airlines permitted to operate into Heathrow, capacity 

limitations would affect the extent to which U.S. airlines would be able to 

operate there. Heathrow is essentially operating at full capacity, especially 

at times that are commercially viable for transatlantic operations. 

According to airline and industry officials, the commercially-preferred 

times for transatlantic arrivals into Heathrow are between 6 a.m. and 10 

a.m., and the commercially-preferred times for transatlantic departures 

from Heathrow are between 10 a.m. and 2 p.m. These times are based on 

airlines being able to coordinate their transatlantic flights with feeder 

flights from their spoke airports. However, as figure 6 shows, the demand 

for arrival (and departure) slots during these times generally exceeded the 

available supply. 30 

29U.S. General Accounting Office, International Aviation: Competition Issues in the 

U.S.-U.K. Market, GAO/T-RCED-97-103 (Washington, D.C.: June 4, 1997).

30A slot is a specific time when airlines are allowed to take-off and/or land. 
Page 27 GAO-04-835 Transatlantic Aviation

Figure 6: Comparison of Total Runway Capacity and Demand at Heathrow, Summer 2004 Demand for Arrivals 

Note: The demand for slots is calculated from requests from individual airlines for the right to operate 

at particular times. Demand is calculated as a 7-day average. Capacity and demand for departures are 

similar to capacity and demand for arrivals.

U.S. Airlines Would Gain Fifth 

Freedom Rights

If the U.S. Open Skies framework were extended to all EU countries 

following the removal of the nationality clause restrictions, U.S. airlines 

would gain full “fifth freedom rights,” including to and from EU member 

states with restrictive bilateral agreements. These fifth freedom rights 

would allow U.S. airlines to operate flights from the United States to any 

EU country and then beyond to another EU country. However, traffic rights 

to countries beyond the EU would be limited to those the United States 

already has under its Open Skies agreements; the EU has no current 

mandate to grant new “beyond rights.” Open Skies agreements, by 

definition, grant airlines the unrestricted right to operate fifth freedom 

flights, which are otherwise limited under the more restrictive bilateral 

agreements, such as the agreement with the United Kingdom. 

Airline officials and industry experts maintain that over time, however, fifth 

freedom rights available from countries that have Open Skies agreements 

have proven to be of limited commercial value to passenger airlines. (Cargo 

airlines, on the other hand, greatly value fifth freedom rights. See appendix 

Runway movements per hour

5:00

21:00

20:00

19:00

18:00

17:00

16:00

15:00

14:00

13:00

12:00

11:00

10:00

9:00

8:00

7:00

6:00

Demand

Capacity

Source: Airports Coordination, Ltd.

0

10

20

30

40

50

60
Page 28 GAO-04-835 Transatlantic Aviation

III for additional information on cargo carriers.) United, for example, 

attempted to exercise fifth freedom rights for operations with Open Skies 

countries in Europe, but abandoned those operations after determining 

that they were not profitable. United officials explained that, with the 

development of alliances, it is more cost efficient to use alliance partners to 

provide connecting service into “beyond” markets. Of the U.S. passenger 

airlines that have fifth freedom rights with EU countries, only two airlines 

exercise these rights. Northwest operates fifth freedom flights from 

Minneapolis that stop in Amsterdam and continue to Bombay, India. Delta 

flies from Atlanta to Bombay using fifth freedom rights over Paris.31

U.S. Airlines Would Gain 

Code-Sharing Rights

Under the terms of the more restrictive bilateral agreements with Spain and 

Greece, U.S. airlines are prohibited from serving those markets by way of 

code-share flights. This effectively prohibits, for example, passengers using 

a United ticket from traveling from Albuquerque to Madrid by connecting at 

Frankfurt, Germany, to a United code-share flight operated by its Star 

alliance partner Lufthansa. If the Open Skies framework were extended 

throughout the EU, such prohibitions would be eliminated. Airlines would 

be able to offer new routings to passengers, and passengers would be free 

to choose among new options for travel into those countries.

EU Airlines Would Be Able 

to Establish Transatlantic 

Routes between the United 

States and Other EU 

Countries 

Like U.S. airlines, EU airlines would have greater access to international 

markets. Eliminating nationality clause restrictions included in existing 

agreements effectively means that, in any new agreement, the United States 

could recognize the concept of a “European Community” airline.32 This 

could mean, for example, that rights originally restricted to designated 

airlines of the signatory countries would be available to all European 

31Several officials from the EU, EU members states, and EU airlines suggested that, to 

balance the fifth freedom rights within the EU that U.S. airlines would gain, they should be 

allowed to operate continuation flights within the United States. For example, after 

deplaning passengers at Washington Dulles International Airport, a British Airways flight 

arriving from Heathrow should be allowed to continue to St. Louis. The return flight to 

London would thus originate in St. Louis and stop in Washington. On such flights, British 

Airways could carry local St. Louis-Washington passenger traffic. U.S. officials note, among 

other things, that such operations would constitute “consecutive or fill-up cabotage” 

(so-called “eighth freedoms”) not equal to the fifth freedoms already negotiated with EU 

member states. Such operations would require a change in U.S. law. We excluded analyses 

of the potential effects of such cabotage from this report.

32EU airlines would still need to obtain formal DOT approval to operate into the United 

States.
Page 29 GAO-04-835 Transatlantic Aviation

Community airlines. In other words, Lufthansa, British Airways, and LOT 

Polish Airlines would be European Community airlines in addition to being 

German, British, and Polish airlines. If the United States recognized a 

European Community airline, it would have the right to operate 

transatlantic flights directly to and from more EU destinations. Under 

current Open Skies agreements, the right to establish transatlantic routes 

between destinations in the signing countries is limited to airlines licensed 

in and designated by those two countries and is under the ownership and 

control of the country’s citizens. For example, Air France—an airline 

licensed and designated by France—is not allowed under existing Open 

Skies agreements to provide nonstop transatlantic service between cities in 

the United States and Italy; it can fly only between U.S. and French cities.33

Under an Open Skies agreement that included an EU nationality clause, Air 

France would have the right to fly between any EU city and any city in the 

United States. In theory, Air France could also decide to establish a 

mini-hub in a city outside of France, where it could potentially begin 

providing nonstop service into additional U.S. cities. This same flexibility 

would extend to all EU airlines and to all U.S.-EU markets. In this way, EU 

airlines, regardless of the EU country in which they were licensed, would 

have the ability to provide flights into the United States from throughout 

the EU (see fig. 7). 

33Air France can use its fifth freedom rights to provide service between Italy and the United 

States only if that flight originates in a French city, stops in Italy, and then continues to the 

United States.
Page 30 GAO-04-835 Transatlantic Aviation

Figure 7: Potential Effect on Transatlantic Service of the Removal of the Nationality Clause Restrictions

EU Airlines Will Have 

Greater Ability To 

Restructure and Operate 

Transatlantic Service

Eliminating nationality-based restrictions would remove a major barrier 

that has prevented EU airlines from restructuring their operations by 

merging with another airline or creating significant commercial operations 

in locations outside their home countries, without sacrificing traffic rights 

across the north Atlantic. Because international traffic rights are granted 

by two signatory nations and are tied to national ownership and control, an 

airline operating an international service cannot merge with a carrier from 

another EU member state without risking the loss of these U.S. traffic 

rights. Similarly, because the traffic rights are tied by designation and 

nationality clause to airlines from particular countries, airlines also cannot 

move operations into another country and exercise those rights. 

Eliminating nationality-based restrictions would allow citizens of any EU 

nation to exercise what is called the “right of establishment.” Under the 

Treaty of Rome, any EU citizen has the right to establish a business in 

another EU state. Removing nationality-based restrictions would allow EU 

airlines to restructure operations, such as merging with another EU airline 

or relocating in another EU member state, to gain economic efficiencies 

without losing traffic rights into the United States.34 For example, EU 

Before: EU airlines provide service between U.S. cities

and native countries

After: Airlines provide service from other EU countries

Example:

Air France flies to

and from French airports

Example:

Air France also flies

London to Newark, Rome to Atlanta

Source: GAO.

34The EU recently approved the merger of Air France and KLM under the current Open Skies 

agreements. For details on this merger see appendix V. 
Page 31 GAO-04-835 Transatlantic Aviation

airlines could relocate operations to or establish subsidiaries in EU 

member states that have lower average wages and (from a business 

perspective) more lenient labor laws. Controlling costs associated with 

labor (i.e., “social costs,” which include wages, benefits, and pensions, and 

which also define the number of hours in the work week) is important to an 

airline’s ability to compete with lower-cost or more efficient airlines, 

because those costs can represent a major portion of an airline’s operating 

costs. 

Under an agreement in which the United States would recognize a 

European Community airline, EU airlines could take the following actions.

• Acquisitions or mergers—EU airlines could engage in cross-border 

airline mergers and acquisitions without jeopardizing traffic rights to the 

United States.35 Some observers of EU aviation have long believed that 

the large number of relatively small state-supported airlines created a 

fragmented, inefficient system burdened with excess capacity. The 

suggested remedy was consolidation of the European industry. 

• Moving operations to another country—EU airlines could move some 

or all of their operations to other EU countries without risking the loss 

of traffic rights. For example, an existing airline, such as Austrian 

Airlines, hypothetically would be able to move its operations into and 

establish itself in Poland and still be able to provide service into the 

United States from anywhere in the EU. 

• Creating subsidiary operations—EU airlines could set up subsidiary 

operations outside of their home countries that could provide 

transatlantic service.36 Because these subsidiaries could be established 

anywhere in the EU, they could potentially take advantage of lower 

costs that might be available in some EU countries.

35Several officials noted, however, that because EU member states continue to have 

restrictive bilateral agreements with other important airline markets (i.e., Japan and China) 

that continue to include nationality clauses, consolidation would still jeopardize those 

traffic rights.

36Since the liberalization of air transport inside the EU in 1993, a number of European 

airlines have established or purchased subsidiaries in countries other than their own, 

including British Airways (in France and Germany), KLM (in the United Kingdom), Ryanair 

(in the United Kingdom), and SAS (in Spain and Finland). 
Page 32 GAO-04-835 Transatlantic Aviation

• Establishing new entrant airlines--EU citizens in one country could 

establish an airline in another country and provide service into the 

United States, provided they met licensing and certification 

requirements. Citizens from Spain, for example, could establish a new 

airline in Poland and provide service from anywhere in the EU to the 

United States.37

Moving Airlines or 

Operations between EU 

Countries Raises the Issue 

of Which Country Would 

Have Regulatory Authority

While eliminating the nationality clause restrictions may mean that traffic 

rights are no longer limited, the concept of an airline’s being licensed by a 

particular EU country remains important for regulatory oversight. For 

issues concerning safety and security oversight of airlines, all governments 

maintain an interest in having assurance as to which other government 

remains responsible for assuring the safe and secure operation of airlines 

that may fly to or from any given location. 

While operating a safe, secure carrier is of course important for 

maintaining consumer confidence in the carrier, ensuring the safe and 

secure operation of commercial aviation is a fundamental responsibility 

that is shared by governments and airlines. Under the existing EU 

framework, this oversight responsibility resides with each country, subject 

to a framework of European level cooperation and legislation. Thus, one 

issue that will need to be resolved, if airlines are permitted to shift their 

operations from one EU country to another, is which country exercises the 

oversight responsibility. 38

A number of criteria have been suggested for determining which country’s 

legal and regulatory system should apply. Traditionally, the country that 

issued the airline’s operating license has been responsible. However, 

ensuring safety and security would become problematic if an airline 

relocated its major hub activities to a location possibly hundreds of miles 

outside the licensing state’s borders. Another possible criteria proposed to 

37Moving operations, creating subsidiary airlines, or establishing new airlines would be 

subject to satisfying the licensing and safety authorities in their home country and the 

receiving country that such a change would not compromise safety standards and other 

regulatory requirements. 

38Issues relating to safety and security regulatory oversight are obviously critical to any 

comprehensive analysis of aviation. Because of the magnitude of these issues, however, we 

agreed at the outset to leave them beyond the scope of this report. For additional 

information on limitations to the scope of this work, see appendix I.
Page 33 GAO-04-835 Transatlantic Aviation

determine which state’s systems apply is based on the location of the 

carrier’s “principal place of business.” But in an industry in which the 

assets and employees are mobile, what constitutes an airline’s principal 

place of business is uncertain. While not providing a definition per se, the 

ICAO Air Transport Regulation Panel and the Organization for Economic 

Co-operation and Development have suggested a set of guidelines that 

governments could use in determining an airline’s “principal place of 

business.”39 These guidelines propose that a “principal place of business” 

means the country in which an air carrier does the following: 

• maintains its primary corporate headquarters;

• regularly provides air transportation service;

• maintains substantial capital investment in physical facilities;

• pays income tax and registers its aircraft; and 

• employs a significant number of nationals in managerial, technical, and 

operational positions.

However, questions arise regarding how to measure the extent to which an 

airline might meet each of these criteria (e.g., defining and measuring 

“substantial capital investment”). 

Officials with major airline unions generally support these criteria. The 

concern of labor groups is that, unless a relatively stringent standard is 

applied, airlines will move operations to countries specifically to take 

advantage of lower costs of doing business (particularly with regard to 

wage rates and labor laws). Doing so is sometimes referred to as adopting a 

“flag of convenience,” a pejorative term adopted from the maritime 

industry. 

The question of which member state’s labor law should apply to a situation 

is the subject of a current legal challenge brought by employees of the EU 

low-fare carrier Ryanair at the Charleroi Airport in Belgium. Ryanair is 

headquartered in Ireland and has bases located in Stansted, United 

Kingdom; Frankfurt/Hahn, Germany; Stockholm, Sweden; and Charleroi, 

39Organization for Economic Co-operation and Development, Liberalization of Air Cargo 

Transport (May 2, 2002).
Page 34 GAO-04-835 Transatlantic Aviation

Belgium. It employs nonunionized pilots. All of Ryanair's pilots, regardless 

of where they are based, are employed under Irish labor law and pay Irish 

taxes. In May 2002, Ryanair did not retain three employees after these 

employees had completed Ryanair’s 1-year probationary period. The 

employees at Charleroi charge they were wrongfully terminated under 

Belgian law. The question for the EU courts is whether Ireland or Belgium's 

labor laws would apply in this instance.

U.S. Consumers, 

Airlines, and Labor 

Groups May All Benefit 

from Changes in 

Agreements, Although 

Extent of Benefits Is 

Uncertain and Gains 

May Not Be Realized 

Immediately

Eliminating the nationality clause restrictions from the new U.S.-EU 

agreement would likely provide new benefits to consumers, airlines, and 

labor groups. By eliminating the nationality clause restrictions, a new 

agreement would in effect extend the Open Skies framework to the 10 EU 

member countries without Open Skies agreements. This could potentially 

provide the same benefits that consumers, airlines, and labor groups 

realized after the signing of the current Open Skies agreements. However, 

because of mitigating circumstances, these benefits will take some time to 

develop, and they will be contingent on resolving a number of related 

issues (e.g., de facto access to restricted airports). Experts and industry 

officials with whom we spoke generally agreed that eliminating the 

nationality clause restrictions would mainly increase the potential for the 

following:

• More U.S. airlines might attempt to provide nonstop service from their 

hub airports into London’s Heathrow Airport.

• EU airlines might use their new ability to establish transatlantic routes 

between U.S. cities and EU destinations outside of their homeland.

• More transnational mergers might occur between EU airlines.

• An EU airline might attempt to establish a “flag of convenience” 

operation—that is, the airline might move some or all of its operations 

to another EU country with lower wage or other costs.

Each of these actions would allow airlines to more freely respond to 

market forces and consumer demand. As in other instances where 

government removed restrictions on airlines, such as domestic 

deregulation and Open Skies agreements, consumers could potentially 

benefit from increased competition and therefore better service and lower 

fares. 
Page 35 GAO-04-835 Transatlantic Aviation

New Entry by U.S. Airlines 

Into Restricted Markets 

Would Benefit Consumers, 

but Access to London’s 

Heathrow Airport May Be 

Limited by Current Slot 

Allocation Process

Officials at some U.S. airlines said a major potential benefit of a new 

agreement would be the opportunity for access to markets restricted by the 

existing bilateral agreements. Similar to the experience of current Open 

Skies agreements, U.S. consumers and airlines would benefit from gaining 

access to the 10 restricted markets, such as the United Kingdom, Spain, 

Ireland, and Greece. The likely source of the greatest benefit would be 

London’s Heathrow Airport, since it is the largest destination for U.S. 

travelers (see fig. 8). If a new agreement extended the U.S. Open Skies 

framework to all EU member states, it would remove the restrictions of the 

Bermuda 2 agreement. U.S. airlines with no current access to Heathrow 

would gain the right to operate there. For example, Continental Airlines, 

which currently has no Heathrow access with its own aircraft, would be 

able to begin service into Heathrow from any U.S. airport, including its 

hubs at Newark, Houston, and Cleveland. (Continental now operates flights 

from those hubs into London’s Gatwick Airport and code-shares with Virgin 

Atlantic into Heathrow.) Because Heathrow is the major U.S.-EU gateway, 

many U.S. airlines view the opportunity to gain access to this market as a 

positive benefit. 
Page 36 GAO-04-835 Transatlantic Aviation

Figure 8: Top EU Markets Based on Total Percentage of U.S.- EU Passenger Traffic 

from 1990-2002

Access to Heathrow by additional U.S. airlines represents potentially 

positive benefits to consumers and airlines. Consumers would benefit from 

gaining greater choice of airlines, service from more U.S. destinations, and 

possible competitive pressures on price. For example, if all U.S. airlines 

now serving London by flying into Gatwick switched their operations to 

Heathrow, London-bound consumers would benefit because access to 

central London is faster and easier from Heathrow. In addition, consumers 

in Denver and Detroit, who now have flights into Heathrow only on British 

Airways, would likely benefit from the additional competitive presence on 

those particular routes. Airlines that do not now have access to Heathrow 

would benefit from being able to carry passengers into a valued 

destination. Even though these airlines operate to London’s Gatwick 

Airport, they have reported losing high-yield business passengers and 

0

5

10

15

20

25

22

14

12

10

9

4

3 33 33

Percentage

Source: GAO analysis of DOT data.

London Heathrow

Frankfurt

Paris Orly

Brussels

Manchester

Zurich

Madrid

Rome

Amsterdam

London Gatwick

Paris Charles de Gaulle
Page 37 GAO-04-835 Transatlantic Aviation

corporate accounts to competitors because of their inability to provide 

service to Heathrow. 

For consumers and airlines to realize such benefits, however, airlines 

would first need to gain de facto access to airport slots, gates, and terminal 

space. Because Heathrow is already operating essentially at full capacity, a 

new entrant airline would have to gain access through the existing slot 

allocation process, which provides limited opportunities for new 

entrants--airlines with no more than four slots per day (the equivalent of 

two daily takeoffs and landings). Each year, the number of slots that 

become available through the normal slot allocation process is equivalent 

to about five daily takeoffs and landings.40 Existing EU slot allocation 

regulation requires the slot coordinator41 to set aside 50 percent of any slots 

that become available for distribution to new entrants.42 Before those slots 

are made available, however, incumbent airlines have limited rights to 

acquire any open slot and substitute another they already hold. Incumbent 

airlines can use this process to “trade up” slots they hold at less desirable 

times for newly available slots that might be for more commercially 

advantageous times. This effectively relegates the slots available to new 

entrants to commercially less desirable times. However, once a new entrant 

does obtain slots, it can gain slots at more commercially viable times 

through a grey market, which is used by airlines to trade slots. These trades 

are allowed during any point of the year and are often done so for payment. 

The EU does not officially condone this grey market, although a 1999 

decision by a UK court found this system to be acceptable within European 

law.43 The EU has recently initiated proceedings against this system. 

40Slots generally become available in three ways. First, airlines can lose any slot they do not 

use at least 80 percent of the time. Second, if an airline fails, it must surrender its slots. 

Third, slots can be created based on technical improvements in operations, either on the 

ground or in air traffic control. Examples of such improvements include shortening the time 

aircraft spend on the runway or smoothing the peaking of demand within an hour. 

41Each EU nation’s slot coordinator is responsible for managing the slot allocation process 

for operations at one or more of the country’s airports.

42EU regulations also generally grant priority consideration for slots to airlines meeting 

certain conditions. For example, an airline would receive priority consideration for slots if it 

holds less than 5 percent of the slots at an airport and is seeking to use those slots to 

provide service to an EU market in which two or fewer other airlines compete. Incumbent 

airlines already having relatively large slot holdings are not allowed to qualify for such 

priority consideration.

4325 March 1999, in R v Airport Co-ordination Limited ex parte. The States of Guernsey 

Board of Transport.
Page 38 GAO-04-835 Transatlantic Aviation

While some officials have pointed out that the slot allocation process does 

give priority to allocating slots to new entrant airlines, there is 

disagreement regarding the effectiveness of this process in assisting new 

entrants. Once a new entrant airline acquires five or more daily slots, it is 

no longer considered a new entrant and then must compete for any 

available slot as an incumbent airline. To gain additional slots for 

transatlantic operations, a new incumbent airline with five slots would 

have to compete against British Airways, with over 500 daily slots, and 

Virgin Atlantic, with just over 30 daily slots (in the Summer 2004 scheduling 

season). 

Another option for U.S. airlines to gain slots is based on the reallocation of 

slot resources between alliance partner airlines. Some airline officials said 

that, once the legal restrictions are removed, international alliances with 

substantial numbers of Heathrow slots could reallocate these slots 

between alliance members, thereby providing U.S. airlines with some 

access to Heathrow slots. Some European airlines have stated that this 

option would be discussed within the alliance; others maintained that 

alliance partners would be hesitant to trade or sell slots to other alliance 

members, because the Heathrow operations likely add considerable 

revenue to their own network. Alliance partners may also be hesitant to 

trade or sell slots because, although the alliances are established through 

legal contracts, past experience has shown that airlines can and do move 

out of alliances. Thus, a slot sold or traded might be permanently lost or 

used against the airline in the future. Finally, even if an alliance partner may 

have a slot that theoretically could be put to more productive commercial 

use by trading or selling it to another alliance partner, other capacity 

constraints at Heathrow could prevent its use for transatlantic operations. 

For example, a slot (with its associated Jetway and terminal facilities) used 

for 40-passenger turboprop operations could not readily be transformed for 

use by a 400 passenger Boeing 747.

Given the limits imposed by these slot allocation options, it may be some 

time before the potential benefits for U.S. airlines and passengers emerge. 

Some European airline officials have pointed out that gaining access to 

slots, gates, and terminal space at Heathrow can be done over time. They 

cite Virgin Atlantic as an example of an airline that originally obtained slots 

at less preferable times and, over time, acquired additional slots and traded 

them with other airlines. Through trading, Virgin Atlantic gained a number 

of slots at prime times. In Virgin Atlantic’s case, it applied for and obtained 

six daily slots once the UK government designated it as one of the two 

British airlines allowed to provide transatlantic service from Heathrow in 
Page 39 GAO-04-835 Transatlantic Aviation

1991.44 By 1996, it had obtained approximately 15 daily slots, which rose to 

28 daily slots by 2001. Airline officials reported that between 1996 and 2001, 

the airline gained an additional five pairs of daily slots to the United States. 

As of the 2004 summer schedule, Virgin Atlantic will have just over 30 daily 

slots. That total includes four pairs of slots that Virgin Atlantic was able to 

acquire this year for about 20 million British pounds (approximately $36 

million). 

Airlines may also gain access if capacity at Heathrow expands. Heathrow’s 

capacity may increase over time through capital improvements and 

changes in operations. 

• The first phase of a new terminal at Heathrow, Terminal 5, is expected to 

be operational in 2008 and could ease terminal and aircraft parking 

capacity constraints related to passenger holding areas and aircraft 

gates. With the completion of the second phase in 2011/2012, this new 

terminal is expected to handle 30 million annual passengers and will 

include 45 aircraft parking stands.45 British Airways is expected to be 

the principal tenant at the new terminal, and its relocation there will 

allow other airlines (possibly new entrants) to gain access to facilities in 

other terminals. However, the new terminal will have no direct impact 

on the number of available runway slots. 

• BAA, plc,46 is examining the potential to implement a “mixed mode” 

runway operation, which would allow both runways to be used for 

landings and takeoffs rather than assigning one runway for landings 

only and one runway for takeoffs only. 47 The examination will need to 

take account of potential noise and air quality implications. There are no 

official estimates of the impact on runway capacity of a change to 

”mixed mode,” but BAA, plc, has suggested that this change could 

44Prior to 1991, Virgin Atlantic was not allowed to use Heathrow, but instead was required to 

use Gatwick. As part of the revision of the bilateral agreement in 1991 between the United 

States and United Kingdom, Virgin Atlantic was allowed to transfer much of its service from 

Gatwick to Heathrow.

45Some of the 45 parking stands will be “remote” stands rather than stands accessed via a 

pier and Jetway.

46BAA, plc, is a private airport company that owns seven UK airports, including Heathrow, 

Gatwick, and Stansted, and has interests at 13 airports overseas.

47Heathrow currently limits the use of its two runways so that one is used only for takeoffs 

and the other is used only for landings. 
Page 40 GAO-04-835 Transatlantic Aviation

increase slot capacity by 10 per hour. However, it is unclear if the UK 

government will approve this change due to opposition by local 

communities related to the expected increase in noise. 

• The UK government’s 2003 report on the future of air transport 

supported further development of Heathrow, including a new runway 

and additional terminal capacity, but only after a new runway at 

London’s Stansted Airport was finished and only if stringent 

environmental limits could be met.48 The report indicated that any 

additional future enhancements to Heathrow’s capacity would be 

completed within the 2015-2020 period.

A report commissioned by the EU on the effects of different slot allocation 

approaches concluded that current EU slot regulation provides incumbent 

airlines an advantage and makes it difficult for new airlines to obtain slots 

to introduce new or more frequent service.49 It also concluded that if the 

EU adopted various market mechanisms (such as secondary trading, 

increased slot prices, or slot auctions), higher passenger volumes would 

occur. The report did not recommend that the EU commission require 

divestiture of slots as a condition of airline mergers. However, in its 

approval of the Air France–KLM merger, to ensure that new entrant airlines 

could provide new competitive service on certain markets, the EU 

commission sought the surrender of 94 daily slots from Air France and 

KLM.50 Generally, incumbent airlines object to such events, arguing that

48United Kingdom Department of Transport, The Future of Air Transport (Dec. 2003).

49National Economic Research Associates, Study to Assess the Effects of Different Slot 

Allocation Schemes: A Final Report for the European Commission, DG TREN (Jan. 2004).

50Slots are to be made available at Amsterdam, Paris, Lyon, Milan, or Rome. The EU stated 

that the surrendering of slots would enable rival airlines to start a service where 

competition would have been eliminated or significantly reduced, therefore preserving 

choice of airlines and competitive prices for European travelers. Air France and KLM have 

committed to surrender these slots. 
Page 41 GAO-04-835 Transatlantic Aviation

they own the slots and would have to be compensated for them.51 BAA, plc, 

officials also voiced the concern that forcing incumbents to surrender slots 

each time a new entrant wanted to gain access to the airport was not 

permitted in the EU slot regulation and would create an undesirable 

precedent, in part because of the instability it would create for incumbent 

airlines’ operations.

While a new U.S.–EU agreement would provide U.S. airlines with legal 

access to markets that are now restricted, airline officials stated that, 

without actual physical access, these new legal rights would be 

meaningless. This is especially true for access to Heathrow. The current 

slot allocation process at Heathrow gives incumbent airlines an advantage 

to help maintain and improve their position, making it difficult for new 

entrants to gain effective commercial access. Therefore, it may take an 

indeterminate amount of time before consumers and airlines derive 

significant benefits from a more open Heathrow.

EU Airlines’ New Ability to 

Provide Service in More 

Markets Could Increase 

Competition, but Entry May 

Be Limited 

Absent the nationality clause restrictions, EU and U.S. airlines could begin 

offering new transatlantic service between more cities. New competition 

has the potential for generating various benefits for consumers: 

transatlantic service to and from more cities, increased choices—and 

possibly pressure on prices—on existing routes, and pressure on airlines to 

provide higher quality service. Some officials said that increased consumer 

demand for nonstop point-to-point service could spur airlines to develop 

new city-pair markets. For example, a carrier could start nonstop service 

from Berlin to Kansas City, neither of which, as of May 2004, had direct 

transatlantic service. 

51In the “explanatory memorandum” to the proposal presented on 20 June 2001 to revise the 

slot allocation rules, the European Commission stated that slots should be considered as 

“public goods” allocated to airlines to be used under certain conditions. Slots are created by 

decision of the State and exist only as long as “capacity is not sufficient to meet actual or 

planned operations.” While EU regulation 95/93 defines a slot as “the scheduled time of 

arrival or departure available or allocated to an aircraft movement on a specific date at an 

airport coordinated under the terms of this regulation," it did not create any ownership 

rights. The Phase I revision (Regulation 793/2004 of 21 April 2004), which will be enacted on 

July 30, 2004, redefines slots to mean “the permission given by a coordinator in accordance 

with this Regulation to use the full range of airport infrastructure necessary to operate an air 

service at a coordinated airport on a specific date and time for the purpose of landing or 

takeoff as allocated by a coordinator in accordance with the Regulation.”
Page 42 GAO-04-835 Transatlantic Aviation

The Boeing Company expects that consumer preference for nonstop 

flights, congestion at major airports, and new technology will push airlines 

to develop new nonstop city pairs. According to Boeing officials, between 

1980 and August 2001, as the transatlantic market has developed, the total 

number of city pairs served with nonstop flights more than doubled, in part 

because airlines were able to connect those markets using aircraft with 

smaller capacities (see fig. 9). Boeing projects that, between the United 

States and EU, an additional 114 city pairs could support nonstop service 

with 250-seat aircraft. It cites San Francisco–Milan, Houston–Madrid, and 

Seattle–Frankfurt as possible examples. 
Page 43 GAO-04-835 Transatlantic Aviation

Figure 9: Change in Nonstop City Pairs and Average Aircraft Capacity across the North Atlantic

Note: Data were drawn for the month of August in each year.

The development of new nonstop service or new competition in existing 

markets would offer consumer benefits. Clearly, consumers would benefit 

from having nonstop service on new city-pair markets rather than 

connecting service. If airlines chose to compete on other airlines’ existing 

0

Year

Source: The Boeing Company.

50

100

150

200

250

300

350

198019811982198319841985198619871988198919901991

19921993199419951996

199719981999200020012002

City pairs with nonstop service

Average aircraft size (seating capacity)
Page 44 GAO-04-835 Transatlantic Aviation

routes, the presence of additional airlines on a route could not only provide 

consumers with more choices of flight times during the day, but also could 

act as a competitive force on service quality and price. In the United States, 

consumers at dominated airports experience higher average airfares than 

do those at more competitive airports.52 

Although removal of the nationality clause restrictions would theoretically 

open the door for new competition in various markets, airlines will likely 

face significant operating barriers in those markets, particularly at 

dominated hub airports. In the past, we reported that new competition at 

key domestic airports was inhibited by a lack of access to slots and airport 

facilities.53 In 2004, an EU report noted that competition at certain key 

airports continued to be inhibited by lack of available slots at attractive 

times. The report listed Heathrow, Frankfurt, Madrid, and Paris’s Charles 

de Gaulle airports as having more demand for slots than available capacity, 

either throughout the day or at peak times of the day. 

As in the United States, major European gateway airports also tend to be 

dominated by a single carrier or alliance.54 As table 6 shows, each of the 

EU’s major airports has one airline that controls a much larger percentage 

of scheduled seat capacity than its next largest competitor. Transatlantic 

flights to and from these airports are generally dominated by one alliance. 

For example, Delta and Air France, both members of the Sky Team 

Alliance, fly 100 percent of the nonstop flights between Atlanta and Paris’s 

52Dominance at an airport, in and of itself, is not anticompetitive. Nevertheless, research has 

consistently shown that dominated airports tend to have higher airfares than airports that 

have more competition from other airlines. An airline’s dominance of an airport alone, 

however, does not demonstrate its market power. One important indicator of the possible 

exercise of market power is what is known as a “hub premium,” which represents the extent 

to which fares to and from hub cities are higher than average fares on similar routes 

throughout the domestic route system. Dominated airports tend to have markets with 

higher airfares than airports that have more competition from other airlines. In 1999, the 

Transportation Research Board confirmed that dominated hub markets (i.e., markets where 

either the origin or the destination is a dominated hub) tend to have higher airfares than 

other markets. This is especially true in short-haul markets. Transportation Research Board, 

Entry and Competition in the U.S. Airline Industry: Issues and Opportunities, Special 

Report 255 (July 1999). 

53See, for example, U.S. General Accounting Office, Airline Deregulation: Changes in 

Airfares, Service Quality, and Barriers to Entry, GAO/RCED-99-92 (Washington D.C.:

Mar. 4, 1999). 

54The Commission’s 2002 industry report demonstrates that, at each major EU airport, there 

was a single alliance that dominated that airport. 
Page 45 GAO-04-835 Transatlantic Aviation

Charles De Gaulle airport. United and Lufthansa, both part of the Star 

Alliance, operate 100 percent of the nonstop flights between Frankfurt and 

Washington Dulles and 73 percent of the nonstop flights between Frankfurt 

and Chicago. 

Table 5: Comparison of Dominant Carrier’s Scheduled Seat Capacity with That of Next Largest Airline at Major EU Airports 

Source: Citigroup Smith Barney, 2003 Hub Factbook.

Sales and marketing practices—which include frequent flier programs and 

corporate incentive programs—may also impede competition. They do so 

by reinforcing market dominance at hubs and impeding successful entry by 

new carriers and existing carriers into new markets. Practices such as 

frequent flier programs encourage travelers to choose one airline over 

another on the basis of factors other than obtaining the best fare. 

Such factors have a tempering effect on the extent to which EU airlines 

may seek to launch competitive transatlantic service at these EU gateways. 

EU airline officials with whom we spoke said they have no plans to 

establish a significant presence in the hub airports of other airlines. 

Officials said it would be difficult to successfully compete in a hub against 

an incumbent airline because of the inherent advantages airlines maintain 

in their own hub airport. More recent experience has shown however that 

it is precisely the existence of high premium routes that have attracted 

low-cost carriers to introduce new competition at or near those high-fare 

markets, although they often use secondary airports. Experience in both 

EU airport Dominant airline 

Dominant airline’s 

percentage total 

scheduled seat capacity 

for airport (2002)

Percentage of scheduled seat 

capacity for next largest carrier 

(2002)

Madrid, Spain Iberia 59.3% 9.3%

Frankfurt Lufthansa 58.8 2.6

Paris Charles De Gaulle Air France 57.2 4.1

Barcelona Iberia 52.7 7.7

Amsterdam KLM 52.5 5.6

London Gatwick British Airways 51.3 8.6

Munich, Germany Lufthansa 49.4 8.8

Rome Fiumicino Alitalia 46.8 8.9

London Heathrow British Airways 40.5 9.6

Manchester, United Kingdom British Airways 35.5 10.7
Page 46 GAO-04-835 Transatlantic Aviation

the United States and Europe has shown that low-cost carriers have 

increased their presence in major hub airports or secondary airports in 

major hub markets (i.e., Southwest and ATA at Chicago’s Midway airport 

and easyJet at Gatwick). 

Consolidation among EU 

Airlines Could Affect 

Consumers Both Positively 

and Negatively

Consolidation among EU airlines may be more likely if nationality clause 

restrictions were eliminated, and could lead to a more efficient EU industry 

structure. Generally, removal of regulatory barriers to industry structure, 

when accompanied by appropriate competition-preserving antitrust 

policies, is expected to improve operating efficiencies and promote 

innovation. The U.S. Department of Justice’s Horizontal Merger 

Guidelines55 recognize that competition usually encourages firms to 

become more efficient. Mergers can also generate significant efficiencies 

by permitting a better utilization of existing assets, enabling the combined 

firm to achieve lower costs than either firm could have achieved without 

the merger. In turn, that may result in lower prices, improved quality, 

enhanced service, or new products. At the same time, however, because the 

motivation behind mergers is the prospect of financial gain, mergers are 

restricted under both U.S. and EU antitrust laws in their ability to create or 

enhance market power or to facilitate its exercise. Market power in this 

instance is the ability of a firm to profitably maintain prices above 

competitive levels for a significant period of time. Thus, while 

consolidation in an industry through mergers can produce efficiencies and 

potential consumer benefits, it remains important for antitrust or 

competition authorities to guard against market abuses.

Analyses we have previously conducted of actual or proposed mergers in 

the U.S. domestic market suggest that mergers often have both positive and 

negative effects.56 Mergers have the potential for creating positive benefits 

to consumers in such ways as the following:

• In markets where each of the merging airlines had a relatively limited 

presence, combining their limited shares can create an additional 

effective competitor. 

55U.S. Department of Justice and Federal Trade Commission Revision to the Horizontal 

Merger Guidelines (Apr. 8, 1997).

56See, for example, U.S. General Accounting Office, Aviation Competition: Issues Related 

to the Proposed United Airlines-US Airways Merger, GAO 01-212 (Washington, D.C.:

Dec. 15, 2000).
Page 47 GAO-04-835 Transatlantic Aviation

• Consumers in some markets would benefit from having access to new 

“on-line” service. For example, when the European Commission 

recently approved the merger of Air France and KLM, it reported that 

KLM consumers would gain access to more than 90 new destinations 

and Air France customers would be offered 40 new routes. 

• Members of the frequent-flyer programs of the merged airlines would be 

able to use their miles to reach an expanded number of destinations. 

Some industry officials and experts said a U.S.–EU agreement removing 

nationality restrictions would facilitate the opportunity for more 

cross-border mergers in the EU aviation industry, because EU airlines 

would not lose important traffic routes into the United States as a result of 

merger. However, other officials said that restrictive bilateral agreements 

still held with three other major aviation nations would limit the extent to 

which airlines would seek to consolidate. The three nations most 

frequently mentioned were Japan (because of the size and value of the 

existing market), China (because of the size and value of the potential 

market), and Russia (because of the implications of overflight rights). For 

example, Russia and Germany currently have a bilateral agreement that 

restricts routes and overflight rights to Russian and German airlines. If 

Lufthansa Airlines were to merge with another EU carrier, it is not clear 

that Russia would extend these rights to the merged airline. If an EU carrier 

did not have overflight rights from Russia, its flight times and costs for 

operations to other Asian countries would increase significantly. These 

officials said airlines that had received traffic rights and other operating 

considerations through such agreements might be unwilling to risk losing 

them through a merger.

A merger can have negative effects on consumers in those markets where 

the merger reduces the number of effective competitors. This negative 

effect is increased if the two airlines that merge have significant 

overlapping markets or if the merger creates an airline that dominates a 

particular market. Industry experts generally agree that, with dominance in 

a market, airlines can wield market power and make entry into those 

markets by would-be competitors more difficult. Therefore, an airline that 

can wield this market power has the ability to raise fares when 

unconstrained by competition. Consolidation also raises the possibility that 

competition in key markets will be reduced, thereby potentially affecting 

fares and service. The current merger between Air France and KLM 

illustrates this point. The European Commission noted that the merger 

would also eliminate or significantly reduce competition on 14 routes, 
Page 48 GAO-04-835 Transatlantic Aviation

including 3 transatlantic routes (Amsterdam–New York, 

Amsterdam–Atlanta, and Paris–Detroit). Air France and KLM have agreed 

to surrender slots at Amsterdam and Paris, but it is unclear if other airlines 

will provide effective competition in those markets. 

In the absence of specific merger proposals, it is not possible to project the 

extent to which such positive and negative effects would be present. Some 

aviation experts maintain that the likely outcome of consolidation is the 

solidification of three “mega” alliances. These “mega” alliances would 

provide the vast majority of international aviation service and would be 

solidified around the Star, SkyTeam, and oneworld alliances, with the 

major U.S. and EU airlines providing the vast majority of transatlantic 

service. Some experts question the long-term viability of the existing 

structure of smaller EU national airlines, such as Austrian Airlines or TAP 

Airlines. These experts project that such smaller airlines may become 

regional or niche airlines serving limited markets.

Major Obstacles Likely 

Would Limit EU Airlines 

from Moving Operations to 

Other Countries, at Least in 

the Near Term

While labor groups and some other stakeholders are concerned that EU 

airlines may attempt to achieve lower costs by relocating operations or 

establishing subsidiaries in EU member states that have lower social costs 

and labor standards, a number of major obstacles could limit airlines from 

establishing such “flag of convenience” operations. Increased competitive 

pressure resulting from any new U.S.-EU agreement may lead airlines to 

seek reductions in operating costs. Because labor represents the single 

largest portion of these costs, labor groups have expressed concern that 

EU airlines might consider relocating to EU countries with—from an 

operating standpoint—more favorable labor laws. 
Page 49 GAO-04-835 Transatlantic Aviation

Differences in labor costs and labor law among EU member states certainly 

exist. According to a 2003 EU study, the newest 10 member states had an 

average gross domestic product that is 40 percent of the average for the 15 

other member states.57 The EU has adopted a common set of rules with 

regard to certain labor policies, such as gender equality, nondiscrimination, 

and health and safety. Even so, specific regulations and enforcement 

authority remain with the member states. Additionally, EU member states 

still maintain their own national labor laws, some of which may provide 

airlines with more favorable labor environments. Differences remain, for 

example, in how EU member states regulate collective bargaining. For 

instance, an EU report stated that the new EU member nations had 

generally very weak collective bargaining regulations when compared to 

the other EU member nations.

According to labor representatives, the ability of airlines to relocate to or 

establish subsidiary operations in other member states would enable 

airline management to replace the existing workforce with lower-wage 

workers. Additionally, EU officials stated that there is no EU law regulating 

the representation, in collective bargaining, by a single employee 

organization. As a result, workers in the same “craft” (i.e., pilots or flight 

attendants) employed by a single company but located in different EU 

member states cannot be represented by a single employee organization. 

There are, however, common rules concerning the right to information and 

consultation of employees in Community-scale undertakings and 

Community-scale groups of undertakings. According to labor 

representatives, employee representation rights are critical to preventing 

downward pressure on wages. These rights include single representation 

for all members of an employee group, including those of subsidiaries and 

holding companies; the ability to negotiate an agreement; and effective 

enforcement of a negotiated agreement. Unless labor gains some of those 

rights, airlines will be able to establish subsidiaries and then substitute 

lower-wage labor for the existing workforce. A study prepared for the 

European Cockpit Association, the association of each member state’s 

pilots unions, argues, that with the increase in inter-company and 

cross-national alliances, trade unions and employee associations based in 

single countries and without inter-union networks could be left without an 

57Wim Kok, Enlarging the European Union: Achievement and Challenges,” Report of Wim 

Kok to the European Commission (Mar. 2003). By comparison, Spain and Portugal had an 

average GDP per capita of 70 percent of the existing EU.
Page 50 GAO-04-835 Transatlantic Aviation

effective voice in the future restructuring of the industry, such as 

determining where work will be located and under what conditions. 

While many aspects of this issue remain unsettled, we did not find 

substantial evidence to indicate that airlines would relocate operations or 

establish “flag of convenience” subsidiaries in lower-wage EU countries, at 

least in the short term. 

• None of the EU airline officials we interviewed indicated a desire to 

relocate to a low-wage country, citing company branding and markets as 

being more important in driving business decisions than low-wage labor. 

Airline officials said that commercial aviation differs from other 

industries because the product (air travel) must be produced close to 

the customer base (population and economic centers). Consequently, 

airlines need to maintain their major operations at key economic 

centers, none of which are located within the lower-cost countries. 

Another example that suggests factors other than low-wage labor drive 

an airline’s business decisions is that EU regional airlines, not bound by 

international bilateral agreements, have not pursued movement to 

countries with lower wages and social costs over the last 11 years, 

despite the fact that such movements were possible after the creation of 

a single European aviation market.

• Despite the fact that pilots and flight attendants are inherently mobile 

and could theoretically travel from lower-cost areas to do their work, 

airlines said it was preferable to locate flight personnel close to the base 

of operations. Therefore, airlines will have to provide a competitive, 

market-based compensation package to retain qualified employees. For 

example, an airline that chose to have a major base of operations in 

Paris would need to hire employees paid at “market” salaries. To run its 

daily operation from Paris to Hong Kong, Cathay Pacific Airways, for 

example, employs 70 French citizens at its Paris offices and Charles De 

Gaulle Airport. To compete in the labor market for qualified employees, 

Cathay officials said that it must offer a compensation package that is 

competitive with that offered by other airlines.58

58Ryanair also stations its personnel close to their European base of operations; however, all 

employees are contracted under Irish labor laws, regardless of where they are located. 

Additionally, according to a 2001 International Labor Organization study, there were at least 

10 other EU member states with higher nonwage costs than Ireland.
Page 51 GAO-04-835 Transatlantic Aviation

• If an airline decided to move its operations to another EU country or 

import low-wage labor from there, it appears unlikely they would have 

access to a sufficient supply of appropriately trained personnel. For 

example, according to EU and airline officials, the number of pilots 

available in these countries who are trained on aircraft used by the 

airlines is relatively small. 

• Finally, airline and government officials noted that both U.S. and EU 

pilots have negotiated scope clauses59 that limit the airline’s ability to 

substitute workers from lower-wage subsidiaries for its current 

workforce (i.e., engage in “labor substitution”). Moreover, available 

evidence suggests that the creation of the EU’s single market has not led 

to labor substitution.60 A report by the UK Civil Aviation Authority stated 

that, since EU aviation deregulation and the creation of a single market, 

the United Kingdom had not had any airlines reflagging to a more lax 

regulatory regime or workers displaced by cheaper workers from other 

countries in the EU, nor had any UK airlines lost any market share to 

airlines from lower-wage EU countries, despite the fact that the United 

Kingdom is one of the higher-wage EU countries. 

While there currently appears to be little evidence of serious consideration 

of relocation or establishment of subsidiaries for access to low-wage labor, 

the removal of the nationality clause restrictions and the accession of 10 

lower-wage member states into the EU does change the market dynamic. 

EU labor groups said that the benefits of relocating business operations 

among the 15 countries that comprised the EU prior to May 2004 were 

limited, since there was not a large wage and social cost disparity between 

them. Now, the disparities are greater. In addition, one U.S. labor 

representative said that, while there initially may be little economic 

incentive for established transatlantic EU airlines to move their operations 

to countries with lower costs and labor standards, new entrants could use 

the change in regulatory structure to gain a competitive advantage. 

Furthermore, over time, there may be economic incentives for established 

59Scope clauses are found in some union contracts that limit the company’s ability to use 

code-sharing regional or international airlines for its flying.

60We did not conduct a direct wage or compensation comparison between U.S. and EU 

airline employees. While the compensation data for U.S. airline employees were relatively 

complete, the data for European airlines were frequently incomplete or not available. The 

social costs between the U.S. and EU also vary, and several officials told us that any 

comparison of wages or compensation between U.S. and EU airlines would not completely 

account for those differences.
Page 52 GAO-04-835 Transatlantic Aviation

EU airlines to move their principal places of business or to establish 

subsidiaries in countries with lower labor standards. Some airline officials 

cite low-cost carrier Ryanair as an example of a carrier that is taking 

advantage of the fact that the EU’s single market is still governed by 

individual member states’ labor laws, and that pay and working conditions 

are not subject to collective labor agreements at the European level.

Because of this concern, U.S. labor representatives have proposed that 

certain protections be included in any draft U.S.-EU agreement that would 

reduce the incentive for airlines to take advantage of "flags of 

convenience.” One proposal would be to include a definition of "principal 

place of business" in the draft to help clarify which set of laws would be 

applied to a given carrier. Including this definition would make it harder for 

major EU airlines to establish subsidiaries in lower labor standard 

countries and have those laws applied to them. Setting this standard would 

also clarify which country would be responsible for overseeing and 

enforcing safety and security requirements for the airlines. 

The success of low-cost carriers like Ryanair and Southwest raises the 

question of whether existing low-cost carriers could successfully compete 

in the transatlantic market. Typically, low-cost carriers have succeeded in 

the domestic market by providing point-to-point service, often at less 

congested airports. These airlines achieve their comparative cost 

advantages through lower operational costs (often gained through using a 

single aircraft type), and greater productivity. Recently, low-cost carriers 

have begun to compete with network airlines by offering long-haul 

(transcontinental) service. Under current Open Skies agreements, both 

U.S. and EU low-cost carriers can provide nonstop flights between the U.S. 

and the home countries of the EU low-cost airlines. However, it is unclear 

how low-cost carriers would compete on transatlantic routes. Key aspects 

of the low-cost carrier business model, notably the higher relative 

productivity of labor and aircraft and the use of a single fleet type, are more 

difficult to achieve on transatlantic routes. 

Concluding 

Observations

A new aviation agreement without nationality-based restrictions between 

the United States and the EU could create additional benefits for 

consumers and airlines, but would require oversight from antitrust 

authorities to ensure that the benefits of more open markets in the EU 

accrue to the traveling public. The existing bilateral aviation agreements 

between the United States and individual EU countries would need to be 

modified to resolve legal concerns within the EU, namely the nationality 
Page 53 GAO-04-835 Transatlantic Aviation

clause. Depending on the outcome of negotiations between the United 

States and the EU, the changes could be relatively minor or could result in 

a comprehensive opening of the U.S. and EU markets. With a new 

agreement that removed the nationality clause restrictions and expanded 

the Open Skies framework, U.S. consumers and airlines could benefit from 

increased access to new destinations within the EU, lower fares from more 

efficient route networks, and potentially more competitive routes. As 

discussed in this report, such benefits may be limited because the current 

alliance structure and bilateral agreements already provide many benefits, 

and because congestion and limited access to key airports may mitigate or 

delay the potential benefits. Resolving the EU legal concern over the 

nationality clause could lead to continued consolidation among airlines 

within the EU and potentially stronger ties between U.S. and EU airlines. 

However, mergers such as that between Air France and KLM raise 

questions about their impact on U.S. consumers because of their 

antitrust-immune alliance partnerships with U.S. airlines. For example, 

how might the Air France-KLM merger affect the international operations 

of their U.S. partners, Delta, Continental and Northwest? In evaluating the 

potential effects of such a scenario, how would regulators separate the 

effects or influences of airlines’ international operations from their 

domestic operations? Since other major U.S. airlines participate in 

alliances with EU airlines, further European industry consolidation would 

continue to raise such questions.

In the absence of any significant competitive pressure from low-cost 

carriers flying between the United States and the EU, there is a risk that 

beneficial elements of potential restructuring could be offset by a reduction 

in competition between alliances. Antitrust authorities in the United States 

and EU will need to be vigilant to safeguard the benefits that could accrue 

from the changing market structure. 

The net effect on airlines and consumers will depend on (1) when and to 

what extent U.S. airlines might gain access to markets that are now 

restricted, and (2) the business strategies that U.S. and EU airlines adopt. 

Obviously, the outcomes of any of these developments cannot be predicted. 

For example, low-cost airlines–which have often been a source of 

innovation–may find ways to alter their traditional business plans in ways 

that would make them a competitive alternative to major network carriers 

in transatlantic service. Past experience has shown that removing 

government restrictions on aviation (e.g., through domestic deregulation or 

Open Skies agreements) provided benefits to consumers, airlines, and the 

industry’s workforce. Because those significant benefits have already been 
Page 54 GAO-04-835 Transatlantic Aviation

realized, the benefits associated with additional liberalization of the 

U.S.-EU markets should be similar in nature but incremental in scope. It 

appears that the greatest source of likely benefits to both U.S. airlines and 

consumers lies in gaining de facto access to London’s Heathrow Airport. 

How the benefits from access to such restricted markets may compare to 

those already realized from the other 15 Open Skies agreements ultimately 

depends on the extent of the increase in competition and changes in airline 

operations and passenger traffic.

Agency Comments and 

Our Evaluation

We provided a draft of this report to DOT and State for their review and 

comment. Neither DOT nor State offered written comments, but did 

provide technical corrections, which we incorporated as appropriate. In 

oral comments, DOT’s Deputy Assistant Secretary, Office of the Assistant 

Secretary for Aviation and International Affairs, noted that concluding a 

new agreement with the EU that would further liberalize transatlantic 

aviation would provide significant benefits to consumers, airlines, 

communities, and labor interests on both sides of the Atlantic. DOT 

believes that establishing a regional air transport agreement between the 

United States and the 25 members of the EU would establish a template for 

a more competitive aviation regime on a worldwide basis. Finally, DOT 

noted that it remains committed to achieving that goal and securing the 

benefits that it could bring. We also provided selected portions of a draft of 

this report to the European Commission; airlines; BAA, plc; the Airline 

Pilots Association; and other groups cited to verify the presentation of 

factual material. We incorporated their technical clarifications as 

appropriate.

Unless you publicly announce the contents of this report earlier, we plan no 

further distribution of this report until 30 days from the date of this letter. 

At that time, we will provide copies to relevant congressional committees; 

the Honorable Norman Y. Mineta, Secretary of Transportation; the 

Honorable Colin L. Powell, Secretary of State; and other interested parties, 

and will make copies available to others upon request. In addition, this 

report will be available at no charge on the GAO Web site at
Page 55 GAO-04-835 Transatlantic Aviation

http://www.gao.gov. If you have any questions about this report, please 

contact me or Steve Martin at 202-512-2834. Other major contributors are 

listed in appendix VI.

JayEtta Z. Hecker

Director, Physical Infrastructure Issues
Page 56 GAO-04-835 Transatlantic Aviation

Appendix I

Scope and Methodology ApApenednxidexiIs

At the request of the Chairman and Ranking Minority Member of the Senate 

Committee on Commerce, Science, and Transportation, and the Chairman 

and Ranking Minority Member of that Committee’s Subcommittee on 

Aviation, we examined three issues relating to potential changes to existing 

Open Skies aviation agreements with European Union member states. 

Specifically, our objectives were to answer the following questions: (1) how 

prevalent are Open Skies agreements between the United States and EU 

nations, and what has been their effect on airlines and consumers; (2) what 

are the key ways that commercial aviation between the United States and 

EU could be changed by the Court of Justice decision; and (3) how might 

the elimination of nationality clause restrictions in any new U.S.-EU 

agreement affect airlines and consumers?

To determine how prevalent Open Skies agreements are and what their 

effect on airlines and consumers has been, we reviewed prior research 

from Department of Transportation (DOT), the UK Civil Aviation Authority, 

the EU Directorate General Transport and Energy (DG TREN), and other 

aviation research organizations. We reviewed documents from the 

Department of State (State) to identify the EU member nations with Open 

Skies agreements and reviewed the five bilateral agreements the United 

States has with 5 of the 10 non-Open Skies EU member nations. (The 

United States does not have any relevant aviation agreements with Cyprus, 

Slovenia, Estonia, Latvia, or Lithuania.) We interviewed officials from these 

agencies to confirm that the information in these documents and reports 

were correct.

To determine the effect of Open Skies, we looked at the growth of 

transatlantic passenger and freight traffic, and we analyzed historical data 

on airline passenger and freight traffic. We used DOT’s T-100 on-flight data 

to determine the total number of passengers and the total weight of freight 

and mail volumes that flew between the United States and the EU from 

1990 to 2002. U.S. and foreign airlines are required to report all nonstop 

segments in which at least one point is in a U.S. state or territory. 1

 To 

facilitate analysis of the T-100 data, we contracted with BACK Aviation 

Solutions (BACK), an aviation-consulting firm. BACK obtains the DOT data 

1

14 C.F.R. Sec. 241 prescribes the collection of scheduled and nonscheduled service traffic 

data from the domestic and international operations of U.S. air carriers, while 14 C.F.R. Sec. 

217 prescribes the collection of data from foreign air carriers. The schedules submitted by 

the air carriers to DOT under this requirement collect nonstop segment data and on-flight 

market information by equipment type and by service class. This report is known as the

T-100 report. 
Appendix I

Scope and Methodology

Page 57 GAO-04-835 Transatlantic Aviation

and makes certain adjustments to these data, such as correcting recognized 

deficiencies in the airlines’ data submissions, when these submissions have 

not met DOT’s standard of 95-percent accuracy. 

To determine the reliability of DOT’s T-100 data and BACK’s product, we (1) 

reviewed existing documentation from DOT and BACK about the data and 

the systems that produced them, (2) interviewed knowledgeable agency 

and company officials, and (3) performed electronic tests of the data. We 

concluded that the data were sufficiently reliable for the purposes of this 

report. 

To determine the amount of nonstop or connecting service available 

between selected U.S.–EU markets,2

 we analyzed airline flight schedule 

information submitted to Innovata by U.S. and EU airlines for May 2004. 

Innovata, whose clients include all major North American airlines, 

maintains comprehensive airline schedule data files based on information 

they collect, verify, and aggregate from the airlines. We purchased and 

accessed Innovata data through Sabre’s FlightBase airline scheduling 

software. To determine the reliability of the Innovata data and Sabre’s 

product, we (1) reviewed existing documentation from Innovata and Sabre 

about the data and the systems that produced them, (2) interviewed 

knowledgeable company officials, and (3) performed electronic tests of the 

data. We concluded that the data were sufficiently reliable for the purposes 

of this report. 

When analyzing the scheduled service in markets, we selected the largest 

U.S. and EU airports in terms of passenger traffic, based on airport 

categorization by the Federal Aviation Administration (FAA) and the 

Airports Council International.3

 While this does not include all airports 

within the United States or EU, the U.S. airports selected accounted for 

96.6 percent of the total U.S. passenger traffic in 2002, and EU airport 

officials stated the EU airports selected comprised the major European 

airports. We also used the May 2004 schedule data to examine the number 

2

In the airline industry, markets are generally defined in terms of service between a point of 

origin and a point of destination. Thus, a market is often, but not always, defined as a city 

pair. 

3

U.S. airports are defined at 49 USC 47102 as large hub airports, medium hub airports, and 

small hub airports. Airports Council International defines the largest EU airports as having 

more than 2 million passengers per month for Category 1 airports, between 1 million and 2 

million boardings per month for Category 2 airports, and less than 1 million boardings per 

month for Category 3 airports. 
Appendix I

Scope and Methodology

Page 58 GAO-04-835 Transatlantic Aviation

of competitors within a given airline market. DOT has in the past defined a 

“competitor” as an airline or alliance that has a market share of at least 10 

percent of available flights. As in prior reports on the effects of changes in 

competition of proposed mergers or alliances, we adopted that 10 percent 

threshold. To determine the number of competitors within each market, we 

identified the best level of service provided and the competitive 

alternative.4

 For example, if a market has nonstop service, that would be 

considered the best level of service. However, one stop/single on-line 

connecting service may be a valid competitive alternative to nonstop in 

some markets (e.g., among the subset of passengers who are not timesensitive or may be more sensitive to prices).5

 Therefore, when the best 

level of service is nonstop, to determine the number of competitors, we 

counted all airlines that provided either nonstop service or one stop/on-line 

single connecting service. For markets where the best level of service is 

one stop/on-line single connecting service, we counted airlines that 

provided two stop/on-line double connecting service as additional 

competitors. 

To determine what the key ways are that commercial aviation between the 

United States and EU could be changed by the Court of Justice decision, 

we interviewed officials from DOT, State, DG TREN, the European Union 

Directorate General for Competition (DG COMP), France, Germany, the 

Netherlands, and the United Kingdom, as well as from U.S. and EU airlines, 

EU airports, and EU aviation trade associations. We discussed the 

implications for European airlines of changes to the nationality clause in 

existing Open Skies agreements. We also discussed congested airport 

facility access and environmental regulations to better understand carrier 

access to EU airports. We reviewed reports recommended by aviation 

authorities from the European Commission, Germany, Britain and the 

Netherlands. Finally, we also discussed with EU officials the EU process 

for airline certification, establishment, and operations.

4

Coding by best level of service meant that once a market was identified, it could not be 

recounted. For example, while the San Francisco to Frankfurt market has nonstop, singleconnection and double-connection service, the market would be counted once as a nonstop 

market.

5

For example, DOT’s approval of the United–Lufthansa antitrust agreement (docket number 

OST-1996-1116) states, “for a significant number of travelers in long-haul markets not 

constrained by strict time-sensitivity, one-stop and connecting service can provide a 

reasonable substitute for nonstop service and should be considered as a competitive option 

for purposes of antitrust analysis.”
Appendix I

Scope and Methodology

Page 59 GAO-04-835 Transatlantic Aviation

To analyze the potential effect of removing the nationality clause 

restrictions on consumers and airlines, we interviewed officials from DOT, 

State, DG TREN, DG COMP, France, Germany, the Netherlands, and the 

United Kingdom, as well as from U.S. and EU airlines, U.S. and EU airports, 

and EU aviation trade associations. We also conducted a review of existing 

research and analyzed airport capacity and demand data from Airport 

Coordination Limited. These data contain the number of slots available at 

London’s Heathrow airport and the demand for these slots by airlines. 

Based on logical tests for obvious errors of completeness and accuracy, we 

determined that the data were sufficiently reliable for our purposes. To 

analyze the potential labor effects, we interviewed officials from major U.S. 

and EU airlines, U.S. and EU labor unions, the EU Directorate General for 

Employment, labor research organizations, and U.S. and EU agencies. 

We also conducted a review of existing research and analyzed data from 

DOT’s “Form 41” database. This database contains financial information 

that large air carriers are required by regulation to submit to DOT (see 49 

C.F.R. Sec. 241). Airlines submit financial data monthly, quarterly, 

semiannually, and annually to DOT with financial and operating statistics. 

To facilitate analysis of these data, we contracted with BACK, an aviationconsulting firm. BACK obtains the DOT data and makes any necessary 

adjustments to these data to improve their accuracy. To determine the 

reliability of DOT’s Form 41 data and BACK, we (1) reviewed existing 

documentation from DOT and BACK about the data and the systems that 

produced them, (2) interviewed knowledgeable agency and company 

officials, and (3) performed electronic tests of the data. We concluded that 

the data were sufficiently reliable for the purposes of this report.

We also reviewed an industry survey of pilot contracts that included wages 

and benefits for pilots and pilots of different seniority levels, by airline. The 

Association of European Airlines (AEA) provided employment information 

for 15 member airlines. Based on interviews with knowledgeable AEA 

officials and logical tests for obvious errors of completeness and accuracy, 

we determined that the data were sufficiently reliable for our purposes.

We conducted our work from October 2003 through July 2004 in 

accordance with generally accepted government auditing standards.
Page 60 GAO-04-835 Transatlantic Aviation

Appendix II

Air Freedoms ApendxiI

A B

A B

A B

A B

A C B

A C B

A C B

A B C

A B

Currently, there are generally considered to be nine freedoms of the air. Although these operations are called "freedoms," they are not necessarily available to an 

airline. Most nations of the world exchange first and second freedoms through the International Air Services Transit Agreement. The other freedoms, to the extent that 

they are available, are usually exchanged between countries in bilateral or multilateral air services agreements. The eighth and ninth freedoms (cabotage) have been 

exchanged only in limited instances. (U.S. law currently prohibits cabotage operations.) In addition, airlines are often required to have an operating license to exercise 

the rights that are available.

First Freedom - The right to fly 

across the territory of a foreign 

country without landing (e.g., United 

Airlines flies from the United States 

(A) over Ireland (B) en route to 

Germany).

Second Freedom - The right to 

land in a foreign country for 

technical or nontraffic purposes, 

such as for refueling or 

maintenance (e.g., American 

Airlines flies from the United States 

(A) and lands to refuel in Ireland (B) 

en route to Germany).

Third Freedom - The right to 

deplane traffic in a foreign country 

that was enplaned in the home 

country of the carrier (e.g., United 

Airlines carries passengers from the 

United States (A) to France (B)).

Fourth Freedom - The right to 

enplane traffic in the foreign country 

that is bound for the home country 

of the carrier (e.g., American 

Airlines carries passengers from the 

United Kingdom (B) to the United 

States (A)).

Fifth Freedom - The right to enplane 

traffic at one foreign point and deplane it 

in another foreign point as part of 

continuous operation also serving the 

airline's homeland (e.g., Northwest 

Airlines has "fifth freedom" rights to carry 

traffic between Tokyo (B) and Hong Kong 

(C), on services which stop at Tokyo (B) 

en route between Los Angeles (A) and 

Hong Kong (C)).

Sixth Freedom - This term is applied to 

fifth freedom traffic carried from a point of 

origin in one foreign country to a point of 

destination in another foreign country via 

the home country of the airline (e.g., KLM 

carries sixth freedom traffic between New 

York (A) and Cairo (C), carrying 

passengers traveling from New York (A) 

to Amsterdam (B) and on to Cairo (C)).

Seventh Freedom - This term is applied 

to an airline's operating turnaround service 

and carrying traffic between points in two 

foreign countries without serving its home 

country (e.g., Lufthansa operates between 

New York (A) and Mexico City (C) without 

serving Germany (B)). 

Eighth Freedom - This term is used to 

refer to "consecutive or fill-up" cabotage in 

which an airline picks up traffic at one point 

in a foreign country and deplanes it at 

another point in that same foreign country 

as part of a service from the home country 

of the airline (e.g., Singapore Airlines 

enplanes traffic at Wellington (A) and 

deplanes it in Auckland (B) as part of its 

service between New Zealand and 

Singapore (C)). 

Ninth Freedom - This term is used to refer 

to "pure" cabotage in which an airline of 

one country operates flights and carries 

traffic solely between two points in a foreign 

country (e.g., Air France operates flights 

between Berlin (A) and Frankfurt (B)).

Source: DOT.
Page 61 GAO-04-835 Transatlantic Aviation

Appendix III

Cargo Carriers ApendxiI

While U.S. cargo carriers have also benefited from the 15 Open Skies 

agreements the United States has signed with EU member nations, the 

European Court of Justice ruling also affects these carriers. Since 1990, 

U.S. cargo carriers have experienced a significant increase in volume and 

operations with the development of a large hub-and-spoke network. With a 

new agreement that extended the Open Skies framework, U.S. cargo 

carriers would also likely gain additional traffic rights into markets that are 

currently restricted. There are unique cargo carrier issues that are not 

directly linked to the nationality clause, however, and these issues do 

present concerns to U.S. cargo carriers. Because U.S. cargo carriers rely 

heavily on night operations, attempts by local communities in EU member 

states to impose additional restrictions on night flight operations could 

have an effect on U.S. cargo carriers.

U.S. Cargo Carriers 

Have Increased Their 

North Atlantic 

Operations Since Open 

Skies

Similar to the increase in passenger service, cargo service also experienced 

a significant increase in volume and operations since the inception of Open 

Skies agreements. Freighter operations for all carriers flying between the 

United States and EU increased more then 75 percent from 1990 levels to 

over 20,000 flights in 2002 (see fig. 12).1

 Using “fifth freedom” rights 

provided by Open Skies, FedEx and United Parcel Service (UPS)—the 

largest U.S. all-cargo carriers—expanded operations through hub-andspoke networks in Paris and Cologne. FedEx currently operates three daily 

flights from the United States to Paris, one to Frankfurt, and one to London 

(Stanstead Airport); UPS operates five daily flights from the United States 

into its European hubs (Cologne, Germany; East Midland, United Kingdom; 

and Paris, France). These increased freighter operations carried more than 

double the 1990 freight and mail volumes, so that by 2002 freighters carried 

over 2.5 billion pounds between the United States and the EU. 

1

Freighters are airplanes that provide only cargo service.
Appendix III

Cargo Carriers

Page 62 GAO-04-835 Transatlantic Aviation

Figure 10: Freighter Operations for All Carriers Flying between the United States 

and the EU, 1990-2002

Fifth Freedom Rights With the removal of the nationality clause restrictions, U.S. airlines would 

gain “fifth freedom rights” (i.e., the right to operate flights from the United 

States to an EU country and then beyond to another country) in EU 

member states with restrictive bilateral agreements. For example, under 

“fifth freedom rights,” FedEx is able to transport cargo from Memphis to 

Paris, deposit some or all of it in Paris, and then pick up new cargo and fly 

it to Frankfurt. While all U.S. cargo carriers have fifth freedom rights under 

current Open Skies agreements, under the more restrictive bilateral 

agreements, such as the agreement with the United Kingdom, these rights 

are limited. 

UPS and FedEx make extensive use of fifth freedom rights in many of the 

EU countries where they have such rights. Under the Bermuda 2 

agreement, when U.S. cargo carriers operate a flight from the United States 

that stops both in the United Kingdom and an airport in continental 

Europe, that flight is restricted from using some fifth freedom rights to pick 

up cargo in the United Kingdom and transport it on to the continental 

U.S. - EU Freighter Ops (in thousands)

0

5

10

15

20

25

Year

Source: GAO analysis of DOT data.

1990 1997 1991 1992 1993 1994 2001 200 1995 1996 1998 1999 2000 2
Appendix III

Cargo Carriers

Page 63 GAO-04-835 Transatlantic Aviation

destination. For example, FedEx schedules a daily flight from its hub in 

Newark to its hub in the United Kingdom, and this flight then continues on 

to Paris. Under the current agreement, FedEx is allowed to drop off cargo 

in the United Kingdom, but it is not allowed to pick up cargo in the United 

Kingdom and transport it to Paris. Instead, the plane must travel to France 

only partly loaded (that is, with the Paris-bound cargo that originated in the 

United States). Cargo that FedEx receives in the United Kingdom for 

shipment to Europe must be shipped using a separate charter service. This 

increases FedEx’s operating costs. A new agreement would remove these 

restrictions and allow FedEx to utilize its network more efficiently.

Lack of EU 

Enforcement Ability on 

Noise Regulations May 

Affect U.S. Cargo 

Carriers

Increased restrictions on night flight operations could potentially adversely 

affect the ability of U.S. cargo carriers to operate. At a number of EU 

airports, local communities are seeking, for environmental reasons, to 

restrict the extent of night operations. At Frankfurt, for example, German 

officials are in the process of attempting to ban all nighttime operations at 

the Frankfurt airport and have cargo carriers move their operations to the 

Hahn airport—about 80 miles away. Restrictions on these nighttime 

operations would compromise U.S. cargo carriers’ operations.

If cargo carriers need to limit their nighttime operations or move them to 

other locations, the impact on U.S. cargo carriers could be significant, since 

they have invested substantial financial resources to develop their 

distribution networks and airport facilities. For example, FedEx has 

invested over $200 million to develop its operations at the Charles de 

Gaulle, Stansted, and Frankfurt airports. UPS also has invested significant 

sums in its facilities at Cologne, Germany. Therefore, changes in night 

flight regulations could effectively devalue these investments by reducing 

the ability of these companies to fully utilize their networks and facilities. 

In particular, if FedEx were forced to relocate its Frankfurt operations to 

Hahn, the value of its Frankfurt facilities would be diminished. FedEx 

officials indicated that if a night ban was enacted, it would limit them with 

regards to expanding future operations. In addition, if an airport restricted 

aircraft from landing after midnight, it would force U.S. cargo carriers to 

eliminate either late pickups or early deliveries. Both FedEx and UPS 

highlighted this as a huge competitive disadvantage.

The EU has little direct influence in local attempts to invoke such 

restrictions, as such actions remain a local- and country-specific matter. 

Although the EU issued a directive in 2002 on the establishment of rules 

and procedures with regard to noise-related operational restrictions at EU 
Appendix III

Cargo Carriers

Page 64 GAO-04-835 Transatlantic Aviation

airports, all actual regulations are established and implemented by the 

individual member states.2

 The EU directive supports the ICAO “balanced 

approach,” which outlines a standard set of procedures for establishing 

aircraft noise regulations.3

 This approach and the EU directive attempt to 

harmonize the procedures used by individual member states. However, 

since the pressure to restrict night operations usually originates with local 

communities surrounding airports, local governments have enacted night 

flight restrictions in compliance with local citizen demands or local 

government regulations. Therefore, noise restrictions can greatly vary 

between member states. If aviation stakeholders feel that member states 

have not followed the procedures established under the ICAO “balanced 

approach,” they can appeal to the EU. If the EU rules in favor of the 

aviation stakeholder, the member state is required to amend the regulation. 

However, according to EU officials, under EU law, during the infringement 

proceedings, there is no requirement for the EU member states to stop or 

delay these noise regulations. Officials stated that, while the EU does not 

have any enforcement mechanisms and the infringement procedure is more 

of a political pressure tool, the EU treaty does provide for accelerated 

procedures once the procedure is placed on the Court of Justice agenda. 

2

Directive 2002/30/EC of the European Parliament and of the Council of 26 March 2002 on 

the establishment of rules and procedures with regard to the introduction of noise-related 

operating restrictions at Community airports.

3

ICAO Resolution A33/7 introduced the concept of a “balanced approach” to noise 

management. The “balanced approach” concept of aircraft noise management is composed 

of four principal elements and requires careful assessment of all different options to 

mitigate noise, including reduction of airplane noise at the source, land-use planning and 

management measures, noise abatement operational procedures, and operating restrictions, 

without prejudice to relevant legal obligations, existing agreements, current laws, and 

established policies.
Page 65 GAO-04-835 Transatlantic Aviation

Appendix IV

Current International Airline Alliances ApendxiIV

Source: U.S. Department of Transportation, U.S. Department of State, oneworld alliance, Star alliance, Northwest Airlines, and SkyTeam 

alliance.

Global 

alliance Alliance airlines

Annual passengers 

(millions)

Number of cities 

served

Airlines with 

antitrust 

immunity

EU Open Skies 

countries

oneworld Aer Lingus, American, 

British Airways, 

Cathay Pacific, Finnair, 

Iberia, LanChile, 

Qantas

218.4 573 American, Finnair Finland

SkyTeam Aero Mexico, Air 

France, Alitalia, CSA 

Czech Airlines, Delta, 

Korean Air

212 500 Delta, Air France, 

Alitalia, CSA 

Czech Airlines, 

Korean Air 

France, Italy, Czech 

Republic 

Northwest - 

KLM

Northwest, KLM N/A N/A Northwest, KLM Netherlands 

Star Air Canada, Air New 

Zealand, ANA, Asiana 

Airlines, Austrian, bmi, 

LOT Polish Airlines, 

Lufthansa, Mexicana, 

SAS, Singapore 

Airlines, Spanair, Thai 

Airlines, United, US 

Airways, Varig

360 680 United, Lufthansa, 

Austrian, SAS, Air 

Canada, Air New 

Zealand, Asiana 

Germany, Denmark, 

Sweden, Austria 
Page 66 GAO-04-835 Transatlantic Aviation

Appendix V

Air France-KLM Merger ApendxiV

A major consolidation event—the recently approved Air France-KLM 

merger—is already occurring within the framework of existing Open Skies 

agreements. This merger involves two airlines owned and controlled by 

national citizens from countries that had both signed Open Skies 

agreements with the United States. It has been structured in such a way as 

to protect the traffic rights granted under bilateral agreement for each 

airline.1

 This meant that the merger needed to include a series of corporate 

governance and ownership adjustments not normally found in a traditional 

merger. For example, the actual merger includes a 3-year transitional 

shareholding structure that will ensure that majority ownership of Air 

France is with French citizens and that the majority ownership of KLM is 

under Dutch citizens. The basic structure attempts to preserve the brands 

and identity of each airline by establishing a French holding company, Air 

France-KLM, which will own 100 percent of the economic rights for both 

Air France and KLM.2

 To protect KLM’s traffic rights, Air France-KLM will 

only control 49 percent of the voting rights, with 51 percent being held by 

Dutch foundations and the Dutch government. After 3 years, the Air 

France-KLM holding company will own 100 percent of both airlines. 

European officials believe that the EU’s February 2004 approval of the Air 

France-KLM merger signals the start of consolidation of the European 

aviation industry. If a new U.S.-EU agreement eliminates the nationality 

clause restrictions, the need to structure mergers to protect traffic rights 

across the north Atlantic will likely be eliminated.

Mergers among major European airlines will inevitably raise questions 

about how existing global alliances will be affected. Because of the alliance 

with U.S. partners, mergers will exert effects on U.S. airlines and 

consumers. Air France and KLM are in separate alliances with different 

major U.S. airlines (Delta and Northwest, respectively), and DOT has 

granted antitrust immunity to both of these alliances. In addition, Delta, 

Northwest, and Continental agreed to a major domestic code-sharing 

partnership in 2002, which was permitted with certain conditions by DOT. 

1

The Dutch government has an option allowing it to obtain 50.1 percent of KLM’s voting 

rights if its traffic rights are challenged as a consequence of the nationality of KLM’s 

shareholders.

2

Economic rights are defined as the right to collect dividends.
Page 67 GAO-04-835 Transatlantic Aviation

Appendix VI

GAO Contacts and Staff Acknowledgments ApendxiVI

GAO Contacts JayEtta Z. Hecker (202) 512-2834

Steven C. Martin (202) 512-2834

Acknowledgments In addition to those named above, Amy Anderson, David Hooper, Jason 

Kelly, Joseph Kile, Grant Mallie, Sara Ann Moessbauer, Tim Schindler, Stan 

Stenersen, John Trubey, and Matt Zisman made key contributions to this 

report.

(544082)
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