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. 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 airline operations and passenger traffic grew, U.S. and EU aviation industry employment increased as well (see table 1). 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. 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 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. 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, 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. Open Skies agreements are a particular kind of bilateral agreement. They remove the vast majority of restrictions on how airlines of the two 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. 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. 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. Table 2 summarizes some of the key differences between traditional bilateral agreements and Open Skies agreements. 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. 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. 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. 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 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-share 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. 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. 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. 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. 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. 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 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. DOT has granted antitrust immunity to most of the alliances that U.S. airlines have with EU airlines.