Yesterday, the European Court of Justice ruled that a basic tenet of the "Bermuda-type" bilateral air transport agreements negotiated by the U.S. since the end of the Second World War violates the Treaty of Rome when an EU Member state is involved. The ruling was expected -- in January the court’s Advocate General had recommended this result -- but nonetheless, it is a major event in the history of international air transportation.

In 1946, the U.S. was in a position to largely dictate the terms of post-war international air transportation. With the multilateral Chicago Convention providing a framework, and with the failure of the multilateral Five Freedoms Agreement as background, the U.S. proceeded to negotiate a landmark agreement with the U.K. That agreement, executed in Bermuda, provided for the bilateral exchange of traffic rights on agreed terms and for rights incidental to those operations. Most importantly, it limited the rights granted by the agreement to airlines that were "substantially owned and effectively controlled" by nationals of the U.S. and the U.K.

The Bermuda-type agreement became the template for hundreds of bilateral, nationality-restricted air transport agreements, and it served the U.S. airlines well. In fact, the U.S. has only one multilateral air transport agreement in effect today. Two years ago, the U.S. entered into a "model" multilateral open skies agreement with Brunei, Chile, New Zealand and Singapore. While that agreement is open to signature by other nations, only Peru has signed to date.

When the U. S. proceeded on the path of international "open skies," tentatively with the Netherlands in 1992 and as a matter of policy since 1995, it continued to do so using the Bermuda form of bilateralism and nationality restrictions. Indeed, all of the Open Skies agreements entered into by the U.S. are bilateral and contain the Bermuda nationality clause.

The Treaty of Rome, the constitutional foundation of the European Union, confers jurisdiction on the EU to regulate transport within and among Member states. In the period 1987-1993, the European Commission adopted a set of regulations, commonly referred to as the "Third Package," providing access to intra-Community air routes, governing fares and rates on those routes and addressing details such as CRS regulations and the allocation of airport slots.

The EC also took the position that it had exclusive competence to negotiate external air transport rights for the member states. The member states did not share that view and seven of those States, in addition to the Netherlands, proceeded to enter into bilateral "Open Skies" agreements with the U.S. Additionally, in 1995 the U.S. and the U.K. amended their bilateral agreement.

In December 1998, the EC initiated legal action against Austria, Belgium, Denmark, Finland, Germany, Luxembourg and Sweden -- the late 1990s open skies culprits -- and the U.K. The Netherlands joined in the cases in support of the other nations.

The decisions of the European Court of Justice in the eight cases were issued on November 5, 2002. With a few exceptions, e.g., the decision with respect to the U.K. necessarily is limited to the nationality clause issue, the substance of the decisions is constant. The EC immediately announced that it is "still examining the scope for legal action against the Netherlands (in its own right), France, Italy and Portugal -- all of which have now also concluded bilateral "Open Skies" agreements with the United States."

Article 52 of the Treaty of Rome prohibits any restrictions on the right of any member state to establish a business in another member state. For example, a German company doing business in the U.K. is entitled to all the rights and privileges of a British company. A Bermuda-type bilateral, on the other hand, limits the rights and privileges to airlines that are "substantially owned and effectively controlled" by nationals of the bilateral partners. Lufthansa, for example, cannot claim any rights under the U.S.-U.K. agreement.

This inconsistency, and the court’s determination that Article 52 must take precedence, is at the heart of the decisions. A bilateral agreement that is open to third parties is, by definition, not a bilateral agreement. And that is precisely the result that the EC sought in an effort to establish it as the sole voice for the member states in air transport negotiations with other nations.

The decisions involving the seven open skies agreements also hold that, whenever the EC has promulgated regulations or rules affecting the treatment of nationals of non-EU countries, the EC acquires exclusive competence to deal with non-EU countries in the matters covered by the regulations and rules; thus, individual bilateral agreements may not address those matters. The Court ruled that open skies provisions addressing pricing by U.S. carriers in intra-EU fifth freedom markets and addressing CRS’s are invalid because the EC has promulgated rules on those matters. The court also held that slot allocation provisions, which were not present in the agreements before it, also fell within the EC’s competence. On the other hand, the Court did not accept the EC position that the EC has broad exclusive competence to negotiate air transport agreements with non-EU countries.

The EC’s view of the next step, in a press release immediately following the decisions, is unequivocal: "there is thus, an urgent need to open negotiations between the EU and the U.S. with a view to agreeing on an EU-wide replacement for the problematic bilaterals. The Commission has to this effect made proposals to the member states for the negotiation of a '‘Transatlantic Common Aviation Area'’ that would bring further opening to the EU/U.S. relationship. It will also propose in the near future to negotiate with other third countries." That said, there is nothing in the court’s decisions about remedies.

Others are less certain. The U.K. Transport Ministry issued a statement saying, "the U.K. welcomes the court’s decision that member states may continue to negotiate bilateral air service agreements, subject to certain conditions." The fact that at least one of those conditions would seem to preclude a bilateral agreement was not addressed.

A spokesman for the U.S. State Department noted that "the current agreements that we have remain in force as the legal basis for air services between the U.S. and individual European member states." This is a correct statement of the law, albeit bilateral air transport agreements typically may be terminated by either party on one year’s notice. The EC may well urge member states to give such notice

In the end, the court’s decisions may not mark an end to bilateralism, as the EC believes, but, instead, the start of a long and complicated political process ending in new forms of agreements. The status quo could continue, with or without modifications. There could, at least in theory, be "open" bilateral agreements or multilateral agreements with open skies partners and not the EU. How long all of this will take, and what forms, remains to be seen.

The full text of the decisions of the European Court of Justice are available on the court’s web site: www.europa.eu.int/cj/en. The decisions are reported at cases C-466/98 through C-476-98.

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