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. 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. 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. In addition, consumers in most U.S.-EU markets have a choice of service  from more than one competing airline or alliance. 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. 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. 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. Creating subsidiary operations—EU airlines could set up subsidiary  operations outside of their home countries that could provide  transatlantic service. 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. 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. As in the United States, major European gateway airports also tend to be  dominated by a single carrier or alliance. 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. 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. 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?
Why GAO Did This Study

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.

What GAO Found

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. However, those airlines would likely face difficulties in competing successfully at another airline's hub.