Remarks by Duane E. Woerth
President, Air Line Pilots Association

International Aviation Club
September 21, 2004

Good afternoon. I am pleased to have this opportunity to address the IAC. This club’s membership is very much composed of those individuals who consider, develop and execute the government and private sector policies and plans that drive a most critical sector of the air transport industry. It is a privilege to be here.

As some of you know, I have a home on the central west coast of Florida. This year has been a record year for hurricanes and already I’ve been visited by Charlie and Frances and Ivan waved as he went by. I can’t say that being in Washington has provided much respite. Every week has brought new airline storms of sorts -- bankruptcies; rising fuel prices; pension plan crises. But as this is the International Aviation Club, I will focus on international issues, and, in particular, on some of the meteorological challenges posed by the recent US-EU air services negotiations -- which might have been dubbed “Hurricane Loyola” by some. Threats of renunciation. Threats to hold hostage Open Skies agreements for the new EU member states.

I leave it to you to evaluate the hurricane analogy, but let’s do some assessment while we’re between storms.

A good place to begin might be with looking at the realistic economic value of what might be brought about by the regulatory changes contemplated by the EU’s open aviation area proposal. Before the talks began, the European Commission commissioned an economic study to estimate this value. As far as I know, no one on the US side has done a comprehensive assessment of that study or a comparable analysis. But I think such an assessment should be undertaken because the EU proposals would require changes in some fundamental components of the regulatory regime and could have a negative effect on a number of interest groups. Not surprisingly, there has been much talk about leveling the playing field. Apparently a person’s view on how unlevel the playing field currently is or in which direction it is tilted, depends on where he or she is sitting.

From a jobs perspective the current Open Skies and code share alliance regimes have produced more transatlantic block hours and available seat miles flown by US crews; i.e., more transatlantic jobs. However, and this is a big however, these regimes have produced significantly more transatlantic block hours and available seat miles flown by European crews.

A few examples may be helpful here. Following the German Open Skies Agreement, United added over 120 monthly operations. Lufthansa added over 400 monthly operations. To be sure other US carriers grew their German operations as well but their growth paled in comparison to Lufthansa’s.

KLM and Northwest have a much more balanced jobs relationship due to the joint venture agreements between the carriers. Air France and Delta are also more balanced but for different reasons. The bottom line is that in the aggregate if current ten-year trend lines continue, whereby US crews more and more often get the code while the Europeans fly the plane, the playing field of jobs will be a bigger rout than the Ryder Cup this weekend.

This is not a reflection of a defect in open skies policies. Rather, it is a marketplace demonstration of the difference in the strategic importance European airlines place on transatlantic flying even when the U.S. has lower labor unit costs. Nonetheless, this fact is troubling to U.S. workers who fear they may ultimately be replaced by their European counterparts.

At any rate, the Commission’s report identifies three primary sources of the benefits that it contends will flow from an Open Aviation Area. The first is potential efficiency improvements for US and EU carriers. The second is an improved ability of EU and US airlines to coordinate prices and schedules. The third is the elimination of restrictive bilateral agreements.

Let’s see if their assumptions stand up to even modest scrutiny.

The first source of benefits is based on the notion that the OAA would push European and US carriers to move their cost structures toward benchmark “medium cost” carriers. But one wonders, especially in light of recent events, how much there is left to gain here in reality. While it’s not clear from the report which carriers were the selected medium-cost carriers, or what year the comparative data was taken from, it’s quite probable that the data was from 2000 or earlier. Since then, as everyone knows, there has been dramatic cost cutting both at major US airlines and European airlines alike. This cost cutting has occurred separate and apart from any OAA because of the fiercely competitive intra-EU and domestic US markets. Moreover, this cost cutting continues, really unabated, and is likely to achieve virtually all the so-called “efficiencies” identified in the EU study. Attributing these cost cuts that have nothing to do with an OAA to the OAA is false accounting.

The second source of benefits is the purported ability of US and EU airlines to coordinate prices and schedules on interline routes -- which the study defines as routes that require passengers to fly on two or more airlines to reach their destination. In determining the purported benefits, the study looked at (1) the then-current fares on particular routes, (2) the fare reductions that would presumably occur because of the increased coordination, and (3) the increased traffic volume estimated to result, in turn, from the fare reductions. Routes subject to the four restricted bilaterals -- Greece, Ireland, Spain and United Kingdom were excluded from this analysis. But since the study was done, further development of alliances and the coordinated implementation of pricing and other cost reducing measures have proceeded apace, again even though no OAA has been put in place. For example, just last week Northwest and Continental jointed the Sky Team alliance. Moreover, all the routes in question are subject to open skies agreements. So we are forced to ask the obvious, how much is there to be gained here by an OAA?

Additionally, if US airlines appear to have no expressed business plan beyond alliances, why are we pursuing goals our commercial enterprises don’t seem to want? Could it be that at the present time the OAA is a solution in search of a problem?

The third potential source of benefits is the liberalization of the air service arrangements between the US and four non-open skies countries -- again, Greece, Ireland, Spain and the UK. Here the estimated gain due to increased traffic on the transatlantic is a relatively modest $69 million, but even this amount is subject to doubt. According to the study, fully $58 million, or nearly 85% of this amount would be attributable to opening up the UK market. But as we know, there is a little obstacle here, namely the limited access to Heathrow and Gatwick that is likely to continue whether there is an OAA or not. In fact, the Government Accountability Office recently issued a thorough report on the effects of easing restrictions on US-European markets. In particular, the GAO looked at the potential benefits of eliminating the bilateral nationality clauses and found that while consumers would be likely to benefit at some point, this probably would not occur in the near term because UK airport capacity would postpone and limit new carrier access to those airports.

Thus, in summation the purported benefits found in the EU study almost certainly overstate the benefits that would be generated by an OAA. But even if we accept, for argument’s sake, the study’s total increase in consumer surplus due to increased traffic on the transatlantic, we should put that number in some perspective. That number is $168-645 million depending on price elasticity assumptions. Well, a dollar fluctuation in the price of a barrel of oil is worth approximately $425 million annually to the US airline industry. So the identified ”consumer surplus” roughly equates to a 39¢ to $1.50 drop in the price of oil. Stated conversely a return to $35 a barrel oil would have many times more economic impact than even rosy OAA traffic projections.

Along with the alleged potential economic benefits of an OAA must be considered the implications of some of the elements of that framework. I will focus on just a couple of the concerns airline workers have about the proposal.

First, let me address the Commission’s proposal that a US-EU agreement contain an exchange of cabotage rights. I only do this because the EU continues to advance this proposal. It should be evident to anyone who is serious about trying to “get to yes” here, that this proposal does not help that effort. Most of you were here when John Byerly called cabotage a red herring. I agree. Enough said.

However, in this regard, at the end of the last round, the US had on the table a proposal to give EU carriers access to the US domestic market through US charter partners. While the exact scope of this proposal was never fully defined, we believe that it went too far, and greater clarification and examination of any similar proposal will be necessary in any future talks.

Second, let me address at more length the EU’s proposal that the US and the EU eliminate their restrictions on foreign ownership and control of their airlines. I frequently hear the question -- what is wrong with allowing a foreign airline to buy a US airline if that airline remains incorporated in the US and subject to all the laws that apply to any US airline? Let me explain.

Basically, current labor laws do not deal with labor relations issues that would be created by transnational airline families that operate in multiple domestic markets. For example, the Railway Labor Act, the law governing labor-management relations for airlines in the United States, does not provide a mechanism to address representational and collective bargaining issues that may be created by multiple airlines under a single ownership, operating in different parts of the world.

The consequences of these shortcomings in the RLA and other international labor laws are potentially significant for US airline employees.

Elimination of the ownership and control requirement would allow an airline holding company to own airlines in multiple countries. But there is no legal mechanism that allows the employees of the affiliated carriers to select a common representative and to bargain on their behalf over the wages and working conditions that would apply throughout the system. Thus, the holding company could allocate flying to one affiliated airline or another based on which country’s labor or social laws are most favorable, or in the case where government ownership is involved, a dramatic bias toward employment or promotion of its citizens could come into play. Essentially, as long as the RLA and other national labor laws remain national in scope, there will not be an effective legal framework for the resolution of transnational labor-management issues that will be spawned by a single aviation enterprise operating through wholly-owned airlines of different nationalities. Accordingly, in our view, much work would need to be done in this area before a change in ownership rules could seriously be considered.
Everyone tells me they do not want “flags of convenience” abuses to plague aviation the way they do the maritime industry. Well if that’s true, the aviation community must face up to this very real problem and provide meaningful solutions rather than the lip service provided to date.

Does this mean that the US should refuse to continue to negotiate with the EU? Of course not. There is, after all, the European Court of Justice decision that must be addressed. But we do not believe that the US should just pick up where the talks left off. Rather, we should take a fresh look at what are our appropriate goals and modify our negotiating positions accordingly. Perhaps we should once more look into whether modifications to individual bilateral agreements are a possible response to the court decision.

Now, apart from the US-EU negotiations, there is another legislative shortcoming that I would like to discuss here -- and that is the possible limitation on the jurisdictional scope of the RLA.

The National Mediation Board has a rule that the RLA does not cover foreign-based employees of US airlines and some courts have reached the same conclusion with respect to foreign-based flight attendants, at least to the extent that they work exclusively on flights outside the United States.

This interpretation of the Act raises the possibility that as US airline operations become increasingly global, flight crew of the same US airline may be subject to different labor laws, have different bargaining representatives, and work for different wages under different rules and working conditions. Or worse, have their contracts, negotiated in good faith with past practice precedents reaching back nearly 70 years, suddenly ruled to be unenforceable. Should foreign domiciles be a tool for ad hoc union busting?

This is not a hypothetical concern. US airlines have based flight crew overseas almost since the beginning of commercial aviation and today both Atlas and FedEx have foreign pilot domiciles. As carriers look at possible expansion of international operations under increasingly liberalized air service agreements, this practice could well expand.

We believe that Congress intended that foreign-domiciled flight crew of US carriers would be covered by the Act. The Act states that it covers “every common carrier by air engaged in interstate or foreign commerce . . . and every pilot or other person who performs work as an employee . . . of such carrier.” The Act did not say anything that would exclude employees of US carriers just because they are based overseas. At the time this provision was enacted, two of the largest and most prominent US airlines, Pan American World Airways and Panagra flew nothing but international routes, a fact almost certainly known to Congress as the two airlines held many of the first air mail contracts awarded by the US Postal Service. These airlines had pilots at foreign domiciles, and ALPA, a principal proponent of the provision, whose membership included Pan Am and Panagra pilots, advised Congress that pilots engaged in operations between foreign points were among the airline employees that ALPA sought to bring under the Act.

In these circumstances, Congress’ failure to exclude pilots based overseas speaks volumes. The term “interstate or foreign commerce” was a phrase defined in the Air Commerce Act of 1926 -- the principal aviation legislation in place at the time the RLA was amended to cover airlines as “air commerce between any state . . . and any place outside thereof . . . .” “Air commerce,” in turn, was defined as “transportation in whole or part by aircraft of persons or property for hire . . . navigation of aircraft from one place to another for operation in the conduct of a business.” In other words, what mattered was not where a pilot was domiciled or performed his work but what his work was. If the pilot was engaged in foreign commerce aboard a US-registered aircraft of a US air carrier, then he or she was within the embrace of the Act.

For this reason I believe the NMB and the courts have erred when they have refused to apply the RLA to foreign-based flight crew.

So why is this important? Because the ongoing liberalization of the regulatory regime governing international air services is steadily increasing opportunities for US carriers to conduct international operations and may make the establishment of foreign crew bases more economically attractive. Ensuring the stability of labor relations for US carrier flight crew assigned to a foreign base is as critical to advancing the Congressionally-established objectives of the RLA as is ensuring similar stability for US-based crew. We need certainty in this area and thus need to know that we have a single regulatory structure that applies to flight crew representation and collective bargaining rights. It is time for Congress to confirm that the Act, just as do the aviation safety statutes, applies to US air carriers wherever they do business around the globe. The FAA has absolute and unquestioned jurisdiction over US registered aircraft. US crews deserve the same clarity and certainty with respect to their employment rights.

In conclusion, I have been in Washington for 14 years now. The debates over foreign ownership and control, and to a lesser extent, the rights of establishment, have droned on unamended with the usual suspects making their usual assertions.
Perhaps many of you will judge my remarks today to fall within that unimaginative category. However, I also know that a significant number of International Aviation Club members are attorneys or consultants who are required to advise their clients on potential risks in international business ventures. And when risk is to be taken you insist upon reliable, enforceable dispute resolution mechanisms. International commercial business law provides such mechanisms. The current state of labor law does not.

Help me and my fellow union presidents who make up the Transportation Trades Department of the AFL-CIO change that unsatisfactory fact, and you may very well shake up the political calculus about foreign ownership.

Former Governor Baliles, who as you know chaired the National Commission to Ensure a Strong Competitive Airline Industry, wrote in a September 9th editorial printed in Aviation Daily that labor and security issues are real and must be addressed up front if progress is to be made on foreign investment. With that Governor Baliles and I are in total agreement.

Thank you for your kind attention.