Inside Economic Diplomacy Podcast- Episode 5: Open Skies

Remarks
Thomas S. Engle
Deputy Assistant Secretary for Transportation, Bureau of Economic and Business Affairs
Washington, DC
February 25, 2016


OMAR PARBHOO, SENIOR ADVISOR, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE: : Yesterday when I got home, I found three packages waiting for me on my doorstep. Just a few days before, I ordered a new computer and some high tech accessories. And of course, like any good consumer, I was tracking them from the moment they were shipped.

EMILY-ANNE PATT, FINANCIAL ECONOMIST, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE: A late Christmas present for yourself?

MR. PARBHOO: Something like that. But what surprised me about these packages was that all three came from different places in Asia. And yet, all arrived together relatively quickly and relatively cheaply. Being an economist, I couldn't help but think how connected our world has become. But also, how predictable air transport and cargo are these days.

MS. PATT: Which is great for everyone. I'm sure during the recent holiday season especially, people are glad that air transport has become so reliable.

MR. PARBHOO: Right. People were flying all over the world to spend time with loved ones and also buying an endless number of gifts that needed to reach a destination on time. All of this was made easier faster, cheaper, and more efficient, thanks to something called open skies.

MS. PATT: Sounds like another frequent flyer program. But I'm sure you're going to tell me something more important.

MR. PARBHOO: You know me well. Open skies or more accurately open skies air transport agreements, are arrangements countries make to liberalize air transport. These agreements have vastly expanded international passenger and cargo flights around the globe. But to bring it home, these agreements mean I can get fish from Iceland or raspberries year round.

MS. PATT: Or get your holiday gifts in time.

MR. PARBHOO: Exactly. Today we'll hear from the State Department's lead negotiator to understand how open skies agreements actually work. And we'll also talk with a representative from FedEx to see how open skies benefits her company. I'm Omar Parbhoo.

MR. PARBHOO: And I'm Emily-Anne Patt. Welcome to another episode of Inside Economic Diplomacy.

MR. PARBHOO: Back in 1992, the United States concluded the first ever open skies agreement with the Netherlands. Now we have over hundred100 of them and they're the gold standard of air transport agreements.

MS. PATT: Now we had air transport agreements before 1992 but they were restrictive. There were restrictions on the number of flights between countries. There were limits on the types of airplanes that flew a specific route. Governments were even involved in deciding which cities airlines could serve. So I'm assuming open skies changed all of that?

MR. PARBHOO: You guessed it. The agreements strive to minimize government interference in the market. But to get a better grasp of what open skies is all about I spoke with the lead US negotiator on civil aviation agreements.

MR. TOM ENGLE, DEPUTY ASSISTANT SECRETARY OF STATE FOR TRANSPORTATION AFFAIRS, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE:: I'm Tom Engle, Deputy Assistant Secretary of State for Transportation Affairs.

MR. PARBHOO: I asked Tom why the United States turned to an open skies balls in the first place.

MR. ENGLE: It was an assessment that we needed to do more than just focus on the airline industry itself. Before open skies, the focus was very much on our aviation industry narrowly defined and aimed to protect our airlines. With open skies, we took a much broader approach and recognized the huge impact that aviation has on travelers on shippers, companies that want to ship things using air cargo, on airports and municipalities, and just kind of a broader economic assessment, a broader understanding of the huge impact that aviation has an economic development. So where we now with open skies, we still support the US aviation industry, but now we recognize how these aviation agreements can affect a much wider set of stakeholders.

MR. PARBHOO: Well can you walk us through the negotiation process of a typical open skies agreement?

MR. ENGLE: Sure it can start in different ways. Either party can initiate things. US has a policy of basically being ready to pursue an open skies agreement with any friendly country that's willing to negotiate one with us. So we have what we call a model text. It's a model agreement. It's a public document. It's available on the internet.

So any other country that's interested in possibly negotiating an open skies agreement with us, that text is available for them to look at and assess whether they're ready to take that step. For the United States, these are executive agreements. We don't have to bring them to Congress after we conclude the agreement. Other countries may have different procedures where they have to get ratification through their parliament. So it really varies. But the basic process is more or less along those lines.

MR. PARBHOO: So you mentioned that opens guys takes into account broader market forces if you will. But how has open skies affected let's say, tourism and business travel around the world?

MR. ENGLE: We've seen massive expansion in travel, tourism, and trade and investment that flow from these things, as well as people to people contacts. And there have been academic studies for example, that have assessed that the economic impact of the open skies agreements that we have to date, and we now have about 120 of them around the world, that they have produced an additional economic impact of something like $4 billion of economic activity.

MS. PATT: Those are impressive numbers I actually read a similar study that breaks the benefits down at the local level. It shows that a single additional international flight can actually bring a city to $100 to $200 million in increased economic activity.

MR. PARBHOO: Which goes to show how valuable open skies agreements are. To that end, I wanted to hear how industry viewed open skies. Fortunately, I had the great pleasure of sitting down with Nancy Sparks, a managing director from FedEx.

Nancy Sparks, thank you so much for speaking with us today. How has the open skies policy affected FedEx's business?

MS. NANCY SPARKS, MANAGING DIRECTOR, FEDEX: open skies is an aviation policy and Fed Ex is a major airline. We model our international business and our international aviation structure on what we do in the United States. So we have what's called a hub and spoke system. With that system, we can link hubs around the world and cover the world with our own airline. That way we don't have to hand our packages off to anyone else.

The open skies agreement allows us to link international points. So it takes aviation rights beyond a purely back and forth, back and forth two way thing to a global network. And so we view the open skies policy and the open skies agreements that flow from that as critical to us being able to give our customers the best and the broadest global network.

MR. PARBHOO: Can you take us back to the pre open skies era? What were government regulations like and how do they impact the industry?

MS. SPARKS: Well, government regulations prior open skies were very mercantile. My airline gets this, so your airline gets the same thing . But we're going to ration opportunities. And so was the government that was making the decisions of how the marketplace was going to evolve. What's happened under open skies is that the markets are now generally without economic restrictions. There's generally no limit as to how many airlines can operate to a particular country from the United States, how many times they can fly, what size aircraft they have to use.

And so the airlines make the decisions based on the demands of their customers. So if there's not enough capacity in the market, we can react to that and we can put more capacity in. And so it's very much giving the economic decisions back to business, back to customers, and take it away from government officials who, as hard as they try, can't make better decisions than we can.

MR. PARBHOO: Can you give me an example of a typical flight route that is only possible due to open skies?

MS. SPARKS: Well we have for example Charles de Gaulle airport in Paris. We fly from US points in the United States such as Memphis, Tennessee, our global super hub, or Newark, New Jersey our East Coast hub. We fly aircraft from there to Paris. At Paris, we have aircraft on the ground that do nothing but operate within Europe but they connect with the US flights. So you have a flow through from say, Memphis to Paris to Milan. Two different airplanes, one single service where a customer can get their package from the United States to Milan.

MR. PARBHOO: So then let's flip it. Does FedEx operate differently in countries that restrict traffic rights for cargo operations?

MS. SPARKS: Oh yes. Back in 2004 in the China negotiations, it was very important to us that those negotiations succeed because we wanted to put a hub in China. But we couldn't put a hub in China because we would have just been allowed under the old agreement prior to 2004 to fly from the United States to China and back. And those packages that ended up in China had to stay in China. So instead of flying from the United States to China and six flights fanning out across Asia, we would have had to have a flight come from the United States, to China, the United States to Japan, and the United States to Seoul, et cetera. So this is a much more efficient system.

MR. PARBHOO: And now you have a hub in China?

MS. SPARKS: We do. We have a hub in Guangzhou.

MS. PATT: It seems pretty clear to me now why you were able to get your computer and accessories all on the same day and all pretty quickly.

MR. PARBHOO: Yeah, thanks to open skies is a very efficient aviation network out there.

MS. PATT: Which means I get more choices and better prices on international flights.

MR. PARBHOO: And goods from all over the world, including raspberries in the winter.

MS. PATT: Right.

MR. PARBHOO: I want to thank Tom Engle and Nancy sparks for shedding light on this important policy. And thank you, Emily-Anne for being here for another episode of Inside Economic Diplomacy.

MS. PATT: Thank you, Omar. Until next time, everyone. Thanks for listening.