If You Don’t Like Norwegian Air International Being Approved to Fly to the US, Blame the Authors of the Open Skies Agreement

On Friday I noted that the European Commission had officially begun arbitration proceedings because the US had improperly delayed approval of Norwegian Air International Limited (NAI) being allowed to fly across the Pond. Regardless of how you feel about the outcome, you can agree that ANY decision was long overdue. A lot of people are angry at the Department of Transportation (DOT) due to fears that this is going to turn the US airline industry into the cruise industry. But the anger is misdirected. It should be aimed at the people who wrote and signed the open skies agreement. DOT is simply following what the rules say has to happen.

Norwegian Air International Approved

You can get a full understanding of Norwegian’s ownership structure in this previous post. But in short, Norwegian Long Haul AS is based in Norway, which shouldn’t be much of a surprise. I mean, “Norwegian” is in the friggin’ name. But Norway, like other Scandinavian countries, is strongly pro-worker and has many rules that make it more costly for an airline to operate than in other jurisdictions. This hasn’t stopped Norwegian from flying to the US and elsewhere, but it has caused Norwegian to come up with a more creative plan to reduce costs.

That’s why Norwegian launched NAI and applied for the right to serve the US on December 2, 2013. NAI is based in Ireland, like a lot of companies, because rules are less strict and taxes are low. It looks like an end run around Norwegian safety, environmental, and labor law. That’s where the cruise ship comparison comes in.

I don’t mean that travelers will now have access to a bunch of cheesy shows and massive buffets. I’m talking about what’s called “flags of convenience.” Plenty of cruise ships start and end their journeys in the US, but when’s the last time you saw a cruise ship registered here? It doesn’t happen (or is extremely rare), because the US has higher standards for safety, environment, labor, etc compared to many other places. Cruise lines find it easier and cheaper to register outside the US, hire foreign workers, and still be able to operate here. That’s why you almost never see an American working on a cruise ship, even if it’s owned by an American company and operating in US ports. This is what scares pro-labor groups. They don’t want to see the same thing happen with airlines. In their minds, Norwegian is the proverbial “camel’s nose under the tent.”

Is this an end-run around Norwegian law? To some extent, yes. But it’s perfectly allowable under the open skies agreement. As noted in the DOT’s final decision:

Opponents have also raised another novel and important argument that goes directly to a central legal feature of the Agreement. By arguing that NAI represents a “flag of convenience,” opponents lose sight of this key feature of the Agreement: that under the concept of a “Community airline,” Article 4(b), any carrier may fly under the flag of any [author’s emphasis] European Union country, as well as Norway or Iceland, as long as it is satisfactorily owned and controlled by citizens of those countries.

The structure of the agreement means that US/EU/Norway/Iceland-based airlines are to be allowed to fly between the US and EU as long as the airline is based in the EU or US, it meets all international air transport laws, and it exceeds safety and security hurdles. The Irish and Europeans decided that NAI met all these criteria ages ago, and that’s why the EC filed for arbitration. The US was dragging its feet. But why?

Well, many pro-labor groups were actively arguing that something called “social dimension” would be grounds to deny the airline’s application. That is a clause, also known as Article 17 bis, that was added to the US-EU agreement back in 2010. It says:

1. The Parties recognise the importance of the social dimension of the Agreement and the benefits that arise when open markets are accompanied by high labour standards. The opportunities created by the Agreement are not intended to undermine labour standards or the labour-related rights and principles contained in the Parties’ respective laws.

2. The principles in paragraph 1 shall guide the Parties as they implement the Agreement, including regular consideration by the Joint Committee, pursuant to Article 18, of the social effects of the Agreement and the development of appropriate responses to concerns found to be legitimate.

Norwegian has used hiring practices in the past that would bring this into question. It has contracted with companies that hire crews in Southeast Asia under more lax Southeast Asian laws. That takes jobs away from American and puts them in the hands of lower wage people on the other side of the globe with fewer protections. While that is concerning, the DOT and many others ruled that this is not relevant to this case.

Why? Well, this Article 17 bis is written in a really flimsy and vague way. I mean, come on, authors. The principles shall “guide” the parties? What the heck does that mean? It’s fluff, and the legal decisions generally say that this alone isn’t a reason to deny an airline permission if it meets the explicit criteria in the agreement. This clause really doesn’t matter, because of the way that it’s written.

Despite this ruling saying that it’s irrelevant, Norwegian has been trying to assuage concerns. It previously said it would open a crew base in Ft Lauderdale. Over the weekend, it announced it would also open bases in Boston and New York. (Interestingly, it was very vague on which airports.) But with the 737MAX coming into the fleet soon, NAI is getting ready to run a bunch of them between the Northeast US and Europe. It’s growth time now that the Irish subsidiary is approved, and many flights will be operated by Americans.

I know that this is complex, but it should never have taken 3 years. The final decision was held more than 6 months even though it simply affirms everything in the tentative decision. In the end, this paragraph from the final decision sums up three years of insanity:

This case is among the most novel and complex ever undertaken by the Department. We have taken the necessary amount of time to review and consider the comments from a wide range of stakeholders. Regardless of our appreciation of the public policy arguments raised by opponents, we have been advised that the law and our bilateral obligations leave us no avenue to reject this application.

While DOT was far too slow here, it made the right decision. For those who don’t like Norwegian getting approved, talk to the people who negotiate agreements. Without stronger wording, there’s not going to be any way to stop an EU-owned airline from creating a subsidiary in any EU coountry and flying to the US.

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29 Responses to If You Don’t Like Norwegian Air International Being Approved to Fly to the US, Blame the Authors of the Open Skies Agreement

  1. grichard says:

    You may want to put in an introductory sentence to the effect that Norwegian’s application was approved over the weekend. If you read the post without already knowing this fact (like me), it’s kind of confusing.

  2. Ken McLeod says:

    The issue on Transatlantic routes is that there are now only four groups of carriers who protect the pricing levels without much serious competition. Although we know there is probably too much capacity on some routes the carriers involved have to spread their destinations and number of departures so they can compete in a very active market place. Some of the pricing across the Atlantic has seen a multitude of fares, and it needs to be simplified. Norwegian may not be everyone’s choice, but it could shake up a network that needs shaking up.

    • Ken says:

      Norwegian has already shaken up “networks.” And it is a very good thing for the flying public.

  3. Todd Richardson says:

    I think the analogy of the cruise industry is pushing it a little bit far. The flags of convenience that the cruise industry uses are with countries that are almost devoid labor regulation. But Norwegian is basing this airline in Ireland which is part of the EU and certainly not Panama or the Bahamas. Indeed, politicians in Ireland have been quite upset at the implication that they were going to let anything go with the airline. Is it a cost-saving measure? Undoubtedly! Is the implication that it is somehow immoral or that the US Airways are unable to compete a valid one? That is debatable.

  4. A says:

    I’m no labor law expert but doesn’t an airline have to comply with the labor laws in the countries they operate. At least for ground crew based there wouldn’t they need to be paid the local minimum wage? Sure, you can contract that out but the costs are somewhat static vs. other airlines operating in at that airport. Otherwise manufacturing would import the workers, not export the factory, right? Exporting heavy maintenance to low cost countries is nothing new and american based airlines are experts at that. So we are essentially talking flight crew, which for pilots I understand is set on a global supply/demand basis. Ireland makes sense from a corporate tax liability viewpoint but for labor I’m just not seeing it. Someone educate me.

    • Harris says:

      Minimum wage in Ireland is €1,461 per month.

      That’s about $1,574.

      • Kilroy says:

        …And that’s significantly higher than minimum wage in the US ($7.25/hour federal minimum wage), assuming the worker in the US is lucky enough to get 40 hours every week.

    • CF says:

      A – It’s not ground crews that I think people are concerned about. It’s the people on the airplane.

    • Marks says:

      Yes, it’s about airlines in the US trying to keep their cosy little club going over the Atlantic.

      Labor issues are a side show: Airline pilots are able to work and transfer internationally at this level, ground staff costs are pretty much the same in the countries the airlines compete in. So, for example ground staff in Norway cost the same for one airline as they do for another flying there, and the ground staff costs for Norwegian in the US will be related to US costs, not Norwegian labor laws.

  5. Zack Rules says:

    Didn’t Delta examine doing something similar to escape taxes last year? They wanted to create a Delta Amsterdam to move their Air France-KLM and Virgin joint venture revenue to reduce their taxes. How is what Norwegian ultimately did any different?
    http://loyaltylobby.com/2015/11/07/delta-airlines-escaping-taxes-by-setting-up-a-foreign-subsidiary-might-be-an-option/
    It just seems a little hypocritical for an airline such as Delta to advocate so hard against a scheme it strongly considered pursuing itself.

    It is not just the Open Skies Treaty at work here, there are also World Trade Organization laws as well as other treaties prohibiting the US from denying a European company access for political reasons.

    • CF says:

      Zack – I think that’s a little different. They have the joint venture with Air France/KLM/Alitalia so they were looking at structures to base it in one of those countries. Those countries would still have substantial operations and labor rules wouldn’t change. I think it was more about dodging taxation specifically. But yes, it would be interesting to hear them thread the needle on how one is different from the other. We just don’t know any details about how the Delta thing would have (or might still) worked.

  6. David SF eastbay says:

    It was way to long to approve written law already in effect on the subject.

    I see Norwegian announced today they will increase USA-London service next spring. Most feel comfortable now to work on improving the network now that they have the final go ahead.

    I did find it funny that BA is entering the OAK-LGW market which they could have done decades ago. Guess they want to try and steer people away from Norwegian as much as possible to go head to head with them here.

  7. thisworldtraveler says:

    Cruise ships don’t fly a US flag for a number of reasons – and labor is a key reason, but not the only reason why. It’s not just about meeting US labor standards, it has more to do with the fact that to have a US flagged ship, over 75% of your staff on board must be from the US, the ship must be built in the US, and no casino is allowed onboard ship. The major drawback to this issue is that only US flagged ships can sail domestic itineraries. Non US flagged ships must visit at least one international port a minimum distance away from the US. Only one cruise line has a US flagged ship (Norwegian Cruise Line’s subsidiary NCL USA) because they have a Hawaii program that can only be sailed with a US flagged ship.

  8. Lucas says:

    To the cruise ship flags of convenience – NCL Pride of America is US flagged, and the only oceanic cruise ship to be so in America. Just an FYI.

  9. Tim Dunn says:

    Few people would argue against Norwegian being issued operating US permits if they really did have to use only US or European based crews. The problem is that they could easily use other foreign based crews based on their ownership structure, something that NAI recognizes are valid concerns – which they are addressing in part by basing crews in the US, a pretty bold step for a fairly new transatlantic carrier.

    They will inject some healthy competition into the transatlantic market; some legacy carriers will adapt well to it while others will not. Some carriers will adopt very direct competitive strategies while others will adjust their overall network strategies.

    Carriers like JetBlue that want to get into the transatlantic market must be biting at the bit given that NAI will be well-entrenched in the couple years before JetBlue will have aircraft that can cross the Atlantic.

    Supposedly, NAI has said they will add a base at Stewart Airport outside of NYC which will serve as a base for transatlantic low fare flights at an airport that has seen very little commercial activity.

    @Zack
    the article you cite is a little over a year old and the most significant statement is this one. “Keeping in mind that NONE of this is official, I don’t blame Delta or any company for trying to optimize their tax benefits through all legal means available to them.'”

    Given that Trump has said he will go after US companies that move operations overseas, I doubt seriously that Delta will pursue a foreign subsidiary strategy even if it were seriously planning on doing so.

    Also, if he cuts corporate tax rates – as the UK says they will do – and invests in infrastructure that benefits airlines there is little reason to create a foreign subsidiary.

    • Kilroy says:

      > Supposedly, NAI has said they will add a base at Stewart Airport outside of NYC which will serve as a base for transatlantic low fare flights at an airport that has seen very little commercial activity.

      That’s in Newburgh, halfway to Albany (by drive time without traffic), and a solid hour and half north of Midtown. It’s going to be a stretch to get people to drive that far, especially without easy public transportation (hope Norwegian partners with a charter bus company).

      For most people in Westchester, Rockland, and Fairfield counties (read: the suburbs north of NYC), JFK will still be a similar or quicker drive. For those in NJ, Newark will be a quicker drive.

      I honestly don’t see a base in Newburgh working for trans-Atlantic flights (at least without unbearably low fares, which are already pretty low), but can’t think of a better alternative outside of JFK or Newark… Shame there aren’t longer runways and customs facilities at Westchester (White Plains) or even New Haven.

      • CraigTPA says:

        Yeah, I’m having trouble seeing Newburgh-Stewart working for them. Too bad Islip doesn’t have I&C, quick shuttle van to the LIRR.

        Depending on if and when Aer Lingus winds up joining Oneworld, perhaps JetBlue should take a “if we can’t be ready to beat them, let’s join them” approach and working with them at JFK?

    • Adam N Hartnett says:

      NAI trying to cut costs by, from what appears to be, avoiding JFK/BOS for alternate airports is going to play right into JetBlue’s hands.

      NAI will fill these planes from any airport they serve in the US. Easy to fill planes with $400 USD roundtrips to any destination in the British Isles… I don’t see Bergen (BGO) working out though since its just barely in 737MAX8 range with the exception of Pease in Portsmouth if its marketed for New England Tours (Maine to RI). BGO-JFK only stuck around 2 years.

      Come 2019-2020 DY/D8 will have developed the markets and JetBlue will pull the rug from underneath them with better service, reputation, premium class, and most importantly the better airport!!

  10. Kilroy says:

    Given that Norwegian has pledged to hire US workers, I think another analogy besides the cruise ship “flag of convenience” one that might be perhaps more appropriate would be the “corporate base of convenience”… Think about how most major US corporations are officially based in Delaware because of its predictable courts, low costs, and easy bureaucracy, to the point that the state gets something like half its revenue from the fees it charges corporations. To me that is pretty similar to what it sounds like Norwegian is doing in Ireland.

  11. DougYWG says:

    True, you don’t find Americans employed on cruise ships (there’s the odd exception for highly paid cruise directors or officers). I always thought it was because they would have to get a W2 and pay income tax. Foreigners don’t.

  12. A Kindred Soul aka Norman L. Wherrett, Jr. says:

    A coountry? Are we Southern-speak here? I regularly have coons in my backyard. They destroy the bark on three 50-year old Western Red Cedars. Like a Blue Angels formation-takeoff, up Momma goes, followed by five young’uns. They climb to cruising altitude full of something, then poop using an airliner Straight-pipe Blue Room….YUCK!

    Norman L Wherrett Jr.

  13. JoEllen says:

    Third world (asian crews) outsourced and free from any employee objections (work rules, wages and benefits). What could go wrong – and where are they hiring maintenance for these planes ? I believe if every large entity or corporation could outsource for cheap labor, workers, 3rd world rules, they would do so in a heartbeat. We’re all supposed to dumb ourselves down to this level; no questions asked.

    • Marks says:

      Yes, but that’s not the issue here. Norwegian operates out of Ireland, and European Union labor and safety rules apply.

      More likely, it’s the lower tax rates that has Norwegian setting up there. Ireland has a 12.5% corporate tax rate, while Norway has 25%

      Corporate welfare, not pro-labor issues at work.

  14. Ken says:

    I do like it. Norwegian is a well run outfit. KRW Calif.

  15. rogerdcox says:

    Time to go back to bilaterals.

  16. Howdy says:

    Don’t many US airlines – and other industries too, incorporate in Delaware to escape certain regulations and taxes?

    • A Kindred Soul aka Norman L. Wherrett, Jr. says:

      HOWDY I do not often ‘DO’ corporations, but when I do, I prefer THE COOK ISLANDS. Not kidding!
      Dr. Norman L Wherrett Jr Neuroproctologist – Retired

  17. Mathello says:

    Hi, I am late to the discussion but to add some clarity, as Norwegian wants to fly frome everywhere to everywhere with the same plane, they need to set up their schema with companies in different countries. They are unable to for example fly from Finland to Dubai with their Norwegian license. They are also unable to fly from UK to the USA and South Africa or India with the same plane without the UKs bilateral agreements. This is why they also setting up a subsidiary in the UK.

    For those interested this Norwegian article has a lot of good information. Use Google translate :
    http://e24.no/boers-og-finans/norwegian-air-shuttle/kjos-gir-ikke-opp-planene-har-soekt-ny-usa-lisens-med-nytt-selskap-i-storbritannia/23592966

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