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.
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.
