Bermuda II

Bermuda II was a Bilateral Air Transport Agreement between the governments of the United Kingdom and the United States signed on July 23, 1977 as a renegotiation of the original 1946 Bermuda Agreement. A new "open skies" agreement was signed by the United States and the European Union (of which the United Kingdom is part) on 30 April 2007, and came into effect on 30 March 2008, thus replacing Bermuda II. [http://news.bbc.co.uk/1/hi/world/europe/6607757.stm]

The original 1946 Bermuda agreement took its name from the island where UK and US transport officials met to negotiate a new, inter-governmental air services agreement between Britain and the United States. That agreement, which was highly restrictive at the insistence of the British negotiators who feared that "giving in" to US demands for a "free-for-all" would lead to the then financially and operationally superior US airlines' total domination of the global air transport industry, was the world's first bilateral air services agreement. It became a blueprint for all subsequent air services agreements.

Bermuda II has been revised several times since its signing, most recently in 1995. Although Bermuda II was much less restrictive than the original Bermuda agreement it replaced, it is widely regarded as a highly restrictive agreement that contrasts with the principle of "open skies" against the background of continuing liberalisation of the legal framework governing the air transport industry in various parts of the world.

Description of the Agreement

* Broadly speaking, only a combined four airlines from the UK and US are allowed to operate flights between London Heathrow and the US. The two British carriers are currently British Airways and Virgin Atlantic. The American carriers are American Airlines and United Airlines. The US has also approved Continental to fly to London Heathrow but the British do not recognize this route authority and, consequently, this service is not in operation. However, the British have not obstructed Continental's codeshare agreement with Virgin Atlantic, which places Continental flight numbers in addition to its own on some Heathrow flights. Air India, El Al, Iran Air and Kuwait Airways were permitted to continue exercising their so-called "fifth freedom" traffic rights from Heathrow to JFK, which they had already enjoyed under the original Bermuda agreement. (Both El Al and Iran Air no longer exercise these rights. The former has decided that it makes better economic sense for it to fly non-stop between Tel Aviv and New York. The latter's US traffic rights were withdrawn in the aftermath of the 1979 Iranian hostage crisis.) Similarly, Air New Zealand was allowed to continue using its fifth freedom rights between London and Los Angeles.
* Bermuda II has continued and expanded the principle of "dual designation", i.e. the right to designate two UK airlines as well as two US carriers as "flag carriers" on the same routes, which already existed on the London-New York and London-Los Angeles routes under the original Bermuda treaty.
* The extensive fifth freedom rights US carriers used to enjoy from the UK to other European countries were restricted to a few routes from London Heathrow to what used to be West Germany, including West Berlin, in the days prior to German reunification. In the early '90s, United Airlines used to fly between Heathrow, Berlin, Hamburg and Munich (United had acquired these traffic rights along with Pan Am's transatlantic traffic rights to/from Heathrow for US$1bn in 1990). A few years earlier, TWA flew between London and Brussels but, unlike United, did not have rights to carry local traffic between the two cities.
* American and British regulatory authorities must approve every airline's capacity and pricing ahead of each operating season.
* Each country can refuse traffic rights to a carrier it is not satisfied with, particularly with regard to ownership and/or control.
* Only a specified number of US "gateway cities" can be served by both UK and US carriers from London Heathrow as well as London Gatwick.
* Only the following US gateway cities may be served non-stop from Heathrow: Baltimore, Boston, Chicago O'Hare, Denver, Detroit, Los Angeles, Miami, New York-JFK, Newark, Philadelphia, Phoenix, San Francisco, Seattle, and Washington-Dulles.
* All non-stop flights between London and Atlanta, Cincinnati, Cleveland, Pittsburgh, Dallas/Fort Worth, Houston, Minneapolis/St. Paul, Las Vegas, Orlando, Tampa, Raleigh/Durham, St. Louis, and Charlotte must use Gatwick as their UK departure/entry point rather than Heathrow.
* In a 1995 annex to Bermuda II capacity, fare and route restrictions governing all scheduled air services serving airports other than London Heathrow or London Gatwick were lifted. (This partial liberalisation came about as a UK concession to the US to help British Airways gain approval for its code-share alliance with US Air. As a result, access restrictions that originally covered all London airports were lifted at Luton and Stansted. This, in turn, has enabled "new generation", all-business class carriers such as Eos, Maxjet and Silverjet to enter the lucrative London-New York business travel market by choosing Stansted and Luton rather than Heathrow or Gatwick as their UK departure/arrival airports). Continental Airlines has also taken advantage of this liberalisation by starting service to a number of important regional UK airports, including Bristol, Birmingham, Manchester, Edinburgh, Glasgow and Belfast International Airport. Continental also introduced direct flights from Stansted to Newark in 2001, but these were withdrawn in the industry downturn after the September 11 terrorist attacks.

Historical background

In July 1976, Edmund Dell, the then new UK Secretary of State for Trade, renounced the original Bermuda air services agreement of 1946 and initiated bilateral negotiations with his US counterparts on a new air services agreement, which resulted in the Bermuda II treaty of 1977.

The reason for this was that there was no provision in the original 1946 Bermuda agreement that would have allowed British Caledonian (BCal), then the UK's foremost wholly privately owned, independent international scheduled airline, to use the licences the CAA had awarded it in 1972 to begin daily scheduled services from its London Gatwick base to Houston and Atlanta. (These cities were not nominated as "gateway cities" in the original Bermuda agreement.) In addition, there was no provision in the original Bermuda agreement that would have allowed Laker Airways to use the licence the UK's Air Transport Licensing Board (ATLB), the CAA's predecessor, had awarded it the same year to commence a daily "Skytrain" operation between London Stansted and New York JFK.

Under the new agreement, BCal had its licences to commence scheduled services from its Gatwick base to both Houston and Atlanta confirmed and was designated as the UK's exclusive flag carrier on both routes. It also obtained a licence and sole UK flag carrier status to commence scheduled services from Gatwick to Dallas/Fort Worth. In addition, BCal obtained a licence and sole UK flag carrier status to commence scheduled all cargo flights between Gatwick and Houston - including an optional stop-over at Manchester or Prestwick in either direction.

The UK Government chose to designate Laker Airways rather than BCal as the second UK flag carrier to New York to enable that airline to inaugurate its long-planned "Skytrain" operation on that route.

Moreover, both sides agreed to continue dual designation, i.e. designating two UK flag carriers as well as two US flag carriers, on the London-New York and London-Los Angeles routes. The principle of dual designation was extended to another two high-volume routes. The UK side chose to designate a second carrier on London-Miami, while the US side chose London-Boston for the same purpose. This meant that a second British airline was permitted to commence scheduled services on the former route while another American carrier could do the same on the latter route. The UK Government chose to designate Laker Airways as the second UK flag carrier on the L.A. and Miami routes while the US Government decided to designate Northwest as the second US flag carrier on London-Boston. (Pan Am and TWA continued in their role as the two designated US flag carriers between London and New York as well as London and L.A. respectively.)

During the Bermuda II negotiations the UK side succeeded in having a clause stating that Gatwick - rather than Heathrow - was to be nominated as the designated US flag carrier's London gateway airport whenever BCal was going to be the sole designated UK flag carrier on the same route inserted into the new air services agreement. This clause was meant to support the growth of BCal's scheduled operation at Gatwick as well as to redress the competitive imbalance between it and its much bigger, more powerful rivals.

The UK side furthermore succeeded in negotiating a three-year "exclusivity" period for the incumbent operator on any new route with their US counterparts.

For Gatwick-based BCal this meant that it did not have to face any competitor that was using Heathrow, a more accessible airport with a bigger catchment area and a far greater number of passengers connecting between flights, on any of the new routes it was planning to launch to the US. It also meant that it had any new route to the US completely to itself for the first three years of operation, which most airline industry analysts reckon is sufficiently long for a brand-new scheduled air service to become profitable.

At British insistence Bermuda II furthermore contained clauses that made it illegal for any airline operating scheduled flights between the UK and the US to resort to predatory pricing or capacity dumping. Air fares were only approved if they reflected the actual cost of providing these services. Similarly, capacity increases were sanctioned on a reciprocal basis only. The reason for insisting on the inclusion of these provisions in the Bermuda II agreement was to prevent the much bigger, better financed and commercially far more aggressive US carriers from undercutting BCal with "loss-leading" fares cross-subsidised with profits those carriers' vast domestic networks generated as well as to stop them from "marginalising" the UK carrier by adding capacity far in excess of what the market could sustain.

In 1981, in an annex to Bermuda II, both sides agreed to automatically nominate Gatwick as the gateway airport for London for any London-US route that did not already exist under the original 1946 Bermuda agreement.

As all available routes between London Heathrow/Gatwick and the US are currently taken, any carrier wishing to start a new route to a US gateway city currently not served from either of London's two main airports must drop another route. Further, both nations must agree to the change. This rule has prevented non-stop flights between London and Honolulu, Portland (OR), Salt Lake City, etc.

Bermuda II's access restrictions to Heathrow are still in force almost 30 years after the agreement took effect. BA's access rights to Heathrow under Bermuda II derive from the fact that it is BOAC's legal heir on all routes that airline used to operate between Heathrow and various points in the US under the original Bermuda agreement. American's and United's access rights to Heathrow under Bermuda II derive from the fact that they are TWA's and Pan Am's respective legal heirs on all routes these airlines used to operate between various points in the US and Heathrow under the original Bermuda agreement. However, Bermuda II contained terms that US negotiators overlooked. The agreement specifically mentioned Pan Am and TWA. When Pan Am sold Heathrow rights to United Airlines, British negotiators initially stated that they would not allow United to receive the transferred route authority citing the treaty's specific designation of Pan Am. They furthermore stated that United was not a successor airline because it was not assuming ownership of Pan Am. This may have been a negotiating ploy as the British later did allow transfer of route authority to United. Virgin Atlantic's access rights to Heathrow under Bermuda II derive from the fact that the UK was not using its entitlement to nominate a second carrier to match the two US carriers' presence at London's premier airport. The UK Government therefore took advantage of the abolition of the London Air Traffic Distribution Rules, which had confined Virgin's London operations to Gatwick, as well as of the US Government's intention to have American and United replace TWA and Pan Am as the designated US flag carriers at Heathrow to help Virgin establish a presence at that airport as well. These access restrictions are also the reason BA (as BCal's legal heir between London and Houston, London and Dallas as well as London and Atlanta) and American (as Braniff's legal heir between Dallas and London) are obliged to continue using Gatwick as their UK gateway for all non-stop scheduled operations between London and Houston, London and Dallas as well as London and Atlanta as long as Bermuda II remains in force.

Future

Liberalisation of the Bermuda II agreement has been the declared intention of both countries since 1995. However, bilateral negotiations between the UK and the US were unsuccessful.

Meanwhile, matters have been complicated by the European Court of Justice's judgement to declare all bilateral agreements between individual EU member states and the US illegal. Such agreements are deemed to violate the EU's Common Aviation Market.

The main sticking point that has until now prevented the conclusion of a new, transatlantic "Common Aviation Area" agreement between the EU and the US is that the UK and most other European countries view the US version of "open skies" as too restrictive. The US "open skies" template denies foreign airlines "cabotage" rights, i.e. the right to operate wholly within the US domestic market without entering into a code-share agreement with a US carrier. It also denies foreign airlines the right to acquire stakes in their US counterparts with the intention of exercising boardroom control.

Another bone of contention preventing the conclusion of a "Common Aviation Area" agreement between the EU and the US was the US government's continuing insistence on its so-called "Fly America" policy for all employees and contractors of the Federal Government. This policy compels US government employees/contractors to make all their work-related, overseas air travel arrangements with US-based airlines only. (This also includes a requirement for Federal employees to use international services operated by foreign airlines only if they are code-shared with a US carrier, in which case these services must be booked under the US carrier's flight number.)

On (March 2, 2007) a draft agreement [http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52006PC0169(02):EN:HTML] was reached by negotiators from the European Commission and the US that will in effect to drop Bermuda II restrictions preventing US flag carriers, other than American and United, from flying to Heathrow. [ [http://www.bloomberg.com/apps/news?pid=20601103&sid=aSYhQy6KP1mw&refer=news Bloomberg.com: U.S ] ] This new Air Transport Agreement between the EU and the US was approved unanimously by the EU Transport Council on 22 March 2007 [http://ec.europa.eu/transport/air_portal/international/pillars/global_partners/doc/us/council_conclusions_22_03_2007.pdf] and will replace Bermuda II with effect from 30 March 2008. This also effectively paves the way for either country to allow foreign airlines to enter the market. On 3 October 2007, Britain concluded its first fully liberal Open Skies Agreement with Singapore, allowing Singapore Airlines to fly completely unrestricted from any point in the United Kingdom, including Heathrow, to any other destination, including the United States and domestic destinations, effective 30 March 2008 [ [http://www.channelnewsasia.com/stories/singaporebusinessnews/view/303608/1/.html Channelnewsasia.com ] ] .

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