How Open Skies Agreements Shaped Global Aviation

The Bilateral Regime Before Open Skies

For the first four decades of commercial international aviation, the global air transport system was governed by a dense web of bilateral agreements negotiated directly between national governments. Each agreement specified which airlines from each country could fly which routes, how many flights per week each carrier could operate, and at what prices tickets could be sold. The system gave governments enormous control over their national airlines and their competitors, but it produced an international aviation market that was fragmented, inefficient, and characterized by fares many times higher than what costs and competition would otherwise have generated.

The bilateral system's logic was rooted in a conception of international aviation as an extension of national sovereignty. An airline flying from country A to country B was exercising that country's "traffic rights" over foreign airspace and at foreign airports, and governments jealously protected these rights as valuable diplomatic assets. The result was a system in which every international route required explicit governmental approval and in which the terms of competition were determined by diplomatic negotiation rather than by market forces.

Bilateral agreements typically shared certain common features. Each agreement designated which carriers from each country were "authorized" to fly the routes in question — almost always the national flag carrier and no others. Capacity and frequencies were often strictly limited, with governments requiring advance approval for schedule changes. Fares had to be approved by both governments, typically based on recommendations from the International Air Transport Association's fare-setting machinery. These arrangements effectively immunized international aviation from competition while ensuring predictable revenues for national carriers.

The costs of this system for consumers were substantial. Transatlantic economy fares in the 1970s were extraordinarily high relative to what competition would have produced. A round-trip economy ticket between New York and London in 1975 cost approximately $700 — equivalent to several thousand dollars in contemporary terms, and representing a price set by governments rather than by the market. Business and first-class fares were even more dramatically elevated, with carriers earning extraordinary margins on premium cabin passengers that cross-subsidized unprofitable routes they were required to operate as conditions of their bilateral rights.

The Chicago Convention and the Architecture of International Aviation

The international aviation system that open skies agreements would eventually reform was built on foundations laid at the Chicago Convention of November 1944. Convened while the Second World War was still being fought, the Chicago Conference brought together representatives of 52 nations to design the postwar international aviation order. The conference produced the Convention on International Civil Aviation, which established the principles and institutions that would govern international aviation for the next eight decades, including the International Civil Aviation Organization (ICAO), which remains the United Nations agency responsible for setting global aviation standards.

The Chicago Convention's most consequential and contentious achievement was the establishment of the "freedoms of the air" framework that continues to define international aviation rights. The Convention established five fundamental freedoms, with subsequent diplomatic practice adding several more:

• First Freedom: The right to fly over a foreign country without landing
• Second Freedom: The right to land in a foreign country for technical stops without picking up or dropping off passengers
• Third Freedom: The right to carry passengers from your home country to a foreign country
• Fourth Freedom: The right to carry passengers from a foreign country back to your home country
• Fifth Freedom: The right to carry passengers between two foreign countries on a flight that originates or terminates in your home country
• Sixth Freedom: The right to carry passengers between two foreign countries via your home country
• Seventh Freedom: The right to carry passengers between two foreign countries without continuing to your home country
• Eighth Freedom (Cabotage): The right to carry passengers between two points within a foreign country on a service originating in your home country

The United States had hoped to secure liberal international agreements granting broad traffic rights to American carriers, whose wartime production had given them an overwhelming advantage in aircraft and operational capability. Britain, recognizing this disparity, successfully blocked the most liberal American proposals, and the conference ultimately failed to agree on a multilateral framework for commercial traffic rights. Instead, governments were left to negotiate bilateral air services agreements that would each incorporate as many or as few of the freedoms as the negotiating parties could agree upon — the bilateral system that open skies would eventually dismantle.

The U.S. Open Skies Program

The United States government began actively pursuing open skies agreements in the early 1990s as an extension of the domestic deregulation philosophy that the Carter administration had applied to the American market in 1978. The State Department's aviation negotiating team, working in coordination with the Department of Transportation, developed a standard open skies template that called for eliminating restrictions on routes, capacity, and frequencies, granting airlines of both countries the right to set their own fares, and extending beyond the traditional third and fourth freedoms to include fifth freedom rights and beyond.

The Netherlands became the first major European country to sign an open skies agreement with the United States in September 1992, a decision driven partly by KLM's desire to expand its partnership with Northwest Airlines. The Netherlands-U.S. agreement served as a template for subsequent negotiations, and the United States proceeded to conclude similar agreements with a succession of European countries through the 1990s — Belgium, Luxembourg, Austria, Denmark, Finland, Iceland, Norway, Sweden, and Switzerland all signing before the end of the decade.

The proliferation of bilateral open skies agreements with individual European countries created a politically and legally awkward situation in which the United States had more liberal air service arrangements with some EU member states than others. Carriers from countries that had signed open skies agreements could operate with minimal restrictions, while carriers from countries that had not signed continued to operate under older, more restrictive bilateral frameworks. The European Commission began challenging these bilateral agreements in 2002, arguing that they violated EU law by granting rights to national carriers that should belong to all EU carriers.

The EU-U.S. Open Skies Agreement

The negotiation of an open skies agreement between the United States and the European Union as a whole — rather than with individual member states — was a complex diplomatic undertaking that took nearly five years to complete. The European Commission, having been granted authority to negotiate international aviation agreements on behalf of member states by a 2002 European Court of Justice ruling, sought an agreement that would grant EU carriers cabotage rights within the United States — the right to carry passengers on domestic American routes — in exchange for equivalent rights for American carriers within the EU.

American negotiators resisted cabotage rights vigorously, arguing that domestic aviation was a matter of national security and that allowing foreign carriers to operate domestic routes raised unacceptable risks. The EU position reflected the logic of the single aviation market that member states had created among themselves: if Ryanair, an Irish airline, could fly between London and Rome, why should American carriers not be able to fly between New York and Los Angeles in a truly open market?

The compromise that emerged — the EU-U.S. Air Transport Agreement signed in April 2007, which entered into force in March 2008 — was a historic liberalization that fell short of the EU's ambitious goals. The agreement granted EU and U.S. carriers the right to fly between any point in the EU and any point in the United States, eliminating the country-specific limitations of the previous bilateral framework. It extended fifth freedom rights, allowing EU carriers to pick up passengers in the United States and carry them to other destinations. But it did not grant full cabotage rights, leaving domestic aviation markets in both jurisdictions protected from foreign entry.

A second stage agreement, initialed in 2010, added provisions on investment, regulatory convergence, and environmental matters, but the most sensitive issues — particularly the foreign ownership restrictions that prevent EU carriers from holding majority stakes in American carriers and vice versa — remained unresolved. The EU Aviation Agreement remains the most comprehensive international aviation agreement in history, covering routes that account for a substantial fraction of global international passenger traffic, but it stops well short of the fully open market that proponents of aviation liberalization envision.

Fifth and Sixth Freedom Rights in Practice

The practical effects of fifth and sixth freedom rights on global aviation patterns are substantial and often underappreciated. Sixth freedom operations — in which a carrier from country A picks up passengers in country B, routes them through a hub in country A, and delivers them to country C — have enabled carriers from small hub nations to build global networks that their home market alone would never support.

Singapore Airlines has built one of the world's most respected long-haul networks primarily through sixth freedom operations. Passengers flying from Europe to Australia, for instance, may well travel via Singapore, connecting between two flights that each carry the Singapore Airlines logo but that together constitute a sixth freedom itinerary. The carrier earns revenue from both segments while providing passengers with a convenient one-stop option between cities that would be difficult to connect non-stop economically.

Emirates, Etihad, and Qatar Airways have become perhaps the most controversial practitioners of sixth freedom operations. Using their Middle Eastern hub airports as connecting points between Europe and Asia-Pacific, Africa, and the Indian subcontinent, these carriers have captured significant traffic that previously moved via European hubs. Legacy European and American carriers have argued that the Gulf carriers benefit from implicit state subsidies that allow them to offer artificially low fares and to expand capacity beyond what a genuinely market-driven carrier would deploy — a charge the Gulf carriers vigorously deny.

Remaining Restrictions and Contested Terrain

Despite decades of liberalization, significant restrictions on international aviation competition remain. The most fundamental is the persistence of nationality-based limitations on airline ownership and control. Under the conventions that govern most bilateral aviation agreements, airlines must be "substantially owned and effectively controlled" by nationals of the country whose traffic rights they are exercising. This requirement prevents truly global airline ownership structures in which investors from any country could hold majority stakes in any carrier.

The ownership restrictions have significant practical consequences. They prevent the kind of cross-border mergers and acquisitions that have transformed industries from banking to telecoms, limiting consolidation to arrangements — code-sharing, interline agreements, alliance memberships, and limited joint ventures — that fall short of full integration. An American investor cannot simply buy a controlling stake in British Airways and rationalize the combined operation; the British carrier would lose its traffic rights under bilateral agreements that require it to be controlled by EU nationals.

Cabotage rights remain almost universally restricted. No major country allows foreign carriers to compete freely on domestic routes, and even the EU's single aviation market preserves cabotage rights for EU carriers that non-EU carriers do not share. The Gulf carriers, despite their sixth freedom operations, cannot fly passengers between New York and Los Angeles or between London and Edinburgh on domestic services. These restrictions preserve domestic markets for national or regional carriers while limiting the full benefits of international competition.

The Future of Aviation Liberalization

The trajectory of international aviation liberalization over the past four decades has been largely positive, moving from the highly restrictive bilateral framework of the Chicago Convention era toward progressively more open arrangements that allow airlines greater freedom to serve markets where demand exists. The question of how far this process will ultimately go — and whether the final barriers to a genuinely global airline market will ever fall — remains genuinely open.

The strongest arguments for continued liberalization rest on the consumer benefits of competition. Markets where open skies agreements have taken effect have consistently shown lower fares, more route options, and higher service quality than markets that remain restricted. The EU single aviation market has been particularly transformative, enabling the growth of low-cost carriers that have made air travel broadly accessible across the continent and reshaping tourism patterns in ways that have significant economic consequences for destination communities.

The arguments for maintaining some restrictions reflect genuine concerns about national security, reciprocity, and the consequences of allowing foreign ownership of airlines. Governments maintain that carriers providing essential air services to remote communities, operating sensitive routes, or constituting critical national infrastructure cannot be entrusted to foreign shareholders whose interests may not align with national priorities. These concerns are unlikely to disappear entirely, suggesting that the ultimate destination of aviation liberalization is not a frictionless global market but rather a system substantially more open than today's while retaining certain national prerogatives that governments are unwilling to negotiate away.