Flags of Convenience: Undercutting Labor Standards, Undermining International Aviation

In the United States and much of the rest of the world, international aviation regulations have traditionally required aircraft to be registered (“flagged”) in the home country of its owners and regulators. This system encourages best practices in safety and prohibits forum shopping—or the repositioning of airlines as a means to benefit from environments with the most impotent regulatory and labor practices, and lowest tax rates—to provide more stability and predictability to the consumer and a more level playing field for air carriers.

Several new airlines are currently attempting to evade the national flag–based system and switch to a flag-of-convenience business model. Using the international maritime system as a template, companies such as Norwegian Air Shuttle have set up subsidiaries based outside of their home countries in an attempt to increase their “bottom line” financial results.

The debate over flag-of-convenience carrier access to U.S. markets reached a potential watershed on April 15, 2016, when the U.S. Department of Transportation (DOT) tentatively approved Norwegian Air Shuttle subsidiary Norwegian Air International’s (NAI) foreign air carrier permit. The DOT made that decision final on Dec. 2, 2016—the three-year anniversary of NAI’s application. ALPA is opposing this decision and working with our allies to reverse DOT’s decision. Help stop this job-killing approval by participating in ALPA’s Call to Action and tweeting the Administration today!

The NAI example fully illustrates the flag-of-convenience dilemma and the threats it poses to the international airline industry. While headquartered in Norway (as the name suggests), NAI is based in Ireland. Norwegian Air Shuttle already flies to the United States today under its own DOT authority. Flagging its planes outside of Norway allows the company to evade Norwegian tax and labor laws.

The pilots who operate the NAI aircraft are employed by Singapore and Thai hiring companies on fixed-term individual employment contracts with total compensation and labor protections substantially inferior to pilots employed by Norwegian. The flight attendants have been employed in a similar manner, though the laws, terms, and conditions of employment that apply to them are unclear.

The expressed purpose of this forum shopping, according to NAI itself, is to avoid Norwegian labor standards and reduce its costs compared to its other competitors who are playing by the rules.

The possibility of such flag-of-convenience airlines was anticipated during the negotiations that led to the U.S.-EU-Norway-Iceland Air Transport Agreement. To prevent forum shopping, Article 17 bis was added during the second phase of the agreement. This article reads in part:

The Parties recognize 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. . . [and these] principles. . . shall guide the Parties as they implement the Agreement. . .

This provision is designed to prevent forum shopping with the intent of undermining labor-related standards—exactly what NAI is attempting to do. Unfortunately, the Obama Administration ruled that Article 17 bis cannot be used to prevent the approval of a foreign air carrier permit. ALPA is asking for clarification on what the Article could be used for if not the prevention of a flag-of-convenience carrier.

Atypical Employment

Many flag-of-convenience industries are developing atypical employment models. The liberalization of Europe’s aviation market and the emergence of these new business models have given rise to a variety of new employment arrangements for pilots. A recent study sponsored by the European Commission evaluated this threat. The study identified several particularly pernicious variations on these models, including (1) “bogus” or “false” self-employment (where the pilot who is an employee is classified other than as an employee in order to mask his or her true status to avoid costs associated with taxes or social contributions, or has a contract with an intermediary such as a hiring agency rather than directly with an airline); (2) “zero-hour” flying (where the pilot is remunerated only for the hours of the flight with no paid leave of any sort); and (3) pay-to-fly schemes (in which the pilot contributes to the airline to gain flight hours).

Flight Plan

DOT’s approval of the NAI permit fails to acknowledge the intent of U.S. Open Skies policies to ensure that U.S.-based airlines are able to compete in the global marketplace. Nor does it recognize the hundreds of thousands of good-paying U.S. jobs that could potentially be lost. Both the U.S. Senate and House of Representatives have passed legislation requiring DOT to ensure that any applications for U.S. foreign air carrier permits made under the U.S.-EU Air Transport Agreement comply with its terms as well as U.S. law. The Obama Administration ignored all of this in their decision.

Furthermore, Open Skies agreements should—where appropriate—contain enforceable labor provisions that support the value of high labor standards and protect U.S. aviation jobs. Where labor provisions are present, such as Article 17 bis of the EU-U.S. Open Skies Agreement, they must be enforced, and the prohibition of flag-of-convenience models like NAI must be upheld and strengthened.

Learn Why DOT Must Deny NAI