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A U.S.-European dispute over granting budget carrier Norwegian Air Shuttle ASA additional traffic rights escalated Thursday after the European Union challenged Washington's delay in approving the extra flights.

In an action that could represent an early test for the incoming Trump administration on the hot-button issue of foreign airline market access, the European Union said it had notified the U.S. that it considered Washington in breach of a bilateral aviation agreement.

The dispute centers on Norwegian Air's plan to use an Ireland-based affiliate to operate long-haul from Europe to Asia and the Americas. Norwegian Air has said the Ireland base and the use of staff contracted through Asian entities give it more strategic flexibility to launch future international routes and cut labor and finance costs.

But Norwegian Air's applications for expanded trans-Atlantic flights has faced fierce opposition from U.S. labor groups and carriers, including Delta Air Lines Inc.

Some U.S. airlines have leaned on the Obama administration to slow the growth of foreign rivals, in particularly the rapidly expanding Persian Gulf carriers such as Emirates Airline and Qatar Airways they accuse of benefiting from government subsidies. The Mideast airlines deny the charge.

The EU has backed Norwegian Air. Brussels has argued that under the so called Open Skies agreement with the U.S. that liberalized traffic rights Washington should have granted the application without delay. Norwegian Air filed its application almost exactly three years ago.

The U.S. government gave preliminary approval for Norwegian Air's plan in April, but has since held off on granting the final green light.

The European Commission, the EU's executive arm, on Thursday said "the Commission and the EU Member States share the view that the failure of the U.S. authorities to act on this request made in 2013 constitutes a breach of the EU-U. S. Air Transport Agreement," the formal name for the Open Skies accord.

The EU named Giorgio Sacerdoti as its arbitrator. The U.S. has 20 days to name its representative. The two sides then have 45 days to agree on a third arbitrator who would preside over the tribunal to resolve the dispute, under the terms of the agreement signed in 2007. Though the U.S. needs to name its arbitrator before Donald Trump is inaugurated as U.S. President on Jan. 20, the arbitration proceedings will not conclude until after the president-elect is in the Oval Office.

Norwegian Air has already delayed some U.S. expansion plans because of the delays, including flights from Cork, Ireland to Boston that were set to commence last May. It is the first time either side has invoked arbitration proceedings.

The EU had previously warned the U.S. it would consider filing arbitration proceedings. Commission spokeswoman Anna-Kaisa Itkonen said the EU "regrets that no suitable solution could be found despite intensive discussions at all levels."

Norwegian Air said it welcomed the Commission's action and that it was "confident that any arbitration case will recognize Norwegian's clear right to a foreign carrier permit."

Write to Robert Wall at robert.wall@wsj.com

(END) Dow Jones Newswires

December 01, 2016 06:25 ET (11:25 GMT)

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