Select Committee on European Communities Minutes of Evidence

Examination of witnesses (Questions 101 - 119)




  101.  Mr Hamer, thank you very much for agreeing to come and give evidence in front of us and indeed for bringing two of your colleagues with you. You are aware, of course, of our enquiry into airline regulation. Indeed, you have submitted, if I may say so, a very valuable piece of written evidence. You have slightly cut the ground from under the oral questions we were going to ask you but no doubt we will get around that problem. Could I preface by saying that it is not within our brief, nor do we wish to get into, any detail regarding the British Airways/American Airlines proposed co-operation, if we call it that. It may well be that reference is made to it but I would not wish it to be any more than reference. If you would be so kind, for the record, to introduce yourselves and colleagues; and if you have any opening statement you wish to make, please do so.
  (Mr Hamer)  Thank you, my Lord Chairman. Firstly, if I could introduce Dr Delores O'Reilly, who is the Chair of the Economic Policy Sub-Committee of the Air Transport Users Council; and Dr Philip Martin, who is the Director General of the AUC. He heads up our full-time secretariat. The Sub-Committee, as you have intimated, have already seen our memorandum; and that explains who we are and sets out our general views on the subject of airline competition regulation. It may be that, as it was submitted only a few days ago, it would be helpful if I summarised our position briefly.

  102.  Please.
  (Mr Hamer)  Thank you. There appears to be no clear consumer interest in the technical questions regarding the application of the Competition Rules to air services to third countries. The Rules are designed to protect the consumer and it would appear to be of no great moment whether this is done by the Office of Fair Trading or the European Commission. The question of Community involvement in air service relations with third countries is, however, much more interesting. Bilateral air service agreements involve the economic exchange of traffic rights to carry passengers, mail and cargo. Historically, passengers were there to be uplifted, and very rarely consulted or considered. These restrictive agreements were designed to maximise the economic value to national airlines. We believe that view has changed radically with the recognition that liberalisation—competition in a free market—benefits passengers as well as airlines. The merits of Community involvement in this process turn on whether the Commission is more likely to seek such liberalisation and whether it is more likely to achieve that end. We would answer both of these questions in the affirmative. Unlike Member States, the Commission is committed to opening up markets to third countries to all Community carriers. At its most extreme this would mean that Air France could operate a service, for example, between London and New York. Perhaps more realistically, Deutsche BA could be designated by the German Government to operate between Frankfurt and Istanbul. The Commission is also more likely to achieve liberalisation. By exercising the pooled negotiating capital of 15 Member States they are more likely, for example, to gain improved access to the United States domestic market. Whether, in fact, they could negotiate entry to the United States cabotage market, or persuade the American Government to relax its ownership and control rules, would remain to be seen. The possibility of such major successes may be remote but what is certain is that they will not be achieved in 15 separate bilateral negotiations. We recognise the danger that if the Commission is not entirely successful in negotiating a liberal agreement, the United Kingdom may lose out in the subsequent internal division of traffic rights between Member States. However, our view of this risk is that any short-term loss to United Kingdom consumers is outweighed by the potential long-term benefits of global liberalisation, which can only be achieved by negotiations at supranational level. We are, therefore, in favour of Community involvement in aviation relations with third countries and for that reason we endorse the Commission's proposals. Thank you, my Lord Chairman.

  103.  Thank you very much not only for doing that, but it was succinct in the extreme which goes down well with this Committee. May I pick up this last point. You have really expanded slightly on paragraph 20 of your written evidence. I have two questions on that paragraph. In the first line you say: "In our view the balance of these interests comes down in favour of Community negotiations." Balance is a relative thing. Is the see-saw teetering marginally at the fulcrum, or does it come down very heavily on the side of Community negotiations?
  (Mr Hamer)  I think our position has been taken firmly from the consumer's viewpoint. Perhaps to answer your question in more detail I could ask Dr Martin to expand on that particular paragraph.

  104.  In which case, may I just come on to my second question, which is also on that paragraph. In the last sentence you say—and again you have repeated this orally—"In our view, these long-term strategic gains [those are ones in favour of the Community negotiations] justify the small [it is my emphasis] risk of losing consumer benefit in the short term." Perhaps, Dr Martin, when you reply you could give us examples of that: be it country versus country, or short versus long-haul. What do you mean by small risk?
  (Dr Martin)  As the memorandum states, what we are looking at here is a balance between, in some ways, apples and pears. There are potentially very substantial long-term gains to the consumer from Community negotiations. Wielding the negotiating power of 15 Member States, they should be able to win much greater liberalisation than individual Member States could obtain themselves. At some stage you might like to come back to talk about what could be achieved in that area, possibly with the United States. The potential losses occur if the Community cannot negotiate an entirely liberal agreement with a third country. It will then exchange limited traffic rights with that third country, and those traffic rights have to be divided up in some way between the Member States and their airlines. To take a concrete example—it may not be likely but it is concrete—if one looks at the access that the United Kingdom has to Narita Airport——

  105.  To Madrid?
  (Dr Martin)  Narita in Japan.

  106.  Oh yes, I know it well.
  (Dr Martin)  We have very good access to that airport because the United Kingdom has very strong negotiating power. We have a good agreement with Japan. If negotiations with Japan were conducted at a Community level and were not entirely successful at liberalising the relationship between Europe and that country, there is a question as to how the resulting benefits should be divided up. From a Community viewpoint it might well make more sense to give some of this limited access to that airport to services to Rome or to Madrid, as you mentioned. That would not benefit the United Kingdom. So, at that stage, there is a potential loss to consumers originating from United Kingdom airports. It is this trade-off that we were trying to draw out in our memorandum. We have come down in favour of going for the long-term benefits, even if there are small chances of these potential losses.

  107.  Then why, in your written evidence, do you use the expression "in the short term"? How would that then bring itself back because "short term" by definition does mean short-term. Therefore, the inference is that in the longer term things would even out?
  (Dr Martin)  The thought there is that in the longer term aviation services will be liberalised. They will be treated like any other sector. We will move away, first of all, from this type of bilateral arrangement. If the Community only obtains limited liberalisation initially, one would hope they would go back for a second round of negotiation and eventually win full liberalisation.

Lord Thomas of Macclesfield

  108.  In paragraph 20 I have a number of questions on that as well. If we were to conclude that your advice here is the advice we should take in terms of our report: first of all, what about the competence of the Commission? I do not mean it in a legal sense but in an administrative sense, and the expertise to undertake this for 15 countries, possibly 25 countries, in the future. That is the first question. The second question: if we began to take that advice, what would happen to the existing bilateral agreements? Would they be no longer embodied? Would they have to be renegotiated? Or would they add the sort of grandfather clauses because they predate any Commission involvement?
  (Mr Hamer)  Thank you, my Lord Chairman. If Dr O'Reilly would take both of those questions, please.
  (Dr O'Reilly)  Thank you. As they stand, the proposals from the Commission would have little immediate effect. The first proposal would bring the full weight of the European Union Competition Rules to bear on air services to third countries. But the second would actually allow for immediate exemption of agreements by airlines entered into under the terms of the air service agreements so, in effect, those that have already been entered into would be permissible by the second proposal to be exempt, so they would be protected. The status quo would be preserved but the Commission would then have its foot in the door and it would also have the threat to withdraw the block exemptions; to withdraw the protection that the agreements they have entered into. With regard to the expertise of the Commission to negotiate on behalf of the 15 Member States, I really do not think it is our position to comment on that. What I do feel is that maybe the Commission, by reviving this proposal to apply the Competition Rules to air services between Member States and third countries, are for quite understandable reasons putting the cart before the horse. If I may have a few moments to elaborate on that. Prior to the adoption of the so-called first package of liberalisation in 1989, there was no legislation applying the Competition Rules to air transport, in spite of the fact that there was a previous Commission proposal and three European Court of Justice rulings, that the general rules of the Treaty should be applied to all branches of economic activity. The reason why the Council finally gave way was because it recognised that if the competence for such matters as airline pricing and market access were to be passed over from the Member States to the Community, then the Community should also be able to police them. I think that will probably reflect in the expertise that they would have with regards to negotiating and policing for the 15 Member States. Thus liberalisation and application of the Competition Rules were almost two sides of the same coin in that they came hand in hand. Today the circumstances are different. The Council seems unwilling to surrender competence for external relations and thus if the Commission's present proposals were adopted the Competition Rules would apply not to a common regime but, in fact, to individual Member States and individual third countries. It would not be on a common basis. The Commission could only take action against such agreements which it found to be in breach of Articles 85 and 86. It could not put anything in their place. It would just be making a ruling on the breach of those two Articles. It would be up to the Member States concerned to do that who may be at that stage, in a weak negotiating position. It seems to us that it would be likely, in that case, to act against the consumer interests. The Commission feel that once the Council has agreed to the proposal that they have currently put before us, eventually it will be forced to concede that the Community should be competent for all aspects of external relations. Our memorandum states quite clearly that we are in the favour of this for the reason that liberalisation does benefit the consumer. The liberalisation packages which we have seen through the Community have indeed shown that consumers have benefited. So just as the Council adopted a single package of measures for the internal market in 1987, maybe there ought to be a comprehensive external policy based on long-term objectives—we have been talking about the short term. That is not the position at the moment, but the proposals put forward are maybe the beginning of that. For that reason I feel it may be that the Commission are putting the cart before the horse. They are putting in place Articles 85 and 86 from which they can judge, but once they do that there is nothing to replace what they may strike down.

  109.  Just for clarity, going back to the first question, did I understand you rightly that you indicated that the grandfather clauses, the original bilateral agreements, would be acceptable initially, but then they would be exposed, to be unpicked at a later date?
  (Mr Hamer)  Our understanding is that this is the case. Much of our policy has been based on this, in fact, being the case. Also, if I could just comment on the point that you raised in terms of the Commission's expertise, we certainly do have some reservations as to the physical competence, in terms of the numbers of people available, and how they would actually go about this. This would need to be looked at. We have also worked on the basis that the Commission would be able to draw on the existing expertise of Member States in their negotiating teams.


  110.  May I pursue this grandfather clause bit. I do not quite understand, at this stage of our enquiry, how what you have said squares with Commissioner Kinnock's action at the moment. He is calling-in, if I can use that expression, three different alliances.
  (Mr Hamer)  If we can take the opportunity of clarifying that.

  111.  We have to be very careful over the BA/AA.
  (Mr Hamer)  We fully understand your direction on that. Dr Martin.
  (Dr Martin)  As Dr O'Reilly said, inter-airline relations that are required in bilateral agreements may be in conflict with Article 85 of the Treaty but will be granted block exemption, so that existing bilateral arrangements will remain in place. The next move is to modify those arrangements or replace them with Community bilateral agreements with third countries. We believe that there will be subsequent negotiations in which a Community agreement will be put in place, which will overtake the bilateral air service agreements between Member States. Does that answer your question?

  112.  Yes, it does, but it immediately gives me another one which is: do you believe that it is realistic and practical that countries which presently have (let us use the word) advantageous bilateral agreements, are willingly going to give them up? Or do you think the issue is going to be forced by one or more cases in the European courts?
  (Dr Martin)  The aim is to negotiate liberal bilateral agreements with third countries in which case, whatever advantage those Member States have with that third country, would be shared with other Member States.

  113.  To the disadvantage of the first Member State?
  (Dr Martin)  It is not a disadvantage to see another country have a liberal agreement with a third country.

Lord Skelmersdale

  114.  It is for slots, for example.
  (Dr Martin)  This was the potential disadvantage that we had added initially. What I am saying is, if one could eventually negotiate fully liberal arrangements with a third country, that would benefit all Member States. The potential downside, if the arrangements in the short term are not fully liberal, is that then one has this sharing-out of benefit which might mean that some, such as the United Kingdom, could lose by it.

  115.  Going back to paragraph 20, you have all spoken about the physical competence of the EC officials, as you have seen them. What about their psychological competence? As I see it, we have a situation where we have two battering rams. We have anti-Trust immunity in America. We have exactly the opposite Competition Rules that look as if they are going to be waived in the Community. Do you think, in that situation, that there is any likelihood of any sort of agreements being forged between the Commission and the United States Government?
  (Mr Hamer)  That is certainly one of the difficulties. We do recognise that in this form we do not think that any of these proposals are likely, in themselves, to overcome the particular issue that you identify. But at least we know where the starting point would be in those negotiations, and it may well be that where you have two very large economic blocks negotiating on these issues, that both blocks will have to give something. One would see that as part of the negotiations; taking, for example, a new bilateral agreement between the EU and the United States, the example which was suggested.

  116.  But it could happen in Indonesia.
  (Mr Hamer)  Absolutely.

  117.  But you do accept my premise that the psychology of the Union is totally different from the psychology of virtually anywhere else in the world, especially America in this context?
  (Mr Hamer)  One has to accept the statement. You can also say that the psychology of the United States is different from that in many other countries of the world. We certainly accept what you are saying, of course, and we recognise that difficulty, but it is something that we assume would form part of any negotiations.

  118.  So you believe ultimately that it can be overcome?
  (Mr Hamer)  Oh, yes.

Lord Skelmersdale]  That is a lot of confidence, thank you.


  119.  On a slightly more legalistic note, again regarding European and United States relationships, the ownership and control rules: as we understand them, at the moment, within the European Union they require that airlines have to be at least 51 per cent owned; whereas in the States, the foreign ownership cannot exceed 25 per cent. You say in your written evidence that if the United States threshold could be increased to that of the Community, or indeed if in both it could be raised—and I would like to come back to that point in a minute—the pressure to form alliances would no longer exist. Then you go on to say: "This, therefore, would be a method of achieving such market entry without the loss of competition that results from the formation of alliances." Surely, if you went along that path, you almost inevitably get more mergers. Would that not be anti-competitive?
  (Mr Hamer)  I think if you ended up with one or two global airlines, clearly that would be the case. What we are seeing from a consumer's point of view is the growth in formal alliances, two competitors getting together to operate ostensibly as one airline (all but), and we see great problems as far as competition is concerned in that respect. However, one has to recognise that the economic realities of life and globalisation is afoot. There is nothing, we think, that our view will do to change that. What we have suggested, however, is that the need for alliances of the nature that we were concerned about would be reduced because airlines could take financial interests in each other or could, in fact, start up their own subsidiaries in one another's market area. That, we feel, would enhance or bring about competition rather than stop competition. The big benefit, as we see it from the European airline point of view, is, of course, the ability to operate within the United States domestic market. Similarly, for European consumers, we see benefit in further competition within the European market operated by perhaps American airlines, if we are being specific, from the United Kingdom to America. The question as to whether or not global mergers would be the order of the day and any competitive gain or any gained competition would go out of the window, so to speak, we would hope we would have some ability to rely on the investigation by the competition authorities at that time. That really is the point that we had reached.

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