Select Committee on European Communities Minutes of Evidence

Written Memorandum from Lufthansa

1. Is Lufthansa in favour of the Commission's proposals to extend the scope of Regulations 3975/87 and 3976/87 to include aviation services between the Community and third countries?

  Lufthansa concedes the Commission's proposals' inherent logic. It is certainly true that a Single European Aviation Market cannot be regulated on its own merits with no consideration given to the relationship between that market and the rest of the world. Given the impact of global competition on intra-European competition in general, and European competitors in particular, it is furthermore correct to assume that measures should be envisaged that ensure a level playing field for competition both within Europe as well as between Europe and third countries.

  However, there are two important caveats. Firstly, the Regulations 3975/87 and 3976/87 can and should only be extended in their geographic scope to countries that have implemented a liberal aviation policy with most, if not all Member States, and are willing to negotiate a Single Aviation Agreement with the European Union. Such a prerequisite is necessary, because a market-orientated competition policy can only be applied in an environment in which the market is not distorted by regulatory intervention. By proceeding in such a manner, the Commission would essentially be adopting the approach it implemented in the course of the intra-European liberalisation process, which, if I may recall, was indeed a gradual phasing in of a European regulatory regime accompanied by the gradual implementation of competition rules. The Community has always maintained a close link between the scope of Community liberalisation measures in the air transport sector and the scope of the Regulation 3975/87, which the Commission itself recognises in its proposals. The conclusion of air service agreements between the Community and third countries should therefore be a precondition for the proposed extension of the Commission enforcement powers to air transport between the Community and such countries. Whether the Community should seek to conclude such agreements with third countries should, of course, be evaluated and determined on its own merits and not in the wake of Commission enforcement action.

  This leads to the second caveat, which is that the scope should be extended gradually, on a step-by-step basis. Given the highly sophisticated revenue-management systems and route planning tools modern airlines use, aviation is dependent on stable parameters; any paradigm shift, any dramatic change in the regulatory framework that affects the commercial activity of airlines, should be such that airlines can adapt appropriately.

2. In your opinion, what impact do you think that the European Commission's proposals will have on airline competition on short and long haul routes?

  Currently, each Member State is responsible for its air transport relations with third countries. Each such bilateral relationship necessarily reflects the specific balance or air transport interests and negotiating powers of the two parties. It would be potentially very harmful if in such—often sensitive—bilateral relations the Commission would have full powers under Article 87 to apply the Competition rules, whilst the responsibility for trade in the air transport sector would still remain with the Member States individually. Any enforcement initiative taken by the Commission in such an environment may trigger a negative reaction from the third country concerned, which may have serious consequences at the level of the bilateral air transport relations between the Member State and the third country in question. Instead of bringing about the legal certainty advocated by the Commission, such a development would have the opposite effect.

  It is difficult to foresee in detail what specific effect the legal uncertainty thus created would have on competition on short and long haul routes. Lufthansa strongly believes that, in the short- and mid-term future, international alliances between airlines will continue to be an essential instrument particularly for European carriers. It is with the help of such alliances that European carriers, which currently transport only 8 per cent of global traffic, have been able to position themselves strategically in the global aviation market. Any legal uncertainty created by the Commission would substantially undermine the strategic value of European carriers as potential alliance partners for Asian or North American carriers.

3. In your opinion, would carriers from any particular Member States be advantaged or disadvantaged by the proposals?

  Whether or not carriers from particular Member States would be advantaged or disadvantaged by the proposals depends on their implementation in individual cases. Current experience of several airlines, including my own, seems to indicate that the Competition Directorate (DG IV) as part of the Commission is a politically driven entity. It is Lufthansa's view that the current investigation by the Competition Directorate of all transatlantic alliances is unnecessary and driven essentially by what the Commission construes to be reasons of "political fairness". It is also Lufthansa's view that by applying the same methodology to all transatlantic alliances despite the different market sizes and structures, as well as differing market penetration of the carriers concerned, the Competition Directorate is following a politically driven approach. The results of such politically driven moves can, depending on the circumstances, be disadvantageous to some individual carriers.

  In an attempt to reduce the likelihood of such politically motivated moves, Lufthansa proposes the creation of a truly independent European Competition Authority. Without wishing to elaborate such a proposal in detail, I would merely like to point out that the Federal Republic of Germany has a well established national Competition Authority, which is indeed independent of any given political aspirations. This model has, at times, proven to be a difficult regulatory body to deal with for the private sector, and Lufthansa did not always share the views expressed by the German Bundeskartellamt, but we endorse the principle that the technical implementation of a politically predetermined competition policy should be left to an independent agency. I believe it would be worthwhile to examine the legal and procedural details of the German solution as a potential model for the European Council to consider.

4. Do you think that this proposal forms part of a process that will lead to the Commission assuming responsibility for the negotiation of Air Services Agreements between the Community and third countries?

  The proposals do indeed have far-reaching consequences for the Commission in the field of air transport. The effect of the extended scope of the Regulations 3975/87 and 3976/87 would basically be to create a legal instrument for the Competition Directorate to intervene with respect to any behaviour of airlines, any agreement between airlines and any clauses foreseeing or allowing behaviour of airlines that could be construed as having adverse effects on competition, tariff clauses, capacity clauses, in short, any clause currently contained in Bilateral Air Service Agreements that is relevant from the perspective of EU Competition law, would be susceptible for review by the EU Commission. The effect would thus be: lack of legal certainty with the Member States as to which kind of agreements could still be negotiated and agreed upon bilaterally; and lack of certainty with the third country concerned.

  You will be aware of the ongoing investigation of the Lufthansa/SAS/United Airlines alliance by DG IV; depending on the measures contemplated by the Competition Directorate, it could very well erode rights of European and a US carrier granted under bilaterally agreed Open Skies Agreements. The alliance investigations thus have the effect of increasing political pressure to transfer negotiating rights from the individual Member States to the Commission. Lufthansa considers it politically unwise to permit Commission enforcement action in specific cases to drive a competition policy which in turn determines the nature of a negotiation mandate. The inverse should be true: The Council should seek to identify the parameters for an external aviation policy, including competition policy, based upon which a Single Aviation Agreement could be concluded with a third country, which includes the guidelines for the enforcement of a competition policy; such a competition policy must be agreed upon with the third country, it should not be imposed unilaterally by the European Union.

5. Do you consider that the proposals would lead to a harmonisation of bilateral agreements?

  It follows from the above, that the proposals, if implemented in their current form, would erode the contents of bilateral agreements and increase political pressure for a resolution of the ensuing legal uncertainty. A harmonisation of Bilateral Air Service Agreements presupposes that all third countries would be prepared to accept new clauses that effectively replace the current diverse specific agreements. I doubt whether this is a realistic assumption.

6. In your opinion, will this proposal help to resolve the differences that currently exist between different Competition authorities in their policy making both within the Community and between the Community and third countries?

  Lufthansa is not aware of any real differences that exist between the competition authorities in the Member States regarding competition policy in respect of air transport. The only real conflicts that exist are between the Commission and certain Member State authorities. While the proposal would help resolve those conflicts, the cost of that resolution is not worth the benefit.

7. Are you in favour of the Commission having a greater influence on Air Services Agreements between Member States and third countries? How far would it be wise to proceed in this direction at present?

  Lufthansa believes that if a level playing field for competition between competing alliances and competing airlines is to be created not only within the European Union but also for traffic between the European Union and third countries, then further influence of the Commission on Bilateral Air Service Agreements with these third countries will be inevitable. As a first step, however, an encompassing European External Aviation Policy should be adopted by the Council of Transport Ministers that includes all elements of an aviation policy, including competition policy. As a second step, individual third countries should be identified with which a Single Aviation Agreement could be concluded. In presenting such countries to the Council with a request to be given a mandate for negotiations, the Commission should be required to demonstrate the added value of Community negotiations with these countries. The experience gained from such individual negotiations should then be evaluated before moving to negotiations with additional third countries. Setting aside the EU negotiations with Middle and Eastern European countries with which the EU is currently beginning negotiations, it would appear wise to pursue the notion of a mandate for negotiations with the USA as a first priority, assuming such negotiations could, indeed, be based upon a European External Aviation policy and would prove to constitute an added-value for Member States.

8. In what ways do you consider that future bilaterals established between the Member States and third countries will differ from current bilateral under the proposals?

  Under the proposals, future bilateral Air Service Agreements would have to permit Commission participation at the negotiations, contain clauses that the Commission deems to be in conformity with EU law, foresee jurisdiction of at least DG IV in matters of relevance for Community competition law. It is not difficult to foresee that divergent views on several issues such as the relevant market, bi- or multilateral tariff or capacity agreements between the designated carriers, the designation of all EU carriers instead of carriers of the two countries concerned could make an agreement difficult to achieve. It appears highly unlikely that the third countries would accept all EU conditions in the same manner. In particularly difficult cases, the Commission would either have to resort to trade power outside the realm of traditional aviation agreements or accept that aviation between the Member State and the third country concerned cease.

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries

© Parliamentary copyright 1998