Select Committee on European Communities Minutes of Evidence


Letter and Memorandum by Virgin Atlantic Airways Ltd

  On 28 May 1998 the Clerk to Sub-Committee B wrote to us about the Sub-Committee's current investigation into airline regulation. She invited us to submit written evidence, which Virgin Atlantic is pleased to do. Our submission is attached.

  In addition to the submission, however, we wish to draw to your attention to three points in particular. First, the subject of the Sub-Committee's enquiry is the proposal by the Competition Directorate (DGIV) of the European Commission to extend its powers to apply the existing competition provisions of the Treaty of Rome to aviation services between the Community and third countries ((8582/97 (COM 97) 218)). Yet the overwhelming focus of attention, for example in questions sent to interested parties and in the questioning of witnesses appearing before the Sub-Committee, appears to be on the separate issue of extending the Commission's competency to negotiate air services agreements between the Community and third countries. Extending the Treaty of Rome's competition provisions and extending the competency of the Commission to negotiate air services agreements are two quite separate proposals, from different Commission Directorates. Virgin Atlantic would welcome clarification about why the Sub-Committee has chosen to undertake its investigation in this way.

  Secondly, the Explanatory Memorandum submitted by the Department of the Environment, Transport and the Regions (DETR), and enclosed with the Clerk's letter of 28 May, states in paragraph 21 that British Airways (BA) and Virgin Atlantic have been consulted and both support the Government's position on the Commission's proposals. As far as Virgin Atlantic is concerned, this is not correct. We were not formally consulted and we do not support the Government's position. We have asked the DETR to correct its Memorandum.

  Thirdly, Virgin Atlantic understands why the Sub-Committee does not want to consider the details of the alliance between British Airways and American Airlines in the context of the Commission's competition proposals, although as explained in our submission, the alliance in fact illustrates aptly why these proposals are needed. However, it is in our view unfortunate that as a result the decision has been taken not to invite Virgin Atlantic to give oral evidence to the Sub-Committee. The Commission's proposals go far beyond the BA/American alliance and raise issues of considerable importance to the future of air transport in Europe, and to Virgin Atlantic. It seems odd that a British airline likely to be among those most affected by the proposals should not be invited to give oral evidence, while other UK and foreign airlines with less direct interest have been invited.

  We believe that the Sub-Committee's deliberations would be helped by concentrating solely on the Commission's proposals and avoiding as much as possible not only the BA/American alliance but also the separate Commission proposal to acquire air services negotiating competency with non-EU countries. Competition policy is an important subject in its own right and deserves detailed consideration.

  If Virgin Atlantic can be of any further assistance we would be pleased to hear from you.

Barry Humphreys

Director of External Affairs and Route Development

23 June 1998

(I) THE PROPOSALS

  Virgin Atlantic supports the deregulation of air services. We believe that air transport is a mature industry and should be treated as any other industry. The role of governments should be restricted to ensuring that there is fair and equal competition and that dominant airlines are not able to abuse their positions in the market. It is critically important, therefore, that for deregulation (or liberalisation, or open skies, or whatever the term used) to succeed there must be a strong and effective competition policy, and the political will to apply it.

  Many believe that deregulation of US domestic services in the late 1970s failed to achieve its full potential because of the laissez-faire approach to competition policy adopted by the US Government. The result was the disappearance of the numerous small, low cost airlines which emerged following deregulation and an increase in concentration among the major carriers to the detriment of the travelling public. Fortunately in Europe, the Commission is well aware of US experience and appears to be determined to ensure that European air transport does not follow the US pattern. It remains to be seen whether the Commission will be successful. Certainly there are powerful airline interests, often supported by their national governments, apparently determined to undermine the Commission's efforts.

  Traditionally international aviation has been tightly controlled. Bilateral air services agreements have determined which routes may be operated, by whom and at what frequency, and prices have had to be approved by both governments concerned. (In practice, of course, given the extremely close relationship between national airlines and their governments, most of these decisions were taken by the airlines themselves, operating in cosy cartels, a situation which still prevails in many markets.) There was no room for competition policy in this environment, since there was virtually no competition.

  It is evident that the world is changing. Bilateral air services agreements are being liberalised. The process still has a long way to go, and all the liberal agreements so far negotiated outside the EU continue to contain unnecessary restrictions which separate air transport from other industries. However, the potential exists for increased competition. Unfortunately, competition policy has failed to keep pace with other regulatory changes. For air services within the European Community, Articles 85 and 86 of the Treaty of Rome apply, but in the absence of adoption of the Commission's proposals presently under consideration, these Articles do not apply to air services between the Community and third countries. In the UK international scheduled air transport is specifically excluded from current competition legislation. The Competition Bill tabled by the present Government is silent on whether international air services will again be excluded, but there is certainly a risk that they will be.

  Thus, there is a hole that must be filled if air transport competition is to stand any chance of surviving. Air transport is, after all, an industry characterised by high barriers to entry, where national markets are usually dominated by a single favoured airline and where the economic characteristics of the industry and technical marketing developments mean that predatory behaviour is a relatively attractive and feasible option for larger carriers. In other words, smaller airlines face signficant competition problems and have a right to look to the appropriate competition authorities to ensure that they are able to compete fairly. What is involved is not the protection of competitor; it is the protection of the competition. Without that there is a real risk that smaller competitors will be squeezed out of the market, as they were in the US, and the cosy cartel recreated.

  The Sub-Committee has said that it does not want to consider the details of the proposed alliance between British Airways and American Airlines. It is a fact, however, that this alliance highlights many of the practical problems created by the absence of competition rules in international air transport. Every competition authority that has examined the alliance has concluded that it is anti-competitive. Yet the Commission's investigation has been complicated and lengthened because it has been forced to make use of Article 89 of the Treaty of Rome, combined with the use of Article 88 by the UK, instead of Articles 85 and 86. This problem would not have arisen in almost any other industry and illustrates the importance of accepting the Commission's proposal to extend EU competition rules to routes to non-EU countries. In the United States the competition legislation has always applied to international aviation, and at times has been used extra-territorially. Europe will remain at a disadvantage until similar powers are adopted here.

  Acceptance of the Commission's proposals might make the negotiation of bilateral air services agreements by EU Member States more complicated, and it would probably be necessary to reach agreement within the Community on how such negotiations may be carried out. However, this is not a sufficient argument to reject the proposals. The benefits in terms of protecting competition and ensuring that smaller airlines can compete fairly are well worth the price of any additional inconvenience for air services negotiators.

  It is a disappointment to Virgin Atlantic that the UK Govnerment has chosen to oppose the Commission's proposals. The DETR appears to be determined to protect its bilateral powers at all costs and sees the competition proposals as a threat. However, the extension of the Commission's competency to cover all extra-EU air services negotiations is a separate matter. The Government could have sought an understanding on how the Commission's proposals would work within the context of the current bilateral environment, rather than opposing the proposals outright. The explanation in the DETR Memorandum of how the British Airways/American Airlines case has been handled under Articles 88 and 89 does not do justice to the very real problems and delays which occurred. These would have been avoided had the Commission's proposals for new powers been in place.

(II) THE QUESTIONS

(1) In your opinion, what are the strengths and weaknesses of the current regulatory regime governing airline competition in the European Union?

  The principal weakness of air transport in Europe, as in most other markets, is the dominant positions occupied by national carriers in their home countries. Air France is overwhelmingly dominant in France, Lufthansa in Germany, BA in the UK, etc., not because they are "better" than their local competitors, but because they were once the recipients of favours from their government owners. It is only relatively recently that other airlines have been allowed to compete (and in certain cases this still has not happened), by which time the major carriers had established almost impregnable positions in terms of route networks, airport slots, control of marketing outlets, etc. This is why the strength of the Treaty of Rome's competition rules is needed. These are certainly capable of being used to ensure that competition can thrive, despite the distortions which currently characterise the market. The critical question is whether the political will and resources exist to apply them diligently and urgently.

(2) If, under the proposal, the Commission was to negotiate bilateral agreements with third countries on behalf of Member States, should this be done by: (a) a gradual, phased process; or (b) a rapid transition?

  As elsewhere, there appears to be some confusion here. The proposals will not, of themselves, give the Commission powers to negotiate bilateral agreements with third countries. However, were the Commission to obtain such powers, they would undoubtedly be used gradually, as the Commission has made clear. The Commission does not have the resources to take over all Member State bilateral negotiations, most of which will remain the responsibility of individual Member States for the foreseeable future, possibly permanently. The Commission would concentrate initially on negotiations with the United States, followed by other major aviation countries such as Japan.

(3) If, under the proposal, the Commission was to negotiate on behalf of Member States a single bilateral agreement with each third country: (a) how should they do this; and (b) how would this affect European airline competition?

  The Commission already has a mandate to negotiate so called "soft rights" with the US, i.e., those parts of a bilateral agreement which do not include traffic rights and pricing. The Commission established a process of consultation to agree common positions on each item for discussion at the negotiations, and for revising those positions as the negotiations proceeded. On the whole, this approach worked effectively and there is no obvious reason why it could not be applied to a wider mandate.

  An agreement with the US is likely to be some form of "open skies" deal, allowing any licensed US or EU airline to operate on any route covered by the agreement. This would permit, for example, a German airline to operate between Paris and New York or an Italian carrier to serve Amsterdam-Lost Angeles. Because the UK accounts for some 40 per cent of trans-Atlantic traffic, it has been argued that such an arrangement would benefit Continental airlines far more than UK carriers. Superficially this may be true. However, infrastructure constraints at the principal UK airports are likely to limit the impact, and of course opportunities would be created for UK carriers elsewhere in Europe. In addition, EU-US negotiations would permit the Commission to pursue its objective of creating an Atlantic Aviation Area, similar to the internal European aviation market which already exists. This could lead to the removal of the remaining government restrictions on air transport, in particular those which limit foreign ownership and control of airlines, so that at last aviation could be treated as any other industry. The opening up of the US domestic market to competition from foreign companies such as Virgin could benefit the UK significantly.

  The real problems for the Commission in negotiating on behalf of the Community will arise in dealing with countries which are not willing to accept open skies. There is no evidence that the Commission has yet addressed these problems in detail. For example, if only X frequencies are allowed between the EU and, say, Tokyo, which airlines will be allocated how many frequencies on what routes? Who will decide and on what basis? No procedure currently exists to ensure that such allocation is carried out fairly.

(4) What effect would the harominisation of future bilateral agreements between Member States and third countries have on airline competition?

(5) How would the proposal resolve differences in economic regulation and implementation of competition rules for airline services operating between Member States and third countries?

  We believe that we have already answered these questions above.




 
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