Select Committee on European Communities Minutes of Evidence

Examination of Witnesses (Questions 257 - 279)




  257.  First of all, thank you for sparing the time to see us on such an important day for you; we really do appreciate it. You know what the subject of our enquiry is and I need not go into that really. I think up to now, and we have been doing this for about two months, we have steadfastly kept off the proposed British Airways-American Airlines alliance because it is sub judice and because our enquiry is perhaps wider than that, but I think the three of us today feel that we can talk about it as a kind of case study which will make it much easier and, as you may know, we are taking evidence from Glenda Jackson, the Minister for Transport, tomorrow in London, so I imagine the same comments will apply with her. We have got a number of questions to ask, but do you want to say anything by way of introduction? We tend to find it best to have a sort of discussion on these things, but perhaps you would like to make a short introduction.
  (Mr van Miert)  Perhaps fairly short, yes. I really appreciate very much the fact that we can sit together today and talk about this issue because it has been in our minds for a considerable time already, indeed since we have had a common civil aviation policy and you will certainly recall I was in charge of transport policy and at that time we were lucky enough to be able to develop a common aviation policy within the European Community. It was very important and indeed needed because instead of having this old-fashioned situation on the basis of bilateral agreements, we could create a fully-fledged Single Market. So we were able to achieve this, but obviously the logic of doing that meant that we would also have to go in the direction of having the necessary instruments for taking care of the effects beyond our own boundaries. That is the logic, which happened in other areas by the way: once you have a common policy, it is very difficult to keep its external dimension separate and stand aside and not care for the other events. Now, as it happens, since the establishment of our common aviation policy several alliances have developed in the airline industry and this is going to continue, so more and more the question did arise as to what was going to be the effect of these alliances and these cross-border agreements on the functioning of the Single Market because obviously when a company, a Community airline develops an alliance with an American or another carrier, obviously it has effects not just in one single Member State, but also to some extent, and often to a considerable extent, in the rest of the European Union. So, already then we proposed to Member States that we be given a specific procedural instrument for civil aviation as we have in all the other areas. For instance, when we have a competition case in any other area of the private sector, we have the instruments and there is a one-stop-shop procedure, so to speak, where we say, "The authority to deal with this is the European Commission and we are implementing or enforcing the competition rules and are able to do so because we have been given this specific procedural instrument". Now, I do not think there is much discussion about the fact that the Commission has the responsibility to deal with the external aspects of civil aviation. I know it has been contested from time to time, but nowadays it seems that it is difficult to contest the logic and the effects of such alliances on the rest of Europe's Member States and the European Union as a whole. That is true for the alliance between Lufthansa-United, that is true for KLM-NorthWest and so on. However, we are now in a situation where we are considerably handicapped because if such alliances occur and if they trigger competition problems, which is the case, then how do we deal with it? The only way to deal with it now is on the basis of Article 89. This is fairly annoying because, one, it is a fairly complicated procedure and, secondly, it is a procedure whereby you have to go through so many phases that it is very long, unacceptably long. This means, on average, that the procedure on the basis of Article 89 takes a year or more longer than under the ordinary procedure[2] which is to the detriment of the companies and which also creates a very counterproductive opinion that the Commission is dragging its feet. This is really extremely annoying. Therefore, last year, in May 1997 we again made two proposals. One has to do with giving the Commission these instruments as far as alliances with companies from third countries are concerned, and the other one relates to block exemption which needs to be adapted as well to be binding, so there we are. I must say that really from time to time it is extremely unpleasant that because of the complexity of the procedure, we have been accused by some of the carriers of dragging our feet, which is absolutely not true, while at the same time some of the carriers have been lobbying their governments not to allow the Commission to be given these instruments. As it happened, during the Luxembourg Presidency, it was not even put on the agenda and during the British Presidency also, it was not put on the agenda. We were in Vienna last week and, together with Neil Kinnock, I did draw the attention of the Austrian Presidency to the fact that they had not put it on the agenda either and we said, "Look, really we cannot go on like that, being accused of being too complicated and not transparent enough, losing a lot of clout and at the same time you block any progress in this direction", so there we are and I can really only regret it because for an efficient application of the competition rules, this instrument is crucial.

Lord Thomas of Macclesfield

  258.  They did not change their minds?
  (Mr van Miert)  Well, the Austrians said, "Okay, we are going to think about it and we might well come back on that issue", so the Minister himself was open-minded and he said, "Really, I cannot contradict your arguments. You are right, but, I must admit, the situation remains politically difficult and, therefore, I am not sure we can convince the majority of the Member States to go along with it or even to have it really discussed", but they were prepared to take the question up again and try to find out whether at least some Member States might be interested in having it discussed.


  259.  I think that is absolutely right, but one gets the feeling sometimes that whether the carriers would prefer the Commission to do it or their own national governments very much depends on whether they believe they are going to get a better result from one or the other rather than any sort of philosophical reason because one thing we have certainly noticed in these negotiations going on with the United States of course is this apparent conflict between EC competition law and the anti-trust immunity in the United States. It seemed to be a head-on clash, so how do you see that working in the future?
  (Mr van Miert)  On the American side, the situation is very complicated as well because we have outstanding co-operation with our American friends, with the Department of Justice and the Federal Government, but for transport issues, it is the Department of Transportation which at the end of the day takes the decision and with which we do not have such a well-established co-operation. I was in Washington a month ago and had several discussions with members on the Hill, with Senators, who, by the way, said, "Well, what you are doing is against the interests of American companies", and I was very astonished about that because in Germany they will accuse us of being in favour of American companies, so really from time to time one wonders if we are discussing the same issues and the same relevant facts. So, on the American side it is also complicated. In British Airways-American Airlines case, the Department of Justice did share to a very large extent our concerns, but they are not the ones taking the decision at the end of the day.

Lord Thomas of Macclesfield

  260.  And, by being in transport, they are likely to be more influenced by their own carriers, are they not?
  (Mr van Miert)  That is right. Being the Department of Transportation, they link it to their specific policy issues.

Lord Methuen

  261.  In talking to the Americans, do you bring up this matter of not making them more than 25 per cent foreign holdings?
  (Mr van Miert)  Yes, over and over again I have been doing that even at the time when I was in charge of transport policy because they were at that time accusing us, for instance, about the fact that still a lot of carriers remain nationally-owned carriers. They are in favour of privatisation, but that does not necessarily lead to a situation whereby American carriers can take over European carriers because we have the concept of Community carriers and I said, "By the way, you do have a problem which is more serious than ours because we allow an American carrier to go up to 49 per cent ownership, but you allow European carriers only to go up to 25 per cent", and they said, "Well, it has to do with national security" and so on and so on, and I said, "Yes, but I thought these were private carriers and in private business, it should be possible, in principle, that there can be takeovers, there can be mergers, but I have to live with the fact that this is not possible with US carriers", so I said, "Therefore, you should respect us and our Member States should just accept that American carriers will not take over European carriers and then assume or pretend that they are European carriers", but it is even worse than that. I remember Bob Grandall coming to London and I think it must have been at the time when this alliance between British Airways and American Airlines was being proposed and then the question was put to him as to why that was not possible and he said that it was not going to be accepted by the trade unions. I said, "Can you imagine that we would tell the Americans that we would not agree that an American company would buy more than 25 per cent of a European company because the trade unions are against that?" So we made that point over and over again and I am sure that the only way at the end of the day to get the Americans really moving is by behaving in the European Union as one entity, and we will be able to tell them, "Look, we are prepared to have an open-skies agreement, but then several things have to be changed as well". In all my experience, being able to talk as a responsible member of the Commission on behalf of the Union in competition matters, makes you see that on the American side they accept a real partnership. You are probably aware that today we have taken the decision on the MCI case because we had some competition problems related to the Internet backbone and, I would like to underline that it has been dealt with in a very splendid way and with very good co-operation between the Department of Justice and ourselves, but it was the only way to bring these two American companies to deliver the goods and to accept the benefits. Boeing is another case and I can give you many other examples because the Americans know we have a fully-fledged competition policy, and a European institution, ie, the Commission, which is caring for that and, therefore, they accept that and they know that they have to accept that they cannot get away any more and even if it is a merger between American companies, if it has adverse competition effects in Europe, we are in charge and they know that then they have to accept the conditions, otherwise the Commission will say no.


  262.  Can we ask you about the conditions two proposed airline alliance deals that you announced today? With British Airways and American Airlines, you seem to have got agreement with the British Department of Trade and Industry and it looks good, but what has happened with the Lufthansa one? Did the German authorities have a similar view or what is their view on it because we had some interesting evidence from Lufthansa, complaining that you were too political, I think?
  (Mr van Miert)  Well, first of all, the German competition body fully agrees with us, the German Bundeskartellamt said, "Okay, we do support your analysis", so there is full agreement from the German competition body. Now, the Minister of Transport and Lufthansa, they applauded it when we said, "We are going to investigate the alliances", but in their minds it was only about British Airways and American Airlines. I remember that I was participating in a debate, and they put it in the papers that there was no problem, it can be checked, it was public, where it was said, "Yes, the Commission is doing the right job because it is unacceptable as it is, even the question of whether such an alliance should be extended at all", and so on and so forth, and we said, "Yes, we have some fairly strong feelings about some competition concerns, but, by the way, we are looking at all the alliances and particularly on the hub-to-hub situation where more and more it has become apparent that competition is going to be problematic. Even a big carrier like American Airlines is out of business in Brussels, there is no competition any more on the route Brussels-New York because of the alliance between Sabena and Delta. The same is true for Zurich, Zurich-New York and other destinations, so there is a tendency whereby the alliance, in being able to control the hubs on boths sides of the ocean, is gradually pushing the others out of business and even strong companies like American Airlines", so that is what we said to them and even if indeed the Lufthansa-United case is not of the same magnitude and the situation is different as far as the effects are concerned and the intensities, nevertheless, there is also a hub-to-hub problem and, therefore, we said, "You also have to give up slots eventually when another competitor wants to come in, and reduce frequencies to enhance the chances that competition will remain or will be extended", and we told them that this was particularly needed in the light of the experience made with the alliance between SAS and Lufthansa. At that time we required a little bit less than 200 slots eventually to be given up for other competitors on the route between Germany and Scandinavia and not one single slot has been claimed. Why? Because small companies are scared to take the alliance on, so we said, "So if you will not at the same time reduce frequencies to allow others at least during a certain period of time (and we are talking about six months) to establish themselves and have access to the routes, it is not working". Perhaps I might add one additional thing which is that the Americans do share that view, well, at least to a certin extent. The Americans have been introducing this carve-out system on particular routes and it is not functioning. In the case of Lufthansa-United, the carve-out means that they cannot discuss tariffs when it is in the direction from the US to Europe, but they can do so if flying the other way, and yet if you are part of an alliance, you are doing everything together and yet you are supposed not to compete on the hub-to-hub routes in one direction. That is just not serious and, therefore, we did reject that and said, "No, really you can pretend that that is a remedy, but we do not believe in it at all". We want to enhance the chances of new competitors. For instance, in the case of British Airways and American Airlines, British Midland or Virgin Atlantic could also decide to come in and it is up to them, but at least they should be given some real chance to take off and it remains to be seen what happens next.

Lord Thomas of Macclesfield

  263.  We well understand that when you make decisions or the Commission makes decisions, which are favourable to any individual carrier, they are very supportive, but when it is not a favourable decision, then they think that perhaps their sovereign nation should be doing it. Many of them have referred though to the Commission having a political agenda, whatever that means, and I would like to explore that. I would like to know where the Commission is or where you think it is or where it should be. For example, other witnesses have told us that they have argued that the airline industry should be treated like any other industry and the marketplace should prevail and that with these alliances, however much you have refined them as a result of today's decision and previous decisions, that is only refining a cartel and, like in other industries, you go back to the point where it is marketplace-driven.
  (Mr van Miert)  Well, that is a very interesting point because if you read the report made by the Department of Justice, they say that if airline alliances would have to be scrutinised according to the normal way it is being done in other sectors, their conclusion would be that the alliances cannot happen. Now, of course I accept that you can make that point. On the other hand, the airline business is to some extent a specific sector as well and, therefore, I think alliances potentially have advantages also for the consumer, so we should not deny that and we should not just ignore that, but if you do not attach specific conditions to the alliances in order to be sure, and mainly on this hub-to-hub situation they should simply not go ahead.

  264.  But that is a very subtle point. What you are saying is that it can have advantages, but it possibly will not have advantages unless those advantages are part of the alliance agreement with your conditions on this today to the tune of 267 slots.
  (Mr van Miert)  Let me put it this way: if the remedies we are now suggesting will be fully observed and enforced, I think there will be benefits because, if we take the British Airways-American Airlines case, Virgin Atlantic might extend its business which is already there, so that is a real possibility, and British Midland might eventually come in.

  265.  But if you had not intervened, none of those conditions would have applied and, therefore, the consumer would not have benefited from them.
  (Mr van Miert)  That is right.

  266.  I just wanted to make sure that is right.
  (Mr van Miert)  And with American Airlines, the last time I met Bob Grandall here, I must admit, he has always been very outspoken and honest about this and he was of the opinion that these kind of code-sharing agreements were anti-competitive and against the interests of the consumer, and he has been constantly arguing this, but he said, "Okay, if it is happening and the others drive us out of business on some routes, I do not have any other choice left than trying to have my own alliance".

  267.  But the hand you have got, as we say, is the hand you have got. This is not where we should be in terms of competition, but this is the historical reality and now we are looking at ways to move forward from where we are today. Now, in that context, would it be simpler to come up with a clear competitive mandate which everybody in Europe would agree and then for the Commission to call in any agreement that seems to be in contravention of that understanding rather than looking to the Commission to negotiate what are, after all, free market negotiations?
  (Mr van Miert)  Do you mean a global open-skies agreement?

  268.  Well, any agreement. Is it not better that there is an agreed competition rule, that there might be a block exemption for grandfather agreements that already exist and that as and from then, every agreement, including the old agreements, can be called in one at a time if they are clearly in contravention of that competition mandate? Then you would allow everybody to negotiate as individuals, as carriers or as countries, and you would be looking at the exception rather than everyone. Also the concern expressed is that there will not be the commercial drive in the negotiations because you will be trying to do the best deal for every country, whereas the marketplace would determine that in its own way.
  (Mr van Miert)  Well, the problem is that in this case, as in other cases, the market is not caring to make sure that competition remains and it is the other way round. If you fly from Brussels to Vienna, there is no competition and you pay a very high fare, and there is no competition if you fly Brussels-Lisbon because in the meantime they have these code-sharing agreements by alliances and competition is gone.

  269.  So you would call that agreement in, as I see it.
  (Mr van Miert)  Yes, but here we touch upon another thing which is whether you can allow code-sharing agreements or not because, as it happens, code-sharing agreements eliminate all competition between the carriers concerned.

  270.  And there would be consolidation in the industry.
  (Mr van Miert)  Yes, but also the attempt to take on such an alliance. Virgin has been doing that on some routes and eventually went for its own agreement with Sabena, for instance, and so on and so forth, but what is becoming more and more evident is that on really a lot of routes the competition has gone because of code-sharing agreements.

Lord Methuen

  271.  Is there not another problem, that in many cases there is not enough traffic on these particular routes?
  (Mr van Miert)  Yes, but there has been competition before. There are several flights, for instance, to Lisbon so two carriers can do business and it has happened before. Now, obviously it is much easier for them to say, "Well, we will stop competing and let's code-share" and before someone else can come in and it is only because they have all the frequencies, so they have some power.

Lord Thomas of Macclesfield

  272.  Forgive me, but if you agreed a competitive ruling, a mandate that should apply, then if you had agreements like you have just described, they would be called in and they are the ones that would be looked at.
  (Mr van Miert)  We are going to do that.

  273.  You are going to do that?
  (Mr van Miert)  Yes.

  274.  Rather than negotiate with all the individual countries? Do you see the difference? You would be working on the exceptions.
  (Mr van Miert)  I am not sure that I get it.

  275.  Well, let me put it another way. Let us say that there are a few hundred agreements in terms of the 15 Member States of the European Union, and there will be hundreds more. Now, if the European Commission were concentrating on the exceptions to the rule rather than every one: one, it would have the advantage of reducing its workload considerably; but, two, the advantage would be that the private sector could negotiate their deals within this convention as best they might.
  (Mr van Miert)  But inside the European Union, traffic rights exist in their own right and, therefore, there is no need to be given traffic rights any more and you just can try to use them, but the problem is that obviously if you have to compete with carriers with deep pockets or alliances or code-sharing incumbents, it is extremely difficult. Then you have people like Deutsche BA and they complained about the fact that on this route between Frankfurt and Munich, as far as Lufthansa was concerned, it was time for war.

Lord Methuen

  276.  To what extent is this limited by slot availability? Would you like to talk about that?
  (Mr van Miert)  Yes, it is limited.

  277.  And the method of trading in slots?
  (Mr van Miert)  Obviously when we have to deal with an alliance inside the European Union, we have to see to it that attractive slots, adequate slots will be made available to other competitors if the effect of the alliance is to eliminate all existing competition completely and, speaking about the case of Lufthansa-SAS, there were competitors. They started to run their alliance and it stopped. Therefore, we said, "Then you need to accept as a remedy that eventually up to", I think it was, "198 slots should be made available mainly in Frankfurt, but also some other airports, if other competitors want to come in, but you need to make them available only when someone is asking for them, otherwise there is no point in doing so". What happened in the real world was that smaller carriers apparently, or I know of at least one case where a smaller carrier was attracted by this business and wanted to enter the market, but it was made abundantly clear that if the carrier concerned had the guts to do so, then this meant war, so at the end of the day they refrained from doing so and, therefore, not every one of these slots has been taken up, so this proves that this remedy was not good enough.


  278.  But you are proposing the same on Heathrow in your statement, that they should give up 267 or however many slots it is going to be.
  (Mr van Miert)  Heathrow and Gatwick.

  279.  That is because of course there is pressure and other people probably will want to take up the slots there, so that is a remedy that is probably worthwhile, is it not?
  (Mr van Miert)  That is right. I fully share your view because of the attractiveness of Heathrow and I would be very astonished if there were no carriers, but only for transatlantic business, so maybe British Midland one day. Sir Michael did write us a letter which said, "Could not the Commission consider that the number of slots to be made available could also be used for intra-European flights?" and we said, "No, it has to do with curing competition problems which derive from the transatlantic alliances", so the slots are 200 maximum because if they can be made available at Gatwick in another way, the companies concerned do not need to give them up. By the way, the same is true in the United States because, let us say, if British Midland were to enter the market and were able to get slots at Heathrow, interesting slots, the Americans would have to make available corresponding slots and if the airport authorities could not do so, then American Airlines would need to free up the slots on their side.

2   Case 22/70, Commission v Council (EFTA), ECR 263. Back

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