Select Committee on European Communities Thirty-Second Report


  28.    Historically, scheduled airlines have played an important role in carrying their country's national identity abroad. In many respects it has been because of the strategic importance (for example, defence) of aviation that governments have been reluctant to relinquish tight control of this mode of transport. Although most governments no longer regard their national airlines as performing a vital economic and cultural role, many retain a strong desire to protect their country's flag carrier.

  29.    Whilst the international market in air transport has developed significantly in the last two decades both within the European Union and globally, there remain restrictions on national ownership and control of airlines both in the European Community and the United States (see paragraph 43) which have forced the airline industry to evolve in a different way from other industries. Recently this development has been characterised by international airline alliances often involving several large carriers. Airlines often present these alliances as a boon to consumers, but many of those involved in regulating competition in the airline industry take a different view. It is the Commission's contention that these international airline alliances, by reducing competition on routes between the European Community and third countries, are distorting trade between Member States.

  30.    This potential anti-competitive effect of airline alliances prompted the revival of the Commission proposals which are the subject of this report. Similar proposals had been put forward in 1989 but failed to gain the support of the Council[1]. The proposals are themselves relatively narrow dealing, in regard to air transport, with procedures for the application of competition rules by the Commission. The issues surrounding the proposals, however, are wide-ranging and significant, for aviation both in the European Community and worldwide.

  31.    The first proposed Regulation would extend the scope of the current Regulation 3975/87 which is limited to air services within and between Member States[2], to cover air transport services between the European Community and third countries[3]. Currently, the Commission only has circumscribed powers to investigate competition matters in respect of air transport services to and from the Community under "transitional provisions" contained in Article 89 of the EC Treaty. Enforcement ultimately depends on the Member States who have greater powers under Article 88. As scrutiny by the United Kingdom and European Community competition authorities of the BA-AA alliance has shown, the precise relationship between the procedures in Articles 88 and 89 is unclear. This was particularly evident with the question of whether the national authority or the Commission, when acting simultaneously, takes precedence. Currently, only Member States can grant exemptions in individual cases and impose fines. In the United Kingdom, the Office of Fair Trading (OFT), in the first instance, is responsible for enforcement[4]. What the Commission is seeking with this current proposal is stronger and more substantial powers to apply the EC Competition Rules (particularly Article 85) and to investigate claims of anti-competitive behaviour by airlines which affect the provision of air transport services on routes between the European Community and third countries. These alleged anti-competitive practices might include:

    —   alliances, co-operative joint ventures and code sharing[5] arrangements;

    —   traditional commercial agreements on matters such as tariffs, capacity and scheduling, as well as revenue/profit pooling arrangements;

    —   price fixing;

    —   slot allocation.

The Commission would also gain the power to investigate and act against activities by airlines which might be in contravention of Article 86 of the Treaty (which prohibits abuse of a dominant position).

  32.    The proposal would also add a new Article to the current Regulation to provide for "consultations and, where necessary, negotiations under Council Directives in the event of conflict between Community competition law and the laws, regulations or administrative provisisions of third countries" concerning airline services[6].

  33.    The second proposal—which would effectively allow the Commission to set the parameters of commercial and competitive activity—contains provisions which would allow the Commission to grant exemptions for certain activities engaged in by airlines which would contravene Article 85. These exemptions would apply only for a specific period and could be amended where circumstances changed. These exemptions are known as "block exemptions" as they exempt categories of activities by airlines from compliance with Article 85. The purpose is to "relieve operators of the bureaucratic burden of seeking individual exemptions and to create enhanced legal certainly"[7]. The Commission argues that there is "still a climate of serious uncertainty in which air carriers cannot know what practices and arrangements they may legitimately engage in"[8] on routes between the Community and third countries. Allowing the Commission to grant exemptions to the Competition Rules would "enable air carriers to adapt gradually to a more competitive environment"[9] and would clarify uncertainty about what exemptions are [currently] granted.

  34.    The Commission now believes that several new factors have arisen which "make it more necessary than ever" to endow the Commission with the powers to ensure compliance with the competition rules in the case of air transport between the European Community and third countries[10]. The Commission identifies these "new factors" as: the effects of the liberalisation of the internal market in air transport; the incomplete nature of the external market dominated by bilateral agreements between Member States and third countries; and the lack of a structured framework to "make good the deficiencies of the present system"[11]. Furthermore, the emergence of a number of global alliances between major airlines has raised concern.

  35.    These proposals would, in effect, remove restrictions on the Commission's actions in the area of air transport services and allow it to become a "one-stop" authority for competition matters. Currently there appears to be little or no support from Member State governments for the proposals[12]. Since publication they have not been taken up by either the Luxembourg (July to December 1997) or United Kingdom (January to June 1998) Presidencies. It appears therefore that these proposals have little or no chance of gaining the approval of the qualified majority of Council Ministers required in the near future[13].

  36.    This report examines what we consider to be the important issues which surround the publication of these proposals and which will affect the future development of the air transport industry worldwide. It looks at the proposals under four headings: attitudes to the proposed Regulations; barriers to competition in the airline industry; the impact of the Regulations on bilateral air services agreements; and whether the airline industry should continue to be treated differently from other industries.

1   COM(89) 417 final, proposal for a Council Regulation extending the scope of its powers to enforce the competition rules to include both domestic (intra-European Community) and third country air transport. The proposal was subsequently replaced by one dealing solely with transport entirely within one Member State: 2410/92, adopted in July 1992. Back

2   Council Regulation 3975/87 (as amended), Article 1(2). Back

3   Parallel competition rules apply under the Agreement on the European Economic Area (EEA). Were the Commission's proposals to become Community law, the EEA rules (and the powers of the Commission and EFTA Surveilance Authority) would likely be similarly extended. Back

4   Statutory Instrument 1996/2119, The EC Competition Law (Articles 88 and 89) Enforcement Regulations 1996. After preliminary invstigation by the OFT the matter may be considered by the Monopolies and Mergers Commission and ultimately by the Secretary of State for Trade and Industry. Back

5   See Part 4, paragraph 47. Back

6   Commission Explanatory Memorandum, paragraph 7. A similar provision exists in relation to maritime transport, Council Regulation 4056/86, Article 9.  Back

7   Government Explanatory Memorandum, paragraph 4. Back

8   Commission Explanatory Memorandum, paragraph 4. Back

9   Commission Explanatory Memorandum, paragraph 13. Back

10   Commission Explanatory Memorandum, paragraph 9. Back

11   Commission Explanatory Memorandum, paragraphs 10.1-10.3. Back

12   QQ 257-8, 346. Back

13   Under qualified majority, the proposals would require 62 votes out of a total 87 at the Council of Ministers. Back

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