Select Committee on European Communities Thirty-Second Report



  52.    DG IV acknowledged that none of the Member States had officially stated their support for the proposal. They said that the reason for this attitude was that the proposed Regulations were linked with discussions on a possible US-EU "Open Skies" bilateral agreement in which competition policy was one of the items on the agenda. Unofficially, however, there was "some sympathy and understanding for our ideas and certainly the logic of them is not denied" (Q 346).

  53.    Of our witnesses, only the Air Transport Users Council (AUC) and Virgin Atlantic Airways were clearly in favour of the Commission's proposals to extend the scope of Regulations 3975/87 and 3976/87 to embrace air services between the European Community and third countries.

  54.    Virgin Atlantic expressed the view that there was currently a vacuum in the application of competition policy to air services with third countries which would be filled by the European Commission's proposals. "It is vital for the success of competition in the airline industry, with all the benefits that this brings for consumers, that there is an effective competition policy diligently applied" (Q 188).

  55.    The AUC thought that the EC Competition Rules were "designed to protect the consumer" and that "it would appear of no great moment" whether they were applied by the Office of Fair Trading or the European Commission. The merits of the proposal rested on the wider question of achieving greater competition in a free market. The Commission was more likely than Member States to seek, and to achieve, such liberalisation (Q 102). This contrasted with the view of Ms Glenda Jackson MP, Parliamentary Under Secretary of State, Department of the Environment, Transport and the Regions, that giving the Commission exclusive decision making power would mean that "the individual Member State's consumers' perception of what constitutes a better service for them" might not be represented in any decision as the "Commission would have to be arguing from the perspective of all 15 Member States" (Q 237).

  56.    In 1987, when the Commission began the process of establishing Europe's single aviation market, it took the approach that competence for the application of the EC Competition Rules to the air transport sector should move in parallel with competence to negotiate traffic rights[20]. Several witnesses were concerned that the Commission was not following a similar approach now. The Government argued that, to date, Member States had not been persuaded that there would be any net gain from EU-wide negotiations with third countries (pp 90-91).

  57.    Lufthansa acknowledged the inherent logic of the proposal but thought that the Commission's powers should only be extended to air services to and from third countries that had implemented a liberal aviation policy with a majority of, but preferably all, Member States and who were willing to negotiate a single bilateral agreement with the EU. This would mirror the approach previously adopted by the Commission when it had sought to liberalise the intra-European market (Q 152).

  58.    British Airways opposed the proposals. They argued that they were not just concerned with the application of the competition rules but that their influence would be extended "to the whole question of aviation relations between European countries and the rest of the world and the respective responsibilities of national governments and the Commission". In their view, "to apply the Commission's competition powers directly to airlines whose activities are governed by air services agreements could create serious conflicts". Such a conflict would arise if a collaborative arrangement between two designated carriers established under the terms of an existing bilateral agreement was subsequently found to conflict with EC Competition Rules (Q 221).

  59.    Ms Jackson also made the point that the United Kingdom Government had a very good prospect in the near future of completing a liberal Air Services Agreement with the United States. If the proposals were accepted "everything would come to a halt and one could conceive of a very long period of time indeed before any such agreement could be reached" (Q 379). In contrast, Virgin Atlantic considered that the benefits of ensuring a strongly competitive marketplace outweighed any additional inconvenience for air services negotiators (pp 53-4).

  60.    Whilst the competition provisions of the EC Treaty in principle apply to Member States with regard to bilateral air services agreements with third countries, the Government argued that the Commission does not have the power to intervene directly in such negotiations in order to enforce compliance by Member States and the Community's external competence did not extend this far (p 90)[21]. Ms Jackson was concerned that the proposals "would enable the Commission to participate in bilateral negotiations with third parties on air services agreements by the back door". As the Council of Ministers had consistently refused to grant a mandate for the Commission to negotiate such agreements with third countries, by approving the proposal the Government would be "ceding powers for which the Commission has not managed to obtain any kind of political mandate from the Council [of Ministers]" (Q 361). This view was echoed by Lufthansa.

  61.    Several witnesses were concerned that the Commission was attempting to push its own political agenda. British Airways thought that all questions involving competition and resource allocation ultimately were political and involved a public interest judgement (Q 229). Lufthansa argued that DG IV's investigations of the various transatlantic alliances (under Article 89) were a lever being used by the Commission to "obtain additional political authority". Applying the same methodology to each alliance irrespective of market size and structure was evidence of a politically driven approach. In order to prevent competition policy being used as a political tool Lufthansa favoured "an independent enforcement authority" along the lines of the German Bundeskartellamt, the German competition authority (Q 152).

Existing and proposed procedures

  62.    Concern was expressed about the limited resources of the Commission, particularly in view of its central role in dealing with the alleged abuses of dominant positions by airlines (Q 213, p 5). The Government also raised the issue of local knowledge in the application of the Competition Rules. By granting exclusive powers to the Commission to apply the Competition Rules "the experience, the expertise, the detailed awareness of the particular market forces which the individual Member State brings to bear" would be excluded (Q 362). DG VII, however, envisaged developing "some mechanism for making use of the expertise which now exists in the Member States" (Q 335).

  63.    Concern was also expressed about the length of time that it took the Commission to investigate complaints of anti-competitive behaviour. The Civil Aviation Authority (CAA) stated that in cases involving allegations of predatory behaviour speed of resolution was of the essence (p 5). British Midland stated that the workload of the Commission, particularly DG IV (Competition), was enormous and that there was "an almost random selection of the cases they want to pursue with vigour". They thought that the Commission, although often effective, took too long to reach a decision and needed to speed up its investigations (QQ 9, 45). Commissioner van Miert expressed the view that the Article 89 procedure currently used by the Commission to investigate competition matters in relation to air transport was unacceptably long, delaying by a year or more any decision. He went on to say that it "creates a very counterproductive opinion that the Commission is dragging its feet" (Q 257).

  64.    DG IV stated that whilst the Commission had the competence to deal with competition matters, it did not "have the enforcement mechanisms and the procedural rules to do [its] work efficiently and effectively". Commissioner van Miert conceded that the Commission did take a long time before it could act and that action might come too late for a new-entrant carrier (QQ 284, 339). But he thought that the proposed Regulation would give it the procedural powers to investigate these matters on a much shorter time-scale. Ms Jackson expressed the counter opinion that "if the Commission was exclusively in charge of such competition procedures, then that process of itself would necessarily lengthen" (Q 374).

  65.    Lufthansa were not convinced that the present arrangements under Articles 88 and 89 were unsatisfactory for either airlines or their customers. In their view the climate of uncertainty about what activities airlines were allowed to engage in, that the Commission had identified as one of the reasons for the proposed change, had been exaggerated. They also thought that the current procedure was not unacceptably costly in terms of time and money. There were definite advantages in retaining the present procedures "until such time as Community-wide air transport agreements are in place". (Q 152)

  66.    Deregulation of the European Union airline industry has produced some fundamental changes in the ways in which airlines behave. The high level of protection provided under tight economic regulation has gone and airlines have found different means by which to protect themselves from competitors. The Commission and other regulatory authorities have had to develop their procedures in response to these market changes, and several witnesses voiced the criticism that the Commission had not always kept abreast of developments. For example, British Midland expressed concern that the Lufthansa-SAS code-sharing alliance on services between Germany and Scandinavia, which had been approved by the Commission, had effectively removed any real competition on these routes. "Some of the earlier arrangements they allowed to go through with relatively simple remedies have not produced the result needed" (QQ 31, 34). Commissioner van Miert acknowledged that in this particular case the remedy, which involved the two carriers freeing up slots if requested to do by a new entrant, had not been entirely effective (QQ 198, 277).

Winners and losers

  67.    Differing views were expressed about which airlines might be likely to benefit or lose under the proposed Regulations. Virgin Atlantic thought that some European airlines remained in existence either "because they have been, and to a large extent still are, protected by their governments" and some form of shake-up of the industry was still needed. They recognised that some of the smaller carriers would go out of business, but hoped that this would happen "because they failed to meet the demands of the marketplace, not because they have been forced out of business by uncompetitive practices". It was competition rather than competitors which needed protection (Q 207). Delta Airlines thought that the less market-orientated carriers "of various Southern European Member States ... who have not embraced privatisation" would be most at risk (Q 53). Lufthansa agreed that it would be the airlines that were "too dependent today on state subsidies or have taken ill-fated commercial decisions" that would lose out (Q 152).

  68.    Lufthansa conceded that some smaller carriers operating within the protective environment of restrictive bilateral agreements could suffer but it was also possible that such airlines could benefit from the greater access that would arise in the event of EU-wide agreements.

  69.    Commissioner van Miert argued however, that many new entrants found it difficult to compete against incumbent airlines and without deep pockets they had little option but to pursue a complementary role as a feeder carrier[22] or franchised operator[23]. "In a few years' time we might well have far less competition than even we have today" (QQ 284-85).

  70.    British Airways argued that as the "UK has a thriving and competitive air transport industry ... second in size only to that of the United States" it "has the most to lose by getting this issue wrong". The proposals, of themselves, would produce no winners except possibly the legal profession because of the confusion that would result (QQ 221, 231). Several witnesses thought that in the event of a bilateral agreement between the EU and the United States "the losers might well be British carriers, because ¼ the market between the UK and the United States is so much larger than the markets from continental countries" (QQ 3, 102, 232). The AUC however thought that any short-term loss to the UK would be outweighed "by the potential long-term benefits of global liberalisation" which could only be achieved by negotiations at a supranational level (Q 102).

  71.    The view that the UK civil aviation industry was widely acknowledged as being the most competitive in Europe received support. British Midland argued that UK air fares "at their current levels are without doubt at the most outstanding value for money for any retail product that you can buy" and the level of competition for leisure travellers was exceptional. By contrast, many domestic air fares in the United States which had been low in comparison to fares charged for journeys of equivalent distances in Europe were now often considerably higher as a result of the demise of many low cost operators (QQ 12, 13, 18).

  72.    The CAA pointed out that during the five years of liberalisation in the European airline market there had been a steady growth in smaller and medium-sized carriers, with a resultant fall in the market share of national carriers. On those routes where significant new entry had occurred air fares had fallen, often dramatically. This was not the case on routes on which national carriers had retained their dominance (p 5).

  73.    While discounted economy fares have generally fallen in real terms across the European Union since deregulation, the same is not true of first class and business class fares, particularly on flights out of the United Kingdom. In the last two years, United Kingdom first class and business class fares rose by around 20 per cent[24]. British Airways stated that first and business class fares were higher between the United Kingdom and the United States than they were between the continent and the United States because of the laws of demand and supply. "Demand for those fares is much higher in the United Kingdom proportionately than it is on the continent" (Q 229). The British Airline Pilots' Association (BALPA) pointed out that in the past the CAA had had some success in dealing with the problem of high business fares through the selective freezing of tariffs (p 1).

  74.    The AUC also believed that European consumers were likely to gain more benefit from European Communities negotiations with third countries than from a continuation of the existing bilateral approach. This was for two reasons: first because Community negotiators "wielding the negotiating power of 15 Member States . . . should be able to win much greater liberalisation than individual Member States could obtain themselves" (a view shared by Lufthansa); and secondly because Member States would be likely to place greater weight on national economic interests than on those of consumers. The AUC did acknowledge that this would not necessarily result in any net gain for consumers in the United Kingdom as any benefits won by the Commission would be shared among the Member States (QQ 104-6).

Harmonisation of competition rules

  75.    Several witnesses raised the potential problem of conflicting competition policies between the Member States and the European Union on the one hand and third countries, for example, the United States, on the other. In the event of a disagreement whose rules would take precedence? British Airways argued that globalisation of the industry underlined "the need to harmonise competition rules and the methods and practices of enforcement as between different jurisdictions". Lufthansa thought that competition policy should be agreed with a third country and that it should not be imposed unilaterally by the Commission. The Council of Ministers should seek to identify the parameters for an external aviation policy which would include the regulation of competition. British Airways argued that negotiations between the EU and the United States about common competition rules and their enforcement should precede any discussions concerning a common aviation area (Q 153, 221).

20   See paragraph 44 for a definition of traffic rights. Back

21   The capacity to regulate relations with foreign countries, to conduct international relations and enter into binding international obligations is commonly referred to as the "external competence" of the Community. It contrasts with "internal competence" which is the power of the Community to lay down internal rules which are binding on Member States and on individuals and firms. The extent of the Community's competence in transport matters was considered by the Court of Justice in Opinion 1/94, [1994] ECR 5267. Back

22   A feeder carrier is an airline which feeds passengers into another (usually larger) airline's route network at the latter's operational hub. Back

23   A franchise operator is an airline which operates services on behalf of another airline using its own aircraft painted in that other company's livery and carrying its designator code (see paragraph 47). Back

24   1998 European Corporate Travel Index, American Express Corporate Services. This figure applies to the period from second quarter 1996 to second quarter 1998. Back

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