Select Committee on European Communities Minutes of Evidence

Memorandum by the European Commission

  The following questions have been made concerning the Commission proposals:

1. Paragraph 17 of the Government's EM states that bilateral agreements "may not be compatible with the competition rules in Article 85 and 86 of the Treaty." Given that Articles 85 and 86 relate to the activities of "undertakings" (i.e., airlines), how does this incompatibility arise?

  As indicated in reply to question 5, the Commission initiated infringement proceedings pursuant to Article 169 of the EC Treaty against bilateral agreements concluded by some Member States with the United States.

  The infringement actions were started because the Commission considers that these bilateral agreements were concluded in breach, in particular, of Articles 5 and 52 of the EC Treaty and of secondary legislation adopted in the air transport sector creating the internal market in aviation.

  The legal actions of the Commission do not rely on the competition rules of the EC Treaty, Articles 85 and 86. These two provisions relate to the activities of undertakings. However, airlines operating between EU Member States and third country, frequently do so in accordance with so called "commercial agreements" entered into with the other operators on the route concerned. Often, those commercial agreements implement provisions in the bilateral air service Agreement concerned. Some of these provisions may restrict competition on third country routes and thus infringe Articles 85 or 86.

  Examples of provisions in commercial agreements between airlines that are most likely to fall within the scope of Article 85, include those which relate to:

    —  sharing of capacity between the airlines party to the agreement;

    —  consultation or agreement on schedules for each season;

    —  pooling of revenues frequently involving the sharing of revenues in proportion to the capacity mounted by each carrier;

    —  arrangements whereby certain routes are operated jointly.

  Unless such provisions fall within a block exemption or if not, are individually notified to the Commission for an exemption and the Commission grants such exemption, they are void and unenforceable and may lead to the Commission fining the airlines concerned.

  It is to be underlined that by its second proposal, the Commission is proposing that it be given the power by the Council to adopt a block exemption applicable to arrangements affecting international air transport between the EU and third countries. If that proposal is adopted, the Commission would then adopt a block exemption which would automatically exempt a number of key aspects of commercial agreements summarised above. Such a block exemption covering third country routes would be the counterpart of Council Regulation 1617/93 whose scope is limited to intra-EU routes.

  The second proposal of the Commission envisages a block exemption being granted to the joint planning and co-ordination of capacity and revenue pooling. These activities are beyond what is allowed for in the current block exemption applicable to intra-EU air transport, Regulation 1617/93. They have been inserted to give the Commission the possibility of exempting anticompetitive behaviour frequently found in commercial agreements entered into under bilateral Air Service Agreements.

  In circumstances where the airlines concerned have entered into a commercial agreement containing provisions that infringe Article 85(1) and do not benefit from a block exemption then there may be a conflict between what is required of the airlines by the governments at each end of the route and by EC competition law. In such circumstances, the Commission is proposing that Regulation 3975/87 be amended to insert a new Article 18a to deal with such conflicts of law (a similar provision exists in Article 9(1) of Regulation 4056/86 on maritime transport). It is envisaged that if the Commission considers it appropriate to withdraw the benefit of a block exemption from a specific agreement (because, for example, the agreement nevertheless has effects incompatible with Article 85(3) or is prohibited by Article 86) then, if that situation results from "provisions laid down by law, regulation or administrative action of a third country or from the provisions of an air service agreement between a Member State and a third country", the Commission must, before withdrawing the benefit of the block exemption apply Article 18a of Regulation 3975/87 and hold "consultations with the competent authorities of the country concerned".

2. Paragraph 18 of the Government's EM goes on to say that "Bilateral Air Services Agreements are entirely a matter for the Member State and third country concerned." To what extent do the Treaty and its competition rules restrain Member States' freedom of action? In particular, having regard to Articles 5, 88 and 90 of the EC Treaty and the general principles of Community law, to what extent it is permissible for Member States to conclude bilateral agreements which might include provisions that may not be compatible with Articles 85 and 86?

  As indicated in the reply to question 1, the Commission has not challenged so far the legality of bilateral agreement with regard to Articles 85 and 86 of the Treaty.

  However, the taking of any such action on the Commission's part would be possible as a matter of EC law.

  In the case of a commercial agreement concluded by airline operating on third country routes which would be considered to restrict competition and to infringe Article 85(1) whilst having been entered as a result of a bilateral agreement, the Commission would also be entitled, subject to Article 234 of the EC Treaty, to take infringement proceedings against any Member State party to such bilateral agreement which encouraged or required the airlines concerned to infringe Article 85 and/or Article 86 under the case law of the European Courts relating to "effet utile" and the binding obligations imposed on Member States under EC law resulting from the combined effects of Articles 3(g) and 5 of the EC Treaty read together with Articles 85 and 86.

  Member States which conclude bilateral agreements including provisions which are incompatible with Articles 85 and 86 could be considered as breaching EC competition law and could face infringement proceedings.

3. To what extent does the Community already have external competence in civil aviation matters?

  As shown by its legal action against certain bilateral agreement which is described in some detail in the reply to question 5, the Commission believes that by individually negotiating and concluding open skies bilateral agreements with third countries, which falls within exclusive Community competence, the Member States concerned breach the EC Treaty. The bilateral agreements affect the aims, scope and functioning of the internal aviation market as established under the complete set of common Community rules creating the internal market in aviation. In accordance with the AETR judgment of the European Court of Justice[1] as confirmed in the Court's Opinions 2/92 and 1/94, Member States are no longer able to undertake obligations with third countries which affect those internal rules and which create discrimination and distortion of competition.

4. How would the Community's competence be extended if the proposed Regulations were adopted by the Council? (In this context, the Sub-Committee notes that the Commission already has certain procedural powers under Article 89.)

  At present, Council Regulation 3975/87 lays down rules for the application of Articles 85 and 86 of the EC Treaty to air transport and gives the Commission the necessary procedural powers to investigate cases and make competition policy decisions. The scope of the Regulation is, however, limited to air transport services between airports within the Community.

  The consequences of this situation for air transport services on Community-third country routes are the following:

    —  The Commission does not have the power to adopt block exemption regulations which satisfy a genuine need for legal certainty on the part of air carriers,

    —  The Commission lacks the procedural rules necessary to apply effectively Articles 85 and 86 (for instance the Commission does not dispose of direct investigating means as the power to send formal request for information or to carry investigations and cannot fine the undertaking for infringements of EC competition rules). Instead, the Commission is obliged to resort to Article 89 of the Treaty when it investigates airlines alliances linking the Union with third countries as the USA,

    —  Article 89 was clearly foreseen as a transitory regime by the EC Treaty and unlike the applicable Council Regulation does not grant the Commission any powers to enforce the competition rules itself. The Commission can reach conclusions following its investigations but has to rely on the Member States concerned to implement them.

    —  The Member States have parallel powers under the current regime to initiate a procedure under Article 88 of the Treaty. A dual examination of the same agreement by the Commission and one or more Member States as it is the case with some of the alliances currently examined by the Commission is not only costly and time consuming but also a source of great legal uncertainty for airlines which run the risk of being the subject of conflicting decisions by those authorities.

  So, although Article 89 gives the power to examine international alliances, in procedural terms, its application is cumbersome, time consuming and confers less effective direct powers on the Commission than the corresponding Council Regulation.

  By submitting its two proposals, the Commission only wants to receive an adequate procedural instrument to allow it to enforce directly and in a more efficient way the EC competition rules. The Commission is not asking for new external competence. That is not at all the purpose of the Commission proposals.

5. On what grounds is the Commission, as reported in the media, bringing infringement proceedings against certain Member States for negotiating agreements with third countries?

  The infringement proceedings initiated by the Commission in March 1998 concern some bilateral agreements, the Open Skies agreements concluded after 1992 with the USA by some Member States and the 1977 Bermuda II agreement existing between the United Kingdom and the US.


(A) Open skies agreements already concluded

  The US has already concluded bilateral open skies agreements with the following Member States: Germany, Austria, Belgium, Denmark, the Netherlands, Sweden, Finland and Luxembourg.

  In the first three cases, the agreements were signed concurrently with the grant of antitrust immunity by the US authorities to the following alliances:

    —  KLM/Northwest,

    —  Sabena/Austrian Airlines/Swissair/Delta Airlines,

    —  Lufthansa/United Airlines and SAS/United.

  As far as the US authorities are concerned, the authorising of an alliance is conditional on the conclusion of such an agreement.

  None of these agreements confers rights on Community airlines who do not belong to the relevant Member States. So for instance, under the open sky agreement concluded between Germany and the United States in May 1996, only German airlines can serve any point in the US from any point in Germany and vice versa.

(B) United Kingdom/United States bilateral agreement on air transport

  The conditions under which airlines may provide services between the United Kingdom and the United States are laid down in the UK/US bilateral agreement known under the name of Bermuda II, the main provisions of which are as follows:

    —  The British regional airports as well as Stansted and Luton may be served from any US airport, without restriction as regards the number of carriers who may operate or the number of frequencies; in the case of services from London Heathrow and London Gatwick, however, the agreement lays down a fixed list of airports in the US which may be served. Each party may also choose an optional list of airports which may change over time.

    —  No rights are granted under the agreement to Community carriers not belonging to the Member State concerned.

    —  A second list specifies the services which may be provided from Heathrow and those which may be provided from Gatwick or Stansted. At all events, a maximum of only two airlines of each party, for the UK side, British Airways and Virgin Atlantic, may operate at Heathrow. As a rule, where annual traffic on a route is less than 600,000 passengers, each party may designate only one airline. On each route out of London, the number of frequencies which each airline may operate is limited, and fares must be approved by both governments.

    —  The UK authorities have informed the Commission that they envisage changing the Bermuda II agreement in the direction of greater liberalisation. The restrictions on access to routes between Heathrow and the US would be removed, and airlines would be able to set their fares freely, subject to the rules of fair competition. UK airlines would thus be free to serve US airports freely from the UK, and US airlines would have the same rights in respect of services between the US and the UK. However, only American and British airlines would enjoy these rights.


  The Commission has started an infringement action under Article 169 of the EC Treaty. Under this provision, legal proceedings may be brought by the Commission against a Member State which fails to fulfil an obligation under the EC Treaty or the law derived therefrom.

  The Commission takes the view that open skies bilateral agreements of this kind are contrary to Community law, and in particular to the requirements laid down in Articles 5 and 52 ("freedom of establishment") of the EC Treaty and in the secondary legislation adopted in the air transport sector creating the internal market in aviation, and has accordingly initiated proceedings against the Member States concerned for failure to fulfil their obligations by sending them a reasoned opinion.

  For the United Kingdom, the reasoned opinion is restricted to a breach of Article 52 contained in the air carrier designation provisions of its 1977 Bermuda II Agreement which is not an open sky Agreement of the type concluded by the other Member States concerned.

  If no satisfactory settlement is reached after the sending of the reasoned opinions, an action may be brought by the Commission in the European Court.



  "Member States shall take all appropriate measures, whether general or particular, to ensure fulfilment of the obligations arising out of this Treaty or resulting from action taken by the institutions of the Community. They shall facilitate the achievement of the Community's tasks.

  They shall abstain from any measure which could jeopardise the attainment of the objectives of this Treaty."


  "Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be abolished by progressive stages in the course of the transitional period. Such progressive abolition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.

  Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 58, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital."


  "If the Commission considers that a Member State has failed to fulfil an obligation under this Treaty, it shall deliver a reasoned opinion on the matter after giving the State concerned the opportunity to submit its observations.

  If the State concerned does not comply with the opinion within the period laid down by the Commission, the latter may bring the matter before the Court of Justice."

1   Under Articles 85 and 86. Back

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