Select Committee on European Communities Minutes of Evidence

Memorandum by the Department of the Environment, Transport and the Regions


  1. This evidence should be read in conjunction with the Explanatory Memorandum submitted to the Scrutiny Committees by the Department of the Environment, Transport and the Regions on 8 September 1997.

  2. Articles 85 and 86 of the EC Treaty set out the Community's rules on competition. Existing Regulations (3975/87 and 3976/87 (as amended)) apply these rules to intra-EC/EEA air services, entirely between or within Member States. They do not apply to extra-EEA air services. The Commission has now proposed two Regulations which would in effect extend the scope of the existing Regulations to cover extra-EEA air services.

  3. Until Regulations applying the rules to extra-EEA air services are adopted, both Member States (under Article 88) and the Commission (under Article 89) have powers to investigate the competition aspects of extra-EEA air services. However, only Member States have powers to grant exemptions from the competition rules set out in Article 85. If the proposed Regulations were adopted, the Commission would have the sole right to investigate and to grant exemptions in future cases under EC competition law.


  4. Historically, the provision of air services to third countries has been negotiated on a country-to-country basis. This system of bilateral agreements continues to govern much of international aviation, but aviation services within the European Community are a major exception. With the adoption of the so-called "First Package" of liberalisation measures in 1987, the Community began to move towards establishing a single aviation market. At the same time, the existing Regulations were adopted, to provide common competition rules for the services covered by the new liberalising measures, i.e., air services between Member States. When the single market was completed with the adoption of the "Third Package" in 1992, which opened up domestic air services within individual Member States ("cabotage") to all Community carriers, the Regulations were amended to extend the scope of the common competition rules to those services too. There has therefore always been a parallel between the scope of the Community's aviation rules and the scope of the Regulations applying the competition provisions of the Treaty to the air transport sector.

  5. It should be noted that the Commission presented proposals in both 1981 and 1989 which would have brought services to third countries within the scope of procedures for applying the competition rules, but on both occasions, Council declined to give its support.


  6. The Government believes that competence for the application of the Community's competition rules to the air transport sector should move in parallel with competence to negotiate traffic rights. The adoption of Community legislation has until now followed that path, with the application of competition rules first to air services between Member States and then to services within Member States mirroring the gradual development of the single aviation market.

  7. In the present state of Community law, the Community does not have exclusive competence to negotiate air services agreements with third countries. Should the Council at some point in the future authorise the Community to conclude air services agreements with third countries generally, or with a major third country such as the US individually, it might be envisaged that the sole power to enforce the Community's competition regime in the markets in questions should transfer to the Commission at that time. The Government believes that for as long as Member States retain competence for negotiating bilateral air services agreements, they should also retain competence for the application of the Community's competition rules to the services covered by those agreements. It should of course be borne in mind that Member States' competence in this area is not exclusive; it runs in parallel with Commission competence by means of dual arrangements set out in Articles 88 and 89 respectively, as evidenced by the current investigations into the proposed British Airways/American Airlines alliance.

  8. Member States have declined to cede competence to the Community for negotiating the generality of air services agreements with third countries. In particular they have resisted sustained pressure from the Commission to grant the Commission a mandate to negotiate traffic rights with the United States. Member States have not been persuaded that they would obtain added value from negotiations at Community level compared to continuing to negotiate bilaterally. The Commission's present proposals on the application of the competition rules would widen the Commission's scope to intervene where a conflict arose between the competition rules and a Member State's bilateral agreement with that third country, or between the competition rules and the competition regime of that third country. In the Government's view this would be tantamount to the Commission securing a measure of competence with regard to external aviation relations by the back door which it has been unable to achieve by obtaining a mandate.


  9. In response to the five specific questions posed by the Sub-Committee, the Department for the Environment, Transport and the Regions has the following comments:

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

  10. The Department has already indicated its view that the application of the Community's competition rules to the air transport sector should move in parallel with the competence to negotiate traffic rights. The Department therefore believes the scope of the current regime to be appropriate.

  11. Regarding the practical arrangements under which the Community's competition regime operates with regard to services inside the internal market, the Department would identify two principal weaknesses. First, there is scope for greater transparency surrounding the administrative procedures, though once the Commission has decided to open proceedings following an initial complaint, the Department believes a fair balance is generally maintained between the conflicting claims of transparency and the need to protect commercial confidentiality.

  12. This point links to the Department's second concern: the speed of the regulatory process. It is not unusual for parties to have to wait for several months before knowing whether their case will be heard formally, and even then the process moves slowly. As the case brought by easyJet against KLM in October 1996 demonstrated (Case IV/36.240), even when there is an application for interim measures, (in that case because of alleged predatory behaviour), the Commission may find it difficult to respond with a speed appropriate to the nature of the alleged offence and, if proven, its possible commercial consequences. While appreciating the need for robust analysis of complaints, and the resource constraints under which the Commission operates, the Department believes that such delays may call into question the effectiveness of the regulatory regime.

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?

  13. It should be noted that the proposal itself would not permit the Commission to negotiate bilateral agreements with third countries. It would, however, grant the Commission a more significant role in the negotiation of bilateral agreements between individual Member States and third countries by giving it more scope to intervene when conflicts emerge between those bilateral agreements and the Community's competition rules. At present, the Commission has to rely on the provisions of Article 169 of the Treaty which, in practice, restrict its ability to intervene before the formal conclusion of a bilateral agreement by a Member State.

  14. Formal negotiation by the Commission of a multilateral Community-level air services agreement with a third country would require an explicit mandate from the Council, following a proposal from the Commission. To date, the Commission has obtained mandates from Council for three sets of aviation negotiations: with Norway and Sweden (which were subsequently subsumed by the agreement establishing the European Economic Area and, in the case of Sweden, its accession to the Community); with Switzerland; and with ten Central and Eastern European countries (Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia, Slovakia). The Commission has also been granted a mandate to hold limited exploratory talks with the US, but has no authority to negotiate on "hard rights" i.e., market access, capacity or fares). In every case where the Commission has been given authority to negotiate a comprehensive agreement, the practical effect has been or would be, to extend the single European aviation market to countries bordering on the Community. All of these, with the exception of Switzerland and Norway, are also applicants for full accession to the Community. Negotiations with geographically distant third countries such as the US raise different considerations.

  15. The Department assumes that the question of phasing refers to the nature of the agreement between the Community and a particular third country. In this respect, the Department would point to the Commission's current proposals for a "dual-track" approach to aviation negotiations with the US. This envisages that while the Commission would negotiate on a comprehensive EC/US agreement, Member States would still be able to conclude bilateral agreements, with the aim that these would eventually converge into the multilateral regime at an agreed future date. Discussion of these proposals has already uncovered a number of technical weaknesses and uncertainties that suggest this process is not likely to form a viable basis for EC/US aviation relations. The Department believes many of the same considerations would apply to a similarly phased approach to aviation negotiations with other third countries.

  16. There are, of course, other ways in which a phased approach could be achieved. For example, a multilateral agreement could begin by including only flights within and between the Community and a third country, with so-called "beyond rights" reserved for a later phase. Given the many different levels of market access which can be defined, the Department is unable to give a blanket answer to this question: each case would need to be assessed on its merits. In general, however, the UK would seek to secure the same high level of liberalisation in any Community-level agreement that it currently tries to achieve through its bilateral negotiations.

  17. If the question refers instead to the generality of negotiations with third countries world-wide, it is most probable, on the grounds of resource implications alone, that the transition from a system of Member State bilateral agreements with third countries to a multilateral Community-level regime could be achieved only gradually. In any event, it should be noted that there are only a limited number of markets in which there might be any prospect of Member States obtaining added value from a multilateral agreement. Broadly, these are the large trading blocks whose size is commensurate with that of the Community: for example, (in addition to the US), Japan, the ASEAN countries, and possibly Australasia. A series of inter-regional agreements would be a more likely scenario than an accumulation of agreements with individual third countries.

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?

  18. It should be noted that the proposal itself would not permit the Commission to negotiate on behalf of Member States a single bilateral agreement with each third country. However, the general procedure for Community-level negotiations with third countries is set out in Article 228 of the EC Treaty. This provides, inter alia, for a Special Committee of Member State representatives to assist the Commission in its negotiations, which take place within a general framework laid down by the Council. In addition to complying with Article 228, it would also be necessary to ensure that industry interests are taken fully into account in preparing for multilateral negotiations with third countries, as is currently the case with bilateral talks.

  19. In principle, a Community-level agreement with a third country could be based only on a liberal mandate (i.e., one which would secure a free regime broadly analogous to that which now applies within the single European aviation market), since a protectionist mandate (i.e., one which would envisage limitations on market access) would necessitate the division of restricted traffic rights among Member States, a scenario which is difficult to envisage. But in practice, the effects on European airline competition of a single Community-level bilateral agreement with a third country would depend largely on the identity of the country concerned and the nature of the traffic rights granted by the agreement. Traffic patterns between individual Member States and individual third countries vary enormously: e.g., about 40 per cent of total EC/US traffic is carried between the UK and the US, while the next largest Member State, Germany, has less than 20 per cent of the total market; and smaller third countries may have direct services to and from only a few European Union member States. The main change from a bilateral to a multilateral regime might involve the replacement of national designation by a Community designation, which would have the effect of opening up bilateral arrangements to competition from within the Community (e.g., in the context of an EC/US agreement, a German carrier would be able to fly between London and New York, conversely, a British carrier would be able to fly between Frankfurt and Washington). It is difficult to assess how much use carriers would in practice make of these opportunities, and hence the effect on competition. If the development of the Community aviation market provides any guide, there might be increased competition on the densest routes, but carriers may be reluctant to operate routes which do not link into their existing network. Much would depend on the size of a particular market, the extent to which hub carriers dominate major airports, and the state of airline alliances. A Community-level agreement might also involve the removal of nationality-based restrictions on ownership and control of airlines in favour of the more liberal arrangements that now apply in most other sectors of the economy.

What effect would the harmonisation of future bilateral agreements between Member States and third countries have on airline competition?

  20. It is assumed this question refers to the possibility that, rather than authorising the Commission to negotiate a new multilateral agreement, Member States should endeavour to secure the same effect by harmonising their existing bilateral agreements with third countries along agreed lines.

  21. This does not appear to us a practical route for achieving a Community-level agreement with third countries. Member States' bilateral agreements with any given third country may vary significantly, as will the relative negotiating weight of the two parties, depending on the nature of the market concerned. Because one Member State is able to achieve a particular Community objective, it does not necessarily follow that all other Member States will be able to do likewise. Seeking to establish a multilateral regime by this method would also have significant resource implications for the Commission, which would in effect be required to attend all bilateral negotiating sessions between Member States and third countries.

  22. Assuming the same underlying objectives applied, we would expect the overall effect on airline competition to be the same as if the multilateral route were followed.

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

  23. The proposals will not themselves resolve differences in economic regulation and competition rules between Member States and third countries.

  24. The principal effect of the proposals would be to transfer sole competence to the Commission for the application of the Community's competition rules on routes to third countries, removing from Member States the primary role they exercise at present. The change is thus not one of the competition regime itself, i.e., Articles 85 and 86 of the EC Treaty, but of the procedures and responsibilities for implementing the relevant provisions of those rules, including granting exemptions. Should the Commission's proposals be adopted, any conflicts which currently exist between the Community's competition regime and those of third countries will therefore remain, though they would become the subject of consultation in certain circumstances. The application of the competition rules would also cause problems where bilateral agreements, which require negotiation with a third country, are themselves restrictive. Other differences in economic regulation would not be affected.

June 1998

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