CHAPTER 2:dealing with the European
Court of Justice
Judgments of 5 November
38. The European Court of Justice decisions deal
only with two specific areas covered by existing ASAs. The Court
(a) "nationality" restrictions infringe
Article 43 of the TEC; and
(b) "open skies" agreements with the
US (but not the UK/US ASA known as "Bermuda 2") cover
issues within the exclusive competence of the Commission, such
as fares on intra-EU routes and provisions relating to computer
The Commission's View of the Judgments
39. The Conclusions of the Commission's Communication
of 9 November 2002 read as follows:
"The judgments of the European Court of Justice
of 5 November 2002 on the so-called "open skies" cases
against eight Member States, not only have implications for the
eight specific agreements with the United States but also for
existing bilateral aviation agreements between Member States and
other third countries and for any future negotiation of bilateral
air service issues."
"According to Article 10 of the Treaty, Member
States shall take all appropriate measures, whether general or
particular, to ensure fulfilment of the obligations arising out
of the treaty or resulting from action taken by the institutions
of the Community."
"Moreover, as the Court found in the judgments
of 5 November 2002, in the case of an infringement stemming from
an international agreement Member States are prevented not only
from contracting new international commitments, but also from
maintaining such commitments in force
in the light of the foregoing considerations,
the Commission has requested the eight governments directly concerned
by the judgments to activate the provisions for denunciation contained
in their agreements with the United States in order to ensure
at the earliest possible date compliance with the judgments of
the Court of Justice."
"The Commission has also requested the remaining
seven Member States to activate the provisions for denunciation
contained in their agreements with the United States in order
to ensure compliance of their agreements with Community law and
to avoid the necessity to pursue further infringement procedures."
"More generally, the Commission has asked all
Member States to refrain from making international commitments
of any kind in the field of aviation before having clarified their
compatibility with Community law."
"Finally, in order to take the first step forward
in this area, the Commission has urged the Council of the European
Union to agree a mandate as soon as possible for negotiations
to replace the existing bilaterals with the United States with
an agreement at Community level."
40. The European Commission argues that only
it has the competence to remedy the infringements in existing
ASAs. When the Community has or acquires an internal competence,
the application of that competence externally is for the Community
alone (see Appendix 6). This is a view supported by many witnesses.
Subsequently, the Commission, in its first Communication on the
judgments, asked Member States:
(a) to denounce their ASAs with the USthat
is to say, to give the requisite notice of termination; and
(b) to give the Commission a negotiating mandate
in all areas including some where it has no current competence,
for example traffic rights.
41. These were ambitious demands. There is no
doubt that the infringements identified by the ECJ in existing
ASAs have to be removed. Some witnesses stated that Member States
were obliged to do this themselves and had the right to do so
bilaterally. The argument in this instance between Member States
and the Commission is: who should make the changes?the
Commission (on a mandate), the Member States themselves, or both.
The United States Response
42. The United States government has expressed
a willingness to modify its ASAs bilaterally with EU Member States.
(For a fuller account of the US position, see Chapter 4 and Appendix
7.) However, it should be noted that in the first instance the
United States government made this offer specifically to those
EU Member States that have signed "open skies" agreements
with the United States, and circulated a new text to replace the
existing ownership article. This would allow designation of any
airline having its "principle place of business" in
the designating state. However, this proposal has not been made
formally to the United Kingdom.
It was also pointed out to the Committee while it was in Washington
that EU airlines from Member States that have signed "open
skies" ASAs with the US already have rights granted by the
US (fifth freedom) to fly from other EU states to the US. It is
EU Member States that are currently preventing airlines from doing
this by not granting fifth freedom rights to the USA to other
Position of EU Member States
43. Although all EU Member States' Civil Aviation
Authorities were invited to submit evidence to the Committee,
only the German authorities gave evidence (see paragraph 34 below).
Member States have been considering collectively how to respond
to the Commission's two Communications. According to the Government,
there appears to be a general reluctance on the part of Member
States to accept that the Commission's interpretation of the judgments
necessarily excludes Member States from remedying the breaches
of Community law themselves. The Council has still to adopt a
common position on the matter. The subject was discussed at the
27 March Transport Council when it emerged that "most Member
States were willing to give the Commission a mandate but only
in return for greater certainty over future arrangements for the
negotiation and implementation of bilateral agreements in the
light of the recent judgment of the European Court of Justice.
The Presidency concluded that work would continue with a view
to reaching agreement in June".
44. The Committee received evidence from the
German Civil Aviation Authority (Bundesministerium Für Verkehr,
Bau, und Wohnungswesen (BMVBW)). In a covering letter, Dr Thilo
Schmidt, Deputy Director General, wrote:
"in my view, the ECJ's judgments form a solid
basis to shape the external aviation relations with non-EU countries
in the spirit of close co-operation of the Community institutions
involved in the field of international civil aviation"
And in the body of the evidence, the BMVBW states:
"as regards infringements which are founded
in commitments affecting the Treaty (article 43) it appears to
be difficult, although not impossible, to bilaterally agree with
the other contracting party on adequate remedial action. In this
respect a common approach by all Member States concerned appears
to be indispensable in order to ensure conformity with the Treaty.
In our view, consent by the European Commission is also required
in addition to agreement by the other contracting party."
This careful wording introduces a nuance and seems
to suggest that while Member States will have to address the specific
requirements of the Court, they should do so jointly and in association
with the Commission. However those who would wish to deny the
Commission a role in dealing with the ECJ judgments stress that
those States that have been found wanting are "obliged"
to amend their ASAs. In other words, they argue that the Court
effectively placed the onus on the Member State.
According to some witnesses, alliances between EU and US airlines
might lose their US anti-trust immunity if "open skies"
agreements were denounced.
However, this view of possible US reaction was not supported
by the US authorities during the Committee's visit to Washington.
Position of the United Kingdom
45. The position of the United Kingdom Government
is notably cautious and for good reason:
"The UK Government is clear, however, that the
judgment does not go so far as to preclude Member States from
negotiating bilateral agreements, provided these comply with relevant
provisions of Community law."
"we recognise that we should secure agreement
from our aviation partners to effect appropriate changes to nationality-based
designation clauses in existing aviation bilateral agreements."
"There are many issues
on which Member
States will want to reach an understanding with the Commission
in the light of the Court verdict. These include the question
of to what extent existing bilaterals with the US may remain in
force pending the conclusion of Community level negotiations and
also to what extent Member States may continue to negotiate, or
at least update, bilaterals with the US during the period of Community-level
The United Kingdom Government is currently attempting
to persuade bilateral partners to accept a clause of its own devised
to take heed of the ECJ judgments (see box 4).
Views of the Airlines
"I believe last November's judgment of the European
Court of Justice offers a great opportunity to modernise the arcane,
indeed the archaic, regulation of the aviation industry
hope, therefore, that this Committee's report will be able to
provide clear guidance to the British Government and the European
Commission on how to use this opportunity to normalise our industry."
46. So said Mr Andrew Cahn, Director of Government
and Industry Affairs, British Airways, when presenting oral evidence
to this Committee on 10 February 2003. The Committee found this
position surprising. British Airways has a commanding position
at Heathrow; in any negotiation led by the Commission, it might
well find this position threatened. BA's response is that having
survived in an intensely competitive United Kingdom domestic market,
the airline was confident that it could survive in a liberalised
environment, particularly when the block on ownership and control
In supplementary written evidence, British Airways proposed that
Member States give a mandate to the Commission to negotiate on
behalf of the Community, and that negotiations be phased. Its
reasons for agreeing a mandate are that:
"since the Community has more power as a negotiating
bloc than individual states and has the competence to propose
changes to some of the existing restrictive European Regulations,
an EU-led US negotiation is more likely to achieve the whole package
than Member States on their own."
Turning to how the negotiation might proceed, BA
"the body of the negotiation including the hard
rights inherent in an open skies
deal must necessarily remain as a coherent whole in order to exercise
the requisite leverage on the US to provide for access to the
hinterland. However, there are shorter and longer-term issues
which can be discussed in separate phases in order to facilitate
the progress of the overall negotiation. Our suggested phasing
model is as follows:
phase: right of establishment; issues of Community competence;
overall shape of deal; and timetable;
phase: open skies
including liberalisation of routing and traffic rights; pricing
freedom; code-sharing, "Fly America" restrictions removed;
wet leasing restrictions eased; foreign ownership limit raised
to 49 per cent and then to 100 per cent (legislative changes needed);
consecutive and free standing cabotage (legislative changes needed)."
47. This division into two phases and, in effect,
two mandates, coincides with the views of the Committee, namely
that the first mandate should be to put right the issues that
have appeared as a result of the ECJ judgments of 5 November 2003
and a second mandate would cover the restrictions that currently
impede the operation of a fully liberalised Trans-Atlantic Aviation
Area recognising that this will require legislative changes in
the United States.
48. Virgin Atlantic, too, foresee a phased agreement,
but recognise the ECJ Judgments of 5 November 2002 as the lever
to bring about a fully liberalised aviation market, and to expand
a Trans-Atlantic Common Aviation Area to embrace countries such
as Australia, Singapore and Canada.
"Virgin Atlantic has consistently over many
years campaigned for the removal of
the archaic rules which
still apply to international aviation
the current rules which
we are forced to operate under have resulted in an artificial
industrial structure which is not in the interests of the industry
anymore than it is in the interests of the consumer. The decision
of the European Court of Justice in our view provides a real opportunity
to achieve the goal we have been seeking for a long time."
49. Contrary to British Airways' concept of phased
negotiation, Virgin Atlantic envisage tackling the "hard
rights""to include liberal ownership control
and cabotage rights"in the first phase, and is remarkably
optimistic about the time required to achieve it. But Virgin Atlantic
also recognise that full liberalisation will require legislative
changes both in Europe and in the United States which would take
time. It therefore regards such issues as falling into a second
phase. The third phase, which British Airways describe as "ongoing",
would deal with "soft rights" e.g. competition policy,
environmental issues etc.
Virgin Atlantic's interest in dealing with ownership and control
and cabotage issues in a first phase reflects its global strategy.
For example, Virgin set up an airline in Australia when the Australian
domestic market was de-regulated, and told the Committee that
it would wish to do so in the United States.
Virgin Atlantic subsequently announced plans to set up a US company
even though it will be limited to 25 per cent of the voting shares.
BMI British Midland
50. The position of the third major United Kingdom
carrier, BMI British Midland, was at odds with that of BA and
Virgin Atlantic. BMI British Midland argued that the willingness
of those two airlines to support a mandate for the European Commission
was based on a cynical awareness that this would take considerable
time, during which the existing UK/US ASA would preserve their
status at Heathrow. BMI British Midland argue, however, that multilateral
liberalisation "should result in the opening up of competition
in all Member States" in the long-term, "but in the
short-term it is clear that the difficulties and the complexities
of the EU negotiating with the US mean that it is likely to take
significantly longer to achieve that liberalisation than if, for
example, the United Kingdom Government was encouraged in the next
few months to attempt to negotiate a deal with the Americans that
would allow us allindeed it would not be us, it would be
a third national carrier of EU nationalityto fly from Heathrow
to the US".
51. BMI British Midland's position may well be
coloured by its relationship with Lufthansa (which owns 30 per
cent of BMI British Midland and already enjoys the benefits of
a US "open skies" ASA) and because BMI British Midland
is also seeking to persuade the Government to obtain a Heathrow/US
route in exchange for concessions for the US cargo carrier FedEx
on services from the United Kingdom to Europe (see paragraph 95).
KLM Royal Dutch Airlines
52. In its written evidence to the Committee,
KLM Royal Dutch Airlines argued that in those areas affected by
the ECJ judgments, changes could only be made by the Commission
which had sole competence. On the issue of Article 43 of the Treatythe
"nationality" clauseKLM stated that
"in order to enable the Member States to rectify
this inconsistency, the Commission must supply to the Member States
language which provides for conformity with Article 43 of the
This is a subtle point: it does not specify whether
Member States should negotiate bilaterally to a Commission text
or whether Member States act in coordination with the Commission.
53. On the question of a general mandate, KLM
Royal Dutch Airlines argues that the present bilateral system
is both inefficient and outdated, and that, "the development
of the European air transport industry (including the United Kingdom
air transport industry) would be best helped along by a coordinated
EU-broad approach." This formulation, however, falls short
of recommending that Member States grant the Commission a negotiating
Association of European Airlines
54. In written evidence to the Committee the
Association argues that,
"we believe the Member States are entitled to
renegotiate in such a manner as that there will be clauses that
satisfy the requirements of legal experts both of the Commission
and of the Member States involved".
In other words, AEA did not consider it necessary
to grant the Commission a specific mandate to negotiate the remedies
to the problems identified in the ECJ Judgments. The AEA's concern
appeared to be that whatever was required of the eight Member
States to bring them into compliance with the requirements of
the Court, the Council should decide at a political level whether
a mandate should be granted to the Commission to negotiate on
behalf of all Member States. The AEA seemed particularly anxious
to break any implicit link between the ECJ decisions and the requirement
to change the existing pattern of ASAs.
Revised Ownership and Control"nationality"Clause to Take Account of the ECJ Judgments of 5 November 2002
Designation and Authorisation of Airlines - Principal place of business version
(1) Each Contracting Party may designate in writing to the other Contracting Party one or more airlines for the purpose of operating the agreed services on the specified routes and may withdraw or alter such designations.
(2) On receipt of such a designation the other Contracting Party shall, subject to the provisions of paragraphs (3) and (4) of this Article, without delay grant to the airline or airlines designated the appropriate operating authorisations.
(3) The aeronautical authority of one Contracting Party may require an airline designated by the other Contracting Party to satisfy that authority that it is qualified to fulfil the conditions prescribed under the laws and regulations normally and reasonably applied to the operation of international air services by that authority in conformity with the provisions of the Chicago Convention.
(4) Each Contracting Party shall have the right to refuse to grant the operating authorisations referred to in paragraph (2) of this Article, or impose such conditions as it may deem necessary on the exercise by a designated airline of the rights specified in Article 3(2) of this Agreement, in any case where:
(a) Country X is not satisfied that the said airline:
i) is incorporated and has its principal place of business in the territory of a Member State of the European Union or of an European Free Trade Association State party to the Agreement on the European Economic Area; and
ii) holds a current Air Operator's Certificate issued by the aeronautical authority of a Member State of the European Union or of an European Free Trade Association State party to the Agreement on the European Economic Area; or
(b) the United Kingdom of Great Britain and Northern Ireland is not satisfied that the said airline:
i) is incorporated and has its principal place of business in the territory of Country X; and
ii) holds a current Air Operator's Certificate issued by the aeronautical authority of Country X.
(5) When an airline has been so designated and authorised it may begin to operate the agreed services, provided that the airline complies with the applicable provisions of this Agreement.
Source: Department for Transport
A Second Communication from the Commission
55. On 26 February, the Commission submitted
a recommendation to the Council for authority to open Community
negotiations with all bilateral partners on the ownership and
control i.e. "nationality" issue.
The mandate would be following "the procedures set out in
Article 300 of the Treaty creating a special Committee of Member
States representatives to assist and support the Commission".
The Commission added, however, that it "would also be mandated
to address other issues of Community exclusive competence with
a view to incorporating these into the Community agreement.
"The Commission envisages that the outcome of
the negotiations could take several forms. The simplest would
be a short stand-alone agreement in which the parties agreed to
a revised definition of the beneficiaries that would override
the relevant clauses in the existing bilateral agreements. Such
an agreement should also contain new provisions covering other
matters of Community competence as identified by the Commission
in its previous Communication of 19 November 2002. This agreement
would be the subject of Community signature and conclusion. Member
States would maintain their own agreement with the country concerned
dealing with matters of national competence. This situation would
be maintained until such time as a mandate is granted for a full
negotiation on a Community agreement. For most countries, this
is likely to remain some time in the future."
56. On the face of it, this would appear to offer
a sensible solution to the general difficulties that have arisen
from the ECJ judgments. A Community mandate would ensure that
any changes were made uniformly and at the same time. Unfortunately,
this Communication came too late for the Committee to put to the
Minister in the oral evidence session on 24 February 2003. The
Communication has since been submitted to the Committee, and the
Government's view is covered by Explanatory Memorandum 7047/03
COM(2003) 94 final. The EM argues that the effect of the Commission's
Communication of 26 February is to recognise that Member States
will continue to negotiate with their bilateral partners, though
the Commission will wish to ensure non-discrimination among Community
carriers in the allocation of traffic rights agreed in such negotiations.
The proposed Regulation aims to ensure that bilateral negotiations
would be conducted in such a way as to produce results compatible
with Community law, and that there would be a proper information
exchange within the Community and non-discriminatory treatment
of European airlines by Member States. In addition, in implementing
the results of any negotiations, the Commission would want to
be sure that all eligible EU airlines had an equal chance to apply
for, and to take up, the traffic rights negotiated by Member States.
57. In his Explanatory Memorandum, the Minister
"In principle, the UK Government is open to
giving the Commission a mandate to negotiate an Open Aviation
Area with the US, provided it would not preclude Member States
acting bilaterally if Community-level talks failed to progress.
But the UK, along with other Member States, has indicated that
a mandate must be part of a package agreement encompassing a number
of issues on which Member States need to reach an understanding
with the Commission in the light of the Court verdict."
"By addressing the need of Member States to
be able to negotiate new bilateral agreements, or to re-negotiate
existing ones, in conformity with Community law, the latest proposal
by the Commission contains the seeds of a compromise agreement.
The proposed Regulation is in principle acceptable to the UK Government,
although we will need to consider carefully a number of areas
where the procedures appear unduly cumbersome or impose limitations
on Member States' future freedom of action. Areas for discussion
include the requirement in Article 1 for Member States to communicate
to the Commission their intention to negotiate with a bilateral
partner at least one month before making contact with that country.
I consider that this provision could disrupt normal business contact
with bilateral partners to an unacceptable degree. I am also concerned
about Article 4(2), which would give the Commission wide powers
to object to the conclusion of a bilateral agreement if it considered
it incompatible with Community law, and about Article 3, which
would preclude Member States agreeing limited designations."
"I also consider that it would be helpful if
the Commission offered up a standard Community designation clause
which Member States could use in their negotiations with their
bilateral partners, but the Commission has so far refused to do
so. We will pursue this point when negotiations in Working Group
The Committee's Views
58. The Committee considered whether the changes
occasioned by the ECJ judgments should be made by Member States
bilaterally or by giving the Commission a restricted mandate to
do so with and on behalf of Member States. The chief arguments
that favour a mandate are that any amendments to the existing
ASAs ought to be uniform and to take place at the same time. If
individual Member States were to renegotiate, even with the agreement
of the Commission, it is unlikely that they would be able to meet
these two desiderata.
59. Other EU Member States that were not directly
mentioned in the ECJ judgment because there were no cases in the
Court against them are not specifically obliged by the Court to
renegotiate their ASAs. They are bound implicitly, however, by
the consequences of these judgments. But, if eight Member States
were to amend their ASAs, and seven did not do so at the same
time as the other eight, then there would be an imbalance, if
only temporarily, in the rights available to airlines of different
Member States that could affect competition issues.
60. Response from witnesses shows a clear predominance
in favour of the Commission remedying the flaws in current ASAs
identified by the ECJ judgments.
In particular, the two largest United Kingdom airlines have demonstrated
powerful support in favour of a mandate for the Commission even
though their current positions, for example, at Heathrow could
be threatened by a more liberal regime. Indeed, the Committee
was struck by the robust attitude adopted by the airlines which
contrasted with the caution expressed by the Government.
Most witnesses regarded the ECJ judgments as a moment for historic
change to move beyond the current restrictions on the market imposed
by the web of bilateral national state agreements.
61. While the Committee can understand the reluctance
of Member States to cede greater competence to the Commission,
the effect of the judgments of the European Court of Justice on
5 November 2002 is to recognise the Community's exclusive competence
on these specific points. The Commission's right to negotiate
these issues in place of the Member States is a matter of principle
and can no longer be questioned. The Committee therefore
recommends that the Government accede to the approach proposed
by the Commission, namely that the Commission, assisted by Member
States, negotiate in the first instance with the United States,
to remedy those breaches of Community law identified by the ECJ
judgments in existing ASAs with the United States. However,
such a mandate should be restricted to the specific issues raised
by the ECJ judgments.
Denouncing Existing ASAs with the
62. In its Communication dated 19 November 2002
and again in its second Communication dated 26 February 2003 and
in the Commissioner's written evidence dated 6 February 2003,
the Commission calls on Member States to denounce existing bilateral
ASAs with the USA as a necessary prelude to negotiating changes
to these agreements. The Minister told the Committee that no Member
State wished to denounce their ASA with the USA.
Given that the United States Government has already indicated
its willingness to negotiate changes to the ASAs to bring them
into line with Community law,
the Commission's insistence of formal denunciation seems unnecessarily
confrontational. We agree with those witnesses
who saw little value and possibly much harm in denouncing the
ASAs. We recommend that HMG resist the Commission's call for
denunciation of existing bilateral ASAs with the USA. This
is a matter that should be dealt with in a co-ordinated manner
across the EU States as part of negotiations between the EU and
27 EM 14663/02 COM(2002) 649 final: Communication from
the Commission on the consequences of the Court Judgments of 5
November 2002 for European air transport policy. Back
DTI written evidence page 82, paragraph 10; written evidence from
Professor E Denza and Mr R Gardiner, page 8. Back
US State Department taken questions 20 November 2002 and speech
by Assistant Deputy Secretary of Transportation, Jeffrey Shane,
at an American Bar association forum in Florida, 8 November 2002. Back
Q 327. Back
Q 325. Back
PQ, House of Commons Official Report (Hansard), 2 April 2003,
Vol 402 No 76, Col 703W. Back
Covering letter to BMVBW written evidence (not printed). Back
CAA written evidence, page 23, paragraph2; Memorandum by T Soames,
G Goeteyn and Dr P D Camesasca, page 132, paragraph 4. Back
Memorandum by T Soames, G Goeteyn and Dr P D Camesasca, page 132,
paragraph 4. Back
DTI written evidence, page 82, paragraph 4. Back
States which have accepted a designation article on the model
of that in Box 5/XXX: Macao SAR, Albania, Serbia and Montenegro,
Slovakia, and Algeria. States that have declined to accept this
proposed change to ASAs: China, South Korea, Brazil, Ukraine,
and Egypt. Georgia is still considering whether or not to accept
or decline. Back
Q 230. Back
Q 232. Back
BA presumably means an "Open Aviation Area" or "Trans-Atlantic
Common Aviation Area". The term "open skies" applies
only to the restricted US model for ASAs. Back
BA presumably means by this term an "Open Aviation Area"
or "Trans-Atlantic Common Aviation Area". The term "open
skies" applies only to the restricted US model for ASAs. Back
Q 258. Back
Q 258. Back
Q 259. Back
Q 263. Back
The Financial Times, 24 March 2003, page 26. Back
Q 95 and Q 87. Back
2003/0044 (COD) - COM(2003) 94 final: Communication from the Commission
on relations between the Community and third countries in the
field of air transport - Proposal for a European Parliament and
Council Regulation on the negotiation and implementation of air
service agreements between Member States and third countries. Back
Evidence from: KLM, page 135; German Directorate-General for Civil
Aviation, Aerospace and Shipping, page 128, paragraph 9; BA, page
52, paragraph 2.2; and Virgin Atlantic, page 63, paragraph 6.
But see contra opinion from: BMI, page 44; Air 2000, page 75,
paragraph 1;and AEA, page 16, paragraph 6. Back
Q 352. Back
Q 333. Back
But see Mr M J Hall's written evidence, page 129, paragraph 2.2. Back
AUC, page 96, paragraph 16; BMI, Q 209; CAA, page 25, paragraph
12; and Soames, Goeteyn and Camesasca, page 132, paragraph 4. Back