Select Committee on European Union Seventeenth Report

CHAPTER 3: a wider mandate for the Commission?

63.  Assuming that it is possible for the Commission to secure a separate mandate to address, on behalf of all EU Member States, the existing infringements identified by the ECJ judgments on 5 November 2002, there is a wider, and ultimately more important question, of whether or not Member States should mandate the Commission to negotiate on behalf of all Member States in matters of aviation policy that have hitherto been within the competence of Member States. In other words, is it now time effectively to dismantle the system of bilateral ASAs that has grown up since the 1944 Chicago Convention, and to replace it with bloc to bloc common aviation areas starting first with the United States, but moving thereafter to include Russia, Japan and other states?

64.  The evidence from witnesses is almost unanimous in support of a mandate for the Commission. Here, again, the United Kingdom Government is cautious. It argues that it does not object in principle, but that negotiation by the Commission on behalf of Member States would have to "add value" to the existing ASAs. The Government is right to be cautious in that the United Kingdom, as one of the major aviation countries, might have to make considerably greater concessions to a common policy than other Member States. Access to Heathrow has long been recognised as a highly desirable negotiating objective for the United States: in our discussions in Washington demands for Heathrow landing-slots were made by representatives of all airlines which presently do not have them. HMG was also insistent that if the Commission was to negotiate with the US its negotiating objective should be to go beyond existing "open skies" agreements and aim for full liberalisation.

Does the Commission Have the Capacity to Conduct Such Negotiations and what Benefits Would a Successful Negotiation Bring?

65.  Two questions arise:

(i)  has the Commission the capacity to conduct negotiations satisfactorily?

(ii)  what additional benefits would flow from a successful EU bloc negotiation?

66.  So far as the first of these two questions is concerned, the Committee has received mixed evidence, but on balance most witnesses agree that the Commission is capable of conducting this type of negotiation satisfactorily. It has done so before, for example, in negotiating an air services package with the ten Accession States; with Norway and Switzerland; and in analogous Law of the Sea negotiations. The Commission will, inevitably, want to use the expertise of Member States, and it has made this explicit in its second Communication of 26 February 2003.

67.  However, the Commission has recognised that there are problems inherent in a joint EU negotiation. How to distribute traffic rights between EU carriers when rights are limited in agreements signed with particular third countries. There is the added problem of slot constraints at certain airports—in particular Heathrow. (See box 5 and Appendix 7 for a fuller account of the importance of slots at Heathrow in any negotiation with the US, for the US, the other EU Member States and the United Kingdom.) The Commission already has competence for certain aspects, for example, slots and ground handling. Difficult as it may seem, the fair allocation of traffic rights at EU airports is not an insoluble problem. Increasingly, the Commission is being drawn into all aspects of ASAs and aviation policy. This seems an ineluctable process which means that Member States and the Commission will have to work together until eventually ASAs and aviation policy become, in effect, a full Community competence. In her written evidence to the Committee, the Commissioner and Vice-President of the European Commission, Mme Loyola de Palacio, gave a hint of this:

"the ECJ already identified [as falling within Community competence] airport slots, computer reservation systems, and intra-Community fares and rates, but an analysis of existing Community law reveals that there are many further areas where the AETR principle creates exclusive Community competence since the Court's analysis concerned only those measures of Community law in force at the time of concluding the agreements."

Advantages in a Community Approach

68.  The argument is, therefore, that the process is moving in favour of a Community approach, and that it might be advantageous to hasten this process by means of a mandate. But, it is also important to try to estimate what added value Member States might expect to achieve. The first argument is surely one of negotiating weight. The European Commission, supported by Member States, must, by any definition, carry more weight in a negotiation with the US than the individual Member States by themselves. This leverage is likely to increase as the range of subjects that have hitherto fallen to Member States passes gradually to the Commission under the application of the AETR principle (see Appendix 6). The two main objectives must, therefore, be parity and comprehensiveness—that is to say, on the one hand, balancing the advantages which US airlines currently enjoy in being able to operate from their own large home market into the single Community market with the disadvantages the EU Member States currently face in being excluded from the US domestic market, and on the other, going for full rather than partial liberalisation. As the Brattle Report points out, the US currently protects its domestic market through a series of legal measures, e.g. "Fly America", the Civil Reserve Air Fleet (CRAF), and not least the restrictions on foreign ownership of capital in American airlines.[54] It is therefore important that any mandate that Member States give to the Commission should be firmly anchored in a negotiating programme that will lead to full liberalisation beyond the current US "open skies" model. However, it became clear from our Washington meetings that the opposition of labour unions in the US to liberalisation is likely to be extensive.

69.  An additional benefit that might accrue from a successful negotiation with the US is that other non-EU States might be persuaded to liberalise their own agreements with the EU. A more direct benefit would be airline consolidation, particularly among EU carriers, and a widening of the alliance system that would lead to lower costs through rationalisation, thus enabling surviving EU airlines to become more competitive in comparison with US or other major carriers. But there are other regulatory benefits that can only come from a common approach as the German Civil Aviation Directorate notes:

·  opening up US air carriers to greater foreign investment;

·  full access to the US aviation market with comprehensive traffic rights;

·  convergence in the application of competition rules both of the EU and the USA;

·  measures to prevent state aids which distort effective competition;

·  harmonised security measures to combat terrorism in civil aviation.

State Aid for the Airlines

70.  State support for airlines arising from the terrorist attack in New York on 11 September 2001 continues in the US—indeed, we heard in Washington that Congress would be approached for further financial support this year, possibly as much as US$9 billion primarily in the form of relief from federal aviation-related taxes, help in extending terrorism insurance, and paying for extra security measures at airports. Further direct cash payments and further loan guarantees for struggling airlines were also being canvassed. However, Congress is split on whether or not to bolster the airlines.[55] In the EU, the Commission is reported to be considering allowing EU governments to meet costs of extra security measures without this being classed technically as a subsidy, as well as costs of extra war-inflated insurance. The Commission may also relax the "use it or lose it" rule on slots to allow airlines to reduce flights temporarily without losing their slot rights.[56] The size of any implied financial support to EU airlines is expected to be substantially less than such support to US airlines in the US.

71.  The Commission has proposed a Regulation on unfair pricing practices by third countries that would allow Community measures to be applied to non-EU airlines found to be using state aid to price unfairly. This was the subject of discussion at the Transport Council held on 27/28 March 2003.[57]

Benefits of Liberalisation

72.  There is an argument that increased competition on major US/Europe routes, and more trans-Atlantic services from a larger number of secondary points in Europe would mean increased consumer benefits through a wider-range of services to chose from and lower prices. It would also create benefits for Europe's tourism industries by encouraging more incoming tourism. However, at least one witness cautions against accepting the obvious.[58]

73.  Perhaps the most persuasive argument in favour of the mandate is that this would ensure that all EU Member States were treated equally. The Commission has already identified this as an important requirement, and, in its second Communication of 26 February 2003, has proposed a new draft Regulation that would require all Member States to inform the Commission about existing or future activities in connection with ASAs. The Commission's design of a single aviation market bringing together the EU and US aviation market is visionary. But, preparations for such a mandate would have to be careful. Member States would have to identify and agree negotiating positions, and there would have to be a mechanism for the Commission to report back regularly to the Council if Member States are to be carried collectively with the Commission.

74.  The Commission's vision of an open aviation area carries with it the implicit assumption that a degree of harmonisation will have to be established between the United States' anti-trust legislation, and the European Community's competition regulatory system.

75.  The Committee concludes that, on the basis of the evidence it has received, the balance of opinion lies in supporting the proposal that the Council should give the Commission a mandate to negotiate a wider Open Aviation Area and recommends that the Government should agree to a full negotiating mandate for the Commission on the basis that the objective of such a mandate would be the full liberalisation of the aviation industry in the EU and the US. However, much preparatory work will have to be done between Member States and the Commission to ensure that the negotiating objectives are fair to all Members, that agreed fall back positions will be strictly observed, that there will be a mechanism for rapid reference to the Council during the course of negotiations, and that the Commission and Member States consult about the establishment of an impartial mechanism to deal with the award of traffic rights whenever these are constrained or limited in any way. In addition, the Government will wish to be reassured that the United Kingdom's major international aviation asset—access to London Heathrow—will not be included in a settlement that might prove damaging to United Kingdom national interests. Increased access to Heathrow without the total package of opportunities provided by full liberalisation would simply disadvantage United Kingdom carriers. The Committee further recommends that progress be made in ensuring that the objectives and application of Community competition law and United States anti-trust legislation with respect to international aviation are in tandem and harmonised.

76.  The Committee recommends that it would not be in the European Union's interest, or the United Kingdom's national interest, to negotiate for anything short of a fully liberalised aviation market between the EU and the US. The Committee believes that in current circumstances it may be necessary to deal first with the need to bring EU Member States' bilateral ASAs with the United States into conformity with Community law as specified in the ECJ Judgments of 5 November 2002 before moving on to the wider negotiation of a EU/US Open Aviation Area. It will be of paramount importance to the United Kingdom to ensure that a robust and acceptable mechanism links all intermediate steps in the negotiation to the final agreement.
Box 5

Airport Capacity: Heathrow and the Question of Slots

One difficulty in the way of a negotiation between the EU and the US on a fully liberalised trans-Atlantic aviation market is that of airport capacity, particularly at London Heathrow. The United Kingdom has, by a considerable margin, the highest volume of passengers of any European country travelling to and from the US. As BAA notes, "experience has shown that the process of liberalisation typically stimulates additional demand". Capacity utilisation is currently so tight at Heathrow that there is a thriving (grey) secondary market in the allocation of landing and take off slots. If liberalisation leads to increased trans-Atlantic access to Heathrow, then, necessarily, as capacity stands at present, other routes using Heathrow will be displaced.

The allocation of slots applies at several European airports, but the pressure is acute only at Heathrow. Access to Heathrow is the main objective of US airlines. Heathrow, alone among European airports, operates an independent slot regulator because the United Kingdom, again unique among EU Member States, has more than one major trans-Atlantic airline operating under the ASA with the United States.

By way of example, British Airways currently has some 39 per cent of slots at Heathrow, whereas Air France has 58 per cent of the slots at Charles de Gaulle Paris, KLM has 59 per cent at Amsterdam, Lufthansa has 63 per cent at Frankfurt, and in the US, Delta has 75 per cent at Atlanta, and Continental 83 per cent at Houston.

Because more airlines currently want to fly the Atlantic via Heathrow, a partial liberalisation of the aviation market might require United Kingdom carriers currently using Heathrow to surrender slots to competitors, while being unable to obtain the benefits of full liberalisation such as the ability to buy into or take over other airlines, particularly in the United States. This, therefore, will be an important concern for the Government in any negotiation of the current ASAs with the United States.

A fuller account of runway capacity, aircraft movements, passenger and cargo thoughput at major European airports is provided in the CAA's supplementary evidence on pages 34 and 35.

54   The Brattle Report, paragraph 1.3, pages 1-6 and 1-7. Back

55   The Times, March 27 2003, page 29. Back

56   The Times, March 27 2003, page 29. Back

57   Hansard, 2 April 2003, Col 705W Back

58   Written evidence by Professor Button, page 104, paragraphs 9 and 10. Back

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