Select Committee on European Union Seventeenth Report


CHAPTER 6: conclusions of the Committee

The ECJ Judgments

111.  The declared reason why the Commission took Member States to the Court was to ensure that ASAs were consistent with the single market rules and to address matters of Community competence. However, it may well have been, in part, to put pressure on Member States to grant the Commission a mandate and a locus standi in what had hitherto been an almost exclusive preserve of Member States.[72] The Commission has pointed out that the growth of competition policy and commercial policy has inevitably leaked into aviation. It is no longer feasible to exclude aviation as was once thought possible. However, whatever the Commission's intentions, the outcome has been claimed as a victory by both sides. The Court has found Member States in default on specific clauses in their existing ASAs, but, at the same time, has reiterated the competence of Member States to conclude bilateral ASAs.

A "First" Mandate for the Commission

112.  In our view, this now requires a fresh look at the way in which ASAs are handled. There is clearly mixed competence, and the balance between Member States' competence and the areas of Community competence is likely, over time, to move in the direction of the latter. However, in the short term, our concern has been to address the specific issues on which the Court found the eight Member States wanting. Should Member States try to bring their ASAs to conformity with the Court's judgments, or should the Commission be given a mandate as it has proposed in its Communication of 26 February 2002? We have concluded that it makes more sense for Member States to concede a mandate to the Commission to deal with the amendments to ASAs to take account of the ECJ judgments. The most persuasive argument in favour of a mandate for the Commission is that this is the only way, in our view, that changes can be brought about uniformly and at the same time.

A Wider Mandate

113.  We have also looked at the wider issue of a second mandate for the Commission to conduct a renegotiation of all EU Member State ASAs with the United States in the first instance, and later perhaps with Russia, Japan and others. Here again, we have concluded that the arguments in favour of a Commission mandate outweigh the case made by those who would prefer to stick to a mixed bag of bilateral ASAs. The Commission can deploy more weight, and might well achieve concessions in areas where the Member States individually have so far been unsuccessful. But we recognise that even armed with a mandate, a full negotiation on these issues, which include cabotage, cargo, wet-leasing, ownership and control, and the right of establishment will take time. We think it important, therefore, that the first mandate mentioned above should be granted as soon as possible provided that the conditions set out in paragraph 51 are adhered to—and certainly no later than the June 2003 Transport Council.

Liberalisation

114.  Whilst superficially it may appear that the benefits from greater liberalisation that the Brattle Report examined could be to a significant degree achieved by an EU/US "open skies" type of agreement, and that such an agreement could be achieved more quickly because it was manifestly in the interests of the United States, it would not remove other distortions in market opportunities which currently favour US airlines. Nor would it address key issues of ownership and access to international capital. In our opinion, therefore, HMG should ensure that a wider mandate is designed to bring about a fully liberalised Trans-Atlantic Common Aviation Area, and to include those areas currently subject to United States and EU legal restrictions. This would include the ability to buy into American airlines, to wet-lease to American clients for all-cargo operations to obtain internal US cabotage rights. We recognise that this wider requirement will inevitably take time, but we think it is worth waiting for.

Competition

115.  Liberalisation will not, in itself, necessarily bring economic benefit either to the economy or to the airlines. There is currently excess capacity in global aviation and many airlines survive because the bilateral ASAs support the existing international route system. But many also survive on subsidies, hidden or overt. We have indicated some of the latter, especially in the USA, in paragraphs 72-74, but there is also believed to be a range of practices in some EU Member States, which are tantamount to hidden subsidies, often in defence of national airlines. Until such practices are rooted out, many of the benefits of an open market through transparent competition on a level playing field will fail to come through.

116.  There is widespread agreement that the airline industry requires a degree of consolidation in both the USA and the EU, while at the same time enabling new airlines to emerge in a competitive environment. If airline consolidation and restructuring is to take place within and between the USA and the EU, the relevant competition authorities on both sides of the Atlantic will need to reflect further upon the application of competition policies to the aviation industry, especially in the international context.

Denouncing Existing ASAs

117.  The Commission has demanded that Member States denounce existing ASAs with the United States as a necessary prelude to any negotiation with the United States, both on the infringements identified by the ECJ, and on negotiation to a wider liberalised EU/US aviation market. Given that the United States has already indicated that it is willing to negotiate in both areas, it seems to the Committee unnecessarily confrontational at this stage to denounce ASAs in the way proposed by the Commission.

An Opportunity

118.  The Committee concludes that the Government and other Member States should give two mandates to the Commission: the first, to remedy the specific breaches of Community law identified by the ECJ in its judgments of 5 November 2002; the second, to address the imbalance in the existing ASA system between the United States on the one hand and the European Union on the other. The Government is right to be cautious. Heathrow is the priority target for the Americans, and we cannot expect our European competitors to make our position any easier. The main constraint is the limited capacity at Heathrow, and the intense competition that this generates for slots. These are matters of considerable importance for the Government, the aviation industry and the United Kingdom economy. Nevertheless, we think that the ultimate benefits that would flow from a fully liberalised Trans-Atlantic Common Aviation Area could outweigh the potential disadvantages of widening access to Heathrow (see box 6). The Government has argued that any mandate to the Commission should not be exclusive, and that Member States should have the right to negotiate bilaterally if they think the mandated negotiations are unlikely to succeed. We are not convinced that this is a sustainable argument: there are areas of Community competence where the Member States no longer have the right to take action, and even on the matter of the "nationality" clause, there are divided opinions about whether or not Member States could act separately from the Commission.

119.  Having said this, it is, in the view of the Committee, important that this opportunity be seized. We sense that witnesses such as Virgin Atlantic are right when they describe this as an historic opportunity to change the nature of civil aviation away from a highly regulated market to an open and liberalised one. We recognise it cannot happen quickly, but we note that action to deal with the matters raised by the ECJ Judgments has to be taken quickly. We urge the Government, therefore, to attempt to achieve agreement at the June Transport Council so that negotiations can be opened quickly thereafter with the Americans on these specific issues.

120.  We also see benefit in Member States granting the Commission a wider mandate to negotiate an EU/US open aviation area. We agree strongly with the Government that this negotiation must not settle for anything less than full liberalisation—an extension of the US "open skies" system will not lead to the type of consolidation in the airline industry and restructuring of that industry that will ultimately bring the fullest economic benefit. However, we urge the Government to keep the objective of a fully liberalised aviation market firmly in its sights. We think that the economic benefits to the United Kingdom economy will justify risks taken in negotiation to achieve them.

  1. The Committee considers that the European Court of Justice judgments and their effect on existing bilateral air service agreements between EU Member States and the United States of America raise important questions to which the attention of the House should be drawn and makes this Report to the House for debate.



72   See M. Ayral's oral evidence, Q 178. Back


 
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