Examination of witnesses (Questions 101
THURSDAY 18 JUNE 1998
and DR DELORES
101. Mr Hamer, thank you very much for agreeing
to come and give evidence in front of us and indeed for bringing
two of your colleagues with you. You are aware, of course, of
our enquiry into airline regulation. Indeed, you have submitted,
if I may say so, a very valuable piece of written evidence. You
have slightly cut the ground from under the oral questions we
were going to ask you but no doubt we will get around that problem.
Could I preface by saying that it is not within our brief, nor
do we wish to get into, any detail regarding the British Airways/American
Airlines proposed co-operation, if we call it that. It may well
be that reference is made to it but I would not wish it to be
any more than reference. If you would be so kind, for the record,
to introduce yourselves and colleagues; and if you have any opening
statement you wish to make, please do so.
(Mr Hamer) Thank you, my Lord Chairman. Firstly,
if I could introduce Dr Delores O'Reilly, who is the Chair of
the Economic Policy Sub-Committee of the Air Transport Users Council;
and Dr Philip Martin, who is the Director General of the AUC.
He heads up our full-time secretariat. The Sub-Committee, as you
have intimated, have already seen our memorandum; and that explains
who we are and sets out our general views on the subject of airline
competition regulation. It may be that, as it was submitted only
a few days ago, it would be helpful if I summarised our position
(Mr Hamer) Thank you. There appears to be no clear
consumer interest in the technical questions regarding the application
of the Competition Rules to air services to third countries. The
Rules are designed to protect the consumer and it would appear
to be of no great moment whether this is done by the Office of
Fair Trading or the European Commission. The question of Community
involvement in air service relations with third countries is,
however, much more interesting. Bilateral air service agreements
involve the economic exchange of traffic rights to carry passengers,
mail and cargo. Historically, passengers were there to be uplifted,
and very rarely consulted or considered. These restrictive agreements
were designed to maximise the economic value to national airlines.
We believe that view has changed radically with the recognition
that liberalisationcompetition in a free marketbenefits
passengers as well as airlines. The merits of Community involvement
in this process turn on whether the Commission is more likely
to seek such liberalisation and whether it is more likely to achieve
that end. We would answer both of these questions in the affirmative.
Unlike Member States, the Commission is committed to opening up
markets to third countries to all Community carriers. At its most
extreme this would mean that Air France could operate a service,
for example, between London and New York. Perhaps more realistically,
Deutsche BA could be designated by the German Government to operate
between Frankfurt and Istanbul. The Commission is also more likely
to achieve liberalisation. By exercising the pooled negotiating
capital of 15 Member States they are more likely, for example,
to gain improved access to the United States domestic market.
Whether, in fact, they could negotiate entry to the United States
cabotage market, or persuade the American Government to relax
its ownership and control rules, would remain to be seen. The
possibility of such major successes may be remote but what is
certain is that they will not be achieved in 15 separate bilateral
negotiations. We recognise the danger that if the Commission is
not entirely successful in negotiating a liberal agreement, the
United Kingdom may lose out in the subsequent internal division
of traffic rights between Member States. However, our view of
this risk is that any short-term loss to United Kingdom consumers
is outweighed by the potential long-term benefits of global liberalisation,
which can only be achieved by negotiations at supranational level.
We are, therefore, in favour of Community involvement in aviation
relations with third countries and for that reason we endorse
the Commission's proposals. Thank you, my Lord Chairman.
103. Thank you very much not only for doing
that, but it was succinct in the extreme which goes down well
with this Committee. May I pick up this last point. You have really
expanded slightly on paragraph 20 of your written evidence. I
have two questions on that paragraph. In the first line you say:
"In our view the balance of these interests comes down in
favour of Community negotiations." Balance is a relative
thing. Is the see-saw teetering marginally at the fulcrum, or
does it come down very heavily on the side of Community negotiations?
(Mr Hamer) I think our position has been taken
firmly from the consumer's viewpoint. Perhaps to answer your question
in more detail I could ask Dr Martin to expand on that particular
104. In which case, may I just come on to
my second question, which is also on that paragraph. In the last
sentence you sayand again you have repeated this orally"In
our view, these long-term strategic gains [those are ones in favour
of the Community negotiations] justify the small [it is
my emphasis] risk of losing consumer benefit in the short term."
Perhaps, Dr Martin, when you reply you could give us examples
of that: be it country versus country, or short versus long-haul.
What do you mean by small risk?
(Dr Martin) As the memorandum states, what we
are looking at here is a balance between, in some ways, apples
and pears. There are potentially very substantial long-term gains
to the consumer from Community negotiations. Wielding the negotiating
power of 15 Member States, they should be able to win much greater
liberalisation than individual Member States could obtain themselves.
At some stage you might like to come back to talk about what could
be achieved in that area, possibly with the United States. The
potential losses occur if the Community cannot negotiate an entirely
liberal agreement with a third country. It will then exchange
limited traffic rights with that third country, and those traffic
rights have to be divided up in some way between the Member States
and their airlines. To take a concrete exampleit may not
be likely but it is concreteif one looks at the access
that the United Kingdom has to Narita Airport
105. To Madrid?
(Dr Martin) Narita in Japan.
106. Oh yes, I know it well.
(Dr Martin) We have very good access to that airport
because the United Kingdom has very strong negotiating power.
We have a good agreement with Japan. If negotiations with Japan
were conducted at a Community level and were not entirely successful
at liberalising the relationship between Europe and that country,
there is a question as to how the resulting benefits should be
divided up. From a Community viewpoint it might well make more
sense to give some of this limited access to that airport to services
to Rome or to Madrid, as you mentioned. That would not benefit
the United Kingdom. So, at that stage, there is a potential loss
to consumers originating from United Kingdom airports. It is this
trade-off that we were trying to draw out in our memorandum. We
have come down in favour of going for the long-term benefits,
even if there are small chances of these potential losses.
107. Then why, in your written evidence,
do you use the expression "in the short term"? How would
that then bring itself back because "short term" by
definition does mean short-term. Therefore, the inference is that
in the longer term things would even out?
(Dr Martin) The thought there is that in the longer
term aviation services will be liberalised. They will be treated
like any other sector. We will move away, first of all, from this
type of bilateral arrangement. If the Community only obtains limited
liberalisation initially, one would hope they would go back for
a second round of negotiation and eventually win full liberalisation.
Lord Thomas of Macclesfield
108. In paragraph 20 I have a number of
questions on that as well. If we were to conclude that your advice
here is the advice we should take in terms of our report: first
of all, what about the competence of the Commission? I do not
mean it in a legal sense but in an administrative sense, and the
expertise to undertake this for 15 countries, possibly 25 countries,
in the future. That is the first question. The second question:
if we began to take that advice, what would happen to the existing
bilateral agreements? Would they be no longer embodied? Would
they have to be renegotiated? Or would they add the sort of grandfather
clauses because they predate any Commission involvement?
(Mr Hamer) Thank you, my Lord Chairman. If Dr
O'Reilly would take both of those questions, please.
(Dr O'Reilly) Thank you. As they stand, the proposals
from the Commission would have little immediate effect. The first
proposal would bring the full weight of the European Union Competition
Rules to bear on air services to third countries. But the second
would actually allow for immediate exemption of agreements by
airlines entered into under the terms of the air service agreements
so, in effect, those that have already been entered into would
be permissible by the second proposal to be exempt, so they would
be protected. The status quo would be preserved but the
Commission would then have its foot in the door and it would also
have the threat to withdraw the block exemptions; to withdraw
the protection that the agreements they have entered into. With
regard to the expertise of the Commission to negotiate on behalf
of the 15 Member States, I really do not think it is our position
to comment on that. What I do feel is that maybe the Commission,
by reviving this proposal to apply the Competition Rules to air
services between Member States and third countries, are for quite
understandable reasons putting the cart before the horse. If I
may have a few moments to elaborate on that. Prior to the adoption
of the so-called first package of liberalisation in 1989, there
was no legislation applying the Competition Rules to air transport,
in spite of the fact that there was a previous Commission proposal
and three European Court of Justice rulings, that the general
rules of the Treaty should be applied to all branches of economic
activity. The reason why the Council finally gave way was because
it recognised that if the competence for such matters as airline
pricing and market access were to be passed over from the Member
States to the Community, then the Community should also be able
to police them. I think that will probably reflect in the expertise
that they would have with regards to negotiating and policing
for the 15 Member States. Thus liberalisation and application
of the Competition Rules were almost two sides of the same coin
in that they came hand in hand. Today the circumstances are different.
The Council seems unwilling to surrender competence for external
relations and thus if the Commission's present proposals were
adopted the Competition Rules would apply not to a common regime
but, in fact, to individual Member States and individual third
countries. It would not be on a common basis. The Commission could
only take action against such agreements which it found to be
in breach of Articles 85 and 86. It could not put anything in
their place. It would just be making a ruling on the breach of
those two Articles. It would be up to the Member States concerned
to do that who may be at that stage, in a weak negotiating position.
It seems to us that it would be likely, in that case, to act against
the consumer interests. The Commission feel that once the Council
has agreed to the proposal that they have currently put before
us, eventually it will be forced to concede that the Community
should be competent for all aspects of external relations. Our
memorandum states quite clearly that we are in the favour of this
for the reason that liberalisation does benefit the consumer.
The liberalisation packages which we have seen through the Community
have indeed shown that consumers have benefited. So just as the
Council adopted a single package of measures for the internal
market in 1987, maybe there ought to be a comprehensive external
policy based on long-term objectiveswe have been talking
about the short term. That is not the position at the moment,
but the proposals put forward are maybe the beginning of that.
For that reason I feel it may be that the Commission are putting
the cart before the horse. They are putting in place Articles
85 and 86 from which they can judge, but once they do that there
is nothing to replace what they may strike down.
109. Just for clarity, going back to the
first question, did I understand you rightly that you indicated
that the grandfather clauses, the original bilateral agreements,
would be acceptable initially, but then they would be exposed,
to be unpicked at a later date?
(Mr Hamer) Our understanding is that this is the
case. Much of our policy has been based on this, in fact, being
the case. Also, if I could just comment on the point that you
raised in terms of the Commission's expertise, we certainly do
have some reservations as to the physical competence, in terms
of the numbers of people available, and how they would actually
go about this. This would need to be looked at. We have also worked
on the basis that the Commission would be able to draw on the
existing expertise of Member States in their negotiating teams.
110. May I pursue this grandfather clause
bit. I do not quite understand, at this stage of our enquiry,
how what you have said squares with Commissioner Kinnock's action
at the moment. He is calling-in, if I can use that expression,
three different alliances.
(Mr Hamer) If we can take the opportunity of clarifying
111. We have to be very careful over the
(Mr Hamer) We fully understand your direction
on that. Dr Martin.
(Dr Martin) As Dr O'Reilly said, inter-airline
relations that are required in bilateral agreements may be in
conflict with Article 85 of the Treaty but will be granted block
exemption, so that existing bilateral arrangements will remain
in place. The next move is to modify those arrangements or replace
them with Community bilateral agreements with third countries.
We believe that there will be subsequent negotiations in which
a Community agreement will be put in place, which will overtake
the bilateral air service agreements between Member States. Does
that answer your question?
112. Yes, it does, but it immediately gives
me another one which is: do you believe that it is realistic and
practical that countries which presently have (let us use the
word) advantageous bilateral agreements, are willingly going to
give them up? Or do you think the issue is going to be forced
by one or more cases in the European courts?
(Dr Martin) The aim is to negotiate liberal bilateral
agreements with third countries in which case, whatever advantage
those Member States have with that third country, would be shared
with other Member States.
113. To the disadvantage of the first Member
(Dr Martin) It is not a disadvantage to see another
country have a liberal agreement with a third country.
114. It is for slots, for example.
(Dr Martin) This was the potential disadvantage
that we had added initially. What I am saying is, if one could
eventually negotiate fully liberal arrangements with a third country,
that would benefit all Member States. The potential downside,
if the arrangements in the short term are not fully liberal, is
that then one has this sharing-out of benefit which might mean
that some, such as the United Kingdom, could lose by it.
115. Going back to paragraph 20, you have
all spoken about the physical competence of the EC officials,
as you have seen them. What about their psychological competence?
As I see it, we have a situation where we have two battering rams.
We have anti-Trust immunity in America. We have exactly the opposite
Competition Rules that look as if they are going to be waived
in the Community. Do you think, in that situation, that there
is any likelihood of any sort of agreements being forged between
the Commission and the United States Government?
(Mr Hamer) That is certainly one of the difficulties.
We do recognise that in this form we do not think that any of
these proposals are likely, in themselves, to overcome the particular
issue that you identify. But at least we know where the starting
point would be in those negotiations, and it may well be that
where you have two very large economic blocks negotiating on these
issues, that both blocks will have to give something. One would
see that as part of the negotiations; taking, for example, a new
bilateral agreement between the EU and the United States, the
example which was suggested.
116. But it could happen in Indonesia.
(Mr Hamer) Absolutely.
117. But you do accept my premise that the
psychology of the Union is totally different from the psychology
of virtually anywhere else in the world, especially America in
(Mr Hamer) One has to accept the statement. You
can also say that the psychology of the United States is different
from that in many other countries of the world. We certainly accept
what you are saying, of course, and we recognise that difficulty,
but it is something that we assume would form part of any negotiations.
118. So you believe ultimately that it can
(Mr Hamer) Oh, yes.
Lord Skelmersdale] That
is a lot of confidence, thank you.
119. On a slightly more legalistic note,
again regarding European and United States relationships, the
ownership and control rules: as we understand them, at the moment,
within the European Union they require that airlines have to be
at least 51 per cent owned; whereas in the States, the foreign
ownership cannot exceed 25 per cent. You say in your written evidence
that if the United States threshold could be increased to that
of the Community, or indeed if in both it could be raisedand
I would like to come back to that point in a minutethe
pressure to form alliances would no longer exist. Then you go
on to say: "This, therefore, would be a method of achieving
such market entry without the loss of competition that results
from the formation of alliances." Surely, if you went along
that path, you almost inevitably get more mergers. Would that
not be anti-competitive?
(Mr Hamer) I think if you ended up with one or
two global airlines, clearly that would be the case. What we are
seeing from a consumer's point of view is the growth in formal
alliances, two competitors getting together to operate ostensibly
as one airline (all but), and we see great problems as far as
competition is concerned in that respect. However, one has to
recognise that the economic realities of life and globalisation
is afoot. There is nothing, we think, that our view will do to
change that. What we have suggested, however, is that the need
for alliances of the nature that we were concerned about would
be reduced because airlines could take financial interests in
each other or could, in fact, start up their own subsidiaries
in one another's market area. That, we feel, would enhance or
bring about competition rather than stop competition. The big
benefit, as we see it from the European airline point of view,
is, of course, the ability to operate within the United States
domestic market. Similarly, for European consumers, we see benefit
in further competition within the European market operated by
perhaps American airlines, if we are being specific, from the
United Kingdom to America. The question as to whether or not global
mergers would be the order of the day and any competitive gain
or any gained competition would go out of the window, so to speak,
we would hope we would have some ability to rely on the investigation
by the competition authorities at that time. That really is the
point that we had reached.