Memorandum by the European Commission
The following questions have been made concerning
the Commission proposals:
1. Paragraph 17 of the Government's EM states
that bilateral agreements "may not be compatible with the
competition rules in Article 85 and 86 of the Treaty." Given
that Articles 85 and 86 relate to the activities of "undertakings"
(i.e., airlines), how does this incompatibility arise?
As indicated in reply to question 5, the Commission
initiated infringement proceedings pursuant to Article 169 of
the EC Treaty against bilateral agreements concluded by some Member
States with the United States.
The infringement actions were started because
the Commission considers that these bilateral agreements were
concluded in breach, in particular, of Articles 5 and 52 of the
EC Treaty and of secondary legislation adopted in the air transport
sector creating the internal market in aviation.
The legal actions of the Commission do not rely
on the competition rules of the EC Treaty, Articles 85 and 86.
These two provisions relate to the activities of undertakings.
However, airlines operating between EU Member States and third
country, frequently do so in accordance with so called "commercial
agreements" entered into with the other operators on the
route concerned. Often, those commercial agreements implement
provisions in the bilateral air service Agreement concerned. Some
of these provisions may restrict competition on third country
routes and thus infringe Articles 85 or 86.
Examples of provisions in commercial agreements
between airlines that are most likely to fall within the scope
of Article 85, include those which relate to:
sharing of capacity between the airlines
party to the agreement;
consultation or agreement on schedules
for each season;
pooling of revenues frequently involving
the sharing of revenues in proportion to the capacity mounted
by each carrier;
arrangements whereby certain routes
are operated jointly.
Unless such provisions fall within a block exemption
or if not, are individually notified to the Commission for an
exemption and the Commission grants such exemption, they are void
and unenforceable and may lead to the Commission fining the airlines
It is to be underlined that by its second proposal,
the Commission is proposing that it be given the power by the
Council to adopt a block exemption applicable to arrangements
affecting international air transport between the EU and third
countries. If that proposal is adopted, the Commission would then
adopt a block exemption which would automatically exempt a number
of key aspects of commercial agreements summarised above. Such
a block exemption covering third country routes would be the counterpart
of Council Regulation 1617/93 whose scope is limited to intra-EU
The second proposal of the Commission envisages
a block exemption being granted to the joint planning and co-ordination
of capacity and revenue pooling. These activities are beyond what
is allowed for in the current block exemption applicable to intra-EU
air transport, Regulation 1617/93. They have been inserted to
give the Commission the possibility of exempting anticompetitive
behaviour frequently found in commercial agreements entered into
under bilateral Air Service Agreements.
In circumstances where the airlines concerned
have entered into a commercial agreement containing provisions
that infringe Article 85(1) and do not benefit from a block exemption
then there may be a conflict between what is required of the airlines
by the governments at each end of the route and by EC competition
law. In such circumstances, the Commission is proposing that Regulation
3975/87 be amended to insert a new Article 18a to deal with such
conflicts of law (a similar provision exists in Article 9(1) of
Regulation 4056/86 on maritime transport). It is envisaged that
if the Commission considers it appropriate to withdraw the benefit
of a block exemption from a specific agreement (because, for example,
the agreement nevertheless has effects incompatible with Article
85(3) or is prohibited by Article 86) then, if that situation
results from "provisions laid down by law, regulation
or administrative action of a third country or from the provisions
of an air service agreement between a Member State and a third
country", the Commission must, before withdrawing the
benefit of the block exemption apply Article 18a of Regulation
3975/87 and hold "consultations with the competent authorities
of the country concerned".
2. Paragraph 18 of the Government's EM goes on
to say that "Bilateral Air Services Agreements are entirely
a matter for the Member State and third country concerned."
To what extent do the Treaty and its competition rules restrain
Member States' freedom of action? In particular, having regard
to Articles 5, 88 and 90 of the EC Treaty and the general principles
of Community law, to what extent it is permissible for Member
States to conclude bilateral agreements which might include provisions
that may not be compatible with Articles 85 and 86?
As indicated in the reply to question 1, the
Commission has not challenged so far the legality of bilateral
agreement with regard to Articles 85 and 86 of the Treaty.
However, the taking of any such action on the
Commission's part would be possible as a matter of EC law.
In the case of a commercial agreement concluded
by airline operating on third country routes which would be considered
to restrict competition and to infringe Article 85(1) whilst having
been entered as a result of a bilateral agreement, the Commission
would also be entitled, subject to Article 234 of the EC Treaty,
to take infringement proceedings against any Member State party
to such bilateral agreement which encouraged or required the airlines
concerned to infringe Article 85 and/or Article 86 under the case
law of the European Courts relating to "effet utile"
and the binding obligations imposed on Member States under EC
law resulting from the combined effects of Articles 3(g) and 5
of the EC Treaty read together with Articles 85 and 86.
Member States which conclude bilateral agreements
including provisions which are incompatible with Articles 85 and
86 could be considered as breaching EC competition law and could
face infringement proceedings.
3. To what extent does the Community already have
external competence in civil aviation matters?
As shown by its legal action against certain
bilateral agreement which is described in some detail in the reply
to question 5, the Commission believes that by individually negotiating
and concluding open skies bilateral agreements with third countries,
which falls within exclusive Community competence, the Member
States concerned breach the EC Treaty. The bilateral agreements
affect the aims, scope and functioning of the internal aviation
market as established under the complete set of common Community
rules creating the internal market in aviation. In accordance
with the AETR judgment of the European Court of Justice
as confirmed in the Court's Opinions 2/92 and 1/94, Member States
are no longer able to undertake obligations with third countries
which affect those internal rules and which create discrimination
and distortion of competition.
4. How would the Community's competence be extended
if the proposed Regulations were adopted by the Council? (In this
context, the Sub-Committee notes that the Commission already has
certain procedural powers under Article 89.)
At present, Council Regulation 3975/87 lays
down rules for the application of Articles 85 and 86 of the EC
Treaty to air transport and gives the Commission the necessary
procedural powers to investigate cases and make competition policy
decisions. The scope of the Regulation is, however, limited to
air transport services between airports within the Community.
The consequences of this situation for air transport
services on Community-third country routes are the following:
The Commission does not have the
power to adopt block exemption regulations which satisfy a genuine
need for legal certainty on the part of air carriers,
The Commission lacks the procedural
rules necessary to apply effectively Articles 85 and 86 (for instance
the Commission does not dispose of direct investigating means
as the power to send formal request for information or to carry
investigations and cannot fine the undertaking for infringements
of EC competition rules). Instead, the Commission is obliged to
resort to Article 89 of the Treaty when it investigates airlines
alliances linking the Union with third countries as the USA,
Article 89 was clearly foreseen as
a transitory regime by the EC Treaty and unlike the applicable
Council Regulation does not grant the Commission any powers to
enforce the competition rules itself. The Commission can reach
conclusions following its investigations but has to rely on the
Member States concerned to implement them.
The Member States have parallel powers
under the current regime to initiate a procedure under Article
88 of the Treaty. A dual examination of the same agreement by
the Commission and one or more Member States as it is the case
with some of the alliances currently examined by the Commission
is not only costly and time consuming but also a source of great
legal uncertainty for airlines which run the risk of being the
subject of conflicting decisions by those authorities.
So, although Article 89 gives the power to examine
international alliances, in procedural terms, its application
is cumbersome, time consuming and confers less effective direct
powers on the Commission than the corresponding Council Regulation.
By submitting its two proposals, the Commission
only wants to receive an adequate procedural instrument to allow
it to enforce directly and in a more efficient way the EC competition
rules. The Commission is not asking for new external competence.
That is not at all the purpose of the Commission proposals.
5. On what grounds is the Commission, as reported
in the media, bringing infringement proceedings against certain
Member States for negotiating agreements with third countries?
The infringement proceedings initiated by the
Commission in March 1998 concern some bilateral agreements, the
Open Skies agreements concluded after 1992 with the USA by some
Member States and the 1977 Bermuda II agreement existing between
the United Kingdom and the US.
(I) CURRENT SITUATION
(A) Open skies agreements already concluded
The US has already concluded bilateral open
skies agreements with the following Member States: Germany, Austria,
Belgium, Denmark, the Netherlands, Sweden, Finland and Luxembourg.
In the first three cases, the agreements were
signed concurrently with the grant of antitrust immunity by the
US authorities to the following alliances:
Lufthansa/United Airlines and SAS/United.
As far as the US authorities are concerned,
the authorising of an alliance is conditional on the conclusion
of such an agreement.
None of these agreements confers rights on Community
airlines who do not belong to the relevant Member States. So for
instance, under the open sky agreement concluded between Germany
and the United States in May 1996, only German airlines can serve
any point in the US from any point in Germany and vice versa.
(B) United Kingdom/United States bilateral agreement
on air transport
The conditions under which airlines may provide
services between the United Kingdom and the United States are
laid down in the UK/US bilateral agreement known under the name
of Bermuda II, the main provisions of which are as follows:
The British regional airports as
well as Stansted and Luton may be served from any US airport,
without restriction as regards the number of carriers who may
operate or the number of frequencies; in the case of services
from London Heathrow and London Gatwick, however, the agreement
lays down a fixed list of airports in the US which may be served.
Each party may also choose an optional list of airports which
may change over time.
No rights are granted under the agreement
to Community carriers not belonging to the Member State concerned.
A second list specifies the services
which may be provided from Heathrow and those which may be provided
from Gatwick or Stansted. At all events, a maximum of only two
airlines of each party, for the UK side, British Airways and Virgin
Atlantic, may operate at Heathrow. As a rule, where annual traffic
on a route is less than 600,000 passengers, each party may designate
only one airline. On each route out of London, the number of frequencies
which each airline may operate is limited, and fares must be approved
by both governments.
The UK authorities have informed
the Commission that they envisage changing the Bermuda II agreement
in the direction of greater liberalisation. The restrictions on
access to routes between Heathrow and the US would be removed,
and airlines would be able to set their fares freely, subject
to the rules of fair competition. UK airlines would thus be free
to serve US airports freely from the UK, and US airlines would
have the same rights in respect of services between the US and
the UK. However, only American and British airlines would enjoy
(II) GROUNDS OF
The Commission has started an infringement action
under Article 169 of the EC Treaty. Under this provision, legal
proceedings may be brought by the Commission against a Member
State which fails to fulfil an obligation under the EC Treaty
or the law derived therefrom.
The Commission takes the view that open skies
bilateral agreements of this kind are contrary to Community law,
and in particular to the requirements laid down in Articles 5
and 52 ("freedom of establishment") of the EC Treaty
and in the secondary legislation adopted in the air transport
sector creating the internal market in aviation, and has accordingly
initiated proceedings against the Member States concerned for
failure to fulfil their obligations by sending them a reasoned
For the United Kingdom, the reasoned opinion
is restricted to a breach of Article 52 contained in the air carrier
designation provisions of its 1977 Bermuda II Agreement which
is not an open sky Agreement of the type concluded by the other
Member States concerned.
If no satisfactory settlement is reached after
the sending of the reasoned opinions, an action may be brought
by the Commission in the European Court.
ARTICLES 5, 52 AND
169 OF THE
"Member States shall take all appropriate
measures, whether general or particular, to ensure fulfilment
of the obligations arising out of this Treaty or resulting from
action taken by the institutions of the Community. They shall
facilitate the achievement of the Community's tasks.
They shall abstain from any measure which
could jeopardise the attainment of the objectives of this Treaty."
"Within the framework of the provisions
set out below, restrictions on the freedom of establishment of
nationals of a Member State in the territory of another Member
State shall be abolished by progressive stages in the course of
the transitional period. Such progressive abolition shall also
apply to restrictions on the setting-up of agencies, branches
or subsidiaries by nationals of any Member State established in
the territory of any Member State.
Freedom of establishment shall include the
right to take up and pursue activities as self-employed persons
and to set up and manage undertakings, in particular companies
or firms within the meaning of the second paragraph of Article
58, under the conditions laid down for its own nationals by the
law of the country where such establishment is effected, subject
to the provisions of the Chapter relating to capital."
"If the Commission considers that a
Member State has failed to fulfil an obligation under this Treaty,
it shall deliver a reasoned opinion on the matter after giving
the State concerned the opportunity to submit its observations.
If the State concerned does not comply with
the opinion within the period laid down by the Commission, the
latter may bring the matter before the Court of Justice."
1 Under Articles 85 and 86. Back