Supplementary Memorandum by the Department
of the Environment, Transport and the Regions
1. Paragraph 17 of your Explanatory Memorandum
(EM) states that bilateral agreements "may not be compatible
with the competition rules in Articles 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?
1. The above statement in paragraph 17 of our
Explanatory Memorandum refers to the possibility of an incompatibility
or conflict between certain provisions of bilateral agreements
and the EC competition rules. This is the subject of the new Article
18a of Regulation 3975/85 proposed by the Commission, which was
discussed in paragraph 17.
2. Bilateral agreements relating to air services
between Member States and third countries may encourage or require
airlines to engage in certain types of activity which would normally
be prohibited under the EC competition rules applicable to undertakings.
Such agreements may contain limitations on capacity, designation
and pricing freedom, and, in some cases, particularly in older
agreements, provisions requiring formal co-operation between airlines.
The Commission is proposing in the new Article 18a that it should
be empowered to hold consultations with the competent authorities
of the third country concerned where the application of the competition
rules in a particular case is liable to lead to a conflict with
the provisions of the bilateral agreement to which the third country
has subscribed with a Member State. It is in this context that
the incompatibility mentioned in paragraph 17 of the Explanatory
Memorandum may arise.
3. As a general practice, the UK seeks to conclude
liberal agreements with its aviation partners, where possible,
but is not always able to do so.
2. Paragraph 18 of your 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 does 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 is it permissible for Member States to conclude
bilateral agreements which might include provisions that may not
be compatible with Articles 85 and 86?
4. The above statement in paragraph 18 of our
Explanatory Memorandum relates to the proposed new Article 18a,
mentioned above, which would enable the Commission to intervene
in certain circumstances in the context of a bilateral air services
agreement between a Member State and a third country. The purpose
of this statement was to emphasise that the Commission is not
entitled to renegotiate the terms of existing bilateral agreements
with third countries.
5. The statement was not, however, intended
to suggest that the Treaty and its competition rules do not limit
Member States' freedom to conclude bilateral agreements containing
provisions which may be incompatible with Articles 85 and 86 of
the Treaty. The European Court of Justice has held that Member
States have a duty under Article 5 of the EC Treaty not to adopt
or maintain in force any measure which could deprive the competition
rules of their effectiveness (Joined Cases 209 to 213/84 Ministère
public v Asjes  ECR 1457 and Case 66/86 Ahmed
Saeed  ECR 803). In the case of undertakings to which
Member States have granted special or exclusive rights, Member
States are bound by Article 90 to refrain from enacting or maintaining
in force any measure contrary to the competition rules laid down
in Articles 85 and 86 of the Treaty (Ahmed Saeed). Article
88 of the Treaty imposes on the authorities of the Member States
the obligation to apply Articles 85 and Article 86 in the absence
of Community implementing legislation under Article 87 (Ministère
public v Asjes). The EC Competition Law (Articles 88
and 89) Enforcement Regulations 1996 enable the UK competition
authorities to rule on practices which fall outside the scope
of Regulation 3975/85.
6. The Treaty and its competition rules do,
therefore, in principle, restrain Member States' freedom of action
in respect of bilateral agreements covering extra-Community air
services. However, at present, the Commission does not have the
power (which it is seeking in the proposed new Article 18a) to
intervene directly vis-á-vis Member States' bilateral
partners with a view to enforcing Member States' obligations under
the Treaty and its competition rules; the appropriate procedure
is infringement proceedings under Article 169 of the Treaty.
3. To what extent does the Community already have
external competence in civil aviation matters?
7. The Community derives external competence
in civil aviation matters from the Treaty provisions on transport,
in particular Article 84(2). As a general rule, this competence
only becomes exclusive when and insofar as common internal rules
are established which could be affected by obligations assumed
by Member States with third countries (Opinion 1/94 (WTO) 
ECR-I 5267, paragraph 77). The extent of the Community's exclusive
competence depends on the scope of those internal rules.
8. With the adoption of the Third Package in
1992, the Community has laid down common rules covering most aspects
of the internal market in the aviation sector. Where the common
rules apply to third country nationals (e.g., in respect of slot
allocation and computer reservation systems), the Community probably
has exclusive external competence for the subject matter covered.
Where, however, the scope of application of the rules is limited
to the Community, Member States retain their competence to conclude
international agreements. This is the case, in particular, of
the rules on traffic rights contained in Council Regulation 2408/92,
which govern the access of Community air carriers to intra-Community
air routes. The Community has not established common rules on
access to third country routes, so Member States remain competent
to negotiate traffic rights with third countries.
9. In Opinion 1/94, the European Court of Justice
rejected the Commission's argument that "the Member States'
continuing freedom to conduct an external policy based on bilateral
agreements with non-member countries will inevitably lead to distortions
in the flow of services and will progressively undermine the internal
market", particularly in the case of "open skies"
agreements (paragraph 78). The Court stated that, in such cases,
the Community institutions could make provision in the common
rules laid down by them for "concerted action in relation
to non-member countries" or could "[prescribe] the approach
to be taken by the Member States in their external dealings"
(paragraph 79). The Community has not laid down rules containing
such provisions in the area of extra-Community traffic rights.
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 had
certain procedural powers under Article 89.)
10. If the proposed Regulations were adopted
by the Council, the Commission would considerably enhance its
procedural powers to apply the competition rules in respect of
extra-Community air services. The existing transitional regime
based on Article 88 of the Treaty would come to an end, and the
authorities of the Member States would, in particular, lose their
power to grant exemptions under Article 85(3) of the Treaty.
11. The proposed Regulations might also indirectly
extend the Community's external competence in air transport. The
Community has not been authorised to negotiate and conclude air
transport agreements which would replace the existing network
of bilateral agreements between Member States and third countries.
By enabling the Community to intervene in respect of the competition
provisions of those bilateral arrangements, the proposed Regulations
might extend the Community's competence to negotiate aviation
relations with third countries.
5. On what grounds is the Commission, as reported
in the media, bringing infringement proceedings against certain
Member States for negotiating agreements with third States?
12. The Commission has initiated legal proceedings
against eight Member States which have signed bilateral air services
agreements with the US since the creation of the single European
aviation market: Austria, Belgium, Luxembourg, Denmark, Finland,
Germany, Sweden, and the UK. It should be noted that the so-called
"Open Skies" agreements signed by all other Member States
were considerably more wide-ranging than the "mini-deal"
concluded by the UK in 1995, which amended the main 1977 air services
agreement with the US (commonly known as "Bermuda 2")
and whose principal effect was to open up air services between
UK regional airports and the US.
13. In July 1995 the Commission wrote to the
Secretary of State for Foreign and Commonwealth Affairs alleging
that the UK had breached Community law by concluding its agreement
with the US. The UK responded in September 1995, rebutting the
Commission's claims. In March this year, the Commission moved
to the next stage of the legal process by issuing a "Reasoned
14. The Government firmly rejects the Commission's
allegations. It regrets that it is not, however, possible for
it to comment in detail on the proceedings as these are covered
by a long-standing principle of confidentiality observed by the
Commission and Member States.