Memorandum by Virgin Atlantic Airways
Limited (EU 13)
EUROPEAN UNION COMPETENCE AND TRANSPORT
INTRODUCTION
1. Virgin Atlantic welcomes the Committee's
decision to launch an inquiry into this important subject. The
inquiry is timely as, in the aviation sector in particular, the
European Commission is seeking to extend both its powers and its
influence. It is inevitable that the Commission will play a major
role in the regulation of European air transport. However, Member
States should ensure that the Commission's involvement adds value
to what is already in place. There is nothing to be gained, and
much to be lost, from unnecessary Commission intervention.
2. The Commission is likely to add most
value in two areas. First, where it is taking action to promote
competition by removing obstacles to the free movement of goods,
services, persons and capital. In this way it is most likely to
contribute to the competitiveness of the European economy and
to promoting social and economic welfare within Europe. Consumers,
through the exercise of choice, are the most effective regulators.
Commission action should aim to help empower consumers to exercise
those choices. Second, where there are issues or problems affecting
more than one member state, that do not respect national borders
and that can only be effectively dealt with by concerted action
at a supra-national level or EU level. Many environmental issues
would fall into this category. The area where the accretion of
powers or responsibilities should be most vigorously resisted
is where the extension of competence becomes an end in itself,
not the achievement of some policy objectives of benefit to EU
citizens.
3. The evidence in this Memorandum is confined
to the air transport sector. It focuses in particular on EU/US
air services negotiations, but also encompasses moves by the Commission
to obtain mandates for air services negotiations with other countries
and further intervention by the Commission in the areas of consumer
rights, airport slots, air traffic services, safety and security.
Each of these complex issues is covered only briefly. Virgin Atlantic
would be pleased to provide more detailed briefing should the
Committee require it.
4. It is essential, as the Commission increases
its powers in the aviation sector, that the UK Government remains
alert to ensure that UK interests are protected. Other Member
States are certainly actively involved in protecting the interests
of their own stakeholders. There have been occasions when the
UK industry has felt that the Department for Transport has been
unnecessarily heavy-handed in the way it has chosen to implement
new EU legislation, in contrast to the attitude of some other
Member States. The Department could do even more to keep the industry
informed about developments in Brussels.
EUROPE AND
AIR SERVICES
NEGOTIATIONS
EU/US Air Services Negotiations
5. The Committee will be aware that the
European Commission received a mandate to negotiate an Open Aviation
Area with the United States in June 2003, as part of the broader
political settlement with Member States on the conduct of air
services negotiations with third countries. This followed the
European Court of Justice Decision of November 2002. Since June
there have been two rounds of negotiations between the US and
the EU, the most recent of which took place in December in Brussels.
Another round is scheduled to take place in Washington DC in mid-February.
6. Virgin Atlantic has been a long-standing
supporter of the Commission being granted such a mandate. There
are good practical reasons for this. The EU and US markets are
of equivalent size. This makes for a more even-handed negotiation.
Moreover certain items critical to the achievement of an OAA,
such as changes to the ownership and control rules, already require
legislative action at an EU level. We very much welcomed, therefore,
the June settlement. It remains our view that only by acting together
can Europe expect to persuade the United States to alter its protectionist
policies on air services and to move away from the self-serving
so-called "Open Skies" agreements, which the Committee
itself has criticised. However, it is also Virgin Atlantic's view
that the Commission's mandate for the negotiations with the United
States is too tightly drawn in that it covers only air services
between and within the European Union and the United States, and
therefore excludes fifth and seventh freedom rights. This is not
a tenable position for the negotiation of a fully liberal agreement.
The US will wish to include fifths and sevenths. Moreover, if
the US is to be persuaded to move away from its traditional protectionist
position, Europe will similarly have to widen its negotiating
mandate.
7. The inclusion of fifths is of particular
importance to ensuring that the benefits of liberalisation are
spread equitably through the regions of the EU. As the Committee
has in the past recognised, such rights would make direct transatlantic
flights from regional points more viable.
8. The conclusion of a fully liberal Open
Aviation Area between the United States and the European Union
could well lead to a new world order for air services and move
the industry away from bilateralism and protectionism. It is likely
that a number of other, liberally-minded countries will seek to
join a new EU/US agreement, ensuring that the OAA covers a very
large proportion of worldwide aviation. The implications of this
for the future structure of the global airline industry are considerable,
if unpredictable. Certainly, at long last aviation could become
just another mature industry, instead of being restricted by unnecessary
and damaging government regulations. This is why the EU/US negotiations
are so important. It is difficult to exaggerate what is at stake.
If the negotiations are eventually successful, there is no reason
to doubt that UK airlines will be well placed—because of
their earlier exposure to a more competitive multi-airline environment—to
take advantage of the new regulatory environment, as they did
so successfully when the internal EU aviation market was liberalised.
9. The Virgin Group was among the first
to take advantage of the more liberal regulatory environment in
Europe with the establishment of Virgin Express. The same was
true in Australia with the creation of the highly successful Virgin
Blue following the removal of the ownership and control restrictions
for domestic airlines. We are confident that we will be able to
exploit whatever new opportunities are created by an EU/US Open
Aviation Area.
10. The negotiating mandate granted to the
Commission contains most of the elements of a fully liberal deal
that Virgin Atlantic would expect to see, including the removal
of all capacity and designation restrictions, the opening up of
domestic markets, and the ending of the controversial "Fly
America" scheme operated by the United States Government
and its various agencies. The negotiating process is therefore
complex and will inevitably take some time, although probably
not as long as some UK airlines have forecast. Since it is likely
that legislative action will be necessary to implement a fully
liberal agreement, such an agreement may well have to be implemented
in stages. Virgin Atlantic hopes that the Commission will pursue
all elements with equal vigour and will resist US attempts to
limit a final agreement to those elements benefiting its own airlines.
This means that not only should the ultimate package be balanced,
but also each phase, to ensure that the US has a strong incentive
to complete the negotiations. It will also be imperative to ensure
that the Commission does not trade the most valuable UK rights—such
as access to Heathrow—to achieve less valuable concessions
on behalf of other EU member states.
11. Traditionally airlines, as well as other
stakeholders, have participated directly in bilateral air services
negotiations. The stakeholder consultation process is still evolving
and so far is far from perfect. If the Commission is to obtain
deals that best meet the needs of European consumers and industry
it must show a greater willingness to involve all the key stakeholders.
12. We are hopeful that despite inevitable
delays because of the US Presidential Election and EU Commissioner
changes this year, an EU/US agreement will be reached within a
reasonable period. There really is no alternative. The old bilateral
approach has failed, and particularly since the ECJ Decision,
there is no going back for European airlines.
Air Services Negotiations with Third Countries
In many respects this is a more problematic
matter. Despite the political settlement of last June, there remains
a great deal of uncertainty surrounding negotiations with third
countries. The current situation is damaging for both the industry
and consumers and cannot be allowed to persist for much longer.
14. The political settlement was intended
to remove the legal uncertainty and enable Member States to continue
to negotiate bilateral air services agreements. They undertook
that during such negotiations they would seek agreement that any
EU airline could be designated under the provisions of the bilateral.
Where Community designation is acceptable to the other country,
the new bilateral arrangements can be concluded and implemented
immediately. However, where the third country is not willing to
accept Community designation, which is likely in most cases because
this would reduce that country's ability to achieve its future
negotiating objectives, a deal can only be implemented on a provisional
basis pending approval by either an EU Advisory Committee or Regulatory
Committee.[25]
The role of such a Committee would be to ensure that any bilateral
agreement is consistent with EU policy.
15. Since the legislation to create the
Advisory/Regulatory Committee has not yet been approved, the Committee
has not met. The criteria that might be used to decide whether
or not any new arrangements are acceptable (and, if not, what
action Member States would then have to take) is therefore unclear.
This is causing some confusion, especially amongst bilateral partners
who are often reluctant to commit to new deals without knowing
the views of the Commission. As a result some bilateral relationships
are stagnating and failing to respond to market needs. Inevitably,
of course, certain Member States are taking more notice of the
Commission and the political settlement than others. The Commission
itself at times appears to be more interested in expanding its
powers than in meeting in timely fashion the evolving needs of
airlines and the travelling public. A more pragmatic approach
is required.
Horizontal Mandate
16. The third element of the June political
settlement was the granting of a mandate to the Commission to
conduct negotiations with certain third countries to bring their
bilaterals into line with the ECJ Decision on air services. This
involves, inter alia, reaching an EU-wide agreement with these
countries on new designation provisions. The process is commonly
known as the "Horizontal Mandate". It is largely down
to the Commission to propose with which countries it should enter
into horizontal discussions, but its list has to be endorsed by
the Council of Ministers.
17. Horizontal negotiations have already
taken place with Australia, Singapore and New Zealand, though
without a positive outcome largely because these countries wanted
to discuss a much broader deal. The Commission was restricted
by the Council to its tightly-defined mandate.
18. There is concern that the Horizontal
Mandate creates an unnecessary level of complication. If the Commission
is engaged in, or is planning to enter into, horizontal negotiations
with a third country, Member States should not raise the standard
designation clauses with that country. It is also Virgin Atlantic's
understanding that the Commission is asking Member States not
to do anything in their own negotiations with the third country
that could jeopardise its ability to reach agreement on horizontal
matters.
19. The principal difficulty for the Commission
on the Horizontal Mandate is that it is often in a very weak bargaining
position. It is seeking changes to existing bilaterals without
being able to offer anything in return to a third country. The
concern of many in Europe is that the Commission will very quickly
use this as a reason to seek additional full mandates. There remains
opposition among many Member States to the granting of such mandates
unless the Commission is able to show that it can add value to
the current bilateral approach. There is a distinct possibility
of a stand-off, which could further restrict the ability of airlines
to react to market demands. This was not what the political settlement
of last June was meant to achieve.
Additional Mandates
20. Consistent with its position on negotiations
with the US, Virgin Atlantic is not opposed in principle to the
Commission being given additional mandates. However, as a practical
matter it should prioritise its activities, rather than spread
itself too thinly at the outset. The Commission would be better
advised to concentrate its efforts initially on securing an Open
Aviation Area with the United States, rather than seek additional
full air services negotiating mandates from the Council. It could
then turn its attention to other countries. The only exception
to this should be potential accession States to the European Union
and other geographically close States in Eastern Europe or around
the Mediterranean basin. The Commission already has experience
of such negotiations, and has achieved some success.
Consumer Issues
21. The Commission and the European Parliament
have brought forward a number of new measures and consultations
connected with consumer rights. Whilst Virgin Atlantic welcomes
measures which support consumer interests and accessibility, some
Commission activities in this area show a lack of understanding
of the industry and the external impacts upon it.
22. Examples of where the Commission and
the European Parliament can and have been effective are in introducing
the voluntary "Air Passenger Service Commitment" code
of conduct which establishes industry-wide best practice. Commission
efforts to promote best practice through voluntary action places
consumers in a stronger position in the market. Virgin Atlantic
also welcomes the Commission's draft Regulations on assistance
for passengers with reduced mobility, which will ensure a level
playing field across Europe. Virgin Atlantic already provides
free of charge assistance to passengers with reduced mobility,
whilst some others charge for assistance, either in full or in
part. The proposed EU Regulation will prevent carriers and airports
for charging for such assistance and we are happy to work with
the Commission to ensure that the eventual Regulation is workable
for the industry and provides the best possible service for customers.
23. However, not all initiatives are well
timed or thought through. An example of this is the proposed Regulation
on Denied Boarding Compensation. Developed by the Commission at
a time when the industry was deep in crisis in the immediate aftermath
of the tragic events of 11 September 2001, it stems from a misunderstanding
on the part of some in the Commission about the way that airlines
operate and what passengers really want. The draft Regulation,
which is nearing its final stages, was poorly drafted from the
outset, resulting in a large proportion of the legislative process
being taken up with trying to clarify and define key elements.
In its current form it is still unclear and is, in some respects,
probably unworkable. It will lead to large increases in compensation
payments for passengers who are either denied boarding or who
are subject to delays, even where the airline is not responsible
or at fault. The result will almost certainly be an increase in
fares and reduced flexibility for passengers. Neither of these
outcomes will serve the consumer's interests
Single European Sky
24. Virgin believes that the Commission
can add value in this area. Adopting a united and unified air
traffic control regime for Europe will produce significant savings
for airlines, reduce complexity and benefit the environment. Despite
recent agreement in Brussels, there is still a long way to go
and the political obstacles should not be underestimated. Whilst
this is a pan-Europe initiative, Virgin Atlantic believes that
this should be done with the full support and input of national
governments and we are pleased to see that the UK Government and
National Air Traffic Services are playing a full role in this
important development.
Slots
25. The Commission has for some time been
conducting a review of the current Slot Regulation. This has been
a very slow process. Rather than aiming for a more radical review
of the current Regulation, as Virgin Atlantic would prefer, the
Commission has instead opted for relatively minor adjustments,
leaving more substantive revisions to a later date. However, even
reaching agreement on the more minor changes has proved very difficult,
with the Commission proposing at one time to ban all forms of
secondary trading in slots, something that would have created
serious problems at an airport such as Heathrow. This shows a
lack of understanding on the part of the Commission of the way
the aviation industry operates. These proposals have now been
overturned, thanks in particular to active lobbying by the UK
Government and airlines. The Commission should now consider how
the promotion of a permissive market in slots could improve consumer
welfare on a pan-European basis, rather than attempt to impose
inappropriate supranational solutions. Where capacity is restricted,
slots act as a barrier to entry. Trading is an obvious, initial
solution, although longer term a more radical approach might be
more appropriate.
Safety and Security
26. The Commission is now responsible for
setting minimum levels of security at European aviation installations.
Detailed proposals are likely to be published soon, although they
are not expected to require significant changes in the UK.
27. On safety, the new European Air Safety
Authority (EASA) has been established to oversee safety regulation
in Europe. In principle, this is a development to be welcomed,
although it remains to be seen how EASA will perform in practice.
A system of single European safety values could promote the operation
of the single market whilst guaranteeing high safety standards
across the EU.
28. However, Virgin Atlantic, along with
other UK airlines, remains concerned at the role of the Safety
Regulation Group of the UK Civil Aviation Authority in relation
to EASA. There is an urgent need to review SRG's activities relative
to EASA's new powers. Safety standards must be maintained, but
in addition duplication should be avoided and costs on the industry,
which eventually have to be passed on to the travelling public,
should be kept as low as possible. It is not obvious to Virgin
Atlantic that SRG has yet developed an acceptable business strategy
to reflect the new environment in which it now has to operate.
The Commission is intending to propose progressive amendments
to the aviation safety regulation to widen the responsibilities
of EASA; it is essential that SRG reviews its responsibilities
in advance of the adoption of these amendments.
29. The Commission has also recently reached
agreement with the US on transatlantic air passenger data exchanges.
The protracted nature of these negotiations demonstrate many of
the difficulties that lie ahead for the Commission. However, on
many aspects of safety and security, the Commission could achieve
more on a pan-European basis than member states could alone. The
Commission should ensure that it makes full use of the expertise
available in the aviation industry and other member states.
Conclusion
30. The Commission can add value in a number
of areas through the promotion of competitiveness and choice across
Europe and the facilitation of the operation of the internal market.
However, the UK Government should remain alert to Commission initiatives,
and ensure that UK interests are fully protected in the framing
of legislation and that domestic legislation keeps track with
developments elsewhere.
31. The Commission in turn should focus
on the areas where it can add most value. At the moment, its effort
should be directed towards the securing of an Open Aviation Area
with the United States. This should be done in full consultation
with industry and Member States to guarantee that the Commission
is making best use of the extensive expertise available.
January 2004
25 The draft Regulation concerning third country negotiations
originally proposed an Advisory Committee, but Virgin Atlantic
understands that some Member States and some elements within the
European Parliament favour a Regulatory Committee. There is an
important distinction here. The former is a committee consisting
of Member States which merely advises the Commission, with the
Commission making the final decision. In the latter case it is
the Committee which would itself endorse any air services deal,
working on the basis of Qualified Majority Voting. Back
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