Memorandum by the Air Transport Users
Council
LOCUS
1. The Air Transport Users Council (AUC) represents
the interests of air travellers. It was established in 1973 to
advise the Civil Aviation Authority (CAA) on the interests of
airline users and to investigate individual complaints against
airlines. The Council consists of lay Members supported by two
consultants and a small secretariat. Members are drawn from all
parts of the country and walks of life, providing a balanced representation
of business and leisure travellers. In addition to the Council
itself being representative of airline users, it is kept well
informed about the wider views of passengers by several thousand
letters and telephone calls received each year.
BACKGROUND
2. Our understanding is that this investigation
stems from the proposal by the European Commission to extend the
Regulations laying down the procedure for the application of the
Community Competition Rules to air transport. The Competition
Rules were originally applied to services between Community Member
States by implementing Regulations adopted in 1987, so prospectively
applying the Competition Rules to the liberalised aviation market.
The scope of the Regulations was subsequently extended to services
within Member States, in line with the final stages of liberalisation,
which permitted carriers established in one Member State to operate
services in another (cabotage).
3. In 1989, the Commission brought forward proposals
to extend the scope of these Regulations to services to third
countries but these were not taken up by the Council of Ministers.
The current proposals effectively revive the 1989 draft.
SCOPE OF
THE PROPOSALS
4. The direct effect of the proposals would
be to give the European Commission a clear mandate and well-defined
procedures for applying the Competition Rules and the Treaty of
Rome to anti-competitive practices by airlines on services to
third countries.
5. Currently, because the implementing Regulations
do not apply to such services, Articles 85 and 86 must be applied
through the transitional provisions contained in Articles 88 and
89. Article 88 is applied by Member States and Article 89 by the
Commission. The central difference between these two provisions
is that only a Member State can exempt an agreement involving
services to a third country from the prohibitions contained in
Article 85. For the Commission to achieve this requires the co-operation
of the Member State.
6. This legal framework has given rise to the
less than satisfactory situation under which the proposed alliance
between British Airways and American Airlines has been examined
both by the UK national authorities (Office of Fair Trading) and
the European Commission (DGIV). The lack of clear powers has made
the Commission's task more difficult but has not inhibited it
from investigating this alliance alongside the Star alliance and
the KLM/NorthWest alliance.
7. The indirect effect of the proposal
would be to extend "Community Competence" to air services
to third countries. This is a complicated legal area concerned
with the extent to which decision making has been transferred
to the Community from the Member States. The main way that competence
is transferred is through adoption of Regulations. That is, the
more that the Community has done in an area, the more it can claim
to have responsibility, to the point where national competence
is extinguished.
8. There is a strong difference of opinion between
the European Commission and the Member States over whether external
Community Competence has already been established in the field
of air transport. Unless circumstances change, this dispute appears
unlikely to be resolved short of a ruling by the European Court
of Justice. However, adoption of these Regulations would represent
explicit recognition by the Council of Ministers of some degree
of external Community Competence in this area. As indicated in
the question posed by the Committee, this would open up the possibility
of Community involvement in the negotiation of Air Service Agreements
with third countries.
THE CONSUMER
INTEREST
9. There is no clear consumer interest in the
technical questions regarding application of the Competition Rules.
These Rules are designed to protect the consumer and, provided
they are properly applied, it is probably of no great moment which
authority has responsibility. For services affecting the UK, we
would expect either the OFT or the European Commission to carry
out a full, objective investigation of any potentially anti-competitive
agreements or actions.
10. Conversely, there is a major consumer interest
in Community involvement in air service relations with third countries.
Air Service Agreements govern the exercise of sovereign rights
over the use of national air space and represent an exchange of
rights to carry "passengers, mail and cargo" between
the two contracting States. The fundamental problem with such
agreements is that they have historically been negotiated on the
basis of national economic interests. The classic, unreformed
Air Service Agreement permits the flag carriers of each country
to provide equal numbers of flights on specified routes at fares
agreed by the two authorities. Such agreements can require the
two airlines to establish a revenue pool and agree any changes
they wish to make between themselves before seeking approval from
their governments. This lack of competition reduces consumer choice
and leads to higher fares. For example, while we have no access
to the Air Service Agreement with Brazil, it is notable that the
direct fares to Rio de Janeiro are almost twice as expensive as
the equivalent fares to Los Angeles, which is about the same distance.
Moreover, where there is no competition, carriers have no incentive
to improve efficiency or to provide better services. Liberalisation
of such agreements should benefit consumers by providing competition
and greater choice on routes that are already served and by opening
up new destinations. For example, under a liberal agreement with
the United States, British Airways and Virgin Atlantic would both
have been able to operate their services to Denver and Las Vegas,
respectively.
11. In recent years, the UK government has actively
sought to re-negotiate more liberal Air Service Agreements, and
has had some significant success. The benefit to consumers therefore
turns on the extent to which negotiations conducted at Community
level are likely to result in even greater liberalisation of services
to third countries. This, in turn, depends on whether the European
Commission is more likely to seek liberalisation and whether
it is more likely to achieve that end.
12. One area where the Community is almost certainly
more likely to seek liberalisation concerns the "ownership
and control" clauses in bilateral Air Service Agreements.
These permit the authorities in the two countries that are party
to the agreement to refuse designation of an airline that is not
owned and controlled by nationals of the other party. So, for
example, Deutsche BA cannot operate between Frankfurt and Tokyo
under the bilateral Air Service Agreement between Germany and
Japan. This limitation is contrary to the right of establishment
and the right to provide services laid down in the Treaty of Rome
and, while the Treaty does contain a transitional provision for
pre-existing international agreements, there is an obligation
on Member States to seek to remove any discrimination. We know
of no case where a Member State has actively sought to re-negotiate
this aspect of its Air Service Agreements.
13. The reason for this inaction by Member States
is that it is against the economic interests of their national
airlines to open up their markets to third countries to carriers
from other Member States. They therefore have little or no interest
in seeking to amend their Air Service Agreements in this way,
particularly when the other party to the agreement is likely to
seek some economic advantage in return. However, from the point
of view of consumers, it is the competition that matters, not
the nationality of the airlines. We would therefore welcome any
agreement that permitted more services to be operated to third
countries from the UK, irrespective of the ownership and control
of the airlines offering those services.
14. The strongest argument in support of the
Commission's assertion that the Community is more likely to achieve
liberalisation is that, by pooling the negotiating capital of
15 Members States, it is possible to win a better deal than through
15 separate negotiations. This argument is applied particularly
with respect to the United States where the Commission has hopes
of winning cabotage rights within the United States in return
for fifth freedom rights within the Community. There is little
doubt that they would have a stronger case for such rights than
would any Member State seeking to negotiate reciprocal cabotage
rights. On the other hand, cabotage within the United States is
so valuable that it may not be negotiable at all. However, if
it could be achieved, such cabotage would benefit consumers, as
would the economic "concessions" of permitting US carriers
(or, indeed other third country airlines) to offer fifth freedom
services within the Community.
15. The third potential benefit of Community
negotiations would be a general relaxation of the "ownership
and control" rules. The rights granted within the Community
to "Community carriers" applies only to airlines that
are at least 51 per cent owned and controlled by Community nationals.
Any change to this figure could only be negotiated at Community
level. In the United States, there is primary legislation which
prohibits the foreign holding in a US airline from exceeding 25
per cent. If the US threshold could be increased to that of the
Community (or, indeed, if both could be raised), the pressure
to form alliances would no longer exist. The reason that Community
carriers wish to form such alliances is that this provides their
only access to the US cabotage market. If the ownership rules
were relaxed, they could buy into an American carrier or even
set up a subsidiary. This, therefore, would be a method of achieving
such market entry without the loss of competition that results
from the formation of alliances.
16. In principle, therefore, there are a number
of grounds for believing that consumers would benefit from Community
involvement in air service negotiations with third countries.
It is in consideration of the practical aspects that the drawbacks
surface. There are many unresolved questions as to how a transition
would be made from bilateral to multi-lateral arrangements. However,
the principal problems would arise if the Commission were not
entirely successful in winning a fully liberalised agreement with
a third country. In those circumstances, a limited set of traffic
rights would be exchanged and the Community would be left with
the problem of prioritising traffic rights and deciding which
airlines should exercise them. This would, doubtlessly go to the
Council of Ministers where a second negotiation would take place
based on the basis of national economic interests.
17. The UK is an extremely powerful player in
the world aviation scene and, with most third countries, is likely
to be able to negotiate an Air Service Agreement that is beneficial
to UK industry, the economy and consumers. While the Community
is likely to be in an even stronger negotiating position, any
benefits that it wins will be spread more evenly among Community
Member States and there is no guarantee that the net outcome for
UK consumers would be better.
CONCLUSIONS
18. There are two reasons for believing that
European consumers are likely to gain more benefit from Community
negotiations with third countries than from the continuation of
bilateral Air Service Agreements. First, Community negotiators
would have more to offer and could therefore expect to win greater
liberalisation. Secondly, Member States are likely to give greater
weight to national economic interest than to consumer benefit.
19. For UK consumers, these advantages are tempered
by the possibility that the UK Government could be less successful
in the internal Community negotiations in which traffic rights
are divided up than if they are in direct air service negotiations
with third countries. (This concern reflects the view that the
UK generally has a more powerful negotiating position when exchanging
air traffic rights with third countries than in negotiations within
the European Community).
20. In our view the balance of these interests
comes down in favour of Community negotiations. Consumers have
benefited substantially from air service liberalisation, first
within the UK and now in the European Community. The next stage
in this process is liberalisation with third countries. This seems
much more likely to be achieved multi-laterally. In our view,
these long-term strategies gains justify the small risk of losing
consumer benefit in the short term.
21. We are therefore in favour of Community
involvement in aviation relations with third countries and, for
that reason, we endorse the Commission's proposals.
15 June 1998
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