Select Committee on European Communities Minutes of Evidence

Memorandum by the Air Transport Users Council


  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.


  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.


  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.


  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.


  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

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries

© Parliamentary copyright 1998