Letter and Memorandum by Virgin Atlantic
Airways Ltd
On 28 May 1998 the Clerk to Sub-Committee B
wrote to us about the Sub-Committee's current investigation into
airline regulation. She invited us to submit written evidence,
which Virgin Atlantic is pleased to do. Our submission is attached.
In addition to the submission, however, we wish
to draw to your attention to three points in particular. First,
the subject of the Sub-Committee's enquiry is the proposal by
the Competition Directorate (DGIV) of the European Commission
to extend its powers to apply the existing competition provisions
of the Treaty of Rome to aviation services between the Community
and third countries ((8582/97 (COM 97) 218)). Yet the overwhelming
focus of attention, for example in questions sent to interested
parties and in the questioning of witnesses appearing before the
Sub-Committee, appears to be on the separate issue of extending
the Commission's competency to negotiate air services agreements
between the Community and third countries. Extending the Treaty
of Rome's competition provisions and extending the competency
of the Commission to negotiate air services agreements are two
quite separate proposals, from different Commission Directorates.
Virgin Atlantic would welcome clarification about why the Sub-Committee
has chosen to undertake its investigation in this way.
Secondly, the Explanatory Memorandum submitted
by the Department of the Environment, Transport and the Regions
(DETR), and enclosed with the Clerk's letter of 28 May, states
in paragraph 21 that British Airways (BA) and Virgin Atlantic
have been consulted and both support the Government's position
on the Commission's proposals. As far as Virgin Atlantic is concerned,
this is not correct. We were not formally consulted and we do
not support the Government's position. We have asked the DETR
to correct its Memorandum.
Thirdly, Virgin Atlantic understands why the
Sub-Committee does not want to consider the details of the alliance
between British Airways and American Airlines in the context of
the Commission's competition proposals, although as explained
in our submission, the alliance in fact illustrates aptly why
these proposals are needed. However, it is in our view unfortunate
that as a result the decision has been taken not to invite Virgin
Atlantic to give oral evidence to the Sub-Committee. The Commission's
proposals go far beyond the BA/American alliance and raise issues
of considerable importance to the future of air transport in Europe,
and to Virgin Atlantic. It seems odd that a British airline likely
to be among those most affected by the proposals should not be
invited to give oral evidence, while other UK and foreign airlines
with less direct interest have been invited.
We believe that the Sub-Committee's deliberations
would be helped by concentrating solely on the Commission's proposals
and avoiding as much as possible not only the BA/American alliance
but also the separate Commission proposal to acquire air services
negotiating competency with non-EU countries. Competition policy
is an important subject in its own right and deserves detailed
consideration.
If Virgin Atlantic can be of any further assistance
we would be pleased to hear from you.
Barry Humphreys
Director of External Affairs and Route Development
23 June 1998
(I) THE
PROPOSALS
Virgin Atlantic supports the deregulation of
air services. We believe that air transport is a mature industry
and should be treated as any other industry. The role of governments
should be restricted to ensuring that there is fair and equal
competition and that dominant airlines are not able to abuse their
positions in the market. It is critically important, therefore,
that for deregulation (or liberalisation, or open skies, or whatever
the term used) to succeed there must be a strong and effective
competition policy, and the political will to apply it.
Many believe that deregulation of US domestic
services in the late 1970s failed to achieve its full potential
because of the laissez-faire approach to competition policy
adopted by the US Government. The result was the disappearance
of the numerous small, low cost airlines which emerged following
deregulation and an increase in concentration among the major
carriers to the detriment of the travelling public. Fortunately
in Europe, the Commission is well aware of US experience and appears
to be determined to ensure that European air transport does not
follow the US pattern. It remains to be seen whether the Commission
will be successful. Certainly there are powerful airline interests,
often supported by their national governments, apparently determined
to undermine the Commission's efforts.
Traditionally international aviation has been
tightly controlled. Bilateral air services agreements have determined
which routes may be operated, by whom and at what frequency, and
prices have had to be approved by both governments concerned.
(In practice, of course, given the extremely close relationship
between national airlines and their governments, most of these
decisions were taken by the airlines themselves, operating in
cosy cartels, a situation which still prevails in many markets.)
There was no room for competition policy in this environment,
since there was virtually no competition.
It is evident that the world is changing. Bilateral
air services agreements are being liberalised. The process still
has a long way to go, and all the liberal agreements so far negotiated
outside the EU continue to contain unnecessary restrictions which
separate air transport from other industries. However, the potential
exists for increased competition. Unfortunately, competition policy
has failed to keep pace with other regulatory changes. For air
services within the European Community, Articles 85 and 86 of
the Treaty of Rome apply, but in the absence of adoption of the
Commission's proposals presently under consideration, these Articles
do not apply to air services between the Community and third countries.
In the UK international scheduled air transport is specifically
excluded from current competition legislation. The Competition
Bill tabled by the present Government is silent on whether international
air services will again be excluded, but there is certainly a
risk that they will be.
Thus, there is a hole that must be filled if
air transport competition is to stand any chance of surviving.
Air transport is, after all, an industry characterised by high
barriers to entry, where national markets are usually dominated
by a single favoured airline and where the economic characteristics
of the industry and technical marketing developments mean that
predatory behaviour is a relatively attractive and feasible option
for larger carriers. In other words, smaller airlines face signficant
competition problems and have a right to look to the appropriate
competition authorities to ensure that they are able to compete
fairly. What is involved is not the protection of competitor;
it is the protection of the competition. Without that there is
a real risk that smaller competitors will be squeezed out of the
market, as they were in the US, and the cosy cartel recreated.
The Sub-Committee has said that it does not
want to consider the details of the proposed alliance between
British Airways and American Airlines. It is a fact, however,
that this alliance highlights many of the practical problems created
by the absence of competition rules in international air transport.
Every competition authority that has examined the alliance has
concluded that it is anti-competitive. Yet the Commission's investigation
has been complicated and lengthened because it has been forced
to make use of Article 89 of the Treaty of Rome, combined with
the use of Article 88 by the UK, instead of Articles 85 and 86.
This problem would not have arisen in almost any other industry
and illustrates the importance of accepting the Commission's proposal
to extend EU competition rules to routes to non-EU countries.
In the United States the competition legislation has always applied
to international aviation, and at times has been used extra-territorially.
Europe will remain at a disadvantage until similar powers are
adopted here.
Acceptance of the Commission's proposals might
make the negotiation of bilateral air services agreements by EU
Member States more complicated, and it would probably be necessary
to reach agreement within the Community on how such negotiations
may be carried out. However, this is not a sufficient argument
to reject the proposals. The benefits in terms of protecting competition
and ensuring that smaller airlines can compete fairly are well
worth the price of any additional inconvenience for air services
negotiators.
It is a disappointment to Virgin Atlantic that
the UK Govnerment has chosen to oppose the Commission's proposals.
The DETR appears to be determined to protect its bilateral powers
at all costs and sees the competition proposals as a threat. However,
the extension of the Commission's competency to cover all extra-EU
air services negotiations is a separate matter. The Government
could have sought an understanding on how the Commission's proposals
would work within the context of the current bilateral environment,
rather than opposing the proposals outright. The explanation in
the DETR Memorandum of how the British Airways/American Airlines
case has been handled under Articles 88 and 89 does not do justice
to the very real problems and delays which occurred. These would
have been avoided had the Commission's proposals for new powers
been in place.
(II) THE
QUESTIONS
(1) In your opinion, what are the strengths and
weaknesses of the current regulatory regime governing airline
competition in the European Union?
The principal weakness of air transport in Europe,
as in most other markets, is the dominant positions occupied by
national carriers in their home countries. Air France is overwhelmingly
dominant in France, Lufthansa in Germany, BA in the UK, etc.,
not because they are "better" than their local competitors,
but because they were once the recipients of favours from their
government owners. It is only relatively recently that other airlines
have been allowed to compete (and in certain cases this still
has not happened), by which time the major carriers had established
almost impregnable positions in terms of route networks, airport
slots, control of marketing outlets, etc. This is why the strength
of the Treaty of Rome's competition rules is needed. These are
certainly capable of being used to ensure that competition can
thrive, despite the distortions which currently characterise the
market. The critical question is whether the political will and
resources exist to apply them diligently and urgently.
(2) If, under the proposal, the Commission was
to negotiate bilateral agreements with third countries on behalf
of Member States, should this be done by: (a) a gradual, phased
process; or (b) a rapid transition?
As elsewhere, there appears to be some confusion
here. The proposals will not, of themselves, give the Commission
powers to negotiate bilateral agreements with third countries.
However, were the Commission to obtain such powers, they would
undoubtedly be used gradually, as the Commission has made clear.
The Commission does not have the resources to take over all Member
State bilateral negotiations, most of which will remain the responsibility
of individual Member States for the foreseeable future, possibly
permanently. The Commission would concentrate initially on negotiations
with the United States, followed by other major aviation countries
such as Japan.
(3) If, under the proposal, the Commission was
to negotiate on behalf of Member States a single bilateral agreement
with each third country: (a) how should they do this; and (b)
how would this affect European airline competition?
The Commission already has a mandate to negotiate
so called "soft rights" with the US, i.e., those parts
of a bilateral agreement which do not include traffic rights and
pricing. The Commission established a process of consultation
to agree common positions on each item for discussion at the negotiations,
and for revising those positions as the negotiations proceeded.
On the whole, this approach worked effectively and there is no
obvious reason why it could not be applied to a wider mandate.
An agreement with the US is likely to be some
form of "open skies" deal, allowing any licensed US
or EU airline to operate on any route covered by the agreement.
This would permit, for example, a German airline to operate between
Paris and New York or an Italian carrier to serve Amsterdam-Lost
Angeles. Because the UK accounts for some 40 per cent of trans-Atlantic
traffic, it has been argued that such an arrangement would benefit
Continental airlines far more than UK carriers. Superficially
this may be true. However, infrastructure constraints at the principal
UK airports are likely to limit the impact, and of course opportunities
would be created for UK carriers elsewhere in Europe. In addition,
EU-US negotiations would permit the Commission to pursue its objective
of creating an Atlantic Aviation Area, similar to the internal
European aviation market which already exists. This could lead
to the removal of the remaining government restrictions on air
transport, in particular those which limit foreign ownership and
control of airlines, so that at last aviation could be treated
as any other industry. The opening up of the US domestic market
to competition from foreign companies such as Virgin could benefit
the UK significantly.
The real problems for the Commission in negotiating
on behalf of the Community will arise in dealing with countries
which are not willing to accept open skies. There is no evidence
that the Commission has yet addressed these problems in detail.
For example, if only X frequencies are allowed between the EU
and, say, Tokyo, which airlines will be allocated how many frequencies
on what routes? Who will decide and on what basis? No procedure
currently exists to ensure that such allocation is carried out
fairly.
(4) What effect would the harominisation of future
bilateral agreements between Member States and third countries
have on airline competition?
(5) How would the proposal resolve differences
in economic regulation and implementation of competition rules
for airline services operating between Member States and third
countries?
We believe that we have already answered these
questions above.
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