Memorandum by the Department of the Environment,
Transport and the Regions
(I) INTRODUCTION
1. This evidence should be read in conjunction
with the Explanatory Memorandum submitted to the Scrutiny Committees
by the Department of the Environment, Transport and the Regions
on 8 September 1997.
2. Articles 85 and 86 of the EC Treaty set out
the Community's rules on competition. Existing Regulations (3975/87
and 3976/87 (as amended)) apply these rules to intra-EC/EEA air
services, entirely between or within Member States. They do not
apply to extra-EEA air services. The Commission has now proposed
two Regulations which would in effect extend the scope of the
existing Regulations to cover extra-EEA air services.
3. Until Regulations applying the rules to extra-EEA
air services are adopted, both Member States (under Article 88)
and the Commission (under Article 89) have powers to investigate
the competition aspects of extra-EEA air services. However, only
Member States have powers to grant exemptions from the competition
rules set out in Article 85. If the proposed Regulations were
adopted, the Commission would have the sole right to investigate
and to grant exemptions in future cases under EC competition law.
(II) HISTORICAL
BACKGROUND
4. Historically, the provision of air services
to third countries has been negotiated on a country-to-country
basis. This system of bilateral agreements continues to govern
much of international aviation, but aviation services within the
European Community are a major exception. With the adoption of
the so-called "First Package" of liberalisation measures
in 1987, the Community began to move towards establishing a single
aviation market. At the same time, the existing Regulations were
adopted, to provide common competition rules for the services
covered by the new liberalising measures, i.e., air services between
Member States. When the single market was completed with the adoption
of the "Third Package" in 1992, which opened up domestic
air services within individual Member States ("cabotage")
to all Community carriers, the Regulations were amended to extend
the scope of the common competition rules to those services too.
There has therefore always been a parallel between the scope of
the Community's aviation rules and the scope of the Regulations
applying the competition provisions of the Treaty to the air transport
sector.
5. It should be noted that the Commission presented
proposals in both 1981 and 1989 which would have brought services
to third countries within the scope of procedures for applying
the competition rules, but on both occasions, Council declined
to give its support.
(III) GOVERNMENT
POLICY
6. The Government believes that competence for
the application of the Community's competition rules to the air
transport sector should move in parallel with competence to negotiate
traffic rights. The adoption of Community legislation has until
now followed that path, with the application of competition rules
first to air services between Member States and then to services
within Member States mirroring the gradual development of the
single aviation market.
7. In the present state of Community law, the
Community does not have exclusive competence to negotiate air
services agreements with third countries. Should the Council at
some point in the future authorise the Community to conclude air
services agreements with third countries generally, or with a
major third country such as the US individually, it might be envisaged
that the sole power to enforce the Community's competition regime
in the markets in questions should transfer to the Commission
at that time. The Government believes that for as long as Member
States retain competence for negotiating bilateral air services
agreements, they should also retain competence for the application
of the Community's competition rules to the services covered by
those agreements. It should of course be borne in mind that Member
States' competence in this area is not exclusive; it runs in parallel
with Commission competence by means of dual arrangements set out
in Articles 88 and 89 respectively, as evidenced by the current
investigations into the proposed British Airways/American Airlines
alliance.
8. Member States have declined to cede competence
to the Community for negotiating the generality of air services
agreements with third countries. In particular they have resisted
sustained pressure from the Commission to grant the Commission
a mandate to negotiate traffic rights with the United States.
Member States have not been persuaded that they would obtain added
value from negotiations at Community level compared to continuing
to negotiate bilaterally. The Commission's present proposals on
the application of the competition rules would widen the Commission's
scope to intervene where a conflict arose between the competition
rules and a Member State's bilateral agreement with that third
country, or between the competition rules and the competition
regime of that third country. In the Government's view this would
be tantamount to the Commission securing a measure of competence
with regard to external aviation relations by the back door which
it has been unable to achieve by obtaining a mandate.
(IV) RESPONSE
TO QUESTIONS
9. In response to the five specific questions
posed by the Sub-Committee, the Department for the Environment,
Transport and the Regions has the following comments:
In your opinion, what are the strengths and weaknesses
of the current regulatory regime governing airline competition
in the European Union?
10. The Department has already indicated its
view that the application of the Community's competition rules
to the air transport sector should move in parallel with the competence
to negotiate traffic rights. The Department therefore believes
the scope of the current regime to be appropriate.
11. Regarding the practical arrangements under
which the Community's competition regime operates with regard
to services inside the internal market, the Department would identify
two principal weaknesses. First, there is scope for greater transparency
surrounding the administrative procedures, though once the Commission
has decided to open proceedings following an initial complaint,
the Department believes a fair balance is generally maintained
between the conflicting claims of transparency and the need to
protect commercial confidentiality.
12. This point links to the Department's second
concern: the speed of the regulatory process. It is not unusual
for parties to have to wait for several months before knowing
whether their case will be heard formally, and even then the process
moves slowly. As the case brought by easyJet against KLM in October
1996 demonstrated (Case IV/36.240), even when there is an application
for interim measures, (in that case because of alleged predatory
behaviour), the Commission may find it difficult to respond with
a speed appropriate to the nature of the alleged offence and,
if proven, its possible commercial consequences. While appreciating
the need for robust analysis of complaints, and the resource constraints
under which the Commission operates, the Department believes that
such delays may call into question the effectiveness of the regulatory
regime.
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
13. It should be noted that the proposal itself
would not permit the Commission to negotiate bilateral agreements
with third countries. It would, however, grant the Commission
a more significant role in the negotiation of bilateral agreements
between individual Member States and third countries by giving
it more scope to intervene when conflicts emerge between those
bilateral agreements and the Community's competition rules. At
present, the Commission has to rely on the provisions of Article
169 of the Treaty which, in practice, restrict its ability to
intervene before the formal conclusion of a bilateral agreement
by a Member State.
14. Formal negotiation by the Commission of
a multilateral Community-level air services agreement with a third
country would require an explicit mandate from the Council, following
a proposal from the Commission. To date, the Commission has obtained
mandates from Council for three sets of aviation negotiations:
with Norway and Sweden (which were subsequently subsumed by the
agreement establishing the European Economic Area and, in the
case of Sweden, its accession to the Community); with Switzerland;
and with ten Central and Eastern European countries (Bulgaria,
the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland,
Romania, Slovenia, Slovakia). The Commission has also been granted
a mandate to hold limited exploratory talks with the US, but has
no authority to negotiate on "hard rights" i.e., market
access, capacity or fares). In every case where the Commission
has been given authority to negotiate a comprehensive agreement,
the practical effect has been or would be, to extend the single
European aviation market to countries bordering on the Community.
All of these, with the exception of Switzerland and Norway, are
also applicants for full accession to the Community. Negotiations
with geographically distant third countries such as the US raise
different considerations.
15. The Department assumes that the question
of phasing refers to the nature of the agreement between the Community
and a particular third country. In this respect, the Department
would point to the Commission's current proposals for a "dual-track"
approach to aviation negotiations with the US. This envisages
that while the Commission would negotiate on a comprehensive EC/US
agreement, Member States would still be able to conclude bilateral
agreements, with the aim that these would eventually converge
into the multilateral regime at an agreed future date. Discussion
of these proposals has already uncovered a number of technical
weaknesses and uncertainties that suggest this process is not
likely to form a viable basis for EC/US aviation relations. The
Department believes many of the same considerations would apply
to a similarly phased approach to aviation negotiations with other
third countries.
16. There are, of course, other ways in which
a phased approach could be achieved. For example, a multilateral
agreement could begin by including only flights within and between
the Community and a third country, with so-called "beyond
rights" reserved for a later phase. Given the many different
levels of market access which can be defined, the Department is
unable to give a blanket answer to this question: each case would
need to be assessed on its merits. In general, however, the UK
would seek to secure the same high level of liberalisation in
any Community-level agreement that it currently tries to achieve
through its bilateral negotiations.
17. If the question refers instead to the generality
of negotiations with third countries world-wide, it is most probable,
on the grounds of resource implications alone, that the transition
from a system of Member State bilateral agreements with third
countries to a multilateral Community-level regime could be achieved
only gradually. In any event, it should be noted that there are
only a limited number of markets in which there might be any prospect
of Member States obtaining added value from a multilateral agreement.
Broadly, these are the large trading blocks whose size is commensurate
with that of the Community: for example, (in addition to the US),
Japan, the ASEAN countries, and possibly Australasia. A series
of inter-regional agreements would be a more likely scenario than
an accumulation of agreements with individual third countries.
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?
18. It should be noted that the proposal itself
would not permit the Commission to negotiate on behalf of Member
States a single bilateral agreement with each third country. However,
the general procedure for Community-level negotiations with third
countries is set out in Article 228 of the EC Treaty. This provides,
inter alia, for a Special Committee of Member State representatives
to assist the Commission in its negotiations, which take place
within a general framework laid down by the Council. In addition
to complying with Article 228, it would also be necessary to ensure
that industry interests are taken fully into account in preparing
for multilateral negotiations with third countries, as is currently
the case with bilateral talks.
19. In principle, a Community-level agreement
with a third country could be based only on a liberal mandate
(i.e., one which would secure a free regime broadly analogous
to that which now applies within the single European aviation
market), since a protectionist mandate (i.e., one which would
envisage limitations on market access) would necessitate the division
of restricted traffic rights among Member States, a scenario which
is difficult to envisage. But in practice, the effects on European
airline competition of a single Community-level bilateral agreement
with a third country would depend largely on the identity of the
country concerned and the nature of the traffic rights granted
by the agreement. Traffic patterns between individual Member States
and individual third countries vary enormously: e.g., about 40
per cent of total EC/US traffic is carried between the UK and
the US, while the next largest Member State, Germany, has less
than 20 per cent of the total market; and smaller third countries
may have direct services to and from only a few European Union
member States. The main change from a bilateral to a multilateral
regime might involve the replacement of national designation by
a Community designation, which would have the effect of opening
up bilateral arrangements to competition from within the Community
(e.g., in the context of an EC/US agreement, a German carrier
would be able to fly between London and New York, conversely,
a British carrier would be able to fly between Frankfurt and Washington).
It is difficult to assess how much use carriers would in practice
make of these opportunities, and hence the effect on competition.
If the development of the Community aviation market provides any
guide, there might be increased competition on the densest routes,
but carriers may be reluctant to operate routes which do not link
into their existing network. Much would depend on the size of
a particular market, the extent to which hub carriers dominate
major airports, and the state of airline alliances. A Community-level
agreement might also involve the removal of nationality-based
restrictions on ownership and control of airlines in favour of
the more liberal arrangements that now apply in most other sectors
of the economy.
What effect would the harmonisation of future
bilateral agreements between Member States and third countries
have on airline competition?
20. It is assumed this question refers to the
possibility that, rather than authorising the Commission to negotiate
a new multilateral agreement, Member States should endeavour to
secure the same effect by harmonising their existing bilateral
agreements with third countries along agreed lines.
21. This does not appear to us a practical route
for achieving a Community-level agreement with third countries.
Member States' bilateral agreements with any given third country
may vary significantly, as will the relative negotiating weight
of the two parties, depending on the nature of the market concerned.
Because one Member State is able to achieve a particular Community
objective, it does not necessarily follow that all other Member
States will be able to do likewise. Seeking to establish a multilateral
regime by this method would also have significant resource implications
for the Commission, which would in effect be required to attend
all bilateral negotiating sessions between Member States and third
countries.
22. Assuming the same underlying objectives
applied, we would expect the overall effect on airline competition
to be the same as if the multilateral route were followed.
How would the proposal resolve differences in
economic regulation and implementation of competition rules for
airline services operating between Member States and third countries?
23. The proposals will not themselves resolve
differences in economic regulation and competition rules between
Member States and third countries.
24. The principal effect of the proposals would
be to transfer sole competence to the Commission for the application
of the Community's competition rules on routes to third countries,
removing from Member States the primary role they exercise at
present. The change is thus not one of the competition regime
itself, i.e., Articles 85 and 86 of the EC Treaty, but of the
procedures and responsibilities for implementing the relevant
provisions of those rules, including granting exemptions. Should
the Commission's proposals be adopted, any conflicts which currently
exist between the Community's competition regime and those of
third countries will therefore remain, though they would become
the subject of consultation in certain circumstances. The application
of the competition rules would also cause problems where bilateral
agreements, which require negotiation with a third country, are
themselves restrictive. Other differences in economic regulation
would not be affected.
June 1998
|
