Select Committee on European Communities Minutes of Evidence

Supplementary Memorandum by the Department of the Environment, Transport and the Regions

1. Paragraph 17 of your Explanatory Memorandum (EM) states that bilateral agreements "may not be compatible with the competition rules in Articles 85 and 86 of the Treaty". Given that Articles 85 and 86 relate to the activities of "undertakings" (i.e., airlines), how does this incompatibility arise?

  1. The above statement in paragraph 17 of our Explanatory Memorandum refers to the possibility of an incompatibility or conflict between certain provisions of bilateral agreements and the EC competition rules. This is the subject of the new Article 18a of Regulation 3975/85 proposed by the Commission, which was discussed in paragraph 17.

  2. Bilateral agreements relating to air services between Member States and third countries may encourage or require airlines to engage in certain types of activity which would normally be prohibited under the EC competition rules applicable to undertakings. Such agreements may contain limitations on capacity, designation and pricing freedom, and, in some cases, particularly in older agreements, provisions requiring formal co-operation between airlines. The Commission is proposing in the new Article 18a that it should be empowered to hold consultations with the competent authorities of the third country concerned where the application of the competition rules in a particular case is liable to lead to a conflict with the provisions of the bilateral agreement to which the third country has subscribed with a Member State. It is in this context that the incompatibility mentioned in paragraph 17 of the Explanatory Memorandum may arise.

  3. As a general practice, the UK seeks to conclude liberal agreements with its aviation partners, where possible, but is not always able to do so.

2. Paragraph 18 of your EM goes on to say that "Bilateral Air Services Agreements are entirely a matter for the Member State and third country concerned". To what extent does the Treaty and its competition rules restrain Member States' freedom of action? In particular, having regard to Articles 5, 88 and 90 of the EC Treaty and the general principles of Community law, to what extent is it permissible for Member States to conclude bilateral agreements which might include provisions that may not be compatible with Articles 85 and 86?

  4. The above statement in paragraph 18 of our Explanatory Memorandum relates to the proposed new Article 18a, mentioned above, which would enable the Commission to intervene in certain circumstances in the context of a bilateral air services agreement between a Member State and a third country. The purpose of this statement was to emphasise that the Commission is not entitled to renegotiate the terms of existing bilateral agreements with third countries.

  5. The statement was not, however, intended to suggest that the Treaty and its competition rules do not limit Member States' freedom to conclude bilateral agreements containing provisions which may be incompatible with Articles 85 and 86 of the Treaty. The European Court of Justice has held that Member States have a duty under Article 5 of the EC Treaty not to adopt or maintain in force any measure which could deprive the competition rules of their effectiveness (Joined Cases 209 to 213/84 Ministère public v Asjes [1986] ECR 1457 and Case 66/86 Ahmed Saeed [1989] ECR 803). In the case of undertakings to which Member States have granted special or exclusive rights, Member States are bound by Article 90 to refrain from enacting or maintaining in force any measure contrary to the competition rules laid down in Articles 85 and 86 of the Treaty (Ahmed Saeed). Article 88 of the Treaty imposes on the authorities of the Member States the obligation to apply Articles 85 and Article 86 in the absence of Community implementing legislation under Article 87 (Ministère public v Asjes). The EC Competition Law (Articles 88 and 89) Enforcement Regulations 1996 enable the UK competition authorities to rule on practices which fall outside the scope of Regulation 3975/85.

  6. The Treaty and its competition rules do, therefore, in principle, restrain Member States' freedom of action in respect of bilateral agreements covering extra-Community air services. However, at present, the Commission does not have the power (which it is seeking in the proposed new Article 18a) to intervene directly vis-á-vis Member States' bilateral partners with a view to enforcing Member States' obligations under the Treaty and its competition rules; the appropriate procedure is infringement proceedings under Article 169 of the Treaty.

3. To what extent does the Community already have external competence in civil aviation matters?

  7. The Community derives external competence in civil aviation matters from the Treaty provisions on transport, in particular Article 84(2). As a general rule, this competence only becomes exclusive when and insofar as common internal rules are established which could be affected by obligations assumed by Member States with third countries (Opinion 1/94 (WTO) [1994] ECR-I 5267, paragraph 77). The extent of the Community's exclusive competence depends on the scope of those internal rules.

  8. With the adoption of the Third Package in 1992, the Community has laid down common rules covering most aspects of the internal market in the aviation sector. Where the common rules apply to third country nationals (e.g., in respect of slot allocation and computer reservation systems), the Community probably has exclusive external competence for the subject matter covered. Where, however, the scope of application of the rules is limited to the Community, Member States retain their competence to conclude international agreements. This is the case, in particular, of the rules on traffic rights contained in Council Regulation 2408/92, which govern the access of Community air carriers to intra-Community air routes. The Community has not established common rules on access to third country routes, so Member States remain competent to negotiate traffic rights with third countries.

  9. In Opinion 1/94, the European Court of Justice rejected the Commission's argument that "the Member States' continuing freedom to conduct an external policy based on bilateral agreements with non-member countries will inevitably lead to distortions in the flow of services and will progressively undermine the internal market", particularly in the case of "open skies" agreements (paragraph 78). The Court stated that, in such cases, the Community institutions could make provision in the common rules laid down by them for "concerted action in relation to non-member countries" or could "[prescribe] the approach to be taken by the Member States in their external dealings" (paragraph 79). The Community has not laid down rules containing such provisions in the area of extra-Community traffic rights.

4. How would the Community's competence be extended if the proposed Regulations were adopted by the Council? (In this context the Sub-Committee notes that the Commission already had certain procedural powers under Article 89.)

  10. If the proposed Regulations were adopted by the Council, the Commission would considerably enhance its procedural powers to apply the competition rules in respect of extra-Community air services. The existing transitional regime based on Article 88 of the Treaty would come to an end, and the authorities of the Member States would, in particular, lose their power to grant exemptions under Article 85(3) of the Treaty.

  11. The proposed Regulations might also indirectly extend the Community's external competence in air transport. The Community has not been authorised to negotiate and conclude air transport agreements which would replace the existing network of bilateral agreements between Member States and third countries. By enabling the Community to intervene in respect of the competition provisions of those bilateral arrangements, the proposed Regulations might extend the Community's competence to negotiate aviation relations with third countries.

5. On what grounds is the Commission, as reported in the media, bringing infringement proceedings against certain Member States for negotiating agreements with third States?

  12. The Commission has initiated legal proceedings against eight Member States which have signed bilateral air services agreements with the US since the creation of the single European aviation market: Austria, Belgium, Luxembourg, Denmark, Finland, Germany, Sweden, and the UK. It should be noted that the so-called "Open Skies" agreements signed by all other Member States were considerably more wide-ranging than the "mini-deal" concluded by the UK in 1995, which amended the main 1977 air services agreement with the US (commonly known as "Bermuda 2") and whose principal effect was to open up air services between UK regional airports and the US.

  13. In July 1995 the Commission wrote to the Secretary of State for Foreign and Commonwealth Affairs alleging that the UK had breached Community law by concluding its agreement with the US. The UK responded in September 1995, rebutting the Commission's claims. In March this year, the Commission moved to the next stage of the legal process by issuing a "Reasoned Opinion".

  14. The Government firmly rejects the Commission's allegations. It regrets that it is not, however, possible for it to comment in detail on the proceedings as these are covered by a long-standing principle of confidentiality observed by the Commission and Member States.

July 1998

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