PART 2 INTRODUCTION
28. Historically, scheduled airlines
have played an important role in carrying their country's national
identity abroad. In many respects it has been because of the strategic
importance (for example, defence) of aviation that governments
have been reluctant to relinquish tight control of this mode of
transport. Although most governments no longer regard their national
airlines as performing a vital economic and cultural role, many
retain a strong desire to protect their country's flag carrier.
29. Whilst the international market
in air transport has developed significantly in the last two decades
both within the European Union and globally, there remain restrictions
on national ownership and control of airlines both in the European
Community and the United States (see paragraph 43) which have
forced the airline industry to evolve in a different way from
other industries. Recently this development has been characterised
by international airline alliances often involving several large
carriers. Airlines often present these alliances as a boon to
consumers, but many of those involved in regulating competition
in the airline industry take a different view. It is the Commission's
contention that these international airline alliances, by reducing
competition on routes between the European Community and third
countries, are distorting trade between Member States.
30. This potential anti-competitive
effect of airline alliances prompted the revival of the Commission
proposals which are the subject of this report. Similar proposals
had been put forward in 1989 but failed to gain the support of
the Council[1]. The proposals
are themselves relatively narrow dealing, in regard to air transport,
with procedures for the application of competition rules by the
Commission. The issues surrounding the proposals, however, are
wide-ranging and significant, for aviation both in the European
Community and worldwide.
31. The first proposed Regulation would
extend the scope of the current Regulation 3975/87 which is limited
to air services within and between Member States[2],
to cover air transport services between the European Community
and third countries[3].
Currently, the Commission only has circumscribed powers to investigate
competition matters in respect of air transport services to and
from the Community under "transitional provisions" contained
in Article 89 of the EC Treaty. Enforcement ultimately depends
on the Member States who have greater powers under Article 88.
As scrutiny by the United Kingdom and European Community competition
authorities of the BA-AA alliance has shown, the precise relationship
between the procedures in Articles 88 and 89 is unclear. This
was particularly evident with the question of whether the national
authority or the Commission, when acting simultaneously, takes
precedence. Currently, only Member States can grant exemptions
in individual cases and impose fines. In the United Kingdom, the
Office of Fair Trading (OFT), in the first instance, is responsible
for enforcement[4]. What
the Commission is seeking with this current proposal is stronger
and more substantial powers to apply the EC Competition Rules
(particularly Article 85) and to investigate claims of anti-competitive
behaviour by airlines which affect the provision of air transport
services on routes between the European Community and third countries.
These alleged anti-competitive practices might include:
— alliances,
co-operative joint ventures and code sharing[5]
arrangements;
— traditional
commercial agreements on matters such as tariffs, capacity and
scheduling, as well as revenue/profit pooling arrangements;
The Commission would also gain the power to investigate
and act against activities by airlines which might be in contravention
of Article 86 of the Treaty (which prohibits abuse of a dominant
position).
32. The proposal would also add a new
Article to the current Regulation to provide for "consultations
and, where necessary, negotiations under Council Directives in
the event of conflict between Community competition law and the
laws, regulations or administrative provisisions of third countries"
concerning airline services[6].
33. The second proposal—which
would effectively allow the Commission to set the parameters of
commercial and competitive activity—contains provisions
which would allow the Commission to grant exemptions for certain
activities engaged in by airlines which would contravene Article
85. These exemptions would apply only for a specific period and
could be amended where circumstances changed. These exemptions
are known as "block exemptions" as they exempt categories
of activities by airlines from compliance with Article 85. The
purpose is to "relieve operators of the bureaucratic burden
of seeking individual exemptions and to create enhanced legal
certainly"[7]. The
Commission argues that there is "still a climate of serious
uncertainty in which air carriers cannot know what practices and
arrangements they may legitimately engage in"[8]
on routes between the Community and third countries. Allowing
the Commission to grant exemptions to the Competition Rules would
"enable air carriers to adapt gradually to a more competitive
environment"[9] and
would clarify uncertainty about what exemptions are [currently]
granted.
34. The Commission now believes that
several new factors have arisen which "make it more necessary
than ever" to endow the Commission with the powers to ensure
compliance with the competition rules in the case of air transport
between the European Community and third countries[10].
The Commission identifies these "new factors" as: the
effects of the liberalisation of the internal market in air transport;
the incomplete nature of the external market dominated by bilateral
agreements between Member States and third countries; and the
lack of a structured framework to "make good the deficiencies
of the present system"[11].
Furthermore, the emergence of a number of global alliances between
major airlines has raised concern.
35. These proposals would, in effect,
remove restrictions on the Commission's actions in the area of
air transport services and allow it to become a "one-stop"
authority for competition matters. Currently there appears to
be little or no support from Member State governments for the
proposals[12]. Since
publication they have not been taken up by either the Luxembourg
(July to December 1997) or United Kingdom (January to June 1998)
Presidencies. It appears therefore that these proposals have little
or no chance of gaining the approval of the qualified majority
of Council Ministers required in the near future[13].
36. This report examines what we consider
to be the important issues which surround the publication of these
proposals and which will affect the future development of the
air transport industry worldwide. It looks at the proposals under
four headings: attitudes to the proposed Regulations; barriers
to competition in the airline industry; the impact of the Regulations
on bilateral air services agreements; and whether the airline
industry should continue to be treated differently from other
industries.
1 COM(89) 417 final, proposal for a Council Regulation
extending the scope of its powers to enforce the competition rules
to include both domestic (intra-European Community) and third
country air transport. The proposal was subsequently replaced
by one dealing solely with transport entirely within one Member
State: 2410/92, adopted in July 1992. Back
2
Council Regulation 3975/87 (as amended), Article 1(2). Back
3
Parallel competition rules apply under the Agreement on the European
Economic Area (EEA). Were the Commission's proposals to become
Community law, the EEA rules (and the powers of the Commission
and EFTA Surveilance Authority) would likely be similarly extended. Back
4
Statutory Instrument 1996/2119, The EC Competition Law (Articles
88 and 89) Enforcement Regulations 1996. After preliminary invstigation
by the OFT the matter may be considered by the Monopolies and
Mergers Commission and ultimately by the Secretary of State for
Trade and Industry. Back
5
See Part 4, paragraph 47. Back
6
Commission Explanatory Memorandum, paragraph 7. A similar provision
exists in relation to maritime transport, Council Regulation 4056/86,
Article 9. Back
7
Government Explanatory Memorandum, paragraph 4. Back
8
Commission Explanatory Memorandum, paragraph 4. Back
9
Commission Explanatory Memorandum, paragraph 13. Back
10
Commission Explanatory Memorandum, paragraph 9. Back
11
Commission Explanatory Memorandum, paragraphs 10.1-10.3. Back
12
QQ 257-8, 346. Back
13
Under qualified majority, the proposals would require 62 votes
out of a total 87 at the Council of Ministers. Back
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