Select Committee on European Communities Thirty-Second Report


  103.    Competition should provide a good deal for the consumer. The aim of the Competition Rules governing the airline industry in the European Community, as in other industries, should be to offer the consumer lower prices, a better quality of service and greater choice. The airline industry is constantly evolving. We are concerned that the way in which it operates does not and will not achieve these goals.

  104.    Whilst the airline industry is truly global, many of the negative effects on competition affecting Member States come from distortions that arise from the bilateral agreements between Member States and third countries, notably the United States. Much of this distortion arises from the way in which the United States regulates its airline industry granting extensive anti-trust immunity, under bilateral agreements, to airlines flying on routes between the United States and third countries but not within the United States. However, the principle of providing carriers with immunity from US anti-trust legislation differs little from the block exemptions that airlines would be able to obtain under the proposed extension of Regulation 3976/87. The continuance of any immunity or block exemptions should be strictly justified in the interests of consumers and the promotion of competition.


  105.    The development of global airline alliances which prompted the Commission to revive these proposals continues apace. We share the Commission's concern that these alliances, which affect trade between Member States are potentially anti-competitive. Given the historical development of the industry to date and the continued existence of ownership and control restrictions, such alliances are inevitable. However, we also accept that there is a serious neglect, in practice if not in law, of the enforcement of competition between airline services between the European Community and third countries which needs to be remedied. Whilst normal competitive conditions cannot be introduced into the airline industry overnight, that should be the clear objective for further regulation and development of the industry.

Problems with the current application

  106.    Competition in a global industry cannot be regulated effectively at the national level. However, we accept that at this stage a global regulatory system is not a viable proposition and that any global action would require much international co-operation. We consider that the responsibility for regulation of airline competition should lie at the highest practical international level. In the case of these proposals, this means the European Commission.

  107.    At present, enforcement of the EC Competition rules in relation to extra-EC routes is a matter for both Member States and the Commission, acting under Articles 88 and 89 respectively. We note the concern expressed by several witnesses that, under the current procedures, the Commission is slow to act in competition cases, to the detriment of the airlines involved. In our view, under the new Regulations the enforcement of the European Community competition rules in relation to extra-EC routes will improve.

  108.    We consider that under the powers conferred by the proposals the Commission could apply the Competition Rules more efficiently and consistently than Member States have done to date. Indeed, there is little evidence that national competition authorities have taken any significant steps against airlines. As well as providing the Commission with the necessary procedural powers to apply the Competition Rules effectively, the proposed Regulations could achieve a greater degree of transparency in the application of competition policy to airlines.

Commission experience in airline competition

  109.    We note the view expressed by several witnesses that the Commission had undergone a "learning curve" with respect to regulation of the single market for air services in the European Community. This phenomenon however is not confined to the European Commission—it is a feature of regulatory agencies worldwide that they must act to keep up with methods employed by airlines to restrict competition. In retrospect, past actions of the Commission involving airline competition have been inadequate to preserve competition on certain routes within the European Union. However, we consider that the present system of airline regulation predominantly at the level of Member States should not continue. We consider that the Commission is better placed in the future to act on this issue.

  110.    Several witnesses feared that the Commission would push its own political agenda if it was given the powers to interfere with airline services external to the European Community. Regulating competition will always have political implications. We do not accept that the Commission would use competition policy as more of a political tool than Member State governments do. A political and commercial solution would need to be agreed on what should be contained in the block exemptions and an agreement between the Commission, Member States and the industry should lead to a solution which would minimise the ability of the Commission to exploit competition policy from a political motive.

  111.    In our view the airline industry should, in the long run, be treated as any other industry in terms of the Competition Rules. The Commission should, over time, limit the kinds of activity that would be permitted under block exemptions. This would gradually remove the special conditions applied to the airline industry and give carriers a stable environment in which to plan and adapt to change over time.

  112.    While we acknowledge the logic of the argument put forward for an independent European competition authority, we do not consider either that it is necessary or that it would be practical.

  113.    Several witnesses were concerned that greater enforcement of the Competition Rules at the Community level might be to the detriment of knowledge of local conditions at the Member State level. Furthermore, concern was expressed that the Commission would not have the resources to take on this task. In our view, that the political willingness needed to agree these proposals would extend to a willingness to agree to the co-opting of the services of skilled Member States officials. The Commission would thus be able to overcome both these problems.

Winners and losers

  114.    We are aware that these proposals could have a profound effect on concentration in the airline industry. Like most of our witnesses, we agree that, inevitably, some airlines would lose in a more competitive environment. We note the concern expressed that liberalising airline services with third countries might lead to a highly concentrated industry. We consider, however, that with strict application of competition policy (in terms of controlling cartel activities, dominant positions, mergers and state aids) this can be avoided.

  115.    Air traffic from the United Kingdom represents around 40 per cent of the total transatlantic market and we understand the perception that United Kingdom owned airlines would lose out in the short run. Given the advanced state of deregulation of the industry in the United Kingdom, we consider that airline carriers in this country would be well placed to cope with increased competition under the proposals and may do well in the longer term.

  116.    The needs of the consumer should be paramount. We believe that the number of airlines currently operating external routes out of the European Community is unsustainable in the long-term, largely due to the retention by most Member States of a "national" airline. Further liberalisation will probably lead to the loss of some "national" airlines within the Community. Such loss could encourage low cost competition on routes where previously little existed. Competition between airlines should ultimately be for the benefit of the consumer, whether in economy, business or first class, in terms of price and quality of service. In this respect, the maintenance of "national" airlines is irrelevant. We do, of course, recognise that in certain circumstances, for instance where there was no competitive interest in serving a certain route, it would be necessary for essential services, such as on regional feeder routes, to be maintained by government subsidy. Consumers across the European Union could benefit from competition rules being applied at the European Union level.


Code-sharing alliances

  117.    We agree with witnesses who suggested that code-sharing alliances can be a two-edged sword—both enhancing and restricting competition. We also recognise that given the current ownership restrictions on airlines, such alliances are a second-best solution for creating a global industry. We would urge action to be taken at the Community level to ensure that airlines are able to compete in a normal competitive environment free from ownership restrictions, thereby making code-sharing alliances less prevalent in the long term.


  118.    The availability of slots and their related services is the key to airline competition at any airport where demand for them is greater than their supply, a situation principally affecting Member States of the European Community. There are very few congested hub airports in the European Union with the potential to increase the number of slots available to airlines. Given the continuing increase in consumer demand for airline travel, the pressure on the slot allocation system will only increase. Reforming the system of slot allocation is fundamental to ensuring a competitive airline industry, both in the European Community and worldwide.

  119.    We were surprised by the uncertainty of witnesses about the issue of slot ownership: Ms Jackson and the airlines did not know who owned them, whilst ACL thought that airports did. Given the shortage of slots at many European Community airports and the importance of slot allocation in promoting competition between airlines, we consider that it is important to resolve this issue. We recommend that the question of slot ownership is clarified.

  120.    In our view, the current system of slot allocation, based on the retention of grandfather rights, is clearly anti-competitive. We were concerned to learn that there is currently limited scope for new entrants to gain access to slots at the major United Kingdom airports. We were also concerned that airlines were able freely to exploit their competitive positions by transferring slots to more profitable routes, in order to maintain their market position at important hub airports, and thus thwart competition. We urge the Commission to use its existing powers to suppress anti-competitive practices and abuses of dominant positions by airlines at Community airports.

  121.    We are concerned that airlines are able to transfer slots across routes to the detriment of regional services in the United Kingdom. Under the current Slot Regulation, Member States are permitted to allocate slots at congested airports to provide essential services to and from regional airports. Unlike other Member States, the United Kingdom Government has not chosen to implement this aspect of the Regulation. We urge the Government to consider allocating a number of slots at major airports to maintain regional air services.

  122.    The system of grandfather rights, while it served a useful purpose during the infancy of the industry, is now increasingly anomalous and anti-competitive. We recognise that the system has advantages: providing stability for incumbent airlines and allowing them to plan and invest in future services. However, we consider that the drawbacks of the system, in terms of blocking potential competition at major airports, now vastly outweigh the advantages. The system of grandfather rights combined with the flexibility afforded to airlines to switch slots between routes provides incumbent airlines with too powerful a tool against current and potential competitors.

  123.    Ensuring a fair allocation of slots at airports is fundamental to ensuring that competition can thrive. A new European Community Slot Regulation is long overdue—the current Regulation[30] was scheduled for revision in July 1997. Unfortunately, there seems little evidence that such a proposal will emerge in the near future, not least because of differences of opinion that exist between the competition and transport Directorates of the Commission, which are often reflected at the national level. There is now a pressing need for a new Slot Regulation which radically alters the rules governing the allocation of slots at Community airports.

  124.    In the United Kingdom, ACL is responsible, within the terms of the current Regulation, for the allocation of slots at busy airports. Their role is administrative—dealing with the technical and complex allocation procedure. We were, however, concerned to learn that considerations of "competitive requirements" and "needs of the travelling public" were only "secondary criteria" in ACL's decisions regarding the allocation of slots. We were also concerned at the relationship between ACL and airlines, which necessarily have vested interests in the slot allocation procedure. We consider that a truly independent body should be responsible for slot allocation in each Member State.

  125.    We are fully aware of the vast complexities involved in allocating slots. Reforming the present system would necessarily involve difficult and complex decisions which may well work against the interests of incumbent airlines, at least in the short term. The status quo exists largely because no alternative system has emerged without drawbacks. However, given what, in our opinion, are the significant anti-competitive effects, the present system of slot allocation can no longer be justified. The time has come for the system to be reformed.

  126.    No airline should be allowed to dominate at any particular airport to the extent that they have unfair and anti-competitive access to slots. The aim of any new system of slot allocation should be to promote competition between airlines. We have identified those aspects of the present system which we consider to have the most anti-competitive effects.

  127.    Currently, slots are not tied to a particular route. The draft conditions agreed between the Commission and the United Kingdom Government for the BA-AA alliance agreement links numbers of slots with particular routes with the specific aim of facilitating and encouraging competition. We consider that linking slots to routes is a positive step towards regulating airline behaviour and one that could be extended to enhance competition. The continuing public debate about the proposed BA-AA alliance, especially regarding slots, reinforces our view of the value that airlines place on slots and the fundamental importance of a fair system of allocation.

  128.    To achieve greater competition, slots need to be made available at busy airports for airlines to enter routes, particularly those routes where there is a case for increased competition. There are different ways to achieve this aim, and we recognise that each has its own difficulties. The aim in the long run should be an open and competitive slot allocation system. Increasing the number of slots in the pool for reallocation should be a first step. One way of achieving such an increase might be to require any airline wishing to change the destination of a flight using a particular slot to relinquish that slot to a slot pool to be reallocated. Any airline (including the airline that previously used the slot) could then apply for the right to use that slot (and others in the pool).

  129.    We consider that the new European Community Slot Regulation should set clear and effective criteria for the allocation of slots and that promotion of competition and the public interest should be the most important elements. Whilst we recognise that there may be legal complexities to overcome, ultimately we believe that slots at each Member State's airports should be treated as national assets of that Member State. We consider that airlines should bid for use of slots within criteria set by the European Community.


  130.    Most witnesses accepted that these proposals would give the Commission increased competence to act in the area of bilateral air services agreements between Member States and third countries. Many saw this as the thin end of a wedge leading to the Commission negotiating bilateral agreements on behalf of the European Community. While we would not support the Commission in this approach without a political mandate from the Council of Ministers, we recognise that these proposals would take the Commission one step further towards an objective of negotiating an EC-US bilateral agreement.

A phased approach

  131.    Several witnesses suggested allowing the Commission more responsibility for regulating airline services within a confined area, for example geographical Europe. We do not accept the logic of this approach. The true negative effects on competition within the European Community do not come from geographical Europe but from distorted competition between the European Community and other large airline markets, notably the United States, precisely those areas in which these witnesses wish to maintain the current regulatory structures. We think that the Commission is unlikely to pursue its ambitions in the application of competition provisions beyond a certain set of countries, perhaps including Japan and South America.


  132.    Airlines have been afforded special treatment in the European Community's competition policy for historical reasons. We believe that these reasons are just that—historic. While we fully recognise the importance of safety standards and controls in the airline industry these should not inhibit the creation of a more competitive airline industry worldwide.

  133.    Much is made of the "special relationship" between national carriers and their respective governments. We believe that this relationship still exists, to varying degrees, in all Member States. Sometimes this relationship is unhealthy and can distort competition. Member States' governments are as culpable, if not more so, than the Commission for playing politics with airlines. The Commission would have to balance the competitive needs of airlines from all 15 Member States in its decision-making. It should not, therefore, have a relationship with any particular airline.

  134.    We support the path the Commission is seeking to take in applying the Competition Rules effectively at Community level, but we believe that this is only the first step. Whilst we acknowledge that progress can be made by action at Community level, the real issue affecting airline competition worldwide is the continuing existence of ownership and control restrictions, particularly in the European Community and the United States.

  135.    These restrictions have prevented the industry developing by merger and acquisition in the same way as other industries and have been a prime factor in justifying the exclusion of airlines from the competition provisions which govern other industries. We recognise that any agreement between Member States and the United States on relaxing, and eventually removing, ownership and control restrictions will require considerable negotiation. It is inevitable that the European Community, acting collectively, has the best chance of achieving this objective. Removing ownership and control restrictions is a vital step towards achieving a truly competitive global airline industry.

  136.    The Committee considers that this proposal raises important questions to which the attention of the House should be drawn, and makes this report to the House for debate.

30   Council Regulation (EEC) 95/93 on common rules for the allocation of slots at Community airports. Back

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