Select Committee on European Communities Thirty Second Report

Memorandum by The British Air Line Pilots' Association

  (i) The British Air Line Pilots' Association welcomes the opportunity to respond to the House of Lords Sub-Committee B of the European Communities Committee on the subject of proposals by the European Commission to extend its powers to apply existing competition provisions to aviation services between the Community and Third countries.

  (ii) We offer no views on aspects relating to political sovereignty or the legal interpretation of the UK's treaty obligations. Our evaluation is based primarily upon the degree to which we believe the proposals would help to achieve the kind of regulatory objectives set out in paragraphs 4 and 68 of the Civil Aviation Act 1982.

  (iii) Consistently with the UK's own stated objectives, competitions should be regarded not as an end in itself, but as one of several possible mechanisms for securing long-term benefits for users, airlines, employees and the UK national interest. The appropriate means to be used in each specific context should be a matter of careful assessment and policy judgment.

1. What are the strengths and weaknesses of the currently regulatory regime governing airline competition in the European Union (EU)?

  1.1 BALPA has long taken the view that modern regulatory arrangements must take realistic account of the geographical scale on which the modern industry operates. For that reason, we have advocated measures towards the pragmatic liberalisation of international air services and supported the establishment of EU regulatory mechanisms.

  1.2 However, the current "Third Package" regime, in association with EU Competition legislation, has so far been somewhat disappointing in terms of reducing tariffs and widening consumer choice. Many of the claimed benefits could have been secured, or would have happened naturally, under the previous intra-EU bilateral regimes. For example, many of the new ex UK routes have resulted from the sustained growth of air traffic rather than the removal of any bilateral restraints.

  1.3 A notable feature is the persistence of excessively high "on demand" business fares levels. In the past, the UK authorities achieved a fair degree of success in dealing with this problem by regulatory pressure by the selective "freezing" of certain tariffs. However, the weaker EU tariff regime has led to a significant loss of momentum in this area.

  1.4 Where liberalisation of route access could reasonably have been expected to produce significant gains for users, notably on prime trunk routes, slot restrictions at major airports have severely limited the theoretical gains. Indeed, the slots problem may well be insoluble within present policy parameters, which exclude the common sense solution of allocating slots by regulatory judgment, aiming to maximise benefits in the widest sense.

  1.5 The latter difficulty flows out of the implicit assumption behind European Commission policy making that only the fullest possible reliance upon market mechanisms will maximise benefits for all concerned. The Commission's reluctance to draw lessons on this from world experience and its consequent failure to develop an appropriately pragmatic approach are, in our view, significant weaknesses.

  1.6 World experience suggests that the regulatory task is best performed by a specialist body, experienced in aviation technicalities, like the UK Civil Aviation Authority. The present regime gives too prominent a role to general competition policy, as opposed to specific aviation regulation, and there is an unsatisfactory division of responsibility between the two EU Directorates concerned.

  1.7 A significant part of the former bilateral regulatory mechanisms were concerned, at least from the UK point of view, not just with protecting national interests, but also with safeguarding the interests of users and promoting the general health of British operators. These features have as yet not been generalised in the form of an equally effective regime at European Union level.

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?

  2.1 The current proposals appear to relate only to those aspects of bilateral agreements which impinge upon Competition Policy, not to the generality of their content. Nevertheless, if the Commission were to be awarded competence in this area, it would logically be difficult to deny it competence also in the full process of bilateral negotiation, and we take the question to refer also to that possibility.

  2.2 Bearing in mind the numbers of experienced staff currently involved in the process at national level, we doubt whether it would be feasible to make a rapid transition to a situation where the Commission itself negotiated bilateral agreements. We believe this to be true even if the Commission were to use existing national teams as its agents.

  2.3 Any such assumption of responsibility would therefore have to be a gradual, phased process with a long-term build up of the required human resources at the Commission.

  2.4 A possible intermediate stage would be for the EU Member States, under European Commission chairmanship, to negotiate as a block with, say, the United States, somewhat on the lines of past European Civil Aviation Conference/US multilateral agreements. But this would be a difficult process to manage in the light of the factors discussed below in Section 3.

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?

  3.1 It would probably be necessary to renegotiate all the agreements with a specific third country in parallel because of the number of issues arising which would involve the Commission in making judgments between the national interests of Member States and those of their airlines.

  3.2 Many bilateral agreements are predeterminist in nature because of the "thinness" of the traffic, the need to "spread" services in the interest of users and the protection by Governments of their national interests. This necessarily limits the number of carriers which can economically operate in given markets.

  3.3 The Commission would thus be faced with problems of carrier choice—a classic regulatory task. This would not simply be a matter of selecting designations; it could also involve decisions, for example, in regard to capacities, frequencies and slot usage. It would therefore necessitate some co-ordinating and decision making machinery at EU level, almost certainly involving the Council of Ministers at some stage.

  3.4 Such controlled regimes, whatever their overall merits, can sometimes generate sizeable profits for the incumbents, thus providing the EU carriers concerned with a sizeable "war chest" which can help them withstand commercial pressures on other routes. This could undoubtedly have some significance for European airline competition.

  3.5 Bilateral agreements with the United States are a special case because of the size of the market and the fact that extra bargaining power from a combined European negotiating effort could certainly, in principle, be employed to extract concessions from the USA.

  3.6 However, there would again be the problem of sharing out the costs and benefits between EU national interests. Experience suggests that it would be extraordinarily difficult to build a common front where some EU countries felt that they were being invited to sacrifice benefits they had achieved under the bilateral negotiating process without receiving any form of compensation.

  3.7 It could of course be argued, ignoring slot and other constraints, that a highly competitive regime would transcend this problem. On the contrary, just about every historic precedent suggests that the outcome would be a rapid resolution of the competitive elimination contest. A massive concentration of economic power into a handful of mega-airlines which are effectively accountable to no regulatory body would hardly lead to an outcome consistent with the policy objectives outlined ealrier.

4. What effect would the harmonisation of future bilateral agreements between Member States and third countries have on airline competition?

  4.1 We assume this question to relate to the harmonisation of "hard" rights, in a situation where each Member State continues to have its own bilateral agreements with individual third countries . (Many harmonisation issues are of course best pursued through multilateral organisations such as International Civil Air Transport Organisation.

  4.2 Air services agreements tend to reflect the political and economic realities of the geographical markets concerned. It would be hard to see the point of denouncing a "predeterminist" bilateral which was serving users well on the doctrinaire grounds that it was inconsistent with EU competition policy and/or not exactly symmetrical with a parallel agreement signed by another EU Member State.

  4.3 Regimes anathema to competition policy theorists have in fact generated some of the most significant low fares breakthroughs, e.g., the original UK/Australia APEX facilities.

  4.4 We therefore see little point in undertaking harmonisation exercises for their own sake. In each case, there should be an attempt to identify the specific costs and benefits involved before taking a pragmatic decision as to whether the task was worth the effort. Moreover, the factors to be considered should go well beyond the effects on airline competition.

5. How would the proposal resolve differencess in economic regulation and implementation of competition rules for airline services operating between Member States and third countries?

  5.1 The real, and long standing, problem is how to dissuade certain countries from trying to impose their own domestic competition policies on the rest of the world. (In that context, it is relevant to note that the EU and the US Governments have now signed an agreement to step up co-operation in acting against cartels.)

  5.2 If the current proposals were designed simply to lead to an effective way of neutralising "extraterritorial" ambitions, they would be worthy of serious consideration. In our view, it would be satisfactory if the EU and the USA (say) were to agree to take reserve powers in regard to competition policy towards air transport, while remaining content for the generality of problems to be dealt with under existing bilaterals or under an appropriate EU/US agreement transcending the present bilaterals.

  5.3 However, if the latter type of agreement was to be of the "lowest common denominator" type, based upon Open Skies competition, we do not believe this would at all be in the interests of users, employees or the smaller airlines.

  5.4 The current UK/US air services agreement has worked extremely well, as have many other of the UK's bilateral agreements. Any proposal to supersede them must offer something demonstrably superior, not simply text book promises.

  5.5 As it has not been shown that the current proposals are at all capable of doing that, we therefore support the position of HM Government at this stage.

  5.6 However, we do not feel that the matter can be left there. There needs to be a wider discussion, particularly in regard to facilitating the development of managed international regime. This could take full account of airline needs for global flexibility, while also placing satisfactory weight on the interests of other legitimate parties.

  5.7 To illustrate the fallacy of pursuing competition for its own sake, we append (by kind permission of M A Brenner Associates) a diagram showing the trend of US airline yields since 1960. It will be seen that US de-regulation has had no discernible effect upon domestic fares trends. Not only did the rigid US pre-deregulation regime match the performance of its successor; it did so without arousing the severe discontent amongst users currently being experienced in the USA.

  5.8 This underlines the need to discard preconceptions and bring some well-informed analysis and careful judgment to bear on the problems. We shall be happy to expand orally upon any of these, or related matters, should the Sub-Committee wish us to do so.

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