Memorandum by British Midland Airways
Ltd
Thank you for the opportunity for British Midland
to submit written evidence to Sub-Committee B, in respect of the
Commisison's proposals to extend its powers to apply existing
competition provisions to aviation services between the Community
and third countries (8582/97 (COM(97)218)).
The evidence given in this submission represents
the views only of British Midland Airways Limited.
1. INTRODUCTION
1.1 Successive UK governments have over the
last three decades followed a policy of progressive civil aviation
liberalisation, both in respect of competition within the UK (such
as the decision in 1982 to allow British Midland to compete for
the first time with British Airways on a core domestic truck route
from Heathrow) and internationally. The first fully liberalised
international market within Europe was established between the
United Kingdom and the Netherlands in 1985, an agreement which
enabled British Midland to launch its first international route
from Heathrow to Amsterdam in 1986.
1.2 This policy of developing competition has
contributed to the UK's civil aviation industry being the most
competitive and successful in Europe. The wide variety of consumer
choice and pricing options available in the UK from both established
and "low-cost" scheduled carriers and the fact that
almost 50 per cent of all customers boarding a passenger aircraft
in the UK travel on a charter airline, is unique in Europe.
1.3 Responsibility for the negotiation of bilateral
air services between the United Kingdom and third countries, currently
lies with the UK Government and is administered by the Aviation
Department of the Department of Environment, Transport and the
Regions. The Commission now proposes to undertake the negotiation
of Community-wide air services agreements with third countries
and to extend its powers to apply competition provisions of the
Treaty (Article 85 and 86) to aviation services between the Community
and third countries.
1.4 The Parliamentary Under Secretary of State,
in her Explanatory Memorandum on the issue dated 8 September 1997,
confirmed the Government's view that Bilateral Air Services Agreements
are a matter between the individual Member State and the third
country concerned. Member States should therefore retain the right
to reach their own arrangements with third countries.
1.5 The Commission has however been granted
a mandate by the Council to begin negotiations with Switzerland
and 10 other central and eastern European countries. Negotiations
with these countries have not yet been finalised and the proposed
framework for such agreements have not yet been advised by the
Commission to Community carriers such as British Midland. Until
such time as a Community-level agreement has been concluded and
introduced, existing bilateral agreements remain in effect an
individual Member States retain competence.
1.6 In addition, the Commission has Council
approval to hold exploratory talks with the United States of America,
although it has no mandate to negotiate a Community-level aviation
agreement.
1.7 British Midland in principle supports the
Government's view as expressed in the Minister's Explanatory Memorandum.
We believe that it would be premature at this stage, particularly
in terms of the lack of political, economic and administrative
integration necessary to ensure a collective European benefit,
for the Commission to undertake global aviation negotiations on
behalf of all Member States.
1.8 The success of the Commission in expanding
the application of third package liberalisation beyond the immediate
borders of the Community to include EEA countries such a Norway
and Iceland, however, suggests that a gradually increasing role
for the Commission in this area could be appropriate.
1.9 The conclusion of current negotiations being
undertaken by the Commission with Switzerland and the other European
countries will, British Midland believes, assist in the definition
of the role the Commission should undertake.
1.10 It is therefore the view of British Midland
that the Commission's current proposals to negotiate pan-EC Air
Services Agreements with third countries should not be accepted
by the United Kingdom at this time. We would not however rule
out a developing role for the Commission in the establishment
of Community level aviation agreements, particularly within geographical
Europe and North Africa.
2. IMPACT OF
REGULATORY CONSTRAINTS
ON COMPETITION
WITHIN EUROPE
2.1 In order for competition to be introduced
it is necessary for potential competitors to be able to gain access
to markets. Significant constraints to market access, outside
of the countries of the liberalised EEA area, still remain today
and involve regulatory restrictions, anti-competitive behaviour
by incumbent operators and infrastructure constraints.
2.2 Regulatory restrictions, formalised in bilateral
Air Services Agreements, can control the number of airlines permitted
to operate between certain city pairs, the frequency operated,
number of seats that such airlines can offer for sale and the
fares that such airlines are allowed to charge.
2.3 Such regulatory constraints contributed
significantly to the withdrawal of British Midland from the Heathrow-Zurich
route. The business class fares from Switzerland, which we had
set at levels lower than Swissair and British Airways, were consistently
disapproved by the Swiss authorities—therefore restricting
our ability to compete with the two dominant incumbent national
carriers. British Midland's withdrawal from this route has resulted
in the sixth busiest air route in Europe reverting to a Duopoly.
2.4 British Midland is also currently constrained
by restrictions in bilateral Air Services Agreements, which limit
its ability to provide credible competition in the London-Prague
and London-Warsaw routes. Despite repeated attempts to increase
its frequency to 14 services per week, British Midland's schedule
between Heathrow and Prague is still capped by the Czech authorities
at nine weekly services. British Airways and CSA Czech Airlines
are both currently operating 14 weekly services each. A similar
situation exists on the Heathrow-Warsaw route where following
the intervention of the Secretary of State, British Midland this
summer secured 7.5 per cent of the Heathrow-Warsaw capacity sufficient
only to provide a single daily service on the route for half the
summer season. British Airways and LOT Polish Airlines, who earlier
this year announced a wide ranging strategic alliance, are currently
offering a combined total of 31 services a week between Heathrow
and Warsaw.
3. THE IMPACT
ON EUROPEAN
AIRLINE COMPETITION
3.1 It is British Midland's view that if the
Commission were to be granted authority to negotiate pan-EC Air
Services Agreements with third countries it would have a signficant
impact on European Airline Competition.
3.2 Such arrangements would enable any Community
based airline to operate between cities pairs covered by the EC—third
country agreement. If therefore an agreement was reached with
the United States, any EC based airline would be permitted to
operate between London Heathrow and any point in the US.
3.3 Given Heathrow's position as the world's
most important international airport and London's geographic position
on the western edge of Europe, British Midland would anticipate
that many major EC carriers would wish to operate such services.
Other major airports such as Paris—Charles de Gaulle and
Frankfurt would also prove attractive. However nearly all Europe's
major airports are already heavily congested and future growth
is constrained. It would be necessary therefore for existing slots
and airport terminal capacity to be reallocated away from shorthaul
regional European services to enable the new longhaul services
to be introduced.
3.4 This would result in a significant change
to the nature of airline competition in Europe as major airports
become focused on the most profitable non-EC markets, served by
numerous competitors. The additional competition in these markets
would be to the detriment of the many millions of passengers who
travel on short haul services within Europe, particularly business
travellers, and the many communities who rely on air services
to major airports for commerce, jobs and global access who would
inevitably loose such air links.
4. APPLICATION OF
COMMUNITY AND
NATIONAL COMPETITION
LAWS
4.1 Article 85 of the EC Treaty prohibits agreements
and undertakings between companies which restrict or distort competition
within the EC and which may affect trade between EC Member States.
Article 86 prohibits a company which holds a dominant position
in a particular market from abusing its position in so far as
it may affect trade between EC Member States.
4.2 Under current EC legislation, the Community
does not have direct powers to investigate and enforce breaches
of EC competition law under Articles 85 and 86 in respect of routes
involving non-EC countries. Under the Commission's proposals,
enforcement of Articles 85 and 86 by the Commission would be applicable
to routes involving non-EC countries.
4.3 It is British Midland's belief that the
continued close relationship between many European governments
and their national carriers prevents action being taken on a national
level to investigate and enforce infringements of Articles 85
and 86 involving non-EC countries. In view of the significant
anti-competitive implications of such infringements, particularly
abuses of dominant positions under Article 86, to other EC based
competitors. British Midland believes that it would be appropriate
to consider an extension of the Commission's powers to investigate
and enforce such infringements.
4.4 If such powers were given to the Commission
it would become desirable for companies wishing to conclude such
commercial agreements involving non-EC routes, which potentially
infringe Articles 85 or 86, to seek a prior exemption from the
Commission. The Commission would be able to consider such requests
and impose remedies as appropriate, including disapproval.
4.5 This would introduce a system similar to
that of the United States where US anti-trust laws are applicable
to commercial agreements between US companies involving worldwide
trade, where prior anti-trust immunity is a necessity. British
Midland would support the introduction of a similar system in
Europe, as the present situation where companies operating commercial
agreements which infringe EC competition rules under Articles
85 or 86 can only be investigated by the national competition
authorities of the Member State is unacceptable.
4.6 British Midland is attaching a copy of a
document produced by Norton Rose which provides a detailed analysis
of the likely implications that the Commission's proposals would
have on the revised application of EC competition law on the air
transport sector (not printed).
5. THE IMPACT
ON CONSUMERS
OF LIBERALISATION
IN EUROPE
5.1 During the debate in the House of Lords
on Civil Aviation (20 May 1998), Lord Mountevans commented that
"one concludes that air travel prices have fallen so steeply,
that what once was the privilege of the few has become the facility
of the many."
5.2 The gradual deregulation of the aviation
market in Europe has enabled many carriers, but in particular
British Midland, to challenge the dominance of national carrier
duopolies in cross-border markets.
5.3 British Midland's experience has been that
the introduction of new carriers has a very positive effect for
consumers on prices, that frequently leads to real falls.
5.4 The chart shown as annex 1 to this submission
demonstrates that in respect of the lowest available return business
class fares from London, routes where British Midland entered
as a third airline, such as Frankfurt, Zurich and Nice are, despite
significant fare increases in the years prior to British Midland's
entry, actually lower up to six years after competition was introduced.
Routes such as from London to Geneva, Madrid and Munich however,
which remain duopolies from Heathrow, have all had significant
fare increases.
5.5 The real reduction in fares introduced by
British Midland has not however been at the cost of customer service.
British Midland has been the recipient of 34 industry awards in
the last 10 years, it operates one of the youngest fleets of modern
aircraft in Europe (including two brand new Air bus A321-200),
operates an extensive range of airport lounges for business passengers
and operates its own frequent flyer programme.
5.6 Despite having some of the highest airline
operating costs in the world (the combined costs of fuel, airport
charges and air traffic control charges are approximately three
times higher on an available seat mile basis than North America),
airfares in Europe compare favourably with air travel costs within
the United States.
5.7 The chart in annex 2 demonstrates that over
sectors of similar length, the cost of the lowest business type
fares in Europe are at similar levels or lower than in the United
States, while the cost of the full unrestricted fares in the United
States are significantly higher.
5.8 In 1996 British Midland produced a document
entitled "Clearing the flight path for competition".
This document, a copy of which is attached to this submission
(not printed), sets out British Midland's experiences and
detailed analysis in relation to competition and the effect on
fares during the first 10 years that the airline operated international
services from Heathrow.
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