Select Committee on European Communities Minutes of Evidence

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.


  1.1 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.


  2.1 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.


  3.1 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.


  4.1 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).


  5.1 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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