Supplementary Memorandum by Lufthansa
PROPOSED EXTENSION
OF REGULATIONS
3975/87 AND 3976/87 TO
AIR TRANSPORT
BETWEEN THE
EUROPEAN UNION
AND THIRD
COUNTRIES: COMMENTS
OF LUFTHANSA
GERMAN AIRLINES
Lufthansa German Airlines ("Lufthansa")
provides these comments in response to the Sub-Committee's request
for written submissions on the Commission proposal to extend its
direct enforcement powers in respect of Articles 85 and 86 of
the Treaty to air transport to or from countries outside the European
Union. For the reasons set forth below, Lufthansa would not favour
extension of the Commission's enforcement powers at this time.
THE RELATIONSHIP
OF THE
PROPOSED EXTENSION
OF POWERS
IN COMPETITION
CASES TO
THE ISSUE
OF COMMISSION
COMPETENCE FOR
EXTERNAL AVIATION
RELATIONS
The points raised in the Sub-Committee's invitation
for written comments reveal the close relationship between the
proposed extension of Regulations 3975/87 and 3976/87 and the
broader issue of Commission competence to negotiate air service
agreements with third countries on behalf of the EU as a whole.
Lufthansa favours, in principle, the grant of a mandate for negotiation
of air transport agreements on behalf of the EU. A Community-wide
agreement could remove artificial regulatory restrictions on EU
airlines that limit their ability to compete against each other
and against non-EU airlines. Negotiating on behalf of the whole
Community could also give negotiators greater leverage to obtain
opportunities for EU carriers in third countries.[3]
Lufthansa's support for the concept of a single
aviation agreement is not unconditional. An EU Aviation Agreement
with a third country would, in Lufthansa's view, not be desirable
if it resulted in more limited access for the EU airline industry
as a whole to the foreign market in question. Lufthansa also believes
that it will be important, given the institutional focus in the
EU on competition policy, that such an agreement incorporate binding
principles for the application of competition rules by both the
EU and the third country in question. Once an agreement of this
nature is in place, it would be logical and appropriate to give
the Commission direct enforcement powers to implement those binding
principles in the EU.
In order to ensure that the EU Aviation Agreement
properly protects the interests of the European air transport
industry, it is essential, in the view of Lufthansa, that the
Member States play a full role in the development of the policy
principles incorporated in such an agreement. One of the reasons
that Lufthansa is opposed to extending the direct enforcement
authority of the Commission at this time is that the Commission
will seek to use such powers as a lever in order to obtain competence
for external relations. Experience in the airline industry and
in other areas (such as telecommunications) has shown that the
Commission views its competition law powers as a tool for achieving
policy objectives in the face of Member State objections. Although
Lufthansa supports the conclusion of EU air service agreements
with third countries in principle, such agreements should reflect
the consensus of Member State views and not be imposed unilaterally
by the Commission.
The grounds cited by the Commission as reasons
for extending its authority are not persuasive
The Commission identifies five problems in the
current regulatory environment that would be corrected by an extension
of competence under Regulation 3975/87: (i) the need for legal
certainty; (ii) the need to ensure that the benefits of the liberalisation
process are not lost; (iii) the need to strengthen the "external
aspect" of the internal aviation market; (iv) the need to
avoid the inefficiency of parallel proceedings; and (v) the need
for powers to regulate US airlines in alliance cases. In the view
of Lufthansa, none of these supposed problems provides a convincing
justification for the proposed change.
(i) The need for legal certainty does not justify the proposed
change
The Commission has suggested that there is currently,
in respect to routes to third countries, "a climate of serious
uncertainty in which air carriers cannot know what practices and
arrangements they may legitimately engage in on such routes."
The Commission has suggested that this uncertainty affects airlines
because if, "even inadvertently, they act unlawfully they
run the risk of actions in national courts leading to the payment
of damages." The Commission has also suggested that similar
uncertainty affects Member States who may infringe Community law
where they approve fares that are unlawful.[4]
Lufthansa does not believe that the climate
of uncertainty identified by the Commission is as troubling as
the Commission assumes. Insofar as Article 85 is concerned, the
current position is that agreements are only subject to that provision
once there has been a decision to that effect by the Commission
or a national competition authority. Neither the Commission nor
a national competition authority will render such a decision where
the agreements in question meet the requirements for exemption
under Article 85(3). If they do not meet those requirements (in
the view of the regulator) the airlines will in practice have
the opportunity to revise their arrangements before the decision
is taken making Article 85 inapplicable. It is doubtful whether
the courts in any Member State will award damages for an infringement
of Article 85 predating the decision making Article 85 applicable.
Thus, from the perspective of the airlines, there is less uncertainty,
at least as regards exposure to damages, under the current system
than under Regulation 3975/87.
Insofar as Article 86 is concerned, extension
of Regulation 3975/87 will have no effect on the uncertainty of
airlines regarding the behaviour that is permissible. (Although
the Commission would in theory have the power to grant a negative
clearance in respect of specified conduct, in practice this procedure
has not played a significant role in the context of Article 86.)
The result of extending Regulation 3975/87 in this context will
be that where airlines infringe Article 86 "even inadvertently"
they will face the risk not just of damages actions in national
courts but also the imposition of fines by the Commission.
(ii) The need to ensure that the benefits of
the liberalisation process in the internal market are not lost
does not justify the proposed change. The Commission suggests
that liberalisation in the internal EU market for air transport
requires that the Commission have better tools "to ensure
fair competition between competitors and to safeguard the interests
of consumers." The Commission goes on to suggest that for
some airlines or alliances "flights in the Community"
market are in some cases no more than an initial stage in, or
a prolongation of, a flight bound for a third country." The
Commission concludes that greater powers are needed to ensure
that the beneficial effects of the liberalisation process within
the Community are not offset by restrive or abusive conduct.[5]
Lufthansa does not understand the connection
between greater enforcement powers regarding routes to third countries
and liberalisation within the Community. If an agreement restricts
competition in respect of sale of air transport between airports
in the Community, then it is subject to jurisdiction under Article
85 and Regulation 3975/87. If, in contrast, an agreement does
not restrict competition on a route between Community airports,
it should not usually threaten the integrity of the liberalised
air transport market. Similarly, Lufthansa cannot envisage a situation
where an airline that does not hold a dominant position in respect
of a relevant market for air transport within points in the EU
(putting that airline outside Commission jurisdiction under Regulation
3975/87 and Article 85) nonetheless could engage in unilateral
conduct, that threatened the integrity of the internal market
for air transport. Thus, in Lufthansa's view, the Commission already
has the powers it needs to prevent distortions of the air transport
market within the Community.
(iii) The need to strengthen the "external aspect"
of the common policy in the field of air transport does not justify
the proposed change. The Commission suggests that the "liberalisation
of the Community aviation market . . . remains fragile . . . inasmuch
as the market is still incomplete externally. It remains subject
to bilateral arrangements between Community Member States and
third countries." The Commission goes on to suggest that
the "existence of these agreements is partly responsible
for the lack of competitive pressure on the Community market."[6]
The Commission does not explain why this consideration would call
for extension of direct enforcement powers under Regulation 3975/87,
but presumably the Commission considers that vigorous enforcement
of Community competition law could either reduce the supposed
anticompetitive effects of these agreements or give the Commission
leverage to negotiate more competitive regimes with the third
countries concerned.
In Lufthansa's view, the Commission has its
priorities backwards. Even if it were accepted that the current
system of bilaterals somehow puts the internal aviation market
at risk, the way to deal with that problem is by addressing the
bilateral system. As long as there is a serious debate about the
desirability of shifting from the bilateral system, it makes no
sense to sidestep that debate by introducing Community competence
through enhancement of competition law enforcement powers.
(iv) "The need to avoid the inefficiency of parallel
proceedings does not justify the proposed change." Making
reference to the current investigations of the various transatlantic
alliances (where there are parallel investigations pending by
the German Federal Cartel Office, the Office of Fair Trading,
and the Commission) the Commission observes that:
"A dual examination of one and the same
agreement by two authorities, that of a Member State under Article
88 of the Treaty, and of the European Commission under Article
89, is not only costly for the airlines party to the agreement
in terms of both money and time, but is also a source of great
legal insecurity for those airlines."
The Commission goes on to suggest that extension
of Regulation 3975/87 would "afford airlines the clear benefit
of a single set of controls as to the legality of their agreement
according to a more ponderous and more direct procedure than that
of Article 89 of the Treaty, without there being any risk of conflicting
decisions".[7]
As one of the airlines currently involved in
the parallel proceedings referred to by the Commission, Lufthansa
does not view the current procedure as either unacceptably costly
in terms of money and time (compared to a proceeding before the
Commission alone under Regulation 3975/87) nor as a source of
great legal insecurity. Lufthansa does not therefore view the
Commission proposal as creating any "clear benefit"
in this regard.
(v) "The need for powers to regulate US airlines in
alliance cases does not justify the proposed change." The
Commission observes, in describing the deficiencies of the present
system that:
"Co-operation agreements between European
and US airlines are closely scrutinised by US authorities, who
apply their antitrust law to routes between the US and the Community,
imposing where appropriate conditions on European airlines, whereas
the Commission has as yet no power to impose any conditions on
US airlines on the strength of Article 85(3) of the Treaty with
a view, if necessary, to exempting such agreements".
[8]
Lufthansa finds this assertion puzzling. In
discussions where Lufthansa has been involved, there has been
no suggestion that the Commission lacks the power in an Article
89 proceeding to require imposition of conditions by Member States
on US airlines.
RESPONSE TO
SPECIFIC QUESTIONS
1. In your opinion, what are the strengths
and weaknesses of the current regulatory regime governing airline
competition in the European Union?
As regards the regime for regulating competition
regarding air transport within the EU, the system created under
Regulations 3975/87 and 3976/87 seems to function reasonably well.
The principal deficiencies that Lufthansa would note are:
(i) a lack of sophistication within DG IV
regarding the economic factors affecting airline markets—this
is reflected in over-emphasis on individual routes and a fixation
on new entry as a measure for the competitiveness of a market;
(ii) a tendency to intervention an re-regulation
(imposing "remedies" that limit the ability of airlines
to respond competitively); and
(iii) a tendency to use competition powers
in order to further a broader agenda.
As regards air transport with third countries,
the comments above deal extensively with the "defects"
identified by the Commission in the current regulatory regime.
As already explained, Lufthansa does not view these defects as
critical. On the contrary, Lufthansa sees some benefits in the
current regulatory structure, where Member States have primary
responsibility for dealing with competition cases in the international
air transport sector and the Commission may intervene in exceptional
cases under Article 89:
Under existing bilateral arrangements the EU
carriers providing air transport from a Member State to a third
country will almost invariably be based in that Member State.
This means that the principal EU parties to any agreement subject
to Article 85 or any practice that is allegedly abusive under
Article 86 will usually be based in that country. The principle
of subsidiarity suggests that it would be appropriate and desirable
for the national competition authority to exercise the primary
responsibility for enforcement under these circumstances.
As long as the Member State remains responsible
for the political relationship with the third country involved,
this arrangement makes it easier to ensure that the authorities
responsible for competition policy are sensitive to the political
issues that enforcement activity may raise in the other country.
Lufthansa would add that the shortcomings identified
above in respect of the Commission's application of the competition
rules within the Community appear to be even greater when the
Commission considers agreements that involve air transport between
the Community and the United States. There seems no clear intrinsic
explanation why this should be the case. Rather, the explanation
appears to derive from the Commission's pursuit of an overly political
agenda in such cases.
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
Lufthansa notes that the proposal under consideration
does not actually provide authority for the Commission to negotiate
bilateral agreements. As far as the negotiation of bilateral agreements
is concerned, it would clearly be impractical to replace all of
the existing bilateral relationships involving EU Member States
with EU agreements at once. It will be necessary to proceed with
individual third countries or groups of countries. It is possible
that, depending on the third country concerned and the nature
of its existing bilateral relationships with Member States, that
transitional provisions may be appropriate. As far as the extension
of Regulation 3975/87 is concerned, Lufthansa has already explained
its view that this extension should only apply in the context
of the conclusion of an EU air services agreement with a third
country. Thus, if the EU enters into an agreement with the US,
Regulation 3875/87 should be extended to services with the US,
but not to other third countries until they are also party to
an agreement.
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?
Here again it is noted that the proposal does
not provide for negotiation of bilateral agreements. If the Commission
were given this power, Lufthansa regards it as essential that
the Member States should be fully involved in the negotiating
process.
The effects of a single EU aviation services
agreement on European airline competition will depend on the actual
terms of the agreements reached. In theory, smaller carriers operating
with the protection of restrictive bilaterals could suffer as
a result of such agreements, while airlines that benefit from
extensive networks could benefit. However, smaller airlines could
also benefit from a shift to EU-wide agreements, because the EU
will have more leverage in negotiations for traffic rights than
most Member States have individually. This will mean that carriers
based in smaller countries will be able to gain access to third
country markets that would be closed to them under the existing
system. Larger airlines, in contrast, already enjoy extensive
traffic rights in most third countries. (It may be noted in this
regard that, although the principal focus in discussions regarding
a possible mandate for external competence in aviation has been
on EU/US relationships, the most significant effects of such a
shift may be on other markets.)
4. What effect would the harmonisation of
future bilateral agreements have between Member States and third
countries have on airline competition?
The impact of future harmonisation of Member
State agreements would depend on the form that harmonisation takes.
If harmonisation involved recognition of Community carriers (all
EU carriers would have the status of national carriers) and the
establishment of an "open skies" regime between the
third country and each EU Member State, the effects on competition
would be similar to those of an EU-wide agreement.
5. How would the proposal resolve differences
in economic regulation and implementation of competition rules
for airline services operating between Member States and third
countries?
The proposal to extend the scope of Regulation
3975/87 will only resolve differences in economic regulation indirectly,
by giving the Commission a lever to obtain authority to negotiate
Air Services Agreements on behalf of the EU. Insofar as there
are presently differences in the implementation of competition
rules between EU Member States, those differences will be resolved
by replacing the existing rules with a single set of rules, enforced
by DG IV. As already noted, however, Lufthansa is not of the view
that such differences are very significant in practice.
3 COM(97) 218, paragraph 10.1 Back
4
COM(97) 218, paragraph 10.2 Back
5
COM (97) 218, paragraph 10.3 Back
6
COM(97) 218, paragraph 10.3 Back
7
Note by witness: Bilateral Air Service Agreements have
the status of international treaties and are, therefore, not subject
to national laws. For this reason international scheduled services
are explicitly excluded from the scope of most aspects of UK completition
law. Airline mergers can, however, be referred to the Monopolies
and Mergers Commission under the 1973 Fair Trading Act. Back
8
For questions 138-146 see also supplementary evidence by AUC,
pp. 38-39. Back
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