Select Committee on European Communities Minutes of Evidence

Supplementary Memorandum by Lufthansa


  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 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".


  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.


  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

    (b)  a rapid transition?

  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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