Examination of Witnesses (Questions 257
- 279)
WEDNESDAY 8 JULY 1998
MR KAREL
VAN MIERT,
MR HUMBERT
DRABBE and MR
VAN HOUTTE
Chairman
257. First of all, thank you for sparing
the time to see us on such an important day for you; we really
do appreciate it. You know what the subject of our enquiry is
and I need not go into that really. I think up to now, and we
have been doing this for about two months, we have steadfastly
kept off the proposed British Airways-American Airlines alliance
because it is sub judice and because our enquiry is perhaps
wider than that, but I think the three of us today feel that we
can talk about it as a kind of case study which will make it much
easier and, as you may know, we are taking evidence from Glenda
Jackson, the Minister for Transport, tomorrow in London, so I
imagine the same comments will apply with her. We have got a number
of questions to ask, but do you want to say anything by way of
introduction? We tend to find it best to have a sort of discussion
on these things, but perhaps you would like to make a short introduction.
(Mr van Miert) Perhaps fairly short, yes. I really
appreciate very much the fact that we can sit together today and
talk about this issue because it has been in our minds for a considerable
time already, indeed since we have had a common civil aviation
policy and you will certainly recall I was in charge of transport
policy and at that time we were lucky enough to be able to develop
a common aviation policy within the European Community. It was
very important and indeed needed because instead of having this
old-fashioned situation on the basis of bilateral agreements,
we could create a fully-fledged Single Market. So we were able
to achieve this, but obviously the logic of doing that meant that
we would also have to go in the direction of having the necessary
instruments for taking care of the effects beyond our own boundaries.
That is the logic, which happened in other areas by the way: once
you have a common policy, it is very difficult to keep its external
dimension separate and stand aside and not care for the other
events. Now, as it happens, since the establishment of our common
aviation policy several alliances have developed in the airline
industry and this is going to continue, so more and more the question
did arise as to what was going to be the effect of these alliances
and these cross-border agreements on the functioning of the Single
Market because obviously when a company, a Community airline develops
an alliance with an American or another carrier, obviously it
has effects not just in one single Member State, but also to some
extent, and often to a considerable extent, in the rest of the
European Union. So, already then we proposed to Member States
that we be given a specific procedural instrument for civil aviation
as we have in all the other areas. For instance, when we have
a competition case in any other area of the private sector, we
have the instruments and there is a one-stop-shop procedure, so
to speak, where we say, "The authority to deal with this
is the European Commission and we are implementing or enforcing
the competition rules and are able to do so because we have been
given this specific procedural instrument". Now, I do not
think there is much discussion about the fact that the Commission
has the responsibility to deal with the external aspects of civil
aviation. I know it has been contested from time to time, but
nowadays it seems that it is difficult to contest the logic and
the effects of such alliances on the rest of Europe's Member States
and the European Union as a whole. That is true for the alliance
between Lufthansa-United, that is true for KLM-NorthWest and so
on. However, we are now in a situation where we are considerably
handicapped because if such alliances occur and if they trigger
competition problems, which is the case, then how do we deal with
it? The only way to deal with it now is on the basis of Article
89. This is fairly annoying because, one, it is a fairly complicated
procedure and, secondly, it is a procedure whereby you have to
go through so many phases that it is very long, unacceptably long.
This means, on average, that the procedure on the basis of Article
89 takes a year or more longer than under the ordinary procedure[2]
which is to the detriment of the companies and which also creates
a very counterproductive opinion that the Commission is dragging
its feet. This is really extremely annoying. Therefore, last year,
in May 1997 we again made two proposals. One has to do with giving
the Commission these instruments as far as alliances with companies
from third countries are concerned, and the other one relates
to block exemption which needs to be adapted as well to be binding,
so there we are. I must say that really from time to time it is
extremely unpleasant that because of the complexity of the procedure,
we have been accused by some of the carriers of dragging our feet,
which is absolutely not true, while at the same time some of the
carriers have been lobbying their governments not to allow the
Commission to be given these instruments. As it happened, during
the Luxembourg Presidency, it was not even put on the agenda and
during the British Presidency also, it was not put on the agenda.
We were in Vienna last week and, together with Neil Kinnock, I
did draw the attention of the Austrian Presidency to the fact
that they had not put it on the agenda either and we said, "Look,
really we cannot go on like that, being accused of being too complicated
and not transparent enough, losing a lot of clout and at the same
time you block any progress in this direction", so there
we are and I can really only regret it because for an efficient
application of the competition rules, this instrument is crucial.
Lord Thomas of Macclesfield
258. They did not change their minds?
(Mr van Miert) Well, the Austrians said, "Okay,
we are going to think about it and we might well come back on
that issue", so the Minister himself was open-minded and
he said, "Really, I cannot contradict your arguments. You
are right, but, I must admit, the situation remains politically
difficult and, therefore, I am not sure we can convince the majority
of the Member States to go along with it or even to have it really
discussed", but they were prepared to take the question up
again and try to find out whether at least some Member States
might be interested in having it discussed.
Chairman
259. I think that is absolutely right, but
one gets the feeling sometimes that whether the carriers would
prefer the Commission to do it or their own national governments
very much depends on whether they believe they are going to get
a better result from one or the other rather than any sort of
philosophical reason because one thing we have certainly noticed
in these negotiations going on with the United States of course
is this apparent conflict between EC competition law and the anti-trust
immunity in the United States. It seemed to be a head-on clash,
so how do you see that working in the future?
(Mr van Miert) On the American side, the situation
is very complicated as well because we have outstanding co-operation
with our American friends, with the Department of Justice and
the Federal Government, but for transport issues, it is the Department
of Transportation which at the end of the day takes the decision
and with which we do not have such a well-established co-operation.
I was in Washington a month ago and had several discussions with
members on the Hill, with Senators, who, by the way, said, "Well,
what you are doing is against the interests of American companies",
and I was very astonished about that because in Germany they will
accuse us of being in favour of American companies, so really
from time to time one wonders if we are discussing the same issues
and the same relevant facts. So, on the American side it is also
complicated. In British Airways-American Airlines case, the Department
of Justice did share to a very large extent our concerns, but
they are not the ones taking the decision at the end of the day.
Lord Thomas of Macclesfield
260. And, by being in transport, they are
likely to be more influenced by their own carriers, are they not?
(Mr van Miert) That is right. Being the Department
of Transportation, they link it to their specific policy issues.
Lord Methuen
261. In talking to the Americans, do you
bring up this matter of not making them more than 25 per cent
foreign holdings?
(Mr van Miert) Yes, over and over again I have
been doing that even at the time when I was in charge of transport
policy because they were at that time accusing us, for instance,
about the fact that still a lot of carriers remain nationally-owned
carriers. They are in favour of privatisation, but that does not
necessarily lead to a situation whereby American carriers can
take over European carriers because we have the concept of Community
carriers and I said, "By the way, you do have a problem which
is more serious than ours because we allow an American carrier
to go up to 49 per cent ownership, but you allow European carriers
only to go up to 25 per cent", and they said, "Well,
it has to do with national security" and so on and so on,
and I said, "Yes, but I thought these were private carriers
and in private business, it should be possible, in principle,
that there can be takeovers, there can be mergers, but I have
to live with the fact that this is not possible with US carriers",
so I said, "Therefore, you should respect us and our Member
States should just accept that American carriers will not take
over European carriers and then assume or pretend that they are
European carriers", but it is even worse than that. I remember
Bob Grandall coming to London and I think it must have been at
the time when this alliance between British Airways and American
Airlines was being proposed and then the question was put to him
as to why that was not possible and he said that it was not going
to be accepted by the trade unions. I said, "Can you imagine
that we would tell the Americans that we would not agree that
an American company would buy more than 25 per cent of a European
company because the trade unions are against that?" So we
made that point over and over again and I am sure that the only
way at the end of the day to get the Americans really moving is
by behaving in the European Union as one entity, and we will be
able to tell them, "Look, we are prepared to have an open-skies
agreement, but then several things have to be changed as well".
In all my experience, being able to talk as a responsible member
of the Commission on behalf of the Union in competition matters,
makes you see that on the American side they accept a real partnership.
You are probably aware that today we have taken the decision on
the MCI case because we had some competition problems related
to the Internet backbone and, I would like to underline that it
has been dealt with in a very splendid way and with very good
co-operation between the Department of Justice and ourselves,
but it was the only way to bring these two American companies
to deliver the goods and to accept the benefits. Boeing is another
case and I can give you many other examples because the Americans
know we have a fully-fledged competition policy, and a European
institution, ie, the Commission, which is caring for that and,
therefore, they accept that and they know that they have to accept
that they cannot get away any more and even if it is a merger
between American companies, if it has adverse competition effects
in Europe, we are in charge and they know that then they have
to accept the conditions, otherwise the Commission will say no.
Chairman
262. Can we ask you about the conditions
two proposed airline alliance deals that you announced today?
With British Airways and American Airlines, you seem to have got
agreement with the British Department of Trade and Industry and
it looks good, but what has happened with the Lufthansa one? Did
the German authorities have a similar view or what is their view
on it because we had some interesting evidence from Lufthansa,
complaining that you were too political, I think?
(Mr van Miert) Well, first of all, the German
competition body fully agrees with us, the German Bundeskartellamt
said, "Okay, we do support your analysis", so there
is full agreement from the German competition body. Now, the Minister
of Transport and Lufthansa, they applauded it when we said, "We
are going to investigate the alliances", but in their minds
it was only about British Airways and American Airlines. I remember
that I was participating in a debate, and they put it in the papers
that there was no problem, it can be checked, it was public, where
it was said, "Yes, the Commission is doing the right job
because it is unacceptable as it is, even the question of whether
such an alliance should be extended at all", and so on and
so forth, and we said, "Yes, we have some fairly strong feelings
about some competition concerns, but, by the way, we are looking
at all the alliances and particularly on the hub-to-hub situation
where more and more it has become apparent that competition is
going to be problematic. Even a big carrier like American Airlines
is out of business in Brussels, there is no competition any more
on the route Brussels-New York because of the alliance between
Sabena and Delta. The same is true for Zurich, Zurich-New York
and other destinations, so there is a tendency whereby the alliance,
in being able to control the hubs on boths sides of the ocean,
is gradually pushing the others out of business and even strong
companies like American Airlines", so that is what we said
to them and even if indeed the Lufthansa-United case is not of
the same magnitude and the situation is different as far as the
effects are concerned and the intensities, nevertheless, there
is also a hub-to-hub problem and, therefore, we said, "You
also have to give up slots eventually when another competitor
wants to come in, and reduce frequencies to enhance the chances
that competition will remain or will be extended", and we
told them that this was particularly needed in the light of the
experience made with the alliance between SAS and Lufthansa. At
that time we required a little bit less than 200 slots eventually
to be given up for other competitors on the route between Germany
and Scandinavia and not one single slot has been claimed. Why?
Because small companies are scared to take the alliance on, so
we said, "So if you will not at the same time reduce frequencies
to allow others at least during a certain period of time (and
we are talking about six months) to establish themselves and have
access to the routes, it is not working". Perhaps I might
add one additional thing which is that the Americans do share
that view, well, at least to a certin extent. The Americans have
been introducing this carve-out system on particular routes and
it is not functioning. In the case of Lufthansa-United, the carve-out
means that they cannot discuss tariffs when it is in the direction
from the US to Europe, but they can do so if flying the other
way, and yet if you are part of an alliance, you are doing everything
together and yet you are supposed not to compete on the hub-to-hub
routes in one direction. That is just not serious and, therefore,
we did reject that and said, "No, really you can pretend
that that is a remedy, but we do not believe in it at all".
We want to enhance the chances of new competitors. For instance,
in the case of British Airways and American Airlines, British
Midland or Virgin Atlantic could also decide to come in and it
is up to them, but at least they should be given some real chance
to take off and it remains to be seen what happens next.
Lord Thomas of Macclesfield
263. We well understand that when you make
decisions or the Commission makes decisions, which are favourable
to any individual carrier, they are very supportive, but when
it is not a favourable decision, then they think that perhaps
their sovereign nation should be doing it. Many of them have referred
though to the Commission having a political agenda, whatever that
means, and I would like to explore that. I would like to know
where the Commission is or where you think it is or where it should
be. For example, other witnesses have told us that they have argued
that the airline industry should be treated like any other industry
and the marketplace should prevail and that with these alliances,
however much you have refined them as a result of today's decision
and previous decisions, that is only refining a cartel and, like
in other industries, you go back to the point where it is marketplace-driven.
(Mr van Miert) Well, that is a very interesting
point because if you read the report made by the Department of
Justice, they say that if airline alliances would have to be scrutinised
according to the normal way it is being done in other sectors,
their conclusion would be that the alliances cannot happen. Now,
of course I accept that you can make that point. On the other
hand, the airline business is to some extent a specific sector
as well and, therefore, I think alliances potentially have advantages
also for the consumer, so we should not deny that and we should
not just ignore that, but if you do not attach specific conditions
to the alliances in order to be sure, and mainly on this hub-to-hub
situation they should simply not go ahead.
264. But that is a very subtle point. What
you are saying is that it can have advantages, but it possibly
will not have advantages unless those advantages are part of the
alliance agreement with your conditions on this today to the tune
of 267 slots.
(Mr van Miert) Let me put it this way: if the
remedies we are now suggesting will be fully observed and enforced,
I think there will be benefits because, if we take the British
Airways-American Airlines case, Virgin Atlantic might extend its
business which is already there, so that is a real possibility,
and British Midland might eventually come in.
265. But if you had not intervened, none
of those conditions would have applied and, therefore, the consumer
would not have benefited from them.
(Mr van Miert) That is right.
266. I just wanted to make sure that is
right.
(Mr van Miert) And with American Airlines, the
last time I met Bob Grandall here, I must admit, he has always
been very outspoken and honest about this and he was of the opinion
that these kind of code-sharing agreements were anti-competitive
and against the interests of the consumer, and he has been constantly
arguing this, but he said, "Okay, if it is happening and
the others drive us out of business on some routes, I do not have
any other choice left than trying to have my own alliance".
267. But the hand you have got, as we say,
is the hand you have got. This is not where we should be in terms
of competition, but this is the historical reality and now we
are looking at ways to move forward from where we are today. Now,
in that context, would it be simpler to come up with a clear competitive
mandate which everybody in Europe would agree and then for the
Commission to call in any agreement that seems to be in contravention
of that understanding rather than looking to the Commission to
negotiate what are, after all, free market negotiations?
(Mr van Miert) Do you mean a global open-skies
agreement?
268. Well, any agreement. Is it not better
that there is an agreed competition rule, that there might be
a block exemption for grandfather agreements that already exist
and that as and from then, every agreement, including the old
agreements, can be called in one at a time if they are clearly
in contravention of that competition mandate? Then you would allow
everybody to negotiate as individuals, as carriers or as countries,
and you would be looking at the exception rather than everyone.
Also the concern expressed is that there will not be the commercial
drive in the negotiations because you will be trying to do the
best deal for every country, whereas the marketplace would determine
that in its own way.
(Mr van Miert) Well, the problem is that in this
case, as in other cases, the market is not caring to make sure
that competition remains and it is the other way round. If you
fly from Brussels to Vienna, there is no competition and you pay
a very high fare, and there is no competition if you fly Brussels-Lisbon
because in the meantime they have these code-sharing agreements
by alliances and competition is gone.
269. So you would call that agreement in,
as I see it.
(Mr van Miert) Yes, but here we touch upon another
thing which is whether you can allow code-sharing agreements or
not because, as it happens, code-sharing agreements eliminate
all competition between the carriers concerned.
270. And there would be consolidation in
the industry.
(Mr van Miert) Yes, but also the attempt to take
on such an alliance. Virgin has been doing that on some routes
and eventually went for its own agreement with Sabena, for instance,
and so on and so forth, but what is becoming more and more evident
is that on really a lot of routes the competition has gone because
of code-sharing agreements.
Lord Methuen
271. Is there not another problem, that
in many cases there is not enough traffic on these particular
routes?
(Mr van Miert) Yes, but there has been competition
before. There are several flights, for instance, to Lisbon so
two carriers can do business and it has happened before. Now,
obviously it is much easier for them to say, "Well, we will
stop competing and let's code-share" and before someone else
can come in and it is only because they have all the frequencies,
so they have some power.
Lord Thomas of Macclesfield
272. Forgive me, but if you agreed a competitive
ruling, a mandate that should apply, then if you had agreements
like you have just described, they would be called in and they
are the ones that would be looked at.
(Mr van Miert) We are going to do that.
273. You are going to do that?
(Mr van Miert) Yes.
274. Rather than negotiate with all the
individual countries? Do you see the difference? You would be
working on the exceptions.
(Mr van Miert) I am not sure that I get it.
275. Well, let me put it another way. Let
us say that there are a few hundred agreements in terms of the
15 Member States of the European Union, and there will be hundreds
more. Now, if the European Commission were concentrating on the
exceptions to the rule rather than every one: one, it would have
the advantage of reducing its workload considerably; but, two,
the advantage would be that the private sector could negotiate
their deals within this convention as best they might.
(Mr van Miert) But inside the European Union,
traffic rights exist in their own right and, therefore, there
is no need to be given traffic rights any more and you just can
try to use them, but the problem is that obviously if you have
to compete with carriers with deep pockets or alliances or code-sharing
incumbents, it is extremely difficult. Then you have people like
Deutsche BA and they complained about the fact that on this route
between Frankfurt and Munich, as far as Lufthansa was concerned,
it was time for war.
Lord Methuen
276. To what extent is this limited by slot
availability? Would you like to talk about that?
(Mr van Miert) Yes, it is limited.
277. And the method of trading in slots?
(Mr van Miert) Obviously when we have to deal
with an alliance inside the European Union, we have to see to
it that attractive slots, adequate slots will be made available
to other competitors if the effect of the alliance is to eliminate
all existing competition completely and, speaking about the case
of Lufthansa-SAS, there were competitors. They started to run
their alliance and it stopped. Therefore, we said, "Then
you need to accept as a remedy that eventually up to", I
think it was, "198 slots should be made available mainly
in Frankfurt, but also some other airports, if other competitors
want to come in, but you need to make them available only when
someone is asking for them, otherwise there is no point in doing
so". What happened in the real world was that smaller carriers
apparently, or I know of at least one case where a smaller carrier
was attracted by this business and wanted to enter the market,
but it was made abundantly clear that if the carrier concerned
had the guts to do so, then this meant war, so at the end of the
day they refrained from doing so and, therefore, not every one
of these slots has been taken up, so this proves that this remedy
was not good enough.
Chairman
278. But you are proposing the same on Heathrow
in your statement, that they should give up 267 or however many
slots it is going to be.
(Mr van Miert) Heathrow and Gatwick.
279. That is because of course there is
pressure and other people probably will want to take up the slots
there, so that is a remedy that is probably worthwhile, is it
not?
(Mr van Miert) That is right. I fully share your
view because of the attractiveness of Heathrow and I would be
very astonished if there were no carriers, but only for transatlantic
business, so maybe British Midland one day. Sir Michael did write
us a letter which said, "Could not the Commission consider
that the number of slots to be made available could also be used
for intra-European flights?" and we said, "No, it has
to do with curing competition problems which derive from the transatlantic
alliances", so the slots are 200 maximum because if they
can be made available at Gatwick in another way, the companies
concerned do not need to give them up. By the way, the same is
true in the United States because, let us say, if British Midland
were to enter the market and were able to get slots at Heathrow,
interesting slots, the Americans would have to make available
corresponding slots and if the airport authorities could not do
so, then American Airlines would need to free up the slots on
their side.
2 Case 22/70, Commission v Council (EFTA), ECR 263. Back
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