Select Committee on European Communities Minutes of Evidence

Examination of Witnesses (Questions 359 - 379)




  359.  Minister, you are most welcome. I think I am right in saying this is the first time you have actually been able to give evidence in front of this Committee, in which case you are doubly welcome. You are, of course, more than fully aware of the enquiry we are doing at the moment on the proposed EU airline Regulations. Would you like to make an opening statement and perhaps introduce your colleagues first? I do tend to be a rather well worn record on this but we find that by far the greatest benefit on these occasions is in the question and answer period rather than a monologue.
  (Glenda Jackson)  I am most grateful for your welcome. I am accompanied by Mr Smethers from our multilateral division and Dr Letemendia from the legal department. If it is in order I would like to make a brief opening statement beginning with an apology to the Committee, in effect correcting an error in the Department's Explanatory Memorandum (EM). At the time the memorandum was written it was our understanding that both British Airways (BA) and Virgin Atlantic supported the Government's position. We have, however, since learned that Virgin Atlantic support the Commission's proposals. We have told Virgin Atlantic that we will correct the situation and, again, I apologise to the Committee for this misunderstanding. In light of this, we have double checked and BA continue to support the Government's line. As you are aware, the European Commission has presented proposals to extend the scope of the Regulations implementing the competition rules of the EC Treaty to the air transport sector. The current Regulations apply only to intra-EEA services. The Commission is empowered to investigate, take decisions and has sole power to grant exemptions under Article 85(3) of the Treaty. By contrast, in cases affecting extra-EEA routes, Member States play the key role in enforcement under the transitional regime which is provided in Articles 88 and 89 of the Treaty. Article 88 confers on Member States the jurisdiction to apply competition rules, including sole power to grant exemptions, whereas by virtue of Article 89 the Commission may only investigate possible infringements with the assistance of the Member States and propose appropriate measures to end an infringement or authorise Member States to take such measures. The effect of the proposals we are considering today would be to put an end to the transitional regime in cases affecting extra-EEA routes and confer on the Commission full powers of investigation, enforcement, and sole power to grant exemptions. As a result the Commission would rule on all significant aviation competition cases, regardless of the market question, and the Member State most closely involved would lose its locus except for participation in an advisory Committee composed of representatives of all Member States. We believe these proposals are premature. In 1987 the Community took its first steps towards creating the single aviation market by agreeing rules on market access on routes between Member States. At the same time competition implementing regulations were adopted applying only to services between Member States. When cabotage services were included within the single European aviation market in 1992 the regulations were extended to apply to air services within individual Member States, and we believe that this parallel approach should be maintained. In our view, exclusive competence to apply the Treaty's competition rules to air services to and from third countries should be linked to the competence to negotiate the relevant air services agreements. With the exception of mandates covering what would, in effect, be an extension of the Community single aviation market to geographically neighbouring countries, the Commission has so far failed to secure the necessary authority from the Council to negotiate air services agreements with third countries on behalf of Member States. In our view, it would, therefore, be inappropriate to grant the Commission exclusive competence to apply the competition rules of the Treaty to routes between Member States and those third countries. Since Member States have maintained the right to negotiate bilaterals, there is no case for extending the scope of the competition regulations. Thank you.

  360.  Thank you very much, and thank you for that initial statement regarding Virgin Atlantic's position. Indeed, in evidence to us they have confirmed exactly the position that you have made. Could I just ask you a bit further on this question of competence and probe slightly more as to why the British Government are not in favour of the proposed Regulation? In your supplementary, it is not really an EM—it is supplementary written evidence which you kindly recently supplied to us—in paragraph 11, incidentally I am very glad you brought your legal expert with you because one does get into the most frightful problems on these clauses——
  (Glenda Jackson)  Not as grateful as I am!

  361.  We are still slightly reeling from this but in paragraph 11, which I find very significant, you say in the last sentence of that, "By enabling the Community to intervene in respect of the competition provisions of those bilateral arrangements"—which you referred to earlier on—"the proposed Regulations might extend the Community's competence to negotiate aviation relations with third countries". Now I think I have been around the tracks long enough—particularly in this House—to read between the lines as to the definition of the word "might" which seems to me to infer that they probably will. Would you like to comment and expand on that?
  (Glenda Jackson)  It is certainly our perception that this would enable the Commission to participate in bilateral negotiations with third countries on air service agreements by the back door. This is a proposal that they have presented to the Council. The Council has consistently refused to grant this political mandate but, if these Regulations did come into being, it would mean that the Commission would have exclusive and sole powers in the examination and application of the competition rules to flights between a Member State and a third country and, therefore, we believe it would be by this means that the Commission would be able to actually intervene in bilateral air service agreements which, at the moment, are essentially within the exclusive powers of the Member State and the third country. We do not believe this is an appropriate means. It is actually ceding powers for which the Commission has not managed to obtain any kind of political mandate from the Council.

  362.  Is that therefore one of the main, if not the main, reason why the British Government are not in favour of the proposed regulations?
  (Glenda Jackson)  It is one of two main reasons why we are opposed to these regulations. The first, which, as I said, would give exclusive powers to the Commission in the examination and application of the existing competition rules, would be to exclude from this process what I would call the local knowledge, in a sense—the experience, the expertise, the detailed awareness of the particular market forces which the individual Member State brings to bear in the present situation. As I have already said, the second reason is that we do believe this would give the Commission powers in the negotiation of bilateral air service agreements for which they have absolutely no political mandate.

  363.  If I could just home in on that first reason, I am very interested because it is absolutely consistent with virtually every piece of evidence we have had—including that obtained from a very interesting visit to Brussels yesterday which Lord Berkeley led—and I am sure he will comment on that in a minute. First of all, by definition, that expertise is not going to be present in the Commission because the Commission does not have the authority or the competence, but it is not beyond the wit of man or woman that that expertise could be seconded to Brussels. I am not quite sure why that is a prime reason for objection.
  (Glenda Jackson)  The present situation where that expertise is utilised is because there are essentially equivalent and balancing powers under the equivalent Regulations. If these proposed Regulations came into being, then the individual Member State would be excluded. I am not wishing to imply that the skills of the Commission are less than those of the individual Member States' departments who have responsibility in competition areas, but it does seem to us that (a) there would be this expertise which would be excluded, and (b) there would be the concern that any such negotiations would, of necessity, be infinitely longer possibly, because we are, are we not, considering the possibility where one group within the Commission, within the European Union, would have exclusive competence over fifteen Member States. I know there are already allegations that such inquiries take too long but it is possible that if it was exclusively the Commission, in a sense the work would not only be doubled or quadrupled but would be multiplied fifteen times.

  364.  Could I probe one more point on the reasons for the British Government's stance? The Commission states in its memorandum "the existence of these"—by which they mean bilateral agreements -"is partly responsible for the lack of competitive pressure on the Community market". Does the Government take a different view from that?
  (Glenda Jackson)  We think it is somewhat overstated. There may be existing bilaterals which are very tightly drawn but in a sense, if they do have an impact, it is on essentially short-haul feeder services. If we look at the capacity for expansion in markets between the EU and third countries, with the exception of London there are essentially only five long-haul destinations, five routes, where competition between more than two airlines is currently borne so we think, in essence, it is somewhat overstated.

  365.  Could you give us those five?
  (Glenda Jackson)  That answer would probably better come from Mr Smethers.
  (Mr Smethers)  Tokyo, New York, Boston, Chicago and Los Angeles. Those are the destinations.

  366.  All ex Heathrow?
  (Mr Smethers)  No. This is not London.
  (Glenda Jackson)  These are excluding Heathrow where there are more services of an international nature. These are the destinations from points within the European Union, excluding London. We deem that there would not be any great scope for increasing competition on other international routes in that way. There are essentially are there not five major international air market areas in the world.

  367.  I said the previous question was the last one but I want to ask just a vague general one: we are approaching this enquiry asking whether the proposed Regulations will or will not increase competition, by which I think we define that as giving a better deal to the customer. Would you go along with that?
  (Glenda Jackson)  Clearly the whole purpose of competition is to ensure that the customer is best served and that those who can provide those services should not be victimised by mere size by being excluded from the market by larger players, but I do not see that the application of these Regulations would provide any greater assurance for the consumer. The rules have been agreed; the application of the rules, in a sense, will not be changed. It is simply that the decision making power would rest exclusively within the hands of the Commission and, therefore, the perspective, the perception—if you like the individual Member State's consumers' perception of what constitutes a better service for them—could, I would argue, be excluded because the Commission would have to be arguing from the perspective of all fifteen Member States.

Lord Berkeley

  368.  Minister, you opened your introduction by saying that Virgin Atlantic were supportive of the Commission's view and British Airways were in favour of the Government's view. Do you have any explanation as to why that should be and why some airlines are in favour of Member States looking after their own interests and others believe that the Commission is better able to do so? Could I put it to you that this may be connected with the continuing notion among many Member States that there is a national airline and therefore the national Government is more likely to support them than a Community wide institution, where there might be competition with other national airlines of other Member States?
  (Glenda Jackson)  That could be a perception but certainly, as far as the United Kingdom competition authorities are concerned, it would be utterly inaccurate. I would strongly refute the idea that, as I said, the competition authorities within the United Kingdom would favour one airline over another. There is no evidence to support that. There is equally no evidence—although I must admit my experience here is somewhat limited—that any such situation applies with any other European Union country. I believe, for example, the competition authorities in Germany have acted against Lufthansa on two occasions in what, they believed, to be uncompetitive practices on internal routes within Germany.

Lord Howell of Guildford

  369.  I was interested in your use of the word "premature" when we were talking about the proposed Regulations. Does that imply that there might one day be circumstances in which the Government would be happy to see these Regulations adopted and the transfer of powers both in this area, and by extension and implication to negotiations generally with countries, to Brussels?
  (Glenda Jackson)  If a mandate was given to the Commission by the Council to enter into, for example, Community-wide negotiations with, say, the United States of America, and if a successful agreement was reached, then, yes, we would be prepared. That, we think, would be the appropriate way, and why we say that we think these kinds of regulations are premature—that there should be this kind of parallel approach to possible Community-wide negotiation with third countries.

  370.  So there is not behind the present stance, as it were, a really fundamental objection that this kind of new arrangement, if the mandate was available to the Commission, might actually lead to a less competitive and a more cartelised European airline structure? That does not worry you?
  (Glenda Jackson)  I do not know that I would see it leading to that necessarily. If you are meaning that there would possibly be, if the Commission had the powers to which we are referring, more alliances between fewer Community airlines and the rest of the world's airlines, I would not have thought that the regulations themselves would have automatically led to that. I would have thought those kinds of alliances, or proposed alliances, stem from the actual economic realities of the market but, as I have said, if there was a mandate granted to the Commission, if they did successfully conclude a Community/US agreement as far as air services are concerned, then we could see that clearly there would be the requirement then for the application of the competition rules. I must stress here, however, that the Commission has significantly failed to receive such a mandate up to now—not least because we do not know what model of mandate is being proposed in a sense, and there has been certainly no agreement within the Member States on what model that mandate should be.

Lord Paul

  371.  Minister, taking this Clause 11, the last sentence, if this actually happens, what is Britain likely to lose, especially when we are trying to play a stronger role in Europe? How are you going to take the perception away from the newer airlines in other countries that Government will always play ball with what is perceived to be the national airline?
  (Glenda Jackson)  If the Regulations came into force it would not be a loss exclusively for the United Kingdom—it would be a loss for every single Member State having any say in the investigation and application of competition rules. I also do not accept the argument that Member States—and certainly not this Member State, the United Kingdom—prioritise one of their airlines over another. Where you do see perhaps market dominance as far as airlines of a particular nation state are concerned is because they effectively compete within world markets and the idea that any airline of any size could, in a sense, be a global player in that market place is not something that the market could support. In that, the existing competition rules—or the rules of the EU in a sense—do not have any part to play. It is the actual market that decides in that sense.

  372.  Why is it that Virgin Atlantic is so upset that they want to follow the Commission rules? They are a British airline so there must be something in their perception that is bothering them.
  (Glenda Jackson)  With respect, I think that should be addressed to Virgin Atlantic but I would put forward the point that theirs is not necessarily an objective opinion because they are in direct competition themselves not only with BA but with all other airlines, and I can only repeat that I refute very strongly that the United Kingdom's competition authorities would be, in any way, partial in the application of the existing competition rules. It is my somewhat limited knowledge and experience that there is no such prioritisation of any one airline over another in any of the other European Member States.


  373.  Given the dominance of the trans-Atlantic market in this context, would you prefer that these Regulations applied only to the US—in other words, Europe/US—and leave other countries out of it just for the time being? Would that make any sense?
  (Glenda Jackson)  It does not alter the basic concerns we have (a) on the first point of the exclusion of the actual experience and expertise of the Member State but (b) perhaps more importantly that it seems to us that the Commission would be taking powers to itself which they had not received the political mandate for and I think that, on the matter of principle, is probably the weightier of the two, in a sense.

Baroness Dean of Thornton-le-Fylde

  374.  You said that, in the Government's view, these proposals were premature and you explained why. You talked about the consumer and competition. If these proposals went through now, what impact do you think they would have on air transport users? What benefits would there be for them?
  (Glenda Jackson)  I cannot in all honesty see there would be any benefits at all. The rules themselves would not change—although the application of them would be ceded to one exclusive power base. In a sense, I could conceive that there would be demerits as far as the consumer would be concerned, simply on the level of possibly an even longer period before a decision was reached. We have seen the most recent example where that has been a very lengthy process and, as I have pointed out earlier, it seems to me that, if the Commission was exclusively in charge of such competition procedures, then that process of itself would inevitably lengthen. We are talking about a market that is very fluid, fast moving, and highly competitive and if there is going to be an interminable—perhaps that is slightly exaggerated—a very long period of time before a decision is introduced, I cannot see that that would necessarily be to the benefit of the consumer.

Lord Berkeley

  375.  We took evidence from Mr van Miert yesterday and officials from DG IV and DG VII. Their view on the timescale was that, in terms of the complexity of this particular proposal—and I am talking about the American Airlines/British Airways' one—they had actually worked very closely with the Department of Trade and Industry (DTI) (and maybe we should look at that later) and they had reached unanimity of view with Margaret Beckett—as they had with the German equivalent of the Ministry of Transport on the Lufthansa deal. They felt, considering the complexity of it, it was not considerably longer than if it had just been done in one particular Member State—the competition element of it. They went on to comment, and I would like your views on this, that they felt that the ownership rules on airlines—and in the US it is, I think, 25 per cent on maximum foreign and in the European Union I think it is 49 per cent—was a disincentive because it means allowances rather than straight takeovers and Mr van Miert was very strongly of the opinion that the best thing would be a phased scrapping of these limits—first of all, getting the Americans to bring their limit up to 49 per cent and then maybe widening it on both sides on a bilateral basis. Would you support such a move of reducing these ownership restrictions on airlines in particular Member States or other countries?
  (Glenda Jackson)  I understand the argument that has been put forward but we have no powers to change the United States' approach to these matters and it is my understanding that, if such a change in ownership was considered by the United States, it would require legislation and therefore that, in a sense, is an internal argument for the United States. There is nothing in these Regulations, and nothing in any of the Community Regulations, that in a sense could impact upon that.

  376.  But coming back on this, Lord Chairman, obviously you do not have any powers with respect to US legislation but in negotiations with the US such a subject could be brought up if it was felt that it would be beneficial to Community based airlines or British based airlines, freeing them up to get more business in the United States—eventually it might work the other way as well, but freeing up the market. I think really Mr Van Miert was arguing "Why is airline business so different from any other? Why should it have so many special rules and regulations? Why should there not be normal competition law applying here and in the rest of the world?"
  (Glenda Jackson)  They are very good questions and I have to say, in certain areas, I would agree with him. Why is there not? There are obviously national interests, I think, in these areas but also practical reasons as well why there has to be a regulatory regime in a sense. No airport in the world is going to, for ever and a day, be able to accept ever increasing capacity and it is foolish, is it not, to pretend that every airport in the world has the same attractions for people flying into or out of it. Certainly in how independent sovereign nation states approach these issues, however, (and I take the point on the issue of ownership which can be raised and I have little doubt that it is raised), reaching agreement on such issues I do not think would ever be achieved in isolation. There has to be a much broader agreement between all the negotiating parties of what are the desirable outcomes. In some instances, of course, there would be totally disparate views on what that desirable outcome would be.


  377.  Can I come back to Lady Dean's point on timing, or time taken? What you have said is the perception that, if the negotiations were entirely in Brussels' hands, they might take for ever and a day—those are my words—and, indeed, all the evidence we have had until yesterday confirmed that. All the witnesses said "One entity dealing on behalf of fifteen members—the mind boggles". As I understand it, Commissioner van Miert reversed that and said that, in his opinion, it actually would make things a great deal quicker. Would you like to comment on that?
  (Glenda Jackson)  I am tempted to say there is no evidence to support that statement but that would be somewhat extreme. I do not in all honesty see how it could be—I will rephrase that. I could see how it would be quicker but there is no guarantee, is there, that conclusions after what he would claim would be a speedier process would be necessarily acceptable. As Lord Berkeley said, such negotiations, such examinations, are extremely complex which is why we believe that it is necessary to have the experience of the Member State present in all such negotiations. If it devolved exclusively to the Commission, although they undoubtedly could ask for advice from the individual Member State and the relevant bodies who are also part and parcel—although somewhat outside—the exclusive competition authorities in these issues, that would not of itself necessarily speed up the process. I think there could be justifiable concerns that the process itself, because it lacked this kind of input, because there was no longer the balance of power—and in essence this is what we are talking about—the decision could possibly be subject to a perception that it had not taken into consideration all the very relevant concerns of the particular Member State.

Lord Haslam

  378.  Lord Berkeley has covered quite a bit of what I wanted to say. However, I understand Mr van Miert said it would be better if the airline industry were treated like any other industry and that view was endorsed by Virgin Atlantic and consumer groups who have given evidence. I believe that this spate of alliances that is taking place is making the situation worse and indeed these alliances are substitutes for mergers in other industries. The key therefore is exactly what Lord Berkeley was saying—that the removal of these limits in the US and in Europe would be one of the essential factors leading to a preferred solution. I would have thought that the United Kingdom Government ought to have a view on this. In the US, you have the Open Skies policy linked to an anti trust immunity and that is a total anathema. The US has the most strict regime of anti-trust activities on every other industry but the airline industry. Is it inconceivable that one could argue quite positively with the US Government that this immunity should not exist? It seems to me that the Government ought to be saying there is not too much benefit to be gained from these new Regulations and we ought to be putting forward some alternative proposal, ultimately for treating the airline industry as any other industry.
  (Glenda Jackson)  But that would pre-suppose that these Regulations would actually change America's attitude to Open Skies.

  379.  I was not suggesting that the proposed Regulations would change that attitude; I was just saying that if the Government does not wish to participate in this new approach—and I too am not very much in favour of it—the key resolution of this industry, in my view, goes back to resolving this ownership situation in Europe and the US. I cannot see why the European Union cannot argue with the US Government about actions which are so contrary to everything they impose on other industries.
  (Glenda Jackson)  I have no doubt that such arguments are, indeed, put forward and I have heard arguments you have been putting forward to me actually emanating from chief executives of American airlines and this is obviously something that in the future would, conceivably, be desirable—always I think, however, with the caveat, as I have said earlier, that there is no airport in the world that is going to be able to accept, for ever, constant expansion. There are considerations there that are specific to airline operations, not least the environmental ones. The issue here surely, however, is in essence the powers and the abilities of the negotiators on both sides of the Atlantic. We believe we have a really good prospect within a very short space of time of completing a liberal Air Services Agreement with the United States. We argue that these regulations would, indeed, give the Commission the power to actually enter into those kinds of negotiations. You are looking at a prospect where everything would have to go on hold, if we were actually arguing for a bilateral agreement between the US and the EU. Everything would come to a halt and one could conceive of a very long period of time indeed before any such agreements could be reached.

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