Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  1. Good afternoon, Mr McNulty and your colleagues. First, could I congratulate you warmly on your new appointment and, secondly, thank you equally warmly for fitting us in at an early stage. We appreciate that you have a lot to get on top of and we are deeply appreciative that you have given us the time. Your colleagues are almost becoming old friends on these issues. May I say how nice it is to see them too. As you might expect, we have a range of matters to raise with you. It could well be that you want to make an opening statement in the first instance.

  (Mr McNulty) Yes, briefly, and firstly to thank you on both counts for your kind words. I think congratulations is right, but time will tell. This is a massive brief, not least the aviation element. I thought it was terribly important from my perspective to use this opportunity to put myself in front of you, but that comes with some strings in that this time, and only this time, I shall be looking left and right far more than I usually do at such hearings. I usually enter into a deal with officials that if they brief me properly and we read things in properly, then they come and look pretty and do not say anything, but I will probably abuse that deal just in this one regard. You will know that John Spellar went to the Transport Council on 5 June. The Council agreed principally three measures on external aviation in the light of the ECJ rulings. You will know already that we got a mandate for the Commission to negotiate on an open aviation area with the US; a horizontal mandate for the Commission to negotiate with all third countries on the so-called Community clauses; and a Council Regulation establishing the framework for Member Sates to continue negotiating bilaterals. We believe this is a good agreement for UK citizens and UK industry, entirely consistent with the recommendations of your Committee. I suspect that this will not be the one and only time I appear before the Committee, given the importance of aviation in the European dimension, which is why I thought that the sooner I knew who you were and you knew who I was, the better. That concludes my opening statement.

  Chairman: Thank you very much indeed. As no doubt select committees do in your place, we will start off to a pattern and we will see how well behaved and disciplined Members are.

Lord Shutt of Greetland

  2. Thank you for coming. We have been here before with this subject. We are now getting the phrase "open aviation area" and we have been talking about "open skies". Is there a difference and, if so, what is it?
  (Mr Smethers) Yes, there is a difference. Open Aviation Area is the term that is used to describe a possible agreement between the EU and the US, in which there would be open market access for EU and US airlines within a harmonised regulatory framework. It used to be called the Transatlantic Common Aviation Area; it is now known as the Open Aviation Area. "Open skies" is the term normally applied to the US idea of liberalised aviation, which we would regard as an incomplete liberalisation. It is the style of agreement that the US has negotiated with many Member States but not with the UK. The crucial difference is that there is limited access to traffic from the US hinterland for the European side and the US still has a reservation on Government traffic "Fly America". It also has restrictions on ownership and control which would not exist in a full and open aviation area. "Open skies" is a US template from which we want to move on.

  3. Does this mean then that we will still have difficulty with this subject called cabotage?
  (Mr Smethers) Part of the mandate includes negotiating cabotage in the US but I think it would be fair to say that that would be one of the most difficult areas for the EU to negotiate with the US.
  (Mr Baker) Perhaps I could add this, as someone who has negotiated with the US, that we call it the "so-called US open skies" because it is a partial open skies, partial reorganisation. I often term it as "partial" in both senses of the word: partial because it is not full open skies, not full liberalisation, they are not opening up their own domestic market; and "partial" because actually it is in the US commercial interests.

  4. What now is the thinking of Her Majesty's Government regarding control and ownership of airlines? Is that shifting in any way or is that the same position?
  (Mr Smethers) At the moment, we are bound by EU laws that Community carriers have to be majority owned and controlled by EU interests. In the US, US airlines have to be no more than 25 per cent owned by foreign interests and be effectively controlled by US interests. There is a small discrepancy already. Our view is that it would be a good thing to break down these restrictions and to move to an aviation area in which there were no such restrictions, but of course that is a long-term ambition. It would help all airlines in Europe and in America, for example, to attract capital from more sources and to attract management expertise from more sources, and it would enable the industry to restructure itself, as other industries have done.
  (Mr McNulty) That is part of the reason, I think, why we refer to the "open skies" of America as "so-called" because of those ownership restrictions.


  5. But is the situation where the US rules on ownership and control are different from those in the EU sustainable?
  (Mr Smethers) I think as a modest, first step, the EU has every right to expect the US to put its rules on the same footing as the EU rules. That would still only be 49 per cent ownership. That does not in fact open up the market; it does not enable an EU carrier to purchase a US carrier or vice versa. To make a real change, you have got to go beyond that.

  6. Do you anticipate that that particular issue, amongst others, will be part of the detailed mandate for the Commission?
  (Mr Smethers) It is part of the detailed mandate for the Commission.

  7. What is the mandate in relation to ownership?
  (Mr Smethers) The mandate is an ambitious one. It aims for an aviation area in which there is the option of 100 per cent ownership by any interest within the area, and so any airline within the US or the EU could own an airline within that area. That is the long-term ambition of the mandate.

  8. In simple terms, the concept of the US airline or the EU airline would, by implication, no longer exist?
  (Mr Smethers) The concept would not disappear automatically for relations outside the area, but within the area, yes, any airline could be owned by any interest within the area. That would be the long-term aim of the agreement.

  9. In terms of cabotage, that of course in a sense would overcome that issue if one went through that route?
  (Mr Smethers) Yes.

  10. Does the Commission have a separate element within the overall mandate to deal with the issue of cabotage, or is the intention to wrap up ownership and cabotage as one implicit issue?
  (Mr Smethers) They are both there at the moment. Included in the mandate is an instruction to the Commission to negotiate cabotage in the US, and also to negotiate an opening up of restrictions on ownership and control. It would be fair, however, to say that in practice one might see them as alternatives. In fact, and Tony Baker will be able to say more on this, I think probably in most cases it would be more attractive for, say, a UK airline to buy a US airline and control it rather than try to create its own stand-alone cabotage services in the US, which would be difficult for many UK airlines to do.
  (Mr Baker) There are three ways of getting access to the US domestic market which have been considered in the past. One is ownership and control, so a UK airline would buy a US airline and provide a feed to its own transatlantic aviation carrier. The second one is cabotage, where it would actually operate itself within the United States. The third is if they got an immunised alliance with an American carrier, which BA tried with American and Lufthansa has with United. I think my colleague was right, that the ownership and control will largely supercede the cabotage demand. There is one aspect of cabotage, though, that might still be relevant, which is what is called consecutive cabotage. That is that if an airline flies from the United Kingdom through from London to New York and then wanted to fly on to Chicago, and was dropping people in New York and picking up people to carry them between New York and Chicago, that would be consecutive cabotage and that would not necessarily be allowable if you just had ownership and control of the airline.

  11. On that issue of alliances and so on, British Airways have been held up so far on that. Given what you would anticipate is the proper time before the ownership issue is negotiated and agreed, and it may not be—we will come to that later—do you see potential for alliances involving UK airlines into the United States being able to proceed more smoothly than in the past?
  (Mr Baker) I think always they will be considered by the competition authorities. It may be that the general structure of the industry will change and competition authorities will look at these things differently. I think there are already signs in the United States that the competition authorities, given the poor financial state of the US industry, are looking a little bit less stringently at the apparently anti-competitive effects of alliances. I think the general structure of the industry might have changed and the competition authorities' views might change. The competition authorities will always obviously have some worries about that aspect.

  12. We will probably return to that when we look at slots and the competition issues. Could I just pick up one or two fine, smaller details before we go on to the Community clause and the nationality clause and all that. Where does wet leasing stand in the mandate. Is that part of that mandate?
  (Mr Smethers) Yes, that is part of the mandate.

  13. Can you tell us what the mandate is on that?
  (Mr Smethers) I will pass to Tony Baker for the detail because you will be aware the rules in Europe are currently very different to the rules in the US. Part of the mandate is to try to bring those rules closer together and more into line with what exists in the EU rather than in the US. The US rules are very restrictive at the moment and part of the mandate is to achieve a more liberal leasing environment within the so-called open aviation area.
  (Mr Baker) The current US rules on wet leasing do not allow US airlines to wet lease from foreign carriers. They have sometimes held out the prospect of allowing wet leasing by US airlines, provided that they use those aircraft not within their own domestic market but between points from the US to a foreign point. That has never been formally offered but we have talked about it. That is actually not very useful to a UK airline which might be interested in wet leasing.

  14. The final detailed point at this stage concerns "Fly America" on the passenger side and there is the cargo equivalent, is there not? I assume that the mandate is approaching with equal vigour the issue as to whether it is passenger or cargo travel. I thought I had understood Mr Smethers to say, and perhaps I misheard, that the "Fly America" issue was not one of those issues to be addressed in the mandate.
  (Mr Smethers) It certainly would be inconsistent with the Open Aviation Area (OAA) for any "Fly America" type policy to exist,

  15. What is the acronym CRA mean?
  (Mr Baker) CRAF, Civil Reserve Air Fleet. The American Government asks the US airline industry to stand ready to provide their aircraft in times of war or emergency—aircraft with crew. They have a scheme whereby they take up aircraft from the different airlines. They reward their own airlines by saying, "You will get all the contracts for government personnel and contractors". That is the deal.

  16. That is the cargo equivalent of "Fly America"?
  (Mr Baker) It covers both passenger contracts and cargo contracts.

  17. Does the Commission's mandate cover that particular matter?
  (Mr Smethers) Yes; any restriction on cargo or passenger carrying would be inconsistent with the concept of an Open Aviation Area. They are in there.

  18. Is there anything else in the mandate that I have missed out or not cited?
  (Mr Smethers) There is quite a lot on competition rules. Obviously competition rules will be different on each side of the Atlantic, but a lot of work has been done already on converging application.

  19. We will come back to competition.
  (Mr McNulty) And safety as well.
  (Mr Smethers) Safety harmonisation has been progressed over many years between the JAA and the FAA. We are now into a new regime in Europe with the European Aviation Safety Agency, and it is foreseen there will be an agreement between the Commission and the US on safety. Safety is mentioned in the mandate. It is an integral part of the Open Aviation Area.

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