Select Committee on European Union Seventeenth Report

CHAPTER 2:dealing with the European Court of Justice

Judgments of 5 November 2002

38.  The European Court of Justice decisions deal only with two specific areas covered by existing ASAs. The Court concluded that:

(a)  "nationality" restrictions infringe Article 43 of the TEC; and

(b)  "open skies" agreements with the US (but not the UK/US ASA known as "Bermuda 2") cover issues within the exclusive competence of the Commission, such as fares on intra-EU routes and provisions relating to computer reservation systems.

The Commission's View of the Judgments

39.  The Conclusions of the Commission's Communication of 9 November 2002 read as follows:

"The judgments of the European Court of Justice of 5 November 2002 on the so-called "open skies" cases against eight Member States, not only have implications for the eight specific agreements with the United States but also for existing bilateral aviation agreements between Member States and other third countries and for any future negotiation of bilateral air service issues."

"According to Article 10 of the Treaty, Member States shall take all appropriate measures, whether general or particular, to ensure fulfilment of the obligations arising out of the treaty or resulting from action taken by the institutions of the Community."

"Moreover, as the Court found in the judgments of 5 November 2002, in the case of an infringement stemming from an international agreement Member States are prevented not only from contracting new international commitments, but also from maintaining such commitments in force…"

"…in the light of the foregoing considerations, the Commission has requested the eight governments directly concerned by the judgments to activate the provisions for denunciation contained in their agreements with the United States in order to ensure at the earliest possible date compliance with the judgments of the Court of Justice."

"The Commission has also requested the remaining seven Member States to activate the provisions for denunciation contained in their agreements with the United States in order to ensure compliance of their agreements with Community law and to avoid the necessity to pursue further infringement procedures."

"More generally, the Commission has asked all Member States to refrain from making international commitments of any kind in the field of aviation before having clarified their compatibility with Community law."

"Finally, in order to take the first step forward in this area, the Commission has urged the Council of the European Union to agree a mandate as soon as possible for negotiations to replace the existing bilaterals with the United States with an agreement at Community level."[27]

40.  The European Commission argues that only it has the competence to remedy the infringements in existing ASAs. When the Community has or acquires an internal competence, the application of that competence externally is for the Community alone (see Appendix 6). This is a view supported by many witnesses.[28] Subsequently, the Commission, in its first Communication on the judgments, asked Member States:

(a)  to denounce their ASAs with the US—that is to say, to give the requisite notice of termination; and

(b)  to give the Commission a negotiating mandate in all areas including some where it has no current competence, for example traffic rights.

41.  These were ambitious demands. There is no doubt that the infringements identified by the ECJ in existing ASAs have to be removed. Some witnesses stated that Member States were obliged to do this themselves and had the right to do so bilaterally. The argument in this instance between Member States and the Commission is: who should make the changes?—the Commission (on a mandate), the Member States themselves, or both.

The United States Response

42.  The United States government has expressed a willingness to modify its ASAs bilaterally with EU Member States.[29] (For a fuller account of the US position, see Chapter 4 and Appendix 7.) However, it should be noted that in the first instance the United States government made this offer specifically to those EU Member States that have signed "open skies" agreements with the United States, and circulated a new text to replace the existing ownership article. This would allow designation of any airline having its "principle place of business" in the designating state. However, this proposal has not been made formally to the United Kingdom.[30] It was also pointed out to the Committee while it was in Washington that EU airlines from Member States that have signed "open skies" ASAs with the US already have rights granted by the US (fifth freedom) to fly from other EU states to the US. It is EU Member States that are currently preventing airlines from doing this by not granting fifth freedom rights to the USA to other EU States.

Position of EU Member States

43.  Although all EU Member States' Civil Aviation Authorities were invited to submit evidence to the Committee, only the German authorities gave evidence (see paragraph 34 below). Member States have been considering collectively how to respond to the Commission's two Communications. According to the Government,[31] there appears to be a general reluctance on the part of Member States to accept that the Commission's interpretation of the judgments necessarily excludes Member States from remedying the breaches of Community law themselves. The Council has still to adopt a common position on the matter. The subject was discussed at the 27 March Transport Council when it emerged that "most Member States were willing to give the Commission a mandate but only in return for greater certainty over future arrangements for the negotiation and implementation of bilateral agreements in the light of the recent judgment of the European Court of Justice. The Presidency concluded that work would continue with a view to reaching agreement in June".[32]

44.  The Committee received evidence from the German Civil Aviation Authority (Bundesministerium Für Verkehr, Bau, und Wohnungswesen (BMVBW)). In a covering letter, Dr Thilo Schmidt, Deputy Director General, wrote:

"in my view, the ECJ's judgments form a solid basis to shape the external aviation relations with non-EU countries in the spirit of close co-operation of the Community institutions involved in the field of international civil aviation"[33]

And in the body of the evidence, the BMVBW states:

"as regards infringements which are founded in commitments affecting the Treaty (article 43) it appears to be difficult, although not impossible, to bilaterally agree with the other contracting party on adequate remedial action. In this respect a common approach by all Member States concerned appears to be indispensable in order to ensure conformity with the Treaty. In our view, consent by the European Commission is also required in addition to agreement by the other contracting party."

This careful wording introduces a nuance and seems to suggest that while Member States will have to address the specific requirements of the Court, they should do so jointly and in association with the Commission. However those who would wish to deny the Commission a role in dealing with the ECJ judgments stress that those States that have been found wanting are "obliged" to amend their ASAs. In other words, they argue that the Court effectively placed the onus on the Member State.[34] According to some witnesses, alliances between EU and US airlines might lose their US anti-trust immunity if "open skies" agreements were denounced.[35] However, this view of possible US reaction was not supported by the US authorities during the Committee's visit to Washington.

Position of the United Kingdom

45.  The position of the United Kingdom Government is notably cautious and for good reason:

"The UK Government is clear, however, that the judgment does not go so far as to preclude Member States from negotiating bilateral agreements, provided these comply with relevant provisions of Community law."[36]


"we recognise that we should secure agreement from our aviation partners to effect appropriate changes to nationality-based designation clauses in existing aviation bilateral agreements."

"There are many issues…on which Member States will want to reach an understanding with the Commission in the light of the Court verdict. These include the question of to what extent existing bilaterals with the US may remain in force pending the conclusion of Community level negotiations and also to what extent Member States may continue to negotiate, or at least update, bilaterals with the US during the period of Community-level negotiations."

The United Kingdom Government is currently attempting to persuade bilateral partners to accept a clause of its own devised to take heed of the ECJ judgments (see box 4).[37]

Views of the Airlines

British Airways

"I believe last November's judgment of the European Court of Justice offers a great opportunity to modernise the arcane, indeed the archaic, regulation of the aviation industry…I hope, therefore, that this Committee's report will be able to provide clear guidance to the British Government and the European Commission on how to use this opportunity to normalise our industry."[38]

46.  So said Mr Andrew Cahn, Director of Government and Industry Affairs, British Airways, when presenting oral evidence to this Committee on 10 February 2003. The Committee found this position surprising. British Airways has a commanding position at Heathrow; in any negotiation led by the Commission, it might well find this position threatened. BA's response is that having survived in an intensely competitive United Kingdom domestic market, the airline was confident that it could survive in a liberalised environment, particularly when the block on ownership and control was removed.[39] In supplementary written evidence, British Airways proposed that Member States give a mandate to the Commission to negotiate on behalf of the Community, and that negotiations be phased. Its reasons for agreeing a mandate are that:

"since the Community has more power as a negotiating bloc than individual states and has the competence to propose changes to some of the existing restrictive European Regulations, an EU-led US negotiation is more likely to achieve the whole package than Member States on their own."

Turning to how the negotiation might proceed, BA argues that:

"the body of the negotiation including the hard rights inherent in an open skies[40] deal must necessarily remain as a coherent whole in order to exercise the requisite leverage on the US to provide for access to the hinterland. However, there are shorter and longer-term issues which can be discussed in separate phases in order to facilitate the progress of the overall negotiation. Our suggested phasing model is as follows:

·  initial phase: right of establishment; issues of Community competence; overall shape of deal; and timetable;

·  main phase: open skies[41] including liberalisation of routing and traffic rights; pricing freedom; code-sharing, "Fly America" restrictions removed; wet leasing restrictions eased; foreign ownership limit raised to 49 per cent and then to 100 per cent (legislative changes needed); consecutive and free standing cabotage (legislative changes needed)."

47.  This division into two phases and, in effect, two mandates, coincides with the views of the Committee, namely that the first mandate should be to put right the issues that have appeared as a result of the ECJ judgments of 5 November 2003 and a second mandate would cover the restrictions that currently impede the operation of a fully liberalised Trans-Atlantic Aviation Area recognising that this will require legislative changes in the United States.

Virgin Atlantic

48.  Virgin Atlantic, too, foresee a phased agreement, but recognise the ECJ Judgments of 5 November 2002 as the lever to bring about a fully liberalised aviation market, and to expand a Trans-Atlantic Common Aviation Area to embrace countries such as Australia, Singapore and Canada.[42]

"Virgin Atlantic has consistently over many years campaigned for the removal of…the archaic rules which still apply to international aviation…the current rules which we are forced to operate under have resulted in an artificial industrial structure which is not in the interests of the industry anymore than it is in the interests of the consumer. The decision of the European Court of Justice in our view provides a real opportunity to achieve the goal we have been seeking for a long time."[43]

49.  Contrary to British Airways' concept of phased negotiation, Virgin Atlantic envisage tackling the "hard rights"—"to include liberal ownership control and cabotage rights"—in the first phase, and is remarkably optimistic about the time required to achieve it. But Virgin Atlantic also recognise that full liberalisation will require legislative changes both in Europe and in the United States which would take time. It therefore regards such issues as falling into a second phase. The third phase, which British Airways describe as "ongoing", would deal with "soft rights" e.g. competition policy, environmental issues etc.[44] Virgin Atlantic's interest in dealing with ownership and control and cabotage issues in a first phase reflects its global strategy. For example, Virgin set up an airline in Australia when the Australian domestic market was de-regulated, and told the Committee that it would wish to do so in the United States.[45] Virgin Atlantic subsequently announced plans to set up a US company even though it will be limited to 25 per cent of the voting shares.[46]

BMI British Midland

50.  The position of the third major United Kingdom carrier, BMI British Midland, was at odds with that of BA and Virgin Atlantic. BMI British Midland argued that the willingness of those two airlines to support a mandate for the European Commission was based on a cynical awareness that this would take considerable time, during which the existing UK/US ASA would preserve their status at Heathrow. BMI British Midland argue, however, that multilateral liberalisation "should result in the opening up of competition in all Member States" in the long-term, "but in the short-term it is clear that the difficulties and the complexities of the EU negotiating with the US mean that it is likely to take significantly longer to achieve that liberalisation than if, for example, the United Kingdom Government was encouraged in the next few months to attempt to negotiate a deal with the Americans that would allow us all—indeed it would not be us, it would be a third national carrier of EU nationality—to fly from Heathrow to the US".

51.  BMI British Midland's position may well be coloured by its relationship with Lufthansa (which owns 30 per cent of BMI British Midland and already enjoys the benefits of a US "open skies" ASA) and because BMI British Midland is also seeking to persuade the Government to obtain a Heathrow/US route in exchange for concessions for the US cargo carrier FedEx on services from the United Kingdom to Europe (see paragraph 95).

KLM Royal Dutch Airlines

52.  In its written evidence to the Committee, KLM Royal Dutch Airlines argued that in those areas affected by the ECJ judgments, changes could only be made by the Commission which had sole competence. On the issue of Article 43 of the Treaty—the "nationality" clause—KLM stated that

"in order to enable the Member States to rectify this inconsistency, the Commission must supply to the Member States language which provides for conformity with Article 43 of the Treaty".

This is a subtle point: it does not specify whether Member States should negotiate bilaterally to a Commission text or whether Member States act in coordination with the Commission.

53.  On the question of a general mandate, KLM Royal Dutch Airlines argues that the present bilateral system is both inefficient and outdated, and that, "the development of the European air transport industry (including the United Kingdom air transport industry) would be best helped along by a coordinated EU-broad approach." This formulation, however, falls short of recommending that Member States grant the Commission a negotiating mandate.

Association of European Airlines

54.  In written evidence to the Committee the Association argues that,

"we believe the Member States are entitled to renegotiate in such a manner as that there will be clauses that satisfy the requirements of legal experts both of the Commission and of the Member States involved".

In other words, AEA did not consider it necessary to grant the Commission a specific mandate to negotiate the remedies to the problems identified in the ECJ Judgments. The AEA's concern appeared to be that whatever was required of the eight Member States to bring them into compliance with the requirements of the Court, the Council should decide at a political level whether a mandate should be granted to the Commission to negotiate on behalf of all Member States. The AEA seemed particularly anxious to break any implicit link between the ECJ decisions and the requirement to change the existing pattern of ASAs.[47]
Box 4

Revised Ownership and Control—"nationality"—Clause to Take Account of the ECJ Judgments of 5 November 2002

Article 4

Designation and Authorisation of Airlines - Principal place of business version

(1) Each Contracting Party may designate in writing to the other Contracting Party one or more airlines for the purpose of operating the agreed services on the specified routes and may withdraw or alter such designations.

(2) On receipt of such a designation the other Contracting Party shall, subject to the provisions of paragraphs (3) and (4) of this Article, without delay grant to the airline or airlines designated the appropriate operating authorisations.

(3)   The aeronautical authority of one Contracting Party may require an airline designated by the other Contracting Party to satisfy that authority that it is qualified to fulfil the conditions prescribed under the laws and regulations normally and reasonably applied to the operation of international air services by that authority in conformity with the provisions of the Chicago Convention.

(4)   Each Contracting Party shall have the right to refuse to grant the operating authorisations referred to in paragraph (2) of this Article, or impose such conditions as it may deem necessary on the exercise by a designated airline of the rights specified in Article 3(2) of this Agreement, in any case where:

(a)  Country X is not satisfied that the said airline:

i)  is incorporated and has its principal place of business in the territory of a Member State of the European Union or of an European Free Trade Association State party to the Agreement on the European Economic Area; and

ii)  holds a current Air Operator's Certificate issued by the aeronautical authority of a Member State of the European Union or of an European Free Trade Association State party to the Agreement on the European Economic Area; or

(b)  the United Kingdom of Great Britain and Northern Ireland is not satisfied that the said airline:

i)  is incorporated and has its principal place of business in the territory of Country X; and

ii)  holds a current Air Operator's Certificate issued by the aeronautical authority of Country X.

(5)   When an airline has been so designated and authorised it may begin to operate the agreed services, provided that the airline complies with the applicable provisions of this Agreement.

Source: Department for Transport

A Second Communication from the Commission

55.  On 26 February, the Commission submitted a recommendation to the Council for authority to open Community negotiations with all bilateral partners on the ownership and control i.e. "nationality" issue.[48] The mandate would be following "the procedures set out in Article 300 of the Treaty creating a special Committee of Member States representatives to assist and support the Commission". The Commission added, however, that it "would also be mandated to address other issues of Community exclusive competence with a view to incorporating these into the Community agreement.

"The Commission envisages that the outcome of the negotiations could take several forms. The simplest would be a short stand-alone agreement in which the parties agreed to a revised definition of the beneficiaries that would override the relevant clauses in the existing bilateral agreements. Such an agreement should also contain new provisions covering other matters of Community competence as identified by the Commission in its previous Communication of 19 November 2002. This agreement would be the subject of Community signature and conclusion. Member States would maintain their own agreement with the country concerned dealing with matters of national competence. This situation would be maintained until such time as a mandate is granted for a full negotiation on a Community agreement. For most countries, this is likely to remain some time in the future."

56.  On the face of it, this would appear to offer a sensible solution to the general difficulties that have arisen from the ECJ judgments. A Community mandate would ensure that any changes were made uniformly and at the same time. Unfortunately, this Communication came too late for the Committee to put to the Minister in the oral evidence session on 24 February 2003. The Communication has since been submitted to the Committee, and the Government's view is covered by Explanatory Memorandum 7047/03 COM(2003) 94 final. The EM argues that the effect of the Commission's Communication of 26 February is to recognise that Member States will continue to negotiate with their bilateral partners, though the Commission will wish to ensure non-discrimination among Community carriers in the allocation of traffic rights agreed in such negotiations. The proposed Regulation aims to ensure that bilateral negotiations would be conducted in such a way as to produce results compatible with Community law, and that there would be a proper information exchange within the Community and non-discriminatory treatment of European airlines by Member States. In addition, in implementing the results of any negotiations, the Commission would want to be sure that all eligible EU airlines had an equal chance to apply for, and to take up, the traffic rights negotiated by Member States.

57.  In his Explanatory Memorandum, the Minister says that,

"In principle, the UK Government is open to giving the Commission a mandate to negotiate an Open Aviation Area with the US, provided it would not preclude Member States acting bilaterally if Community-level talks failed to progress. But the UK, along with other Member States, has indicated that a mandate must be part of a package agreement encompassing a number of issues on which Member States need to reach an understanding with the Commission in the light of the Court verdict."

"By addressing the need of Member States to be able to negotiate new bilateral agreements, or to re-negotiate existing ones, in conformity with Community law, the latest proposal by the Commission contains the seeds of a compromise agreement. The proposed Regulation is in principle acceptable to the UK Government, although we will need to consider carefully a number of areas where the procedures appear unduly cumbersome or impose limitations on Member States' future freedom of action. Areas for discussion include the requirement in Article 1 for Member States to communicate to the Commission their intention to negotiate with a bilateral partner at least one month before making contact with that country. I consider that this provision could disrupt normal business contact with bilateral partners to an unacceptable degree. I am also concerned about Article 4(2), which would give the Commission wide powers to object to the conclusion of a bilateral agreement if it considered it incompatible with Community law, and about Article 3, which would preclude Member States agreeing limited designations."

"I also consider that it would be helpful if the Commission offered up a standard Community designation clause which Member States could use in their negotiations with their bilateral partners, but the Commission has so far refused to do so. We will pursue this point when negotiations in Working Group resume."

The Committee's Views

58.  The Committee considered whether the changes occasioned by the ECJ judgments should be made by Member States bilaterally or by giving the Commission a restricted mandate to do so with and on behalf of Member States. The chief arguments that favour a mandate are that any amendments to the existing ASAs ought to be uniform and to take place at the same time. If individual Member States were to renegotiate, even with the agreement of the Commission, it is unlikely that they would be able to meet these two desiderata.

59.  Other EU Member States that were not directly mentioned in the ECJ judgment because there were no cases in the Court against them are not specifically obliged by the Court to renegotiate their ASAs. They are bound implicitly, however, by the consequences of these judgments. But, if eight Member States were to amend their ASAs, and seven did not do so at the same time as the other eight, then there would be an imbalance, if only temporarily, in the rights available to airlines of different Member States that could affect competition issues.

60.  Response from witnesses shows a clear predominance in favour of the Commission remedying the flaws in current ASAs identified by the ECJ judgments.[49] In particular, the two largest United Kingdom airlines have demonstrated powerful support in favour of a mandate for the Commission even though their current positions, for example, at Heathrow could be threatened by a more liberal regime. Indeed, the Committee was struck by the robust attitude adopted by the airlines which contrasted with the caution expressed by the Government.[50] Most witnesses regarded the ECJ judgments as a moment for historic change to move beyond the current restrictions on the market imposed by the web of bilateral national state agreements.

61.  While the Committee can understand the reluctance of Member States to cede greater competence to the Commission, the effect of the judgments of the European Court of Justice on 5 November 2002 is to recognise the Community's exclusive competence on these specific points. The Commission's right to negotiate these issues in place of the Member States is a matter of principle and can no longer be questioned. The Committee therefore recommends that the Government accede to the approach proposed by the Commission, namely that the Commission, assisted by Member States, negotiate in the first instance with the United States, to remedy those breaches of Community law identified by the ECJ judgments in existing ASAs with the United States. However, such a mandate should be restricted to the specific issues raised by the ECJ judgments.

Denouncing Existing ASAs with the USA

62.  In its Communication dated 19 November 2002 and again in its second Communication dated 26 February 2003 and in the Commissioner's written evidence dated 6 February 2003, the Commission calls on Member States to denounce existing bilateral ASAs with the USA as a necessary prelude to negotiating changes to these agreements. The Minister told the Committee that no Member State wished to denounce their ASA with the USA.[51] Given that the United States Government has already indicated its willingness to negotiate changes to the ASAs to bring them into line with Community law,[52] the Commission's insistence of formal denunciation seems unnecessarily confrontational. We agree with those witnesses[53] who saw little value and possibly much harm in denouncing the ASAs. We recommend that HMG resist the Commission's call for denunciation of existing bilateral ASAs with the USA. This is a matter that should be dealt with in a co-ordinated manner across the EU States as part of negotiations between the EU and the US.

27   EM 14663/02 COM(2002) 649 final: Communication from the Commission on the consequences of the Court Judgments of 5 November 2002 for European air transport policy. Back

28   DTI written evidence page 82, paragraph 10; written evidence from Professor E Denza and Mr R Gardiner, page 8. Back

29   US State Department taken questions 20 November 2002 and speech by Assistant Deputy Secretary of Transportation, Jeffrey Shane, at an American Bar association forum in Florida, 8 November 2002. Back

30   Q 327. Back

31   Q 325. Back

32   PQ, House of Commons Official Report (Hansard), 2 April 2003, Vol 402 No 76, Col 703W. Back

33   Covering letter to BMVBW written evidence (not printed). Back

34   CAA written evidence, page 23, paragraph2; Memorandum by T Soames, G Goeteyn and Dr P D Camesasca, page 132, paragraph 4. Back

35   Memorandum by T Soames, G Goeteyn and Dr P D Camesasca, page 132, paragraph 4. Back

36   DTI written evidence, page 82, paragraph 4. Back

37   States which have accepted a designation article on the model of that in Box 5/XXX: Macao SAR, Albania, Serbia and Montenegro, Slovakia, and Algeria. States that have declined to accept this proposed change to ASAs: China, South Korea, Brazil, Ukraine, and Egypt. Georgia is still considering whether or not to accept or decline. Back

38   Q 230. Back

39   Q 232. Back

40   BA presumably means an "Open Aviation Area" or "Trans-Atlantic Common Aviation Area". The term "open skies" applies only to the restricted US model for ASAs. Back

41   BA presumably means by this term an "Open Aviation Area" or "Trans-Atlantic Common Aviation Area". The term "open skies" applies only to the restricted US model for ASAs. Back

42   Q 258. Back

43   Q 258. Back

44   Q 259. Back

45   Q 263. Back

46   The Financial Times, 24 March 2003, page 26. Back

47   Q 95 and Q 87. Back

48   2003/0044 (COD) - COM(2003) 94 final: Communication from the Commission on relations between the Community and third countries in the field of air transport - Proposal for a European Parliament and Council Regulation on the negotiation and implementation of air service agreements between Member States and third countries. Back

49   Evidence from: KLM, page 135; German Directorate-General for Civil Aviation, Aerospace and Shipping, page 128, paragraph 9; BA, page 52, paragraph 2.2; and Virgin Atlantic, page 63, paragraph 6. But see contra opinion from: BMI, page 44; Air 2000, page 75, paragraph 1;and AEA, page 16, paragraph 6. Back

50   Q 352. Back

51   Q 333. Back

52   But see Mr M J Hall's written evidence, page 129, paragraph 2.2. Back

53   AUC, page 96, paragraph 16; BMI, Q 209; CAA, page 25, paragraph 12; and Soames, Goeteyn and Camesasca, page 132, paragraph 4. Back

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