Select Committee on European Union Fortieth Report


Letter from Rt Hon Alistair Darling MP, Secretary of State, Department for Transport to the Chairman

  Thank you for your letter of 13 December 2005.[30]

  Access for EU carriers to cabotage traffic in the US would require Congressional action to change the US statute, and it is clear that this is not a realistic possibility in the near future. For this reason the EU side has focused attention on changes to the administrative regime under which EU interests, airlines or others, may invest in US carriers, which may be regarded as an alternative means to gain access to the. US domestic market.

  For example, if an EU airline were to be able to control the operations of a US-registered carrier, it would be able to organise that carriers' route structure and scheduling so as to maximise passenger feed onto its own. trans-Atlantic services. Indeed, changing airlines ownership and control rules in a EU-US deal could have advantages compared to seeking cabotage rights, since significant relaxation of these rules in the trans-Atlantic market would be likely to have far-reaching consequences, increasing the pressure to dismantle anachronistic restrictions on airline ownership and control worldwide, thereby helping to bring the global airline industry into line with other sectors.

  Any Stage One deal would include a commitment on both sides to resume negotiations at an early date towards further liberalisation. We know already that the US would have negotiating priorities in areas not likely to be covered in a Stage One deal, including seventh freedom rights for. cargo operators, entitlements to set prices freely on intra-EU routes, and various regulatory concerns. This will enable the EU side to press for the further liberalisation we shall be seeking. Once a liberalising process gets under way it is likely to continue, as erstwhile opponents realise that the benefits outweigh any drawbacks. If we can achieve a sufficiently significant Stage One deal it will help to create its own momentum for going further.

  A Stage One deal of the kind currently under consideration would very largely supersede the Bermuda II Agreement. All UK airlines, all non-UK EU airlines established in the UK, and all US airlines would be entitled to operate trans-Atlantic services into any UK airport, including Heathrow. The only parts of Bermuda II which would remain in force would be those dealing specifically with services between UK Overseas Territories and the US, which would be outside the scope of an EU-US agreement.

  At the Transport Council on 5 December 2005 Vice-President Barrot reported on the progress of talks. We welcomed that progress, but agreed that Council could not make an overall assessment of whether to conclude a Stage One deal until the US had completed its current rule-making process on airline ownership and control which I described in my previous letter. I attach for your information an extract from the Council Press Notice showing the Presidency's Conclusions following the debate.

20 January 2006

Annex A

  The Commission informed the Council of the agreed minutes reflecting the outcome of the last two rounds of negotiations with the United States, following which a number of delegations intervened.

  The President summarised the results of the exchanges as follows:

    "The Council welcomed the significant progress made in the negotiations for an EU-US aviation agreement, which it regards as a matter of the highest importance for the future development of aviation worldwide. The Council unanimously expressed its satisfaction that the text represents significant improvement on the proposals considered by the Council in June 2004, in particular on the enhancement of cooperation on a range of regulatory issues, including in the areas of security, competition and state aids. The Council also welcomed the new opportunities created in the field of market access, such as the results achieved on code share approvals and wet leasing, but observed that improvements in the field of ownership and control of airlines would be an essential element for a Stage One deal to be concluded. In this regard the Council is following with close interest the rule-making process under way in the US through which the administration is seeking to relax the rules governing control of US airlines by foreign nationals. The Council noted that clear, meaningful and robust changes to US policy in this area would be critical in the evaluation of the overall situation, which will be a priority once the US rule-making process is complete.

    The Council requests the Commission to continue its efforts accordingly."

Letter from the Chairman to Rt Hon Alistair Darling MP

  Thank you for your letter of 20 January in response to mine of 13 December 2005 which Sub-Committee B considered at its meeting on 30 January 2006.

  Sub-Committee B remain concerned about EU-US aviation negotiations and will maintain a keen interest in them. Therefore I would ask that you keep them fully informed of future developments in this area.

  What is the position of EU airlines not established in the UK? Would they not be entitled to operate trans-Atlantic services into and out of any UK airport? Can you provide a list of non-UK EU airlines which are established in the UK and a list of those which are not?

  The press release attached to your letter stated that the Council noted that clear, meaningful and robust changes to US policy in the area of the rules governing control of US airlines by foreign nationals would be critical in the evaluation of the overall situation. We have noted carefully this point.

  The Council expressed its satisfaction with the negotiated text on state aids. What are the principals of the text on state aids? Will it eliminate state aid for aviation on both sides of the Atlantic?

1 February 2006

Letter from Rt Hon Alistair Darling MP to the Chairman

  Thank you for your letter of 1 February replying to mine of 20 January.

  I note Sub-Committee B's continued interest in EU-US aviation negotiations and I will keep you abreast of developments.

  Under the terms of the agreement now under consideration by the Council any EU or US carrier would be able to operate transatlantic air services between any airport located in the territories of the European Community and any airport in the United States. Legal establishment of a Community carrier in the Member State where the European airport is located would not be required, though in practice the commencement of regular air services between a Member State and the United States would involve the establishment of a presence on the territory of that Member State by the airline concerned.

  We do not keep a list of those non-UK Community carriers which are established here. We would treat an application from a non-UK Community carrier to be designated under one of our bilateral air services agreements with a third country on its merits. The basis for our decision would be whether it appeared to meet the definition of establishment set out in the tenth recital to Regulation (EC) 847/2004 on the negotiation and implementation of air service agreements between Member States and third countries, as clarified by a statement included in the minutes of the Council meeting on 5 December 2003 which adopted a Common Position on that Regulation. The relevant extracts are attached in an Annex to this letter.

  In general, we would expect that any Community carrier operating regular scheduled air services to and from the UK would meet the conditions for establishment.

  Finally, you ask about the text on state aids. The draft agreement recognises that government subsidies and support may adversely affect the fair and equal opportunity of airlines to compete in providing international air transport services. It contains a mechanism whereby the parties may submit observations to the other party regarding government subsidies and support which they believe to be having an adverse effect on the ability of their airlines to compete, and if necessary request a meeting of a Joint Committee of the parties to consider the issues and develop appropriate responses.

14 February 2006

Annex A

Tenth Recital from Regulation (EC) 847/2004 on the negotiation and implementation of air service agreements between Member States and third countries:

  "Whereas establishment on the territory of a Member State implies the effective and real exercise of air transport activity through stable arrangements;

  "whereas the legal form of such an establishment, whether a branch or a subsidiary with a legal personality, should not be the determining factor in this respect;

  "whereas, when an undertaking is established on the territory of several Member States, as defined in the Treaty, it should ensure, in order to avoid any circumvention of national law, that each of the establishments fulfils the obligations which may, in accordance with Community law, be imposed by the national law applicable to its activities."

Statement on the right of establishment, entered in the minutes of the Council meeting on 5 December 2003

  "The benefit of the right of establishment, according to the case law of the European Court of Justice on the `Open Sky' judgements, is granted to Community carriers having in one or more Member States stable and permanent organisational structures; it is for Member States to examine, in accordance with Community law, the nature of those structures.

  "The Member State is entitled to require, from Community carriers established on its territory, the respect of the appropriate national legislation, inter alia the applicable air transport specific regulations, including those concerning safety and security, as well as fiscal and social law, in conformity with Community law and its principles, in particular the principles of non-discrimination and proportionality.

  "The Member State is also entitled, under non-discriminatory conditions, to require from the Community carrier established the permanent presence on its territory of staff responsible for safety.

  "The Council takes note of the declaration of the Member States on co-operation in all fields relating to the safety of aircraft and their operation."

  (Council Document 15247/03 ADD 1)

Letter from the Chairman to Rt Hon Alistair Darling MP

  Thank you for your letter of 14 February in response to mine of 1 February which Sub-Committee B considered at its meeting on 27 February 2006.

  The Members of the Sub-Committee are grateful to you for undertaking to keep them abreast of development in this area.

  You stated in your letter that "in practice the commencement of regular air services between a Member State and the USA would involve the establishment of a presence on the territory of that Member State by the airline concerned." What is the difference, in practical terms, between the legal establishment of an airline in a territory and the establishment of a presence in that territory? You stated that the Government does not keep a list of those non-Community air carriers which are established in the UK. Does the CAA keep such a list?

  I asked you whether the negotiated text on state aids would eliminate state aids on both sides of the Atlantic. Sub-Committee B assumes from your answer that the negotiated text will not eliminate state aids on both sides of the Atlantic.

1 March 2006

Letter from Rt Hon Alistair Darling MP to the Chairman

  Thank you for your letter of 1 March replying to mine of 14 February.

  The proposed EU-US aviation agreement foresees an open regime for flights between any airport in the Community and any airport in the US, without the need for airlines to be designated by Governments. A non-UK Community carrier would therefore not be required to demonstrate that its operations in the UK amounted to legal establishment in order to operate to the US from a UK airport (as it would if it sought designation to operate services under one of the UK's bilateral air services agreements). However it would be difficult for any airline to operate services to the US without having the presence of, for example, a sales office and personnel on UK soil.

  I can confirm that neither the Government nor the CAA keeps a definitive list of non-UK Community carriers established in the UK. However, the Government would not seek to designate a non-UK carrier where this was required under one of our bilateral air services without first ascertaining that that carrier was duly established in the UK.

  You are correct to assume that I do not think the first stage of a EU-US agreement would immediately eliminate all forms of aid currently provided to US carriers by the US Government. What the agreement would do from the outset is give Europe a legal framework and a forum within which to raise these issues and develop responses if it appears that US Government support for its airlines is having a detrimental effect on fair competition between air carriers on North Atlantic routes.

21 March 2006

Letter from the Chairman to Rt Hon Alistair Darling MP

  Thank you for your letter of 21 March 2006 replying to my letter of 1 March 2006. Sub-Committee B considered your letter at its meeting on 19 April 2006.

  We were grateful for your full response to our questions, and look forward to hearing of any developments in this area.

24 April 2006

Letter from the Chairman to Gillian Merron MP, Parliamentary Under Secretary of State for Transport, Department for Transport

  Sub-Committee B considered this document (8656/06), and your Explanatory Memorandum, at its meeting on 12 June 2006.

  As you might recall, the Sub-Committee published a report in 2003, "Open Skies or Open Markets? The effect of the ECJ Judgements of 5 November 2002 on Aviation Relations between the EU and the USA",[31] followed by a supplementary report. Our reports recommended that the Commission be given two mandates: firstly to negotiate with non-EU states to persuade them to accept Community airline designation instead of bilateral national airline designation in air service agreements (ASA); and secondly to negotiate a fully-liberalised Open Aviation Area with the USA.

  We will carefully consider the latest proposal and your Explanatory Memorandum in the light of our previous recommendations and write to you further in due course. We will hold this proposal under scrutiny at this stage.

15 June 2006

Letter from the Chairman to Gillian Merron MP

  As you will be aware, Sub-Committee B has been considering the above proposed Agreement (8656/06) together with your Explanatory Memorandum.

  The Committee believes that it is likely to be in the interests of the EU, and more particularly the UK, for the proposed Agreement to be concluded, subject to clarifying the practical importance of certain aspects covered or not covered by the Agreement, and subject also to greater certainty about whether, and if so how, the EC slot Regulation is likely to be amended. The Committee welcomes attempts to liberalise markets (including the aviation market), provided there is a fair and even balance, and that any points of difficulty are given due consideration. In order to assist it in coming to a more definite recommendation, the Committee would be grateful for your views generally, and on the following points in particular:

    1.  How significant in practice would the right to operate domestic services within the US be for UK airlines?

    2.  How significant in practice, from the point of view of UK interests, would be the proposed rule change about the "actual control" of US airlines, given that the voting interest by non-US citizens would remain limited to 25% and that the airline's constitutional documents would have to show that US citizens retained actual control?

    3.  Our understanding is that the proposed relaxation of the rule of "actual control" is encountering significant opposition in the US. Can you update us as to present status and the likely future timetable?

    4.  The Agreement would remove the present limits on the number of US airlines serving Heathrow and Gatwick (which we understand to be two in the case of each airport). However, is significant new entry by US airlines considered likely in view of the severe shortage of slots at Heathrow?

    5.  The allocation of slots at EU airports is governed by EC Regulation 95/93 (as amended). We are aware that the Commission is considering proposing further amendments in the near future, and we believe that, although it has not made up its mind what to propose, it is unlikely to interfere with rights in slots which airlines already have, and likely to propose formal recognition of secondary trading in slots. Do you have any further information about the Commission's current thinking, and in any event do you agree that there might be risks in opening up access, to Heathrow before it were clear what the regime as to slots was to be, at least in the near and immediate future?

    6.  How commercially significant for UK airlines would it be for them to be able to participate in the Fly America programme (which requires most US Government commercial air transport requirements to take place on US airlines)?

    7.  Are you aware whether any EU Member State operates a policy similar to the Fly America policy (ie, requiring its government commercial air transport requirements to take place on a Community airline)?

    8.  Although the Agreement provides for quite detailed provisions on cooperation in connection with competition rules, there are no actual agreed common substantive provisions on competition rules or state aid. Do you consider that this is satisfactory, particularly given concerns which have been expressed by UK airlines about aid measures enjoyed by US airlines?

    9.  It seems likely that, if the Agreement is not concluded, anti-trust immunity will be withdrawn from certain transatlantic alliances to which it present applies. bmi is the only UK airline party to an immunised alliance. British Airways is not, although several of its main European competitors are. Do you have a view whether such withdrawal of anti-trust immunity would overall be in the interests of the UK or not?

  We will maintain the scrutiny reserve on the proposed Agreement, and would be grateful to you for any updates as negotiations progress in this key area.

5 July 2006

Letter from Gillian Merron MP to the Chairman

  Thank you for your letter of 5 July regarding these proposed decisions, which would authorise the signature, provisional application and conclusion of an aviation agreement between the European Community and its Member States on the one hand, and the United States on the other.

  Before responding to the specific questions in your letter, it may be helpful if I up-date your Committee on the latest position. I can now confirm that the US Department of Transportation's Final Rule setting out a revised policy on foreign control of US airlines is unlikely to be published until late August or early September. As you are aware, this is a significant element within the overall package of measures surrounding the proposed agreement and, as indicated in my Explanatory Memorandum of 31 May, the UK Government will reserve its position until we have had a chance to consider the final package as a whole.

  We understand that the Finnish Presidency currently intends to bring the matter forward for consideration at the Transport Council meeting on 12 October, and I wanted therefore to write to you before the summer break to provide your Committee with as much further information as we are able to give you at this point.

  Turning to the questions listed in your letter:

    1.  Clearly the size of the US domestic market alone makes it of potential interest to foreign airlines. At the same time, it is a highly competitive environment served by a range of existing US carriers. Whether, given the opportunity, UK airlines would in practice operate there, either immediately or in the longer term, is difficult to judge. In the Government's view, it is likely that over time some carriers operating out of the UK would at least make use of the opportunity to fly passengers or freight on onward legs between points in the US (so-called "consecutive cabotage"). EU cargo carriers in particular may wish to establish hubs for onward distribution of freight within the US. And EU passenger carriers might also want to establish or collaborate with US domestic airlines as a means of feeding traffic onto their transatlantic services.

    2.  The statutory limitations on ownership and control of US airlines that would remain in place even if the proposed rule change is implemented are in our view an unhelpful and unnecessary restriction. We would hope that in the future, perhaps as a further stage of an EU-US aviation agreement, the US Government would consider an appropriate relaxation of these statutory limitations. In the meantime, although clearly sub-optimal, we consider the proposed rule change is a well-intentioned attempt to alter the previous policy presumption against any semblance of foreign involvement in the running of US airlines. As such, it might encourage some investment by, and increased co-operation with, foreign airlines, although to what extent is difficult to predict. We believe this possibility could be enhanced if the rule can be improved in its final version so as to offer greater certainty to minority foreign investors, in particular about their ability to enter into arrangements to exercise meaningful control over commercial matters and to protect their investments.

    3.  Consultation on the Supplementary Notice of Proposed Rule-Making has now closed. There remains some opposition to the changes amongst vested interests in the US, and within Congress, but we do not currently anticipate that this will prevent the US Department of Transportation from promulgating its policy change through a final rule. As indicated above, we expect this to occur in late August or early September. However, there would remain a possible risk of legal or regulatory action thereafter to try to overturn the rule.

    4.  The current UK-US agreement limits services between the US and London Heathrow to two airlines from each country. In the Government's view, removal of this restriction would be likely to lead to the entry of additional carriers from both countries into that market. Clearly, the scale and speed of new entries would be limited by the very restricted additional capacity currently available at Heathrow. However, some potential new entrants already hold slots at the airport, and the possibility exists for others to acquire them through secondary trading. We anticipate that the relative value of transatlantic services and the growth of airline alliances both make it more likely that such trading would take place.

    5.  We hope that the Commission will soon bring forward proposals to recognise secondary trading, and we do not expect these to interfere with the rights in slots which airlines already have. However, we do not believe that the content or timing of any such proposals need be a factor in deciding whether or not to conclude an EU-US aviation agreement.

    6.  We believe the Fly America policy has a significant effect in the market, though we have not sought to quantify this. We consider the policy to be anti-competitive, and would wish to see this issue addressed in the future. The proposed EU-US Aviation Agreement would provide potential mechanisms for doing so.

    7.  We are not aware that such a policy exists in any EU Member State.

    8.  There are well established arrangements for dealing with competition issues within both the EU and the US, and for collaboration between the relevant authorities. Both sides have concluded that it is therefore not necessary to lay down new substantive procedures for dealing specifically with aviation matters. However, state aids and indirect subsidies remain a matter of some concern: there remain differences of practice and interpretation between the two sides, and we would hope to see these reduced and eliminated over time. For the present, the arrangements that would be set up under the proposed EU-US agreement would at least offer a new mechanism for addressing these issues. We consider this to be a useful step forward and a realistic approach for a first stage agreement, but we would want to see further progress made under future stages.

    9.  As the question suggests, if the US authorities were to withdraw anti-trust immunity, this could affect European carriers in various ways and to different extents. We have not made any assessment of the overall balance of interests for UK carriers in this regard.

  I hope this information will be helpful to Sub-Committee B in its further deliberations.

18 July 2006

Letter from the Chairman to Gillian Merron MP

  Thank you for your letter of 18 July, replying to my letter of 5 July. Sub-Committee B considered your letter at its meeting on 24 July.

  We were grateful to you for the fullness of your response to our questions. We note that much will depend on the content of the US Department of Transport's revised rules on foreign control of US airlines, which you expect either at the end of August or the beginning of September. We share your view that judgement on the proposed agreement should be withheld until those rules have been properly considered. In the meantime, we would be grateful if you kept the Committee informed of developments both in European and US institutions.

  In answering our question 4, you refer to "potential new entrants" already holding slots. Can you confirm who these potential new entrants are?

  We will maintain scrutiny on the proposal, and may revisit the issue after the US Department of Transport publishes its revised rules.

25 July 2006

30   Correspondence with Ministers 45th Report of Session 2005-06, HL Paper 243, pp 144-145. Back

31   17th Report of Session 2002-03, HL Paper 92. Back

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