UK: Airline Regulatory: New developments Following “Open Skies” Decisions

In the open skies cases, which examined the legality of certain of the provisions in bilateral air service agreements (ASA’s) between eight Member States and the US, the ECJ adjudged:

• that the EU has competence in respect of air transport relations with third countries; and
• that the nationality clauses in Member States’ bilaterals infringed EU law as being contrary to those States’ obligation to allow freedom of establishment to individuals or companies of other Member States.

The Commission proposes to end what it regards as the current inconsistency whereby it has jurisdiction in relation to an alliance of EU airlines but not over an alliance between an EU airline and a third country airline – a situation made more anomalous given the ECJ’s finding that the EU has competence in respect of air transport relations with third countries. The proposed regulation (due to come into effect on 1 May 2004) therefore enables the Commission to examine EU/non-EU airline alliances and cooperation agreements and to apply enforcement powers in respect of any infringements of EU competition rules which such arrangements might occasion.

The Commission takes the view that, following the open skies judgment, there will be increased alliance, cooperation and merger and acquisition activity amongst airlines (presumably aided by decreased emphasis on nationality restrictions in bilaterals), making the application and enforcement of competition rules all the more important. Secondly, the Commission identifies an increasing need, following the ECJ’s judgment, for a coherent, Europewide regime for the regulation of international air transport. Whilst there is a logic to discarding what is undoubtedly an inconsistency, it is questionable whether the first of these justifications is particularly well-founded. The Commission already has power to review mergers involving non-EU airlines under the EC Merger Regulation (4046/89). To date, nationality restrictions in bilaterals have tended to force airlines down the route of alliances; however the removal of those constraints may increase the prospect of industry consolidation by way of merger, an area already regulated by existing EU legislation.

In a Communication dated 26 February 2003, the Commission has set out its thinking as to the future structure and negotiation of ASA’s in the light of the open skies decisions. In doing so, the Commission is seeking to give effect to the rights of Community carriers under EU law – specifically freedom of establishment, which in the present context means nondiscriminatory access to traffic rights in other Member States. The main proposals put forward by the Commission are as follows:

(a) The Commission has repeated its request for a mandate to open negotiations with the US for the creation of an EU-US ASA. It is understood that Member States and the US are broadly in favour of this.

(b) The Commission seeks a mandate to open negotiations with third countries on questions of ownership and control and other matters of exclusive EU competence in relation to existing bilaterals. The Commission envisages the possibility of parallel but closely connected negotiations, conducted partially by itself on matters of EU competence and by Member States on matters of national competence. Initially the Commission envisages that existing bilaterals will remain in place but with newly negotiated provisions as to the beneficiaries/ designated airlines which will override the existing (unlawful) nationality clauses. "Community clauses" of this nature would then, in theory, enable EU carriers to expand their operations in other Member States.

(c) The Commission has also proposed a draft Regulation to enhance the exchange of information between Member States and with the Commission: to the extent that Member States continue to conduct their own ASA negotiations, it is the Commission’s firm view that they are no longer doing so only for themselves and that traffic rights obtained are negotiated on behalf of all EU airlines. Consequently the draft regulation would provide for the Commission and EU carriers established in a Member State’s territory to participate in all such negotiations.

The Commission recognises that the nondiscriminatory allocation of traffic rights is likely to present a real challenge. Not only does it fly in the face of all practice hitherto where rights have been granted to one or two designated airlines in each state; it also raises difficult questions as to what happens when the limited traffic rights obtained are insufficient to satisfy all interested EU airlines. The Commission has set out some guidelines which it asks Member States to follow: these provide for the soliciting of applications from interested carriers and adjudication by the Member State which has negotiated the traffic rights, potentially after a public hearing and appeal to a court of law.

This is only the start of the legislative process. At the time of publication, the Transport Council is expected to discuss this subject in further detail in early June and some more definitive conclusions might emerge as to the way forward. We will report further in future editions as the discussions within Europe continue.