If the Commission's latest proposals were adopted in their entirety by the Council, the Commission would obtain much stronger and more effective powers to apply Articles 85 and 86 of the EC Treaty to the provision of air transport services on third country routes.
Article 85 would enable the Commission to vet and impose fines on airline alliances, cooperative joint ventures and codesharing arrangements; traditional commercial agreements on matters such as tariffs, capacity, scheduling and revenue/profit pooling; and cartel activities on third country routes.
The Commission would also obtain the power to investigate and prohibit activities on third country routes which are considered an abusive exploitation of a dominant, or jointly dominant, position under Article 86. This would include predatory behaviour aimed at eliminating smaller airlines from the market or forcing them to exit a route.
The practical implications of these changes would be enormous. Airlines would need to review urgently their commercial arrangements and business practices, as well as their approach to joint ventures and alliances, to avoid incurring significant penalties for infringing EC competition rules.
The powers conferred by Articles 85 and 86, hitherto applied only on routes within Europe, are extensive. Article 85 prohibits agreements and understandings between companies which have as their object or effect the prevention, restriction or distortion of competition within the EU and which may affect trade between EU member states. Article 86 prohibits companies which hold a dominant or jointly dominant position in a particular market from abusing that dominant position in so far as it may affect trade between EU member states.
When the Commission first obtained direct power to apply the competition rules to the air transport sector as part of the 'first package' of liberalisation measures on 1 January 1988, this was specifically limited to air transport routes between EU member states. Later these powers were extended to cover all air transport services between EU airports, bringing domestic cabotage services within their ambit.
As a result there was, and still is, a gaping hole in the Commission's powers. The relevant legislation does not confer any powers on the Commission to apply the competition rules directly to international air transport services on 'third country routes' - routes between EU and non-EU countries and routes between non-EU countries.
As a result, the Commission has only very limited powers to control arrangements or behaviour that may affect competition on such routes under a cumbersome and rather ineffective transitory regime established under Article 89 of the EC Treaty.
Although the Commission has started to flex such Article 89 muscles as it has in its current investigations into the alliances between British Airways/American Airlines, KLM/Northwest, Swissair /Sabena/Austrian Airlines/Delta Air Lines and Lufthansa/United/SAS, its powers are heavily circumscribed. It can neither grant exemptions nor impose fines.
In a masterpiece of understatement, the Commission says that the Article 89 procedures do not allow it to address the issues raised by the alliances 'with the required efficiency'.
Just as the Commission has sought to use such powers as it could scrape together under Article 89 to assess the various transatlantic alliances, individual EU member states have realised that they can use Article 88 of the Treaty to rule on the application of the competition rules - including the granting of Article 85(3) exemptions - in respect of arrangements or practices on third country routes.
Until recently, Article 88 procedures had never been employed by member states in the air transport sector. However in August 1996 the UK opened a procedure under Article 88 to examine the compatibility of the British Airways/American Airlines alliance with EC competition rules. The German authorities opened a similar Article 88 procedure to examine the Lufthansa/United/SAS alliance.
Inevitably, overlap between the competencies of member states under Article 88 and those of the Commission under Article 89 can lead to conflict and confusion.
The UK's assumption of competence to apply the EC competition rules under Article 88, alongside the Commission's use of Article 89, resulted in some as yet unresolved and stormy confrontations between the previous UK administration and the Commission. The Commission considered that the slot divestiture recommendations made by the UK Office of Fair Trading were inadequate to address the adverse effects on competition at London/Heathrow.
The simultaneous use of Articles 88 and 89, combined with the effects of the judgements of the European Court of Justice in leading cases such as Nouvelles Frontières and Ahmed Saeed, have made the application and enforceability of Articles 85 and 86 in the air transport sector highly complex and inconsistent.
The Commission's proposal to remove the geographical limits from the scope of regulation 3975/87 would still mean that Articles 85 and 86 would only apply if 'an effect on trade between member states' can be shown. The effect would be determined on a case-by-case basis and would be difficult to establish in respect of third country routes between non-EU countries.
A Council of Ministers decision to give the Commission direct power on third country routes would make the transitional procedures under Articles 88 and 89 redundant. The Commission would terminate any continuing Article 89 procedures and have the sole right to grant individual exemptions and apply the competition rules on such routes. If authorised by the Council, it could also adopt block exemptions conferring antitrust immunity on certain arrangements where the benefits were considered to outweigh the adverse effects on competition.
A similar proposal, put to the Council in 1989, failed to gain sufficient member state support. However this time the Commission's revised proposals could be adopted by the Council for three reasons.
First, the confusion caused by the current Article 88 and Article 89 investigations into the transatlantic airline alliances; second, the completion of the EU's internal aviation market with the opening up of cabotage in April 1997; and third, the change in the political complexion of the UK which previously vehemently opposed an extension of Commission competence in this and any other area.
But the Commission's proposals are unlikely to be adopted in unamended form. The Council may only concede additional powers on those routes to third countries with which it has mandated the Commission to negotiate, namely Switzerland, the associated countries of central Europe and the US, with which the Commission can negotiate 'soft rights'. The result could arguably be an even more complex and inconsistent web of competition law enforcement in air transport than exists at present.
Undoubtedly, an extension of the Commission's ability to apply directly Articles 85 and 86 to third country routes would transform the way in which the air transport industry operates internationally.
The experience of the world's shipping sector is instructive. Less than three years ago, the Commission was given the power to apply Articles 85 and 86 directly to 'international maritime transport services from or to one or more Community ports'. Over the past few years the Commission has used those powers to attack various commercial practices of the global shipping industry which it found offensive. If the Commission's decisions in these cases are upheld in appeal cases before the European Court, it will fundamentally change the way in which the whole industry operates, particularly as regards liner conference and consortia activities, and commercial practices like multimodal rate fixing.
Indeed, the Commission's current proposal would give the Commission even greater powers in air transport than in the maritime sector. The Commission would be able to apply the competition rules, so long as all the other conditions for their application were met, to air transport services between non-EU countries, a level of competence which is not permitted under the maritime regime. To avoid criticism, the Commission could amend its proposals so that any extended competence conferred by the Council only applied to air transport services from or to one or more EU airports.
Doubtless the Council of Ministers, and particularly some of those member states which have vehemently opposed the Commission's controversial competition policy in the liner shipping and multimodal sector, will bear that experience in mind when deciding whether to confer similar, or more extensive, powers in the air transport sector.
An extension of the Commission's powers to routes between the EU and non-EU countries would have a significant effect on joint ventures, alliances and other forms of cooperation; commercial agreements between EU and non-EU airlines; cartel behaviour; and abuses of a dominant position. Private litigants would also gain the ability to use Article 85 in national court proceedings, whereas at present they may only do this under Article 86.
There is currently a significant and anomalous difference between the treatment of mergers and 'concentrative joint ventures' under EC competition law and that accorded to cooperative joint ventures and alliances.
A merger or 'concentrative joint venture' in the air transport sector falls within the Commission's competence under the EC merger regulation if it satisfies the requisite turnover thresholds, even if it affects third country routes. There is no need specifically to prove an 'effect on trade between member states'. But a cooperative joint venture or alliance, such as that between British Airways and American, falls outside the scope of the EC merger regulation. Since it relates to third country routes it would also fall outside the Commission's direct powers to apply Articles 85 and 86, so forcing the Commission to rely instead upon Article 89 procedures.
By contrast, a cooperative joint venture or alliance which primarily affects air transport routes within the EU, such as Lufthansa/SAS, will fall within the scope of regulation 3975/87 and would be at risk of unenforceability and fines unless notified to the Commission and exempted.
Even more confusing, the Commission could take simultaneous action under both regulation 3975/87 and Article 89 in the case of an alliance like Star, which which links Lufthansa/SAS with three other partners and affects air transport services both within the EU and on third country routes. The extension of the Commission's powers would therefore put alliances such as British Airways/American on the same footing as Lufthansa/SAS.
There are some other potentially more serious consequences of an extension of the Commission's powers.
The application of the competition rules to air transport between EU member states brought the extinction of hitherto traditional commercial agreements between EU airlines for cooperation on matters such as tariffs, capacity and scheduling. Because the EC competition rules only became applicable to air transport routes between the member states in 1988, there was no effect at that time on commercial agreements relating to third country routes.
However an extension of the Commission's powers would make bilateral commercial agreements on third country routes subject to the direct application of EC competition law for the first time. These agreements commonly exist to apply the provisions laid down in the bilateral accords between EU member states and third countries.
The impact on both EU and non-EU airlines would be significant. The commercial agreements most likely to fall within the scope of Article 85, and to be scrutinised by the Commission, relate to the sharing of capacity between airlines; consultation or agreement on schedules for each season; consultation and/or agreement on fares (whether bilaterally or multilaterally within Iata); the pooling of revenue; and the joint operation of certain routes.
Unless such provisions fell within a block exemption, or were individually notified to the Commission and granted an exemption, they would be void and could be the object of a Commission fine.
In order to address this problem, the Commission is proposing that it be given the power by the Council to adopt a block exemption which would automatically exempt many of the key aspects of commercial agreements relating to routes between the EU and third countries and made necessary by bilateral air service agreements. However, the Commission is likely to attach a variety of specific and extensive conditions to the block exemptions.
At times there may be a conflict between the requirements of the governments at each end of the route and EC competition law.
In such instances the Commission is proposing that, before withdrawing a block exemption to a specific agreement deemed incompatible with competition rules, it would hold 'consultations with the competent authorities of the country concerned'. A new Article would be inserted into regulation 3975/87 to this effect. But whatever the outcome, private litigants could still take legal action before the courts of the member states.
In cases of unresolved conflict the Commission would be entitled, subject to Article 234 of the EC Treaty, to take proceedings against any member state party to a bilateral agreement which encouraged or required the airlines concerned to infringe Article 85 and/or Article 86. However the Commission has never taken such action in the air transport sector.
If the Commission gains competence to apply Articles 85 and 86 directly to third country routes, the threat to the commercial structure that has underpinned the operations of airlines on all such routes would be great, particularly where competition has been limited.
The Commission would also gain the power to investigate and fine airlines for cartel-type behaviour, such as price-fixing, on such routes. Iata would no longer be an acceptable forum for tariff agreements on third country routes as the proposed block exemption only envisages tariff consultations, as opposed to agreements (although the distinction between the two is often unclear). Tariff consultations are likely to be exempted only in so far as they are essential to interlining.
The extension of the Commission's powers would also enable it to investigate all forms of predatory or abusive behaviour. If proven, substantial fines of up to 10 per cent of worldwide turnover are possible. Crucially, there is no possibility whatsoever of exemption from infringements of Article 86, which may apply even where a block exemption has been given.
The adoption of an extended application of EC competition law in air transport would pose significant challenges for many international airlines and would change the face of international air services between the EU and non-EU states.
Source: Airline Business
