But things are not always what they seem: in the last few months, the debate has moved away from the question of whether the Commission has the legal authority to negotiate to questions of economics.
The first Commission proposal that it take over external aviation relations with non-EU states was submitted as early as January 1990. Since that time, the Commission has alternated between conciliation and threats of court action to persuade the transport ministers that a single aviation market cannot be complete unless EU states speak with a single voice. In his December report to the Council, Kinnock argued that EU-wide negotiations would provide 'added value' to EU states, airlines and consumers: in Kinnock's words, if the Commission negotiates, 'it would produce better results for the individual member states than those that could be achieved by the simple pursuit of a bilateral approach'.
Though progress towards EU block negotiations has been glacial, few would deny that such a development is the logical consequence of a single market or that someday the Commission will be given a mandate, albeit conditional, to negotiate with the Americans.
What issues will be on the table when that happens? For a growing number of proponents - including the Association of European Airlines and the Commission itself - the need to develop a transatlantic understanding on competition rules, as well as an effective dispute settlement mechanism to handle conflicts, should be at the heart of the discussions.
The preoccupation with competition rules and their potential for generating conflict in international air transport began in the late 1970s, following the implementation of the US deregulation act. In 1978 a former US Civil Aviation Board 'Show Cause' order proposed withdrawing all immunity from the US anti-trust laws for Iata's tariff coordination activities. The immunity was eventually left in place after a storm of protest from countries complaining about the extraterritorial application of US laws and the negotiation of a US-ECAC regime that somewhat liberalised the regulation of transatlantic air fares.
A second instance, equally contentious, was the US case of Laker Airways versus Pan American World Airways, in which Laker alleged that it had been subject to predatory pricing by a number of US and European carriers on North Atlantic routes. Vigorous protests from European governments, some of whose carriers were charged in the action, halted a grand jury investigation, but private actions involving the same allegations continued and were only settled years later.
More than a decade later, in its suit against British Airways, Virgin Atlantic has also turned to the US courts for its anti-trust action against the larger UK carrier. Under the so-called 'effects doctrine', recognised by a 1945 case of United States versus Aluminum Co of America, a state is permitted to regulate actions outside its territory 'if they were intended to affect imports and did affect them'. Hence the spectacle of two UK carriers battling it out in a foreign jurisdiction. Damage awards in US anti-trust suits can result in treble damages being awarded to the winning party.
Such past and present tensions over competition laws are spilling over into the debate on EU external air transport policy. Frederik Sorensen, the European Commission's director of air transport policy, complains that the US is using its anti-trust powers as a lever to force open transatlantic markets on its own terms. A case in point: the granting of anti-trust immunity to shield alliances, such KLM and Northwest, from the rigours of American competition law, based in part on the Netherlands' acceptance of open skies with the US. At presstime, the alliance between Delta, Sabena and Swissair also seemed likely to be granted immunity, since both Belgium and Switzerland - like the Netherlands - have signed on to open skies. Immunity for Lufthansa and United could prove tougher to achieve, since the German commitment to open skies has yet to be tested.
Naturally the European Commission, which views open skies as a threat to its authority to negotiate, wants to see a more uniform international approach to the enforcement of competition law: 'We need a situation that is more predictable for the carriers,' says Frederik Sorensen diplomatically.
In fact, developments in the market may be forcing just such a development, according to Jeffrey Shane, a former assistant secretary of transportation in the Bush administration, now with the Washington law firm of Wilmer, Cutler & Pickering. Shane, who signed the order granting anti-trust immunity to KLM and Northwest, believes that competition authorities must recognise that in an aviation environment in which alliances dominate the marketplace, the consumer benefits that flow from competition between alliances are likely to outweigh any reduction in competition between alliance partners. Shane points to US Government statements which support the view that alliances, with their close schedule coordination, shorter layover times and potential to lower fares, are good for the user. As a consequence, Shane says, the US Department of Transportation is moving towards a more accommodating approach to alliances. Even the US Department of Justice, which has traditionally taken a tougher line on anti-trust than DOT, 'has begun to buy into the idea that the alliance phenomenon changes the rules', Shane says.
In fact, the movement towards liberal bilateral agreements and multinational alliances is largely behind the new push to reach an international accord on the application of competition laws. 'The potential for conflict on competition issues is greater in open markets,' observes Kees Veenstra, deputy secretary general of the Association of European Airlines (AEA).
What then are the main competition issues that would need to be ironed out in any future transatlantic discussions?
From the US point of view, the question of state aid could well head the list. 'Operating subsidies are unfair in a competitive market,' says Patrick Murphy, US deputy assistant secretary for aviation and international affairs. 'Reliance on state aids leads to . . . an inevitable need for more assistance and additional pressure on the national government to restrict competition,' he adds. The European Commission, which has already expressed a willingness to discuss state aid with the US, takes a different approach. While in future it would only allow state aid in 'very exceptional circumstances', the Commission maintains that - according to the EU's constitution - it cannot order airlines to privatise, and that if private investors are willing to take a risk by investing in an airline, 'the state can join them to the same extent'. And Commission officials would insist that, in any discussion of state aid, US Chapter 11 procedure be put on the table as well.
Also at issue would be merger, acquisition and alliance policies. Many Europeans, as well as some Americans, view this as the Achilles heel of US deregulation, due to the relatively passive attitude taken by US competition authorities towards the raft of takeovers that followed deregulation. US Government officials have repeatedly claimed the takeovers have not stifled consumer choice and that new airlines have repeatedly sprung up to challenge the majors. But Commission policy has taken a different, more interventionist line.
So far there have been no attempted takeovers involving EU carriers as such, but before equity alliances between European carriers have been allowed - as in the case of Air France/Sabena or Sabena/Swissair (a non-EU carrier) - the Commission has repeatedly required that both carriers involved give up slots to other carriers on routes where, under Article 86 of the Treaty of Rome, they might be considered to have a dominant position.
But what would happen in the context of a transatlantic merger or takeover? Here, Commission policy could be more flexible than the US one. Take the case of Sabena and Swissair as an indication. Under the terms of the equity alliance between the two carriers, once Switzerland has signed an acceptable air transport agreement with the EU, Swissair will have the right to purchase up to 62 per cent of Sabena by the year 2000.
This is the first time the Commission has indicated, using a concrete case, that majority ownership of an EU flag carrier need not be held by EU nationals. In fact, despite the basic requirement that EU airlines be Community-owned, the EU's third air transport liberalisation package has a provision that allows for special arrangements to overturn that requirement in individual cases. By contrast, there is, at present, no exception to the US law restricting foreign ownership to less than a majority share, a requirement that, Shane concedes, 'makes no sense' in a truly liberalised environment. 'Ownership is crucial to achieve real balanced competition with equal opportunities for all air carriers on both sides,' insists Sorensen.
Pablo Mendes de Leon, executive director of the International Institute of Air and Space Law in Leiden, cites other issues that could surface in competition talks. These include 'acts such as dumping, predation and discrimination, both as regards capacity and pricing'. Mendes de Leon, who is heading a project to study the harmonisation of air transport competition rules for the Paris-based International Chamber of Commerce (ICC), also lists coordinated tariff setting, codeshare agreements, frequent flyer programmes, and 'acts which constitute abuse of marketing and distribution tools', such as CRS.
On the question of predatory practices, there is a clear dividing line between Europe and the US over whether governments should intervene to ensure fair competition. While the Commission has the power to intervene if airlines set tariffs which, in its view, are either too high or too low - or to freeze capacity in the event of severe market disruption - US authorities have been loath to intervene in such cases. 'The United States prefers to rely on the market because, for one thing, we find it extremely difficult to define "predation," ' says Murphy.
The EU has also been more interventionist on CRS. It has set out the criteria for priority listings on CRS displays, whereas the US has preferred to let vendors establish their own criteria, provided they are consistent and non-discriminatory. Yet in this domain a precedent for cooperation was established when the Commission intervened to prevent two EU carriers, Iberia and Alitalia, from refusing to list their domestic flights in AMR's Sabre CRS. Screen crowding could also require oversight from the US competition authorities.
Another difficult subject concerns the shape - and legal impact - of any agreement on competition rules. Efforts to avoid conflicts in competition law enforcement go back to the post-war Havana Charter, which failed to be ratified by a sufficient number of countries. In 1986 and again in 1995, the OECD approved a recommendation concerning anti-competitive practices involving international trade. But the OECD document is limited to notification, the exchange of information and conciliation between competition authorities 'on a fully voluntary basis'. It also specifies that 'such cooperation should not, in any way, be construed to affect . . . questions of sovereignty, and in particular, the extra-territorial application of laws concerning anti-competitive practices'.
Icao, too, has taken a turn at resolving the issues. In 1989 it developed a model clause on competition laws for countries to insert into bilateral agreements. But, like the OECD model, the Icao language stops short of seeking 'harmonisation' of national laws or a common set of principles and focuses on procedure and a sympathetic dialogue rather than substance.
Modern advocates of an agreement want an accord with teeth and a binding dispute settlement mechanism. An EU group of experts on competition policy, for example, is recommending that an international body be set up to develop and oversee a list of common principles on competition with a 'register of anti-competitive practices' to provide a structure for settling disputes. The AEA would like to see uniform binding codes of conduct on CRS and governmental agreements on anti-trust enforcement and jurisdiction, with an arbitration structure modelled after those used in private commercial disputes. Other observers believe dispute settlement should be centred in the World Trade Organisation (WTO), which has the machinery for dispute resolution in trade matters.
Too ambitious? Perhaps. But as competition becomes more multinational and alliances dilute the concept of 'national airlines', new ways of thinking will be called for. The concept of national sovereignty over airlines and airspace, and perhaps national enforcement of competition laws, will be widely tested.
The building blocks for change are already in place: the EU and the US already have a 1991 cooperation agreement on competition that calls for 'positive comity' in competition cases, and in 1994, the US Congress passed a law that would allow the exchange of confidential information in anti-trust matters. As recently as December 1995, President Clinton and the EU signed a new transatlantic agenda that requires both sides to look at 'conflicting regulatory standards'. When ideas are in the air, there's no telling where they will land.
Ron Katz is an independent consultant based in Paris and London.
Source: Airline Business
