Creating the European Common Aviation Area

In parallel to the United States, Europe was also moving towards open skies but the approach was structurally quite different. The US strategy was essentially bilateral. The implementation of open skies was being promoted by one country through a series of bilateral air services agreements. In contrast to this, the development of a single open aviation market in Europe was to be achieved through a compre- hensive multilateral agreement by the member states of the European

Union. This multilateral approach to opening up the skies enabled the Europeans to go further in pursuit of deregulation than was possible under US bilateralism.

Within the European Union (previously known as the European Com- munity) the push towards multilateral liberalisation of air transport among the Member States was driven by two complementary lines of approach. The Directorate General for Transport espoused airline lib- eralisation early and had been trying from about 1975 to push various proposals through the Council of Ministers. The second driver for change was the Directorate General for Competition, which was trying to ensure that competition between producers and service providers within the Union was not distorted by uncompetitive practices im- posed by governments or introduced by the industries themselves. The twin objectives of air transport liberalisation and fair and open com- petition were only achieved in stages. In the late 1980s, the first two packages of liberalisation measures, described earlier, did not go very far but they did set the trend and identify the direction of Community aviation policy. The major breakthrough was achieved through the so- called ‘Third Package’ of aviation measures, which came into force on 1 January 1993.

The Third Package consists of three inter-linked regulations which have effectively created an ‘open skies’ regime for air services within the European Union. First, there is open market access. Airlines from member states can operate with full traffic rights between any two points within the EU and without capacity restrictions even on intra- EU routes entirely outside their own country (CEC, 1992b). Govern- ments may only impose restrictions on environmental, infrastructure capacity, regional development or public service grounds, but any re- strictions would have to be justified. Second, there are no price con- trols. Airlines have complete freedom to determine their fares and cargo tariffs but there are some limited safeguards to prevent

predatory or excessive pricing (CEC, 1992c). Finally, the third Regula- tion harmonises the criteria for granting of operating licences and air operators’ certificates by EU member states (CEC, 1992a). Apart from technical and financial criteria which have to be met, the airline must be majority owned and controlled by any of the Member States or their nationals or companies. But they do not need to be nationals or companies of the state in which the airline is registered. In addition, henceforward, all regulations applied equally to scheduled and charter services with no distinction being drawn between them.

The Third Package went further than the US-style ‘open skies’ bilater- als in two important respects. First, it was a multilateral agreement to open up the skies covering not just pairs of states but a whole region, which by 2009 had grown to twenty-seven Member States of the European Union (EU) plus Norway, Iceland and Switzerland, as well as some Balkan states that have all adopted the package of measures in phases without joining the EU. Second, whereas the open skies bi- laterals did not change the nationality rule at all, the Third Package for the first time explicitly allowed cross-border majority ownership. It gave the right to EU nationals or companies from any Member State to set up and operate an airline in any other EU Member State or to buy such an airline. In the 1990s this enabled British Airways to own and manage Deutsche BA in Germany, though it was later sold. However, this so-called right of establishment was restrictive in one important sense. While Deutsche BA could operate freely within the area of the European Union it could not, as a British-owned airline, operate inter- national services from Munich to, say, Moscow, because the Ger- many–Russia air services agreement contained the traditional article regarding substantial ownership and effective control by nationals of the designating state.

On 1 November 2008, a new Regulation (No. 1008/2008) came into force which consolidated and updated the earlier three Regulations,

which comprised the ‘Third Package’. It introduced several minor changes. On ownership and control of EU airlines it requires that ‘Member States and/or nationals of Member States own more than 50 per cent of the undertaking and effectively control it …’ Financial fitness tests for operator licences were tightened. The Regulation also introduced important new rules on air fares to ensure non-discrimina- tion and greater transparency. For example, the final ticket price must be indicated at all times, including on adverts and websites, and must include all unavoidable charges and fees.

In parallel with the liberalisation of air transport regulations, the European Commission felt that greater freedom for airlines had to be accompanied by the effective application and implementation to air transport of the European Union’s so-called ‘competition rules’. These were designed to prevent monopolistic practices or behaviour which was anti-competitive or which distorted competition to the detriment of consumers. The competition rules cover three broad areas, namely cartels and restrictive agreements, monopolies and mergers and state aid or subsidies to producers. The basic principles on competition were originally laid down in articles 81 to 90 of the Treaty of Rome and the separate Council Regulation on Mergers of 1989 (Regulation No. 4056/89).

The European Commission has used Articles 84 and 85, which relate to transitional measures, to take action on air transport between the EU and third countries and in particular on the alliances between European airlines and major US carriers. In its decisions in the late 1990s on both the proposed American Airlines–British Airways alli- ance, which did not progress and the Lufthansa–SAS–United alliance, the Commission required the partners to give up substantial numbers of runway slots at their European hubs to competitors so as to ensure effective competition.

The subsidisation of airlines by central or local government clearly dis- torts competition. So Articles 88 and 89 of the Treaty of Rome spe- cifically prohibit ‘state aid’ of any kind. Yet during the 1980s and early 1990s most of Europe’s numerous state-owned airlines were being heavily subsidised by their governments. To overcome this contradic- tion, the European Commission in a series of decisions between 1991 and 1997 approved major injections of state aid to a number of airlines but with strict conditions whose purpose was to ensure their trans- formation into profitable enterprises. The state aid had to be used for financial and operational restructuring of the airline through debt re- payment, early retirement of staff and so on (Doganis, 2006, pp 245–55). Moreover, the state aid was approved on the basis of a ‘one time, last time’ principle. In other words, no further requests for ap- proval of additional state aid would be considered. With the exception of the authorised state aid schemes no direct or indirect subsidisation of any kind by governments or their airlines is now permitted within the European Union. For example, governments can no longer guar- antee airline borrowings or offer reduced airport charges to their owned airlines. But governments can offer support for the operation of air services to meet social service needs but in a manner which is transparent.

But it appears that in emergencies state aid may be authorised to deal with unexpected crises! For example, the Commission allowed the Bel- gian Government to give an emergency loan to the Belgian airline Sabena in 2001 as it was on the verge of collapse. This was sub- sequently transferred to its subsidiary, DAT, enabling it to be re- launched as SN Brussels Airlines, in 2002, the successor to Sabena. The Commission also approved emergency state aid to Cyprus Airways early in 2005, which was in the form of a government-backed loan. A key element of the competition rules is the EU’s Regulation on Mer- gers first agreed in 1989 and subsequently modified in 1997

(Regulation 1310/97). Any mergers or acquisitions which exceed the stated threshold in terms of turnover must be first notified to the Commission. It will only give its approval if the transaction does not lead to the strengthening or creation of a dominant position. To en- sure that this does not happen the Commission may impose demand- ing conditions, as it did in February 2004 when approving the Air France–KLM merger. It ruled that, since the merger would eliminate or significantly reduce competition on 14 routes both airlines served, they would have to surrender 47 pairs of airport slots on the affected routes (O.J. No. C60, 9 March 2004). The Commission has sub- sequently attached conditions when approving other acquisitions or mergers, such as Lufthansa’s purchase of Swiss Airlines in 2006 or its take-over of SN Brussels Airlines in 2008.

There is an extra-territorial dimension to the EU competition rules. This was evident in October 1999 when the Commission, using the cumbersome Article 85 of the EC Treaty, launched an investigation in- to the proposed merger of Air Canada and the Canadian Airlines on the grounds that it would reduce competition on services between London and Canada. However, its powers regarding air services to/ from non-EU states were limited and unclear. But on 1 May 2004 a new EU Regulation (Regulation EC411/2004) came into force which granted the Commission the ability to apply the key competition art- icles 81 and 82 to air services between the Community and third countries.

In addition to its decisions arising directly out of the application of the competition rules, the European Commission, acting through the Council of Ministers and the European Parliament, has passed various Directives, Regulations or Codes of Conduct both to ensure greater competition in areas where competition was previously limited and to ensure that competition is not distorted through unfair practices. Both the code of conduct for slot allocation at airports (Council Regulation

95/93, amended 2009/0042 COD) and the Directive on ground hand- ling services (Council Directive 96/97) were both aimed at ensuring greater competition. More recently the Airport Charges Directive in March 2009 aimed to ensure a level playing field for airlines at differ- ent airports (Directive 2009/12/EC). On the other hand, the Code of Conduct for computer reservation systems was aimed at avoiding un- fair practices (Council Regulations 3089/93 and 323/99). Such Dir- ectives and Regulations were in addition to the numerous measures introduced to protect consumers directly (e.g. Regulation No. 261/ 2004 on passenger compensation rights) or to ensure safety of aircraft and so on.

If the aim of transport deregulation and open skies is to encourage much greater competition, then competition rules appear to be neces- sary to ensure that the increased competition is effective and is not un- dermined by anti-competitive practices or the abuse of dominant mar- ket positions, hence the parallel but contradictory development in the European Union of an intra-European open skies regime and a raft of new competition rules.

The ‘Third Package’ and the various EU Directives, Regulations and Codes of Practice have created a truly ‘open skies’ regime for air trans- port within the European Common Aviation Area. By 2008 this covered not only the 27 EU member states but several other European countries, such as Norway and Iceland, which had adopted these vari- ous measures into their own regulations without joining the European Union.