The Next Frontier - European Community External Aviation Matters

01 July 2006

Some three-and-a-half years on from the judgment of the European Court of Justice in the so-called ‘open skies’ cases, it has become apparent that it was a landmark ruling which is now having very significant practical effects, in much the same way as the ‘Nouvelles Frontières’ judgment in 1986, on an apparently rather technical point concerning cross-border ticketing, paved the way for the creation of the internal aviation market in the EC.
John Balfour, Beaumont & Son – Aviation at Clyde & Co

Although the European Commission largely lost on its main claim (that there was exclusive community competence for external aviation relations), the commission’s subsidiary claim was successful, and this has had much more dramatic effect than might at first have been thought. Traditionally, almost all bilateral air services agreements between states have contained a clause, which permits one state to withhold or withdraw traffic rights from an airline of the other if it is not substantially owned and effectively controlled by that other member state or its nationals. Such clauses appeared in the various open skies agreements between seven EC member states and the US. They also appeared in the UK–US Bermuda II bilateral, which is why the commission also brought infringement proceedings against the UK, although it was not party to an open skies agreement with the US. The commission argued that such clauses infringed the rules in the EC treaty on the right of establishment, because they prevented community carriers from one member state from benefiting from the treatment which another member state accorded to its own carriers. In other words, (for example) because of the existence of the clause in the UK/US bilateral, a German airline could not establish itself in the UK and operate air services from the UK to the US.

Although the infringing nationality clause was just one clause among many in the agreements with the US, it soon became clear how significant it was when, shortly after the judgment, the commission issued a communication calling on all member states to exercise their right to terminate their air services agreements with the US on 12 months’ notice, on the grounds that the nationality clause in them infringed EC law.

THE JUNE 2003 COUNCIL DECISIONS

Clearly, termination of eight bilateral agreements between EC member states and the US would have had serious adverse effects. A compromise was reached in June 2003, when the Transport Council adopted a package of three measures, with which the commission concurred.

First, in direct response to the court’s judgment, the council adopted a decision authorising the commission to open negotiations with third countries in order to amend air services agreements so as to bring them into line with the court’s judgment (the so-called ‘horizontal mandate’). This meant principally seeking to amend nationality clauses so that they would recognise the right of any EC airline to operate from any EC member state, but also included the few other areas where the court had recognised exclusive community competence.

Second, in recognition of the court’s confirmation that member states continued to retain competence for most aspects of external air services, the council agreed that a regulation should be proposed on the negotiation of air services agreements between member states and third countries, and this resulted in Parliament and Council Regulation No. 847/2004, adopted on 29 April 2004. The regulation permits member states to enter into negotiations, and conclude agreements, with third countries but subject to a number of conditions, in particular that they must modify the nationality clauses so as to be consistent with EC law, and that they must keep the commission informed and invite it to participate as an observer. Information on how this regulation has been working is scant, but there is little evidence either of success in modifying nationality clauses or of involving the commission.

The commission had sought a wider mandate to negotiate with third countries generally. The council did not grant a mandate in such wide terms, but did grant the commission a mandate to negotiate with the US – clearly the most important single aviation relationship.

THE HORIZONTAL MANDATE

Pursuant to the horizontal mandate, the commission has to date concluded agreements with 23 other states in which they accept a community nationality clause – Albania, Australia, Azerbaijan, Bosnia- Herzegovina, Bulgaria, Chile, Croatia, Georgia, Kosovo, Krygyzstan, Lebanon, Macedonia, Malaysia, Maldives, Moldova, Morocco, New Zealand, Paraguay, Romania, Serbia, Singapore, Ukraine and Uruguay. In addition, 39 other states have accepted such a clause in bilaterals with individual member states.

Although these agreements are too recent to have yet produced any noticeable practical effect, they may in time have quite radical effects, as they open the way, for example, for Lufthansa to operate services between London and Sydney, or British Airways to operate between Madrid and Santiago de Chile. Of course, in the case of congested airports, such as Heathrow and Frankfurt, it would be difficult for airlines to find the necessary slots, and therefore unlikely that many such services would be launched, but it will be interesting to see to what extent advantage is taken of new opportunities at less congested airports.

THE UNITED STATES

The grant of a mandate to negotiate a full air services agreement with the US was a considerable victory for the commission, as it had been seeking such a mandate since June 1995, but only succeeded in obtaining a limited, and practically not very useful, mandate, before the European Court of Justice’s judgment.

Shortly after receiving the mandate, the commission commenced negotiations with the US, which resulted, quite quickly, in a draft agreement in June 2004, which was not, however, accepted by the council, as it was not considered by some member states to contain a sufficient balance of benefits.

Negotiations recommenced following the coming into office of the new commission in November 2004; a year later the text of a proposed agreement was agreed between officials on each side and now remains to be approved by the council. The agreement that has been reached provides liberalisation in most areas (including access to Heathrow, which is seen as one of the most important aspects), but stops short of creating full open aviation area, such as exists internally within the EC, in five principal ways:

• First, although it contains provisions on enhanced cooperation in areas such as safety, security, consumer and environmental protection and competition rules, it does not harmonise laws in these areas.

• Second, seventh freedom rights are not included on either side.

• Third, it excludes cabotage, so that EC airlines are not permitted to carry traffic on domestic routes within the US. The same applies to US airlines in the EC but, given that the EC is a collection of individual states, whereas the US is one state, this means that US airlines will be free to operate fifth freedom services between points in different EC member states, eg, Paris to Rome.

• Fourth, it does not open up the ‘Fly America’ programme, under which US governmental air transportation requirements have to be fulfilled by US airlines.

• Fifth, it does not open up the right for EU citizens and airlines to own and control US airlines.

This last aspect has been particularly controversial because of the difference between the EC and US rules in this respect. The EC rule provides that community carriers must be majority owned and effectively controlled by member states or nationals of member states, whereas the US rule limits the voting interest of foreign shareholders to 25 per cent and requires that ‘actual control’ of US airlines is exercised by US citizens.

It is not surprising that these areas are not liberalised in the agreement, as they can only be liberalised by legislation, except for seventh freedom services (which would, however, require the approval of the third, non-EC, non-US, country in question). The council has, however, made it clear that it requires an extra-legislative amendment from the US side on the last point as a precondition to its approving the agreement – namely that the rule requiring ‘actual control’ by US citizens be relaxed so as to permit EC interests to have a greater degree of commercial control over airlines in which they invest. In recognition of this, the US administration issued a proposal in November 2005 which would result in a relaxation of this rule to permit a greater degree of commercial control by EC investors, although it would not amend the statutory requirement that 75 per cent of the voting interest be owned and controlled by US citizens. It is, in fact, questionable how practically important this relaxation would be, given that US citizens would still be required to exercise control of the airline under its constitutional documents. Nevertheless, modest though it may be, the proposal is currently encountering significant opposition in the US, so that it is not clear whether it will be accepted in the near future.

If no quick progress is made on this issue, then the EC and its member states will need to consider whether it is important enough to constitute a deal-breaker, balancing the limited benefits which would result against the disadvantages of the agreement not being concluded. Apart from the obvious disadvantage that the liberalisation, which would otherwise happen, would not take place, the commission would then be likely to demand that member states terminate their existing bilaterals with the US (on the grounds that they contain the infringing nationality clauses). This in turn would be likely to lead to the US withdrawing antitrust approval from the transatlantic alliances to which it has been granted conditionally upon the existence of open skies agreements (the Star Alliance, involving Lufthansa, SAS and bmi British Midland and the Skyteam Alliance, involving Air France and KLM).

NEIGHBORING STATES

At the same time, and unconnected with the court proceedings, the commission has been pursuing a policy of extending EC aviation liberalisation to neighbouring states, by including them in a European Common Aviation Area, with a target date of 2010.

This was done first with the then EFTA states in 1992, although that initiative has now been overtaken by some of the EFTA states becoming full members of the EC and others becoming party to the European Economic Area Agreement, which has the effect of their becoming part of the liberalised European Common Aviation Area.

A special agreement was concluded with Switzerland, which came into force on 1 June 2002, covering various particular areas, including air transport. It has the effect of Switzerland’s being treated as part of the EC for the purposes of EC aviation legislation and other legislation affecting air transport (such as the competition rules) with the exception that cabotage remains excluded for the time being.

In October 1996, the council gave the commission a mandate to negotiate a similar agreement with 10 central and eastern European states, as well as Cyprus and Malta. All these states (except Bulgaria and Romania, which are next in line to join the EC) have now become full member states, so that the initiative has largely lapsed.

Nevertheless, mandate to negotiate with Bulgaria and Romania continued, and to it was added a mandate to negotiate with Albania and five states which were formerly part of Yugoslavia. On 9 June 2006, an agreement was signed between the EC and these countries on the creation of a European Common Aviation Area. When formally adopted and in force, this will basically extend EC aviation laws to these countries (and will therefore give their airlines the right to operate within the EC on the same terms as community airlines, and vice versa) with certain variants and transitional provisions to accommodate the needs of individual countries.

The commission has also expressed a policy of extending the European common aviation area to other neighbouring countries, particularly in the Mediterranean. The first such agreement, with Morocco, was reached in December 2005, although it is subject to certain transitional provisions. Other countries, such as Ukraine and Jordan, have been identified as targets for negotiations in the near future.

OTHER COMPREHENSIVE NEGOTIATIONS BY THE COMMISSION

Because of the compromise reached in June 2003, the commission has to go back to the council in order to obtain mandates to negotiate more widely with other countries, but it has already sought, and is awaiting, mandates to negotiate with countries falling into two categories – those which are known to take a liberal approach to aviation (Australia, Chile and New Zealand) and those whose aviation markets are particularly important to the community (China and India).

CONCLUSIONS

It can be seen from the above that there has been considerable activity in the short period following the European Court’s judgment. Although there has not yet been enough time for the changes to produce significant practical effects, they are likely to follow, and it will be interesting to see what use is made of the new opportunities presented by the renegotiation of nationality clauses. The effects of an EC-US aviation agreement would be even more striking, not only on the transatlantic markets directly affected, but also on other aviation markets, by way of indirect influence.