The last months have seen the issue of two long awaited Commission decisions which characterise two major recent trends in the air aviation. On the one hand, the consolidation among air carriers with a decision concerning the first real merger between Air France and KLM and, on the other hand, the expansion of low-cost carriers with a decision concerning the State aid granted by a regional airport to Ryanair.
In addition, new legislation has been adopted, putting an end to the specific character of air transport when it comes to the application of competition law.
Air France/KLM merger
Air France and KLM launched the first real merger between two Community carriers. Under the terms of the agreement, the French airline will take over its Dutch rival. Together they will become the world’s third biggest airline in terms of passenger revenue per kilometre, behind American Airlines and United, but number one when considering annual sales. The Commission welcomed the deal in the European air transport sector, which will contribute to the consolidation of this industry.
Applying the merger control rules, the Commission identified 14 routes, especially between Paris and Amsterdam and between Europe and the United States, where the merger would reduce competition. For the first time in its assessment of the dominance on routes, the Commission took into account the competition aspect of indirect flights or network flights, but only on long-haul routes.
The airlines committed to surrender 47 pairs of slots, i.e. 94 single take-off and landing slots, in order to create the conditions for competitors to operate 31 new return flights a day on the routes raising competition concerns. The slots given to rival carriers for an unlimited period must be returned to the slot co-ordinator and redistributed if they are misused or underused by the new entrant. Provided the new entrants operate the route for at least three years, they may acquire so-called grandfather rights over the slots, allowing them to use them for other destinations. In order to give new operators a fair chance to compete, Air France/KLM committed themselves not to increase their offer of flights on the routes concerned.
In addition, intermodal agreements have been signed between Air France/KLM and land transport companies, enabling passengers to make their outward trip by train and their return trip by plane, for instance. This agreement is particularly important on the Paris-Amsterdam route, where the high-speed train, Thalys, can be regarded as a real alternative.
The clearance is also subject to undertakings by the French and Dutch authorities. They have accepted to give traffic rights to other carriers wishing to stop over in Amsterdam or in Paris while en route to the United States or to other non-European destinations. They further agreed to refrain from regulating prices on long-haul routes.
The merger has also been approved by the US Department of Justice.
In May 2004, EasyJet - Air France’s principal competitor at Orly airport - submitted an appeal requesting the Court of First Instance to annul the European Commission's clearance decision. Easyjet’s main argument was that the Commission had failed to analyse the dominance of the new group on the routes where Air France and KLM services overlap and challenged the remedies imposed to restore effective competition. Easyjet maintained that the merger would not have a positive impact on French consumers, particularly in Paris, where passengers are already confronted with less choice of airlines and higher air fares than elsewhere in Europe.
Earlier in May, Easyjet instituted legal proceedings before a French administrative court against the French slots co-ordinator at Paris airport, questioning the impartiality of the body that allegedly favours Air France and its subsidiaries at the expense of their competitors when allocating slots.
Illegal aid received by Ryanair at Charleroi
In recent years, the air transport sector has seen an exceptional development of low-cost airlines. Such airlines are characterised by a low-cost structure principally in terms of services offered to the passengers, employment conditions and aircraft policy. In addition, they only operate point-to-point routes to and from usually underused regional airports that grant them attractive conditions in order to become their centre of operations. The advantages thus conceded by the state-owned regional airports have in turn created a source of concern for the Commission which decided to examine whether the advantages offered by Charleroi airport to Ryanair complied with State aid rules.
Charleroi airport signed a special deal exclusively with Ryanair that included a 50% rebate for landing charges, a preferential rate of €1 per passenger for groundhandling services in comparison with the €8-13 rate normally charged to other airlines, a €4 contribution per boarding passenger towards promotional activities over 15 years, incentives per new route opened and reimbursements for pilot training and for hotel accommodation costs.
The Commission assessed the advantages granted by the airport to be State aid, since no prudent private operator in the same circumstances would have offered the same kind of conditions. The contract exposed the airport to the risk of losses over a ten-year period, without any guarantee of a fair return on the investment.
Nevertheless, the Commission considered that some of the aid granted for the start-up of new air routes may be compatible with the common market insofar as such aid fosters the development and improved use of secondary airport infrastructure currently underused and representing a cost to the Community as a whole. Therefore, the airport’s contribution to the financing of a joint promotion and publicity company with Ryanair was held compatible with the common market.
Moreover, the Commission clarified the conditions under which incentives for the opening of new routes could be acceptable, i.e.:
they are necessary and proportional for the opening of the new routes, accompanied by a mechanism for imposing penalties. Should the carrier fail to comply with his commitments; the incentives may not be aggregated with aid which serves a social objective or with public service compensation payments
they are limited to five years and correspond up to 50% of the net start-up costs incurred
they are available to all interested carriers with due regard for the principles of transparency, equal treatment and non-discrimination
Concerning the rebates on airport charges and groundhandling fees, the Commission ordered Ryanair to pay them back. These amounted to 25-30% of the €15 million given initially. Surprisingly, the Commission left the responsibility for setting the exact total amount to be paid back to the Walloon Region. Considering the carrier’s reluctance to co-operate, the Region commenced legal proceedings to claim back €15 million, instead of the €2.8 million due, according to initial estimates by the Region. The Region was supposed to have notified the measures taken to execute the Commission’s decision by 13 April 2004.
Ryanair, on the other hand, launched an appeal against the Commission’s decision of 3 February 2004 and threatened to leave Charleroi. The Walloon Region and the airport, therefore, negotiated new rates with Ryanair which would allow the carrier to operate its 11 existing routes at no extra cost, namely €5 per passenger. However, the deal will be not exclusive this time, as the new agreement notified to the Commission is now available to all other airlines wishing to operate to and from Charleroi airport.
Finally, at the same time the Commission issued its decision; it announced the preparation of a first communication on regional airports and a second on revised guidelines for State aid aimed at helping to develop regional airports. In a recent statement, the Committee of the Regions urged the Commission to acknowledge that regional airports are a tool for achieving cohesion and territorial development and that low-cost airlines contribute to sustainable economic development of small and medium-sized regional airports.
Extension of the rules on the Commission’s competition powers with regard to air transport between the EU countries and non-EU countries
Council Regulation (EC) No 411/2004 of 26 February 2004 (OJ 2004 L68 of 6/3/2004) put an end to an abnormal situation where the Commission lacked full enforcement powers in connection with air transport between the European Community and non-EU countries.
Indeed, both Regulation (EEC)3975/87 laying down the procedure for the application of competition rules to undertakings in the air transport sector and Regulation (EEC)3976/87 on the application of Article 81(3) EC in the air transport sector only relate to international transport between Community airports. Therefore, the Commission used to rely on Article 85 for the assessment of global airline alliances such as STAR (Air Canada, Air New Zealand, ANA, Asian Airlines, Austrian Airlines, bmi, LOT Polish Airlines, Lufthansa, SAS, Singapore Airlines, Spanair, Thai Airways International, United, US Airways and VARIG) and Skyteam (Air France, Aeromexico, Alitalia, CSA Czech Airlines, Delta Air Lines and Korean Air). On the basis of Article 85, the Commission had to co-operate with the national competition authorities for investigations, since it had no direct enforcement powers. In case of infringement, the Commission could only suggest remedies, but these were left in the hands of the Member States to be implemented.
In order to create a clear and coherent regulatory framework, the new Regulation allows the Commission to review and, if necessary, to take enforcement action to preserve competition with regard to international airline co-operation agreements (such as alliances) and air services agreements (also known as ‘bilateral agreements’) between Member States and/or the European Community and non-EU countries. In addition, the Commission can decide to grant block exemptions for air transport agreements involving, for instance, transatlantic routes, as is already the case for air transport services between Community airports. Operations that can be qualified as a merger, such as the Air France/KLM deal, will continue to fall under the Merger Regulation.
In practice, Regulation 411/2004 repeals Regulation 3975/87 and instead extends the scope of Regulation 1/2003 (the “Modernisation” Regulation on the application of Articles 81 and 82) and Regulation 3976/87 (application of Article 81(3)) to air transport between the Community and non-EU countries.
Measures to tackle unfair competition practices from non-EU country carriers
After the events of 11 September 2001, a number of non-EU country airlines received State subsidies to survive the economic downturn in the air transport sector and to finance the cost of additional security measures and the exponential increase of insurance premiums.
Whereas US airlines were granted more than US$3 billion, European airlines, on the contrary, were not allowed to receive financial assistance from their governments according to State aid rules. Exceptions were made for a first aid package to compensate for the losses incurred when the transatlantic air space was closed off for three days after the attacks and for a second provisional aid package for insurance purposes.
European airlines protested against this differential treatment which could lead to anti-competitive effects. They asked the Commission to take all the necessary measures in order to provide remedies for the distorting effect of subsidies to international air transport services.
Considering that neither the bilateral air services agreements nor the GATS provided a satisfactory solution to this particular issue, the Commission proposed to resort to specific legal means. It was done through Regulation (EC) No 868/2004 of the European Parliament and of the Council of 21 April 2004. The purpose of the Regulation is to furnish protection against subsidisation and unfair pricing practices that cause injury to Community air carriers in the supply of air services from countries that are not members of the European Community (OJ 2004 L162 of 30/04/2004).
The scope of Regulation 868/2004 covers unfair and discriminatory practices resulting from aid granted by a government, regional body or other public organisation of a country that is not a member of the Community, or from certain pricing practices of non-Community air carriers that benefit from non-commercial advantages.
It allows the imposition of duties on non-EU country carriers benefiting from subsidies. The duties will be calculated on the basis of the amount of aid granted but will not be higher than necessary to remedy the damage caused to Community carriers. In the case of State-owned non-EU country carriers, duties can also be imposed to counterbalance unfair pricing practices resulting from non-commercial advantages granted by governments.
Regulation 868/2004 provides for a strict procedure, which can be initiated following a complaint by the air transport industry (the airlines, for instance) or by the Commission. Where it is apparent that there is sufficient evidence to initiate a proceeding, a notice will be published in the Official Journal and the Commission will start an inquiry. In the end, three types of decisions are possible: i) adoption of provisional measures of a maximum duration of six months ii) adoption of definitive measures (duties) or iii) termination without measures, e.g. in case of lack of causal link between the subsidies and the damage. Nevertheless, a settlement with the non-EU country concerned is possible at any time during the procedure. The Commission will act with the assistance of an Advisory Committee representing the Member States and will take account of the general interest of the EU before imposing any measures.
In late June 2004, British Airways addressed a letter of complaint to the European Commissioner for Transport and Energy denouncing the aid granted by the US government to national airlines. In particular, it argued that the measures in place since the 11 September attacks to cover the insurance premiums should be reassessed in the light of the steps taken on the international level, within the framework of the International Civil Aviation Organisation (ICAO), to settle a global scheme to cover third-party war/terrorist liability.