New Regulation safeguarding competition in air transport – can competition take off?

We had previously discussed the proposal of new Regulation in our article published last April, "Proposed replacement to regulation 868/2004: EU moves a step closer to a new Regulation addressing anti-competitive practices from outside the EU".

Background of the proposal

While aviation is a global industry, there is currently no international framework either under the World Trade Organisation (WTO) or the International Civil Aviation Organisation (ICAO) which governs competition among air carriers. Consequently, a number of countries have adopted their own rules to safeguard competition. The EU and its Member States rely in part on bilateral and multilateral air service agreements (ASAs) to regulate the operation of international air services.

However, ASAs between the EU and third countries are not homogeneous in their content, and not all of them contain a so-called fair competition clause. As a result, there is a view that ASAs do not effectively promote competition since the level of liberalisation and deregulation of the market is not consistent between contracting parties. For that reason, the EU has taken steps to regulate competition between EU carriers and non-EU carriers, for the second time in fifteen years.

Regulation 868/2004 was essentially an attempt to a respond to the concerns of EU airlines regarding what they saw as unfair pricing practices of US carriers on the transatlantic market following the terrorist events of 11 September 2001. The aim of Regulation 868/2004 was to protect EU air carriers against practices objectively defined as “unfair” and “discriminatory”, namely subsidisation and unfair pricing practices, which caused injury to EU carriers in the supply of air services to and from third countries. Regulation 868/2004 enabled the European Commission to take measures to redress and compensate for subsidies or unfair pricing that cause or threaten to cause severe injury to the air transport industry in the EU. However, since its adoption fifteen years ago, Regulation 868/2004 has never been used. Indeed, despite numerous informal accusations, no formal complaints were ever lodged by EU air carriers and no action was ever taken on the Commission's own initiative.

The current proposal is part of the EC's "Open and Connected Aviation" package which was adopted in 2017, and which also includes Guidelines on ownership and control of EU air carriers and their public service obligations. While liberalisation and deregulation of international air transport has led to a tremendously increased competition in Europe and globally, the European Commission's impact assessment of the new Regulation highlighted that market share has shifted away from EU air carriers despite efficiency gains and market restructuring. Indeed, although internal connections in the EU still largely rely on the services performed by EU air carriers; in the market for air transport connections between the EU and the rest of the world, the market share of EU air carriers is declining, while the market share of third country air carriers, in particular the ones from the Gulf, have increased.  

The US has developed its own unilateral instrument to prevent international competitors from exploiting any “unfair” advantages. In 1974, the International Air Transportation Fair Competitive Practices Act (IATFCPA) was adopted to protect US airlines from unfair and discriminatory practices by foreign governments or airlines, as well as to protect its rights acquired in bilateral ASAs. Under the Act, the US Department of Transport can "deny, amend, modify, suspend, revoke, or transfer a foreign air carrier's permit or can impose tariffs". The IATFCPA can be used as a deterrent to foreign governments – in this case it acts as a catalyst to encourage international negotiations, eventually leading to the resolution of the dispute through the removal of the unfair practice in question. US air carriers have made complaints based on the IATFCPA a number of times. However, during recent years the big US air carriers have been complaining about practices of the Gulf carriers without filing a formal complaint with the Department of Transport. 

Features of the new Regulation

Scope

The purpose of the new Regulation is to ensure fair competition between EU air carriers and third country air carriers. The Regulation prescribes rules on the investigations by the European Commission and on the adoption of redressive measures, relating to practices which distort competition between EU air carriers and third country air carriers, and which cause, or threaten to cause, injury to EU air carriers. The scope is wider than the Regulation 868/2004, which only aimed to provide protection against subsidisation and unfair pricing practices, which are by their nature harder to prove.

Importantly, the new Regulation takes into account bilateral and multilateral ASAs with third countries. The proposal defines two possible purposes of investigations, either to identify a violation of applicable international obligations, or to identify practices adopted by a third country or a third country entity, which affect competition in the EU and cause injury (or threat of injury) to EU air carriers.

Who can file a complaint?

The ineffectiveness of Regulation 868/2004 was due in part to the fact that only EU air carriers providing "like air services" could file a complaint, and that these carriers had to demonstrate in detail subsidisation or unfair pricing practices.

Under the new Regulation an investigation can be opened on the basis of a complaint from a Member State, an EU air carrier or an association of EU air carriers, or on the European Commission's own initiative. Further, the complainant only has to demonstrate prima facie evidence of: (i) a practice distorting competition; (ii) injury or threat of injury; and (iii) a causal link between the two.

The European Commission will only initiate an investigation if the facts raise a systemic issue or have a significant impact on one or more EU air carriers. This is similar to the Union interest test in trade defence cases.

Procedure and sanctions

The procedure in the new Regulation highly resembles the EU's anti-dumping and anti-subsidy procedural process. The redressive measures that can be imposed on third country carriers benefitting from the practice of distorting competition may take the form of either financial duties or operational measures, such as the suspension of concessions, in relation to the services owed or other rights of the third country air carrier. However, operational measures cannot go so far as the suspension or limitation of traffic rights granted under an ASA.

In addition, there is no automatic expiry of the redressive measures after a fixed period of time, as there is in anti-dumping proceedings. As such, the measures remain in force as long as necessary, however a review can be requested, which is similar to the review mechanism found in anti-dumping proceedings. 

The Regulation also highlights the intention of the European Commission to strengthen its efforts to support the adoption of international rules guaranteeing fair competition between air carriers, to enable the negotiation of the inclusion of fair competition clauses in existing and future ASAs. Indeed, on multiple occasions during the legislative process, the EU rule-makers reiterated that the new Regulation is not intended to be used immediately since it should in the first place act as a deterrent. This is comparable to the US position with the IATFCPA.

A compromise text

The European Parliament's proposed changes did not greatly alter the initial proposal of the European Commission. It highlighted the importance of connectivity and stressed that the investigations and redress measures should not go against the EU's interest, which includes a balancing exercise. It also added that the dispute settlement mechanisms agreed upon in multilateral and bilateral agreements do not preclude the European Commission from starting an investigation.

The European Council had another take on the proposal. It wanted to prevent the European Commission from acting as long as an injury had not materialised and to introduce a mechanism by which a Member State could request the European Commission to suspend its investigation in order for the Member State to reach a solution on a bilateral basis. Additionally the Council preferred to distinguish financial obligations from measures of an operational nature. As such, the European Commission would be allowed to adopt the former by way of an implementing act, as had been originally proposed by the European Commission, but the latter would require a Council decision. These suggestions would have significantly watered down the original proposal.

The text which was ultimately agreed upon in interinstitutional trilogues and to which the European Parliament gave its consent, is clearly the result of a compromise. On the one hand, the European Commission will be permitted to launch an investigation and take a decision on redressive measures if a practice that distorts competition has caused injury, or poses a clear threat of injury, to an EU air carrier. On the other hand, the redressive measure will only be able to enter into force once an actual injury materialises. In addition, any redressive measure, whether financial or operational, will have to be adopted through a European Commission implementing act, but stricter procedures must be followed for operational measures.

Both Barroso Commissions (2004-2014) were quite active in the field of external aviation policy. In 2005, a Roadmap was published, highlighting the objective of the Commission to conclude more ASAs on EU level, as allowed by the Court of Justice in the so-called "open skies" judgments of 2002. In 2012, the Commission published a Communication on the EU's external aviation policy aimed at tackling the future challenges. Moreover, during that decade, many other policy documents regarding external aviation policy were published. The current Commission seems to have continued the work of Barroso Commissions. As recent as 4 March 2019 an ASA was concluded between the EU and Qatar, which includes a competition chapter with an exceptionally strong enforcement mechanism. Parallel negotiations with ASEAN are at an advanced stage, and negotiations are also ongoing with Turkey. EU negotiations with Ukraine, Armenia and Tunisia have been finalised and the agreements are pending signature. The Commission also received a negotiating mandate for aviation agreements with the United Arab Emirates and Oman. However, the negotiations with UAE have come to a halt recently.

Nevertheless it remains to be seen whether the new Regulation will live up to its promises. While it will be easier to bring a case to the European Commission, the interplay between the Regulation and existing ASAs may in practice reduce its attractiveness, and the overall effectiveness of the European Commission's new toolbox to tackle unfair competition in the air transport sector. If anything, the new Regulation might prove to be a useful instrument for the EU to increase its leverage in negotiations with third countries to conclude ASAs. However, the Commission does not have a history of interfering with market dynamics in aviation and taking up claims, save with respect to matters involving intra-EU state aid.  This new Regulation may give the European Commission the tools, but can the new European Commission take action to safeguard competition within the EU? One can only know after a few years of implementation.