Anti-competitive behaviour:
New European approach October 2017

In December 2015, the European Commission published An Aviation Strategy for Europe (Com(2015)598 final), following a public consultation. The Commission’s paper opened by emphasising that aviation is a strong driver of economic growth, jobs, trade and mobility for the EU. “It plays a crucial role in the EU economy and reinforces its global leadership position… An Aviation Strategy is needed to ensure that the European aviation sector remains competitive and reaps the benefits of a fast changing and developing global economy.”

Firmly in the Commission’s eye is the fact that in the long-haul markets Europe’s airlines are facing increasing competition, especially from the Gulf carriers. To a significant extent, it is this elephant in the room which drove the need to review the EU’s aviation strategy. The problem is fairly obvious; the solution less so.

As the Strategy paper notes: “The international aviation sector outside Europe has …. been witnessing some significant developments, characterised by very strong growth in certain world regions. This is associated with the shift of the world’s economic centre of gravity towards the East, notably Asia. As a result, several new airlines and airports have emerged and are posing a new and considerable challenge for European hub airports and carriers.”

The Commission identified three key priorities, as well as a number of secondary principles, to guide future EU aviation policy, namely:

• Tapping into growth markets by improving services, market access and investment opportunities with third countries, whilst guaranteeing a level playing field.

• Tackling limits to growth in the air and on the ground by reducing capacity constraints and improving efficiency and connectivity.

• Maintaining high EU safety and security standards by shifting to a risk and performance based mind-set.

Generalisation and substance

This is all very well, and few would take issue with the Commission’s position, but there was little real substance to the generalisations. How precisely, for example, does the Commission intend to tap into growth markets, improve services, increase market access and investment opportunities with third countries, and above all guarantee a level playing field for European airlines?

The answer at least partly came in June this year with the publication of a series of measures designed to add meat to the bare bones of the 2015 Strategy paper. Three papers addressed Public Service Obligations (C(2017)3712 final), provided guidelines for interpreting EU rules on airline ownership and control restrictions (C(2017)3711 final) and discussed Air Traffic Management Service Continuity (SWD(2017)207 final). All important, no doubt, but hardly likely to attract a great deal of attention. It was the fourth document published in June, Proposal for a Regulation of the European Parliament and of the Council on Safeguarding Competition in Air Transport, Repealing Regulation (EC)No 868/2004 (COM(2017)289 final), to give it its full title, which was far more interesting and potentially controversial.

This represents the Commission’s response to the war of words which has been raging in Europe and elsewhere for many years between those airlines (notably Lufthansa and Air France/KLM in Europe) who contend  that the Gulf carriers have engaged in unfair competitive practices, and those such as IAG who resist regulatory intervention, arguing that European airlines should stop complaining and compete. (In September this year, Willie Walsh, speaking at the World Routes conference, again emphasised his antagonism towards the approach taken by other European airlines: “I don’t believe the argument that Gulf carriers are bad. It is nonsense. We will compete with them and beat them through strong fair competition and not via regulation.”)

The proposal for a new EU Regulation is clearly an attempt to find a way out of the current impasse, and like many would-be compromises, it is unlikely to succeed.

The Commission already has limited powers to take action against unfair competition in international markets in the form of Regulation (EC) No868/2004. This Regulation has attracted considerable criticism, mostly unfairly since it was only ever intended to be a face saver, with no practical implications. The proof of this is surely to be found in the fact that it has never been used in anger, and as the Commission points out, “some of its features make it very unlikely that it could ever be (concretely) applied.” It is supposed to deal with unfair pricing practices, which are defined as “air fares which are sufficiently below those offered by competing Community air carriers to cause injury.”

It provides a very high hurdle to jump. For example, to mount a successful case a complainant has to go beyond just showing that a third country airline has received a non-commercial advantage. In addition, the Regulation does not address the violations of fair competition obligations contained in Air Services Agreements signed by the EU itself. Finally, only ‘Community industry’, defined as “the Community air carriers supplying like air services as a whole or those of them whose collective share constitutes a major proportion of the total Community supply of those services,” are entitled to mount cases under the Regulation. In other words, neither Member States nor individual airlines can submit complaints in their own right.

None of this is accidental. The Commission, supported by certain Member States, especially the UK, realised that this whole area was a can of worms and best avoided if at all possible. One way of doing so, while at the same time acknowledging the concerns of countries such as France and Germany (and their airlines), was to introduce rules which superficially addressed the problem, but in practice could never be used. It should be added as well that certain other EU regulations, such as those relating to slot allocation and ground handling, also contain provisions for retaliatory action against non-EU carriers, although again such legislation has rarely been used for this purpose.

The world has changed, however. The persistence of the complaints from the likes of Lufthansa and Air France/KLM, more recently matched in the US by Delta, United and American, has drawn considerable attention to the competitive practices adopted by the Gulf carriers in particular. The debate has been underway for over a decade in Europe, but shows few signs of abating. If anything, it has increased in ferocity in recent years. At the same time, with Brexit fast approaching, the Commission is no longer able to rely to the same extent on the support of the UK in promoting a liberal EU external aviation policy and in resisting pressure to take retaliatory action against third country airlines. And, of course, despite some recent set-backs (see for example Aviation Strategy, September 2017), the Gulf carriers continue to grow and threaten competitors in the EU and elsewhere.

The fundamental problem is the absence of an international framework governing competition among airlines. ICAO has no such multilateral rules and air transport services have largely been excluded from World Trade Organisation agreements. The General Agreement on Trade in Services (GATS) covers only three relatively peripheral areas of aviation trade, such as computer reservation systems and aircraft maintenance and repair services. Core market access issues are left to bilateral Air Services Agreements, which normally include only generalised restrictions, such as insisting on a “fair and equal opportunity to compete.” What fair and equal actually means in practice is left unclear, primarily because few States would be able to agree on a definition.

The Commission’s 2012 paper on the EU’s External Aviation Policy had clearly defined the problem which needed to be addressed, namely “…while EU airlines are ultimately responsible themselves for their competitiveness and must continue to adapt their products and business models to the prevailing market condition, … it is equally important that competition, both within the EU and externally, is based on openness, reciprocity and fairness and that it is not distorted by unfair practices.” However, again the question arises: what does it mean in practice? What can the EU do to achieve this admirable objective? The June 2017 draft Regulation seeks to provide the answers.

Five Chapters and a Recital

The new Regulation, yet to be adopted by Member States, is divided into five Chapters plus a Recital:

• Chapter I sets out its scope, including relevant definitions.

• Chapter II contains the rules governing the initiation and conduct of an investigation into anti-competitive practices. Notably, it provides for complaints to be made by a single Member State, an EU airline or an association of EU carriers, or on the Commission’s own initiative. It goes on to prescribe the conditions under which the Commission may decide to open an investigation and specifies the procedures to be followed. The Commission’s rights to obtain and verify the accuracy of information to carry out an investigation are specified.

• Chapter III describes the acts through which proceedings regarding the violation of applicable international obligations are concluded, ie. with or without the adoption of ‘redressive’ measures.

• Chapter IV defines two possible purposes for an investigation, namely: a violation of applicable international obligations (the so-called ‘violation risk’); or practices adopted by a third country or third-country entity affecting competition and causing injury or threat of injury to EU airlines (the so-called ‘injury’ track).

• Chapter V, arguably the most critical chapter, establishes how injury may be identified. It provides for the possible adoption of financial or operational measures intended to offset injury, requiring that the measures should not exceed what is necessary for such offsetting, bearing in mind that the objective is not to punish a third country airline but to restore fair competition.

• Finally, Chapter VI covers provisions to repeal Regulation 868/2004 and the entry into force of this new Regulation.

It is immediately obvious that this is a very different approach to that embodied in Regulation 868/2004. For a start, it has all the signs of a piece of legislation that is intended to be actually used. The detail would seem to cover almost any allegation of anti-competitive behaviour, and certainly the complaints voiced about the practices of the Gulf carriers ( as well, of course, as other airlines around the world).

Definition of discrimination
and subsidy

To take just one example, ‘discrimination’ is defined to mean “differentiation of any kind without objective justification in respect of the supply of goods or services, including public services, employed for the operation of air transport services, or in respect of their treatment by public authorities relevant to such services (including practices relating to air navigation or airport facilities and services, fuel, ground handling, security, computer reservation systems, slot allocation, charges, and the use of other facilities or services employed for the operation of air transport services.”

This would seem to cover all the options. A similarly detailed definition of ‘subsidy’ then follows. It is surely not going to be difficult to put together a case alleging discrimination or subsidy by governments or airlines in any number of countries around the world. The Commission might find itself quite busy. All a complainant needs to do is provide prima facie evidence of either a violation of international obligations or injury or threat of injury to a Community carrier from a practice affecting competition. The history of international aviation is riddled with such examples, including European and US ones, and they continue to be found in many countries.

The Commission clearly recognises that cases brought under the new Regulation are likely to be difficult and complex. Two years are allowed for the conclusion of each case, with the option of an extension if necessary. Even where there is a risk of “immediate and irreversible injury” to an EU airline, the minimum period proceedings may be shortened to is one year.

So what will the Commission do?

The key question is: what will the Commission do if it satisfies itself that there has been injury to an EU airline as a result of anti-competitive behaviour? The answer is that it will adopt “redressive measures”. These will be “imposed on the third country air carrier(s) benefitting from the practice affecting competition and may take the form of either… : (a) financial duties; or (b) any measure of equivalent or lesser value.” Thus, the Commission is granted extensive options, if it is prepared to use them.

There is a precedent elsewhere in the world for a similar approach to dealing with alleged anti-competitive behaviour in aviation. As long ago as 1974, the United States introduced the International Air Transportation Fair Competitive Practices Act (IATFCPA), specifically designed to give the Department of Transportation powers to take action “in response to anti-competitive, discriminatory, predatory or unjustifiable activities by a foreign government or foreign airlines against a US airline.” Complaints may be filed by a US carrier or the DOT itself can take the initiative. The DOT has up to 180 days to investigate the dispute, dismiss the complaint or resolve it, although this time-scale can be extended.

If the DOT finds that action is justified, the first step is usually to require the non-US airline concerned to seek approval for all or part of its schedules for services to and from the US. Such action is taken where the DOT concludes that the government of the country where the airline is based has:

• “taken an action that impairs, limits, or denies operating rights to a US airline; or

• otherwise denies a US airline a fair and equal opportunity to compete.”

However, the practical implications are limited. The likelihood is that the filed schedules will be approved and the airline will continue to operate services to the US as before. The intention, of course, is to encourage the foreign government involved, as the signatory of the Air Services Agreement with the US, to ensure that its designated airline mends its ways and abandons any alleged anti-competitive practices. To move to the next stage, the so-called Phase 2 of the process, and actually limit the airline’s operations requires the approval of the US President, which in diplomatic terms is a far more serious step.

The DOT claims that “generally speaking the intergovernmental process has been very successful in resolving complaints filed by US airlines.” It has rarely been necessary to move to Phase 2. It may well be the case that in a number instances foreign airlines have been persuaded to abandon certain practices, but it is far less clear that IATFCPA has solved more intractable problems, including those associated with the Gulf carriers.

The reasons for this are fairly obvious. The approach is a legal process defined and applied unilaterally by a single country, the United States. Although the other government involved and its airline(s) are given opportunities to argue their case under due process, the US is still effectively the judge and juror. Not many sovereign countries are prepared to accept such a situation.

Furthermore, if persuasion fails, the only weapon available to the US to enforce its decisions is what amounts to a nuclear option, namely the cessation of some or all of an airline’s services to the US. If the foreign government concerned doesn’t accept the judgement of the US authorities, it is hardly likely to stand by and see its carrier treated in this way. The probability is that it will also take action, either to restrict the services of US airlines to its territory or even to renounce the relevant Air Services Agreement. It is difficult to see how such an outcome can be in the overall public interest, which the DOT says is one of its guiding principles.

Finally, there may be occasions when a non-US airline’s services can be restricted without any action being taken against US carriers. For example, US airlines may not actually serve the country involved (although this is increasingly unlikely given the global coverage of US all-freight carriers such as Fed Ex and UPS). Even in such a case, however, non-aviation retaliatory action is a distinct possibility. There are precedents, for example the decision by the UAE Government to restrict Canadian access to military facilities in the Gulf following Canada’s refusal to allow Emirates Airlines to expand its services to the country.

It is not surprising, therefore that the IATFCPA has had only modest success in achieving its objectives. Such an outcome may well be inevitable given the regulatory structure of international aviation, based as it is on agreements between sovereign States. It is very likely that the EU initiative will face similar problems. If adopted by Member States, it may be able to address some, relatively minor issues, but the chances of successfully solving major problems such as alleged anti-competitive behaviour by the Gulf carriers are probably as remote as ever. The basic challenge faced by Air Services Agreement negotiators for many decades, how to define the ‘fair and equal opportunity to compete’ clause, remains unresolved.