Air Transport and the European Union: Europeanization and its Limits (Palgrave Studies in European Union Politics)

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Air Transport and the European Union: Europeanization and its Limits (Palgrave Studies in European Union Politics)

Palgrave Studies in European Union Politics Edited by: Michelle Egan, American University USA, Neill Nugent, Manchester

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Palgrave Studies in European Union Politics Edited by: Michelle Egan, American University USA, Neill Nugent, Manchester Metropolitan University, UK and William Paterson OBE, University of Aston, UK. Editorial Board: Christopher Hill, Cambridge, UK, Simon Hix, London School of Economics, UK, Mark Pollack, Temple University, USA, Kalypso Nicolaïdis, Oxford UK, Morten Egeberg, University of Oslo, Norway, Amy Verdun, University of Victoria, Canada, Claudio M. Radaelli, University of Exeter, UK, Frank Schimmelfennig, Swiss Federal Institute of Technology, Switzerland. Following on the sustained success of the acclaimed European Union Series, which essentially publishes research-based textbooks, Palgrave Studies in European Union Politics publishes cutting edge research-driven monographs. The remit of the series is broadly defined, both in terms of subject and academic discipline. All topics of significance concerning the nature and operation of the European Union potentially fall within the scope of the series. The series is multidisciplinary to reflect the growing importance of the EU as a political, economic and social phenomenon. Titles include: Ian Bache and Andrew Jordan (editors) THE EUROPEANIZATION OF BRITISH POLITICS Richard Balme and Brian Bridges (editors) EUROPE-ASIA RELATIONS Building Multilateralisms Thierry Balzacq (editor) THE EXTERNAL DIMENSION OF EU JUSTICE AND HOME AFFAIRS Governance, Neighbours, Security Michael Baun and Dan Marek (editors) EU COHESION POLICY AFTER ENLARGEMENT Derek Beach and Colette Mazzucelli (editors) LEADERSHIP IN THE BIG BANGS OF EUROPEAN INTEGRATION Tanja A. Börzel (editor) COPING WITH ACCESSION TO THE EUROPEAN UNION New Modes of Environmental Governance Milena Büchs NEW GOVERNANCE IN EUROPEAN SOCIAL POLICY The Open Method of Coordination Michelle Egan, Neill Nugent, William E. Paterson (editors) RESEARCH AGENDAS IN EU STUDIES Stalking the Elephant Kevin Featherstone and Dimitris Papadimitriou THE LIMITS OF EUROPEANIZATION Reform Capacity and Policy Conflict in Greece Stefan Gänzle and Allen G. Sens (editors) THE CHANGING POLITICS OF EUROPEAN SECURITY Europe Alone? Heather Grabbe THE EU’S TRANSFORMATIVE POWER

Eva Gross THE EUROPEANIZATION OF NATIONAL FOREIGN POLICY Continuity and Change in European Crisis Management Hussein Kassim and Handley Stevens AIR TRANSPORT AND THE EUROPEAN UNION Europeanization and its Limits Katie Verlin Laatikainen and Karen E. Smith (editors) THE EUROPEAN UNION AND THE UNITED NATIONS Intersecting Multilateralisms Esra LaGro and Knud Erik Jørgensen (editors) TURKEY AND THE EUROPEAN UNION Prospects for a Difficult Encounter Ingo Linsenmann, Christoph O. Meyer and Wolfgang T. Wessels (editors) ECONOMIC GOVERNMENT OF THE EU A Balance Sheet of New Modes of Policy Coordination Hartmut Mayer and Henri Vogt (editors) A RESPONSIBLE EUROPE? Ethical Foundations of EU External Affairs Philomena Murray (editor) EUROPE AND ASIA Regions in Flux Costanza Musu EUROPEAN UNION POLICY TOWARDS THE ARAB-ISRAELI PEACE PROCESS The Quicksands of Politics Daniel Naurin and Helen Wallace (editors) UNVEILING THE COUNCIL OF THE EUROPEAN UNION Games Governments Play in Brussels David Phinnemore and Alex Warleigh-Lack REFLECTIONS ON EUROPEAN INTEGRATION 50 Years of the Treaty of Rome Sebastiaan Princen AGENDA-SETTING IN THE EUROPEAN UNION

Palgrave Studies in European Union Politics Series Standing Order ISBN 978-1-4039-9511-7 (hardback) and ISBN 978-1-4039-9512-4 (paperback) You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and one of the ISBNs quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, UK

Air Transport and the European Union Europeanization and its Limits Hussein Kassim School of Political, Social and International Studies University of East Anglia, UK and

Handley Stevens Formerly of the European Institute, London School of Economics and Political Science, UK

© Hussein Kassim and Handley Stevens 2010 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2010 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978-0-333-63127-0 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 19 18 17 16 15 14 13 12 11 10 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

Contents Tables and Figure

vi

Preface

vii

Abbreviations or Acronyms

ix

1 Introduction

1

Part I Air Transport under the Traditional Regime

19

2 From the Chicago Conference to the New US Aviation Policy

21

3 National Aviation Policy in Europe

40

Part II The Development of the Common Air Transport Policy

57

4 From the Sidelines to the Margins: The EC and Aviation, 1950–83

59

5 The Liberal Breakthrough, 1984–7

81

6 Completing the Single Market in Air Services

105

7 Extending the Scope of the Common Air Transport Policy

130

8 Beyond the Borders of the Single Market

154

Part III The Impact of EU Action

179

9 Regulating the Single Market

181

10 The EU and the Transformation of European Aviation

216

11 Conclusion: Revolution in the Air

257

Notes

271

References

298

Glossary

326

Index

327

v

Tables and Figure Tables 2.1

Types of bilateral agreement

27

2.2

Consolidation on the US domestic market

34

2.3

Leading US and world carriers, in 1983 (US airlines highlighted)

36

3.1

European Flag Carriers (selected): Origins and ownership (1985)

44

5.1

The First Package compared with traditional intra-European bilaterals and Commission proposals in Memorandum No 2

102

6.1

EU Liberalization 1987–2008

121

7.1

Membership of European regional organizations

142

7.2

Towards a Single European Sky (SES), 1999–2012

146

8.1

The EU–US Open Skies Agreement: Phases I and II

175

9.1

Main aviation interests in Brussels (2009)

185

9.2

European Commission decisions on capital injections and state aid in air transport, 1991–2008

204

10.1 Privatization and ownership of EU legacy carriers

218

10.2 Market supply in Europe* by different airline types 1998–2008

246

10.3 Leading No-Frills Carriers in the European Union, 2008

246

10.4

247

Leading European and World Carriers, 2007

10.5 Alliances and partnerships of main European carriers (selected), 2008

250

10.6 Global Alliances, 2008

252

Figure 10.1 Domestic policy change in aviation: Causes and comparison, 1984–2008

vi

223

Preface This book, which has a longer history than we care to admit, grew out of projects that we had been pursuing individually. Hussein had completed a doctorate on the emergence of EU aviation policy and was planning to extend his study to examine the Union’s impact on national policy and policymaking in the sector. Handley as a former practitioner turned academic was personally involved in the negotiation and development of the common air transport policy during a key phase of the processes that the book investigates. The sharing of ideas and experience at many a meeting in the garret overlooking Gower Street, which was formerly Hussein’s office in the School of Politics and Sociology at Birkbeck, proved stimulating for us both. We have each accumulated many debts in carrying out the research on which this book is based. We should like to thank the many people who agreed to meet us, a number of whom were Handley’s former colleagues in the close-knit network of aviation, to discuss the topics considered in this book. They include officials in the European Commission; the Council of the European Union; the International Civil Aviation Organization; the European Civil Aviation Conference; the European Aviation Safety Agency; Eurocontrol; and national administrations in Bonn, Brussels, Dublin, The Hague, London and Paris, as well as members of the European Commission, ministers, members of the European Parliament, airline executives and interest group representatives. Most of those who kindly took the time to share their expertise and experience in interviews conducted over nearly two decades did so on the understanding that they would not be identified or their comments attributed, but we are delighted to be able to record especial thanks to Robert Espérou, Mike Smethers and Frederik Sørensen, who have been especially generous with their time over many years. Since he began to research air transport in 1990 Hussein has also learned from discussions with Sean Barrett, Simon Bulmer, Mark Dierikx, Dinos Kyrou, Mark Lehrer, Francis McGowan, Adriaan Schout, Cornelia Woll, and especially Martin Staniland. He has received helpful comments on conference papers or work in draft from Gary Marks, John Peterson, Susanne Schmidt, Vivien Schmidt and Mark Thatcher. Dionyssis G. Dimitrakopoulos patiently allowed his ears to be bent over many years about the book’s broader themes, while Anand Menon kindly read an earlier version of the entire manuscript and offered invaluable feedback as well as encouragement, mixed at times with barely concealed exasperation. A reviewer’s report helped sharpen the argument and offered suggestions for how the manuscript could be improved. We, of course, bear sole responsibility for what follows. vii

viii

Preface

Hussein could not have carried out the research without funding from an ESRC research studentship in 1992–4, a Birkbeck Arts Faculty research grant in 1996–7, and generous support from the ESRC Centre for Competition Policy at the University of East Anglia, which allowed a final round of interviews to be completed in 2006–7. He is most grateful to all three bodies. He should also like to thank the friends who over the years have offered useful suggestions on the project, help with tracking down articles or documentation, or hospitality while he was conducting fieldwork, especially when an impecunious doctoral student. They include Giuseppe Abbamonte, Becket Bedford, Agnès Bizzaro and Stefan Thies, Pascal and Mariola DuchauchoyCreuzin, Pepper and Mary-Louise Culpepper, John Fingleton, Patrick le Galès, Simon Hix, Peter John, Régine Leroy, Helen Margetts, Mark Walsh and Naheed Rahmani, Paulo Moura Santos, Paul Taggart, and Alasdair R. Young. He has also become increasingly aware of the debt that he owes to Graham Bearman, John Carroll, Jeremy Jeanes and Geoff Tait, but has always appreciated what he owes to Yvonne Kassim. He is grateful to Sam Connolly for his curiosity about the project. Handley wishes to record his particular thanks to his successors in the international aviation directorate of the Department of Transport who have allowed him generous access to the department’s files, and to successive directors of the European Institute of the London School of Economics and Political Science, who have supported him as a visiting research associate and facilitated his access to the LSE’s unrivalled library facilities. Finally, we have four special debts: to the late Vincent Wright, an inspirational supervisor, colleague and friend; to Sidney Edison, for his long-standing interest, generosity and friendship with Hussein; and to our respective partners, Sara Connolly and Anne Stevens, for unceasing encouragement, forbearance for long absences suffered, as well as the opportunity cost for the time expended on researching and writing this book, and love during the years spent on this project and beyond. Hussein Kassim Handley Stevens

Abbreviations or Acronyms ACE

Association des Compagnies Aériennes de la Communauté Européenne

ACI

Airports Council International

AEA

Association of European Airlines

AECMA

Association Européenne des Constructeurs de Matériel Aérospatial

APATSI

Airport/Air Traffic Systems Interface Project

APEX

Advance Purchase Excursion fare

ASA

Air Services Agreement

ASK

Available Seat Kilometres

ASM

Air Space Management

ATC

Air Traffic Control

ATFMU

Air Traffic Flow Management Unit

ATK

Available Tonne Kilometres (measure of total capacity)

ATM

Air Traffic Management

AUC

Air Transport Users’ Committee

BEUC

Bureau Européen des Unions de Consommateurs

CAA

(UK) Civil Aviation Authority

CAB

(US) Civil Aeronautics Board

CDB

Central Data Bank

CFMU

Central Flow Management Unit

CMTP

Common Medium Term Plan

CNS

Communication-Navigation-Surveillance

CRS

Computer Reservation System

CSAM

Conseil Supérieur de l’Aviation Marchande

DGAC

Direction Générale de l’Aviation Civile

DoT

(US) Department of Transportation

EANGP

European Aviation Navigation Planning Group (Standing Committee of ICAO European Region)

EAS

Eurocontrol Assistance Services

ix

x

Abbreviations or Acronyms

EATCHIP

European Air Traffic Control Harmonisation and Integration Programme

EBAA

European Business Aviation Association

EC

European Communities

ECAC

European Civil Aviation Conference

ECSC

European Coal and Steel Community

EEA

European Economic Area

EEC

European Economic Community

ERA

European Regional Airlines Association

ESC

Economic and Social Committee

EU

European Union

EUROCONTROL

European Organisation for the Safety of Air Navigation

EUROPILOTE

European Organisation of Airline Pilots Associations

FANS

Future Air Navigation System

FATUREC

Federation of Air Transport User Representatives in the European Community

FEATS

Future European Air Traffic Services Concept

FFP

Frequent Flier Programme

IACA

International Air Carriers Association

IAPA

International Air Passengers’ Association

IATA

International Air Transport Association

ICAO

International Civil Aviation Organisation

ITA

Institute of Air Transport

ITC

Inclusive Tour Charter

JAA

Joint Aviation Authorities

JAR

Joint Aviation Requirements

KLM

Royal Dutch Airlines

MOU

Memorandum of Understanding

OECD

Organization for Economic Cooperation and Development

OOPEC

Office for Official Publications of the European Communities

QMV

Qualified Majority Voting

Abbreviations or Acronyms

xi

RLD

Air Transport Department (Rijksluchtvaartdienst) of the (Netherlands) Ministry of Transport

RPK

Revenue Passenger Kilometres

RTK

Revenue Tonne Kilometres (measure of total demand)

SAS

Scandinavian Airways System

SEM

Single European Market

SGAC

Secrétariat Générale de l’Aviation Civil

SNCF

Société National des Chemins de Fer Français

SNPL

Syndicat National des Pilotes de Ligne

SUATMS

Single Unified Air Traffic Management System

TAP

Air Portugal

TCAA

Transatlantic Common Aviation Area

TENS

Trans-European Networks

TWG

Transport Working Group (of the Council)

UTA

Union des Transports Aériens

‘The airlines, though they seemed to defy geography, are among the most national of industries, inextricably bound up with their home country’s ambitions and security. Their competition may look like a contest between smiles or legroom, but it is chiefly a question of air routes and frequencies which have been thrashed out in hundreds of tough secret deals between governments … The sovereignty of airspace and the law of the air lie behind every agreement and freedom’ (Anthony Sampson, Empires of the Sky, 1984, p. 19). ‘Imagine Japan allowing Sony to be the only Japanese firm to make a product like a Walkman; and then imagine all the other world’s consumer-electronics firms getting together to agree identical prices for televisions, CD players and video camcorders. If one firm happened to sell more than its share, the cartel would split the extra revenue between its members. Consumers would be in uproar. Yet that is exactly what airlines have been doing for decades’ (The Economist. Survey - Airlines 1993, p. 6). ‘The biggest barrier to air transport liberalisation in Europe is this crazy idea that every member state has to have its own airline … People still assume that there is something glorious about flying, but airlines are just glorified bus companies’, European Commission official quoted in the Financial Times, 29 July 1994, p. 2. Newsweek: You’ve said in the past that you foresee a time in the near future when passengers will fly free. Michael O’Leary, CEO, Ryanair: I think it’s coming. The days when you could charge consumers $500 and $1,000 per flight are over. We’re all running glorified bus services. We’ve got to make it easier for people to fly (Newsweek, 23 June 2003).

1 Introduction

The European Union (EU) has brought about a revolution in air transport.1 Before the creation of the single market in air services, European aviation was characterized by protectionism, collusion and fragmentation (see Button and Swann 1989, 1991; Doganis 1985, 1991a; Holmes and McGowan 1997; Kassim 1995, 1996a, b; OECD 1988). Governed by a patchwork of state regulations under an international regime that enshrined the absolute sovereignty of states, the industry was segmented into distinct national markets. Governments used their authority to promote the interests of state-owned ‘national champions of the air’ (Kassim 1995). They erected regulatory barriers at home and used the terms of bilateral air services agreements – the global mechanism for the exchange of commercial aviation freedoms – to protect their chosen carriers on routes to short-haul European destinations and on long-haul intercontinental services. Although there was some variation in the outlook and approach adopted by European governments, competition in the few places it existed was strictly limited and the opportunities permitted to independent carriers were scarce. Action by the Union has transformed the regulation of the sector. The EU has not only created a regional system, interposed between the national and the global, that is liberal in inspiration, but has displaced a state-centred regime with a multilateral framework of rules that are enforced by a supranational regulatory authority. Governments have lost the powers that allowed them previously to protect and the freedom to subsidize their airlines. Former flag carriers, now designated ‘legacy’ or ‘full service’ carriers, still benefit from decades of privilege, but are no longer owned, bankrolled or controlled by governments. They compete in a single market against independent carriers, including the no-frills carriers that have become an established feature of European aviation (Calder 2002; Lawton 2002; Creaton 2004; CAA 2006).2 Indeed, European airlines operate with full commercial freedom on any route between and within European Union member states. They decide according to their own commercial judgement what services they operate, when and with what frequency, and what tariffs to charge. They do so subject to rules 1

2 Air Transport and the European Union

that prohibit anti-competitive practices, including many that were previously prevalent in the European industry, and that impose restrictions on state subsidies, which were a key feature of national aviation policy. The changes wrought by the Union have not been restricted only to economic regulation. The common air transport policy touches virtually every area of the sector.3 The Union has emerged as a regulatory authority in a series of technical and operational areas. In air traffic management, where governments traditionally insisted on strict national control, the EU has launched the Single European Sky initiative, a programme aimed at enhancing cooperation and the interoperability of member state infrastructures, while in safety and environmental protection, it has created a European Aviation Safety Agency and introduced rules governing noise control. Nor has the EU’s impact been limited to the territories of the member states. The Union has become increasingly influential internationally. It has exported its aviation regime to neighbouring states, its rules governing competition and safety apply to carriers from non-EU members serving destinations in the Union, and it has concluded a series of air services agreements with third countries, including the US. The Union has forged new, often innovative, relationships with established regional organizations, including the European Civil Aviation Conference, which it has now eclipsed as the main forum for cooperation between governments in aviation matters and Eurocontrol. At the global level, it is regarded as an important actor by the International Civil Aviation Organization, although it can have no formal standing in a body whose founding treaty allows it only to recognize sovereign states. The Union has also exerted a significant effect on the shape of the aviation industry with far-reaching domestic and international consequences. As well as creating a new, open regulatory environment in which independent carriers are able to enjoy unprecedented freedoms, the EU has compelled stateowned carriers to restructure by exposing them to competition and limiting the extent to which they can be protected by government.4 Although it cannot privilege a particular form of ownership, Union action and in particular its scrutiny of state aid has contributed importantly to the spread of privatization since the early 1990s. Moreover, the creation of a single market in air services led not only to the commercialization of public-service carriers5 but to processes of consolidation, partnership and trans-Atlantic alliance-building – themselves subject to the Community’s competition rules enforced by the European Commission – that have transformed the sector. While the US open skies policy and the formation of the American so-called mega-carriers undoubtedly also played an important part, these developments would not been conceivable without EU liberalization. The revolution in the air has not only been wide ranging, but it was effected within a short timescale. Given the formidable range of obstacles to the Community’s involvement, the fact that the transformation was

Introduction

3

brought about by action on the part of the EU only makes it more remarkable. For decades the Commission had sought to establish the Community’s competence in the sector, but had confronted an array of apparently insuperable barriers. First, the ‘regulatory space’ (Hancher and Moran 1989) in aviation was already occupied. The sector was governed by an international regime, underpinned by a series of treaties, including most importantly the Chicago Convention of 1944, a dense network of bilateral air services agreements, and detailed national rules. Interlocking global and regional organizations, created in the 1940s and 1950s, were firmly established venues for the handling and management of air transport matters. Second, member governments, supported by European flag carriers, had been trenchantly opposed to Community intervention. From the time of the Messina Conference, which was an important milestone to the negotiation of the Treaty of Rome, European governments had sought explicitly to avoid involvement by Brussels in air transport. They supported the Chicago regime, were satisfied with the extensive powers it granted to them, and feared any change that might threaten their ability to protect their aviation industries. In addition, they regarded the Commission as bureaucratic and inexpert in aviation matters, and could not see how it might play a useful role. Third, the original provisions of the EEC Treaty – Article 84 (2) (now Article 80 (2))6 – appeared to leave any decision concerning the possibility of Community intervention to the Council of Ministers acting unanimously. It therefore required opposition on the part of only a single government to prevent action. The positioning of Article 84 (2) in the Treaty, moreover, gave rise to the argument that air (and sea) transport had been placed outside its general provisions, beyond the reach, notably, of the competition rules. Despite the crowded regulatory space, government opposition to its involvement and the ambiguous Treaty status of the sector, the Union has emerged as a key regulator, decision-making arena, and actor in aviation. Beginning with the adoption of the first liberalization package in December 1987 – a second was agreed in 1990 and a third in 1992 – it has transformed European air transport. It has imposed important limitations on member state sovereignty and, more broadly, in the terminology of the first Commission President, Walter Hallstein (1965), it has introduced ‘a new factor’ into the international regulation of the sector.

Aims and argument The main purpose of this book is to explore how, despite formidable obstacles, the Community not only became involved in air transport but how it developed a comprehensive policy and brought about such a wide-ranging transformation. It looks at the development of the single market in air services, considers how the common air transport policy was extended and expanded beyond liberalization, and assesses the impact of EU action domestically and

4 Air Transport and the European Union

internationally. These separate, but related, processes cannot be explained in terms of a single theory or theoretical framework. The approach taken in the book is, therefore, inevitably eclectic. It draws where necessary on a range of mostly mid-range theories. The book presents three arguments. The first (and the most general) concerns existing approaches to the study of the EU. It argues that the wider international context of EU action tends to be overlooked in both the traditional integration literature and the Europeanization scholarship that has emerged more recently. The integration literature, which (to simplify) is concerned principally with the transfer of competencies from the national to the Community level, tends to focus on the actions, motivations and interplay of policy actors inside the Union and pays little attention to how the presence of an international regime,7 action by third countries, or the availability of alternative arenas for intergovernmental cooperation, may influence EU policymaking. It thereby disregards the following possibilities: that, in any particular sector, the structure of a regime (how power is distributed, the values it enshrines, the institutions associated with it), the attitudes of actors to it (how much power they enjoy, how satisfactory they consider the regime to be) or developments within it (shifts in power between stakeholders, predatory behaviour on the part of leading players, the emergence of new policy paradigms) may affect the opportunities for Community involvement; that the actions of third countries may make it more or less difficult for the Commission or other actors to mobilize support for or against EC action; and that the Commission or member governments use other international forums meaningfully to lend credibility to or to oppose initiatives to establish or extend Community competence. The Europeanization literature, which consciously directs attention to the domestic impact of EU action,8 is also, albeit more understandably, somewhat inattentive to the broader international environment. Although scholars have increasingly directed their energies to this important, but historically under-researched, dimension of integration (see Kassim and Menon 1996, pp. 1–10), a research agenda that is concerned with the Union’s impact, but focuses only on the EU’s immediate domestic effects, may produce findings that are overly narrow. The external impact of EU action be in some instances more consequential than its domestic effects, but where they restrict their attention exclusively to interaction between the EU and the member states, Europeanization scholars may fail to notice where domestic consequences are mediated by external factors in complex causation chains. The book’s second argument addresses analyses of the EU’s involvement in aviation. Although unsurprisingly Union intervention in this strategic, politically sensitive and highly visible sector has attracted attention, the three main accounts in the existing literature – a power indices approach (van den Bos 1994), a historical institutionalist interpretation (Armstrong

Introduction

5

and Bulmer 1998) and a modified neofunctionalist perspective (O’Reilly and Stone Sweet 1998a, 1998b) – are problematic.9 Like the integration literature discussed earlier, they are insufficiently attentive to wider international developments, particularly in regard to how the international aviation regime affected the prospects, timing and form of EU intervention. Limited coverage of EU activity is a further shortcoming. The accounts tend to focus on liberalization and ignore policy development in other areas. Moreover, in their treatment of the former, they tend to present the second and third packages as an inevitable consequence of the first, and the process leading to the creation of the single market as inexorable. As the chapters that follow demonstrate, the full liberalization that flowed from the third package was not entailed by the modest relaxation of the traditional system enacted by the first. Indeed, both subsequent packages were the product of intense negotiation. A third argument concerns scholarship on Europeanization. Since the early 1990s, an interest in how the EU affects national policy and policymaking has produced a voluminous, but fragmented, literature. Though sharing a common concern in the Union’s impact on and in the member states, scholars used a range of non-equivalent organizing concepts,10 and sought to investigate change on quite different dimensions. The magnitude of the challenge became evident at an early stage when it became clear that any expectation that the enactment of a common policy decided in Brussels would bring about policy convergence between the member states was likely to be confounded (see, e.g., Kassim and Menon 1996; Hine and Kassim 1998; Forder and Menon 1998; Howorth and Menon 1997; Jordan and Liefferink 2004) and with the occasional reminder that ‘Europeanization’ consists in more than simply implementation (Dimitrakopoulos 2001, 2008). From chaotic beginnings (Radaelli 2000, p. 19), with ‘no received wisdoms, no readily recognisable rival schools of thought, no “classic” account’ (Goetz and Hix 2000, p. 15), Europeanization scholarship has steadily become more orderly and unified,11 coalescing around two main perspectives.12 The dominant, top-down approach takes domestic change as its dependent variable and EU action as the independent variable that is its cause.13 The bottom-up approach takes a less unidirectional view of interaction between the EU and the member states.14 Less an explicit theoretical framework than a running critique of the top-down approach, it begins from the premise that any attempt to evaluate the Union’s domestic impact must commence with an analysis of the status quo ante in the member states, then proceed to the identification of the processes or instances of domestic change and thereafter to trace these back to discover the ir source. The book argues that the bottom-up approach is able to offer a better measure than the top-down perspective of the extent to which national policy has been affected by EU action, not least due to its greater sensitivity to time – or ‘time, timing and tempo’ in the words of Klaus Goetz (2000,

6 Air Transport and the European Union

p. 223; see also Goetz 2006 and Goetz and Meyer-Sahling 2009). While the top-down perspective is able to register only that national policy has changed over a certain period, the bottom-up approach makes it possible to determine exactly when change has taken place, how quickly it followed Union action and how rapid was its enactment. It is especially valuable when undertaking cross-national analyses, as it offers a detailed and precise picture of the pattern of domestic change. Indeed, the book aims to demonstrate the insights afforded by the bottomup approach, which it uses to organize the analysis undertaken in the chapters that follow. To that extent it represents, to the knowledge of the authors, the first book to undertake a detailed assessment of the Union’s impact on policy and policymaking using a bottom-up approach. Moreover, while many of the claims in the Europeanization literature are made on the basis of an investigation of the effects of a single directive or the experience of a particular subsector over a relatively short period of time, this volume examines developments across an entire policy sector and over the long term. Its breadth makes it possible to compare EU action and its consequences across different areas of aviation, while the time frame – the entire post-war period – sets Union-level developments and their impact in historical context. The study is also comparative. Had the focus been restricted to the experience of a single state, the conclusions that could be drawn would be limited. For that reason, it examines developments in four EU member states; namely, France, Germany, the Netherlands and the United Kingdom. The countries were selected not only on the grounds that they are four of Europe’s leading aviation nations, but also because they offer coverage of both large and small states and represent a range of policy traditions. Finally, while Europeanization scholars have tended to investigate the EU’s impact either in areas of positive integration15 – environmental policy and gender are especially popular – or sectors where national policy was not extensively developed prior to the Union’s intervention, this book examines negative integration in a sector where national policy and policymaking had matured and was established long before Brussels became involved.16 The remainder of the chapter is organized into four sections. The first develops the argument stated earlier concerning the importance of the international context to understanding EU policy dynamics stated by highlighting ways in which the international context has influenced the development of the common air transport policy. The second critically reviews the three main accounts of the development of EU aviation policy and describes why they are problematic. It also sets out an alternative explanation that is presented and elaborated in the chapters. The argument concerning the Europeanization literature and the merits of the bottom-up approach is presented in the third. The fourth section provides an introduction and outline of the chapters that follow.

Introduction

7

Aviation: Bringing in the international One of the book’s main arguments is that the international context is usually overlooked in the study of EU action and its impact. The following chapters demonstrate that, in the case of air transport, external factors were important in all areas and at virtually every stage of policy development. The Chicago regime and the action of third countries decisively shaped the ‘structure of opportunity’ (Goetz and Hix 2000, p. 12) that confronted the Community.17 The existence of an established, well-functioning international regime was a major factor in keeping the Community at the sector’s margins for more than three decades. EC member governments valued the freedom of action that it granted, regarded the strict regulation it enabled them to enact as desirable if not essential, and where cooperation was useful considered that their needs were met by existing international organizations. They saw no benefit in Community involvement and were able successfully to oppose Commission efforts to establish Community competence. The opportunity structure was fundamentally changed, however, by US deregulation and Washington’s adoption of a new foreign air transport policy in the late 1970s. The impact was partly material, but its main effect was ideational. The introduction by the world’s leading aviation power of a new liberal policy paradigm gave credibility to a Commission initiative that aimed at relaxing the strict rules that governed air transport within the Community. Although member governments had been able to ignore its previous proposals, including those contained in a 1979 text (COM (79) 311) when US deregulation was new and its effects uncertain, the Commission’s ‘second memorandum’ (COM (84) 72) was less easy to dismiss once the success of the US experiment had demonstrated not only that there was an alternative to the traditional approach, but that a liberal policy could deliver benefits both to carriers and passengers. The effect of US deregulation was to open a debate in Europe, to strengthen the hand of states, such as the UK and the Netherlands, which had historically taken a more liberal approach to aviation, and to lend plausibility to a new policy agenda advanced by the Commission. The possibility and timing of Community-instituted liberalization were thus centrally influenced by international developments.18 International factors were also important in regard to other aspects of EU policy. The second open skies initiative launched by the US in the 1990s, for example, played a major role in the battle between the Commission and the member states over the development of an external dimension to EU action. Washington’s aggressive policy of divide-and-rule vis-à-vis the European governments allowed the Commission to mobilize support for, and ultimately to persuade member governments of the advantages of, granting the Community a mandate to negotiate traffic rights with third countries. Its previous failed attempts suggest that, without the manoeuvrings by the US, the Commission may not have been able to strategize as effectively. In the

8 Air Transport and the European Union

case of air traffic control management, meanwhile, the inability of governments and existing regional bodies, including the European Civil Aviation Conference (ECAC) and Eurocontrol, to respond to congestion problems in European airspace was a key factor leading to Community intervention. When attempts at harmonization demonstrated the limitations of traditional intergovernmental approaches, the Commission was able to take control of the issue and to propose a supranational scheme that built on existing infrastructure. The aviation case also shows that, while EU action can have important consequences for national policy and policymaking, its impact beyond the Union’s borders can be equally far reaching. The EU’s effects have been felt in a number of ways, most directly through the export of its aviation regime to selected neighbouring states, in the extra-territorial application of its rules governing competition and air safety to the airlines of third countries, and by the requirement on third countries to bring their bilateral air services agreements with EU member states into line with Community law. It has also affected the international aviation system more broadly. Its emergence as a decision-making arena and regulatory actor has established the Union as an international actor in key areas of air transport and the partner (and rival?) of the US, which has been the hegemonic power in aviation since 1945. The EU has introduced new types of bilateral agreements through the creation of the European Civil Aviation Area and in the pursuit of its neighbourhood policy and new concepts, notably the Community clause, in the renegotiation of air services agreements with third countries. It has created new regional regimes that incorporate and have redefined the functions and responsibilities of existing agencies, as in the case of air traffic control, or as in the area of air safety, it has played an instrumental role in the creation of new bodies. In regard to ECAC, it has crafted a new modus vivendi. Furthermore, liberalization and the enforcement of the competition rules have been a major influence on the reshaping of the European aviation industry and contributed to the formation of global alliances, as well as the emergence of carriers able to compete against the main US airlines. The narrow focus of the Europeanization literature leaves such external effects unexplored, but to do so is to disregard how, when EU member countries are entrenched in a wider system of governance, EU policy development has repercussions not only for EU member states but also for other stakeholders in the form of third states and their airlines, as well as international organizations at global and regional levels.

The origins and development of the common air transport policy The book’s second argument concerns the three main accounts in the existing literature on the development of the common air transport policy. The first, offered by Jan van den Bos, forms part of a project that aims to demonstrate the

Introduction

9

usefulness of the ‘power indices’ model to understanding policymaking in the EU. The premise of the approach is that for each actor ‘the model requires estimates of only three variables for each issue that is investigated. [These are] the capability of the actor to influence the policy outcome; the salience of the issues for the actor; and the outcome presented by the actor’ (Bueno de Mesquita and Stokman 1994, p. 15). The general claim is that these variables hold the key to understanding and explaining the outcome in any instance of EU decisionmaking. Using data on five of the issues discussed in the lead-up to the first air transport liberalization package,19 van den Bos concludes that in each case the outcome is predicted by the expected utility assessments of the leading member governments (Bueno de Mesquita and Organski 1994, pp. 148–9). Although there is insufficient space here to undertake a detailed critique of the approach (for which see Garrett and Tsebelis 1996, 1999), it is possible to identify a number of its limitations. As a state-centric approach that accords explanatory primacy to the intensity of member state preferences and bargaining between national delegations, the ‘power indices’ theory disregards both the role played by EU institutions and the impact of rules. It is unable to take account of how the Commission set the agenda in aviation, or how the Commission was able to force the issue in the mid-1980s, using its enforcement powers combined with its policy initiation prerogative (see Schmidt 2000) in order to overcome the opposition of a conservative majority in the Council. Nor can it capture how member states interact with each other, still less with the Commission, to build coalitions, or how they use the Council Presidency to advance dossiers which they favour. Focused exclusively on the distribution and intensity of preferences within the Council, it disregards wider developments and how they might influence the terms of discussion within the EU, such as the efforts of member states opposed to Community involvement in the sector to shift discussion about liberalization to another decision-making venue in the form of ECAC. For these reasons, a power indices approach is unable to offer a satisfactory explanation of EC policy development in aviation. A second account, from the perspective of historical institutionalism, forms part of the inquiry by Kenneth Armstrong and Simon Bulmer (1998) into the governance of the single European market (SEM). Armstrong and Bulmer argue that ‘air transport liberalisation was subject to many of the same dynamics and thinking which went behind the internal market programme … [and] takes into account the fact that air transport regulation was mentioned, albeit weakly, in the White Paper [CEC 1985, paras. 109–111]’ (ibid.), though they also locate liberalization within ‘a wider set of industry dynamics and regulatory issues’ (ibid., p. 171). In their discussion, Armstrong and Bulmer highlight the role played by the Commission, but contend that ‘exogenous’ influences (the theory and practice of US deregulation, UK liberalization and ECAC’s reflection on the regulatory system) and endogenous factors also contributed to the adoption of the first package.20

10 Air Transport and the European Union

Although there is much that is convincing in Armstrong and Bulmer’s analysis, particularly in regard to the importance of developments in the US, there are three main difficulties. First, interpreting air transport liberalization as part of the single market programme is problematic. The sector is mentioned only briefly in Lord Cockfield’s White Paper and gets only a short reference in the Presidency Conclusions of the June 1986 Hague Summit. Importantly, it came onto the EU’s policy agenda not as a result of the 1992 project, which was agreed at Milan in June 1985, but due to the Commission’s 1984 initiative, which pre-dates the launch of the single market programme. Although the momentum generated by the single market programme did no harm to the liberal cause in aviation, its influence was at best secondary to more sector-specific factors. Second, although Armstrong and Bulmer highlight the influence of US deregulation, they say relatively little about other international factors. In particular, the importance of ECAC as a think tank in which national aviation officials reflected on the strengths and weaknesses of the existing system and contemplated the possible implications of a relaxation of regulations in Europe in the early 1980s, and then as a parallel arena to the Community, into which the battle between conservative and liberal member governments spilled over in the mid-1980s, tends to be overlooked. Third, important dynamics leading to the adoption of the first package are not necessarily reflected in the Armstrong–Bulmer account. The conflict between traditionalists and liberals within the Council was closely fought so that the outcome was by no means a foregone conclusion; the UK played a more important role (notably, in tabling a market access proposal that would eventually form part of the 1987 package and its threat to challenge anti-competitive agreements under Article 88 of the EEC Treaty should the Council fail to make sufficient progress on the dossier) than the historical institutionalist interpretation suggests. In addition the Commission’s strategy for forcing action depended on the use of two very specific powers. The third and the most detailed account is offered by Dolores O’Reilly and Alex Stone Sweet (1998a, 1998b), who find in air transport a confirming instance of the modified neofunctionalist approach elaborated by Wayne Sandholtz and Stone Sweet (1998a, 1998b). Utilizing this model, O’Reilly and Stone Sweet contend that the first package came about as a result of ‘the increasing intensity of transnational exchange and the prointegration behaviour of the EC’s supranational organizations, which not only generated the context in which inter-governmental bargaining took place, but provoked the emergence of supranational governance’ (1998a, p. 164). When an expansion of transnational activity revealed the inadequacies of existing arrangements and the costs of maintaining the status quo, the ‘societal actors most adversely affected by state-centric control’ mobilized and called for ‘European rules and supranational governance to replace national rules and governance’ (1998a, pp. 169–70). These interests

Introduction

11

‘forged alliances with the Commission, and lobbied national governments for change’ (1998a, p. 184). The Commission pushed for the implementation of a package of liberalization measures at the European level, but was relatively unsuccessful until the European Court of Justice laid down its decision in Nouvelles Frontières . This ruling ‘rewrote the rules governing national rule-making in the sector, placing member-state governments in the shadow of the law’ (1998a, p. 184) and gave the Commission the leverage to compel member state governments to accept its proposals to liberalize the sector. ‘[F]aced with declining benefits and rising costs of maintaining national governance structures, [the governments] reacted by constructing supranational governance’ (1998a, p. 184). Thus, they continue, ‘a combination of transnational forces and supranational initiative overcame the commitment of governments to national control, which we take to support the transaction-based theory of integration laid out [by Stone Sweet and Sandholtz]’. This account is also problematic. As well as its neglect of the wider international setting and a materialist reading that overlooks the importance of ideas, it disregards the key role played by the Commission (as discussed later). Moreover, the claim that the first package resulted from an increase in transnational activity is not borne out by the data. Traffic grew significantly over the period examined by O’Reilly and Stone Sweet, but there is no evidence of a sudden surge after 1983. Indeed, the steady increase from the late 1970s would appear to illustrate less the rigidities imposed by the traditional system than its ability to accommodate growth.21 Furthermore, though consumer groups, business representatives and independent airlines were, as O’Reilly and Stone Sweet suggest, supporters of liberalization, they were also among the least influential interests in a sector dominated by governments and their flag carriers.22 Given the tight regulatory grip exerted by states and the weakness at both domestic and EC levels of the groups identified, lobbying by the latter was neither effective nor decisive. Finally, although O’Reilly and Stone Sweet focus on the adoption of the first package, they argue that once this initial step was taken, progress towards full liberalization, driven by EU institutions, was inevitable. As with the historical institutionalist account, however, this view fails to recognize the extent to which the Council continued to be divided after 1987, the importance of the continued conflict between conservative and liberal camps and the degree to which further policy development on the part of the Community was contested. It also overlooks how EU institutions intervened and under what conditions their actions succeeded. Although the book aims to place EU policymaking in the wider international context, it does not, as noted earlier, attempt to explain the emergence of the common air transport policy and its development in terms of a single theory. It is, however, generally informed by institutionalist assumptions.23 Inspired by the old institutionalism, it takes formal institutions, powers and

12 Air Transport and the European Union

the law seriously. It attributes considerable importance to the constitutional order of the European Union – the allocation of functions between the institutions of the EU political system, the biases of the treaty on which that constitutional order is founded and the competencies that it defines for the Community, which expanded significantly (to safety, air traffic management, external policy and environmental policy) as a result of successive treaty reforms from the SEA through to the Nice Treaty – and to the exercise by EU actors of their formal powers.24 The Commission acting in its roles as policy initiator, guardian of the treaties, and executive, has been particularly important, as has the European Court of Justice in enforcing compliance with EU law on the part of public and private actors. The book also draws, where relevant, on the more refined models concerning the behaviour of these actors that have been developed under the rubric of the new institutionalism. Rational choice institutionalism is especially valuable in this respect.25 Since the Community cannot legislate within the first pillar in the absence of a proposal from the Commission, it is a truism that policy development follows policy initiation by the Commission. Yet the tabling of a proposal or agenda-setting by the Commission is neither necessary nor sufficient in delivering action by the Community. The challenge is to identify not only what leads the Commission to propose action, but the conditions under which the Council and, since the introduction of co-decision, the European Parliament decide to adopt measures on the basis of the Commission’s proposals. The two models developed by Susanne Schmidt (2000) from a rational institutionalist perspective are particularly useful in this respect, as they identify two scenarios in which the Commission can be ‘more than an agenda setter’ and can compel member governments in the Council to enact measures that it favours, but to which they have been hostile. In the case of air transport, the Commission consciously adopted an approach similar in key respects to what Schmidt describes as the strategy of ‘the lesser evil’ in a number of cases, most dramatically in relation to the adoption of the first liberalization package.26 In such cases, the Commission combines two of its Treaty-given prerogatives: those relating to policy initiation and those relating to its role as guardian of the treaties, where it can use ‘existing supranational legal obligations’ (2000, p. 44) to shift the ‘Council’s default condition of decision making’ (2000, p. 38). Where member governments do not meet their obligations under the law, the Commission can use its enforcement powers to bring infringement procedures that may lead eventually to the Court. It thereby confronts recalcitrant governments with a choice between two courses of action: either negotiate and adopt legislation on the basis of the proposals set out by Commission, a path that allows the possibility of derogations, transitional arrangements and gradual change, or risk policymaking by judicial fiat, a potentially more abrupt and less predictable route that offers no room for negotiation. In aviation, the Commission

Introduction

13

used the executive powers that it enjoys with respect to the enforcement of the competition rules to force governments to accept liberalizing measures. The ‘lesser evil strategy’ is, of course, not always available to the Commission nor does it exhaust the latter’s repertoire for influencing Community action. Indeed, as the following chapters demonstrate, the Commission has used a variety of methods and techniques across time and the various aspects of aviation, including straightforward agenda setting (Pollack 1997, 2003), creating ‘focal points’ to achieve common action when member governments have diverse preferences,27 or ‘framing’ (Schön and Rein 1994) Community involvement as the best available option. It has also shown a tendency to open legal proceedings, even in areas where it has no special powers of enforcement. In most cases, though by no means all, the European Court of Justice has found in its favour.

‘Europeanization’ and its limits The third argument made in this volume concerns the merits of ‘bottom up’ approach to Europeanization, which the book contends offers a more precise measure of the Union’s impact on national policy than the ‘top down’ perspective, which has come to dominate the literature. Advocates of the ‘top down’ approach argue that its strict insistence on EU action as cause and domestic change as effect bestows scientific rigour (see Jordan and Liefferink 2004, pp. 5–11; see Dyson 2002, pp. 3–5 for an alternative view). However, the research method that this implies – identifying what action the EU has taken, then assessing domestic change – risks exaggerating the Union’s impact and does not so much problematize the EU’s effects as presume that it is the source of the changes in question (Dyson 2002; Radaelli 2003, 2004). As many authors have pointed out – among them Wallace 1996; Schmitter 1999; Hix and Goetz 2000; Goetz 2000; Héritier et al. 2001; Levi-Faur 2004; Radaelli 2004 – change in domestic policy and policymaking can be brought about by a host of internal and external pressures. It cannot be assumed that, when domestic change occurs, action on the part of Brussels has been the only or even the main cause. A second weakness of the ‘top down’ approach is the method by which it detects policy change. The ‘top down’ approach discovers change by comparing domestic policy at two points in time, t1 and t2. However, this is a somewhat crude method, not least because it makes it difficult to determine when exactly change between t1 and t2 took place, whether change was rapid or prolonged, and, where there are several changes, the order in which they occurred. The ‘top down’ approach is therefore insensitive to when change occurs, how rapidly member states respond to developments at the EU level and how the EU interacts with other factors in producing domestic policy change. Yet these are key questions in investigating and measuring the Union’s impact. The timing or tempo of change in relation to

14 Air Transport and the European Union

action on the part of the Union may shed light on the factors that condition national responses or that affect the process of change, while uncovering the sequence in which different factors intervened may help establish the relative impact of each. A third problem concerns the sharp distinction that ‘top down’ theorists impose between EU action and domestic change,28 which results from the insistence that developments at the Union level should be regarded as the independent variable. It is important, however, not to overlook the processes that lead to EU outputs, which themselves involve national inputs. To that extent the independent variable is in fact dependent.29 Although causal explanation requires separating cause from effect, it is important not to lose sight of the influences that produced EU action. Screening out the Union decision-making phase is likely to deprive researchers of useful data relating to member state preferences or technical issues that may hold important clues about how EU policy output is likely to play out in the member states or the (later) domestic impact of EU policy (see, e.g., Börzel 2002, p. 195). A final criticism concerns the tendency of ‘top down’ theorists to explain domestic change in terms of ‘misfit’ or adaptational pressure. Particularly in the early literature (Knill 1998, 2001; Knill and Lenschow 1998) proponents of the approach explained differences between states in terms of the disjuncture created by Union requirements that were at variance with domestic arrangements and the pressure, backed by the threat of sanction by the Commission or the Court, for governments to align their practices with EU policy. While one view holds that there is a direct correlation between the degree of misfit and the magnitude of domestic change that can be anticipated (Risse et al. 2001, p. 7; see also Börzel and Risse 2003), another regards adaptational pressure as a necessary, but not a sufficient, condition of domestic change (Héritier and Knill 2001; Risse et al. 2001). Authors writing from this second perspective point to various intervening variables to account for cross-national variation (see, e.g., Knill 1988; Knill and Lenschow 1998; Börzel 2000), while Börzel and Risse (2003) suggest pressures for adaption can operate through two logics, consequentialism and appropriateness, to produce domestic change. However, the importance attributed to ‘misfit’ as a necessary condition for change has been challenged by studies that show governments respond to EU action even where there is no friction between Union and national policies. Such cases can arise even when EU and national policies are congruent (see, e.g., Héritier et al. 2001, p. 288) – indeed, under such circumstances, EU action may create opportunities rather than pressure to change (Thatcher 1996, 2004) – or where there is no pre-existing national policy (see, e.g., Freestone and McLoughlin 1998; Dyson and Goetz 2003). Other critics contend that domestic adaptation is more influenced by variations in domestic opportunity structures than policy ‘fit’ (Haverland 2003), that the focus on institutional dynamics of change leads to neglect of the role played by political actors (Jacquot and Woll 2003) in adaptation and

Introduction

15

that what does or does not constitute either misfit or adaptational change is open to constant reinterpretation and negotiation (Dyson and Goetz 2003, p. 16). Indeed, the extent to which domestic policy change is captured by the notion of adaptation is itself problematic. The bottom-up approach attempts more rigorously to establish that, where it has occurred, domestic change really is the result of EU action. It aims explicitly to determine the extent to which Union-level action has been a factor, if at all. Crucially, it proceeds from the premise that any attempt to assess, evaluate or demonstrate the Union’s domestic impact should commence with an analysis of pre-existing policy and policymaking arrangements in the member states.30 Only then should Union-level developments be brought into consideration. Radaelli (2004, p. 9) has helpfully formulated three tests designed to establish that EU action has in fact been the cause of domestic change. These are as follows: first, that EU action antedated domestic change (the sequencing condition); second, that the change would not have taken place without EU action (the counterfactual condition); and, third, that the change was caused by EU action and not other factors, whether domestic – ideologically inspired change, government alternation, new economic constraints or interest group pressure – or external – globalization or an economic shock (the alternative hypothesis test). Finally, from the perspective of the ‘bottom up’ approach, European integration, understood in this context as the development of EU policy and action, and Europeanization, understood as domestic change brought about by action on the part of the Union, are bound closely together in ‘complex, interdependent feedback loops’ (Dyson 2002, p. 2).31 The interaction between integration and domestic change is conceived by the bottom-up approach as continuous, iterative and complex (see Goetz 2002, p. 4). From this viewpoint, it is not sufficient either to assess the extent of Europeanization by showing that domestic arrangements were not the same after EU action as they were prior to it or to summarize Union-level developments as though they consist in a single intervention. EU policy is an independent variable that is constantly developing (Dyson 2002, pp. 335–66). As EU policy changes, it is possible that each step prompts an adjustment on the part of the member states. Domestic change, in other words, may not always, often or ever be a one-event, but may take the form of a series of adjustments or set of processes. Understanding the dynamic interaction of EU-level action and domestic change requires developments to be tracked at both levels. Only then is it possible to apply Radaelli’s tests. Though the construction of a double narrative is a demanding requirement, it is essential to determine whether, when and to what extent the EU has affected domestic policy. It would not, for example, be possible in the absence of a detailed account of EU policy development to identify how domestic actors respond and how quickly, or to uncover the conditions that determine the responsiveness to

16 Air Transport and the European Union

EU developments. Nor does such an approach collapse into circularity as proponents of the top-down approach allege ( Jordan and Liefferink 2004, pp. 6–7). Provided that the two narratives are kept separate and by disentangling and tracking the causal chains that lie behind domestic policy change – the core prescription of the bottom-up approach – it is possible not only to identify exactly when the Union causes domestic change but also to offer a more time-sensitive and precise analysis than the ‘top down’ approach permits.

The plan of the book The book is organized into three parts. Part I examines the status quo ante, describing the context in which European states formulated and pursued their traditional policies. Chapter 2 looks at the Chicago system. It considers its origins, its development and the institutions, rules and norms that characterize it. It then discusses US deregulation and the first wave of ‘open skies’ bilaterals. Chapter 3 examines national aviation policies in Europe. It looks at how governments in Britain, France, Germany and the Netherlands organized aviation until the mid-1980s. It examines their policy aims, the aviation strategy pursued and the policy instruments deployed, and discusses key milestones, including their responses to US deregulation. Part II examines the development of the common air transport policy. Chapter 4 considers the competencies and powers of the European Community in relation to existing aviation bodies. It looks at the provisions of the EEC Treaty relating to air transport, the competition rules and the Community’s institutional system. It discusses early initiatives to involve the Community in air transport and considers how and why it was sidelined until the 1980s. Chapter 5 examines the 1987 breakthrough. It discusses the Commission’s second memorandum, the extended negotiations between member states, and, highlighting the changed international circumstances that resulted from the implementation by the US of a new aviation policy, explains why the Council moved from opposition and resistance to the adoption of a first liberalization package, based on the Commission’s proposals. Chapter 6 looks at developments after the first package. It explains the adoption of the second package ( June 1990), the liberalization of air freight (December 1990) and the third package ( June 1992), as well as ancillary measures to ensure that the single market was not undermined. It emphasizes the role of the competition rules and shows how the balance in EU policy was shifted fundamentally in favour of liberalization. Chapter 7 looks at the extension of the common air transport policy beyond the liberalizing measures and considers how the Commission was able to push successfully for action in regard to safety, air traffic management and security. In these areas, the leverage exercised by the Commission derived not so much from the competition powers, but from treaty reform,

Introduction

17

which extended the competence of the EU into new fields of activity, building on the preference of member states for the stability and uniformity of Community law rather than the less predictable implementation of intergovernmental agreements under national law. Chapter 8 examines the external dimension of the common air transport policy from the Commission’s early failed initiatives to the extension of the single market to neighbouring European countries, and finally the development of a comprehensive external policy in the wake of the Court’s landmark ‘open skies’ decision, which established the Commission’s right to negotiate air service agreements on the Community’s behalf. It considers the external consequences of the common air transport policy. It looks at the impact on regional and global aviation bodies, examines the effects of Union rules on third countries and their airlines, and assesses the wider international consequences of the EU’s emergence as a major actor in world aviation. The two chapters that form Part III examine the impact of EU action on the member states and on the outside world. Chapter 9 looks at the new regional order created by Brussels. The focus is on the governance of the single market, including the enforcement of the competition rules, the control of state aids and the regulation of mergers and alliances, which taken together have created and policed the space within which a new and globally competitive European air transport industry has begun to take shape. Chapter 10 examines changes in domestic policy and policymaking in four member countries. Using the bottom-up approach outlined earlier, it assesses the extent to which these changes are attributable to EU action, finding that, though the development of the common air transport policy has affected all four states, its impact has varied significantly and other factors, domestic and international, have also been important. The book’s findings are summarized in the final chapter. The conclusion draws on evidence from the preceding chapters to show the importance of international influences as a factor in EU policy change, as well as to highlight the dramatic impact of the common air transport policy beyond the borders of the Union. It discusses the dynamics of policy development across various areas of EU policy and argues that attempts to explain policymaking in the sector need to take account of the very different processes at work in, for example, safety, air traffic management and environmental protection, as compared with the economic regulation of aviation. It reviews the merits of the bottom-up approach to Europeanization and more broadly considers the limitations of the Europeanization literature that exploration of the air transport case reveals, notably with respect to dimensions of change that the toolkit currently available is unable to capture. It concludes with a consideration of the implications of the study for future research.

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Part I Air Transport under the Traditional Regime

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2 From the Chicago Conference to the New US Aviation Policy

The EU’s common air transport policy developed within a pre-existing international system, founded on the principle of state sovereignty. The regime,1 which remains effective outside the Union and to a limited extent within it, is based on a series of multilateral treaties, supplemented by a dense network of bilateral agreements. Key functions are performed by international organizations at global and regional levels. Within the traditional framework, the state occupied a central position, determining the terms on which airlines serve points within its territory and the organization of its domestic market. Historically, governments accorded aviation special treatment on account of the importance of the political, social and economic roles it played in providing links within the state and between the state and the rest of the world (Balfour 1994, p. 1026). It was often observed of air transport that ‘no other world-wide economic activity of comparable magnitude [was] more thoroughly regulated, less free of official restraint and guidance’ (Lissitzyn 1968, cited in Button and Swann 1991, p. 85). This chapter examines the structure and organization of this international order. As well as providing a point of reference against which to measure the change effected by EU action, it argues that external factors can be an important, but overlooked, influence on EU policy development. It shows how, in the case of air transport, the international context profoundly affected the prospects for Community intervention in the sector. Until the late 1970s, an ethos of protectionism led governments worldwide to use the powers afforded to them under the Chicago regime to support their aviation industries and flag carriers through strict and detailed regulation (see Chapter 3). EC member countries, like other states internationally, enjoyed far-reaching autonomy to pursue diplomatic, industrial and social goals, as well as communications objectives, through air transport and had no wish for the Community to become involved. US domestic deregulation in the late 1970s and the new foreign policy that accompanied it brought radical change to the traditional order, however. The introduction of a new policy paradigm, a liberal alternative to traditional policies of tight state control and intervention, altered the 21

22 Air Transport and the European Union

opportunity structure that confronted the Community. In the short term, it created a breach in the existing system and lent credibility to advocacy of a liberal platform, which the Commission (with others) was able to exploit. In addition, as a regional actor with supranational powers, the EC had the resources to advance a liberal agenda that was not available to either individual member states or other international bodies, such as ECAC (European Civil Aviation Conference). In the medium term, it led to the emergence of US mega-carriers, a new type of airline against which European flag carriers would need to find a way of competing. The discussion here is divided into two sections. The first section looks at the origins of the international regulation of air transport, before examining the emergence of what was to become the post-war regime at Chicago and after. It discusses the separation between international scheduled, international non-scheduled and domestic air services, and the arrangements according to which each was governed. The second considers the development of US aviation and its regulation. It looks at domestic deregulation and its consequences, then at Washington’s new foreign policy in aviation and its effects.

The regulation of air transport: The traditional system An international system governing both the technical and economic dimensions of aviation was already in place when the Rome Treaties were negotiated. The Chicago regime, based on a series of treaties agreed in 1944, was founded on the principle of state sovereignty.2 The principles underpinning the 1919 Paris Convention, the first international agreement in aviation, were thereby reaffirmed.3 The Chicago system is complex. Technical aspects of the industry are regulated by an intergovernmental body, the International Civil Aviation Organization (ICAO), while the economic aspects are governed by three sets of rules and conventions, covering international scheduled, international non-scheduled and domestic air services respectively. In each category, governments retain ultimate authority, but the method of regulation varies significantly. The arrangements governing international scheduled services – the most important category – are the most elaborate. The Chicago Convention and its aftermath The framework that has governed international scheduled air services in the post-war consists of three interlocking elements: a series of multinational agreements adopted in 1944 at the Chicago Convention;4 the bilateral system improvised following the failure of delegates at Chicago to agree a more comprehensive charter; and the creation of a trade association, the International Air Transport Association (IATA), formed by the international airlines (flag carriers) to set air fares.

From Chicago to ‘Open Skies’ 23

When delegates from 52 countries assembled to agree a framework for the peaceful post-war development of the industry at the invitation of the US government, it was not a foregone conclusion that they would agree on sovereignty as a founding principle. The idea that air transport should be governed by the principle of sovereignty, which would give governments control over the sector, had been championed by Britain as early as 1910 and had been enshrined in the 1919 Paris Convention. The US, however, preferred a multilateral exchange of air traffic rights, which would give commercial carriers wide-ranging freedoms, independently of government. The clash reflected a difference between aviation models on opposite sides of the Atlantic – US airlines were privately owned, profit-seeking companies; European carriers were state-owned, prestige operations – but there were also mercantilist motivations. As in the negotiation of the 1928 Havana Convention, the US’s advocacy of multilateralism had been linked to its support for Pan American’s expansion in South America,5 so its call in 1944 for open competition in international air transport was not unconnected with its emergence from the war as the world’s major aviation power (Sochor 1991, pp. 7–8). However, as it lacked access to the staging posts that longhaul travel still required – many remained colonial possessions or sovereign bases of the UK – the US, with the support of South American governments (Gidwitz 1980, pp. 49–50), sought a generalized freedom of the air. This included so-called beyond rights, such as the fifth freedom (see definition), which would permit US carriers to pick up passengers in one foreign state and to set them down in another, but which would also threaten the recovery and growth of air carriers in the states concerned. With European aviation in ruins, governments argued for a more restrictive approach. Fearing that the ‘clear blue sky of competition would [result] in immediate and total American hegemony over civil aviation everywhere outside the communist bloc’ (Lyth and Dienel 1998, p. 3), the UK proposed a world regulatory body to license operators, distribute routes, determine frequencies and fix tariffs, and to link the number of flights which an airline could offer to the numbers of passengers it could attract travelling to or from its own country (Sampson 1984, pp. 67–8; Sochor 1991, pp. 8–9). Australia and New Zealand went even further and called for international ownership and operation of all international services. Other states were concerned simply to safeguard their sovereignty. Still in the shadow of the War, security considerations and the need to nurture their carriers in the face of US aviation’s commanding position ensured that sovereignty prevailed.6 The opening provision of the Convention on International Civil Aviation stated: ‘The contracting States recognize that every State has complete and exclusive sovereignty over the airspace above its territory.’ Though regarded as a failure at the time due to the inability of delegates to approve a multilateral charter (see Naveau 1989, p. 27), the Chicago Conference ‘produced six important documents, five of which still govern the way air

24 Air Transport and the European Union

transport operates today’ (Sochor 1991, p. 12). Among its main achievements was the creation of ICAO, which remains the industry’s standard-setting authority. With respect to economic regulation, the Conference established fundamental principles and put in place a framework that made possible the development and growth of international air services.7 ICAO and the regulation of international air transport 8 The Convention on International Civil Aviation (the ‘Chicago Convention’), which entered into force on 4 April 1947, was the most important of the documents agreed at Chicago. Originally initialled by 52 states, it now has more than 150 signatories. While the first part of the document lays down general principles, and rights and obligations of states in international aviation, the second, together with the annexes to the Convention, is directed towards the technical regulation of the industry. The ‘International Standards and Recommended Practices’ provide a framework of common standards and practices for the airworthiness certification, registration and safe operation of civil aircraft, and for the provision of air navigation facilities.9 Article 44 of the Convention creates ICAO, which it charges with responsibility for ensuring the safe and orderly growth of international civil aviation and promoting the development of all aspects of international civil aeronautics (Goh 1997, pp. 5–6). Headquartered in Montreal and a specialized organization of the United Nations since 1947, ICAO is recognized as one of the functional successes of the post-war settlement. The Convention respects the political equality of signatory states, while recognizing the greater ability of some to contribute at the technical level. It gives overall political direction to an Assembly, meeting every three years, in which all member states have one vote, while entrusting a small permanent Council with responsibility for guiding the Organization’s technical work. This weighting towards technical competence is important as the main practical function of the ICAO Secretariat under the direction of the Council is to update the annexes, which set out standards and recommended practices for the global industry. However, neither the operation of ICAO nor the adoption of standards agreed within the organization contravenes the sovereignty principle. Norms are ‘promulgated as regulations’ by aviation authorities in the signatory states (Doganis 1991a, p. 25), and individual governments retain the power to impose more restrictive measures. Regulations are national, and enforced by national authorities, who decide whether an aircraft is airworthy, impose requirements on flight and cabin crew, regulate aviation infrastructure and license air transport operators. Bilateralism: The regulation of international scheduled air services The International Air Transport Agreement, also agreed at Chicago, sets out the five freedoms of the air (Sochor 1991, p. 14).10 These definitions, which

From Chicago to ‘Open Skies’ 25

quickly achieved international recognition and remain the basic currency of air services negotiations, are as follows: First freedom: the freedom to fly across the territory of another state; Second freedom: the freedom to land for non-traffic purposes; Third freedom: the freedom to put down in another state passengers, mail and cargo from the aircraft’s home state; Fourth freedom: the freedom to take on board in another state passengers, mail and cargo destined for the aircraft’s home state; Fifth freedom: the freedom to embark and set down in another state passengers, mail and cargo to or from a third country. Although delegates agreed, under the International Air Services Transit Agreement, on the multilateral exchange of the first two freedoms – the ‘technical’ freedoms – a similar agreement with regard to the ‘commercial’ freedoms – the third, fourth and fifth – proved elusive.11 In the absence of a multilateral charter, bilateral air services agreements, ASAs, emerged as the method for exchanging traffic rights.12 These agreements have the full status of an international treaty. Articles 1 and 6 of the Chicago Convention provide the legal basis. The first establishes the principle of state sovereignty; the second requires ‘special permission or other authorisation’ from a state of destination in order to operate international scheduled services. While the standard form of ‘Bilateral Agreement for the Exchange of Routes and Services’ adopted as part of the Final Act of the Chicago Conference ‘proved to be of great help in drafting future bilateral agreements’ (Sochor 1991, p. 13), the Bermuda agreement (HMSO 1946), signed in February 1946 by the US and the UK – at the time, the world’s two leading aviation powers – came to be regarded as the principal template.13 Bilateral agreements place the state firmly at the centre of the industry. As a regulatory instrument, they enable governments to exercise detailed control over all aspects of the air services that serve their territory. Airlines were therefore entirely dependent on the state for their commercial opportunities. Five features of the bilateral agreement are important to highlight. First, ASAs identify or ‘designate’ the airlines that can operate international services. A ‘nationality clause’ restricts access to carriers that are ‘substantially owned and effectively controlled’ by nationals of the contracting states.14 Unlike maritime transport, flags of convenience have no place in international aviation. Historically, each of the contracting parties granted the other the right to designate a single airline to operate services between their two territories, typically allowing no more than third and fourth freedom rights (Davies 1964, p. 271). Second, the routes designated airlines are permitted to serve are specified in an annex to the agreement, which may also identify the particular cities (or gateways) to which they are allowed to fly, as well as in rare cases the points that can be served in other countries

26 Air Transport and the European Union

either en route or beyond. Third, bilaterals contain provisions that relate to frequency and capacity. Bermuda I stipulated that there should be ‘a fair and equal opportunity for the carriers of the two nations to operate on any route between their respective territories’ – the source of the norm of reciprocity that underlies the bilateral system. Though in the original agreement the capacity provisions were to be flexibly interpreted, and any review was to be ex post facto, in practice they were more usually read as implying an equal share. Fourth, although governments reserved the right to approve or reject the tariffs proposed by carriers, Bermuda I delegated the negotiation of fares to airlines acting collectively in IATA (see below). Where agreement could not be reached in IATA, the airlines were required to negotiate with each other and only if they failed did governments become directly involved. Controls on tariffs therefore operated at several levels: proposal within IATA, approval by governments, and enforcement by IATA and government regulation, inspection and fines. In Europe these arrangements were reinforced by an agreement reached within ECAC in 1967 (Wheatcroft and Lipman 1986, p. 104). Finally, most ASAs included safeguard clauses that allowed corrective action to be undertaken in the event of an imbalance arising between carriers from the two sides, and provisions for arbitration in the event of disagreement and, in extreme cases, termination. Under most ASAs, either party has the right to give 12 months notice of termination, which allows time for a new and more acceptable agreement to be drawn up. Although Bermuda I was brief and expressed in general terms, later bilaterals and their annexes have tended to be long and detailed. The general principles and provisions of an air services agreement are translated into precise rights and obligations, and most agreements are interpreted by more detailed (and often confidential) Memoranda of Understanding (MOUs). The treaty status of the main agreement makes it slow to amend, but the heads of negotiating teams usually have the authority to alter MOUs with immediate effect, which adds an important dimension of flexibility. The Bermuda I template was, in practice, customized rather than emulated. Doganis (1993, p. 49) places it at the centre of a spectrum ranging from restrictive (‘predetermination’) to very liberal (‘open skies’) agreements (see Table 2.1). The key characteristic of the former is the requirement in the main text that all services be approved by the respective governments before airlines can be granted operating permits. At the other end of the spectrum, the United States negotiated ‘open skies’ agreements with as many of its partners as were willing as part of its new aviation policy from the late 1970s (see below). These bilaterals have no restrictions on the number of airlines that can be designated (‘multidesignation’) or the frequency and capacity of the services they can offer, while tariffs are approved automatically unless rejected by both governments. There are few restrictions on charter or cargo services.

Airlines to use IATA machinery, though fares require approval of both governments (‘double approval’)

Source: Compiled by authors from ECAC (1983), Doganis (1993: 50, 53; 2001: 37).

Airlines to use IATA machinery, though fares require approval of both governments (‘double approval’)

Does not apply to charters

Does not apply to charter services

Tariffs

Limited fifth freedom rights

Some fifth freedom rights

Frequency and capacity limits set by agreement between parties. ‘Fair and equal opportunity’ interpreted as equal shares with compensation for any imbalance through commercial (i.e. pooling) agreements

Services permitted to specified points only

Services permitted to specified points only

No pre-determined split, but safeguard clause in case of imbalances

A single airline designated by each side (‘monodesignation’)

Typical intra-European bilateral

A single airline designated by each side (‘monodesignation’)

Capacity

Market access

Bermuda-style agreement

Table 2.1 Types of bilateral agreement

Tariffs apply unless both governments disagree (‘double disapproval’)

No control over capacity or frequency

Open access for charter services

Fifth freedom rights with some restrictions

US carriers enjoy access to any point in territory of bilateral partner; Carriers of bilateral partner enjoy access to limited points in US only

Multiple designation

US ‘open skies’ bilaterals I (1978–1990)

Carriers free to set own tariffs

No control over capacity or frequency

Open access for charter services

Fifth freedom rights

Carriers from each side enjoy open access to points in other

Multiple designation

US ‘open skies’ II (after 1991)

From Chicago to ‘Open Skies’ 27

28 Air Transport and the European Union

IATA IATA has been a key pillar of the post-war regime.15 A global organization open to world airlines from states eligible for ICAO membership, and successor to the predominantly European pre-war International Air Traffic Association,16 IATA was formed in Havana in April 1945, following agreement at Chicago that the setting of tariffs was better managed by airlines than governments. Its responsibilities included ‘setting the standards of tickets, establishing conditions for appointment and payment of travel agents, creating rules for settlement of accounts through a central clearing house, and … providing for coordinated product development’ (Wheatcroft and Lipman 1986, p. 38). There can be little doubt that IATA made a significant contribution to the development of international aviation.17 Interlining, for example, would not have been possible without the clearing-house facilities it provided. The machinery that the association put in place ensured that passengers making journeys that involved several airlines could purchase a single set of tickets for the whole journey and know that bookings on one airline could readily be exchanged for bookings on another by allocating the fare among the participating airlines (Wheatcroft and Lipman 1986, p. 38; Sampson 1984, p. 93). Its tariff-fixing function, by contrast, has been contentious. For 30 years, air fares across the globe were decided at IATA tariff conferences. These decisions were enforceable by law, and the Association had a compliance department whose task was to detect breaches and prosecute airlines that stepped out of line. It also imposed strict rules regarding quality of service – exemplified by the infamous ‘IATA sandwich’ – on a route-by-route basis. In addition, it sought to protect its members by stifling the growth of charter services, directly by minimizing the discounted fare against the scheduled tariff, and indirectly by pressuring governments to insist on strict conditions. Though forced into retreat in regard to its tariff-setting activities in the wake of the challenge by US authorities (see later) and ultimately defeated in its attempt to block the development of non-scheduled services, IATA continues to provide the apparatus for multi-airline ticketing and coordinates the complex network of interlocking airline schedules for each summer and winter season.18 Even if it no longer controls airline tariffs, the Association remains important. The rates that governments approve under the terms of their bilateral agreements are still largely those discussed and agreed within IATA. Since the Association reformed its tariff procedures, there has been significant competition on discounted fares, subject to conditions that limit their availability and flexibility, but for both airlines and regulatory authorities the agreed IATA rate remains an important benchmark, particularly in regard to the fully flexible fare which many business passengers still require.

From Chicago to ‘Open Skies’ 29

Inter-airline agreements A further element of the bilateral system – widespread in Europe (ECAC 1982),19 but forbidden to US airlines by American antitrust legislation – was inter-airline agreements (see Doganis 1991a, pp. 30–4; see also ECAC 1982). Negotiated by the designated carriers on a route or route system, they formed ‘the commercial arrangements by which the bilateral government agreements are put into effect’ (OECD 1991, p. 8). Although their content varied, and they became increasingly complex (Doganis 1991a, p. 31), most included provisions relating to the coordination of service frequencies and the allocation of landing slots at airports (usually incorporating the IATA principle of ‘grandfather rights’ (OECD 1991, pp. 23–4)), and many involved revenue sharing. Some aspects of these agreements offered undoubted benefits to passengers. The coordination of timetables, for example, ensured that flights would be spread across the day rather than clustered around peak times in the mornings and afternoons. The merits of others were more dubious. Where revenue was shared between the carriers on a route, for example, the income might be shared equally between the operators, irrespective of any difference in service quality (see National Consumer Council 1986; OECD 1988). Non-scheduled air services20 The system for regulating non-scheduled, or ‘charter’, services differs significantly from the system that governs international scheduled services.21 Its legal base is Article 5 of the Chicago Convention, according to which operators of non-scheduled international services ‘have the privilege of taking on or discharging passengers, cargo, or mail, subject to the right of any State where such embarkation or discharge takes place to impose such regulations, conditions or limitations as it may consider desirable’ (cited in Goh 1998, p. 5). In practice, authorization is required from both governments, but the regulatory arrangements are less cumbersome as most charters operate point-to-point services. The two most important markets have been the North Atlantic and routes between northern Europe and the Mediterranean. The first developed in the 1950s, and grew dramatically in the 1960s, when US scheduled and charter (‘supplemental’) companies operated ‘affinity charters’ across the North Atlantic. These were permitted to clubs or societies with fewer than 20,000 members and whose primary purpose was other than travel, across the North Atlantic. Although a law of 1962 confined supplemental carriers to designated geographical areas, the US Civil Aeronautics Board began in the mid-1960s to authorize inclusive tour charters (a holiday package, where a single fee included travel and hotel accommodation). In Europe, non-scheduled operators offered holiday packages rather than affinity flights. The first inclusive tour operators emerged in Britain in the early 1950s, but were soon followed by companies in Scandinavia and Germany, offering Mediterranean holidays.

30 Air Transport and the European Union

The main period of growth occurred ‘[b]etween 1965 and 1973, ITC [inclusive tour charter] traffic in Europe grew at an average rate of 25 per cent’ (Doganis 1991a, p. 12). Later, operators began serving long-haul markets, including the US, Africa and the Far East, though these services usually took the form of affinity groups rather than ITCs. At their highpoint in 1973, ICAO estimated that 31 per cent of international passenger traffic was carried on non-scheduled services. US deregulation would later blur the distinction between the scheduled and non-scheduled sectors. New low-cost airlines and existing scheduled carriers began to offer low fares that charters found it difficult to challenge (Wheatcroft and Lipman 1986, pp. 26–9). Within Europe, by contrast, the non-scheduled market continued to flourish into the 1980s. Domestic air services States exercised total discretion over air services at home. Domestic air transport was considered important not only for maintaining internal communications, but to promote regional development, and for industrial and social policy. Although the domestic network was rarely a natural monopoly, governments typically awarded exclusive rights to a single carrier on the grounds that the internal market was too small to support competition and that competition was likely to be disruptive. Governments believed that this was the only way to ensure the ‘regular and reliable provision of services to all parts of the country at the lowest cost consistent with a reasonable return to the service’ (OECD 1988, p. 35). In return, the protected carrier was expected to operate non-profitable routes to isolated or backward regions and to undertake other public service obligations. Some governments offered subventions. Others expected the company to cross-subsidize using its revenue from profitable routes. In addition, national authorities regulated market access and fares in order to protect consumers against monopoly abuse. Finally, due to the perceived fragility of the domestic carrier, states did not allow foreign airlines to operate services within their territories. Cabotage rights, the freedom of a carrier from one state to carry traffic between points within another state, were rarely granted. The Chicago regime and post-war aviation The Chicago regime has succeeded in its aim of creating a framework for the peaceful development of international aviation. Traffic has shown continued and rapid growth since the 1950s (Doganis 1991a, p. 8), though low levels of profitability have been a perennial feature of the industry (Doganis 2002, pp. 4–25).22 The regime has also demonstrated an ability to accommodate technological advances,23 major geopolitical shifts and the emergence of new markets. It has been popular with governments, because it gives them far-reaching powers and extends their right to be represented in the skies to all states, whatever their economic strength (Espérou 1989).

From Chicago to ‘Open Skies’ 31

US aviation policy and international air transport Despite its failure at Chicago (and subsequently) to create an international system that would allow airlines to enjoy full commercial freedoms, the USA’s leading position in the sector has never been in doubt. The emergence of the North Atlantic as the world’s most lucrative aviation market gave Washington considerable bargaining strength vis-à-vis its European partners, enabling it to demand a high price in bilateral negotiations. Then, in the late 1970s, it initiated a series of changes that had a profound impact on the industry worldwide. With its deregulation of domestic air services in 1978, the US introduced a new policy paradigm that challenged the rationale for tight state control in aviation. Its new foreign policy, meanwhile, led to a series of open skies agreements that created and expanded freedoms for airlines on transatlantic routes, and introduced new concepts in air transport regulation. In the medium term, the domestic consolidation that took place in the mid-1980s as a consequence of deregulation led to the creation of several powerful carriers, able to draw traffic from a domestic base that was unrivalled elsewhere, that would emerge as the world’s most competitive. US aviation: The traditional approach The development of US aviation took a different path to elsewhere. Although government played an active role in the sector, the US model was characterized by the limited use of public subsidies, intervention by regulation not state shareholdings, and after 1925 private ownership. The country’s first commercial carriers, mainly mail companies, began to operate after the First World War. The first regular air mail service was started by the US Post Office in 1918, but the 1925 Air Mail Act (‘Kelly Act’) required the Post Master General to contract private carriers. Following allegations of collusion, a further Air Mail Act in 1934 introduced a competitive bidding process. When this system proved unworkable, Congress adopted the Civil Aeronautics Act (1938), which created a new body, the Civil Aeronautics Authority – from 1940 the Civil Aeronautics Board (CAB) – charged with ensuring the provision of ‘an air transport system properly adapted to the present and future needs of the foreign and domestic commerce, of the postal services, and of the national defense’ (cited in Wheatcroft and Lipman 1986, p. 82). The CAB was responsible for issuing licences for interstate and international services, tariff regulation and advising the Department of State in bilateral negotiations. The CAB took a conservative approach to authorizing access, though this partly reflected the parameters set by the Civil Aeronautics Act. The Act gave grandfather rights to the (16) carriers that had operated services continuously between May and August 1938, and permitted new entry only when it could be shown that an existing carrier would not be harmed (Meyer and

32 Air Transport and the European Union

Oster 1984, p. 5). In 40 years the CAB did not award a single major route to a new entrant and refused nearly a hundred petitions to operate new services (Button 1991a, p. 6). In addition, its tariff policies had an inherent bias towards high fares (Morrison 1989, pp. 144–6). The international aviation policy pursued by the US before 1939 was superficially similar to other countries in that a single carrier, Pan American, was granted a virtual monopoly. However, unlike elsewhere, the ‘chosen instrument’ (ECAC 1982, p. 13; Lyth and Dienel 1998) of the US was privately owned and aggressively profit seeking. Pan Am’s monopoly ended after 1945, when companies that had ‘operated international flights to support the military during the war wanted to continue their services’ (Gidwitz 1980, p. 56). The CAB began in 1946 and 1947 to authorize multiple airlines on intercontinental services and, almost uniquely, the US authorized more than a single carrier, which they allowed to compete on lucrative routes. Domestic deregulation24 Regulation first came under scrutiny in the 1950s, when academic economists argued that the industry did not have the characteristics that justified such a restrictive regime (Keyes 1951; Caves 1962; Levine 1965). Though political support for liberalization grew from the late 1960s, it was not until the mid1970s, against the background of rising fuel costs, overcapacity and a shift in public opinion in favour of competition, that action was forthcoming (Morrison 1989, p. 147; Dobson 1995, chs 4, 5 and 7). Following Congressional hearings in 1976, a new CAB Chairman, John Robson, began to experiment with a more relaxed stance on market access and fares, but a reform bill failed to reach the statute book, despite support from the Ford administration. The turning point came in 1977 when President Carter appointed the economist, Alfred Kahn, as CAB Chairman. Kahn overturned the cautious policies of his predecessors, allowed applicants for new route licences to begin services without awaiting the outcome of the usual case-by-case review and approved proposals for heavily discounted, ‘supersaver’ fares. At the same time, the Carter administration acted with supporters of deregulation in the Senate to revive the 1976 Bill. Despite strong opposition from the major airlines, trade unions and some parts of the administration itself, the Bill passed into law in October 1978. The Airline Deregulation Act gave legislative authority to the liberal policies followed by Kahn to the extent permitted by existing statutes since 1977, and made them irreversible by terminating the CAB’s jurisdiction over route entry (after three years) and over fares (after five years). At that point, Congress was to rule on whether to eliminate the CAB altogether. In the event, Congress decided to abolish the Board from 1984 and to transfer its residual functions to other agencies. The effects of deregulation, though radical, were not entirely in line with what its supporters had anticipated (see Kahn 1987).25 Its advocates had based their call for change on the theory of contestable markets (Baumol 1962),

From Chicago to ‘Open Skies’ 33

arguing that, although the airline industry was oligopolistic, carriers could be compelled to set prices at the same level as in more competitive sectors, provided that the threat of competition existed.26 They believed that aviation met the conditions of contestability: the absence of barriers to entry, including major benefits to incumbents deriving from economies of scale; no heavy sunk costs; and the ability of entrants to make their entry profitable before incumbents could respond (Hanlon 1996, pp. 35–7). However, the results of deregulation were more complex than its supporters had expected and their analyses were only partially vindicated. First, competition did bring fares more in line with costs, but, though fares fell on long-haul routes, they increased on shorter journeys. Second, although there was an initial flurry of new entrants, particularly on short-haul and commuter routes (Meyer et al. 1984), low-cost competition from new carriers, such as People’s Express (Wheatcroft and Lipman 1986, p. 84), the four-largest former trunk carriers, United, American, Eastern and Delta, maintained their hold in the market. They accounted for 56.3 per cent of domestic passenger traffic in 1984, compared with 57.4 per cent six years previously (Wheatcroft and Lipman 1986, p. 83). Third, although productivity increased, financial results were not especially impressive. Finally, an early competitive scramble gave way to a period of consolidation after 1984 (see Table 2.2). Bankruptcies and mergers reduced the number of carriers of all sizes, but new partnership arrangements were also struck between large and small airlines, under which the latter supplied feeder traffic into the hubs of the former. Concentration increased as the incumbent airlines fought back. In 1984, the number of carriers peaked at 123, but within five years ‘only 27 truly independent carriers survived’ (McGowan and Seabright 1989, p. 291). By 1988, 94 per cent of domestic traffic in the US was assured by eight major operators. The success of the incumbent airlines and industrial consolidation have been major debating points of the US experience. The established carriers were more responsive than adherents of contestability had anticipated, demonstrating the existence of incumbency advantages both on the production and cost side, and in marketing and selling (Doganis 1991b, p. 186). First, the established carriers exploited the new freedoms to rationalize their route networks, developing hub-and-spoke network systems, which enabled them to multiply the number of city-pair services they could offer for the same flight miles. As well as bringing substantial economies of scale and scope, raising payloads and making a better match between aircraft size and route densities (Hanlon 1996, pp. 70–110), hub-and-spoke systems delivered an advantage over smaller carriers, who were unable to serve as many destinations (Morisson 1989; Wheatcroft and Lipman 1986, p. 87). The incumbents also reduced their production costs. As well as creating nonunionized subsidiaries, they used Chapter 11 of the US bankruptcy code, which permitted airlines experiencing financial problems to withdraw from

34 Air Transport and the European Union

Table 2.2

Consolidation on the US domestic market

Carrier

Merger, Bankruptcy and Exit

American Airlines

Merger with Air California (1987); Acquisition of TWA routes to London (1991)

Braniff

Ceased operations 1982; resumed limited service 1984; ceased operations 1989

Continental (Texas Air Corp)

Merger with Texas International (1981), New York Air (1980), Frontier (1985), Eastern (1986 – exit 1990) and People’s Express (started 1981 – exit 1987); survived bankruptcy 1983 and 1990

Delta

Merger with Western (1987)

Eastern

Shuttle sold (1989); ceased operations 1991

Midway (began operations 1979)

Merger with Air Florida (1984); Ceased operations 1991

Northwest

Merged with Republic (1986), itself created from merger between Southern, North Central and Hughes Airwest (1980)

Pan Am

Acquired National (1980); ceased operations 1991

Southwest

Muse (started 1981), 1986; ceased operations 1991

TWA

Merger with Ozark (1986)

United

Pam Am Pacific routes (1985); Pan Am London routes (1990)

USAir (formerly, Allegheny)

Merger with PSA (1988) and Piedmont (1989)

Sources: Pickrell (1991: 18–19); Marty Barrick ‘A shrinking Industry: Mergers and Acquisitions among Major Airlines since 1978’, The Washington Post, 5 December 1991, reproduced in IATA, Airline Industry and Regulatory Developments in 1991. Fourth Report of the Aviation Regulatory Watch Group, IATA: Geneva, p. 6.; Elizabeth E. Bailey ‘Airline Deregulation Confronting the Paradoxes’, Regulation: The CATO Review of Business and Government, 15 (3), online at http://www.cato.org/ pubs/regulation/regv15n3/reg15n3-bailey.html.

wage settlements, and otherwise put pressure on salaries and working practices (Wheatcroft and Lipman 1986, p. 85; Meyer et al. 1984). As a result, they were able to increase productivity significantly. On the marketing side, two developments were important. Led by United and American Airlines, the larger airlines developed computer reservation systems (CRSs), which enabled them to manage information about, and to market, an increasingly complex range of ticket types.27 Originally used to automate passenger seat reservation and ticketing processes, they were

From Chicago to ‘Open Skies’ 35

expanded when trunk carriers moved beyond their traditional routes and were no longer able to rely on their pre-existing network of sales offices to sell seats. The new systems with vast data storage capacities and the ability to record changes in real-time enabled airlines to market and distribute their products more effectively. The second innovation was the introduction of loyalty or frequent flyer programmes (FFPs). Their larger networks made incumbent carriers more attractive to frequent fliers as they served a wider range of destinations and provided greater opportunities for accumulating and spending credits than small carriers.28 Whatever the other effects of deregulation, the emergence of American Airlines, United Airlines, Continental and Delta as mega carriers has been one of its most important consequences. Having reached a critical size at home, the former trunk carriers sought to expand into international markets. As Doganis notes (2002, p. 61), this was achieved through the ‘gradual development of their existing networks, by purchasing routes from those US airlines in decline [both Delta and United acquired routes from Pan Am] and as a result of cross-border alliances’. With the high levels of efficiency and profitability that they had developed as the result of exposure to competition at home, and able to draw traffic from a domestic market larger than any elsewhere, these four airlines emerged as the world’s largest carriers (see Table 2.3). The new US foreign policy Domestic deregulation was accompanied by a new foreign aviation policy, comprising two main elements.29 The first concerned IATA. The US had long considered that the tariff-setting activities of the Association qualified it as a cartel, or at least cartel-like,30 but had granted it immunity from American anti-trust law so as not to cause any destabilization of the industry. When Washington intensified its criticism, ICAO convened a Special Air Transport Conference, which met in April 1977 and was attended by representatives of 102 states. The overwhelming majority expressed support for the continuation of existing arrangements. IATA convened two months later, however, and agreed a series of reforms that were then adopted at its annual conference. The most important was that carriers would be permitted to take part in its trade association activities without being obligated to participate in tariff coordination. However, its critics in the US were not satisfied, and in June 1978, the CAB issued Order 76-6-78 requiring IATA to ‘show cause’ as to why the Board should not rule that IATA tariffs were not in the public interest and why they should continue to be exempted from US antitrust. The possibility that US airlines would be prevented from participating in IATA activities was also floated. In the event, the IATA reforms, together with pressure from the international community and, more discreetly, US airlines, persuaded the CAB to amend the order in 1979, restricting it to the North Atlantic tariff conference. However,

Aeroflot United Airlines American Airlines Northwest Pan American Japan Air Lines TWA Eastern Airlines Air France Delta Lufthansa British Airways Flying Tiger KLM Singapore Airways Air Canada Iberia Qantas Swissair Alitalia

19.058 7,566 5,932 5,461 5,460 5,260 4,765 4,605 4,556 4,426 4,189 4,161 3,156 2,716 2,620 2,394 1,877 1,874 1,771 1,769

Aeroflot United Airlines American Airlines Pan American Northwest Eastern Airlines TWA Delta British Airways Japan Air Lines Air France Lufthansa Air Canada Singapore Airways KLM Iberia Republic Western Continental Saudi Arabian Airlines

176,480 69,847 54,877 46,397 46,118 45,495 44,332 43,059 34,456 32,237 27,585 22,713 19,554 18,498 15,928 15,563 15,506 15,095 14,925 14,621

Ranking by scheduled passenger/kms (international and domestic)*

Notes: * IATA World Statistics 1983 and ICAO Statistical Yearbook Civil Aviation Statistics of the World 1983 ** IATA World Air Statistics and ICAO Financial Series.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Ranking by total capacity (scheduled tonne/km performed, international and domestic)*

Table 2.3 Leading US and world carriers, in 1983 (US airlines highlighted)

United Airlines American Airlines Delta Pan American TWA British Airways Lufthansa Japan Air Lines Air France Northwest Saudi Arabian Airlines All Nippon Air Canada SAS Alitalia KLM Republic Iberia Swissair USAir

Ranking by total operating revenue (US $ millions)** 5,286.5 4,532.4 3,905.2 3,529.6 3,332.0 3,311,8 3,292.5 3,094.1 2,814.0 2,214.9 2,009.3 1,746.9 1,739.6 1,665.7 1,601.2 1,628.0 1,511.5 1,505.7 1,435.3 1,432.3

36 Air Transport and the European Union

From Chicago to ‘Open Skies’ 37

this left open the possibility that, if an understanding with the Americans could not be reached, the ‘show cause’ order would prevent any discussion of fares among airlines serving the North Atlantic. Such a precipitate abolition of consultation on tariffs would create deep uncertainty, which might suit the CAB’s enthusiasm for radical deregulation, but would not be popular with Pan Am or TWA, their sponsors in the US Department of Transportation and the State Department, or European airlines and their governments, who would resent the sudden and unilateral overturning of long-established procedures. In the event, US negotiators proved willing to negotiate and arrived at a new modus vivendi with their European counterparts within ECAC. The US/ ECAC MOU, dated 5 May 1982, liberalized arrangements for agreeing tariffs on the North Atlantic without risking a sudden leap into total deregulation by the introduction of a zonal system for tariff setting and approval (see Wheatcroft and Lipman 1986, p. 109). Within defined zones of flexibility, set in relation to an agreed reference fare, airlines were given the freedom to set fares that governments did not have the power to disapprove. Outside these zones, the tariff provisions of existing air services agreements continued to apply. The Memorandum also answered Washington’s concern about IATA. Airlines were allowed to consult within IATA, but participation in multilateral tariff coordination by carriers could no longer be made a condition of tariff approval.31 The CAB suspended its order in 1982 and, in 1984, withdrew it altogether. The overall effect was substantially to reduce IATA’s control over international airfares (see Wheatcroft and Lipman 1986, p. 105). The second element of the new US policy aimed to expand international opportunities for US airlines.32 Following its declaration of a new US policy for the conduct of international air transportation negotiations in August 1978,33 the US government sought to renegotiate its bilaterals on more liberal terms. Key US objectives included liberal charter rules, multiple designation, more gateways for US carriers, and greater airline freedom to set fares and frequencies. New agreements signed with Israel and with the Netherlands opened additional US gateways to El Al and KLM respectively. The Israeli agreement, regarded as the model ‘open skies’ bilateral, allowed airlines free rein to set fares unless both governments disapproved (‘double disapproval’), while the Dutch agreement granted country-of-origin rules for charter fares, and took a more relaxed view of the capacity offered by KLM on transatlantic than in the past, despite the dependence of such services on traffic originating outside the Netherlands – an example of sixth freedom traffic (see Chapter 3). Once it had secured liberal access to the Dutch market, the US brought pressure to bear on other European states, pointing out that, unless they signed an open skies agreement, the traffic carried by their carriers was likely to divert to Amsterdam. By 1982, 23 open skies agreements had been signed, including with Belgium and Germany.34 Both ‘open skies’ bilaterals and the US–ECAC MOU had an impact that transcended the expansion of the commercial opportunities available to US

38 Air Transport and the European Union

airlines. They influenced debates about the future of regulation in Europe, and introduced innovations that were later adapted and incorporated into its proposals by the European Commission. New concepts, such as the zonal approach to tariffs, were included in the Commission proposals of 1984, while multidesignation, introduced in the agreements with Belgium and Germany, and double disapproval, which featured in the bilateral signed by the US and the Netherlands, appeared in the first EU air transport liberalization package.35 Domestic deregulation and the new US foreign policy The effects of the US experiment were far-reaching. By introducing an alternative approach to the paradigm of tight regulation that had dominated the industry, it stimulated a worldwide debate about how air transport should be regulated. Partly inspired by the US reforms, Australia, Canada, China, Japan, New Zealand and the United Kingdom took steps to deregulate domestic aviation. In Europe, an intense discussion about the existing system and future regulation began in the wake of US deregulation (see Chapter 5). Support for greater competition was voiced by governments in the UK and the Netherlands, the European Commission and independent airlines, as well as some consumer groups and business interests. However, a majority of states, notably, France, and the major European airlines argued in favour of the status quo. The traditional system was also defended resolutely by the flag carriers in IATA. Their defensive adherence to a less commercial model of aviation reflected a different conception of its role and purpose. It also partly derived from fears about the ability of European airlines to compete against US companies. Moreover, the US experience provided a key point or reference for debates about the merits and demerits of deregulation. Supporters highlighted the lower fares and greater range of products brought by competition. Opponents focused on the instability of the industry, inadequate profits, higher fares on short-haul routes, the disappearance of services to smaller towns, the deterioration in the position of airline employees and the oligopoly of large airlines that it appeared to have produced.

Conclusion The international aviation system placed the state firmly at its centre. Governments were able to dictate the conditions under which air services operated to, from and within their territories; their powers qualified only by the requirements of the bilateral system. Until the late 1970s, states regarded aviation as a public service and used their prerogatives to defend and protect their national aviation industries through close and detailed regulation. However, the dramatic decision of the world’s leading aviation nation to deregulate its domestic industry, and to export deregulation, introduced an

From Chicago to ‘Open Skies’ 39

alternative policy paradigm. Before the US adopted its new policy, the idea that regulatory restrictions could be relaxed, still less lifted, was entertained by a small number of free market economists. Following deregulation, the US example was taken up by a small number of states, but the overwhelming majority continued to uphold the status quo and opposed any movement in the direction of liberalization, which they considered would threaten the stability of the industry. The principles that inspired US deregulation were so fundamentally at odds with the highly regulated Chicago system that their international application would entail a radical reshaping of the industry worldwide. At this stage, however, apart from its challenge to IATA, the US did nothing to challenge directly the structure of the global system, including the bilateral regulation of international scheduled services, still less its underlying state-centrism. This was the international context within which those who supported liberalization within the European Community sought to advance their agenda. The US example provided inspiration, but most states continued to believe that aviation was special and needed to be tightly regulated. Moreover, the ambiguous provisions of the EEC Treaty (see Chapter 4) appeared to give member governments the power to resist any initiative in favour of liberalization. The next chapter looks at the structure and organization of aviation in Europe.

3 National Aviation Policy in Europe

Aviation in Europe came to be organized very differently from in the US. On both sides of the Atlantic state involvement had begun with the provision of public subsidies to private companies, but, whereas in the US the state retreated to arms-length regulatory intervention after 1925, in Europe it became progressively more far-reaching, culminating in the development of the ‘flag carrier system’ (Davies 1964, p. 272). At the centre of national aviation systems, publicly owned carriers came to occupy a protected and privileged position. While US carriers were privately owned and had to survive in the market, European airlines were subject to different imperatives. As enterprises focused on production rather than profit seeking, they operated in an environment characterized by collusion and cooperation, and under the tutelage of the state were used by governments to pursue a variety of diplomatic, military and industrial policy objectives. This chapter examines the origins, development and content of national aviation policy and policymaking in Europe prior to EU involvement in the 1980s.1 It argues that European aviation was characterized by three main features. The first and most important was the flag carrier strategy. Although the content of the ‘bargain’ (Staniland 2003, p. 6) between state and airline varied in its particulars, the core terms of the exchange were broadly similar across the continent: in return for the state’s protection and financial support, the airline accepted intervention in its internal management and the imposition of obligations to fly particular routes. Second, government attachment to the principle of sovereignty informed both economic regulation and technical management in European air transport. The European industry was fragmented along national lines, creating multiple markets that were small in comparison to the US, and where airlines routinely had to negotiate with numerous national authorities. The third feature was an absence of competition. European aviation was characterized by cosy relations between governments, between governments and airlines, and between airlines, that reflected a conception of air transport as a cooperative, rather than a commercial, venture. 40

National Aviation Policy in Europe

41

Although liberalization and a retreat from state ownership to regulation marked other industries in the 1980s (see, e.g., Wright 1994), these ideas were considered by most governments and most airlines to be too radical for air transport (see OECD 1991). This chapter examines why states and flag carriers were so wedded to the traditional system. It shows why a majority opposed both liberalization and Community intervention.

The origins and development of European aviation ‘Until the outbreak of World War I,’ according to one classic work, ‘the aeroplane was regarded by most authorities … as of potential use only for sporting or military purposes’ (Davies 1964, p. 3).2 The war significantly advanced aeronautical technology, and in its aftermath, with aircraft and trained personnel readily available, commercial air companies – many owned by aircraft manufacturers or shipping lines – began to sell seats to fare-paying passengers.3 With high operating costs and an exiguous clientele, however, civil aviation depended on government subsidy. Initially, it was thought that this phase would be temporary and airlines would soon be capable of supporting themselves, but in practice the state’s involvement in the industry only increased. A pattern emerged, consisting, as Staniland observes (2008, pp. 17–35), in an early phase of subsidization of several private carriers, followed by a period of state-engineered consolidation, and then a process of ‘statization’ (Lissitzyn 1942, p. 98),4 where governments assumed a direct role in ownership and management of airline companies. Subsidization Governments had many motives for encouraging the development of air transport. The War had demonstrated aviation’s military potential, and the industry held obvious promise for trade and improving colonial administration.5 It also quickly assumed symbolic importance. Flying the flag signalled sovereignty and power, and a way to spread cultural influence.6 Despite their enthusiasm for the nascent industry, however, governments were ‘members of the aviation club, [but] rarely creators’ (Staniland 2003, p. 17). They limited their involvement to subsidizing carriers.7 In the Netherlands, financial support was directed to a single airline (KLM),8 but in Britain, France and Germany, several companies were beneficiaries of the public purse. Since these carriers were often in competition on the same routes, this was not a viable long-term strategy and governments soon began to encourage consolidation. Following the recommendations of the Hambling Committee, the UK government amalgamated four private carriers (AT&T, Handley Page, Daimler Airways and British Marine Air Navigation) to form Imperial Airways in 1924. The new UK flag carrier, which would operate mainly imperial services, was given a monopoly over existing (mainly long-haul) routes and a ten-year

42 Air Transport and the European Union

subsidy contract.9 In Germany, the government merged two private companies, Aero Lloyd and the Junkers conglomerate, to form Deutsche Lufthansa. The new airline extended the impressive international and domestic networks of the two earlier airlines to become Europe’s leading carrier in fleet size and the number of passengers transported. Although it had no empire to serve, the airline invested considerable effort in developing routes to and within Latin America, where there were significant German communities (Sampson 1984, pp. 34–5). By the mid-1930s, it had become a major operator in the region. In France, by contrast, a divided parliament and weak executive delayed decisive action. It was not until 1933, some years after debate had begun on best to organize French aviation, that Air France was formed as a ‘mixed company’ (une société d’économie mixte ),10 after a consortium of five airlines had responded to a call for tender.11 Although the state did not grant it a statutory monopoly – indeed, subsidies continued to be paid to private companies – it allowed Air France to continue to serve existing routes and undertook not to subsidize other companies on these routes for a further 15 years. From consolidation to statization Consolidation considerably simplified policy, but the status of the new national champions as private companies presented difficulties.12 Although states used subsidies and subsidy contracts to exert leverage over commercial and operational decisions (Lissitzyn 1942, pp. 137–99), they came to realize that only public ownership and the direct participation of government in management could deliver the level of detailed control that they desired and allocate risk appropriately between state and carrier. Motivated also by the political importance of the sector, governments in all four countries extended their involvement through a process of statization. They increased their shareholdings and strengthened their presence on the executive boards of their national airlines. Germany was the first to move in this direction. Indeed, statization was introduced at the same time as consolidation in the mid-1920s. Initially, ownership was shared between the state, the Länder and large cities, German-speaking countries and private interests, but after the Nazi revolution ten years later the shares held by the Länder and the municipalities were transferred to the Reich. In 1935 Lufthansa lost its status as a private company and was incorporated into the Reich air ministry. The Third Reich took a keen interest in developing the airline, which had a close relationship with the Luftwaffe, and used it to serve Nazi ideology (Sampson 1984, pp. 33–6; Staniland 2003, p. 32). The statization of KLM, by contrast, took place in several stages and was complete by 1930. Though the state became the majority shareholder in the company and ministerial approval was required for operational decisions, formally the airline remained a private company.

National Aviation Policy in Europe

43

Statization in France was modest by comparison. The state extended its control over the airline, through the appointment of two members of the board who had the power to suspend any decision of the board that they judged contrary to agreements with the government or the public interest (Lissitsyn 1942, p. 116). The carrier’s schedules were to be approved by the air minister and it was required to purchase aircraft that had been built in France. There was no full-scale nationalization. The UK, meanwhile, was the last of the four to undertake statization. It chose to disregard the recommendations of the 1938 Cadman Report, which had proposed dividing international services between Imperial Airways and British Airways, an independent carrier, formed in 1935 by the merger of two private carriers which operated services to the European mainland. Instead, the government created a single state-owned carrier that it then granted a monopoly on international routes.13 The British Overseas Airways Corporation (BOAC) began operations in November 1939 under a Secretary of State for Air, who nominated the chair and members of the company board, and was responsible for its route schedule and aircraft procurement. The company received loan guarantees in return for serving the national interest. By 1939, despite variation in the paths taken, civil aviation had become firmly established in Europe (Davies 1964, pp. 20–38, 56–122). The industry was then disrupted by the outbreak of war, with only a handful of airlines, most notably Lufthansa, able to continue operations. European aviation after 1945 With state control over the sector reaffirmed at Chicago, European governments set about rebuilding their aviation industries. Security was a continuing concern, colonial communications needed be restored and air transport was vital to economic recovery and reconstruction. European governments especially in the West acted quickly to re-establish their flag carriers (Davies 1964, pp. 271–94) the Axis powers, though, were prohibited from operating air services (Italy until 1947, Austria and Germany until 1955), while in Greece and Portugal, the state paid subsidies to several companies until a single national airline was created in the 1950s (see Table 3.1). Uniquely, the governments of Denmark, Norway and Sweden agreed to form the Scandinavian Airways System (SAS) as a joint venture between their three flag carriers, based on the calculation that the move would increase their bargaining power.14 In the relaunched industry, flag-carrying national airlines were again central to government policy. Indeed, their economic significance was enhanced after 1945, as technological advances during wartime made available for the first time aircraft that were efficient and commercially viable. Operating costs fell, making air transport for the first time accessible beyond a small elite, and profitable. Between 1946 and 1961, the traffic carried by major European carriers grew from 924 million to 13,270 million passenger-miles

44 Air Transport and the European Union Table 3.1

European Flag Carriers (selected): Origins and ownership (1985)

Flag carrier

Origins

Ownership (1985)

Aer Lingus

Founded 1936. Amalgamation with Aerlínte Éireann (1960)

Ministry of Finance

Air France

Founded 1933 from takeover by Société Centrale pour l’Exploitation de Lignes Aériennes (formed by the merger of Air Orient, Air Union, Compagnie Internationale de Navigation Aérienne and Société Générale de Transport Aérien) of Compagnie Générale Aéropostale. Nationalised in 1946.

State 99.38%

Alitalia

Established September 1946 as Alitalia-Aerolinee Italiana Internazionali. Merged with Linee Aeree Italiana (LAI), a regional operator, to become Alitalia-Linee Aeree Italiana, combining domestic and international operations.

IRI, Banca d’Italia, Assicurazioni d’Italia, Banca Nazionale del Lavoro, Credito Italian

British Airways

Formed 1974 from merger of British Overseas Airways Corporation (BOAC), British European Airways (BEA), Cambrian Airlines, and Northeast.1

State

Iberia

Compañía Aérea de Transportes established 1927. State-controlled in 1928, when merged to form Compañía de Líneas Aéreas Subvencionadas S.A. Ceased operations 1929. Líneas Aéreas Postales Españolas founded in 1935. Merged into military 1936 to 1939, when re-instated. Nationalized 1944.

State

KLM

Founded 1919.

61% state; 39% private

Lufthansa

Formed 1926 from merger of Deutsche Aero Lloyd’ (DAL) and ‘Junkers Luftverkehr’. Ceased operations 1945. Re-created 1953.

82% Federal Government

Luxair

Formed 1961, with origins in Luxembourg Airlines Company, founded in 1948.

State

Olympic Airways

Formed 1951, from merger of three companies to create TAE Greek National Airlines. Nationalized 1955. Sold to Aristotle Onassis, became Olympic Airways in 1957. Nationalized 1973.

100% state

(Continued)

National Aviation Policy in Europe Table 3.1

45

(Continued)

Flag carrier

Origins

Ownership (1985)

Sabena

Formed 1923.

55% state; 45% private

SAS

Founded 1946 from partnership between Det Danske Luftfartselskab A/S, Svensk Interkontinental Lufttrafik AB, and Det Norske Luftfartselskap AS, flag carriers respectively of Denmark, Sweden and Norway.

2:2:3 shares held by Denmark, Norway and Sweden, each of which split 50:50 public and private.

TAP Portugal

Founded 1945.

State

Notes: 1 Origins can be dated to BA Limited, formed from merger 1935, merged with Imperial Airways (created 1924 from merger of British Marine Air Navigation Company Ltd, the Daimler Airway, Handley Page Transport Ltd and the Instone Air Line Ltd) and nationalized in 1939 to form British Overseas Airways Corporation (BOAC). Sources: Flight International, World Airline Directory, 1986; National Consumer Council (1986); Davies (1964).

per annum – an annual average increase of 19 per cent (Staniland 2003, p. 69). Growth continued, though at a slower rate, throughout the 1960s. Though the increase in traffic enabled many flag carriers to show profit in the 1950s, freeing them from the need to draw state subsidies to cover operating costs, they still required financial assistance from government, particularly in fleet procurement. The arrival in the late 1950s of long-range jets, which were larger and more powerful than the piston and turboprop machines they replaced, but with lower operating costs, revolutionized air travel. However, airlines were forced to seek government assistance for the substantial investment required. National airlines also relied on governments for commercial opportunities and protection. Internationally, they could only operate routes to which their governments had negotiated access. Aviation diplomacy, or ‘aeropolitics’, became increasingly important as technical advances opened up the North Atlantic market. Elsewhere, when African and Asian states gained their independence, leading to the withdrawal of their services by many European flag carriers, the number of international scheduled operators increased and a major overhaul of airline route networks took place. Flag carriers also looked to the state to protect them from non-scheduled operators. High-cost national airlines were not able to compete easily with low-cost charter operators, and lobbied government for strict regulation of non-scheduled activities. Some, in addition, created charter subsidiaries. On the home front, flag carriers were typically the beneficiaries of tightly controlled access, as well as a long list of privileges, concessions and dispensations, including exemption from national competition rules.

46 Air Transport and the European Union

National aviation policy in Europe Though European states took a broadly similar approach, there were some significant differences in policy and policymaking. As well as variation in the goals set, how regulatory protection was afforded and the policy instruments employed, there were important differences in government-flag carrier relations. ‘Governance’ (Staniland 2003), the structures and procedures put in place by states to manage the airline, took very different forms and flag carriers exercised varying degrees of autonomy.15 Furthermore, the aviation policy community varied in size and composition between states. In most, transport and finance ministries played a key role, with the ministry of foreign affairs involved in the negotiation of air services agreements, but the relative influence of each differed significantly. There were also differences in the involvement of national parliaments, sub-national authorities and passenger representatives. France The French state was strongly interventionist in aviation. National prestige was a guiding precept, and public service took precedence over competition and competitiveness. Internationally, the post-war priority was to restore air links to the colonies, but later, as the empire shrank, this was replaced by the aim of connecting the metropole to parts of the world where France had political or economic interests. More broadly, France was a vocal supporter of international regulation. At home, the main concerns were to promote regional development, to ensure lines of communication to otherwise isolated communities and to provide a link between France’s major cities. Successive governments considered the avoidance of Franco-French competition imperative. The principle of une ligne, une compagnie was firmly enshrined, even if never formally expressed in statute. France was a leading practitioner of the national champion strategy. Nationalized in 1945, Air France assumed the status of a mixed company under a law of 1948, with the state taking a 70 per cent shareholding. Two per cent of its shares were held by private interests and the remainder by public institutions (Neiertz 1998, p. 19). Though the relationship between the state and the airline’s senior management was close and marked by pantouflage, Air France did not have a monopoly and was forced to coexist with two private operators, the Compagnie des Transports Aériens Intercontinentaux (TAI) and Union Aéromaritime de Transport (UAT). Reviving the ‘separate spheres’ principle of the interwar years, the state encouraged the three airlines to divide routes between them, initially in a series of season-by-season accords and eventually, in 1954 at Peira Cava, in a long-term agreement.16 Air France was granted a monopoly of Atlantic and Polar services, TAI served Australia and the Pacific, and UAT South, central and some areas of West Africa. When the colonies achieved independence, the French government called on Air

National Aviation Policy in Europe

47

France to withdraw its services, but in exchange extended the Peira Cava agreement for ten years and granted the company exclusive rights to all routes not served by UAT and TAI (Espérou 1984, p. 92). There was a further redrawing of the map when UAT and TAI merged to form UTA in 1962.17 Later adjustments followed in 1974 and 1976 (Espérou 1984, pp. 92–3). Protection of these chosen airlines was further extended by the government’s restrictive approach to non-scheduled services (Freud 1987). International services were treated separately from the domestic network, where the government granted a monopoly to Air Inter.18 Formed in 1954, Air France and the Société National des Chemins de Fer français (SNCF) owned a 50 per cent shareholding in the company, while the remaining shares were held by private interests, including UAT/TAI. The government believed that only a single carrier with free range over the entire domestic network would be able to implement the policy of cross-subsidization needed to assure thin routes were served.19 The terms of exchange were set out in a series of short-term agreements signed with the state until 1967, when a more general convention confirmed the airline’s privileged domestic vocation.20 In return for preference over traffic rights and a guarantee that it would not face competition, the airline was obliged to cooperate with Air France and UTA on mainland and some domestic routes.21 A number of small carriers, including TAT, were, however, permitted to operate regional services on routes that did not interest Air Inter. Most received subsidies from local and regional governments, and in practice worked closely with the publicly owned carriers. In terms of governance, oversight was exercised by the Ministry of Transport and the Finance Ministry. The former was charged with general supervision of Air France. The company’s President, usually from one of the grands corps, though not usually with aviation experience – the legendary, Max Hymans, an engineer, was an exception – and a powerful figure vis-à-vis the executive board (conseil d’administration), was appointed by a decree of the Transport Minister. The company was required to provide the Ministry with its plans, as well as information concerning expenditure and income, personnel and shareholdings, and required ministerial approval for its investment, purchases and routes (Staniland 2003, pp. 78–9). The Ministry of Transport, or more precisely the aviation department – initially, the Secrétariat Générale de l’Aviation Civil (SGAC), later the Direction Générale de l’Aviation Civil (DGAC)22 – had a strong influence over the company’s strategy and operations. More broadly, the airline was expected to support the French aeronautical industry. Though not a problem with the Caravelle, the company’s forced acquisition of Bréguet-built aircraft in the early 1950s and Concorde in the 1960s was expensive, and denied Air France the opportunity to implement a more rational fleet renewal policy. Financial relations between the state and Air France were complex.23 Until 1953, the airline received an operating subsidy for all routes, including those

48 Air Transport and the European Union

on routes within the French Union where it competed with other French airlines. However, the government decided that it should no longer receive subsidies for the latter, except for individual contracts for providing a specific public interest service. In the 1970s, Air France proposed a business plan, which posited that if the state paid expenses incurred by Air France in fulfilling the obligations placed on it by government, the company could return to profitability by 1979. A formal contract was agreed in 1978, agreeing an increase in the company’s capital, purchase of new aircraft, subsidy for Concorde and reimbursement to compensate the airline for its (enforced) move to the new Charles de Gaulle airport. In addition, it was agreed that the government would not impose any new political or public service obligations without prior contact. Throughout the post-war period, however, the company received loans, a substantial proportion of which were converted into capital stock, and regular cash injections. Air transport policymaking in France was negotiated in a small ‘village’ (Lehrer 1997, p. 76), comprising senior officials within the DGAC and the top management of Air France. The French parliament had little influence or interest. Although in addition the Conseil Supérieur de l’aviation marchande (CSAM) was created as an independent body to hear applications for traffic rights, it remained strictly consultative, leaving the transport minister with the final say. Charter airlines and consumers were policy outsiders, but trade unions were influential. As many as 18 unions were active within Air France. As well as formal channels of influence through the company’s governance structures, unions, particularly the pilots’ union, the Syndicat National des Pilotes de Ligne (SNPL), considered a veto player, exercised considerable political leverage. Governments disliked industrial disputes in state enterprises, and preferred to intervene to bring about a negotiated solution rather than to allow labour unrest to continue. The cumulative effect was to undermine the ability of the airline’s management to take decisions that affected working conditions, salaries or employment. As a result, wages at the company were high and productivity low compared to other national airlines.24 Air France was the archetypal prestige airline. Its first managing director spoke characteristically of the carrier’s ‘civilising mission [which defied reduction to its] pure technical, financial and commercial aspects’ (cited in Neiertz 1998, p. 20). His successor spoke of how it symbolized the industrial and commercial dynamism of France (Neiertz 1998, p. 21). Presence and quality were leading considerations. The company sought to carry the flag as far as possible – by 1952, it could claim on the basis of its route system to be the world’s biggest airline (Sampson 1984, p. 94) – and offered luxury levels of service and comfort. Its public service ethos was expressed in the belief that all routes were of equal value. The company extended into a range of auxiliary services. In addition to a long-standing practice of forming alliances with and buying shareholdings in smaller carriers, it owned subsidiaries in

National Aviation Policy in Europe

49

aircraft maintenance, food and beverage preparation, hotel accommodation and tourism. Active in IATA, where it was a strong defender of the status quo, it responded to the threat from non-scheduled operators by creating its own charter airline. The airline’s commitment to high technical standards and quality, and apparent disregard for commercial considerations, led to the caricature of the company as ‘an elephant in an evening suit’ (see Attali 1994; Neiertz 1998). Germany Germany’s aviation policy, by contrast, was centred on a single flag carrier, which served both international and domestic routes (Dienel 1998, p. 92). The Federal Republic’s position after 1945 was unique for two reasons. First, having been deprived of sovereignty over its airspace for a decade, the government found that, by the time that it was permitted to resume commercial aviation (in 1955 when its sovereignty was restored), more than 30 European airlines were operating services to and from German cities (Lyth 1998, p. 92).25 In addition, routes into West Berlin were reserved to Allied carriers until such time as the three Western powers and the USSR were to decide otherwise. Second, as Germany did not have an empire, it was not guided by the same imperial considerations as other European states. Commercial considerations were paramount and aviation was regarded as a sector that was vital to Germany’s recovery and economic growth. Deutsche Lufthansa, a new company reclaiming an old name,26 was relaunched in 1955 and put into operation a detailed plan formulated by the earlier airline’s managers.27 Although the Federal government held a major shareholding in the airline (74 per cent in 1955, which rose later to 87 per cent), and Länder governments, concerned about regional services, also held stakes, Lufthansa was a private company with a mandate to operate commercially. Unlike its counterparts elsewhere, it was not obliged to purchase domestically produced aircraft. Indeed, purchasing airliners from America and Britain was seen as part of the country’s rehabilitation. In theory, Lufthansa was open to competition from other airlines – the German Cartel Office regulated its non-aviation activities – but in practice no Germany carriers were licensed to compete against it. With respect to its governance, Lufthansa, like other German joint stock companies above a certain size, had a two-tier board. A supervisory board (Aufsichtsrat), composed of members selected equally by shareholders and employees, elected the airline’s executive board (Vorstand). The latter was essentially a collegial body, with each member responsible for a particular department and decisions taken collectively. The chairman was little more than a spokesman for the board (Staniland 2003, p. 84), unable to bring in his own appointees or fire colleagues. As the main shareholder, the federal government was represented on the supervisory board. A list of suitable candidates was proposed by the transport ministry to the cabinet.

50 Air Transport and the European Union

The supervisory board was a conduit through which both federal and Länder governments sought to influence the airline’s policy.28 The lead department in German air transport policymaking was a bureau in the Federal Ministry of Transport. Although the airline enjoyed full commercial freedom, relations between the ministry and the airline were close, as a secretary of state from the government department sat on the company’s supervisory board. The transport ministry also proposed a list of individuals to represent the state as the main shareholder. The company’s aviation activities were not subject to competition law, but the German Cartel Office scrutinized the airline’s commercial ventures in related areas. Lufthansa developed primarily as an international carrier on transatlantic routes.29 The opening of services to the US was followed by routes to South America and the Middle East, and later to Asia and Australia. The company’s commercial opportunities were limited, however, by Germany’s inferior status in bilateral negotiations, where its lack of colonial outposts gave it little bargaining power. On the domestic front, despite the presence of foreign operators and the company’s exclusion from lucrative routes to Berlin, where the airlines of the occupying Western powers had a monopoly, Lufthansa became the leading carrier on Europe’s busiest internal network. Germany’s polycentrism, contrasting sharply with centralization in other European states, created strong domestic demand for air services that benefited the airline.30 Lufthansa became one of Europe’s largest carriers, developing a reputation for high standards, punctuality and safety. Though it took until 1963 before the airline showed a profit and 1965 before it was attractive enough to private capital to launch a private share offer, the company was profitable for most of the 1960s and 1970s. As well as its scheduled services, it operated charter flights through a subsidiary, which was founded as Deutsche Flugdienst in 1955 and changed its name to Condor in 1961. This move prevented the emergence of non-scheduled competitors and enabled Lufthansa to benefit from the dramatic growth of charter traffic in the 1960s and 1970s. (By the mid-1970s, Germany produced more charter passengers than any other country.) The airline also became an important cargo carrier in the 1960s. It further diversified into services, such as pilot training, catering and reservation systems for both its own use and by other companies. Despite its impressive size and operations, the company’s high operating costs – the result of the high number of routes it flew, the frequency of its flights, the quality of its aircraft and the high salaries of its staff – made Lufthansa vulnerable to competition. The Netherlands The Dutch government’s traditionally liberal approach to international aviation arose from its concern to find and improve the market opportunities for a national airline that, in Dierikx’s words, had ‘outgrown its flag’ (1998, p. 126). Royal Dutch Airlines (KLM), founded in 1919, is not only the

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world’s oldest airline in continuous operation, but was from the beginning a pioneer. Conscious of the small size of the Dutch domestic market, it was a first mover on many long-haul routes, sometimes in cooperation or alliance with other carriers, in a quest for ever-greater commercial opportunities. The government supported these endeavours and encouraged the development of the airline’s colonial services.31 It sought vigorously, if not always successfully as the government of a small state, to find new markets for its national airline. The loss of Indonesia, for example, deprived it of an important bargaining chip, while the UK and the US were wary of granting routes to such an efficient operator for fear of endangering their own carriers.32 In the late 1940s, however, Dutch negotiators successfully secured new rights to African destinations, and in the 1950s further rights to Australia, the Middle East and the Far East. The Netherlands was also the first state, following Washington’s announcement of its new aviation policy, to strike an ‘open skies’ agreement (1978) with the US. In its bilateral negotiations, the Dutch government aimed to further the country’s position as a gateway to Europe. Passengers and freight attracted to the company’s Schiphol hub could then pick up KLM connections. ‘This strategy’, which its bilateral partners, including the US, regarded as illegitimate exploitation of the sixth freedom – flying passengers from one foreign state to another via the home state – ‘became so successful that KLM marketed “the Amsterdam connection” and made it the cornerstone of KLM’s international operations’ (Dierikx 1998, p. 140).33 The Netherlands struck a more ambivalent stance in regard to non-scheduled operations. KLM’s greater vulnerability to the market led the government to abandon its liberal principles in the 1970s when the company came under pressure from charter flights in Europe and across the North Atlantic. The Dutch campaigned to bring charter air traffic within the bilateral system, but abandoned this call when the US embarked on deregulation, calculating that ‘wider access to the US market outweighed the dangers of an increase in competition’ (Dierikx 1998, p. 113). The Dutch government was the first to conclude a bilateral agreement with the US that eased restrictions on access for carriers from both sides (ibid.). Aviation policy was made within a relatively closed policy community that included KLM, the Rijksluchtvaartdienst (RLD) of the Ministry of Transport, which administered the Civil Air Code, and the ministry for foreign affairs. An academic institution, the Leiden Department of Air and Space Law also enjoyed privileged, insider status – a unique feature of Dutch aviation. Although there was no tradition of pantouflage, relations between the members of this ‘quadrant’ were close.34 Lacking a formal monopoly, KLM was nonetheless protected from competition from would-be Dutch entrants,35 while the foreign ministry actively sought continuously to extend the company’s bilateral opportunities. KLM also enjoyed a close relationship with Schiphol Airport.

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Though owned by the state, KLM enjoyed a high degree of autonomy and was more independent of its main shareholder than other national airlines. In legal terms, it remained a private company. In contrast to the experience of most national airlines, where the state shareholding increased, the Dutch government agreed in the mid-1950s to sell some of its 95 per cent holding to the airline, so that it could be offered for sale on the New York Stock Exchange. KLM thereby became the first non-US airline to list its shares on Wall Street. At the same time, the government agreed to amend the company’s articles of association, which had the effect of removing its special powers and normalizing its position as a shareholder. Under its new 1956 constitution, the airline’s Board of Directors was abolished and the Board of Supervisors given direct control over the company’s directors. Directors and members of the board came from both the private and the public sectors. Many executives worked their way up through the ranks of the company. The Board enjoyed considerable autonomy and, once post-war recovery had been achieved, the government generally took a ‘hands off’ approach. Though there were periodic attempts to encourage the airline to ‘buy Dutch’, procurement was left mainly to the company. KLM was foremost a commercial airline. With a reputation for speed, reliability and quality, and a talent for marketing, it continually sought to develop its route network. Living up to its pre-war image as a pioneer, it was the first European airline to operate scheduled services across the Atlantic, when it opened its New York service in early 1946. As well as its links to Dutch colonies, it took advantage of Allied restrictions on German aviation to open routes to several German cities, and inaugurated intercontinental services to Africa, and Central and South America. It also formed alliances with airlines in Asia, South America and Europe at a time when such cooperation was a rarity. The first airline, as noted earlier, to exploit sixth freedom services, it used its base at Schiphol to move cargo as well as people. Remarkably, given its lack of natural assets, KLM became one of the world’s largest international airline companies, registered a profit for every year in the 1940s except 1949 and by the mid-1950s was Europe’s largest cargo airline. It formed a subsidiary short-haul carrier, NLM City Hopper, to serve thin routes first in neighbouring countries, then across Europe more widely, and took shares in an independent charter company, Martin’s Air Charter (later, Martinair Holland).36 However, Transavia, also a charter company, founded by a Dutch shipping firm in 1966, remained beyond KLM’s reach. Finally, not all of the national airline’s commercial decisions were successful. Its decision not immediately to buy jet aircraft in the early 1960s was an unusual error for a company that prided itself on being at the technological forefront. Diversification into the hotel business was not very successful. Overall, KLM achieved impressive levels of performance in an industry where profits have always been rare.

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The United Kingdom While not a supporter of multilateralism, and after a false start when under the 1946 Civil Aviation Act it granted monopoly rights to its nationalized flag carriers, the UK adopted a more liberal aviation policy than other European states. Few bilaterals signed by other European states were as flexible as Bermuda I. While it was no less concerned about links to empire, extending the international and domestic route networks of British carriers, or the sector’s commercial potential, the UK adopted a pragmatic approach. It was more permissive of competition, less ready to bestow monopoly rights, and supportive of charter operations. In comparison to the continuity observed elsewhere, British aviation policy was more changeable.37 As well as ensuring the cohesion of empire, the UK government was concerned to exploit the commercial potential of air transport. Its control over key territories around the globe that were vital to the future development of international air transport as potential or actual air bases gave it a strong hand to play with its bilateral partners (Sampson 1984, p. 87). Initially, it decided to divide international routes between three state-owned airlines: BOAC, which re-established Imperial Airways’ connections to the colonies; British European Airways (BEA) to serve the European continent; and British South American Airways (BSAA), which was to operate across the south Atlantic. However, in 1949, following the unexplained disappearance of one of its aircraft, BSAA was absorbed by BOAC. Despite support for its flag carriers, the government showed an unusual openness to private carriers.38 It gradually reduced the privileges of the nationalized airlines, while extending the opportunities for independent carriers, first in theory, and then following the Edwards Report,39 in practice. In the wake of the latter, which embraced the principle of consumer choice, the government undertook a far-reaching reform. It replaced the Air Transport Licensing Board (ATLB) – the latest in a series of relatively ineffectual tribunals, whose licensing decisions had been regularly overturned by ministers – with a new body, the Civil Aviation Authority (CAA). The CAA, formed in 1972, was a genuine regulatory agency, inspired by the US CAB, that operated at arms’ length from ministers, with the authority and expertise to act independently (see later discussion). It initiated the merger of BOAC and BEA under a common holding company, the British Airways Board, which was created in 1974 (Lyth 1998, pp. 52–3). It sought to develop a ‘second force airline’ to operate short- and long-haul services. BOAC’s routes to West Africa and Libya were duly transferred to a privately owned carrier, British Caledonian Airways (BCal).40 Three years later, BCal opened scheduled services to New York and Los Angeles. Nor was British Caledonian a one-off. Sir Freddie Laker, probably the most famous of all charter entrepreneurs, also took advantage of the UK’s commitment to a multi-airline policy, though, unlike BCal, this was not due to government-sponsored action. Laker had left BUA to form his own airline,

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Skytrain. Starting life as an operator of affinity charters, Skytrain was later granted authorization to offer cut-price scheduled services across the North Atlantic. Although the company was ultimately forced into bankruptcy,41 at one point in 1977 it was carrying 30 per cent of passengers from Europe to North America. The UK was also one of the few countries to adopt a liberal charter policy. The Atlee government ‘allowed private companies to operate non-scheduled services as associates of the state corporations’ (Wheatcroft and Lipman 1986, p. 26). From 1950, several companies, often associated with shipping firms, began to offer inclusive tours to a ready and growing market. Nonscheduled services were regulated by the Air Transport Advisory Council, a predecessor of the CAA, which was responsible for ensuring that the sector did not become overcrowded and that no inclusive tour was cheaper than the full fare on a scheduled flight to the same destination. The sector expanded dramatically in the 1960s, despite protests from both Britain’s flag carriers. Alongside BUA, BCal and Skytrain, BEA and a number of charter airlines, among them Britannia Airways, later to become one of the largest charter companies in Europe, began to offer inclusive tours to Mediterranean destinations. Almost total liberalization followed in the wake of the Edwards Report, when the CAA abolished virtually all price and capacity controls on inclusive tours. The following year advance booking charters, which took a step away from the concept of affinity, were introduced on the North Atlantic. Part-charters were also permitted on routes from the UK to Spain. Domestic air services, operated in the 1930s by independents, were taken over by BEA in 1947, which initially was a monopoly carrier. The company used profits from trunk routes (London to Manchester, Edinburgh, Glasgow and Belfast) and its international network to subsidize services to the Highlands and Islands of Scotland. However, the UK began to liberalize domestic air services in 1960, when the Civil Aviation (Licensing) Act (1960) authorized private carriers to offer services and compete on any route. Independent airlines entered on routes from London to Edinburgh, Glasgow and Belfast, and by 1967–8 ‘accounted for 15 per cent of the Glasgow traffic and 8 per cent on both Edinburgh and Belfast’ (Barrett 1987, p. 30).42 Liberalization was significantly extended after 1979, when having conducted a review (CAA 1979), the CAA authorized a number of airlines to begin services on domestic routes out of Heathrow in competition with BA and transferred several of the company’s route licences to independent carriers (Corke 1986, p. 68). In terms of state–flag carrier relations, the government had far-reaching formal powers, but in practice allowed the companies considerable autonomy. Under the 1946 Civil Aviation Act, the government had substantial powers of appointment and oversight, intended to ensure the accountability of the flag carriers as publicly owned companies to parliament. The minister also had ‘powers of command to give to that corporation directions of

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a general character as to the exercise and performance of their functions in relation to matters appearing to the minister to affect the national interest; and the corporation shall give effect to any such directions’ (Staniland 2003, p. 80). In practice, ministers appointed the chairman, the deputy chairman and the members of the board, but allowed the management to run the company without interference.43 However, carriers were obliged under the 1946 Act to buy British aircraft and to cross-subsidize their operations. Both BEA and BOAC were the beneficiaries of loans and grants from HM Treasury, but after 1952 neither needed to draw on the deficit-covering subsidies authorized in the 1946 Act (Staniland 2003, p. 96). In policymaking, the transport ministry took the lead, though the Treasury was also important. However, the UK differed from other European states in three respects. The first was the role played by the CAA as an independent regulatory body. It had significant powers when created, but these were further extended in 1979 by a liberalizing Conservative Government (see Chapter 5). An effect of the removal by the Civil Aviation Act of 1980 of the Secretary of State’s power to issue policy guidelines was to make CAA pronouncements more important, which was significant not least due to the Authority’s outspoken advocacy of a pro-competition agenda in aviation. The second was the interest shown by parliament in aviation. Few national legislatures in Europe were as attentive as Westminster to the industry. The third was the formal representation of passenger interests. In a national context where consumer groups tended to be better organized and better funded than their counterparts in Europe, and were taken more seriously by governments, the interests of passengers were represented by the Air Transport Users Council as a group within the CAA. In terms of airline strategy, the creation of BA had brought together two companies with very different cultures. BOAC, the long-haul carrier, had been more of a prestige airline that had ‘inherited some illusions of grandeur from its predecessor Imperial Airways’ (Sampson 1984, p. 87), had been disadvantaged by government intervention, particularly concerning aircraft procurement, and was overstaffed.44 Over 27 years, it had recorded a profit in only five (Staniland 2003, p. 26). BEA, which operated short-haul routes to Europe, North Africa and the Middle East in an environment where it faced competition from charter airlines, was a highly commercial enterprise and profitable by the mid-1950s. Moreover, in a worsening economic climate, government was not prepared to allow the large-scale redundancies that a thoroughgoing reorganization would imply. For this reason, for almost an entire decade ‘it was never a real merger, most jobs remained duplicated and the “public school airline” continued to look down on the “grammar school airline”’ (Sampson 1984, p. 88). It was only after the Conservative Party came to power in 1979 that the two parts of BA were properly integrated and the management problems facing the company were addressed. Sir John (later Lord) King, appointed chairman in 1981, implemented a

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far-reaching restructuring programme to turn the airline into a market-led company.45 Two years later, Colin Marshall was appointed chief executive, the company was rebranded and the privatization of the airline agreed (see Chapter 4), though it did not take place until 1987. By 1984, British Airways had become the world’s biggest international airline and Europe’s most competitive flag carrier.

Conclusion European aviation developed in a very different direction from air transport in the US. Although both were characterized by tight regulation, European governments took a far more interventionist approach to the industry. Whereas US airlines were privately owned, European states moved in the 1920s and 1930s to engineer the creation of public-owned flag carriers that would serve as chosen instruments. Using their powers under the Chicago regime, they developed protective systems to support their national airlines. In consequence, the airline industry in Europe ‘was characterised by special regulatory arrangements, cartel-like behaviour on the part of airlines at the international level, and the predominance of a single, often publicly owned, firms within countries. Taken together these factors render[ed] it hard to demarcate between government pressures, inter-firm collusion, and industry lobbying’ (Holmes and McGowan 1997, p. 170). At the same time, there were significant differences between European states.46 As this chapter has shown, the aims of national policy were often subtly different. There was variation in the mix and use of instruments, and policymaking arrangements and especially the governance structures relating to the national airline, which to a large extent reflected differing state traditions and models of capitalism. In all cases, however, governments showed themselves to be firmly wedded to detailed intervention. Finally, it is important to underline the contrast between European and US airlines after deregulation was considerable. The US companies that emerged in the 1980s were large, powerful and drew upon an extensive domestic base. European airlines, by contrast, were principally international carriers. They were, in general, smaller, and had lower levels of productivity. This was partly due to the difference in the length of flight stage, but higher labour costs were also a factor. There was little doubt that the large US airlines were more efficient and more competitive.

Part II The Development of the Common Air Transport Policy

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4 From the Sidelines to the Margins: The EC and Aviation, 1950–83

Existing scholarship on the Union tends to minimize or to neglect the international context in which EU policy develops. This book argues, however, that external factors can affect the prospects for intervention by Brussels and may therefore be an important influence on action by the Union. In the case of air transport the Chicago regime as it existed until the late 1970s confronted the Community with a structure of opportunity that was unfavourable to Community intervention. Member states were content with the freedom that they enjoyed under Chicago and considered that their needs for cooperation or joint action were adequately met by the structures associated with the traditional system. The situation changed only in the aftermath of the launch by the US of its new aviation policy (see Chapter 5). This chapter examines the period between the early 1950s and the early 1980s, and focuses on the regional order in Europe. As well as providing a reference point against which to measure the extent to which these formations were later reinvented following EU action (see especially Chapter 7), it discusses the forms of cooperation that European governments established in the 1950s and 1960s, and shows why EC member states preferred to manage air transport matters within these organizations. It examines how EC member states sought to block the Community’s involvement in the sector as early as the preparatory discussions and negotiations that would lead to the Treaty of Rome. It explains how, despite the EC’s supranational powers and the expansionist liberalizing imperative that inheres in the Treaty, member states were able to dispute Community competence in aviation and to prevent discussion within the EC framework until the late 1970s. The chapter argues that the Court’s 1974 ruling in the French Seamen case brought about the first breach in member state resistance, leading in 1977 to consideration of aviation matters for the first time within the Community framework. Although it did not lead to a dramatic change, the ruling marked the first in a series of relatively minor developments that nonetheless made clear that member governments could not act with total autonomy and that they were constrained by their obligations under 59

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Community law – a message that would be strengthened by a succession of subsequent judgements. The ruling also provided an important stimulus to the Commission, which recruited its first aviation experts in its wake and, in preparing for the Council’s discussions, began to develop specialist knowledge in the field. When the change in US aviation policy occasioned international debate in 1979, the Commission was able to submit a comprehensive set of proposals for Community action. Its capacity was strengthened further in 1981 by the appointment of John Steele, a widely respected aviation figure, as Director General of DG VII. Given the long-standing desire of the member states to keep the Community firmly out of aviation, these were important developments that assumed even greater significance when the Council adopted its first legislative measures. However, they should not be exaggerated. The items concerned were uncontroversial,1 and the member states remained opposed to major involvement by the Community. The Council’s response to the text that the Commission brought forward in 1979 underlined its continuing hostility. The chapter is divided into three sections. The first discusses post-war cooperation in European aviation. It looks at the two main regional bodies in Europe – ECAC and Eurocontrol – and considers why they were created, their responsibilities, and their structures and organization. It also offers a brief discussion of the Air Union initiative. Although a one-off project that was ultimately abortive, the episode was instructive in demonstrating the determination of EC member states (especially France) to keep cooperation on air transport matters firmly outside the Community arena. The second section discusses the EEC Treaty. It looks at its general features – the ambition underlying the Treaty, the main principles and objectives and the institutions created to achieve its aims – and the provisions relating specifically to air transport. It outlines the debate concerning the status of aviation in the Treaty. The third section examines attempts by the Commission and the Parliament to establish the Community’s competence and to engineer EC action in aviation from 1958 until 1983. It shows that the Council was able to dismiss or to ignore the proposals tabled by the Commission throughout the 1960s and into the 1970s, but that the position changed in the late 1970s. It considers the Court’s judgement in the French Seamen case in 1974 and its impact, including the first extensive discussion of aviation matters within the Council and the first measures to be adopted. It looks at other rulings that steadily undermined member state autonomy, and traces the creation and growth of Commission expertise and confidence.

Regional cooperation in European air transport Two specialist aviation organizations were created in Europe after 1945.2 The ECAC, the more important, became the principal forum for the discussion

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of technical, regulatory and aeropolitical matters. The European Organization for the Safety of Air Navigation (Eurocontrol) is an operational body concerned with air traffic management. Though the original ambitions of its founders were far-reaching, the responsibilities of the organization were repeatedly scaled back in the 1960s and 1970s. The Air Union project, which originated as an initiative on the part of the flag carriers of the original Six, but was joined later by other governments, was also launched in the late 1950s. ECAC ECAC’s origins can be traced to the proposals made in the early 1950s by members of the Council of Europe’s Consultative Assembly variously for the creation of an aviation body similar to the High Authority of the European Coal and Steel Community to coordinate air transport, a supranational authority to manage airspace, and a European Conference to examine how a consortium of airlines might be constituted.3 Though the Committee of Ministers of the Council of Europe was sceptical about these ambitions, it did invite ICAO to convene a European conference to consider ways of improving cooperation between airlines and between states in technical and commercial matters, including the exchange of commercial rights. ICAO proposed that the Conference should deliberate on the basis of a preparatory report, and delegates from nine states duly assembled in Paris in November 1953 for this purpose. The Conference on Coordination of Air Transport in Europe (CATE) convened in 1954 in Strasbourg. Among its recommendations, the Conference proposed the creation of a body that would continue ‘to review developments of intra-European air transport with the object of promoting the coordination, the better utilisation and the orderly development of such air transport’, as well as ‘to consider any special problems that may arise in the field’ (ECAC 2009) The issues debated by the Conference ‘formed a framework from within which the work programme of ECAC was subsequently developed’ (ECAC 2009). At its inaugural meeting (also in Strasbourg) in 1955, ECAC adopted a constitution that permitted the organization to draft its own work programme, call its own meetings and finance its own activities, but stipulated also that the Conference should continue to work closely with ICAO (ECAC 1955).4 ICAO remains ECAC’s parent body, provides its permanent staff and shares its premises in Paris with the organization. Commercial rights were an early topic of discussion and occasioned a debate between advocates of multilateralism and supporters of national sovereignty that was resolved in favour of the latter. Thereafter ECAC settled for a mainly technical role, though the structures required to deal with economic matters were never entirely lost. It was within ECAC, for example, that European governments adopted a Multilateral Agreement on Non-Scheduled Services in Europe (ECAC 1956), and common procedures

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for tariff approval in bilateral agreements in 1967 (ECAC 1967). In the wake of US deregulation in the late 1970s and early 1980s, ECAC was once again the venue for debate between reformers and champions of the status quo (see Chapter 5). Mainly, however, the Conference has been the principal arena for the discussion and study of the technical aspects of aviation in working groups that bring together national specialists and representatives of other interests. The Joint Aviation Authorities ( JAA), which brought together national officials to define product specifications, became an associate body of ECAC in 1989, and oversaw the development of Europe’s common airworthiness requirements until these functions were taken over by the EU’s European Aviation Safety Agency (EASA) after 2002 (Chapter 7). It was also a succession of ECAC Ministerial meetings between 1988 and 1999 that gave strategic direction to the development of Europe’s air traffic management systems. Moreover, ECAC operated as a common negotiating body with authority to finalize agreements with third countries. It was within ECAC that European governments negotiated the MoU with the US in 1982 (Chapter 2).5 European states liked ECAC for several reasons. As well as its capacity to draw on the expertise and technical knowledge available within the member states, its ties with ICAO, and the breadth of its membership – 19 states were founder members; there are now more than 40 (see Table 7.1) – ECAC was and remains an intergovernmental organization.6 In keeping with the primacy given to sovereignty in international aviation, it was created as a consultative body with no power to impose decisions on member governments, who remain free to decide whether and how to incorporate its recommendations into national law. In a sector with a strong sense of its uniqueness (Attali 1994, pp. 131–50), ECAC is a community of specialists united by a common sense of appreciation for what one UK official described in an interview with one of the authors as ‘a very agreeable organisation for those with a common interest and a common concern for this particular amazing endeavour’ (interview with UK official, 19 February 1993). Eurocontrol Under the Chicago Convention, responsibility for air navigation rests with individual states.7 However, the jet age, which ‘took civil air transport into the upper regions of airspace’, which as Majid (1988, p. 88) notes ‘had been hitherto the preserve of military aviation’, dramatically reduced journey times and brought about rapid traffic growth, which presented challenges, particularly for small states.8 In Europe, in the late 1950s, the Benelux countries and the Federal Republic of Germany began exploring the possibility of a joint air navigation system. With France and the UK, they signed an International Convention in December 1960, creating the European Organization for the Safety of Air Navigation (Eurocontrol).9

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Ireland joined in 1965, and those European states who were not members signed cooperation agreements between 1964 and 1967. The Convention bestowed legal personality on Eurocontrol, entrusted it with important regulatory functions and granted it exclusive authority to manage air traffic in the upper airspace, that is, above 20,000 feet.10 However, as Staniland (2008, p. 144) observes: ‘The early years of Eurocontrol offer … a contrast between … technical accomplishment and … [an] erosion of political support.’ France and the UK withdrew in 1965 due to concerns about military security and national sovereignty. The Netherlands followed. As a result, the airspace over which sovereignty had been delegated to the organization was soon restricted to a relatively small area covering Benelux and the north of Germany. A decade later, the Federal Republic and then Ireland decided to bring the upper air control centres established in their territories – in Karlsruhe and Shannon respectively – back under national control. Then in 1981, an amending protocol reduced Eurocontrol’s other responsibilities to little more than research and training. Although the ECAC Ministerial meetings appeared to breathe new life into Eurocontrol after 1988, its membership expanded and a new Convention was signed in 1997; a decade later the text had still not attracted a sufficient number of ratifications to enter into force (Chapter 7). Two organs play a central policymaking role in Eurocontrol. The Permanent Commission for the Safety of Air Navigation, composed of national representatives, formulates general policy. The Agency for the Safety of Air Navigation is the operational part of the organization. Led by the Director General, it is administered by a Committee of Management, composed of member state representatives, which prepares the operational, technical and financial plans of the organization. Unlike ECAC, Eurocontrol has been a specialist body where European states not only exchanged views, but cooperated in air navigation. It was not in conflict or competition with the Commission until the late 1990s (Chapter 7). Air Union The Air Union project was an important early attempt at commercial collaboration between European airlines.11 The initiative originated with Lufthansa, which in 1957 proposed cooperation with Air France, Alitalia, KLM and Sabena to meet the challenges of the jet age.12 The companies were attracted by the prospect of a monopoly, their governments by the possibility of controlling a consortium which, by suppressing ruinous competition, would mitigate the cost of upgrading their carriers’ fleets. Throughout 1958 a series of options were proposed and discussed, but negotiations were beset by two fundamental problems: what aircraft should be purchased from which company;13 and how traffic should be distributed between the contracting parties.14

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Although the governments of Belgium, France, Germany and Italy managed to reconcile their differences sufficiently to sign an agreement in May 1962, the French reopened the negotiations with an alternative proposal at the end of the year that would have tipped the balance of control from the airlines to the governments. Community institutions played no part in these lengthy negotiations, despite the Commission’s complaint to the Council in 1964 that the Community ought to be involved (see later discussion). Further difficulties were encountered, and despite attempts to reach a compromise, the project was finally abandoned in 1965.15

The European Economic Community (EEC) Given the far-reaching impact that the Community would eventually have on aviation, and the attributes of the Community system that made action possible in the late 1980s, the inability of Brussels to intervene meaningfully for three decades is important to explain. The argument made in this chapter is threefold. First, member governments preferred to manage aviation within existing structures, as described earlier. Second, although the ambitions of the EEC were sweeping and powerful rules and institutions were put in place to achieve them, the status of air (and sea) transport under the EEC Treaty was sufficiently unclear to allow the conservative majority to exploit the ambiguity that existed to block any major initiatives. They were assisted by the Commission’s tendency to put forward proposals that were so overly ambitious that they lacked credibility. Third, advocates of Community action were unable to devise a strategy, whether through the use of formal powers or the use of persuasion, to compel governments that were supportive of the existing order to involve the EC in the sector. The EEC Treaty: General aims and principles The Rome Treaty was wide ranging in its objectives, and committed signatory states to permanent cooperation in a dynamic joint enterprise. Its signatories undertook to comply not only with the Treaty’s provisions, but with all future legislation adopted by the Community institutions in pursuance of the objectives of the Treaty. At the Treaty’s centre was the core project of the creation of a common market. An instrument to achieve economic integration, promote industrial development and raise living standards, it was also conceived by the Treaty framers as a platform for eventual political integration. The creation of the common market involved three elements. The first was the ‘dismantling of all obstacles to trade and the free movement of the factors of production’ (von der Groeben 1987, p. 24). Article 3 of the EEC Treaty declared the abolition of obstacles to freedom of movement for persons, goods, services and capital as a general ambition. Specific provisions concerning the realization of the ‘four freedoms’ were stipulated

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at Articles 23–31 (ex 9–37), which covered goods, Articles 17–22, 39–41 (ex 8, 48–51) persons, Articles 49–55 (ex 59–66) services and Articles 59–60 (ex 76–73) capital. More broadly, nationals were given a right of establishment, permitting them to set up agencies, branches and subsidiaries in other member states (Articles 43–8; ex 52–8)); the legal systems of the member states were to be gradually harmonized (Article 86 (ex 90)); the discriminatory use of taxation was prohibited as a fiscal barrier to free trade (Articles 94–5; ex 100); and the member states were obliged to implement a common social policy (Articles 136–51; ex 117–28). Moreover, Article 86 (ex 90) sought to prevent member states from enacting or maintaining in force any measures contrary to the rules contained in the Treaty. This prohibition was particularly important when read in combination with Article 7 of the EEC Treaty, which established a principle of non-discrimination against Community nationals. The second element was the creation of a common external tariff and the pursuit of a common commercial policy towards third countries wanting to import goods into the common market. The Six were obliged to coordinate agreements with third countries and to bring their existing international agreements into alignment with the provisions of the Treaty (Articles 131–5, 307; (ex 110–16, 234)). Third, a system of rules was designed to ensure fair competition within the common market (Articles 81–9; (ex 85–94)). The Treaty included provisions forbidding any restriction liable to distort competition, not only in the private sector but also in cases of State action. Article 81 (ex 85) prohibited anti-competitive agreements between undertakings, though it also provided for the possibility of individual exemptions and exemptions by category or bloc. Article 82 (ex 86) introduced controls on the abuse by companies of a dominant position. Article 87 (ex 92), meanwhile, deemed incompatible with the common market any aid granted by a member state or the use of state resources in any form that distorts competition. Exceptions were permitted in relation to assistance to underdeveloped regions, promotion of projects of European interest, emergency action taken to deal with serious economic disturbance and aid with a social character. In short, the ambitions and principles embodied in the Treaty of Rome were fundamentally at odds with the practices that characterized European air transport. However, the position in the text of the provisions relating to air transport led to uncertainty about the applicability of the general principles and rules of the Treaty to the sector. Aviation in the EEC Treaty Despite the efforts of Paul-Henri Spaak, the Belgian Foreign Minister, to include in the Treaty a commitment to integrate transport in general and air transport in particular, only a minimal formulation ultimately found its way into the text. Spaak had sought to secure inclusion of provisions relating to both transport modes in his proposal to the German, French

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and Italian Foreign Ministers on 4 April 1955, where he set out Monnet’s ideas for a EEC,16 and in the Spaak Report, where he held out the possibility of liberalizing commercial traffic rights, coordinating aircraft procurement and the sharing of aircraft between companies, and rationalizing services through joint operations.17 In the final negotiations, Spaak persisted with his proposals, but officials, sent from their national capitals to discuss transport, resisted his appeals, citing the prior existence of developed regulatory structures (Van Tichelen 1981, pp. 339–40). The provisions relating to transport in general that were eventually included in the Treaty reflect the inability to reconcile conflicting positions.18 Although a common transport policy was identified as one of the general aims of the Treaty (Article 3 (e) of the EEC Treaty), Article 51(1) (ex 61(1)) of the EEC Treaty stipulated that ‘[f]reedom to provide services in the field of transport shall be governed by the provisions of the Title relating to transport’. The Title in question – Title IV, Articles 70–80 (ex 74–84), in Part Two of the Treaty – required the member states to pursue the objectives of the Treaty within the framework of a common transport policy (Article 70; ex 74), but enjoined them to take account of the distinctive features of transport (Article 71; ex 75). Air transport occupied a curious position even in relation to these provisions. Article 80 (ex 84) introduced an important distinction between transport modes. It stated that 1. The provisions of the Title shall apply only to transport by rail, road and inland waterway 2. The Council may, acting unanimously, decide whether, to what extent, and by what procedures appropriate provisions may be laid down for sea and air transport’.19 The wording of Article 80(2) (ex 84(2)) and its position in the Treaty and in relation to Title IV gave rise to debate and controversy. Two competing interpretations emerged.20 ‘Particularists’, including most members of the Council, argued that the formulation of Article 80(2) together with its location in the text had the effect of removing air (and sea) transport from the scope of the Treaty until such time as the Council agreed unanimously that it should apply and how. By contrast, ‘universalists’, who included the Commission, contended that the effect of Article 80(2) was simply to exclude air transport from the provisions of the Title relating to transport and not from the general provisions of the Treaty. Community institutions The EEC Treaty created a set of institutions which it entrusted with the task of realizing the objectives stated by the text, as well as a complex system of decision-making and collective governance. Most functions were shared

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between Community institutions and the member states (Hix 2005; Kassim 2007), but at the same time the Commission, the Court and to a lesser extent the Assembly were granted powers and responsibilities that enabled them to act independently of member governments – a feature that distinguished the EEC from other international organizations. Various checks and interdependencies built into the system did, however, impose the scope for discretionary action in most areas.21 The following discussion relates mainly to the powers and responsibilities of the individual institutions up to the early 1980s. Subsequent extensions in the scope of Community competence and the powers of its institutions are noted in later chapters, especially Chapters 7 and 8. The European Commission The responsibilities entrusted to the Commission confirm the founders’ intention that the organization should be the motor of integration (Hallstein 1965; Coombes 1970; Ludlow 1991; Fitzmaurice 1994; Pollack 2003). It would take the lead in advancing the aims of the Treaty and prevent negotiations and decision making from degenerating into inter-governmental horse trading, while ensuring that member states complied with their obligations. The Commission was given four main responsibilities. The first was policy initiation. Article 211 (ex 155) granted it a formal monopoly over legislative initiative.22 Although the Council (and later the European Parliament) could ask it to submit a text, the Commission could alone decide whether to prepare or to withdraw a proposal. This formal agenda-setting power is, however, subject to an ‘amendment rule’ (Pollack 2003, p. 85): other institutions can amend the Commission’s proposal; and a ‘voting rule’ (Pollack 2003, p. 85): the Council takes a decision on the proposal before it by unanimity or qualified majority voting. Nevertheless the Commission’s agenda-setting power is an important resource that has enabled it to persuade or compel other actors to take action on particular issues and to shape to a significant degree the final content of Community legislation.23 The Treaty also granted executive powers to the Commission. A general provision allows the Council to delegate powers to the Commission to implement policies agreed by the member states. However, the Council was from an early date concerned to monitor and control the exercise by the Commission of its executive powers, and developed implementing committees composed of national officials with varying degrees of power to perform this function. As procedures were becoming more complex and confusing, a Council decision was adopted on 13 July 1987 in an effort to clarify the possibilities available and to set down guidelines as to which procedure should be used in what particular case.24 Comitology has always been a contentious issue. The Treaty also gives the Commission direct responsibility for applying the rules relating to competition policy and state aid (Chapter 9). Given the key role that the competition rules were to play in achieving and regulating the

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common market, and their far-reaching scope, the Commission was handed considerable powers. Effect was to be given to Articles 81 (ex 85) and 82 (ex 86) by a Council regulation, to be enacted on the basis of a proposal from the Commission. This measure, which was agreed by the Council in 1962, gave the Commission far-reaching powers in investigating suspected infringements; wide discretion in determining whether an infringement had taken place; and final decision-making authority, subject to the jurisdiction of the Court (Goyder 2003; McGowan 2000; Morgan and McGuire 2004). The Commission could act on its own initiative or in response to an application by a member state, and in cooperation with the relevant national authorities (Article 85; ex 89). In the interim, in the period prior to the adoption of an implementing regulation, Article 84 (ex 88) entrusted the competent authorities in the member states with responsibility for ruling on the admissibility of concerted practices and the abuse of dominant positions. No implementing measure was required in the area of state aid. Article 88 (ex 93) charged the Commission, in cooperation with the member states, with the task of keeping all systems of aid under constant review. Where it finds that such aid is not compatible with the common market, it can require the state concerned to abolish the aid within a specified period and, if the state fails to comply, the Commission (or any other state) may refer the matter to the European Court of Justice. Under Article 88(3) (ex 93(3)), a member state may seek clearance from the Commission for plans to grant or alter aid. Moreover, member states have the right to appeal to the Council, which, by a unanimous decision, can declare that a particular transaction or arrangement is compatible. Article 89 (ex 94) empowered the Council, acting on a proposal from the Commission, to devise appropriate regulations for the implementation of Articles 87 and 88 (ex 92 and 93) and, in particular, to define the conditions under which Article 88(3) (ex 93(3)) applies. The Commission is the guardian of the treaty – a third function. Under Article 122 (ex 155), the Commission was given the power to take action against the Council or member states, companies and individuals, for failure to comply with their obligations under EU law. Where it suspects that a member state is in violation of Community legislation, the Commission can request information and clarification from the government concerned. If it is not satisfied, it can issue a reasoned opinion, in which it specifies the infringement that has taken place and the measures to be taken for it to be remedied (Article 226; ex 169). Should the violation persist, the Commission is empowered to bring proceedings before the European Court of Justice (ECJ). The Commission’s fourth function concerns external relations. Where the Community has an internal policy that may be affected by relations with third countries, or in multilateral organizations, the Council decides, on the basis of a Commission proposal, what position the Community is to adopt, but the Commission normally conducts negotiations on the Community’s behalf, assisted by a committee of national officials.

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European Court of Justice While the provisions in the Treaty relating to the Commission are long, the function of the Court is defined in a single article: ‘The Court of Justice shall ensure that in the interpretation and application of this Treaty the law is observed’ (Article 164; ex 220). Subsequent provisions specify its areas of jurisdiction. They include infringement actions brought against a member state by the Commission or other governments; preliminary rulings, according to which a national court faced with a question involving European law can ask the Court to give its interpretation; review of the legality of actions by Community institutions; reviewing the legality of a failure to act of a Community institution; determining Community liability for damage caused by the institutions or their servants in carrying out their duties; and adjudicating on the legality of international agreements. The role given to the Court under the EEC Treaty is one of the features that distinguish the Community from other international organizations and lend the EC its distinctive supranational quality. The Court has the authority to require that national governments comply with their obligations and to impose fines where it finds that a government has contravened primary or secondary law. It has also extended its remit and the reach of the treaty. The preliminary rulings procedure has enabled the Court to establish itself as the highest court in the Union, to enlist national courts as enforcers of EU law and to penetrate the legal orders of the member states (Stone Sweet 2000; Chalmers 2000). Moreover, by proclaiming doctrines of direct effect and of the supremacy of EU over national law, the Court has transformed the Treaty through a process of constitutionalization, creating rights based on the Treaty that are legally enforceable by litigants in national courts (Weiler 1991, 1997). In the absence of effective controls, the Court can act autonomously and with wide discretion. The European Parliament The Parliament originated as the Assembly of the European Coal and Steel Community and was created to provide a check on the High Authority, though its powers and responsibilities have grown considerably, especially since the Single European Act (see Rittberger 2005). Under the EEC and Euratom Treaties, the Assembly became a common institution that served all three Communities. Although it had the power to censure the Commission, its participation in law making was limited. Under the EEC Treaty, the Commission and Council were required to seek the Assembly’s opinion. The latter was permitted only a single reading and had no opportunity to make a further input once its opinion had been transmitted to the Council. Moreover, neither the Commission nor the Council was obliged to follow the Assembly’s recommendations. In the period under discussion in this chapter, the most important developments were the decision of the members

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of the Assembly to style itself the European Parliament as a symbol of their aspirations for the institution; the decision of the European Council in 1975 to set the date of direct elections to the Parliament for 1979; and the ruling of the Court in Isoglucose (European Court of Justice 1976), which prohibited the Council from reaching a decision until it had received the Parliament’s opinion. The first major step in the strengthening of its law-making power took place under the Single European Act, which required that the Parliament be consulted on proposed air transport measures, but the cooperation procedure did not apply to the sector until 1993. Co-decision, which has upgraded the European Parliament to the status of co-legislator in those areas where it applies, was introduced by the Treaty of European Union in 1993, but has applied to aviation only since 1997 (Stevens 2004, p. 78). Council of Ministers The Council’s functions and responsibilities under the EEC Treaty are perhaps the most straightforward of the four institutions (Wessels 1991; HayesRenshaw and Wallace 2007). Originally the Community’s sole legislator, a role now shared with the European Parliament, the Council had (until the co-decision procedure was reformed under the Treaty of Amsterdam) the final say in the policy process and was regarded as the EC’s ‘decision-making center’ (Wessels 1991, p. 133). Composed of member state representatives and meeting at three levels – upwards from working group through the Committee of Permanent Representatives to the ministerial Council – its deliberations have been marked by a search for accommodation, even in issue areas where the Treaty specified qualified majority voting as the decision rule. The European Council, which brings together Heads of State and Government, and the President of the European Commission emerged in the late 1960s. Initially an informal gathering outside the Community framework, its status has been formalized in stages since the mid-1970s. It was mentioned in the treaties for the first time by the Single European Act (SEA) and its role was defined in the Treaty of European Union. Though it has no formal executive or legislative powers, the European Council is regarded as the senior decision-making body within the Union system, reflecting the composition of its membership. It takes decisions concerning treaty reform, as well as in sensitive political areas, and can intervene when dossiers have become blocked in the Council. It has on occasion played a decisive role in air transport.

The triumph of conservatism? The EC and aviation 1957–83 The opponents of Community involvement in air transport, content with the existing order, were able to withstand pressure for EC intervention for 30 years. This was due partly to the failure of its advocates to make a compelling case (see later discussion). However, the member states’ ability to exploit the

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ambiguous status of aviation under the Treaty was a major factor at a time when there was no compelling ideological, strategic or commercial reason for the Community to develop an aviation policy. Although independent carriers, consumer organizations and passenger groups came increasingly in the 1970s and 1980s to champion Community involvement as a way to achieve air transport liberalization in Europe (Chapter 5), they did not have the formal standing required to bring a case before the Court (Conant 2002, 2003). Intervention by the Court in French Seamen forced the first retreat of upholders of the status quo, which it followed with a series of other rulings that, though not directly related to air transport, had implications for the sector. However, it was only after the launch by the US of its new aviation policy that member governments began to discuss air transport matters within the Community framework and then only reluctantly and on a limited basis. Early debates 1958–74 In the 1960s and early 1970s, the Commission vacillated between hesitancy about Community competence in air transport and grand ambition in the multi-modal schemes that it envisaged. Initially, the Commission was somewhat tentative about aviation and deferred towards the Council.25 In its Second General Report (Commission 1959, section 198), the Commission noted that governments had been unwilling to extend to air transport the provisions of the Treaty, but argued in the Third that entry to the jet age made collaboration between airlines a necessity and indicated that it was proceeding towards a study of the problem (see also Commission 1960, section 271). It asserted that air and sea transport were indeed subject to the general rules of the Treaty, including competition, on the ground that they were not specifically excluded, and the Community should endeavour to make policy in these areas, while taking the special characteristics of the two modes into account (Commission 1960, section 270). The ‘Schaus memorandum’ (Commission 1961), which set out the Commission’s proposals for a common transport policy – in other respects a bold and comprehensive plan firmly rooted in the liberal objectives of the Treaty – made no proposals for air transport, however, beyond observing that the Council could suspend the application of the competition rules until such time as appropriate measures were taken. The proposed action programme that followed in 1962 (Commission 1962) also made no proposals for air transport and sheltered behind the responsibility of the Council to decide what to do under Article 80(2) (ex 84(2)). The Commission’s reluctance to make proposals did not impress the Assembly, which argued consistently throughout the 1960s and 1970s that the Treaty gave the Community competence in aviation. The report to its Transport Committee, drafted by Corniglion-Molinier (Parliament 1961), demolished the objections raised by the member states. It contended that there was no need to ‘bring in’ air transport, since the sector was already

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covered under Articles 3 and 80 (ex 84), that Article 80(1) (ex 84(1)) spoke of exclusion from the ‘present title’ (i.e. Title IV on Transport) rather than from the Treaty as a whole, and that Article 80(2) (ex 84(2)) allowed for derogations from the competition rules in the same way that Title IV required the special characteristics of other modes of transport to be taken into account in the implementation of the general rules of the Treaty. The Corniglion-Molinier report also argued that claims that air transport was different on account of its relationship to sovereignty and national defence needs or because international aviation matters were dealt with in other forums could not be sustained in view of the pooling of sovereignty in other organizations, such as NATO and the WEU, or other requirements made of member states by the EEC Treaty. It called for cooperation between European airlines and coordination rather than competition as a way of overcoming the small size of the European market, its fragmentation into sovereign territories and the rigidities of the bilateral system. Its other proposals included lower fares and a closer alignment between airlines costs and the fares charged to customers, central negotiation by the Community of air services agreements with third countries and the harmonization of working conditions and professional requirements for airline professionals. As a consultative body, the Assembly had no power to enforce its opinions, and the Council was able to ignore them. The same fate befell reports on the Air Union project drafted by Martino (Parliament 1962) and Drouot-l’Hermine (Parliament 1965) for the Internal Market Committee and the Transport Committee respectively. The Commission experienced only marginally more success after expressing concern that the project was being managed outside the framework of the EEC, securing the concession from the Council that the Commission would be kept informed of the progress of negotiations.26 The Commission was preoccupied throughout the 1960s and into the 1970s with the more urgent business of getting the Council to develop a common policy for the more important inland transport modes than with embarking on a fruitless search for the unanimity in the Council that would have been required for air transport. Indeed, the only action taken on air transport by the Community in the early years was the adoption of Council Regulation No. 141/62, which exempted air transport along with all other modes from the application of the treaty competition rules – a path of action that was contested by the Assembly (Parliament 1962). Air and sea transport remained excluded, when inland transport was brought within the scope of the competition rules six years later (Council Regulation 1017/68). The Commission was continually seduced by the attractions of planning and policymaking on a grand, even visionary scale. The Schaus memorandum was followed by further attempts to create an all-embracing common transport policy in 1965 and again in 1973. The 1965 proposals related to the harmonization of tariffs across all the inland transport modes. The 1973 proposals (Commission 1973) were even more ambitious in attempting to link transport

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policies to the whole range of policies required to support the concept of an economic and monetary union launched at the Paris Summit of October 1972,27 but the Council did not respond. In 1975, another bold but unrealistic programme, more specifically relevant to the air transport sector, known as the ‘Spinelli Plan’ after the Commissioner concerned (Commission 1975), emerged from the Commission’s industry directorate. It advocated a fully fledged air transport policy as part of a comprehensive plan to support the European civil and military aeronautical industry. The thrust of the scheme reappeared in the Scarascia-Mugnozza communication (Commission 1976) the following year. In between, a more modest proposal was put forward by the Commission in 1972 (Commission 1972). The Commission aimed only to obtain authorization for measures to promote cooperation between Community airlines and to take preliminary steps towards a general definition of the common air transport policy. It paid due regard to bilateral agreements within the EC, and called for services to be improved on secondary routes, a common approach by member state airlines in IATA negotiations, and coordination of the negotiation of air services agreements between member governments and third countries. The initiative was well received by the Parliament and the Economic and Social Committee (Commission 1972b), but, although the Council adopted a decision based on the Commission’s proposal, it was clear that the member states had no intention of proceeding further within the Community framework, nor were they compelled so to do. Even the Commission’s more limited proposals received no encouragement from the Council.28 In 1972, for example, it suggested rather tentatively to the Council that it might draft measures for Community action on secondary services within the EEC, on IATA tariff consultations and on the coordination of negotiations between member states and third countries. However, the Council took no action. Governments preferred to treat air transport matters in the traditional forums, while the Commission lacked the knowledge and expertise to act as an effective interlocutor and broker among the conflicting interests of the member states. It was 1977 before an attempt was made to remedy this critical weakness when a specialized air transport unit was created in the Commission’s transport directorate-general, DG VII. Though the Commission has never entirely given up its pursuit of an over-arching common transport policy, the establishment of a dedicated air transport unit did begin to facilitate the development, from about 1979, of more practical mono-modal proposals for air transport. The French Seamen’s case Though member governments were able to maintain their resistance for a further decade, the Court’s ruling in Commission v. France (French Seamen) was an important milestone. It gave the Commission the opportunity to

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put aviation on the Council agenda, strengthened the hand of advocates of Community action and created uncertainty among supporters of the status quo about their ability to block Community initiatives indefinitely. The case concerned the question of whether Article 80(2) (ex 84(2)) of the EC Treaty removed sea (and, therefore, air) transport from the scope of Title IV of the Treaty or from the entire Treaty. It was brought before the Court after the Commission had challenged a provision of the French Code du travail maritime that stipulated that a certain percentage of the seamen employed on French merchant vessels should be French nationals.29 The French government argued that the provisions of the Treaty relating to discrimination against EEC nationals did not apply to sea transport, since under Article 80(2) (ex 84(2)) sea (and air) transport were removed from the scope of the general provisions of the Treaty and were subject to a special regime as determined by the Council, while the Commission contended that these provisions of the Treaty applied to all areas, unless explicitly stated. The Court upheld the position of the Commission. It reasoned that the establishment of the common market covered all economic activities within the Community and that the general principles enunciated under Articles 2 and 3 of the Treaty applied across the board unless specific provision was made for an exemption, as was the case, for example, with respect to agriculture. The effect of Article 80(2) (ex 84(2)) of the EC Treaty was not to exclude air and sea transport from the general principles of the treaty, but only from the special provisions of Title IV, so long as the Council had not used its powers under the Article to decide otherwise. The Court concluded that the application of Articles 39–42 (ex 48–51) to sea transport was not, therefore, optional, but obligatory. Although the Court’s judgement rejected the interpretation of Article 80(2) of the EC Treaty on which opponents of Community involvement had relied, it introduced a new uncertainty that would not be resolved authoritatively for a further 12 years.30 The Court used a phrase ‘general rules’ of the Treaty, which was a terminology unknown in the document itself. This shifted the ground for conflict between supporters of EEC action and their opponents. The former argued that the ‘general rules’ included all the general provisions of the Treaty (for example, right of establishment, nondiscrimination against nationals of a member state, competition). The latter claimed that the phrase referred to the general provisions of Part I and Part II of the Treaty, but not Part III, which set out the competition rules. Despite these uncertainties, the period after the French Seamen case was marked by a new spirit of cooperation between the Commission, the Council and the established aviation world. The new air of cordiality did not immediately generate any material results, not least because, as discussed earlier, the Commission dropped its more modest approach of the early 1970s in favour of grander ambitions. In the wake of the Court’s judgement, the Commission explored the possibility of implementing the competition rules

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of the Treaty in air transport, before concluding rather timidly that agreements between airlines were ‘a matter for the governments of the member states’.31 The creation of a Council working group Despite the relative inactivity of the Commission in 1977 and 1978, the member states made their first concession to Community involvement in the sector in June 1977 when the Council instructed the Permanent Representatives’ Committee (COREPER) to establish a working group to investigate air transport in the EC. The decision was motivated by two developments. The first was the decision of the US to ask IATA to ‘show cause’, which had already led to emergency debates in ICAO (see Chapter 2) and ECAC (see Chapter 5). The second was a series of rulings by the Court following its ruling in French Seamen that had no immediate consequences for air transport, but that carried implications which the member states could ill afford to ignore. The Court gradually undermined member governments’ view that the status quo was secure because there could be no common policy for air transport unless and until they agreed it unanimously. It became increasingly clear that individuals and companies had rights and obligations under the Treaty that could not be set aside by the failure of the Council to lay down implementing regulations. Either the Council must act or the Courts would have to apply the Treaty articles as they stood to the questions which came before them case by case. In AETR in 1970 (Case 22/70), for example, the Court laid the foundations for the exercise of external competence by the Community (Chapter 7). In INNO v. ATAB (Case 13/77), which raised a first question mark against the compatibility with the Treaty competition rules of the arrangements by which governments enforced the tariffs agreed among the airlines within IATA,32 the Court ruled that, although Articles 81 (ex 85) and 82 (ex 86) were addressed to the actions of commercial undertakings and not member states, Article 10 (ex 5) imposed a duty on the latter not to enact or maintain in force any measure which would deprive Treaty provisions of their effectiveness.33 The implication was that illegal price-fixing by companies could not be sheltered from the competition rules by government regulations imposing the agreement reached. A further ruling in the same year, in a case which concerned the provision of subsidy to the Belgian railway company, confirmed that the state aid rules applied to transport by stating that the effect of Article 73 (ex 77), which acknowledges that aid to transport is compatible with the Treaty only in certain well-defined cases, could not be to exempt aid to transport from the general system of the Treaty as set out in Articles 87–9 (ex 92–4).34 These rulings were not yet sufficient to persuade the Commission that they might attack the IATA cartel (Chapter 2) and its government supporters. The multilateral and bilateral agreements in air transport were widely understood, not least by the Commission, to give the airlines protection from the

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application of the competition rules of the EC Treaty, in particular Articles 81 and 82 (ex 85 and 86) by virtue of the special position accorded under Article 86(1) (ex 90(1)) to ‘public undertakings and undertakings to which Member States grant special or exclusive rights’. There was little room for doubt that most airlines were undertakings of that character, and the Court had confirmed, in the 1974 Sacchi case (Case 155/73), that member states had the right to grant exclusive rights and to create monopolies for reasons of public interest of a non-economic character.35 Moreover, under Article 86(2) (ex 90(2)) where such undertakings are ‘entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly’ the competition rules apply to them only ‘in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them’. Several national airlines, including Air France, Lufthansa and British Airways, were subject to formal obligations of a public service character, which could be held to satisfy this requirement. And finally, although airline fares were negotiated within IATA, governments played a decisive role in fixing and enforcing the fares so negotiated, and the Court had taken the view that government price regulation as such was not prohibited under Community law.36 COREPER allocated the task of establishing a working group to investigate air transport in the Community to the Transport Working Group (TWG), ‘specially constituted for the study of air transport questions’. When air transport was on the agenda, the regular members of the TWG drawn from national representations in Brussels could be accompanied and advised by experts in air transport from national capitals. The group was asked to draw up a list of areas which might benefit from Community examination, measures which the Council might be invited to take and subjects which the Council might ask the Commission to look at with a view to applying the general provisions of the Treaty to air transport. The list was submitted to the Council and approved one year later on 12 June 1978 (Commission 1979a). The list was a ragbag of non-controversial and essentially technical topics.37 In some cases, they were the focus of work in other forums, notably ECAC. However, the inclusion of topics from the general parts of the Treaty, such as the right of establishment and the state aid and competition provisions, which the Court had shown to be at risk in the absence of any Council decisions, was significant. The working group’s report did subsequently lead to the adoption of a small number of modest technical measures by the Community,38 but this did not signify that the member states considered the EC an appropriate forum for the discussion of aviation matters. ECAC remained the principal focus for regional cooperation in air transport. The ‘First Memorandum’ Until 1979 the Commission lacked the confidence to do more than put forward modest initiatives that built on the list of priorities approved by the

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Council. The only exception was the draft directive on implementing the competition rules of the Treaty, formulated by DG IV Competition rather than DG VII Transport. However, in July 1979, one year after the Council had approved the list of topics for study, the Commission sent the Council its first memorandum on the contribution of the European Communities to the development of air transport services (Commission 1979b). This cautious document acknowledged the importance of US deregulation, but emphasized the need for Europe to follow a prudent evolutionary course that would not disrupt the existing system, and called for close consultation with all parties. It drew on the list of topics endorsed by the Council (e.g., the simplification of formalities at airports, technical harmonization and the mutual recognition of professional qualifications) in an attempt to provoke a wide-ranging dialogue that would open the way for specific actions, but stopped short of making specific proposals. In the 45-page text, the Commission outlined the objectives of a future common air transport policy to benefit users, airline companies, workers and the Community as a whole. It called for the liberalization of market access, starting with interregional services, the encouragement of tariff reductions through measures designed to make it easier for airlines to introduce innovative fares and the implementation of the competition rules. It also stressed the importance of a coherent approach on the part of member states in their dealings with international organizations and third countries. The European Parliament and the Economic and Social Committee were largely sympathetic to the Commission’s analysis and prescriptions.39 The Association of European Airlines (AEA), the body representing European flag carriers, gave cautious approval to the Commission’s approach to fares, competition and general economic development of airlines – an indication of the modesty of the Commission document – as did IATA. However, scheduled carriers made it clear that air traffic control and infrastructure were more important priorities than liberalization – a view echoed by ICAO, which added that such improvements could only be achieved through its own global and regional bodies. They also indicated that they considered the present system adequate. Trade unions considered that the Commission had paid insufficient attention to social issues and were worried that its proposals would lead to ‘anarchy in the air’ (Commission 1984a, p. 7). User groups, on the other hand, argued that the Commission aims were modest, while the Association of Independent Airlines (ACE) welcomed the initiative. The member states showed little enthusiasm for the Commission initiative. Some expressed surprise that the Commission had been capable of preparing such a document. Most thought it doctrinaire, because of its insistence on Council obligations under the Treaty, and utopian on the grounds that the Community lacked the necessary machinery to assume responsibilities in the field. Following deliberations in December 1979, the Council asked the Commission to draw up an action programme on inter-regional air

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services – a barely significant sector of economic activity – but remitted other matters to COREPER (in practice, to the TWG) for further consideration. The Council did in July 1980, however, ask the Commission to review the level of scheduled air fares in the Community. The report, submitted a year later and largely echoing the findings of an ECAC report, concluded that air fares were not excessive in relation to costs. In October, the Commission followed up with a proposal on tariffs on scheduled air transport, which called for closer relation of fares to costs, the introduction of country-of-origin approval as a way of moving away from mutual agreement, Commission arbitration to resolve disputes between member states and the attendance of Commission observers at IATA traffic conferences. At the same time, the Commission proposed a regulation to apply the competition rules of the Treaty to air transport. The proposal provided for limited exemption for certain airline cooperative activities. Its declared applicability was to all air services to and from the Community and to non-Community airline operations. Both proposals were fiercely debated in the European Parliament. The Council, where a majority of states were opposed to Community regulation in air transport, did not act on the proposals. DG IV tended to take a more doctrinaire and legalistic approach than DG VII. The 1981 proposal made explicit reference to a Court ruling in Case 156/77 laid down on 12 October 1978, which specified that the competition rules were part of the general rules of the Treaty, and argued that there could be no doubt about the application of Articles 81 and 82 (ex 85 and 86) to air transport. The measures described earlier illustrate both the benefits and the limitations of the cautious, pragmatic, problem-solving approach that characterized DG VII’s ambitions at this time. It was an approach that accepted the limitations of intergovernmental decision-making, where the unanimity rule allowed the least enthusiastic government effectively to determine policy or indeed whether action was taken at all. Even where technical and practical considerations seemed to favour cooperation, proposals could be blocked by one member state that opposed Community involvement on principle. A more assertive Commission The Commission’s approach changed significantly after the first memorandum. The process of preparing the document had for the first time brought Commission officials into direct contact with the aviation world. The Commission gained a standing and status which it had not previously enjoyed, and its experience was instructive about what could be achieved with an approach that was more moderate than the multi-modal proposals of the mid-1970s. The Commission was further strengthened by the arrival of a new Director General at DG VII in the form of John Steele, a former Deputy Secretary in the UK Department of Trade with extensive experience of aviation and shipping, and a figure widely respected within the air transport community.40 Steele’s presence not only enhanced the Commission’s

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credibility in the aviation field, but gave DG VII the confidence to address new issues. It began to study state aid in aviation,41 signed a cooperation agreement with Eurocontrol, started an investigation into the effects of infrastructural constraints on the industry and prepared in cooperation with IATA’s Facilitation Committee a report on the free movement of air freight within the Community. In addition, following an initiative of the UK Air Transport Users’ Committee, the Commission supported the creation in October 1982 of the Federation of Air Transport Users Representatives in the European Community (FATUREC), which merged associations representing business and leisure air travellers. Most significant, despite its modest content, was the adoption by the Council in June 1983 of the inter-regional air services directive (Council Directive 83/206/EEC) – the Community’s first incursion into economic regulation. The Commission had submitted its proposal (in November 1980) following Council discussion of the first memorandum. However, the episode showed that member governments had not undergone a change of heart. Although there was wide agreement that inter-regional services were underdeveloped and that there was considerable scope for new services without risking damage to the commercial interests of the major national airlines (ECAC 1978), the Council still took nearly four years to complete their negotiations. The German Presidency in the first half of 1983 gave substantial time and effort to the issue, but the Commission’s proposal, modest as it was in the first place, was further weakened.42 Whatever the symbolic importance of the directive, the Commission’s high hopes that a taste of freedom on these minor routes would lead airlines to call for the relaxation of restrictions on the major trunk routes proved unfounded. Other Commission proposals (on greater transparency in the structure of tariffs and allowing airlines freedom to determine their own fares (Commission 1981a), and on applying the competition rules of the EEC Treaty to air transport (Commission 1981b, Commission 1982) were simply allowed to lapse by the Council.

Conclusion This chapter has explored why the Community remained a spectator in aviation until the 1970s. It has examined the development of regional aviation bodies in post-war Europe and shown that EC member states preferred to manage aviation matters within these structures and the wider international regime of which they were a part than to contemplate any transfer of responsibility to Brussels. ECAC in particular commanded loyalty and respect. As well as its links with ICAO, the specialist expertise of which it disposed, and its intergovernmental organization and operation, ECAC had demonstrated its usefulness and value. It had proved able to meet the needs of its members with regard to the technical, and also economic, aspects of

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aviation, and its membership extended more broadly across the European continent than did the Community’s – an important asset. The presence of these regional bodies, with ICAO at the global level, strongly deterred member governments from seeking to involve the EC in the sector. In addition, despite their obligations under the Treaty, member governments were largely able to ignore or to resist initiatives from the Parliament and the Commission for the Community to play a role in aviation. They claimed that the Treaty left it to the Council to decide when, and if, action should be taken in the sector, and that its more general provisions did not apply. Nor did the Commission demonstrate the strategic or tactical adroitness necessary to compel governments to take meaningful action in Brussels. It was only when the Court delivered its judgement in French Seamen that member state resistance began to be eroded. Although the first discussion of air transport issues within the Community framework was followed a few years later by a series of relatively innocuous measures, the Commission gradually began to develop some expertise in the field, while the Court laid down a series of rulings with direct and indirect implications for aspects of air transport regulation that ran counter to member state preferences, raising important doubts about the ability of member governments to resist Community action indefinitely. However, a breakthrough came only when the Commission, actively supported by the UK, brought forward a series of proposals that exploited the opportunity created by the new aviation policy launched by the US.

5 The Liberal Breakthrough, 1984–7

Although air transport was discussed within the EC framework for the first time in the late 1970s and a number of minor measures were adopted thereafter, major intervention by the Community in the first half of the 1980s was by no means inevitable. A majority of governments remained opposed to Community involvement in the sector (and indeed to liberalization), preferred to manage aviation matters in ECAC and continued to question both the Community’s legal competence and the Commission’s expertise. Yet within three years of the cool reception that it gave to the Commission’s second memorandum, the Council had crossed ‘the Rubicon for air transport liberalisation in Europe’ (Wheatcroft and Lipman 1986, p. 115), adopting in December 1987 a first air transport liberalization package that was based largely on that text. This chapter considers how this liberal breakthrough came about. Contesting the main accounts in the literature (see Chapter 1), it highlights the importance of changes in the external environment and aims to demonstrate that the adoption of the first package cannot be explained only by reference to factors internal to the Union. It argues that the first package cannot be satisfactorily explained as a function of the interaction within the Council that reflects the intensity of national preferences and the relative power of the member states as proposed by the ‘power indices’ approach (van den Bos 1994). Nor can it be seen as a response by member governments to the demands of air carriers, business groups and consumers to replace the rigidities of the Chicago regime with more flexible supranational rules as claimed by modified neofunctionalism (Stone Sweet and O’Reilly 1998a, 1998b). It is misleading also to interpret its adoption as part of the single market programme as suggested by historical institutionalist accounts (Armstrong and Bulmer 1998, p. 170). The chapter contends rather that the breakthrough was made possible by the effects of the new US policy on international aviation and brought about by activism on the part of a transinstitutional liberal coalition and the exploitation by the Commission of its powers associated with the implementation of the competition rules to overcome opposition within the Council. 81

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The international context became more favourable to Community involvement in the sector following the change in US policy (Chapter 2). Although its effects were not direct and did not translate immediately into Community legislation – to which the fate of the Commission’s ‘first memorandum’ bears testimony – the new US policy greatly enhanced the prospects for Community action. By introducing new practices, concepts and an alternative paradigm, it provoked a wide ranging debate about the regulation of the sector, as well as policy emulation in Europe and elsewhere. The position of advocates of a more liberal approach to aviation was greatly enhanced and a growing number of actors in Europe, including the British and the Dutch governments, called for the first time specifically for Community intervention to reform aviation regulation. This climate was far more conducive for the Commission to argue for Community action. With the support of two important aviation states, the Commission was able, assisted by the intervention of the European Court of Justice, to mobilize the bias in the Treaty towards negative integration and to use its enforcement powers to compel the conservative majority in the Council to adopt a legislative package. The discussion that follows is organized into three parts. The first considers the effects of the new US policy. It shows how policy change in Washington had consequences, both general and specific, that were favourable to the Community’s involvement in air transport. The second examines developments in the EC and ECAC in 1984 and 1985 following the Commission’s presentation of its second memorandum in March 1984. While little progress was made towards an agreement within the Community during these two years, the liberal coalition began to develop a more aggressive strategy following the appointment of a new Commission at the beginning of 1985. The third section offers a detailed examination of the complex processes between and within the EC and ECAC that led eventually to the adoption of the first package in December 1987.

After US policy change: A new environment for Community action The changes that the new US policy brought about in international aviation were not restricted only to the terms of the open skies agreements that it negotiated or the giant carriers that emerged from domestic deregulation (see Chapter 2). US policy opened up a debate about the regulation of the sector, empowered the supporters of a more liberal aviation policy and led to a growing chorus for Community action. The impact of the new US policy Although it did not rewrite the Chicago Convention, the new US policy was premised on a radically different approach to the use of the powers granted to states under the regime and challenged the restrictionist assumptions

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on which governments across the world had based their aviation policies. It provoked a debate on fundamental principles that had not been in question since the 1940s or early 1950s. While advocates of reform pointed to the benefits of liberalization for consumers and airlines, defenders of the status quo argued that the traditional approach had created a reliable, stable and extensive system of air services that had lasted for 40 years. Competition, they claimed, would jeopardize these achievements, and bring chaos and instability. At the thirty-eighth annual conference of IATA in 1982, for example, the Director General, Knut Hammarskjöld, warned of the dangers of uncontrolled competition, while a Swiss aviation official insisted on ‘pricing discipline and tariff integrity’ and a ‘return to serious values’. Pierre Giraudet, President of Air France, meanwhile, pointed in 1983 to the ‘chaotic, unbridled competition’ in the US that deregulation had brought (cited in Sampson, 1984, p. 187). A similar clash of views took place in ECAC. Although outnumbered by supporters of the traditional system, a liberal President – Hans Raben, the Dutch Director General, who held the office between 1976 and 1979 – was able to confront the officials of more conservative states with arguments in favour of liberalization and evidence of shortcomings in the state of European aviation. Moreover, the debate was not restricted to traditional forums, such as IATA or ECAC, but spilled into other arenas, including the Community. It was joined by consumer groups, business representatives and independent airlines, who called explicitly for action on the part of the European Community to loosen regulatory restrictions. The British and the Dutch governments adopted a similar stance (see discussion later). Under these circumstances and with the debate in ECAC taking place on the EC’s doorstep, it was no longer possible for opponents of Community intervention to ignore the Commission and merely to assert that Brussels had no role to play in aviation. The focus of the discussion on economic regulation, moreover, where the Community enjoyed competence and the Commission had expertise, rather than technical or operational issues or matters of domestic policy, where other organizations were responsible, similarly removed questions about the legitimacy of the EC’s participation in the debate. ECAC Developments within ECAC prompted by the new US policy also had important consequences for the Community. First, there was prolonged discussion of the merits of a less restrictive approach to aviation and analysis of the regulation of European aviation and its consequences. Second, the Netherlands and the UK sought actively to promote a liberal agenda within ECAC. Third, the Commission would later draw on the studies produced by ECAC to support its arguments and inform its proposals, and would use the fact that EC member states were engaged in discussion about the regulation of aviation to justify its position that reform was necessary.

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Raben challenged his colleagues from other aviation authorities to engage with the issues raised by US deregulation. He invited Fred ‘Genghis’ Kahn, the architect of US deregulation and Chairman of CAB, to deliver an address to his fellow Directors-General, thereby exposing defenders of the established system to Kahn’s forceful economic arguments in favour of relaxing regulatory restrictions in the sector. He also initiated reflection on the state of European aviation, creating a new committee (EURPOL), which he chaired for two years, to discuss change.1 Conscious of the Commission’s concern to involve the Community in the regulation of the sector, Raben emphasized the importance of addressing these issues in EURPOL, noting, for example, that the membership of ECAC was uniquely pan-European, and warning pointedly that ‘(d)elegations should realize … that if ECAC decides not to pursue a given matter, it leaves the initiative to other international bodies’. During this period, ECAC set up a number of task forces to review the state of the industry, which produced a series of authoritative and influential reports.2 The most important was the Report on Competition in Air Services, known as the ‘COMPAS Report’ (ECAC 1982), produced by a task force on competition in air services set up by EURPOL. The creation of the task force a year after the Commission launched its 1979 first memorandum (Commission 1979b) was not accidental.3 The task force’s low-key terms of reference invited the group to collect information about pooling agreements, bilateral agreements, fare agreements, and other questions on competition, and to suggest improvements in each case.4 John Loder, the United Kingdom representative, who was generally credited with the impetus that the group developed, drew considerable support from his Whitehall department (Bulmer et al. 2007, p. 52), and took advantage of the opportunity to explore a wide range of options, which could in principle be used to increase competition – for example, by designating more airlines to compete on established routes, giving them more freedom to decide for themselves frequencies, capacities and tariffs – as well as describing the situation that prevailed. After two years of intense work, the group concluded that the three main elements of the regulatory system, governing route entry, tariffs and capacity, had to be considered together. Reviewing the bilateral agreements of ECAC member states covering services within Europe, it revealed high levels of restriction and the near absence of competition.5 It argued that zones of freedom, combined with safety nets, would open up potential for greater competition, and recommended that a multilateral system incorporating these zones of freedom be created by ECAC countries, with zones implemented by its member states on a bilateral basis (though see de Coninck 1992, p. 18).6 When the final text came to the ECAC Triennial Session at Strasbourg for approval in June 1982, the reception was at best lukewarm,7 but the thoroughness of the research gave the Report an authority that

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these reservations could not diminish. Its influence was later evident in the Commission’s second memorandum (Commission 1984a) and lent that document considerable weight and authority. A call for Community action In the wake of the new US policy, supporters of change began for the first time to identify the Community as an arena in which European aviation could be liberalized. The UK was the most influential, though a range of organized interests and other groups also began to lobby for the involvement of Brussels. The UK’s European strategy Somewhat paradoxically given the Party’s later scepticism about ‘Europe’, Conservative governments after 1979 played a key part in highlighting the role that the Community might play in liberalizing air transport and after 1983 actively promoted action at the EC level.8 The first Thatcher government had embarked on a liberalizing programme in 1979. As well as giving greater autonomy to the CAA (Chapter 3), it began to deregulate domestic air services (Barnes 1988). The CAA relaxed its restrictions on route entry following a policy review, and allowed direct competition between British Airways and British Midland between London and Glasgow and Edinburgh. It was considerably less effective in its efforts on the international front, however. Ministers had been encouraged by the early results of air transport deregulation in the USA and the initial success of the Laker Airways ‘Skytrain’ service to New York, and were keen to see similar opportunities opened up in Europe. They approved three objectives in November 1979: to introduce better and cheaper air services within the European Community; to provide new opportunities for UK airlines to fly them; and to further by this means, the political aims of encouraging greater competition, and demonstrating the benefits of Community membership. The policy was further developed in evidence from the Department of Trade to the House of Lords in December 1979,9 which identified bilateral negotiations with European partners and multilateral negotiations within ECAC and the EC as the channels through which these objectives were to be achieved. Indeed, the importance of Brussels was reinforced in the conclusion to a policy review by Lord Cockfield in September 1982, when he was Secretary of State for Trade, which stated: I propose to continue our campaign of persuasion and argument within the Community, with the aim of achieving a degree of liberalisation by consensus when our airlines are again in a position to expand their activities in Europe. (cited in Stevens 1997, pp. 6–8)

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The initial results of this strategy were meagre, however. Although the UK had made an important contribution to the COMPAS report, it made little progress on bilaterals or with the Community. It was strongly outnumbered in the Council – seven of the Nine (eight of the Ten after the accession of Greece in 1981) were still firmly committed to the status quo – unable to advance a liberal agenda during its tenure of the Council Presidency in 1981,10 and dismayed by the position that the Commission took in regard to the case brought by Lord Bethell (Case 246/81 Bethell v. Commission [1982] ECR 2277) in an attempt to declare existing practices in aviation incompatible with the Community’s competition rules (discussed later). UK efforts were redoubled when, following the June 1983 election, the second Thatcher government transferred aviation and shipping from Trade and Industry to a new Department of Transport, which had a sharper focus on the political goals of privatization and deregulation. Nicholas Ridley, who had been for two years the Treasury Minister responsible for the privatization programme, became Secretary of State in October and immediately stepped up government efforts. He raised the profile of the bilateral programme by participating personally in the negotiations,11 and signed a first liberal agreement, with the Netherlands, on 20 June 1984. This agreement granted free access by any licensed British or Dutch airline to any routes between the two countries, abolished all restrictions on capacity and allowed the aviation authorities of each country to determine the tariffs for their own airlines, which immediately cleared the way for airlines of both sides to offer lower fares. By the time the two Ministers signed a yet more liberal agreement a year later, freeing the airlines from all control over their fares unless both governments disapproved (‘double disapproval’), the first agreement could be shown to have generated ten new services across the North Sea, and a 16 per cent increase in traffic on the main route between London and Amsterdam. Meanwhile, in the year between the two Dutch agreements, the UK had signed liberal agreements with the Federal Republic of Germany (December 1984), Luxembourg (March 1985), Switzerland (June 1985), with a further agreement to be signed with Belgium in October 1985. In 1984, the Commission brought forward its second memorandum (Commission 1984b) (see discussion later). The UK strongly supported liberalizing action by the Community, but wished to go considerably further than the proposals contained in the Commission’s text. London recognized the potential of Community competition rules for opening up the sector and sought from the early 1980s to bring about their implementation (interviews with former UK officials 24.8.92 and 12.10.92). It also used the success of its renegotiated bilaterals to advertise the merits of liberalization to its European partners. Thus, an analysis of the benefits of the first Dutch bilateral was attached to the ECAC policy statement of June 1985 (see discussion later). The agreement with Germany, meanwhile, was signed by Ridley and Dollinger, his German counterpart, in the margins of the Transport Council

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meeting in Brussels which received the report of the high-level group in December 1984. The bilateral route to liberalization proved to have important limitations, however. There was a relatively small pool of states prepared to renegotiate with the UK, and the available possibilities soon became exhausted. In September 1986, for example, Spain signalled its opposition to British pressure for a more liberal bilateral by terminating the existing agreement on the grounds that its airlines were not getting a fair share of the rapidly expanding seat-only charter market. Achieving Community action thus assumed even greater importance for the UK. London sought to press the liberal cause in the Council, engaged in bilateral diplomacy with key member states, with particular attention directed towards France and Germany, to persuade them of the benefits of liberalization, and played a key part in shaping the proposals that would later be adopted in the form of the first package. Action by independent airlines and consumers The European Community was also targeted by interest groups. In the wake of US deregulation, independent airlines argued that the regulatory system unfairly denied them commercial opportunities, while consumer groups claimed that European air transport was inefficient and that passengers were forced to suffer the excessively high fares that resulted.12 Both constituencies were especially active in the UK, which had both the continent’s largest aviation sector and a strong tradition of consumer activism, but they were also active in Brussels. As well as calling for legislative action by the Community, some of these groups believed that EC law offered a possible route by which to change the existing order. Freddie Laker was responsible for an early challenge. He had applied to the UK CAA for licences to operate Skytrain services between London, Birmingham, Manchester and Glasgow and 32 European destinations. In April 1980 his application was turned down, but not before the application and the public hearing had focused public attention on competitive conditions in European aviation generally, and on the high fares, which he promised to challenge. Frustrated in his immediate ambitions, Laker joined forces with Lord Bethell in May 1980 to launch, with Business Traveller magazine, a ‘Freedom of the Skies’ campaign. Its aim was to get as many readers as possible to complain to the Commission that the system governing air fares operated by governments and airlines through IATA was contrary to Community competition rules. The campaign received support from user groups, such as the International Air Passengers’ Association (IAPA), which represented frequent travellers, as well as from the media and from Conservative Members of the European Parliament (MEPs). In a letter to the Commission in May 1981, Lord Bethell argued that if the airlines could not be held responsible for fixing fares in contravention of Article 81 (ex 85) and for abusing a dominant position in contravention of

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Article 82 (ex 86), then the governments must themselves be responsible and the Commission should take action against them instead. The Commission was not ready to leap to that conclusion. In its reply the Commission pointed out that two inquiries, in 1978 and again in 1981, had led it to the conclusion that in most cases the final fixing of air fares was the sole responsibility of the Member States; government participation generally took the form of autonomous price-fixing measures, and not consultation between companies. There was therefore no ground, in principle, for scrutinizing the activity of either the States or the airlines under Article 85. (Letter from Commission 17 July 1981, cited in Court ruling Case 246/81, ECR 1982, 2277, Ground no. 5) The Commission indicated that it intended to examine the subject again, and was writing to governments to warn them that ‘even if fares were lawfully fixed by them by means of autonomous price-fixing measures, the fares must not be so excessive as to infringe Article 86’ (ibid.). Dissatisfied with this answer, Lord Bethell with the support of the British government and a number of airlines, including Air France, British Caledonian, KLM and Lufthansa brought an action against the Commission in the ECJ on 10 September 1981, under Articles 230 and 232 (ex 173 and 175) of the Treaty, seeking, inter alia, a decision to ‘annul the Commission’s communication of 17 July 1981 [Commission 1981a] either in its entirety or in so far as it declares the competition rules are not applicable to airlines with respect to the fixing of air tariffs within the Community’. The Court, however, threw out the case as inadmissible, without addressing its substance, on the grounds that Lord Bethell did not have locus standi (Case 246/81, [1983] ECR 2277). Undeterred, the MEP launched a number of other cases – against Sabena in 1983 on the grounds that its price and pooling agreements contravened the competition rules of the Treaty,13 and against British Airways alleging that its tariff agreements with KLM prohibited the availability of low tariffs on routes between the UK and the Netherlands.

The second memorandum and impasse in the Council, 1984–5 Despite these changed circumstances, liberal supporters of Community action remained in a minority. Although the proposals the Commission tabled in 1984 (Commission 1984a) were more thoughtful, moderate and considered than those contained in the first memorandum, traditionalist member governments remained opposed to Community involvement. The deadlock persisted throughout 1984 and 1985. However, following the appointment of a new College in 1985, the Commission began to develop a new strategy. Whereas previously it had relied on its agenda-setting

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powers, proposing action and hoping to persuade the member states of the need to act, it now started to develop a more aggressive approach. Pursuing what Schmidt (2000) terms a ‘lesser evil’ strategy, the Commission threatened to attack the existing system of regulation by taking action under the Treaty against anti-competitive practices in air transport, either the direct use of its own powers under the Community competition rules or indirectly through recourse to the Court, unless member states agreed to give their endorsement to the measures that it proposed. The second memorandum The Commission presented Civil Aviation Memorandum No. 2 (Commission 1984a), the text on which the first package would ultimately be based, in March 1984. It began with a review of developments since the 1979 memorandum, observing that consumer criticism, the impact of the recession and US deregulation had provoked a debate about the extent to which the regulation of European aviation served the interests of passengers or airlines, and whether it was compatible with the Treaty (Commission 1984a, pp. 1, 12, 17). Although it argued for the creation of a common market in the long term and opined that liberalization was necessary for consumers and airlines, the Commission took pains to reject US-style deregulation as an appropriate model for Europe.14 In contrast with the first memorandum, it called not for the wholesale replacement of the bilateral system within the Community, but for its relaxation, which would allow for improvements in efficiency and profitability, while at the same time ‘maintaining the significant benefits that the present system provides’ (Commission 1984a, p. i).15 Government control would be loosened and airlines allowed to take decisions according to their own commercial judgement, but governments would continue to use their flag carriers for non-aviation purposes. Memorandum No. 2 put forward a series of proposals that the Commission presented as interdependent. Governments would not be permitted to require their airlines to enter capacity- or revenue-sharing agreements, or to restrict the capacity offered by airlines designated by another member state, and, amending its 1981 tariff proposal, a zonal system for fares would be introduced.16 Discrimination against airlines from other Community states would be prohibited. Amending its 1981 proposal (Commission 1982), the Commission proposed implementing the competition rules in aviation, but only on international routes between Community airports. The Commission should be empowered to grant block exemptions under Article 81(3) (ex 85(3)) from the anti-trust prohibition set out in Article 81(1) (ex 85(1)) and specified categories of agreement that would benefit from this exclusion. The Commission also appended a policy paper on state aids on the grounds that, if not properly regulated, a ‘subsidy race’ would destroy the benefits of greater competition, as it had done in steel. It noted its intention to extend to aviation the provisions of Commission Directive

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80/723/EEC,17 which would require member governments to notify to the Commission the grant of any state aid to their airlines. Although it focused principally on economic regulation, the memorandum also discussed other areas. It noted the shortcomings of air traffic control in Europe, emphasized the Commission’s’ efforts to simplify frontier formalities and gave notice of its intention to make personnel licences mutually acceptable. In respect of third-country relations, the Commission acknowledged that Community action would affect neighbouring states and indicated that it would try to develop consultation with the countries concerned. The Commission noted that, acting under Article 302 (ex 229) of the Treaty, it had entered into cooperation agreements with ECAC and with Eurocontrol. Finally, the memorandum reminded the member states of their obligations under Article 307 (ex 234) to take appropriate steps to eliminate incompatibilities between their Treaty obligations and any agreements they might have with third countries (1984b, paras 90–2). The second memorandum was an important milestone. Even officials from the most conservative aviation states were impressed by the quality of document and suspected that the UK must have had a hand in producing the text.18 In fact it was very largely the work of John Steele himself, though it used ideas and incorporated concepts from discussions in ECAC.19 The strategy it proposed was evolutionary, and its ambitions more restrained than in earlier documents. Bilateral agreements – the ‘basic fabric of intergovernmental cooperation’ (Travis 2001, p. 47) – would not be disturbed, and the competition rules would not apply to domestic services and would be mitigated by the use of block exemptions. Moreover, the measures proposed were directed at the commercial activities of airlines, such as tariff-setting and capacity, not state prerogatives such as licensing or market access.20 Deadlock in the Council Despite the more moderate character of the second memorandum, opposition to the Commission proposals remained fierce. Meanwhile, the minority liberal camp intensified its efforts. London sent an especially strong delegation to the Council working group, where it formed a ‘close coalition’ with the Dutch officials and the Commission (interview with former British official, 24.8.92). The UK also embarked on a charm offensive in 1984 and 1985 in an attempt to persuade France and Germany that gradual liberalization would not be destructive.21 However, little progress ensued in the Council discussions in the 21 months that followed the tabling of the Commission’s proposals. None of the countries that held the Council Presidency – France and Ireland in 1984; Italy and Luxembourg in 1985 – wanted to advance the issue. Moreover, discussion in the Transport Council was dominated by proposals for a common transport policy, which followed the case brought by the European Parliament against the Council for its alleged failure to fulfil its obligations under the Treaty.

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The Council did agree at its meeting on 10 May 1984 to create a high-level working group to examine the Commission’s proposals. Comprising senior representatives from the member states and Commission, the group was asked to report back before the end of the year.22 Over dinner on the same day, Nicholas Ridley underlined his government’s intent to advance the liberalizing agenda when he drew attention to his government’s new bilateral agreement with the Netherlands. He then gave notice that the UK would no longer require airlines to consult one another before filing fares. In making this move, the UK was departing from procedures laid down in the ECAC multilateral tariff agreement of 1967 that were universally observed in Europe. The minister made it clear that he was taking this step because he believed it was required by the Treaty. It was not so much the UK’s liberal policy stance that caused a ripple of concern to spread around the dinner table as the reference to the overriding authority of the Treaty of Rome and its liberal competition rules.23 The first meeting of the high-level group was a critical moment. The French Presidency proposed an agenda focusing on the social consequences of increased competition which, if followed, would have led to a report critical of the Commission’s proposals. France repeated this attempt to insist on harmonization before considering liberalization when it next held the Presidency in 1989. The procedural proposals of the Presidency are usually nodded through, but in this case the British delegate countered with a proposal that the group should first examine the regulation of each of the main economic parameters of airline competition – market access as well as capacity and tariffs – next the Commission’s proposals for applying the competition rules of the Treaty, and only then the social consequences. Not only was this agenda the reverse of that proposed by the Presidency, it included in market access a major topic that had not figured at all either in the Commission’s proposals or in those of the French Presidency, but which the UK considered key to introducing a more liberal system of regulation. With the Presidency passing within days to Ireland, France was not in a strong position to insist on its agenda, and the Irish Presidency accepted the logic of the British proposal. The report of the high-level group submitted to the Council in December 1984 focussed firmly on economic issues. Asked to produce guidelines for the development of the Commission’s proposals, it set out mechanisms for liberalizing capacity, tariffs and market access, but not proposals for the breadth of the liberalized tariff or capacity zones, which it left open to further consideration (interview with former Council official, 2.4.93). However, for the first time in Brussels, these included proposals for the designation of more than one airline from each side to serve the market between two countries, and even between two cities, as well as a special, less onerous, regime for services operated by small aircraft (ESC 1985). The Commission was initially unimpressed, regarding the Council’s guidelines as ‘legally

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unsound and unacceptable’ (Commission 1986a, para. 28), though many of them would later find their way into the first package. The Council remitted the group’s report through COREPER to the TWG, but the Working Group made little progress under either the Italian or Luxembourg Presidencies. However, in May 1985 the Court upheld the Parliament’s argument on the Council’s failure to develop a common transport policy.24 The immediate impact of this ruling was to refocus attention on the common transport policy. However, the following month, ECAC adopted a relatively liberal ‘Policy Statement on Intra-European Air Transport’ (ECAC 1985) in terms that were a little more specific than the guidelines adopted by the Council’s high-level group (see discussion later). By contrast, in September, departing from its previous support for Community action, the European Parliament endorsed the Klinkenborg Report (European Parliament 1985) that was critical of the Commission’s approach. Praising recent procedural reforms introduced by IATA and AEA, the report accused the Commission of attempting to introduce US-style deregulation in Europe and of being the captive of a small unrepresentative consumer interest group.25 Civil aviation was a highly cooperative activity, the rapporteur argued, and the EEC should only take action if other organizations failed to take the initiative. He argued that the Commission’s tariff proposals were bureaucratic, that a large number of agreements would have to be exempted from the competition rules, since air transport was an inherently cooperative activity, and that there should be no blurring of the distinction between scheduled and non-scheduled services. Though the report drew criticism from within the Parliament, including members of the EP’s Transport Committee, the Commission, Bureau européen des unions de consommateurs (BEUC), and from Association des Compagnies Aériennes de la Communauté Européenne (ACE) (Agence Europe Bulletin, Nos 4155, 5.9.85, p. 7, 4157, 7.9.85, p. 9, 4160, 12.9.85, pp. 9–10, and 4163, 16–17.9.85, p. 9), it showed that the anti-liberal coalition was still influential. At this point, the Commission was in trouble, but two developments in 1985 had beneficial long-term effects. First, the single market programme was launched. Lord Cockfield’s White Paper, which made specific mention of aviation, was submitted to the Milan Summit in June 1985 and the European Council signed the Single European Act (SEA) in December.26 It became difficult for member governments thereafter to sustain the argument that air transport should remain aloof. Furthermore, the SEA modified the institutional arrangements governing air transport: from 1 July 1987, qualified majority voting would apply in Council decision-making with respect to air transport (Article 16 (5)) and the role of the European Parliament was to be strengthened by the introduction of the cooperation procedure. Second, the New Year brought a change of Commission. The first Delors Commission saw Stanley (later Lord) Clinton-Davis become Commissioner for Transport and Peter Sutherland take charge of competition.

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Both Clinton-Davis and Sutherland had a greater interest in aviation than their respective predecessors. Sutherland, in particular, had identified air transport, along with financial services and telecommunications, as areas to which application of the competition rules of the EEC Treaty could be extended and where the Community could act decisively in the interests of the ordinary EC citizen and consumer by attacking the anti-competitive practices that characterized the industry (interview with member of Sutherland cabinet, 7.1.96). By bringing its enforcement powers in relation to the competition rules to bear, the Commission could exert pressure on member governments. In his first month in office, Sutherland signalled his intent by taking action against Olympic Airways on the grounds that it had abused its dominant position over ground-handling services (Commission Decision 85/121/ EEC). A few months later, he made an initial move in the direction of the strategy that would eventually force the Council’s hand (Sutherland 1988, pp. 105–23). In April, in a letter to BEUC, he observed that some aspects of the tariff-setting procedures might be contrary to Articles 81 (ex 85) and 86 (ex 90) of the EEC Treaty, and that action under Article 169 (now 226) might be taken against member states who failed to cooperate (Agence Europe Bulletin, No. 4132, 15–16.7.85, p. 12). The following month the Commission sent reasoned opinions to seven member governments it considered to be in contravention of Article 85 (ex 89) by failing to supply information about inter-airline agreements involving its carriers.27 Sutherland also made use of press coverage and public-speaking opportunities to advertise the benefits of air transport liberalization in an attempt to bring public opinion to bear on the governments and airlines that opposed change. The message of a more efficient industry, cheaper fares and better quality service for consumers was difficult to counter. Clinton-Davis took a softer line than Sutherland, but stressed that if by June 1986 negotiations were not getting anywhere, the Commission would have no alternative but to use ‘other weapons’. He stated his preference for a ‘balanced approach’, and ‘trying to achieve our objective through the Court [as a] second-best solution’ (Commission, IP/85/385, 11.9.85). The difference reflected the different priorities and concerns of the two portfolios: the Competition Commissioner that fair competition within the Community should be the primary objective of policy, the Transport Commissioner that the consideration of the industry was important. One effect was to send mixed messages, which encouraged the industry to believe that the aggressive policy espoused by Sutherland might yet be watered down. Moreover, the arrival of Clinton-Davis led to the departure of John Steele,28 and his replacement by Eduardo Peña, a former Spanish diplomat and consultant in international economic relations. Although the member states had been compelled to assist the Commission in providing the information it had requested from their airlines, they

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still insisted that the competition rules of the Treaty did not apply to air transport, and they were aware of tactical differences between DG IV and DG VII. They perhaps hoped that even if the Commission were to proceed successfully with action against scheduled carriers, it would not achieve a common air transport policy, but only the annulment of certain inter-airline agreements. Despite the commitment of the two new Commissioners, the air transport dossier had made little progress up to the end of 1985. Parallel developments in ECAC The debate on the future regulation of European aviation had continued in ECAC. Liberal countries were keen to press their case in both Paris and Brussels and were buoyed by the technical work taking place in ECAC that seemed to be advancing their position. The Commission, however, was not part of ECAC, and though it followed discussions in Paris and drew on the studies and documents that the Conference produced, was insistent that action should take place within the Community. Conservative states that were also members of the EC initially sought to counter liberal arguments in both organizations, but as momentum grew became increasingly concerned that if a step towards liberalization were to be made, it should be taken by ECAC rather than by the Community. ECAC’s intergovernmental operation and its inability to impose obligations on its members made it considerably less threatening than the Community. Within ECAC, the secretariat was instructed to send the COMPAS report of 1982 to the AEA, the Council of Europe, the EEC Commission and IATA. The AEA and IATA did little with it, but the Commission drew extensively on the recommended mechanisms for tariff and capacity liberalization in its second memorandum. Moreover, the Council of Europe embarked on its own study of liberalization which in April 1985 gave rise to Resolution 839 of its Parliamentary Assembly, inviting ECAC to adopt a policy statement ‘with a view to promoting a more innovative, competitive and efficient air transport system in Europe’. The Council of Europe is not the most influential body in European aviation, but its support for a more liberal regime was a significant marker of how the climate of opinion was changing.29 ECAC’s 1985 Triennial Session, the Conference’s highest policymaking forum, received the Council of Europe’s Resolution 839 and adopted a policy statement on intra-European air transport policy that had been carefully crafted in the EURPOL group in the summer of 1984 following the second memorandum. It stated that ECAC ‘seeks to achieve a pragmatic, balanced, middle-course between the extremes of deregulation and unduly restrictive regulation’, and suggested that in their bilateral relations governments should adopt ‘a more flexible policy with regard to market access, less rigidity in the application of the principle of fair and equal opportunity in the field of capacity, and more flexible conditions and criteria in the tariff system’. It mentions designating more than one carrier on each side,

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abandonment of strict 50:50 capacity sharing and zonal tariff systems. The ECAC policy statement stopped short of prescribing any particular set of measures, but the Conference resolved ‘to develop further its intra-European air transport policy work during the next triennium’. These efforts had the strong support of Germany and France, which preferred to seek an agreement in ECAC: partly because it would apply across the whole of Europe, partly because it would almost certainly be less radical than anything developed in Brussels and partly because they did not want the Commission to have a larger role in air transport.30 Over the following 12 months ECAC working groups drew up draft schemes for both tariff and capacity liberalization (though not market access), though the outline schemes submitted to the ECAC Intermediate Session in June 1986 demonstrated the limitations of the Conference’s consensual approach. The IATA observer indicated that the proposed tariff scheme went further than they and the AEA had proposed,31 and a German participant maintains that the development of these ECAC agreements helped to draw France, Portugal and Italy towards eventual acceptance of a more liberal regime (private correspondence). But the UK and Netherlands delegations found both schemes too restrictive, and the Irish delegation, whose leader had chaired the group which developed the capacity scheme, also had to enter a reservation against it, on the grounds that the liberalization of capacity sharing, which allowed a range of 55:45 in the first two years, would not necessarily be widened by any more than 1 per cent in the third year. The Commission observer, who had participated in the work of the two groups, acknowledged the usefulness in preparing the revised proposals which they had put forward in Brussels on 18 June, but warned that ‘some of the elements in the two proposed ECAC schemes [might not meet] all the requirements of the Treaty’s competition rules’. Throughout the remaining months of 1986 and into 1987, as negotiations approached their climax in Brussels, work proceeded in parallel in Paris on an alternative set of tariff and capacity agreements that were significantly less liberal than the Brussels package, and with no provision for market access. The British failed to deliver a Community agreement under their Presidency, mainly because the market access dimension was a late addition (see discussion later), and ECAC was not ready with fully fledged capacity and tariff agreements at the end of the year either, but the pressure within ECAC to outflank the Community if possible was such that the French delegation, with support from Germany and Portugal, proposed the signature of MoU which would put the ECAC schemes into immediate effect among the signatories. Notwithstanding a reminder from the Council Legal Service that member states should abstain from any measure which could jeopardize the objectives of the Treaty, Austria, France, Germany and Switzerland signed both MoUs on 19 December 1986, while Spain and Portugal signed only the Memorandum relating to tariffs. When the final agreements were

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opened for signature in Paris on 16 June 1987, the tariffs agreement was signed by twelve states, and the capacity agreement by eight. This was a serious attempt by the cautious majority to create an alternative framework for reform of European aviation, but the ECAC agreements were overtaken by the more radical first package, which may be seen as the point at which power in air transport shifted from ECAC to the European Community.

Towards the first package, 1986–7 At the beginning of 1986, the possibility of agreement on the adoption of legislation by the Council appeared a long way off. The cautious majority seemed capable of preventing any decision and the imminent accession of Portugal and Spain, two countries with strongly conservative views on aviation, promised to strengthen that majority. The Commission began the year with a communication to member governments, asking why, if they were able to consider changes in ECAC, they would not countenance similar measures within the Community (Commission 1986c), and expressing its frustration that discussions involving member states were proceeding outside the Community framework.32 At this point, the ruling of the European Court of Justice in Nouvelles Frontières strengthened the credibility of the Commission’s threat to take recourse to litigation should the Council fail to adopt appropriate measures. Successive Dutch and British Presidencies offered an opportunity for the liberal minority to prioritize air transport. The Nouvelles Frontières judgement The Court’s ruling of 30 April 1986 finally settled the dispute over the applicability of the competition rules of the EEC Treaty to air transport (Ministère Public v. Lucas Asjes, Joined Cases 209–213/84 [1986] 3 CMLR 173 – ‘Nouvelles Frontières ’). The case had been referred to the Court by the Tribunal de Police in Paris for a preliminary ruling, after the French aviation authorities had commenced proceedings against a number of airline companies and travel agents for an alleged breach of provisions of the Code de l’Aviation Civile. The companies were accused of applying tariffs which had not been approved by the minister as required.33 It was the content of the phrase ‘general rules’ of the EEC Treaty, used by the Court in its ruling in the French Seamen case that was at issue. The Court reiterated its opinion that the general provisions of the Treaty applied to all areas, except where specific exemptions had been made and that the Council, in adopting Council Regulation (EEC) No.141/62 to exclude air and sea transport from the application of Council Regulation (EEC) No. 17 of 1962, accorded with this understanding. The view that air transport was exempt, either because the Council had excluded it from Regulation 17 or because it had not adopted a regulation implementing the competition rules in the sector, amounted to a failure of the Council to fulfil its obligations under Article 83 (ex 87) of the EEC Treaty, but this could

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not constitute valid grounds for arguing that the rules did not apply. The consequence of the Council’s inaction was that member states rather than the Commission bore primary responsibility for ensuring compliance with Articles 81 and 82 (ex 85 and 86) of the EEC Treaty. Moreover, the Court pronounced that agreements could only be exempted under either Article 86 (ex 90) or Article 81(3) (ex 85(3)) of the EEC Treaty once general rules governing block exemptions had been adopted. In the absence of these provisions, no specific exemptions could be granted. The Court balanced its judgement, however, by ruling that, in the absence of a Council regulation implementing the competition rules in air transport, the sector was subject neither to the direct enforcement provisions of the Commission under Council Regulation 17 or Regulation 1017/68, nor to automatic nullity under Article 81(2) (ex 85(2)) of the EEC Treaty. Until the Council adopted an implementing regulation, Articles 81 and 82 (ex 85 and 86) of the EEC Treaty could be applied either by aviation authorities in the member states (under Article 84 (ex 88)) or by the Commission, acting in cooperation with the member states (under Article 85 (ex 89)). Once these authorities had taken a decision, ordinary national courts would be able to act to ensure compliance with EEC competition rules. Commission and Council in the aftermath of Nouvelles Frontières The Commission responded promptly, signalling its intention to use the threat to enforce the competition rules to put pressure on the Council, by writing to the major EEC air carriers and requesting information about their inter-airline agreements.34 In preparing to deploy the ‘lesser evil’ strategy (Schmidt 2000) (see Chapter 1), the Commission would be forcing the member states to reach agreement on the proposals that it had put on the table or to accept the consequences of Court action. The advantage of the legislative path was that it would allow a gradual transition to a more liberal framework for European aviation, grant sufficient time for flag carriers to prepare for their exposure to competitive pressures and permit the negotiation of derogations. Were the Court to decide that existing practices were incompatible with the Treaty, change would be abrupt and there would be no scope for easing the industry into a new era. The Court’s decision did not immediately galvanize the member states into action, however. Indeed, the Transport Council scheduled for May was postponed until June, and then put back further when the Commission submitted a communication to ministers at the last minute. Although the ruling of the Court and the action of the Commission caused member governments to realize that they could not oppose the Commission’s efforts indefinitely, it had not made them any more favourably disposed to the development of a liberal common policy. By the time that the Council finally met in June, ECAC had reached agreement on the main features of its proposed capacity and tariffs agreements (see earlier discussion). In addition, the Dutch had

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inserted a commitment to the achievement of a single market in aviation in the Declaration of Heads of State and Government, delivered on 27 June.35 Thus, the European Council had effectively cut the ground from under the transport ministers of the Ten. Thereafter, the Commission would ritually refer to the Hague Declaration. The Transport Council discussed the Commission’s communication of 20 June (COM (86) 338) and its report on the first year of operation of the InterRegional Directive (COM (86) 382). In the first, the Commission had averred that it should be possible for ministers to reach agreement on fares, capacity and the application of the competition rules at this next meeting, and warned that it would agree to exemptions from the competition rules only if sufficient flexibility was shown by the Council on the other issues. In the second, the Commission noted the new services introduced and new routes between hub and regional airports opened following the Inter-Regional Services Directive, argued that these developments supported a widening of the Directive and indicated that it would present proposals to the Council accordingly. The Ministers also considered a joint Franco-German proposal, based on the majority position in ECAC and tabled at the Council as a compromise (Agence Europe Bulletin, No. 4344, 21.6.86, pp. 13–14). It foresaw strict conditions on the availability of reduced fares, and rejected the Commission’s liberal capacity proposal, suggesting instead that capacity should be allowed to vary only between 55 and 45 per cent for a three-year period. On the one hand, the proposal revealed a softening of positions and an acknowledgement that some measure of liberalization was inevitable. On the other, it represented an attempt to pre-empt the agenda of the incoming UK Presidency. The UK responded with an uncompromisingly liberal counter-proposal that it intimated would form the basis for discussion during its forthcoming Presidency. It argued that airlines should be free to set their own tariffs within zones of reasonableness and determine capacity according to their own commercial judgement, that Community competition rules should be implemented and that there should be free access to the market. A majority supported the Franco-German proposals. Only the UK and the Netherlands supported the British view, while Ireland adopted an intermediate position (Agence Europe Bulletin, No. 4351, 2.7.86, p. 5). Despite its failure to reach agreement, the Council did express its wish to follow up the Declaration made at the Hague Summit in the preceding week. It acknowledged the need for a coherent air services system in Europe and committed itself to gradual change over a three-year period, during which it would consider and decide other measures to complete the single market.36 Most significantly, however, and as a result of lobbying by the UK and the Commission, the Council agreed that it was necessary to take action with respect to market access.

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The UK Presidency, July–December 1986 The UK Presidency sought to carry negotiations in a liberal direction on all fronts, and, like the Commission, brandished the threat of the competition rules. Two weeks before the start of the British Presidency, John Moore, who had succeeded Ridley as Secretary of State, announced a review of the machinery and procedures required to enforce EC competition rules in UK law under Article 84 (ex 88) of the Treaty ‘if it proves impossible to achieve a satisfactory agreement in the EC Council’.37 Shortly thereafter, the Commission announced that it would enforce the competition rules, while indicating its preparedness to accommodate the reasonable requirements of member governments and the airlines.38 Then, on 18 July, proceeding under Article 85 (ex 89), it formally charged ten Community airlines with infringements of the competition rules.39 The Commission had been slow to introduce proposals on market access, despite the recommendations of the high-level group in 1984 and the ECAC policy statement of 1985. Towards the end of July it introduced a rather timid market access proposal in the form of a proposed amendment to the Inter-Regional Services Directive,40 but two months later submitted a revised and slightly more ambitious version of this proposal (Commission 1986f).41 Clinton-Davis judged this change to be sufficiently important to tour national capitals in September to assess the Commission’s margin for manoeuvre, but the British government took the view that only market access for mainstream services would justify block exemptions under the competition rules. Key members of the British and French negotiating teams had interrupted their summer holidays to explore the outlines of a package deal which might have a chance of succeeding under the UK Presidency. The French were willing to contemplate multiple designation between country pairs, but were still firmly attached to a capacity safety net, initially within a bracket of 55:45, and wanted safeguards for predatory or excessive fares. The British team agreed provided that the capacity bracket could be widened to 60:40 in the third year and on the understanding that this was only the first stage of liberalization. This was essentially the package that the British Presidency put forward at the informal Council meeting in London in October. The Dutch, for whom capacity liberalization was the main prize, stayed away in disgust, but the French and the Germans led the way for the cautious majority, judging that this was the best deal they could hope to get. The Commission was finally persuaded to put forward a serious market access proposal, in the form of an amendment to the draft capacity regulation, in terms fed to them by the British (interviews, former UK official 24 August 1992, former Council official, 17 December 1992, Commission official 1 July 1993). The UK Presidency had succeeded in pulling together a package which would ultimately command the assent of the Council, but more work was still necessary.42 At the November Council, the President warned that if these measures could not be adopted at its December session, the

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Commission would have no alternative but to initiate legal proceedings (Commission IP/86/359, 11.7.86; IP/86/534, 6.11.86). By now there were four groups within the Council: enthusiastic supporters of liberalization (the UK, the Netherlands and Ireland); countries which would accept significant liberalization, but would prefer to compromise (France, Germany and Luxembourg); a group which preferred strict regulation, but would be prepared to accept a compromise (Belgium, Italy and Portugal); and defenders of a restrictive regime (Denmark, Greece and Spain) (Agence Europe Bulletin, No. 4427, 10–11.11.86, p. 7; interviews with Commission official 31.6.93 and former Council official 17.12.92). With the exception of Denmark, member states were divided between those with competitive airlines, who championed the cause of liberalization and those with less competitive companies, who preferred to maintain the status quo. At the December meeting agreement was reached ‘in principle’ on the President’s capacity proposals, but there was still disagreement on the conditions which should apply to discount fares, and on access. The liberals refused to accept the list of exemptions from the competition rules on the grounds that the progress made on the other elements of the package did not warrant them (Agence Europe Bulletin, No. 4428, 12–13.11.86, p. 5). The final breakthrough The UK Presidency had failed to deliver an agreement, and there was still a real possibility that the ECAC alternative would become a fait accompli (see earlier discussion). That this did not happen owes much to the commitment of the Belgian Presidency. Belgium was not at all enthusiastic about liberalization, but respected the responsibility of the Council Presidency to act impartially in carrying forward the business of the Community and Herman De Croo, President of the Transport Council, declared aviation to be a Council priority at his New Year press conference (Agence Europe Bulletin, No. 4577, 26.6.87, p. 5). Little progress was made, however, at an informal Transport Council in mid-February, in spite of a Commission threat to withdraw its proposals and to proceed with legal action (Agence Europe Bulletin, No. 4491, 18.2.87, p. 6). In College discussions the week prior to the March Transport Council, the Transport Commissioner argued for a withdrawal of Commission proposals. Other Commissioners took a less confrontational view, however, recommending that the Commission should set minimum demands and not accept any amendments. The College accepted the Competition Commissioner’s view that it should demonstrate its seriousness by sending reasoned opinions to the four airlines (Alitalia, Lufthansa, Olympic Airways and SAS) which had not returned satisfactory replies to the Commission – Aer Lingus, Air France, British Airways, British Caledonian, KLM and Sabena had agreed to bring their agreements into line with the provisions of the Treaty. The effect would be to render the agreements of these airlines null and void if they failed to respond within three weeks (Agence Europe Bulletin, No. 4520, 30.3.87, p. 7).

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Despite some progress on fares and capacity at the March Council (Agence Europe Bulletin, No. 4516, 25.3.87, p. 6), important differences remained with respect to nearly every aspect of market access (Agence Europe Bulletin, No. 4564, 6.6.87, p. 5).43 The UK, the Netherlands and Ireland were still holding out over block exemptions from the competition rules; and there was disagreement on how long the measures should remain in force and how they should be replaced.44 However, the Council finally reached agreement on these issues at its meeting in June, only for the Commission to declare that it would only allow block exemptions if sufficient progress was made on the liberal elements of the package. It also observed that the ECAC agreements which were due to be adopted the following week were not sufficiently liberal (Agence Europe Bulletin, No. 4565, 9–10.6.87, p. 7). Initial optimism faded as the Council got bogged down in negotiations over which airports should be excluded from the proposed measure, with Denmark, Greece, Italy and Spain arguing for derogations, but a final compromise was negotiated over the following two weeks in the working group (Agence Europe Bulletin, No. 4565, 9–10.6.87, p. 7). De Croo received a standing ovation when the Council finally reached agreement at a further meeting convened at the end of June (Agence Europe Bulletin, No. 4577, 26.6.8, p. 5), but the euphoria was tempered by a disagreement between Spain and the UK over the status of Gibraltar, which threatened the whole accord. Spain demanded that Gibraltar be excluded from the package, because Madrid did not recognize British sovereignty over the territory where the airport was situated. This was an issue that could only be resolved by Foreign Ministers. A meeting of the General Affairs Council was duly convened for 27–8 June, with a session of the Transport Council to follow a few days later, but the hoped-for compromise did not materialize (Agence Europe Bulletin, No. 4581, 2.7.87, p. 14). The Anglo-Spanish stalemate persisted until early December when agreement was reached on a procedural device which allowed this and other measures affecting Gibraltar to be adopted without prejudice to the respective positions on sovereignty. The package was finally adopted on 7 December 1987.45 The measures were limited (see Table 5.1) and would be modest in their impact, as a Commission report was to show the following year (Commission 1989c). Key issues, such as licensing, which it would be necessary to address in order to create a genuine freedom of establishment in Community air transport, as well as the relationship between governments and their own air carriers, were left untouched. A degree of flexibility was introduced, but there were also provisions safeguarding public service operations. Neither side could be entirely satisfied with the outcome, but the adoption of the package introduced a degree of liberalization in a sector traditionally characterized by patriotic interventionism, and gave the EEC its first significant measure of regulatory power in a sector in which national governments had hitherto enjoyed absolute sovereignty.

Note: 1 Bilateral agreements varied greatly. Though representative of the template, none was as restrictive as this in all respects. See the COMPAS report (ECAC, 1982 for further detail). Source: Compiled by the authors from Commission’s 1984 proposals COM(84)72 and Regulations Nos. 3975 and 3976, Directives 87/602/EEC (market access and capacity sharing) and Directive 87/601/EEC (fares).

Competition Application of national rules rules at state discretion

Governed by national rules Access to all points Multiple designation on country pairs, and on city pairs above thresholds falling from 250,000 passengers per annum (1988) to 180,000 (1990) Community airlines entitled to carry 30% fifth freedom passenger on any intra-community route No cabotage No service to be refused unless national market share has fallen below 45% until end September 1989, 40% thereafter

First EU package (1987)

Airline consultation permitted but not required. Fares approved automatically within a sophisticated zonal system of reference, discount and deep discount fares. Above the zones, fares approved unless both parties object (double disapproval); below the zones, fares require the approval of both parties (double approval) Implementation of Implementation of Community Community competition rules competition rules

Relatively primitive zonal tariff system based on that developed in ECAC for the 1982 US/ECAC Memorandum of Understanding on transatlantic tariffs

No cabotage Frequency and capacity limits set by agreement between parties. ‘Fair and equal opportunity’ interpreted as equal shares with compensation for any imbalance through commercial (i.e. ‘pooling’) agreements. All fares subject to approval by both governments; airlines required to consult before filing

Tariffs

Capacity

Governed by national rules No proposals in COM(84)72 Proposals for relaxation of access to regional services to follow Limited grant of fifth freedom rights No cabotage No service to be refused unless national share of market has fallen below 25%

Memorandum No 2

Licensing Governed by national rules Market access A single airline on each side. Access limited to named destinations (‘points’). Additional airlines agreed case by case Fifth freedom rarely granted

Traditional bilaterals1

Table 5.1 The First Package compared with traditional intra-European bilaterals and Commission proposals in Memorandum No 2

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Conclusion Existing accounts of the breakthrough period have tended either to disregard the importance of external factors or not to take sufficient account of the variety of extra-Community influences that were important in the lead up to the adoption of the first package. By focusing exclusively on intra- or inter-institutional developments, those that fall in the first category neglect the impact of the new US policy in lowering the barriers to Community involvement in aviation and thereby tell only half the story. Those of the latter type overlook the importance of ECAC as a forum in which the debate about the future of European aviation provoked by US deregulation was played out, how supporters of a more liberal approach were able to advance their platform and how the Commission borrowed credibility from the organization by incorporating ideas and concepts in its proposals. Close analysis of developments over these four years underlines the importance of international factors in making EC intervention possible. It shows how the new US policy provoked a debate about the regulation of aviation in Europe, which led to a questioning of the status quo. Deregulation by the world’s leading aviation power lent legitimacy to advocates of an alternative approach in Europe and gave rise to calls for reform through action on the part of the Community. It created an environment which for the first time made EC involvement in aviation a genuine possibility. In tracing the complex iterative process through which loose guidelines and broad concepts gradually evolved under legal and political pressures into a viable package of increasingly specific legislative proposals, it shows how the new paradigm introduced by the US was fostered and developed into a distinctive European concept of progressive liberalization within and between ECAC and the European Community. In particular, it tracks how the ideas, texts and underlying concepts that emerged and were considered in parallel in ECAC influenced discussions within the Community. It reveals how the emergence of an alternative ECAC model acted at various times as a source of inspiration and a target of criticism, and how ECAC was alternately partner and rival of the Community. External factors influenced, but did not, however, deliver, the liberal breakthrough. Here individual actors played a key part. While the Netherlands significantly advanced the liberal agenda in ECAC, before turning its attention to Brussels, the UK was active and influential in both forums. It raised awareness through private lobbying, public advocacy and its liberal bilateral agreements; used its tenure of the Council Presidency to broaden the proposals under consideration; and led the Commission twice in the application of EU law (in 1984 and 1986) and in the development of more radical market access proposals. The Commission, meanwhile, had long championed Community involvement, but it was only in the wake of the launch of the new US policy when

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it proposed liberalization that its position was bolstered. The experience of 1984 and 1985 demonstrated, however, that it could not secure the adoption of the proposals set out in the second memorandum through the use of its agenda-setting powers alone. Only when it sought legal action against European carriers on the grounds that their agreements were incompatible with Community competition rules was it able to overcome the opposition of the conservative majority in the Council. When the Commission confronted member governments with the choice between a measured transition or the possible imposition of judge-induced change, the Council chose the ‘lesser evil’ (Schmidt 2000) and opted for the legislative path of negotiated reform. The Court’s ruling in Nouvelles Frontières served only to strengthen the Commission’s hand, underlining ‘the highly negative consequences of the Commission’s threat for the member states’ (2000, p. 51). No fewer than nine governments gave their approval only because the liberal minority had left them with no alternative. France, Germany and Luxembourg favoured less liberal measures; Belgium, Italy and Portugal were traditionalists; and Denmark, Greece and Spain remained attached to high regulation.

6 Completing the Single Market in Air Services

The first package constituted a major breakthrough. For the first time, and no fewer than 30 years after its creation, the European Community had a body of legislation that brought the operation of intra-Community air services within the ambit of the Treaties. Within five years of its adoption, moreover, the enactment of two further packages, in 1990 and 1992 respectively, together with a series of secondary measures, had put in place a regulatory framework designed to create a single market in air services. Although the first package set the industry on a new footing, it would be misleading to construe the broadening and deepening of action after December 1987 as a necessary consequence. The main tendency in the existing literature is indeed to treat the subsequent steps towards full liberalization as a single inexorable process (see, for example, O’Reilly and Stone Sweet 1998a,b).1 However, such a view understates the differences that still existed within the Council and overlooks the importance of the series of battles that were fought over the five years from 1988 to 1992.2 Although the first package had addressed the main parameters that govern air services – market access, capacity, tariffs and competition – the measures it contained were modest and reflected a compromise between liberals and traditionalists. To the Dutch and the British the package was a significant but limited step towards a much wider opening of the EU market. To the other member states and their national airlines it was a risky experiment on which they had been obliged to embark more or less reluctantly, because the alternative was the even more alarming prospect of allowing the Commission and the member states to apply the competition rules of the Treaty under the guidance of the courts. Although the two camps later became more fluid, at the beginning of 1988 the Council was firmly divided. There were also divergent views within the College. The view that progress towards a single market in air services after 1987 was necessary also overlooks other complexities. Market building required action on several fronts, subject to a variety of constraints and in a range of decision-making settings. Clashes between liberals and traditionalists therefore 105

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took place on very different terrains. In some, international rules existed, which imposed certain restrictions. In others, there were only national rules which were easier to displace or override. The resources available to the parties also varied. For example, the Commission could mobilize its competition powers in some areas, but not all. A further complexity was that the possible coalitions for and against Community action varied between issue areas. This chapter looks into the processes leading to the third package, which created a single market in air services. It examines the adoption of the second and third packages, as well as the range of supporting measures designed to enhance competition. It considers why, in spite of continuing divisions, major legislative items could be adopted relatively rapidly after 1987. Whereas 45 months of debate and negotiation elapsed between the Commission’s submission of the second memorandum (March 1984) and the adoption of the first package (December 1987), it took only nine months for the Council to reach agreement on the second package (September 1989 to June 1990), the liberalization of air freight (March to December 1990) and the third package (September 1991 to June 1992). The chapter argues that the building of the single market came about largely due to activism on the part of the liberal coalition, in which the Commission took a central role. The UK government also played an important part, especially with regard to the packages, drawing on its experience of liberal regulation to assist the Commission in their construction, and even drafting some of the measures. It also supplied and deployed arguments to persuade other member states of the merits of liberalization and that further relaxation of regulation would not lead to instability or crisis. It was not only that the liberal coalition was active and able to mobilize significant resources, however, that accounted for the move towards liberalization after 1987. Indeed, in some areas, for example the application of Community rules to external routes, the Commission was unable to persuade member states to create Community competence, even when apparently backed by favourable jurisprudence (discussed later in this chapter; see also Chapter 8). Moreover, as liberalization and privatization agendas spread across Europe and the momentum towards the creation of the single market mounted with the approach of the 31 December 1992 deadline, it became increasingly difficult for conservative member states to make a convincing case for continued protectionism. In addition, some of the governments that had opposed Community action and liberalization altered their position after the first package. In particular, member states located on the Community’s periphery began to become concerned about the commercial implications of limited liberalization for their airlines. While (large) carriers, based at hubs such as London, Paris and Frankfurt in the heart of Western Europe, were likely to benefit from the modest measures contained in the 1987 package, only further liberalization allowing greater intra-Community

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competition would permit (smaller) airlines from geographically peripheral states to compete for traffic. Furthermore, in a manoeuvre that was totally unforeseen, and illustrating a contingent aspect of decision-making in the EC, France, hitherto a leader of the conservative coalition and an international champion of the Chicago system, performed an abrupt tergiversation during the negotiation of the second package. A direct instruction, apparently from the Elysée Palace, which was concerned about the need to make progress on certain key dossiers for the success of France’s Council Presidency, ended the French delegation’s opposition to the Commission’s proposals and made agreement possible. Finally, the international context continued to influence policy making in Brussels. While the US experiment remained a key reference point for both sides in the debate, Community developments especially beyond the second and third packages were influenced by the rules and practices of the Chicago regime. The relationship with ECAC was also important, and over this period the rivalry that had been apparent as governments fought to promote opposing models in the two organizations gave way to cooperation and partnership.

The second package, 1988–90 The hope within the liberal camp was that, once member states and their airlines had become accustomed to the first package of liberalization measures, they would discover the benefits for themselves and become increasingly willing to strip away the remaining restrictions. However, there was little sign the following spring of any change in attitudes. When in March 1988 the Commission sent proposals to the Council for bringing the 1983 directive on inter-regional services into line with the terms of the first package where these were more liberal, the majority in the Council took a cautious line. A revised directive was adopted in June 1989 (Council 1989c), but was far more modest than the Commission had proposed. By contrast, the regulations adopted by the Commission in July 1988 granting the block exemptions envisaged under the first package for tariff consultations, interairline agreements on the sharing of capacity and revenue, ground handling and catering services, computer reservation systems and the allocation of airport slots were more significant than they first appeared.3 An important signal was sent by the expiry date – 31 January 1991 – long enough after the date set by the Council for adoption of the second package ( June 1990) to allow for some slippage, but not so long as to encourage the airlines or their governments to believe that the exemptions would survive if a satisfactory second package were not negotiated. In the wake of the first package, the Council had instructed the Commission to submit further proposals not later than 1 November 1989 with a view to adoption of further measures not later than June 1990. The first

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package would be implemented during the course of 1988, and a new Commission installed at the beginning of 1989, before the next major round of negotiations would get under way. In the interim, both liberals and traditionalists prepared the ground for the battles ahead. In London, officials reviewed with ministers the outcome of the first package and discussed priorities for the second. Evidence that new services had opened, particularly to Spain and Portugal, and fares fallen (for example, to Paris where business class had fallen from £105 to £92 and Eurobudget from £85 to £69), created a case for extensions of the tariff, capacity and market access provisions of the first package. If this led others (for example, Ireland) to press for further extensions of fifth freedom rights, this was a price which would have to be accepted. Social measures and measures designed to deal with the growing congestion in air traffic control and airport capacity were to be resisted, particularly if there was any suggestion that further liberalization should wait until these problems had been resolved, which could imply a long delay. UK officials identified a potential obstacle to competition where they advocated action. Right of establishment under the treaty in principle gave airlines the freedom to set up in any country of the European Community and to apply for licences to operate services. In the UK, the CAA was accustomed to dealing with such applications on their merits within a liberal policy framework and at hearings open to the public. These arrangements had allowed a large number of smaller British airlines to obtain licences and even for licences to be granted to two airlines under foreign ownership, Britannia Airways and Monarch. In most other member states the granting of licences was entirely at the discretion of the government, and in practice the system was used to protect the position of the national carrier as the agent of government in the provision of a public service.4 Unless other member states were required by Community law to liberalize their licensing procedures, European airlines would be able to obtain licences in Britain, but there would in practice be little or no scope for British airlines to obtain licences elsewhere in Europe. It was also concluded that the UK should press the Commission to take a firm and consistent line in resisting the tendency of some European governments to subsidize their national airlines through state aid. This strategy was accepted in January 1989 and used to brief the new Transport Commissioner, Karel van Miert, as well as officials in both DG VII (Transport) and DG IV (Competition) at every level up to DirectorGeneral and chef de cabinet. The press were also briefed so that they would be aware of the issues that needed to be addressed in the Commission’s proposals when they appeared in the autumn. On the side of the cautious majority, France and Germany argued the case for harmonizing the conditions of competition rather than extending the liberalization of the first package when in April 1989 the Commission convened an expert group to help them prepare their second package.

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(Two months later ECAC adopted principles for the revision of its 1986 agreements, but only to bring them into line with the tariff and capacity aspects of the first package.) In public and at the negotiating table the German position remained close to that of the French. Dr Zimmermann, the new German Transport Minister, was careful to play down expectations while keeping his options open in an article in the Frankfurter Allgemeine which stated that ‘complete deregulation of air services was not possible, although considerable further progress could and should be made’.5 However, the Franco-German alliance was beginning to show signs of strain. In July there were indications that the German authorities might not be altogether happy with the preoccupation of the French Presidency (then just beginning) with harmonization, and attempts were made behind the scenes to persuade the French to adopt a more liberal position on both tariffs and capacity. As the Commission prepared to finalize its second package proposals and the member states prepared to respond to them, there was in the summer of 1989 little enough sign of the breakthrough that would occur before the end of the year. The adoption of proposals for a genuinely liberal second package by the College was not a foregone conclusion. The proposals went to a meeting of ‘special chefs’ on 14 July,6 which continued into the early hours of the following morning, to the weekly meeting of chefs de cabinet on 17 July and to Commissioners on 19 July. Information given to British officials at the time suggests that the position adopted by the Commissioners generally reflected their national policies. The main proposals were for straightforward extensions of the policies already enacted in the first package: a more liberal tariff regime based on double disapproval rather than tariff zones; further reductions in the protected capacity share from 40 per cent in the final year of the first package to 25 per cent from 1 April 1992; and more open market access, including lower thresholds for multiple designation, more fifth freedom rights and even a limited opening up of cabotage (Commission 1989a). To meet British concerns, provisions were included to require non-discriminatory licensing of airlines by national authorities.7 Further proposals were promised on negotiations with third countries to meet Danish concerns, and on some degree of harmonization, including the mutual recognition of professional qualifications as a gesture towards France. Resistance came from Andriessen, the Danish Commissioner, who was concerned about the need to make provision for the Commission to negotiate arrangements with Sweden and Norway to bring SAS fully within the ambit of the agreement, from Papandreou, the Greek Commissioner, who insisted on continued derogations for the Greek islands, from Cardoso, the Portuguese Commissioner, and most significantly from Delors and Scrivener, the two French Commissioners, who wanted adoption delayed until proposals were available on associated social measures. Papandreou was satisfied

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with the derogations conceded, but the package was apparently adopted despite the contrary votes of Delors and Scrivener, and the abstentions of Cardoso and Andriessen. The German Commissioners seem to have sided with van Miert and Brittan rather than with their French colleagues. Outside the College, the Commission’s proposals received a mixed reception. Supporters of further liberalization, including BEUC and British Airways, complained that the measures were not liberal enough, while opponents complained that the further opening of markets was not matched by action to improve infrastructure or congestion (AEA) and that the role of the state would be reduced (European Centre for Public Enterprises). Still less was there any assurance that the Commission’s proposals would be endorsed by the Council. As well as the continuing opposition from the cautious majority, there were fears within the liberal camp, especially on the part of the UK, that the Commission’s attempts to extend Community competence in other areas were premature and may prove counter-productive to its liberalizing efforts. For example, in seeking to ensure the extension of the right of establishment to all Community airlines and respect for the right of Community nationals to hold capital in any Community airline, the Commission had written to member governments pressing them to substitute Community ownership and control provisions for the traditional nationality clause in their bilateral air services agreements. However, in giving priority to this concern, the Commission had still not taken account of the fact that the right of establishment would be a dead letter in the absence of Community regulations preventing a licensing authority from refusing to designate any airline but its own national carrier, and others which agreed to cooperate rather than compete, for example, in the provision of small feeder services. Even in the unlikely event that member states were willing to oblige, there could be no guarantee that their bilateral partners outside the Community would be prepared to accept a change with such far-reaching consequences for the traditional structure of bilateral agreements.8 The issue was important and difficult (see Chapter 8) but not a high priority in the context of completing the internal market. Another example of the Commission’s tendency to over-reach was identified in October when UK officials explored with DG IV their plans for the competition elements of the second package. During the summer, building on the judgement in the Ahmed Saeed case which had been handed down by the ECJ in April 1989,9 DG IV had drafted regulations aimed at extending the competition regulations to services between member states and third countries (Commission 1989b). Once again, although in principle this was an important issue (see Chapter 8), in 1989 it was a premature extra-territorial ambition. In both cases, the Commission was driven by a preoccupation with implementing the treaty rather than developing the practical capacities necessary for exercising regulatory oversight. In a market where airlines were being given increasing commercial freedom, the Commission was aware of the need to control excessive or predatory

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pricing, and to guard against the refusal of a dominant airline to accept the validity of tickets issued by a competitor (interlining), but had not recognized the risks to competition inherent in the ability of a large airline to drive a competitor out of business by temporarily swamping the market with uneconomic capacity, or through other abuses of a dominant position such as the control of ground handling systems at airports, which could be used to disadvantage a small and unwelcome competitor. The French Presidency, July–December 1989 Opposition to further liberalization was led by France, which held the Council Presidency in the second half of 1989. Paris signalled its intentions at the informal meeting of the Transport Council which took place in the French capital on 6 October, and was stage-managed so as to give maximum exposure to the arguments of the cautious majority. Presentations were made by the AEA and by the unions, both committed to a policy of minimal change and maximum safeguards, while the Presidency itself circulated a paper which set out all the reasons for proceeding cautiously (authors’ comments added): En premier lieu, l’impératif de sécurité y est primordial [the safety card] … en second lieu, le transport aérien reste dépositaire d’une partie de la souveraineté des Etats [the national security card] … en troisième lieu, enfin, comme certains autres modes de transport, l’avion remplit une mission de service public en matière d’aménagement du territoire [the public service card]. The paper maintained that none of these grounds for state intervention could be sacrificed at this stage in the interests of completing the single market, and any undue haste would run up against supply constraints (shortages of qualified staff and adequate infrastructure) as well as putting safety at risk. Only a very gradual process of liberalization could be contemplated, which would need to be based on four principles: 1. Harmonization – ‘en effet, comment libéraliser la prestation de service si les conditions de la concurrence ... ne sont pas loyales’, 2. Liberalization – Some scope for a further step towards the relaxation of the bilateral framework, particularly in respect of tariffs, capacity and freight transport could be envisaged, but would be subject to consideration of the social consequences and the provision of adequate infrastructure. 3. Competition rules – Air transport must continue to benefit from the appropriate exemptions. 4. External competence – A Community policy towards third countries merited consideration, but any transfer of competence could only be envisaged if collective negotiations were likely to be more beneficial than the bilateral pattern (si le bilan global en est amélioré).

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These presentations in the Council were accompanied by articles by Bernard Attali, President of Air France, in Le Monde and by Michel Delebarre, French Transport Minister, in Les Echos that set out the French position. Responding to Spanish concerns about the implications of seatonly charters for scheduled services, the Commission was leant on to prepare a paper on charter capacity. Cecil Parkinson, UK Secretary of State, issued a Press Release on his return to London regretting the absence of any consumer representatives, and remarking that ‘we must not allow liberalisation to fall victim to delaying tactics and vested interests’. The concern within the liberal camp was that France would use their Presidency to challenge and if possible dilute the Commission’s proposals, while developing proposals for harmonization that would emasculate the attempt to introduce further competition.10 When the Council met formally later in the month, the Council President asked the Commission to reconsider its proposals. Very surprisingly the next meeting in Brussels on 4 and 5 December did more than any other to commit the Transport Council to the completion of the single market in air services by the end of 1992. Although legislative texts were not ready for adoption, the Council endorsed the general principles underlying the Commission’s proposals on market access, and agreed that there should be uniform licensing criteria by 1 July 1992. Ministers committed themselves to relaxing capacity restrictions by two further increases of 7.5 per cent each in the second stage, and to the abolition of any protected share from 1 January 1993. They even agreed that the eventual opening up of cabotage should be part of the completed single market. Tariffs were to be subject to double disapproval by 1 January 1993 with an improved zonal system in the meantime. Michael Portillo, the Minister of State sent to the meeting by Parkinson as the UK delegate, released a triumphant Press Notice.11 The background note indicated that Portillo had successfully argued that liberalization should not be held back by prior harmonization. The Financial Times (8 December) saw much hard work ahead under the Irish Presidency to turn commitments of principle into legislative reality, but noted a ‘clear commitment to sweep away most of the anti-competitive restrictions on Europe’s still highly protected airline business after a transitional phase which most see ending by 1 January 1993’. Briefing UK airlines on the outcome of the Council the Department wrote: ‘Overall the principles agreed represent a better deal than we had dared to hope for.’ Quick as Portillo was to claim the credit for the triumph of the liberal cause, it seems more likely that he was the beneficiary of political pressures within the French administration. François Mitterrand, who in 1988 had been re-elected to his second term at the Elysée was deeply committed to the European project and determined to make his mark by presiding over a successful French Presidency. In October, following a progress review conducted by the Secrétariat général du comité interministériel pour les questions de

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co-opération économique (SGCI), the coordinating committee at the centre of French policymaking for Europe,12 ministers chairing sectoral Councils were directed to make concessions in order to achieve tangible results. A report on the aviation dossier was prepared by senior aviation and foreign policy officials for Elisabeth Guigou, the Minister for European Affairs and a close ally of the French President, and although there was no formal response, the subsequent pressure from Michel Delebarre and his cabinet suggests that a decision was taken at the highest levels of the French government that the Transport Council could and should commit the EU to the rapid establishment of a single market in aviation. This surmise, derived from contemporary reports in the files of the British Department for Transport, is supported by Claude Probst, the aviation official most closely associated with French policy towards Europe at the time, who recalls that Delebarre was under such strong pressure from the Prime Minister and the President that ‘all the things we had battled for months and even years, we were obliged to move on in the last few days’ (interview reported in Travis, 2001, p. 97). During October and November, as the report on the Commission’s proposals for the second stage made its way through the Transport Working Group and then a High Level Group, the French progressively abandoned the position of the cautious majority which they themselves had articulated and championed. The extent of political pressure exerted by the French Minister and his advisers at the Council may be gauged from the fact that most of the target dates were inserted during the Council meeting, against the advice of senior French officials who had begun the day by persuading van Miert and Brittan to accept that targets for the third stage need not be set for another six months when texts for the second stage would be ready for adoption under the Irish Presidency.13 To the astonishment of the cautious majority, which had depended on French leadership, shared reservations about relinquishing controls over tariffs and capacity were abandoned. Even France’s special concerns about social and technical harmonization were played down in Council conclusions which referred only to a range of relatively uncontroversial measures on personnel licences and qualifications, flight duty times and common airworthiness standards. The Commission’s ambitions for external competence were limited to the extension of the community’s arrangements to Denmark’s partners in SAS, while the text on air traffic congestion relied on the work of Eurocontrol. An injunction to consider suggestions relating to charter traffic was accompanied by a sentence noting that ‘the measures to be taken in this connection will not be aimed at limiting non-scheduled traffic or at subjecting it to regulations’, which safeguarded the liberal character of European charter rules. In any case the main Spanish objective had been lost with the abolition of all capacity sharing on scheduled services from 1993.

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Of course such a dramatic advance could not have been accomplished by the French alone, even with the advantage associated with holding the Council Presidency, if other factors had not been favourable. In particular the drive towards a single market by 1992 was at its height in 1989, and whereas a vigorous defence by France and Germany together of the cautious policy stance which they had espoused hitherto would almost certainly have attracted enough support from others to obstruct or at least delay progress towards a single market, the very suddenness of the French volte-face not only tipped the balance of major players in favour of the single market but also left the cautious majority without a credible leader. Only the Germans could have held the line for the advocates of a more cautious policy, but they were not prepared to lead a reactionary alliance against the French and the single market. Although France soon reverted to a policy that was closer to that which they had adopted at the informal Council in October, the Council would not go back on its commitment to establish a single market in aviation by 1 January 1993. Completing the second package: The Irish Presidency Although the liberal parameters of the second package were determined by the Council in December 1989, much work remained for the Irish Presidency. Previously reluctant about liberalization, Dublin was now firmly committed to the liberal cause. Like Denmark, Ireland had come to realize that its location on the Community’s periphery would disadvantage its carriers in a liberalized market and so argued for the maximum degree of liberalization in order to win their carriers access to the main continental airports. Both countries supported liberalization at the informal Transport Council (Kassim 1996b, p. 223; see also Agence Europe, No. 5106, 7. 10. 1989, p. 6). While Ireland gave the air transport dossier high priority throughout its Presidency, the European Parliament remained a critic of liberalization. Strongly influenced by the airline lobbies, it proposed on 14 March a series of anti-liberal amendments to the Commission’s second package proposals (OJ C 96 of 17 April 1990). The Commission circulated proposals to the Council, but having done their duty at a stage when the Council had already made up its mind to adopt a liberal position, they were readily persuaded to withdraw them again almost as soon as they had been made. Ultimately, neither tensions nor compromises in the working group, or airline lobbying of the European Parliament, affected the content of the second package, which was agreed by the Council on 18 June 1990 (Kassim 1996b, p. 266). The zonal tariff scheme was liberalized and simplified, the capacity zones were widened and the thresholds for multiple designation set at lower levels, but double disapproval and cabotage were postponed until 1993. France used the concept of the public service obligation to secure protection for single airline designation on routes with less than 30,000 passengers a year, and Spain, which had been having difficulty

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securing the slots it wanted at London’s Heathrow airport, won agreement to a clause which allowed a new service to be refused if a competing service could not obtain the airport slots it required. But liberal points included a commitment to find ways to protect consumers and smaller airlines against anti-competitive practices, such as swamping a route with excess capacity or using predatory low fares to drive a competitor out of business. The second package was sufficiently liberal to justify the Commission’s renewal of block exemptions for airline agreements from the competition rules, this time with an expiry date at the end of 1992 to encourage the timely adoption of the third package.14

The third package 1990–2 The conditions under which the third package was negotiated were very different from those that surrounded the second. The Council had already pre-committed itself to the inclusion of particular measures relating to tariff setting and access during discussions leading to the second package. Ideas, such as double disapproval, full fifth freedom and cabotage, that had been unthinkable in 1987 and too radical as late as 1989 and 1990 would feature as part of the third package. Moreover, the task which was not disputed was to design the framework that would govern the single market in air services. A point had been reached where member governments no longer defined their positions to advance the interests of their respective flag carriers and where the latter sought to press their case via the AEA rather than through governments (interview with French official, 23 January 1993). Furthermore, agreement on the liberalization of freight indicated that the dismantling of the traditional regime was no longer deeply divisive. This measure had first been proposed by France at their informal Council in October 1989, and was appealing mainly because American carriers had been accumulating rights within the Community and obstacles to the operation of freight services by European carriers simply handed business to American companies. The Commission recommended a very liberal regime in its proposal (Commission 1990b), and the Irish secured agreement in principle at the Council meeting which adopted the second package on 18 June 1990. Though the European Parliament had opposed some of the more radical elements such as cabotage, the Commission and the Council accepted a version that was aligned with the second package freedoms, and adoption by the Council on 17 December 1990 was relatively uncontroversial (Regulation 294/91 of 4 February 1991). The Commission’s proposals for the third package were agreed by the College on 17 July 1991 and sent to the Council as COM (91)275 (Commission 1991d) on 18 September. Alongside the more radical elements concerning tariffs and market access, many of which it had tabled in 1989, the package contained a proposal to introduce a Community licensing system.15

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A Community licence, incorporating Community-wide technical and economic criteria, as well as a requirement for ownership by Community nationals, would certify the fitness of an air carrier from any EC member country to operate services in, from or to any point in the Community. It would create a genuine freedom of establishment by replacing the different requirements made by various member states and by abolishing in effect the nationality clause that was a standard feature of bilateral agreements. It would also remove the asymmetry of the first two packages which required national authorities to respect the rights of airlines from other Community countries, but not their own airlines. A ‘global package’, it sought to include non-scheduled services and freight within a single regime. Seeking to assuage the concerns of the more cautious among his colleagues who feared the instability and concentration that had marked the initial phase of US deregulation, the Commissioner for Transport emphasized the inclusion of measures to protect public service routes and his intention to use the competition rules to protect smaller carriers. He also underlined that action already or soon underway on infrastructure, slot allocation and the social aspects of aviation would ensure that the common aviation policy would balance commercial and non-commercial components. The Commission’s proposals failed to provoke the widespread hostility that its earlier proposals had prompted, even though familiar concerns about harmonization, infrastructural limitations, cabotage and the social dimension were aired by the AEA and trade unions. BEUC criticized the proposals for not being liberal enough, notably in regard to the preparedness of the Commission to intervene to defend the interests of small airlines, while ACE suggested that the system for the award of licences should be public and an appeals procedure be introduced. The ESC largely endorsed the Commission’s proposals, though the Parliament called for amendments, most of which reflected its traditional preoccupation with the social dimension and technical harmonization. The Commission’s proposals enjoyed a relatively swift and easy passage through Council. The Netherlands, which held the Presidency in the second half of 1991, embarked on discussions in the TWG almost immediately, elevating discussion to a High Level Group in November and a policy discussion at the Council on 16 December. Positions were staked out at the Council with France and a group of southern states seeking to defer liberal measures and construct a basis for continued protection of the national carrier around the concept of the public service obligation, while northern states, with the exception of Denmark, called for rapid completion of the single market. However, French leadership of an effective rearguard action was considerably hampered by the explicit terms of the conclusions which the Council had adopted in December 1989 when France held the Presidency. Now, under a Dutch Chairman, the Council conclusions

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rejected linkage with other dossiers and noted that ‘safeguards must conform to the principle of the Community as one market and to the degree of liberalisation decided’. It approved the main principles of the package, including Community licensing and the fifth freedom, together with the gradual introduction of cabotage and the seventh freedom, with temporary dispensations where necessary. At its meeting in March, the Council reached agreement on fares, deciding to reject double disapproval and to allow airlines to set their fares freely without government intervention. Not for the first time, the Council adopted a policy more radical than the Commission had proposed. However, member governments remained divided on the length of the transition to cabotage. France, Germany, Greece, Italy and Spain – countries with large domestic markets and in some cases weak national carriers – favoured six years, while Denmark, Ireland, the Netherlands and the United Kingdom insisted on three. The final push towards agreement was greatly helped by the enthusiasm and commitment of the Portuguese Presidency in the first half of 1992, and particularly by Ruy Veres, a veteran of the COMPAS group ten years earlier (Chapter 5), who chaired the Transport Working Group. As the group’s work drew to a close in May 1992, a report from the British delegation noted that early in the year conservative states had tried repeatedly to introduce conditions on the exercise of various freedoms, but the Presidency had resisted such attempts and secured a reasonably clean text for the Council to consider. At the Council on 22 June 1992 France, with support from Germany and Italy, tried initially to link agreement with other dossiers which were not yet ready on the competition rules, on slot allocations and on external relations, but the Presidency held together a majority in favour of proceeding without further delay to the adoption of the final package of five regulations,16 reminding them that linkage had been considered and rejected at the Council meeting six months earlier. The main debate again concerned a date for the liberalization of cabotage. The UK argued for no more than a year’s delay, while France, Germany, Greece and Italy wanted six years. The eventual compromise was four and a quarter, with full rights to apply from 1 April 1997. With the third package in place, the main barriers to intra-Community competition in aviation had come down, even if cabotage was deferred until April 1997 and some derogations notably for services to the Azores and the Greek islands were to remain until 2003. Airlines were now free to exercise their own commercial judgement about where to fly within the Union, with what frequency and capacity, and what the tariffs and associated conditions should be. While each state would continue to license its own airlines, the discretionary power of governments to refuse a license was replaced by the right to receive a licence valid throughout the Community, provided that

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the airline is owned and controlled by Community nationals, and meets prescribed safety and financial fitness standards.17 Though the licence does not in itself ensure permission to operate services, the market access Regulation 2408/92 granted this freedom, with only limited exceptions to protect thin lifeline services to peripheral regions subject to a public service obligation. The single market in air transport had been created.

The single market in air services updated and recast, 2003–9 The essential robustness of the framework that the third package put in place was affirmed when the Commission initiated a review of the measures in 2003. While the Commission observed that the third package had generally been a success in bringing liberalization about, it did note that a number of provisions had become obsolete, some had been poorly applied and others needed revision. The legislation governing the single market would also need to be brought in line with other EU policies that had developed since the early 1990s. The Commission invited views on how financial viability should be scrutinized, since differences between national authorities was creating an unevenness within the single market. It also asked for opinions on airline compliance with JAA standards (see Chapter 7), whether it was necessary to align Community-level coordination of access to third-country airlines with recent ECJ jurisprudence on external aviation relations (see Chapter 8), and whether cooperation between member states on aviation safety should be stepped up. Other issues on which it sought to solicit views included the simplification of rules governing public service obligations (PSOs), traffic distribution between airports within an airport system, and closer monitoring of how airlines set fares. During consultation, the Commission received 56 contributions from interested parties. It held a meeting with stakeholders in February 2004 that was attended by 11 national authorities and 11 representative organizations (Commission 2006a). There was support for many of the actions that the Commission proposed, including greater price transparency for passengers and fair price behaviour, but reluctance for any action that might jeopardize carriers’ freedom to set fares. Stricter regulation of aircraft leasing emerged as a new issue. When the Commission submitted its proposals (Commission 2006a) in July 2007, it duly called for more uniformity in the financial criteria required for licences to be issued to or held by carriers. It proposed strict rules for aircraft leasing from third countries, as well as social welfare measures where flight crews were leased with an aircraft (‘wet leasing’). It also included measures to reduce the administration associated with PSOs and to prevent member states from using them excessively. In addition, the Commission requested exclusive responsibility for negotiating intra-Community traffic rights with third countries in order ‘to ensure greater coherence between the internal market and its external

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aspects’ (Agence Europe, 17.07.2006 – electronic version). On prices, it called for greater transparency and for the elimination of discrimination on grounds of the purchaser’s place of residence or nationality. Finally, in the interests of simplification, it proposed the replacement of the measures that made up the third package with a single regulation. The Parliament welcomed the Commission’s proposals, but, following the recommendations of the Transport Committee’s rapporteur, Arunas Degutis (European Parliament 2006), introduced a long list of amendments. As well as changes to the long list of definitions that featured in the Commission’s text, the Parliament added greater detail to several of the proposed procedures. The Council accepted 20 of the Parliament’s proposed amendments in its common position, though those relating to traffic distribution rules and social legislation required lengthy negotiation. It also sought to clarify that it would be authorities in the member states who would exercise oversight over any given carrier and issue operating licences, proposed that wet leasing would be subject to strict conditions and rejected the Commission’s attempt to assume further external competencies in aviation by insisting that member states would retain the right to impose restrictions on code share agreements between Community and non-Community carriers. The common position retained the provisions concerning the simplification of rules and procedures governing PSOs, introduced a new provision allowing traffic rights to be imposed where serious environmental concerns arise and broadened the pricing transparency provision to include all flights departing from Community airports. The common position, which reflected a compromise between the three institutions following negotiations in the autumn of 2007, was endorsed by the Commission in April 2008 (Commission 2008) and approved by Parliament in its second reading three months later (European Parliament 2008). The final legislative act was published on 29 September 2008. The new text, Regulation 1008/2008, retained the core provisions of the third package, while eliminating those that were no longer relevant. It also extended and refined some elements of the regulatory framework. First, it required airlines to submit more detailed financial information to the licensing authorities in the member states (Article 5). Although governments retain responsibility for issuing operating licences, they are obliged to suspend or revoke the licence of any carrier where the latter ceases to satisfy the requirements set out under the regulation (Articles 3, 8, 9 and 10). Second, the regulation imposes strict requirements on the leasing of aircraft registered in third countries, especially in the case of wetleasing (Article 13). Third, the principles governing PSOs remain unchanged (Article 16), but the maximum concession period was increased from three years to four and five in the case of very peripheral regions (Article 16 (9)), and an emergency procedure was introduced for designating an alternative airline where the existing carrier is no longer able to operate the route

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(Article 16 (12)). In an attempt to prevent abuse of the PSO system, the regulation calls upon member states to impose obligations that are proportionate to economic needs and confers the right to the Commission to request a detailed economic report from the government concerned to justify the grant of the PSO (Article 18). Fourth, under Article 19, member states retain the authority to regulate the distribution of air traffic between airports subject to specified provisos.18 Fifth, the new regulation improves consumer protection. It prohibits price discrimination of the basis of the place of residence or nationality of the customer or the place of establishment of the travel agent and it requires that the final price should include all applicable fares, charges, taxes and fees (Article 23). Finally, no new powers were granted to the Community in respect of third-country relations (see Table 6.1).

Supplementary measures in support of the single market Although the liberalization packages had been the central focus of the aviation community since the mid-1980s, increasing attention from 1990 was directed towards both social measures which, it was argued, should necessarily accompany market building and secondary action that would be necessary to remove barriers that would otherwise restrain the exercise of the new freedoms. The Commission was the main advocate of Community legislation in these areas, having sought since the late 1970s to develop a broad, integrated and balanced aviation policy. In all three of the main areas discussed below – the mutual recognition of personnel licences, slot allocation and ground handling – it had to negotiate opposition from the member states and confront challenges posed by existing international rules. On some occasions, though, the Commission was able to rely on the promise of cooperation with ECAC to enhance the credibility of the Community measures that it proposed. Mutual recognition of personnel licences Although Annex I to the Chicago Convention had laid out minimum standards for personnel licences, national requirements differed across Europe. The issue had been identified as an area for Community attention in the late 1970s, when it appeared on the list of priorities approved by the Council in June 1978 and in the Commission’s first memorandum the following year. It also featured in the Commission’s second memorandum. The issue quickly became contentious because, while the cautious majority argued that harmonization should precede liberalization, the liberal camp believed that liberalization needed to proceed regardless. There was consequently no advance on the issue until after the first package had been adopted in December 1987.

- relations between EU state and own airlines - relations with carriers of other EU states - multiple designation (country-to-country) - multiple designation (city pairs) - safeguard provisions

Full access

Full access

Public service obligations; certain protection for new regional routes

Public service obligations; certain protection for new regional routes

(Continued)

Public service obligations simplified; Commission can request economic report, which will bear on decision to allow extension beyond after a five-year term

Yes, subject to safeguard

Subject to EU rules

All EU airlines enjoy free access

Full freedom subject to EU criteria regarding ownership, airworthiness and economic fitness, but with attempt to ensure greater harmonization of conditions across the Union

Regulation 1008/2008

Yes, subject to safeguard

Subject to EU rules

Rights extended to all EU airlines

Full freedom subject to EU criteria regarding ownership, airworthiness and economic fitness

Third Package

Yes, subject to capacity restrictions (below) Thresholds lowered

Yes under EC rules, subject to capacity restrictions (below) Automatic above defined thresholds

Subject to EC rules

Governments enjoy full discretion Subject to EC rules

National rules

Second Package

Governments enjoy full discretion

National rules

Licensing

Access

First Package

Policy area

Table 6.1 EU Liberalization 1987–2008

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Permitted for up to 30% traffic No change

55:45% from 1/1988, then 60:40% from 1/1989 Zonal system: automatic approval of discount and deep discount fares within defined range

Application of Articles 81 and 82 (ex 85 and 86) Provision for block exemptions

- fifth freedom

Capacity

Competition rules*

Third Package

Competition rules apply Provision for block exemptions

No limits, but safeguard can be triggered Airlines set own fares; safeguards for excessively high or low fares

Permitted without quota constraint

Revised scope for traffic distribution rules and environmental protection

Regulation 1008/2008

Provision for block exemptions

Provision for block exemptions

Ticket prices to include taxes and charges Competition rules apply Competition rules apply

More developed scope for traffic distribution rules and environmental protection Permitted without quota constraint Limited cabotage rights until 1 April 1997; full cabotage rights thereafter 60:40 plus additional No limits, but safeguard 7.5% p.a. can be triggered Zonal system Airlines set own fares; extended; conditions safeguards for exceson availability of sively high or low fares discount fares relaxed

Scope for traffic distribution rules and environmental protection Permitted for 50% traffic No change

Second Package

Note: * ‘Modernization’ Regulation 1/2003 introduces new enforcement regime, effective 1 May 2004. Source: Compiled by the authors from Council legislation, and Council and European Parliament (2008).

Fares

- cabotage

First Package

(Continued)

Policy area

Table 6.1

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123

The Commission sent a draft proposal to the Council in October 1989, and the topic was mentioned in the conclusions of the Council in December 1989, but it was October 1991 before the Council debated the text which had by then made its way through the European Parliament, and December before it was finally adopted (Council 1991g). The Parliament proposed limiting the scope of the directive to cockpit crew only, whereas the Commission had proposed that it should apply to virtually all categories of personnel within the aviation industry.19 The Council confined the operative effect of the proposal to the mutual recognition of national licences, relegating to the recitals the Commission’s ambition to harmonize requirements in licences and training programmes. The outcome, which facilitates free movement for the elite of the industry suited the airlines, since they where experiencing shortages. The Commission was somewhat disappointed by the modesty of the measure ultimately adopted. Computer Reservation Systems One of most complex and earliest threats to fair competition in a liberalized market arose from the development by airlines of CRS. The anti-competitive potential of these systems was first noted in the USA where a 1985 study by the Department of Justice had shown that 80 per cent of ticket sales were made from the first or principal display, and 50 per cent from the first line. The major US airlines invested heavily in such systems which could be leased to travel agents and biased to give priority to the services of the host airline and any alliance partners. The competitive advantage which this gave to the small number of major airlines who could afford the investment was regarded as a major factor in accounting for the concentration that took place in the US airline market at this time. The aim of the regulators had to be to ensure a neutral, unbiased presentation of the host company’s services alongside those of its competitors, by requiring system vendors to make access available to other carriers at a reasonable non-discriminatory rate, and on terms which ensured that information from all participating carriers was fairly displayed. The Commission prepared its first proposal in-house and sent it to the Council in March 1988. The Council recognized the importance and urgency of the topic, but preferred the code of conduct which had been adopted by ECAC in June 1988. The Commission accepted this rebuke and sent the Council a new draft regulation in October 1988, which essentially gave the force of Community law to the ECAC code of conduct. This code, adopted by the Council in June 1989, revised in 1993 on the basis of further work in ECAC, and again in 1999, has been highly influential worldwide and has made a major contribution to neutralizing the potentially anticompetitive effects of an invaluable advance in airline marketing (Council 1993k, 1999).

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Airport slots It has proved easier to identify the anti-competitive effect of the traditional arrangements for slot allocation, which are based on IATA rules dating back to 1947, albeit frequently revised, than to devise new ones which would make more room for new competitors without causing unacceptable disruption to an extremely complex and delicately balanced international network. The basis of the IATA system is that where more carriers want to take off or land at an airport than can be accommodated on the runway or in the terminals, the airport must appoint a coordinator who, with the help of a scheduling committee comprising airline and airport officials, will distribute the available slots in accordance with the priorities set out in the IATA Scheduling Procedures Guide.20 The airport coordinator was traditionally an employee of the main incumbent airline, but in the UK this responsibility was transferred in 1992 to an independent company, Airport Coordination Ltd, and EU regulations now insist on a neutral independent coordinator. The IATA scheduling procedures give precedence to ‘grandfather rights’. An airline that has made regular use of a given slot in the previous corresponding summer or winter season has first call on that slot in the upcoming season if it still wants to use it. However, an airline does not have to use each slot for the same service, allowing incumbent airlines a portfolio of slots to shuffle around. Since most of the major world airlines dominate their home base, and there exists therefore considerable mutual advantage in facilitating one another’s services, informal procedures have grown up under which slots may be exchanged and, where values are unequal, substantial sums of money may also change hands. The combination of stability and flexibility which this gives to the complex business of airline scheduling has been a real benefit, but it makes it extremely difficult for new entrants to break into the charmed circle of incumbent airlines at the most congested airports. Not only are they unlikely to obtain as many slots as they would like, but those they do secure are likely to be outside peak hours, at times which may well make a new service uneconomic. The Commission sought to counter the anti-competitive bias of the IATA system by tipping the balance in favour of new entrants. It began by issuing a Commission regulation exempting the existing slot allocation and airport scheduling procedures from the competition rules until 31 December 1992 (see Chapter 9).21 However, the draft Council regulation which it put forward at the same time was not received with any great enthusiasm by the Parliament or the Economic and Social Committee, showing that it was not only the major airlines that were opposed. Most expert opinion doubted whether the shortage of slots for new entrants could be solved by tinkering with the rules when what was really needed was additional capacity. In any case IATA’s most recent (July 1990) revision of its scheduling procedures had given higher priority to new entrants (defined as airlines with less than four slots a day at the airport in question), and most expert opinion was opposed to more radical surgery.

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The Council would probably have rejected the Commission’s draft out of hand, preferring to rely on the IATA rules, but the Commission had a trump card to play. If the Council would not adopt a regulation by consent, the Commission would impose a Commission regulation using its competition powers. Faced with such an ultimatum, the Council backed down, but the Commission also made a concession, providing ECAC with the resources to work out some alternative proposals. These eventually led to agreement, with the third package, on a Council regulation which did not disturb the foundations of the IATA system or the grandfather rights which it entrenched, but gave priority in the allocation of 50 per cent of available slots to new entrants defined as airlines having less than 3 per cent of the slots on the day in question, and particularly to any airline wishing to enter or expand an existing small foothold on an intra-EU duopoly route (Council 1993h). As early as 1998 a study by the UK CAA showed that the 1993 regulation has not been very successful in fostering competition on intra-European duopoly routes from new entrants seeking slots at the most congested airports (CAA 1998). One of the chief difficulties is that there are many airlines with fewer than 3 per cent of the slots, and little guidance as to how their conflicting claims should be prioritized. The scheduling committees find it easier to satisfy the demands of a large number of long-haul airlines each wanting a small number of additional slots, rather than those of a shorthaul European carrier which may need a large number of slots at convenient times through the day, including the peak hours when there are few if any slots available, in order to mount a competitive service. Besides, some of the strongest potential competitors, such as British Midland Airways at Heathrow, do not receive priority as new entrants because they already have more than 3 per cent of the slots. In these circumstances the Commission sought a more effective approach. Some observers, including the UK CAA, believe that more slots could be released if airlines could buy and sell them as they do in the USA, or if the trading which occurs behind closed doors under existing IATA procedures were made more transparent, but there are also concerns that such a system would tend to reinforce the dominance of the incumbent major carriers who have the deepest pockets and a powerful incentive to hang onto their position (CAA 1993, pp. 60–2). When Neil Kinnock was Commissioner for transport (1995–9), he is said to have been in favour of legitimizing slot trading, arguing that an open market approach would allow new airlines to buy slots if they could make more profitable use of them than their current owners. Van Miert considered, however, that slots had been allocated to the airlines as a public good to enable them to carry out a public service and took the view that they were not owned by the airlines and could not therefore be bought and sold as if they were. As a result the 1995 Commission was not able to agree on any proposal at all.22

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When Loyola de Palacio became Commissioner for transport in 2000 she was initially inclined to follow a precedent set at the most congested US airports since 1986 by obliging incumbents to give up 5 per cent of their slots to meet overriding priorities (in the EU case, services by new entrants on EU duopoly routes),23 while permitting slot trading with the remaining 95 per cent. This proposal, which could not have been applied to foreign airlines at EU airports, provoked wide protest from EU airlines, and was replaced in 2001 by another which would have raised to 7 per cent the threshold for being counted as a new entrant, and made provision for airlines to be fined if they broke the rules (Commission 2001). However, the proposal was almost immediately overtaken by the crisis in civil aviation which followed the terrorist attack on the World Trade Centre in New York on 11 September 2001. So many slots were unused in the following winter season that an amending regulation was passed, suspending the use-it-or-lose-it rule, so that incumbent airlines would not lose their entitlement to slots. The same procedure was followed when the war against Iraq caused airlines to cancel many flights in the summer of 2003 (Council 2002b, 2003). When demand recovered, the Commission resumed the search for ways to encourage slot mobility while seeking ‘to ensure that any alternative slot allocation system fits with the overall EU air transport policy and matches other slot allocation procedures worldwide’. A study with these conflicting objectives was completed in January 2004, but the objectives themselves and the long delay in bringing forward fresh proposals tend to confirm the view expressed by Kyrou (2000) that the Commission (or at least DG TREN) has been largely captured by the status quo lobby of major airlines and airports. Meanwhile, except insofar as the Commission has been able to require the release of slots at congested airports in connection with the approval of airline alliances (see Chapter 9), new competition has had to develop – robustly enough as it turns out – mainly on the basis of indirect competition from alternative and usually less convenient airports such as Luton and Stansted in the London area, Charleroi for Brussels and Hahn for Frankfurt. Ground handling The management of airport ground handling services presented a further obstacle to the effective operation of a single market in air services. These were often operated as a monopoly by the airport acting in close cooperation with the national airline, or even by the national airline itself, an arrangement which tended to bias the service against unwelcome new entrants, as well as resulting in high costs and poor services. From 1990 airlines began complaining to the Commission about the restrictions they faced at more than 20 airports in Spain, Italy, Germany and Portugal. Where the supply of ground services was a monopoly, as for example at Athens, Frankfurt, Madrid and Milan, the charges imposed on airlines were found

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to be between 42 per cent and 75 per cent higher than where there was competition (Espérou and Subrémon 1997, pp. 60–2). In one of the cases later used by Schmidt (2000) to demonstrate that, in some areas where the Commission is able to use its competition policy enforcement powers, it can achieve greater leverage than when it is simply an agenda setter; the Commission (DG COMP) responded by announcing possible decisions against such practices under the competition rules of the Treaty (ex Article 90(3)). Initially the Commission faced opposition from a group of member states with sufficient votes in the Council to constitute a blocking minority, but the threatened use of its competition powers, linked in at least one case (Greece) to the approval of state aid for the national airline, caused enough member states to liberalize ground handling at their airports for a favourable majority to emerge. Those states that were obliged by the Commission to open their own markets to competition acquired a clear interest in supporting legislation which would require others to follow suit. The proposal put forward by the Commission in 1994 was therefore approved by a qualified majority at the end of 1995, overriding continuing opposition from Germany and Austria. Directive 96/67 provided for competition in the provision of ground handling services to be phased in, starting with airlines having the right to provide their own ground handling services within the terminal from 1998. A study carried out for the Commission in 2002 showed that the directive had been successful in stimulating increased competition at 144 airports handling more than one million passengers per year, though airlines continue to complain that many airports restrict competition to the minimum levels prescribed in the directive, with tenders routinely won by the governmentbacked service provider. The study confirmed that there were problems, particularly where the airport manager also provides ground handling services, but the Commission’s 2007 report to the Council on the application of the 1996 directive stops short of proposing amendments (Commission 2007a). An overarching framework for airport regulation Until 2007 the Commission was content with a piecemeal approach to airport regulation, injecting competition where it seemed to be required to support the effective functioning of the single market, but otherwise leaving it to the national authorities of the member states. Ground rules for objectively based and non-discriminatory airport charges had already been laid down by the Court of First Instance in a case brought by Alpha Flight Services against Aéroports de Paris (Case T-128/98 of 12 December 2000). However, the package of airport regulation proposals put to the Council on 24 January 2007, including the report on the application of the ground handling directive (see earlier discussion), not only builds on the jurisprudence of the Court to propose a directive on airport charges (Commission 2007b), but presents a vision of Community airports as an interlocking network which, like air

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traffic control, needs to be operationally integrated at a European level in order to minimize congestion on the ground and in the air, making the best possible use of existing infrastructure, and establishing common safety standards. Under specific mandates to be handed down by the Commission, proposals for safety would be developed by EASA, and proposals for the integration of airport slots with air traffic flow management would be developed by Eurocontrol. It remains to be seen whether the member states will be willing to use Eurocontrol and EASA to undermine their own authority in this way, or whether they would have the necessary resources and expertise, but the Commission is accustomed to playing a long game.

Conclusion Although further liberalization was by no means inevitable, progress towards completion of the single market in air services after 1987 was much more rapid than could have been predicted from past experience in the aviation sector. The determination of the French to score a single market success for their Presidency in the second half of 1989 gave the process a sudden and irreversible political impetus. By June 1992 all the key measures on licensing and market access, together with the abolition of most constraints on capacity and tariffs had been agreed in the Council, so that a liberal market was substantially in place on 1 January 1993, though completed by the availability of full cabotage rights from 1 April 1997. Other measures which were needed to support the single market and counter potential abuses of the powerful market positions occupied by the dominant national airlines were also put in place by the Council both before and after 1992. As noted at the beginning of this chapter, many of these measures, and particularly those which formed part of the second and third liberalization packages, passed through the Council much more quickly than the first package and on occasion the measures adopted were more radical than the proposals initially tabled by the Commission. There are several reasons for this. In the period leading up to 1992, there was support at the highest levels of government for measures relating to the completion of the internal market. This appears to have influenced France and Portugal, both countries that were historically part of the cautious majority, when they held the Council Presidency in the second half of 1989 and the first half of 1992 respectively. Also, the application of qualified majority voting to air transport from 1987 under the SEA lowered significantly the threshold for the approval of liberalization measures. Measures no longer had to satisfy the most reluctant member governments if they were to be agreed. In addition, although there was not the same need to use the Commission’s competition powers or to rely on rulings from the Court of Justice in the run up to the second and third packages, the shadow of the earlier rulings hung over the proceedings, and the united position maintained by the Commissioners for Competition and Transport gave the cautious majority little or no room for

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manoeuvre. Furthermore, the Commission continued to gain experience and expertise. An aviation directorate, Directorate C, was created for the first time in 1990. It had four internal divisions, responsible for political aims, application of the law, safety, and airports and the environment respectively. Ten ‘A’ grade staff were posted to the Directorate. Inter-modal divisions handled infrastructure, research and development, and external relations. There was additional evidence of learning on the part of the Commission. In particular, it became less hostile to outside institutions and came to recognize the value of cooperation with established aviation bodies, notably ECAC. After 1990, use of the Commission’s competition powers to require the liberalization of ground handling in some member states again helped to build up support for liberalization within the Council to the point where a liberalizing directive could be passed. Equally, the absence of agreement between competition and transport Commissioners in relation to slot allocation policies, as well as the complexity and intractability of the dossier, has significantly weakened the Commission’s ability to impose liberal policies in this area. On balance the Commission has been successful in putting in place a comprehensive range of measures to establish a single market in aviation, even though the achievement was not secured by the efforts of the Commission alone. Supportive rulings laid down by the ECJ have been important, but political support has been indispensable (Conant 2003, p. 243). Without the action of liberal-minded member states within the Council of Ministers, the impact of the Court’s decisions and enforcement activity by the Commission would have remained limited. It was the congruence of all three sources of pressure that carried the Council forward from the limited measures agreed in 1987 to the 1992 adoption of the legislation which definitively established the single market in air transport. Since 1992 it has been easier for the Commission to take the lead in completing the single market with further measures, deploying its enhanced powers of enforcement and the decisions of the Court to help build political support as necessary within the Council.

7 Extending the Scope of the Common Air Transport Policy

Although liberalization is the centrepiece and the single market the most significant achievement of the common air transport policy, the intervention of the EU in non-market making areas of economic regulation and especially the technical and operational aspects of the industry is in many ways no less remarkable. Once the member states had decided to liberalize the provision of air services among themselves, there was nothing in the Chicago regime to stop them so doing. Establishing a role for the EC in the more technical aspects of aviation was altogether more problematic, since here the regulatory space had long been occupied by other international bodies. As an international industry, aviation needed common standards from a very early date. Norms were developed globally in the Annexes to the Chicago Convention, continually updated in ICAO’s Air Navigation Council reporting to the triennial meetings of the Assembly, and regionally through ECAC and more specialized organizations, including the JAA for common airworthiness standards and Eurocontrol for air traffic management. Despite the crowdedness of the territory, the Union has become not only active, but a leading actor in these domains. The Community has evolved close partnerships with these specialist bodies, based on a division of labour whereby the latter draw on their expertise to develop standards, to which the EC gives legal force. These new relationships, novel cooperative arrangements between international organizations in themselves, have compelled the Community to adapt and customize its decision-making processes, projecting the Commission into the centre of a new institutional geography. While it is scarcely conceivable that Union intervention in these areas would have occurred without the prior achievement of liberalization, it would be mistaken to explain the EU’s involvement simply as a necessary or automatic consequence of the creation of the single market in air services. The dismantling of national barriers certainly provided a rationale and a strong incentive for greater harmonization, but there were considerable organizational hurdles to surmount for the Community to become involved in aviation safety or air traffic control. The Commission was again active in attempting 130

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to establish Community competence in these fields. Unlike in liberalization (Chapter 5) or external policy (Chapter 8), however, it could not use its enforcement prerogatives to persuade or compel member governments to alter the status quo. Nor was it able to take advantage of changes in the external environment or action on the part of the US to mobilize action as it had been elsewhere. There was, however, strong support from the airline industry in Europe for a more coherent, less fragmented regulatory structure, and pressure from this quarter influenced the member states. The case for Community action became even more compelling once the limitations of traditional intergovernmental methods became evident. The involvement of the EC as a regulatory authority was then perceived not so much as a threat to the use of the existing institutional structures, but rather as a means of making them more effective. Under these circumstances, despite its ambitions the Commission was able to build winning coalitions far more easily than elsewhere and did not need to have recourse to the ECJ. Furthermore in environmental and consumer protection, as well as safety, the Commission was able to take advantage of the general expansion of EC/EU competencies that had marked successive treaty reforms from the mid1980s. Although the Community had adopted environmental action plans since the mid 1970s, it was not until the SEA (1986) that specific competence was formally established in the treaty. The Treaty on European Union (1992) promoted the environment from an action to a policy, including a statement that ‘environmental protection requirements must be integrated into the definition and implementation of other Community policies’. The Treaty of Amsterdam (1997) reinforced this obligation when environmental policy was included among the principles within Part One of the Treaty, where its application to transport was made explicit under Articles 3 and 6. As with the environment, so also with consumer protection, the Commission had begun to adopt action plans as early as 1975, but it was not until an obligation to ‘contribute to a high level of consumer protection’ was written into the Treaty on European Union that a firm basis was established in Community law for legislation to be brought forward to protect air passengers. The Treaty of Amsterdam (1997) added a provision that ‘consumer protection requirements shall be taken into account in defining and implementing other Community policies and activities’ (TEC Article 153). By far the most significant extension was the provision introduced by the Treaty on European Union, under Article 71 (ex 75) of the transport title, for ‘measures to improve transport safety’. This addition to the Treaty opened up new areas of transport law and policy, providing a basis for Community involvement in aviation safety, aviation security and air traffic control. This chapter examines the development of the common air transport policy beyond the single market in three main areas. As the single market took shape, the member states began to see the possibility of Community

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action, and particularly the use of Community law, in safety and security in a more positive light, despite the existence of alternative intergovernmental arrangements. In an initial phase, they agreed to a relatively straightforward division of labour between the JAA and the Community, and later when difficulties with that arrangement became evident, the debate leading to the creation of the EASA was not so much about the need for greater Community involvement as about the form that it should take. In air traffic control, the debate about Community involvement was sharper and more protracted because air traffic management is an operational function, member state investment had been significant, and a competent regional organization (Eurocontrol) already existed. Governments preferred initially to improve cooperation within existing arenas to deal with increases in air traffic. Again, however, once even intensified intergovernmental cooperation failed to generate the necessary increase in capacity within a small, but fragmented, airspace, they were prepared to support the Commission’s proposal for a Single European Sky. Community action with respect to environmental policy and passenger rights confronted the Commission as an advocate of EC involvement with fewer challenges and was considerably less controversial. Member states had adopted similarly high environmental norms in aviation, so that the divisions that existed in other sectors between supporters of higher standards and lower standards (see, e.g., Héritier et al. 1996; Scharpf 1996, 1999: Chapter 3) were not present. The case for Community regulation of passenger rights was more political. The member states could not be seen to oppose the initiatives taken by the Parliament and the Commission, but they were less than enthusiastic in the face of opposition from their national airlines.

Safety and security The Union has come to play an important role in aviation safety and to a lesser extent security. Both areas were traditionally the preserve of national governments, subject to their obligations as members of ICAO, and international cooperation was firmly intergovernmental. The Community created a partnership with the JAA, the regional body responsible for standard setting, in the early 1990s, using Community law to apply JAA standards, the so-called JARs. When that arrangement proved problematic, the Commission blocked the development of an autonomous aviation safety authority, and substituted its own proposal for the EASA. Commission entrepreneurship was important in the development of EC policy, but the Commission’s position was strengthened by the strong functional case for the centralized coordination of safety regulation and the demonstrable benefits of using Community law to give legislative force to technical requirements developed by specialist bodies outside the Community system.

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Safety Until 1991, safety regulation was carried out by the national authorities of the member states, acting on the basis of guidance agreed within ICAO and ECAC. In order for an aircraft to enter service, it has to receive an airworthiness certificate, demonstrating that it has met the necessary safety requirements. The magnitude of the task of standard setting should not be under-estimated. As Schout (2008b) points out, every one of the 12,000 parts required to build an Airbus A 380 needs to be certified. The standards are laid down by national aviation authorities, based on Annex VIII to the Chicago Convention. Many countries adopted or adapted the federal airworthiness requirements (FARs) developed by the US Federal Aviation Authority. Britain and France originally had their own national codes, but the development of the Concorde supersonic aircraft in the early 1970s led to the creation of a joint Anglo-French authority to provide for its certification. When it later proved convenient to establish common airworthiness requirements for Airbus, a consortium involving French, German and Spanish aerospace companies, other European aviation authorities became associated with the Anglo-French initiative. In 1989, at the request of the European aerospace industry, this loose association of airworthiness authorities was put onto a more secure footing as the JAA, an associate body of ECAC. The Commission brought forward proposals in the same year. Along with the desire to promote the highest standards in Europe, there was a concern that differing safety regulations might create barriers to trade that would undermine the single market (Agence Europe, 19.07.1989, No. 5060, p. 11). At a time when the French government was pressing for harmonization to accompany liberalization (Chapter 6), the Commission proposed harmonizing safety standards through the introduction of common airworthiness licensing, based on the JARs as formulated by the JAA (Commission 1989a), and called for all EC member states to join the JAA by January 1992. During the transition period mutual recognition would apply and national codes remain in force, but after 1 January 1993 JARs would provide the common standards, which would be adopted by the Community and given legal force. The Commission, assisted by an advisory committee composed of national experts, would be empowered to make changes to the Annexes, which would contain references to the specific JAR codes that were incorporated into EC law. The European Parliament and the Economic and Social Committee both welcomed the Commission’s proposals, though called in the long term for the creation of a single European Aviation Authority. The Council responded favourably to a proposal that would enhance the effectiveness and international authority of the JARs and adopted at its meeting of 16 December 1991 a regulation (Regulation 3922/91) that was virtually identical to the Commission’s original text.1 Any JAR approved by the JAA would become a Commission proposal and be submitted to the Council.

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It would be discussed in an advisory committee of the Council, where changes would be made or vetoes imposed, and, if approved, would be transmitted to Ministers. This new and innovative method proved somewhat problematic in practice, however. The need to ensure the compatibility of JARs with Community law was one impediment, the difficulty of translating into all EU languages a succession of highly technical documents subject to frequent amendment as technology advanced another. Moreover, member states that were relaxed about the detail of technical requirements adopted in an intergovernmental context could not take the same view about the text of an EU regulation. In these circumstances, the legislative process ground virtually to a halt. Experience with the operation of Regulation 3922/91 suggested that the normal processes of EU law making were not well suited to the regulation of aviation safety, but member governments did not doubt the need for a properly constituted authority with appropriate powers of enforcement and a clear legal identity to replace the loose association of JAAs. In 1995, a legal firm, Frere Cholmeley Bischoff, was commissioned to conduct a feasibility study on a single European certification authority and its relationship to the institutions of the EU, with a view to identifying an institutional arrangement that would permit the rapid adaptation of safety requirements to changes in design and technology within a framework which could take advantage of the benefits of the EU’s single legal authority without excluding non-EU states such as Norway and Switzerland (Commission 1996c). In June 1997 the Council agreed in principle to develop the concept of a European Aviation Safety Authority based on its own Treaty with membership open to the Community and to all European states. This project was accorded high priority under the UK Presidency in the first half of 1998, leading to the adoption on 16 July of a mandate for the Commission to draw up a Convention for the establishment of such an Authority, and to negotiate Community membership. It proved difficult, however, to reconcile Community membership with the requirement for an institution outside EU jurisdiction to take decisions directly applicable in law within the member states. These difficulties had not been resolved when François Lamoureux succeeded Robert Coleman as Director General of DG VII. Widely perceived as a tenacious proponent of the European project, with an ‘unflinching vision of an ever more integrated Europe with strong powers for the Commission’,2 Lamoureux worked with others to persuade the Commission to abandon the previously accepted strategy and structure and argued in a new proposal (Commission 2000) that the constitutional changes implied by such a structure would lead to cumbersome and risky ratification procedures in at least some member states. At the same time, the resistance of John Major’s Eurosceptic government (1992–7) to any extension of EU competence into areas occupied by national and intergovernmental authorities had given way to New Labour’s more

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pragmatic approach.3 As a result, the UK, which had taken a strong lead in promoting an intergovernmental aviation safety authority, did not oppose the Commission being invited to devise an alternative structure within a Community legal framework. During 2000, this led to agreement on the concept of a European Aviation Safety Agency, which would enjoy a substantial measure of autonomy in technical matters, but find legal shelter within the EU’s institutional structures. Regulation 1592/2002, which established EASA, sets out the scope of the new Agency’s activities and its management structures. While the regulation extends in principle to all aspects of aviation safety, its application was limited in the first instance to the airworthiness and environmental certification of civil aircraft, aircraft parts, the organizations involved in design, production and maintenance, and their personnel. A second mandate based on Commission (2005b) covers air operations, pilot licensing and the safety of aircraft from third countries operating within the EU. Further regulations are planned to extend EASA’s remit over the next few years into the safety regulation of airport and air navigation services. While these basic regulations go through the EU’s normal legislative procedures, the more detailed implementing rules are set out in subsequent Commission regulations adopted under comitology procedures (Dogan 1997, 2000; Dimitrakopoulos 2005; Pollack 2003). These rules – for example, Regulations 1702/2003 and 2042/2003 on airworthiness certification – are closely based on those developed by the JAA, and EASA makes recommendations for them to be amended as and when this is required by advances in technology, the need to improve regulatory efficiency or changed international standards. After a period of necessary overlap to allow EASA to build up its technological capacity, the JAA organization was closed down during 2007 and its work transferred to EASA. Although the implementing rules are detailed and technical, the overall approach to safety control is based on objectives (for products) and procedures (for organizations). The organizations concerned must set out in a safety control system how they themselves propose to control and monitor their activities (design, production, maintenance or training) so as to ensure compliance with technical requirements, to identify shortcomings and to implement appropriate corrective actions. These systems have to be approved by the competent regulatory authority, and national regulatory authorities are themselves subject to inspection by EASA. EASA differs from many EU agencies in having substantial executive as well as advisory functions (see Szapiro 2005; Trondal and Jeppesen 2008 on EU Agencies; see Schout 2008a, 2008b on EASA). The Executive Director enjoys an impressive degree of autonomy in the exercise of his technical responsibility, notably to grant or withhold a type-certificate of airworthiness for any aircraft, however prestigious it may be (for example, the A 380 Airbus) if it is designed or operated by a European person, though his decisions may be taken to a Board of Appeal and ultimately to the ECJ.

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That said, the Regulations within which the Agency operates are laid down by the Council and the Parliament in accordance with Community law, so the Commission is not obliged to follow the Agency’s advice, and the implementing rules take the form of Commission Regulations, the adoption of which is governed by comitology procedures involving the member states (Schout 2008b). It follows that even in technical matters the Agency is part – albeit an important part – of a network in which the Commission and the member states are also important players. In the management of the Agency, including the preparation and oversight of its budget, the Director is supported by a Management Board consisting of one representative from the Commission and from each member state. In its early years there were teething problems as the Agency’s recruitment and its work programme were hampered by the EU’s inflexible budgetary control and financial management procedures (interview, 15 March 2007), but the situation has been eased, notably by the adoption of a new fees and charges regulation (Regulation 593/2007), which allows the Agency to charge for certification work in advance, instead of having to rely on the Commission to fund budget deficits while payments were collected in arrears. The Board, which includes non-EU members (Norway, Switzerland and Iceland) takes most decisions by an unweighted two-thirds majority. There are just two exceptions: one for the appointment of the Executive Director, which requires a three-quarters majority, and the other for decisions about the Agency’s linguistic arrangements. On this sensitive issue, the Regulation provides for any member of the Board to insist on unanimity. In practice there has been only one inconclusive discussion of linguistic arrangements in the Management Board, and although many important documents including all EU Regulations have to be translated into all the languages of the Community, the political heat has been taken out of the issue by following a pragmatic approach consistent with EASA’s performance-based attitude to all its tasks and responsibilities. EASA is a young agency which has yet to grow into the full responsibilities envisaged for it by the Commission and the member states. On the one hand, it is exceptional in the extent of technical autonomy exercised by the Executive Director. On the other hand, as Schout (2008a) has pointed out, its agency structures are consistent with a pattern of network management which is common to the generality of EU Agencies (see Metcalfe 1992). In the case of air safety, networks already functioned in ECAC and the JAA. However, that does not alter the fact that the management of European air safety has been moved since 1992 from an intergovernmental framework into a supranational framework. Security Community involvement in aviation security has also seen legal backing given to rules developed in intergovernmental forums that would otherwise

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not be binding. Historically, aviation security was managed within ICAO. Annex XVII to the Chicago Convention lays down internationally accepted guidelines which have been followed in national regulations governing the security of civil aviation. These arrangements had been successful in reducing the number of hijacking incidents and in dealing with those which could not be prevented. However, the terrorist attack on New York and Washington on 11 September 2001 precipitated an urgent review. EU Environment and Transport Ministers, due to meet informally on 14–15 September, convened as an Extraordinary Council on 14 September and decided to strengthen the EU’s defences against such attacks by asking the Commission to convert the guide to best practice that had been developed in ECAC on the basis of lCAO Annex XVII into a draft Regulation. The proposal was discussed at two further Council meetings in October and December, but the question of whether some of the costs should be borne by member governments rather than by airlines and airports was a source of division between Council and Parliament and it took until late 2002 before a regulation (Regulation 2320/2002) was adopted. When as part of its attempt to improve security following the 2001 attack the US approached the EU in May 2004 for an agreement concerning personal data, the Commission, acting on behalf of the Council of Ministers, signed an agreement providing for the transfer of up to 34 items. The European Parliament, however, objected on the grounds that the agreement breached the EU’s privacy laws and initiated legal proceedings against the Council and the Commission. The Court ruled against the agreement on 30 March 2006 on the grounds that it should have been concluded under the procedures applying to justice and home affairs rather than the single market. The EU was forced to ask the US to alter the agreement, which gave Washington two opportunities, in December 2006 and again in July 2007, to reopen the deal, which it duly exploited. The US demanded that the data be made available to a wider range of US agencies, and retained for 15 years, rather than three-and-a-half years. Further confirmation that the Union had become an international actor in aviation security came with the adoption of EU blacklists. Some time after a fatal accident, in which an aircraft operated by Flash Airlines plunged into the Red Sea on 3 January 2004, killing 148 passengers, mostly French tourists, it emerged that the same plane had been banned by Switzerland on safety grounds a couple of years previously. The Commission proposed legislation to establish a Community-wide blacklist of aircraft or airlines banned from Community airspace. Member states were reluctant to allow the Community any influence over their national prerogative to grant or to withhold landing permits, but they did agree a lesser measure, Directive 2004/36, requiring national aviation authorities to make provision for inspections of third country aircraft when there were grounds for concern about safety, with an agreed list of what should be inspected, and provision

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for the Commission and other member states to be informed whenever a ban was imposed. Support for a stronger measure came in the summer of 2005 when the Commission could point to divergent approaches to four crashes. In one case, when the Netherlands aviation authorities imposed a ban on a Turkish airline on grounds of ‘serious safety deficiencies’ and the German, Swiss and French authorities rapidly followed suit, public concern was expressed when flights were re-routed to Belgium. A Commission proposal for the establishment of a Community blacklist was already on the table and Regulation 2111/2005 was passed in November, despite opposition from IATA which had set up its own voluntary inspection system in the hopes of fending off more draconian measures. The new regulation requires the member states to report any national bans they may have imposed, and establishes a set of criteria against which the Commission decides whether to impose specific conditions or a total ban on operations within the Community. The blacklist, first published in March 2006, is reviewed every three months (or more often if necessary) and has significantly raised the public profile of the Commission as an international actor in aviation.4

Towards a single European sky The Union’s involvement in air traffic control represents perhaps the most dramatic case of the extension of Community policy into technical areas, since the barriers to its intervention were formidable. For much of the 1980s and 1990s, member governments preferred to address air traffic management issues in the traditional intergovernmental forums, Eurocontrol and ECAC, and to pursue solutions through ‘cooperation’ and ‘harmonization’ rather than ‘integration’ (see Staniland 2008, p. 147). At the century’s turn, however, the EU succeeded not only in assuming an important role for itself, but became the key actor in moving the organization of air traffic control from a haphazard patchwork towards a single European airspace. Air traffic control in Europe The organization of air traffic control was complex and strongly intergovernmental. Since the 1940s and 1950s, airspace had been divided between civil and military users (see AEA 1989, pp. 7–10). Moreover, civil airspace was managed according to the sovereignty principle.5 Despite some coordination in Eurocontrol and ECAC, and the imposition of certain obligations by ICAO, governments sought to retain tight control. As a consequence, traffic in Western Europe was managed by no fewer than 42 control centres, when in far larger territories, including the US, Canada and the former Soviet Union, responsibility was vested in a single body (Commission 1989d, para. 10).6 National systems had been developed according to national priorities and varied significantly in terms of the level of resources invested. Airspace

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was fragmented and divided along national frontiers rather than structured functionally in line with major traffic flows; its management was uneven; and national authorities used different technologies that were not mutually compatible (Commission 1989d, para. 10). En route services, which provide for the transfer from one set of national authorities to another, were particularly problematic. Although in the early 1960s in anticipation of the jet age Eurocontrol was created by West European States as an operational body with supranational control over Europe’s upper airspace (Chapter 4), the same governments had progressively ‘scaled back’ its functions over the following two decades (Majid 1988). Its activities were restricted to a small area of northern Europe, some of its functions returned to national hands, and new areas of responsibility restricted to intergovernmental cooperation in research, training and planning (Chapter 4). The reduced ambitions were reflected in the organization’s revised Convention of 1981. A system under strain These arrangements came under increasing pressure when air traffic in Europe increased in the late 1980s. In 1987, ECAC predicted that air traffic movements would double between 1987 and 2000 (Commission 1989d, para. 10). In 1986 only 12 per cent of intra-European flights were delayed by more than 15 minutes, but by 1988 that figure had risen to 20 per cent and reached 25 per cent the following year. About half the delays were considered attributable to problems of congestion in air traffic control (Commission 1989d). With airport terminals full of delayed holiday-makers, it was becoming politically important to find ways to reduce the delays. The AEA (1989) contended that the lack of efficient available airspace and the limited technical capacity of the air traffic control systems created substantial and unnecessary costs for airlines, passengers and the European economy as a whole. It calculated total losses at $ 4190 million in 1988 (AEA 1989, p. 21). En route air traffic control services were identified as a particular problem, with estimations that it cost the same amount ($1.6 billion) to produce en route air traffic control services in the ECAC countries as it cost the US system to handle three times the number of flights (Commission 1989d, para. 10). The European Parliament and the AEA both called for centralized solutions. The Parliament passed two resolutions. The first endorsed an own initiative report drafted by Georgios Anastassopoulos (European Parliament 1987), offering a comprehensive review of aviation safety within the Community. It included proposals for a single system of air traffic control in Europe similar to the US Federal Aviation Authority, and called for all member states to join Eurocontrol to improve coordination between civilian and military authorities, and to standardize communications and information systems. The second, drafted by P. A. M. Cornelissen and adopted by the Parliament

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in April 1988, advocated a revitalization of Eurocontrol, also on the model of the FAA (European Parliament 1988). The AEA made a similar appeal in its 1989 document, ‘Towards a Single System for Air Traffic Control in Europe’, which it presented to the Commission, calling for national systems to be upgraded and integrated. The Commission advocated action to address the problem, though its proposals were relatively modest. It called for the capacity of air traffic control to be increased by the harmonization of national systems and the streamlining of air traffic flow management through Eurocontrol. It also proposed that the Community should have a role in technical harmonization, that the EC should become a signatory to the Eurocontrol convention and that the demarcation between civil and military airspace should be revised. In addition, it argued that infrastructure provisions, with a consultation procedure and accompanying committee covering other transport areas (Council 1978), should be extended to sea and air transport. The Council gave these proposals a tepid reception. It discounted as unrealistic the possibility of any ‘big bang’ solution to create a single authority. Though it acknowledged that a lack of coordination between national authorities was partly to blame for air traffic congestion, it argued that the efforts of Eurocontrol and ECAC should not be duplicated by the Community. In a resolution, the Council invited those member states that were not already members of Eurocontrol to accede to the organization and those that were already members to work to bring about observer status for the Commission on the Eurocontrol Management Committee and cooperate in the establishment of a single air traffic flow management centre based on Eurocontrol’s Central Data Bank. It also invited member governments to make efforts to establish compatible technical and performance specifications for air traffic control systems and equipment, to harmonize requirements for the training and recruiting of air traffic controllers, and to cooperate within Eurocontrol to make more airspace available for civil purposes. The Commission was dissatisfied with the Council’s response and the slow rate of progress on the part of governments, Eurocontrol and ECAC. It exhorted member governments to act on safety when presenting its proposals for the second and the third packages. Then in September 1992, it tabled a further document that repeated its encouragement to member states to join Eurocontrol and sought to obtain authorization to make, with the assistance of an advisory committee, Eurocontrol’s technical specifications mandatory at the EC level. Member governments did not respond, but sought to address air traffic control problems in other arenas. An intergovernmental response A series of initiatives were launched in the late 1980s within the European Air Navigation Planning Group (EANGP), a standing committee of the

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ICAO European Region, Eurocontrol and ECAC. The EANGP devised the Future European Air Traffic Services Concept (FEATS), a plan to develop a coherent regional system by optimizing available air traffic performance by eliminating redundancy and duplication, increasing airspace utilization and developing compatible air traffic control systems. Meanwhile the first ever meeting of ECAC at ministerial level, convened at Frankfurt airport on 20 October 1988 at the instigation of Detlef Winter, Director-General of Civil Aviation for the Federal Republic of Germany, who was President of ECAC from 1987 to 1989, opened an era of activism at the highest levels, aimed at improving air traffic control capacity. The initial meeting led to the creation of a Central Flow Management Unit within Eurocontrol which replaced five nationally operated regional centres and the launch of the European Air Traffic Control Harmonization and Integration Programme (EATCHIP), which later (in 1999) became the European Air Traffic Management Programme (EATMP). Eurocontrol was also charged with the task of establishing a Common Medium-Term Plan (CMTP) within the FEATS concept. Subsequent Ministerial meetings, which followed at intervals of two or three years, led to further measures and further programmes, which were sufficient to deliver increases in airspace broadly commensurate with the rapid increase in air traffic between 1988 and 2000. Further action was planned to double the capacity of the system by 2015 (House of Lords 2001, pp. 7–8, 19), but delays which in 1993 had fallen back to 12.7 per cent, reached 22.8 per cent in 1998, and rose to 30 per cent in the first half of 1999. The latter increase was due to the exceptional circumstances resulting from the Kosovo crisis, which disrupted air traffic across south-eastern Europe.7 By the turn of the century Eurocontrol was much more effective than it had been before 1988, and by 2001 membership had grown to 30 countries, including all 15 members of the EU (Table 7.1). However, despite the impetus which had been supplied by regular meetings at ministerial level, the intergovernmental structure was showing signs that it had reached its limits. As early as 1992 the need for a revised Eurocontrol Convention was recognized. Signed in 1997, the revised Convention makes provision for a General Assembly at the ministerial level to determine policy for air traffic control, and a Council of senior national officials to direct Eurocontrol in carrying it out. However, the member states of Eurocontrol have been slow to ratify, and in 2007 it was still three ratifications short of the number required for it to enter into force. As a result, the provisions of the new Convention were being implemented rather unsatisfactorily, on a provisional basis.8 The Single European Sky initiative The Commission persisted in its advocacy of Community involvement, maintaining that this would enhance the efficiency of air traffic control. The first advance, associated with the adoption of the third package, was an apparently innocuous Council Directive (Council 1993h) on the definition

142 Air Transport and the European Union Table 7.1

Membership of European regional organizations

Member State

EU

ECAC

Eurocontrol

Albania Armenia Austria Azerbaijan Belgium Bosnia and Herzegovina Bulgaria Croatia Cyprus Czech Republic Denmark Estonia Finland France Georgia Germany Greece Hungary Iceland Ireland Italy Latvia Lithuania Luxembourg FYR of Macedonia Malta Moldova Monaco Montenegro Netherlands Norway Poland Portugal Romania Serbia Slovakia Slovenia Spain Sweden Switzerland Turkey Ukraine United Kingdom

— — 1995 — 1958* —

1998 1996 1955* 2002 1955* 2002

2002 2006 1993 — 1960* 2004

2007 — 2004 2004 1973 2004 1995 1958* — 1958* 1981 2004 — 1973 1958* 2004 2004 1958* — 2004 — — — 1958* — 2004 1986 2007 — 2004 2004 1986 1995 — — — 1973

1991 1992 1969 1991 1955* 1995 1955* 1955* 2005 1955* 1955* 1990 1955* 1955* 1955* 1993 1992 1955* 1997 1979 1996 1989 — 1955* 1955* 1990 1955* 1991 2002 1991 1992 1955* 1955* 1955* 1955* 1999 1955*

1997 1997 1991 1996 1994 — 2001 1960* — 1960* 1988 1992 — 1965 1996 — 2006 1960* 1998 1989 2000 1997 2007 1960* 1994 2004 1986 1996 2005 1997 1995 1997 1995 1992 1989 2004 1960*

Note: * founder members Source: Compiled by authors from ECAC, Eurocontrol publications.

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and use of compatible technical specifications for the procurement of air traffic management equipment and systems. Three years later, in March 1996, the Commission published a rather slender White Paper (Commission 1996d), lamenting the deficiencies and delays in European air traffic management, emphasizing the desirability of separating Eurocontrol’s regulatory functions from its oversight of performance in accordance with new public management wisdom, and pointing to the advantages of Community law in relation to the exercise of those functions. The Commission sought membership of Eurocontrol, and advised EU member states not to ratify the revised Convention until the Community was also in a position to do so. The Commission took advantage of a renewed crisis in the departure lounges in the autumn of 1999, which had put pressure on Ministers. Commissioner Loyola de Palacio, who had recently succeeded Neil Kinnock as Commissioner for Transport, was invited to attend the sixth ECAC Ministerial meeting, which was to discuss the next steps in developing the Eurocontrol programme. The Commissioner astonished the assembled Ministers by admonishing them for their failure to bring about any lasting improvement, and announcing her intention to launch an EU initiative instead. Though de Palacio’s assertiveness came as a shock, there was acceptance that the ECAC initiative had run out of steam, and Ministers were almost relieved to have the issue taken out of their hands.9 The Commission (1999a) published a communication to the Council and the Parliament, which launched the concept of ‘The Single European Sky’ – with conscious allusion to the Single European Market in an attempt to raise the profile of the issue. Maintaining both impetus and control, the Commission immediately set up a high-level group chaired by the Commissioner, to look again at the case for institutional reform, with an emphasis on the benefits of a Community approach. The high-level group concluded in November 2000 that structural changes were needed, which implied passing from a logic of co-operation to a logic of regulation with al1 that is required in terms of political and legislative controls … these changes suppose that the airspace is managed at European level in the common interest … the high-level group considers that the regulation of air traffic must be fully integrated into the European Union activities … it must be able to benefit from all forms of such activities, whether it be its regulatory powers, its training and assistance instruments, its dialogue and control mechanisms and the new EU competence in the defence domain. (Commission 2001b, pp. 3, 31) It declared that ‘At a time when Europe has achieved a single market and a single currency, it is inconceivable that a Single European Sky is outside our reach’ (Commission 2000, p. 15).

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On the basis of this report, the Commission proposed (Commission 2001b) a framework regulation establishing a ‘Single Sky Committee’ to be chaired by the Commission with two representatives from each member state to allow for both civil and military representation. This was accompanied by further draft regulations (Commission 2001c) for the provision of air navigation services, for the organization and use of airspace, and for the interoperability of the air traffic management network, with the promise of more to follow on accession to Eurocontrol and on the extension of the mandate of the EASA to encompass the safety regulation of air traffic control services. The Commission would look to Eurocontrol’s Safety Regulation Commission to specify safety requirements until this responsibility could he transferred to EASA, and to Eurocontrol’s Performance Review Commission to implement Community rules on airspace structure and management, and to oversee the performance of air navigation services throughout the member states. The essential requirements governing the safety and operation of air traffic control, as well as the mechanisms for making and implementing decisions, would all, however, be governed by Community law. The Commission would assume a regulatory role, while Eurocontrol would continue to perform its traditional functions, and prepare the technical changes necessary to make the transition to the Single Sky. Eurocontrol would become an executive sub-agency of the Commission, providing technical advice to the Commission and to EASA, and carrying out supervisory and executive responsibilities for the Commission within a framework of safety regulation determined by the Community acting on advice provided by EASA to the Commission. The Commission wanted this new structure put in place in time ‘to turn Europe’s sky, from 2004 on, into an integrated airspace governed by the same principles and rules’, but this assumed that some 30 sovereign states, only half of whom were currently EU members, would be content to emasculate Eurocontrol in the way proposed, severely curtailing their exercise of sovereignty in the use of national airspace for both civil and military air traffic. Even within the EU, if the management of civil and military air traffic control was to be brought together within a single organization, there were some extremely difficult issues to be resolved about how to reconcile the supranational decision-making arrangements of the European Communities, which are appropriate to civil aviation, with the essentially intergovernmental arrangements for the common foreign and security policy, which would apply to military aviation. The proposal for a framework regulation promised that the Commission would ‘take all appropriate initiatives for setting up the institutional framework necessary to organise military co-operation’, and the accompanying draft regulation on the organization and use of airspace had a short section on civil-military coordination which relied on Eurocontrol’s concept of ‘flexible use of airspace’, but it was far from clear how the institutional incompatibilities were to be resolved.

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In the event the Commission was successful in getting a package of measures adopted on 10 March 2004 (European Parliament and Council 2004a–d), but the Council and the Parliament insisted on a number of compromises. One important change concerned the role of EASA. Since EASA has not yet been given responsibility for regulating safety in relation to air traffic management, this role is retained for the time being by the Safety Regulation Commission of Eurocontrol, which consequently continues to have responsibilities for safety regulation alongside its responsibility for supervising the performance of air traffic management services in the member states. As anticipated, the most difficult area concerned civil-military cooperation. The Council flatly refused to envisage any role for the Commission. But the Parliament ‘insisted that without close co-operation between civil and military sectors, notably in the context of the flexible use of airspace, the Single European Sky would never become a reality’ (European Parliament 2004, p. 7). The compromise which emerged in the conciliation committee entailed the publication of a statement by the member states on military issues related to the Single European Sky. This statement, annexed to Regulation 549/2004, proceeds from an assertion that ‘the Regulations aimed at creating the single European sky only apply to general air traffic and do not cover military operations and training’, but it goes on to promise cooperation in the flexible use of airspace and in the institutional structures associated with the Single European Sky, notably the Single Sky Committee. The member states are required to report annually to the Commission on the application of the concept of the flexible use of airspace, and ultimately the Commission has the right to propose implementing rules ‘if it becomes necessary to reinforce and harmonise the application of [that concept]’ (Regulation 551 Article 7, with Regulation 549 Article 8). Meanwhile an amending Protocol to the revised Eurocontrol Convention was agreed in 2002, making provision for Community membership, and for the Commission to vote on behalf of the member states where Community competence had been established. This enabled the Commission to withdraw its advice to EU member states not to ratify, but in 2007 Germany was still holding back because it was not yet convinced that the new Convention, which would be harder to amend than the old one, would in fact allow the Commission to treat Eurocontrol as it would treat a Community Agency. Following the European Community’s accession to Eurocontrol in October 2002, the Commission signed, on 22 December 2003, a memorandum of cooperation launching a major jointly funded research programme – the Single European Sky ATM Research Programme (SESAR). The aim of the first phase (2005–8) is to deliver an ATM master plan; in the development phase (2008–13) a joint undertaking will organize and coordinate the development activities of the SESAR project in accordance with the ATM master plan, so that new systems can be deployed under private sector management after 201410 (see Table 7.2.).

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Towards a Single European Sky (SES), 1999–2012

1999 Commission launches Single European Sky (SES) initiative Objectives: to reduce environmental impact of aviation*, to triple capacity, to cut operating costs, and to reinforce safety by harmonization of airspace High level group, reported November 2000, suggesting strong Community regulator, airspace as common resource, cooperation between EU regulatory authorities and Eurocontrol, ensure participation of military authorities, promote introduction of new technologies, and increase involvement of professional and trade union organisations in social dialogue Commission submitted proposals 2001 2004: SES I Regulations adopted with view to implementation by 2025: – the Framework Regulation establishes Commission as regulator and the Single Sky Committee, including member state civil and military representatives, representatives from Eurocontrol and other stakeholders, to assist it – the Airspace Regulation creates a single European Upper Information Region to organise airspace into FABs – the Service Provision Regulation creates a common licensing system for air traffic management providers; and – the Interoperability Regulation which aims to ensure that systems, equipment and procedures function coherently to improve air traffic management. Working methods: regulatory approach, supported by financial instruments; Commission oversees implementation, assisted by Single Sky Committee; support of Industry Consultation Body and Social Dialogue; input from Eurocontrol Start of technological development programme, SESAR, four-year ‘definition phase’, during which 29 companies and organisations representing stakeholders draft ‘Air Traffic Management Master Plan’ for period up to 2025 2008: SES II 2007: Commission progress report, ‘A Framework for Driving Performance Improvement’, with ten recommendations and roadmap, conceding that objectives not been met. 2008: Presentation of ‘Master Plan’ for SESAR, with ‘SESAR Joint Undertaking’ (now 32 companies and other stakeholders) to develop new systems and infrastructure, using new technologies, to begin 2013 2008: Commission communication, ‘Single Sky II – Towards a more sustainable and better performing aviation’, accompanied by proposals to amend four SES regulations. Four pillars: binding performance targets on SES legislation on ATM; extension of EASA to ATM and airports; upgrade technology of ATM through SESAR; improve airport capacity through better coordination between air and ground Importance of: performance regulation, network management, technical upgrades to regulation 2012: Deadline for member states to establish cross-border cooperation Note: * Also with Clean Sky Joint Technology Initiative and inclusion in EU emissions trading scheme one of three pillars of environmental strategy. Source: Compiled by the authors from DR TREN presentations, EurActiv.

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Finally, in September 2006, Commissioner Barrot launched another High Level Group to give renewed direction and impetus to the Single Sky initiative. The group’s report, published in July 2007, recommended the transfer to EASA of safety regulation, leaving Eurocontrol to concentrate on improving the performance of air traffic management, applying market principles to get better value for money by unbundling and liberalizing the provision of air navigation services, and achieving similar benefits through economic regulation where monopoly provision remains. The report also recommends the appointment of a senior figure as ‘Aviation System Co-ordinator’ to drive forward the necessary actions, including the SESAR programme, so as to ensure that Europe has a coherent system of air traffic control, safely regulated, efficiently managed and able to respond to the rapid growth which is foreseen. Even if Eurocontrol finally gets its new Convention, the Commission intends to maintain strategic control.

Environmental and consumer protection Community intervention in environmental and consumer protection preceded EC involvement in safety and air traffic control by several years. Although the regulatory context and the politics of the two issues were very different, there was an unusual level of agreement between the Commission, member governments and the European Parliament not only on the desirability of common action, but on what measures were necessary. The regulation of emissions Community action on noise control has been relatively uncontroversial. Environmental protection had become increasingly salient across the Community in the 1970s and 1980s, with member governments demonstrating a willingness to address concerns at the EC level, while ICAO has recommended technical design standards to limit aircraft noise since 1971. In order to ensure that aircraft manufacturers apply the latest noise limitation technology, new designs must be independently assessed and certified for compliance with the relevant standard before aircraft enter service. Thus, aircraft certificated before 1969 came to be known as chapter 1 aircraft, those certificated between 1969 and 1977 as chapter 2 and those after 1977 as chapter 3. A further consideration was the concern to influence global standard setting and in the late 1970s to preempt action by the US and Nordic countries, who it was known, were preparing legislation. The Community approach has been to incorporate recommendations negotiated on an intergovernmental basis within ECAC and to give them the force of Community law. Substantively, the Community has introduced new noise standards, while gradually phasing out older noisier aircraft. The Community introduced its first measures in 1980 and 1983. Directives 80/51 and 83/206 established a phased programme under which aircraft

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without noise certification were first denied new registration within the Community, and subsequently banned from operating at EC airports. The operational ban applied to all aircraft whether registered within the EU or elsewhere, although derogations were permitted for developing countries and for the countries of eastern and central Europe to allow their fleets to be serviced in the EU or to give them more time to acquire quieter aircraft. A decade later Directive 92/14 applied the same procedure to chapter 2 aircraft, requiring the phasing out between 1995 and 2002 of those which could not be modified to meet the quieter chapter 3 standard. However, a dispute arose about chapter 2 aircraft retro-fitted with so-called hush-kits which were intended to bring the noise down to the prescribed level. The hush-kits had been developed in the US to meet the requirements of the US Airport Noise and Capacity Act 1990, but European experts maintained that under certain circumstances such aircraft breached the noise limits, particularly on take-off and landing, and in any case the modifications tended to worsen gaseous emissions and fuel burn performance. Acting on the basis of recommendations agreed within ECAC, the Council adopted Regulation 925/99 preventing the addition of such aircraft to the EU register from April 1999 and banning their operation at EU airports from April 2002. The US government, under strong pressure from its aircraft engine manufacturers, insisted that such a ban went beyond any understanding in ICAO about the phasing out of chapter 2 aircraft, and threatened retaliatory action against Concorde landings at New York, which were exempt from the noise regulations, if the EU went ahead. Moreover they maintained that if there was a problem, it was confined to a few environmentally sensitive airports, where it could be dealt with on a case-by-case basis. The dispute was eventually resolved by the adoption of the so-called balanced approach to managing aircraft noise. The main elements, subsequently reflected in Directive 2002/30 for application on an airport-by-airport basis, include the following: – standards for reducing noise at source (i.e., the recommended ICAO standards), – noise-related operating restrictions (e.g., continuous descent approaches), – land-use planning and management measures, – operating restrictions (either partial restrictions at sensitive times, e.g., at night, or complete restrictions on the noisiest aircraft types). In this last regard, the Directive includes provision for ‘marginally compliant aeroplanes’, those whose performance was within 5 decibels of the chapter 3 standard, to be phased out at individual airports over a period of five years, but only where an airport can demonstrate a serious noise problem and no other way to bring noise down to an acceptable level. No one element is pre-eminent; airport authorities are required to look at all the

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available mitigation measures and identify the measure or combination of measures that offers the most cost-effective means of achieving the environmental objective. No progress was made on the Community’s other environmental objectives related to a reduction in gaseous emissions, to which, in common with most developed countries except the US and Australia at the time of writing, the Community is committed under the Kyoto Protocol. Although aviation is not yet a very large generator of greenhouse gas emissions in absolute terms (about 3% of EU emissions), the projected increase over the period 1990–2012 is large enough to cancel out a quarter of the 8% reduction in greenhouse gas emissions to which the EU is committed under Kyoto. In the absence of any agreement by ICAO to take action, the Commission proposed in COM (2006) 818 on 20 December 2006 that aviation should be taken into the EU’s emissions trading scheme. The scheme would apply to flights within the EU from 2011, and to all flights from 2012, but as with noise the final outcome could be affected by negotiations between the EU and the USA, for which there is provision under the EU/US air services agreement (Chapter 8) or by decisions taken at the ICAO Assemblies in 2007 and 2010. Passenger rights Exceptionally among the areas considered in this chapter, there were no pre-existing international regulations governing passenger rights in regard to boarding priority or compensation in cases of denied boarding.11 Carriers were free to choose whether to follow recommendations agreed in ICAO or ECAC, IATA or the AEA, or to develop their own policies, which included the possibility of taking no action at all. Even where they decided to introduce a code, they were under no obligation to make public its terms, or even its existence (Kassim 1996b, p. 302). When in the presentation of its proposals for the second package the Commission announced its intention to introduce common rules guaranteeing passenger rights throughout the Community, it framed the issue as a unilateral breach of contract on the part of the carrier, pointed to how differences in practice could confer commercial advantage, so distorting competition, and called for transparency. In its proposals submitted in March 1990, the Commission included a procedure to be followed by the airline in the case of overbooking; set out a schedule of priority boarders and levels of compensation that were related to the ticket, destination and availability of an alternative flight; and posited the requirement that carriers publicize their policies. While welcoming the Commission’s proposals, the Parliament sought to extend the categories of passengers eligible for compensation, remove some of the complex detail and link the level of compensation with journey time. It also introduced a distinction between cases where a flight was cancelled for reasons within

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(i.e. commercial) or beyond (i.e. technical, operational, safety) a carrier’s control, and strengthened the provisions relating to the communication of carrier policy to passengers. The Council adopted a regulation (Council 1991b) that closely resembled the Commission’s proposals as amended by the Parliament. The only major difference related to compensation. A passenger denied boarding on a scheduled flight would receive compensation of 150 ECU on a short-haul flight and 300 ECU on long-haul. All four institutions – Commission, Council, Parliament and ESC – considered EU action necessary, given the absence of any other code or body acting to protect passenger rights. The Commission revisited passenger protection in 2000, when Loyola de Palacio proposed increasing the penalties, extending the scope of the Regulation to cover charters as well as scheduled services and requiring the payment of compensation for cancelled flights as well as overbooking. However, the Commission’s proposal, which entailed raising the compensation levels to €750 and €1500, provoked a storm of protest, particularly from low-cost airlines, whose passengers might if the measures were adopted receive more in compensation payments than they had paid as the fare for their journey. The airlines favoured voluntary arrangements, as practised in the US, under which the compensation on offer to passengers willing to accept a delay is raised at check-in until there are enough volunteers. They argued that an automatic entitlement to a high level of compensation would frustrate the operation of these more flexible arrangements, and tend to undo the pro-competitive benefits of the single market by forcing all airlines to raise their prices to cover the cost of such a programme. The final text of Regulation 261/2004 was negotiated in conciliation between Council, Commission and Parliament. It did not raise the level of compensation as high as the Commission had originally proposed (€250 for the shortest flights, €400 for medium distances and €600 for long haul), flights cancelled for reasons beyond the airline’s control were excluded and provision was made for airlines to operate voluntary compensation schemes. The result was hailed as a success by the Commission, but in truth it was a messy compromise leading to endless disputes between passengers claiming compensation and airlines denying liability. The validity of the regulation itself, challenged in the European Court,12 has been upheld, but if its purpose was to ease relations between fraught passengers and harassed airline staff at the check-in desk, it has not succeeded. A simpler piece of legislation requiring airports and airlines to make provision for disabled passengers to use their services without having to pay additional charges (Regulation 1107/2006) has proved more successful. This measure had the support not only of the European Disability Forum but also of the legacy carriers, who were providing such services themselves, and saw regulation at Community level as a means of imposing the same

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obligations on low-cost competitors such as Ryanair, who had been charging their disabled passengers for the service. Action on air carrier liability illustrates the extent to which the Council has come to accept the Community’s external role in aviation (see also Chapter 8). Compensation for passengers killed or injured during air travel, or when luggage is damaged or lost, has been regulated by international agreement since the Warsaw Convention of 1929 established minimum levels of air carrier liability. When the Convention required updating to meet modern expectations of liability, Council Regulation 2027/97 on air carrier liability for accidents involving passengers had recently set higher levels of compensation within the EU, thereby establishing Community competence over some important areas under discussion. This one regulation was not sufficient to give the Community exclusive competence in relation to the Warsaw Convention, but the Council recognized the need to involve the Commission in the negotiations. Since the member states did not want to give the Commission a formal negotiating mandate, they relied instead on the adoption of a common position set out in Council Conclusions. In this case one of the agreed negotiating objectives was that special provision should be made in the new Convention for ‘regional economic integration organisations’ to become signatories. The Commission was authorized accordingly by the Council, on 9 December 1999, to sign the new Montreal Convention alongside the member states, and its provisions were subsequently applied under Regulation 889/2002.

Conclusion The extension of the common air transport policy in the three domains discussed in this chapter is important not only because it has taken the Community into areas of aviation not directly connected to the single market in air services or because the Commission in particular has assumed a series of additional regulatory functions, but because of its broader implications for aviation. In aviation safety and air traffic management it has created new supranational regimes which give the Community a controlling presence in policies that were previously managed by the member governments in intergovernmental organizations. Although the latter continue to provide specialized technical advice, their policy and law-making functions have in effect been subordinated to those of the EU, despite the fact that the membership of these organizations is considerably broader. Moreover, Community action in these fields has had international consequences. The Union has eclipsed ECAC as the main arena for managing regional aviation issues in Europe, though the relationship between the two organizations passed from rivalry in the 1980s to cooperation and partnership in the 1990s and after (see Chapter 8). The roles that it has assumed with respect to environmental protection and as a regulatory authority in

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aviation safety and security, meanwhile, have turned the Community into an important and influential international actor in the sense defined by Hill (1993, 1998) and Ginsberg (1999) (see Chapter 8). In accounting for this transformation, the option of using Community law to implement and enforce policies agreed between governments provided a strong incentive to the member states to take action at EC level. As well as enhancing the credibility of intergovernmental agreements and limiting the possibilities of free-riding, member governments have discovered through experience the advantages of integration over cooperation in this sector after efforts to utilize traditional intergovernmental methods and forums have shown themselves to be both slow and ineffective. Where there is a strong case for common standards, negotiating a Council regulation that is directly applicable in all the member states, or even a directive, can be faster and more efficient than waiting for a sufficient number of sovereign states to ratify an agreement, or for implementing legislation to be passed in 20 or 30 national parliaments. Not only does this procedure – at least in the case of regulations – save each member state from having to take legislation through its own parliament, but it also results in greater certainty that the same regulatory regime will quickly apply across the whole of the EU and will be uniformly implemented and enforced. The fact that the aviation industry itself also prefers to be subject to one set of regulatory controls rather than a complex European patchwork has only increased support for action at EC level. These considerations weighed heavily in the preparedness of member governments to adopt noise regulations and the persistent pressure for European airworthiness standards which led to the decision to transfer safety regulation from the JAA under the umbrella of ECAC to an organization which could rely on EU law. The member states would have preferred an Aviation Safety Authority based on its own Treaty, at arm’s length from the institutions of the EU, but when this could not be delivered, the advantages of EU law were still sufficient to overcome their reluctance to surrender national authority over aviation safety to the EU. In addition, the Commission has been an especially effective policy entrepreneur, responding rapidly to crises as, for example, following the 2001 terrorist attacks in the US, and ready with proposals for legislation. After the difficulties experienced with the first safety regulation (Regulation 3922/91), for example, it made the case for a more coherent (Community) approach to aviation safety and launched the debate about its institutional form, which ultimately led to the development of EASA. Similarly, it used the adoption of a Council Directive (Council 1993i) on the compatibility of technical specifications for the procurement of air traffic management equipment and systems as a platform for its participation in the debate about air traffic control at a time when ECAC and Eurocontrol were struggling to respond to the need to increase air traffic control capacity. The Commission’s intervention in the form of Kinnock’s White Paper, followed by de Palacio’s High Level

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Group and its legislative proposals produced a far more radical programme than any government, ECAC or Eurocontrol would have countenanced, with, moreover, the Community in a key position. The Commission has also used its legislative powers to block developments that it disapproved, as when it resisted pressure from the member states for Community membership of an Aviation Safety Authority. A further factor has been the shift in member state perspectives on an acceptable and necessary role for the Commission. Once the Commission had established itself as the regulator of the single market, many of the member states became more relaxed about allowing it a role in technical and safety regulation. Ironically, given the leading role of British governments in forcing the pace towards the establishment of a single market in air transport, the UK was among the last to accept the need for a more supranational approach to aviation safety and air traffic management. This mattered since the UK remains the most important nation in international aviation after the United States. It was in this context that the revised Eurocontrol Convention was signed in 1997, and that the British Presidency of the EU, in the first half of 1998, invested so much time and effort in trying to establish a EASA on an essentially intergovernmental basis. It was only after both these designs were blocked by the Commission in the case of safety, or outflanked by a bolder vision in the case of air traffic management, that a more relaxed successor to the Major government of 1992–97 could accept the more supranational approach. A final consideration is that although the Community system has been effective in extending its legal competence, it is sometimes less successful in implementing it. For example, despite the autonomy enjoyed by its director, which is exceptional among European agencies (Schout 2008a, 2008b), EASA has struggled to become established, largely as a consequence of the Community’s rigid rules for staffing and financial management. Moreover, as the Community’s negotiations with the USA and in ICAO over such issues as aircraft noise and the collection of passenger data testify, the independence of the various EU institutions can be a hazard in international negotiations compared with the generally more unified executive authority of a state.

8 Beyond the Borders of the Single Market

The emergence of an external aviation policy has been one of the most important developments in the EU’s involvement in air transport. The EU has extended its air transport regime to a series of non-member states, created a European Common Aviation Area (ECAA), and launched a neighbourhood programme that reaches to the Mediterranean in the south and the Urals in the east. Moreover, although it was an outsider to the Chicago regime for much of its history, the Union has recently become an increasingly important international influence, a partner of ECAC and active in ICAO. Most dramatic, however, has been the Union’s involvement in air services agreements – the heartland of state sovereignty. A major exercise was initiated to bring member state bilaterals into line with Community law, while the Commission has been granted mandates to negotiate with leading aviation nations. The historic EU–US agreement is its outstanding achievement to date. As a consequence, the Union is an ‘international actor’ in aviation and not merely an ‘international presence’ (Hill 1993, 1998; Allen and Smith 1990; Caporaso and Jupille 1998; Ginsberg 1999). The development of the external dimension to EU action in aviation has far-reaching significance both inside and beyond the Union’s borders. With ASAs no longer the exclusive concern of individual member states, governments have lost ‘sovereignty as we know it’.1 Outside the EU, the extra-territorial application of Community competition rules has already had an important impact on the sector (see Chapter 9). The requirement that bilaterals conform to Community norms has led to no less than a recasting of the traditional mould. As EU member states are parties to a significant proportion of total world ASAs – Woll (2006, p. 59) puts the figure at approximately 1500 out of 2054 – the Union’s insistence on the replacement of the standard nationality provision concerning ownership and control by a Community clause has major international implications. The 2007 EU–US agreement, meanwhile, is significant in terms of the (internal) institutional politics of the Union. As the first full air services accord to be negotiated by the Commission (as distinct from the extension 154

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of the EU regime to neighbouring states), it represented a major triumph for the institution that had argued consistently in favour of an external aviation policy. From an international perspective, not only did it replace the ‘regime of individual bilateral air services agreements between EU Member States and the United States’ (AEA 2007, p. 1), but it did so on the world’s most important air transport market, accounting for 60 per cent of all international traffic. Moreover, it brings within sight the prospect of a genuinely common aviation area across the Atlantic (the so-called Transatlantic Common Aviation Area), marks a step towards the normalization of air transport and suggests a possible path for the transition of the global aviation system from a state-centric regime to a multilateral order.2 The path to an external policy was, however, long, tortuous and often bitterly contested. As with liberalization, the Commission played a central role in setting the policy agenda and through the exploitation of its role as guardian of the Treaty. It used actual, as well as threatened, litigation to overcome member state opposition, changing the default condition in respect of the authority to negotiate ASAs with third countries (Schmidt 2000; Woll 2006). However, significant as Commission entrepreneurship and Court jurisprudence have been, the development of Community competence cannot be explained solely by reference to the behaviour of EU institutions (though see Young (2002), Woll (2006), Charokopos (2008) and Staniland (2008) for alternative views). The development of the legal framework for the single market and the principle of implied powers established by the ECJ in the AETR (European Road Transport Agreement) case (see discussion later) were also important, since they provided grounds for the Commission’s claim for Community competence and the development of an external aviation policy. EU aviation rules governing the action of third country carriers within the Union became a vehicle through which the Union was able to impose constraints on member governments in their external relations. Nor should external influences, especially action on the part of the US government, be overlooked. The (second) open skies initiative launched by Washington in the mid-1990s was very important, though not a controlling factor. Though initially the campaign had the effect of dividing the Council and strengthening opposition to the Commission, it was later the subject of Court action brought by the Commission against the member states and used by the Commission to mobilize support among governments and airlines for common negotiating rights. The Commission was able to use the aggressive policy pursued by the US as ‘a focal point for a European consensus’ (Woll 2006, p. 61), ‘as every new agreement of this type was perceived as a “lesson” that “vindicated” the Commission’s rhetoric for opposition’ (Charokopos 2008, p. 10). In contrast to liberalization, the Commission was not able to draw credibility from the steady support of key member governments in its advocacy of an external role for the EU. Finally, the eventual outcome in terms of the division of responsibilities between Community

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and national levels has been more complex than with the single market in air services. The Community has a new and important role, but the continuing involvement of member governments has also been assured. This chapter examines the development of the common air transport policy’s external dimension and assesses its implications. The first two sections discuss the initial export of the common policy to the Community’s near-neighbours and the Community’s status in international aviation bodies respectively. It argues that, while member governments supported the former, which fitted the Community’s wider geopolitical goals, they did little to promote the latter. They preferred to retain their own freedom of action within these organizations and to keep the Community on the outside. The third part focuses on the Community’s competence in respect of ASAs with third countries. It examines the history of the Commission’s attempts to establish the Community’s authority from its earliest initiatives to the implementation of the March 2007 EU–US agreement in three phases: 1989–94, 1994–2003 and 2003–8. It argues that during the first, the Commission was overly ambitious and selected the wrong grounds (Community competition rules, then commercial relations) on which to advance the issue. In the second, the US open skies campaign created a strategic opportunity for the Commission, but a complex series of overlapping games between member states and their airlines, Washington and European capitals, the Commission and the member states, and the EU and the US made it difficult to achieve a resolution. Only when a majority of member states had signed open skies agreements did the Commission proceed with the litigation that led in 2002 to the Court’s landmark ruling on Community competence. In the third, the Commission has assumed new responsibilities, and shaped a broad and ambitious international aviation policy, though the member states continue to play an important role.3 The long-sought after EU–US agreement, concluded after 11 rounds of negotiations over four years, is the most significant achievement of the new era.

Exporting the Community’s aviation regime, 1992–6 The extension of the Community’s aviation regime to neighbouring states has been the least controversial and most easily achieved element of the Community’s external aviation policy. Though the precise terms and scope of the agreements entered into by the Community and its partners have varied, the basic exchange has remained the same: third countries gained access to the single internal market for their airlines, but had to accept the full acquis communautaire in aviation. Initially, the policy was directed at selected EFTA member states. It was then expanded to them all. Later, it became an explicit part of the Union’s pre-accession strategy to which would-be member states were required to sign up.4

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Norway and Sweden were the first countries to become signatories. Denmark had expressed its wish during negotiations on the first package that the states with which it shared ownership of SAS should be invited to sign up to the Community’s aviation rules and made their inclusion a condition of its acceptance of the second package. A divided Transport Council agreed in June 1990 to grant a negotiating mandate to the Commission. Although all the EFTA states had by then expressed a desire to join – a request that the Commission supported in one of its earliest proposals on relations with third countries – the Council was only prepared to permit negotiations with the two Scandinavian states. An agreement was reached in early 1991 and adopted by the Council in June 1992 (Council 1992b).5 The agreement with Norway and Sweden was effectively superseded when the EFTA states, with the exception of Switzerland, signed up to the aviation rules under the agreement creating a European Economic Area (EEA) (OJ L 1/ 1994, 3 January 1994, p. 3). (Switzerland, which had rejected membership of the EEA in a referendum, signed up five years later under a modified arrangement, which did not recognize the authority of the ECJ.) When Austria, Finland, and Sweden acceded to the Union in 1995, the EEA was reduced to three members: Norway, Iceland and Liechtenstein. The policy was revised, adjusted and expanded in 1996. The Council authorized the Commission to negotiate a multilateral agreement with the then ten candidate countries, as well as Iceland and Norway, to create a ECAA. Within this space, any airline from a signatory state could operate services between any two points between or within any other signatory states. The Union’s regulations governing both the commercial and technical aspects of aviation were applicable throughout the ECAA. The objective was to establish ‘an open framework accessible for European countries which wish to fully integrate into the European aviation family and to fit into the Neighbourhood Policy of the Commission’ (IP/06/760, Annex 1). Although in 2002 negotiations with the candidate countries were discontinued once the terms of enlargement had been agreed, the ECAA has continued to perform the same function as part of the EU’s neighbourhood policy (see discussion later).

The Community and international aviation organizations As a newcomer to a state-centric order, in which the key international bodies are intergovernmental, the Community has found it difficult to establish a role. For their part EU member governments have preferred to perpetuate the status quo. However, the Community has become an important actor in relations with aviation organizations, even if it has yet to achieve the same status or to bring about the same level of coordination among EU member countries as it has in other international forums, such as GATT, the UN and the WTO.6

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The Commission had argued as early as its first memorandum that there should be consultation on action relating to relations between member states and third countries within international organizations (Commission 1979b). Council Decision 80/50/EEC, adopted on 20 December 1979, provided for such consultation to take place within the framework of the Council, with the object of identifying any problems of common interest and considering jointly whether action should be coordinated, or any other approach which might be appropriate. It was this decision that provided the formal basis for the Commission to write to ECAC in January 1980 proposing a cooperation agreement for the mutual exchange of information, which ECAC accepted, but there were few other practical consequences and member states refused to allow the Commission the right to observe and participate in decision-making in ICAO and ECAC.7 The attitudes of member governments softened somewhat after the first package. A proposal in July 1988 that the Commission should be represented at the ICAO General Assembly to be held in Montreal in September 1989 was adopted unopposed in COREPER and the Commission duly attended as an observer (Agence Europe, No. 4839, 27.08.88, p. 5). Since then, relations with ECAC and ICAO have grown. Though its relationship with ECAC has developed into a genuine partnership, the Union’s interaction with ICAO is somewhat more complex. The EU and ECAC There was considerable rivalry between ECAC and the Commission in the 1980s, especially between 1986 and 1989, when ECAC seemed to be attempting to hold back liberalization. The position changed in the early 1990s, when the adoption of the second and third packages removed any question that ECAC might provide an alternative framework for economic regulation. Also, in addition, the organizations took the opportunity to establish a more cooperative relationship when a British national (Robert Coleman) was appointed Director General for Transport in the European Commission at the same time that a compatriot (David Moss) was President of ECAC. It was put to Coleman that the Commission had increasing responsibilities but few staff, whereas ECAC had an expert staff and an efficient organization which could be used to prepare recommendations for EC action on a technically sound basis. In December 1991 the new modus vivendi was reported to Ministers in London in the following terms: ECAC has been developing a practice for co-operating closely with the Commission on a wide range of issues, so that policies of the two can develop in parallel where possible. ECAC’s expertise can improve EC proposals and the backing of EC law can strengthen ECAC recommendations and standards. Aircraft noise and computer reservation systems are past examples of the benefits that this way of working can bring. ECAC has

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been working on airline licensing policy and on airport slot allocation, with the thought of informing and influencing EC discussion as well as of developing ideas for wider European application. These contributions from ECAC were timely since licensing was one of the key aspects of the third package, and slot allocation, a major potential obstacle to competition at congested airports, was also under active consideration.8 Relations between ECAC and the EU have developed around this division of labour, and cooperation between the two organizations has generally been constructive.9 A modus operandi has evolved where the Commission takes ideas and texts that have emerged within ECAC and adapts them to the requirements of Community law. The latter takes place either in EC sub-groups or in ECAC’s own committees, but there is substantial overlap between the two and they often involve the same experts (interview, ECAC, 26 July 2007). The interaction leading to the EU’s policy in aviation security, discussed in Chapter 7, offers a useful illustration. At senior level aviation officials still value ECAC’s more relaxed intergovernmental framework with its fully inclusive membership (see Table 7.1) spending up to ten days a year at ECAC meetings whereas the Commission struggles to bring Directors General together for more than half a day. Items to be addressed at the ICAO General Assembly are discussed in advance at a meeting attended by the Commission, the directors of EASA and Eurocontrol, and directors general from the member countries, and positions agreed by the EU Presidency and a representative of ECAC member states. The EU and ICAO The EU’s relationship with ICAO is marked by a pronounced mismatch between the Community’s importance as a regulatory authority and its formal standing. Although the Union is active in virtually every area in which the ICAO is competent and the international impact of its legislation indisputable, ‘the status of the European Community at ICAO is still in question’.10 Article 92 of the Chicago Convention restricts membership of ICAO to states,11 and ICAO officials are at pains to emphasize that formal interaction can only take place with governments. In the words of one ICAO official, ‘The Chicago Convention speaks only of states, not groups of states’ (interview, 17 May 2007). However, the ICAO Council agreed in 1989 that the Community should be included in the list of organizations invited to attend certain ICAO meetings. The Commission has subsequently represented the Community in the ICAO Assembly, as well as in several committees, technical panels and study groups.12 However, as an observer, the Commission can attend Council meetings, but cannot take the floor. Despite these limitations, the Commission is active and ensures that the Community’s positions are well known. As well as attending ICAO meetings

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and engaging with ICAO officials, the Commission is involved in important joint initiatives and projects with ICAO. In April 2008, for example, it organized with ICAO a Symposium on Regional Organizations, which highlighted the EU’s growing importance in international aviation,13 while on 11 September 2008 it signed a Memorandum of Cooperation with ICAO on security inspections.14 The Commission has also taken over from ECAC the role of coordinating the positions among European states, and since September 2005, has had a Representative to ICAO permanently based in Montreal. The Representative follows the work of ICAO, attempts to make delegations aware of Community policies and seeks to strengthen cooperation between EU member states in ICAO. As part of his responsibilities, the Representative attends ICAO meetings, briefs EU representatives and members of the Council on EU policy and legislation, acts as liaison office to ICAO for EASA and Eurocontrol, and liaises with the ICAO Secretariat.15

The negotiation of air services agreements with third countries16 Relations with third countries has been by far the most controversial element of the Community’s external aviation policy. A role for the Community could develop only at the expense of national responsibility for the negotiation of ASAs – the very rock on which proposals for the development of a multilateral air transport agreement had foundered at Chicago in 1944, and the foundation of the post-war regime. The Commission had argued as early as its first memorandum that there should be a Community dimension in relations between member states and third countries. It insisted ever more stridently from the late 1980s that it should take over the negotiation of ASAs.17 As member governments had no intention of conceding this prerogative, the Commission sought for ways to bring pressure to bear on national capitals. Its appeal first to the competition rules, then the common commercial policy, failed. After a series of setbacks, the Commission achieved a significant breakthrough when it challenged the open skies agreements that EU member governments had concluded with the US after 1992. However, even here its success was partial. Two blind-alleys, 1989–94: Competition law and commercial relations In the wake of the ECJ’s 11 April 1989 decision in Ahmed Saeed (Case 66/86), the Commission first attempted to establish Community competence using the competition rules. In this judgement, the Court had declared that airline agreements fixing fares between the Community and third countries fell within the competition rules of the Treaty and were subject to the interim competition regime (Balfour 1994). The Commission sought to take advantage by proposing regulations that would have extended to all air services

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the temporary exemption from the competition rules which had been granted under the first package (Commission 1989b). In return for this offer, which it presented as a concession, the Commission suggested that it should have the authority to determine how the competition rules would apply to services between the Community and third countries. It also proposed a procedure under which in the event of a conflict in the application of their respective competition rules, the Commission would negotiate with third countries on the Community’s behalf. Member governments, however, were not prepared to consider any such extension of Commission authority nor did they come under any pressure from their airlines so to do.18 The Commission then tried a different strategy. It attempted to acquire single negotiator rights by framing air services to third countries as commercial relations – a deliberate attempt to outflank the Council’s authority in transport policy, as defined under Article 80 (ex 84). Focusing on the discrepancy between the powers it exercised in the negotiation of commercial agreements with third countries under Article 133 (ex 113) and the Council’s persistent refusal to allow it any role in air service negotiations, the Commission called for the commercial aspects of air service relations to be brought directly under Article 133 (ex 113). The effect would be to grant it a primary role in conducting negotiations under powers conferred by the Council acting by qualified majority. The Commission argued that aviation should be no exception to the general Community pattern, and that market access, tariffs and capacity were essentially matters of commercial policy to which Article 133 (ex 113) must necessarily apply. The Commission outlined its proposals in a text of March 1990 (Commission 1990a). It had called the previous month for the Councilcentred consultation procedure adopted under Decision 80/50/EEC to be abandoned in favour of a procedure based on practice and precedent in the field of commercial policy (Council 1969b). Following a period of consultation, the Commission would decide whether there were grounds for opening negotiations at Community level, and if so would propose the terms of a mandate to the Council. Recognizing that it did not have the resources to take up the ongoing negotiations of the then EC-Twelve, it proposed a transitional period until the end of 1992 during which the member states might be allowed to continue to conduct negotiations. The Commission advanced four supporting arguments. The first was that principles of the Treaty, in particular the freedom of right of establishment, applied fully to third country carriers, even if this was not true of secondary legislation. The nationality clause in member state ASAs denied this freedom to the carriers of all other member countries. The UK–US bilateral, for example, allowed British and American airlines to operate services between the two states, but, because it limited these rights to carriers owned and controlled by nationals of the signatory states, it discriminated against companies from elsewhere in the Community. (The Commission had already written to

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member governments in September 1989 to request information about their ASAs.) Second, it asserted that EC carriers were disadvantaged by the existing bilateral system, since the collective bargaining strength of the Community would outweigh that of any individual member state vis-à-vis any third country, including the US and Japan. While member states continued to negotiate their bilaterals separately, they would not secure the traffic rights for Community airlines that could be levered if they were to negotiate en bloc. Third, the Commission claimed that an external policy was the necessary complement of the single internal market. The EC would soon be a single cabotage area and fifth freedom rights granted to third-country carriers would become Community assets that should be negotiated at the Community level and exchanged for equivalent rights. Already in March 1990, the Transport Commissioner had instructed member states not to negotiate fifth freedom rights without first referring them to the Commission. The Commission’s final argument was that the negotiation of ASAs fell within the exclusive competence enjoyed by the Community over commercial policy under Article 133 (ex 113). In support of its claim, it invoked the jurisprudence of the ECJ in AETR (Case 22/70). The case concerned five member states who had signed an agreement in 1962 within the United Nations Economic Commission for Europe (ECE) on working conditions in international road transport. As too few countries had ratified the agreement, it did not enter force. Negotiations were resumed, but by the time that progress had been made towards a successful conclusion, the Council had agreed its own regulation (Council 1969a), which covered some of the same ground. Member states had discussed a common position in the Council before they concluded the agreement, but the Commission, which had been sidelined, applied to the Court to have the Council’s proceedings annulled. The Court rejected the Commission’s application on procedural grounds, but ruled that, as well as the Community’s explicit powers to conclude international agreements under Article 133 (ex 113) or Article 310 (ex 238), other Treaty provisions could provide for an implicit treatymaking power where the effectiveness of these provisions would be impaired without such a power (doctrine of implied powers). The judges also averred that treaty-making power could result where the effective application of secondary legislation was impaired when the member states undertook obligations in regard to third states. It thereby recognized a dynamic element to the Community’s treaty-making powers: as the corpus of secondary legislation grew, so did the basis for external action. Moreover, the Court ruled that, since in transport it was not always possible to distinguish clearly between internal competences and treaty-making powers, the Community should be entitled to conclude international agreements with non-member states and thus required a corresponding treaty-making power.19

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The Commission also pointed to Rhine Navigation, where in Opinion 1/76 the Court had pronounced that an implicit Community competence could exist even where no Community measures had actually been adopted: Whenever Community law has created for the institutions of the Community powers within its internal system for the purpose of attaining a specific objective, the Community has authority to enter into the international commitments necessary for the attainment of that objective even in the absence of an express provision in that connexion. This is particularly so in all cases in which internal power has already been used in order to adopt measures which come within the attainment of common policies. It is, however, not limited to that eventuality. Although the internal Community measures are only adopted when the international agreement is concluded and made enforceable, the power to bind the Community vis-à-vis third countries nevertheless flows by implication from the provisions of the Treaty creating the internal power and in so far as participation of the Community in the international agreement is necessary for the attainment of one of the objectives of the Community.20 The Court’s Opinion in Case 1/78 (Rubber Agreement [1979] ECR 2871) appeared to provide further support for the Commission’s stance. In this decision, the Court noted that ‘commercial policy’, as laid down in Article 133 (ex 113), was dynamic and encompassed the external aspects of the policy in question. The member states reacted strongly to a proposal which they regarded as premature, promised uncertainty and threatened their sovereignty. As had the European Parliament (Opinion, OJ C 94, 13 April 1992), they rejected the case for extending authority to the Commission on the basis of Article 133 (ex 113) rather than Article 80 (2) (ex 84 (2)) – not only the sole reference to air transport in the whole Treaty, but a text that does not even mention the Commission. In Rotterdam on 5–6 July 1991, the Council decided that there would be no further discussion of the issue until the single market had come into being. This seemingly arcane dispute over legal bases, the battleground chosen by the Commission to develop Community competence in external aviation relations, would endure for more than four years.21 When, for example, the Council extended the terms of the second liberalization package to Norway and Sweden on 22 June 1992, it replaced Article 133 (ex 113) with Article 80 (ex 84). The Commission President registered his protest in a letter dated 28 September 1992 and sent to each government. Although the Commission reserved its position, it refrained from taking further action, since the agreement in question was to be overtaken within a few months by the establishment of the EEA.

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The Commission’s proposal of 21 October 1992 (Commission 1992c), signalled a modest retreat. It foresaw a longer transitional period and proposed an Aviation Committee that would be composed of senior national officials to advise the Commission. However, it was still based on Article 133 (ex 113) and threatened to open proceedings against the member states for their failure to observe their obligations under the commercial policy decision of 1969 – a provision that the Commission itself had only thought to apply to air services since 1989. The Commission renewed its appeal to the Council to adopt the regulation governing competition related to external air services that it had proposed in 1989 and the amended procedures for the conduct of negotiations with third countries. When the third package came into effect, it was the turn of the member states to adopt a more conciliatory attitude. After three meetings devoted to the subject, the Council responded to the Commission’s proposals on 15 March 1993. It recognized the implications of the internal market in air services for relations with third countries, and the obligation to consult and coordinate which dated back to 1980, but it also underlined the continuing competence of the member states exclusively to conduct bilateral negotiations, as proclaimed at Rotterdam. Negotiations at Community level could be conducted only if the Council deemed such an approach likely to produce a better result for the member states than the traditional system of bilateral agreements. On this basis the Council was prepared to agree to the creation of an Aviation Group, comprising representatives of the member states and the Commission. This Group would work on defining effective consultative procedures based on the 1980 Decision, and study areas of potential common interest with a view to authorizing the Commission to engage in negotiations on behalf of the Community where this was judged advantageous. The Council’s response was not enough for the Commission, however, which immediately initiated legal proceedings. The Commission argued that the Council had used Article 71 (ex 75) of the Treaty – the land transport equivalent of Article 80 (2) (ex 84 (2)) – as the legal basis for the agreements signed with Hungary and Czechoslovakia on 7 December 1992,22 not Article 133 (ex 113). The Commission never got to hear the Court’s opinion, however, as it withdrew when it heard about the Court’s ruling concerning another case. In Opinion 1/94, issued on 15 November 1994, the Court rejected the Commission’s attempt to bring transport agreements under Article 133 (ex 113). It offered detailed guidance on the circumstances under which the Community should exercise external competence.23 It explicitly excluded transport from the scope of the policy, rejected the Commission’s argument that external aviation should fall within the EU’s exclusive competences on the basis of the doctrine of implied powers, and stressed that governments ‘only lose their right to assume obligations with non-member countries as and when common rules which could be affected

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by those obligations come into being’ (Young 2002, p. 125). It also rejected the Commission’s argument that bilateral agreements would undermine the internal market. Thereafter, the Commission abandoned its attempt to establish single negotiator authority on the basis of Article 133.24 In search of a mandate to negotiate with the US, 1994–2003 Having given up on trying to have aviation agreements categorized as commercial policy, the Commission focused instead on EU relations with the US. Its initial moves were pragmatic. The Commissioner for Transport had made a first exploratory foray to Washington in November 1989, which was reciprocated by a return visit from the US Transport Secretary in March 1990. These discussions led to a EU–US agreement to facilitate all-cargo air services, a project which suited the Americans since their airlines enjoyed a relatively small share of the market and could hope to gain from a new agreement (Espérou and Subrémon 1997, p. 103). Although the Aviation Group, which had been established by COREPER following the Council’s agreement in March 1993, authorized the Commission to discuss with the US Departments of Transportation and Justice the differences between the US and the EU codes governing CRSs (see Chapter 6), in February 1994 member governments put a stop to other exchanges for which there had been no formal mandate. Later the same year, the US Secretary for Transportation marked the fiftieth anniversary of the Chicago Convention by calling for open skies agreements, a position formalized in the US International Air Policy Statement of April 1995. The new policy aimed to establish the unfettered right of US airlines to carry passengers and cargo on scheduled or charter services on any route touching the USA and its open skies partners, without any restrictions on capacity or fares. A first such agreement had been signed by the US and the Netherlands in 1992, with the Dutch government concerned as ever to increase the opportunities available to KLM (see Chapter 3).25 Following the Secretary for Transportation’s pronouncement, the US proceeded in 1995 to open negotiations with a series of states, including six EU members. The Commission denounced the agreements, threatened legal action and argued that it should be granted a mandate to negotiate with the US on behalf of the Community. The Commission contended that open skies ASAs were not only incompatible with Community law, but that they disadvantaged European carriers. Although they granted identical rights to the airlines of each side, in practice they favoured US carriers. Airlines of the signatory states were granted open access to all points in the partner country and the right of transit to all points beyond. Any number of airlines could be designated, and were free to operate as many services and charge whatever fares they considered appropriate. However, the US domestic market remained reserved to US carriers – a considerable advantage in competing for international

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traffic originating within the United States. In Europe, where each country is relatively small, not so many international passengers begin their journey with a domestic flight. Thus, exclusive access to cabotage traffic is a greater advantage to American carriers than it is to European airlines. The Commission also argued that a centrally negotiated agreement would deliver greater advantage than multiple bilaterals. The size of the transatlantic market and the desperation of European carriers to increase their traffic gave the US considerable leverage.26 European governments were intensely aware of the importance of the market to their airlines, and, with the prospect of being able to negotiate expanded access for their airlines to additional US gateways, receptive to Washington’s overtures. For its part, the US pursued a very effective game of divide and rule.27 It aimed to conclude agreements with smaller European states first before approaching France, Germany and the UK. Its ‘encirclement’ tactics (Havel 1997, cited by Staniland 2008, p. 133) were designed to bring the larger aviation states to the table under the threat that their airlines’ traffic would otherwise be diverted to neighbouring states. The US bargaining position was further strengthened by its use of anti-trust immunity. With only limited access to the US market, European airlines needed to enter alliances with American carriers in order to secure a share of traffic originating in the States. The US Department of Transportation (DoT), which was both responsible for negotiating ASAs and enforcing the competition rules, made it a condition that it would grant immunity from US anti-trust rules only to alliances involving carriers from countries that had signed up to open skies (DoT 1997, p. 2).28 How this affected carrier–state relations is illustrated by the action of the German government. Germany was resolutely opposed to signing an open skies agreement, but when Lufthansa agreed an alliance with United Airlines persuaded Bonn that this was the price that it was necessary to pay. As soon as the new US policy was announced, Neil Kinnock, Commissioner for transport (1995–9), called on the Aviation Group to define a common position and requested member states not to conclude such agreements in the interim. He identified where the US proposals were at variance with the Community’s regime and threatened to take to the Court any member state which signed up. However, this did not prevent Sweden, Luxembourg, Finland, Denmark, Belgium or Austria from signing open skies ASAs in 1995. (Similar agreements were concluded with non-EU members including Iceland, Norway and Switzerland.) The Commission’s appeal to European carriers also fell on deaf ears. They considered bilaterals a tried and trusted instrument, and airlines were more concerned about their immediate commercial opportunities and the search for a transatlantic partner than the rather hypothetical promise of a better deal negotiated by the Community. The AEA expressed scepticism about any transfer of authority to the Commission, which ‘it criticised for lacking “a clear view” of Community interests in aviation’ (Staniland 2008, p. 137).

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When the Council voted on the issue in June 1995, it was no surprise that the Commission’s request for a negotiating mandate was rejected. However, the Commission persisted, and 12 months later was successful in obtaining a mandate, albeit one limited to exploring with the Americans the regulatory framework for a common aviation area. Young (2002, p. 118) explains this shift in terms of a model that holds that member state preferences for a common approach to negotiations in this period were shaped by the interaction of the internal and external interdependencies of their airlines, both in part a function of geography. The first relates to the extent of the challenge posed by indirect competition – the threat posed to an airline’s market share of transatlantic traffic by competitors operating to neighbouring states. The second concerns the relative importance of the transatlantic market to the airline in question, its competitiveness and the intensity of its desire for a US partner.29 If its airline was exposed to indirect competition from countries with open skies agreements and was competitive, a government would choose competition within a liberalized bilateral, ‘thereby securing the selective benefits of access to more US destinations and antitrust immunity for its carrier’s partnership with a US airline’. If uncompetitive, however, such as Air France until the late 1990s, bilateral liberalization would be unattractive.30 A member government such as the UK, with a competitive airline, might have eventually been prepared to sign an open skies bilateral, but it would certainly not want to surrender the strong cards in its hand for the benefit of other member states and their airlines. Once governments had signed up, however, a different dynamic came into play. According to Young (2002, p. 120): ‘once a member government concludes an “open skies” agreement with the US and secures anti-trust immunity for its airline(s), it becomes more accepting of a common approach, provided it promises additional benefits – such as access to the US domestic market or approximation of regulations or constraints on US bankruptcy provisions – and does not undermine its existing traffic rights’. Thus, the five member governments negotiating open skies agreements opposed the Commission’s proposal in June 1995, but switched positions to support it in June 1996. In the Council as a whole, seven member states supported the Commission in the first vote, while 13 states did so in the second. Reflecting this shift, as well as the efforts of the Italian Presidency (Young 2002, p. 120), the Council agreed a compromise position in June 1996. It adopted as a goal the creation of a common aviation area across the Atlantic – a concept also approved by the AEA (1999) – in which carriers from either side could freely provide services in the EC and the US on a fair and equal basis under comparable regulatory conditions. The objective was to be reached in two stages. In the first, the Commission was authorized to talk with the US about ownership and control, competition law, CRSs, codesharing arrangements and dispute settlement procedures. The second phase

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would include discussion of so-called hard rights, such as market access, designation, capacity and fares. However, the Commission would only be granted a mandate to negotiate in stage two if it could demonstrate ‘significant results’ from the first stage. An already difficult task was compounded by Washington’s lack of interest in discussing soft rights (interviews with UK officials, April 1999). The US made clear that it was not interested in negotiating with the Union unless hard rights were on the table and the Commission had a full mandate (Staniland 1999, p. 18; Meunier 2005, p. 161). As it had been served well by the bilateral system, it had no great enthusiasm for a Common Aviation Area. Having completed the first phase of its open skies campaign, it was ready to focus attention on striking agreements with France and the UK. For much of the 1990s, France had no interest in signing a more liberal bilateral agreement with the US. However, after 1985 Pan Am and TWA had been replaced on the American side by no less than six US carriers, and Air France saw its share of the transatlantic market fall from half to less than one-third. In May 1992 France reacted by terminating its 1946 bilateral with the US. Over the following five years, Air France’s market share was gradually restored through a reciprocal exchange of permits season-by-season. By 1997, the French flag carrier’s share of the market had recovered to 42 per cent, but further improvement could not be made without better access to the US market through a code-sharing alliance. France duly reopened negotiations and signed a new bilateral, which included many ‘open skies’ features, on 18 June 1998 (see Espérou 1999). Agreement with the UK proved much more elusive. Since 1990 there had been round after round of formal and informal negotiations, but despite the involvement of ministers with a sincere commitment to liberal trading regimes, they had foundered because the American side was unable to concede sufficient access to its domestic market to persuade the British to relinquish control over Heathrow. Access to London’s Heathrow airport was limited to two airlines on either side when Bermuda II was negotiated in 1977 – other carriers were allowed to serve Gatwick or Stansted – and although three of the four designated airlines had changed, the restriction had survived. In British eyes the justification for maintaining this restriction lay in the refusal of the American government to contemplate opening access to the US domestic market to the point where British and American carriers could compete on an equal basis for all the traffic between the two countries. Bilateral negotiations around the text of a Bermuda III agreement continued in a desultory fashion, but the fundamental impasse could not be resolved. Although it marked an important concession on the Council’s part, the June 1996 mandate did not ultimately produce a breakthrough. The US had made clear that it saw little purpose in continuing a dialogue with the EU under the terms imposed by the Council. Insofar as the US needed to discuss matters of mutual concern with its European partners, it did so through

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ECAC. Indeed, it initiated a series of high-level meetings, which took place twice a year from 2000. The Union was effectively sidelined. The ‘open skies’ cases at the European Court The Commission used the threat of litigation to put pressure on member governments from the moment that the open skies initiative was launched. It addressed a letter to national capitals on 17 November 1994, and then warned member governments in spring 1995 that the agreements proposed by the US were incompatible with Community law. In the summer it addressed formal letters of notice to member governments under Article 169 (now 226), asserting that their negotiations were an infringement of the Community’s external competence, and in particular that the proposed national ownership and control clauses were contrary to the right of establishment under Article 52 (now 43). Although it decided to suspend its action before the Court when it received a Council mandate in 1996, the Commission revived its litigation in 1998 after it became apparent that discussions with the US were heading nowhere. When it received unsatisfactory replies to its letters of notice, the Commission proceeded to issue reasoned opinions on 16 March 1998, and then on 18 December instituted formal proceedings against eight member states (Austria, Belgium, Denmark, Finland, Germany, Luxembourg, Sweden and the UK) regarding their ASAs with the US. European airlines were also warming to the idea of an EU–US agreement. In September 1999, the AEA (1999) declared its support for a Transatlantic Common Aviation Area. Previously a critic of the Commission’s external policy aims, the AEA saw the merits of such an arrangement over the existing bilateral system. It recognized that, in the words of a leading aviation scholar: ‘A particularly negative consequence of the bilateral system is that European airlines normally cannot fly to non-member countries from any point in the EU but only from the territory of their home Member States. This creates an asymmetry that clearly disadvantages European airlines in comparison with their competitors’ (Dempsey 2004, p. 205). This disadvantage had only been reinforced by the open skies bilaterals. It was more than three years after the Commission had sought recourse to the Court, however, before the Advocate-General delivered his Opinion (31 January 2002), and almost four before it was confirmed in the Court’s formal judgments on 5 November 2002 (Case C-466/98, linked with Cases 467, 468, 469, 471, 472, 475 and 476). In a landmark ruling – a ‘judgment of Solomon’ according to Meunier (2005, p. 162) – the Court rejected the Commission’s central contention that the Community had exclusive competence on the grounds of the 1992 regulations establishing an internal market.31 On this question, it ruled that external competence had not been required in order to establish an internal market (the test for exclusive competence established by Opinion 1/76), and was not therefore automatically

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infringed when member governments entered bilateral negotiations with external partners. However, there were two respects in which the international commitments undertaken by the member states fell within the scope of the Community’s common rules, and were therefore subject to the jurisprudence of the earlier AETR judgement. It ruled that the EU has exclusive competence in respect of the liberal tariff provisions of the ‘open skies’ agreements, insofar as they applied to US air services between points within the EU, and in respect of CRSs. Furthermore, the Court found that the clauses in open skies agreements concerning national ownership and control discriminated against the carriers of other EU member states by excluding them from the benefits enjoyed by airlines of the signatory state. The Commission had argued that if such clauses were new, the member states were in breach of their obligations under the Treaty, since they were contrary to Community rules regarding the right of establishment as set out under Article 43 (ex 52). Where such provisions antedated the Treaty of Rome, the Court observed that member governments were in breach of Article 234 (ex 307) which requires them to bring their agreements into line with their Community obligations. Even member states that had proposed a Community ownership and control clause in their negotiations with the USA, only to have such a clause rejected by the American side, were in breach.32 The Commission might not have succeeded on all points, but it won an outright victory on the issue that mattered most. If the benefits of a bilateral agreement could not be reserved for the airlines of one member state, but had to be shared with all other EU airlines without discrimination on grounds of national ownership and control, it followed that traffic rights could no longer be traded on an exclusive bilateral basis, and the negotiating process would have to take this into account. In this respect, the US DoT’s response to the decision was disappointing. It continued to act as though the ruling did not invalidate the open skies bilaterals and to seek such agreements (Staniland 2008, p. 139).33 The Commission returned to the Council in February 2003, with two requests (Commission 2003a). First, it asked for a mandate to negotiate with the US. Second, it sought a ‘horizontal’ mandate to open talks with all third countries that had signed bilaterals with EU member states in order to replace the existing nationality clause with a Community clause. Member governments would take part in the negotiations and would ‘remain free to negotiate with third countries on matters of national competence as they saw fit using their traditional negotiating structures’. This time the Council had to discuss not whether to proceed, but how. In June 2003 it dramatically acceded to both requests. The Council authorized the Commission to negotiate with the US and agreed that wherever possible the Commission should negotiate ‘horizontal’ agreements which apply the principles of community ownership and control, as well as all other

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matters covered by exclusive EU competence, to all the EU bilateral ASAs of the third country concerned. Member states could continue to negotiate bilaterals with third countries, however, provided that they respected Community law. Member governments undertook in the June 2003 meeting of the Council to comply with the rules on a voluntary basis pending the entry into force of what would be Regulation 847/2004. This measure sets out the framework that enables member states to continue to negotiate and implement ASAs and includes a number of standard clauses. Member states are required to treat all Community air carriers equally, not to enter any new agreement with a third country that potentially reduces the number of community air carriers, and to notify the Commission of the outcome of any bilateral negotiations. If the revised agreement does not incorporate the relevant standard clauses, it can be applied on a provisional basis, but it cannot be formally concluded without first obtaining Community approval under comitology procedures. The development of the EU’s international aviation policy, 2003–8 While the Council’s decisions of June 2003 put in place the foundations of the Community’s international aviation policy,34 the Commission shaped its development. The Commission set out its thinking in two documents: ‘Developing the agenda for the Community’s external aviation policy’ (Commission 2005a) and ‘A Community aviation policy towards its neighbours’ (Commission 2004). The policy has three pillars: horizontal agreements, a Common Aviation Area with the EU’s neighbours and relations with the EU’s global partners. Horizontal agreements The first pillar involves the process of bringing existing bilaterals with third countries into conformity with EU law on the points highlighted in the Court’s 2002 judgement. The Council at its June 2003 meeting outlined two methods: the first, negotiation by member countries, subject to conditions defined following the Court ruling; and, the second, by horizontal negotiations, conducted by the Commission, following the granting at the Commission’s request of a mandate on a case-by-case basis by the Council, in which EU member states’ agreements with a particular third country would be revised in a single process. In view of the number of bilaterals to which EU member states are party, this represented a considerable undertaking and some doubted the ability of the Commission (and the willingness of member governments) to carry it through. However, between June 2003 and August 2008, 118 bilateral agreements with 58 third countries had been revised by the first method. During the same period, horizontal negotiations were undertaken with 36 states and one regional organization – the Union Economique et Monétaire Ouest Africaine with eight member

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countries – leading to the revision of 627 bilaterals.35 The evidence so far suggests that this part of the policy has been remarkably successful. The Common Aviation Area with the EU’s neighbours The second pillar does not mark an entirely new departure, but incorporates the ECAA described earlier and leaves the original aim unchanged. Membership is extended to countries ‘engaged in pan-European cooperation in the field of aviation and viewed in a pre-accession context’ (Commission 2005a, p. 2). Since May 2006, agreements have been signed with the eight states of the Western Balkans (Albania, Bulgaria, Romania, and all the states which formerly comprised Yugoslavia, except for Slovenia which joined the EU in 2004), which will be gradually integrated by 2013, as well as with Norway and Iceland. However, the policy now extends beyond former members of EFTA or prospective member states to include groupings or other neighbouring states. The agreements will vary in type, according to the relationship envisaged. The Commission aims, for example, to conclude broad and far-reaching air transport agreements with the states bordering the Mediterranean, to which the EU is linked as part of the Barcelona Process. A first agreement was concluded with Morocco in December 2006. Future candidates include Tunisia, Jordan, Israel and Lebanon. Other neighbours targeted under the policy are Russia;36 countries that border Russia, including the Ukraine, Moldova, Belarus, Georgia, Azerbaijan and Armenia; and the five Central Asian states. Thus, the ECAA may eventually include as many as 50 countries (including the EU member states) with a total population of around a billion people. The radical nature of the ECAA or the Euro-Mediterranean air transport agreements should not be overlooked. Though the early agreements with Norway and Sweden, and later agreements with the EEA and Switzerland, did not appear to threaten the normal pattern of bilateral relationships, they had in fact begun to break the mould. Whereas bilateral ASAs had always been based on an exchange of traffic rights between partners which recognized and respected each other’s sovereign control over airlines and airspace, the agreements signed by the Community broke new ground by granting traffic rights in exchange for acceptance of a regulatory regime that was already beginning to extend beyond the classic parameters of economic regulation. Now that such agreements are being extended to countries which may never become EU members, and their scope has been widened far beyond the mutual extension of a liberal regime of traffic rights to include technical areas, as well as economic regulation, they are creating an entirely new model of air service relations. Global partners The third pillar is concerned with the negotiation of new agreements with key aviation states in major regions. Progress in this area has been slow.

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The negotiations with the US, for example, took four years and more than 11 rounds of negotiations (see discussion later). In the case of China, the Commission received a mandate to open negotiations in 2005, but despite a promising start, it has reported little progress since a special summit in December 2005. Moreover, the Council has been reluctant to issue mandates. Germany in particular was still resisting Commission requests until it could be satisfied that EU negotiations would deliver added value (interviews in Bonn and Brussels, 27 and 28 June 2007). However, during the German Presidency in late November 2007, the Council conceded a mandate to negotiate with Canada. Negotiations led subsequently to the signing in March 2009 of a groundbreaking agreement that covers all aspects of aviation, including investment.37 In the case of Australia and New Zealand, the Commission asked for a mandate in 2005, but had to wait until June 2008 before the Council granted its request. Although the EU–US agreement has undoubtedly been the main achievement, the road to March 2007 was long and difficult, and the final outcome fell short of the Council’s stated objectives.38 The June 2003 mandate had invited the Commission to negotiate a fully open common aviation area with the US, which would extend fifth freedom rights to US airlines within Europe and cabotage rights to carriers from EU states on the other side of the Atlantic. Foreign investment would also be opened on a reciprocal basis. Such ambitions had been the dream of European negotiators ever since the United States discovered the asymmetric advantages of ‘open skies’ agreements, but major obstacles rapidly became apparent and the US proved to be a difficult negotiating partner. Although the US DoT demonstrated flexibility, there was fierce domestic opposition in Congress and elsewhere to change foreign ownership rules or allow cabotage rights. With a presidential election approaching, the US countered the EU’s negotiating demands with what it called an ‘early harvest’ approach: in return for open skies across the Atlantic, including unfettered access to Heathrow, it would raise the ceiling for foreign ownership in any US airline from a 24.9 per cent shareholding to 40, but nothing more. The Council rejected this offer and proposed a staged transition to a common aviation area, but this was not acceptable to the US (see Mendelsohn 2004). In July 2004, a month after talks had broken down, the Commission tried to exert pressure through other means. Finding that member states had been slow to remedy the problems found by the Court, it sought to force them to amend or terminate their bilateral agreements with the US. Letters of formal notice to comply with the ruling were sent to eight member states. A further four were asked to bring their agreements into line with Community law, and five without bilateral agreements with the US were sent letters asking them not to enter further negotiations. Member states were given two months to indicate how they intend to comply. The Commission further increased the pressure with letters to Finland, Italy,

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Germany and Portugal warning them to cancel all bilateral agreements struck since November 1992. Exploratory discussions took place at the beginning of 2005, with a new Transport Commissioner, Jacques Barrot, and a new Director of Aviation, Daniel Calleja, leading negotiations on the EU side. These led eventually to a tentative American offer of a more liberal interpretation of the rules governing the control, but not ownership, of US airlines. Having established that this offer, limited as it was, would nevertheless be sufficient to unblock the negotiations on the European side, the American negotiators did their best to steer a corresponding Notice of Proposed Rulemaking through the Congress. However, in the wake of the furore surrounding Dubai Ports’ purchase of P&O’s portfolio of US ports in the summer of 2006, the US DoT concluded that it could not get any relaxation of ownership and control rules through Congress and therefore withdrew the agreement from consideration. Again, the Commission attempted to exert pressure through legal action. On 16 March 2005, it called on 11 member states to denounce their existing bilateral agreements with the US. Despite the lack of substantive progress towards the EU’s negotiating objectives, the alliance of Germany, Ireland and the UK, which had been sufficient to ensure rejection of the US offer in 2004, was weakening. The Irish government had concluded that it could no longer maintain the special position of Shannon in its bilateral, and Germany, which held the Presidency in the first half of 2007, and did not want to stand in the way of the majority of member states, was becoming concerned about the risk to Lufthansa’s anti-trust immunity if an agreement could not be reached. The UK was looking increasingly isolated, and the US appeared to have little room for manoeuvre, but the EU side needed at least some concessions to justify what still looked like an unequal agreement. The Council had been unwilling to authorize Calleja to make the first move, but Barrot persuaded Mary Peters, the new Head of the DoT, to send its negotiators to Brussels to explain the difficulty they were in. By all accounts Calleja handled the resumed discussions with great skill.39 Outlining the options which included breaking off the negotiations altogether, or resurrecting the 2005 deal which was now unacceptable to the Americans, he developed a set of small concessions which was ultimately sufficient to bridge the gap between the two sides. The most imaginative and important of these concerned the introduction of a second stage of negotiations which would be needed in order to improve EU access to the American market. The European side needed leverage if this provision was to be credible. This was provided by a safeguard clause in the terms of Article 21 which, read with Article 25, allows new ‘rights specified in this Agreement’ to be suspended on 12-months notice if a second stage has not been agreed by 30 November 2010. This right would be available to ‘each Party’ – in other words, any EU member state acting

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unilaterally – and the subsequent withdrawal of any such suspension would require a unanimous vote in the Council. If no second-stage agreement is reached, the UK, for instance, would be entitled to suspend the enhanced access for US airlines to Heathrow, which the agreement concedes, and the suspension could not be overturned by others in the Council. Of course, any such suspension would be highly provocative, and retaliatory action could further escalate any dispute, but it is less severe than the traditional remedy of last resort – termination of the whole agreement – for which provision is also made. The March 2007 agreement, initialled on 2 March, approved unanimously by the Council on 22 March and signed at the EU–US Summit on 30 April, was similar in many respects to the 2005 agreement.40 It did not create a common aviation area, but took a major step towards this goal (see Table 8.1). It granted fifth freedom rights to both EU and US airlines (US carriers from

Table 8.1

The EU–US Open Skies Agreement: Phases I and II

Stage one (effective from March 2008) − − − − − − −

− −

unlimited third, fourth and fifth freedoms for carriers from both sides intra-EU fifth freedoms for US carriers (but no cabotage for EU carriers in US) liberal agreement on code-sharing full cargo seventh freedoms for EU carriers rights for EU carriers with ownership and control in third airlines franchising and branding agreement regulatory cooperation on safety, security (joint inspection of airports, commitment to move to 'one stop' security) and competition (make regulatory approaches compatible), as well as cooperation on initiative to reduce emissions establishment of Joint Committee to involve stakeholders from both sides. (First meeting, April 2008) labour concerns

Stage two Priorities − further liberalisation of traffic rights − additional foreign investment opportunities − examine impact of environmental measures and infrastructure constraints − greater access to government-financed air transport − provision of aircraft with crew Timetable − May 2008: negotiations begin − November 2009: review progress on second stage. − November 2010: deadline for decision on withdrawal of rights Source: Text adapted by authors from OJ L 134 of 25 May 2007, which contains Council Decision and the full text of the Agreement, and from ec.europa.eu/transport/air/events/doc/dan_edwards. pdf, http://ec.europa.eu/transport/air_portal/international/index_en.htm.

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Europe to Africa, the Middle East and South Asia, and EU airlines from the US to Central and South America). EU carriers could take over non-EU airlines without a change in nationality that would cancel traffic rights, and were permitted franchising rights and gained access to certain Fly America traffic, the arrangement whereby a journey funded by the US Government must be made on a US carrier. The agreement also provided for regulatory convergence in competition, state aid, security, safety and the environment. It created a Joint Committee to meet at least once a year to resolve questions relating to the interpretation and application of the agreement and an arbitration tribunal to treat issues that could not be resolved by the Joint Committee. Negotiations for the second stage would start within 60 days of the application of the agreement and would discuss foreign investment, further liberalization, the impact of slot controls on the environment and several other issues. In welcoming the deal, Barrot commented that the agreement ‘could be worth up to 12 billion euros in economic benefits and up to 80,000 new jobs’ (Commission 2007c). Critics in Europe replied, however, that the agreement was one sided and not fully liberal. While US carriers gained full rights to operate services within the EU, the corresponding (cabotage) rights had not been secured in the US for EU carriers. The terms relating to ownership were another source of dissatisfaction. Although the ceiling for the foreign ownership of US airlines was increased to 49 per cent, a 25 per cent limit was imposed on foreign ownership of voting stock. Finally, the UK government was concerned that access to Heathrow had been given up too cheaply and that the US had achieved a goal that it had coveted for years without making any equivalent concession. Although it was isolated, the UK was able to secure postponement of the agreement’s entry into force until 30 March 2008 – a year later than had been proposed. The agreement came into force on 30 March 2008. IATA expected that it would add 7000 seats a week to flights between London and New York (Milmo 2008). Booz Allen Hamilton (2007), meanwhile, estimated that traffic between the US and the EU could increase by one-third to 37.5 million passengers by 2011. Talks on the second stage began in Ljubljana on 15 May 2008.41 Although the agreement was a triumph both for the Commission and for Mr Calleja, it remains to be seen whether it will deliver benefits for the airlines of both sides and for the travelling public, whether progress will be made to a second stage, and if not whether the potentially explosive right to suspend the new traffic rights granted under the agreement will be activated.

Conclusion The Union has become an ‘international actor’ in the economic regulation of the global industry, displaying the attributes identified by Caporaso and Jupille (1998) and summarized as follows by Ginsberg (1999, p. 447): ‘recognition (outsiders’ acceptance of EU competence); authority (the legal

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competence to act); autonomy (distinctiveness and independence from other actors); and cohesion (the extent to which it acts in a unitary way externally)’. The same is true in terms of its relations with ECAC, though its status with respect to ICAO is somewhat more ambiguous. While the Union’s influence as a regulatory authority is recognized, the Chicago Convention does not permit the EU to become a member of aviation’s main global body. In ICAO, it is certainly more than an international presence, but not fully an international actor. Whatever the EU’s status in relation to ICAO, the international aviation policy has far-reaching significance not only for the Union, but for the global aviation system. The freedom of member governments to conclude bilaterals, already lost in regard to intra-EU services, is now circumscribed with respect to third countries, while the Commission, which had a marginal role in external aviation relations up to the late 1980s, now speaks on behalf of the EU in international forums, is involved in the negotiation of ASAs with global aviation powers and plays a major role in policy development. Internationally, its impact has been felt by the signatories of the ECAA and beyond as part of the programme to develop close aviation ties with the Union’s neighbours. It has also been felt by organizations, such as ECAC and ICAO, designed for an order of sovereign states, that must now interact with and accommodate themselves to a regional organization with supranational powers and wide-ranging regulatory authority, and by the partners of EU member states, compelled to renegotiate their ASAs with the Union and to incorporate new clauses. While its agreements with its neighbours transcended the scope of the traditional bilateral, the Union’s first major negotiation, with the US, culminated in the striking of a new kind of agreement which has largely abandoned the framework of exclusive traffic rights and replaced it with an open market and new procedures for resolving disputes over safety, security, environmental protection, as well as fair competition. Its development is the outcome of a long struggle by the Commission to establish an external dimension for Community action in the sector. Driven by the conviction that Community competence necessarily complemented internal developments, it has, despite tactical errors and setbacks, largely succeeded in achieving its objectives. It was eventually able to overcome member state opposition determined to retain national control over the negotiation of traffic rights. For that reason, the sharing of authority between the Community and member governments should be seen as a triumph for the Commission, even if the Council and the Commission must cooperate in conducting negotiations with other states or international organizations. With only a little exaggeration, the Commission could claim that ‘The tradition of international air services, dating back to 1944, has become contrary to the principles of the single aviation market established in Europe’.42

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As with liberalization, the Court has played a key role, first, by bringing an end to the Commission’s attempt to extend into transport policy the competence it enjoys in commercial policy negotiations and, second, by challenging the authority of the member states on the grounds of jurisprudence developed in the AETR case and after. The doctrine of implied powers, which had already featured in other areas of transport, provided the basis for the Commission’s assertion of Community competence in air transport in Open Skies. The judges accepted its argument that EC aviation rules affected companies from third countries and that therefore member states did not have the authority to conclude third country agreements independently. In addition, the prosecution by the US of its open skies campaign was an important external factor. Initially, US policy divided the Council and delivered a majority against the Commission, but acted later as a unifying factor. As in the case of the first package, EU policy development may not have occurred without US action.

Part III The Impact of EU Action

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9 Regulating the Single Market

In creating a single market in air services, the Community has not only transformed the legislative framework that governs the sector. As with safety (see Chapter 7), it has altered the regulatory landscape. With the adoption of the first package, the European Commission became a regulator of the economic aspects of the industry, responsible for the enforcement of regulations governing licensing, market access and pricing, and a competition authority, responsible for the implementation of the competition rules in aviation as in other sectors. Its remit expanded as the second and third packages, together with the further measures examined in Chapters 6–8, extended the single market in air services and created an external dimension. The application of the competition rules involved the control not only of agreements between, and anticompetitive behaviour on the part of, airline companies but also of mergers and state aid, both of which were and remain areas of high political sensitivity. As well as threatening traditional habits of collusion and state support, the competition rules empowered the Community to regulate new activities on the part of the airlines, who had responded to their exposure to competitive pressures for the first time by taking over domestic rivals, building alliances with other carriers at home and abroad, and acquiring cross-shareholdings. The development of a new regulatory architecture, within which a newly empowered supranational agency came to administer and enforce multilateral rules, has been one of the key features of EU-led change in aviation.1 Somewhat surprisingly, given the controversy surrounding the Community’s involvement and the member state’s adherence to the traditional order, the Commission became an established fixture in European aviation within a remarkably short period of time. Moreover, the Commission’s intervention has contributed importantly to the reshaping of the aviation industry inside the borders of the Community and beyond. It has also had major consequences internationally, not least due to the extra-territorial application of Community competition rules. 181

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The significance of the Commission’s emergence as a regulator in aviation, furthermore, transcends the confines of the particular sector. From a theoretical perspective, the process by which the Commission emerged as a sectoral regulator in aviation is somewhat at odds with the dominant view in the literature of how the Community gains regulatory competencies.2 The Commission assumed its functions less due to the desire on the part of member governments to secure credibility for an intergovernmental agreement than due to its strategy of confronting member governments with the choice between gradual liberalization with their consent and abrupt liberalization by judicial fiat. Moreover, the sequence of national and EU liberalization processes in aviation is the reverse of that which has taken place in other sectors. In telecommunications and energy, for example, the transition from public ownership to regulation by an independent agency preceded EC-level liberalization and the emergence of the Commission as a regulatory authority (see Coen and Thatcher 2008). However, in aviation, except in the UK, Community action came first, and then forced domestic change. This partly explains why Community-led liberalization was so vehemently opposed by a majority of member governments and also why in this sector the domestic impact of Community action has been so far-reaching. This chapter explores the regulatory role played by the Commission as economic regulator and competition authority, and considers the development of these functions. It describes first how the Commission has organized itself to discharge its regulatory responsibilities and the impact of its actions on interest intermediation in the sector. Second, it discusses how the Commission has exercised its functions as an economic regulator to enforce the regulations that were designed to establish and open up the single market. Third, the chapter examines Commission decisions and policy with respect to anti-trust and anti-competitive practices, as well as merger and state aid control.

The Commission as regulator The Commission combines responsibilities as an economic regulator and a competition authority that, since the 1980s, have typically been exercised by separate bodies at national level.3 They are performed by the Commission’s transport and competition departments: DG TREN (Transport and Energy) takes the lead in industry-centred issues, while DG COMP (Competition) leads on competition matters. The exception to an otherwise clean division of labour is state aid control, which is managed not by DG COMP, but by DG TREN. Although the silo mentality that exists within the Commission leads often to poor coordination across the boundaries between departments (Spence 2006; Stevens and Stevens 2001), DG COMP and DG TREN have a long tradition of working closely with one another in air transport. Despite

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different priorities – the first is concerned principally with maintaining a competitive environment, the second with the well-being of the industry – the two have cooperated very effectively. With the exception of the first Delors Commission, the working relationship at Commissioner level has also been a good one. The Commission has surprisingly few officials working on aviation given the breadth of its responsibilities. The relatively small size of the old DG VII (Transport) since 1958 was one reason why Transport and Energy were brought together in 1999. At that time there were 327 officials in Transport, 626 in Energy. In 2006 DG TREN had about 1000 staff in 11 directorates, but within this structure the air transport directorate was one of only three with an exclusive responsibility for transport policy. Two others, security and Trans European Networks, were shared with energy. DG COMP had 750 officials in 2006, with just one unit specializing in transport, but the directorate has now been organized on an essentially functional basis to deal with its antitrust, mergers and state aid responsibilities, making it difficult to determine the precise level of resources committed to transport. A dedicated air transport unit was first established in DG VII in 1977. This grew into a directorate from 1990, which in 2007 had four units, dealing with the internal market, the Single Sky (air traffic management), air safety and aviation infrastructure (mainly airports). Some staff with relevant experience have joined DG TREN from national aviation authorities, but the Commission has been reluctant to be captured by the old aviation community as it sees it.4 A related characteristic is that the legalistic culture reported by a senior official when joining DG VII in the early 1980s (interview, former Commission official, 20 December 1994) is still evident two decades later. Commenting on the differences that he had found between the air transport division in the transport ministry from which he had been seconded and the air transport unit in DG TREN where he was working, a detached national expert from a southern European state contrasted the commercial mind-set of the former to the law-driven outlook of the latter (interview, 3 May 2007). Despite its small size, the Commission’s responsibilities have continued to grow. Whereas before 1987 its task was essentially to formulate policy proposals and to negotiate their passage through the law-making processes of the EU, since 1987 there has been a growing body of law to administer. In economic regulation, the exercise of its executive powers is limited at least in theory by the comitology procedures included in the liberalizing measures.5 In competition, the Commission acts in a quasi-judicial capacity, though the extent to which it can exercise its formal powers is compromised by the relatively low level of available personnel resources (Norberg 2007) and the need to negotiate with stakeholders (Morgan and McGuire 2004, p. 43). Its decisions are often far-reaching and, since so much is usually at stake in this strategic and highly visible sector, they have often been contentious.

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The Commission’s emergence as a regulator, together with the increasing importance of its law-making responsibilities since 1987, has had a profound effect on the organization of interests in aviation. Previously, aviation policy was the product of decisions taken within a tight circle of national actors, while governments played the role of gatekeeper in international negotiations in accordance with the classic state-centric model (see Hooghe et al. 1996). However, once the Community became a decision-making arena, representative federations proliferated, existing bodies developed new functions and the larger airlines set up individual offices in Brussels. Lobbying activities were directed at least as vigorously at Community level as at national level, and in some areas Brussels rather than the national capital emerged as the more important target. The Commission arguably has become the principal interlocutor of aviation interests (see Table 9.1).

The Commission as economic regulator Responsibility for the implementation of the liberalizing elements of the common air transport policy lies principally with the Commission’s transport department. Under the first two packages the Commission was responsible for the regulation of tariff setting and market access, but the third package extended the Commission’s regulatory role by introducing Community licensing criteria. The Commission’s profile and authority have grown considerably in each area since the early 1990s. However, the possibility remains for member governments to limit the effects of liberalization, especially in the case of market access. Market access Under Council Regulation 2408/92 the circumstances in which a national government could limit or refuse the exercise of traffic rights by another Community airline were limited to the protection of services to small communities operated under PSOs (Article 4); the application of non-discriminatory rules for the distribution of traffic between the airports within an airport system (Article 8 (1)); and ‘published … rules relating to safety, the protection of the environment and the allocation of slots’ (Article 8 (2)). With respect to the first, Article 4 of Regulation 2408/92 provides for PSOs where routes cannot be operated on a commercial basis.6 PSOs can be imposed on a route served by scheduled services to an airport in a peripheral or development region or to a regional airport on a thin route, and only to the extent necessary to ensure adequate provision. They must also be put out to tender. Member governments have made use of the provision to protect lifeline services to small communities, particularly island communities at some distance from a member state, but they have rarely been used to protect cross-border flights, with the important exception of Strasbourg,

European Travel Agents and Tour Operators Association (ECTAA) European Travel Commission (ETC)

European Region of Aircraft Owner and Pilot Associations (IAOPA)

European Low Fares Airline Association (ELFAA) European Regions Airline Association (ERA)

European Cockpit Association (ECA)

BEUC

Founded 1948. Represents interests of national tourist organizations

Federation of 66 national general aviation organizations. IAOPA has represented international general aviation for more than 35 years. Founded 1961

Regional body of Airports Council International (ACI) Originated in study group formed by Presidents of Air France, KLM, Sabena and Swissair in 1952, joined later by BEA and SAS. Creation of Air Research Bureau in Brussels 1954. Changed to current name in 1973. BEUC was created on 6 March 1962 by the consumer organizations of Belgium, Luxembourg, France, the Netherlands, Italy and Germany. Regional organization of International Federation of Air Line Pilots’ Associations (IFALPA) Established 2003 to represent views of low-fare airlines and their customers Founded 1980 to represent air transport in Europe’s regions

ACI Europe

Association of European Airlines (AEA)

Origins and Mission

Association

Table 9.1 Main aviation interests in Brussels (2009)

39 members

30 members

General aviation

(Continued)

Airlines (78), airports (49), as well as aircraft & equipment manufacturers, suppliers, service companies, and others

11 members

19 national pilots’ associations (full membership); 16 associate membership

42 independent national consumer organizations

34 full members, including former flag-carriers and independent airlines

440 airports

Membership

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Established in 1990 to campaign on sustainable transport at EU level

Transport and Environment (T&E)

Source: Compiled by authors from organization websites and literature.

International Federation of Air Traffic Controllers’ Associations (IFATCA)

Founded 1945 to represent scheduled international airlines. Now also represents non-scheduled carriers. Executive office based in Geneva, with regulatory representation and team concerned with safety, operations, infrastructure, navigation systems and airports based in Brussels. Brings together professional associations representing air traffic controls

Origins and Mission

International Air Transport Association (IATA)

Association

Table 9.1 (Continued)

49 members

European membership includes 44 member associations, representing 20,000 air traffic controllers

72 European members

Membership

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which enjoys special support from the French government as host city to the Council of Europe as well as the European Parliament. The Strasbourg PSOs have been successfully defended, but extensive recourse to PSOs by certain member states, in particular France and more recently Italy, has aroused suspicion that they are being used to protect services from competition by low-cost airlines or otherwise to limit market entry. One of the weaknesses of the EU’s PSO regime, as Reynolds-Feighan (1995) has argued, is that although the Regulation obliges governments to issue a public invitation to tender, there are no further requirements to encourage a consistent approach on the part of member states. Each government determines the list of routes to be served, the level of prices to be provided and the fare to be charged. As a result, there are not only very significant cross-national differences in the number of PSO routes – in February 2009, France had 56, Norway 38, Italy 29, and Greece, Italy and Portugal 25 – but the conditions under which routes are operated, and the level of subsidy received varies considerably. The Commission’s proposals for the revision of Regulation 2408/92 (COM (2006) 396) included greater clarification of the rules governing the approval of PSOs, while the Commission applied stringent conditions in individual decisions, for example, to PSOs between mainland Italy and Sardinia (Commission Decision (2007) 1712 of 23 April 2007), which had been the subject of complaints by Easyjet. Although Regulation 1008/2008, which recast the common rules for the operation of air transport within the Community (Chapter 6), did not alter the principles according to which PSOs are applied, it did attempt to guard against abuses. As well as reminding governments that concessions needed to be proportionate to the level of economic development, it gave the Commission under Article 18 the right to request on its own initiative or in response to a request from a member state a detailed economic report from a member government justifying the need for the PSO and its compliance with the criteria set out in Article 16.7 The most important challenges to the liberal intentions of Regulation 2408/92 have arisen from the application of traffic distribution rules. Such rules may be needed in order to regulate the use of congested airport systems. Under the Chicago Convention, as well as the Regulation, they have to be non-discriminatory, but in practice they have frequently been used in ways which happen to suit the incumbent airlines of the host nation rather better than their competitors. For example, the long-standing requirement for all new airlines to serve a London airport other than Heathrow is scrupulously non-discriminatory, but in practice of considerable benefit to British Airways and other airlines with an established presence at Heathrow. It was not surprising therefore that several national authorities should seek to use traffic distribution rules to hamper unwelcome competition. Three cases concerning access to Paris (Orly) and Paris (Charles de Gaulle (CDG)) between 1993 and 1996 illustrate the efforts made by the Commission to

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ensure the implementation of the regulation, and the corresponding efforts of a resourceful member state to achieve its national objectives (see CAA 1995, pp. 43–7). The first such case concerned a complaint by Viva Air, a subsidiary of Iberia, that the French authorities had refused to authorize their proposed service between Paris (CDG) and Madrid.8 The French authorities based their decision on traffic distribution rules which did not allow an airline to operate services on the same medium-haul international route into both Paris (Orly) and Paris (CDG). Since Iberia already served Orly, Viva Air – as a wholly owned subsidiary of Iberia – could not serve CDG. The Commission found in favour of Viva Air (Decision of 28 May 1993), mainly because it did not recognize as legitimate in a single market the distinction between domestic services, which could use both airports, and European services which could not; and anyway Viva Air was a separate entity from Iberia for the purposes of the Regulation. The French authorities were accordingly required to authorize Viva Air’s services to Paris (CDG) (Goh, 1997, pp. 128–9; CAA 1995, pp. 43–4). A second case relating to access to the Paris airports system concerned the refusal of the French authorities in 1993 to authorize proposed services by TAT from Marseille and Toulouse to and from Paris (Orly). British Airways had acquired a 49.9 per cent stake in TAT, but on this basis it was still a French airline, with the right to operate services within France. This case turned on the existence of an exclusive concession for such services granted by the French authorities to Air Inter, protected for up to three years by the terms of Article 5, provided that they could also show that there were no other forms of transport capable of ensuring an adequate and uninterrupted service on the route in question. TAT contended that the French authorities had undertaken to open their domestic services to multiple designation when the Commission approved Air France’s acquisition of UTA in 1990, and that the exclusive concession to Air Inter had already been breached, not least by TAT’s own services from Paris (CDG). The Commission came down in favour of TAT, mainly on the grounds that Article 5 should be construed on a city-to-city basis, which knocked down any argument about the absence of alternative means of transport, but by the time TAT were able to start services in the summer of 1995, two other French domestic airlines – AOM and Air Liberté – had already entered the market (CAA 1995, pp. 46–7; Goh 1997, pp. 130–3). TAT was also involved in a third case at Orly (Commission Decision 94/920, [1993] OJ L127/22). In the summer of 1993 TAT had been refused permission to operate four daily return services between London (Gatwick) and Paris (Orly) on the grounds that ‘as part of the airport allocation for the Paris region, scheduled international services to most European countries, and the UK in particular, had been authorized only from Charles-de-Gaulle airport’. This led to a lengthy dispute with the Commission about the

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compatibility of the Paris traffic distribution rules with Community law in general and Article 8 of the market access regulation in particular. Between December 1993 and the winter of 1995, four successive versions of the traffic distribution rules were published as the French authorities struggled to establish limits on access to Orly which the Commission would accept as objective, non-discriminatory and proportionate. In the process Orly was prised open to a limited extent, but by 1996 TAT were no longer the competitive threat they had been in the summer of 1993. The length of the dispute will have contributed to TAT’s economic difficulties, leading first to its merger with Air Liberté, in which BA took a 70% stake after the restrictions on cabotage operations fell away in April 1997, and eventually to BA’s abandonment of any attempt to establish a presence in the French domestic market (CAA 1995, pp. 44–6; Goh 1997, pp. 137–43). The jurisprudence established in the course of the ‘battle of Orly’ helped the Commission to react more decisively when traffic distribution rules were proposed for Milan. The first proposal of the Italian authorities would have had the effect of banishing all European airlines to the new airport at Malpensa from the day it opened in October 1998, while Alitalia alone would continue its services to Rome from the old airport at Linate. The Commission (1998b) ruled that the Italian proposals were both disproportionate and discriminatory, and they were consequently amended by the Italian authorities, two weeks before Malpensa opened, to allow all Community airlines to retain up to 18 flights a week at Linate (or one-third of all flights if that was more favourable) for a transitional period. Unsurprisingly, the conditions under which governments can distribute traffic between airports were more closely specified under Regulation 1008/2008 (see Chapter 6). It remains to be seen, however, whether the new attempt to balance governmental discretion with the principle of nondiscrimination will be successful. The third category concerns safety, environmental protection and slot allocation. The Swedish authorities decided in 1994 to prohibit Chapter 2 aircraft from operating to its new Karlstad airport, but allowed some noncompliant non-scheduled services to continue. SAS, the only company to operate scheduled services, asked the Commission to decide on the compatibility of this decision with Article 8 of Regulation 2408/92. The Commission (1998c) concluded that such a restriction could be justified only on grounds of environmental protection under Article 8 (2). Although the measure was not discriminatory, it was not proportionate, since the airport was in a sparsely populated location, away from the city centre, and other environmental protection measures were already in place (altitude of flights, curfew). In addition, the restriction was incompatible with Directive 92/14 on noisy aircraft, which prohibited one member state from exporting its air pollution to others by banning Chapter 2 aircraft in advance of the deadline.

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Access to slots at congested airports is another important factor affecting market access. An incumbent airline can shuffle its portfolio of slots to increase services on a route where the competitor may find it difficult to respond, which raises the issue of whether such action constitutes a denial of market access. The question was put to the test when in 1992 British Midland Airways increased its services between London Heathrow and Brussels from three to four return services daily. Sabena responded with a late request for slots at Heathrow in order to match BMA’s frequency. Although its preferred slots were not available, the coordinator found others at less convenient times. Since Sabena was not satisfied with these slots, the Belgian authorities refused to authorize BMA’s additional services at Brussels, and the UK invited the Commission to overturn that refusal. Regulation 2408/92, and Regulation 2343/90 which applied at the time, allowed restrictions to be imposed on the basis of published Community, national, regional or local rules relating to safety, the protection of the environment and the allocation of slots. The action taken by the Heathrow slot coordinator was therefore legitimate. However, the right to reciprocity also had to be respected. Although the slots offered to Sabena were less favourable than those available to BMA, it was not a requirement of the Regulation that the ‘slots offered must immediately be economically viable’; they could be considered a ‘starting point for further improvements’. Moreover, the Commission (1992d) found that Article 10 (3) did not provide for countermeasures to be taken, so that the Belgian authorities had no right to refuse BMA’s additional flights. Tariffs The Commission’s earliest decisions were mainly concerned with the regulation of fares. In December 1990 the UK authorities asked the Commission to investigate the compatibility with Regulation 2342/90 of a long list of fares, mostly in the upper bracket. In November 1991 the Commission found that 40 out of the 88 fares notified to it failed to comply with EC regulations (Commission 1991f ).9 Following a second UK request in April 1991, the Commission issued its decision in July 1992, signalling that 22 of the 105 fares notified to it did not comply (Commission 1992e). An important constraint, however, was that the Commission had no direct powers to take action with respect to these fares and was able only to communicate its decisions to the member governments and the carriers concerned. Since any investigation would inevitably take time, there was a strong likelihood that the fares in question would no longer be in force once the Commission reached its conclusion and, moreover, there was no way in which the effects of the fare could be reversed. Many of the complexities of the measures relating to tariffs under the first and second package were swept away by the third. Regulation 2409/92 stated simply: ‘Community air carriers shall freely set air fares’ (Article 5). However,

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member governments retain ultimate responsibility for the approval of air fares and are granted reserve powers to act against fares which they judge to be either excessively high or unjustifiably low, ‘taking into account the long term fully-allocated relevant costs of the air carriers’ (Article 6). The Commission is empowered to examine a fare which has been turned down by a member state, upon application by another member state involved, or another party with a legitimate interest, for example the airline concerned or an aggrieved passenger, and to make a final determination based on their interpretation of the criteria for intervention set out in Article 6 (1). Importantly, the Commission is not permitted to act on its own initiative, and its decisions can be appealed to the Council. Although undiscounted standard and Club Class fares have continued to rise faster than inflation, and at the other end of the spectrum low-cost airlines have routinely offered some seats at prices which must be well below any measure of relevant costs, no government has yet felt it necessary to intervene, and no cases have been brought to the Commission for adjudication.10 Since there has been vigorous competition on fares, particularly where the low-cost airlines have been active in the market, it may be concluded that the tariff regulation has largely achieved its liberal purpose. Licensing The licensing regulation contained in the third package was a key element in the creation of a genuinely single market in air services. Though ‘at first sight a regulatory measure’ as Balfour notes (1994, p. 1028), ‘its main importance was as a liberatory measure, because any airline which meets the specified requirements must be granted an operating licence’. Its aim was to eliminate any possible discrimination by national governments against the carriers of other states. Regulation 2407/92 required the member states to license any airline which meets the four criteria laid down in the Regulation, and expressly forbids them to refuse a licence to any such airline (Article 3). The airline applies to the member state where it has its principal place of business and its registered office, so that there is no scope for the licensing authority of another member state to raise difficulties if its own authorities are satisfied. First, the airline must be wholly owned and effectively controlled by member states or their nationals (Article 4). Second, the airline must be able to demonstrate its financial viability (Article 5). Third, it must be able to show that it is managed by persons of good repute, who have not been declared bankrupt or guilty of professional misconduct or a criminal offence (Article 6). Finally, the airline must be in possession of a valid air operator’s certificate (Article 9). These provisions have been put to the test on a number of occasions, even if no attempt has so far been made to deprive an airline of its licence when acquired by nationals of another Community state. When Sabena was

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taken over by Swissair in 1995 (see discussion later), it was the Community ownership criterion that caused the Commission most concern. The Commission was eventually satisfied that the terms of the Swiss investment left the shareholders (mainly the Belgian government) with sufficient control over airline policy and key appointments to justify the Community licence. In the event, however, the Swissair rescue proved to be no more than a temporary reprieve. Swissair itself had to suspend operations in October 2001, owing $84m to Sabena, which declared bankruptcy on 7 November. SN Brussels Airlines, which eventually rose from the ashes of Sabena, is once again a Belgian airline with an uncontested Community licence, and Swissair’s successor has been acquired by Lufthansa (see discussion later). In summary, the regulations setting the framework for a liberalized market in air services within the Community have been broadly successful in removing most of the obstacles to the free determination by airlines of the routes they wish to serve, the frequencies they wish to operate and the tariffs they wish to charge. However, old habits were slow to give way, and although the Commission has insisted on compliance with a strict interpretation of the terms of the regulations that formed the third package, the record suggests that a determined and resourceful aviation authority could still exploit the provisions concerning traffic distribution rules and PSOs in legitimate ways that offer protection to the national airline. Although Regulation 1008/2008 has sought both to bring greater clarity in these areas and to ensure greater consistency with respect to licensing (Chapter 6), it remains to be seen whether the recast framework can significantly diminish the residual opportunities for discretion to be exercised in ways that are contrary to the spirit of the single market in air services.

The Commission as a competition authority The emergence of the Commission as a competition agency, with authority not only over airline companies, but member governments, has been one of the most dramatic developments in the evolution of the common air transport policy. The traits that have marked the enforcement of Community rules in other areas, moreover, have also been a feature of aviation. A mismatch between competencies and resources led over time to the improvisation of measures, such as comfort letters and the softening of criteria according to which cases were notified, designed to make its workload more manageable without any sacrifice of legal certainty (Norberg 2007, pp. 524–5; see also Goyder 2003, pp. 41, 43). At times, particularly in the area of state aid, a resort to soft law methods and a failure at least initially to put its reasoning in the public domain, has led to criticism (see, e.g., Balfour 1993). The first package placed the Commission on an entirely new footing. Regulation 3975/87, which Argyris calls ‘the procedural regulation’ (1989), enabled the Commission for the first time directly to enforce in aviation

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provisions governing respectively agreements ‘which have as their object or effect the prevention, restriction or distortion of competition within the common market’ and the abuse of a dominant position in air services.11 The procedural regulation was superseded from 1 May 2004 by Council Regulation 1/2003 as part of a sweeping modernization of the anti-trust rules.12 This amendment, which brought air transport under a single implementing regulation for Articles 81 (ex 85) and 82, (ex 86) significantly extended the Commission’s powers of investigation and decentralized the enforcement of the Community competition rules to national authorities.13 Regulation 3976/87 also authorized the Commission to grant exemptions from the general prohibition of anti-competitive agreements and so to moderate the impact of the application of the anti-trust rules. While the ‘procedural regulation’ interacted with the liberalizing provisions to introduce competition in the sector, the exercise by the Commission of its powers under the ‘block exemption regulation’ enabled the European industry to avoid the disruption experienced in the US following deregulation and to preserve for the consumer the positive benefits that would otherwise have been put at risk. In addition, it had been an implication of the Court’s ruling in Nouvelles Frontières that the Treaty provisions relating to the control of state aid, as well as those concerning national monopolies, were applicable. Unlike Article 81, (ex 85) no implementing regulation was required. The Commission’s competition powers were further enhanced by the Merger Regulation, which was adopted in July 1989 and became effective in September 1990. This general measure, for which the Commission had long campaigned, equipped it with a purpose-built instrument for dealing with mergers and gave it a central role in their regulation.14 In short, the Commission was able from the late 1980s to bring a full armoury of competition powers to bear on the sector. Furthermore, the adoption of the first package coincided with the beginning of a period of increased activism on the part of the Commission. Since 1962 the Commission had been empowered under Regulation 17 to levy up to 10 per cent of the turnover of companies found to be operating cartels or abusing a dominant position, but it had rarely sought to impose fines. It had been even less assertive with respect to state aid. The SEA was a key milestone for the Commission in the competition policy domain. Not only did it gain new powers, but the regulation of competition became a central priority in the pursuit of the 1992 project (see, e.g., Ehlermann 1992) and the Commission achieved new legitimacy as the ‘guardian of competition’ (Staniland 2008, p. 219). During this period the Commission became ‘one of the world’s leading antitrust enforcement agencies’ (Brittan 1991, cited by Wilks and McGowan 1996, p. 225). The application of the competition rules and Commission intervention in aviation have been far-reaching, even if at times, especially in state aid,

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political considerations have come into play at the level of the College.15 In a sector previously excluded from national competition rules, long-held habits of collusion and protection on the part of airlines and governments came under pressure, as these practices were exposed for the first time to legal challenge and intervention by the Community. In addition, the Commission was enshrined as the supranational body responsible for the enforcement of competition rules, and has been able to exercise the exceptional and wide-ranging legal powers entrusted to it under the founding Treaties in a field where it is no less than a ‘federal agency, operating directly within the territory of the Member States and having exclusive competence’ ( Jacobs 1981, p. 205). The Commission can at least in formal terms act independently, directly and without the approval of other actors (though see Morgan and McGuire 2004), although its powers of investigation and sanction vary across the domains of competition policy. Suspected infringements are investigated by case handlers in the relevant service, the dossier then moves up the various levels of the DG hierarchy for approval and a final decision is taken by the College. The competition rules have been critical to ensuring the success of liberalization. Without them, it is doubtful that the dominance of publicly owned flag carriers in most national markets for scheduled air services could have been effectively challenged. However, the competition regime in aviation is complex – a reflection of the mix of legal provisions that apply with respect to different types of anti-competitive action. Moreover, the rules have been adapted to new conditions and circumstances as airline companies have, since the late 1980s, devised and developed new strategies. The discussion in the remainder of the chapter is organized into three parts. The first looks at the abuse of dominant position. The second examines the development of rules and their application to cooperation between airlines, acquisitions and mergers. The third considers the control of state aid. The abuse of dominant position The Commission has investigated relatively few cases in aviation in which an abuse of dominant position was alleged and most of those have related to ancillary services. An early decision concerned a refusal by Sabena to allow access to its CRS to London European Airways (LEA), insisting, as a condition, that LEA should contract with Sabena for its ground handling operations at Brussels. The Court ruled against Sabena on both counts. Access to Saphir, Sabena’s CRS, it determined, was essential to any competitive position within the Belgian travel market, since it was the system used by a high proportion of Belgian travel agents. Exclusion from Saphir would therefore be an abuse of Sabena’s dominant position in a substantial part of the relevant market for air travel, ‘limiting production, markets or technical development to the detriment of consumers’ (Article 86b (now 82 (b)). Moreover, the required linkage with a ground handling contract was a ‘supplementary obligation’

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which by its nature had no connection with access to the CRS, and was therefore prohibited under Article 86d (now 82 (d)) (Commission 1988). Such abuses were subsequently prohibited under the code of conduct for access to CRSs (Goh, 1997, pp. 184–5). However, since the case concerned an ancillary service rather than air transport in the narrow sense the decision was taken under Regulation 17/62 rather than Regulation 3975/87. A decade later, the Commission ruled that a loyalty rebate scheme for travel agents operated by British Airways constituted an abuse of dominant position and imposed a fine of 6.8 million. The Commission then decided to define a code of conduct concerning the commissions paid to travel agents (IP/99/504). In respect of air services more specifically, the main cases have concerned interlining. In 1990 the Commission persuaded Lufthansa to reinstate interlining authority for Air Europe on the London–Munich route (IP/90/384). Two years later, it upheld a complaint by British Midland Airways alleging abuse against Aer Lingus, on the grounds that the latter had withdrawn interlining facilities when BMA started services between London (Heathrow) and Dublin. With Aer Lingus carrying some 75 per cent of the passengers on the route, the Commission found no room to doubt its dominant position in the relevant geographic market, and since interlining was important to most business travellers in particular, its denial constituted an abuse (Commission 1992a). Although in the meantime Aer Lingus had reinstated the facility, the Commission imposed a fine of €750,000.

Cooperation and concentration The regulation of agreements between airline companies depends on whether they entail cooperation, which covers arrangements, including joint ventures and alliances, of fixed or limited duration, or concentration, which is more enduring and involves the acquisition of shareholdings or merger. The Commission’s rulings in these areas have been both more frequent and more consequential than in the abuse of dominant position. Most cases of cooperation were treated under Regulation 3975/87. This procedural arrangement allowed the Commission to grant individual exemptions, which it has used to regulate joint ventures and alliances.16 It also included a list of exceptions, which relate to technical arrangements. Initially, it covered only international air services between Community member states, but it was extended to domestic services under the third package. Cooperation between airlines on routes between the Community and third countries, however, was treated under the Treaty’s interim competition provisions subsequent to the ruling of the ECJ in the Ahmed Saeed case and later under Council Regulation 1284/91. Block exemptions, which exclude specific categories of agreement from the scope of the anti-trust rules, have been an important feature of all three packages. Regulation 3976/87, the original enabling regulation, was

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included in the first package. Its scope was subsequently modified with the adoption of the second and third packages. Concentrations, by contrast, were treated under Articles 81 and 82. They are now handled for the most part under the Merger Regulation, which was agreed in 1989 and became effective in 1990. This has introduced greater clarity and efficiency. Cooperation – individual exemptions Between 1988 and 2004, the framework for the Commission’s examination of cooperation between airlines was set out in Regulation 3975/87.17 Unlike Regulation 17, this essentially procedural regulation did not impose a general obligation on companies to notify their agreements to the Commission. Instead, airlines could seek individual exemptions for agreements, where they were able to demonstrate that cooperation would lead to improved services and consumer benefits. Though many of the Commission’s early decisions were of routine character, in 1988 it approved only three of the 12 joint ventures it investigated. Six were discontinued and three terminated. However, at least until recently, the Commission was sympathetic to agreements that allowed potentially competing third parties to enjoy interlining rights (see, e.g., Austrian Airlines–Lufthansa 2002 and Air France–Alitalia 2004). The Commission has also taken a generally positive view of airline alliances. It has cleared most cases that were either notified or investigated, subject to commitments on the part of the parties. The landmark case concerned the alliance between Lufthansa and SAS for services between Germany and Scandinavia, which was announced in 1995. The companies remained separate, but the cooperation it envisaged was wide ranging. It included joint network planning, a single marketing strategy, a joint pricing policy, joint budgeting, reciprocal arrangements in respect of frequent flyer credits, code sharing, maintenance, ground handling and data processing. The Commission found that the two airlines accounted between them for 66 per cent of the total scheduled service air traffic between Germany and Scandinavia; competition and trade would therefore be appreciably restricted; and the agreement was not therefore compatible with Article 81(1) (ex 85(1)) of the Treaty (Goh 1997, pp. 43–4). However, an exemption could still be granted under Article 81(3) (ex 85(3)), provided that the Commission could satisfy itself on four counts, grounded in the text of that provision: – the agreement must promote technical or economic progress – consumers should get a fair share of the resulting benefit – any restrictions in the agreement must be indispensable to the attainment of these objectives – the agreement should not make it possible to eliminate competition in respect of a substantial part of the products in question

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The Commission was persuaded that the agreement would improve services and reduce costs to the benefit of consumers; a joint venture with a Scandinavian airline was indispensable if Lufthansa was to serve some of the more remote communities for which its own fleet was not appropriate; and the possibility of competition would not be eliminated because there was still scope for other airlines to enter the market, using the market access provisions of the liberalization package. However, the Commission did recognize that the joint venture would create a very powerful presence in the market, and barriers to entry might be particularly formidable at congested airports (Frankfurt, Düsseldorf, Stockholm, Oslo) where the two airlines controlled a high proportion of scarce slots. They therefore imposed several conditions designed to ensure that slots would be made available for a new entrant; the new entrant would be allowed to interline with SAS/Lufthansa; and the incumbent airlines would not be permitted to squeeze such a competitor out by flooding the market with excess capacity. In addition SAS was required to disengage from its alliance with Austrian Airlines and Swissair, and Lufthansa had to terminate its agreements with Transwede and Finnair (Goh, 1997, pp. 47–9). The Lufthansa–SAS alliance, which was approved by the Commission in 1996 set important precedents which have been followed in subsequent cases. The most significant are – October 1995, KLM and Air UK, cleared August 1997 – December 1999, Lufthansa and Austrian airlines, cleared July 2002 – March 2000, bmi British Midland with Lufthansa and SAS, cleared June 2001 – November 2001, Air France and Alitalia, cleared April 2004 – July 2002, British Airways, Iberia and GB Airways, cleared December 2003 – July 2002, British Airways and SN Brussels Airlines, cleared March 2003. In each case approval was granted for six years from the date of notification,18 and conditions were attached similar in nature and intent to those which were applied to remedy the anti-competitive effects of Lufthansa’s alliance with SAS. The long interval between notification and clearance, typically 18 months or so, is required for the Commission to examine each case on its merits and negotiate appropriate conditions with the airlines concerned. Since Regulation 1/2003 became effective, the Commission has cleared a number of alliance cases, including Austrian Airlines/SAS (Commission 2007d). It has also been increasingly assertive in attempting to uncover and prosecute suspected cartels. In December 2007, it laid formal charges against a number of airlines, including British Airways, Lufthansa, SAS, Japan Airlines and Air-France KLM for allegedly fixing the price of their

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cargo services. Then, four months later, making use of the greater powers of investigation extended to it under the new Regulation, it launched dawn raids on Lufthansa, KLM and Alitalia on suspicion of a cartel on passenger services on flights between the EU and Japan. Cooperation – transatlantic alliances Until 1 May 2004, the Commission used its powers under Article 85 (ex 89) to investigate cases which appeared to infringe the principles underlying Articles 81 and 82 (ex 85 and 86), and to require the member states to take the measures needed to remedy any such infringement. It was under this interim competition regime, for example, that the Commission investigated several major international alliances, including the Oneworld Alliance (BA, American and others), the Star Alliance (Lufthansa, SAS, United and others) and Skyteam (Air France, Alitalia, Czech Airlines, Delta Air Lines and others). However, an important effect of the new anti-trust regime was to extend the implementation of Articles 81 and 82 to routes between the EU and third countries, so giving the Commission full enforcement powers over international air transport. Thus, when in 2006 the Commission opened its review of the Skyteam Alliance (Commission 2007d), which was joined by Continental, KLM and Northwest in September 2004, it did so under Regulation 1/2003. On balance the Commission has taken the view that alliances ‘generally present benefits for the consumer, but regulators must ensure that they do not result in the elimination of competition on specific routes’.19 For example, the alliance between KLM and Northwest (now subsumed into Skyteam) supplied 88 per cent of the market between Amsterdam and Detroit, but the Commission concluded that no remedies were needed, since there were no structural barriers to entry in terms of slot constraints or regulatory barriers, and there was extensive indirect competition to keep prices down. The Commission was more concerned about the barriers to competition with the Star Alliance partners on services between Frankfurt and four US cities, but accepted commitments from the parties to make slots available for up to two daily competing services between Frankfurt and Washington, and one each on the other three routes, together with access to the Star Alliance’s FFP and interlining facilities. The Commission did not have to deliver a final verdict on the proposed alliance between BA and American, which was abandoned, or rather reduced to a code-sharing arrangement, after the US DoT demanded the surrender of too many slots at Heathrow, but a draft letter of comfort which was leaked to the Press in 1997 suggested that the Commission had been looking for similar concessions (Financial Times, 28 July 1997, cited in Kyrou 2000). Cooperation – block exemptions The wide-ranging block exemptions granted by the Commission under Regulation 3976/87 (see Argyris 1989, pp. 19–22), as amended by the second

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and third packages, have played an important role in shaping the transition to full liberalization.20 As discussed earlier, this measure was ‘an important element of the delicate balance which [lay] at the heart of the air transport package. On the one hand, the package progressively relaxe[d] regulatory constraints on fares, capacity and market access within the Community … thus creating an environment in which airlines [were] freer to compete on their merits, while at the same time the procedural regulation [gave] the Commission effective power to enforce the competition rules. On the other hand, the Council wishe[d] to ensure that the transition to this more competitive environment would be smooth thus giving the industry time to adapt’ (Argyris 1989, p. 19). In practice, the Commission has used block exemptions as a targeted mechanism to secure continuation of the important consumer benefits that it considered could only be achieved by cooperation. Interlining and consultations on passenger tariffs within IATA were two areas to which the Commission devoted considerable attention. It adopted a new set of regulations in the wake of each of the packages. The first three covered capacity planning, revenue sharing, tariff consultation, slot allocation, CRSs and ground handling services (Argyris 1989, pp. 22–32).21 Consultation on cargo rates was added to the list of categories under the second package. The Commission duly issued three block exemptions on 2 December 1990 (Commission 1991a, 1991b, 1991c). The third package further extended the scope of the block exemption regulation; Council Regulation 2411/91 introduced amendments to the categories of agreements, and extended the period of validity of the block exemptions. The block exemption concerning ground-handling services had not proved effective and was not replaced. The other two (Commission 1993 and Commission 1992f) were adopted only after the Council had agreed legislation on slot allocation and CRSs (see Chapter 6) to ensure consistency. In its 1996 report on the impact of the third liberalization package, the Commission could congratulate itself that, with block exemptions playing no small part, ‘liberalization has happened in a progressive way and without major upsets. This contrasts with the situation that the United States experienced at the time of the deregulation of the aviation market. The Community has found the correct balance between competition and control mechanisms’ (Commission 1996f, p. 1). The balance continues to be contested, however, not least within the Commission itself – see, for example, Commissioner Neelie Kroes’s proposal in October 2006 to withdraw the block exemptions granted to IATA passenger tariff conferences and to its slots and scheduling conferences (IP/06/1294).22 Concentration – mergers and acquisitions23 Commission intervention in this area has been both politically and commercially sensitive, as reflected in the vehement reactions of the involved

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parties or those of their competitors, as well as the number of decisions challenged before the ECJ.24 Not only does it involve the Commission in imposing control over a traditional tool of member state industrial policy, but it has given the Commission an important influence over industrial restructuring, since the larger airlines in particular have used alliance building and the acquisition of smaller carriers to position themselves in the single market. The Commission’s approach has shown remarkable continuity since the late 1980s: it has entered into discussions with the parties concerned, culminating in the signing of an agreement that allows the acquisition to proceed, subject to certain undertakings designed to ensure that the merged entity will face competition in relevant markets. The extent to which it has been successful in actually achieving the latter is, however, open to question. The Commission’s first cases pre-date the Merger Regulation. They involved a first wave of mergers when flag carriers acquired lesser competitors aimed at securing the domestic market and preventing them from falling into the hands of foreign competitors. The first involved the merger of British Airways with British Caledonian, which the UK Monopolies and Mergers Commission (1988) had already approved, requiring BA to surrender several BCal route licences, including all domestic and most continental rights, as well as 5000 slots at London-Gatwick. It also recommended that BA should not oppose licence applications from airlines wanting to compete on other routes not restricted by bilateral agreements. The takeover did not eliminate competition either on long-haul international routes, where Virgin Atlantic had emerged as a more effective competitor than BCal, or on European and domestic routes where British Midland Airways and others were active. However, the Commission, which was concerned about intra-European competition, required BA to give several additional undertakings, including some relating to BCal’s European route licences (1989 4 CMLR 258; Goh 1997, p. 82).25 This was a landmark decision ‘not only for BA but for all the other airlines of the EEC’s Member States, in that it was the first time that the Commission had flexed such a powerful muscle. It proved how serious Brussels was in its desire to see a completely liberalized European civil aviation scene by 1992’ (Reed 1990, cited by Staniland 2008, p. 223). Conditions similar to those imposed on BA were applied by the Commission when Air France acquired UTA in 1990, proceeding to a full merger in 1992. Since the two airlines had jointly owned Air Inter, the acquisition of UTA also gave Air France full control of France’s principal domestic airline, which was fully merged into Air France from 1997, when all domestic services were opened to full EU competition. The French authorities were required to give undertakings that another French airline would be authorized to compete with Air France on routes beyond the Community, and with Air Inter on France’s eight most important domestic routes. Air France was also required

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to withdraw from TAT, thus clearing the way for BA to acquire the 49.9 percent shareholding, which raised the stakes in the battle of Orly (see earlier discussion). The Merger Regulation (Regulation 4064/89) introduced greater clarity into the Community’s handling of concentrations (Council 1989e). Its aim was to create a ‘one-stop shop’ for the examination of mergers with significant cross-border effects. It gave the Commission responsibility for treating any merger of a Community dimension, that is, involving undertakings with a combined aggregate worldwide turnover in excess of €5000 million, and aggregate Community-wide turnover of at least two of the undertakings in excess of €250 million. It also imposed strict procedural rules, including deadlines, on the Commission’s investigation of cases.26 The Commission’s general approach to concentrations remained relatively unchanged under the Merger Regulation, though the cases it has considered have been more varied, reflecting a growing diversity of airline strategy. Domestic takeovers have continued to feature and the Commission has been concerned to ensure that competition will not be driven out by any proposed acquisition. Thus, for example, in 1991 it approved KLM’s raising of its stake in Transavia from 40 to 80 per cent, although the Dutch flag carrier already had an interest in Martinair, the main Dutch charter airline, in return for undertakings by the Dutch authorities to liberalize the licensing both of scheduled services from Amsterdam and of charter services (this was before full liberalization was required under the third package), and KLM were required to refrain from acquiring any further interest in other Dutch airlines (Goh, 1997, p. 83–4). However, in 1998, it refused KLM’s offer to purchase Nedlloyd’s shares in Martinair, which would have made KLM the sole owner. The Commission has also ruled on cross-national mergers. The latter have become increasingly frequent since the early 1990s, as during a second wave of merger activity Community carriers have sought to expand their networks or third-country airlines have attempted to establish footholds inside the Community. Its approval in 1992 of Air France-Sabena, subject to undertakings on the part of the two parties in regard to Brussels/Paris, routes to Hungary and Turkey, and routes to Africa, on which it was expected to have an effect (IP/92/792), offers an example of intervention in relation to the first case. When British Airways acquired a shareholding in TAT in the same year (IP/92/978), it raised no objection to the merger.27 In 1995 the Commission approved Swissair’s acquisition of a 49.5 per cent stake in Sabena on the basis of undertakings by the two governments to liberalize services on routes between the two countries, commitments by the two airlines and an undertaking on the part of Swissair to terminate its cooperation with the European Quality Alliance group (Commission 1999b). For many years it was thought that any transnational merger between Community airlines with significant route networks outside the Community

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would be precluded by bilateral agreements under which the exercise of traffic rights was confined to the bilateral partners in each agreement. This remains the formal position, although the Commission has begun to have some success in negotiating agreements with third countries which allow any Community airline to use the rights which have been negotiated bilaterally (Chapter 8). At the same time, the airlines and national aviation authorities directly concerned have already had some success in negotiating their way around this obstacle, both with the Commission and with their principal bilateral partners. The most significant development of this kind has been the authorization of the merger between Air France and KLM, which created what JeanCyril Spinetta, Air France’s CEO, called ‘the first single European market airline’ (speech at Columbia University Business School, 16.11.2004) the world’s biggest airline in terms of passenger-kilometres (Chapter 10). In a carefully crafted operation, designed to ensure that KLM’s international traffic rights are preserved, the French airline has a majority share in a new joint-holding company. The merger was approved by the Commission in little more than two months, under conditions similar to those applied to alliances. It investigated the probable impact on 17 short-haul and 73 longhaul routes on which one or both carriers (and/or their partners) operated services, and concluded that there were 14 on which the merger would significantly reduce competition. It agreed to authorize the merger on condition that the parties surrendered 94 slots at Amsterdam and Paris (CDG) to allow a new entrant to mount a competitive service of up to six return flights daily on that route, as well as a daily flight between Amsterdam and New York (Commission 2003; IP/04/194 11.02.04). A novel undertaking was also given to enhance the competitive attractions of the fast rail service between Paris and Amsterdam by making provision, on a basis similar to interlining, for tickets which would allow a passenger to travel one way by train and the other by air. The Commission also authorized Lufthansa’s acquisition of Swiss International Air Lines Ltd, the airline created in 2002 from Crossair, the Swiss regional airline and what was left of the once highly regarded Swissair, Switzerland’s former flag carrier. Approving the merger in 2005, the Commission required the airlines to surrender slots at eight congested airports in Switzerland, Germany and Scandinavia in order to make room for competition to emerge (IP/05/837). Mergers involving non-Community airlines form a third category and underline the extra-territorial reach of Community competition rules. The first cases concerned Delta and Pan Am. Though they were both US airlines, their turnover within the Community reached the threshold set by the Merger Regulation. The Commission concluded that due mainly to the competitiveness of the transatlantic market the merger would have no significant effect on competition.

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The Commission’s decisions on airline mergers have not all been positive. In June 2007, the Commission refused to authorize Ryanair’s proposed takeover of the Irish flag carrier, Aer Lingus (IP/07/893). The merger would have created a dominant position on 35 routes operated by the two parties affecting 14 million passengers. Although Ryanair had proposed remedies, including the surrender of slots, the Commission considered them insufficient to generate the competition that would have been lost. The Commission’s decision provoked a predictably scathing response from Ryanair’s CEO, Michael O’Leary, who called it ‘politically motivated, designed to appease the narrow interests of the Irish government, which was the only party – other than Aer Lingus itself – to object to the merger’.28

State aid Although the extent to which it has been a driver of change has sometimes been exaggerated, the control of state aid by the European Commission in the single market has been an important regulatory instrument and key mechanism through which Community action has brought about change in the sector. Since the early 1990s, governments have no longer been able to freely offer the financial support to their airlines that characterized the industry and over that same period most of Community’s state-owned carriers – British Airways, KLM and Lufthansa are among the exceptions – have been involved in transactions investigated by Brussels (see Table 9.2). In addition, while Article 222 (now 295) provides that the Treaty ‘shall in no way prejudice the rules in Member States governing the system of property ownership’, the control over state aid has often been cited as a factor that has led the management of poorly performing carriers to conclude that their company’s prospects might be more positive if restructured and in the private sector.29 Since it involves not only the exercise of authority over governments, but scrutiny by a supranational body of the intimate relationship between state and flag carrier that lies at the heart of traditional policies, it has also been one of the most controversial.30 Commission decisions have routinely provoked criticism both from the parties directly involved, and from their competitors. The intense political sensitivities involved have been reflected in accusations levelled against the Commission of excessive zeal and doctrinal purity on the one hand, and pragmatism and undue leniency, on the other, as well as the number of decisions, notably regarding Olympic and Alitalia (see discussion later) that have been the object of serial litigation. The Community’s competence under the Treaty is far-reaching and expansive (Chapter 4).31 Article 87(1) (ex 92(1)) of the Treaty provides that if a state aid distorts competition by favouring certain undertakings and affects trade between member states, it is incompatible with the common market, unless it qualifies for exemption under the provisions of Article 87(2) or (3)

Airline (s) concerned

Sabena Air France Air France Iberia Aer Lingus British Airways1 TAP – Air Portugal Air France

Air France Olympic Airways

KLM1 Iberia Sabena Lufthansa2 Air Outre Mer Iberia Alitalia Olympic

Iberia Sabena

Date of Commission Decision

July 1991 November 1991 July 1992 July 1992 December 1993 1993 July 1994 July 1994

July 1994 October 1994

1994 January 1995 May 1995 May 1995 July 1995 January 2006 July 1997 August 1998

August 1998 October 2001 October 2001

€ 110 million € 125 million

FRF 300 PTA 87billion LIT 2750 billion GRD 40.8 billion

PTA 87 billion BEF 9.5 billion

Constitutes state aid: conditional approval Not classified as state aid Commission guidelines following 11 September terrorist attack in New York and Washington

Not classified as state aid Not classified as state aid Not classified as state aid Not classified as state aid Does not constitute state aid Constitutes state aid: conditional approval5 Constitutes state aid: conditional approval (Commission amended decision October 2000)

Constitutes state aid conditional approval Subscription by Caisse des Dépôts et Consignations-Participations constitutes state aid and should be repaid3 Constitutes state aid: conditional approval4 Constitutes state aid: conditional approval, but Commission initiated Article 93 (2) proceedings in April 1995 in regard to second instalment

ESC 357 billion FFR 1.5billion

FFR 20 billion GDR 635 bn

Constitutes state aid: conditional approval Does not constitute state aid: approved Does not constitute state aid: approved Constitutes state aid: conditional approval Constitutes state aid: conditional approval

Commission decision

BF 56.4 billion FFR 2 billion FFR 3.84 billion PTA 120 billion £IRL 175 million

Amount

Table 9.2 European Commission decisions on capital injections and state aid in air transport, 1991–2008

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Multiple carriers

Multiple carriers

Alitalia

Olympic Airways

Cyprus

2002

2003

July 2004

September 2005

March 2006

Olympic Airways

Alitalia Olympic Airways

June 2002 December 2002

2006

TAP

April 2002

€96 million

€400 million

€1.4 billion €153 million

(Continued)

Commission took decisions on compensation schemes for several EU airlines under guidelines following 11 September 2001 attack (see SEC(2004) 658: 132–3) Constitutes state aid: Commission conditional approval CFI partially annulled Commission decision (Case T-68/2003) Constitutes state aid: Commission conditional approval Commission referred Greece to ECJ for failure to comply with September 2005 decision in relation to aid received 1998–2002

Does not constitute state aid Commission declared illegal some of the aid previously granted by the Greek and further aid because unnotified aid incompatible with the Treaty. It called on Greece to recover aid paid since August 1998 Commission took decisions on compensation schemes for several EU airlines under guidelines following 11 September 2001 attack (see SEC(2003) 467: 125–6)

Does not constitute state aid.

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Privatization plan

€300 million

Alitalia 2

Commission ruled that Olympic continued to receive illegal state aid since decision September 2005;6 Commission partially closed investigation opened in December 2007. Sale of Alitalia’s assets does not constitute state aid Unlawful state aid, incompatible with the common market

€850 million

Olympic Airways and Olympic Airlines 2

Alitalia 1

Plan including privatization constitutes state aid: conditional approval

Commission decision

Privatization plan

Amount

Olympic Airways and Olympic Airlines 1

Airline (s) concerned

Notes: 1 Private airlines raising new capital from shareholders through rights issues, etc.; 2 German government contributed DM 1.55 billion to Lufthansa pension fund prior to privatization; 3 Air France appeal – Case T358/94. 4 Decision later annulled by CFI, but Commission decided July 1998 to adopt a new decision authorizing the same amount and clarifying its position regarding the two points raised by the Court. 5 Following successful appeal by the Italian government before CFI (2000), Commission adopted new adopted a new decision in July 2001 correcting the errors of assessment and declared the aid compatible with the common market. 6 Confirmed by ECJ September (2008) that Greece had failed to comply and had granted illegal aid.

November 2008

September 2008

Date of Commission Decision

Table 9.2 (Continued)

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(ex 92(2) or (3)) (see later discussion). The ECJ has interpreted ‘state aid’ very broadly both in terms of the source of funding, which includes payments from any public authority or undertaking at any territorial level (Goh 1997, pp. 201–3), and its form, which covers direct operating subsidies, capital injections, loan financing and loan guarantees, as well as tax concessions, exemptions, and compensation, and the sale of assets for less than the market price. It is the Commission under Article 88 (ex 93) that has responsibility for enforcement of the state aid rules. Formally, the Commission acts autonomously, independent of the Council and the Parliament, and subject only to the jurisprudence of the Court, which has tended to support the Commission (Cini and McGowan 1998, p. 155), and its own judgement as to what is politically acceptable. However, as in other areas (Morgan and McGuire 2004), it has in practice engaged closely with stakeholders. The fact that the treaty provisions on state aid are directly applicable, and that their terseness leaves considerable scope for interpretation by the Commission, only strengthens it further. In this regard, the exemptions for which Articles 87(2) and (3) (ex 92(2) and (3)) provide are of great importance. The limited range of mandatory exemptions in Article 87(2) (ex 92(2)) has not been relevant to air transport, but the scope for discretionary exemptions under Article 87 (3) (ex 92(3)) provides the legal foundation for the exemptions which have been granted to state aid for air transport under successive guidelines issued by the Commission. In particular, Article 87(3)(c) (ex 92(3)(c)) provides for the exemption of ‘aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common market’. The Commission’s interpretation of these provisions in the case of air transport has been a key issue. Influenced by the processes of on-going restructuring in the industry since the early 1990s, and reflecting the accumulation of experience by DG TREN, the way that it approaches cases has undergone considerable development. In its first set of guidelines, included with the first package of liberalization measures in the Commission’s 1984 Memorandum, exemptions would apply only where the aid forms part of a time-limited restructuring programme aimed at restoring the airline to financial viability.32 The aid should be proportionate, transparent and controllable, and it should not transfer the company’s difficulties to other member states, in particular, by privileging the airline’s debt–equity ratio in relation to its competitors (Balfour 1993, p. 200). These aims were designed to ensure that the aid was used to promote necessary restructuring and not to subsidize competition. By 1992 the Commission had gained some experience in the handling of state aid cases. It conducted an evaluation of state aid in the industry (Commission 1992g) and attempted to develop criteria that were more

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robust. It resisted an attempt by the member states in the second half of 1992 to have the Council adopt a Resolution laying down new guidelines, but did set up a High-Level Group led by Hermann de Croo, the Belgian Minister who had won wide respect for his handling of the Council at the time of the first package in 1987, to assess Community aviation generally (including state aids) and to make recommendations. Its report, Expanding Horizons (Commission 1994a), recommended the strict application of the Treaty provisions on state aid, including a clear and genuine ‘one time, last time’ condition, and a requirement for aid to be linked to a restructuring plan designed to return the airline to ‘commercial viability’ within a defined period, leading ultimately to privatization. The Commission’s revised guidelines, which followed in December 1994 (Commission 1994c), were based on the principle that the Commission should ‘establish with reasonable certainty that the programme financed by the State would be acceptable to the market economy investor’. The Commission could not insist on privatization or indeed exclude a priori any consideration of further aid since such an approach would be inconsistent with the Treaty (Frühling 1992), but it did establish a presumption, to be based on written assurances, that ‘restructuring aid should normally need only to be granted once’. Any further aid would be approved only under exceptional circumstances, unforeseeable and external to the company; and after 1997, when the cabotage provisions of the third package came into effect, any such aid would additionally be subject to very restrictive conditions. Direct subsidies towards the cost of operating services were totally excluded unless associated with the exemptions from competition which might apply on routes operated under a PSO. At least in some respects, the guidelines appeared to institutionalize established practice rather than to herald a new departure. For example, the Commission began to apply the market economy investor principle some years before the 1984 document was replaced by the 1994 guidelines. (The guidelines were published in December 1994.) The Commission used this test in an initial phase of its investigation to decide whether, when it was notified of a state’s intention to transfer funds, the prospects of the airline were so positive that a private investor would plausibly make a similar investment.33 If satisfied that this is indeed the case, the Commission can decide that the transaction did not count as state aid and raise no objection. If not, it opens a second phase investigative procedure. A detailed letter is sent to the government of the member state concerned and published in the Official Journal, with an invitation to third parties to submit comments. The Commission then determines whether the state aid meets the conditions under which it qualifies for an exemption and can either clear the transaction unconditionally, attach conditions or require that some or all of the aid be repaid. As with mergers, the Commission has typically, following discussions with the parties concerned (see Table 9.1), given a conditional

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authorization and insisted on all or most of the following requirements (Commission 1994c): – the aid envisaged should form part of a comprehensive restructuring programme, aimed at restoring the short-term viability of the carrier cost reduction or return to profitability – capacity reduction or constraints on expansion where planned, to form part of the restructuring programme – no fleet expansion – aid not to be used to acquire other airlines – not to act as a price or to increase direct competition with other airlines – no government interference in the airline’s management – no further aid envisaged or likely to be required in the future – aid to be transparent Where the aid is paid in tranches, the Commission must give its approval for each tranche, which is subject to the progress made and the conditions being respected. Only some elements of thi approach, which has now become standard, were evident in its early decisions, however, which attracted criticism for their content and the failure of the Commission to publish detailed notices. In its first major investigation in 1991, the Commission approved state aid to Sabena, subject to a number of conditions: that the aid was part of a restructuring programme, that Sabena would be treated at arm’s length from the state and that the aid would be the last (Commission 1991c). However, in 1991 and 1992 it concluded that two injections of state funds into Air France were not state aid and might have been made by a private investor under market conditions (IP (91) 1024, IP (92) 587) and, also in 1992, allowed state aid to Iberia under conditions similar to those imposed in relation to Sabena (IP (92) 606). These decisions drew two main criticisms. The first was that the Commission had announced its decisions in press releases and not in formal notifications, so that its reasoning could not be subject to public scrutiny. The second was addressed to the Commission’s conclusion that Air France’s long-term prospects were sufficiently good for a private investor to have invested such sums in 1991 and 1992. In the wake of these two decisions, the Commission took a somewhat more rigorous approach. Its handling of Aer Lingus in 1993 is regarded by many as a watershed (see, e.g., Balfour 1994, p. 1040, and Soames and Ryan 1995, p. 291, who attribute the change to ‘an intensive lobbying campaign by Aer Lingus’s competitors’). Though similar to the approach followed by the Commission in its decisions on Sabena and Iberia, the Commission imposed far tougher conditions on Aer Lingus, and published a formal decision (Commission 1994b). Also illustrative of an apparently tougher

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approach, the Commission opened in the same year an investigation into the acquisition of bonds in Air France by CDC-Participations, an investment subsidiary of a state-owned bank, the Caisse des Depots. It concluded in July 1994 that the purchase was illegal state aid and should be reimbursed by the state (Commission 1994c).34 The Commission applied the same approach between 1994 and 1997 when in the course of four years it considered transactions involving TAP, Air France, Olympic Airways and Alitalia (see Doganis 2001, pp. 201—9; Staniland 2008, pp. 198–210). All four airlines were in dire financial straits and in all four cases the respective member governments submitted restructuring plans aimed at achieving solvency to justify the proposed cash injections. The Commission gave its approval to each, subject to a long list of undertakings on the part of airline and government.35 In the case of Air France, it insisted that the funds should be used only for Air France and not its subsidiaries or affiliates, that it should limit any increases in capacity, that it should not engage in predatory pricing or expand its European network and that the French government should allow full liberalization of its domestic market (Commission 1994d). However, the fact that Air France had received cash injections as recently as 1991 and 1992, and the magnitude of the sum involved (20 billion French Francs or 3bn), provoked a storm.36 Indeed, even within the College, two Commissioners reportedly voted against the decision. The UK government, British Midland and six other airlines led by British Airways decided to file suit. Although they eventually won their case (in 1998), the aid package was reauthorized on new grounds (Commission 1998d, pp. 97–100).37 With respect to Olympic Airways, the Commission also imposed a series of requirements, though its 1994 decision turned out to be the first stage in a long-running saga (see Doganis 1991, Featherstone and Papadimitriou n.d.). Olympic committed itself to a restructuring plan, which the Greek government undertook to oversee. Each annual tranche was linked to the continuing implementation of the plan and subject to Commission approval (Commission 1994g). However, when in 1996, the plan ran into difficulties, the Commission refused to release the second tranche. Two years later, following a change of government and a new attempt to restructure the airline, the Greek government requested the release of the two remaining instalments. It accepted that the state aid had been illegal and agreed to a reduction in the global sum to be paid to the airline, while the Commission agreed to the immediate release of the second, but made the third conditional on the implementation of the restructuring programme. This was not to be the end of the story, however (see later discussion). Similarly, in the case of Alitalia, the conditions included stipulations that the Italian government should behave like a normal shareholder; give no further grants or subsidies to the airline nor grant it preferential treatment; and ensure Alitalia’s compliance with the conditions set down by

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the Commission in regard to the company’s restructuring plan, and the sale of its stake in MALEV, the Hungarian flag carrier (Commission 1997). This decision also led to litigation. The Commission’s decision was successfully contested by Alitalia (Court of First Instance 2000). The Commission re-examined its original decision and issued a second (Commission 2001c), which the airline also contested, but this time the Court of First Instance found against the company (Court of First Instance 2008a). In the same period, the Commission approved a (second) cash injection in the case of Iberia. The Commission cleared the transaction on the grounds that it met the market economy investor principle and satisfied itself that the ‘one time, last time’ rule had not been breached, since it reasoned that ‘a capital injection into a state-owned air carrier by the Member State is only subject to the one-time-last-time principle if, on the basis of the market economy investor principle, it has been demonstrated that it amounts to state aid’ (Niejahr and Abbamonte 1996, p. 5). When approached in January 1995, the Commission had indicated that it could not give its approval, since the company had received restructuring aid in 1992 and could not justify a second transaction. However, following discussions with Iberia and the Spanish authorities, the Commission agreed to a revised proposal, where the size of the capital injection was reduced and the company agreed to sell its shareholdings in South American airlines. Since the future cash flows could be anticipated to exceed the capital outlay, the Commission decided that state aid was not involved and raised no objections (Commission 1996e). Despite the hope expressed by Neil Kinnock, Transport Commissioner 1995–2000, that the Alitalia decision would ‘close the cycle of “one-time, last-time” state aid’ (cited in Staniland, 2008, p. 209), the issue has subsided, but not entirely disappeared. A minority of airlines, suffering from what Doganis diagnoses as ‘stressed airline syndrome’ (2001, p. 188) failed in the 1990s to thorough-going restructuring, continued to make substantial losses,38 and returned to seek further financial assistance from the state. The Commission’s approach in these cases has been fairly rigorous. In January 2001, the Commission allowed the Belgian government to invest €100m in Sabena for restructuring, but this was more than matched by €150m from Sabena’s partner Swissair, which suggested that it could be justified on the market economy investor principle. In the case of Alitalia, which undertook restructuring in 2005, the Commission granted conditional authorization (OJ L 69/1 of 08 03 2006) and subsequently signalled (in 2008) that new owners would not have to repay state aid as part of any salvage plan (N 510/2008). Following intense speculation about its fate, Alitalia was finally sold to Compagnia Aerea Italiana s.r.l., formed by Intesa Sanpaolo (an Italian bank) and a group of Italian entrepreneurs in late 2008. It merged with AirOne, an independent Italian carrier in January 2009 and, in the same month, Air France-KLM took a 25 per cent shareholding in the company.

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A new approach from the Greek government concerning Olympic produced a quite different outcome. In December 2002, following a new attempt to revitalize the airline, a new application was made to the Commission. DG TREN produced a damning report of the handling of Olympic’s ‘restructuring’ since 1994. While falling short of asking Olympic to return all state aid it had received from the Greek government since 1994 (worth over €1.5 billion), the Commission concluded that such aid was ‘incompatible’ with common market rules as the conditions (i.e. the restructuring of the airline) upon which it was initially authorized were never met. Focusing on fresh allegations of illegal state aid since 1998, the Commission concluded that the Greek government should recover from Olympic the sum of €153 million that the airline received as aid in the form of preferential tax treatment over the period 1998–2002 as well as asking for the return of €41 million that Olympic received in the summer of 1998 as part of the second instalment of the 1994 rescue plan (Commission of the EC 2002b). Then when Olympic Airways sought capitalization in the run up to a proposed privatization, the Commission delivered a negative decision and sought recovery of state funds (C11/2004 of 14 09 2005). Three years later, it ruled again on state aid provided as part of a restructuring package designed to lead to the privatization of Olympic Airlines and Olympic Airways Services.39 On this occasion, it offered its approval conditional on the Greek government’s compliance with specified undertakings and closed an investigation it had opened in 2007. In a separate, but related decision, it concluded that since its earlier decision of 2005 the two airlines had received illegal state aid of more than €850m (IP (08) 1336). Three other types of decisions made by the Commission are worthy of note. First, the Commission has used its state aid powers to eliminate unfair advantage extended to legacy carriers. Thus, in 1998, following a judgement against them in the ECJ, the Belgian authorities were finally obliged to end their practice of providing hidden state aid to Sabena through a discriminatory scale of landing charges. (The objection had first been raised by British Midland in 1994.) In 1999 the Commission ruled against similar abuses at Portuguese and Finnish airports, and they challenged the scale of financial support proposed for a Sabena training programme. Second, it issued guidelines on the state underwriting of insurance when in the autumn of 2001 a general economic downturn suddenly became an acute crisis following the 11 September attack on the World Trade Centre in New York. US airlines received US$ 5bn in grants and US$ 10bn in loan guarantees, but the Commission said it would hold the line against anything more than compensation for heightened security costs and business lost during the fourday shutdown of US airspace, together with the cost of emergency insurance cover which governments were forced to underwrite when normal cover was withdrawn by the insurance companies.

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Third, the Commission has taken action against the advantages offered by sub-national governments to non-legacy airlines to encourage them to use local airports for the purposes of economic development. In 2004, the Commission (2004b) ordered Ryanair to reimburse €4 million of a €15 million package, which included a 50 per cent reduction in landing charges, reduced ground-handling charges and subsidies towards the cost of training and recruiting staff, including pilots, granted to the carrier by the Walloon regional government to encourage it to use Charleroi airport. (Charleroi, a small town in a depressed former coal-mining area, at 40 km away is just close enough to Brussels for Ryanair’s low-cost services to London Stansted to compete with Sabena’s services from Brussels.) Denouncing the Commission as ‘the evil empire’, Ryanair terminated its services to the airport and warned darkly of the end of low fares travel (Castle 2004). Thereafter, though acting in response to jurisprudence in Aéroports de Paris (see Commission 2007e), the Commission published a set of state aid guidelines dealing specifically with the financing of airports and start-up aid to airlines departing from regional airports (Commission 2005d). These make limited provision for state aid to be approved both for the financing and operation of new airport infrastructure, and start-up aid for new services for no more than three years, or five in the most disadvantaged regions. Since that date, Ryanair has successfully challenged the Commission’s 2004 decision. In December 2008 the Court of First Instance (2008b) upheld the airline’s appeal, ruling that the Commission had not considered the package offered by the Walloon region and Charleroi airport together, and had applied the market economy investor principle to the airport only. The implications of the judgement were, however, contested. While Ryanair claimed that it had vindicated the airport’s business plan and called on the Commission to drop its other cases against airports and focus on ‘“real and blatant breaches” of the state aid rules by Europe’s flag carriers’ (Done and Tait 2008), Commission officials contended that the judgement concerned the methodology, not the private investor test and that ‘other disputes over assistance given by secondary airports to Ryanair should not be affected’ (Done and Tait 2008). Though it is difficult to measure its effects with precision, the control of state aid by the Commission has had far-reaching consequences for European aviation. The direct impact on competition may be mixed (Doganis 2001, p. 207), but the state aid rules cast a long shadow and their application, especially since the mid-1990s, has encouraged a transition to a new era where airlines are expected to be competitive and can no longer rely on government subsidy or bailout. In several cases – Sabena, Olympic, Swissair – the commercial pressures which could no longer be relieved by repeated doses of state aid have led to bankruptcy, and although new airlines have often risen from the ashes of the old, they have generally been less closely identified with the national government, and less ambitious

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commercially. In a further stage, the remains of Swissair have been absorbed into Lufthansa. The longer-term future of Olympic, Alitalia and Aer Lingus remains uncertain, but it seems that the increasingly rigorous application of the state aid rules by the Commission, together with a growing reluctance on the part of national governments to write blank cheques for a national airline, is gradually yielding to market-based provision of air services in Europe. It may be the case that airlines are not yet regarded, in the words of a Commission official quoted in the Financial Times in, 19 July, 1994, as no more glamorous than a bus service, but a European industry (see Chapter 10) is emerging in the place of a complement of all-purpose national airlines,40 and the Commission’s application of the state aid rules has played its part in bringing this about.

Conclusion As the discussion in the chapter demonstrates, the Commission’s dramatic emergence as a supranational regulator, responsible for enforcing single market regulations in aviation and the Community competition rules, have had a profound and far-reaching effect on the sector. Virtually all European airlines and many member governments have been directly affected by its decisions, while its presence as a regulator exerts a less visible but nonetheless important general influence tending in a liberal direction. Although it may not have delivered a perfectly competitive market nor found a way to remove the last vestiges of protectionism, the Commission has through its interventions contributed to the transformation of European aviation. It could not, for example, prevent massive injections of state aid in the 1990s as the industry restructured to face the challenge of a more competitive environment, but the conditions attached, including the application of the market investor principle, have fostered a change of culture, loosening the ties between the state and its airline, encouraging a progressive disengagement from state ownership, and even recognizing the possibility that some EU countries might no longer sustain an airline with a full range of international services. The Commission can also claim to have found a balance between the demands of competition within the Community and international competitiveness In announcing the Commission’s approval of the Air France–KLM merger in February 2004, Mario Monti, Commissioner for Competition, was quoted as saying: ‘The outcome of this case shows that the longawaited consolidation of the European airline sector can be done in full respect of competition rules.’41 The rules have been observed, remedies have been applied, and even if these have not necessarily generated vigorous direct competition in the home markets of the major alliances that seem to be forming around BA, Air France and Lufthansa, they are exposed to sharp competition from the new low-cost airlines which have been most

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successful in taking advantage of the market opportunities created by the liberalization packages and which in total account for about a fifth of traffic within the Union. Meanwhile the major national airline companies seem to have found ways to re-establish, within the context of international alliances that strengthen the position of European aviation in the global market, some of the cosy cooperative inter-company arrangements that characterized European aviation in the 1970s and 1980s. In this respect, the Commission’s decisions have also had an important international impact. By adopting, at least since the mid-1990s, a sympathetic stance in regard to alliances and mergers involving European carriers, the Commission has influenced the international restructuring of the industry and thereby contributed to the development of a global industry which is beginning to emerge from the essentially national structures founded on the Chicago and Bermuda agreements of the 1940s.

10 The EU and the Transformation of European Aviation

The preceding chapters have considered the emergence of the EU as an authoritative decision-making body in aviation, the origins and expansion of the common air transport policy, and the factors that lie behind these developments. European aviation has undergone a radical transformation since the Community became active in the sector in the late 1980s. This chapter examines the impact of the Union’s involvement in the sector on national policy, policymaking and the structure of the European industry. Governments, with very few exceptions, have abandoned the traditional policies of the post-war. The protectionism and state interventionism that characterized the industry have largely disappeared,1 and state action is no longer centred on the protection and promotion of a state-owned carrier. Governments have ceased to be owners and managers; are no longer the providers of the market opportunities on which air carriers depend; and decisions about routes, capacity and tariffs are made by airline companies according to their own commercial judgement. Changes with regard to the technical and operational aspects of aviation have been no less significant. Loose cooperation within traditional intergovernmental institutions has given way to more intense and programmatic interaction within new regional regimes with important supranational elements. Moreover, policymaking is no longer an exclusively, or even a predominantly, domestic preserve. Traditional policy communities have largely dissolved and the close relationship between government and flag carrier has been broken. Resource dependencies have been dramatically reconfigured with governments, airlines, consumers and other interests focused on EU institutions and agencies. Furthermore, the structure of the European industry has changed dramatically. A patchwork fragmented along national lines with international routes operated by flag carrier duopolies and domestic networks monopolized by a single airline has been replaced by a single European market. The distinction between scheduled and non-scheduled services has lost relevance. Although former national champions, reborn as ‘legacy carriers’, dominate the skies, they are no longer monopolists, 216

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but must compete with independent airlines and a host of new entrants, including low-cost carriers, that have become firmly established in the single market in air services. Domestic consolidation has been widespread, while carriers have forged partnerships and alliances of varying degrees of intensity with airlines inside the Union and beyond. This chapter discusses these changes and considers the extent to which changes in domestic policy, policymaking and the structure of the industry can be attributed to EU action. Utilizing a bottom-up approach to investigating domestic policy change – the chapter’s central focus – and drawing on discussions in Chapters 5, 6, 7 and 9, it argues that developments at Union level have been the key factors in economic regulation in three of the four member states selected for detailed investigation; namely, France, Germany and the Netherlands, and that its effects have been most far-reaching in France. The UK was also affected by the common air transport policy, but in some areas and with respect to some aspects domestic factors were the main causes of change. It finds that a more complex pattern of causation has been at work than is suggested by much Europeanization scholarship. In particular, it challenges the view that in areas of negative integration – where the EU removes national barriers, as opposed to positive integration, which involves the creation of new policies at the Union level – regulatory competition is the mechanism by which Union action brings about change (Knill and Lehmkuhl 1999). EU action has also altered how governments make policy in safety, organize air traffic management and negotiate ASAs with third countries. Impact of this kind which is process, rather than product, centred is not readily captured by existing analyses of Europeanization. With respect both to domestic policymaking and changes in the European industry, the Union has been more uniformly the source of change. How precisely change was effected, as well as its magnitude, has varied between the different areas of the sector.

The EU and domestic policy change The protectionist policies described in Chapter 3 have largely disappeared since the 1980s. European governments no longer attempt to pursue aviation and other (often unrelated) objectives through sponsorship of a national champion of the air. Former flag carriers, now near universally in private hands (see Table 10.1), face competition on domestic and international routes, and the presence of independent airlines has become a firm fixture. Although these changes have taken place over the same period that the Union has introduced a liberal regulatory framework, it cannot simply be assumed that they have been a consequence of EU action. Whether the EU has been responsible for the transformation can only be determined by careful empirical analysis. As well as the need to specify precisely what has changed, it is important to disentangle the causes that lie behind domestic change and to identify the mechanisms at work.

Partial privatisation of Air France 1999 and 2001. Float 82.4% (incl. 12.2% employees); French state After 2004, French state became minority share- 15.7%, Treasury stocks 1.9% holder in Air France-KLM

Privatisation 2008

Full privatisation 2008

Privatisation 1987

Founded by private and public investors 2002, following takeover of Sabena by Swissair

Plans to privatize announced 2009

Partial privatisation 2002

Partial privatisation 1994

Privatisation 2001

Air France-KLM

Alitalia

Austrian

British Airways

SN Brussels Airlines

CSA Czech Airlines

Cyprus Airways

Finnair

Iberia

Float 100% Main shareholders include: Caja Madrid – 23.45%, British Airways 13.2%, SEPI – 5.20%, El Corte Inglés – 2.90%

State 66.8%

State 69,62%; Private Investors 30.43%

Ministry of Finance 56.92%; Czech Consolidation Agency 34.59%; remainder owned by other Czech institutions

Private - SN Airholding, which merged with Virgin Express (2007)

Float 100%

Lufthansa 95.4%

Compagnia Aerea Italiana (consortium) 75%; Air France-KLM 25%

State owns 25.1% , employees 14.2%. Ryanair 29.82%

Partial privatisation 1996

Aer Lingus

Ownership (2009)

Privatization

Privatization and ownership of EU legacy carriers

Flag carrier

Table 10.1

218 Air Transport and the European Union

Privatisation 2009. Assets of failed flag carrier, Olympic Airways, sold in March 2009. New airline in operation since 1 October 2009

Partial privatisation 2001

Olympic Air

SAS

AirBridge, 99.95%

Swedish government 21.4%; The Danish government 14.3%; Norwegian government 14,3%. Private investors include Knut and Alice Wallenberg’s foundation 7.6%

Marfin Investment Group

Sources: Compiled by authors from airline websites, financial reports, annual reports.

Publicly owned

State 100%

Privatisation 2007

Malev

State 23.1%; Banque et Caisse d’Épargne de l’État (13.4%), Luxair Group and others (13.2%), Dexia/ BIL (13.1%), Lufthansa (13%), Banque Generale du Luxembourg - BGL (12.1%) and Panalpina World Transport (12.1%)

TAP Portugal

Historically, mixed private and public ownership

Luxair

Float 100%

Fully-owned subsidiary of Lufthansa

Partial privatisation 1994; full privatisation 1997 (1999)

Lufthansa

State 67.97%; 25.1% held by the receiver in bankruptcy SAirLines B.V.; employees 6.93%

Swiss International Airlines Mixed ownership until 2005. Takeover effected 2005–2008

Partial privatisation 1999; plans announced to further privatize between 2009 and 2011

Polish Airlines (LOT)

The EU and the Transformation of European Aviation 219

220 Air Transport and the European Union

The top-down approach – the dominant approach in the Europeanization literature – proceeds by summarizing EU action over a particular period and then seeking to establish the Union’s impact at national level by examining the changes that have taken place subsequent to EU intervention. However, as discussed in Chapter 1, this method of investigating change not only assumes or privileges causation by the EU over other possible sources whether domestic or international, but it is also of limited assistance in assessing the relative importance of the Union as measuring the extent to which the Union has contributed. In addition, comparing domestic policy between t1 and t2, the top-down approach reveals whether change has taken place, but it cannot detect at what point over the period in question change occurred. The bottom-up approach, developed in especially the writings of Goetz (2002), Radaelli (2003, 2004) and Dyson (2002), responds to these concerns and promises to provide a more accurate measure of when, how and to what extent the Union has been a factor in bringing about domestic policy change. The starting point for a bottom-up analysis is the development of domestic policy over a particular period with the aim of highlighting, where there is change, when it took place. This concern with time is central to the bottom-up approach’s claim to greater sensitivity. Whereas the topdown perspective essentially treats domestic change as an event, detected by comparing domestic policy at two points in time, usually before and after EU intervention, the bottom-up approach considers it a process.2 Proponents of the bottom-up approach consider analytically important not that change took place between t1 and t2, but the moment between these two points when it occurred. The ability to pinpoint change makes it possible to detect and disentangle the factors at work, and to establish the sequence in which they exerted their influence in order to arrive at an assessment of their relative impact. This has particular value for crossnational comparisons, where how late or early domestic change took place, and whether it was rapid or prolonged, may hold important clues about the influence of intervening variables or the relative importance of particular factors. Although the exercise may be motivated by a concern to discover whether Union action has caused changes in domestic policy, the method of proceeding does not presume causation by Brussels unlike the top-down approach. Indeed, one of the main proponents of the bottom-up approach proposes a three-fold test. Radaelli (2003) contends that the conclusion that the EU has in fact brought domestic change about is only warranted where EU action antedated domestic change (the sequencing condition), change would not have taken place without EU action (the counterfactual condition) and change was due to the EU action and not other factors (the alternative hypothesis test). The following section examines the changes that have taken place in the economic regulation of air transport in four member states and uses the

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bottom-up approach to assess the EU’s impact. Changes in other areas of policy are discussed thereafter. In the case of economic regulation, domestic changes are considered over the period since 1984 – the year in which the Commission brought forward the second memorandum. In the case of safety and air traffic management, the benchmark date is 1992. Economic regulation Inspection of the policies traditionally pursued by the four member states (aims, strategies and instruments deployed) and their preferences in regard to EU intervention, on the one hand, and the EU’s liberalization of air services, on the other, would suggest that EU action has had the greatest impact on France, that the Netherlands and the UK would be least affected, and that Germany would be located somewhere in between. These expectations are indeed confirmed by analysis of the changes in domestic policy since the mid-1980s. However, the bottom-up approach reveals that, though the EU was a key driver of change, other factors were also important. This is particularly clear with respect to changes in economic regulation and especially privatization. In Germany, the Netherlands and the UK, domestic factors, including ideologically inspired action on the part of a new government and the turn towards liberalization on the part of national officials, played a key role in policy change. In France, by contrast, Union action and intervention were the prime causes of change. International factors, specifically US pressure on member governments to agree open skies bilaterals, were important in France, Germany and the Netherlands, but in the case of France and Germany were so significant only because they followed earlier changes made in response to developments in Brussels. In the UK, by contrast, the US had far less leverage.3 Tracking domestic change over time and tracing back the causes also shows how the EU has exerted influence over national policy. The imposition of sectoral regulations and the implementation and enforcement of the competition rules rather than regulatory competition, which has been identified by some authors as the main mechanism prompting domestic change in market-making policy areas (see, e.g., Knill and Lehmkuhl 1999), have been the two main ways by which the EU has affected the member states. With respect to the former, the Union has brought about change in domestic policy directly in two ways: first, by depriving national governments of the regulatory instruments they used historically to shelter their carriers from competition; and, second, by creating new commercial freedoms that can be exercised by any airline that satisfies EU criteria for financial and technical fitness. It has also influenced domestic policy indirectly. By stripping protection from established airlines and making opportunities that were previously in the gift of the state available to independent airlines, it has allowed smaller carriers to gain access to markets from which they were formerly

222 Air Transport and the European Union

excluded, exposed previously protected airlines to the threat of competition and put pressure on the traditional relationship between state and flag carrier. In regard to the latter, aviation is now subject to the Community’s competition rules, when prior to 1987 it was effectively excluded from national competition rules. As well as proscribing anticompetitive behaviour on the part of airlines, the use of traditional tools such as mergers and state aid by member governments is monitored by, and subject to the approval of, the European Commission. Also in some areas, governments and in some cases airlines and other aviation interests are able to initiate proceedings before the ECJ where they believe that carriers or governments have acted in breach of their obligations under EU law. Finally, the bottom-up approach uncovers the complex causal processes that have been at work in some instances and shows how pressures from several sources have interacted to bring about change. This is particularly important with respect to privatization, where it is often argued that, despite the prohibition under Article 295 (ex 222) of the Treaty from privileging one form of ownership over another, Union intervention has been a key factor in compelling member states to shift away from public ownership.4 In the case of aviation, for example, restructuring programmes required by the Commission as a condition for authorizing state aid have often included a commitment on the part of the government concerned to reduce its stakeholding in the carrier. It could also be argued that the creation of the single market in air services has been a factor in the spread of privatization that has marked the sector since the 1980s. However, in two of the four countries considered here, France and Germany, the process has been more complex than this straightforward model of causation suggests. (In the Netherlands and the UK, privatization was driven by domestic factors.) The experience of both states shows that the nexus of state–airline relations, the structure of airline governance, and the autonomy enjoyed by the senior executive are important variables that influenced the timing, form and shape of privatization. An example of a different sort points to the influence of international and commercial factors. US pressure on France and Germany in the 1990s to sign open skies agreements might have been resisted if the creation of the single market in air services had not already exposed Air France and Lufthansa to competition and, in the wake of the downturn in traffic caused by the Gulf War, required them to develop strategies that included, to give them access to the most profitable global routes, the formation of alliances with US airlines. The US, seeking commercial opportunities for its powerful air carriers, would only grant antitrust immunity to code-sharing agreements to the airlines of states that had signed an open skies agreement. Crucially, the bottom-up approach makes it possible to identify when change occurred and to track its causes (see Figure 10.1).

1985

1986

1987

1985

1986

1987

1988

Debate in Germany about loosening regulation

1984

1992

1993

Gulf War hits Air France

Second package applied early in France

1989

1991

1992

1993

1994

1996

1997

1996

1997

2000

1999

2000

2001

2001

German Wings allowed to compete against Lufthansa

1998

Star Alliance

US-Germany open skies bilateral

1995

1999

2002

2002

2003

2003

2004

2004

2005

2005

2006

2006

2007

2007

2008

2008

Easyjet second carrier in France

Air France privatization as part of merger with KLM

Air France announces merger with KLM

Easyjet begins first services to France

Partial privatisation

1998

Ryanair opens first services to France

Privatization of Lufthansa

New Lufthansa President embarks on turnaround of company

First formal statement in favour of liberal aviation policy

1990

1995

'Battle of Orly'

1994

France denounces bilateral with US

Capital injections and state aid

1991

Air Liberté opens Paris-Toulouse

Christian Blanc CEO

Figure 10.1 Domestic policy change in aviation: Causes and comparison, 1984–2008.

Pre1984

1990

Air France sells 35% stake in TAT following Brussels Accord

1989

BA takes 49.9% stake in TAT

Attali resigns

AOM opens Paris(Orly)-Nice

Following German unification, Lufthansa extends to former GDR

UTA loses battle for more traffic rights

Limited relaxation of prohibition on Franco-French competition

1984

Federal Republic of Germany

Pre1984

1988

Air France buys 35% stake in TAT

Air France takeover of UTA and Air Inter

Air Inter's domestic monopoly re-affirmed

France

The EU and the Transformation of European Aviation 223

1985

1986

1987

1988

State shareholding in KLM falls to 38.2%

1984

1984

1985

1986

1988

1991

1989

1992

1993

1994

1990

1991

1992

1993

1994

State shareholding in KLM falls to 25%

1990

US-NL open skies bilateral and antiimmunity to North West and KLM

BA merger with BCal

1989

Privatization of BA

1987

Figure 10.1 (Continued)

White paper calls for liberalization including through EU action

Pre1984

Liberal bilaterals

Domestic deregulation and creation of independent regulator (CAA) Commitment to second-force policy on international routes Commitment to liberalization in Europe

The United Kingdom

Pre1984

Liberal bilaterals with UK

The Netherlands

1995

1995

1996

1996

1997

1997

1998

1998

1999

1999

2001

2002

2000

2001

2002

Abolition of RLD

2000

2003

2003

2004

2004

2005

2005

Air France announces merger with KLM

2006

2006

2007

2007

2008

2008

224 Air Transport and the European Union

The EU and the Transformation of European Aviation

225

France Of the four countries examined here, France has undergone the most farreaching and most complex changes in domestic policy.5 Traditionally, France’s aviation policy reflected the importance of social, industrial and foreign policy goals, as well as communications, that the French state attributed to aviation. It was based on the conviction that competition was incompatible with ensuring a stable and extensive network of air services and a commitment to the principle of ‘une ligne, une compagnie’. France pursued a national champion strategy through Air France, but also supported and protected two other French carriers, UTA and Air Inter. It divided international services into separate spheres of operation that were served by Air France and UTA, and guaranteed Air Inter monopoly rights over the domestic network that were renewed as late as 1985. A close relationship between the French state and Air France was characterized not only by a revolving door between senior managers and the state administration, but by the mutual interpenetration of personnel, making it difficult to determine where the government ended and the airline began. Bilateral agreements were negotiated between the state as owner of Air France and the company with precise goals and checks and balances. The DGAC, according to some observers was ‘dedicated to contriving ways of denying [would-be competitors] operating authority and runway slots, as well as approval of specific routes and fares’ (Belhassine, cited in Staniland, 2003, p. 249), while applications for traffic rights could be opposed by current or former members of the Air France board on the CSAM, or ultimately refused by the transport minister, of whom Air France usually had the ear. Virtually all these features have disappeared, though paradoxically, given its vehement opposition to EU intervention and liberalization, France has emerged as one of the strongest force in world aviation (see later discussion): UTA and Air Inter have disappeared following their takeover by Air France, the former flag carrier has been restructured and privatized and French airlines compete against each other and other EU airlines on international routes within the Union, as well as on the domestic network. The EU has been the principal cause of change, though domestic and international factors have played a part at times. The first departure from the traditional model was, for example, domestically inspired. Jacques Douffiagues, a liberal Gaullist, who was transport minister between 1986 and 1988, undertook a small and brief liberal experiment. When traffic on its African services began to decline, UTA lobbied for new routes. Douffiagues authorized it to operate from Paris to San Francisco and thereby to compete head-to-head with Air France.6 He also permitted charters to serve routes between mainland France and the DOM, subject to strict conditions. Despite the modesty of these measures,7 the liberal experiment proved short-lived. In 1986, Prime Minister Jacques Chirac, overturned CSAM’s recommendation that UTA be authorized to fly to

226 Air Transport and the European Union

New York. Then, two years later when UTA sought traffic rights that were to be used by its subsidiary Aéromaritime to operate a feeder network in Europe to supply traffic for its long-haul services, its request was turned down. The landmark event of the late 1980s in French aviation policy was, however, the takeover by Air France of UTA and Air Inter in January 1990 (see Chapter 9). Although domestic factors played a part – UTA’s owners decided that, without new traffic rights and the problems encountered in turning Aéromaritime into a company that could compete against low-cost carriers – the merger of France’s three main companies was essentially a defensive measure, intended to prepare French aviation for the single market.8 Indeed, the creation of a single flag carrier was presented as a necessary, and belated, attempt to catch up with other European states. The merger brought about a major consolidation of French carriers, and triggered direct intervention by the EU. As it fell within the scope of the EU’s Merger Regulation, it had to be authorized by the European Commission. The Commission announced its decision to authorise the merger, subject to certain conditions, in October 1990 (Chapter 9). It required the French government to open eight domestic services and 40 international routes to competition from airlines outside the Air France group according to a set timetable,9 and to designate at least one independent airline on routes with traffic over a certain level. Air France was to release landing slots to airlines designated under the Accord, as well as to sell the 35 per cent stake in TAT it had acquired in July 1989. Moreover, the access provisions of the second package were applied early to Community carriers interested in international routes and the French authorities were required to give priority to independent carriers on routes not served by the Air France Group. The Brussels Accord had a three-fold significance. First, it underlined that, although the state could still engineer mergers – Prime Minister Rocard claimed to have ‘piloted the operation’ (Vinçon 1991, p. 215) – the use of this traditional tool of French industrial policy would be subject henceforth to a higher authority in the form of the Commission. Second, Air France’s divestiture in TAT made it possible for a foreign airline (British Airways) to establish a presence on the French market. Third, the Accord reversed two key tenets of French aviation policy: that there should be no competition between French carriers and that Air Inter should have a monopoly over internal flights. However, significant entry occurred only on a single domestic route when Minerve, later AOM following its merger with Air Outre Mer, began to operate on Paris (Orly)-Nice in 1991. The episode demonstrated that, although the French government no longer had final authority over market access, the Union could create new rights, but not new users. Further confirmation of the effectiveness of France’s rearguard action, despite the incompatibility of its preferred policies and practices with EU regulations, came in the early and mid-1990s when it sought to block access to the

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Paris airports (see CAA 1995, pp. 43–7). The French authorities had wanted to preserve a division of traffic between its two Paris airports, Orly and CDG, that separated long-haul and short-haul services, and gave Air France and Air Inter a hub, and on this basis refused a series of requests for traffic rights. It turned down applications from Viva Air, TAT and British Airways (see discussion in Chapter 9). On each occasion, the airline lodged a complaint with the Commission, which found against the French authorities. The French authorities then brought their rules in line with the Commission’s requirements, but introduced new qualifications that generated a further round of complaints. The effect was to postpone the entry of competitors to Air France, though not ultimately to prevent competition from other EU carriers. Despite its efforts, sometimes successful, to delay the implementation of EU legislation, France has not been able to obstruct the effects of liberalization. EU rules have given the right to airlines from EU member states to operate services to, from and within France. The extent to which these freedoms have been used has fluctuated since the early 1990s due to high levels of entry and exit, and Air France’s absorption of its rivals, as has the number of routes on which there was head-to-head competition. There were seven such routes in 1992, 31 in 1996, but only 20 by 2000. Three developments can be discerned. The first is the rise and fall of French independent airlines in the first part of the decade. Air Liberté, for example, which originated as a charter airline, began to operate Orly–Toulouse in January 1995, then four other routes (Bordeaux, Montpelier, Nice, Strasbourg) and acquired Euralair’s scheduled services, but went bankrupt in 1996. The second is the attempt and ultimate failure of non-French national airlines to establish themselves in France. Both British Airways and SAir Group, the parent company of Swissair, bought shareholdings in French airlines (TAT in 1993, Air Liberté in 1996, AOM in 1998 and Air Littoral also in 1998). However, facing heavy losses and difficult labour relations, they withdrew in 2000 and 2001 respectively. The third is the arrival of foreign no-frills carriers, operating both domestic and intra-Union services, which have become established in France. Ryanair and Easyjet are the two most important. While the opening of French domestic and international markets has been a major policy reversal, two other changes are significant. The first, the end of the national champion strategy – a major development in a country where the state and national airline were so intimately connected – has been a long and complex process. The state no longer seeks to achieve its aviation goals through a state-owned company, with close ties to government, while Air France has become a profitable company no longer dependent on state financial support or regulatory protection. The re-definition of the relationship, and Air France’s transformation, has been long and difficult.10 The stimulus to the change was the creation of the single market and the rules put in place at the EU level were a key and constant pressure. By removing the regulatory instruments used by the state to protect the

228 Air Transport and the European Union

company through the control of entry and access, and submitting financial transactions between state and airline to scrutiny by the European Commission, the EU threatened to expose a privileged and cosseted airline to the pressures of the marketplace. For reasons, political and partisan, cultural and personal, both airline and government were slow to appreciate the magnitude of the change that was required and found adaptation to the new environment very difficult.11 The transition took place in three stages. In the first, the company president, Bernard Attali, prepared for the advent of the single market through a strategy of fleet expansion, domestic consolidation and alliances with European partners (EuroBerlin, Sabena, CSA, and Austrian Airlines and Alsavia). When the company’s financial position deteriorated dramatically in the early 1990s, following a decline in its share of transatlantic traffic and the impact of the Gulf War,12 Attali put forward three recovery programmes in successive years.13 Each was accompanied by a cash injection (2 billion francs in November 1991, 1.25 billion in July 1992 and 1.5 billion in February 1993) that was approved, subject to conditions, by the Commission. Not only did none of these plans succeed in balancing the books, but arguably they did not envisage the kind of comprehensive overhaul required to transform the company (Lehrer 1997). When the Balladur government failed to support him during a strike called to protest against proposed staff cuts, Attali resigned. The fundamental change in the company was brought about by Christian Blanc in a second phase. His strategic aim was to introduce a commercial culture in Air France and to turn the company from a production-centred to a consumer-oriented carrier. Crucially, he oversaw a restructuring of the company’s route network into a hub-and-spoke system and the introduction of yield management, the tool that had been used by US airlines to maximize profit.14 Tactically, he succeeded in outmanoeuvring the unions by appealing directly to employees.15 As well as completing the integration of Air France, Blanc negotiated a further round of state aid worth FFr 20 billion – a ‘last and final’ payment – which, in contrast to previous plans, included a credible restructuring plan. The Commission gave conditional approval (see Staniland 2003, p. 256). However, Blanc’s aim of privatizing the company was blocked by a new (left-wing) government elected in 1997 and he resigned shortly thereafter. The third stage, privatization, was accomplished by Blanc’s successor, Jean-Cyril Spinetta, a former president of Air Inter. Following an indication by the Jospin government that it was prepared to accept some ‘opening to capital’, though not to give up the state’s majority shareholding,16 Spinetta proposed in December 1997 to sell 20–25 per cent of Air France’s capital to private investors, 10 per cent to ground staff and 10 per cent to flight crew in exchange for a 15 per cent salary reduction. The latter proposal was cited by pilots when they called industrial action in June 1998 on the eve of the

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World Cup. The strike marked a historic moment: first, because the government gave its full support to Air France management and, second, because for the first time a public sector agreement included layoffs (Staniland, 2003, p. 262). In February 1999, 32 million shares in the company were placed on the market. With the opening of its capital, operating costs falling, and a return to profitability, the company was able to strengthen its ties with other airlines. It launched the SkyTeam alliance (with Aeromexico, Delta and Korean Air) in 2000 and three years later, it announced its historic merger with KLM.17 The terms of the link-up were carefully crafted to realize the benefits of cooperation, while ensuring that the two companies were sufficiently separate in order not to jeopardize the nationality clauses in the bilateral agreements of either France or the Netherlands. As part of the merger, the state reduced its shareholdings to 44 per cent in May 2004, effectively privatizing the company, with 81 per cent of the new company (44 per cent the French state and 37 private shareholders) held by Air France shareholders and 19 per cent by KLM. A further sale reduced the state’s holding to just under 20 per cent in December 2004. The second change concerned the decision by France to denounce its bilateral agreement with the US in 1992 (New York Times, 6 May 1992; see Chapter 9). The French government, and especially, Air France, had grown increasingly concerned about the declining market share of French airlines in the wake of American, Delta and United’s entry to the French market, which had fallen from about 50 per cent in the early 1980s to a third a decade later.18 It proposed a ceiling to limit the further expansion of tickets sold by US carriers, but the US wanted to retain a liberal agreement. Although the 1946 agreement lapsed when the two sides were unable to agree terms, France was compelled to enter negotiations for an open skies agreement in 1996, when the US made it clear that it would not consider granting anti-trust immunity to code-sharing agreements between Air France and its US partners, Delta and Continental, until an acceptable bilateral could be agreed. A new ASA was concluded in 1998. The episode confirmed the importance of wider international factors in aeropolitics, even if ultimately Air France would not have needed to find a transatlantic partner so urgently had EU liberalization not occurred. In summary, changes in French domestic policy were mainly driven by EU-level developments. Not only did EU action pre-date changes in national practice (the sequencing test) and where it did not, as in the case of the Air France–UTA merger, the change took place in anticipation of EU-level developments, but the French government, as its defensiveness in regard to the first and second packages, its preparedness to inject cash into Air France, and its attempts to block the implementation of EU rules testify, was not sympathetic to the direction of EU policy and would have preferred a more modest series of changes than those introduced by the EU (the counterfactual test).19

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Domestic factors were limited as causes of policy change beyond the modest liberal experiment conducted by Douffiagues, though the strategy pursued by Air France CEO’s and state-flag carrier relations were important mediating forces. In addition, the impact of the US would arguably not have been as great had the EU not already put a liberal regulatory framework in place (the alternative hypothesis test). Somewhat paradoxically, in view of its resistance to EU liberalization and its difficulties in adjusting to the new environment, France has emerged as a stronger force in world aviation, with a sector that in key respects is closer in the early twenty-first century to the Colbertiste ideal than was the status quo ante of the early 1980s. In Air France–KLM, it boasts the world’s largest airline by revenue and the third largest in terms of capacity (passenger kilometres). France has also proved adept at exploiting the possibilities that remain to protect French carriers under EU legislation, benefited from apparently sympathetic treatment on the part of EU institutions, and succeeded in inserting requirements that limit the opportunities available to EU airlines operating from its territory. It has the largest number of routes operated under the PSO provisions of the market access regulation.20 Also, while the state aid granted to Air France – by far the highest amount granted to any EU airline – was successfully challenged by other airlines in the European Court, it was ultimately reauthorized by the Commission on new grounds, and Air France was permitted to take over KLM, a manoeuvre that BA was unable to accomplish. Finally, Community airlines wishing to take advantage of opportunities to serve third countries from another member state are required to have a permanent establishment there (Council minutes of 25 November 2003). The French government thus requires other EU carriers established in France, as they may have to be in order to benefit from Community rights under France’s bilateral agreements, to apply French social security law (interview with Commission official, DG TREN, 3 May 2007). Despite the far-reaching changes in French aviation since the mid-1980s, the underlying objective of a strong Air France, substantially unchallenged on its own territory, still remains. Germany Like France, Germany’s aviation policy has undergone considerable change. Despite some superficial similarities in outcome (increased competition on domestic and international routes, the signing of an open skies bilateral with the US and privatization of the national airline), the process of change has been very different in the two countries. Germany, like its Western neighbour, favoured a conservative approach to aviation, but its policy goals were focused on communications rather than other wider objectives. Although the government used its regulatory powers to allow Lufthansa a de facto monopoly and was a majority shareholder, the airline was allowed to operate independently as a commercial company and was not required to

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operate particular routes at the government’s insistence. Even when Heinz Ruhnau (1982–91), a first political appointment at the airline’s head and an unhappy one, played the patriotic card in the 1980s (see later discussion), largely as a way of staving off the threat of privatization, the effect was not to make the company more dependent on the state. In a further contrast with France, although it had been cautious about liberalization and had preferred ECAC’s more modest proposals to those of the Commission, Germany was not opposed in principle to Community intervention. Indeed, it had made a significant contribution to the 1983 regional services directive.21 Competition on domestic and international routes was a first significant change. Until the early 1990s, there had only been two airlines of significant size operating outside the Lufthansa group, neither of which flew head-to-head against the flag carrier (CAA 1993, Annex 2). A new company, Eurowings, created by the merger of two regional carriers, NFD Luftverkehrs AG and RFG Regionalflug, began to operate domestic services, including to Berlin-Tempelhof in 1994. Eurowings along with LTU and Deutsche BA also entered intra-Community routes in competition with Lufthansa. As elsewhere, however, the impact of new entrants was mitigated by the incumbent carrier’s acquisition of smaller companies. Thus, Lufthansa brought Eurowings into the fold in 2006. While in France it had been EU action that led to the opening of previously closed markets, the conditions surrounding policy change in Germany combined EU and domestic causes. A Christian Democrat-liberal coalition in power since 1982 had favoured a more liberal policy, but had been blocked by Ruhnau and the chair of the OTV union, and Franz-Josef Strauss, the CSU prime minister of Bavaria (see later discussion). Unlike France which remained reluctant about liberalization even after 1987, Germany’s preferences changed with the adoption of the first package. Although it was not until 1994 that the policy received formal endorsement in a ministerial statement, officials in the transport ministry began to favour liberalization in the late 1980s (Lehrer 1997, p. 79). Thus, in 1988 the ministry granted traffic rights to German Wings, allowing it to compete directly against Lufthansa (Lehrer 1997, p. 79). This shift from protectionism to a pro-competition policy was undergirded by a strong pro-Europeanism.22 Since the late 1980s, Germany has been a staunch defender of the single market in air services, and critical of continuing state aid and PSOs. The collapse of the German Democratic Republic and unification had an important impact on aviation in Germany. As a result Germany was more preoccupied with Berlin and the integration of the East German Länder than with events in Brussels for much of the 1990s. Following the liquidation of Interflug, the flag carrier of the GDR, in 1991 Lufthansa extended its network to destinations in the east of the country, and after the collapse of the Soviet Union ‘resume[d] the role that pre-war German airlines had played in central and eastern Europe’ (Staniland, 2003, p. 239). Also, the reservation

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of air services to Berlin to airlines from the Allied states under the post-war settlement came to an end, and following unification, Lufthansa was once again able to serve the city. However, the legacy of the post-war arrangements persisted in the form of competition that the airline faced. Pan Am and Air France had quickly retreated, but British Airways remained in the form of a subsidiary, Deutsche BA, which built on the four IGC routes it had operated previously in an attempt to establish itself as a presence on the German market.23 Though BA withdrew in 1995, Deutsche BA provided the basis for Air Berlin, a major low-cost competitor, to compete against Lufthansa on domestic and European routes. Indeed, Air Berlin subsequently acquired LTU and Condor to become the third-largest low-cost airline in Europe. The response of the German government in Berlin contrasted sharply with that of the French government in Paris. A second set of changes concerned relations between the airlines and public authorities. Länder governments, with interests in airports and industry at the state level, had been involved in the company since 1945 (Chapter 3). The relationship had never been problematic, but in 1982 it was suddenly politicized by the selection of Heinz Ruhnau, a former SPD secretary of state for transport, as chairman of the company. His controversial appointment drew a sharp reaction from Lufthansa employees. At the same time, the new Christian Democratic-liberal government pledged to privatize the airline, but its proposal to sell 70 per cent of the government’s 74.5 per cent holding split the supervisory board. A CSU counter-proposal under which the state would have retained a 55 per cent holding was rejected by the government. Strauss’s veto remained until his death in 1988. Second, as EU law and policy progressively opened up the market, the federal government was forced to look to the interests of the aviation sector in general, which was no longer synonymous with Lufthansa. This was reflected in an announcement in the early 1990s that the government would ‘gradually take a more independent stance in bilateral negotiations so that German carriers other than Lufthansa would be allowed to fly on international routes’ (Lehrer 1997, p. 79). Nevertheless the closeness between the transport ministry and the company survived until the company’s privatization (see later discussion), with a secretary of state from the government department sitting on the company’s supervisory board. Between 1982 and 1991, while Ruhnau was Chairman and Winter Director General, the two men spoke at length almost every Sunday evening. The transport ministry also proposed a list of individuals to represent the state as the main shareholder, but the relationship was not marked by the degree of pantouflage that characterized French aviation (see later discussion). The airline underwent a process of strategic transformation in the 1990s, which further loosened its ties with the state, culminating in its privatization in October 1997. Lufthansa had the reputation of a highquality carrier and Ruhnau believed that ‘it could survive and prosper in

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a deregulated market by maintaining a high-quality image and charge the higher fares needed to support its German labour costs’ (Lehrer 1997, p. 127).24 However, with the dramatic loss of profitability that followed the 1990 Gulf crisis coming against the background of a serious decline in market share across the Atlantic, Ruhnau realized that a change of strategy, involving a cultural shift, was necessary. Although some of his proposals were accepted, the executive board was divided, and Ruhnau was eased out in 1991 (Staniland 2003, p. 236). Ruhnau’s successor, Jurgen Weber, was aware of the need for drastic action. He devised a recovery programme, ‘Program ‘93’, with a group of middle managers, aimed at restoring the airline’s profitability through cost cutting, a salary freeze, flexible working and job cuts, and at making the transition to network optimization. These measures put Lufthansa back in the black, but Weber wanted privatization, because the company needed capital that the government could not be relied upon to provide. Though there were no longer any political obstacles, problems first with pensions rights, then with Lufthansa’s proposal for maintaining its nationality prevented privatization from taking place until autumn 1997. The negotiation of an open skies bilateral with the US between 1994 and 1996 was a third major policy change. Germany was the second major aviation state in Europe to sign such an agreement. The decision was brought about, partly, in order to attract back the transatlantic traffic that had been diverted through Amsterdam as a result of the open skies agreement signed by the US and the Netherlands in 1992. Lufthansa’s conversion to open skies was also a factor. The negotiation of the agreement enabled Lufthansa to form an alliance with United Airways as part of the Star Alliance, founded in 1997. The other founding airlines were Air Canada, SAS and Thai Airways International, who were later joined by the Brazilian carrier, Varig. In Germany’s case, the EU played an important part in liberalizing aviation. The first package had a major impact and antedated the main changes in its aviation policy (the sequencing test). Without EU-led liberalization, it is doubtful that Germany would have introduced comparable measures as early as the late 1980s (the counterfactual condition). The protection of Lufthansa’s de facto monopoly had been a long-standing concern and, as a high-cost carrier, it was unclear whether the airline would be able to flourish if exposed to competition. However, domestic factors were also important. There had been a small, but decided, shift towards a more liberal approach. In addition, German unification, which was unrelated to EU action in air transport, profoundly affected Lufthansa, its operations and commercial environment. Finally, the decision to sign an open skies agreement with the US was driven by consideration for Lufthansa’s commercial interests, but had the single market not been in place the airline may not have been as eager to form a transatlantic alliance. The alternative

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hypothesis test, therefore, shows domestic and international factors to have been independent variables, though secondary to the EU in terms of importance. The Netherlands The changes that have taken place in Dutch domestic policy since the mid1980s have been far more modest than in France or Germany. The central ambition of Dutch aviation policy had been to establish extensive air links in the interests of trade and in order to maximize the opportunities available to the flag carrier of a small state, dependent on international, and especially sixth freedom, traffic. Its willingness to be among the first European states to sign a first-generation open skies bilateral bears eloquent testimony to its traditional liberalism. Though it did not have a formal monopoly, KLM had no competitors on the domestic or international routes that it served. The Dutch government did not believe that KLM could be a profitable airline and face competition from a second Dutch airline, and the government had a ‘silent policy’ of buying shareholdings in potential competitors (interview, aviation specialist 14 September 2007). Like Lufthansa, the company operated on a commercial basis and, though it had a close relationship with the government, there was minimal political intervention in its operational decisions. Whereas France had opposed EU developments until late in the day and Germany’s position changed after the adoption of the first package, the Netherlands had been a long-standing supporter of EU intervention. The main change in Dutch aviation has been the liberalization of air services, though, unlike France and Germany, this development was actively sought by the Dutch government and to some extent was implemented independently of it. Its commitment to the liberal cause was evident before serious negotiations on the Commission’s second memorandum had begun. Thus, the UK–Netherlands bilateral agreed in 1984, modified in 1985, effectively deregulated air services between the two countries. As the previous discussion showed (Chapter 5), the agreement represented a clear break from the traditional European bilaterals and had a significant impact on traffic. However, few fifth freedoms rights were permitted under the agreement. The latter position changed with the first and second EU packages, which extended fifth freedoms on intra-Community routes. While the UK–Netherlands bilateral opened routes to any British or Dutch carriers wishing to operate services between the two states, the EU liberalization packages extended opportunities to the airlines of other member states. The number of EU airlines operating scheduled services to the Netherlands increased from 4 in 1986 to 5 in 1988, 6 in 1990, 8 in 1991 and 9 in 1992 (CAA 1995, p. 84). For five years thereafter the number remained between 7 and 9. As elsewhere, however, head-to-head competition was limited and tended not to endure, and other than KLM, only Martinair and Transavia among these carriers operated aircraft of 110

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seats or more. Also, KLM continued to acquire stakes in its domestic rivals (Dierikx 1998, p. 153), so further limiting the extent of competition. It increased its shareholding in Transavia to 80 per cent in 1991 (Dienel and Lyth 1998), for example, and having held a 40 per cent stake in Martinair, acquired a majority share in 2008. However, the arrival of no-frills carriers has brought competitors onto the Dutch market, even if they do not compete directly against KLM. The negotiation of a second-generation open skies bilateral with the US in 1992 was a further development also in keeping with existing preferences; namely, to maxmize the opportunities available to KLM. The Dutch government was the first European country to initial a new agreement and, while other member states did so somewhat defensively, the Netherlands actively sought the possibility. KLM had already formed an alliance with Northwest, and the open skies agreement opened the way to antitrust immunity. However, the liberalization that it has advocated had a major unintended consequence. With neighbouring states signing similar agreements, the attractiveness of Amsterdam with its small national market has diminished. This was one of the factors that led to KLM’s search for a major partner and, eventually, its merger with Air France. While the Dutch experience has differed sometimes sharply from other EU member states, the flag carrier’s loss of primacy in national aviation policy is something that it has in common. For example, KLM is no longer the privileged client of Schiphol airport. The airport corporation is a profitseeking enterprise, concerned to maximize its income from whatever source. Relations between state and carrier are also more distant. The government must take the needs of the whole sector into account and can no longer prioritize the interests of a single carrier. KLM’s distancing from the state has been cemented through the process of self-privatization on which it embarked in the 1980s, which has seen the airline progressively take over the state’s shareholding. In 1985, the government owned a 54.8 per cent stake in the company. That figure dropped to 38.2 per cent in 1986 and to 25 per cent in 1997. The process was complicated by the merger with Air France due to the nationality clause issue and the need to match the French state’s level of participation. The final step, taken in 2008, left the government with no representatives on the airline’s board. In the Dutch case, policy change has been driven largely by internal factors (the alternative hypothesis test), which pre-date EU action (the sequencing test), though competition against KLM and the entry of carriers from other EU states (other than the UK) are the result of measures adopted by the EU, albeit with the support of the Dutch government. The Dutch government continued to seek new opportunities for KLM into the early 1990s, but this ambition has faded with the pluralization of aviation interests and the disappearance of the old aviation establishment, as well as the migration to Brussels of competencies for the negotiation of ASAs with third

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parties. International factors have been less significant in the Netherlands than elsewhere. The United Kingdom Like the Netherlands, the UK had traditionally taken a liberal approach to aviation, but, rather than support a single flag carrier, successive governments had sought to encourage the development of a strong and competitive industry to benefit the UK economy and consumers (Her Majesty’s Government 1980). It negotiated rights for more than one of its carriers to provide services on international routes where possible, and, after the 1969 Edwards report, encouraged a second-force airline, privately owned, to operate international scheduled services.25 While a liberal charter policy had been in place since the early 1960s, domestic services were deregulated in the early 1980s and responsibility for licensing and fares entrusted to the CAA, an independent regulatory agency. The relationship between state and flag carrier was unlike both the archetypal national champion strategy and the Dutch–German model in that the government did not protect British Airways from domestic competition, prioritize the airline’s interests in bilateral negotiations or take a shareholder’s interest in the running of the company (Chapter 3). The landmark changes in UK aviation policy took place in the late 1970s and early 1980s, and therefore antedated action by the Community. Before negotiations on what was to become the first package had seriously begun, the UK had already announced its intention to privatize British Airways, deregulated domestic air services and in its 1984 White Paper committed itself to liberalizing its bilaterals with European states where possible and multilateral liberalization through the Community (HMG 1984). These changes reflected the pro-market commitments of the Conservative government elected in 1979 and, though they were taken after 1978, were not influenced by US deregulation. The UK did not seek to copy a US template, nor was it changing its regulations so that UK carriers would be better equipped to compete with US airlines. The changes in UK policy were driven primarily by domestic factors. As with the Netherlands, developments since the mid-1980s in the UK have been domestically driven and largely consistent with pre-existing policy, though EU action has also had an impact. The privatization of BA is an important example of policy continuity. Though the sale took place in February 1997 – it had been delayed for legal and other reasons (see Staniland 2003, pp. 200–1, 205–10) – the government had appointed a new chairman, Lord King, to turn the company around in 1981. Within two years, profitability had been restored, and the company was overhauled and restructured. So as to ensure consistency with the nationality clause in UK bilaterals, a limit of 25 per cent was placed on total foreign shareholdings. Forty-two per cent of shares were reserved for UK institutional investors, 28 per cent for individual investors and 10 per cent for purchase by BA staff.

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BA, like its counterparts elsewhere, sought to consolidate its domestic position through partnerships and mergers. One of its first acts after privatization was to acquire British Caledonian (BCal), its main domestic rival. Though it had been fostered by the government as a second-force airline, BCal lacked the resources to survive in a more competitive environment and concluded in the mid-1980s that its business base was too narrow. BA took advantage of this ‘unrepeatable opportunity to create a British airline capable of taking on the world’ (Thomson 1990, p. 537). In apparent contradiction of the pro-market principles on which it justified its privatization programme, and overriding the CAA’s concern about imposing limits on the relative size of BA in order for competition to be meaningful, the Conservative government gave its endorsement to the takeover. Both the UK Monopolies and Merger Commission (MMC) and the European Commission authorized the merger, subject to conditions. The MMC required that BA release nearly one-fifth of its slots at Gatwick, as well as several of BCal’s licences for short-haul feeder routes, which the CAA reallocated. BA was also asked to withdraw its objections to Air Europe’s application for licences to launch new services on short-haul routes BCal had served from Gatwick. The European Commission additionally required BA to undertake not to increase its share of Gatwick slots until 1992. BA further strengthened its position through the acquisition of other smaller independent airlines, such as Dan-Air which it acquired in 1992. Initially, it continued to operate an extensive European network from Heathrow, relying on franchisees and subsidiaries such as GB Airlines to operate thinner routes to holiday destinations at low cost, but gradually took them into full ownership. Policy continuity has also been evident in other respects. For example, the takeover of BCal by BA did not signal the demise of the second-force policy. Indeed, Virgin has proved to be more effective than companies that were earlier cast in the role. Its long-standing commitment to diversity and competition in the sector has been met as a result of both domestic and EU measures that it championed. The UK has seen the expansion of existing independent carriers. British Midland is perhaps the best example. The openness of the UK – its island location and low-administrative barriers – has also been key to the development of no-frills carriers. One consequence is that, despite its dominant position, British Airways faces competition on domestic and intra-European routes. Beyond this, however, London has continued to relax regulatory restrictions and to seek opportunities to multidesignate UK carriers on international routes. In the creation of the single market in air services, the UK succeeded in its ambition of securing a multilateral liberal regime that was also a policy aim. However, it did not foresee that the greater distance between government and airline would prove to be a mixed blessing to BA in navigating EU institutions. Although privatization gave the airline the financial resources necessary to its expansion and enabled it to exhibit a ‘pattern of business conduct [that] would

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have been virtually impossible under state ownership’ (Yarrow 1995, p. 54), BA has been much less successful in steering its proposed alliances through the regulatory maze in Brussels and Washington than Lufthansa, KLM or Air France. Its code-sharing arrangement with American Airlines, for example, is more limited than the full alliance both parties would have liked, which was made uneconomic by the demands for slot concessions at Heathrow made by the competition authorities on both sides of the Atlantic. A further unwelcome consequence of EU action for the UK is evident in relation to the development of EU competencies in external relations – a cause to which the UK was far less sympathetic than liberalization. The migration to Brussels of ultimate authority over external relations has affected the UK even more than other EU states, since the strength of the UK aviation industry, together with unfettered national control over access to the valuable London market (especially Heathrow), gave British bilateral negotiators an exceptional degree of international authority. Now, however, Brussels conducts or oversees negotiations and the airlines of other member states have a claim on traffic rights. The UK’s bargaining position has been significantly diminished as a result. With respect to international factors, the UK is the only one of the four not to sign an open skies agreement with the US. The UK has been in a stronger position with respect to its bilateral relationship with the US than other member states due to the importance of London and particularly Heathrow as a gateway. Indeed, the UK has enjoyed a uniquely privileged position in regard to negotiations with the US compared to its European partners. Whereas other European states had to sign open skies agreements in order to secure for their airlines the benefits of code sharing agreements with US airlines, the US was obliged to concede this benefit to UK airlines in 1991 in exchange for access to Heathrow for the successors to Pan Am and TWA.26 Among the four states under consideration the UK has been least affected by EU action. The major domestic policy change came before the Union became active in the sector (the sequencing test) and was the result of ideologically inspired action by a pro-market government (the alterative hypotheses test). Moreover, the UK actively promoted EU liberalization in pursuit of its domestic ambitions. However, it does not follow that developments in Brussels have had no impact on the UK. The single market has given new opportunities to home-based carriers, such as EasyJet, as well as those of other member states, notably, KLM and Ryanair, and given the attractiveness of the UK as an aviation hub, has led to significant growth. The development of regional airports (CAA 2007) offers one measure of the increased activity that EU liberalization has brought about. Economic regulation: Comparing domestic policy change Consideration of the four member states reveals considerable diversity. While all four have been affected by EU action since the mid-1980s, major

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domestic policy change resulted from Union-level developments only in France and Germany. The impact on the Netherlands and the UK was far less marked, though in both countries the number and range of airlines increased as a consequence of EU-led liberalization. In all four countries, domestic factors were also at work. Ideology played a role in the UK in prompting reform in the early 1980s. In the Netherlands, it led to the abolition of the RLD (see later discussion). In France, a Communist transport minister in the first Jospin administration opposed privatization, thereby postponing change, while in Germany, ministers and officials took an increasingly liberal view of aviation in the 1980s. The impact of international factors in the form of US pressure was evident in three cases. The US was able to press France to negotiate an open skies agreement as condition for granting anti-trust immunity to the transatlantic alliance formed by Air France. US pressure was also significant in Germany, but Lufthansa had already reached the conclusion that open skies was important to its new commercial strategy. The Netherlands, by contrast, responded eagerly to the new US initiative, but in keeping with a longstanding policy aim. Bermuda II and the status of Heathrow, meanwhile, relieved the UK from any similar pressure. It did not need to seek an open skies agreement to secure approval for the code-sharing agreement into which British Airways had entered. The diachronic analysis integral to the bottom-up approach makes it possible not only to identify and relativize the sources of change, but also to uncover the mechanisms at work. The findings in all four cases show that regulatory competition has a more limited role than some authors (see, e.g., Thatcher 2007) have contended. The primary impetus to policy change was either domestic (the UK, the Netherlands), or originated with the EU (France) or came from a combination of the two (Germany). Regulatory competition was not a major factor for any of the four. Neither the competitiveness of US airlines nor, in the case of France, Germany or the Netherlands, the strength of BA motivated action on the part of government. Nor was regulatory competition the mechanism by means of which EU action produced domestic change (see Knill and Lehmkuhl 1999). The effects of EU action were felt principally in the increase of carriers, new entrants and competition on intra-Union and domestic routes; the impact on policy came through the coercion of the law or, in the case of France, the law supplemented by quasi-judicial decisions of the Commission or rulings of the ECJ. EU regulations deprived member states of the regulatory tools that had enabled them to protect national airlines through the control over the issuing of licensing and market access, while at the same time they created new entitlements and freedoms for EU carriers. However, the French experience shows that it was possible to temper the liberal wind that blew from Brussels.

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Beyond economic regulation Although the EU’s impact has been most far-reaching and arguably most dramatic in the regulation of the economic aspects of air transport, it is important not to overlook its effects in other areas. In safety and air traffic control, member states have foregone the total freedom of action that they historically enjoyed. Prior to EU intervention, air safety was managed nationally and through intergovernmental cooperation. Standards were developed and adopted by ICAO and by ECAC at global and regional levels respectively. Sovereignty was not impugned, as individual governments retained the freedom to decide whether or not to incorporate any particular norm in national regulations. The traditional system has, however, been transformed by EU action. The locus of decision-making has changed with the emergence of an EU-sponsored agency as a new European venue for standard setting and the process for determining standards has become more formalized. New standards were initially developed within the JAA, later within EASA, and are adopted under EU law. EU member states have thereby lost the ultimate authority that they enjoyed with regard to safety norms, since the adoption of standards is no longer voluntary, but binding and backed by EU law. In air traffic control, developments have not proceeded as far as the full functional integration once envisaged in the setting up of Eurocontrol. Nonetheless as a result of EU action, member states no longer treat air traffic management as a purely national matter. Progress towards a Single European Sky has brought intensified cooperation, and imposed obligations on governments for the first time. Joint operations are a clear prospect. As with safety, Brussels has emerged as a policymaker and decision-making arena. Two further observations are important. First, whereas the Netherlands and the United Kingdom were the most energetic supporters of EU action in economic regulation, France and Germany have been active enthusiasts for closer cooperation in these technical areas. France worked assiduously to export to the EU the policies of technical and even social harmonization that have the capacity to temper the sharp winds of liberal economic policies. It was French pressure for technical harmonization, backed by Airbus with its headquarters in Toulouse, which led to the establishment of the JAA (1989), the adoption of safety regulations under EU law (1991) and ultimately the creation of EASA. Germany, meanwhile, was a strong supporter of the development of EU competencies in safety and air traffic control. Losers in respect of changes in economic regulation, France and Germany have been successful in securing their agenda, and in the case of France and safety standards exporting their preferences, in regard to the technical and operational aspects of air transport. While the UK government by contrast was content to use the EU Treaty, and not least its competition rules, to

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obtain unfettered access for its airlines to the European market, it was much more reluctant to concede EU control over the harmonization of technical and safety regulation that followed in the wake of the single aviation market and argued unsuccessfully for intergovernmental solutions (Chapter 7). Second, for all that it has been criticized for its institutional bias (see, e.g., Bache and Jordan 2007, p. 13), the Europeanization literature has traditionally focused on the detection and measurement of substantive domestic policy change. For that reason, it does not provide a means by which to measure the impact that the EU has had on the member states in the areas of air traffic management and safety where as a result of EU action member states make decisions in a new arena, submit to common standards and have created specialist bodies, in which they cooperate closely and intensively. Further work is necessary to develop the conceptual tools that are sensitive to these forms of Europeanization.

Changes in domestic policymaking The common air transport policy has also brought about important changes in policymaking in the member states. The choice of policy objectives and the selection of strategies to achieve them are no longer made by a small circle of domestic actors. The role of national actors, the nature of their tasks and how they perform them, has changed fundamentally. From subgovernment to supranational governance The context and character of decision-making has been transformed since the late 1980s. Historically, policymaking in aviation represented a classic case of subgovernment (Griffith 1939; Heclo 1978; Jordan 1990). Routine policy tended, as discussed in Chapter 3, to emerge from interaction within a ‘village’ (Heclo 1978; Lehrer 1997) of civil servants, senior airline management and other specialists, bound together by a shared interest in aviation, rather than from parliament or discussion around the cabinet table. Though officials from the aviation ministry were present in all cases, the precise composition of the group varied between countries. In France, for example, it was centred on the DGAC and included senior executives from Air France. In the Netherlands, it took the form of a ‘quadrant’, comprising KLM, the RLD, the foreign ministry and the Leiden Department of Air and Space Law (interview, aviation specialist The Hague, 14 September, 2007). With the exception of the UK, and then only periodically, parliaments have rarely shown much interest in the sector. Also, although again the UK was an outlier, these policy networks or policy communities (see John 2000; Atkinson and Coleman 1992; Rhodes 1990) were producer oriented and focused principally on safeguarding the interests of the flag carrier. Virtually all these features have disappeared. The national capital is no longer the main locus of decision-making, nor do national actors make policy

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independently according to domestic priorities. Brussels has become the principal venue for policymaking across an increasingly broad range of aviation activity. Member governments no longer make policy independently, but share decisional authority with each other and with EU institutions. The setting of policy goals and the selection of policy instruments have become a collective enterprise, and the scope for independent policymaking has diminished substantially. As the UK DoT observes in a consultation document on the future of aviation in the UK, since the mid-1980s the European Union has emerged as the international organization with the most immediate effect on the development of UK aviation policy. In many areas, UK aviation policy is constrained or affected to a greater or lesser degree by Community legislation.27 At the same time, traditional aviation policy communities have faded and the previously close relationships between national actors have unravelled. This is clearest in respect of state–flag carrier relations, where governments no longer intervene in commercial management. National airlines have made the transition from production-centred state-owned companies to privately owned, profit-seeking companies. It is also evident in the relations between other actors that were formerly part of the national aviation system centred on the flag carrier. In France and the Netherlands, for example, airport authorities are commercially oriented enterprises that no longer see supporting the national airline as their principal purpose. In at least one case – that of the Netherlands – the entire policymaking establishment has faded. The RLD was abolished as a special part of the Transport Ministry dealing with aviation in 2001 and integrated as part of a new directorate general of aviation and maritime affairs. As a consequence, the special ties that previously linked KLM to the government, as well as the privileged and intimate relationship it enjoyed previously with the Ministry for Foreign Affairs, have largely disappeared. More broadly, national actors have become subsumed within a wider and more diffuse system of decision-making at the European level. Not only has the closed circle of decision-makers expanded to include the EU-27, the Commission and the European Parliament, but the network of actors has become more open. The range of interests that are routinely consulted is also more extensive.28 Governments would rarely have solicited opinion widely on aviation issues, but the Commission routinely invites comments on its proposals or as part of review exercises of Community legislation from any interested parties of any type and at any level. A notable change is the emphasis given to the views of consumers. Although users had a voice in UK policymaking, where passenger interests were represented by the AUC and the National Consumers’ Council, and the CAA was required by statute to take account of consumer interests in its licensing decisions, this was not true elsewhere. The Commission takes pains to ensure that groups representing passenger and consumer interests are consulted.

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Change and national administrations Administrative departments or agencies with aviation or aviation-related responsibilities in the four member states have also undergone change. As part of the processes described earlier, the aviation departments of transport ministries have lost their leading policy and decision-making authority and no longer determine policy priorities within their respective national territories. Many of the functions that they previously performed individually are now carried out in cooperation with other member states and the EU institutions. The same is true of foreign ministries and the role that they played in the negotiation of bilateral ASAs. At the same time, national administrations have acquired new functions associated with the common air transport policy. In particular, they are responsible for the implementation and enforcement of Community rules in regard to the various aspects of aviation. This marks a significant change of roles. Whereas previously licensing requirements, for example, were set by policymakers or regulatory agencies in the member states, they are now determined at EU-level and administered by national authorities. Unsurprisingly, these adjustments have been accompanied by changes in structure and organization. The major administrative overhaul undertaken by the DGAC in Paris offers a good example.29 In addition, while some functions that traditionally belonged exclusively to national administrations have become shared responsibilities with other actors within the EU, others have shrunk or been lost completely. The French CSAM used to be consulted when an airline requested authorization for traffic rights to serve any route. Now its remit is more limited. The Conseil ‘gives advice to the minister on requests to authorise scheduled and non-scheduled services to destinations outside the Community’ [Il donne au ministre des avis motivés sur l’autorisation d’effectuer des services aériens réguliers et non réguliers vers des destinations extracommunautaires] (authors’ translation; emphasis added).30 The tutelage function performed by aviation departments (see Chapter 3), meanwhile, has disappeared. The government is no longer responsible for monitoring the commercial conduct of the flag carrier. Officials no longer have the same close links with ‘legacy carriers’. They are not involved in the day-to-day management of what used to be the state-owned airline, nor do they scrutinize its activities. To the extent that the oversight function still exists at the national level, it has arguably shifted from aviation departments to competition authorities. More generally, member state administrations have largely lost their role as the gatekeepers of domestic societal interests vis-à-vis EU institutions. Although the extent to which they monopolized the representation of domestic constituencies at Union level was always perhaps exaggerated,31 the proliferation of organized interests in Brussels signalled an appreciation of the concern of airlines, consumers, environmental lobbyists of the importance of the Union

244 Air Transport and the European Union

as a decision-making arena. Since the late 1980s, and in some instances even before, these groups have preferred to collect intelligence through their own representatives on the spot and to make contact with EU institutions and other actors independently of their governments. There have also been major changes at the level of individual officials. Policy is no longer agreed within a mainly domestic setting or principally informed by national priorities, but decided within EU structures. Officials are in continuous contact with their counterparts in other national capitals and in the Commission, and travel regularly to Brussels. The purpose is not so much to bargain or to negotiate as it was until the late 1980s and in some areas until the late 1990s, but to deliberate and to decide collectively with colleagues from elsewhere in the Union. As a result, national officials have developed a very different cognitive map from the preceding generation. They have also had to acquire skills in networking, diplomacy and languages. The sources of change As with policy, the changes in policymaking in the member states have been driven largely, though not exclusively, by action at the EU level. The development of the common air transport policy has had a far-reaching impact on domestic policymaking, the functions of national administrations and how national officials carry out their responsibilities. Its effect has been to transform territorial relations, transferring decision-making authority and the locus of policymaking from the national capitals to Brussels. Member states can no longer independently originate or adopt authoritative decisions, but must address aviation issues within the Community framework, where they operate subject to the EU’s legislative procedures and decision rules. The emergence of Brussels as an authoritative arena also lies behind the dissolution of national policy communities and decline of governments as gatekeepers. With respect to the first, as states ceased to hold ultimate decision-making authority and the actions of governments and airlines became subject to EU regulations, the resource dependencies that held the old policymaking ‘village’ together weakened and faded. The state can no longer dispense commercial opportunities as it pleases. Traditional resource dependencies were superseded by new relations that centred on EU institutions that had become the new source of regulation in the industry. In the case of the second, the shift of regulatory authority to the Community led to a proliferation of representative federations, the development of new functions by existing bodies and the setting up by the larger airlines of their own offices in Brussels. Airlines, passengers and other interests now direct their lobbying activities at Community level institutions rather than national officials or ministers. The Commission arguably has become the principal interlocutor of aviation interests.

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Although the changes in policymaking have been mostly driven by developments at the EU level, domestic factors have also been important. Ideology in the form of economic liberalism has been especially important. The dismantlement of the RLD in the Netherlands was implemented by a neoliberal minister, for example, while the UK’s privatization of NATS was undertaken as part of the programme to roll back the state that was initiated under the Thatcher governments of the 1980s and continued by New Labour after 1997. The complexities of airline privatization and the extent to which it was driven by the EU has already been discussed, but in the Netherlands and the UK at least the adoption of a policy that had a direct impact on domestic policymaking and relations between the state and what had been the national airline can be attributed to domestic factors.

Change in the European aviation industry From state-centred patchwork to single market European aviation in the mid-1990s and after was very different from the 1980s. On intra-European routes, the supply of air services was strictly limited and competition rare. The COMPAS Report observed that ‘(a) although in two-thirds of cases, there are no limitations on the number of airlines that may be designated for scheduled services, in practice there are hardly any routes on a city-pair basis where more than one airline per State is at present operating; and (b) in over 90% of cases there are capacity provisions of some kind’ (ECAC 1982, p. 2). The industry was dominated by stateowned flag carriers, which ‘often have first choice to operate all routes and can prevent the operation of any route by any other airline of their State’ (ECAC 1982, p. 13). Although the Report noted that in some countries, the flag carrier did not have exclusive privileges and other airlines were allowed to apply for traffic rights, it stated that ‘In practice there are very few intraEuropean routes on which there is more than one carrier from each of the bilateral partner states’ (ECAC 1982, p. 13). With regard to pricing, bilateral agreements required airlines to set fares with reference to those agreed through IATA and to seek the approval of both contracting states. Domestic networks, meanwhile, were usually operated as monopolies either by the flag carrier or another state-owned airline. The picture has changed dramatically from that depicted by the COMPAS Report and others (OECD 1986, National Consumer Council 1986). First, whereas the state held majority stakeholdings in most flag carriers in the early 1980s, ownership has been moved into the private sector (see Table 10.1). BA was privatized in 1985; Lufthansa was not formally privatized until 1997 but the government shareholding had been gradually falling since 1987; Iberia was privatized in 2001. Elsewhere in Europe, by 2006,

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government shareholdings were in most cases less than 50 per cent (for example, Alitalia 49 per cent, Aer Lingus 25 per cent). The government shareholding in Air France, still 54 per cent in 2002, had fallen to 20 percent by the end of 2004, in the context of its agreement with KLM, which had been a fully privatized company. Given the traditional prevalence of state ownership and the use of the flag carrier to achieve wider political or public policy goals, privatization is a significant development in European aviation, marking the historic abandonment of a key policy instrument (Table 10.1). The presence on the market of independent airlines, including the no-frills carriers, and the high level of market entry on intra-European and domestic markets is a second difference.32 Not only have these companies become fixtures of European aviation (see Tables 10.2 and 10.3), but they are significant in world terms (Table 10.4). Although flag carriers remain

Table 10.2

Market supply in Europe* by different airline types 1998–2008

Legacy carriers Charter carriers Regional carriers No-frills carriers

1998

2003

2008

9,308,074 730,367 1,323,967 593,112

9,998,495 1,095,370 1,231,063 1,668,011

12,274,131 974,058 987,696 6,208,044

*EU-27 plus Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Croatia, Faroe Islands, FYROM, Georgia, Gibraltar, Moldova, Monaco, Montenegro, Norway, European part of the Russian Federation, Serbia, Slovenia, Switzerland, Turkey, Ukraine. Source: Data from Deutsche Zentrum fur Luft- und Raumfahrt (2008) Topical Report: Airline Business Model, p. 15 available online at http://ec.europa.eu/transport/air/doc/abm_report_2008.pdf.

Table 10.3

Leading No-Frills Carriers in the European Union, 2008

Ryanair easyJet Air Berlin TUIfly Flybe Germanwings

Country

Passengers (millions) ( January – December)

Destinations (December)

Fleet (December)

Ireland UK Germany Germany UK Germany

57.7 44.6 28.6 10.5 7.5 8 [= figure for 2007]*

148 109 126 80 (summer) 65 66

163 161 125 48 68 35

Note: *Shephard News, ‘Eurowings sells Germanwings to Lufthansa’, 15 December 2008, at http://www.shephard.co.uk/news/1257/. Source: Compiled by the authors from airline websites, ELFAA website.

Southwest Airlines American Airlines

Air France easyjet British Airways KLM American Airlines 31,549 30,173 28,302 23,165 21,479

49,030 41,322

53,700 Emirates Airline 20,448 50,442 Singapore Airlines 18,957 50,384 Cathay Pacific 17,695

74,795 72,900 68,400 62,900 56,900

101,911 Ryanair 98,162 Lufthansa

Southwest Airlines British Airways Singapore Airlines

Delta Air Lines Continental Airlines Air France Lufthansa Northwest Airlines

American Airlines United Airlines 8 20 21 24 28

116,385 33 113,275 37 90,901 39

166,209 130,965 128,914 122,091 117,357

222,761 1 191,933 2

17,602 8,044 7,617 6,669 4,769 3,875 3,551 3,510

British Airways SAS Group Iberia Alitalia Virgin Group Ryanair easyjet Austrian Airlines Group

Air France-KLM Group 34,434 Lufthansa Group 30,849

World ranking by scheduled World ranking of airline groups passenger/kms, international by revenues ($ million)3 and domestic (millions)2

Source: 1 IATA (2008) World Air Transport Statistics (WATS) 52nd Edition, extract at http://www.iata.org/ps/publications/wats-passenger-carried.htm. 2 IATA (2008) World Air Transport Statistics (WATS) 52nd Edition, extract at http://www.iata.org/ps/publications/wats-passenger-km.htm. 3 Panariello, A. et al. (2008) ‘Top Airline Groups by Revenue’, Airline Business, August, p. 54.

3. 4. 5. 6. 7.

Air-France-KLM Delta Air Lines United Airlines Lufthansa China Southern Airlines 8. Northwest Airlines 9. Japan Airlines 10. All Nippon Airlines

1. 2.

World ranking by scheduled international passengers carried (thousands s)1

Leading European and World Carriers, 2007

World ranking by scheduled passengers carried (thousands)1

Table 10.4

The EU and the Transformation of European Aviation 247

248 Air Transport and the European Union

dominant, they have lost their monopolies and face competition at home and on European routes. Reporting on the period from January 1993 to January 1996, the Commission (COM (96) 514) found that some 800 licences were issued, the number of EC air carriers operating scheduled services rose from 132 to 156, and the number of routes operated grew from 488 to 518. Greater competition is also in evidence. The number of carriers operating on individual routes has increased – a key indicator, and a major factor in keeping costs and prices down (Button and Swann 1989; CAA 1993; Coles 2005). Whereas COMPAS reported that it was rare to find more than two carriers, one designated by each side, on intra-European routes,33 the Commission (COM (96) 514) reported in 1996 that between 1993 and 1996 routes operated by more than two carriers increased from 10 to 31 (airport to airport) and from 20 to 38 (city to city). Though it also recorded a rise in monopoly routes (from 296 to 329) and a fall in the routes operated by two carriers (from 182 to 158),34 the Commission did not note that most of the numerous monopoly routes were small, including 100 which had taken advantage of the protection afforded by operating under a PSO. The CAA, meanwhile, observed that while in December 1992 only 14 of 119 city-pairs were served by more than two EU airlines, the figure had risen to 31 (or 26 per cent of the total) by December 1997, but that since competition occurred predominantly on the busiest routes, the proportion of flights exposed to significant competition had risen from 31 per cent to 47 per cent. Similarly, though the proportion of domestic routes operated as a monopoly service was 81 per cent in 1997 (down from 90 per cent in 1992), the proportion of flights facing competition had risen from 26 per cent to 48 per cent, reflecting the fact that competition had grown most on the busiest routes. By 2004 almost 70 per cent of intra-Community routes were operated by a single carrier, but the proportion of intra-Community routes operated by two airlines had remained stable since 1994 at around 20 per cent despite a considerable increase in the total number of routes operated (Cranfield 2004). The proportion of routes operated by three or more airlines, meanwhile, had risen from 5 per cent to 10 per cent. The continued prevalence of monopoly routes is explained partly by an increase in the number of routes operated under a PSO. These rose from 67 in 1997 to 230 in 2003. However, that Ryanair also specializes in monopoly services to small regional airports (43 out of its 65 London routes in 2004) challenges the theory that all monopoly services are necessarily anti-competitive and expensive. Indeed, even if there is competition on only 30 per cent of routes, this nevertheless covers 60 per cent of flights. The most telling index of competition is the ever-increasing market penetration of the low-cost airlines (see later discussion), which by 2004 carried over 20 per cent of all passengers, nearly 100 million out of 425 million. While Ryanair and Easyjet were still the dominant carriers in this sector of the market, carrying almost 25 million passengers each, they were no longer

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249

dependent on their original bases in Britain and Ireland, and there were 17 other low-cost carriers operating from various bases in Europe, the largest of which, Air Berlin, carried some 16 million passengers. On the 34 most important domestic routes, the number operated by more than one airline (two is enough to ensure competition on a domestic service) had risen from 16 in 1992 to 26 in 1997, and the proportion of flights facing competition on these key routes had risen from 60 per cent to 89 per cent. Since 1997, there is now lively competition within most of the largest domestic markets, though the national aviation authorities have not altogether given up attempting to protect the national airline(s).35 In short, although many have withdrawn or been bought out by larger or more successful rivals, liberalization has produced a steady stream of new entrants. In 2004, for example, no fewer than 11 low-cost airlines entered the market, while five withdrew. More generally, since 1993 passenger traffic has increased dramatically (Intervistas ga2: 2006: 32). Capacity has also expanded, but, as traffic has grown faster than capacity, liberalization has ‘led to higher load factors and better aircraft utilisation’ (Intervistas ga2: 2006: 34). At the same time, aviation in Europe has also been marked by domestic consolidation, cross-national investment and alliance building of varying forms (see Table 10.5). BA’s takeover of BCal in 1988, Air France’s merger with UTA and Air Inter in 1990 and the acquisition by KLM of several Dutch-owned carriers are examples of the first. With respect to the second, the major airlines began in the mid-1980s to acquire smaller airlines in other EU countries in order to feed traffic into their own principal hub rather than to compete directly with the national airline of their host state. BA’s attempt to break into the French and German markets with TAT (France) and Deutsche BA (Germany) was ultimately an expensive failure, but KLM’s purchase of Air UK to provide services from UK regional airports to Amsterdam has been successful. The formation of partnerships, often involving crossshareholdings and even merger, has become an established feature of the industry. Europe’s main national airlines have gradually coalesced into three major groups, each linked to one of the worldwide alliances which are taking shape. In 2003, these three alliances accounted for 65 per cent of all IATA airlines travel (Cranfield 2004, p. 126). The purchase of Swiss by Lufthansa, and the absorption of KLM into Air France, represents a merging together of Europe’s national airlines, despite the obstacles posed by an international regime which strongly emphasizes national ownership and control. Competition is much reduced within each of the three European groups, but this is balanced by strong competition between the three global alliances for long-haul traffic (see Table 10.6), and sharp competition with the low-cost carriers for point-to-point traffic within Europe. The growth of the low-cost sector has been a major development. Indeed, for some: ‘The most significant impact of the 1992 package was the stimulus to the low-cost airline services’ (Intervistas ga2: 2006: 32). If the national

SkyTeam

OneWorld

British Airways

Alliances

100% Brit Air 100% CityJet 100% Régional 51% All Africa Airways1 11.95% CCM Airlines 7.70% Air Mauritius 7.48% Air Tahiti 5.60% Tunis Air 3.57% Cameroon Airlines 3.17% Air Madagascar 2.87% Royal Air Maroc 2.09% Air Calédonie 1.5% Austrian 10.8% ComAir (South Africa) 10% Iberia

Shareholdings

Franchisees

Aer Lingus, American Airlines, bmi, Brussels Airlines, Cathay Pacific, Finnair, Iberia, Japan Airlines International, LAN Airlines, Malev, Qantas

British Mediterranean, Comair (South Africa), GB Airways, Loganair (UK) and Sun-Air Scandinavia (Denmark).

Aeroflot, Aeromexico, Air Caledonie, Air Europa,Régional, Brit Air, Air Seychelles, Air Tahiti, Alitalia, Austrian, CityJet, CCM Airlines. CCM, China Eastern Airlines, China Southern Airlines, Continental Airlines, CSA, Delta Airlines, Finnair, JAL, KLM, Korean Air Lines, Luxair, Malev, Middle East Airlines, Northwest Airlines, Qantas, Royal Air Maroc, Taca International, TAROM and Tunisair

Codesharing

Alliances and partnerships of main European carriers (selected), 2008

Air France

Table 10.5

250 Air Transport and the European Union

SkyTeam alliance Transatlantic Joint Venture with Northwest Airlines

KLM

100% Air Dolomiti S.p.A., Adria Airways, Aegean Airlines, Air /Canada, 100% AirTrust AG, Zug, 100% Air China, Air India, Air New Zealand, Air Eurowings Luftverkehrs, 100% One, ANA, Austrian Airlines, Blue1, bmi, Germanwings GmbH Croatia Airlines, Eithiopian Airlines, LOT Agreement to purchase Polish Airlines, Mexicana, Qatar Airways, SAS, Austrian Airlines, November Shanghai Airlines, Singapore Airlines, South 2008. (Cleared by European Africa Airways, Spanair, Swiss, TAP Portugal, Commission August 2009) TAM Linhas Aereas, Thai Airways, THY Turkish Agreement to purchase 50% Airlines, United Airlines, United Airlines, US shareholding in BMI (to add Airways to existing 30% stake) from Sir Michael Bishop. (Launched bid for 20% shareholding owned by SAS in 2009) 100% transavia.com Aer Lingus, Air Europa, 100% KLM UK/cityhopper Alaska Airlines, China Southern 50% Martinair Holland Airlines, Comair, Cyprus Airways, 26% Kenya Airways Gulf Air, Kenya Airways, Lithuanian Airlines, Malaysia Airlines, Malev, Meridiana, PGA Portugalia Airlines, TAM and Ukraine International

Sources: Compiled by the authors from airlines’ financial reports and annual reports.

Star Alliance

Lufthansa

The EU and the Transformation of European Aviation 251

328.63

462

Aer Lingus, American Airlines, BA, Cathay Pacific, Finnair Iberia, Japan Airlines (JAL), LAN, Malév, Qantas, Royal Jordanian

Delta, Continental*, Air France, KLM, Alitalia CSA Czech Airlines, Aeroflot, AeroMexico, China Southern, Korean Air

OneWorld

SkyTeam Alliance

905

673

912

97.9

99.78

141.71

20.6%

23.2%

29.3%

Note: * Leaving SkyTeam for Star Alliance from October 2009. Sources: http://skyteam.com/downloads/news/facts/skyteamFactSheet.pdf; http://www.staralliance.com/int/press/facts_figures/star_alliance_facts_and_ figures_dec2008_final.pdf; http://www.oneworld.com/content/factsheet/W2_2009-02-03%20OW%2010A%2011%20AT%20A%20GLANCE%20FINAL1. pdf.

499.90

Air Canada, Air China, Air New Zealand, ANA, Asiana Airlines, Austrian, bmi, Egyptair , Lufthansa, SAS, Shanghai Airlines, Singapore Airlines, South African Airways, Spanair, Swiss, LOT (Poland), Spanair, TAP Portugal, Thai Turkish Airlines, United Airlines, US Airways Regional Members Adria Airways, Blue1, Croatia Airlines

Star Alliance

Passengers per Destinations Revenue Market share year (million) (US$ billion) (%)

Members

Global Alliances, 2008

Grouping

Table 10.6

252 Air Transport and the European Union

The EU and the Transformation of European Aviation

253

airlines were largely successful in seeing off the first wave of competition from domestic competitors owned by their rivals, the low-cost carriers that have emerged since the mid-1990s present a more difficult challenge. Indeed, their attempts to develop low-cost subsidiaries – their response to the low-cost carriers – failed.36 While former flag carriers have not enjoyed meaningful growth since July 2000, the growth of the low-cost sector from 2001 has ‘matched the decline of the full-service sector’ (Intervistas ga2: 2006: 33). The impact of low-cost airlines was especially pronounced from 1998, reflecting the implementation of full liberalization from 1 April 1997. Ryanair was founded in 1985, commencing its rapid growth from 1991 when Michael O’Leary adopted the low-cost no-frills model pioneered by Southwest Airlines in the US. The Ryanair business model relies on keeping costs down by using a homogeneous fleet, and operating point-to-point services from lesser airports within striking distance of major cities to little-used regional airports,37 where rapid aircraft turnaround times allow high aircraft utilization rates. Easyjet, founded in 1995 and operating from Gatwick, Stansted and Luton, also uses a single aircraft type, offers a no-frills service and achieves high aircraft utilization rates, but is more willing to operate from major airports where it can attract a better share of business traffic. Both airlines have cut costs by pioneering Internet booking to sell directly to the customer. Although both airlines originally developed around hubs in the UK (both) and Ireland (Ryanair), they now have them in several other European countries as well. Moreover, both Easyjet and Ryanair have proven their robustness. In the economic recession that followed the terrorist attack on the World Trade Centre, British Airways plunged into heavy losses, cut 13,000 staff and 20 per cent of its aircraft capacity. The effect on Swissair and Sabena was even more severe. Both were forced into administration to re-emerge as regional airlines. Meanwhile Ryanair and Easyjet maintained their profitability with 25 per cent growth rates and announced plans to expand their fleet to accommodate a projected tripling or quadrupling of passenger numbers. By March 2002 the stock market valuation of Ryanair had overtaken that of BA, following the trend in the USA, where Southwest Airlines was worth more than the top five national airlines together. By 2006 low-cost airlines were carrying almost 100 million passengers a year, more than 20 per cent of the European market, and still growing at up to 25 per cent per annum. Explaining change in European aviation The transformation of the industry in Europe can mainly be attributed to the liberalization measures enacted by the European Community. As well as applying the Community competition rules to the sector, the three EU packages progressively limited the ability of governments to restrict capacity, limit market access and control tariffs, while creating new freedoms for airline companies, particularly independents. The effect was to remove the

254 Air Transport and the European Union

rigid constraints imposed by bilateral agreements and to open domestic networks to competitors from home and abroad. Community legislation put in place a multilateral regulatory regime that gave new rights to market entrants and that enabled airline companies from one EU state to operate services to, from and within any other. The measures introduced by the Community did not achieve their effects by provoking regulatory competition – the mechanism often identified in the literature as operative in the area of market making or negative integration. Although member governments sought to promote the interests of their aviation industries and their carriers, they did not do so by regulatory means. The framework introduced by the Community worked directly by depriving governments of the regulatory instruments that they had used historically to protect their favoured companies and by imposing controls on the extent to which they could offer financial support to national champions. Independent airlines, moreover, secured new rights which were guaranteed under EU law. Indirectly, Community legislation compelled those state-owned carriers that were not already competitive to overhaul their operations by creating a regulatory environment in which their governments could no longer offer total protection and support. At the same time, it is important to recognize two limitations to the Union’s impact. First, as the foregoing paragraph suggests, the measures adopted by the EC could not have produced a single market in air services by fiat. They depended, on the one hand, on the entrepreneurialism of market entrants, including start-ups such as Easyjet, and, on the other, on the ability of the management of the former flag carriers to make the transition to effective operation. This would involve often radical restructuring, the adoption of entirely new techniques, such as yield management (see Lehrer 1997) and cultural change. As with privatization, these processes were strongly influenced by structures of airline governance, state–flag carrier relations and the autonomy of senior management (see Staniland 2008). The French and German cases discussed earlier in the chapter testify to the importance of these intervening variables. Second, some governments made an important contribution to the changing shape of the European industry. The UK–Netherlands bilaterals, for example, had an important liberalizing effect, which increased market entry, the number of points served, and introduced competitive pricing (Abbott and Thompson 1991). The effects of UK domestic deregulation also antedated Community liberalization. In summary, however, most of the changes in the European industry followed the adoption of measures by the Community. They are unlikely to have happened in the absence of action by Brussels. Arguably, liberalization could not have been introduced by any other agency. As the UK demonstrated, there were limits to what even an influential liberal-minded state could achieve unilaterally. The proposals that ECAC had developed in the

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mid-1980s were considerably less radical than those adopted by the EC and, arguably, emerged only because reluctant governments sought (unsuccessfully) to pre-empt more radical action on the part of the Community. More broadly, the US was less concerned to promote multilateral liberalization than the negotiation of open skies bilaterals that would favour US airlines, while achieving the unanimous vote that would be necessary in ICAO was, and remains, a far distant prospect.

Conclusion The EU has brought about a revolution in European aviation. As the discussion in the chapter has shown, the liberal policy introduced by the Community has radically transformed the sector. With the restrictions that it has imposed on government action, interventions to enforce Community rules, and the freedoms granted to all European airlines that satisfy technical and financial criteria, the Union has forced the abandonment of the interventionist policies that previously characterized the sector. Where once there was a network of cosy bilateral relationships between governments and their airlines, there is now a pattern of alliances competing against one another for valuable long-haul traffic, while facing a severe challenge from low-cost carriers within the European market. In the early 1980s, only the Netherlands and the UK took a less restrictive approach to aviation, but since the early 1990s the EU has imposed a liberal paradigm across the EEA. Nor have the effects of Union action been restricted only to the economic regulation of aviation or to the substance of national policy. This chapter has noted how in technical and operational areas also the EU’s emergence and intervention have brought about a transformation of policy and policymaking. Traditional state-centric structures and intergovernmental methods have given way to more complex patterns of decision-making in reconfigured regional formations, involving close cooperation and a significant supranational element in regulation and policy leadership. Policymaking, moreover, which was formerly confined in tight national policy communities, is now a collective undertaking, shared with other member countries and EU institutions. A major consequence has been to transform the functions, responsibilities and operation of national administrations, as well as to shift the lobbying focus of aviation interests. An aim of this chapter, and the book more generally, has been to demonstrate the merits of the bottom-up approach. Tracking domestic policy in each of the four member countries has made it possible to disentangle and to trace the sources of change without the presumption that the EU has been the cause. That change in the Netherlands and the UK was driven by domestic factors rather than by action at the Union level is not a surprise, nor that Germany and France have been most affected by the emergence of the common air transport policy. The bottom-up method has made it

256 Air Transport and the European Union

possible to relativize the Union’s impact, however, and to identify other influences. In Germany, for example, there was evidence of domestic change taking place sotto voce in the administration in the late 1980s. In France, EU liberalization and especially enforcement action by the Commission were the key factors behind policy change, but international factors, in particular the pressures arising from the need for Air France to be competitive and the US insistence on an open skies agreement as the price for allowing the French carrier to enter a global alliance, were also important. Finally, the chapter has shown that in the area of economic regulation – a classic example of negative integration – regulatory competition was not the principal mechanism by means of which action at the EU level brought about change at the level of the member states. The case study has shown a more complex series of processes to be at work.

11 Conclusion: Revolution in the Air

Air transport provides a fascinating case for the study of EU policy and its impact. Until the late 1980s, the barriers to Community involvement in aviation appeared to be insuperable: an international regime was already in existence; states controlled which services operated to, from and within their territories; and the provisions of the EEC Treaty left to the Council of Ministers, acting by unanimity, the right to decide when, and indeed whether, common action might be taken. EC member states were in no hurry to make such a decision. Governments used the prerogatives entrusted to them under Chicago to ensure the presence of their flag in the skies. They made full use of the freedoms and independence which the Chicago system extended to them, cooperated in a range of specialist intergovernmental forums and sought resolutely to prevent the Community from making any incursion in the sector. Despite these formidable obstacles, the Community not only became involved in aviation – albeit 30 years after the signing of the Treaty of Rome – but has elaborated a detailed and wide-ranging policy that has revolutionized air transport inside the Union and has had far-reaching consequences beyond it. Although the EU’s involvement has attracted considerable attention among scholars, the full range of Union action and its effects have not previously been explored. Existing accounts tend either to focus on the breakthrough period of the mid-1980s to late 1980s or liberalization, while the EU’s impact on the sector has only rarely been a topic of study.1 By contrast, this book has sought to chart the development of the common air transport policy across the broad range of activities that it now encompasses. Its aim, however, has not only been to contribute a case study of policy development in an important and, at least from a political science perspective, an under-researched industrial sector, but to highlight shortcomings in the existing literature and to address debates and issues of wider interest to scholars of the EU. First, it has argued for the importance of the international in the study of the EU, which tends to be overlooked by both the European integration 257

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literature and scholars interested in Europeanization. While the former has tended to focus on the preferences, action and interaction of actors within the Union, ignoring the possible influence of external factors on EU policymaking, the preoccupation with the Union’s domestic impact that motivates the latter has led to a neglect of the consequences of EU action beyond the boundaries of the EU-27.2 The integration literature therefore disregards the possibility that international factors – the presence and structure of a regime, policy shifts or the actions of third countries – may affect the prospects or opportunity for EU policymaking. Scholarship on Europeanization, meanwhile, by focusing on domestic change, may miss how national policy and policy processes are affected by more complex iterative patterns. It also overlooks the external impact of EU action, which may in some cases be more consequential than its effects inside national borders. Second, the book has challenged existing accounts of how the Community made its initial intervention in aviation and the subsequent development of policy. As well as emphasizing the importance of the international setting and of external factors at different stages of EU policy development and across the various areas of policy, it has shown that very different processes were at work across the sector and that attempts either to explain policymaking in aviation in terms of a single factor, or to construe policy development after 1987 as the inevitable consequence of the adoption of the first air transport liberalization package, are ill-founded. A third argument concerns the Europeanization literature. As well as highlighting dimensions of domestic change caused by EU action that are often disregarded or overlooked in the Europeanization scholarship, the book challenges the top-down perspective that has become dominant in the literature and has argued in favour of the bottom-up approach as a method of assessing and evaluating the impact of the EU as a factor in domestic policy change. It contends that, while the topdown perspective that has emerged as dominant is able only to register the magnitude of change between two particular points in time, the bottom-up approach offers a more sensitive measure of when, how and to what degree the EU has been a factor in bringing about changes in national policy, and is a more effective tool for undertaking comparative analysis.

The importance of the international dimension Scholarship on the EU has significantly extended understanding of the dynamics of decision-making, the relative role and power of EU institutions, and the relationship between the EU and the member states. It has sought, particularly in the more recent past, to illuminate processes and developments using tools and concepts from an increasingly broad range of political science sub-disciplines, as well as the social sciences. However, there is an important respect in which it remains parochial. With the exception of scholars who work on the EU’s external policy and the few policy specialists who

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examine how the Union operates on the international stage, the literature on the EU remains curiously introspective. The attention of most scholars both within the traditional integration and the Europeanization literatures is focused firmly on developments that take place inside the Union. The preceding chapters have shown, however, that this narrow perspective is perilous. Not only can the international context be a key factor in EU policymaking, but action in Brussels can have a far-reaching impact on the world beyond the Union’s frontiers. The effects of international factors on EU policy development in aviation have been felt in several ways. Examination of why the Community’s first major intervention in the sector did not take place until the late 1980s, for example, must begin with the influence exerted by the post-war international regime that was founded on the Chicago Convention. The principle of sovereignty that it enshrined and the system of bilateralism that developed in its wake decisively shaped the preferences concerning intervention by Brussels both of EC member states and the flag carriers who were the beneficiaries of the way that governments chose to use their prerogatives. Embedded within the regime, moreover, were regional and global institutions with established functions and competencies. The EC-6, and later the EC-9 and EC-10, were entirely satisfied with the operation and structure of this system and the opportunities for cooperation that it provided. On the technical side, standards were set within ICAO, supplemented at regional level by ECAC, which also provided a forum for discussion of aeropolitical matters, routine cooperation and the exchange of views as necessary on issues arising. On the commercial front, member governments were able to control access, pricing and capacity unilaterally with non-scheduled and domestic services and through bilateral agreements in the case of international air services. They typically used their powers to pursue policies of patriotic interventionism, centred on the support and promotion of a state-owned flag carrier – the ‘national champions of the air’ (Kassim 1995). Against this background, states were strongly resistant to assertions of Community competence by the Commission and the European Parliament which would inevitably impose constraints on their freedoms, the adoption of binding regional rules that might impede the operation of an international industry and the involvement of what they perceived to be an inexpert bureaucracy in a sector that demanded experience and a high level of technical specialism. At the same time, external developments played a part in improving the prospects for Community intervention after the late 1970s. While it would be misleading to argue that US deregulation and the launch by Washington of a new foreign policy in aviation led directly to the adoption of the first package, the processes that they initiated created a structure of opportunity that was more conducive to EC action (Chapter 5). In broad terms, the US introduced an alternative paradigm to the restrictionist ethos that prevailed

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in the industry. As well as posing fundamental questions about the need for detailed regulation – the first time in decades that such a debate had taken place – and, once the benefits to carriers and passengers had become clear, the new US policy strengthened the hand of the few advocates of a liberal approach to aviation in Europe and beyond. Importantly, supporters of greater freedom and competition in the industry, including the British and the Dutch governments, as well as consumer representatives and some independent airlines, called specifically for Community action to liberalize the sector. The influence of the Chicago regime was evident even in the content of the proposals that led to the Community’s liberal breakthrough in the mid-1980s. One reason why the Commission’s second memorandum of 1984 succeeded where the first had failed five years previously was that the Commission took seriously the member states’ attachment to the bilateral system. Rather than the immediate creation of a new multilateral order that would have brought an abrupt end to a system with which the member states had operated since the mid-1940s, it proposed a relaxation of the more restrictive provisions of bilateralism. The fact that the Commission’s proposals were attuned to the existing system of regulating international services made it more palatable to the member states. The international context at the regional level has also been important. First, both liberals and traditionalists sought to use ECAC as the established arena for handling aviation matters for advancing their respective causes in ways that would affect debates within the Community (Chapter 5). It was ECAC, for example, that supporters of liberalization targeted in the early 1980s and in which under the Presidency of the liberal Dutch Director General, Hans Raben, regulatory arrangements in Europe were scrutinized in a series of authoritative reports. In the mid-1980s, however, ECAC became the forum within which traditionalists launched a counter-offensive, attempting to pre-empt the somewhat modest measures under discussion in the EC with an even weaker set. Second, the presence of ECAC as the authoritative forum could not be ignored by the Community. Unlike other fields, the EC could not simply act ab initio, but had to negotiate the existence of this important pre-established body. While in the 1980s the relationship was one of rivalry and competition, it has become a cooperative partnership since the 1990s. The organizations have found their way to a division of labour that exploits their relative strengths. The technical expertise and breadth of experience commanded by ECAC has been harnessed by the EC as a community of law. More broadly, external developments have provided important opportunities that the Commission has been able to use for strategic or tactical advantage at key moments. When in the 1990s, repeated efforts on the part of ECAC and Eurocontrol to improve air traffic management demonstrated the limitations of intergovernmental cooperation in tackling

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the problem of congestion in Europe, the Commission was able, with the support of the industry, to take a leadership role in promoting the idea of a Single European Sky (Chapter 7). In the same decade, it arguably would not have been possible for the Commission to have persuaded the Council that the Community should be entrusted with a mandate to negotiate an ASA with Washington had it not been for the second ‘open skies’ initiative launched by the US (Chapter 8). The experience of air transport underlies the importance of external factors in understanding developments within the EU. It shows not only how rapidly the EU can develop a comprehensive policy, but also how a supranational EU regime has to learn to accommodate and work with a wider international regime, to which the member states remain attached, and within which the EU must find its place. The Community has devised a variety of strategies for negotiating the structures of the Chicago regime, often accommodating itself to existing organizations and their functions rather than creating an entirely new EU apparatus. The extent to which the international context matters can, of course, be expected to differ between sectors and across time, but it should not be ignored as a potentially important variable. At the very least, it should not be presumed that EU policy and policymaking is to be explained in terms only of interaction between EU institutions, still less reduced to an account of inter-state bargaining between governments in the Council. The extent to which regulatory space in any particular sector has already been occupied is likely to confront the Community with very different structures of opportunity, leading to quite different possibilities for EC involvement. The air transport case also demonstrates how Union action can affect the outside world. The regulatory framework put in place in Brussels has had a dramatic global impact. The development of EU rules on licensing and Community ownership and control have transformed relations with third countries. Bilateral relations between EU member states and third states have effectively been regionalized, with ASAs negotiated at the Union rather than the national level. The Community has recast the traditional bilateral insisting on the systematic replacement of the traditional ‘nationality clause’ in the agreements signed between EU member states and third countries with a Community ownership and control provision. The significance of the Community’s new status and authority is perhaps most evident in the changing nature of relations between EU member states and the US. Whereas previously the US was able to negotiate agreements with individual EU states from a position of overwhelming strength, the Union’s emergence as a regulatory actor, empowered to negotiate ASA en bloc, has rebalanced the relationship. The US is no longer an unrivalled hegemon. While bilateral relations have been transformed by the Community’s external aviation policy, third countries have also been affected by the extraterritorial application of Community rules. The Community’s competition

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rules and regulations governing aviation safety are particularly important. With respect to the former, alliances and proposed mergers between thirdcountry airlines require the approval of the European Commission. In the area of safety, meanwhile, the Union maintains a list of airlines that are prohibited from entering Union airspace, and has powers of inspection that enable the Commission to scrutinize the safety standards, systems and procedures of third countries. The emergence of the Community at the centre of a multilateral, multilevel regional order that is supranational in character has posed an important challenge to the state-centric regime that has governed the sector since the 1940s. Although the Community cannot become a signatory to the Chicago Convention, and therefore cannot join ICAO, the Montreal-based organization has recognized its powerful international influence in economic regulation, environmental protection and safety through the development of contacts and cooperation in a growing number of areas. The Community’s impact has also been felt closer to home, where since the early 1990s the full Community regime in aviation has been adopted by a number of neighbouring states (Chapter 8). Initially, the policy was limited to Norway and Sweden, which were bound to Denmark through joint ownership of SAS, but it was soon extended to members of the EEA. It was expanded in 1996 to the central and East European countries that were then candidates for EU membership, and relaunched as the ECAA. Although with accession pending negotiations with candidate countries were discontinued in 2002, the mandate was extended to the Balkan states in December 2004. The objective was to integrate the EU’s south European neighbours in the single market in air services. The eight countries concerned have agreed to adopt the EU’s aviation acquis. Once fully applied, the ECAA agreement will include 36 countries and more than 500 million people, displacing the system of bilateral agreements within the region. The ECAA forms part of a wider neighbourhood strategy, which similarly aims to transform relations with countries in the Maghreb, the Middle East and bordering Russia. In terms of institutions, the Community has contributed to a major recrafting of the architecture that governs aviation in Europe, creating a complex new institutional geography. For many years, ECAC and the Union were rival organizations as European governments tried to reach an accord on tariffs and capacity within the conference in order to pre-empt EU action, but have since the 1990s found an accommodation. Though the Union has emerged as the authoritative arena for aviation matters in Europe, ECAC has not faded away. Europe’s senior aviation officials, at the level of Director General, still value ECAC’s relaxed intergovernmental framework and its inclusive membership, spending up to ten days a year at ECAC meetings.3 These advantages, together with the technical expertise available to ECAC, still lead the Commission to invite ECAC to develop proposals which can then be taken through the EU’s legislative system.

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ECAC has learned to accept that it cannot compete with the EU in any aspect of economic or technical regulation, but it supplies the Commission with texts that have laid the foundations for much EU legislation. This began with work on licensing, CRSs and slot allocation (Chapter 6), and continued with noise regulation, safety and security (Chapter 7). It also continues to run extensive training programmes particularly in safety and security, which attract substantial EU funding. The continuing role of ECAC is of more significance than might appear from its limited functions. Although the Community has become such an important actor in air transport, the issue of national sovereignty, so fundamental to the Chicago regime, refuses to go away. In Europe it remains important in air traffic control, particularly where military aviation is concerned, and in external relations where competence is shared. In air transport Europe is not just the supranational regulatory state in which Community law must be pre-eminent; it is also, still, a community of sovereign states running wider than the EU. The air transport community values a robust framework of law and regulation, but it is also a cooperative international industry, running wider than the EU, even within Europe, whose representatives network more comfortably in an intergovernmental context. If ECAC has learned to recognize the supremacy of EU law, the EU seems also to have learned that there is a continuing role for an intergovernmental organization which can manage network relationships better than the Commission. In both safety and air traffic control, moreover, the Community has played a leading part in the formation of new regional structures, redefining relationships between existing bodies and also introducing new elements. In aviation safety and air traffic management it has created new supranational regimes which give the Community a controlling presence in policies that were previously managed by the member governments in intergovernmental organizations. In safety, it created a new agency in the form of the EASA to assume responsibility for the certification of aircraft, from the JAAs, which had been an associated body of ECAC. In air traffic control, meanwhile, the Community has taken on a leadership role in new relationships with Eurocontrol and EASA. Finally, EU action has contributed to a reshaping of the international aviation industry. The emergence of some former flag carriers as internationally competitive commercial companies, as well as developments such as the merger between Air France and KLM which by some measures has created the world’s largest airline, has been important in this regard. Moreover, the response of the larger European airlines to the change in the regulatory environment effected by the Union has interacted with the effects of US deregulation to spread and strengthen global alliances. In the US, an initial period in the late 1970s marked by a wave of new entry was followed by a period of consolidation. Once they had demonstrated that, contrary to the expectations of the contestability theorists, incumbency carried advantages which enabled

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them to face off competition from lower-cost carriers, the majors began to acquire smaller airlines in order to extend their geographical and market spread. When they had attained critical mass in the US domestic market, they sought greater reach in international markets, using several mechanisms, including cross-national alliances.4 In the EU the adoption of the first package triggered a similar frenzy of alliance building among larger EU airlines, although nationality rules imposed constraints that did not apply in the US. European flag carriers sought to dominate their home markets through acquisitions, franchising and other forms of commercial agreement, to establish footholds in other member states and ‘to develop a global marketing spread through […] alliances with airlines in North America or the East Asia-Pacific region’ (Doganis 2001, p. 61). These typically involved joint marketing, code-share agreements and the acquisition of shareholdings. Though airlines moved at different speeds and particular partnerships came and went, participation in a global alliance has become a sine qua non for larger European carriers (see Chapter 9). Without EU liberalization, including Community ownership and control rules, which have made possible the emergence of internationally competitive carriers, it is uncertain that the alliances that have transformed the sector could have developed or become enduring features of the international industry.

The common air transport policy: The existing literature A second aim of the book has been to evaluate accounts of the development of the common air transport policy in the existing literature. Unsurprisingly, given the dramatic entry of the Community, the common air transport policy has attracted considerable attention in the literature. There are a range of approaches, but the three main accounts are offered from the perspectives of ‘power indices’ (van den Bos 1994), modified neofunctionalism (O’Reilly and Stone Sweet 1998a, 1998b) and historical institutionalism (Armstrong and Bulmer 1998) respectively. As specific challenges were outlined in Chapter 1 and Chapter 5, discussion here is limited to a number of general problems. The first is that these accounts, like the European literature more broadly, pay insufficient attention to the impact of international factors. As the discussion earlier has shown, the timing, content and development of key elements of the common air transport policy, including the initial breakthrough that is the focus of all three accounts, have been profoundly influenced by external factors. In a sector that is by definition international, this is a serious omission. A second problem is the tendency of the accounts from modified neofunctionalism and historical institutionalism to treat policy development after the adoption of the first package as inevitable. As Chapter 6 shows, however, the view that the second and third packages simply followed the first does

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not reflect the extent to which member states remained divided. The clash between liberals and traditionalists continued at least until the adoption of the second package. It was also evident in the conflict over Commission proposals to address other issues related to market making, including the non-discriminatory use of CRSs, slot allocation and ground handling at airports. Moreover, this is to focus only on liberalization. While it is true that Community policy would not have developed in areas such as safety, air traffic control or external policy (Chapters 7 and 8) had the single market in air services not already been in existence, it was certainly not the case that Community competence simply ‘spilled-over’ from liberalization. Treating developments after 1987 as a consequence of the first package also overlooks the complexities in deepening and broadening the common air transport policy – a third problem. The policymaking context varied significantly between different areas of aviation, and policy development followed quite different trajectories. The presence or absence of other competent international bodies or rules at global or regional level is a factor that has already been discussed, but the settings for negotiation and decision have differed significantly. The diversity can be seen by considering the resources available to, and the constraints confronted by, the Commission. Commission activism has been a constant since the late 1970s, but the policymaking challenge it faced differed. In a small number of areas, member states have been generally supportive of Community law making and it has been relatively easy for the Commission to construct a winning coalition. In safety, for example, governments wanted a single standard, saw the benefits of giving standards produced by technical experts the force of Community law and recognized that the experiment with the JAA had not worked (Chapter 7). Similarly, in noise emissions, member governments had all adopted high environmental norms, so that there were no divisions between supporters of higher and lower standards. In other areas, policy development has been considerably more arduous. The case for Community regulation of passenger rights was more political than technical. Although member states could not be seen to oppose the initiatives taken by the Parliament and the Commission, they were less than enthusiastic in the face of opposition from their national airlines. In some areas, the Commission has been able to use its enforcement powers relating to the Community competition rules to ‘persuade’ reluctant member states to adopt legislation. This resource has not been available to the Commission in all areas, however. In air traffic control, for example, there was no ‘big stick’. The support of the airline industry was an important resource, but it was only after intergovernmental possibilities had been exhausted that member governments lent their support to the Commission’s ambitions for the Single European Sky. The road leading to the common external aviation policy, meanwhile, proved to be long and tortuous. It was only after a number of rulings by the Court, the unrolling by the US of its ‘open skies’

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campaign, and a turnaround on the part of the member states that the Commission finally succeeded in securing a Community mandate. Even then, it secured less than it had sought. In summary, accounts of the development of the common air transport policy need to take account of the high level of segmentation that exists in aviation. Differences in decision-making settings, the extent to which international norms are already in place, action by third parties and the capacity of other bodies to find solutions suggest that the explanation of policy development cannot be reduced to a single set of variables. Still less can EU policymaking across the breadth of the sector be regarded as the inevitable follow-on to the first package.

Europeanization: In favour of a bottom-up approach The book’s third aim has been to explore how the Union has affected national policy and policymaking in aviation and to argue for the merits of a bottomup approach to Europeanization. Whereas claims about the EU’s impact are often based on the effects of a single item of legislation or address changes across a relatively short timescale, this volume has sought to investigate the consequences of Union action across an entire policy sector and over more than five decades. A more general analysis was supplemented by case studies of four leading aviation countries – France, Germany, the Netherlands and the UK – undertaken in order to develop a detailed understanding of national policy and policymaking processes. It has charted far-reaching change, not only in the substance of national policy, where, for example, there is evidence in France and Germany of a ‘paradigm shift’ in the economic regulation of aviation (Hall 1993), but in where and how policy is made, and in the functions, responsibilities and operation of national administrations.5 Although the top-down perspective has become dominant in the literature, it has been subject to a running critique from advocates of a bottom-up approach (Goetz 2000, 2002; Dyson 2002; Dyson and Goetz 2003; Radaelli 2000, 2003, 2004), that has not been formalized, but which proposes a more sensitive method for establishing the extent to which, where domestic policy change has occurred, it is the result of EU action. Whereas the top-down approach begins with an account of Union-level developments, then moves to an assessment of domestic policy change, the starting point for the bottom-up approach is an examination of domestic policy over a particular period. There are two main difficulties with the top-down method. First, by investigating EU action first, it appears to presume that the Union has caused whatever change has occurred subsequently in national policy. It discounts other possible influences and sources. Second, although it can register the magnitude of change between two points in time, it cannot identify precisely when change has taken place.

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By tracking the trajectory of national policy, the bottom-up method, by contrast, takes a more open view of the factors accounting for any change. Where change takes place, its sources can be traced and disentangled without any presumption in favour of a particular cause. Indeed, Radaelli (2003) insists that where it is suspected that the EU might be responsible for a particular change a rigorous three-test should be applied: first, it should be established that EU action predated domestic change (the sequencing test); second, it should be demonstrated that had EU action not taken place, the domestic change in question would not have happened (the counterfactual test); and third, it can be shown that no other factor could have brought about the change (the alternative hypothesis test). Moreover, contrary to the top-down perspective, the bottom-up approach can identify exactly where change between two points in time has taken place. This sensitivity to time gives the approach considerable analytical advantage. It makes it possible to determine in any case not only that change has taken place, but how soon it followed EU action, how long it took to implement and whether the change took the form of a single event or was spread over a period. Its ability so to do is of particular benefit in comparative analyses. Both advantages are apparent in the examination of policy change in the economic regulation of aviation. Taking, for example, the period between 1987 and 2008, use of the bottom-up approach showed that changes in national policy in Germany and France were largely attributable to EU action, whereas in the Netherlands and the UK the drivers were domestic (Chapter 10). However, other factors also made some contribution. In Germany, for example, ideologically inspired action on the part of a new government and the turn towards liberalization on the part of national officials had brought about a change in thinking around the time that the first package was adopted. International factors, specifically US pressure on member governments to agree to open skies bilaterals, were important in France, Germany and the Netherlands, but in the case of France and Germany were significant only because they followed earlier changes made in response to developments in Brussels. In the UK, by contrast, US pressure had far less leverage.6 In regard to the ‘time, timing and tempo’ (Goetz 2000, p. 223) of change, examination found that, while Germany responded relatively quickly to the adoption of the first package and the move towards liberalization, France’s response was slower, considerably more painful and spread over a longer period. It is unlikely that the top-down perspective could have provided these insights. The top-down perspective proceeds on the assumption that EU action is the principal cause of domestic policy change. Also, although it registers change between two points in time, it is inattentive to the timing or the tempo of change. Furthermore, the bottom-up approach made it possible to investigate the processes that produced change and, in so doing, highlighted the importance of airline governance structures and the nexus

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of flag carriers-state relations as key intervening variables. In both France and Germany, these factors made both the transition from productioncentred flag carrier to commercially-minded company and privatization very different for Air France and Lufthansa (as compared, for example, to British Airways or KLM, which had far greater managerial autonomy). Two further findings are of interest. First, the analysis revealed an especially complex interaction between France and the EU which ultimately has had a paradoxical outcome. A number of the changes that took place in French aviation were the result not only of the EU’s three liberalization packages, but of intervention by the Commission when, in decisions in a series of competition cases involving Air France, notably its merger with UTA and Air Inter and several state aid cases, it insisted on the French flag carrier’s surrender of slots to competitors and the imposition of certain restrictions. In addition, the Commission’s decisions in the ‘battle of Orly’, where the French authorities had sought to use the traffic distribution rules to prevent Community carriers from taking advantage of market entry rights granted by EU legislation so that they could not compete against French airlines, required the Community’s liberalizing measures to be applied earlier in France than elsewhere (Chapter 9). The paradox is that, despite the French government’s defiant and long-standing opposition to liberalization, its continued attempts to protect the French industry, and its reluctance to privatize its former flag carrier, Air France has emerged as one of Europe’s most successful airlines, but would not have done so had the Community not created a single market in air services. Second, although policy change in Britain and the Netherlands largely antedated EU action and indeed both states had strongly supported liberalization by the Community, they were not unaffected by the creation of the single market in air services. This challenges the idea that member governments who assume the role of policy leaders (Héritier et al. 1996) can export their preferences to Brussels without having themselves to undergo a measure of policy change and adjustment. As well as arguing for the bottom-up approach, the book has sought to contribute more broadly to scholarship on Europeanization and to explore its limitations. As Goetz (2000) has argued, one of the weaknesses of the Europeanization literature has been its identification of how decisions taken in Brussels produce their effects in the member states. In the case of negative integration, where the EU removes national barriers, as opposed to positive integration, which involves the formation of new policies, it is often contended that Union action brings about change by regulatory competition (see, e.g., Knill and Lehmkuhl 1999). However, in the area of economic regulation at least, it has been through the imposition of sectoral regulations and the implementation and enforcement of the competition rules that EU action had led to change in national policy. In the case of the former, the Union has deprived governments of key regulatory instruments they used historically to shelter their carriers from competition and created

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new rights in the form of commercial freedoms that are not subject to state control, but can be exercised by any carrier that satisfies EU criteria for financial and technical fitness. In regard to the latter, the Union has applied Community competition rules in aviation, when previously it was effectively excluded from national regulations governing anti-competitive practices. As well as proscribing anti-competitive behaviour by airlines, the use, attempted or actual, by governments of the traditional tools of industrial policy such as mergers and state aid is monitored by the Commission. The case studies have also demonstrated limitations in Europeanization scholarship. Although the available toolkit is helpful for examining change in the economic regulation of aviation, it is less useful in technical or operational areas. For example, EU action has brought about significant change in domestic policy practice in regard to safety and air traffic control. In both areas, governments previously enjoyed considerable discretion. In safety, they could decide whether to adopt the standards agreed in ICAO or ECAC, while in air traffic management they made their own decisions in regard to equipment specifications and procurement, operational procedures and the extent of cooperation with intergovernmental agencies. With the development of more integrated structures and a new level of prescription, this is no longer the case. Yet impact on domestic policy of this kind which is process- rather than product- centred is not readily captured by existing analyses of Europeanization. Moreover, for all that it has been criticized for its institutional bias (see, e.g., Bache and Jordan 2007, p. 13), the Europeanization literature is better adapted to investigating and reporting change in domestic policy than changes in policymaking. It is not only that the roles, responsibilities and operation of national administrations, as well as the government’s function as gatekeeper for societal interests and traditional patterns of interest intermediation, have changed as a result of EU action, but that the locus of decision-making has migrated from the member states to Brussels. The entire system of policymaking has been transformed. Historically, aviation represented a classic case of subgovernment (Griffith 1939; Heclo 1978; Jordan 1990; Jordan and Maloney 1997) – whether the ‘village’ in France described by Lehrer (1997) or the ‘quadrant’ of transport ministry, flag carrier, foreign affairs ministry and Leiden Department of Air and Space Law that existed in the Netherlands – where policy was largely decided away from parliament and where the cabinet rarely intervened. Now it is a collective enterprise, shared with other member states and EU institutions, and with the involvement due to the Commission’s commitment to inclusive policymaking of a large array of aviation interests. These changes, which are profound, are difficult for the Europeanization literature to capture.7 This may partly reflect the influence of the top-down approach, which insists on a strict separation between EU and national levels, but the gap is one that it is important to fill. Finally, as part of its examination of the changes brought about by the EU, the book has investigated the Union’s impact on European aviation.

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The Union’s impact on industry is another dimension of change that the Europeanization literature rarely explores. In the case of air transport, the effects of Union action have been dramatic. The EU has transformed the regulatory environment in which air carriers operate, confronting them with a radically different structure of opportunity to that that existed before the late 1980s. It has brought about a far-reaching restructuring and re-organization of the industry, encouraging new business models, practices and strategies, and prompting the dismantling of the traditional flag carrier system.

Suggestions for future research Although caution should be exercised in making generalizations on the basis of a single case study, the experience of air transport suggests at least three further directions for future research. The first is to investigate more extensively the impact of international factors on the dynamics of EU decisionmaking. Which international factors make a difference? How exactly do international regimes affect the prospects of EU policymaking? Does their configuration make a difference, and if so, how? What is the outcome when there is a conflict between member states obligations to an international regime and to the EU? The second is to examine the external consequence of EU action. How does the development of EU policy affect international regulatory structures? How do international bodies respond to the EU as a regulatory or political actor? What form does the relationship between the EU and other bodies take: Partnership or rivalry? Domination or peaceful coexistence? The third concerns the Europeanization literature. What would an application of the bottom-up approach reveal about the EU’s impact in other sectors? Has it been exaggerated? How can the domestic effects of the EU that are overlooked by existing scholarship be captured?

Notes 1

Introduction

1. Both ‘European Community’ and ‘European Union’ are used, but not interchangeably. We endeavour to use ‘European Community’ when discussing either events that took place or developments originating before the Treaty of Union came into effect, or powers, rules and policies that are associated with or apply to the Community but not the Union. We use ‘European Union’ to refer to developments following November 1993 or, where appropriate, as the more general and inclusive term. 2. ‘No frills carriers’ is used in preference to ‘low-cost carriers’, which, as CAA (2006: paras. 1.16–21) points out, does not differentiate airlines, such as easyJet and Ryanair, from charter companies. 3. See http://ec.europa.eu/transport/air_portal/doc/legislation/2006_aviation_code_ en.pdf. 4. As Christopher Chataway, then Chairman of the UK Civil Aviation Authority, noted in the early 1990s, ‘The new regulations have not, of themselves created a more competitive industry in Europe. Rather, they have set the conditions whereby a more open, competitive market can be brought about’ (CAA 1993, p. iii). See also Kraft (2005). 5. See Lehrer (1997) and Staniland (2008) for a discussion of the processes involved. 6. The articles of the EEC Treaty were renumbered when the Treaty of Amsterdam came into effect. For reference both sets of numbers – those pre-dating the Treaty of Amsterdam and those used after 1 May 1999, when the Treaty came into effect – are given in the text, but whether the old comes before the new depends on the historical context under discussion. 7. Krasner (1983, p. 1) defines an international regime as a set of ‘implicit or explicit, principles, norms, rules, and decision making procedures around which actors’ expectations converge in a given issue-area’. For discussions of regime theory, see Haggard and Simmons (1987), Strange (1982) and Kratchowil and Ruggie (1986). On regime theory and international aviation, see Nayar (1995) and Zacher and Sutton (1995). 8. While the classic integration literature is concerned with the pooling of sovereignty by member states or developments at EU level, the Europeanization scholarship looks at the consequences of EU action for the member states. The ‘Europeanization “turn”’ ( Jordan and Liefferink 2004, p. 1) sought to ‘bring domestic politics back into our understanding of European integration’ (Radaelli 2004, p. 3). For a recent review, see Graziano and Vink (2007). 9. For other analyses of EU policy development in aviation, see Button and Swann (1989, 1991), Espérou and Subremon (1997), Jankovec (1999), Lawton (2002), Staniland (2003, 2008) and Travis (2001). See also the chapters in Doganis (1985, 1991a, 2001Sochor (1991), Stevens (2004), Thatcher (2007) and Wheatcroft and Lipman (1990). Bulmer et al. (2007), which compares the experiences of air transport, electricity and telecommunications using a policy transfer framework, appeared too late for detailed critical discussion here. 271

272 Air Transport and the European Union 10. As Kassim and Menon (1996, p. 1) observed, researchers set out to explore what they called variously ‘communitarianisation’, ‘Europeification’ and ‘supranationalisation’. The term ‘Europeanization’, though employed, was not used with any consistency. Compare, for example, Ladrech (1994), Muller (1995) and Favell (1998). For further discussion, see Hix and Goetz (2000), Olsen (2002), Radaelli (2003, 2004) and Jordan and Liefferink (2004, pp. 5–7). 11. It has also become more ambitious and sophisticated. Cowles et al. (2001), for example, undertake a wide-ranging examination of the EU’s influence on several aspects of political life. Greater care is taken in research design, especially with regard to isolating the impact of the EU from other factors (see Haverlund 2005; Levi-Faur 2004, though see Haverlund 2003, p. 218). 12. The objects of research have become more diverse, however, moving beyond an investigation of structural or institutional change which preoccupied the first generation of Europeanization scholars to examine the impact of EU action on ideas, discourse and identity. See, for example, Dyson and Goetz (2003) and Radaelli and Schmidt (2004). 13. See, especially Cowles et al. (2001), Jordan and Liefferink (2004), Börzel (1999), and Börzel and Risse (2003). Though see also Börzel (2002) and Héritier et al. (1996). 14. See especially Goetz (2000, 2002), Dyson (2002), Radaelli (2000, 2003, 2004), Héritier et al. (2001), Börzel (2002), Thatcher (1996, 2004) Laffan et al. (2000). The bottom–up approach was prefigured in the research design followed in Kassim and Menon (1996). 15. While negative integration involves the removal of barriers to trade and competition, positive integration is the process by which new common policies, rules or regulations are developed. See Scharpf (1996). 16. It challenges the argument that domestic policy change in such areas is driven by regulatory competition, as contended, for example, by Knill and Lehmkuhl (1999) and Thatcher (2007). Knill and Lehkuhl (1999) argue that, while positive integration involves the adoption of a model at the EU which member states are compelled to emulate in their national arrangements, negative integration changes domestic opportunity structures and leads to regulatory competition between member states. However, this is not a contention that has been borne out in the literature (see Radaelli 2004). In one of the few examinations of a case of negative integration – a study of the liberalization of road haulage carried out by Héritier and her collaborators (2001) – the differential impact of EU action is explained in terms of three factors: the extent to which member states had moved towards liberalization, ideology (interventionist or pro-liberal) and reform capacity. 17. The concept of ‘opportunity structure’ originated in sociology, where it is associated with the view that the chance for individuals or groups to attain goals or achieve rewards is shaped by the way in which society or an institution is organized. In his classic analysis of social movements, Tarrow (1994) elaborated the idea of the political opportunity structure and argued that the possibilities of collective action were constrained or expanded according to the type of political opportunity structure in place in a particular setting at a particular time. The contention made in the current volume is that the international setting at any particular moment is more or less conducive to Community action.

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18. Studies that focus on the impact of the international on national institutions and policy (see, e.g., Thatcher 2007) may demonstrate that change is not domestically driven, but they lose analytical purchase by collapsing three separate interactions – between the international and the EU, the international and the domestic, and the EU and the domestic respectively – into a single causal relationship between the external and the domestic. As a consequence, they are unable to detect a range of relevant effects, such as when member states use the EU necessarily as a facilitator to adjust to global pressure or, as in the case of air transport, where EU action has domestic consequences, but has also had a major international impact. 19. The issues are the lowest possible deep discount fare, the fluctuation margin in capacity distribution, the number of discretionary exemptions to the inclusion of hub-regional traffic, the degree to which hub-regional traffic would be taken in to account in the capacity balance and the duration of the first liberalization package (van den Bos 1994, pp. 59–60). 20. In summarizing their findings, Armstrong and Bulmer contend that their favoured approach generates insights at different levels of analysis. With respect to systemic change, defined in terms of the relationship between EU member states and the EU, they emphasize that the majority in the Council was forced to give way before the Commission and the European Court of Justice, stating that ‘the EU institutions utilised their autonomous power resources to go beyond what most member governments wanted’ (1998, p. 189). Concerning governance structure, Armstrong and Bulmer underline the importance of both the introduction of qualified majority voting to air and sea transport under the the Single European Act that introduced qualified majority voting to sea and air transport which‘changed the calculations of the member states’, and the Commission’s ability to use its competition policy powers, which enabled it to exploit the Court’s landmark ruling in Nouvelles Frontières . Policy evolution, they argue, was iterative; the interaction between the Commission and the Court was crucial; and the construction of the policy problem by the Commission – ‘liberalisation’, not ‘deregulation’ – was important. Finally, ‘policy norms were transformed in the Commission by the Nouvelles Frontières ruling and the link with the SEM, reinforcing the “mission” of DGs IV [competition] and VII [transport]’ (1998, p. 189). 21. Curiously, although they emphasize the importance of the Court’s decision in Nouvelles Frontières , O’Reilly and Stone Sweet do not establish a direct connection between the intensification of intra-European traffic, which is the main driver of integration in their account, and the Court’s ruling. 22. Travis (2001, p. 155) puts the point somewhat more directly: ‘Interest groups played no important part in the liberalisation process.’ 23. In their seminal article March and Olsen famously describe the new institutionalism as not a theory, but an ‘empirically based prejudice’ (1984, p. 747). 24. On the EU as a constitutional order, see Stein (1981), Mancini (1989), Weiler (1991) and Shapiro (1992). 25. March and Olsen (1984) is the seminal text, setting out the premises of the new institutionalism. See Hall and Taylor (1996) for an overview of its three variants – historical, rational choice and sociological. See Pollack (1996, 1997, 2003) and Schmidt (2000) for analyses using rational choice institutionalism. 26. The other strategy Schmidt (2000) identifies is ‘divide and rule’. In this scenario, the Commission uses its competition policy prerogatives to target those member

274 Air Transport and the European Union

27. 28.

29. 30. 31.

2

states opposed to liberalization by forcing them to implement domestic changes that bring them into compliance with Community competition rules. The policy preferences of the states involved are transformed as a result. In order not to be disadvantaged, they then advocate further liberalization by the EU to level the playing field. On focal points, see Riker (1962, 1996). For applications to the EU, see Tsebelis (1994, 1995) Tsebelis and Garrett (1997, 2000). Such a construal ‘imposes an artificial construction on EU-member state relations; rather than seeing the EU as an institutional ensemble in which the member states … play a leading part and collectively contribute to the determination of policy … [treating] … the EU as a separate organ which imposes its decisions on the member states’ (Kassim and Menon 1996, p. 4). As Héritier et al. (2001 2) observe, governments ‘exert influence in shaping polices at the European level by which they are subsequently transformed’. This approach was taken, for example, by Kassim (1996) and Thatcher (1996). The quotation comes from Dyson (2002, p. 2). He also includes convergence, which the current authors disregard.

From the Chicago Conference to the New US Aviation Policy

1. For discussion about whether the Chicago system constitutes a ‘regime’, see Nayar (1995). The unargued contention here is that it possesses the properties of a regime, as defined by Krasner (1983) (see Chapter 1). The view that it does not qualify on the grounds that it is overly sensitive to the preferences and actions of a single nation is based on a category mistake. The US altered the content of bilateral agreements, not bilateralism as a system. 2. The idea that commercial aviation should be governed by the same principle as maritime transport has had its adherents, but concerns about security and awareness of the industry’s military potential led governments to agree that sovereignty should be the cornerstone of international air transport. 3. The Convention relating to the Regulation of Aerial Navigation, signed at Paris on 13 October 1919, and adopted by the post-war peace conference, began with the proclamation that each state ‘has complete and exclusive sovereignty over the airspace above its territory’. Though the Paris Convention can claim to have been the starting point for the international regulation of aviation, representatives of 18 states had met in the same city in 1910 to negotiate a multilateral convention, but had been unable to reconcile opposing viewpoints. While the UK proposed the principle of state sovereignty, France and Germany wanted to open airspace to the aircraft of all nations. As political tensions mounted in the years leading up to the First World War, first Britain (in 1911), and then other European states, enacted legislation to safeguard national sovereignty by creating powers to regulate the entry of foreign aircraft and effectively to close national airspace. Support for freedom of the air had been voiced at the beginning of the century by French lawyer, Paul Fauchille at a meeting of the Institute of International Law in Brussels (Cooper 1947 cited in Taneja 1980, p 1), but the development of military aviation in the First World War appeared to support the case for national sovereignty (Sampson 1984, p. 24). 4. For detailed discussion of these agreements, see Cheng (1962); see also Naveau (1989). For texts of the agreements, see ICAO website http://www.icao.int/icao/

Notes

5.

6. 7.

8. 9.

10. 11.

12. 13. 14.

15.

16.

17.

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en/leb/treaty.htm., visited 15 January 2009. For accounts of the negotiations at Chicago, see Gidwitz (1980, pp. 46–51), Sochor (1991, pp. 1–21) and Sampson (1984, pp. 62–71). The US invited 56 countries to attend the Conference, including the USSR, which sent a delegation, though it did not participate in the negotiations. The Axis powers were not invited. A US negotiating team had participated in the drafting of the Paris Convention, but it was rejected by the Senate and the Convention became in effect a European regional treaty. The Havana Convention, signed in 1928 by the US and 11 Latin American countries, was modelled on the Paris Convention, but provided for the multilateral exchange of liberal air traffic rights. The division was not between Americans and Europeans, since Scandinavian states also favoured multilateralism. In the interwar period, international air services were facilitated by bilateral agreements, but these were typically negotiated by the airline and the state of destination rather than by two governments. For discussion of technical regulation, see Doganis (1991a, pp. 24–6) on which this section draws extensively. They cover aircraft worthiness; aircraft maintenance, including the training of engineers, the numbers, type, duties; training and licensing of flight and cabin crew; workloads and schedules; operation of aircraft and airlines – operators must be licensed by a relevant civil aviation authority in their home state, and must satisfy certain criteria and operating standards – and aviation infrastructure. The 18 annexes are available at http://www.icao.int/cgi/goto_m.pl?icaonet/anx/info/ annexes_booklet_en.pdf, checked 15 January 2009. Practice has come to recognize four further freedoms, the sixth, seventh, eighth and ninth (see Glossary). As Gidwitz notes (1980, p. 50), ‘The full Five Freedoms, or Transport Agreement, was adopted by only sixteen countries and, therefore, never gained acceptance. The United States, one of the few countries to sign the agreement, denounced it in 1946 when it decided that bilateral negotiations should determine capacity and fifth-freedom rights.’ For discussions of the bilateral system, see Cheng (1962), Lissitzyn (1964), Loy (1968), Doganis (1991a, 1993), Espérou (1989) and Espérou and Subremon (1997). The 1946 agreement is generally known as ‘Bermuda I’ and its successor, negotiated in 1977, as ‘Bermuda II’. This reflects the requirement in Articles 17–20 of the Chicago Convention that carriers have a nationality by being registered in a particular state and obtain the permission of that state to operate services to and from its territory. On IATA, see Branckner (1977). See also Sampson (1984) and Doganis (1991a, pp. 36–41). IATA has the right to participate and table documents in all ICAO committees and panels (Sochor 1991, p. 18). The International Air Traffic Association (emphasis added) was founded in 1919 by six European airlines at The Hague. It emerged as the single body for airline cooperation, eclipsing the Transport Europe Union, based in Central Europe and by 1929 had 23 members. Sampson (1984, p. 93) lauds its achievement in ‘bringing order out of chaos, coordinating and synchronising the polyglot airlines’. By 1949, IATA could claim that it had ‘at last welded together the services of the world’s airlines into an integrated world transport system’.

276 Air Transport and the European Union 18. Airlines have to apply, season-by-season, for operating permits, which specify the services they propose to operate. 19. ECAC (1982) found that between 75 and 85 per cent of tonne-kilometres performed on intra-European services were covered by pooling arrangements. Two-thirds involved the coordination of frequencies, all involved revenue sharing and 10–15 per cent cost sharing. 20. Defining non-scheduled services has proved an elusive undertaking. A rough distinction is that international scheduled services were directly available to the public, while non-scheduled services had to be purchased through intermediaries. 21. For further discussion of the regulation of non-scheduled air services, see Cheng (1962), Wheatcroft and Lipman (1986), Doganis (1991a) and Loder (1986). 22. Though this is not necessarily attributable to the regulatory system (see Doganis 2001, pp. 4–25; see also Borenstein and Rose 2008). 23. The most dramatic changes were the replacement of piston by turbo-props in the 1950s, the jet revolution of the early 1960s and the introduction of wide-bodied airliners in the 1970s. More recent incremental advances have produced larger, lighter and more efficient aircraft. 24. See Dobson (1995, chs. 3, 4, 5, 7), Taneja (1980), Pickrell (1991) on the politics of US deregulation. 25. For analysis of the effects of US deregulation, see Bailey et al. (1985). See also Borenstein, S. (1992) ‘The Evolution of US Airline Competition’, Journal of Economic Perspectives, 6:2, 45–73 Kaplan (1982), IATA (1985), Kahn (1988), Morrison and Winston (1986), Department of Transportation (1990), Wheatcroft and Lipman (1990), Williams (1993), Button (1991a) and Dempsey and Goetz (1992). See also Barrett (1991, pp. 21–2). 26. The theory was applied to air transport by Bailey and Panzer (1981), Levine (1987) and Morrison and Winston (1987). 27. The most important were Sabre developed by American, Apollo by United, SystemOne by Texas Air, Pars by TWA/Northwest and Datas II by Delta. 28. For concerns about the threats posed by CRSs and FFPs to competition, see Katz (1988) and Kasper (1988, pp. 34–6) and Wheatcroft and Lipman (1986, p. 93) respectively. 29. The new US foreign policy was not universally welcomed in Europe. For a sense of the consternation it provoked on the part of traditionalists, see Naveau (1989, pp. 144–55). 30. See the excellent discussion in Gidwitz (1980, pp. 91–9). 31. The fact that the vast majority of fares, particularly in the key UK–US market, fell outside the discount zones and therefore remained subject to bilateral approval procedures tends to confirm that the US negotiators and their airlines were not as committed to deregulation as the CAB which triggered the crisis. 32. The development of this policy can be traced through successive formal statements in 1970, 1976, 1978 and 1995. However, the pro-competition rhetoric often concealed important interdepartmental differences between the State Department, the Department of Transportation and the CAB (see Dobson 1995, pp. 53–7, 63, 104–13). 33. The statement proclaimed: ‘We will aggressively pursue our interests in expanding air transportation and reduced prices rather than accept the self-defeating accommodation of protectionism. Our concessions in negotiations will be given in return for progress toward competitive objectives, and those concessions

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themselves will be of a liberalising character,’ Statement of 21 August 1978, (cited in Dobson 1995, p. 163). 34. A full list can be found in Driscoll (1981). 35. Some innovations were not emulated. For example, the US–Luxembourg bilateral allowed unlimited charter rights between the two countries.

3 National Aviation Policy in Europe 1. Staniland (2003), on which this chapter draws, offers an excellent analysis of European aviation that focuses on the flag carriers or, after the title of his book, Government Birds. 2. ‘Prior to World War I, there had been only a few attempts, of an experimental character, to use aircraft for transportation’ (Lissitsyn 1942, p. 1). 3. A service between Paris and Brussels was opened in February 1919, followed in March by a second between Vienna and Padua. The first commercial service in the USA flew from Seattle to Florida, and also commenced in March 1919. 4. Lissitsyn (1942) uses the term to describe the development or extension of state participation in economic activities. See also Staniland (2003, pp. 26–35). 5. As early as 1917, H.G. Wells, as a member of the Weir committee in the UK, stressed the ‘supreme importance to the Empire of the immediate establishment of Imperial Air Services at the Peace’ (cited in Staniland 2003, p. 38). As Sampson (1984, p. 24) observed: ‘European attitudes were very different from states in emptier and vaster continents. Their ambition was to bind colonies and overseas settlements more closely to the home country.’ 6. Lissitzyn (1942, p. 60) remarks that ‘ “le rayonnement de l’influence française” [the spreading of French cultural influence] was frequently mentioned among the objectives of French air transport policy’. 7. Aeroflot was apparently the only airline that began its life in the public sector (Davies 1964). 8. Despite its name, Royal Dutch Airlines was set up by a private consortium. Its founder, Albert Plesman, had believed that the company could succeed independently from the state, but realized before its first flight that it would need support from public finances. 9. It was not the only UK airline to operate international services between the wars or the only carrier to receive subsidies. A privately owned company, British Airways, formed in 1935 from the merger of two independents, was authozised on routes to the European mainland. Continental Airways, also an independent carrier, operated domestic services, and several small companies provided regional services. 10. This was one of three company-types – the other types were companies run directly by the state and unsubsidized companies – defined under the law of 11 December 1932, which established the framework for commercial aviation in France. The semi-public firm was a compromise between economic liberals and supporters of nationalization (see Espérou 1984, p. 79). 11. Air Orient, Compagnie Générale Aéropostale, Société Générale de Transport Aérien (founded as Lignes Aériennes Farman in 1919), Air Union and CIDNA (Compagnie Internationale de Navigation) combined to form the Société Centrale pour l‘Exploitation de Lignes Aériennes (SCELA). 12. See, for example, the criticisms levelled against Imperial Airways by the 1938 Cadman Report (Baldwin 1985, p. 17).

278 Air Transport and the European Union 13. Sir John Reith of the BBC, who had become chairman of Imperial Airways in 1938, called immediately for the company’s amalgamation with British Airways, which then proceeded under his chairmanship. 14. The creation of SAS in 1951 followed several abortive attempts. ABAB (Sweden) held a three-sevenths share, while two-sevenths were controlled each by DDL (Denmark) and DNL (Norway). A holding company was incorporated in New York in order to avoid possible problems under international law. The three countries renegotiated their ASAs to include a waiver of the customary ‘nationality clause’ and provisions relating to crew. 15. These tended to reflect broader national economic, social and corporate practices, concerning the organization of management structures, the role of the CEO and worker representation on executive or supervisory boards, as well as practices, such as proporz, which are characteristics that collectively distinguish different models of capitalism. See Shonfield (1965), Crouch and Streeck (1997) and Albert (1991). 16. In a book written following his resignation, Bernard Attali, president of Air France between 1988 and 1993, described this arrangement as the ‘Yalta franco-française’ (1994). 17. The government gave Air France sole rights to the Maghreb, Senegal, east Africa, Madagascar and the Indian Ocean, UTA to western, equatorial and southern Africa, except for Senegal. 18. Hymans was, reportedly, delighted at creation of Air Inter (Staniland 2003, p. 101), though the lack of a domestic base for Air France would eventually prove to be costly. 19. Even so, from 1960 Air Inter was subsidized by local government and the French Chamber of Commerce. From 1962, the government paid the company an annual subsidy to assist in aircraft procurement. Its ‘monopoly’ did not include Nice or Corsica, which were served by Air France. 20. The 1967 document set out three categories of financial support (Staniland 2003, p. 102). It was extended in 1974 for a further six years, but not renewed when it lapsed in 1980. 21. These included Paris-Nice, where there was to be an equal sharing of capacity. On routes to Corsica, Air Inter was to operate alongside Air France. Other routes were subject to special agreements. 22. The 1932 Code was abrogated by Vichy in 1941 and the Vichy statute abrogated after liberation. The SGAC’s formal authority dates from September1953. 23. This section draws heavily on Staniland (2003, p. 78–80). 24. Neiertz (1998, p. 21) notes: ‘an unwritten rule was that state-owned firms like Air France should be neither unprofitable, insofar as the Treasury would have to cover operational losses, nor profitable because of the trade unions’ strong pressure to obtain wage increases’. 25. When it did recover its sovereignty, it took an accommodating approach to its NATO partners and agreed liberal bilaterals (Staniland 2003, p. 112). 26. For a while, there were two Lufthansas, but the GDR’s flag carrier changed its name to Interflug following a lawsuit (Lyth 1998). 27. The group responsible had begun to plan the relaunch in the mid-1940s, but the government took the first steps in 1951. The new company, initially called Lufthag, was formed in January 1953 with funding from the German state railway and the state of North Rhine Westphalia. It became Deutsche Lufthansa in 1954. 28. As the state was the company’s largest shareholder, it proposed candidates for ten shareholders’ seats.

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29. Hence Espérou and Subrémon’s observation (1997, p. 80) that ‘comme le réseau hollandais, le réseau allemande parait davantage determiné par l’économie et moins marqué par l’histoire et par la politique’. 30. Lufthansa could claim to be ‘“the capital in the air”’ (Sampson, 1984, p. 96), since it flew ‘business men between rival cities and [as] West Germany had no single centre’. The company felt it had to respond positively to calls from cities and the Länder to provide ‘inner German’ services. 31. The restoration of links to its Asian colonies, particularly with the crisis in Dutch East Indies, was an urgent priority. 32. The US, for example, was more ready to grant rights to Lufthansa than it was to KLM. 33. As Dierikx recounts: ‘KLM’s negotiators never tired in their efforts to explain that the practice of sixth freedom operations existed only in the minds of their misinformed partners across the table, who had difficulty in accepting the size of the Dutch air transport market in the quid-pro-quo dealing over landing rights and schedules’ (1998, p. 140). 34. The expression was used by an academic historian in an interview conducted with one of the authors on 14 September 2007. 35. An initiative from Dutch shipping companies to launch a jointly owned airline was turned down on the grounds that such competition would harm KLM’s international position (Staniland 2003, p. 76). KLM remained the only Dutch airline until 1958. 36. KLM’s favoured approach to protect its market was to purchase shareholdings in its competitors. 37. Baldwin, who has written the authoritative account of regulatory change in UK air transport, comments that ‘Few areas of economic activity have been subjected to as many different regulatory regimes as the British civil aviation industry’ (1985, p. 14). 38. When, for example, BOAC decided to withdraw its services on the south Atlantic, the government handed the routes to British United Airways, an independent airline. 39. The Edwards Report recommended that ‘in the initial stages of introducing competition the licensing authority would award licences to the new and established airlines in a manner which will permit the development of full and equal competition over a determined period of years’ (1969, p. 87). 40. A privately owned airline, which had originated as a charter company, Caledonia Airways, bought British United Airways in 1970 to form British Caledonian. 41. Skytrain was adversely affected by US deregulation and the tariff wars that broke out on the North Atlantic. It was bankrupted in 1982 (see Sampson 1984, pp. 147–62). 42. However, while the number of flights that could be offered by its competitors was limited, BEA could operate as many as it wanted. 43. For the opposite view, see Sampson (1984, pp. 88–90). 44. This problem had beset BOAC from the very beginning, originating in the ‘attitude both in government and among the public at large that nationalised airlines would find a job for every demobilized member of the RAF’ (Lyth 1998, p. 65). 45. It included deep job cuts and the closure of routes, maintenance stations, allcargo services and staff training colleges, if they were not profitable. See Corke (1986, pp. 73–136).

280 Air Transport and the European Union 46. Staniland (2003) observes that Britain began with nationalization and monopolies, but moved towards competition; France granted international traffic rights to Air France and other airlines, and partitioned the skies between them, but promoted Air France’s interests; and while neither KLM nor Lufthansa faced competition from rival companies, neither had a formal monopoly.

4

From the Sidelines to the Margins: The EC and Aviation, 1950–83

1. The first, a directive on noise limitation, adopted in 1980, was modelled on an agreement reached in ECAC. The second, an inter-regional services directive, agreed three years later, was so unthreatening that even members of the conservative majority were able to support it. 2. The Council of Europe has continued to show an interest in aviation, but never became a major player. 3. The Bonnefous plan, which was approved by the Parliamentary Assembly, but never discussed by ministers; a plan put forward by Count Sforza, Italy’s Foreign Affairs Minister (see Abbati 1987, ss. 2.2.1), and an initiative proposed by van de Klieft, a Dutch delegate (see Naveau 1989, p. 181). For discussion of these initiatives, see Henrich-Franke (2007). 4. Article 55 of the Chicago Convention provides for the establishment of regional organizations. 5. The Memorandum was updated on 13 February 1987 and 7 December 1990. 6. At the time of writing, it has 44 members. 7. Though states have total freedom to prescribe which parts of their airspace are used for aviation purposes, the Convention requests that they provide air navigation services. International standards and recommended practices, which they can choose to adopt, are laid down as Annexes, especially Annexe 11, to the Convention. 8. As one Eurocontrol official put it to the authors, ‘the jet age reduced Dutch and Belgian airspace to the size of a postage stamp’ (interview, 4 May 2007). 9. Italy came to the discussions later, but did not sign the Convention due to problems arising from the military control of civilian air traffic control. 10. It styled itself ‘the first international service’ (Collester and Burnham 1975, p. 346). 11. For discussions of Air Union (also called ‘Europair’), see Corniglion-Molinier (European Parliament 1961), Drouot-l’Hermine (European Parliament 1965) degli Abbati (1987, pp. 175–8). See also Espérou (2006) . 12. Luxair joined the discussions in 1962. 13. KLM tended to fly aircraft manufactured by Douglas, while KLM flew Boeings. 14. The ‘realists’, Air France and Sabena, wanted the criteria of the quota system to be based on actual market shares, while the ‘potentialist’, Alitalia and Lufthansa, as new arrivals, wanted the apportionment of routes to leave room for the development of their networks. KLM, as an exporter of services, did not want to see its services cut back. 15. As early as 1958, in a paper for a government working party considering the prospects for a Free Trade Area Convention, the British Ministry of Transport and Civil Aviation pointed to the policy differences between the countries involved and expressed doubts that the Six ‘ will find it any easier to achieve greater integration of their civil aviation operations in the future’. The paper noted UK support for liberalization of civil aviation in Europe, but concluded that ‘we should continue

Notes

16. 17.

18.

19.

20.

21.

22. 23. 24. 25.

26.

27.

28.

29. 30. 31.

281

to press through ECAC for as rapid progress as possible towards liberalisation in the field of civil air transport’, paper dated 30 September 1958 at file ED/56/01 Part B, held by the Public Record Office under ref BT 245/534. Letter of 4 April 1955 (see Duchêne 1994, p. 268). At the Messina Conference in July 1955, it was agreed that Spaak would prepare a document and carry out soundings with governments before the next phase of the negotiations. The Spaak Report, Rapport des chefs de délégations aux ministres des Affaires étrangères was submitted on 21 April 1956. The sections relating to air transport are published as an appendix to Corniglion-Molinier’s report (see also http://www.unizar.es/euroconstitucion/library/historic%20documents/ Rome/preparation/Spaak%20report%20fr.pdf, checked 28 February 2009). On transport in general, an awkward compromise between liberals and traditionalists was struck (see Stevens 2004). Hallstein (1972, pp. 225–30) recalled the transport provisions as one of the ‘hard core’ problems in the preparatory discussions. It was not until the Single European Act that qualified majority voting was introduced to Article 80(2) (ex 84(2)) and a sentence added extending to sea and air transport the procedural provisions of Article 71(1) and (3) (ex 75(1) and (3)). See Folliot (1978), Yorakis (1982) and Estienne-Henrotte (1988). For expositions of the particularist view, see Villeneuve (1961), Wassenbergh (1962) and Stabenow (1967). Support for the generalist view can be found in Goedhuis (1957) and Ventrella (1958). How tightly the Commission and the Court are constrained is contested. On the Commission, see Moravcsik (1999), Pierson (1996) and Pollack (1996, 1997, 2003); on the Court, see Garrett (1992), Mattli and Slaughter (1998) and Pollack (2003). Since Maastricht, the formal monopoly has applied only in the first pillar. On the Commission’s agenda-setting powers, see Pollack (1996, 1997, 2003). See also Moravcsik (1999). Procedures were streamlined by a Council decision in 1999. On comitology, see Dogan (1997, 2000) and Dimitrakopoulos (2005). In response to a letter from the Assembly in 1959, for example, the Commission had declared that it ‘n’était pas compétente dans ce domaine’ (OJ 20, 31 March 1959, p. 403). In his declaration to the Transport Council on 20 October 1964, Schaus insisted that ‘les négociations actuelles des gouvernements des Etats membres, en vue de réaliser une politique commune des transports aériens doivent se poursuivre dans le cadre des institutions de la Communauté et notamment sous la forme des dispositions appropriées prévues à l’article 84, paragraphe 2 du traité.’ The Commission proposed that liberalization should go hand in hand with measures to integrate Community transport networks across all the modes, to be implemented over a period of ten years with the construction of economic and monetary union. Characteristically, the Parliament and the Economic and Social Committee argued that the Commission had not gone far enough. The Noé report (Parliament 1972) rehearsed well-known arguments, but took fuller account of the issues raised by developing a regional system within an established global order. The report was approved by the Assembly and adopted in March 1973 (OJ C 19, 12.04.73, p. 52). Commission v. France, Case 167/73 [1974] ECR 359. In Cases 209–213/84Nouvelles Frontières ), discussed in Chapter 4. European Commission (1977, para. 47; 1978, para. 38). The conclusion of the second was that ‘given the existing structure of the air transport market in the Community and the extent of government intervention’, agreements between

282 Air Transport and the European Union

32.

33.

34. 35.

36. 37.

38.

39.

40. 41.

42.

airlines were ‘a matter for the governments of the member states’. Following the completion of a survey of tariff setting in the Community, it concluded that ‘governments are ultimately responsible for the setting of fares’. The case was brought by a Belgian supermarket company (INNO) against the Association of Tobacco Retailers (ATAB), which had obtained an injunction against INNO for selling cigarettes below the compulsory selling price protected under S.58 of the Belgian VAT tax code. Although not to do with air transport, the ruling appeared to carry general implications for state-imposed obligations on companies to sell at an agreed price. Case 13/77, [1977] ECR 2115, paras 31–4). The case was referred to the Court by the Belgian Hof van Cassatie (the Court of Appeal to which INNO had turned) for a preliminary ruling. Case 156/77, Commission v. Belgium [1978] ECR 1881, section 10 of judgement. Case 155/73, The State v. Sacchi [1974] E.C.R. 409. Ground No 14, cited by Kuyper (1983, pp. 203–31). Kuyper was a member of the legal team that supported the Commission in its defence against Lord Bethell. Kuyper (1983, p. 211). Viz. common standards for aircraft noise reduction; simplification of formalities (facilitation), particularly those relating to air freight; implementation of technical standards (Joint Aviation Requirements or ‘JARs’) produced by the JAA; provisions regarding aids and competition; recognition of licences (aircrew and ground staff); working conditions (aircrew and ground staff); right of establishment; possible improvements to inter-regional services; search, rescue and recovery operations, and accident enquiries. The need to establish working relations with the ICAO and ECAC, and to survey the North Atlantic market very closely were also emphasized. A proposal on noise limitation, submitted by the Commission in 1976 (COM (76) 57), was the first to be adopted by the Council in air transport. This modest directive provided for the implementation of the standards listed under Annex XVI of the Chicago Convention. The supranational elements featured in the original proposal were dropped during Council discussions. A second proposal on consultation between member states and the Commission on matters of common interest in international organizations and relations with third countries (OJ C 193, 31 July 1979, p. 9) was similarly stripped down by the time that it was adopted as a Council Decision on 20 December 1979. The third was the directive (80/1266/EEC) adopted by the Council in 1980, which established a procedure by which a member state could call on others for assistance in accident investigation, which they could do anyway. However, member governments turned down a proposal designed to facilitate search and rescue operations in frontier zones that had been proposed by Germany (Commission 1984a, p. 14). The Parliament convened public hearings in February 1980 to hear the views of interested parties (European Parliament 1980a). Its rapporteurs were Schwartzenberg (Economic and Monetary Committee) and Corrie (Transport Committee). Interview, UK Department of Transport, 19 February 1993. The Commission passed in 1980 a directive on the transparency of financial relations between member states and public undertakings (Commission Directive of 25 June 1980, OJ L 195 29 July 1980, p. 35). The Council refused to agree rules which would make it easier for airlines to obtain traffic licences in their own country, relaxing restrictions for small aircraft serving

Notes

283

routes between hub and regional airports. It was estimated that as a result the number of potential routes for new regional services was reduced from 100 to 20.

5 The Liberal Breakthrough, 1984–7 1. At the group’s second meeting, Raben circulated a Chairman’s note that invited participants to discuss the link between competition, fares and costs, whether there was room for more competition, whether they thought the restrictive character of bilaterals was exaggerated (ECAC archives, Chairman’s paper for EURPOL/2). 2. Although none of the documents called for radical change, each provided an invaluable snapshot of an aspect of European aviation, outlined possible opportunities for improving air services and evaluated various policy options. The report on intra-European services (ECAC 1978) found that the existing network was generally satisfactory, but that international routes between hub and regional airports were likely to develop and that there was scope for short-haul routes (under 650 km) for operations by small aircraft. The review of intra-European air fares (ECAC, 1981), meanwhile, reported that routes generated a higher level of profitability than the world average, but that there was little evidence that operators had earned excess profits or that scheduled European airlines were any less efficient than their American counterparts. They influenced later discussion in the European Community, as well as in ECAC. 3. The idea was broached in the margins of EURPOL/2, which agreed the text of a letter sent to all the Directors-General of Civil Aviation in ECAC countries on 27 March 1980 inviting them to nominate members. The group was formally established at EURPOL/3 on 10–12 June. However, its creation was controversial. Although supported by the Netherlands and the UK, Germany and Spain were unenthusiastic. 4. Ireland provided the first Chairman (Gerry Lumsden), the Netherlands his successor (Ronnie van der Maaten). France, Italy, Portugal, Spain, Sweden, Switzerland and the UK, all sent members. As Bulmer et al. (2007, p. 52) note, only 11 member countries were represented on the group, and the Dutch supplied two of the dozen or so members. 5. The appendices reveal tellingly that, though provisions relating to traffic rights and capacity may have appeared open on paper, the practice was almost invariably somewhat different (ECAC 1982, pp. 103–6). 6. The bilateral approach was criticized on the grounds that it would increase the complexity of an already complex system (de Coninck, 1992, p. 18). 7. The preface noted: ‘This report has been prepared by a task force of experts. It is published as an aid to consideration of a particular problem but does not necessarily represent ECAC policy.’ Ted Hudson, Secretary of ECAC at the time, recalled the emphasis to be placed on that formal position in any dealings he might have with the Press (interview, 19 June 1996). 8. A particular irony was that the architect of the European strategy, the late Nicholas (later Lord) Ridley, would later (in 1990) be forced to resign as Secretary of State for Trade and Industry, following his remarks in an interview published in The Spectator that the European Community was ‘a German racket, designed to take over the whole of Europe’. 9. House of Lords (1979), note by Department of Trade at pp. 1–3 of minutes of evidence.

284 Air Transport and the European Union 10. The second semester is already shrunk by the summer months, but the UK was not assisted by the fact that a Commission report on fares in Europe did not arrive until October and the Commission’s draft proposal on the application of the competition rules to air transport was overly ambitious (Commission 1981b). Finally, the Cabinet Office official committee on European questions reviewed air transport policy three times between November 1981 and July 1982, and decided that the UK should intervene in the Lord Bethell case in support of his contention that the Commission was wrong to find no grounds for applying the Treaty competition rules to the fixing of air fares. 11. Air service negotiations are rarely conducted or even signed at ministerial level, so it was a novelty when British Ministers started calling on their European counterparts to discuss the need for more liberal agreements. 12. See, for example, National Consumer Council (1986), BEUC (1987). 13. As Conant notes (2003, p. 238), however, ‘Lord Bethell fared no better before the English high Court, which also rejected his case on procedural grounds’ (Lord Bethell v. Sabena (1983) Common Market Law Reporter 1, English High Court). 14. Thus, ‘The Commission considers that the underlying conditions which made deregulation possible in the US do not exist in Europe … [T]he US is a large unified domestic market reserved to US carriers; it was accepted policy to end government intervention in the market; and to accept the social and economic effects of such a policy. Furthermore, the US has 20 major carriers all operating on a commercial basis and the US Government can take a relaxed view on the fate of any one of them’ (Commission 1984b, para. 43). 15. It also dropped its earlier insistence that the measures it proposed should apply to routes to third countries as well as to routes within the Community and rejected the view that ‘it would be impossible to adjust the intra-Community system without unacceptable repercussions on the world-wide international system’. 16. It thereby excluded domestic services and avoided the issue of extra-territoriality. 17. Under this directive, governments were required to inform the Commission if they were intending to pay compensation for operating losses, to provide capital or non-refundable grants, to offer loans on privileged terms, to grant financial advantages by foregoing profits on the recovery of sums due or of the normal return of public funds used, and compensation for financial burdens by public authorities. See also (Commission 1980b, p. 2). 18. Claude Probst, at the time an official in the French DGAC, and later a Commission official, observed: ‘At the time we thought that Mr Steele, British, had been helped by fellow colleagues or fellow citizens to draft [the document], because traditionally the Commission was not able to produce such pragmatic papers. We had been more used to see radical papers on competition and on freedom to provide services which were much easier to reject’, cited in Travis (2001, p. 47). A similar comment was made by a French official in an interview with one of the authors, when he spoke of widespread suspicion that the Commission had been ‘télécommandé par les anglais’ (interview, 21 January 1993). 19. There was an explicit acknowledgement to ECAC (Commission 1984, p. 1). 20. The Commission did plan to propose an extension of the Inter-Regional Services Directive once negotiations on the other measures were underway. This was premised on the belief that, if the opportunities it created were taken up by the more competitive carriers, commercial and political pressure would generate calls for the freedom to be extended to other routes. The architect of the ‘snowball

Notes

21. 22. 23.

24. 25.

26.

27. 28.

29. 30. 31. 32.

33.

34. 35.

285

strategy’ was John Steele (interviews with former Commission official, 2 July 1993 and former national French official, 20.1.93). A series of informal meetings took place in 1984 and 1985. Commission (1984a, point 2.1.70). Agence Europe Bulletin, No. 3849, 14-15.5.84, p. 8. See also the remarks of the UK junior minister, Mr Mitchell, who criticized France, Germany and Italy, for ‘clinging to the cartel system’, when the UK and the Netherlands had scrapped the pooling on London–Amsterdam (Agence Europe Bulletin, No. 3844, 7–8.5.84, p. 8). European Parliament v. Council of the European Communities, Case 13/83, [1986] ECR 1513-1603. The report alleged that the memorandum was ‘based on a tendency to meet the interests of a specific group, which in terms of the overall population, is very small, namely air passengers whose European organisation (FATUREC) interestingly only came into existence with the Commission’s support’, op. cit., para. 89). The White Paper observed that it was necessary to give fresh impetus to the work of the Council to provide by 1987 greater freedom in air transport services between the member states (1985b, paras 109–10) and warned that ‘If the Council fails to make progress towards the adoption of the proposed Regulations concerning the application of the competition rules to air transport, the Commission intends to take decisions recording existing infringements … according to Article 89 [now 85] of the Treaty’ (Commission 1985b, para. 111). Commission 1985c, p. 20. Interviews with former Commission officials (18 August 1992 and 2 July 1993) suggested a personality clash between the incoming Commissioner and the Director General. Record of ECAC/12, Strasbourg, 18–21 June 1985. At this point, ECAC was less of a ‘think tank’ (Bulmer et al. 2007, p. 56), for, or partner of, the Community, than a rival actor. Record of INT.S/15, Paris, June 1986. The Commission set out its reasoning in an Information Memo on 8 January 1986, where it reminded member governments that: ‘the ECAC negotiations meet the conditions of Article 116 of the Treaty of Rome, which lays down that “Member States shall, in respect of all matters of particular interest to the common market, proceed within the framework of international organisations of an economic character only by common action’. The member of the Commission responsible for transport policy warned: We must make sure that discussions outside the Community framework do not in any way hamper our progress [in developing a new common policy for air transport]. The other companies involved were Havas, Air France, British Airways and KLM. The regulations they were alleged to have broken were at L 330-3, R 330-0 and R 330-15 of the Code. Commission IP (86) 353, 10.7.86. Agence Europe Bulletin, Nos. 4341, 18.6.86, 10; 4344 21.6.86, pp. 13–14; and 4351, 2.7.86, pp. 5, 12. The Commission reported that ‘The European Council considered that the Council of Ministers (transport) should make a further effort to overcome the difficulties which have recently appeared in relation to the liberalisation and harmonisation of land, sea and air transport in the light of the relevant judgements of the European Court of Justice. With regard to air transport, the Council should without delay adopt the appropriate decisions on air tariffs, capacity and access to

286 Air Transport and the European Union markets in accordance with the rules of competition of the Treaty’ (Commission 1986a, p. 19). 36. Council (1987e, p. 75). Also Commission (1987, para. 36). 37. UK Department of Transport, Press Notice 335 of 18 June 1986. 38. Following discussions in the Council, it presented on 3 July an amended proposal on the implementation of the competition rules (Commission 1986h), adding slot allocation, airport scheduling arrangements, time tabling, reservations, ticketing, various aspects of ground handling and airline catering to the areas where agreements would be permitted. 39. They were Aer Lingus, Air France, Alitalia, British Airways, British Caledonian, KLM, Lufthansa, Olympic Airways, Sabena and SAS (Commission 1987, para. 36). 40. Commission (1986g) proposed an extension to services to and from, but not between, Category 1 airports, and the granting of fifth freedom rights on interregional routes where an existing service would be extended and no indirect services between Category 1 airports created. Multiple designation was left to a later date. The Directive had been previously amended following the accession of Portugal and Spain. 41. It now proposed that special arrangements should be introduced to cover services operated by small aircraft, that the minimum stage length of 400 kilometres for new services should be abolished; and that the grounds on which member states could refuse to receive incoming services should disappear (Agence Europe Bulletin, No. 4386, 12.9.86, p. 8). 42. The Transport Council met again twice before the end of the year, and negotiations at the official level were intensive. Meetings of the working group took up to three full days a week (Parr 1990, pp. 53–6). 43. These included thresholds for multiple designation, the distribution of airports between three different categories, the exclusion of small aircraft, the combination of points and fifth freedom rights. 44. Denmark believed that the measures should remain effective until the Council decided otherwise; the Netherlands, Germany, Ireland, Spain and the Commission argued that they should expire after three years; and a majority considered that the Commission should present further proposals after two years (Agence Europe Bulletin, No. 4564, 6.6.87, p. 5). 45. The British and Spanish Foreign Ministers agreed that passengers destined for Spain at Gibraltar airport would be treated as travellers in transit and would not be subject to British formalities. See Agence Europe Bulletin, No. 4607, 23.9.87, p. 8.

6 Completing the Single Market in Air Services 1. Others, for example van den Bos (1994), focus exclusively on the adoption of the first package. 2. The exception is the Commission regulations that implemented bloc exemptions under Council Regulation 3976/87 under the competition rules, discussed in Chapter 9. 3. Commission Regulations 2671/88, 2672/88 and 2673/88 of 26 July 1988; Commission Regulation 4261/88 laid down the necessary procedures for complaints, applications and hearings. 4. So tenacious was the French government’s adherence to this principle that the restriction of freedom of access to airlines of other EC member states was labelled

Notes

5. 6.

7. 8. 9. 10.

11.

12. 13. 14.

15. 16.

17.

18.

287

the ‘UTA clause’ in an influential report prepared by a committee of the French Senate (Vinçon 1991). Cited in official correspondence dated 12 July 1989. ‘Special chefs’ is the name given to the meeting of the members from Commissioner cabinets who are specialists in the area of the dossier under discussion. Meetings are convened in advance of the weekly meeting of chefs de cabinet where an issue is difficult and needs consideration. The judgement in Whitehall was that ‘our intensive lobbying has been very successful and the Commission has taken up many of our proposals’. Such proposals would in fact be put to the United States in the context of bilateral negotiations for ‘open skies’ agreements after 1994, and rejected. Case 66/86, Ahmed Saeed Flugreisen and Silver Reed Reisebüro GmbH v. Zentrale für Bekämpfung Unlauteren Wettbewerbs , judgement of 11 April 1989. Evidence of such a manoeuvre was to be found in the creation under the French Presidency of the Joint Aviation Committee, composed a third each of employers, employees and professionals, to consider all draft proposals prepared by the Commission. It read: ‘Until this Council it looked as though transport had been left out of the Single Market process. Liberalisation is a long-established British position. Today, some of our colleagues underwent a Damascene conversion. We have agreed clear objectives to move away from constraints on capacity, and in tariffs to move to a system of “double disapproval”, which means that airlines flying to and from Britain will be free to offer low fares. We have got colleagues to sign up to dates for these as well as agreeing in principle to important shorter-term changes. This liberalisation will mean more opportunities for British airlines to get into Europe and for customers to be offered better services and lower fares.’ It became the Secrétariat général des affaires européennes (SGAE) in October 2005 (see Lanceron 2007). Interview with senior French official, 12 March 1997. Regulation 2342/90 (fares) and 2343/90 (market access and capacity) of 24 July 1990; the Commission’s Regulations governing the application of the competition rules were amended by Regulations 82/91, 83/91 and 84/91 of 2 December 1991. These provisions were adopted by the Commission virtually verbatim from proposals drawn up in an ECAC group chaired by an official of the UK CAA. Regulation 2407/92 (licensing), Regulation 2408/92 (market access and capacity), Regulation 2409/92 (fares), Regulations 2410/92 and 2411/92 on the application of the competition rules, all dated 23 July 1992; the Commission amended its arrangements by Regulation 3618/92 on 15 December. France and others were initially very critical of the light regulation applied to small operators in the UK, and inclined to favour requirements which would encourage stability in the industry at the expense of smaller operators who could sometimes bring a fresh, innovative approach, but the outcome exempted smaller operators from an unnecessarily heavy burden of detailed regulation. The airports concerned must serve the same city or conurbation; be served by an adequate transport infrastructure making it possible to arrive at the airport in less than 90 minutes; be linked with each other and the city or conurbation that they service by frequent, reliable and efficient public transport services; and offer

288 Air Transport and the European Union

19.

20. 21. 22. 23.

the services needed by air carriers and do not unduly prejudice their commercial opportunities. The Commission agreed to incorporate a large number of the amendments proposed by the Parliament, including recognition procedures for training establishments, priority to flight crew, safeguards in relation to infringements and account of work in progress in the responsible international organizations. For a description of slot allocation procedures, see CAA (1993, Appendix 9). Commission regulation (EEC) No 84/91 of 5 December 1990; the draft Council regulation was attached to COM (90) 576 of 5 December 1990. European Voice, 7 September 2000. CAP 1993, Appendix 9, paras 10–11.

7 Extending the Scope of the Common Air Transport Policy 1. There was some clarification of the two phases before and after the coming into force of the JAR. Member States, rather than the Commission, were to be permitted to take emergency action and a slightly larger role was granted to the advisory committee. However, the main mechanism proposed by the Commission remained in place. 2. Obituary, European Voice, 31 August 2006. 3. The same issue arose again when the Commission proposed legislation after liquid explosives were identified as a threat in August 2006. (Some member states took emergency action to restrict the carriage of liquids to very small quantities.) The Parliament again attempted over the course of several months to add provisions about the sharing of costs between airlines and governments (European Voice, 19 April 2007). 4. The Commission exercises considerable power. Should a third country fail an inspection, its carriers stand to suffer severe commercial damage. As well as carrying out such inspections as far away as Moscow, the Commission is discussing cooperation with ICAO (see Chapter 8). 5. See van Antwerpen (2002) for a discussion of the technical, organizational and legal complexities. 6. Also, until the late 1980s, eight air flow management units were operating in the EEC with three or four involved in handling one flight. 7. Interview, ECAC Secretariat, 26 July 2007. 8. The General Assembly functions as the Eurocontrol Commission, and there is a Provisional Council of national officials, supported by a Safety Regulatory Commission and a Performance Review Commission, reflecting Eurocontrol’s two distinct roles – in safety regulation, and in the oversight and operation of air traffic management services. 9. Interviews, 26 July 2007. 10. European Aviation, a framework for driving performance improvement, air transport portal of the European Commission website, 24 July 2007. 11. Over-booking is generally a result of CRS malfunctioning, poor communication between travel agent and carrier, and the flexibility permitted to passengers holding full price tickets, where it became standard practice for carriers to over-book in the face of the high probability that for each flight there would be at least some ‘no-shows’. 12. The Guardian, 11 June 2006.

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8 Beyond the Borders of the Single Market 1. The phrase, quoted by Staniland (2008, p. 130), was used by a UK official to describe the importance to the member states of the freedom to negotiate ASAs. 2. By removing the nationality clause, the agreement makes possible the crossnational acquisitions and mergers that are regarded as normal in other sectors. 3. Collectively, in the Council, they issue authorizing mandates to the Commission. Individually, they negotiate ASAs with third countries, subject to Community regulations. 4. As signing up to these agreements has become a condition of membership negotiations, they can be regarded as an instance of Europeanization by imposition. 5. The agreement foresaw its modification to take into account the third package. 6. In GATT, for example, EU member states coordinate their positions and the Commission speaks for the Union. In other international organizations, there has been a tendency towards informal coordination between EU member states. 7. Although a Commission representative was invited to join the French delegation that same year. 8. ECAC’s work on this had even benefited from a Commission grant of 1m ECU to pay for it. Council Regulation 95/93 of 18 January 1993. 9. The period 2000–5 was by all accounts an exception, when an aggressive team led by the Commissioner, Director General and Director was very concerned to extend and define EU legal competence in the area of air traffic control, which was effectively seized by the Commission. 10. Quotation from European Commission: International Aviation, http://ec.europa. eu/transport/air_portal/international/icao_en.htm, visited on 6 December 2008. 11. This did not prevent the Commission from proposing in 2002 that the Council formally begin negotiations on Community membership of ICAO (SEC (2002) 381, 09.04.2002) so that the Commission could ensure that the Union speaks with a single voice. A 2/3 majority vote in the Assembly would be required to enable membership. 12. Information from Air Transport Portal of the European Commission: International Aviation, http://ec.europa.eu/transport/air_portal/international/icao_en.htm, visited on 06.12.2008). The Community is also a signatory to the ICAO Montreal Convention of 1999 on air carrier liability (Council 2002a, 2002b). 13. See http://ec.europa.eu/transport/air_portal/international/doc/icao/20080506_ summary_conclusions.pdf. 14. See http://ec.europa.eu/transport/air_portal/international/icao_security_en_ .htm. 15. Information from the European Commission: International Aviation, http:// ec.europa.eu/transport/air_portal/international/icao_en.htm, visited on 06.12.2008). 16. For useful analyses, see Balfour (1997), Bartlik (2007), Close (1990), Espérou and Subrémon (1997), de Mestral and Bashor (2005) and Staniland (2008). 17. The claim was included in its proposals for the second package (Commission 1989a), in a proposal for an authorization procedures for member states agreements with third countries (Commission 1990a), assertions in letters from the Commission in March and July 1990, and its proposals for the third package (Commission 1991d). 18. The risk to their revenues from more blatant marketing of bucket shop fares to third countries – the likely worst-case scenario if their tariff agreements could

290 Air Transport and the European Union

19.

20.

21. 22. 23. 24.

25.

26.

27.

not be enforced – was nothing like as critical as the risks to intra-Community agreements which had been exposed by the Nouvelles Frontières judgement in 1986 (Cases 209–213/84). The Court concluded that the member states had exercised their powers correctly, but it laid down the following general rule: ‘each time the Community, with a view to implementing a common policy envisaged by the Treaty, adopts provisions laying down common rules, whatever form they may take, the Member States no longer have the right, acting individually or even collectively, to undertake obligations with third countries which affect those rules or alter their scope. With regard to the implementation of the provisions of the Treaty, the system of internal Community measures may not be separated from that of external relations ... With regard to agreements in the sphere of transport policy, the Commission is entitled to make proposals and negotiate, whilst it is for the Council to conclude the agreement’ Case 22/70, AETR, Extract from summary of judgement. In Rhine Navigation the Court had found that the draft agreement to which the Commission had raised objections was so far from being consistent with the terms of the Treaty that the Commission could not be authorized to sign it. In the event the Community had to negotiate its own internal regime before reaching agreement with the Swiss, and that took another 13 years. In the AETR case the Court had allowed the agreement to stand on the grounds that the member states had acted in conformity with their Community obligations. On this occasion, it used the muscle of the Treaty to torpedo an agreement negotiated by the member states within a venerable intergovernmental organization (the origins of the Rhine Commission reach back to 1815), as well as establishing a principle which significantly extended the range of Community competence in external affairs (see Stevens 2004, pp. 225–7). See the doubts expressed, for example, by Balfour (1997), Close (1990) and Platt (1992). OJ L 407 of 31 December 1992, 47 and 56. For a fuller discussion of the implications of Opinion 1/94 for EU trade policy, see Johnson (1998, pp. 10–12 and 66). For its part, the Council did not choose to extend competence under the terms of Article 133 [113] to the conduct of air service negotiations. Indeed, member governments ensured that this possibility was excluded by entering the stipulation that ‘service trade competences do not apply to bilateral transport negotiations (Article 133 (6))’ in the Nice Treaty (Woll 2006, p. 59). Between 1989 and 1992, the US sought to conclude open skies agreements with France, Germany and the UK, but at that time France and Germany had no desire to negotiate liberal bilaterals (Young 2002, p. 126). For US external aviation policy, see Staniland (1995). Reflecting on why third countries might prefer a continuation of the bilateral system rather than negotiations with a the Union as a single bloc, Meunier (2005, p. 144) observes that ‘third countries interested in changing the European status quo have the opportunity to conclude bilateral agreements with the member states open to compromise without being held up by the recalcitrant member states’. Karel van Miert observed of the open skies ASA signed with the Netherlands by the US in 1992 that ‘The Americans have not concluded this agreement for free access to Rotterdam. They are playing another game; they want to play one EC

Notes

28. 29. 30.

31.

32. 33.

34. 35. 36.

37. 38. 39.

40. 41.

42.

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state against the other Community countries to get a foothold in the European market’ (Agence Europe, No. 5812, 11 September 1992, p. 11). As Charokopos (2008, p. 9) observes, the US had the ability effectively to ‘control mergers and acquisitions if an airline was from a non-open skies country’. Young (2002, p. 113) contends that the transatlantic market mattered most to Aer Lingus, BA and Lufthansa, and least to Luxair, TAP, Iberia and Finnair. Thus, France advocated a suspension of bilateral negotiation until common guidelines could be agreed when it had no interest in negotiating an open skies agreement, but once Air France began to recover and to look for an alliance partner, the idea of a liberal ASA with the US became more appealing. For the Commission’s response to the ruling, see Commission (2002). For analyses of the ruling, see Sørensen, F. et al. (2003); see also Bartlik (2007, pp. 29–36). Not all observers regarded the judgement positively. Wassenbergh (2003, p. 19) is excoriating about a decision of the Court which, in his view, ‘disregards the principles of public international law, the integrity of national sovereignty, of existing international agreements, and the political views of non-EU third countries. Legally, therefore, the judgment is completely “incorrect”’. De Mestral and Bashor (2005, p. 14) observe, however, that this argument, based on the Chicago Convention, ‘does not answer the practical problem for all states … resulting from the fact that the EU has adopted open skies principles for itself and that the ECJ appears to have imposed such principles at least on the ownership and control clause of all EU member states bilateral agreements’. For an account of this aspect of the negotiations between France and the USA, see Espérou (1999, pp. 29–30). Woll (2006, pp. 12–13) recounts an incident that underlines the failure of the US DoT to understand the implications of the changed situation. When in February 2003 DOT officials arranged a meeting in Paris with its open skies partners to consider how the agreements might be reformulated to comply with the ECJ’s ruling, they were surprised to find a Commission representative in the room. See http://ec.europa.eu/transport/air_portal/international/index_en.htm. A full list can be found on DG TREN’s website at http://ec.europa.eu/transport/ air_portal/international/pillars/doc/asa_table.pdf. However, the Commission has secured an agreement with Russia, in the context of the Russian application to join the World Trade Organization, which includes the phasing out of payments for Siberian overflights. See http://ec.europa.eu/transport/air/international_aviation/country_index/doc/ canada_final_text_agreement.pdf, checked 12 August 2009. For an analysis of Commission-member state relations, see Delreux (2009). This judgement rests on interviews conducted with senior Commission officials in the summer of 2007. Moreover, at least two Director Generals believed that the suspension mechanism had been devised in their private bilateral discussions with Calleja. As one of them remarked, good ideas have many parents. The text of agreement is at OJ L 134 of 25 February 2007, pp. 4–41. For a summary, see Commission Memo/08/185, 28.03.2008. See Delegation of the European Commission to the USA (2008) and Calleja (2008) for discussions of the issues addressed in the second phase. Subsequent talks took place in late September and early December (see http://ec.europa.eu/transport/ air_portal/international/pillars/global_partners/us_en.htm). Quotation from http://ec.europa.eu/transport/air_portal/international/pillars/ horizontal_agreements_en.htm.

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9 Regulating the Single Market 1. Though not discussed further, the emergence of national competition authorities across the EU was an important development in the 1990s and after. The presence of such an infrastructure made possible the creation of the European Competition Network (ECN) as part of the modernization package (see Kassim and Wright 2007, 2009). As well as their responsibilities as part of the ECN, national competition authorities meet in a less formal setting, the European Competition Authorities (ECA), founded in Amsterdam in April 2001, as a forum for discussion between competition authorities in the EEA. The members of ECA set up an air traffic working group in April 2002 to improve their dealings with the sector, which subsequently produced papers on mergers and alliances (ECA 2004) and loyalty programmes (ECA 2005). 2. See Majone (1996) for the classic account of delegation and the rise of regulation in the EU. 3. DG TREN hosts a very useful portal, recording leading decisions and cases, at http://ec.europa.eu/transport/air/handbook/part2_en.htm, checked 28 February 2009. 4. One head of unit proudly informed us in an interview conducted in summer 2007 that none of his staff had previous experience in aviation. 5. Note on comitology in the liberalizing measures. 6. PSO routes are listed at DG TREN’s portal at http://ec.europa.eu/transport/air/ internal_market/doc/pso_210109.pdf. 7. According to the Commission’s PSO inventory dated 21 January 2009, France had the highest number of PSO routes (56), followed by Norway (38), Italy (29), and Greece, Portugal and the UK (25). 8. This was despite the fact that Viva Air had been granted the landing slots. 9. The fares concerned 25 services between the UK and seven Member States. The 40 tariffs disapproved involved British Airways (25), Alitalia (6), Air France (6), Olympic Airways (2) and SAS (1). None of the complaints against Sabena, Lufthansa, TAP or Iberia were upheld. The Commission took longer than statutorily required to reach this decision, claiming that the companies concerned had failed to make their submissions in the prescribed form. The delay created complications, since the tariffs in question were those set for the winter season 1990/91, while member states are obliged to consider whether new tariffs are reasonably related to the corresponding ones that they replace. Thus, for all those tariffs considered to be incompatible with EC regulations, the member states must redo their calculations two seasons later. 10. Of course, those member states ideologically committed to market liberalism would have preferred to rule out intervention altogether. When the Regulation was adopted by the Council, UK ministers wrote a declaration into the Council minutes denying any intention to use the provisions of the regulation to intervene in the market. They even took the unusual step of ensuring the airlines knew they really were free to set their own fares by revealing the terms of the (unpublished) Council minutes in answer to a Parliamentary question which they arranged (Hansard, 7 July 1992, col. 110). Moreover, they drew their position specifically to the attention of British Airways, and subsequently declined to act on a proposal from the CAA that a BA fares increase should be referred to the Commission. 11. The Commission can also apply Article 90, which enables it to control special or exclusive rights granted by states to commercial undertakings. However, it has used this power in only a small number of instances.

Notes

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12. Claus-Dieter Ehlermann, a former Director General of DG IV, described the White Paper as ‘the most important policy paper the Commission has ever published … It suggests a legal and cultural revolution in proposing the fundamental reorganization of existing responsibilities between the Commission, national authorities and national courts’ (2000, p. 537). For commentary and analyses, see Goyder (2003), Pijetlovic (2004), McGowan (2005) and Venit (2003). 13. For competing perspectives on what motivated the modernization, see Riley (2003a, 2003b), Wilks (2005) and Kassim and Wright (2007, 2009). 14. Theretofore, it had used its powers under Articles 81 and 82 which were not ideally suited to this purpose (see McGowan 2000). 15. See Wilks and McGowan (1996). For the curious design of decision-making in competition, see Karagiannis (2007). 16. The same is not true under Regulation 1/2003, however, since Article 81 (3) became directly applicable and airlines themselves bear responsibility for deciding whether they fulfil the exemption conditions. 17. See Argyris (1989) for a detailed analysis, including how Regulation 3975/87 differed from Regulation 17. 18. An important difference is that the approval for a merger is permanent, whereas alliances are subject to review after six years. 19. Mario Monti, Commissioner for Competition on 29 October 2002, announcing the Commission’s decisions on the Star and Wings Alliances (IP/02/1569). 20. Regulation 3976/87 has been amended by Regulations 2344/90, 2411/92, 1/2003 and 411/2004. 21. Commission Regulations EEC 2671/88, 2672/88 and 2673/88, OJ L 239/9 of 1988. 22. Departing from a policy it had pursued since at least 1993, the Commission announced in October 2006 that following consultations opened in 2002 its plans to revise the block exemption relating to IATA passenger tariff conferences somewhat dramatically (IP/06/1294). While from 1 January 2007 routes within the EU would no longer be exempted, exemptions for routes from the EU to Australia and the US and for routes from the EU to other non-EU states would lapse five and ten months later respectively. Though she recognized the benefit of interlining on routes to third countries – and indicated a preparedness to consider the data – the Competition Commissioner indicated that she no longer saw advantages of the IATA system for passengers travelling within the EU. The new regulation also brought to a close the block exemption for IATA slots and scheduling conferences. 23. For a detailed legal treatment, see Goh (1997, ch. 5). 24. When in the UK BA took over Dan Air in 1992, the Merger Task Force concluded that Dan Air’s scheduled service business fell just below the threshold for Community involvement. Its decision was challenged by Air France – most of Dan Air’s scheduled services were to French destinations – but the decision of the Merger Task Force was upheld by the Court (Case T-3/93, Air France v. Commission [1994] ECR II-121). 25. ‘These opportunities were taken up by Air Europe and Dan Air, both of which several years later had gone out of business (some say, possibly as a result of taking up the opportunities’ (Balfour 1994, p. 1037). 26. The Merger Regulation was amended in January 2004 by Council (2004b). The most important change included a change in the test from dominance to one where the Commission can block a transaction which ‘would significantly impede

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27. 28. 29. 30.

31.

32. 33. 34. 35. 36.

37.

38.

39. 40.

41.

effective competition, in the common market or in a substantial part of it, in as a result of the creation or strengthening of a dominant position’. Air France appealed the decision, but the Court of First Instance dismissed its case as it had done in BA-Dan Air. Source: http://www.euractiv.com/en/transport/commission-grounds-ryanair-bidaer-lingus/article-164999. See Frühling (1992), Clifton et al. (1996) and Verhoeven (1996) for discussions of this issue. See also Balfour (1995, 2002). Unlike anti-trust and monopoly control, which are generic, the competence granted to the Community in respect to state aid has no equivalent at the national level. Article 88 (1) [ex 92 (1)] provides that ‘any aid granted by a member states or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market’. The airline is required to submit a recovery plan, which is examined by a Commission consultant. For discussion of the market economy investor principle, see Abbamonte (1997). Air France challenged the Commission’s decision, but the Court of First Instance ruled against the company (1996). For the Commission’s decision on the Portuguese flag carrier, TAP, see Commission (1994f). Sir Michael Bishop, Chairman of British Midland, estimated that the injection was ‘almost equal to all the entire losses made by all the world’s airlines in 1993’ (Financial Times, 5 October 1991, p. 1). The Court of First Instance (1998) ruled that the Commission had failed to provide adequate legal reasoning for approving the French flag carrier’s purchase of 17 new aircraft and to analyse the competitive effect that state aid would have on routes outside the EEA. Doganis (2001, pp. 188–93) argues that these airlines are overpoliticized, their management is bureaucratic and their service quality is poor. They also have strong unions, are overstaffed but exhibit low productivity and incur substantial losses. Olympic Airlines was created in 2003, based on the flight divisions of Olympic Airways Group. Sabena was rebuilt around its regional airline Delta, with a further injection of €125m in state aid. Swissair went into administration, and was reconstructed around Crossair, its regional airline, with the benefit of an aid package worth €2.3bn, to which the private sector contributed about 40 per cent, but it was forced to shed much of its long-haul route network, and in 2005 it was taken over by Lufthansa. This appeared not to be the Commission’s view at the beginning of that decade. In a joint paper to the Commission in September 1990 about how its powers under the Merger Regulation 4064/89 might be used to deal with corporate restructuring in air transport, van Miert and Brittan highlighted the importance of constraining market power in order to encourage competition within the Community. See the Commission (2005e), pp. 91–6) for expression of the Commission’s more positive view of consolidation.

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10 The EU and the Transformation of European Aviation 1. Alitalia and Olympic Airways have been the slowest to adapt. 2. Although not a study of Europeanization, the analysis of the internationalization of national policy presented in Thatcher (2007) has much in common with the top-down approach. 3. See Thatcher (2007) for the view that UK policy change was inspired by regulatory competition. 4. On this theme, see See Frühling (1992), Clifton et al. (1996) and Verhoeven (1996). 5. See OECD (2004) for an extensive examination of regulatory reforms in civil aviation. 6. Air France responded by extending some of its non-stop Paris-Los Angeles services to Papeete, Tahiti, which competed with UTA on the Los Angeles-Papeete sector. 7. Despite Air France’s complaint that UTA was ‘trop présent’. 8. When it was denied the opportunities to expand into profitable markets, it was not clear what options were open to UTA. 9. The first were to be authorised in two steps – four as soon as possible; the other four from 1 March 1991; the second in three steps: fifteen as soon as possible; a further fifteen from 1 July 1991; and ten from 1 January 1992. 10. See Attali (1994), Belhassine (1997) and Bouaziz (1998). 11. See Lehrer 1997, esp. on Attali. See also Staniland (2003), Pedrano (1994) and Golder (1997). 12. Eight US airlines flying to Paris had secured a 70 per cent share of market. 13. For discussion of ‘CAP ‘93’ (1991), PRE1 (1992) and PRE2 (1993), see Staniland (2003, pp. 250–3). 14. Key figures included Rakesh Gangwall, who had headed scheduling operations at United Air Lines and Stephen Wolf, former CEO at United, who was appointed adviser to Christian Blanc. 15. When only six of the 14 major unions accepted his restructuring plan, he called a referendum: 81.6 per cent of employees voted to accept the measures he proposed. 16. The company’s position was strengthened when, following a governmentsupported campaign to create an alliance with Alitalia, the Italian airline chose KLM over Air France, precisely because KLM was privately owned. 17. See interview with Jean-Cyril Spinetta, Air France chairman, in Airline Business, January 2008, pp. 27–9. 18. Thereafter, the US carriers’ share of the US–France market dropped from 70 to 56 per cent, Atlanta Business Chronicle, 31.07.97, accessed on-line 28 February 2009. 19. Why, despite these commitments, France advanced the second package when holding the Council Presidency is explained in Chapter 6. 20. France not only has the largest number, but many of its routes involve the capital city and a sizeable proportion are at Paris–Orly. 21. This measure was entirely consistent with the interests both of Lufthansa and West Germany a federal state. 22. The desire to be ‘good Europeans’ also contributed to Germany’s shift towards a more liberal policy. The ruling of the ECJ on the common transport policy had a major impact (interview, German aviation official, 27 May 97). 23. Broader consequences of unification for aviation include the disappearance of the East German flag carrier, Interflug, Lufthansa’s expansion into the former

296 Air Transport and the European Union

24.

25.

26.

27.

28. 29. 30. 31. 32.

33.

34.

35.

East Germany and the increase in size of the domestic market. Unification also repositioned Germany at the centre of the continent, so that it was no longer on the Eastern periphery of the West. Thus, it embarked on an expansionist policy to occupy market positions and complete an expensive fleet modernization programme to ready itself for 1 January 1993. When British Caledonian assumed this role, the Heath government transferred a significant number of BOAC’s routes to it without compensating the national airline (Staniland 2003, p. 194). Laker initially, then BCal and later Virgin from 1983 competed head to head with British Airways on major routes. Access to London-Heathrow proved the sticking point in the various efforts over many years to renegotiate Bermuda II, but control over access to this major international gateway gave the UK an extremely strong position from which to bargain. (The UK’s consciousness of the preciousness of this asset contributed to its concerns about the negotiation of an EU–US agreement.) For this reason, the claim that UK action has been motivated principally by the international competitiveness of US airlines and that ‘Britain feared such competition and acted to respond to it’ (Thatcher 2007, p. 234) is somewhat curious. See http://www.dft.gov.uk/consultations/archive/2002/fd/scot/mc/, checked 20 February 2009. The Federal Ministry of Transport, Building and Urban Affairs similarly highlights the centrality of international collaboration in describing its responsibilities in aviation. See at http://www.bmvbs.de/en/Transport/Aviation-, 1897.964576/International-collaboration.htm. To that extent, it can be argued that decision-making is now more transparent and inclusive than when managed within semi-formal national policy communities. See http://www.aviation-civile.gouv.fr/html/publicat/av_civil/349/DGAC349_ P16-21.pdf. DGAC website at http://www.aviation-civile.gouv.fr/csam.htm, checked 20 February. See Hooghe et al. (1996) for a critical discussion. For an analysis of the various airline business models in Europe, see DLR (2008)’. Full reference is: Deutsches Zentrum für Luft- und Raumfahrt e.V. (2008) Analyses of the European Air Transport Market. Airline Business Models, Cologne: Air Transport and Airport Research. London–Paris was one of the few European routes on which a second British airline was allowed to compete, albeit from Gatwick in competition with BA and Air France from Heathrow, but it was still a struggle to persuade the French authorities to allow BCal to increase their frequency from six daily return services to seven. There were long delays in getting permission for BCal to operate even one or two services a day into Frankfurt, and Milan was out of the question. These facts tell only part of the story because they do not distinguish between major and minor routes. In particular, most of the numerous monopoly routes were small, including 100 which had taken advantage of the protection afforded by operating under a PSO. In Italy, for example, both Easyjet (Milan-Olbia) and Ryanair (Rome-Alghero) have been prevented from opening new services by the award of exclusive PSO contracts to Italian airlines. The European Commission examined the regulations governing PSOs, and the use made of them, in the context of its review of the third package. See Chapter 9.

Notes

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36. BA created Go in 1998, but sold it to the management team three years later when BA ran into financial difficulties. They in turn sold the airline to Easyjet in 2002. KLM followed suit with Buzz (1999), which also failed and was sold to Ryanair in 2003. Lufthansa experimented briefly with Lufthansa Express, and has not ruled out the possibility of re-entering the market with its own low-cost operation, but it is much harder for an established airline to operate a low-cost business, or to reinvent itself as a low-cost carrier, as both Olympic and Aer Lingus have found, than for a new airline to be set up on a low-cost basis. 37. The economic benefit which regional airports often see for themselves and their neighbourhood in facilitating new services, often in the face of powerful objections from the national airline and its hub airport, is a factor that encourages competition. See Chapter 9 for discussion of the case of Charleroi and Ryanair.

11

Conclusion

1. Lawton (1999) and Kassim (1996a, 1996b) are rare exceptions. 2. This is true even of the Europeanization literature that addresses the impact of the EU on non-member states (see, e.g., Schimmelfenning, 2007). 3. The Commission, by contrast, has struggled to bring Directors General together for more than half a day. 4. This was achieved by extending their existing networks, acquiring traffic rights from airlines in decline and entering cross-border alliances. 5. Jordan (2002) is the leading text on how ministries have been affected by EU policy development. 6. See Thatcher (2007) for the view that UK policy change was inspired by regulatory competition. 7. Favell (1998) is a rare exception.

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Glossary Available Seat Kilometres (ASKs) Chapter 11 Chapter 2

Common aviation area COMPAS Report Eighth freedom Full-service network carriers Grandfather rights

Interlining Legacy carriers Load Factor Low cost carriers Ninth freedom

No frills carriers Revenue passengerkilometers (RPKs) Seventh freedom

Sixth freedom

The number of seats offered for sale on each flight stage multipled by flight stage distance give this measure of passenger capacity Chapter 11 is a chapter of the US Bankruptcy Code which allows businesses to reorganize, while continuing to operate Annex 16 to the Convention on International Civil Aviation categorizes aircraft under classes (‘chapters’) according to the level of their noise emission. Chapter 2 types are noisier than, for example, more modern Chapter 3 types. Most Chapter 2 aircraft have not been permitted to operate at European airports since 2002 Areas formed by states wherein airlines of signatories can operate services free of bilateral constraints Report on Competition in Intra-European Air Services The right to carry passengers or cargo between two points in a third country Term applied to former flag carriers The convention whereby airlines retain rights (usually with respect to airport take and landing slots) in one season because they had done so in the previous season The practice whereby one airline accepts the travel documents issued to a passenger by another Term applied to former flag carriers Revenue Passenger Kilometres as a percentage of Available Seat Kilometres Independent carriers offering inexpensive travel on a point-to-point basis The right to carry passengers or cargo between two points in a third country without continuing service to or from one’s own home state Independent carriers offering inexpensive travel on a point-to-point basis Revenue Passenger Kilometres are a measure of passenger demand The right to carry passengers or cargo between a second and a third country without continuing service to one’s home state The right to carry passengers or cargo from a second country to a third country while stopping-over in one’s home state

326

Index

Aer Lingus 44, 100, 196, 204, 205, 210, 215 Airbus 133, 240 Air France 42, 44, 46, 48, 63, 88, 100, 167, 168, 198, 201, 202, 203, 205, 210, 211, 215, 223–9, 247, 249, 263, 268 Air Inter 47, 189, 201, 221, 226 air traffic control/management (see common air transport policy) Air Union 61, 63–4 Airports London Heathrow 188, 191, 236, 237, 238 Malpensa 190 Paris (Charles de Gaulle) 188–9, 226 Paris (Orly) 188–90, 202, 225 Schiphol Alitalia 44, 63, 100, 190, 198–9, 204, 205–7, 211–12, 215 American Airlines 33, 34, 35, 199, 238 Anastassopoulos, Georgios 139 Andriessen, Frans 109–10 Armstrong, Kenneth and Bulmer, Simon 4, 9–10, 81, 264 Article 84(2) [now 80(2)] (see EEC Treaty) Association of European Airlines (AEA) 77, 92, 94, 110, 111, 115, 116, 139, 140, 166, 169, 185 Association of Independent Airlines (ACE) 77, 92, 116 Attali, Bernard 112, 228 Barrot, Jacques 174, 176 ‘battle of Orly’ 188–90, 268 Bermuda I 25–6 Bermuda II 239 Bethell, Lord 86, 87, 88 Bilateral air service agreements (ASAs) 1, 3, 8, 16, 25–9, 101, 110, 154, 156, 160–2, 166, 168, 170–2, 218, 243

Bilateralism 24–9, 259 Blanc, Christian 228 Braniff International Airways 34 Britannia Airways 54 British Airways (BA) 43, 44, 53, 55, 56, 85, 88, 100, 110, 188–9, 196, 198, 199, 201, 202, 204, 205, 211, 215, 226, 227, 232, 236–7, 239, 247, 268 British Caledonian 53, 54, 88, 100, 201, 237 British European Airways 53, 54, 55 British Midland Airways 125, 190, 195, 200 British Overseas Airways Corporation (BOAC) 43, 53, 55 British South American Airways 53 British United Airways 53, 54 Brittan, Sir Leon 110, 113 Bureau européen des unions de consommateurs (BEUC) 92, 93, 110, 116, 185 Calleja, Daniel 174, 176 Cardoso Cunha, António 109–10 Charters (see non-scheduled carriers) Chicago Convention 3, 16, 22–4, 25, 29, 137, 159, 180, 259 (see also Convention on International Civil Aviation; ICAO) Chicago regime 3, 7, 59, 21–31, 38–9, 59, 81, 130, 154, 260, 261, 263 Civil Aeronautics Board (US) 29, 31, 32, 35, 37, 53 Civil Aviation Authority (UK) 53, 55, 85, 125, 237, 243 Clinton-Davis, Stanley (now Lord) 85, 92, 93, 99, 100 Cockfield, Lord 85, 92 Code-sharing 166, 199 Coleman, Robert 134, 158 Common air transport policy Airports 127–8 327

328 Index Common air transport policy—(Continued) ground handling 126–7, 129 slot allocation 124–5, 184, 191 traffic distribution rules 184, 188–90 air traffic control/management 130, 132, 138–40, 218, 240, 241 SESAR 145–7 Single European Sky 2, 138, 141–7, 240, 261, 265 Community ownership and control 110, 154, 166, 170 Computer Reservation Systems (CRS) 123, 165, 166 consumer protection 120, 131, 147, 149–51 environmental policy 131–2, 147–9, 184, 190 establishment, right of 108, 110, 161, 170 external aviation policy (of the EU) 154–78, 181 EU-US open skies 154, 156, 172–6, 261 European Common Aviation Area 8, 154, 156–7, 172, 262 horizontal agreements 170, 171–2 Transatlantic Common Aviation Area 167, 168, 169, 173 harmonization 90, 133 inter-regional services 78 Inter-Regional Services Directive 79, 99, 107 Liberalization 2, 5, 7, 8, 9, 10, 11, 77, 90, 104, 106, 111, 130, 182, 200, 253–6, 257, 264 cabotage 117, 166 capacity 114, 116 fares 114, 116, 191–2 first package 3, 9, 12, 16, 101, 103, 106, 121–2, 181, 259 market access 114, 116 second package 106, 107–15, 121–2, 181 third package 106, 115–18, 121–2, 181 licensing of airlines 108, 109, 116, 118–19, 192–3 licensing of personnel 120–3 passenger rights (see consumer protection)

public service obligations (PSOs) 182, 184–8, 231, 248 Regulation 1008/2008 118–20, 120–1, 193 Safety 130–1, 133–6, 151–3, 184, 240 Security 132, 136–8, 151–3 COMPAS Report (of ECAC) 84, 86, 94, 102, 117, 245, 248 Computer Reservation Systems (CRSs) (see also under common air transport policy) 34 Concorde 133, 148 Conference on Coordination of Air Transport in Europe (CATE) 61 Contestable markets 32–3 Continental Airlines 34, 35 Convention on International Civil Aviation (‘Chicago Convention’) 1944 3, 16, 22–4, 25, 29, 137, 159, 180, 262 (see also ICAO) Cornelissen, P.A.M. 139 Corniglion-Molinier report 71, 72 Council of Europe 61, 94 Council of the European Union (Council of Ministers) Council Regulation 141/62 72, 96 Council Regulation 1017/68 72 General Affairs Council 101 High level group (1984) 91, 92, 99 Presidency (Belgium, 1987/1st) (see also De Croo) 100 Presidency (France, 1984/1st) 90 Presidency (France, 1989/2nd) 90, 107, 111–14, 128 Presidency (Germany, 1983/1st) 79 Presidency (Ireland, 1984/2nd) 90, 91 Presidency (Ireland, 1990/1st) 114–15 Presidency (Italy, 1985/1st) 92 Presidency (Luxembourg, 1985/2nd) 92 Presidency (Netherlands, 1986/1st) 96, 97 Presidency (Netherlands, 1991/2nd) 116 Presidency (UK, 1986/2nd) 99–100 Presidency (Portugal, 1992/2nd) 117, 128

Index Transport Council 86, 90, 97, 98, 100, 101, 111, 112, 113, 114, 157 Under the treaty 70 Working group on transport questions (TWG) 75–6, 78, 92, 117, 164, 165, 166 De Croo, Hermann 100, 101, 208 Delebarre, Michel 112–13 Delors, Jacques 109–10 De Palacio, Loyola 126, 143, 150, 152 Delta Air Lines 33, 34, 35 Dierikx, Marc 50 Doganis, Rigas 27, 35, 212 Dollinger, Werner 86 Drouot-Hermine report 72 Easyjet 188, 227, 238, 246, 247, 248, 253, 254 Eastern Air Lines 33, 34 Economic and Social Committee (ESC) 116, 133, 150 European Aviation Safety Agency/ Authority 2, 62, 128, 132–6, 152–3, 159, 160, 262 European Civil Aviation Conference (ECAC) 2, 8, 9, 22, 29, 37, 60, 61–2, 63, 79, 81, 82, 83–5, 86, 92, 94–6, 97, 100, 101, 103, 107, 123, 125, 130, 136, 137, 138–41, 142, 143, 147–9, 151–3, 154, 158–9, 169, 177, 259, 260, 262, 263, 269 EURPOL 84, 94 European Commission as regulator 181–2, 182–93, 214–15 DG IV/COMP 108, 182, 183 DG VII/TREN 60, 73, 77, 78, 79, 94, 108, 126, 129, 182–4, 208 Under the treaty 67–9 European Council 70, 98 Hague Declaration 98 Paris Summit 73 European Court of Justice 69, 82, 265 AETR 75, 155, 162, 169, 178 Ahmed Saeed 110, 160, 196 Alpha Flight Services v. Aéroports de Paris 127, 214 Bethell v. Commission 86, 88 European Parliament v. Commission 92 French Seamen 59, 60, 71, 73–5, 80

329

INNO v. ATAB 75 Isoglucose 70 Ministère Public v. Lucas Asjes (‘Nouvelles Frontieres’) 96–7, 104, 194 ‘open skies’ 17, 156, 169–71, 178 Opinion 1/76, Rhine Navigation 163, 169 Opinion 1/94 164–5 European Economic Community (EEC) Treaty 39, 257 Article 113 [now 133] 161–5 Article 84(2) [now 80(2)] 66, 68, 71, 74, 161–5 Aviation under 65–6 Competition rules (see EU competition policy) General 3, 59 General aims and principles 64–5 Institutions under 66–70 European Parliament 69–70, 114, 116, 119, 133, 139, 150, 163 European Regional Airlines Association (ERA) 186 European Transport Workers Federation (ETF) 186 EU competition policy abuse of dominant position, Art 82 [ex 86] 87, 97, 122, 195–6 anti-competitive practices, Art 81 [ex 85] 87, 93, 97, 122, 181, 197–9 block exemptions 107, 111, 115, 122, 196, 199–200 competition rules (general) 65, 75–6, 81, 97, 99, 105, 110–11, 122, 129, 160–1, 166, 181, 193–5, 214–15, 253, 265 individual exemptions 196, 197–9 Merger Regulation 194, 202–6, 226 mergers and alliances 181, 197–206 Regulation No. 17 (1962) 96 state aid 97, 181, 194, 204–15 Eurocontrol 2, 8, 61, 62–3, 113, 128, 138–47, 153, 159, 160, 259 Agency for the Safety of Air Navigation 63 Permanent Commission for the Safety of Air Navigation 63

330 Index Europeanization 4, 5–6, 13–16, 218, 258, 259, 266–70 bottom-up 5–6, 13–16, 218–22, 254, 265–9 top-down 5–6, 13–16, 220, 266–70 Federation of Air Transport Users’ Representatives in the European Community (FATUREC) 78 First memorandum 60, 76–9, 89 flag carriers 40, 195, 218; see entries for individual airlines; see also legacy carriers Statization 41, 42–3 Subsidization 41–2 France Air transport policy pre-1945 41–3 Europeanization Beyond economic regulation 240–41 Economic regulation 222–9, 238–9 Policy making 240–4 Post-1945 46–9, 222–30 DGAC 47 Flag carrier strategy 46–8, 222, 225, 230 Governance 47 Policy making 48–9 Franco-German proposal 98 Freedoms of the air 24–5 Germany Air transport policy pre-1945 41–3 Europeanization Beyond economic regulation 241–2 Economic regulation 230–4, 238–9 Policy making 241–5 post-1945 49–50, 225, 231–4 Flag carrier strategy 49 Governance 49 Policy making 49 Giraudet, Pierre 83 global alliances (see entries for OneWorld; Skyteam Alliance; Star Alliance) Goetz, Klaus 5, 266, 267, 268 Guigou, Elisabeth 113 Hammarskjöld, Knut 83 Harmonization 240–1

Havana Convention (1928) 23 Historical institutionalism 4, 9–10, 81, 264 Iberia 44, 188, 198, 205, 212 Imperial Airways 41, 43, 53, 55 Inter-airline agreements (includes pooling) 27, 29, 196 International Air Carriers Association (IACA) 187 International Air Passengers’ Association (IAPA) 87 International Air Services Transit Agreement (Transit Agreement) 24 International Air Transport Association (IATA) 22, 26, 27, 28–9, 35, 48, 73, 75, 79, 83, 86, 92, 94, 95, 124–5, 138, 176, 187, 200, 245 International Civil Aviation Organization (ICAO) 2, 22, 24, 30, 35, 37, 39, 61, 62, 75, 79, 80, 83, 132, 147–9, 154, 159–60, 177, 240, 245, 259, 262, 269 Air Navigation Council 130 International regime theory 271 fn 7, 274 fn 1 Joint Airworthiness Requirements ( JAR) 132–4 Joint Aviation Authorities ( JAA) 62, 130–6, 152, 240, 263, 265 Jordan, Andrew and Liefferink, Duncan 5, 13, 16 Kahn, Alfred 32, 84 King, Sir John (later Lord) 55 Kinnock, Neil (now Lord) 125, 143, 152, 166, 212 Klinkenborg report 92 KLM 37, 42, 44, 50, 51, 52, 63, 88, 100, 198–9, 202–5, 214, 229–30, 234–5, 239, 242, 249, 251, 262, 268 Kroes, Neelie 200 Laker, Sir Freddie 53, 86 Laker Airways 85 Lamoureux, François 134

Index legacy carriers 213, 220, 243 Leiden Department of Air and Space Law 51, 259 Loder, John 84 low-fares airlines 185, 219, 248–53 (see also ‘no frills’ carriers) Lufthansa 42, 43, 44, 49, 50, 63, 88, 100, 196–8, 203–5, 215, 249, 251, 268 Luxair 44 Majid, Amir 62 Martinair Holland 52 Martino report 72 Mitterrand, François 112 Modified neofunctionalism 4, 10–11, 81, 264 Montreal Convention 151 Moore, John 99 Moss, David 158 Multilateral Agreement on Non-Scheduled Services in Europe (1956) 61 The Netherlands Air transport policy pre-1945 41–3 Europeanization Beyond economic regulation 240–1 Economic regulation 333–5, 239–40 Policy making 241–5 post-1945 50–2, 226, 234–6 Flag carrier strategy 235 Governance 52 Policy making 51 ‘sixth freedom’ strategy 51 no-frills carriers (see also ow-fares airlines) 1 Non-scheduled carriers 113, 220 Non-scheduled services 29–30 Northwest Airlines 34 O’Leary, Michael 204, 253 O’Reilly, Dolores and Stone Sweet, Alec 5, 10–11, 105, 264 Olympic Airways 44, 93, 100, 204, 205–7, 211, 213–15 Oneworld Alliance 199, 250, 252

331

Pan American World Airways 23, 34, 35, 37 Papandreou, Vasso 109 Paris Convention (1919) 22, 23 Parkinson, Cecil 112 Peña, Eduardo 93 People’s Express 33 Peters, Mary 174 Pooling agreements (see inter-airline agreements) Portillo, Michael 112 Power-indices 4, 8–9, 81, 264 Privatization 106, 232–3, 239, 245, 246, 254 Probst, Claude 113 Raban, Hans 83, 260 Radaelli, Claudio 5, 13, 15, 221, 267 Three tests 15, 221, 230, 233, 234, 236, 238–9, 267 Ridley, Nicholas (later Lord) 86, 91, 99 Rijksluchtvartdienst (RLD) (Dutch aviation department) 51, 239, 242, 245 Ruhnau, Heinz 231–3 Ryanair 204, 214, 227, 240, 248, 253 Sabena 44, 63, 88, 100, 191, 195, 205, 210, 213, 219 Scandinavian Airways System (SAS) 43, 44, 100, 113, 190, 197–9 Scarascia-Mugnozza communication 73 Schaus memorandum 71, 72 Schmidt, Susanne K. ‘the lesser evil’ strategy 12–13, 89, 97, 104, 127, 155 Scrivener, Christiane 109–10 Second Memorandum 7, 16, 81, 82, 86, 88, 89–90, 101, 104, 106, 208, 259 Single European Act (SEA) 70, 92, 128, 131, 194 Single market in air services 181, 245–54 Sforza, Count Carlo 280 fn 3 Secrétariat général du comité interministériel (SGCI) 113 Skyteam Alliance 229, 250, 252 Skytrain 54, 85, 86

332 Index Southwest Airlines 34, 247, 253 Spaak, Paul-Henri 65 Spaak report 66 Spinelli plan 73 Spinetta, Jean-Cyril 203, 230 Staniland, Martin 41 Star Alliance 199, 223, 225, 233, 250, 251, 252 Steele, John 60, 78, 90, 93 Strauss, Franz-Josef 231–2 Subgovernment 241 Sutherland, Peter 92 TAP Portugal 44, 205–6, 211, 227 Touraine Air Transport (TAT) 188–9, 202, 249 Thatcher, Margaret (later Baroness) 85, 86 Transavia 52, 235, 251 Trans World Airlines (TWA) 34, 37 Treaty of Amsterdam 131 Treaty on European Union 131 United Air Lines 33, 34, 35, 166, 199 United Kingdom Air transport policy pre-1945 41–3 Hambling Committee 41 Europeanization Beyond economic regulation 240–1 Economic regulation 236–9, 239–40 Policy making 241–5 Post-1945 53–6, 226, 236–9 Air Transport Advisory Council 54 Air Transport Licensing Board 53 Air Transport Users’ Committee 78 Civil Aviation Act (1946) 53, 54, 55

Civil Aviation Act (1980) 55 Domestic deregulation 85 Edwards Report 53, 236 European strategy 85–7 Governance 54–5 Liberal bilaterals 86, 90 Liberal charter policy 54 Merger of BOAC and BEA 55 Policy making 55 Second-force airline 53 US Air Mail (‘Kelly’) Act (1925) 31 Air Mail Act (1934) 31 aviation policy 31–8, 59 Civil Aeronautics Act (1935) 31 Deregulation 7, 9, 10, 16, 21, 32–5, 38, 62, 83, 89, 200, 259 New foreign policy 7, 35–8, 60, 80, 81, 82, 82–3, 165, 259 Open skies I 2, 7, 37 Open skies II 155, 156, 160, 166, 167, 168, 169, 173, 265 USAir 34 US-ECAC Memorandum of Understanding (1981) 37 UTA 47, 201, 224, 249, 268 Van den Bos, Jan 4, 8, 81, 264 Van Miert, Karel 108, 110, 113 Veres, Ruy 117 Virgin Atlantic 201, 237 Warsaw Convention 1929 151 Weber, Jurgen 233 White Paper on the Internal Market 92 Winter, Detlef 141, 233 Zimmermann, Friedrich 108