EU aviation ready for boarding: the new aviation strategy for Europe

Publication October 2016


Introduction

Aware of the importance of the aviation industry in rejuvenating the European Union’s (EU) economy, the European Commission (the Commission) published last December the first Aviation Strategy for Europe. The aviation industry has been a priority for the Commission since the liberalisation of the internal aviation market in the 1990s. However, this is the first time that the Commission is taking a comprehensive approach to this industry. Please see the timeline.

The Aviation Strategy for Europe is an ambitious plan which sets out and addresses the challenges faced by the aviation industry as a key driver of the European economy. The European aviation industry today accounts for 26% of the world market with 42% of all flights worldwide either landing or taking off in the EU.  What remains to be seen is how the European aviation industry emerges from the Brexit negotiations, given that UK passengers account for around 33% of intra-EU aviation, and that the application of the EU’s aviation framework to a post-Brexit UK remains highly uncertain. We will be covering such developments in our forthcoming issue.

Notwithstanding Brexit uncertainty, the Aviation Strategy for Europe is intended to work as a long-term roadmap towards a more competitive industry.  The strategy includes a range of initiatives covering areas such as security, safety, airport and air traffic capacity, foreign ownership rules and the negotiation of comprehensive air-transport agreements with non-EU countries.

While reactions to the strategy document have been largely positive, the airline industry has criticised the lack of concrete proposals and detailed timetables. Brexit uncertainty is likely to lead to further delays in implementation of the strategy.  We have selected the areas below to illustrate the internal and external challenges for EU airlines identified by the Commission and highlight the seemingly sensible suggestions for reform which appear to be at least temporarily frustrated by the focus on the post-Brexit negotiations and framework.

Airport congestion and the slot regulation

For airlines doing business in Europe, the increasing congestion at airports and the lack of airport capacity is a major burden, with London Heathrow the most notorious example. The currently applicable EU Slot Regulation already sets out rules on the allocation by airports of take-off and landing slots to airlines as a means of alleviating this congestion problem but has some major imperfections.

As airlines are able to protect existing slot holdings through grandfather rights under the 80% “use it or lose it” principle, grandfathering has resulted in limited slots availability for new entrants or those seeking to expand operations. To overcome this, airlines have sought to trade in slots in order to acquire those they need to expand their services. A major imperfection of the EU Slot Regulation is that, although slot exchanges are permissible, outright sales or purchases of slots are not. A consequent “grey market” has developed under which payments have accompanied exchanges of high value slots for “graveyard” slots which have little or no commercial value.

To improve the system’s efficiency, in December 2011 the Commission proposed to the European Parliament and the Council to revise the EU Slot Regulation. For various reasons, not much progress has been made with the legislative proposal.

Through the Aviation Strategy for Europe the Commission urged the Council and the European Parliament to move the proposal forward swiftly, and it is to be hoped that these entirely sensible proposals will be enacted soon. More recently, the EU Transport Commissioner, Violeta Bulc, has re-emphasised the importance of the issue and stressed the need to overcome capacity constraints. However, according to the latest unofficial news, the discussions on the legislative proposal in the EU legislative bodies are currently halted pursuant to the Brexit decision, given London Heathrow - as the busiest EU airport and the one with the most developed slot trading market - may soon be outside EU jurisdiction.

Passenger rights

EU Regulation 261/2004 currently covers air passengers' rights in cases of denied boarding, long delays and cancellations. The number of cases on the interpretation of Regulation 261/2004 brought before the Court of Justice of the EU has demonstrated that clarification and revision are required.

In 2013 the Commission proposed to the European Parliament and the Council to revise Regulation 261/2004. Amongst the most important changes, the proposal adds details to the definition of extraordinary circumstances, and clarifies when a passenger has the right to assistance and compensation if he or she misses a connecting flight. As with the proposal for the revision of EU Slot Regulation, the proposal concerning EU Regulation 261/2004 is still stuck in the EU legislative bodies. One of the main reasons for the delay has been political discussions as to whether a three or five hour delay period is appropriate to entitle passengers to financial compensation.

In the Aviation Strategy for Europe, the Commission urges European Parliament and the Council of the EU to adopt swiftly the revisions proposed.  The Commission has also committed to adopting guidelines on the interpretation of Regulation 261/2004, which may be helpful until the legislative amendments are implemented.

Although the EU Transport Commissioner, Violeta Bulc, stated that the Commission would issue the promised guidelines on passenger rights in 2016, according to the latest unofficial news, the discussions on the legislative proposal in the EU legislative bodies are currently halted following the Brexit decision.

Subsidies and unfair practices

Nationalised “flag” carriers have historically relied on state subsidy for support, although this has been subject to tight approval controls within the EU with the strengthening of the enforcement of EU State aid rules. These rules prohibit in principle any form of state subsidies, and have led to high profile investigations of Olympic and Alitalia, amongst others, and the exit of airlines such as Cyprus Airways and Malev Hungarian Airlines.

However, many airlines operate in a global market, and EU airlines have long alleged that their non-EU competitors do not face the same constraints regarding state funding. In particular, European airlines allege that they are at a competitive disadvantage compared to Middle Eastern carriers which have grown considerably in recent years, while also investing in EU carriers such as Air Berlin, IAG and Alitalia. Middle Eastern airlines have denied they receive any subsidy and have been critical of any proposals to address subsidisation. They have also argued that any measures should be equally applied to airlines from other non-EU countries such as India, Pakistan or Sri Lanka, despite the fact such airlines have had significantly less impact on overall airline competition.

The EU’s previous attempt to address this issue over a decade ago with Regulation No 868/2004 failed. Regulation 868 sought to penalise subsidisation and unfair pricing for air services from third countries into the EU. However, it has never been used in practice due to, amongst other issues, a highly complex methodology that sought to attach tariffs to individual ticket prices to offset unquantifiable subsidies.

The Aviation Strategy for Europe plans to address unfair commercial practices in aviation through two separate means: (i) a better suited improved regulation on unfair practices in aviation; and (ii) the conclusion of international air traffic agreements between the EU and third countries (bilateral or multilateral Comprehensive Air Service Agreements) which incorporate a “fair competition” clause, effectively requiring the counterparty state to police any subsidies to its own nominated airlines.

On 7 June 2016 the EU legislative bodies granted the Commission the first batch of mandates to negotiate Comprehensive Air Service Agreements. According to a Commission’s senior official, these mandates cover the issues of market access and fair competition as elements of a larger package with the following key partners – ASEAN, the Gulf states (Qatar and UAE in the first instance) and Turkey. How quickly such agreements are implemented – and at what price – will be of interest: the Commission has previously acknowledged that its attempts to secure bilateral EU agreements with third countries have formed part of broader trade discussions with such countries “reluctant to agree [to the Commission’s aviation policy requirements] in a purely aviation context”.

Restrictions on foreign ownership and investment

Ownership rules in the aviation industry are another topic which has been subject to extensive debate, with most countries still requiring that airlines licensed within their territory are owned and controlled by nationals of that country. These foreign ownership and control rules create clear barriers to investment. Within the EU, EU Member States and/or nationals of Member States must own more than 50% of EU licensed airlines, and exercise effective control (except as provided for in certain third country / EU agreements). These rules are a significant barrier to non-EU investment in EU airlines, preventing any investment that would result in acquisition of control.

The Aviation Strategy for Europe proposes to ease requirements on foreign ownership for EU airlines. In this respect, the Commission is advocating a relaxation of the ownership and control rules on the basis of the principle of “effective reciprocity” in bilateral agreements. However, this is in danger of being a meaningless policy statement given the challenges in finding third countries willing to enter such reciprocal arrangements. In the US, despite the Open Skies agreement between the US and the EU, non-US investors are only allowed to hold 25% of any US airline – and this position is unlikely to change in the short- to medium-term.

At the same time, the convoluted ownership structures, for example, within IAG to protect the separate UK and Spanish flying rights of British Airways and Iberia or to protect the French and Dutch rights of Air France and KLM, are increasingly common. The Commission, aware of foreign investments in EU carriers close to the 50% threshold (Etihad’s 49% stake in Alitalia and Delta’s 49% stake in Virgin Atlantic), is suggesting that greater clarity as to the definition of “control” would be helpful. It envisages new interpretative guidelines on Regulation 1008/2008 which sets out the requirements for qualification for an EU operating licence.

Ownership and control are not the only barriers EU airlines are facing in respect of operations to the US. On 15 April 2016, the US Department of Transportation (DOT) tentatively approved the application for a foreign air carrier permit by Norwegian Air International for permission to operate flights between the U.S. and Europe. The perceived delay in the issuance of this permission was seen by the Commission as a violation of the EU-US Open Skies agreement, under which EU and US carriers should have unfettered rights to operate transatlantic services although EU carriers cannot operate in the US domestic market.

According to a Commission’s high official, the Commission intends to finalise concrete proposals on airline ownership and control rules in 2018. In the meantime, the Commission planned guidelines on the application of the existing ownership and control rules this year – but these also appear less likely in the post-Brexit vote uncertainty. More fundamental questions arise such as how Brexit will affect (i) the operating licence of UK air carriers currently controlled by EU nationals - will the UK relax the ownership and controlled rules as the UK CAA has previously advocated?; (ii) the operating licence of EU air carriers controlled by UK airlines; and (iii) the flying rights of UK and EU airlines between each other’s territories and to/from third countries as a consequence of this new settlement.

Next steps

The Commission’s Aviation Strategy for Europe does not, at first glance, put forward concrete proposals to address some of the urgently identified industry needs. However, it puts pressure on the EU legislative bodies to progress with previously delayed proposals on the revision of slot regulation and the passenger rights. However, the Brexit vote appears to have put the various legislative reforms – many of which seemed entirely sensible - on hold.

While the Commission received mandates from the EU Member States to begin negotiating bilateral air services agreements to combat subsidies to non-EU airlines, such negotiations may also be delayed pending resolution of the status of the UK after Brexit. In particular, Brexit raises more fundamental questions as to the traffic rights of UK air carriers and non-UK air carriers which are currently governed under pan-EU arrangements.

Despite a number of shortcomings and future uncertainties due to the political context, the Aviation Strategy for Europe is a step forward in tackling some pressing issues faced by EU airlines today, and recognition to the importance of the EU air transport industry. How this industry emerges post-Brexit will be of interest given the significance of UK passengers, airports and routes to the overall EU aviation sector. This will be a topic we will revisit in the next issue. Meanwhile Brussels will be focussed on the best negotiation position for Brexit and will no doubt keep in mind that, inclusion of the UK within a broader aviation area – such as the current European Common Aviation Area – is likely to lead to considerable benefits in minimising the economic harm that could be caused by disrupting EU-UK air travel, as well as keeping the foundations in place for implementation of the Aviation Strategy for Europe.


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