The legal side of the aviation business seems to get more complex than ever. In an effort to try and explain some of the complexities involved we are fortunate in gaining the help of Douglas Lochhead, a senior associate of Harbottle & Lewis LLP, the London-based solicitors whose clients include some of the UK”s leading airlines.
In the first of this occasional series Douglas comments on 'Open Skies', a subject Gordon Bethune, CEO, Continental Airlines, so eloquently discussed in April”s” ”On the Soapbox”.
At the beginning of the month our newspapers again ran the now familiar story of the latest round of ”open skies” talks between European and American negotiators ending in failure. Why is it proving so difficult to conclude these discussions, and what is the background to them?
At present the ability of EU air carriers to fly from their own state to a non-EU country is governed by a bilateral agreement between the governments of the countries concerned. The European Commission has long argued for the right to negotiate such agreements on behalf of the EU as a whole, and in 1998, in response to Austria, Belgium, Denmark, Finland, Germany, Luxembourg and Sweden concluding individual ”open skies” deals with the US, it commenced legal actions against each country. It also brought a similar action against the UK.
The Commission”s case was based on two premises ” firstly, that the conclusion of these deals infringed its own unique competence and authority to enter into agreements of this type (this charge was not levied against the UK), and secondly that the so-called ”nationality clauses” contained in each agreement, the effect of which limited route rights to airlines majority owned and controlled in the countries concerned, were contrary to the ”freedom of establishment” principle enshrined in the EC Treaty. To put this in context, these clauses prevented an Austrian national from setting-up an airline in Belgium and operating flights between Belgium (or any other EU country other than Austria), and the US. Aside from the legal arguments, the Commission also had a political agenda in bringing these actions, as it viewed the US as using its stronger bargaining power to ”pick off” Member States and enter into individual agreements which were heavily weighted in its favour.
The ECJ judgments were handed down in November 2002, and stated that Member States are competent to enter into obligations towards third countries, provided the EU has not already passed its own common rules in the area concerned. In this context the Court concluded that the bilateral agreements did not, on the whole, contradict EU law, as the Commission did not have a general mandate in this area at the time the treaties were entered into. Only in the limited areas of fares and computer reservations was the Commission found to have the exclusive ability to negotiate on behalf of the EU as a whole, as specific regulations had already been passed on these issues at the EU level.
The Commission had more success in its second argument, as the offending nationality clauses were indeed found to be contrary to the principle of freedom of establishment and hence the EC Treaty itself.
The industry was then left somewhat in limbo, as while the judgments had ruled these aspects of the agreements unlawful, they contained no prescriptive remedy, and carriers continued to fly under them. The Commission quickly repeated its request for exclusive negotiating authority to be ceded to it, and in an attempt to build on this in early 2003 it announced a three part package of measures to encourage a true single European aviation market. This involved:
” a negotiating mandate to allow the Commission the ability to negotiate with the US on behalf of the EU as a whole, with a view to replacing the existing individual agreements with a single comprehensive EU/US agreement;
” a negotiating mandate to allow the Commission to open negotiations between Member States and other third (non-EU) countries, in particular to replace the nationality clauses in the existing agreements; and
” a proposal for a regulation governing the general framework of individual negotiations between Member States and third (non-EU) countries.
This package was adopted by the Council on 5 June 2003, and the Commission began its negotiations with the US on 1 October. Shortly before this KLM and Air France announced their intended tie-up. In spite of the nationality clauses having been found to be contrary to EU law, this deal was nevertheless specifically structured to preserve each carrier”s existing traffic rights to and from its home state.
As Gordon Bethune pointed out, at present the EU and the US negotiators remain far apart in their negotiations. The latest round of talks stalled on 2 April, principally over the EU”s continuing demands for the creation of a ”Transatlantic Common Aviation Area”, involving cabotage rights being granted to European carriers in the US (which would allow European carriers to fly to US destinations and then onwards within the US), and equivalent rights being granted to US carriers in Europe. US pilot unions are resistant to this demand, fearing job losses, and the Bush administration is reluctant to make concessions in this area so soon before this year”s election. Some progress has however been made, including that the US is now prepared to seek Congressional approval on proposals to allow foreign ownership of US carriers to be raised from 25% to 49%.
As the issues involved are so complex, involving a mixture of socio-economic, political and legal factors (including the need to change existing laws), both sides seem resigned to a long and drawn out series of negotiations, knowing that when the deal is eventually concluded it will be in place for some time.
In acknowledgement of this the EU has now adopted a legal framework providing for the negotiation of bilateral agreements by Member States until EU wide deals can be concluded. This allows Member States to enter into new, or amend existing bilateral air service agreements with third (non-EU) countries, provided certain procedural and other requirements are followed. These include the establishment of non-discriminatory and transparent procedures for the distribution of traffic rights under such agreements between all EU air carriers ” ie not just those majority owned and controlled in the host country itself. Where a Member State wishes to involve air carriers in the negotiations, it must do so by providing equal treatment for all air carriers with an establishment (ie a real exercise of air transport activity) in the territory of that Member State.
Only time will tell how long the interim lasts, although the thoroughness of these most recent measures suggests that the Commission is prepared to hold out for a long haul.
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