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IP/02/1609

Brussels, 5 November 2002

Open sky agreements : Commission welcomes European Court of Justice ruling

The Commission welcomed today the ruling of the European Court of Justice in the so-called "open skies" cases, which address the legality of bilateral agreements concluded between eight EC Member States and the United States. "Today's judgement is a major step towards developing a new coherent and dynamic European policy for international aviation. In most sectors of the economy, Europe speaks with one voice in international negotiations and takes a leading role in shaping events. Until now, aviation has been excluded from this approach as Member States have pursued their own individual agendas. From now on, it is clear from the Court's ruling that we will all have to work together in Europe to identify and pursue our objectives jointly. The Commission stands ready to play its part" said Loyola de Palacio, Vice-President in charge of transport and energy.

Of particular interest is the Court's finding that the nationality clauses in the agreements, which restrict international traffic rights to the national flag carriers of the countries concerned, are contrary to the Treaty. The Commission had argued that these clauses undermine the fundamental right of establishment laid down in the Treaty, under which Community nationals are free to establish businesses throughout the Community free from any discrimination. The Court confirms that the clauses concerned discriminate between Community companies on the basis of the nationality of their owners.

The Commission believes that this discrimination has limited the benefits of the Single Market liberalisation undertaken in 1992, since Community carriers with international route networks have been unable to engage freely in investment and consolidation activity within the Community's borders. Under the terms of most bilateral agreements, including those covered by the judgement today, European carriers must keep over fifty percent of their shares in the hands of the nationals of their home country, or risk losing their international traffic rights.

Of equal importance is the Court's confirmation of the principle that Community competence for international relations is established wherever internal EC rules have been agreed and affect companies from third countries. Virtually every area of aviation is now covered by European legislation, and Member States may no longer make commitments to other countries on these matters. Member States that conclude bilateral deals risk creating conflicts in between their commitments at international level and their obligations under EC law.

In order to bring the relationship between the Member States and the US into line with Community law, there is thus an urgent need to open negotiations between the EU and the US with a view to agreeing an EU-wide replacement for the problematic bilaterals. The Commission has to this effect made proposals to the Member States for the negotiation of a "Transatlantic Common Aviation Area" that would bring further opening to the EU/US relationship. It will also propose in the near future to negotiate with other third countries.

Very soon, the Commission will issue a Communication setting out its policy for external relations in the aviation field and proposals for the negotiation, conclusion and management of international aviation agreements.

Background Note - The "Open Skies" Court Cases

    Introduction

      In December 1998 the European Commission brought before the European Court of Justice cases against seven EU Member States that have concluded bilateral "Open Skies" agreements with the United States in the field of air transport (Austria, Belgium, Denmark, Finland, Germany, Luxembourg, Sweden). It brought an eighth case against the United Kingdom in respect of its "Bermuda II" agreement with the US.

      In October 1999, the Netherlands decided to join the Court cases in support of the other Member States.

      Oral proceedings took place in May 2001 and the Advocate-General issued his conclusions on 31 January 2002. The final ruling of the Court is taking place today.

      The Commission is still examining the scope for further legal action against the Netherlands (in its own right), France, Italy and Portugal - all of which have now also concluded bilateral "Open Skies" agreements with the United States.

    The Commission's Position on International Air Transport policy

      In 1992, the Member States of the European Union agreed to create a Single Market in air transport. This meant liberalising aviation and allowing all European Community airlines to fly passengers and goods throughout the EU. All airlines established inside the EU now have equal rights under the law to operate air services from their home base. European airlines are also entitled to establish operations anywhere in the EU on the same terms as locals.

      The Commission believed that, in line with other sectors of the economy, the removal of internal trade barriers should be matched by a common external policy towards other countries. The Commission took the view that the Member States of the EU should no longer enter into bilateral agreements with countries from outside on an individual basis. It argued that such agreements:

      affect the way the Single Market operates and all its rules. EU airlines have to meet strict criteria to gain their status as European carriers and they should not face unfair competition from external carriers that do not meet those criteria, or which operate in a protected environment at home. Access to the EU market should only be granted to outside companies in a manner that is acceptable to the EU as a whole;

      discriminate in favour of the national flag carriers in each Member State and against airlines owned by interests from elsewhere in the EU, by allocating air traffic rights to foreign destinations on the basis of nationality. This is in violation of one of the fundamental rules of the Treaty. Furthermore, these nationality-based rules hamper competition between European Community airlines and have effectively prevented the European industry from consolidating into economically stronger, international businesses, because the national flag carriers cannot risk diluting their pure nationality.

      Given these legal problems, the Commission considered that Member States should not negotiate or conclude individual bilateral agreements with third countries.

    The Agreements with the United States

      Open Skies

    In November 1994, US Secretary of Transport Peña released an "International Aviation Policy Statement", which offered a strong commitment towards an open aviation world. The US offered so-called "open skies" agreements to, inter alia, the EU Member States. The objective of these agreements was to liberalise air transport between the signing parties, including the right to fly onwards from a destination to a third country - known as "fifth freedom" traffic rights (for example to continue a flight from New York to Brussels onwards to Munich).

      The European Commission asked Member States not to enter into any new arrangements with the United States for the reasons outlined above, but all eight Member States cited in the current cases (Austria, Belgium, Denmark, Finland, Germany, Luxembourg, Sweden, and the UK) did so. Seven were full "open skies" deals as described above. The UK/US agreement contains similar provisions on nationality, but is more restrictive than the others in terms of traffic rights.

        The Commission's View

      The Commission supports the goal of liberalisation and believes that the "open skies" agreements have brought some benefits to European consumers and businesses. However, the Commission considers that the bilateral negotiations and agreements by individual Member States failed to take account of the fact that the EU had become one large liberalised market, similar in nature to the American market on the other side of the Atlantic. In the view of the Commission, instead of a balanced agreement between two partners of equal size, these bilateral agreements gave US companies considerable operational opportunities in the European market, without gaining any rights of equivalent value for European airlines in the United States.

      For example, while US carriers can fly freely from any point in the US to almost any point in the EU under this patchwork of agreements, European airlines can only fly to US destinations from their home country. Moreover, while US airlines can use their "fifth freedom" rights to fly between two points within the EU's internal market, European Community airlines have no such rights between different destinations inside the US market.

      Moreover, the nationality restrictions enshrined in the agreements have deprived European airlines of the option to build strong businesses of trans-European scale that are freely open to their counterparts in other industries. This has reduced scope for intra-European rationalisation and investment significantly. The current financial problems at some European airlines have highlighted the structural problems in the industry caused in part by these distortions.

      The difficulties at some of the flag carriers inside the EU has also shown-up the danger of depending on national airlines to provide international links. Some EU flag carriers have had to withdraw from many transatlantic routes, leaving an gap in direct flights. Under the current agreements, these can only be filled by American carriers, since the agreements restrict the designation of airlines from elsewhere in Europe to fly these routes. This is a loss to the European industry as a whole.

        The Way Forward

      The Commission believes that in the case of negotiations with the United States and, indeed, with the EU's other trading partners, the only way for the EU to achieve a more balanced outcome is by pooling the negotiating leverage of all EU Member States together and arriving at a joint approach towards external policy in this field. .

      Such a joint approach, under which the EU would speak with a single unified and powerful voice, is now used in virtually all major international trade negotiations to good effect. The Commission sees no rationale for air transport to be approached in a different manner.

ANNEX

The Commission's Legal Argumentation

    The Commission argued in Court that it has the exclusive competence to negotiate air transport agreements with non-EU countries on behalf of the Member States. The Community derives external competence in civil aviation matters from the Treaty provisions on transport, in particular Article 80 (former 84) (2) EC Treaty, which was cited by the ECJ in its AETR judgement. This established the principle that once there is Community law in a field, such as air transport, the Community has exclusive competence to negotiate in this field. This is known as the doctrine of implied powers:  "The Member States lose their right to assume obligations with non-member countries as and when common rules which could be affected by those obligations come into being."

    In the view of the Commission, the "open-skies" agreements do affect the scope and functioning of the internal market in air transport as established by EU legislation. The "third package"(1) of liberalisation measures was intended to establish an internal market in the sector of air services, comprising a complete set of Community rules on the structure and functioning of that market and, in particular, for access to routes between and within Member States. It created an open, liberalised market in which airlines are free to provide services entirely in line with demand and their own commercial judgement.

    The Commission considers that the negotiation of bilateral open skies agreements by individual Member States compromises this "third package" of liberalisation measures, because the agreements lead to discrimination between different EU airlines and create distortions of competition.

    The "open-skies" agreements grant US carriers traffic rights to, from and within the EU, effectively giving foreign carriers access to the European market. Moreover, the Member States reserve the exclusive right to fly from their territory to the US for their own national air carriers creating discrimination between supposedly equal EU airlines.

    Such allocation of traffic rights by nationality restricts competition between EU airlines and effectively prevents any EU airlines with global ambitions from establishing international operations in an EU Member State other than its own. Under the agreements as they stand, it would not have access to international traffic rights. This is a serious impediment to free establishment within Europe.

    In summary, the Commission argues that open skies agreements:

    distort the Single Market by allowing the entry of non-European airlines.

    conflict with the principle of non-discrimination between European airlines;

    undermines the concept of the European Community airline as established in EU law - denying airlines access to international routes from Member States other than their own undermines the right of establishment.

    The Commission believes that by negotiating together, the EU could win a better deal for air passengers and for European airlines. It would have more influence in arguing for a balanced and reciprocal deal that would reinforce existing liberalisation, preserve the concept of equal access to the market between airlines in Europe and respecting the rights conferred in existing agreements. Moreover, a global agreement would allow the establishment of mutual rules on competition, in order to arbitrate the possible conflicts and avoid uncompetitive practices.

    (1) The "third package" consists of the Council Regulation No 2407/92 on licensing of air carriers; the Council Regulation No 2408/92 on access for Community air carriers to intra-Community air routes and Council Regulation No 2409/92 on fares and rates for air services


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