Is European airline consolidation really ready for takeoff? Stephen Dolan sets the scene

A flurry of developments concerning the regulation of European air transportation is transforming the industry. It has quickened the pace of reform and hastened the day when European airlines will be free to engage in the types of cross-border merger, acquisition and consolidation that is common to most other global industries.
Although important hurdles remain, significant momentum will be generated by US/EU negotiations, expected to begin this October, aimed at replacing the current matrix of 15 US/member state bilateral air services agreements with a single US/EU agreement. With other countries waiting anxiously in the wings to enter into their own air services agreements with the European Commission (EC), forward-looking airlines will soon start discounting the regulatory risks of unfettered airline consolidation and begin actively sizing up potential airline partners and targets within the EU.
The EC has sought the authority to negotiate and enter into air services agreements with third countries (non-EU countries) for more than 10 years. Since the implementation of a common internal air transport policy in 1992, including the formation of an EC common aviation area, the EC has sought corresponding competence with respect to external air transport relations. This external authority has been consistently denied by member states, which have preferred to enter into their own agreements with third countries.
However, as the EC has repeatedly pointed out, this approach has resulted in certain commercial limitations. These include limitations on cross-border airline mergers and acquisitions and restrictions on market access to third countries from points of departure in other member states. Importantly, it has also prevented the EC from leveraging the full economic and political weight of the EU in negotiating air services agreements with third countries.
The European Court of Justice (ECJ) ‘open skies’ decision of November 2002 dealt a severe blow to the individualistic approach by member states. The decision held that, among other things, member state open skies agreements with the US violated EU law, principally the EU right of establishment laid down in Article 43 of the EU Treaty, by discriminating against airlines from other member states. The decision also found certain aspects of member state open skies agreements to be within the exclusive domain of the EU as a whole.
Following the ECJ decision, the EC renewed its call for a mandate to negotiate air transport agreements with third countries on behalf of the EU as a whole, and in February 2003 released a policy declaration proposing new boundaries of authority between the EC and member states concerning external air transport relations.
On 5 June 2003, member states finally awarded the EC its long-sought mandate to negotiate air services agreements with the US. The mandate is a triumph for the EC and will eventually transform the basis on which transatlantic – if not worldwide – air transport is conducted.
Specifically, the EC is now authorised to: open negotiations with the US on a comprehensive bilateral air services agreement, covering such topics as traffic rights, routes, capacity, frequency, slots, fares, application of competition rules, safety and security; and open negotiations with third countries in order to remedy violations of EU law identified by the ECJ in its ‘open skies’ decision.
The mandate also proposes a new council regulation that would provide for the sharing of responsibility between the EC and member states concerning the negotiation of new and amended air services agreements between the EU, member states and third countries.
It is evident that the mandate awarded the EC nearly all of what it had been seeking. Although member states retain the ability to address certain aspects of their bilateral aviation relations with countries other than the US, the lion’s share of the negotiating power has been taken out of the hands of the member states and put into those of the EC.
The new mandate sets the stage for US/EU negotiations on a comprehensive new air services agreement, which is set to begin in October. The negotiations will be ambitious, aiming to unify within a single regulatory framework virtually every aspect of US/EU air transport relations. These include traditionally sensitive matters such as domestic sabotage, the US ‘Fly America’ policy and foreign ownership restrictions. They are all matters that would require changes to US law. Also on the agenda for the US will be that all-important access to London Heathrow.
The mandate also envisages separate, standalone agreements with other third countries that would remedy the violations of EU law identified by the ECJ in its open skies decision. These more limited agreements would exist side by side with current member states’ agreements with third countries.
However, the current agreements would be circumscribed by the broader EU-wide agreements. Such agreements would address those areas identified by the ECJ as falling within the exclusive competence of the EU, as well as areas which would fall within the exclusive competence of the EU according to the reasoning of the ECJ, but which were not before the ECJ when it handed down its decision. Altogether, these areas are: computer reservations systems (CRSs); slots at EU airports; intra-EU fares and rates; denied boarding compensation; air carrier liability in the case of accident; package holidays and tours; and data protection of individuals.
The complex divisions of responsibility and authority between the EC and member states, which is necessary in order to negotiate and implement all these new agreements, is specified in the EC’s proposed power-sharing regulation.
Importantly, the EU would appear to be receptive to overtures from third countries that would like to enter into a comprehensive air services agreement with the EU as a whole, similar to the one envisaged by the US mandate. Overtures by third countries offer the EC the possibility of crafting template EU bilateral air services agreements as well as the relatively easy negotiation of some of the first EU bilateral agreements under this mandate. Free-trading states and those with an interest in open aviation relations, such as Singapore and New Zealand, might aspire to be the first to agree to such deals. The implementation of such agreements would also put additional negotiating pressure on countries that have yet to agree to a comprehensive agreement with the EU, such as the US, especially if such agreements were implemented on the transatlantic, ie an EU/Canada agreement.
The cumulative effect of EU bilateral air services agreements with third countries would open up unprecedented possibilities for airline merger and acquisition in Europe and spark a transformation of the European air transport landscape. Once a critical mass of trading partners have agreed to new bilateral air services agreements with the EC, Europe’s major intercontinental airlines would be free to enter into the types of commercial consolidation and restructuring activities that are common to most other industries, as well as in the US air transport industry, where bilateral ownership and control issues do not play such a restrictive role.
In May 2004, the EU will expand to include 10 additional countries in Central and Eastern Europe, enhancing further the significance of the EC mandate and any bilateral air services agreements implemented between the EU and third countries as a result of the mandate.
Stephen Dolan is a consultant in the aviation group at Norton Rose