The European Court of Justice (ECJ) issued its judgment on the landmark ‘open skies’ cases on 5 November. Brought by the European Commission against member states, the cases challenged member state authority to enter into bilateral air services agreements with third countries on the grounds that such authority rests exclusively with the commission. The judgment sided, in part, with the commission, but fell short of granting it the exclusive negotiating authority position that it has been seeking for more than a decade. Nevertheless, the decision could have profound implications for the future of European airlines, and could eventually lead to an increase in airline mergers and acquisitions.
Bilateral air services agreements govern the conditions by which airline services may be offered between one state and another. All such agreements specify the degree of market access afforded to airlines of party states, with open skies agreements generally agreed to be among the most permissive. Bilateral air services agreements may also specify the capacity that may be offered on routes between the states and the fares that may be charged. Because such agreements arise in a bilateral context, they limit the benefits of their terms to airlines owned or controlled by nationals of the party states.
According to the commission, bilateral air services agreements are an anachronism in an age in which the commission is responsible for trade negotiations with third countries in virtually every other industry. The commission believes that they distort the common market for air transport established by community legislation throughout the 1990s. Because member states have thus far refused to cede to the commission’s long-sought negotiating authority through the political process, the commission launched the subject lawsuit in the hope of gaining that authority through the legal process.
The commission does not have exclusive authority to negotiate bilateral air services agreements with third countries, although commission regulation in relation to computer reservations systems (CRS), intra-European fare-setting and the allocation of slots has established exclusive commission authority in these narrow areas.
Nationality clauses found in member state bilateral air services agreements violate the freedom of establishment established in EC law, and discriminate against airlines from other member states.
Although not traditionally considered an ‘open skies’ agreement, the Bermuda II air services agreement in place between the US and the UK was nevertheless subject to the commission’s lawsuit, and the nationality clause contained in the agreement was found to violate EC law.
While falling short of the commission’s primary objective, the decision, and in particular the ruling concerning nationality clauses, could nevertheless have profound implications for European airlines. Nationality clauses are the vehicle by which parties to bilateral air services agreements restrict the benefits of those agreements to their own airlines, and are among the last remaining barriers to full-scale airline merger and consolidation in Europe. Potential tie-ups such as British Airways/KLM have foundered on the issue of nationality clauses and their effects. In the case of British Airways/KLM, the parties determined that the ultimate effect of the nationality clauses contained in the UK and Dutch bilateral air services agreements with the US would be the loss of traffic rights from the Netherlands, which was unacceptable for obvious commercial reasons.
The ECJ judgment promises to hasten the day when European airlines can freely merge and consolidate, to the relief of European airlines as well as the European Commission, which has voiced support for further airline consolidation.
European Commission reaction
Although the judgment offers no prescription for remedying the subject bilateral agreements in order to conform to EC law, the commission has already indicated that it views the agreements in their entirety to be ‘null and void’. On that basis, the commission has reiterated its request to member states to cede to exclusive negotiating authority to it, so that it may conclude new bilateral air services agreements with third countries that conform to the ECJ decision. Although the commission’s stance probably overstates the impact of the court’s judgment, member states may indeed decide that the judgment warrants taking the necessary political steps finally to cede to the commission.
Commission bilateral air services agreements
If it is granted exclusive control, the European Commission would then be free to negotiate bilateral air services agreements with third countries, such as the US, Singapore, Australia, and so on. In negotiations with third parties, the commission would act on behalf of all member states and their airlines, and seek to maximise benefits for the group as a whole. Access to London Heathrow would be a powerful negotiating card in the hands of the commission, especially in negotiations with the US.
Furthermore, a commission finally empowered with bilateral negotiating authority would facilitate negotiations with the US concerning a transatlantic common aviation area (TCAA), which would unite the two jurisdictions under the same air transport regulatory regime. Regarded by many as the next battleground in the continuing air transport liberalisation process, a TCAA in place between Europe and the US would form a formidable trading block and would be attractive to third countries that might seek membership in their own right.
Renegotiated nationality clauses
Although the commission has expressed its opinion otherwise, it appears that a second course of action is open to member states under the terms of the ECJ judgment. Member states could maintain their bilateral agreements in place with the US, provided that the offending nationality clauses are amended to conform to the ECJ’s requirements. This would require that the nationality clauses be renegotiated to allow all European airlines the possibility of benefiting from the terms of the agreements. Member states would then have to establish a procedure for processing applications from other member state airlines seeking to establish themselves in another member state and operate services from there to the US. Although this would be unusual in a bilateral trade agreement, member states might prefer this approach instead of ceding negotiating authority to the commission.
The UK has already indicated that it intends to pursue its current bilateral open skies negotiations with the US, despite the ECJ judgment. Although any future agreement between the UK and the US would have to conform to the terms of the ECJ’s judgment, the US may also prefer this alternative, as its strategy of negotiating with individual member states has before now resulted in favourable terms for US airlines.
Whichever course of action member states decide to pursue, it is unlikely that anything will happen soon. The bilateral and multilateral negotiations required are notoriously slow and difficult, ensuring that we have certainly not heard the last of open skies.
Although the ECJ found that the commission had exclusive authority with respect to slot allocation, none of the agreements subject to the commission’s lawsuit addressed this issue. Nationality clauses would not prevent, however, the merger of two European airlines of the same nationality, or the merger of two European airlines of different nationality not intending to fly to destinations outside the EU.
Stephen Dolan is an aviation consultant at Norton Rose