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The European Commission’s prohibition of airline subsidies means non-EU carriers often have a commercial advantage. Anthony Fitzsimmons reports on how a new regulation is set to redress the balance

On 20 May 2004, the European Commission gained the power to take rapid retaliatory action against non-EU airlines that fly to the EU and receive subsidies or indulge in unfair pricing to the detriment of the EU aviation industry.

The new EU regulation includes a streamlined procedure that can be used to impose “redressive measures”. These are to counteract the unfair pricing practices and state subsidies concerned. The preferred redressive measure is a duty, similar to an anti-dumping duty, to be levied on the carrier concerned.

The main targets are airlines from the US and non-EU airlines that are receiving state subsidies, but predatory pricing is another real target. Airlines need to prepare to deal with this new measure.

An unsubsidised world

After a long period in intensive care and a regime of ‘last chance saloon’ subsidies on a grand scale, European airlines are now more or less weaned off state subsidies. Airlines with severe financial difficulties, particularly those in partial state ownership and flag carriers, still rise high up the political agenda. Politicians are put under intense pressure to give loans or subsidies and to save jobs, but the Commission generally maintains very robust opposition to any subsidies. At the time of writing, Alitalia and Olympic Airlines continue to test the Commission’s resolve. The Commission’s room to manoeuvre has, however, been reduced by the ability of unsubsidised airlines to take action. The expectation is that no aid will be allowed and any illegal state aid will be clawed back with vigour.

The same is not true of airlines in many countries outside the EU. Some have received subsidies during their development and others
have received aid to help them through difficult periods. This not only
concerns airlines that are flag carriers for states that regard the state-owned national airline as a part of its national ego. The US has led the way in providing a raft of subsidies for its airline industry in the wake of 11 September, over a period when European airlines have managed to carry on with no or negligible subsidies.

Financial pressures in Europe led to cost-cutting and, ironically, businesses that are now better able to compete in an unsubsidised world. European airlines argued that it is not fair that they should have to compete with subsidised airlines on routes to and from the EU.

As a result of widespread political pressure, the Commission has now obtained the power to take rapid retaliatory action against non-EU airlines in such cases. This is embodied in a streamlined procedure that can be used to impose redressive measures to counteract not only the effects of state subsidies given to non-EU airlines flying to the EU, but also unfair pricing practices by non-EU airlines. While the largesse of the US government was the cause of the legislation, the new regulation can be directed outside the EU and worldwide.

The new regulation

The regulation (No 868/2004 of 21 April 2004), concerning “protection against subsidisation and unfair pricing practices causing injury to [European] Community air carriers in the supply of air service from countries not members of the European Community”, came into effect on 20 May 2004. It is directly applicable in all EU states without the need for any further action by states.

In a nutshell, its effect is to allow the EU to impose redressive measures for the purpose of offsetting “unfair practices”, by which is meant subsidies directly or indirectly granted to non-EU air carriers and unfair pricing practices by non-EU air carriers.

The text of the regulation makes it very clear that the EU realises the area is politically and commercially sensitive. Economically, many airlines are fragile beasts. National airlines are sometimes seen almost as the embodiment of national political leaders, so that in some countries an attack on the behaviour of the state’s national carrier may sometimes be seen as little less than an attack on the president in person.

The basic principle is: if it is shown that there is a material unfair practice, then the EU may impose either provisional or definitive redressive measures on the non-EU air carrier to offset the effect of the unfair practice. This is to be imposed, preferably, in the form of a duty on the air carrier concerned.

Any person who believes that they have been affected financially by an unfair practice (as defined above) may complain to the Commission – the Commission can then begin an investigation on its own initiative.

The regulation contains detailed provisions concerning the meaning of ‘subsidy’ and ‘unfair pricing practices’, and the Commission has been charged with developing a methodology for the assessment of alleged unfair pricing practices.

The procedures mandated by the regulation are subject to tight timetables and procedures, which are designed to ensure fairness to all concerned. The rules allow the Commission to collect and analyse evidence and to draw conclusions from any failure to provide any information requested.

The EU may impose redressive measures, “preferably” in the form of duties imposed on the non-EU carrier concerned.

Provisional redressive measures may be imposed in urgent cases. These can last for six months only. Definitive redressive measures can be imposed. These are longer-term measures, aimed at permanently removing the benefit of the unfair advantage or subsidy from the non-EU carrier. They may last for an indefinite period, but only for so long as is necessary to offset the injurious behaviour.
Any redressive measures must be proportionate.

Proceedings do not have to end in redressive measures or failure. They can also be ended by the giving of suitable undertakings by the non-EU carrier concerned to the Commission.

Reflecting both the diplomatic sensitivities and the existence of a network of bilateral treaties, the Commission is required to keep relevant governments advised of the initiation of any proceedings. It is also specifically empowered to consult with any non-EU government concerned with a view to resolving the dispute through diplomatic channels.


The regulation extends a largely effects-based approach to distortion of competition on routes to and from the EU, to the extent that injury is caused to the EU aviation industry by subsidies or by unfair pricing practices by non-EU airlines. The system is analogous to anti-dumping duties seen elsewhere.

The subject can be intensely political, particularly as regards state aids granted by non-EU governments (eg the US) and as to the commercial behaviour of state-owned carriers.

This is recognised by the EU.

It remains to be seen whether the Commission has the political will to impose such sanctions. History suggests that the Commission will threaten sanctions more often than it imposes them. Having opened proceedings, it will prefer to negotiate settlements that remove the adverse conduct complained of without causing a diplomatic dispute.
However, history also shows that the Commission is prepared, if necessary, to impose sanctions despite the displeasure of the mighty, such as the US Department of Commerce.

Anthony Fitzsimmons is a partner at Ince & Co