A radical shake up of European competition policy from this May will vastly increase the power of the European Commission (EC)to intervene on airline deals that go beyond Europe's borders.

The changes could also see airlines increasingly involved in litigation at national level as well. Until now, aviation has been treated as a special case, with its own set of competition rules. Except in the case of mergers and acquisitions, Brussels held only limited powers to deal with competition issues that involved services between the European Union (EU) and third countries.

In such cases, an onerous procedure applied under which the EC could open investigations and adopt opinions, but could not issue final decisions or impose fines. It needed to work closely with national competition authorities which have the final say. Against this background, Brussels has tended to concentrate its efforts on the big alliance cases.

Brussels had made it quite clear that it was less than happy with this cumbersome arrangement. However, member states were loathe to extend the EC's competition powers in the aviation sector so long as the issue of granting Brussels a mandate to negotiate an open aviation pact with the USA remained undecided. The granting of this mandate early last year cleared the way for the member states to provide Brussels the wider powers that it was seeking.

From May, the old aviation regime will fall away, eliminating the restriction relating to third country routes. Instead, the EC will apply general European competition rules. The SkyTeam arrangement between Air France, Delta Air Lines, Alitalia and CSA Czech Airlines will be the first alliance to be examined under the new system.

The way in which general European competition laws are enforced will also change drastically. The system of notification, whereby airlines asked Brussels to review certain agreements, such as the Lufthansa/SAS/British Midland alliance, is being replaced by a system that puts the onus on the carriers themselves to ensure that they are acting within the confines of EU competition law.

At the same time, national competition authorities and national courts will take on much of the workload, with the EC overseeing the process and having powers to intervene where identifies a competition issue. One of the reasons for this change is that Brussels was getting inundated with notifications from companies seeking legal certainty and the EC's resources were being spread pretty thinly. This situation was only going to get worse with the accession of 10 new member states to the EU this May.

Geert Goeteyn, partner at Brussels law firm Howery Simon Arnold & White, points out that granting powers to national authorities and courts also plays well politically at a time when the increasing powers being assumed by Brussels plays as a hot topic in some member states.

However, Goeteyn warns that there is a danger that in this new world, airlines will face increased litigation through the national courts by customers or consumer groups who feel aggrieved by what they see as anti-competitive agreements or behaviour.

Complainants could also start to take their case to the national courts most likely to give them a favourable hearing. It was recently ruled in the English High Court, which has a good record on awarding damages, that competition complaints could be brought from elsewhere in the EU against an English subsidiary, provided that a cartel was shown to have operated in England.

In addition, the extension of the EC's powers could put pressures on commercial agreements between carriers relating to services on routes between the EU and third countries. The EC competition authorities now have the powers to take a close look at the provisions in these arrangements and could decide that they infringe EU competition law. Areas likely to come under close scrutiny include capacity sharing, fare fixing, schedule co-ordination and route allocation.

Goeteyn warns that carriers may find it difficult to rely on the argument that an anti-competitive arrangement was made unavoidable by the terms of a particular bilateral air services agreement. He points out that such bilaterals are often worded in a very general way, leaving the carriers with flexibility as to how they fulfil the general principles set out in the agreement.

Under the new regime, the EC will still be able to exempt some classes of agreement from the full force of European competition rules, albeit under stringent conditions. However, no such "safe harbours" have yet been adopted. In particular, there has not yet been a move to protect the existing block exemptions, including those covering airport slot allocation and also the IATA passenger traffic conference, which allows carriers to discuss tariffs for the purpose of interlining.

The IATA exemption was renewed in 2002 for three years, but carriers and other interested parties will have to persuade Brussels that this exemption is necessary for interlining if it is to be renewed again in 2005.


Source: Airline Business