Evidence of the continuing reluctance of airlines to exploit the better known aspects of liberalisation was found in the UK Civil Aviation Authority's latest report. The report pointed out that, as of December 1994, there were only two instances of airlines flying seventh freedom routes between two EEA member states other than their home state, despite the existence of this possibility since January 1993 (Sabena flies between Barcelona and Venice and LTU between Salzburg and Las Palmas).
It is also possible for existing and startup airlines to benefit from the differences between the regulatory regimes in any country within the European Economic Area. In particular, the difference can result in commercial benefits for an airline having access to more than one operating licence. Dublin-based Ryanair recently created a sister operator (Ryanair UK) which has applied for a UK operating licence. It also contracted with GB Airways, pending the granting of Ryanair UK's operating licence, to operate routes on the licences of GB Airways. Ryanair was, in each case, putting itself in a position to operate UK domestic routes on an unrestricted basis. There are, however, a variety of other reasons why carriers may wish to have access to operating licences in more than one member state.
Many airline licensing rules are now uniform throughout the EEA and the location of the regulatory authority within the EEA should be irrelevant. Implementation and interpretation of the third package rules are, however, diverse. The larger member states have the resources to police the rules thoroughly and cultural differences inevitably lead to a different emphasis on interpretation. The views of national authorities, for example on what capitalisation is required for an airline's operations, can differ significantly.
The UK does not intervene in the finances of operations of small aircraft - those with less than 20 seats or 10 tonnes maximum takeoff weight - but other member states impose capitalisation requirements on them. Also, national taxation and social security legislation has not been harmonised to any significant extent.
It is these differences in national regulation that offer opportunities for airlines to manage their regulation creatively. The licensing regime established by the third package allows an airline certain choices on where it wishes to be licensed within the EEA. An airline may feel that it will achieve a better deal on some important aspects of its operation by being licensed, in whole or in part, in a different part of the EEA.
An airline with an operating licence from any EEA country may operate any routes within the EEA, subject to certain limited exceptions and rules on cabotage. An airline with a German operating licence is entitled to fly between Rome and Madrid and has the same right to do so as an airline with an Italian or Spanish operating licence. But with cabotage restrictions in force until April 1997, the German airline would have restrictions on a flight between Milan and Rome.
However both market entrants and existing carriers can suffer substantial commercial disadvantage as a result of their regulatory environment:
1 The regulatory authority may take a conservative approach to authorisation of an airline's operations, including fixing high capitalisation requirements.
2 The pace of decision making by a regulator may be so slow that it impedes the development of the airline's business.
3 Non-flag carrier airlines may feel that there is a historical bias of the regulatory authority in favour of the national flag carrier.
4 Fees charged by the regulatory authority may be excessive.
5 Many European carriers are unhappy with the level of national employer's tax/ social costs.
European carriers are availing themselves of the opportunities set out in the third package to benefit from differences in regulation between member states. Some of the opportunities relate to access to more than one operating licence. Carriers can do this by applying for an operating licence in another member state. An often less complicated method is to enter into an operating arrangement with an existing holder of an operating licence in another member state, whereby certain services are operated on the licences of that other carrier.
In the first case airlines can establish a new, though associated, airline in a chosen EEA jurisdiction by applying for an operating licence in that jurisdiction - as Ryanair has done. This is the first well publicised example of a new second operating licence being used to overcome regulatory difficulties.
The third package sets out the requirements for the granting of a new operating licence and there is a strong legal argument that when these conditions are met the regulator cannot impose extra requirements.
An applicant for an operating licence must have: its principal place of business and any registered office in that member state; air transport as its main occupation; certain liability insurances; and at least one aircraft available for use. It must also be majority owned and effectively controlled by EEA nationals, apply for and obtain an AOC for the aircraft type to be operated, and be financially fit.
Financial fitness and having a principal place of business in the new member state are likely to be the most difficult requirements for carriers to meet.
Financial tests are set out in the third package, namely that the carrier can meet actual and potential obligations for 24 months and for three months without taking income into account. If the airline has chosen a new member state for its flexibility on licensing issues, it will probably have satisfied itself that financial fitness requirements can be met. If part of an airline's operations are to be carried out by the new sister airline, the home state operations will be less significant and the original airline will be able to argue to its existing regulator for lower required capitalisation on the basis that the original airline is responsible for a smaller operation.
The third package does not, however, define what is meant by 'principal place of business'. The European Commission's view is that the various factual circumstances of the operation should be looked at to determine where the airline has its principal place of business and that merely holding board meetings in a particular country is not sufficient.
The requirement for an airline to have its principal place of business in the country where it has an operating licence clearly prevents an airline from establishing a mere paper presence in a new member country, while basing all of its operations and management in its home country. However an airline should not have to locate all the management for a particular part of its operations in the new member state merely to have a principal place of business there. Instead, airlines establishing a sister airline in another member state should take all practical steps to manage the relevant part of the operations from the new member state. This should ideally include basing managers and aircraft there.
If these potential difficulties prove insurmountable, the more straightforward way of obtaining the benefit of another member state's regulatory regime is to enter into an operating arrangement with an existing holder of an operating licence in that country.
If a French airline, for example, wished to secure any perceived benefits of the UK regulatory regime, it could enter into an arrangement with a UK operator. The arrangement in its simplest form would be that the French airline agrees that the UK operating licence holder operate the French airline's aircraft on behalf of the French airline on intra-EEA routes. The licence holder is paid a fee for operating on this basis. The regulatory authority will generally sanction the arrangement provided that the holder of the licence is licensed to the necessary level to support this extra operation. Ticketing could be carried out by the French airline and the operation branded as if operated by the French carrier itself.
Airlines like EasyJet (on GB Airways' licence) and Airworld and TNT (under Air Foyle's operating licence) operated in this manner while seeking their initial operating licence. A cross-border example is Ryanair's intended operation of London/Stansted-Prestwick on the licence of GB Airways, while it awaits its UK operating licence. The arrangement also has many similarities with franchising. CityJet operates aircraft on its Irish operating licence, but the operation is branded as a Virgin operation and Virgin Atlantic issues tickets.
Neither of these options is without its problems. Should the carrier wish to fly non-EEA routes difficulties will almost certainly be encountered. Other problems can arise if the aircraft being used for the operation are registered in the home member state. Crew licensing can also cause difficulties.
Operating with a sister airline or other operating licence to a point outside the EEA will prove difficult. The bilateral arrangements in the country of the alternative operating licence will almost certainly contain nationality restrictions. These will provide that if an airline is to avail itself of route rights from that country to a point outside the EEA, the airline must be substantially owned and effectively controlled by national, not EEA, citizens.
It seems likely that there will soon be significant change to the way member states deal with their bilateral air service agreements. At minimum there is likely to be some Commission pressure on member states to include 'Community ownership clauses' in their ASAs; these would allow airlines to benefit from route rights in the ASA subject to EEA (rather than national) ownership and control requirements. It may be that EC transport commissioner Neil Kinnock will get his way and that the Commission assuming some competence for the negotiation of ASAs with non-EEA countries. It is this present difficulty with non-EEA routes which may be the Commission's best argument that the existing position adversely affects the operation of the third package and that change is needed.
An airline planning access to a second operating licence will usually want aircraft from its existing fleet to be used on the new licences. These aircraft will almost certainly be registered in the airline's original home state, but the consent of the new country to the operation of a foreign registered aircraft may be needed. Ryanair's proposed arrangement with GB Airways came unstuck in this respect when the UK Department of Transport refused to consent to GB Airways using an Irish-registered Ryanair aircraft.
If the airline cannot get the necessary consent to operate a foreign registered aircraft, it will need to consider moving the aircraft to the register of the second country. The third package sets out rules to facilitate this re-registration and provides help by requiring national aircraft registries, with certain provisos, to register aircraft from other EEA registries 'without any discriminatory fee and without delay'.
The main objective of using a second operating licence may be to avoid social costs of employment, in which case careful research will be needed. Simply because an airline is operating flights on licences in a second jurisdiction does not mean that employment of staff and crew becomes subject to tax and social security legislation of that second jurisdiction. There are complex rules for determining which national social security system applies to individual employees.
A second issue to be considered with crew is their licensing. If aircraft registration is to change, the crew licences will need to be endorsed by the regulator in the new state of registration. EEA legislation requires member states to accept licences where they are issued by another member state with equivalent requirements to its own. This obviously leaves some room for dispute on equivalence of requirements. The Commission's view is, broadly, that a member state must not refuse to recognise another member state's licences merely because they think their own standards are superior. The Commission has also given specific opinions on the equivalence of certain member states' crew licencing criteria.
Airlines are only just beginning to push out the boundaries of the regulatory system and this will increase the pressure on national authorities to achieve a level EEA regulatory playing field.
Source: Airline Business
