Antitrust Alert: EU Adopts New Regulation For European Community Air Transportation

On 1 November, a new set of rules for operation of air services in the European Community came into effect, as a result of the adoption by the Council and the European Parliament of Regulation No 1008/08. This Regulation continues a lengthy process of liberalisation of air transport in the Community, and it imposes certain new requirements on the Member States and Community air carriers.

Liberalisation of EU air transport began in 1987 with the adoption of a first package of measures limiting the right of Member State governments to object to new fares for intra-EU traffic and providing greater flexibility to airlines concerning seat capacity sharing. In 1990, a second package opened the market further, allowing airlines greater flexibility over setting fares and capacity-sharing and giving every EU carrier the right to carry unlimited passengers or cargo between its home country and another EU country. Later in the 1990s, a third package of measures introduced open access for all EU airlines to all routes within the EU, then also the freedom to provide "cabotage" service between any Member States. National governments retained the right to impose public service obligations on routes they considered to be essential for the regional development. The requirements for an operating licence for EU airlines were also harmonised and full freedom with regard to fares and rates was provided.

The third package led to unprecedented expansion of air transport in Europe and contributed to lower fares. However, it also left two perceived issues that this new regulation now tackles: an inconsistent application of the third package across the Member States and lingering restrictions on intra-Community air services due to a lack of price transparency or price discrimination.

Regarding inconsistent application of the third package, licences to provide air service in the EU still will be granted by the Member States. However, licensing authorities will be required to monitor airlines operating as Community air carriers and to suspend or revoke the licences of carriers that do not meet the requirements of the new regulation. To reduce the bankruptcy rate of new carriers, greater financial information will be required from new entrants.

Members States retain the right to impose public service obligations when the economic development of remote regions is at stake, but now there must be proportionality between the obligations imposed and the goals pursued, to avoid higher fares or possible creation of market power. The Commission is entitled to supervise the actions taken by Member States and may require them to substantiate the adequacy of public service obligations imposed. The duration of such obligations and of the monopoly on the relevant route associated therewith has been extended to four years (five years for routes serving an outermost region), thereby attracting more competitors to the calls for tenders.

Of most direct importance to customers, there also are new regulations on price transparency and discriminatory practices. The Regulation prohibits price discrimination on the basis of the place of residence, the nationality of the customer, or the location of the travel agent is prohibited. It has been common for airlines to discriminate almost without notice by requiring residents to book on the country-specific website of the airline, which would apply different prices. Price transparency rules require that ticket prices display all charges, taxes and fees, to allow passengers to compare prices. No optional charge is permitted without the passenger’s express consent.

In the context of ongoing second-phase negotiations of the Open Skies agreement between the EU and United States, the new rules will also have an impact on external aviation relations. Firstly, while safety standards have been harmonized in the EU, not all third countries meet these European safety requirements. Regulation No 1008/08 relaxes the rules on leasing EU-registered aircraft, while introducing more stringent requirements for the leasing – especially wet leasing – of aircraft registered in third countries. Secondly, the Regulation abolishes the remaining restrictions in bilateral air service agreements between Member States, which created additional hurdles to code-sharing with third country carriers and price setting on 6th freedom routes.

The new Regulation completes the process of liberalisation of EU air transport, but imposes new obligations on Member States and Community carriers. The Commission’s Directorate-General for Energy and Transport has announced that Regulation No 1008/08 is a first stage towards the further consolidation of legislation and that studies are ongoing in view of elaborating a fully fledged European Civil Aviation Code.

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