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KPMG Partner Examines Challenges Around Amending EU Aviation Legislation

European carriers have been waiting with bated breath for the amended aviation legislation which they hope will make them competitive once again. For over a decade now, airlines in the European Union have been losing market share to third country carriers (TCCs). The EU Commission has taken up their concern and announced various options that it is looking into.

A combination of factors, including more modern fleets, superior service, in-flight amenities and competitive prices has helped the third country carriers lure passengers away from European players.

The European airlines have expressed concern that these TCCs benefit from practices inconsistent with equality of competition principles enforced by their governments, airports and carriers, which has led them to increase their market share at the expense of European ones. The allegations centre on market-distorting practices, such as subsidies, protectionist measures and privileged slot allocation at airports.

For instance, the EU commission notes that Middle-Eastern airports are majority-owned and funded by governmental entities, whilst in Europe, every airport that handles traffic in excess of five million passengers annually is required to be self-funded. Landing costs tend to be much higher at European airports compared with airports in this region.

For instance, the EU Commission notes that Dubai’s DXB landing and terminal charges are some 33% lower than London Heathrow and 66% lower than Paris Charles de Gaulle, Frankfurt and Schiphol Amsterdam.
Regulations governing the areas around the airport have also given some third-country airports an advantage over European airports such London Heathrow.

Environmental regulations in place of the latter impose restrictions on the number of flights taking off during a large part of the night. By contrast, Dubai DXB, now one of the world’s busiest airports with annual passenger traffic of some 83.6 million, has fewer such constraints.

In response, the targeted airlines argue that there is no substantiated evidence of unfair practices and that the pressures felt by the European carriers making the allegations reflect sustained, intense competition from low-cost carriers.

They also claim that there are a number of commercial factors that have fuelled the growth of TCCs. They note that the increasing market share of such carriers is largely due to their growing economies, favourable geographic positions, modern fleets and greater route options.

These carriers also benefit from lower-cost structures compared with their European counterparts due to the different legal and regulatory frameworks established by their governments – European carriers typically face higher costs due to variations in labour laws, taxes, pension obligations, consumer-protection measures and environmental restrictions, among others.

Some EU carriers may challenge some of the data and financial information available for some of the airline – and airport – entities in these countries.

The third country carriers, however, is likely to respond that they comply with their respective countries’ reporting requirements.

Getting any amended European law to see the light of day will be easier said than done.

In its current form, the EU legislation, principally Regulation 868/2004, has proved to some carriers to be too loosely worded and, therefore, difficult to enforce. Regulation 868/2004 allows compensation to EU companies for unfair trade practices conducted by TCCs. There is also a requirement to prove that TCCs have received a non-commercial advantage and that the affected party has been injured, with a clear link to be established between the two.

Further, for this system to come into play, the complaint needs to be registered by a community of organisations and not member states or individual air carriers. With no consensus on the allegations by the European carriers and what qualifies as unfair trade practices, it has proved difficult for the EU carriers that have made the allegations to enforce them.

Hence, to date, no action has been taken under 868/2004 since its inception.
To achieve some breakthrough in such situations, the European Commission is considering four potential options.

First: Continue with the legislation and regulations in their current form. The TCCs have indicated that the current regime, including the air-service agreements, is adequate to support fair practices in commercial aviation.

Second: Adopt a multilateral legal framework for fair competition at the level of the International Civil Aviation Organization (ICAO) or World Trade Organization (WTO).

The EU would work towards defining fair competition, facilitate amicable dispute settlement and give access rights to data where there is some evidence around alleged unfair practices. This would aim to ensure proper implementation and provide redress measures.

Third: Replace Regulation 868/2004 with an altogether new framework that is more robust, relevant and effective to enforce fair competition.  The EU Commission would be given powers to formally pursue enquiries on alleged unfair practices and, where found to exist, undertake measures for redress.

Fourth: A new comprehensive EU instrument, combined with increased efforts on a more global scale. This effectively combines options two and three above. The EU Commission acknowledges that such a global solution would be most effective given the international nature of air transport and, therefore, it is its preferred policy.  But it is likely to take a long time to craft and agree.

Whatever the EU decides, it will have to consider the fine balancing act it has to conduct. In this whole episode, the stakeholder who has gained is the consumer, benefiting from low prices, improved service and newer routes. In an effort to protect airlines, the EU cannot forego the interest of the consumer.

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