• The European Commission's New Horizons for Aviation—The German Airlines' Perspective
  • March 7, 2013
  • Law Firm: Jones Day - Cleveland Office
  • The "Kallas" Paper

    On September 27, 2012, European Commission Vice President Siim Kallas presented the EU Commission's analysis paper on the EU External Aviation Policy Package, called "New Horizons for EU Aviation."[1]

    Mr. Kallas, the European Commissioner responsible for transport, said: "It is of strategic importance that Europe maintains a leading global aviation industry at the centre of a network that connects the EU with the rest of the world. We have created huge economic benefits over the last decade as a direct result of the new business opportunities from our EU external relations. But the current systems no longer deliver what is needed. We urgently need a step change. Faced with the dramatic changes in global aviation, Europe must respond and adapt rapidly or be left behind."[2]

    Three Major Challenges Facing the European Aviation Sector

    The "Kallas" paper describes aviation as key to Europe's competitiveness. European aviation as a whole is still a world leader; however, its position is under threat from a number of new challenges.

    Growth Toward Other Regions of the World. The demand for air transport, which is driven by economic growth and prosperity, will likely shift from Europe toward other regions of the world—in particular to Asia and the Middle East. The Asia Pacific Region will overtake the U.S. as a leader in world traffic by 2030. Due to below-average growth rates, EU carriers will be losing market shares to non-EU airlines in most regions. In 2003, EU carriers had a market share of 29 percent of all intercontinental capacity in the world. By 2025, this share is expected to have fallen to 20 percent.

    Intense International Competition. Non-EU carriers are reinforcing their global position. For example, the fastest regional traffic growth in the world is expected to be in the Middle East, where by 2030 the region's airlines will represent 11 percent of world traffic, up from 7 percent in 2010.

    Infrastructure and Investment. The third major challenge is characterized by under-investment in airport hub infrastructure, as a result of which the largest EU hubs are increasingly congested. This hampers the European hubs' ability to compete with major new hubs developing in other parts of the world. The airport capacity crunch must therefore be efficiently addressed if European competitiveness is to be maintained.

    The "Kallas" paper concluded that investments in airport infrastructure and development of hubs must be enabled because they are justified by a strong and sustainable demand and are crucial for enabling European aviation to compete with airports in other parts of the world.

    The European Commission's Proposals

    The European Commission is proposing to move ahead on three fronts:

    New Agreements with Neighbors and International Partners. To give the EU aviation industry better access to business opportunities, the Commission is proposing to: (i) conclude EU-level air transport agreements with key and increasingly important aviation partners such as China, Russia, the Gulf States, Japan, India, and ASEAN countries in southeast Asia; and (ii) complete, by 2015, EU-level aviation agreements with neighboring countries such as Ukraine, Azerbaijan, Tunisia, Turkey, and Egypt. To accelerate this process, Member States should grant the Commission a general negotiating mandate for the remaining neighborhood countries.

    In addition, industrial and technological agreements should be signed with key partners and other countries in areas such as air traffic management ("ATM")—including cooperation with the EU's SESAR program—and safety, including the certification of aeronautical products.

    Fair Competition. The EU considers open markets as the best basis for developing international aviation relations and embraces competition. Nevertheless, competition has to be both open and fair.

    In order to safeguard fair competition, the Commission is proposing to develop, following consultation with stakeholders, new and more effective EU instruments to protect European interests against unfair practices. The existing EU Regulation[3] in this respect has proven impracticable, and a new instrument needs to be put in place that is better adapted to the realities of today's global aviation sector.

    As an additional safeguard measure, the Commission is proposing to develop EU-wide standard "fair competition clauses" to be agreed upon and included in existing bilateral air services agreements between EU Member States and non-EU countries.

    Investment. Current ownership and control restrictions, applied by most countries, deny carriers access to important sources of new capital. The Commission wants to address this issue more vigorously and take the additional steps envisaged in the EU¿U.S. air transport agreement to liberalize airline ownership and control in order to allow airlines to consolidate and attract the investment they need. This should also be pursued at ICAO level, including at the March 2013 ICAO Air Traffic Conference.

    The German Airlines' Reaction to the "Kallas" Paper

    The German airlines have, in a press release issued by the German Airline Association, welcomed the analysis of the challenges and the Commission's recognition of the need to disburden the European airlines to improve competitiveness.[4] The airlines highlighted the burdens of European emissions trading, air travel taxes, and the lack of success in completing a Single European Sky. Lufthansa was even more specific in mentioning burdens, such as the German unilateral action of introducing an air travel tax; the EU unilateral action of introducing emissions trading; the restrictions on the operation of airports, in particular the ban on night flights at the Frankfurt airport; and the expected increase in air navigation charges.[5]

    Let's take a look at the burdens German airlines are facing and how those are being addressed by the new European initiative.

    Air Travel Tax. On January 1, 2011, Germany introduced an air travel tax (air passenger duty) levied on passengers departing Germany. The tax is between €7,50 and €42,80 per flight, resulting in roughly €1 billion tax revenues per year in 2011 and 2012. Doubts have been raised as to whether the implementation of the tax is legal and whether the tax fulfills its goal. The airlines are claiming that the tax has massive negative effects on German aviation by discouraging passengers from traveling from German airports. Passengers of German airlines have contributed 60 percent of the tax revenues. The remaining 40 percent was shared among roughly 100 foreign airlines.

    Meanwhile, the political climate seems to be changing; in November 2012, representatives of the German States requested that the federal government withdraw the tax.

    Emissions Trading. The European Commission's decision to put the application of the EU emissions trading system partially on hold until the end of 2013 helped prevent greater damage; the decision avoided a trade war between the EU and the U.S., China, and other countries. While the EC decision is a step in the right direction, the present situation of applying emissions trading only to flights within the European Union has a damaging effect on all European carriers. It goes without saying that European carriers, such as the German airlines with their hubs located inside the EU, have a substantially higher percentage of flights that are affected by the present application of the emissions trading scheme. Competitors that have a hub in, for example, the Middle East can fly all passengers to their respective hubs and from there to anywhere else in the world, without being subject to European emissions trading. The European airlines' flights to and from their respective European hubs are always subject to emissions trading. This creates a disadvantage for European airlines.

    Furthermore, it still remains to be seen whether it will be possible to reach a compromise on the overall issue of European emissions trading in October 2013.

    Restrictions on the Operation of Airports. In a decision of April 4, 2012, the Federal German Administrative Court confirmed a general ban of night flights at Germany's major airport in Frankfurt. After London's Heathrow and Paris's Charles de Gaulle, Frankfurt am Main is the third largest airport in the European Union. As of 2012, this airport will not be allowed to operate flights between 11:00 p.m. and 5:00 a.m. This puts the Frankfurt airport and the airlines operating out of this airport at a significant disadvantage compared to airlines operating without such restrictions.

    In addition, flight paths at many German airports have recently been subject to restrictions imposed as a result of litigation.

    Failure to Ensure Adequate Airport Infrastructure. The "tragedy" around the delayed, delayed, then again delayed, and again and again delayed opening of the new Berlin airport ("BER") is only the latest and most visible problem when it comes to the inadequacy of providing airport infrastructure in Germany. An airport project in Germany seems to have become nearly impossible to undertake. Strong opposition in German public opinion to new infrastructure projects is not the only obstacle to airport projects. As BER illustrates, inefficiencies and the unhealthy mingling of interests when governments on the federal, regional, and municipal level try to build, own, operate, and regulate airports at the same time further hampers airport projects.

    Airport Charges. Airport charges in Germany have always been on the expensive side. Germany recently amended its Aviation Law[6] to implement European Law[7] and for the first time introduced legal criteria for the approval of airport charges. Despite recent changes, the legislator failed to ensure that the government entity that approves the airport charges take appropriate account of the interests of the users, i.e., the airlines. Furthermore, the approving government entity often belongs to the same entity that holds a major stake in the respective airport.

    Groundhandling Services. Previous attempts to liberalize groundhandling services at German airports have failed. For years, German airports have done nothing but the bare minimum required under the European Groundhandling Directive[8] by admitting only one independent service provider besides the airport itself. The one alternative groundhandler that was admitted was admitted only for a period of seven years. The limited admission time period has prevented the independent service provider from seriously competing with the incumbent airport operator.

    Recent Europe-level attempts to find a compromise for an amendment on the Groundhandling Directive would at least provide for some improvement. The proposed amendment would enable one additional independent groundhandler (for a total of three, including the airport operator) to be admitted at each community airport.

    Air Navigation Charges. Air navigation charges are a substantial cost for airlines. Current plans provide for an increase of these charges in Germany in 2013 by 11.8 percent. Recent charges already increased charge costs by 5.1 percent in 2012. The newest increase would burden airlines taking off and landing in Germany with more than €100 million per year of additional charges. The Eurocontrol charges applied to flights passing German territory are also likely to increase. The planned increase is in direct opposition to the European target to harmonize such charges via an annual decrease of 3.5 percent.

    Passenger Rights Regulation. Finally, payment of compensation under the Passenger Rights Regulation[9] is gaining more and more practical and economic importance. Situations in which airlines are unable to control the facts leading to cancellations or delays of flights (e.g., airport congestion) are increasing. There appears to be a trend in the case law of Member States and even more so in Europe to expand the scope of application of the Passenger Rights Regulation. The case law stretches the Passenger Rights Regulation beyond its originally intended scope while at the same time narrowing the airlines' ability to make use of the already narrow exemptions to the Regulation. This, of course, concerns all airlines, but this development will have greater significance for airlines with a higher percentage of European flights.

    Conclusion

    The European Initiative addresses only a few of the challenges airlines are currently facing. The Commission's proposal, when finally implemented, will only be a small step in creating a level playing field for European airlines. The value of the current European Commission "Kallas" paper lies in recognizing the significance of air transport to Europe's economic future and the challenges European air transport will be facing in the years to come. The "Kallas" paper will hopefully help national governments realize that more needs to be done to actively preserve the interests of aviation and that imposing new restrictions or burdens on European players in this global industry will help competitors elsewhere.


    ENDNOTES

    [1] European Commission MEMO/12/714.

    [2] According to the European Commission's Press Release of September 26, 2012, IP/12/1027.

    [3] Regulation (EC) No 868/2004 of the European Parliament and of the Council of April 21, 2004 concerning protection against subsidization and unfair pricing practices causing injury to Community air carriers in the supply of air services from countries not members of the European Community. Official Journal L 162 , 30/04/2004 p. 1-7.

    [4] http://www.bdf.aero/downloads/1209261305PMBDFKOM-PapierEU-Luftverkehr.pdf.

    [5] According to the Lufthansa Policy Brief 1/2013, the German Federal Transport Minister Peter Ramsauer calls these special levies and taxes a "toxic quartet."

    [6] Section 19b of the Aviation Act—Luftverkehrsgesetz - LuftVG—as amended by the 14th law for the amendment of the Aviation Act BGBl. I S. 1032, as of May 12, 2012.

    [7] Directive 2009/12/EC of the European Parliament and of the Council of March 11, 2009 on airport charges. Official Journal L 070 , 14/03/2009 p. 11-16.

    [8] Council Directive 96/67/EC of October 15, 1996 on access to the groundhandling market at Community airports. Official Journal L 272 , 25/10/1996 p. 36-45.

    [9] Regulation (EC) No 261/2004 of the European Parliament and of the Council of February 11, 2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights. Official Journal L 46, 17/02/2004, p. 1-8.