Airline Regulatory ECJ Rules on Open Skies Bilaterals

Article by Richard Gimblett and Sue Barham

Article 52 of the EC Treaty enshrines the principle of "freedom of establishment" into EU law. Essentially this principle recognises the right on the part of individuals or companies belonging to one EU Member State to establish operations in another Member State and to be accorded the same treatment and advantages in relation to that operation as nationals of that State. The defendant Member States’ bilateral agreements with the US provide traffic rights to designated airlines from the US and the Member State in question but also contain "nationality clauses" which permit the US to refuse such rights where an airline is not owned or effectively controlled by nationals of the State in question. The net effect of this is that other EU airlines established in that Member State are shut out from the ability to operate flights between the US and that State under its bilateral.

The ECJ dismissed arguments that the Community rules have no application in relation to such agreements which deal with air transport outside the EU. The Court held that Member States are obliged to conduct themselves consistently with Community law and therefore the fact that the EU has not legislated on air transport outside the community is not capable of rendering Article 52 inapplicable in that sector.

The ECJ further ruled that by entering into certain commitments within their bilateral agreements, Member States had infringed their obligations under EU law. In particular, the Court held that the nationality clauses in the air services agreements it had reviewed were contrary to the Member States’ obligations to allow freedom of establishment – in this case to other EU carriers. The Commission’s case against the UK was focused on the validity of the nationality clause in the Bermuda II agreement. In the cases against the other Member States, the ECJ held that those States had breached their obligations in respect also of community legislation relating to fares and rates and computer reservation systems by entering into bilateral agreements with the US which covered those issues.

Of wider interest will be what happens next. The Commission is keen to move towards the negotiation with the US of a Trans-Atlantic Common Aviation Area. The Commission perceives disadvantages to European airlines in pursuing bilateral negotiations in that this affords advantages to US airlines not available to their European counterparts; US carriers are able to operate from any part of the US to any number of European States with whom the US has bilateral arrangements, and to exercise fifth freedom rights from those countries within Europe, whereas the operations of EU carriers are limited to their "home" Member State and they cannot operate domestic routes within the US. From a wider perspective, the Commission considers that having the issue of traffic rights organised along strict national, rather than trans-European, lines prevents the EU airline industry from consolidating into a stronger and more international business.

The Commission has made no secret of its desire to take on the role of negotiating air services agreements on behalf of the EU as a whole. Its aim is for the EU to be treated as a single aviation jurisdiction entering into its own bilateral agreements not just with the US, but with other significant geographical areas. The negotiation of "European bilaterals" with Russia and Japan is known to be a present objective.

However, it is to be noted that the ECJ has not ruled that the Commission has exclusive competence to negotiate air services agreements on behalf of Member States, or that the existing bilaterals are of themselves illegal in their entirety. Nevertheless the judgment does raise considerable doubts as to whether States will be prepared to negotiate new agreements given the bar on nationality clauses in particular and as to how the existing agreements will now operate. In particular it begs the question of how Member States are in the practice to go about negotiating the amendment of their bilaterals and removing the offending provisions.

On 20 November 2002 the Commission, in response to the ECJ’s judgment, called on all members of the EU, not just those states which were defendants in the recent case, to exercise the denunciation rights in their bilateral agreements with the US – which would provide for those agreements to be terminated one year after notice of denunciation is given – and to refrain from taking on further bilateral commitments without first confirming their compliance with Community law. The Commission has also called on Member States to provide it with a mandate to enter negotiations with the US for a new agreement to replace the current structure.

Preliminary indications from the US are that the Department of Transportation may be willing to adopt a liberal approach to nationality clauses and that it would welcome the opportunity to enter open skies negotiations with the Commission as and when the latter receives a mandate to do likewise – a development which, if it were to become reality, could transform the structure of transatlantic air traffic and pave the way for the consolidation badly needed by the industry.

Despite the advantages that might flow from a move to a European Common Aviation Area, much opposition can be expected from Member States to the Commission’s call to denounce existing bilaterals. Much shadow boxing and manoeuvring for position can be expected over the next few months. Yet with nationality clauses and certain other aspects of those agreements declared unlawful, simply doing nothing is not likely to be a viable long term option. This issue is fundamental to the future structure of the European airline industry and we will report on further developments as they arise over the coming months.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.