Friday, December 19, 2008
The Wall Street Journal reported yesterday that the merger talks between British Airways and Australia's Qantas collapsed after just two weeks of negotiations. While both sides are blaming each other for premature leaks which seriously impeded the negotiations process, the paper listed "the ownership split of the combined business, the lack of obvious cost savings beyond those already achieved under the two airlines' code-sharing agreement, the need for a complex dual-listing structure to satisfy national ownership restrictions, worries over BA's giant pension deficit and . . . its separate ongoing merger talks with Iberia" as obstacles to the deal.
The breakdown of negotiations strikes a minor blow to those who were hoping to see some concrete progress made on overcoming the longstanding nationality restrictions on airline ownership and control. However, early reports indicated that the Australian Government was never keen on handing majority ownership of Qantas over to British Airways in the first place. For starters, it would have meant a forfeiture of the airline's traffic rights to and from Japan due to the nationality restriction contained in the two countries' bilateral air services agreement. It would also have likely compromised other international traffic rights conditioned on ownership "purity." Also, the plain fact that the merger would have meant Australia's oldest and most venerable carrier was in the hands of the British would be, perhaps, more than a few Australians could stomach.
It will be interesting to see what, if any, impact the breakdown has on the continuing negotiations between the European Union and Australia for a comprehensive air services agreement. According to the European Commission, "[t]he negotiations will go beyond the 'open skies' approach." Whether that means real opportunities for foreign ownership and control of each sides' carriers by the other or more hortatory language which points to some unspecific future point where that may be possible (see, e.g., the recently concluded EU/Canada Air Transport Agreement) remains to be seen.
Thursday, December 18, 2008
Irish low-cost carrier Ryanair won a noteworthy victory over the European Commission today as the European Court of First Instance (CFI) annulled the Commission's 2004 decision which had deemed the advantages authorized by Belgium's Walloon Region and Brussels South Charleroi Airport (BSCA) to the airline to be illegal State aid.
The dispute arose out of separate agreements Ryanair struck with the Walloon Region and BSCA (a public sector company controlled by the Region) in 2000 for a substantial reduction in landing charges, compensation for any profit loss arising out of subsequent changes to airport charges, contributions to cover the costs of Ryanair establishing its base at Charleroi Airport, and reduced fees for ground handling services. In return, Ryanair agreed to maintain two to four aircraft at Charleroi and maintain three rotations a day per aircraft for fifteen years. Following a number of complaints, the Commission launched an investigation into each agreement separately and found that they amounted to illegal State aid under Article 87 of the EC Treaty. In rendering its decision, the Commission determined that the Walloon Region had acted as a public authority in reaching its agreement with Ryanair. That finding foreclosed the application of the so-called "private investor principle" whereby the Commission, through a complex economic analysis, would have had to determine whether or not the arrangement was State aid by comparing it the behavior a private market actor would likely engage in under similar circumstances. The State acting in its capacity as a public authority can never be compared to a private actor in the market, however. The Commission thus ordered Belgium to recapture the aid granted to Ryanair--leading the carrier to challenge the legality of the Commission's decision in court.
The CFI's decision, available online here, took exception to the Commission's choice to view Ryanair's two agreements separately. In the CFI's view, since the BSCA is economically dependent on the Walloon Region, the Commission should have viewed them as a single entity for the purposes of assessing whether or not they behaved as rational market actors in granting the various concessions to Ryanair. Furthermore, the CFI disagreed with the Commission that the Walloon Region was exercising its public authority powers when reaching its agreement with Ryanair. This means that the Commission should have applied the private investor principle when it made its decision. Due to what the CFI found to be a clear error in law on the part of the Commission, the 2004 decision is annulled.
Ryanair may have a reason to smile for a moment, but it may be short-lived. The Commission is continuing to investigate similar arrangements made between Ryanair and regional airports all over the European Union. While the CFI found an error in law in this particular case, no doubt the Commission will take greater care in how it renders future State aid decisions involving regional airports. The Commission also has two months in which to challenge the CFI judgment before the European Court of Justice. Whatever the final outcome of the case proves to be, there appears little reason to expect the Commission to keep itself out of the economic arrangements of low-cost carriers and public regional airports. Given the benefits strong carriers can bring to Europe's underutilized regional airports and the reality that many of the EU's mainline ports are at capacity and thus unable to provide cost-effective options to low fare airlines, it would seem the Commission should be encouraging this market development. Unfortunately, pressure from flagship airlines and longstanding airports leery of a little competition seems to be animating the Commission's concern more than development and efficiency.