# EUR-Lex - 52012DC0556 - EN

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# 52012DC0556

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS The EU's External Aviation Policy - Addressing Future Challenges /* COM/2012/0556 final */**

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COMMUNICATION FROM THE COMMISSION TO
THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

The EU's External Aviation Policy -
Addressing Future Challenges

1.           Introduction

1.           Aviation plays a fundamental
role in the European economy both for EU citizens and industry. By supporting
5.1 million jobs and contributing €365 billion or 2.4% to European GDP[1], it makes a vital
contribution to economic growth, employment, tourism, people-to-people contacts
as well as the regional and social cohesion of the Union. As set out in the
Commission's 2011 Transport White Paper[2],
aviation is and will remain essential for connecting Europe with the rest of
the world. Over the last two decades, by removing historic barriers, the EU has
transformed and integrated fragmented national aviation markets into the single
largest and most open regional aviation market in the world.

2.           But Europe has been harder
hit by the global recession than other regions, and the competitive position of
its international airlines in particular is under threat from a number of
different challenges. This Communication argues that the EU's external aviation
policy needs a major and rapid transformation to meet these challenges: Europe
must maintain a strong and competitive aviation industry at the centre of the
global network that connects the EU with the rest of the world. We must
properly reflect aviation's strategic role in general, the particular role
which is played by EU carriers, airports, manufacturers and service providers
in terms of growth, jobs and the major contribution that aviation can make to the
EU's growth strategy "Europe 2020" and to the recovery of the
European economy. Europe's airlines are on the front line of this competitive
challenge and are fighting to survive in a tough international market[3] that is characterised
by diverse regulatory frameworks and cultures, by bilateral air services
agreements which restrict market access, and by competition that is often
distorted in third countries by unfair subsidies or practices such as
over-flight restrictions.

3.           This Communication
evaluates the progress achieved since the Commission's 2005 Communication in
developing an EU external aviation policy[4].
It is focused on "classical" aspects of international aviation
relations and agreements, but also discusses several other important aspects
with a strong international dimension which play an increasingly important role
in market growth and our overall competitiveness, such as: the development of
the Single European Sky and its related technology pillar SESAR (Single
European Sky ATM Research); European safety policy, with a growing
international role for the European Aviation Safety Agency (EASA), bilateral
aviation safety agreements (BASAs) as well as technical cooperation; European
aviation security policy, aimed at preventing unlawful
interference in civil aviation and European airport and
infrastructure policy which must deliver viable and cost-efficient
infrastructure. Any revision and strengthening of the EU's external policy on
aviation must take these important elements fully into account.

4.           While the Communication
concludes that the policy established in 2005 goes in the right direction, we
need to recognise that, seven years later, the world of aviation is a very
different place. European aviation urgently needs a stronger framework where fair
and open competition can thrive, and this can be ensured by a much more
coordinated European approach to external aviation relations. It is in the
interests of the European consumer and of the sector's competitiveness for
there to be a shared political readiness to push ahead with EU-level
negotiations where the added value and economic benefits have been
demonstrated.

5.           The EU needs to use the
full range of tools available, including Council authorisations of EU-level
negotiations with major partners as well as European neighbourhood countries,
and, where necessary, to defend ourselves more effectively against unfair
practices. The EU needs to show leadership in driving change to international
ownership and control regimes that will ensure that EU-based global carriers
stay prominent in the global network for years to come. In doing so, we must
always remember that we are not only looking to strengthen the competitiveness
of the entire value chain of European aviation, and all elements within that,
but doing so in the interest of the end-consumer.

1.1.        Building on progress since
2005 – time for a review

6.           The achievements of the
EU's external aviation policy over the past seven years, based on three key
pillars - restoring legal certainty; the creation of a common aviation area
with neighbouring countries; and comprehensive agreements with key partners -
are set out in the Annex. In short, they have been considerable. As a result of
coordinated efforts between the European Commission and EU Member States, legal
certainty has been restored to nearly 1000 bilateral air services agreements
with 117 non-EU countries. Solid progress has been made in developing a wider
Common Aviation Area with neighbouring countries, with agreements already
signed with the Western Balkans, Morocco, Jordan, Georgia and Moldova. More
agreements are being negotiated. The economic benefits resulting from the first
of these agreements (Western Balkans and Morocco) have been estimated at a
total of €6 billion between 2006 and 2011[5].
Since 2005, the EU has also negotiated comprehensive air transport agreements
with a number of key trading partners: the United States, Canada and Brazil.

7.           Since 2005, the EU's
external aviation policy has achieved significant results, enabling the EU to become
an important player in global aviation and leading to tangible economic
benefits and other advantages. But it is also clear that progress has not been
as rapid and extensive as it should have been. The transition from having only
bilateral relations between EU Member States and partner countries to a mix of
bilateral and EU-level relations has led to occasional confusion among partner
countries, and EU interests have not always been best defined and defended.
This calls for further efforts to coordinate at EU level between the European
Commission and Member States as well as cooperation with industry stakeholders.

8.           The changes and challenges
facing the global aviation community have enabled the EU to show leadership in
pursuing an ambitious and coherent international aviation policy (see below).
However, national fragmentation still prevails, with a
general lack of unity and sense of solidarity at EU level. We have not yet
completed a comprehensive common EU external aviation
policy; we are still too much subject to national interests and rely too much
on ad hoc initiatives based on individual authorisations to negotiate.

9.           Recently,
a further factor has been the reaction of a large number of international
partners to aviation's inclusion in the EU Emission's Trading System. However,
given the overall importance of decarbonising the economy, the EU sees
sustainable development of aviation as an important subject for our external
relations policy, both bilaterally and globally through ICAO. The reactions to
the EU ETS demonstrate the need for further collaboration on the climate change
issues so as to overcome barriers and increase the scope for mutually
beneficial cooperation. The EU strongly supports and reiterates its continued
willingness to agree a global approach in ICAO on the issue of aviation
emissions so as to enable sustainable development of the aviation industry.

10.         What has been achieved over
the past seven years represents good progress but is clearly not enough. New
challenges are constantly emerging due to the very dynamic and rapidly changing
global aviation environment. In addition, these challenges are increasingly of
a global scale, which demonstrates the need for joint EU responses, given that
solutions are very difficult to achieve at EU Member State level.

11.         It
is now time to take the EU external aviation policy and vision a significant
step forward. Reviewing and upgrading the policy is urgent. The pace of
un-coordinated market liberalisation, at EU Member State level with certain
non-EU countries is such that if we do not act now to establish a more
ambitious and effective EU external policy, then in a few years' time it may be
too late. And in this, Member States' apparent intent to continue to grant
bilateral air traffic rights to third countries without commensurate return, or
account taken of the EU-level implications, could be a contributing factor. In
addition, we have not made sufficient headway in tackling ownership and control
restrictions. These threaten to ossify the development of a global industry and
deny EU carriers important new sources of capital. It is urgent to extend the
scope of EU-level negotiations to a number of key and increasingly important
aviation partners.

2.           Key challenges in a
rapidly changing global aviation environment

2.1.        The medium and longer-term
market trends

12.         Air transport has almost
become an acquired right which is taken for granted in the EU and across the
world. Curbing mobility is not an option: connectivity is key to
competitiveness. Emerging economies have understandably high aspirations to
access to increased travel by air and the gradual appearance of a more affluent
population in these markets will contribute considerably to a growing demand
for air transport. The global middle class is expected to nearly triple in size
by 2030 (from 1.8 billion in 2010 to 4.9 billion by 2030) and rise by more than
a factor of six in the Asia-Pacific region[6].

13.         Despite the current
economic crisis, global air transport over the long-term is expected to grow by
around 5% annually until 2030[7],
a compound increase of more than 150%. Demand for air transport is primarily
driven by economic growth and prosperity. With an expected average annual GDP
growth rate for Europe of 1.9%[8]
between 2011 and 2030 compared, for example, with growth rates for India and
China of 7.5% and 7.2% respectively, aviation growth will see a relative shift
to areas outside the EU with Asia and the Middle East in particular expected to
become the focus of international air traffic flows. Half of the world's new
traffic added during the next 20 years will be to, from, or within the
Asia-Pacific region, which will thereby overtake the US as leader in world
traffic by 2030 reaching a market share of 38%. 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% of all inter-regional
capacity in the world. By 2025, this share is expected to have fallen to 20%.[9] This trend means that, if nothing is done, European airlines will
be less able to generate benefits and growth for the European economy.

14.         At the same time, non-EU
carriers have reinforced 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% of world traffic, up
from 7% in 2010. The global competitive pattern has changed significantly with
the rise of the Gulf carriers providing so-called 6th freedom services
(connecting markets through inter-continental routes via their hubs),
increasing their market shares, positioning themselves aggressively for the
future with massive new investments in aircraft and airports and taking
advantage of a worldwide network of highly liberal bilateral air services
agreements. Governments in the Gulf region have invested heavily in aviation
infrastructure, de facto turning aviation into a strategic instrument to
promote the global role of the region. Similarly, South American markets have
grown, albeit from a smaller base; Asian carriers have consistently promoted
growth; and US airlines have further consolidated and improved competitiveness,
although this has been facilitated by creditor protection legislation.

2.2.        Competing aviation
business models

15.         The viability of the
various business models being pursued in the EU such as the point-to-point and
network service models and their related route systems is important in relation
to EU carriers sustaining a competitive presence in external markets.

16.         The European airline
industry is undergoing significant changes. The network carriers now face
strong competition from low-cost carriers. These now represent 40% of the
intra-EU capacity on offer and a significant further increase is expected[10].

17.         This obviously has a major
impact on the operations, performance and profitability of EU network carriers.
Low-cost carriers have been far more successful than network carriers in
exploiting the new market freedoms created by liberalisation by stimulating new
demand through lower fares and offering point-to-point services without any
constraints of connecting flights. But they have largely limited themselves to
short- and medium-haul operations. In recent years, the large European network
carriers have experienced significant losses in their short- and medium-haul
intra-European businesses due to increased competition from low-cost carriers
and high-speed rail. These losses have in part been off-set by long-haul
routes, which are the main revenue sources of these carriers. A vigorous
external EU aviation policy targeted at key long-haul growth markets would
create new commercial business opportunities for EU carriers.

18.         Network carriers are
expected to continue to play a key role in international air traffic,
delivering 74% of total worldwide traffic by 2030[11]. Network carriers will
therefore remain vital for connecting Europe with the rest of the world and it
cannot be assumed that low-cost carriers will contribute much to this other than
by feeding into the airports from where inter-continental traffic departs. In
that sense, the two business models could potentially develop synergies and
convergence between each other.

2.3.        The importance of hubs

19.         The economic benefits of
hubs are well known, enabling "thinner" routes to be operated
profitably with the support of connecting traffic. In order to be viable a hub
requires a significant level of local demand as well as an extensive network of
feeder services, which is why the most successful hubs are usually situated at
major city airports.

20.         With a few caveats, there
is no reason to assume that European airlines are not able to operate viable
hubs, whether cargo or passenger, now or in the foreseeable future. However,
the under-investment in airport infrastructure and the increasing capacity
crunch, which at some European airport hubs are already limiting the number of
feeder routes that can be operated, must be effectively addressed if European
competitiveness is to be maintained. Investments in airport infrastructure and
development of hubs, where justified by a strong and sustainable demand, are
crucial for allowing European hubs to compete with those developing in other
parts of the world. It is therefore important to identify bottlenecks to growth
at an early stage and to remove them or at least limit their negative impact by
using all means available to use scarce airport capacity more efficiently.

3.           Main objectives for the
EU's future external aviation policy

3.1.        Creating fair and open
competition

21.         Another important caveat is
that EU carriers are able to compete on open, fair and undistorted basis.

22.         The EU considers open
markets as the best basis for developing international aviation relations and
therefore embraces competition. This has been a fundamental lesson from the
success story of the EU internal aviation market. While it is vital to ensure a
business climate that enables EU carriers to compete internationally, the EU's
external aviation policy must also stress the importance of fair and open
competition. When, for example, subsidies, unfair practices, inconsistent
application of regulatory frameworks and lack of transparency in financial
reporting of companies are used to distort the market, it is legitimate to defend
the industry against unfair competition.

23.         Aviation competes as a
service industry in a global market, so sustainable competitiveness depends
upon fair conditions of competition. Europe-based airlines are at a competitive
disadvantage internationally if their production costs are higher than those of
other airlines. The competitiveness of EU carriers, many of which are
struggling financially, is hampered when the economic burdens that lead to
higher unit costs of production are higher than those of carriers from other
regions of the world. The application of different national taxes on the
aviation sector could have a detrimental effect on the internal market and on
the competitiveness of EU-based aviation companies and hence would require
further analysis. EU carriers are also handicapped by higher costs resulting
from congested airports and airspace in Europe, as well as higher ATM and
airport charges. Labour costs related to high labour standards and well
developed social protection systems are also higher in Europe than in most
other world regions as are costs related to compensation for passengers' rights
and the cost of carbon emissions. Some of these additional economic burdens and
costs for flights to and from Europe compared to the situation in other regions
may prevail, at least for some time, while others may, to some extent, be
offset by innovation, earlier deployment of new technology in Europe or
productivity gains or may be addressed in negotiations with partner countries
aiming to create a level playing field, e.g. by respect for international
labour and environmental standards.

24.         It is therefore important
that the entire aviation value chain (airports, air navigation service
providers, manufactures, computer reservation systems, groundhandlers etc.) is
considered and that the cost structures, the level of exposure to competition
in other parts of the value chain and infrastructure financing mechanisms in
other key markets are taken into consideration when assessing the
competitiveness of the EU aviation sector and in particular EU airlines
internationally. But EU airlines are ultimately responsible themselves for
their competitiveness and for offering the right combination of prices and
service quality levels that appeal to customers.

25.         It is equally important
that competition, both within the EU and externally, is not distorted by unfair
practices. Within the EU, the European Commission has recently opened a series
of in-depth investigations into cases of potential state aid to airlines from
regional airports in several EU Member States. The concern is that airlines
receiving such aid obtain an undue economic advantage that competitors do not
enjoy, thereby distorting competition within the EU single aviation market. The
Commission has also announced in 2012 that it will revise its Community
guidelines on financing of airports and start-up aid to airlines departing from
regional airports. The recent adoption of EU rules[12] regarding social
security for mobile workers in the EU such as aircrew will also improve the
functioning of the single market as the practice adopted by some airlines of
using the least onerous social security systems irrespective of the crew
member's home base can no longer be continued. Adopting or amending EU
legislation can therefore contribute to enhancing a business environment that
enables EU carriers to compete internationally.

26.         On the external side,
Regulation 868/2004[13]
was intended to protect against subsidisation and unfair pricing practices
causing injury to EU carriers in the supply of air services from non-EU
countries. However, strong calls have been made for developing more effective
EU instruments in the aviation sector to protect European interests against
unfair practices. Regulation 868/2004 has never been used and the industry
argues that the Regulation is not practicable as it has been modelled on tools
used in anti-dumping and anti-subsidy for goods and is not properly adapted to
the specificities of the aviation services sector. The possible remedies and
the Regulation's procedural aspects are also considered inappropriate for a
services sector. A more appropriate and effective instrument would need to be
developed to safeguard fair and open competition in the EU's external aviation
relations.

27.         The aviation systems
against which EU airlines and hubs compete in the Gulf are the result of clear
decisions taken to develop aviation as a strategic economic sector generating
benefits for the overall economy. Gulf carriers insist that they do not enjoy
unfair competitive advantages from these systems. Given this, it would appear
that one immediate way forward should be to develop – most appropriately at
EU-level – standard "fair competition clauses" to be agreed and
included in the respective bilateral air services agreements with EU Member
States.

28.         In this new commercial
context, it is both important and legitimate that the EU is able to act
effectively internationally to safeguard the competitiveness of EU airlines
against unfair competition and/or practices wherever they may come from.

3.2.        A growth strategy based on
"More Europe"

29.         The EU aviation sector,
notably Europe's international network carriers, has gone through a difficult
period and is still facing very serious challenges ahead. Meeting these
challenges requires concerted and rapid efforts at EU level, with more
coordinated action that must be more effective than the current system of
bilateral negotiations and relationships. The EU, where united, has shown that
it is capable of delivering added value. This applies both to negotiations and
when it comes to ensuring the proper functioning of agreements through, for
example, common positions in the Joint Committee under the various agreements.

30.         The independent study
carried out for the Commission[14] has estimated that there would be very significant economic
benefits, more than €12 billion per year, from further EU-level comprehensive
air transport agreements with neighbouring countries and key partners
particularly in fast-growing and/or restricted markets. These include, notably,
Turkey, China, Russia, Gulf States[15],
Japan, Egypt and India.

31.         It is of strategic
importance for the EU to maintain a strong and competitive European-based
aviation industry connecting the EU with the world. The fastest-growing
aviation markets are now outside Europe, so it is vital that European industry
has the opportunity to grow in these markets as well. The challenge will be to
position European industry to take advantage of the opportunities offered by
the rapidly changing environment and of access to new fast-growing markets.
Meeting this challenge will require a coherent EU vision as well as a clear
signalling of stronger unity in the EU's external aviation relations.

32.         The EU's external aviation
policy should be driven by three parallel objectives
which can be reconciled to the benefit of the overall economy, growth and jobs:
(i) creating consumer benefits (which suggests a strong continued focus on
market opening); (ii) safeguarding competitiveness, which suggests stronger
EU-level measures to insist on ownership and control reform, reductions of the
regulatory burden and an international level playing field (all difficult to
secure at Member State level); and (iii) wider public policy objectives going
beyond traffic rights (the EU approach will therefore seek to ensure overriding
public safety, security and environmental goals).

33.         The EU's external aviation
policy and initiatives should promote and defend European interests more
vigorously and continue to promote and share European values, standards and
best practices on a collaborative basis. It should aim at the highest possible
standards to be applied in the industry, through regulatory cooperation and
convergence. These goals will not be achieved without coordinated EU-level
negotiations with key partners.

4.           Lessons learned and the
Way Forward

4.1.        What remains to be done
from the 2005 roadmap?

34.         Over the past seven years,
there have been substantial achievements - both quantitative and qualitative in
the EU's external aviation policy (see details in the annex). But there have
also been shortcomings and real disappointments, from which lessons should be
learned.

35.         Under
the first pillar (restoring legal certainty), much has now been achieved.
However, continued engagement with certain partners and a coordinated and
determined EU approach to these few countries should be pursued with a view to
resolving outstanding issues.

36.         Under
the second pillar (neighbourhood agreements), a number of important agreements
have been negotiated which will generate increasing benefits both for the EU
and the neighbouring countries. Contacts and negotiations with the remaining
neighbouring countries should be intensified and accelerated with a view to
reaching agreements by 2015 with Ukraine, Turkey, Tunisia, Azerbaijan, Lebanon,
Algeria, Armenia, Egypt, Libya and Syria (obviously subject to national and
regional political conditions). It is important to ensure that, over time, a
truly integrated common aviation area evolves from this process where relations
between the neighbouring countries themselves also become open and integrated.
In view of the similar objectives that the EU pursues with neighbouring
countries, it no longer makes sense for the Council to have to consider
granting authorisations to negotiate agreements on a country-by-country basis.
It would be far more efficient to grant the Commission a single authorisation
to negotiate with the remaining neighbouring countries albeit still on a
country-by-country basis. This would also allow more flexibility in terms of
the timing of when negotiations are launched.

37.         Under the third pillar
(comprehensive agreements with key partners) a number of important agreements
have been negotiated. However, it is also an area where some key objectives
still need to be achieved, notably under the EU-US and EU-Canada agreements
regarding the liberalisation of ownership and control of airlines.

38.         Despite the progress made
worldwide towards a more liberal regulatory regime for international air
transport, governments have still not reformed the archaic ownership and
control rules for airlines. Most countries still maintain rules stipulating
that airlines must be majority owned and controlled by their own nationals
thereby denying air carriers access to a wider range of investors and capital
markets. The effect has been to impose an artificial industry structure on the
airline sector that does not exist in other industries. Despite aviation's
global reach, there is not a single truly global airline in the way that other
industries have global companies. Cross-border consolidation, seen by many as a
pre-requisite for a more economically sustainable airline industry, is severely
restricted. In the US, for example, foreign ownership of voting shares of
airlines may not exceed 25%. These national restrictions on ownership and
control have given rise to three global airline alliances (Star Alliance,
SkyTeam and oneworld), and more specifically the joint ventures created between
some of their members on some routes. These have come to play a role as the
nearest proxy to global airlines.

39.         Under existing EU
legislation, however, EU carriers are not subject to national ownership and
control restrictions but can be owned by any EU interest. In recent years, the
European airline industry has undergone a process of cross-border consolidation
around three main European air carrier groups: the Air France-KLM Group; the
Lufthansa Group with SWISS, Austrian Airlines and a significant share in Brussels
Airlines; and most recently the International Airlines Group (IAG) created as
the parent company of British Airways, Iberia and now also bmi. Moreover, the
EU majority ownership requirement can be waived through EU comprehensive
agreements with partner countries which would allow foreign majority ownership
and control.

40.         The consolidation trend in
Europe is unique, in that cross-border mergers and acquisitions are only
permitted within the EU while ownership and control regimes remain
fundamentally stuck where they were negotiated in 1944 in the Chicago
Convention. The difficulties encountered as a result of current ownership and
control provisions are significant and require negotiations with partner
countries and highly complex governance structures. Inevitably this means that
the full benefits of consolidation cannot be achieved. Alliance members
cooperate more and more closely to offer customers a seamless integrated global
multi-hub network service.

41.         Part of the problem in
removing ownership and control restrictions is the need, for reform to have any
real meaning, to secure the agreement of a critical mass of the global market
or a large proportion of countries. For global reform of ownership and control
to advance, the logical starting point is the trans-Atlantic market. Since
between them, the EU and US account for nearly half of global aviation, they
represent a powerful bloc and the emergence of genuinely trans-Atlantic
carriers would create important momentum. The time is now ripe to take the
additional steps envisaged in the EU-US air transport agreement to liberalise
airline ownership and control in order to enable airlines to attract investment
irrespective of the nationality of the investor. However, this important policy
objective of allowing foreign investment in airlines should also be pursued
more widely - both bilaterally between the EU and other key partners, and at a
global multilateral level notably through ICAO. The EU should take a stronger
lead in assessing how the concerns related to the current ownership and control
clauses can be catered for, particularly with like-minded countries, whilst
also addressing the need for airlines to access capital funding and enhancing
the attractiveness of airlines in the financial markets. Negotiations of free
trade agreements may play a useful complementary role in removing restrictions.

42.         It is also important now to
finalise negotiations with Australia and to allow the benefits to start flowing
from the EU-Brazil agreement, the signature of which has unfortunately been
delayed.

43.         The third pillar also
represents a huge potential for further benefits. For example, in 2005, the
Commission already demonstrated significant economic benefits from future
comprehensive agreements with Russia, China and India and therefore requested
authorisations to negotiate comprehensive air transport agreements with each of
these countries, which have so far not been granted. These potential benefits
have been confirmed by the independent study carried out for the Commission and
the objective of comprehensive agreements with these key partners should
therefore be maintained and pursued. The study has also shown potential major
economic benefits from comprehensive agreements with a number of other
important partners.

4.2.        Key principles guiding the
EU's future external aviation policy

44.         Given the deepening of the
single market, the emergence of truly European carriers which are increasingly
multi-national in their ownership structure and the EU's expanding powers in
practically all areas of aviation, it is high time for the EU to pursue a much
more coordinated and assertive approach in its external aviation relations. In
some cases, it may be enough to strengthen the existing level of coordination
between the European Commission, Member States and industry while continuing to
pursue relations with partner countries on a bilateral basis. This would
require stronger formalised EU coordination and transparency arrangements.
However, experience shows that even when coordinated, bilateral relations
entail a serious risk of sub-optimal results. EU-level negotiations which are
based on EU unity and authorised by the Council generally represent a more
appropriate and effective way in pursuing the European interest. This approach
should therefore be developed as the general practice with all major partners,
rather than as an exception to the rule - as at present.

45.         The EU should continue to
be bold in promoting further openness and liberalisation in aviation, while
ensuring that a satisfactory level of regulatory convergence is achieved.
Wherever necessary, it should also stand up for the EU's industry, economy and
jobs and ensure that the appropriate instruments are deployed to defend its
interests. In negotiations with partner countries, due attention should also be
paid to labour and environmental standards and respect for international
conventions and agreements in both areas to avoid market distortion and prevent
a race to the bottom.

46.         Changes are also needed
within the global context of aviation. This is where ICAO can play a leading
role in modernising the existing framework governing the global aviation
market, as it does in other key areas such as safety and security. ICAO can
help to further develop the economic regulatory framework for the global
aviation sector, including in liberalising ownership and control of airlines,
ensuring a worldwide framework for fair competition and ensuring
environmentally sustainable development of the sector.

4.3.        Enhancing relations with
key partners

47.         This Communication has
stressed the strategic importance for the EU of a competitive European aviation
industry which includes EU network carriers with global reach. As a first
condition, this requires safeguarding the industry's competitiveness and
secondly, securing market access opportunities for it to compete and operate in
key markets. Given its particular characteristics, the European cargo and
express industry in particular is suffering worldwide from restrictive
bilateral air services agreements and should be given a high priority when
obstacles are removed to market access. The EU needs to tailor its response to
the challenges related to some of the strategic markets and partners, as
follows.

48.         Turkey, as a key regional
player, represents a strategic and one of the fastest-growing aviation markets
for the EU. After the US, Turkey is the largest destination for passenger
traffic to and from the EU with 30 million passengers carried in 2010. Since
1999, EU-Turkey passenger traffic has grown on average by more than 9% a year.
It represents three times more than EU-Morocco passenger traffic and is more
than double the size of the EU-Russia market for passenger services. Turkey and
the EU have common interests in many areas of aviation and the scope for
cooperation is very considerable. There are also some difficult aviation issues
in the region which need to be resolved since they harm both sides. A positive
and pragmatic agenda for cooperation should be developed with Turkey that would
allow mutually beneficial progress to be made in resolving concrete issues in
the region. In particular, a bilateral safety agreement should be advanced.
Providing that progress is made in resolving these obstacles, then a
comprehensive agreement should be envisaged.

49.         With Russia, it is high
time to agree on a more coherent, stable and ambitious relationship that can
offer planning predictability for both sides' carriers. Russia must urgently
demonstrate its commitment to the 2011 agreement to implement the "Agreed
Principles on the modernisation of the Siberian overflight system". Beyond
that, the scope for cooperation is vast and the potential benefits for Russia
and the EU of a genuine strategic partnership, or even a normalised relationship,
are equally significant - as are the potential costs if the relationship is not
taken forward. As soon as the current obstacles are resolved, the EU should
therefore propose a road-map whose ultimate objective should be a comprehensive
EU-Russia aviation agreement.

50.         Relations with the Gulf
States have in recent years been a largely one-way process of opening EU
markets for Gulf carriers, which has created significant imbalances in
opportunities. At the same time, doubts remain about whether the transparency
in the financial performance reporting of some Gulf carriers meets
international standards. In addition, some Gulf States have remained reluctant
to accept or even discuss "fair competition" clauses with EU Member
States individually. This trend must be reversed, firstly towards ensuring
transparency and fair and open competition and then, on that basis, towards
continued market development. It would be appropriate to coordinate this
process at EU level through comprehensive EU aviation agreements with the key
countries.

51.         Asia is growing fast in
importance in global aviation and is therefore obviously a market where EU
carriers cannot afford not to be actively present. Many Asian countries now
pursue more liberal aviation policies; several have expressed interest in
concluding comprehensive agreements with the EU. The EU should pursue such
opportunities, provided that these countries fully recognise EU law in aviation
including the principle of EU designation, and provided that these markets
offer equal opportunities and fair competition for the two sides. Significant
potential economic benefits have been demonstrated from comprehensive EU air
transport agreements with China, India and Japan which should be pursued. The
EU is also, with much interest, following developments in ASEAN towards a fully
liberalised ASEAN Single Aviation Market by 2015, which has many similarities
to the creation of the open regional aviation market in Europe. This will offer
new interesting opportunities for cooperation between the EU and ASEAN and
should at some stage lead to a comprehensive EU-ASEAN aviation agreement.
Singapore has taken a lead in this respect and has presented itself as a
"pathfinder" for the EU to deepen its presence in ASEAN, and beyond.

52.         Similar regional
developments are underway in other regions of the world, including in Latin
America where the continued consolidation of airlines should be welcomed since
it offers possibilities for developing closer bloc-to-bloc relations that merit
further market opening.

53.         Africa's aviation market
has a long-term potential for growth. In EU-Africa aviation relations at
present, priority is given to improving aviation safety in Africa by supporting
the creation and operations of Regional Safety Oversight Organisations and
providing assistance to the countries included in the EU list of airlines
subject to an operating ban within the EU.

4.4.        The tools to be applied

54.         The EU wishes to develop
strong, comprehensive and mutually beneficial aviation relations with its key
partners. This goes well beyond the simple issue of liberalising traffic rights
and should include, for example, regulatory, technological and industrial
cooperation. Comprehensive air services agreements with
neighbouring countries and major and like-minded partners should address and
synchronise the regulatory conditions for fair
competition and for a sustainable aviation industry including essential aspects
such as safety, security, environment and economic regulation.

55.         This Communication has stressed
the importance of maintaining a competitive European aviation industry. To make
sure that this strategic objective is achieved will require more systematic
coordination, stronger solidarity and use of the full range of tools which are
available to the EU, the European Commission, EU Member States, EU industry and
European aviation institutions and agencies. It will also enhance the potential
benefits for the EU's partners. This could take various forms which should be
considered jointly.

56.         It is important that all
affected parties are as fully involved as possible in establishing the policy
and then in the negotiations, both in the preparations and in the discussions
themselves. For this reason, the Commission is prepared to re-examine the
practical arrangements to ensure that negotiations are transparent and
inclusive. At the same time, we need to make sure that the processes that
govern EU external aviation relations are efficient, effective and not
excessively bureaucratic.

57.         The Commission believes
that a more effective instrument to ensure fair competition is an important
part of the tool-box that the EU will need to develop the EU's external
aviation policy further. Regulation 868/2004 has proven complex and
impracticable for the aviation services industry and, subject to a full
assessment of its impact, the Commission will review and as necessary make
proposals for more appropriate measures once all the stakeholders concerned
have been consulted.

5.           Conclusion

58.         It is now time for EU
Member States, the Council and the European Parliament to consider carefully
how best to devise the EU's future external aviation policy and to take the
decisions that will be needed for a more ambitious policy to match the serious
challenges facing the European aviation sector today and to unleash the full
potential that aviation can contribute to the European economy.

ANNEX

What has
been Achieved so far from the EU's external aviation policy?

The emergence of an EU external aviation
policy

1.           The development of an EU
external aviation policy was a logical consequence of the creation of the EU
internal market and associated common rules. A key milestone was the "open
skies" judgement of the European Court of Justice on 5 November 2002[16] which concluded (i)
that the Union acquires an exclusive external competence where international
commitments fall within the scope of the common rules; and (ii) that the
national ownership and control requirements for designation of airlines under
bilateral air services agreements violate the freedom of establishment
enshrined in the EU Treaties.

2.           In June 2003, the Council
granted authorisations to the Commission to negotiate a comprehensive air
transport agreement with the United States and to negotiate "Horizontal
Agreements" with all other non-EU countries to bring their bilateral
agreements with EU Member States into conformity with EU law.

3.           In June 2005, the Council
agreed on three key "pillars" for an EU external aviation policy
aimed at: (i) bringing all bilateral air services agreements that EU Member
States have with third countries into conformity with EU law following the
"open skies" Court judgement, notably by removing national ownership
and control requirements and so recognising the freedom of establishment of EU
air carriers; (ii) developing a wider Common Aviation Area by 2010, to
incorporate neighbouring countries to the south and east of the EU; and (iii)
negotiating EU-level comprehensive agreements with other key partners based on
individual authorisations to negotiate where the economic benefits and added
value of an EU agreement have been demonstrated.

While significant challenges and much work
remain, important progress has been made on all three pillars since 2005.

Achievements made under the three
pillars

First pillar – restoring legal certainty

4.           The necessity of restoring
a sound legal basis for aviation relations with the EU has been accepted
worldwide; with only a few exceptions this is no longer a real issue. Some 117
non-EU countries have recognised the principle of EU designation. Of these, 55
countries have agreed to amend all their bilateral agreements with EU Member
States through Horizontal Agreements with the EU while the remaining countries
have done so on a bilateral basis with individual EU Member States. In total
nearly 1000 bilateral air services agreements have been brought into legal
conformity with EU law representing 75% of all extra-EU passenger traffic.
There is, however, still work to be done with a few important aviation
countries, to complete the implementation of EU designation. These include India, China and South Korea and also South Africa, Kenya, Nigeria
and Kazakhstan. Of these countries, it is only South Africa, Kenya, Nigeria and
Kazakhstan which have not yet recognised the principle of EU designation at
all. Where regional organisations exist, such as in
Africa and South East Asia, a regional approach should preferably be followed
by negotiating bloc-to-bloc agreements. Such bloc-to-bloc Horizontal Agreements
should contain elements of reciprocity (in particular with regard to ownership
and control provisions) which would allow for reciprocal progressive
recognition of respective regional aviation markets with benefits for both
sides. Restoring legal certainty, preferably on a regional
bloc-to-bloc basis with the Regional Economic Communities where they have power
to conclude a Horizontal Agreement, continues to be a prerequisite for wider
cooperation in key aviation areas such as safety, security, economic
regulation, air traffic management and environment.

5.           The results achieved are
significant. These changes recognise the removal of national ownership and
control restrictions on EU carriers as required by EU law. As a result, EU
carriers can offer services from any EU Member State to non-EU countries,
provided that designation rights and traffic rights are available under the
relevant bilateral air services agreements. Furthermore, mergers between EU
carriers are recognised. But above all, legal certainty to bilateral agreements
has been restored which is important for all operators.

Second pillar – Common Aviation Area with
neighbouring countries

6.           Solid
progress has also been made on developing a wider Common Aviation Area. The EU has negotiated a number of important air services agreements
with neighbouring countries which will, over time, constitute a Common Aviation
Area based on a parallel process of gradual market opening and regulatory
convergence towards EU aviation legislation and regulations, encompassing some
55 countries and 1 billion inhabitants i.e. double the size of the population
of the EU. In addition to Switzerland, Norway and Iceland, which are part of
the internal aviation market, comprehensive air transport agreements have been
signed with the Western Balkans[17], Morocco, Georgia, Jordan and Moldova and
an agreement has been initialled with Israel. Negotiations are ongoing with
Ukraine and Lebanon, they are expected to start soon with Tunisia and
Azerbaijan, and at some stage also with Armenia.

7.           The economic impact of
those neighbourhood agreements that were negotiated first has been measurable
and significant. An independent study carried out for the European Commission[18] has estimated the total economic benefit from the EU-Morocco
agreement (2006) to have exceeded € 3.5 billion between 2006-2011, with a
massive growth in air traffic between the EU and Morocco and many new routes
and carriers, resulting in more competition, choice and lower prices. There has
been a real decline in passenger fares of around 40% since 2005. Similarly, the
EU-Western Balkan agreement (the ECAA agreement) has generated a total economic
benefit of more than € 2.4 billion between 2006 and 2011. Of the total economic
benefit, 80-85% is consumer surplus gain resulting from lower fares, while the
remainder represents other productivity and efficiency gains.

8.           Neighbouring countries
have done a great deal to align their regulatory framework with EU legislation
in key areas such as aviation safety, security, air traffic management, environment,
passenger rights, economic regulation and social aspects. This is in the
interest of the consumers and aviation industry both of the EU and the
neighbouring countries. The EU gives significant assistance to neighbouring
countries in supporting them to align their legislation with EU rules. Both
sides have agreed to grant additional traffic rights (5th freedom
rights i.e. the right to carry traffic between a partner country and
intermediate or beyond points as part of a service starting/ending in the
airline's home country) to apply once the process of regulatory harmonisation
has been completed. In the case of the Western Balkans, the early
implementation of EU aviation rules under the ECAA Agreement will also
contribute to their efforts in the context of the EU accession process.

9.           Relations
with one key neighbouring country - Russia - have been difficult. Russia is a
potentially highly important partner for the EU due to its geographic proximity
and the mutual dependency that creates significant commercial opportunities.
More than 40% of Russian international passenger traffic comes to the EU, for
instance. However, the scope for mutual benefits is not exploited to its full
potential.

10.         2011 marked a turning point
regarding Russia's recognition of EU law. In September 2011, Russia - for the
first time - agreed to incorporate the principle of EU designation in its
bilateral air services agreements with EU Member States, a process which is now
being completed.

11.         However, one key issue still remains to be fully resolved: the Russian system
of charging EU carriers for using Siberian routes to fly to Asian destinations. It has been estimated that EU airlines have had to pay more than
€300 million annually for flying over Siberia, most of which has apparently
gone to a direct competitor. At
the end of 2011, the European Commission and the Russian Government exchanged
letters to the effect that the 2006 negotiated, agreed and signed "Agreed
Principles on the modernisation of the Siberian overflight system" should
be fully implemented by 1 July 2012. The EU expects Russia to honour this
international commitment and reserves its right to take the necessary measures
if this should not be the case.

Third pillar – comprehensive agreements with
other key partners

12.         Under
the third pillar, the EU has negotiated a few agreements with major partners. These comprehensive agreements aim at a combination of market
opening, creating the conditions for fair and open competition through
regulatory convergence, liberalisation of ownership and control of airlines and
resolving "doing business" issues.

13.         A
first stage agreement with the United States was signed in April 2007 and a
second stage agreement in June 2010. An agreement was signed with Canada in December 2009 which provides
for a staged market opening based on Canada's changes
of its foreign investment regulations. A comprehensive
air transport agreement was initialled with Brazil in March 2011, although
Brazil's signature is still pending. The Council has also granted the
Commission authorisations to negotiate comprehensive agreements with Australia
and New Zealand. Negotiations with these countries have not yet been completed.

14.         The
EU-US agreement has played a pivotal role in shifting international aviation
agreements away from mere market access negotiations based upon reciprocity.
For the first time, a major international agreement acknowledged that
conditions for competition also needed to be addressed and harmonised to ensure
fair competition. The EU and the US have developed a new template agreement
which facilitates the role of aviation. While the US and Canada agreements have
so far only been applied during a period of economic downturn which has had
negative impacts on most aviation markets, the benefits are expected to be very
significant, reflecting the size of the trans-Atlantic market. A study[19] undertaken on behalf of the Commission concluded that an EU-US Open
Aviation Area agreement would, over the first 5 years, generate more than 25
million additional EU-US passengers and more than € 15 billion benefits for
consumers as well as create 80,000 new jobs in the EU and the US combined. The
benefits and efficiencies resulting from regulatory cooperation and
convergence, and the effect of the work of the Joint Committees established by
the agreements, are already clear. Under the EU-US agreement, for example, the
Joint Committee has addressed a broad range of issues including market access,
regulatory cooperation and convergence and conditions for competition. This
provides a valuable forum to monitor the implementation of the agreement and
address obstacles to doing business. The Joint Committee was, for example, a
catalyst for the June 2012 EU-US cargo security agreement that will allow
cheaper and faster air cargo operations as a result of mutual recognition of
the respective air cargo security regimes.

[1]               "Aviation: Benefits Beyond Borders", Report
prepared by Oxford Economics for ATAG, March 2012. It should be noted that
these figures include considerable indirect and induced effects which multiply
the impact of aviation on the economy.

[2]               Roadmap to a Single European Transport Area – Towards
a competitive and resource efficient transport system", COM (2011) 144
final, 28.3.2011.

[3]               While forecasting a total net profit of $3 billion
for 2012 for the world's commercial airlines, in its June 2012 financial
forecast, IATA forecasts a net loss of $1.1 billion for European commercial airlines.

[4]               In 2005, the Commission presented a Communication
entitled "Developing the agenda for the Community's external aviation
policy" (COM(2005) 79 final, 11.03.2005) on the basis of which the Council
adopted Council Conclusions in June 2005 and the European Parliament adopted a
Resolution in December 2005.

[5]               Booz & Company: "Development of the EU's
Future External Aviation Policy", Final Report, April 2012.

[6]               Airbus: "Delivering the Future: Global Market
Forecast 2011-2030"

[7]               Airbus: "Delivering the Future: Global Market
Forecast 2011-2030"

[8]               Bombardier/Global Insight

[9]               Booz & Company: "Development of the EU's
Future External Aviation Policy", Final Report, April 2012, based on OAG
and AEA Research.

[10]             Low-cost carriers are expected to grow 1.4% per annum
faster than the global network airlines and are expected to operate 19% of
world traffic by 2030 (Airbus: "Delivering the Future: Global Market
Forecast 2011-2030"). The association of European low fares airlines (ELFAA)
has published a study ("Market Share of Low Fares Airlines in Europe –
Final Report – February 2011", by York Aviation for ELFAA) which indicates
that the market share of low fares airlines in Europe could reach between 45%
and 53% by 2020.

[11]             Airbus: "Delivering the Future: Global Market
Forecast 2011-2030"

[12]             The European Parliament and the Council reached a first
reading co-decision agreement on a proposal from the Commission to amend
Regulation (EC) No 883/2004 on the coordination of social security systems and
Regulation (EC) No 987/2009 laying down the procedure for implementing
Regulation (EC) No 883/2004.

[13]             Regulation (EC) N° 868/2004 of the European Parliament
and of the Council of 21 April 2004 – Official Journal 30.4.2004 (L 162/1).

[14]             Booz & Company: "Development of the EU's
Future External Aviation Policy", Final Report, April 2012

[15]             Notably United Arab Emirates and Qatar.

[16]             Court cases instigated by the European Commission
against eight Member States in relation to their bilateral air services
agreements with the United States.

[17]             Multilateral agreement signed with the following
partners: Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav
Republic of Macedonia, Montenegro, Serbia and UNMIK

[18]             Booz & Company: "Development of the EU's
Future External Aviation Policy", Final Report, April 2012

[19]             "The Economic Impacts of an Open Aviation Area
between the EU and the US", Final Report, January 2007, Booz Allen,
Hamilton,