EUROPEAN COMMISSION Brussels, 8.6.2017 SWD(2017) 182 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on safeguarding competition in air transport, repealing Regulation (EC) N° 868/2004 {COM(2017) 289 final}

{SWD(2017) 183 final}



Table of Content 1.General context 1.1.EU aviation sector today 1.2.Legal context 1.2.1.Regulation of international air transport 1.2.2.Internal EU air transport market 1.2.3.External dimension 1.3.Economic context 1.4.Political context 2.Problem definition 2.1.Description of the main problem 2.1.1.Competitive position of EU aviation globally 2.1.2.Competitive advantages of third country carriers 2.1.3.Competitive disadvantages of EU carriers 2.1.4.Concerns about the existence of subsidies and other practices seen as distorting competition to the detriment of EU carriers 2.1.5.Allegations regarding subsidies and other practices seen as distorting competition to the detriment of EU carriers 2.1.6.Impact of the alleged practices on EU air transport market 2.1.7.Legal instruments for protection of competition in other sectors and countries 2.1.8.Ineffectiveness of Regulation 868/2004

2.2.Underlying drivers of the problem 2.2.1.Lack of proper mechanism for protection of fair competition in international aviation 2.2.1.1.Non-existence of international global trade agreements applicable to the international air transport services sector 2.2.1.2.ICAO rules do not currently address the issue of fair competition in the international air transport sector 2.2.1.3.Bilateral Air Service Agreements between EU Member States and third countries do not effectively guarantee protection for EU air carriers against unfair practices 2.2.1.4.Lack of access to information about the support received and financial accounts of third countries air carriers 2.3.Does the EU have the right to act? Legal basis and subsidiarity 3.Objectives 3.1.Policy options 3.2.Baseline scenario (how would the problem evolve, all things being equal) 3.3.Discarded policy options 3.3.1.Improved functioning of the current Regulation (EC) No 868/2004 through a limited revision and the adoption of interpretative guidelines 3.4.Considered policy options 3.4.1.Policy option A: Baseline scenario 3.4.2.Policy option B: Increased international efforts at WTO and ICAO level aimed at the adoption of a multilateral legal framework for fair competition in aviation and inclusion of expanded fair competition clauses in ASA ensuring protection for EU air carriers against unfair practices (non-regulatory option) 3.4.3.Policy option C: Major changes to the regime contained in Regulation 868/2004 which would be repealed and replaced by a new comprehensive and effective EU legal instrument (regulatory option) 3.4.4.Policy option D: Adoption of a new comprehensive EU legal instrument combined with increased efforts on the international scene and work on enhancing ASAs through inclusion of fair competition clauses 3.4.5.Summary of all considered options 4.Analysis of impacts 4.1.Economic impacts

4.1.1.Functioning of the internal market and competition 4.1.2.Competitiveness, trade and investment flows 4.1.3.Small and Medium Enterprises (SMEs) 4.1.4.Cost of implementation 4.1.5.Consumers and households 4.2.Social impacts 4.3.Environmental impacts 5.Comparing the options 5.1.Effectiveness 5.2.Efficiency 5.3.Coherence 5.4.Proportionality 5.5.Conclusion 6.Monitoring and evaluation Annex A – Procedural information and summary of amendments72 Annex B – Stakeholder consultation79 Annex C – Affected parties and key interests99 Annex D – Environmental impacts100 Annex E – Market trends in Europe and other regions102

ABBREVIATIONS ASA Air Services Agreement ASK Available Seat Kilometre ATM Air Traffic Management ATC Air Traffic Control CAGR Compound Aggregated Growth Rate CRS Computer Reservation System CAA Common Aviation Area DOT (US) Department of Transportation EEA European Economic Area ETS Emission Trading Scheme GATT General Agreement on Tariffs and Trade GATS General Agreement on Trade in Services IATA International Air Transport Association IATFCPA International Air Transportation Fair Competitive Practices Act ICAO International Civil Aviation Organisation JC Joint Committee MFN Most Favoured Nation

MoU Memorandum of Understanding NT National Treatment RPK Revenue Passenger Kilometre SARPS Standards or Recommend Practices TBR Trade Barriers Regulation WTO World Trade Organisation

GLOSSARY OF TERMS Air Service Any scheduled air service performed by aircraft for the public transport of passengers, mail or cargo (Article 96 of the Chicago Convention) Air Services Agreement A treaty containing a bilaterally agreed legal framework upon which scheduled air services operate Air carrier capacity Quantitative measure of air transport services offered by one or more air carriers in a city or country pair market over a route which may be expressed in terms of aircraft size, aircraft type, number of seats or frequency of operations Available Seat Kilometres A measure of capacity available calculated by multiplying the number of seats available on a flight leg by the number of kilometres flown during that flight leg (i.e. segment of a flight) Designation Nomination by a state of the airline or airlines to operate particular routes Fair competition clause Article in bilateral/comprehensive air services agreement laying down agreed principles and/or specific provision governing competition in the provision of air services by the parties' designated airlines Freedoms of the air Traffic rights granting an airline of one country the privilege to enter another country's airspace and land in its territory. There are, in total, nine freedoms of the air (see the box on next page) Hub and spoke Airline network concept whereby small aircraft carry passengers between small airports (feeders) and main airports (hubs). From there passengers connect to large aircraft to fly longer part of their journey Operating Licence Authorisation granted by the competent licencing authority to an undertaking, permitting it to provide air services as stated in the operating licence Revenue Passenger Km A measure of passenger traffic that is calculated by multiplying the number of paying number of paying passengers by the number of kilometres flown during a flight leg (i.e. segment of a flight) Slot A particular time allocated to an airline to land or take-off from a particular airport Tariff The price charged for the public transport of passenger, baggage and cargo on scheduled air services including the conditions governing the availability or application of such price and the charges and conditions for services ancillary to such transport

Traffic right Market access right expressed as an agreed physical and/or geographic specification of whom and what may be transported over an authorised route in the aircraft authorised









Freedoms of the air The first freedom of the air is, according to ICAO, 'the right or privilege, in respect of scheduled international air services, granted by one State to another State or States to fly across its territory without landing'. The second freedom refers to the right or privilege granted by one state to another state or states to land in its territory for technical and maintenance purposes, without picking up or dropping off any passengers. The third freedom is the right or privilege, granted by one state to another state 'to put down, in the territory of the first State, traffic coming from the home State of the carrier'. The fourth freedom is the right or privilege, 'to take on, in the territory of the first State, traffic destined for the home State of the carrier'. The third and fourth freedoms are granted together. The fifth freedom is the right or privilege 'to put down and to take on, in the territory of the first State, traffic coming from or destined to a third State'. Under the fifth freedom, a carrier can transit passengers between two foreign countries, provided the flight either begins or ends in the carrier's base country.

The sixth freedom is the right or privilege of transporting, via the home State of the carrier, traffic moving between two other States. The so-called Sixth Freedom of the Air, unlike the first five freedoms, is not incorporated as such into any widely recognized air service agreements such as the "Five Freedoms Agreement". The seventh freedom is the right or privilege of transporting traffic between the territory of the granting State and any third State with no requirement to include on such operation any point in the territory of the recipient State, i.e. the service need not connect to or be an extension of any service to/from the home State of the carrier. The eighth freedom is the right or privilege of transporting cabotage traffic between two points in the territory of the granting State on a service which originates or terminates in the home country of the foreign carrier or (in connection with the so-called Seventh Freedom of the Air) outside the territory of the granting State (also known as an Eighth Freedom Right or "consecutive cabotage"). The ninth freedom is the right or privilege of transporting cabotage traffic of the granting State on a service performed entirely within the territory of the granting State (also known as a Ninth Freedom Right or "stand alone" cabotage). 1.General context 1.1.EU aviation sector today Aviation plays a fundamental role in the European economy both for EU citizens and industry. With more than 150 scheduled airlines, a network of some 450 airports, and 60 air navigation service providers, the aviation sector employed in 2014 5.5 million people and contributed over €510 billion to GDP in the EU . Overall, aviation supports up to 9.3 million jobs. Over 918 million passengers travelled by air in the European Union in 2015 and more than 1.45 billion passengers departing or arriving at EU airports on the same year . Linking people and regions, air transport plays a vital role in the integration and the competitiveness of Europe, as well as its interaction with the world. Aviation also makes a vital contribution to economic growth, employment, people-to-people contacts as well as the regional and social cohesion of the Union. There are indications that one Euro value added in the air transport industry creates a value of almost three Euro value added for the overall economy while one job in the air transport industry added creates more than three jobs in other sectors. 1.2.Legal context 1.2.1.Regulation of international air transport International aviation is a regulated service sector operating in a framework of state sovereignty and governed by a dense network of bilateral air services agreements (ASAs) which are concluded between States to regulate the operation of the international air services. In particular, ASAs cover: route selection, that is, the freedoms of the air that they intended to grant (see box on page 6), from basic bilateral air traffic rights involving overflight to more complex patterns involving transit through third countries; the designation of the airline(s) serving the agreed routes; provisions on capacity, that is, the number and frequency of flights, and type of aircraft on the agreed routes, as well as pricing. In the absence of binding multilateral regime, bilateral ASAs are worldwide the only method used for exchanging traffic rights and hence, enable governments to exercise detailed control over all aspects of the air services which serve their territory. In this context, the degree of liberalization of air transport services between the two States is determined by the specific design of each ASA. Traditional bilateral ASAs regulate the level of competition on the market by restricting the number of airlines allowed to operate on given routes, the number of flights and the possible destinations. Under such ASAs, the market for operation of the agreed air services is shared exclusively between the two airlines of Parties and the capacity and tariffs are regulated by the governments of the two contracting sides. This traditional system allowed the governments to fully control their markets, as they could dictate the terms on which airlines could serve points from and within their territories. It also allowed the states to use their prerogatives to defend and promote the interests of their national air carriers (called ‘flag’ or ‘legacy carriers) through close and detailed regulation. Since 1980s the sector has been undergoing progressive liberalisation triggered by the deregulation process of the internal US market and the new US foreign aviation policy that accompanied it. Internally, the US adopted the 1978 Airline Deregulation Act which eliminated the regulation of fares, routes and schedules in the US domestic market. In the following step, the US applied the same approach to international aviation which manifested in the renegotiation of a number of its bilateral ASAs and the subsequent conclusion of so called ‘open skies’ agreements. The latter constitute a new kind of air service agreement granting multiple designations (a greater number of airlines is allowed in traffic between the counterparties), more routes and greater airline freedom to set fares and frequencies according to their needs and on market terms. The new US open-market approach fuelled the debate about the future of air service regulation in Europe which eventually resulted in the adoption of three legislative packages leading to the completion of the internal EU air transport market in the beginning of 1990s. 1.2.2.Internal EU air transport market Before the creation of the internal market for aviation in the 1990s, European air transport had traditionally been a highly regulated industry, dominated by national flag carriers and state-owned airports. Since then, by removing historic barriers, the EU has transformed and integrated fragmented national aviation markets of its Member States into the single largest and most open regional aviation market in the world. The EU internal market, set out as an objective of the Single European Act in 1987 and established in 1993, has removed all restrictions for airlines flying within the EU, such as restrictions on the routes, the number of flights or the setting of fares. Today, all EU airlines irrespective of the Member State in which they are legally established may operate air services with full commercial freedom on every route between and within EU Member States without any restrictions as to frequency or fare-setting. In other words, it is only for EU carriers to decide what services they operate, when and how frequently, and what tariffs to charge for them. There is no longer anything to stop an airline from Ireland, for instance, operating flight between two Italian airports or between a British and a Greek airport. Following the establishment of the internal air transport market, prices have fallen dramatically, in particular on the most popular routes. But it is especially in terms of choice of routes that progress is impressive. European policy has profoundly transformed the air transport industry by creating the conditions for competitiveness and ensuring both quality of service and the highest level of safety. Consumers, airlines, airports and employees have all benefited as this policy has led to more activity, new routes and airports, greater choice, lower prices and an increased overall quality of service. The creation of the EU single air transport market stimulated competition between EU airlines. Hence, to ensure a level playing field for all entities the comprehensive regulatory framework of common rules was developed in parallel to market opening. To eliminate any possible discrimination by national governments against the carriers of other states, EU air carriers are licensed according to a set of specified requirements laid down in Regulation 1008/2008. Any airline which meets these criteria must be granted an operating licence by the Member State which received the application. Moreover, the airline applies in to the Member State where it has its principal place of business and its registered office, so that there is no scope for the licencing authority of another Member State to raise difficulties if its own authorities are satisfied. All EU airlines are governed by the common concept of "EU air carrier", regulated and supervised under the same rules which grant them equal rights and obligations. Another relevant indeed complementary part of the EU regime resides in competition rules (including State aid rules) which are applicable to the activity of undertakings, including air carriers and airports. As regards rules on State aid, these are intended to prevent that government support, by EU Member States, entails distortion of competition and effect on trade between Member States. EU Member States' governments cannot subsidise their airlines and airports in contravention of those rules. The latter permit the granting of aid only subject to strict requirements which, insofar as of interest here, are mainly explained in the guidelines on State aid in the aviation sector. Hence, airlines may receive (under certain conditions) "start-up aid" that gives them the necessary incentive to create new routes from regional airports, increases the mobility of EU citizens and stimulates regional development. Moreover, in line with Guidelines on State aid for rescuing and restructuring, EU airlines facing difficulties may receive rescue and restructuring aid, though under very restrictive conditions. For restructuring aid to be approved, three main principles must be complied with: i) there must be a credible restructuring plan capable of restoring the long-term viability of the airline without further public support; ii) the airline must make an own contribution, at the appropriate level, to the costs of restructuring, to avoid the entire burden falling on taxpayers; and iii) measures should be introduced to mitigate the distortions of competition created by the aid. Finally, a given airline cannot receive rescue and restructuring aid more than once every 10 years (the "one time last time" principle). With regard to airports, the guidelines allow public authorities to support investments into airport infrastructure and equipment as well as, for a transitional period of 10 years, to cover the operating losses of small airports (below 3 million passengers), before they become profitable. Very small airports with annual traffic of less than 700,000 passengers may benefit from operating aid to cover losses for a period of 5 years, after which the Commission reviews their situation to decide whether and for how long they should receive further operating aid. In recent years the Commission has conducted numerous in-depth investigations into cases of possible aid granted by Member States to the European aviation sector. During 2014 for example the Commission adopted 17 decisions concerning investment or operating aid to airports or operating aid to airlines granted by Member States. With regard to airlines, a number of State aid investigations found that arrangements between state-controlled airports and airlines amounted to a selective economic advantage given to those airlines, which distorted competition. In these cases, the recovery of the incompatible state aid from the airlines was ordered. 1.2.3.External dimension Rules applicable within the EU internal market have been geographically extended, by way of agreements, to include the European Economic Area (EEA) States and Switzerland. To overcome continued fragmentation and restricted market access in international aviation the EU is also concluding Comprehensive EU Agreements which supersede the bilateral agreements of EU Member States with the respective third country and in their scope go beyond liberalising traffic rights. These agreements include comprehensive provisions to 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. There are two main sub-groups of Comprehensive EU Agreements.

Firstly, Neighbourhood Agreements, which aim at including a third country into a wider Common Aviation Area (CAA) of the EU and its neighbouring countries to the South, South-East and East through full market access and complete regulatory convergence (acceptance of the entire EU aviation acquis). The process of regulatory convergence ensures the application of EU rules and the implementation of common safety, security, environmental and other standards in the entire Common Aviation Area. Secondly, comprehensive agreements with EU key partners (strategically important third countries and country blocs) which are based on the pillars of market access liberalisation, removal of investment barriers (airline ownership), regulatory cooperation and convergence and resolution of "doing business issues". The EU have signed comprehensive agreements inter alia with the US, Canada, Morocco, Israel, Moldova, Jordan and Western Balkans. Beyond the EEA and geographic areas covered by CAA-type agreements or indeed by EU Comprehensive agreements, the aviation markets regarding routes between the EU and third countries are still governed by the network of bilateral air services agreements between EU Member States and third countries. Together with associated memoranda of understanding, agreed records etc., these usually cover traffic rights, capacity, frequency of air services, the number of designated airlines and other commercial arrangements such as pricing mechanisms. In addition, bilateral ASAs usually provide for a number of provisions covering aviation safety, and security as well as other organisational aspects of bilateral relations. It is estimated that a number in the order of 1,600 of such ASAs are in place between EU Member States and third countries. In 2002, the European Court of Justice ruled that bilateral aviation agreements of EU Member States with third countries were in breach of fundamental provisions of the EU Treaty ("freedom of establishment") as they did not allow airlines from other Member States to benefit from the provisions of those agreements. Following the court's judgement, the EU developed an external aviation policy to restore legal certainty to the bilateral agreements including by negotiating at EU-level so-called Horizontal Agreements (HA) with partner countries which allow amending all bilateral agreements that EU Member States have with a third country. Bilateral negotiations between each EU Member State concerned and its partners have also been carried out with a view to amending each bilateral ASA separately. It is estimated that out of the existing 1,600 ASAs around 1,100 ASAs have been amended or newly concluded and as such are considered to be in line with EU law (notably include the EU designation and revocation provisions and are considered compatible with Article 101 of the TFEU). Within the last two decades, the reduction of limitations and constraints to provision of air transport services through a number of bilateral and comprehensive ASAs have liberalized the aviation market between the EU and third countries. Although some old-type ASAs containing restrictions on competition remain in place today, they do not concern main EU partners representing the key markets for EU airlines. However, the ASAs between the EU and third countries cannot effectively promote competition if the level of liberalisation and deregulation of internal markets of contracting parties is not the same. As mentioned, within the EU internal air transport market, regulatory framework and common rules were developed to provide for equal rights and obligations for all companies, ensure fair competition between them and address possible market distortions. However, similar rules and procedures regarding competition, environment, social rights or consumer protection do not exist in many air transport markets to/from the EU and the vast majority of liberalised bilateral ASAs do not contain any provisions on these either. 1.3.Economic context The liberalisation and deregulation of international air transport fostered unprecedented competition on a global aviation market. According to the 2012 Communication on the EU's external aviation policy, global competition is expected to further intensify in coming years with expected international aviation growth of around 5% annually until 2030. The Communication predicts that this aviation growth will see a relative shift to areas outside the EU in particular to Asia and the Middle East meaning that EU carriers will be losing market shares to non-EU airlines in most regions. According to the International Air Transport Association (IATA) Airline Industry Forecast 2013-2017, the Asia-Pacific region - led by China, and the Middle East are expected to deliver the strongest growth with United Arab Emirates expected to add an estimated 29.2 million passengers (Compound Annual Growth Rate of 6.6%), nearly as many as China, whereas Europe will see international passenger demand growth of merely 3.9% CAGR. These forecasts are based on the market trends observed over the past decade. It is relevant to note that the starting base for aviation traffic is much higher in regions such as North America and Europe, which have relatively mature aviation markets, in comparison to regions where the aviation has been expanding considerably in recent years. In recent years, there have been substantial developments in the market shares of EU airlines in virtually all intercontinental markets to and from the EU. In the African region, EU carriers’ market share has declined overall by 2% between 2004 and 2013. At the same time, carriage by Middle East carriers between Africa and the EU has increased some 600% to a point where their passenger carriage is about 30% of that of EU carriers. A similar picture emerges on Europe-Asia routings, where carriage by EU airlines has largely stagnated since 2004, versus a nearly 700% increase in carriage by Middle East airlines. In 2013 the passenger carriage of Middle East carriers represented about 70% of that of EU carriers on routes between Asia and EU28, as compared to merely 10% in 2003. Even in markets where European carriers benefit from natural geographic advantages – namely on routes from the East Coast of North America to Asia or the Indian Subcontinent, Middle East airlines have achieved growth in excess of 2000% since 2004, and now exceed EU airline carriage on some of these routes. It should be noted that in a strongly growing aviation sector with emerging markets in many regions, the market share indicator should not exclusively be held as undisputable evidence that airlines are affected by competition. Indeed, in such a context, an overall decrease in market share is also likely to be the mere effect of growing markets on the global scale. The market share indicator must be considered with caution, and must be put into perspective with the overall market developments. The Middle East carriers have also been successful on the European market where their growth in transport capacity is significant. Between 2004 and 2015 traffic between Europe and the Gulf increased by 430% with 140 daily flights (80% of which was undertaken by Gulf companies). This means that today, there are more seats offered between Europe and the Gulf than between Europe and China, Japan and South Korea together, whilst the GDP of the latter is 250 times that of the UAE and Qatar together. Similar trends may be observed when the traffic growth rates for EU passengers carried on routes between the EU and key world markets are analysed. Throughout the last 5 years for which figures are available (2008-2013), the total volume of EU worldwide passenger traffic has been growing slowly and was unequally distributed. On some markets the aggregated traffic growth was relatively strong - EU-South America (+14%) or rather slow - EU-Central Africa (+5%), whereas on many others the traffic actually decreased - EU-Central America (-12%); EU-Northern Africa (-7%); EU-Asia (-3%); EU-North America (-1%). Only on the EU-Middle East market the growth was very strong (+47%). On each of those markets the total number of passengers carried by EU carriers (measured in Available Seat Kilometres) between 2008 and 2013 either stagnated (EU-Africa: +1.8m; EU-South America: +0.6m) or slightly fell (EU-North America: -1.2m; EU-Middle East: -0.6m; EU-Asia: -0.1m). Most notably, all of the dynamic passenger traffic growth on the EU-Middle East market (from 29.1m to 40.5m) was generated by non-EU carriers (+12m). It is highly likely that most of this added capacity is actually feeder traffic to the hubs of the Gulf region. The trend is even more visible when looking at transfer traffic. Despite Europe continuing to be the region with the largest transfer market in the world, with 45m passengers in 2013, an increase of only 3m passengers (i.e. 7%) was recorded since 2004. On the other hand, the Middle East, Asia and Turkey experienced considerable growth. Asian region grew by about 40% from 17m to 24m in 2013, the Middle East has almost quadrupled from 8m to 30m (i.e. a growth of 275%) and Turkey is now capturing 5 times the transfer traffic that it was capturing in 2004 (i.e. 2m in 2004 vs. 10m in 2013). The EU aviation sector and EU airlines in particular are on the front line of this competitive challenge and are increasingly struggling in a tough international market characterised by diverse regulatory frameworks and cultures, and by enhanced international competition from fast-growing third countries and regions. 1.4.Political context The Commission's Communication of 27 September 2012 on 'The EU's External Aviation Policy – Addressing Future Challenges' points that "while EU airlines are ultimately responsible themselves for their competitiveness and must continue to adapt their products and business models to the prevailing market conditions (…) it is equally important that competition, both within the EU and externally, is based on openness, reciprocity and fairness and that it is not distorted by unfair practices". Therefore, as indicated in the Communication, "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". The Council, in its Conclusions of 20 December 2012 acknowledged that actions aimed at enhancing competitiveness and ensuring fair competition need to be taken both in the EU's internal and external policies. The Council encouraged the Commission "to use its bilateral and multilateral relations to actively support the establishment of a level playing field favouring open and fair competition in international air transport". The Council also considered that "Regulation (EC) No 868/2004 has proven not to address adequately the specific characteristics of the aviation services sector” and supported “the Commission's intention to analyse (…) possible options for a more effective instrument to safeguard open and fair competition and its intention, on that basis, to present a proposal for a revision or replacement of Regulation (EC) No 868/2004". In the resolution of 9 September 2015 , the European Parliament (EP) called upon the European Commission to "address the major challenges to competition in the European air sector". To this end, the EP urged the Commission to engage ineveral third countries"". The Parliament also called for "the revision of the current Regulation (EC) No 868/2004 in order to safeguard fair competition in EU external aviation relations and reinforce the competitive position of the EU aviation industry, ensure reciprocity and eliminate unfair practices, including subsidies that distort the market".

As noted in the recent Commission Communication on an Aviation Strategy, if the EU aviation industry is to remain competitive, it is essential that market access is based on a regulatory framework which promotes EU values and standards, enables reciprocal opportunities and prevents distortion of competition. Europe must address the challenge of unfair competition and cannot afford to lose the competitive edge of its aviation industry which today is at the centre of the global network connecting Europe with the rest of the world and secures a high level of intra-European connectivity. In this respect, the strategic role of a well-developed aviation sector in general must be taken into account, as well as 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" as well as Commission President Juncker's agenda. 2.Problem definition 2.1.Description of the main problem Concerns about unfair practices by third countries and third country entities negatively affecting EU carriers continue to exist 2.1.1.Competitive position of EU aviation globally The liberalisation of international air transport has made the airlines from very diverse world regions (in economic, legal and cultural terms) compete in the same international markets. This means a new competitive challenge for European airlines which face new competitors, in particular, from growth markets to the East. Over recent years a number of large economic powers and several developing countries have recognised the strategic role of aviation in their economic development policies and created opportunities for further growth of their respective national air transport industries. Several new and highly competitive airlines and airports have emerged in particular in the Middle East and Asia, which pose a considerable challenge to some European hub airports and carriers. When ranked by revenue passenger kilometre (RPK) as a measure of sales volume of passenger traffic, one can observe the rapid rise of these emerging competitors to EU airlines. In terms of RPKs, a comparison of 2007 and 2014 data shows that leading EU airlines have been, or are increasingly left behind fast-growing competitors such as Emirates, Southwest and China Southern while others like China Eastern Airlines, Air China, Qatar Airways and Turkish Airlines are growing considerably faster. Some of the reasons negatively influencing the international position of the EU aviation sector stem directly from competitive advantages of third country carriers and the linked competitive disadvantages suffered by Europe-based airlines in the European market. 2.1.2.Competitive advantages of third country carriers Over the last decade, the aviation sector outside Europe has been supported by extremely rapid growth in some world regions. As a result, international aviation growth is increasingly characterised by a relative shift to areas outside the EU with the emerging industrialised and services-providing economies in Asia and the Middle East in particular becoming the focus of international air traffic flows. Scheduled passenger traffic in the Asia Pacific region is forecast to grow faster than in other regions at rates of more than 6% per year until 2033 when it will account for over 40% of world air traffic. Due to above-average growth rates, EU carriers are expected to lose global market share to non-EU airlines. 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 fall to 20% . Meanwhile, China is expected to become the world’s largest air transport market, overtaking the United States in 2023 in terms of number of passengers carried. Secondly, the competition between world airlines today is gradually shifting toward access to third country markets. Bilateral agreements focus increasingly on the requirement to meet not only the market demand between the signatory partners, but to enable passengers to combine services between the signatories to connecting flights into third countries. This gives another important competitive advantage to the Middle East and Asia regions linked to the geographic location of their hubs which are “naturally” located as crossroads between many world destinations, in particular on routes towards dynamically growing Asian continent. The business strategy of the non-EU airlines which hub at these airports has focused on building their networks by linking secondary airports via their hubs (so called 'hub and spoke system') and bypassing primary hubs elsewhere. A most striking example of this practice is the competition for passengers between several European airlines and the Gulf States' carriers. The latter have a comparative advantage in international hub operation on many routes between Europe and South Asia/East Africa. In the absence of significant domestic demand, Gulf airlines geared their business model globally to connecting highly populated markets (e.g. in Asia and Europe) with a stop at their respective hub airports. They employ the so called hub‐and‐spoke model in which the passengers/freight are gathered, predominantly from long‐distance flights, at the airline's hub airport and carried onward from there, also on long‐distance flights. The waves of arrivals and departures are optimally coordinated with the corresponding passengers flows. This provides their passengers with advantages such as more convenient travel itineraries, higher frequencies, and a wider range of destinations within a certain flight time. The ability to concentrate services over a hub also reduces costs for non-EU airlines, enabling them to pass on savings to the consumer in an attempt to drive higher demand. This business practice has enabled the dynamic growth of their carriers. These developments have led some EU airlines to exit several markets. For instance, according to a US Congressional Research Service report, ‘Lufthansa claims that its Frankfurt hub has lost nearly a third of its market share on routes between Europe and Asia since 2005, and that more than 3 million passengers now fly annually from Germany to other points via Gulf hubs instead of using direct services of German, Asian and African airlines’. The above trend is confirmed when analysing hub connectivity i.e. hubs facilitating travel from one world region to another. It is clear that the EU is losing significant market share as global hub for inter-continental flight connections. While the top 3 European hubs still have the highest total connectivity level, the hub connectivity of Abu Dhabi, Doha and Dubai respectively grew by +1,913%, 1,861% and 485% between 2004 and 2014 while Istanbul-Ataturk airport registered a growth of +1,222%. Technological advances and trends on the aircraft manufacturing market may influence the balance between the hub and spoke and point to point models and thus give a competitive advantage to EU or non-EU air carriers. Indeed, EU and non-EU aircraft manufacturers have different visions of the strategic evolution of the international air transport market, which results in different characteristics of the manufactured aircrafts. As the hub and spoke model consists of the transportation of large amounts of passengers from hub to hub followed by transportation of smaller amounts of passengers from the hub to a multitude of smaller destinations, manufacturers which rely on this model (mainly EU manufacturers) tend to develop wider bodied aircrafts, capable of carrying larger amounts of passengers. On the contrary, as the point-to-point model consists of the transportation of smaller amounts of passengers directly from one point to another without necessarily a hub connection, manufacturers which rely on this model (mainly non-EU manufacturers) tend to develop aircrafts with a slightly lower passenger capacity. Although depending on the manufacturing market evolution, the models on which air carriers rely may be strengthened or weakened, one cannot determine at this stage if technological advances favours EU or non-EU air carriers. However, it should be noted as well, that EU network carriers are also subject to the strategy developments of other kinds of carriers, such as low cost carriers increasingly flying to nearby third countries, or bypassing big hubs by providing direct flights (in opposition to the hub-and-spoke model). As such, these market strategic evolutions also have an effect on the manufacturing requirements and may cause difficulties to EU network carriers. The hub and spoke strategy of third country carriers is supported by a high level of investment in airport infrastructure at their home hubs. Whilst within the EU, aid to airports and airlines can be approved only in few cases and under very strict conditions, few such requirements exist outside the EU. Indeed, in terms of investment in airport infrastructure in the EU, this is all but forbidden since airports with greater than 5 million passengers per year, such as all the major EU hub airports, must be fully self-financing and cannot receive any aid except under exceptional circumstances. Many governments worldwide are making heavy investments in state-owned airports creating large increases in capacity – and to the extent that the cost of these investments is not passed on to airlines potentially providing the airlines concerned with significant cost advantages not available to EU carriers. As an example, airport infrastructure investment in the Middle East over the past 10 years has exceeded 35 billion US dollars and continues to grow. According to IATA another 40 billion US dollars is being invested in aviation infrastructure by the Gulf-region governments with infrastructure development being concentrated at the largest airports in the region, including Dubai, Doha, Jeddah, Riyadh, Abu Dhabi, Muscat, Kuwait, Dammam and Manama. Dubai alone is expected to invest over 8.1 billion US dollars in new infrastructure until 2020. Abu Dhabi's new airport terminal complex which will be the future base of Etihad Airways will be commissioned by 2017 with the initial capacity to of 27 million passengers per year. Massive capacity expansion is also planned for Turkish airports with the anticipated opening of a new airport at Istanbul by the end of 2018 with a capacity of 150 million passengers annually. Similarly, the Government of Singapore has announced in the beginning of 2014 that it plans to almost double the capacity of Changi Airport over the next decade with two new terminals at the cost of 1.28 billion US dollars. Heavy investment in airport capacity whose cost is not passed on to airlines, would appear to allow airlines based in Asian and the Middle East to benefit from considerably lower airport charges as compared to airlines based in the EU and other regions of the world. For example, Dubai airport’s landing and terminal charges with baggage and check-in are around one third below Heathrow’s and two thirds below the average of Paris-Charles de Gaulle, Frankfurt and Amsterdam Schiphol which gives Emirates a competitive advantage in this area in comparison to European airlines. According to 2009 Travel and Tourism Competitiveness Report, Bahrain and the United Arab Emirates are the best performers in the category of average ticket taxes and airport charges, both with scores of 6.78, followed by Qatar, at 6.68 out of 7. Asia Pacific countries are also very attractive from this indicator’s point of view, with an average score of 5.82 out of 7. In contrast, Europe enjoys a much lower average score of 5.69. The rapid growth of Asian and Middle East aviation sectors is also supported by large investments in aircraft fleet. Already today the airlines based in the Middle East - Emirates, Etihad and Qatar Airways - have a combined fleet of wide-body aircraft (1283 units) larger than the combined one of the three leading EU Airlines (Lufthansa, Air France and British Airways) which currently amounts to 714 units. While the currently largest existing wide-body aircraft fleets are with Emirates, Air France-KLM and United, the largest orders of wide-body aircraft (exceeding airlines' current fleet size) are placed for Emirates, Singapore Airlines, Qatar Airways, Etihad and Air Asia. It is also in the Middle East where wide body aircraft represent the largest proportion of total orders – around 63%. In Europe the proportion is 20%, and in Asia Pacific it is 26%. This indicates that carriers based in the Middle East and Asia anticipate the continuation of strong growth of their long haul networks. The increased capacity arising from fleet and airport capacity expansion gives scope for continued route expansion. As indicated by aircraft orders, the greatest expansion is planned by airlines based in the Middle East: if growth rates over the period 2008-2013 are continued in the period 2013-2018 (as aircraft orders indicate likely), Etihad could offer an additional 44 routes from Abu Dhabi, Emirates an additional 46 from Dubai and Turkish Airlines an additional 114 from Istanbul. The considerable increase in routes, allows the Middle East carriers to strengthen their market shares by further consolidating traffic at their home hubs and using additional fleet capacity to service an extended range of final destination services. Last but not least, non-EU carriers are not burdened by costs to the degree experienced in Europe. According to statistics provided by CAPA, the biggest source of unit cost advantage for Emirates is having much lower labour cost per employee than European carriers. For comparison IAG’s average labour cost per employee is almost 94,000 US dollars, which is more than 80% higher than the figure of 51,500 US dollars for Emirates, while Virgin Atlantic pays 9% more than Emirates. The average of the IAG and Virgin figures is 75,000 US dollars, which is 45% higher than the Emirates figure. Emirates benefits in this area from the absence of income tax in Dubai. In addition to the tax benefits, Emirates does not have significant legacy pension costs. 2.1.3.Competitive disadvantages of EU carriers

A key competitive disadvantage of EU aviation stems from the fact that Europe is generally acknowledged as an expensive place for airlines to do business. EU airlines operate (especially) long haul networks in markets that are global, against competitors whose cost bases are often substantially lower. An end result is that airlines in the EU have some of the lowest profit margins of any region globally. The European airline industry, including also companies based in Russia, Turkey, Switzerland or Norway, reported an average net profit margin of 0.5% in 2013 and 1.6% in 2014, falling short of the global average margins in both years. In 2014 there were 32 EU airlines among the leading 150 airline groups by revenue (comprising passenger, leisure and cargo airlines), 30% less than in 2001 and 20% less than 2008. During that period of time, EU airlines fell behind their global competitors in terms of net profit and posted an average net loss while the non-EU top 150 airlines are on average profitable. High costs in the EU are in part due to regulatory costs, which are result of high levels of protection to consumers, fair conditions for workers and other social benefits. The EU also has some of the highest labour standards in the world with regard to inter alia working conditions, work time, health and safety at work, equal treatment and social rights which represent costs borne by the EU air sector, as well. Many airlines established in third countries do not bear such costs. Significant differences between the EU’s and most third countries’ regulatory environments also exist in terms of environmental protection. In the EU, growth in air traffic is being reconciled with the necessity to reduce aviation's environmental footprint and contributing to the fight against climate change. EU carriers have to comply with specified noise standards and may face noise-related operating restrictions (e.g. bans on flights during the night) on the basis of Regulation 598/2014. In the third markets where similar restrictions do not apply, the carriers are allowed to carry out 24-hour-a-day operations. By contrast, in the EU, stringent regulatory measures, such as more restrictive noise abatement operational procedures and airport operational noise quotas, pose challenge to the already constrained capacity of EU airports (see below) and generate additional costs for EU airlines. In the EU aviation has also been included in the EU Emissions Trading System (ETS) by Directive 2008/101/EC, in line with the International Civil Aviation Organization´s (ICAO) resolution on incorporating international aviation into existing trading schemes. However, for the period 2013-2016, the legislation has been amended so that only emissions from flights within the European Economic Area fall under the EU Emissions Trading System (ETS). This constitutes an extra burden for the international competitiveness of EU airlines. The regulatory framework is not the only reason for an expensive business environment in EU. Not less important are the airport capacity and efficiency constraints which are seriously impeding the European aviation sector's ability to grow sustainably, compete internationally, and which are causing congestion, delays and raising airlines’ operating costs. As concluded in the Aviation Strategy, European airspace as a whole is inefficiently managed and unnecessarily fragmented. The Single European Sky initiative launched ten years ago was meant to cope with sustained air traffic growth through reform and consolidation of Air Transport Management systems of EU Member States. The implementation of SES aims inter alia at raising EU airports’ capacity and consequently increasing flight efficiency and reducing delays and costs related to air service provision. However, the project is still not delivering as the level of cooperation between Member States air navigation service providers is far from optimal, and the technology used is not harmonised. Slow implementation of the Single European Sky framework means higher costs for the airlines, which directly affects their competitiveness. The estimated costs of the EU's fragmented airspace represent at least €5 billion a year. Meanwhile, major European airports are predicted to face a capacity crunch in the near future. Eurocontrol predicts that in 2035 European airports will be unable to accommodate some 2 million flights due to capacity shortages. There will be more than 20 airports operating at or near full capacity for 6 or more hours per day, against just 3 in 2012, leading to an additional average airport-related delay of 5-6 minutes per flight. The estimated economic cost of being unable to accommodate demand has been estimated at an annual loss in GDP of between €28 billion and €52 billion at EU level. At the same time, many airports in the EU are chronically underused and facing overcapacity. Finally, the competitive position of EU hub carriers is also heavily impacted by the emergence of competition from low-cost carriers (LCCs) on a short-haul, intra-EU market. Before the liberalisation of the EU internal aviation market, the EU network carriers used their short/medium haul operations to feed their more profitable long-haul network. The creation of the EU single aviation market liberalised intra-EU market access for EU airlines and led to the emergence of new – low-cost – business model. Contrarily to more complex hub-and-spoke model of EU network carriers which operate one or more hubs and combine feeder traffic with long-haul routes, the low-cost business model focuses on short-haul, point-to-point routes, maximisation of flying hours, use of secondary airports and high frequency of service. This model has proven to be very successful and has allowed the LCCs to claim a growing share of the intra-European market. Virtually non-existent on EU internal market until 1995, and with a share of below 10% of weekly scheduled seats prior to 2002, the low cost sector outperformed and by 2012 left behind the network carriers' sector. In 2015, LCCs accounted for 48% of seat capacity in the EU market while network carriers provided less weekly seats than in 1998. The growing competition from LCCs on intra-EU market confronts most European network carriers with increasing price pressure and makes their cost basis more vulnerable. The cost disadvantage of a hinterland hub network compared with those of short haul only networks are reflected in the structurally lower unit costs of the EU LCCs as compared to EU network carriers. This is also the case for the competition between expensive hub-and-spoke systems of EU network carriers and some third country carriers (in particular from the Gulf) operating a cheaper long haul network at their hourglass hubs (e.g. Dubai airport where all Emirates passengers are transferred). The intensifying competition has growing impact on European full service carriers, which have to look not only for further cost-cutting opportunities but into improving their hub connectivity to keep their networks as attractive as possible. Several EU network carriers have rationalised their networks since the beginning of the century in response to this increasing competition from both inside the EU market (low-cost carriers) and outside the EU market (Turkey and the Gulf). Others are still struggling to reform their business model and have not or are still in the process of adaptation. Drawing from the above, it should be noted that not all EU carriers suffer from the recent market evolutions. EU LCCs are mainly present on the intra-EU market and therefore almost not exposed to competition from third country air carriers, whereas EU network carriers are much more present on the international market and more exposed to competition from third country air carriers. Being exposed to different markets and having adopted different business approaches, notably the intra-EU point-to-point model, the LCCs are not as exposed as EU network carriers to the competition exercised by third country carriers. Without prejudice to the above factors, the competitive situation of EU aviation also depends upon fair conditions of competition in international aviation which may be distorted by unfair practices by third countries and third country entities. Throughout the last years a number of cases of competition distortion through subsidies or other distortive practices have been alleged by the EU industry (described further below). As presented in the PwC study , a number of European airlines and several other industry stakeholders have repeatedly expressed concerns that the market share gains by third country carriers have occurred not only because of their geographic advantages and lower cost structures, but also because of market-distorting subsidisation and unfair practices by third country governments, carriers or airports. 2.1.4.Concerns about the existence of subsidies and other practices seen as distorting competition to the detriment of EU carriers Over the last two decades, many EU stakeholders have argued that the competitive playing field in international aviation has not been level, with both overt and more subtle government support for airlines in several regions of the world affecting the ability of EU airlines to compete in the market for traffic to and from third countries. The concern over the existence of subsidies and unfair practices and their harmful effect on EU carriers was strongly echoed in the comprehensive public consultation on "aviation package for improving the competitiveness of EU aviation sector". A large proportion of respondents (96 out of 123) agreed that EU carriers face challenges when competing with third country carriers. A thin majority of stakeholders (68 out of 104) were also of the opinion that the state subsidies for third country carriers are an important competitive disadvantage for EU carriers, though several respondents argued strongly against the existence of such support. The same response pattern could be identified with regard to the question of unfair commercial practices by third country entities (53 agreed, 21 disagreed and 21 were neutral). More neutral opinions were expressed with regard to the question of possible discrimination of EU carriers by third country governments or non-EU service providers (41 agreed, 19 disagreed and 26 were neutral) . When asked to rank the challenges/obstacles which EU carriers face on extra-EU markets, the issues most mentioned by the respondents were cost advantages of non-EU carriers, more favourable tax regimes and the issue of possible subsidies. When asked about the main areas for future work to improve the framework conditions of the EU's aviation sector in international competition, respondents particularly highlighted three areas: fair competition, regulatory harmonisation and taxation. These views closely correspond to responses provided by stakeholders in the less representative online public consultation on a "proposal for improved protection against subsidisation and unfair pricing practices". Noticeably, EU and non-EU entities participating in the consultation expressed opposite views on the subject. It should be noted that most EU respondents (6 out of 8) taking part in the consultation believe that EU air carriers are currently facing unfair practices whereas most non-EU air carriers disagreed with this statement. The majority of respondents to the public consultation also agreed or strongly agreed that the injury is caused by the existence of subsidies in the supply of air services from non-EU countries to and from the EU market (all but one EU airline were in agreement, with the remainder declared neutral on this issue). Half of respondents declared that unfair pricing practices were causing injury to EU carriers. The review of the qualitative responses provides more interesting insights into stakeholders' opinions. There seems to be a general consensus among the respondents of both public consultations that the EU competitiveness vis-à-vis dynamic Asian and Middle East economies, is dwindling. It is broadly believed that EU airlines are less and less able to compete on pricing, capacity and route choice on a global basis. Stakeholders also agree that, should the growth of non-EU airlines continue at the present pace, many EU carriers will be required to pull out of numerous markets which would represent a damaging blow to the EU aviation market. However, respondents remain divided on the question of the underlying reasons for the declining EU market position on international air transport market. Most of individual stakeholders' inputs indicate a general view that third country carriers are potentially distorting the market through the subsidisation they receive from governmental bodies which requires regulatory attention at EU level. Stakeholders perceive that there is often a close link between non-EU carriers and their governments who grant a range of advantages which airlines operating in the more open EU market are unable to compete with. Respondents point that foreign governments distort competition, not only by subsidisation (e.g. by covering airline’s or airport’s operating losses through public funding or by offering favourable tax treatment), but also by protectionist measures in order to secure their national carriers’ advantages over foreign competitors. It is also suggested that significant marketing expenses are committed each year by third-country carriers which cannot be matched by EU entities. Respondents believe that these expenses vastly exceed what could realistically be expected to be invested by a carrier operating entirely within the confines of its own financial limitations and therefore subsidisation must exist. It is believed that this practice unfairly disadvantages EU carriers as the marketing expenses of third-country carriers can exceed the profit generated by some airlines. When asked about other kinds of unfair practices, several stakeholders point that the daily business of EU carriers is also hindered with respect to access to airport facilities, ground-handling and slot distribution whereby third-country carriers are given precedence over EU competitors. Respondents also report cases, where European carriers need a local sponsor to offer services in a third country and have no access to direct sales. Other examples of quoted unfair practices are the obligations made to some European carriers to enter into compulsory commercial agreements with third country airlines so as to be in a position to exercise traffic rights including overflying rights. It is further noted by respondents that the non-EU carriers are often protected against insolvency, whilst their ultimate aim abroad is not to be a profitable entity but to represent the country of its origin abroad. The national governments thus have an intrinsic interest in the operations of their carriers which they believe represents them abroad. Such an interest is perceived as less prevalent in the EU market, where the open market has seen many national carriers move into private hands. Some respondents also pointed that third-country entities are making strategic investments in EU airlines. Once in control of the entity in question, it is suggested that they seek to channel as many passengers as possible to their non-EU airlines and hubs to maximise returns. This then allegedly damages the EU airlines themselves and by extension the airports where they operate. Some respondents expand on this point, citing that where the airline in question is partly owned by a non-EU entity, it can then avail of non-EU sources of capital which EU entities may find far more difficult to have access to. This exacerbates the problems and increases the gap between two groups of airlines. Several representatives of third countries who responded to the public consultation rejected the claims put forward by their competitors. These stakeholders (mostly non-EU entities), suggested that there is no substantiated evidence of subsidies and unfair practices and the difficult situation of EU aviation internationally stems rather from the inefficiencies and structural problems of EU airlines themselves. They point to the ‘objective’ competitive advantages of non-EU carriers, such as advantageous geographic location and modern fleet and airport infrastructure, as the drivers of their unprecedented growth. In conjunction with a wide route network, this has made the airlines in question the service provider of choice for many consumers. It was also suggested that it is the general economic crisis in Europe, with a number of EU nations remaining in recession and others requiring financial rescue, that contributed to a decline in EU aviation services offered which third-country entities. One stakeholder also suggested that the increasing prevalence of low cost carriers operating within the EU aviation market is adversely impacting the services which EU flag carriers can offer on routes where there was previously no low-cost carrier presence. The respondent implied that the EU-based low cost carriers have more flexible approach and lower cost structures which give them the capacity to successfully compete with EU flag carriers through increasing competitive pressure on prices. It is therefore implied that the pricing issues reported by EU legacy carriers stem from competing against low-cost carriers rather than against carriers reliant on subsidies. The views expressed in both public consultations resonate with the positions expressed by major EU airlines. One of the main concerns of the newly founded largest EU airlines association - Airlines for Europe (A4E) is that the EU air transport sector is in urgent need of capacity and efficiency improvements to remain competitive and continue to grow. However, the airlines remain divided on the reasons behind EU aviation problems and the necessary response to competition with third countries. Some carriers, like International Airlines Group or Alitalia (not a member of A4E) strongly dispute the claims that alleged unfair subsidies are being provided by certain third countries to their airlines and stress that the EU and other national unnecessary regulatory costs are ultimately responsible for putting European companies on a competitive disadvantage. They also point to national taxes (e.g. passenger/ticket taxes) applied in some Member States which lead to a higher production cost base and subsequently hamper the competitive position of EU aviation. IAG, along with Air Berlin consider liberalisation with third countries as best means to sustain EU air industry growth. On the other side of the spectrum are Lufthansa and Air France-KLM who claim that third country carriers are ‘offering unnecessary capacities at non-economical prices with the objective of gaining market shares at the expense of airlines operating under normal commercial conditions’. Air France-KLM has said that the financial statements from certain third countries carriers are proving that ‘subsidies appear to keep in the market non-commercially viable players’. Both airlines call for strong EU measures to tackle unfair competition.

The positions of main EU flag carriers and their Member States of origin are often in line. Noticeably, in their responses to the public consultation, as well as separate position papers, all public authorities (Austria, France, The Netherlands and UK) have all expressed the need to address the issue of unfair competition in international aviation, though without prejudging on the best conceivable solution. French representatives were most vocal in denouncing a wide range of market-distorting practices, including state subsidies, price dumping or various types of doing business issues (e.g. requirement to employ local sales agent). Austrian authorities agreed with the statement that subsidies and other unfair practices exist and mentioned possible discrimination with regard to access to airport facilities and ground handling as commonly reported distortions of competition. The UK authorities’ position in the public consultation stood out as manifestly neutral to all the questions regarding the existence of subsidies and unfair practices. Finally, a distinctly neutral position on the subject is presented by Airbus - the major EU aerospace manufacturer. The company has consequently refrained from positioning itself in the debate on how best to promote 'European' interests in aviation. According to the PwC study, Airbus refused to answer questions on its position on trade defence instruments quoting "numerous EU and non-EU clients" and potential conflicts as reason. Although, the EU stakeholders are not unanimous on the question of subsidies and unfair practices used by third countries and third country carriers or other third country entities, the responses provided in public consultations as well as individual opinions of key EU airlines indicate that a considerable part of EU air transport industry considers them a prominent problem today. 2.1.5.Allegations regarding subsidies and other practices seen as distorting competition to the detriment of EU carriers The perceived problem with subsidies and unfair practices by third countries and third country entities is brought forward by a number of alleged cases reported by EU governments, air carriers and media over the last years. Although, they have never been examined or proven in a formal investigation under EU law, these cases suggest that currently the term "unfair practice", as referred to in the grievances raised, encompasses a broad range of measures which amount to providing direct or indirect support to third country air carriers and other third country entities. A non-exhaustive catalogue of possible unfair practices, whether by airlines, airports, air navigation service providers or governments themselves, along with examples of each of them is presented below. These have not been subject to investigations and as such are not proven. This does not prejudge of any action or investigation that could be undertaken by the Commission. A subsidy is one of the most commonly alleged and overt unfair practice in international aviation. Regulation (EC) No 868/2004, hereafter "Regulation 868/2004", defines a subsidy as a financial contribution by a government, regional body or other public organisation, which confers a benefit on a recipient of the subsidy. Under the same Regulation, subsidies qualify for redressive measures against third country carriers if they are limited in law or in fact to an enterprise or industry or group of enterprises or industries within the jurisdiction of the granting authority. In practical terms, subsidies of the kind, independently from the form they take, can have a major impact on the growth and operation of third country air carriers. EU network carriers operate essentially on a commercial basis, and therefore for financing their activities they must rely on the strength of their respective corporate balance sheets. The EU has detailed rules on State aid, applicable also to the aviation sector, within which dedicated Guidelines explain the Commission's understanding and application of those rules. Public support for airports or airlines of whatever form escapes scrutiny if it can be demonstrated that it was granted under normal market conditions. As regards aid to airports, this is only permitted if certain strict conditions are met to ensure that its distortive effects have been minimised. In turn, aid to airlines is largely banned, with a small number of exceptions. For instance, government rescue and restructuring aid for an ailing EU airline could only be permitted if the following criteria were met: the aid envisaged forms part of a comprehensive restructuring programme aimed at restoring the short-term viability of the carrier cost reduction or return to profitability; capacity reduction or constraints on expansion are planned; no fleet expansion takes place; aid is not used to acquire other airlines; aid does not increase direct competition with other airlines; there is no government interference in the airline’s management and; no further aid is envisaged or likely in the future. Moreover, where the rescue and restructuring aid is paid in tranches, the Commission must give its approval for each tranche, which is subject to the progress made and the conditions being respected. By contrast, outside the EU it would not appear that comparable control exist, and therefore some third country carriers may benefit from more favourable treatment in terms of financial support by the State. Over recent years, a large number of media reports, academic articles and informal industry complaints have been suggesting that in some non-EU countries, government intervention would provide direct or indirect commercial advantages to selected carriers and airports in a manner which reduces their costs, or increases their revenues to the detriment of competitors. These carriers would then allegedly be able to offer lower fares for their services or offer extra capacity which may in turn allow them to increase their market share by pushing competitors out of the market. The PwC study presents a number of examples of alleged subsidisation by non-EU countries. For instance, various forms of subsidies were alleged to exist in the Asian market. As an example, in 2014, four major State A airlines collectively received over 1.1 billion US dollars of subsidies and grants, including 162 million US dollars for Airline A1, 589 million US dollars for Airline A2, 276 million US dollars for Airline A3 and 82 million US dollars for Airline A4. The receipt of the above government aid is incontestable as the government funding was openly stated in the carriers’ accounts. Also Airline A2 who successfully merged with Airline A5 received an injection of more than 3 billion US dollars from State A government. In another case State B Government provided a 5.8 billion US dollars bailout to the ailing Airline B1 which allegedly enabled the carrier to charge below-cost fares. Recently, leading State X airlines have claimed that the three largest States C and D carriers together would have received 42.3 billion US dollars in subsidies from their governments since 2004. According to these claims (strongly disputed by States C and D carriers), this amount would include interest free loans, equity infusions, cash injections, grants, passenger fee exemption, additional committed subsidies, union ban resulting in below-market labour costs, avoided interest from government loans, government assumption of fuel hedging losses and subsidised airport charges. This is in contrast to rules in the EU where State support largely has to be under market conditions. State X carriers moreover claim that the three leading carriers from States C and D also would have received further subsidies that could not be quantified due to lack of financial transparency. The issue is not so much that airlines may receive loans or capital injection by their governments, but whether or not the terms of such advances are in line with those that might be expected from private investors. Media recently reported about the State C alleged 3 billion US dollars loans to Airline C1 on interest-free terms not requiring any repayment until 2027 and apparently not in exchange for shares. It would seem very unlikely that a market investor would enter into such transaction. A recent study by transport research firm GRA on States C and D carriers' profitability on State X routes makes the rationality of alleged subsidies schemes even more questionable. According to the report, of the 23 routes operated by the States C and D carriers to State X in calendar year 2014, 19 appeared to be loss-making. More than half of these routes are estimated to have loss margins in excess of 20 percent and the overall loss margin for the three carriers combined is -14.4%. The report concludes that ‘the preponderance of loss making routes and the size of the losses suggest that the three carriers have over-expanded in State X markets beyond levels one could justify from the operating results’. Experience in the EU has shown that subsidies which are not granted directly to airlines may also result in market distortion. As mentioned in section 2.1.4, many EU stakeholders express concerns that certain third country governments would be financing the growth of airport infrastructure in order to accommodate for the growth of their incumbent carriers through deviation of traffic from "traditional" routes. According to major EU airlines, this trend is particularly apparent for traffic that is being deviated via the major States C and D hubs and via major hub of State E. There are many reported examples where state-owned airports provide capacity above the actual demand without passing on the cost of that extra capacity to their incumbent airlines in the form of higher airport charges. With this practice, the airports provide those incumbent airlines with significant cost and service advantages over EU carriers (since in the EU, state support for large airports is essentially outlawed). According to information provided, the most notable example of this kind of alleged subsidisation are investments made in States C, D, E and F, currently in the process of expanding their airports' capacities which combined will ultimately accommodate 450 million passengers per year as compared to the region's current capacity of 140 million passengers per year. In another example, the Government of State G announced at the beginning of 2014 that it plans to almost double the capacity of G1Airport ahead of demand over the next decade with two new terminals. The concerns of the European airline industry are not limited to subsidies as such, but also extend to the lack of access to information about such potential actions, which leads to the perception that subsidies are being offered to the airlines and airports in question. In a number of world regions, there is no clear institutional or functional separation between the government, civil aviation authority, airport management, and sometimes even airlines, making it often impossible for outsiders to trace the flow of finances, other resources and information. The complex inter-linkage of the various entities (e.g. airlines, airports, catering companies, leasing companies, ground-handlers etc.) which are often vertically integrated and controlled by the State raises the perception of market distortion among competitors. In this regard the lack of transparency regarding the finances of the hub airports in question is particularly important, since they form the central nexus between State, airline and third parties. Although problematic, it is not to be expected that any modification of the current Regulation would be able to provide a solution to this issue but only in to a limited extent. The restrictions of access to infrastructure and facilities for non-incumbent operators are other kinds of most commonly alleged unfair practices. EU stakeholders suggested several cases of possible discriminatory treatment at third country airports, where privileged access to airport infrastructure and airport services was granted to the incumbent carriers at the expense of EU competitors. One example of such alleged unfair practice concerns is the suggested discriminatory treatment of EU carriers by Airline H1 - the incumbent operator at State H's main airport. It is alleged that some EU airlines which fly to and from State H capital face restrictions of access to ground handling services and are forced to pay higher prices than Airline H1. A similar discrimination in access to ground handling services has allegedly been experienced by EU carriers at State I airports. Discriminatory airport slot allocation and discriminatory airport charges are other type of allegedly used unfair practices negatively affecting the EU airlines' competitive position on international market. Congestion at airports as a consequence of the increase of air traffic, coupled with environmental concerns often leads to a shortage of slots. This alleged phenomenon would impede market access for EU entrants as third country authorities would tend to allocate the slots in a biased, non-transparent manner. As an example, State J authorities would have allegedly been discriminating against EU airlines by excluding them from using slots at State J Airport J1 during daytime. Due to unequal slot distribution by State J authorities, the EU and North American carriers’ long-haul services were limited to overnight hours, while services by regional airlines to State K, State L, State A capitals and other regional destinations continued to be allowed during the day which allowed them to get better opportunities for onward connections. The latest allocation of daytime international slots (October 2013) led to increased flight capacity between city J1 and many regional markets, but did not have a major effect on capacity between State J and Europe. Problems with slots were also allegedly experienced by two EU low-cost carriers in State M. In 2014, Vueling’s and easyJet’s summer season slots to airport M1 were allegedly revoked last minute and replaced by the slots to airport M2, on the basis of new State M memo on slot allocation (circulaire nr 2399). For Vueling the transfer of passengers to another airport posed a risk of cancellation of its services and mandatory reimbursement of some 14 000 tickets already sold. Following the analysis of the case, the Commission concluded that the new State M circular comprised discriminatory criteria openly favouring the national carriers at the expense of EU airlines. Following the discussion under the EU- State M Joint Committee, State M authorities ceased the discriminatory treatment and committed to modify the disputed circulaire in order to bring it to compliance with IATA guidelines as well as Council Regulation (EEC) No 95/93 on slot allocation. Allegations of higher airport charges which are discriminatory to EU carriers and favour incumbent operators have been, in turn, suggested at State N and State I airports. State I authorities are charging a special tax (35.9% surcharge) applied to the fee for domestic and international boarding and fees for the use of air navigation aids and telecommunications. This surcharge is imposed on foreign air carriers as the collected airport charges do not recover costs for State I airports . EU airlines have expressed concerns on many occasions about the level of State I charges and the way they are calculated. In another case, airport N1 authorities have been reported to have prepared a tailor-made incentive scheme that favours one incumbent airline and its transfer passenger-focused business model. Low-cost EU airline has raised complaints that the above practice unfairly protects high fare monopolist and jeopardises access of State N consumers to low cost air travel. Third country governments and other public bodies may substantially distort the fair competition on the market by using what may be labelled as "soft" measures, though displaying some form of discrimination. Practices of the kind are generally harder to detect and prove as the advantage offered to incumbent carriers may often be of non-commercial nature. This capacious group of alleged unfair practices may include a broad range of obstacles to "doing business" for foreign airlines, such as unnecessary red tape, burdensome customs clearance procedures, discriminatory accommodation rates and visa schemes for foreign carrier's staff, as well as limited access to airport sales outlets, marketing restrictions or obligations to appoint a General Sales Agent in the third country. Although the European parties have difficulties in obtaining concrete evidence of such soft discriminatory measures there has been a number of allegations of this type over recent years.

For example, EU carriers have allegedly faced several problems with "doing business" in State I. The issues reported by the EU aviation industry include unjustified long waiting times to obtain routes authorization, engine start-ups or taxi clearances; burdensome customs procedures for airline spares and equipment; or imposition of special fees on indirect service provisions including the sale of a ticket issued by a Travel Agent. Allegations on the potential discrimination against full fare carriers applied in State O were also formulated by EU Member States. According to MS reports, State O law grants advantages to low-cost carriers by exempting them from the rule allowing passengers to cancel their tickets up to 14 days after the purchase, and by allowing them to use the main terminal at airport O1 for lower fees. Another example of doing business issue reported by an EU airline concerned State P. The new State P Air Services Price Advertising Regulations require that any person who advertises an air service should display the total price in State P currency when selling flights within or originating in State P. All companies whether or not they are legally established in State P are obliged to display the prices in State P currency on all their global websites, even if an airline does not operate in State P (company might be 'present' in the market through interline and/or code-sharing arrangements only). The provisions allegedly limit the competition, since carriers not serving State P directly will effectively be prevented from holding out their services to the State P public, and to the public in other countries wishing to travel to/from State P, through their global sites, unless they accept to publish their prices in State P currency. The Commission indicated that meeting the new requirement is problematic as EU airlines would have to develop country specific websites or generic sites supporting transactions in State P currency. EU stakeholders also complained about the lack of possibility to use facilities for their passengers at the terminal of third countries' airports, while at the same time it is possible at terminals used by local airlines. In 2014, EU air operators allegedly experienced such discriminatory treatment at airport M1. By the decision of State M Airport authority all but the incumbent carrier (Airline M1) were reportedly forced to transfer their operations to a specific terminal. As the latter was unadjusted to accommodate the high number of passengers, EU carriers allegedly faced serious operational and commercial disadvantages and additional costs. On the basis of all of the above allegations provided by the EU member States, the industry and the media over the past years, possible unfair practices fall into two main categories: discriminatory practices against EU air carriers, and selective subsidies from third countries to third country entities. 2.1.6.Impact of the alleged practices on EU air transport market The possible impacts of the alleged unfair practices by third countries or third country entities are difficult to assess in the absence of sufficient publicly available information and without practical experience of addressing them at EU level. While it is difficult to quantify the negative effects of the possible unfair practices on the economic performance of EU air carriers, the number of reported problems both in and outside the EU, as well as public consultation results, suggest that it is highly likely that alleged unfair practices have a negative impact on the EU entities. Alleged unfair practices in the international air transport market, to the extent they exist, may in the first place negatively affect EU airlines’ competitiveness and financial performance and, as a consequence, the whole air transport value chain. As indicated in section 1.3, the current trends in traffic evolution between the EU and world regions indicate decreasing prominence of EU carriers in almost all air transport markets – to/from the EU and beyond. The extent to which the above market trends may be due to the impact of unfair practices is unknown and it is difficult to quantify it. While it is noticeable that the market share of EU airlines has declined the most in markets where unfair competition is widely alleged to exist. It is also clear for the reasons presented above, that it is difficult to establish a direct causal link between alleged unfair practices and lower market shares of EU airlines, which in absolute levels in most cases are still higher than the ones of their competitors coming from these regions. Notwithstanding this, it is highly likely that alleged unfair practices have a negative impact on the market position of EU airlines, and accordingly, that their impact is most significant on routes where beneficiaries of these operate. Consequently, it might be assumed that EU carriers may lose an important part of their revenues on routes towards certain regions in favour of their competitors benefiting from alleged subsidies and unfair practices. The financial performance of EU carriers may also be hindered on other international routes where alleged discriminatory airport charges, additional taxes/fees or obstacles to doing business occur. Distortions of competition resulting from practices adopted by third countries and third country entities could also have negative effect on EU air transport sector employees. The decline in economic position of EU airlines worldwide would translate into stagnation and shrinkage of jobs of flight crews and other air transport workers. From the EU consumer’s perspective the most important impacts of alleged subsidies and unfair practices, concern the ticket prices, service quality and connectivity in terms of route choice. The impact of alleged unfair practices on the ticket fares can be very different depending on the type of practice in question and period of time. In cases where the EU airlines face higher airport charges, supplementary taxes or royalties, the additional costs will most likely be passed on the consumers and reflected in higher ticket prices. On the other hand, in the short term, the consumers may benefit from lower ticket prices and often higher service quality, where these advantages ultimately result from subsidisation to the non-EU carrier concerned. However, in the medium and longer term, EU airlines may not survive the competition of state-owned, allegedly subsidised competitors and may cut back or abandon air services on certain routes. This could ultimately transform certain markets into oligopolies (e.g. only two or three carriers offering nearly identical service on same routes) or even monopolies. According to classical economic theory, once the competition is replaced by oligopoly/monopoly the prices are no longer shaped by changes in supply and consumer demand. This is even more so as in the long-haul international air transport market no direct, cheaper product substitutes exist (i.e. a long-haul flight by airplane cannot be effectively replaced by any other transport mode). Hence, in the medium to long-term perspective, some third country airlines might find themselves in a situation of quasi monopoly regarding certain routes and will have no further incentives to cut fares which could mean that EU passengers may face ticket price increases. Similar rules apply to the impact of alleged unfair practices on service quality. On one hand, EU consumers may be able to benefit from better quality of service at reduced prices when flying with allegedly subsidised carriers. In 2013, States C and D carriers together with State E and State G airlines were among the top-10 both in first-class, business-class and economy-class in terms of customer satisfaction. On the other hand, there are number of reported cases where alleged unfair and discriminatory practices of third countries and third country entities negatively affect the quality of services provided by EU flag carriers. As mentioned in the previous section, due to the discriminatory treatment of EU carriers, EU passengers were allegedly confronted with inconveniences at a specific terminal 1 of airport M1, which was not adjusted for high passenger volumes (small number or lack of check-in counters, security gates, baggage claims, passenger boarding bridges etc.). In like manner, many long-haul services of EU carriers suffered quality deterioration as a result of alleged discriminatory slot allocation at airport J1. The unattractive overnight schedules made British Airways temporarily suspend its service on city J1-London route (which was later restored on a less than daily basis). Finally, the direct connectivity to and from Europe would likely also be affected by alleged unfair practices. As explained, recent trends show that non-EU hubs have allegedly been increasing market share relative to EU hubs through the expanding networks of their carriers into airports in Europe. This may have implications for intra-EU connectivity as there would be a reduction in feeder services from EU airports to EU hubs (where a non-EU hub airport has set up a direct connection from the EU feeder airport), thereby reducing demand and ultimately capacity and frequency on these routes. This means that European consumers are increasingly dependent on States C, D and E to travel to distant destinations that were previously flown to directly and frequently. Hence, EU passengers are gradually losing their freedom of choice in terms of the journeys they take and the companies with whom they fly. European capitals are less and less connected via direct flights to final destinations vital to European growth. Regarding the EU aeronautical industry, some EU manufacturers and suppliers in the aviation sector could benefit from rapid fleet expansion in other parts of the world. The scale of aircraft orders from non-EU carriers, in particular from States C and D region, has propelled these carriers into the role of key customers for aircraft manufacturers. Airbus (along with Boeing) is a top provider of jet aircraft to the world’s airlines and an export leader especially in these growth markets. States C and D airlines are big investors in European aircraft and currently buy up to 50% of Airbus A380 capacities. However, t presentvolume of. In the long term, the growth prospects for EU equipment manufacturers will then fundamentally depend on high-demand, large aviation markets such as Europe. Hence, it is not in EU manufacturers' interest to have an EU airline industry that lacks the prospects and the means to modernise and invest. Hence, unfair competition in international aviation, to the extent it exists, may have a serious negative effect on EU airlines and indirectly, on EU consumers (passengers), employees, manufacturers and the EU economy as a whole. 2.1.7.Legal instruments for protection of competition in other sectors and countries Throughout history, international trade has been driven by two contradictory pressures from the domestic market players. Some industries urged their governments to reach agreements with third countries in order to access foreign markets and export their goods, whereas the others called for protective measures against foreign competitors to be put into place. This dual pressure led governments to conclude agreements with each other and enable access to part of their respective markets by eliminating or reducing barriers to entry, while specific rules against dumped and subsidised products were established. This system was gradually developed through a series of trade negotiations, or rounds, held under General Agreement on Tariffs and Trade (GATT) and culminating into the multilateral regime established under the WTO agreement. A number of EU instruments are relevant to the above. In part, the intention is to help imposing the respect of existing commitments that bind third countries. Other instruments are intended, even in the absence of such commitments, to outbalance the effects of practices considered unfair. The latter is the case of Council Regulation (EEC) 4057/86.

A short overview over all these instruments is given immediately below. Under EU law, anti-dumping measures are currently governed by Council Regulation (EU) 2016/1036 of 8 June 2016 on protection against dumped imports from countries not members of the European Union. This Regulation implements Article VI of GATT 1994 and the WTO Anti-dumping Agreement and allows the EU authorities to apply an anti-dumping duty to any dumped product whose release for free circulation in the EU causes injury. The Commission initiates an investigation to determine the existence, degree and effect of any alleged dumping. Anti-subsidy measures are governed by Council Regulation (EU) 2016/1037 of 8 June 2016 on protection against subsidised imports from countries not members of the European Union which implements Articles VI and XVI of GATT 1994 and the WTO Agreement on Subsidies and Countervailing Measures. Under this regulation, the Commission may impose a countervailing duty for the purpose of offsetting any subsidy granted, directly or indirectly, for the manufacture, production, export or transport of any product which release for free circulation in the Community causes injury. The EU anti-dumping and anti-subsidy rules are defensive instruments protecting the EU market. They are applicable uniquely to trade in goods and cover only two kinds of uncompetitive practices. In order to ensure that the Union's trading partners would respect the rules contained in agreements to which the Union is party, the EU adopted a Trade Barriers Regulation (TBR) - a tool with a much broader scope of application that applies not only to goods but also to services and intellectual property rights. However, the TBR only applies to those services in respect of which international agreements can be concluded by the Union on the basis of Article 207 of the Treaty, and therefore does not cover transport services. The TBR is an instrument aimed making sure that the international rules eliminating obstacles to trade effectively deliver benefits to EU exporters. It gives the right to EU enterprises, industries or their Associations as well as the EU Member States to lodge a complaint with the European Commission who then investigates and determines whether there is evidence of a violation of international trade rules which has resulted in either adverse trade effects or injury. A wide range of obstacles to trade or trade barriers is covered by the Regulation and the Annex provides an illustrative list of some of the trade obstacles that are covered by the TBR. An obstacle to trade is defined in the Regulation as “any trade practice adopted or maintained by a third country in respect of which international trade rules establish a right of action”. In this context, international trade rules are primarily those established under the World Trade Organisation (WTO) and bilateral trade agreements. Until the adoption of TBR, the only EU legislation in the services sectors aiming at defensive measures was the Council Regulation (EEC) 4057/86 on unfair pricing practices in maritime transport. The Regulation was modelled on the anti-dumping and anti-subsidy regulations on trade in goods. It allows the Commission to impose a redressive duty in response to unfair pricing practices “by certain third country ship-owners engaged in international cargo liner shipping, which cause serious disruption of the freight pattern on a particular route to, from or within the Community and cause or threaten to cause major injury to Community ship-owners operating on that route and to Community interests”. The Regulation was used only once in the so called Hyundai Merchant Marine case, where the complainant alleged that Korean ship operator, has implemented unfair pricing practice in the liner shipping trade between the Community and Australia (charging a freight rate that is 30% lower than the average rate on the route), causing a 7% decrease in utilisation of capacity of Community’s shippers and a decline in profits on the route. The Commission considered that the evidence presented was sufficient to justify the initiation of a proceeding and to impose, at the end of these proceedings, a redressive duty “on all containerized cargo loaded in a Community port on vessels operated directly or indirectly by Hyundai (…) with destination Australia. Following the deregulation of the internal aviation market in 1978, the US has developed its own unilateral defence instrument to prevent international competitors (for whom market access in the US was being expanded) from exploiting any “unfair” advantages. Adopted in 1979, the International Air Transportation Fair Competitive Practices Act (IATFCPA) is a legislative tool designed to protect US airlines from unfair and discriminatory practices by foreign governments or airlines as well as to protect its rights acquired in bilateral air service agreements. Under the Act, the US Department of Transport (DOT) has means of action to ensure that "U.S. flag air carriers operating in foreign air transportation are protected from all forms of discrimination and are compensated for excessive or otherwise discriminatory charges l