EU Commission Seeks Airline Pacts in Gulf to Curb Subsidies

The European Union’s transport chief sought more leverage to fight alleged unfair subsidies to airlines based in the Persian Gulf in a bid to create a “level playing field” for EU flag carriers.

European Transport Commissioner Violeta Bulc asked EU governments for authority to negotiate aviation agreements with the six countries that belong to the Gulf Cooperation Council. Curbing any market-distorting aid to operators such as Emirates, Etihad Airways PJSC and Qatar Airways Ltd. would be a goal of the negotiations.

Bulc’s request is part of a European aviation package that also seeks deals with China, the Association of Southeast Asian Nations, Mexico, Turkey and Armenia; foresees guidelines on the control of EU airlines; and proposes a regulatory framework for the use of drones. The targeted accords with the Persian Gulf states are a priority because countries such as the United Arab Emirates have fast-growing aviation markets and the issue of subsidies in the GCC has become politically sensitive in Europe.

“While the additional connections provided by the Gulf airlines are welcome, there are concerns regarding the conditions under which they operate,” the European Commission said in a statement about the package on Monday in Brussels. “The right way forward” is “to bridge the interests of both sides by creating conditions that will allow further market development and growth based on common rules and transparency.”

Bigger Battle

The commission, the 28-nation EU’s regulatory arm, is preparing for a bigger battle over state aid to Gulf-based airlines after national governments in Europe joined European carriers such as Air France-KLM Group and Deutsche Lufthansa AG in raising the issue.

France and Germany voiced concerns about foreign subsidies earlier this year at an EU meeting where transport ministers debated global aviation competition. The chief executive officers of several European airlines, including Air France-KLM and Lufthansa, wrote a letter to Bulc in December 2014 urging her to step up efforts to tackle government support for Gulf rivals.

Total seats on scheduled flights between the EU and the GCC nations have more than tripled over the past decade to 39 million this year, the commission said on Monday. The UAE has more direct traffic with the EU than China, India and Japan combined, according to the commission.

Bulc said she wants EU governments to give her “open and dynamic” mandates to negotiate aviation agreements with the GCC, which also includes Qatar, Saudi Arabia, Oman, Kuwait and Bahrain. The deals being sought are dubbed “comprehensive” because, in addition to provisions on “fair competition,” they would cover such areas as market access, investment and technologies for air-traffic management.

‘Very Careful’

At a press conference, Bulc refused to be drawn on the question of subsidies in the Persian Gulf.
“I am very careful about that,” she said. “I don’t want to generalize in this matter. And that’s exactly why we are proposing comprehensive bilateral agreements where fair competition is one of the clauses. We really want to address it in a very comprehensive level.”

As part of any accords, she said the EU would be prepared to ease its 49 percent limit on foreign ownership of airlines based in the bloc in return for reciprocal rights abroad for European companies. Etihad Airways has a 49 percent stake in Alitalia SpA and a 29 percent holding in Air Berlin Plc.

An existing EU aviation agreement with the U.S. has failed to abolish foreign-ownership curbs because of American defense of the country’s 25 percent limit on voting equity, while a European pact with Canada foresees the scrapping of control restrictions once the Canadian government takes the necessary steps.

‘Interpretative Guidelines’

For investors in countries that have no derogation from the EU’s limit on foreign ownership of carriers, the aviation package promises “interpretative guidelines” at a later stage on the enforcement of the cap. The limit is enshrined in a 2008 European law requiring that EU states and/or nationals own more than 50 percent of any airline based in the bloc and “effectively control” it.

In their letter to Bulc a year ago, the group of European airline CEOs also pressed her to ensure that foreign investments in EU-based airlines “strictly comply” with the 2008 legislation. In addition to the heads of Air France-KLM and Lufthansa, the letter was signed by the CEOs of three Lufthansa units:

Austrian Airlines AG, Brussels Airlines NV and Swiss International Air Lines.

The goal of the planned guidelines is to ”bring more legal certainty for airlines and investors,” Bulc said on Monday.

Originally published on Bloomberg Business