Your Committee considered the Explanatory Memorandum on the above proposal on 9 October 2006 and responded that it would like to see the outcome of our consultations before considering further. The Committee also raised questions about the significance of the issue of wet-leasing for UK airlines, and about the Government's position on pricing. I am writing to update you on these issues, to inform you of the conclusions of the Department's consultation on the proposed Regulation, and to update you on the Council negotiations. I also attach a Partial Regulatory Impact Assessment (not published), which takes account of the outcome of the consultation.

  As you may recall from the Explanatory Memorandum, the Government was happy with the general direction and intent of the proposal, but had some concerns which we intended to discuss with industry. The Department conducted a stakeholder consultation on the proposals which included a Stakeholder Symposium. This generated a significant amount of interest from industry, and twenty-three separate responses were received in total. Respondents were invited to comment on a number of aspects of the Commission's proposal. The proposed restrictions on wet-leasing of aircraft and crew from outside of the Community caused particular concerns for charter air carriers, the majority of whom rely on wet-leasing to address the seasonal fluctuations in their business. Restrictions on this practice in the form originally envisaged by the Commission were a serious concern for the UK charter industry, which operators stated could cost them several millions of pounds per year. Respondents also commented on the issues of licensing, pricing and Public Service Obligations (PSOs). The Explanatory Memorandum also commented on the issues of the time period necessary for demonstrating financial fitness (which the Commission proposed to increase from two to three years), and the definition of `principal place of business'. Following discussions in the Working Group, and working closely with the Civil Aviation Authority (CAA) and industry I am content that the text now meets the UK's concerns on these issues.

  There have been a number of Working Group discussions of this proposal, most recently on 15 May, and I am happy to be able to report that we have achieved a number of improvements to the text, aided by the views expressed during the consultation. The Commission's original proposals would have significantly restricted the ability of EU carriers to lease aircraft with crew (known as `wet-leasing') from outside of the Community-which would have been allowed only in exceptional circumstances. This was a major concern for UK charter carriers, many of whom, including First Choice and Thomas Cook, have long-term arrangements to wet-lease aircraft and crew in from the United States for the summer season, and out to the US in the winter months. Many UK charter carriers expressed grave concerns about these proposals, and predicted that this restriction would seriously damage their business model, costing them several millions of pounds.

  Our position in the Council, in line with our existing practice, has been to allow carriers to wet-lease to satisfy both seasonal capacity needs and to cope with exceptional circumstances such as technical problems. At the same time, we believe that it is important to retain the ability to monitor leasing for safety purposes, and to prevent carriers from becoming overly-dependent on wet-leasing. The text of the Commission proposal has been considerably modified in this regard, and now meets the UK's concerns by allowing wet-leasing to meet seasonal capacity needs, and for this lease arrangement to be renewable consecutively. In addition, the proposed restriction on wet-leasing with third countries where reciprocal agreements are not in place has been removed. I am satisfied that the current text meets the concerns of UK industry, allowing charter carriers to continue to operate their business model, whilst also ensuring appropriate safety oversight.

  The proposed Regulation also seeks to tighten up the rules for establishing PSOs on routes vital for the economic development of a region. This is welcome, as the process has in recent years been used by some Member States to protect their national carriers from competition and as a means of providing direct and indirect State subsidies. At the same time, we have sought to reduce the burden of the regulations on existing PSOs in the UK, nearly all of which are lifeline routes to and between the Scottish Highlands and Islands.

  The Regulation, as revised following the Working Groups, is satisfactory in meeting both these objectives. In particular we have worked closely with the Scottish Executive and secured an amendment creating a de minimis exemption from the notification procedure for very thin routes of less than 10,000 passengers per annum, which include a number of the PSOs in Scotland. However, the Government could not support Scottish Ministers' preference for extending the contract period for PSO services to 5 years to further reduce administrative burdens and improve competition from airlines to provide PSO services. On balance, we believe this would unduly restrict access to PSO routes and so go against the Government's general position in favour of increased liberalisation. The Regulation already extends the contract period to 4 years from 3 under the current arrangements, which should go some way to meeting Scottish Ministers' objectives.

  There are two remaining issues that need to be resolved, and it is likely that these will be determined during Ministerial discussions at the Transport Council on 8 June.

  The first relates to the scope of the provisions on the transparent advertising of air fares. These provisions will end the practice of apparently low headline fares which turn out to be much higher once various taxes, fees and charges are added. You may recall that we initially wished to consider these further to ensure that they were workable. Following our consultations with industry and some clarifications to the text in the course of the negotiations I now believe that this measure will improve consumer clarity and allow passengers to compare fares more easily. Some Member States are proposing that these rules should apply to intra-EU flights only. However, I believe that the rules on pricing should apply to all flights departing the EU, whatever the final destination, and hope that it will be possible to achieve this. The UK industry broadly shares this view.

  The second issue concerns a proposal by one Member State which would stipulate the social law applying to airline staff employed outside of that airline's home country. I believe that such provisions are inappropriate in the context of a Regulation that deals with the technical matters of airline operations, a view that is shared by a number of other Member States. Furthermore, this proposal appears to cut across established EU legislation on posted workers and the co-ordination of social security systems. My officials have been in contact with the Department for Work and Pensions on this issue, and I propose that we continue to argue against this text. If a compromise becomes necessary, we might consider neutral language which simply asserts that all relevant social provisions of Community law would apply to such workers.

  The German Presidency has indicated that it hopes it will be possible to reach a general approach on this dossier at Transport Council on 8 June. The European Parliament has begun its consideration of the proposal, and its plenary first reading is currently scheduled for July. I will of course keep the Committee informed of the progress of the proposed Regulation.

24 May 2007

  Thank you for your letter of 24 May which Sub-Committee B considered at its meeting on 4 June.

  We were grateful for your reply regarding the significance to industry of `wet-leasing' of aircraft and crew from outside the European Union.

  We welcome the clarification of your position regarding the proposals for the transparent advertising of airfares and are reassured that you are now able to support the proposal.

  We have decided to clear the document from scrutiny, but we would be grateful to be kept informed of progress on this dossier in the European Parliament.

5 June 2007

  I am writing to update you on the progress of negotiations on this dossier which consolidates and updates three Regulations from 1992. These regulations have been essential for the expansion and success of the single market in aviation, and their reform is intended to update these Regulations, to close certain loopholes that have emerged, and to ensure consistent application across member states.

  Since Douglas Alexander's letter of 24 May 2007, a General Approach was reached on the proposal at the Transport Council on 7-8 June. This letter explained that an amendment had been put forward that would require an airline to apply to its employees the social legislation of the Member State in which the employees are based. The UK, supported by a number of other Member States, had argued that such legislation was not appropriate in this Regulation. This issue was discussed by Ministers at Transport Council. Instead of an article in the Regulation a joint statement was agreed. The statement says that the Council will await the outcome of a study launched by the Commission to investigate the effects of the internal market in aviation on employment and working conditions before considering whether further legislation is necessary. The study is expected to report at the end of the year. A second outstanding issue raised in the letter of 24 May related to Public Service Obligations (PSOs). At that time, that the Scottish Executive had favoured proposing a de minimis exemption from the notification procedure for very thin routes of less than 10,000 passengers per annum. This amendment has now been incorporated into the text of the general approach.

  The European Parliament had its plenary first reading at its meeting on 10-12 July. At plenary the EP adopted 55 amendments.

  Many of the EP's amendments are welcome to us as they have improved the original Commission proposal. For example, in terms of wet-leasing (the leasing of aircraft and crew) the Commission's proposal sought to impose significant restrictions on the ability of airlines to wet-lease aircraft from carriers outside the Community. A number of charter carriers in particular expressed grave concerns about the measure, which they stated could cost several million pounds per year. These carriers have long-term arrangements reflecting the seasonal nature of the European charter market, under which a number of their aircraft are leased to North American charter airlines during the winter months, and other aircraft leased in from the same source during the summer season. An EP amendment which would enable wet-leasing to continue of the basis of exceptional needs; seasonal capacity needs; or due to unforeseen operational difficulties including technical problems, was adopted in plenary.

  However, the amendments adopted by the EP require that a valid reciprocity agreement exists between a member state and the third country in order for leasing to take place. These provisions are unwelcome because they restrict access by Community air carriers to safe and well-regulated sources of aircraft and crew—particularly from the North American market—and will therefore disadvantage consumers.

  We do not support a number of other EP amendments relating to pricing, insurance and social legislation. We strongly support the principle that air fares should include all applicable and non-optional taxes, fees, charges and surcharges at all times, in order to allow consumers to compare prices and to make informed purchases. This principle is widely supported in the EP, although a number of amendments require a full breakdown of any taxes, fees and charges, including security costs. We believe that this level of detail is undesirable, as it is likely to confuse consumers and will be operationally difficult to implement.

  Similarly, a number of amendments require Community air carriers to provide evidence of sufficient insurance cover to refund and repatriate consumers in the event of bankruptcy or revocation of the operating licence. We are opposed to these amendments as many passengers are already covered in this regard by the Package Travel Directive which is currently under review by the Commission as part of the Consumer Acquis. Any changes should be taken forward in that context, to prevent confusion. We have already encouraged airlines operating in the UK to include airline failure in the insurance they offer passengers to purchase, and several airlines have amended their insurance products accordingly including BA, easyJet, Flybe and Ryanair. This allows consumers to make a choice about whether they purchase such insurance (as consumers do for medical insurance when travelling abroad) rather than raising the cost of air tickets for all to protect against a very rare risk.

  Finally, three amendments were adopted on social legislation; two of which would require an airline to apply to its employees the social legislation of the Member State in which the employees are based. The third amendment requests the Commission to propose legislation on this issue. We believe that the third aviation package is not the appropriate place to review social legislation, which should be considered in a much wider context. The Commission has launched a study on the effects of the single aviation market on social and working conditions which will report at the end of 2007. We believe that we should await the outcome of this study to determine whether any specific action is necessary.

  The proposal is expected to be on the agenda for a political agreement at the Transport Council on 1-2 October, which will not incorporate the European Parliament's amendments, except where they are in agreement with the position of the Council, which does not include any of the amendments that are unwelcome to the UK. The Presidency is expected to start informal discussion with the European Parliament and the Commission on the issues where the EP's opinion differs from the Council's position, in the early autumn. If these discussions are successful it should be possible to reach a second reading agreement on this proposal. I will of course keep the Committee informed of the progress of the proposed Regulation.

23 July 2007