UK RESPONSE TO THE DG COMPETITION CONSULTATION PAPER ON REGULATION 1617/93 (EC)

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1 UK RESPONSE TO THE DG COMPETITION CONSULTATION PAPER ON REGULATION 1617/93 (EC) I INTRODUCTION 1. This paper sets out the views of the UK s competition and transport authorities (the Office of Fair Trading, the Department of Trade and Industry, the Department for Transport and the Civil Aviation Authority) on the DG Competition Consultation Paper on Regulation 1617/93 (EC) on the application of Article 81(3) to passenger and cargo tariff conferences and to consultations on slot allocation at airports. 2. Given the limited period of time that has been allowed for responding to the consultation document, we have been restricted in the consideration that we could give to the questions posed. We hope that there will be further opportunities for us to comment on the issues involved in the future. In particular, we have recently received IATA s response to the consultation document and would welcome an opportunity to comment on this. 3. Our views are broadly unchanged since the last DG Competition consultation exercise on the topic of passenger tariff co-ordination in We consider that the IATA passenger tariff co-ordination system has as its object and/or effect an appreciable restriction of competition. We recognise that interlining brings benefits to consumers but we are not convinced that tariff co-ordination is indispensable to achieving those benefits. The onus to prove that tariff co-ordination satisfies the conditions in Article 81(3), in particular that it is indispensable, should rest with IATA. 4. Block exemptions in the air transport sector were originally developed, at least in part, to help the European flag carriers and former beneficiaries of state aid in the transition to a market-based, deregulated competitive environment that culminated in the implementation of the Third Package of air transport regulation in We seriously question whether there is a continuing need for such a transition to continue. Given that we consider it questionable that the indispensability test in Article 81(3) of the EC Treaty is met, and in the absence of IATA submitting persuasive evidence to the contrary, we suggest that Regulation 1617/93 is extended for a limited period of time (two years may be an appropriate period) while alternative methods of facilitating interlining are given serious consideration. 1

2 5. The consultation document suggests a posted prices system as a potential alternative to passenger tariff co-ordination. We consider that IATA has not, to date, given sufficiently serious consideration to this, or any other potential new framework for facilitating interlining. Moreover, any assessment of whether such a system is feasible is hampered by the inadequacies in IATA s explanations of the benefits of tariff coordination as a method of facilitating interlining (IATA s arguments to date have instead focused on the benefits of interlining). We consider that the onus should be on the industry to consider and propose solutions to overcome the difficulties of developing an alternative system, or provide clear and compelling evidence as to why no such system is viable. In doing so we consider that the aim should be to meet the reasonable demands of the market for an interline product, rather than necessarily seeking to replicate the current gold-plated system without considering what the market actually requires. 6. This paper also touches on the other areas raised in DG Competition s Consultation Paper. In summary: we consider that Regulation 1617/93 should be extended in geographic scope to apply to EU-third country routes for the same limited period while alternative methods of facilitating interlining are given serious consideration; we see no reason to make any changes to the slots block exemption following the technical amendments made to the EC airport slots regulation; we support DG Competition s arguments that there is no objective reason to reinstate the former block exemption for cargo tariff co-ordination on intra-eu routes; and we see no reason for formulating a new block exemption for cargo tariff consultations between EU and third countries when the indispensability test in Article 81(3) is not likely to be met. II PASSENGER TARIFF CONSULATIONS 2

3 6. There are clear benefits for passengers arising from the ability to interline. However, it is less clear that tariff co-ordination is indispensable to achieving these benefits. A further consideration is that tariff co-ordination is likely to significantly dampen competition. In this section we discuss the restrictive effects of the IATA system and consider more precisely how the benefits arise from IATA tariff co-ordination. We then consider indispensability, in particular discussing the posted prices system as a possible alternative method of facilitating interlining. Finally we consider whether there are any other arguments that arise in considering interlining in relation to EU-third country travel. A The restrictive effects of IATA tariff co-ordination 7. The restrictive effects of IATA multilateral tariff co-ordination potentially arise in four, sometimes overlapping, areas, each of which is considered in turn. These comments apply to both intra-eu and to EU-third country routes. i) Price fixing of IATA flexible tickets 8. It is generally accepted that any horizontal price fixing is likely to have an appreciable effect on competition, especially where (as is the case with IATA tariff conferences) the parties to that agreement account for a significant proportion of the relevant market. 9. We are aware that IATA in its response to the DG Competition consultation paper claims that the IATA tariff consultations do not have the object of restricting competition, and use the European Commission s Notice on the application of Article 81(3) 1 to support this view. Their argument appears to be that the tariff co-ordination conferences do not fit the model of a classic price fixing cartel and that in meeting they are creating a multilateral product that the individual airlines cannot provide on their own; in effect it is a new product they are creating. 10. At first glance, IATA s argument would appear to have some merit. In the same Notice, the European Commission states in its discussion on the basic principles for assessing agreements under Article 81(1) that certain restraints may in certain cases not be caught by Article 81(1) when the restraint is objectively necessary for the existence of an agreement of that type or that nature 2. This would seem to favour IATA s arguments that their tariff co-ordination conferences are objectively necessary otherwise a new multilateral product would not emerge. 1 OJ C , p

4 11. However, the same paragraph goes on to clarify that such exclusion of the application of Article 81(1) must be made on an objective basis. The question to be asked is: whether given the nature of the agreement 3 and the characteristics of the market a less restrictive agreement [could] not have been concluded by the undertakings in a similar setting. As discussed later in this response, it appears possible that a less restrictive system (e.g. a posted prices system) could be devised to facilitate interlining. As a result, we would argue that interline fare-setting at IATA tariff conferences does seem unnecessarily to restrict competition as it could be possible to facilitate interlining in a less restrictive way. As the European Commission s Notice goes on to state, price fixing (as occurs within the conferences) is a serious offence, and so has by its object the potential to restrict competition 4. We would suggest that tariff co-ordination appears to fall into this category of being restrictive by its object. However, this is something we would like to give further consideration to once we have digested IATA s response to DG Competition. 12. We also consider that the tariff conferences are likely to have the effect of raising the price of interline tickets (as well as other restrictive effects on competition discussed below). In addition to the potential for the IATA fare to be excessively high as a result of collusion between carriers, conference votes are taken unanimously, so it is possible for the least efficient carrier to veto a proposed tariff until it is sufficiently high for that carrier to cover costs. The IATA fare will in any case be set at an artificially high level compared with that appropriate for a direct point-to-point journey in order to allow for the added cost of optional flexibility for multi-sector routings, and the ability to change those routings, within certain mileage limits. A question which remains unanswered due to a lack of adequate data is the extent to which this facility is actually used. In the event of few passengers utilising, or relying on, this facility it appears that the majority of passengers buying IATA tickets are paying for a service that they do not use. The onus should be on the industry to supply data in this respect. ii) Reduction of incentives for airlines to offer flexible tickets on some routes 13. In some markets a fixed IATA fare may reduce incentives for airlines to offer their own flexible tickets. Business travellers faced with only an IATA flexible fare are compelled to buy that fare even where they may not require an interline facility but only a ticket free 2 Ibid. paragraph 18(2) 3 The Notice makes clear that references within the Notice to agreement also include decisions by associations of undertakings (e.g. IATA), and concerted practices. See footnote 1 in the Notice. 4 Ibid. paragraph 21 4

5 from restrictive booking conditions. Although past surveys 5 have found that on routes within the EU airlines did not offer a single-operator alternative flexible fare on a substantial proportion of routes, this does now appear to have changed. The UK s Civil Aviation Authority looked at a sample of intra-eu flexible fares offered in July 2004 from their home base by 13 EU national carriers that have regularly attended recent IATA TC2 Within Europe tariff co-ordination conferences. This revealed that of the 247 routes checked, only 14 (less than 6%) had no carrier-specific flexible fare 6. In some EU markets, fare structures have altered more radically because of the substantial changes in the competitive position following the entry of low-cost carriers. Cost-conscious business travellers have the option of low-cost carrier fares, which, while usually nonrefundable, often remain an attractive proposition because of their low level and lack of other restrictions. In addition, full-service carriers have in some cases been forced to react, for example by simplifying their tariff and in particular dropping the Saturday-night stay requirement that previously prevented most low fares from being used by business travellers. 14. The effects on competition of airlines offering their own flexible tickets are likely to vary depending on the structure of the particular market in question. Where the airlines on a route are evenly matched in terms of frequency it is likely to be particularly beneficial for them to compete for passengers that require some flexibility but do not need the flexibility provided by access to all operators flights. If a single airline operates a large proportion of the total frequencies on a particular route then its single-operator flexible ticket is likely to be very attractive to consumers. In this case the benefits to consumers of that airline s own flexible ticket being made available at less than the IATA fare may be offset to some extent by a weakening in the competitive position of any airlines operating at low frequency on the route if the smaller airlines rely on the IATA fare to offer an interlineable product that benefits from the larger carrier s frequency. iii) IATA fares act as a reference price for business and full economy fares 15. It is a requirement of the block exemption that consultations on fares give rise to interlining. The UK authorities are concerned that even where a non-interlineable carrier-specific fully flexible fare is introduced, its level may be influenced by the level of 5 See Aloy/Lévêque Assessment of the effects of the promotion by IATA of universal interlining Study commissioned by European Commission DG IV (September 1998). 6 The following airlines from the sample offered carrier-specific flexible fares on all the sample routes checked: Air France, Air Portugal, Austrian, British Airways, Finnair, KLM, Lufthansa, Olympic, SN Brussels and SAS. Airlines from the sample not offering such fares on all the sample routes checked were Alitalia (no carrier- specific fare on 2 of 15 routes), Iberia (7 of 15) and Air Malta (5 of 15). 5

6 the fully flexible IATA fare and, if this is the case, changes in the level are likely to mirror those of the IATA fare the so-called coat-hanger effect. The coat-hanger effect is of most concern in those markets which are directly served, particularly those with medium/high frequency. 16. A publication by the UK s Civil Aviation Authority illustrated the coat-hanger effect on intra-eu routes 7 although the report, published in 1998, is rather dated. More up to date analysis of this effect is necessary when assessing the competitive impact of IATA tariff co-ordination. The CAA has carried out some preliminary work on this to aid the DG Competition s analysis. 17. The CAA looked at flexible fares offered by EU national carriers (plus bmi) on 15 or more intra-eu routes from London, Amsterdam, Paris, Brussels, Frankfurt, Zurich, Vienna, Madrid, Lisbon, Rome, Malta, Athens, Copenhagen, Oslo, Stockholm and Helsinki. The analysis compared carrier-specific flexible fares set independently by these airlines as a percentage of the IATA fares set at the multilateral conference. The results are mixed. In most markets a snapshot of fares in late July 2004 showed no obvious correlation across routes between these non-iata fares and the IATA fare. However, there were notable exceptions. These are shown in the tables at Appendix 1, and are summarised below. 18. Certain Air France flexible economy fares from Paris showed a distinct pattern by country; some fares to Germany 8 and Italy appeared to be set at 90% of the IATA level, and fares to Scandinavia and Eastern Europe appeared to be set at 85%. Furthermore, a more detailed examination of these fares from Paris showed that many appear to have increased in step with increases agreed at IATA conferences. 19. A sample of 21 Lufthansa routes from Frankfurt showed 13 routes with a fare set at 90% of the IATA fare, two routes to Spain set at 92% and two routes to Switzerland set at 80%. A sample of 21 Lufthansa routes from Munich showed a similar pattern (in some cases fare levels were identical to Frankfurt; in others they were different but showed the same percentage difference from the IATA fare). 7 Civil Aviation Authority The Single European Aviation Market: The First Five Years CAP685 (June 1998) (see Appendix I, pages ). 8 Fares from Paris to Frankfurt and Munich were 87% rather than 90% of the IATA fare. In the other direction, the equivalent fares to Paris from Frankfurt and Munich (and Dusseldorf and Berlin) were 90% of the IATA fare. 6

7 20. A sample of 15 Air Malta routes from Malta showed seven routes set at 66% of the IATA fare, and three more at 67 68%. While Malta was not a member state at the time of the last IATA conference, this nevertheless illustrates the potential spill over effect that the conference can have on fares that are not interlineable. 21. The CAA also looked at a much smaller sample of long-haul routes from three EU countries. From this data it appears possible that carrier-specific flexible fares are less likely to be made available for long-haul routes than for short-haul routes, but where they are available, there is less tendency for them to be set as a particular proportion of the IATA fare. However, this data is not presented in any detail here as the sample was too small to draw any conclusions from the analysis. In addition, the data only covered published fares and in long-haul markets there may be a greater likelihood of discounted fares being available, particularly for indirect travel. iv) Information sharing 22. Paragraph 44 of the Consultation Paper indicates that the tariff conferences provide a forum wherein airlines exchange information on costs, prices and general industry development. In particular, in order to set tariffs, airlines share their analysis of why some routes or tariff classes are under or overpriced and how tariffs should be structured. This could potentially dampen competition by revealing airlines future pricing strategies and may encourage and facilitate co-ordinated strategies for all fares. It is not clear that such information sharing is necessary for determining interline fares. In addition, the conferences provide the opportunity for further information sharing between airlines beyond that considered necessary to set interline tariffs, although we have no evidence that such information exchange actually occurs. 23. The extent to which competition concerns arise from tariff conferences may differ between different types of inter-operator services (these different types of services are discussed in more detail in section B below). Tariff co-ordination is likely to raise serious concerns for interchangeable tickets for direct flights as it is more likely that deriving the IATA fare will enable airlines to co-ordinate their individual fare structures for direct travel. For through tickets customers have the option of purchasing separate tickets for the individual sectors of the journey and this option may act to restrain prices for these tickets, although this option is more onerous for the customer. (Ensuring effective competition for direct flights is therefore also important in making this restraint effective.) In addition, there may be justification for allowing tariff co-ordination on through tickets 7

8 due to the Cournot effect 9. Nonetheless, a posted prices system could take at least some account of this double marginalisation in pricing by allowing airlines to set wholesale posted prices at a level designed to stimulate connecting traffic. 24. If there was a cheaper flexible alternative to the IATA fare and if the price of that alternative was not influenced by IATA tariff co-ordination, then it could be argued that it was in the consumer s interest for there always to exist a fully interlineable fare. Even if demand is very low, this could be regarded as the default fare that is always available on any city-pair. However, the problem remains that a fully interlineable fare that is determined by tariff co-ordination may influence the level of the cheaper alternative fare, as noted above. It is worth recording, nevertheless, that on intra-eu routes where there has been low-cost carrier entry, the passenger does now have access to lower semiflexible non-interlineable fares which, given the business model of those carriers, are less likely to be influenced by IATA. B Benefits of interlining that are claimed to derive from tariff conferences 25. Passenger tariff conferences are one method of facilitating interlining, which can broadly be defined as allowing passengers to use the services of more than one airline on a single ticket. In assessing the benefits that arise from interlining, and the pros and cons of using tariff conferences to facilitate it, it is helpful to distinguish between three types of inter-operator services that are available under the IATA multilateral interline system: (i) flexibility over the carriers a passenger can choose to travel with on a specific sector from A to B (including the ability to return on a different carrier); (ii) provision of through tickets which allow passengers to combine travel on the services of one carrier between points A and B and on another carrier between points B and C on a single ticket (i.e. combine two sectors end to end); and (iii) flexibility over the route that a passenger takes between points A and B, including both a direct flight between A and B and indirect flights via a variety of midpoints such as C, D and E. 9 The Cournot effect is that producers of complementary products have an incentive to set prices jointly in order to take account of the fact that lowering the price of one product increases demand for the other product. 8

9 Subject to the participation of the carriers concerned, all the above can be achieved on one ticket purchased in one transaction in one currency, with baggage through checked etc. i) Flexibility over the carriers that can be used on a specific sector 26. This facility can be useful where each carrier offers a low-frequency service but by combining the carriers services on an IATA flexible ticket the airlines are able to provide passengers with a higher frequency service. Additionally, flexibility over carriers enables small competitors that offer a low-frequency service to compete more effectively with a large carrier offering a high-frequency service. The extent to which the ability to interline will assist small airlines in competing is likely to depend on their share of frequency on the route. If frequencies are fairly evenly split between two or more airlines then passengers may prefer an IATA interline fare as it provides more flexibility on the sector by allowing passengers to choose among both airlines flight schedules. This may increase the number of passengers that travel with the smaller airline. However, the more substantial the larger airline s presence or the larger its proportion of rotations, the less attractive an IATA fare will be when compared with a carrier-specific fare offered by the larger airline. Similar benefits could be provided through codeshare arrangements that are not as restrictive as tariff co-ordination, although multilateral interlining may be beneficial if: it enables all carriers on the route to participate, when some would otherwise be excluded from codeshare arrangements; or competition is only dampened for the most flexible, highest price tickets sold to those who value such flexibility, whereas codeshare arrangements may dampen competition for all ticket types. ii) Combining services end to end on a through ticket 27. Through tickets are likely to be particularly beneficial on long-haul flights, where indirect flights may be effective substitutes for direct flights, or between points where no direct service is available. They can enable improved connections to be provided (for example, making it easier to switch to a new flight on the second sector if the first sector flight is delayed) and may allow lower fares to be charged by enabling carriers to take account of the Cournot effect. 9

10 28. Benefits may also accrue to other passengers if increased connecting traffic makes a thin route viable or supports higher frequencies. Small airlines often contend that interlining allows them to offer a wider range of frequencies on the routes they serve and to participate in traffic flows in markets far beyond their own networks. The additional passengers generated by interlining bolster their ability to survive and to compete effectively with the larger airlines. 29. However, the benefits of IATA through fares may be argued to be less now than they have been in the past as through fares are increasingly available via airline alliances or codeshares on an intralining 10 basis at a lower price. A feature of the last few years in the air passenger transport sector has been the growth of strategic alliances between airlines involving a wide range of cooperation ranging from price, marketing and sales co-ordination to joint purchasing and maintenance. Passengers are increasingly able to travel within one alliance, especially on transatlantic and intra-european routes. However, multilateral interline arrangements through IATA may have advantages even where alliance tickets are available or bilateral arrangements are in place in that they may assist non-aligned airlines to compete more effectively with alliance carriers that are able to codeshare and therefore provide on-line connections. 30. It is questionable how important the preservation of the IATA interlining system is to nonaligned airlines now, and how important it will be in terms of their ability to survive outside alliances in the future. As global alliances develop, there will be a greater desire and ability for alliances to set their own prices for any journey worldwide. Airlines independent of an alliance will find it increasingly difficult to attract passengers who might formerly have interlined, and will only be able to do so if the through fare is competitive with any alliance alternative, both in terms of price and flexibility of routing and timings. As the alliance network grows, so that flexibility widens. At present, the IATA system represents the ultimate alliance of all mainstream carriers, but the margin between the flexibility offered by the IATA system and by each of the growing alliance groupings may be whittled away over time. Competition between alliance groupings in drawing traffic from regional markets over their hubs is likely to intensify and a nonaligned small airline may find its independent survival in such markets threatened whether tariff co-ordination, or even the IATA interline system, exists or not. 10

11 31. This argument would suggest that many independent carriers (including small regional carriers and no-frills carriers) may tend to concentrate on routes with strong point-topoint traffic or on relatively thin niche routes, entering codeshares or other limited agreements only on selected routes. As such, they are less reliant on forming alliances than feeder/franchise carriers to major networks and alliances. But it is also argued that an independent airline (such as Virgin Atlantic, an IATA member that does not actually participate in tariff co-ordination), while focusing primarily on point-to-point markets, may nevertheless rely on its ability to interline freely to pick up interline traffic at the margins and maintain the profitability of its network. iii) Itinerary flexibility on indirect routings 32. The benefits that passengers obtain from itinerary flexibility are less clear cut than those related to the other inter-operator services. In dense short-haul direct-service markets it is less immediately obvious why such flexibility is of value to passengers in itself (for example, few passengers wishing to travel from London to Frankfurt are likely to want to make an unplanned stop in, say, Paris on the return journey). However, itinerary flexibility may be beneficial for time-sensitive passengers in low-frequency markets (for example, a passenger who misses the only direct flight between two cities and who decides to take an indirect route rather than waiting for a direct flight the following day). It may also provide a range of connecting opportunities between two cities with no direct service or a low-frequency service (for example, if it enables passengers to switch between connecting hubs depending on which services have available seats or convenient schedules, perhaps allowing a day return on a short-haul route where that would not otherwise be possible). 33. However, building in complete itinerary flexibility to IATA fares (within certain mileage parameters) may also have detrimental effects on those passengers who require a flexible ticket but not to that degree because (as DG Competition discusses) that complete flexibility inevitably raises the cost of travel. Unfortunately it is unclear what proportion of passengers buying an IATA ticket utilise the itinerary flexibility, because of the lack of adequate data. In order to claim this benefit for the IATA system, IATA should substantiate the value of this flexibility to demonstrate that passengers are not paying a premium for a product characteristic that is little used. 10 The terms intraline and on-line are used here to distinguish travel within an alliance from interlining between two non-allied carriers. 11

12 34. Finally, it must be recognised that the IATA tariff co-ordination system can provide a default through fare where none would otherwise exist, for example between two small regional points with no direct service and which are not both served by the same alliance. These fares can be used for ticketing on any participating airline s service, without each airline individually incurring the cost of setting and maintaining them in reservation systems. The passenger would otherwise have to pay the sum of the sector fares, which might be expected to be higher than a co-ordinated fare which takes account of the Cournot effect. But it should not be assumed that sum-of-sector fares are always higher; carrier-specific fares on each sector may be substantially lower than IATA fares. C Are tariff conferences indispensable? 35. A key question is whether the restriction of competition outlined above is indispensable. The Consultation Paper suggests that price fixing may be justified as the resulting fare is a product that is offered jointly by all the operators that could provide a service on all or parts of the route between the city pair for which the ticket is purchased. However, as noted elsewhere in this response, it is not clear that price fixing is indispensable to interlining in all circumstances. 36. IATA has argued in the past that tariff co-ordination allows the airlines to offer a geographically comprehensive fares structure which would otherwise be far too expensive for individual airlines to create and maintain. Without co-ordination the larger carriers would be less willing to interline. Where they did interline, they would dictate fare levels and the level of prorates the small airlines would receive. 37. Air transport within the United States (a market where, being domestic, there are no IATA tariff consultations 11 ) provides a radical alternative to the IATA tariff co-ordination system. There is much less interlining than in Europe, but more intralining within the hub and spoke systems of individual airlines (or their partners), thereby allowing passengers to make connecting air journeys between city pairs where there is no direct service because origin/destination traffic flows are relatively weak. One of the network benefits of alliances is the ability to internalise the complexity of interlining and the emergence of 11 The US Department of Transportation also requires partners to an immunized airline alliance to withdraw from IATA tariff co-ordination between the US and the home countries of alliance members and any other countries with immunized alliances. This has diminished the impact of tariff coordination in the US-Europe market, for example, because many of the major players are blocked from participating in IATA tariff conferences. 12

13 alliances should therefore allow many of these potential gains to be realised, assuming that there is effective competition between rival alliances. The US approach is likely to look increasingly normal as alliances and probably eventually mergers and takeovers continue to develop globally. However, there remain concerns about the effect on carriers independent of an alliance, and the potential anti-competitive effect if they were to be excluded from interline markets. 38. Interlining is based around the IATA Multilateral Interline Traffic Agreement (MITA) governed by Resolution 780. A distinction must be drawn between this and tariff coordination. We understand that there is significant interlining taking place at fares not subject to IATA tariff co-ordination, even by tariff co-ordination participants. Furthermore, tariff co-ordination participants are just a subset of the airlines that are IATA members and signatories to multilateral interline and prorate agreements (see Table 1 below). Table 1 Total airlines worldwide EEA-based airlines Multilateral Interline Traffic Agreement signatories approx 400 approx 80? Multilateral Prorate Agreement Passenger signatories non-signatories registering revenue requirement for interline journey IATA membership Tariff co-ordination participants (cargo and passengers) Notes: EEA airline signatories to MITA are thought to number around 80. Apart from the MPA Passenger signatories, the figures include a few all-cargo airlines. Source: IATA website 10 September 2004; Prorate Manual Passenger June 2003; Meeting between OFT, CAA and IATA on 14 September Airlines signing up to MITA are authorised to sell each other s services subject to concurrence between individual airlines (i.e. the agreement is not automatically in effect between parties). Where the necessary concurrence exists, airlines or their agents will sell carriage on another airline s service at its published fare unless that other airline deliberately opts out from participation in interline carriage at that fare. This is often regarded as one of the strengths of the interline system, in that the ability to interline is 13

14 the default position. We understand that Resolution 780 governing MITA makes no mention of tariffs being agreed through IATA tariff co-ordination. 40. In 1997 the UK CAA, recognising that there appeared to be interlining taking place at non-iata fares, attempted to obtain some sample data from UK airlines that included the proportion of interline tickets sold at IATA fares. Unfortunately none of the airlines was able to differentiate properly between tickets sold at IATA and non-iata fares. The CAA concluded that the airline arguments in favour of tariff co-ordination were therefore only loosely based on the actual usage of IATA fares (since airlines generally did not seem to have such data to hand). These arguments seemed to be based more on the perception that interlining is dependent on the IATA tariff co-ordination framework, and that the withdrawal of tariff co-ordination would lead to the collapse of interlining. Obtaining evidence for such a causal link has proved more difficult. 41. This lack of data led the Commission to make it a condition of extending the block exemption to 2005 that air carriers participating in consultations on passenger tariffs should collect data showing the usage of IATA fares, the extent to which those fares are used for interlining, and the extent to which non-iata fares are used for interlining. This data would then be used to facilitate the Commission s re-examination of whether the block exemption should be further extended beyond The Consultation Paper states that the data provided so far is only partial because interlining between codeshare carriers is treated as on-line carriage, and because usage of the itinerary flexibility allowed by IATA fares is not measured. The UK authorities consider it regrettable that the data provided is not sufficient to allow a proper assessment of the role IATA fares actually play in the EU market and would like to see more information about what data has already been received. The UK authorities believe that the onus should be on the industry to provide this information, in a sensible format, to support their case for a block exemption. 42. Annex 2 of the Consultation Paper sets out an alternative to IATA tariff co-ordination in the form of a posted prices system. We believe that a posted prices system may be workable in practice, although it would need to be developed with the close involvement of current participants to meet industry requirements. As part of the proration system airlines sometimes specify by means of a proviso the revenue they require for a particular sector where a through fare has to be divided between the airlines that operated the sectors concerned. It would appear feasible for airlines to extend this 14

15 approach to a posted-price system of the kind described by the CAA in its publication CAP685 (Appendix K, page 337) and outlined in paragraph 24 of the Consultation Paper. 43. Posted prices could be set on either a wholesale or a retail basis. A wholesale posted prices system would require each airline that wished to participate in interline tickets to set the reimbursement it requires if it carries a passenger on a ticket sold by another airline (the posted price ). A retail posted prices system would set the level of remuneration as a proportion of the fare charged for the sector. In both systems, each airline would then independently set its own fares for interline tickets in light of these posted prices. Should such a posted prices system be used, we consider that this should be a wholesale system rather than a retail one. This is because a retail system may limit (a) the gains for passengers in terms of reduced fares compared with buying separate tickets for each leg of the journey, and (b) the benefits for airlines in terms of their ability to use interline fares to attract additional traffic on particular routes. 44. A posted prices approach appears to be straightforward when there are just two airlines involved and the route is predefined, but it may be difficult for operators to determine a price to charge when the possible routing options are numerous (with perhaps a large number of airlines involved) 12 and the ticket permits flexibility in the route taken. While the multiplicity of routings may prevent the industry from establishing a posted prices system that allows itinerary flexibility, it does appear to be possible for posted prices to deliver more restricted flexible tickets that provide most of the advantages of the current IATA system, i.e. that facilitate both inter-carrier flexibility on a particular route, or intercarrier through tickets. For example, airlines could offer an interline ticket that was valid on particular airlines or a number of the possible routes between two points rather than the fully flexible tickets currently available. Following our comments above in relation to itinerary flexibility, where we question how widely used this facility is, we query how important it is to preserve it in any new system that is created. The loss of itinerary flexibility in a posted prices system may not be significant, particularly as currently including this flexibility results in IATA fares being more expensive than they would otherwise need to be. At worst, those few passengers whose itinerary changes exceeded the flexibility of the ticket would simply have to obtain a refund and rebook, if necessary using sum-of-sector, carrier-specific, fares which could in theory still be combined end-to-end on a through ticket where an interline agreement exists. 15

16 45. One disadvantage of using posted prices is that it could be possible for airlines to set wholesale prices that enable them to collude to achieve monopoly retail prices. Where a significant proportion of passengers on a direct route is connecting with a variety of other flights, competition to attract connecting traffic may reduce this incentive. This problem is less likely to be overcome on routes that are dominated by point-to-point traffic, although even here collusion is no more likely than if fares are agreed at tariff conferences. 46. Some practical experience from another posted prices system can be drawn from the UK block exemption for public transport ticketing schemes 13. This specifies that schemes providing through tickets must be operated on the basis of independently set wholesale posted prices. 47. Under Regulation 1/2003 and as set out in EC jurisprudence, it is for the parties to an agreement seeking to benefit from the application of Article 81(3) to prove that they satisfy the criteria. The same requirement should apply when a block exemption is tailored to the requirements of an individual organisation. The onus to prove that tariff co-ordination satisfies the conditions in Article 81(3), in particular that it is indispensable, rests with IATA. To date, we believe that they have not proved this to a satisfactory level, instead rehearsing the benefits of interlining rather than the benefits of tariff coordination as a means of facilitating interlining. D Differences between Intra-EU and EU-third country routes 48. This section considers whether there are any arguments for adopting a different stance to IATA passenger tariff co-ordination for EU-third country routes than that applied to intra-eu routes. The view of the UK authorities is that different benefits are apparent from interlining on long-haul routes than on intra-european routes (primarily because of differences in the attractiveness of indirect travel and the scope of intra-alliance travel) but that similar arguments concerning the indispensability of tariff co-ordination apply. 12 However, there is greater scope of competition occurring where the process results in different fares being available for an interlining ticket along different routings. 13 The Competition Act 1998 (Public Transport Ticketing Schemes Block Exemption) Order 2001 (SI 2001, No. 319). 16

17 49. In general, indirect services are more likely to be suitable substitutes for direct services on long-haul than short-haul routes because the increased time spent in travelling indirectly is less significant relative to the total long-haul journey time. Two airlines providing the individual sectors of an indirect service will be able to compete much more successfully with an airline providing a direct service where they are able to offer a through fare on an interline ticket. Moreover, given that long-haul route networks tend to be less dense than short-haul networks, indirect travel is more likely to be necessary because no direct flights are available. Further, through ticketing and itinerary flexibility on EU-third country routes may also encourage greater traffic along thin routes which are sectors of an indirect route. 50. At present the main global airline alliances are oneworld, Skyteam and Star Alliance. These have good network coverage in important geographical areas like the transatlantic market and the intra-european market. Nonetheless, there are gaps in network coverage with certain areas, like parts of the Orient (for example China) being unconnected points of destination. Whilst attempts are being made to bridge these gaps (for example, South African Airways bid to join the Star Alliance was recently 14 accepted) there is not the same level of connectivity on EU-third country routes as there is on intra-eu routes. As a result, it may be more difficult to intraline on EU-third country routes than on intra-european routes. Carriers that are not members of an alliance may also rely to some extent on feed traffic to boost the profitability of their long-haul services. As noted above, Virgin Atlantic, for example, regards the ability to pick up feed traffic from interline partners as essential, even though the bulk of its traffic is point to point. This effect is much more important on long-haul routes than short haul. Also, some EU-third country markets are foreclosed altogether to new entrants by bilateral restrictions. For example, British Airways has until recently been unable to serve Shanghai from London. Therefore interlining provided the only means for BA to access that market and to offer some limited competition to carriers serving Shanghai. As a result of these effects it becomes all the more important to ensure that a system enabling extra-eu interlining is available. 51. In its Consultation Paper, DG Competition comments in paragraph 99 that the alternative posted prices system may not provide a credible or viable alternative in respect of EUthird country routes as the posted prices system is intimately linked to the adequacy of the hub & spoke model. We do not share this view it should be possible to formulate 17

18 the price of the journey taking into account posted prices of the off-line sectors so long as the relevant interline connections are available to make the overall journey. There does not appear to us to be any obvious reason why there should be any greater need for tariff co-ordination on EU-third country routes than on intra EU routes. A posted prices system should be capable of facilitating interlining on EU-third country routes as a complement to airline alliance intralining, and indeed the system of provisos under the Multilateral Prorate Agreement which operates equally for non-iata and IATA fares shows that a similar system is already in operation. As noted above, a posted prices system may not allow for itinerary flexibility on EU-third country routes. However it is unclear in view of the different journey characteristics of long-haul passengers what proportion of passengers actually require itinerary flexibility. We would reiterate that it is for IATA to substantiate the value of this flexibility in order to claim the benefit of it. 52. We do recognise that extra-eu markets are characterised by bilateral Air Services Agreements containing significant government-imposed restrictions, including market entry, capacity and pricing, and tariff co-ordination has historically been firmly embedded in this bilateral system. Indeed some bilateral agreements require fares to be agreed between the designated carriers of each side, and in at least one notable case, this is strongly enforced by the government, which regularly disapproves (i.e. vetoes) fares that have not been so agreed. While discontinuing tariff conferences may not necessarily lead to lower fares while such restrictive bilaterals remain in place, this does not, of course, justify the continuation of the conferences if they are not indispensable to the preservation of the interline system. 53. In the Consultation Paper DG Competition suggests that on EU-third country routes the IATA interlining system may be considered pro-competitive as passengers have the ability, in using the itinerary flexibility provided by IATA fares, to choose the carrier they want to fly with for the longer part of their journey. The paper concludes that this may allow for some form of competition between airlines in respect of the quality of services provided. We agree that interlining can have pro-competitive effects, as described above, where it allows airlines to gain access to markets that would otherwise be out of reach, and as a result provide additional competition. However, we find this particular claimed benefit somewhat questionable. The quality of service benefit arises from competition between airlines (or alliances), whether direct or indirect, not from the ability 14 5 June 2004, BMI press release: 18

19 to switch carriers at a common fare. Agreement of the IATA fare is also of course likely to result in an artificially high fare level. 54. We conclude that (a) there is more need to ensure the preservation of the multilateral interline system on long-haul routes; (b) the restrictive effects of IATA tariff co-ordination on long-haul routes are of just as much concern as on short-haul routes (although these restrictions are less significant than those caused by certain bilateral agreements); and (c) that posted prices would appear to be a possible alternative to tariff co-ordination on third-country routes as well as intra-eu. For these reasons, we consider that the block exemption for passenger tariff conferences should be extended to include EU-third country travel for the same limited time as intra-eu travel, but with a view to implementing an alternative framework facilitating interlining. This could be a posted prices system. E Obligation to interline imposed as a remedy in the framework of an alliance or merger operation 55. In paragraph 71 of its Consultation Paper, DG Competition enquires whether the obligation to interline as a remedy is satisfactory in preventing market foreclosure in relation to small/regional carriers. 56. In recent years the European Commission has accepted an obligation to interline as a remedy in assessing both alliance and mergers. 15 The aim of this remedy is to enable smaller competitors or new entrants to effectively offer a higher frequency service in competition with the dominant carrier. It is typically offered in conjunction with other remedies to encourage entry/expansion, such as the provision of slots, frequency freezes and/or entry into the dominant carrier s frequent flyer programme. 57. The main problem with such remedies is that they require the smaller competitor to rely on the dominant carrier to provide a service to its customers. This can act as an incentive for the dominant carrier not to treat such customers as well as it does its own, and it is our experience that airlines have generally viewed this remedy as unattractive. The remedy is also one that requires constant monitoring. Even if such monitoring is achievable, it is difficult to see how competition authorities could enforce a requirement 19

20 to treat all passengers equally. As a result, the obligation to interline as a remedy appears unlikely to provide sufficient assistance to small/regional carriers to prevent them from being foreclosed from the market. 15 See COMP/ Austrian Airlines/Lufthansa, COMP/38.284/D2 Air France/Alitalia (both alliances) and COMP M.3280 Air France/KLM (merger). 20

21 III CARGO TARIFF CONSULTATIONS 58. We support DG Competition s reasoning of there being no objective reason to reinstate the former block exemption for intra-eu cargo tariff co-ordination. We have not been made aware that any comprehensive evidence has been gathered of serious detriment to the effective functioning of the intra-eu cargo market following the removal of the block exemption in 1997 (Regulation 1523/96 (EC)) and the Commission s subsequent Statement of Objections in 2001 in response to IATA s application for an individual exemption. 59. Furthermore, our view is that no evidence has yet been provided that cargo tariff coordination is indispensable to the effective functioning of the cargo market between the EU and third countries. Many of the considerations set out in those earlier decisions in respect of intra-eu routes would appear to apply equally to third-country routes. Therefore, we see no reason for formulating a new block exemption for cargo tariff consultations between EU and third countries when the indispensability test in Article 81(3) is not likely to be met. IV CONSULTATIONS ON SLOT ALLOCATION AND AIRPORT SCHEDULING CONFERENCES A Impact of Technical Amendments to the EC Slot Regulation 60. The Consultation Paper enquires about the impact that Regulation No 793/2004 will have on making efficient the arrangements for slot allocation at airports and airport scheduling. Regulation 793/2004 introduced a number of technical amendments to the slots regulation (95/97 EC). These are at the most likely to have a relatively limited effect on the functioning of slot allocation arrangements. Consequently we agree with the preliminary conclusion of the Consultation Paper that for the time being the slots block exemption should be extended. 61. It may be necessary to alter the block exemption should more radical changes be made to the Slots Regulation in the future. On this matter, the UK would welcome a move to a more market-based method of slot allocation. We therefore welcome the Commission s 21