The Application of EU Competition Rules in the Transport Sector

Journal of European Competition Law & Practice, 2014, Vol. 5, No. 4 SURVEY 227 Survey The Application of EU Competition Rules in the Transport Sector Itai Rabinovici* I. Introduction The transport sector accounts for an important share of the EU s economy and is a necessary participant in plans to foster growth and tackle burning issues such as energy consumption and environmental protection. The efforts to modernise the sector also involve further liberalisation and the improvement of the conditions of competition which sometimes lag behind in comparison to other industries. In 2013 the Commission persisted with its endeavours to liberalise the railway industry. It adopted a proposal for a fourth railway legislative package that is intended to complete the liberalisation of the railway passenger sector, cut red-tape, and improve the structure of the market. Some of the competition problems that stem from the particular structure of the railways market were examined in the Commission s investigation of Deutsche Bahn that was concluded in 2013 with a commitments decision. The maritime industry has traditionally benefited from a special antitrust regime in the EU and the rest of the world. In 2013 the Commission continued to work on bringing the maritime industry closer to the general competition regime. It allowed the maritime guidelines to expire and was examining the need to extend the application of the consortia block exemption, the last measure specific to the maritime sector. Official proceedings were opened in 2013 against a large number of shipping companies in order to investigate a common practice in the industry to make public announcements of future price increase intentions. Competition in the air transport industry continued to preoccupy the Commission in 2013 with several antitrust and merger investigations. The Commission adopted a final decision in its investigation into the joint venture between Air Canada, United, and Lufthansa, making binding the commitments offered by the parties. The Commission also adopted three major merger decisions: blocking Key Points The major legislative development in 2013 was the adoption of the Commission s proposal for a fourth railway package. Air transport was the focus of competition enforcement with the adoption of a commitments decision and three major merger decisions. the third attempt by Ryanair to acquire control of Aer Lingus; clearing the second attempt by Aegean Airlines to purchase Olympus Air, and the merger between the American giants US Airways and American Airlines. II. Articles 101 and 102 TFEU A. Maritime 1. Legislation The antitrust rules applicable to the shipping industry have changed significantly in recent years. The longstanding antitrust block exemption for container shipping cartels (also known as the Liner Conference Block Exemption) was repealed as of October 2008 1 and in February 2013 the Commission decided not to prolong the Maritime Guidelines. 2 The Maritime Guidelines were adopted in order to facilitate the transition of the maritime industry from a specific to the general competition regime and provided shipping operators of liner shipping and tramp vessel services with guidelines to assess the compliance of their activity with EU competition law. 3 The Commission s view, which was confirmed in the public consultation, was that the goal of facilitating the transition was achieved and that more recent and * European Commission, Directorate General for Competition, Directorate F (Transport, Post and Other Services). The content of this article does not necessarily reflect the official position of the European Commission. Responsibility for the information and views expressed here lies entirely with the authors. 1 Council Regulation 1419/2006, repealing Regulation 4056/86 and amending Regulation 1/2003, OJ L 269/1, 28 Sep. 2006. 2 See Commission press release of 19 Feb. 2013, IP/13/122. 3 Guidelines on the application of Article 81 of the EC Treaty to maritime transport services, OJ C 246/2, 26 Sep. 2008. # The Author 2014. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com

228 SURVEY Journal of European Competition Law & Practice, 2014, Vol. 5, No. 4 up-to-date guidelines in terms of legal and economic standards existed. The Maritime Guidelines have therefore expired on 26 September 2013. After the expiration of the Maritime Guidelines the only remaining specific legislation in the liner shipping sector is the Consortia Block Exemption Regulation. 4 This block exemption regulation sets out the conditions, pursuant to Article 101(3) TFEU, under which the prohibition in Article 101(1) TFEU does not apply to consortia, that is, horizontal agreements between two or more vessel-operating carriers for the provision of a joint liner shipping service. According to Article 7 of the Regulation it will apply until 25 April 2015 and during 2013 the Commission started evaluating the need to prolong its application. As part of the evaluation process, the Commission has sent a large number of questionnaires to stake holders (shipping companies, freight forwarders, and shippers) and their associations also made their views known. The Commission is expected to publish its proposal in the first half of 2014. 4 Commission Regulation (EC) No 906/2009, OJ L 256, 29 Sep. 2009, p. 31. 5 Container liner shipping is the transport of containers by ship at a fixed time schedule on a specific route between a range of ports at one end (e.g. Shanghai Hong Kong Singapore) and another range of ports at the other end (e.g. Rotterdam Hamburg Southampton). 6 OJ C11/1, 14 Jan. 2011. 7 Ibid., paras 63 and 99. 8 Ibid., para. 63. 2. The container shipping case On 21 November 2013 the European Commission opened formal antitrust proceedings against 14 container liner shipping companies to investigate whether they engaged in concerted practices, in breach of EU antitrust rules. 5 Since 2009, these companies have been making regular public announcements of price increase intentions through press releases on their websites and in the specialised trade press. These announcements are made several times a year and contain the amount of increase and the date of implementation, which are generally similar for all announcing companies. The announcements are usually made by the companies successively a few weeks before the announced implementation date. The Commission has concerns that this practice may allow the companies to signal future price intentions to each other and may harm competition and customers by raising prices on the market for container liner shipping transport services on routes to and from Europe. The Commission s guidelines on horizontal cooperation agreements 6 accept in principle that an announcement which is genuinely unilateral and public would not breach EU competition law and can be informative and beneficial to customers. 7 However, the possibility of finding a concerted practice cannot be excluded, for example in a situation where such an announcement was followed by public announcements by competitors. Such responses of competitors to each other s public announcements could provetobeastrategyforreachingacommonunderstanding about the terms of coordination. 8 The most sensitive exchanges between competitors relate to individualised data regarding intended future prices or quantities. Such exchanges should be considered a restriction of competition by object and in particular, private exchanges of such information between competitors would be treated and fined as a hard-core cartel. 9 In the Container Shipping case the exchanges through announcements were public and the case would therefore not be dealt as a hard-core cartel. The parties could argue for efficiencies under Article 101(3). The Horizontal Guidelines acknowledge in principle the benefits to customers of public announcements but are sceptical with respect to announcements regarding future pricing intentions because companies which announce their pricing intentions are likely to revise them before consumers actually purchase based on that information. 10 B. Rail 1. Legislation On 30 January 2013 the Commission announced the fourth railway legislative package. 11 The liberalisation of the EU s railway industry has been a major concern of the EU in recent years, adopting in 2012 the recast of the first rail legislative package 12 and pursuing numerous infringement procedures against Member States relating to the implementation of EU railway legislation. The Commission s view is that this effort is required because although railways are seen as a vital part of EU transport, with a key role in addressing rising traffic demand, congestion, fuel security, and decarbonisation, many European railway markets are currently facing stagnation or decline. Faced with this reality, the Commission has proposed in the fourth legislative package far reaching measures to encourage more innovation in EU railways by opening EU domestic passenger markets to competition as well as substantial accompanying technical and structural reforms. The Commission is proposing to complete the liberalisation of the domestic railway passenger markets. The 9 Ibid., para. 74. 10 Ibid., para. 99. 11 Commission press releases of 30 Jan. 2013, IP/13/65 and MEMO/13/45. 12 Directive 2012/34/EU of the European Parliament and of the Council of 21 Nov. 2012 establishing a single European railway area, OJ L 343, 14 Dec. 2012, p. 32.

Itai Rabinovici. The Application of EU Competition Rules in the Transport Sector SURVEY 229 existing EU legislation requires Member States to give access to their markets to cross-border railway passenger services and only a handful of Member States have completely opened their railway passenger markets to competition. The Commission is proposing that railway companies would be free to offer competing domestic rail passenger services and bid for public service rail contracts in other Member States. In order to improve the management of the railway infrastructure, increase investment, and ensure fair and equal access for all operators, the Commission is suggesting strengthening the infrastructure managers so that they control all the functions of the railway network including infrastructure investment planning, day-today operations, and maintenance as well as timetables. Mindful of the possible conflict of interest of vertically integrated railway undertakings that are both active upstream as infrastructure managers and compete downstream as rail transport operators, the Commission is suggesting introducing a Compliance Verification Clause according to which rail undertakings forming part of a vertically integrated structure could be prevented from operating in other Member States if they have not first satisfied the Commission that all safeguards are in place to ensure a level playing field in practice and that fair competition is possible in their home market. In order to cut red-tape, The Commission is also proposing to empower the European Rail Agency to issue EU-wide vehicle authorisations and safety certificates, replacing the national procedures and allowing significant savings in time and costs to railway operators. 2. Investigations The Commission accepted on 18 December 2013 the commitments offered by the German railway incumbent Deutsche Bahn (DB) regarding its pricing system for traction current in Germany and made them legally binding. Traction current is the 16.7 Hertz electricity used to power rail locomotives in Germany and is an indispensable input for railway companies. DB s subsidiary, DB Energie, is the only supplier of traction current in Germany, thereby holding a dominant position on this market. DB Energie has established a pricing system that included significant duration and volume discounts. The threshold for the application of the discounts meant that only DB s railway transport subsidiaries had the necessary scale of operations to enjoy the full discounts and in turn that DB s subsidiaries enjoyed a significantly lower 13 On the concept of margin squeeze see section D of the Commission s communication on enforcement priorities in applying Article 102 TFEU, 2009/C 45/02, OJ C 45/7 of 24 Feb. 2009. 14 Commission press release of 15 Aug. 2013, IP/13/780. 15 Commission press release of 18 Dec. 2013, IP/13/1289. average price for its electricity consumption in comparison to its competitors. The Commission had concerns that the price disadvantage suffered by DB s competitors would not allow even an equally efficient competitor to operate profitably in the railway transport market on a lasting basis ( margin squeeze ). 13 The Commission considered that DB has not demonstrated that DB Energie s pricing system is objectively justified or produces sufficient efficiency gains to outweigh its anticompetitive effects. In order to meet the Commission concerns, DB has offered commitments pursuant to Article 9 of Regulation 1/2003. The draft commitments were made public on 15 August 2013 14 and following the comments made by stakeholders to the Commission, DB proffered a revised proposal on 21 November 2013. DB Energie offered to introduce a new pricing system which will market the price of electricity separately from the fee charged for accessing the network. The latter is regulated by the German regulator for network industries, the Bundesnetzagentur. To foster market entry, DB Energie renounces applying any discounts to its electricity offer. For the year starting in July 2014, it will also grant a 4 per cent reduction on the price of traction current to all railway companies not belonging to DB, based on their invoice of the preceding year. This will ensure that railway companies immediately benefit from lower prices until the effects of increased competition set in. These lower prices for traction current will contribute to ending the margin squeeze and restoring the ability of railway companies to compete with DB on the rail freight and long distance passenger markets. The Commission concluded that these commitments will introduce competition on the traction current market and will put an end to the margin squeeze on the rail transport markets in Germany. The Commission will closely monitor the implementation of the commitments with the support of a monitoring trustee. 15 In the background of the main investigation, the General Court rejected DB s appeals against the Commission decisions that authorised the unannounced inspections conducted on various sites of the DB group in March 2011. 16 DB s appeal on the General Court s judgment is still pending. 17 On 6 March 2013 the Commission opened formal proceedings against the Lithuanian railway company AB Lietuvos geležinkeliai (LG), investigating concerns that the company abused its dominant position as the 16 Joined cases T-289/11, T-290/11, and T-521/11 Deutsche Bahn AG and Others v European Commission, judgment of 6 Sep. 2013. On the inspections see Commission press release of 31 Mar. 2011, MEMO/11/208. 17 Case C-583/13 P Deutsche Bahn and Others v Commission.

230 SURVEY Journal of European Competition Law & Practice, 2014, Vol. 5, No. 4 railway infrastructure manager in Lithuania. In September 2008 LG suspended traffic on a 19-kilometre railway route connecting Lithuania to Latvia and later dismantled the entire track which has not been rebuilt since. The Commission is concerned that these actions could limit competition on the railway markets in Lithuania and Latvia, in particular by preventing customers from redirecting their railway freight to Latvia using the services of other rail undertakings. 18 These investigations demonstrate the possible competition concerns that arise from the existence of strong national incumbent companies that combine ownership of both rail infrastructure (usually a monopoly) and train services, a situation that exists in the majority of EU countries. The vertically integrated incumbents are in a position to leverage their monopoly over the essential rail infrastructure in order to favour their rail transport operation to the detriment of competitors and consumers. Current EU legislation does not go as far as requiring complete separation of ownership over infrastructure and train activities but requires strict Chinese walls to ensure the necessary legal, financial, and operational separation. The proposed fourth railway package confirms that ownership separation is the simplest and most transparent way to guarantee the independence of infrastructure managers by allowing rail undertakings that do make part of a vertically integrated holding immediate access to the internal passenger market without going through the compliance verification procedure. 19 C. Aviation 1. The Air Canada / United / Lufthansa case The Commission accepted on 23 May 2013 commitments offered by Air Canada, United, and Lufthansa to address the Commission s concerns that the parties cooperation under a revenue-sharing joint venture may harm premium passengers on the Frankfurt New York route. 20 The joint venture eliminated competition between the parties on price and capacity. The Commission had concerns that this may have resulted in higher prices for premium passengers on the Frankfurt New York route. In addition, due to considerable barriers to entry and expansion, new and existing competitors would have been unable to challenge the market power of the parties. 21 The parties argued that their cooperation created efficiencies on both the Frankfurt New York route and on other related routes (such as Prague Frankfurt New York or Frankfurt New York Seattle), leading to benefits for connecting passengers. In light of the specific characteristics of the aviation industry and of the particular circumstances of this case, the Commission considered it appropriate to broaden the existing test for assessing efficiencies, contained in its Guidelines for application of Article 101(3) TFEU. This broadened test includes efficiencies produced on routes related to the route of concern the so-called behind and beyond routes (e.g. Prague Frankfurt New York or Frankfurt New York Seattle) provided there is a considerable commonality between passenger groups travelling on the route of concern and these related routes.however,underthisbroadenedtestthecommission accepted only those efficiencies that accrued to the passengers also travelling on the Frankfurt New York route. In other words, the broadened test does not weigh up the harm suffered by one customer group against benefits perceived by another customer group. The parties therefore offered commitments aimed at facilitating the entry of new competitors on the Frankfurt New York route. Since the main entry barrier remains the slot shortage at airports, the parties offered to make landing and take-off slots available at Frankfurt and/or New York. The parties also offered to enter into agreements allowing competitors to offer tickets on the parties flights (reducing competitors frequency disadvantage) and to get better access to the parties connecting traffic. Finally, the parties committed to submit data concerning their cooperation, which will facilitate an evaluation of the alliance s impact on the markets over time. An independent trustee will monitor the parties compliance with these commitments. This investigation is part of an ongoing effort of the Commission to scrutinise forms of cooperation in the air passenger industry. In July 2010, the Commission accepted commitments by several members of the oneworld alliance and made them legally binding to ensure competition on transatlantic passenger air transport markets. 22 The Commission is currently also investigating the transatlantic joint venture between certain members of the SkyTeam alliance 23 and code share agreements between Lufthansa and Turkish Airlines and between TAP Portugal and Brussels Airlines. 24 18 Commission press release of 6 Mar. 2013, IP/13/197. 19 Commission press release of 30 Jan. 2013, IP/13/65. 20 Premium passengers are passengers travelling in the first, business, and flexible economy classes. 21 Commission press release of 21 Dec. 2012, IP/12/1445. 22 Commission press release of 14 Jul. 2010, IP/10/936. 23 Commission press release of 27 Jan. 2012, IP/12/79. 24 Commission press release of 11 Feb. 2011, IP/11/147.

Itai Rabinovici. The Application of EU Competition Rules in the Transport Sector SURVEY 231 III. Mergers 1. The Aegean Airlines / Olympic Air case The Commission has cleared the second attempt by Aegean Airlines to purchase Olympic Air following an in-depth investigation (Phase II). 25 In 2011 the Commission blocked the first attempt of Aegean Airlines to purchase Olympic Air. 26 Aegean Airlines is a Greek airline providing air transport for passengers and offering scheduled flights on approximately 50 Greek domestic routes and international short-haul routes. Likewise, Olympic is a Greek airline active in air transport for passengers serving approximately 30 short-haul destinations, mainly within Greece. The Greek crisis has seen a significant drop in demand for domestic air passenger transport and in the number of routes served by the parties to the merger. When the Commission blocked Aegean s previous attempt to merge with Olympic in 2011, the parties provided competing services on 17 routes; currently the companies overlap only on seven routes. The Commission has examined the effects of the proposed acquisition on competition in the affected markets for the domestic air transport of passengers. Aegean is Olympic s closest competitor on these markets in Greece. The Commission initially expressed concerns and opened an in-depth investigation in April 2013. 27 The market investigation has revealed that entry in the immediate future by other airlines is unlikely on any of the routes of concern due to a variety of reasons: potential entrants see more profitable opportunities elsewhere, they consider the costs of entry too high or they stay away from the Greek domestic market due to Greece s current dire economic situation. However, the Commission s in-depth investigation has also clearly demonstrated that, in any event, Olympic is a failing firm and would go out of business soon. Olympic has never been profitable since its privatisation in 2009 and has received considerable financial support from its sole shareholder, Marfin Investment Group (MIG), ever since. A thorough analysis of Olympic s business prospects has confirmed that the company is highly unlikely to become profitable in the foreseeable future under any business plan. MIG had therefore decided to discontinue its support of Olympic, should it not be sold to Aegean. This would lead to Olympic s permanent shutdown in the short term. Furthermore, the market investigation has confirmed that there is no other credible purchaser other than Aegean interested in acquiring Olympic. There has also been no expression of any credible interest in the acquisition of Olympic s assets including its brand. Consequently, the most likely scenario is that absent the transaction Olympic s assets would leave the market completely. The Commission has therefore concluded that any competitive harm caused by Olympic s disappearance as an independent competitor is not caused by the merger. As a consequence, the merger is compatible with the internal market and must be authorised. 2. Ryanair / Aer Lingus The Commission prohibited on 27 February 2013 the third attempt by Ryanair 28 to acquire the Irish air carrier Aer Lingus by the low-cost airline Ryanair. 29 Ryanair and Aer Lingus are by far the most important carriers operating out of Ireland, competing directly on 46 routes. The Commission concluded that the merger would have harmed consumers by creating a monopoly or a dominant position on these routes where, currently, Aer Lingus and Ryanair compete vigorously against each other. This would have reduced choice and, most likely, would have led to price increases for consumers travelling on these routes. The Commission took into account the changes in market circumstances since 2007, for example the fact that the market positions of Ryanair and Aer Lingus have become even stronger, with their combined market shares going up from 80 per cent in 2007 to 87 per cent in 2012 for short-haul flights out of Dublin. The number of routes to and from Ireland operated in competition by Ryanair and Aer Lingus has increased from 35 in 2007 to 46 in 2012. Moreover, the Commission s investigation confirmed the existence of high barriers to entry stemming, in particular, from Ryanair s and Aer Lingus strong market positions in Ireland. The market investigation showed that there was no prospect that any new carrier would enter the Irish market after the merger, in particular by the creation of a base at the relevant Irish airports, and challenge the new entity on a sufficient scale. Ryanair offered several sets of remedies during the procedure. The final remedy package consisted mainly of the 25 Commission press release of 9 Oct. 2013, IP/13/927. 26 Commission press release of 26 Jan. 2011, IP/11/68. 27 Commission press release of 23 Apr. 2013, IP/13/361. 28 In 2007 the Commission prohibited Ryanair s first attempt to acquire Aer Lingus (see Commission press release of 27 Jun. 2007, IP/07/893). The decision was upheld by the EU s General Court in Case T-342/07 Ryanair Holdings v European Commission [2010] ECR II-3457. In 2009, a second notification by Ryanair was withdrawn. 29 Commission press release of 27 Feb. 2013, IP/13/167.

232 SURVEY Journal of European Competition Law & Practice, 2014, Vol. 5, No. 4 divestiture of Aer Lingus operations on 43 overlap routes to Flybe and the cession of take-off and landing slots to IAG/British Airways at London airports, so that IAG/ British Airways would operate on three routes (Dublin London, Shannon London, and Cork London). Flybe and IAG committed to operate the routes for three years. Additional slot divestitures on London Ireland routes were also offered. However, the Commission s investigation demonstrated that these remedies were insufficient to ensure that customers would not be harmed, taking into account the scope and magnitude of the competition concerns raised by the proposed transaction on the 46 routes. In particular, the Commission found that Flybe was not a suitable purchaser capable of competing sufficiently with the Ryanair/Aer Lingus merged entity. The investigation also showed that IAG/British Airways would not constrain the merged entity to a sufficient degree and would have little incentive to stay on the routes beyond a three-year period. In addition, the Commission could not conclude with the requisite degree of certainty that the proposed commitments could actually be put in place in a timely manner. Nor was it certain that they would work in practice and for a sustained period of time. Ryanair has lodged an appeal against the Commission s decision to the General Court which is still pending. 30 On 28 August 2013 the Competition Commission of the United Kingdom published the final report on its investigation of Ryanair s minority shareholding (29.8 per cent) in Aer Lingus. The Competition Commission found that Ryanair s minority shareholding had led or may be expected to lead to a substantial lessening of competition between the airlines on routes between the United Kingdom and Ireland. The Competition Commission confirmed that it would order Ryanair to divest its holdings in Air Lingus to 5 per cent. 31 Although the draft of the final order was published for public consultation, the adoption of the final order would be stayed as long as Ryanair s appeal proceedings are pending before the Competition Appeal Tribunal. 32 3. US Airways / American Airlines On 5 August 2013 the Commission cleared the proposed merger between the two US flag carriers, US Airways Group and AMR Corporation, including its main subsidiary American Airlines offering together more than 6,000 daily flights. The Commission examined the competitive effects of the proposed merger on numerous transatlantic routes (one non-stop/non-stop overlap on the London Philadelphia route, 27 non-stop/one-stop overlap routes and 39 one-stop/one-stop overlap routes). Its investigation found that on all but one transatlantic route affected by the merger the combined entity will continue to face competition from other strong competitors, notably from other joint ventures such as North Atlantic Joint Venture and Aþþ. Concerns were raised with respect to the London Philadelphia route out of London Heathrow airport on which US Airways and American Airlines through their membership in the Transatlantic Joint Business (de facto British Airways operates this route) are the only carriers offering non-stop flights. US Airways and American Airlines submitted commitments to release one daily slot pair at London Heathrow and Philadelphia airports, and also provided further incentives such as the possibility for a new entrant to acquire grandfathering rights after a certain period of time. Furthermore, the parties, supported by their joint venture partners of the Transatlantic Joint Business, committed to entering into special feed traffic agreements with the likely entrant airline. The Commission considered that these commitments alleviated its concerns and allowed the transaction. 33 doi:10.1093/jeclap/lpu010 Advance Access Publication 25 February 2014 30 Case T-260/13 Ryanair Holdings v Commission. 31 Competition Commission press release of 28 Aug. 2013. 32 Competition Commission press release of 5 Nov. 2013. 33 Commission press release of 5 Aug. 2013, IP/13/764.