International Airline Alliances: EC Competition Law / US Antitrust Law and International Air Transport Angela Cheng-Jui Lu KLUWER LAW INTERNATIONAL THE HAOUE / LONDON / NEW YORK
Table of contents Table of Contents Dedication About thè Author Table of Contents Preface Acknowledgement Abbreviation Fo reword V vii ix xxiii XXV xxvii xxix Introduction 1 Chapter 1: Relevant Background to International Airline Alliances 9 1. Hi storica! Background 10 1.1. Establishment of thè Doctrine of Sovereignty over Airspace Paris Convention 1919 10 1.2. Sovereignty and Exchange of Air Operating and Traffic Rights 1.2.1. Chicago Conference 1944 11 1.2.2. Chicago Convention 1944 13 1.3. Bilateral Air Service Agreements 15 1.3.1. Substantial Ownership and Effective Control Clause 16 1.3.2. Prohibition of Cabotage 23 1.4. New Developments, Questions and Problems 23
Table of Contents 2. Economie Background 24 2.1. Deregulation in thè United States 1978 24 12. Libera]isation in thè European Union 1993 30 2.2.1. Three Liberalisation Packages 30 2.2.2. Relationship between thè European Community and Third Countries 55 2.2.2.1. General 35 2.2.2.2. Open Skies Agreements 39 2.2.2.3. Reactions to thè ECJ Judgment 45 2.2.2.4. Comments on thè ECJ Judgments on Open Skies Agreements 46 3. Modern Trends 50 3.1. Liberai Bilateral and Open Skies Agreements 50 3.2. Consolidation, Globalisation and Concentration 53 3.3. Difficulties of Mergers and Equity Sharing between Airlines of Different Nationalities 54 3.4. Difficulties in Exchanging Traffic Rights on a Multilateral Basis 55 3.5. Forming Alliances to Meet Competition and Consumer's Preferences 56 4. Airline Alliances 56 4.1. Different Models of International Airline Alliances and Their Growth 56 4.2. Benefits of International Airline Alliances for Airlines 63 4.3. Benefits of International Airline Alliances for Consumers 65 4.4. Disadvantages of International Airline Alliances: Anti-Competitive Practices 67
Table of contents 4.5. Antitrust Immunity for International Airline Alliances 68 4.6. Comments on International Airline Alliances 68 5. Application of Competition/Antitrust Law to thè International Air Transport Sector 70 5.1. Inevitability of Application of Competition/Antitrust Law 70 5.2. Special Attenti on Required in International Air Transport 72 5.3. Escalation of Conflicts and Differences in Applications of Competition/Antitrust Law to International Economie Activities 73 5.4. Effects of Applying Competition/Antitrust Law to International Economie Activities 73 Concluding Remarks 74 Chapter 2: Overview of European Community Competition Law and Its Applications to Transatlantic Airline Alliances 81 1. Basic Background to EC Competition Law 81 1.1. Brief Introduction to thè European Union 81 1.1.1. The European Community and Its Legai Institutions 82 1.1.2. The Legai Instruments 84 1.2. Sources of EC Competition Law 85 1.3. Relationship between thè European Community and Member States regarding Competition Law 86 1.4. EC Competition Law and thè Air Transport Sector 87 2. Substanti ve EC Competition Law 88 2.1. Artide 81 of thè EC Treaty 89 XI
Table of Contents 2.1.1. The Prohibition of Artide 81(1) 89 2.1.2. The Legai Effects of An Infringement of Artide 81(1) 91 2.1.3. Group and Individuai Exemptions under Artide 81(3) 91 2.2. Artide 82 of thè EC Treaty 93 2.2.1. General Concepts 93 2.2.2. Relevant Market 93 2.2.3. Existence of Dominant Position 98 2.2.4. Abuse of Dominant Position 100 2.2.5. Application of Artide 82 in thè Air Transport Sector 100 2.2.6. Interface of Articles 81 and 82 102 2.3. The Implementation of EC Competition Law 103 2.3.1. General Implementation: Council Regulation No. 17/62 103 2.3.2. Special Exemptions in Air Transport Sector 104 (A) Council Regulation No. 141/62 104 (B) Case: Nouvelle Frontière 106 (C) Council Regulation No. 3975/87 107 (D) Council Regulation No. 3976/87 109 (E) Case: Ahmed Saeed 110 (F) Commission Proposai for Amending Council Regulation Nos. 3075/87 111 2.4. Merger Contrai and Joint Venture 113 2.4.1. Background to thè European Community Merger Regulations ("ECMR") 113 2.4.2. The Relationship between thè ECMR and Articles 81 & 82 114 2.4.3. The ECMR and Air Transport 115
Table of contents 2.4.4. An Overview of thè ECMR 116 2.4.4.1. Basic Elements of thè ECMR 116 2.4.4.2. Notification and Procedure 121 2.4.5. Applications of thè ECMR in thè Air Transport Sector 122 3. The Applications of EC Competition Law to Economie Activities with Foreign Elements Involved 123 3.1. Applications under Articles 81 and 82 of thè EC Treaty 124 3.1.1. Before thè WoodPulp Case 124 3.1.2. The Wood Pulp Case 125 3.1.3. Other Relevant Developments 126 3.2. Applications of thè ECMR 127 4. EC Competition Policy 127 4.1. Overview 128 4.2. International Co-operation and thè Commission's Mandate 130 4.3. The Limited Scope of 1991 and 1998 Agreements 131 5. EC Competition Policy in thè Air Transport Sector 131 6. Applications of EC Competition Law to International Airline Alliances 133 6.1. Commission Decisions on LH/SAS, LH/SAS/BMI and LH/OS Airline Alliances 133 6.1.1. LH/SAS Alliance 133 6.1.2. LH/SAS/BMI Alliance 135 6.1.3. LH/OS Alliance 135 6.1.4. AF/AZ Alliance 136 6.2. Commission Notices on Transatlantic Airline Alliances 137 6.2.1. KLM/Northwest ("Wings") Alliance 138 Xlll
Table of Contents 6.2.2. LH/United/SAS ("Star") Alliance 140 6.2.3. BA/AA ("Oneworld") Alliance 143 6.2.4. Air France/Delta ("SkyTeam") Alliance 144 6.3. Comments on thè Commission Notices on thè KLM/NW, LH/United/SAS and BA/AA Alliances 145 Concluding Remarks 148 Chapter 3: Overview of US Antitrust Law Governing International Air Transport and Its Applications to Transatlantic Airline Alliances 151 1. Overview of Substantive US Antitrust Laws 152 1.1. Basic Economics of US Antitrust Laws 152 1.2. Substantive US Antitrust Laws 153 1.2.1. The ShermanAct 154 1.2.1.1. Section 1 of thè Sherman Act 154 1.2.1.2. Section 2 of thè Sherman Act 156 1.2.1.3. Relationship between thè Sherman Act and Oligopoly 162 1.2.1.4. Major Differences between Section 1 and Section 2 of thè Sherman Act 163 1.2.2 The Clayton Act - Mergers and Acquisitions 164 1.3. Enforcement of US Antitrust Laws and Related Legai Departments 170 2. Applications of US Antitrust Laws to Economie Activities with Foreign Elements Involved 171 2.1. Judicial Interpretations: From American Banana to Laker Ainvays 172 xiv
Table of contents 2.2. Legislative Contribution: Direct, Substantial, and Foreseeable Effect Doctrine 777 2.3. Academic Contribution: Reasonableness 179 2.4. A Step Backward: Hartford Fire Insurance 182 2.5. Executive Contribution: Antitrust Enforcement Guidelines for International Operations 184 2.5.1. Overview 184 2.5.2. Defences against US Application 186 3.US International Antitrust Policy 189 4. US Antitrust Laws and International Air Transportation 191 4.1. Special Provisions for International Air Transportation 192 4.2. Antitrust Immunity and Public Interest Test 192 4.2.1. The United States Code 193 4.2.2. Procedural Rules 195 4.3. Specific Regulatory Department 197 5. US Policy in International Air Transportation 198 6. DOT Decisions on Transatlantic Alliance Agreements 199 6.1. Open Skies Agreements Required 202 6.2. Public Interest Test 204 6.3. Merger Guidelines Invoked 204 6.4. Definition of Relevant Market and thè Carving-Out of Immunity 205 6.5. Need for Competitive Remedies 210 6.6. Requirement of Withdrawal from Ali IATA Tariff Co-ordination Activities 211 6.7. Computer Reservation System Issues 211 xv
Table of Contents 6.8. Separate Issues 212 Concluding Remarks 213 Chapter 4: Comparison of Applications of EC Competition Law and US Antitrust Law to International Air Transport 215 1. Introduction 215 2. Similarities and Differences in General 216 2.1. Similarities 216 2.1.1. Substance 216 2.1.2. Implementation of Competition Law to thè International Air Transport Sector 218 2.2. Differences 218 2.2.1. Genesis of Competition Law 218 2.2.2. Authorities 219 3. Different Procedures for Granting Approvai of Antitrust Immunity or Exemption 222 3.1. Airline Alliances and Code-Sharing Agreements 222 3.1.1. Introduction to Airline Alliance Agreements 222 3.1.2. Introduction to Code-Sharing Agreement 223 3.2. Comparison of Procedures 225 4. Differences in Laws 231 4.1. Overview of thè Tariff Consultation Agreement 231 4.1.1. Background to thè International Air Transport Association and Its Tariff Co-ordination Process 231 xvi
Table of contents 4.1.2. Rationale for Tariff Co-ordination Process 232 4.1.3. Anti-Competitive Risks of Tariff Co-ordination Agreements 233 4.2. Comparison of thè of EC Competition Laws and US Antitrust Laws Applicable to thè Tariff Co-ordination/Consultation Agreement 234 5. Differences in Interpretati ons and Applications of Laws 236 5.1. Defining thè Relevant Market 236 5.2. Market Power and Dominant Position 239 5.3. Approaches to thè Application of Competition/Antitrust Law to International Economie Activities 239 6. Comparison of thè EC and US Authorities' Reviews of Transatlantic Airline Alliances 242 6.1. Divergent Evaluations of Market Concentration 243 6.2. Concept of Anti-Competitive Practices 245 6.3. Different Remedies 246 1. Differences in Merger Control and Alliances (Joint Venture) 248 1.1. Differences in Applications of Laws to Alliances 248 7.2. Applications of Merger Regulations: Similar Rules but Contradictory Decisions 249 7.3. Clashes in Individuai Cases 254 8. Differences in Policies 260 8.1. EC Competition Policy with Regard to International Air Transport 261 8.1.1. From thè Judicial Point of View 261 8.1.2. From thè Executive Point of View 262 8.1.3. From Case Studies 264 8.2. US Antitrust Policy with Regard to International Air Transport 265 xvi i
Table of Contents 8.2.1. Application of US Antitrust Law to International Economie Activities 266 8.2.2. From thè Perspective of Deregulation 266 8.2.3. Exporting "Open Skies" 267 8.2.4. DOT's Approvai of Antitrust Immunity for alliance Agreements 268 8.2.5. Approvai of thè Merger between Boeing and McDonnell Douglas 269 8.2.6. Analysis of US Antitrust and International Air Transport Policy 269 Concluding Remarks 270 Chapter 5: The Current International Competition Regulations regarding International Air Transport 273 1. Introduction 273 2. Multilateral Approach 273 2.1. A Unified International Competition Law 274 2.1.1. Havana Charter 274 2.1.2. United Nations Conference on Trade and Development Code 275 2.1.3. Munich Proposai- Draft International Antitrust Code 277 2.2. Review of Multilateral Approaches 279 2.3. Special Concerns in International Air Transport 280 3. Special Proposai for Applying Competìtìon/Antitrust Law to International Air Transport 282 3.1. International Civil Aviation Organisation ("ICAO") 282 3.1.1. Roleof thè ICAO 282 XVI li
Table of contents 3.1.2. Contributions of thè ICAO 282 3.1.3. Review of thè ICAO's Contributions 286 32. World Trade Organisation ("WTO") 287 3.2.1. GATT/GATS Mechanism 287 3.2.2. Different Considerations regarding Applying GATS to International Air Transport 289 323. Trade and Competition Policy under thè WTO 293 3.2.4. Limits of GATS with regard to Trade in Services in International Air Transport 293 3.3. Other International Organisations 295 4. Regionalism 296 4.1. Supranational Approach 296 4.2. Transatlantic Common Aviation Area 299 5. Doctrine of Comity and Co-operation between Governments 505 5.1. Bilateral and Cooperative Approach 306 5.1.1. US and EC Comity Agreements 307 5.1.2. Review of US and EC Comity Agreements 310 5.2. Organisation on Economie Co-operation and Development Recommendations 311 5.3. Benefits of Comity Doctrine and Co-operation 314 5.4. Limits of Comity Doctrine and Co-operation 314 6. Synthesis 315 1. Convergence of Competition Policies 317 7.1 OECD: Global Forum on Competition 317 7.2. US: Global Competition Initiative 318 xix
Table of Contents 7.3. EC: Global Competition Forum 579 7.4. Review of thè GCF, GCI and ICN 527 Concluding Remarks 527 Chapter 6: Conclusion and Recommendations 323 1. Introduction 323 2. Brief Review of thè Essential Elements for Fair and Free Competition in thè International Air Transport Market 324 2.1. Elements in Aviation Law 324 2.2. Elements in Application of Competition Law to International Air Transport 325 3. Recommendations 326 3.1. An International Air Transport Market with Free Competition 326 3.1.1. Multilateral Approaches to Exchanging Traffic Rights 326 3.1.2. Eliminating thè Limitations on Ownership/Control and Cabotage 329 3.2. Rules for Reducing thè Conflicts over thè Applications of Competition Laws to International Economie Activities 330 3.2.1. Safeguarding Public Interests via thè Application of Competition Law 331 3.2.2. Harmonising Approaches to Applying Competition Laws to International Economie Activities 332 3.2.3. Harmonisation in Procedures and Institutions 332 3.2.4. Unified Criteria for Granting Immunity/Exemption 333 xx
Table of contents 3.2.5. Harmonisation of Divergent Evaluations of Market Access 335 3.2.6. Harmonising thè Concept of Anti-Competitive Practices 33 7 3.2.7. Providing Reliable Remedies 337 3.2.8. Convergence of Competition Policies 337 4. Supplements to Present Solutions 338 4.1. Bilateral Agreements 339 4.1.1. Expanding Application and Strengthening Binding Force 339 4.1.2. Suggestions on Harmonising Substantive Laws 341 4.1.3. Unified Procedural Rules 342 4.1.4. Forum for Convergence of Competition Policies 342 4.2. Transatlantic Common Aviation Area 343 5. Assistance from International Organisations 345 Concluding Remarks 346 Bibliography 349 Subject Index 407 xxi