STUDY Requested by the ECON committee The Impact of Unfair Commercial Practices on Competition in the EU Passenger Transport Sector, in particular Air Transport Policy Department for Economic, Scientific and Quality of Life Policies Directorate-General for Internal Policies Authors: F. SCIAUDONE, K. NOTI, H. SCHEBESTA, F. MORETTI, M. PIANTONI, R. ARANCIO EN PE 642.381 - April 2020 The Impact of Unfair Commercial Practices on Competition in the EU Passenger Transport Sector, in particular Air Transport Abstract The study aims at identifying and analysing the unfair commercial and trading practices in passenger air transport that not only are detrimental to consumers, but which can also distort competition in the Single Market. The study analyses the main air carrier business models and price patterns, as well as the decisions adopted by the national competent authorities with regard to unfair commercial practices and predatory pricing. This document was provided by Policy Department A at the request of the ECON Committee. This document was requested by the European Parliament's Committee on Economic and Monetary Affairs. AUTHORS Francesco SCIAUDONE, Grimaldi Studio Legale; Kletia NOTI, Grimaldi Studio Legale; Hanna SCHEBESTA, Blue & Stars Legal Research; Francesca MORETTI, Grimaldi Studio Legale; Martina PIANTONI, Grimaldi Studio Legale; Rosaria ARANCIO, Grimaldi Studio Legale ADMINISTRATOR RESPONSIBLE Radostina PARENTI EDITORIAL ASSISTANT Janetta CUJKOVA LINGUISTIC VERSIONS Original: EN ABOUT THE EDITOR Policy departments provide in-house and external expertise to support EP committees and other parliamentary bodies in shaping legislation and exercising democratic scrutiny over EU internal policies. To contact the Policy Department or to subscribe for email alert updates, please write to: Policy Department for Economic, Scientific and Quality of Life Policies European Parliament L-2929 - Luxembourg Email: [email protected] Manuscript completed: March 2020 Date of publication: April 2020 © European Union, 2020 This document is available on the internet at: http://www.europarl.europa.eu/supporting-analyses DISCLAIMER AND COPYRIGHT The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament. Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the European Parliament is given prior notice and sent a copy. For citation purposes, the study should be referenced as: SCIAUDONE, F., NOTI, K., SCHEBESTA, H., MORETTI, F., PIANTONI, M., ARANCIO, R., The Impact of Unfair Commercial Practices on Competition in the EU Passenger Transport Sector, in particular Air Transport, Study for the Committee on Economic and Monetary Affairs, Policy Department for Economic, Scientific and Quality of Life Policies, European Parliament, Luxembourg, 2020. © Cover image used under licence from Shutterstock.com The Impact of Unfair Commercial Practices on Competition in the EU Passenger Transport Sector CONTENTS LIST OF ABBREVIATIONS 5 LIST OF DEFINITIONS 7 EXECUTIVE SUMMARY 9 1. INTRODUCTION 11 2. THE EU PASSENGER AIR TRANSPORT MARKET 13 2.1. FSC and LCC business models – developments and impact 14 2.1.1. The full-service carrier (FSC) business model 14 2.1.2. The low-cost carrier (LCC) business model 15 2.2. Pricing strategies and price transparency 16 2.2.1. Price discrimination in airline fares 18 2.2.2. Consumer protection in passenger air transport pricing 19 2.2.3. Additional charges: the CJEU and national court judgments 21 2.2.4. Profiling and personalised advertising 22 2.2.5. Comparison websites 25 3. CONSUMER PROTECTION AUTHORITIES’ INTERVENTION IN PASSENGER AIR TRANSPORT 28 3.1. Definition of unfair and misleading practices in passenger air transport 29 3.2. Most commonly detected UCPs in the passenger air transport sector 29 3.2.1. Germany 30 3.2.2. Italy 32 3.2.3. Malta 34 3.2.4. Spain 35 3.2.5. UK 36 4. POSSIBLE IMPACT OF UCPS ON PASSENGER AIR TRANSPORT COMPETITION 38 4.1. Interactions between UCPs and predatory pricing 39 4.2. Market definition and dominance 40 4.2.1. Defining the relevant market 41 4.2.2. Market power amounting to dominance 44 4.3. Predatory pricing: theory of harm 45 4.3.1. Presumption of predatory pricing: below-AVC pricing conduct 46 4.3.2. Additional elements when below-cost pricing is above AVC 47 4.3.3. Case law on predatory pricing in the air transport sector 49 4.4. National competition authorities’ interventions against airlines 50 4.4.1. Germany: BKartA’s decision in the Lufthansa case 50 4.4.2. Lithuania: FlyLAL versus Air Baltic 52 3 PE 642.381 IPOL | Policy Department for Economic, Scientific and Quality of Life Policies 4.4.3. UK: Air Southwest versus Flybe 52 4.5. Predatory pricing in the rail and maritime transport sectors 53 4.5.1. The Italian market for maritime passenger transport: the Diano case 53 4.5.2. The Czech passenger rail transport sector 54 5. CASE STUDIES 56 5.1. The predatory pricing case study 56 5.1.1. Air and rail transport: intermodal competition or complementarity? 57 5.1.2. Air and rail transport competition: market definition 58 5.1.3. The impact of an oligopoly market structure: the Barcelona-Alicante route 60 5.1.4. Conclusions 62 5.2. The Malta case study 62 5.2.1. Recent developments in the relationship between Air Malta and Ryanair 63 5.2.2. Possible impacts of Ryanair’s acquisition of Malta Air 64 5.2.3. The MCCAA position 64 6. CURRENT LEGISLATIVE INITIATIVES ON UCP’S AND POSSIBLE FUTURE INTERVENTIONS 66 7. CONCLUSIONS 69 REFERENCES 72 ANNEX 79 PE 642.381 4 The Impact of Unfair Commercial Practices on Competition in the EU Passenger Transport Sector LIST OF ABBREVIATIONS AAC Average avoidable costs AGCM Autorità Garante della Concorrenza e del Mercato (Italian Competition and Consumer Authority) ASA Advertising Standards Authority (UK) ATC Average total costs AVC Average variable costs BEUC The European Consumer Organisation BGB Bürgerliches Gesetzbuch (German Civil Code) BKartA Bundeskartellamt (German Competition Authority) CAPA Centre for Aviation CJEU Court of Justice of the European Union CMA Competition and Markets Authority (UK Competition and Consumer Protection Authority). CPC Consumer Protection Cooperation Network DOT US Department of Transport ECAA European Common Aviation Area FFP Frequent Flying Programme FSC Full Service Carrier GDPR General Data Protection Regulation HSR High Speed Rail IAA Irish Aviation Authority LCC Low Cost Carrier LGDCU General Law on the Protection of Consumers and Users (Spain) LRAIC Long-run average incremental cost MCCAA Malta Competition and Consumer Affairs Authority OAG Official Aviation Guide OCA Office for Consumer Affairs, Malta O&D Origin & Destination OFT Office of Fair Trading, UK, the predecessor of the CMA TFEU Treaty on the Functioning of the European Union 5 PE 642.381 IPOL | Policy Department for Economic, Scientific and Quality of Life Policies UCP Unfair Commercial Practices UCPD Unfair Commercial Practices Directive UTP Unfair Trading Practices PE 642.381 6 The Impact of Unfair Commercial Practices on Competition in the EU Passenger Transport Sector LIST OF DEFINITIONS Consumer Protection Cooperation (CPC) network: Network of national authorities responsible for enforcing EU consumer protection laws to protect consumers’ interests in EU and EEA countries. The authorities cooperate on consumer rules (e.g. on unfair commercial practices, e-commerce, comparative advertising, package holidays, online selling, and passenger rights), sharing best practices and alerting each other about malpractices with a cross-country dimension. The CPC network also conducts regular EU-wide screenings of websites ('sweeps'1) to assess compliance of business operators with consumer rules. It was set up in 2007 by the CPC Regulation2, which provided for a cooperation framework so that national authorities could jointly address breaches of EU laws to protect consumers’ interests in cases when the trader and the consumer are based in different EU and EEA countries. European Single Aviation Market: Single market in aviation services created the three Council Regulations, known informally as the ‘third package’ 3. The third package allows any legal or physical person, irrespective of nationality, to set up an airline anywhere inside the EU market and fly routes within the single market. With the European Common Aviation Area (ECAA) agreement 4, the EU's internal aviation market – consisting of EU Member States as well as Norway and Iceland – was integrated with the EU’s neighbours in South-East Europe5. The ECAA agreement, by creating a single aviation market, aims to bring economic benefits to air travellers and industry, as well as introduce uniform and high standards in term of safety and security, and harmonised rules across Europe. Full-Service Carriers (FSCs): Air service operator that focuses on providing a wide range of pre-flight and on-board services, including different service classes, and connecting flights. Since most full- service carriers (FSCs) operate a hub-and-spoke model, this group of airlines are usually also referred to as hub-and-spoke airlines6. Hub-and-Spoke Service: Air transportation system in which the plane goes to a central location (hub) where all passengers, except those whose origin or destination is the hub, transfer at the hub to a second flight to reach their destination 7. Low Cost Carriers (LCCs): Term originated within the airline industry in the middle of the 1990’s8 referring to air service operators with a specific operating model that focuses on cost reduction in order 1 A sweep is a set of checks carried out simultaneously by national enforcement authorities to identify breaches of EU consumer law in a particular sector. Where breaches of law are identified, the relevant authorities ask the traders to take corrective action. The European Commission coordinates the sweep action. 2 Regulation (EC) No 2006/2004 of the European Parliament and of the Council of 27 October 2004 on cooperation between national authorities responsible for the enforcement of consumer protection laws, OJ L 364, 9.12.2004.