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International Air Transport Association IATA Centre, Route de l’Aéroport 33 P.O. Box 416 CH-1215 Geneva 15 Airport, Switzerland INTERNATIONAL AIR TRANSPORT ASSOCIATION COMMENTS ON DG-COMPETITION CONSULTATION PAPER CONCERNING COMMISSION REGULATION 1617/93 NON-CONFIDENTIAL VERSION 6 September 2004 IATA COMMENTS ON 6 SEPTEMBER 2004 INTERLINE CONSULTATION PAPER NON-CONFIDENTIAL VERSION INTRODUCTION The International Air Transportation Association (“IATA”) submits these comments in response to the Consultation Paper concerning “revision and possible prorogation of Commission Regulation 1617/93” issued by DG Competition on 30 June 2004 (the “Consultation Paper”). The Consultation Paper sets out preliminary DG Competition views regarding the scope for a revised block exemption regulation defining the application of Article 81 EC Treaty to cooperation between airlines in the context of the IATA multilateral interline system. The Consultation Paper proposes that tariff consultation among airlines for routes between points in the EU, currently permitted under Regulation 1617/93, should be prohibited. The Consultation proposes that consultation between airlines on cargo rates for carriage from the EU to points outside the EU should likewise be prohibited. IATA recognizes the need for a revised regulation in light of changes in the Commission’s jurisdiction over air transport. IATA strongly disputes, however, both the conclusions set out in the Consultation Paper and the underlying legal and economic analysis. IATA submits that the revised regulation should cover passenger tariff consultations in respect of both routes within the EU and routes between the EU and third countries. IATA further submits that cargo rate consultations for routes between the EU and third countries should be allowed to continue as well.1 In this paper, IATA will show that an Article 81(3) regulation2 covering airline tariff consultations remains fully justified: The proposition that IATA fare consultations restrict competition within the meaning of Article 81(1) EC Treaty is not supported by empirical evidence or economic theory. Interlining based on IATA tariff consultations creates significant benefits that can only be fully realized within the existing Conference system. There are strong policy reasons for keeping in place an Article 81(3) Regulation covering these practices. 1 The Consultation Paper also considers the extension of the existing block exemption covering consultations between airlines on scheduling at airports. As the Commission recognizes the clear continuing value of these consultations and their lack of any significant anti-competitive effects, IATA does not propose to address these issues in this paper. 2 The Consultation Paper refers to the relevant provisions of Regulation 1617/93 as a “block exemption”. This reflects the practice of the Commission and the Community courts under Regulation 17/62, but is not appropriate under the new EU competition law regime. Under Regulation 17/62, Article 81(1) was regarded as the normative rule and Article 81(3) as an exception to that rule, applicable only where the Commission took affirmative action. Thus Commission application of Article 81(3) involved the administrative grant of a derogation from otherwise applicable law, making the term “exemption” appropriate. Under Regulation 1/2003, however, both Article 81(1) and Article 81(3) have equal weight with the implication that Article 81(3) can no longer be regarded as an exception to Article 81(1). In the same way, a Commission regulation “declaring Article 81(1) inapplicable” on the basis of Article 81(3) can no longer properly be described as an “exemption” from Article 81(1): it is rather an administrative act applying Article 81(3) to a category of agreements or practices. These agreements or practices do not, in any case, formally require “exemption”, since they already satisfy the requirements of Article 81(3) which now has direct effect. The purpose of an Article 81(3) regulation under the new EU rules is thus not to “exempt” agreements that otherwise would be unlawful, but to provide legal certainty for practices that are common to an entire sector or industry. The history of the Article 81(3) exemption for IATA Tariff Conferences is described in the Legal Analysis in Annex I, p. 2-5. Page 1 IATA COMMENTS ON 6 SEPTEMBER 2004 INTERLINE CONSULTATION PAPER NON-CONFIDENTIAL VERSION As background to this analysis, this paper addresses three preliminary matters: (i) the role of IATA tariff conferences in promoting an efficient interline system; (ii) the significance of changes in the economic and regulatory context for assessment of the IATA multilateral system; and (iii) the appropriate context for assessing the effects and benefits of the IATA multilateral interlining system with specific reference to the complex traffic flow model set out in the Consultation Paper. 1 Background 1.1 Tariff Consultations Form the Basis for an Efficient Interline System The purpose of airline tariff consultation under the auspices of IATA is to facilitate “interlining.” Interlining refers to the facility by which a passenger or a shipper can arrange transport that could use the services of more than one airline. For a passenger, an interline booking may involve travel on an itinerary involving stops at intermediate airports and use of a different airline for the onward and/or return journey. A ticket purchased at an interlineable tariff may also allow a passenger to change to another carrier on the same or an alternative routing. For a shipper, an interline shipment involves contracting with an airline for transport of cargo to an airport where the contracting airline either does not serve the airport or may not have a service or capacity available at a time that meets the shipper’s needs. Tariff consultations facilitate multilateral interlining by creating “industry fares and rates”. These provide the basis for allocation of revenue when a passenger travels or a shipment moves on an itinerary involving multiple sectors and different carriers.3 Industry fares or rates also provide a basis for a “through fare or rate” that will often be lower than the sum of the fares that individual airlines would charge on the individual sectors comprising an interline itinerary. In addition, industry tariffs provide a basis for acceptance of tickets or air waybills issued by other carriers where a passenger’s travel plans change or a shipment has to be rebooked. Consultations on industry fares or rates in the context of IATA tariff conferences significantly reduce the transaction costs that would result from agreement on fares/rates for specific routes or itineraries between airlines on an ad hoc bilateral basis. Last, the IATA tariff conferences are the foundation of all other elements of industry interlining (including integrated reservations, through baggage, and through check-in).4 1.2 Assessing the IATA Interline System in the Context of Broader Changes to the Airline Industry and to the Jurisdiction of the European Commission The Commission has always recognized the contribution of IATA tariff consultations to an effective industry interline system. Since Article 81(1) EC Treaty became directly applicable to the airline industry in 1987, a regulation has been in effect establishing that IATA tariff 3 For ease of reference, this description focuses on passenger interlining. The benefits associated with cargo interlining are similar and are described specifically at page 14 below. 4 For additional information on the multilateral interline system see Annex VII. Annex VII contains the description of the passenger interline system included in IATA’s April 2001 response to the February 2001 DG Competition Consultation Paper. Page 2 IATA COMMENTS ON 6 SEPTEMBER 2004 INTERLINE CONSULTATION PAPER NON-CONFIDENTIAL VERSION conferences are allowed under Article 81.5 Thus, as far as passenger interlining is concerned, the focus of this consultation should be on whether conditions have changed to an extent that the previous Commission findings underlying the present regulations are no longer justified. Careful consideration of the key changes in the airline industry shows, however, that this is not the case. The growth of “low-cost” carriers. A key change, noted in the Consultation Paper, has been the growing importance of so-called “low cost” carriers like Ryanair or easyJet. As the Consultation Paper recognizes, these airlines operate on a different model that does not rely on connecting traffic. They do not participate in IATA tariff consultations and in general do not provide transport on an interline basis.6 The Consultation Paper fails, however, to recognize the significance of this development for assessment of the multilateral interline system. First, the need to respond to competition from the “low cost” sector, including for business travellers who increasingly find that low-cost carriers offer viable options in many cases,7 makes it even more unlikely that there is a link between fares set in IATA tariff consultations and fares set by individual IATA airlines. Second, actual or potential competition from “low cost” carriers demonstrates that it is implausible that IATA fare consultations could ever lead to an “elimination of competition” in a significant part of the EU for purposes of Article 81(3). Thus without affecting the benefits of the multilateral interline system, the emergence and growth of low-cost carriers significantly reduces any objections to multilateral interlining based on supposed adverse market effects. The growth of code-sharing and airline alliances. A further key change noted in the Consultation Paper has been the development of code-share agreements between airlines on a bilateral basis, often in the context of broader airline “alliances”.8 A code-share arrangement 5 The Consultation Paper questions whether industry practice regarding interlining is consistent with the definition of interlining set out in Regulation 1617/93. The Commission’s concerns in this regard are misplaced for reasons explained in the Legal Analysis in Annex I, p. 16-18. 6 Ryanair and easyJet make this point clear on their websites.