Competitive Airlines: Towards a More Vigorous Competition Policy In
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Report from the Nordic competition authorities No. 1/2002 Competitive Airlines Competitive Airlines Towards a more vigorous competition policy in relation to the air travel market Towards a more vigorous competition policy in relation to the air travel market Towards Konkurrencestyrelsen Nørregade 49, 1165 Copenhagen, Denmark Telephone: +45 3317 7000 Telefax: +45 3332 6144 www.ks.dk Konkurrensverket 103 85 Stockholm, Sweden Telephone +46 8 700 1600 Telefax: +46 8 24 55 43 www.kkv.se Konkurransetilsynet Postbox 8132 Dep, 0033 Oslo, Norway Telephone: +47 22 40 09 00 Telefax: +47 22 40 09 99 www.konkurransetilsynet.no Samkeppnisstofnun Postbox 5120, 125 Reykjavik, Iceland Telephone: +354 552 7422 Telefax: +354 562 7442 www.samkeppni.is Kilpailuvirasto/Konkurrensverket Postbox 332, 00531 Helsinki, Finland Telephone: +358 9 73 141 Telefax: +358 9 7314 3405 http://www.kilpailuvirasto.fi/ No. 1/2002 Produksjon: www.kursiv.no Competitive Airlines Towards a more vigorous competition policy in relation to the air travel market Report from the Nordic competition authorities Contents PREFACE.......................................................................................................................................... 4 EXECUTIVE SUMMARY .............................................................................................................. 5 Aviation is a network industry ................................................................................................5 Merger and alliance control ..................................................................................................... 6 Slot allocation procedures ........................................................................................................ 7 Predatory behaviour ................................................................................................................. 7 Frequent flyer programmes ......................................................................................................8 Tariff consultations ................................................................................................................... 9 State aid, public procurement, taxation, and subsidies ............................................................ 9 Travel agent agreements, corporate discount schemes, and computer reservation systems .......................................................................................... 9 Competition between airports ................................................................................................ 10 Ground handling services .......................................................................................................10 Concerted action is needed .................................................................................................... 11 1 INTRODUCTION................................................................................................................. 12 1.1 Theoretical perspective .......................................................................................................... 12 1.2 Barriers to airline competition .............................................................................................. 13 1.3 Deregulation in the USA ........................................................................................................ 13 1.4 The European experience and outlook ................................................................................... 15 1.5 Outline .................................................................................................................................... 16 2 MARKET DESCRIPTION ................................................................................................. 18 2.1 Air travel demand in the Nordic countries ............................................................................ 18 2.2 The supply side: carriers operating in the Nordic countries .................................................. 22 3 LEGAL FRAMEWORK ...................................................................................................... 27 3.1 Community Law/EEALaw ....................................................................................................27 3.2 Exemptions for the airline industry ....................................................................................... 29 3.3 Bilateral agreements ............................................................................................................... 30 3.4 National competition legislation ............................................................................................ 31 3.5 Aviation legislation and institutional conditions ................................................................... 37 4 TOPICS IN AVIATION ECONOMICS.............................................................................. 41 4.1 Aviation network economics ................................................................................................. 41 4.2 Price discrimination and economic welfare ........................................................................... 49 4.3 The cost structure of the airline industry ................................................................................ 52 4.4 Comparative airline productivity ............................................................................................60 2 5 TAXES, SUBSIDIES, AND PUBLIC CHARGES ............................................................. 67 5.1 Taxes and charges in Nordic aviation .................................................................................... 67 5.2 External costs of aviation ...................................................................................................... 74 5.3 State aid .................................................................................................................................. 75 6 BUSINESS CONDITIONS AND STRATEGIES............................................................... 77 6.1 Frequent flyer programmes .................................................................................................... 77 6.2 Corporate discount schemes ................................................................................................... 85 6.3 Travel agent agreements ........................................................................................................ 88 6.4 Corporate cards and related discounts ................................................................................... 91 6.5 Computerised reservation systems ........................................................................................ 92 6.6 Interlining ............................................................................................................................... 96 6.7 Airport capacity ................................................................................................................... 101 7 SUMMARY AND CONCLUSIONS.................................................................................. 109 7.1 Network economics and competition ................................................................................... 109 7.2 Airline mergers and alliances ............................................................................................... 111 7.3 Community and EEA Law ................................................................................................... 111 7.4 Contestability and predation ............................................................................................... 112 7.5 Scarcity of slots .................................................................................................................... 113 7.6 Interlining and tariff consultations .......................................................................................114 7.7 Frequent flyer programmes ..................................................................................................114 7.8 Corporate discount schemes .................................................................................................116 7.9 Computerised reservation systems ....................................................................................... 116 7.10 Corporate cards and electronic ticketing ............................................................................ 116 7.11 Travel agent agreements ....................................................................................................... 117 7.12 Taxes, subsidies, and public procurement............................................................................. 117 7.13 Ground handling ................................................................................................................... 117 7.14 The Nordic aviation market ................................................................................................. 118 LITERATURE .............................................................................................................................. 119 3 Preface During their joint meeting in Skagen (Denmark) on 6-7 September 2001, the competition authorities of the Nordic countries established a task force to examine the degree of competition in Nordic aviation and to suggest measures to enhance it. Their report is hereby submitted. The analyses, conclusions and recommendations contained herein are unanimous. The Nordic Task Force on Airline Competition has consisted of the following persons: Lasse Fridstrøm (chairman),