1 Uk Response to the Dg Competition Consultation
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UK RESPONSE TO THE DG COMPETITION CONSULTATION PAPER ON REGULATION 1617/93 (EC) I INTRODUCTION 1. This paper sets out the views of the UK’s competition and transport authorities (the Office of Fair Trading, the Department of Trade and Industry, the Department for Transport and the Civil Aviation Authority) on the DG Competition Consultation Paper on Regulation 1617/93 (EC) on the application of Article 81(3) to passenger and cargo tariff conferences and to consultations on slot allocation at airports. 2. Given the limited period of time that has been allowed for responding to the consultation document, we have been restricted in the consideration that we could give to the questions posed. We hope that there will be further opportunities for us to comment on the issues involved in the future. In particular, we have recently received IATA’s response to the consultation document and would welcome an opportunity to comment on this. 3. Our views are broadly unchanged since the last DG Competition consultation exercise on the topic of passenger tariff co-ordination in 2001. We consider that the IATA passenger tariff co-ordination system has as its object and/or effect an appreciable restriction of competition. We recognise that interlining brings benefits to consumers but we are not convinced that tariff co-ordination is indispensable to achieving those benefits. The onus to prove that tariff co-ordination satisfies the conditions in Article 81(3), in particular that it is indispensable, should rest with IATA. 4. Block exemptions in the air transport sector were originally developed, at least in part, to help the European flag carriers and former beneficiaries of state aid in the transition to a market-based, deregulated competitive environment that culminated in the implementation of the Third Package of air transport regulation in 1993. We seriously question whether there is a continuing need for such a transition to continue. Given that we consider it questionable that the indispensability test in Article 81(3) of the EC Treaty is met, and in the absence of IATA submitting persuasive evidence to the contrary, we suggest that Regulation 1617/93 is extended for a limited period of time (two years may be an appropriate period) while alternative methods of facilitating interlining are given serious consideration. 1 5. The consultation document suggests a ‘posted prices’ system as a potential alternative to passenger tariff co-ordination. We consider that IATA has not, to date, given sufficiently serious consideration to this, or any other potential new framework for facilitating interlining. Moreover, any assessment of whether such a system is feasible is hampered by the inadequacies in IATA’s explanations of the benefits of tariff co- ordination as a method of facilitating interlining (IATA’s arguments to date have instead focused on the benefits of interlining). We consider that the onus should be on the industry to consider and propose solutions to overcome the difficulties of developing an alternative system, or provide clear and compelling evidence as to why no such system is viable. In doing so we consider that the aim should be to meet the reasonable demands of the market for an interline product, rather than necessarily seeking to replicate the current “gold-plated” system without considering what the market actually requires. 6. This paper also touches on the other areas raised in DG Competition’s Consultation Paper. In summary: • we consider that Regulation 1617/93 should be extended in geographic scope to apply to EU-third country routes for the same limited period while alternative methods of facilitating interlining are given serious consideration; • we see no reason to make any changes to the slots block exemption following the technical amendments made to the EC airport slots regulation; • we support DG Competition’s arguments that there is no objective reason to reinstate the former block exemption for cargo tariff co-ordination on intra-EU routes; and • we see no reason for formulating a new block exemption for cargo tariff consultations between EU and third countries when the indispensability test in Article 81(3) is not likely to be met. II PASSENGER TARIFF CONSULATIONS 2 6. There are clear benefits for passengers arising from the ability to interline. However, it is less clear that tariff co-ordination is indispensable to achieving these benefits. A further consideration is that tariff co-ordination is likely to significantly dampen competition. In this section we discuss the restrictive effects of the IATA system and consider more precisely how the benefits arise from IATA tariff co-ordination. We then consider indispensability, in particular discussing the ‘posted prices’ system as a possible alternative method of facilitating interlining. Finally we consider whether there are any other arguments that arise in considering interlining in relation to EU-third country travel. A The restrictive effects of IATA tariff co-ordination 7. The restrictive effects of IATA multilateral tariff co-ordination potentially arise in four, sometimes overlapping, areas, each of which is considered in turn. These comments apply to both intra-EU and to EU-third country routes. i) Price fixing of IATA flexible tickets 8. It is generally accepted that any horizontal price fixing is likely to have an appreciable effect on competition, especially where (as is the case with IATA tariff conferences) the parties to that agreement account for a significant proportion of the relevant market. 9. We are aware that IATA in its response to the DG Competition consultation paper claims that the IATA tariff consultations do not have the ‘object’ of restricting competition, and use the European Commission’s Notice on the application of Article 81(3)1 to support this view. Their argument appears to be that the tariff co-ordination conferences do not fit the model of a classic price fixing cartel and that in meeting they are creating a multilateral product that the individual airlines cannot provide on their own; in effect it is a new product they are creating. 10. At first glance, IATA’s argument would appear to have some merit. In the same Notice, the European Commission states in its discussion on the basic principles for assessing agreements under Article 81(1) that ‘certain restraints may in certain cases not be caught by Article 81(1) when the restraint is objectively necessary for the existence of an agreement of that type or that nature’2. This would seem to favour IATA’s arguments that their tariff co-ordination conferences are objectively necessary otherwise a new multilateral product would not emerge. 1 OJ C101. 27.04.2004, p 97-118. 3 11. However, the same paragraph goes on to clarify that such exclusion of the application of Article 81(1) must be made on an objective basis. The question to be asked is: ‘whether given the nature of the agreement3 and the characteristics of the market a less restrictive agreement [could] not have been concluded by the undertakings in a similar setting’. As discussed later in this response, it appears possible that a less restrictive system (e.g. a posted prices system) could be devised to facilitate interlining. As a result, we would argue that interline fare-setting at IATA tariff conferences does seem unnecessarily to restrict competition as it could be possible to facilitate interlining in a less restrictive way. As the European Commission’s Notice goes on to state, price fixing (as occurs within the conferences) is a serious offence, and so has by its object the potential to restrict competition4. We would suggest that tariff co-ordination appears to fall into this category of being restrictive by its object. However, this is something we would like to give further consideration to once we have digested IATA’s response to DG Competition. 12. We also consider that the tariff conferences are likely to have the effect of raising the price of interline tickets (as well as other restrictive effects on competition discussed below). In addition to the potential for the IATA fare to be excessively high as a result of collusion between carriers, conference votes are taken unanimously, so it is possible for the least efficient carrier to veto a proposed tariff until it is sufficiently high for that carrier to cover costs. The IATA fare will in any case be set at an artificially high level compared with that appropriate for a direct point-to-point journey in order to allow for the added cost of optional flexibility for multi-sector routings, and the ability to change those routings, within certain mileage limits. A question which remains unanswered due to a lack of adequate data is the extent to which this facility is actually used. In the event of few passengers utilising, or relying on, this facility it appears that the majority of passengers buying IATA tickets are paying for a service that they do not use. The onus should be on the industry to supply data in this respect. ii) Reduction of incentives for airlines to offer flexible tickets on some routes 13. In some markets a fixed IATA fare may reduce incentives for airlines to offer their own flexible tickets. Business travellers faced with only an IATA flexible fare are compelled to buy that fare even where they may not require an interline facility but only a ticket free 2 Ibid. paragraph 18(2) 3 The Notice makes clear that references within the Notice to agreement also include decisions by associations of undertakings (e.g. IATA), and concerted practices. See footnote 1 in the Notice. 4 Ibid. paragraph 21 4 from restrictive booking conditions. Although past surveys5 have found that on routes within the EU airlines did not offer a single-operator alternative flexible fare on a substantial proportion of routes, this does now appear to have changed.