British Airways, Iberia and American Airlines

Competition Policy Newsletter British Airways, Iberia and American Airlines: airline cooperation and ANTITRUST consolidation under review by the Commission by Emmanuelle Mantlik, Daniel Mes, Tatyana Panova, Anatoly Subočs, Axel Specker and Lucia Bonova (1) 1. Introduction between airlines at international level (2). The Com- mission’s investigation concerned only the close On 14 July 2010, the Commission adopted two transatlantic cooperation between BA, AA and IB, decisions in relation to air transport services. The and not the looser forms of cooperation with the first decision, in antitrust Case COMP/39.596 other members of the oneworld alliance. BA/AA/IB, made binding the commitments offered by British Airways (‘BA’), American Airlines The Commission decision of 14 July 2010 is (‘AA’) and Iberia (‘IB’) in relation to their coopera- a commitment decision on the basis of Article 9 of tion on transatlantic routes. The second decision, in Regulation No 1/2003. In its decision, the Com- merger Case COMP/M.5747 IB/BA, cleared a con- mission concluded that the commitments offered centration between BA and IB in Phase I without by BA, AA and IB met the competition concerns remedies. that it had expressed in its preliminary assessment of the case, which was contained in the Statement The present article discusses the main issues raised of Objections that was addressed to the parties on in these investigations and highlights developments 29 September 2009. The sections below describe in the Commission’s approach towards competition the Commission’s competition concerns as ex- analysis and remedies in the passenger air transport pressed in its preliminary assessment and the com- sector. mitments that the parties offered to meet those concerns. 2. British Airways/American Airlines/ Iberia antitrust case 2.2. Relevant markets 2.1. Background Point of origin/point of destination’ (O&D) BA, AA and IB concluded a set of agreements versus network-wide market establishing cooperation on all routes served by The Commission examined a recurrent question these airlines between Europe and North Ameri- in recent airline cases, namely whether the relevant ca (‘transatlantic routes’). In particular, the parties markets in these cases should be defined at the level agreed to coordinate prices, capacity, schedules, of airline networks rather than at the level of indi- marketing and sales, as well as to share revenues. vidual city pairs. On 8 April 2009, the Commission opened formal proceedings pursuant to Article 101 TFEU. From a demand side perspective, passengers usually wish to travel between specific cities. Accord- All three parties are members of the oneworld al- ingly, a price increase on a flight to Palermo will liance, which is one of the three global airline alli- not generally make a passenger fly to Paris instead. ances, the other two being the Star alliance and the Hence, passengers are concerned by competitive SkyTeam alliance. The level of cooperation between conditions on a particular route, which is not sub- members of each of these alliances ranges from stitutable by other routes. On the other hand, some a relatively low degree of cooperation, involving for full-service airlines consider that they compete on example the sharing of frequent flyer programmes the basis of their networks of flights, since larger (‘FFPs’) or lounge access, to highly integrated ar- networks allow airlines to offer more destinations rangements, such as setting of common prices and and to persuade more passengers to travel via their revenue sharing. The latter types of cooperation hub airports. However, these supply-side consid- have developed partly in response to existing regu- erations are secondary for the definition of the latory barriers which prevent cross-border mergers (2) Mergers involving non-EU airlines are hampered by na- (1) The authors would like to thank the other members of the tionality clauses in bilateral air services agreements due case teams, in particular members of the Chief Econo- to which a merging airline risks losing valuable air traffic mist Team Miguel de la Mano, Mario Marinello, Szabolcs rights. Furthermore, some countries maintain explicit for- L rincz, Manuel Godinho de Matos and José Enrique eign ownership and control restrictions. Thus, the United Elías Cabrera. The content of this article does not neces- States limit foreign ownership of its airlines to 49 % and sarily reflect the official position of the European Com- foreign control to 25 %. Similarly, non-EU citizens may mission. Responsibility for the information and views ex- own only up to 49 % of EU airlines. Mergers between EU pressed lies entirely with the authors. carriers are possible thanks to EU liberalisation measures. Number 3 — 2010 23 Antitrust relevant market (3). For a passenger wishing to trav- includes fewer stays over the weekend). Further- el on a specific route where a transaction results in more, premium passengers appeared to be much monopoly prices, it would be of little relief if the more likely to simply switch airlines in the case of same transaction strengthened the network of the a price increase rather than reduce their travel com- parties vis-à-vis their competitors. Since competition fort or the flexibility of their travel by switching to assessment deals first and foremost with the effect a lower fare class. The Commission therefore took of the transaction on consumers, demand-side the preliminary view that services provided by air- considerations are key for the purposes of market lines to these two groups of passengers belonged definition. to two separate markets. The Commission thus provisionally concluded that The Commission used booking classes as a proxy O&D city pairs were the relevant method to define for determining the size of each of these markets. the market in the present case. This market defini- Booking classes are the main indicator which air- tion does not negate the importance of networks in lines themselves use to distinguish and price differ- the airline industry. The Commission took network entiate between premium and non-premium pas- considerations into account in its competitive analy- sengers. As it was not necessary to determine the sis, in particular when assessing the strength of the precise boundaries of the two markets in this case, airlines at the relevant hubs, the likelihood of entry the Commission calculated market shares on the by a competitor in the light of its overall network basis of the premium market, including all tickets presence and the competitive constraint imposed by except restricted Economy. one-stop flights over the airport hubs of competing airlines and airline alliances. Non-stop versus one-stop flights Premium versus non-premium passengers Air transport markets may be further segmented The Commission’s investigation identified the ex- on the basis of the distinction between non-stop istence of two distinct groups of passengers with services and one-stop services. However, the Com- different travel needs on transatlantic routes. While mission provisionally concluded that, in the present one group of passengers selects the flights prima- case, it was not necessary to determine whether rily on the basis of price (‘non-premium passen- non-stop flights and one-stop flights were in the gers’), the other group of passengers selects trips same market. The parties’ cooperation would re- on the basis of a combination of factors such as strict competition irrespective of the precise mar- shorter trip duration, ticket flexibility, price and, ket definition, since on the routes of concern given the length of the flight, travel comfort (‘pre- one-stop services were only remote substitutes 4 mium passengers’) ( ). Premium passengers are to non-stop flights. The competitive constraint usually less price sensitive than non-premium pas- imposed by one-stop services varied between the sengers. The Commission’s conclusion was based routes of concern and depended on several factors, on qualitative and quantitative evidence collected such as passenger type (premium/non-premium) throughout its investigation. In particular, an analy- and total travel time. The Commission conducted sis of the correlation of fares within the various a detailed assessment of the extent of competitive fare classes on transatlantic flights revealed that constraint imposed by one-stop services on each fares for restricted Economy tickets are not corre- route of concern. lated with fares for flexible Business tickets. More- over, a passenger survey conducted at London Heathrow airport indicated that premium passen- Airport substitution gers share common travel preferences, which differ from the travel preferences of non-premium pas- London is served by five main airports: Heathrow, sengers, particularly as regards the time when the Gatwick, London City, Luton and Stansted. The ticket was booked (which is generally closer to the Commission’s investigation indicated that demand- time of departure of the flight) and the length of side substitution and supply-side substitution be- stay at destination (which is generally shorter and tween transatlantic flights out of Heathrow and the other four London airports was likely to be in- (3) Commission Notice on the definition of relevant mar- sufficient to consider that they all belonged to the ket for the purposes of Community competition law, same relevant market. However, in this case it was OJ C 372, 9.12.1997, p. 5–13, paras. 13-14. not necessary to define the exact boundaries of the (4) While in previous cases the Commission used ‘time sensi- market, since such definition did not alter the Com- tive/non-time sensitive’ terminology to define these two mission’s competitive assessment. With respect to groups of passengers, in the present case ‘premium/non- premium’ distinction was applied to underline the impor- New York airports, the Commission provisionally tance of non-time-related considerations, in particular considered John F. Kennedy and Newark airports to travel comfort, for passengers on transatlantic routes.

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