ROYAL NORWEGIAN MINISTRY OF GOVERNMENT ADMINISTRATION, REFORM AND CHURCH AFFAIRS EFTA Surveillance Authority Internal Market Affairs Directorate RueBelliard35 B-1040 Brussels Your reference Our reference Date 09/510- $c. 12.^0(0 Case No. 63645 - Reply to request for further information on Frequent Flyer Programmes (FFPs) Reference is made to the EFTA Surveillance Authority's e-mail of 7 July 2010 and to the subsequent discussions with the Surveillance Authority at the Package Meeting on 11 November 2010. The Norwegian competition authorities' strong concern with Frequent Flyer Programmes (FFP) on Norwegian domestic routes is based on our experience with the SAS and Braathens SAFE (Braathens) duopoly and the subsequent SAS/Braathens near monopoly following the merger in December 2001. Due to the specificities of the Norwegian domestic market, entry barriers are high. One such barrier to entry is SAS' competitive response to previous attempts on entry. By prohibiting FFPs on domestic routes, the barriers to entry were substantially reduced. The prohibition furthermore promotes competition between the existing carriers. With regard to the effects of FFPs on the Norwegian domestic market, reference is made to the Ministry's letter of 12 March 2009. Before adopting Regulation No 684 of 20 June 2007, the Norwegian competition authorities carefully assessed the need for and use of the Regulation as a means of facilitating competition. A general prohibition on FFPs applicable to all carriers is considered the most targeted and efficient measure available to the Norwegian competition authorities. It is recalled that Regulation No 684 of 20 June 2007 prohibits the accumulation of bonus points on Norwegian domestic flights only. It does not prohibit the use of accumulated bonus points in Norway or in any other way impose restrictions on the services offered by the carriers. Thus, all carriers may fully apply their FFP strategies by offering additional or better services also to travellers on domestic flights. The only restriction imposed by the Regulation is that domestic flights do not qualify for additional bonus points: http://www.lovdata.no/for/sf/fa/fa-20070620-0684.html Postal address Office address Telephone Department of Competition Our officer PO Box 8004 Dep Akersgt. 59 +47 22 24 90 90 Policy Nina Gorrissen N-0030OSLO Vat no. Telefax +47 22 24 4606 [email protected] 972 417 785 +47 22 24 27 23 [email protected] The Regulation removes an important barrier to competition on price, in that it allows all carriers to compete on price on equal terms with the incumbent carrier(s). The Regulation does not preclude competition on other parameters, for instance on volume or the quality of services. Nor do the Norwegian competition authorities prefer competition on price to competition on other parameters. In our experience, however, the ability to compete on price is a prerequisite for entry on Norwegian domestic routes. During the SAS/Braathens SAFE duopoly and subsequent SAS near monopoly, the incumbent carrier SAS responded to new entry by fierce competition on volume, while enjoying a substantial competitive advantage on price through its FFP. Prior to the prohibition on FFPs in 2002, attempts on entry have failed. The Regulation has thus played an important role in enabling new carriers to compete with SAS on price and thereby successfully enter the market. The Norwegian competition authorities believe this still to be the case. However, when adopting general measures imposing obligations on undertakings, the effect of and the continued need for such measures on the market should be regularly assessed. Since the entry into force of the Regulation, NAS has further gained considerable market shares and now holds almost equal positions with SAS on many routes. Furthermore, SAS and NAS have both introduced reward programmes which are considered not covered by the prohibition Regulation.1 The Norwegian Competition Authority (NCA) has therefore recently initiated an evaluation of the domestic market. The NCA will examine into whether a continued prohibition will still contribute to increased competition and thereby lead to better services for travellers in Norway, as well as whether the prohibition should be extended to cover also the new reward programmes. Based on the recommendation from the NCA, the Ministry of Government Administration, Reform and Church Affairs will decide whether to continue the prohibition, to extend it or to repeal it. Entry on domestic routes 2003 - 2010 As requested by ESA, please find enclosed an overview of traffic development and new entry on Norwegian domestic non-Public Service Obligation routes (PSO) between 2003 and 2009. The overview is compiled by the Institute of Transport Economics (T0I) and based on data from Avinor. Avinor does not have relevant data prior to 2003. "Route" in this context is defined as (i) city pairs where direct flights have not previously been established or (ii) new entry on existing routes. Furthermore, only routes of at least 10 000 passengers per year are included. Applying the above definition, 23 domestic non-PSO routes have been established since 2003. The by far most important entry is Norwegian Air Shuttle (NAS), which during the relevant period has entered 15 routes previously served by SAS only. SAS and NAS now compete on all larger routes out of Oslo, with the exception of Oslo-Kristiansand. NAS now holds an overall market share on the "established" routes of between 40 and 50%. Of the remaining new routes, SAS opened one route, and Widerae, which is fully owned by SAS, entered two routes. One route each was opened by Coast Air, Sun Air, Danish Air Transport and City Star Alliance respectively. During that period, 14 routes were terminated. Of these, 7 were Coast Air routes. Coast Air exited the market in 2008. 1 SAS Credits and Norwegian Reward. Page 2 The Norwegian domestic market The Norwegian domestic market is characterized by low population density and scattered population distribution. It covers a large and extended territory, and the Norwegian topography makes land transport in and between large parts of the country relatively slow and difficult. Air transport is therefore the most important means of passenger transport for longer travels. According to the T0I travel survey for 2009 , air transport has a market share of approximately 28% for travels of between 300 and 500 kilometres. For travels of more than 500 kilometres, air transport is by far the dominant means of transport (63%). There are few other European countries in which air transport holds an equally strong share of passenger transport. The car is the main alternative to air transport for all travel distances. Railway transport holds a market share of 10% for travels of between 300 and 500 kilometres, and 7% only for travels of more than 500 kilometres. As a result of the above, the number of air travels per capita is higher in Norway than in most other countries. This is particularly the case in the business segment. FFPs are therefore relatively more attractive and their lock-in effect stronger in the Norwegian market. Although several of the larger routes hold important commercial value, a large share of the routes, and in particular the regional routes, are very small and of low commercial value. Many regional routes are furthermore Public Service Obligation routes (PSO).3 For further information on which routes are PSO, please see the enclosed map. Due to network effects, entry on one domestic route only may not be commercially attractive. For new carriers to enter, entry on more domestic routes may therefore be required. Furthermore, the Norwegian domestic routes must connect efficiently to the carrier's hub. Hub and spoke logistics is probably an important barrier to entry for foreign carriers. As further explained below, the incumbent carrier SAS in previous attempts on entry has clearly demonstrated its will and ability to meet new entry with aggressive competition. As potential entrants must expect SAS to react in a similar manner to future entry, the costs of entry will be increased. SAS' competitive conduct is therefore a further barrier to entry. Development of the Norwegian domestic market since the 1994 liberalisation of the air transport sector From 1994 until their merger in December 2001, SAS and Braathens held a duopoly on the Norwegian market, with a market share of approximately 50% each. However, SAS and Braathens did not compete hard on price in the business segment. The price level in the Norwegian domestic market remained in general very high compared to international flights. In 1998, the newly established Norwegian carrier Color Air attempted to enter the market. Color Air entered several larger routes. SAS and Braathens responded with fierce competition on volume. From what could be observed, the incumbent carriers followed a strategy of flying * http://www.avinor.no/avinor/trafikk/20 Reisevaner. The travel surveys are carried out bi-annually on behalf of Avinor and Oslo Airport. The surveys are based on replies to questionnaires by travelers at Norwegian airports and do not cover routes between regional airports. As such the surveys do not present accurate figures or information. 3There are 21 PSO route areas. Page 3 "wing to wing" with all Color Air flights. Color Air went bankrupt and exited the market in 1999. In December 2001, S AS and Braathens merged. Following the merger, prices increased substantially on domestic flights. In a situation of one, incumbent airline dominating the market, and given the importance of air transport in Norway, it became paramount to the Norwegian competition authorities to remove to the extent possible barriers to entry and growth and re-establish competition. The SAS FFP constituted a major barrier to entry. In March 2002, the Norwegian Competition Authority adopted a decision prohibiting SAS from offering bonus points on Norwegian domestic flights.