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 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 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 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 (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 , 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 , Sun Air, Danish Air Transport and City 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 .

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 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 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. The decision entered into force in August 2002. NAS entered the market in September 2002. NAS first entered four larger routes only. However, despite fierce competition from SAS/Braathens, which again followed an aggressive "wing to wing" strategy, NAS soon experienced a rapid growth in both volume, number of routes and market share. It is widely recognized4 that prohibiting SAS from offering FFP on Norwegian domestic routes played a decisive role in the successful entry and growth of NAS, as it allowed NAS to compete on price with SAS domestically. NAS has repeatedly stressed that the FFP prohibition was a pre-condition for its successful entry and growth.

As can be seen from the enclosed graph "Flybillettpriser og konkurranse 1998-2007", the price level on domestic routes fell substantially following the adoption of the prohibition decision in March 2002 and the subsequent entry of NAS in September 2002. The graph is based on the Central Bureau of Statistics' (SSB) price indexes, which show the price level of air transport compared to the general development of consumer prices from October 1998 until August 2007. Part of the reduction in price in the spring of 2002 may be due to other factors, such as the abolition of the passenger seat charge in April 2002. However, there is a clear correlation between the introduction of competition and price reductions. As is shown inter alia in the T0I travel surveys, when competition is introduced on a route, the price level ofthat route decreases substantially. For instance, according to T0I, on the five routes which NAS entered in competition with SAS between 2007 and 2009, fares fell by 22 % in the business segment and 18 % in the leisure travel market.5 It is natural to conclude that there is a causal link between competition and price reduction in the Norwegian domestic market.

The re-introduction of competition through the NAS entry furthermore fundamentally changed the domestic market, inter alia in that it forced SAS to introduce one-way tickets.

At the expiry of the prohibition decision in August 2007, SAS, holding approximately 61% was still the dominant carrier on the Norwegian domestic market. NAS by then had achieved a market share of approximately 24%. Widerae held 13% of the market, and the remaining 2% were shared between a number of smaller carriers, of which Danish Air Transport (0,8%) and Coast Air (0,6%) were the largest.6 NAS, however, was still established on the larger domestic routes as well as on certain international routes only. In order to maintain and increase competition, it was considered necessary to uphold the prohibition on FFPs with regard to SAS. However, given the structural changes on the domestic market, prohibiting SAS from offering FFP only was considered no longer sufficient. It was believed that if NAS

4 Se inter alia the T0I travel survey for 2007, page 5. 5 see T0I travel survey for 2005 page 25-27, 2007 page 32-34 and 2009 page 26-27. 6 T0I travel survey 2007, page 21.

Page 4 were allowed to offer FFP, it would reduce NAS' incentives to compete hard with SAS. It would furthermore lead to unequal conditions of competition between SAS and NAS. The Norwegian competition authorities considered an exemption from the prohibition for carriers with smaller market shares. However, an exemption would lead to unequal conditions of competition between larger and smaller .

By 2009, NAS had gained considerable further market shares. According to the T0I travel survey for 2009, SAS was still the dominant carrier, holding a market share of approximately 49%. NAS held an overall market share of approximately 35%. Widerae furthermore held a market share of approximately 14% and other carriers a market share of approximately 2%. Of these, Danish Air Transport was still the largest, with a market share of approximately 1%.7

Assessment of the current competitive situation The Norwegian competition authorities consider that, due to the successful entry and growth of NAS, there is efficient competition on the domestic market, characterized by competition on price. NAS competes with SAS on all larger routes out of Oslo, with the exception of Oslo-Kristiansund, and holds a market share of between 40 and 50% on all established routes. On all routes on which competition has been introduced, the price level has fallen substantially, both in the business and leisure travel segments.

Apart from NAS, there has been relatively little entry on domestic routes by other carriers. This is the case both prior to and after the adoption of the general prohibition on FFPs in August 2007. The low level of actual entry can be explained by the fact that there is already competition in the market as well as by the structural properties of the Norwegian market. With two incumbent airlines already competing, there is little room for new carriers to enter the market, or, for hub and spoke carriers, to enter on a sufficiently large scale to be commercially viable. However, the potential competition from other carriers is an important disciplining threat to both SAS and NAS.

Regulation No 684 of 20 June 2007 As stated above, a general prohibition on FFPs is considered the most efficient and targeted means to facilitate new entry on domestic routes available to the Norwegian competition authorities. Under the SAS/Braathens near monopoly, the main barrier to entry was the new carrier's ability to compete with the incumbent carrier on price. The Regulation successfully removes this barrier. It does not prevent carriers from competing on other parameters than price.

From what can be observed, the prohibition on FFPs does not negatively affect the carriers' decision to enter the domestic market. It is noted that between August 2002 and August 2007, when the ban on FFPs applied to SAS only, apart from NAS, very little entry by other carriers, whether low-cost or hub-and-spoke, took place. The level of entry by other carriers is no different prior to and after the entry into force of the general prohibition on FFPs in August 2007. If Norwegian domestic routes were commercially attractive to foreign carriers, and the ban on FFPs were in fact a barrier to entry, one might expect that low-cost carriers, which in general do not include FFPs in their commercial strategy, would have established themselves

7 T0I travel survey 2009, page 20.

Page 5 on the Norwegian market. However, no entry by low-cost carriers on domestic routes has taken place.

It is furthermore noted that the Norwegian competition authorities neither prior to nor after the adoption of the Regulation have received any information from other carriers indicating that the prohibition on FFPs on domestic routes has any negative effects on their commercial decisions with regard to possible entry on the Norwegian market.

Yours sincerely,

einar Undrum 46*u6**& Director General Nina Gorrissen Senior Adviser

Page 6 Transportokonomisk institutt Stiftelsen Norsk senter for samferdselsforskning

Arbeidsdokument av 10. november 2010 KT/1529/2010 Jon Martin Denstadli

Trafikkutvikling og ruteendringer i innenriks luftfart i perioden 2003-2009

Innhold 1. Nye ruter 2 2. Ruter som er lagt ned 2 3. Trafikkutvikling pä hovedrutene 2

Dette materialet er ikke offentliggjort. Det kan brukes kun i den saklige sammenheng det er gitt. Det skal ikke tas noen form for kopier til annen bruk eller spredning. Unntak må klareres med TØI.

Gaustadalléen 21 Tlf: +47 22 57 38 00 E-post: [email protected] Bankgiro: Org.nr: 959056773 MVA NO 0349 Oslo Faks: +47 22 60 92 00 www.toi.no DNB NOR 8200.01.30164 1. Nye ruter Tabell 1 viser hvilke nye ruter som er etablert fra og med 2003, etableringsår og hvilket selskap som sto bak, samt antall passasjerer i etableringsåret og i 2009. En rute er her definert enten som (i) nye relasjoner, dvs bypar som tidligere ikke har hatt direkte flyforbindelse, eller (ii) ny aktør på en eksisterende rute. For å bli regnet som ny rute har det også vært et krav at passasjergrunnlaget skal være minst 10 000 per år, dvs minst 5 000 i hver retning. I alt ble det etablert 23 nye ruter i perioden. Norwegian har stått bak de fleste nyetableringene ved at de har kommet inn på ruter som tidligere kun var trafikkert av SAS. På stamrutenettet ut fra Oslo er det i dag kun Oslo-Kristiansund hvor det ikke er konkurranse mellom Norwegian og SAS. Norwegian har i løpet av de siste par årene også åpnet fem nye ruter til Moss lufthavn Rygge, fra , , , Bodø/Tromsø. Sistnevnte er imidlertid lagt ned i løpet av 2010.

2. Ruter som er lagt ned Tabell 2 viser at 14 ruter ble lagt ned i perioden. Halvparten av disse var ruter som ble operert av Coast Air, som innstilte driften i 2008. På denne listen finner vi også Norwegians ruter mellom Oslo og /Ålesund, som har blitt startet opp på nytt i løpet av de siste par årene,

3. Trafikkutvikling på hovedrutene Tabell 3 viser trafikkutvikingen på utvalgte hovedruter i perioden 2003-2009. Oslo- Trondheim og Oslo-Bergen er de største rutene med drøyt 1,5 millioner passasjerer i 2009. Perioden sett under ett har imidlertid trafikkveksten på disse rutene vært lavere enn for gjennomsnittet. Størst har veksten vært på Oslo-Bodø og Oslo-. Norwegian gikk inn på stamrutenettet i Sør-Norge i 2002. Etter dette har selskapet gradvis utvidet rutetilbudet, både ved at de har gått inn på nye relasjoner og økt frekvensen på eksisterende strekninger. Tabell 4 viser hvordan markedsandelen til Norwegian på konkurranserutene har utviklet siden 2003 Hovedtrekkene i utviklingen de siste par årene er: - Norwegians markedsandel på de ”etablerte” rutene ligger gjennomgående mellom 40 og 50 prosent. - På alle ruter hvor det har vært konkurranse i perioden har Norwegian tatt markedsandeler. - På ruter hvor Norwegian har gått inn etter 2007 varierer markedsandelen fra 16 (Oslo- Haugesund) til 42 prosent (Oslo-Ålesund). På Oslo-Haugesund gikk imidlertid Norwegian inn sent på året. I fjerde kvartal hadde selskapet en markedsandel på 43 prosent. Norwegian står enda sterkere i punkt-til-punkt markedet. Figur 4 viser markedsandeler på rutene ovenfor for reiser mellom de respektive byene. På seks av de 15 strekningene har Norwegian en markedsandel på over 50 prosent, med Oslo-Harstad/Evenes som høyest (61 prosent) og Oslo-Haugesund som lavest (20 prosent).

Arbeidsdokument KT/1523/2010 2 Tabell 1: Nye ruter på innenriksnettet etter 2003

Etablerings- Antall pass isjerer i Nye ruter Selskap år etableringsåret 2009 Bergen-Bod0 Widerøe 2007 5 000 15 000 Bergen-Rygge Norwegian 2008 80 000 100 000 Bergen-Skien Coast Air 2005 11 000 - Bergen-Stavanger Norwegian 2006 150 000 195 000 Bergen-Troms0 Widerøe 2006 4 000 22 000

Bod0-Rygge Norwegian 2009 40 000 40 000

Oslo-Bardufoss Norwegian 2008 120 000 170 000 Oslo-Haugesund Norwegian 2009 64 000 64 000 Oslo-Kirkenes Norwegian 2004 20 000 60 000 Oslo-Kristiansand Norwegian 2008 105 000 190 000 Oslo- Norwegian 2008 11 000 - Oslo-Molde Norwegian 2003 24 000 - Oslo-Molde Norwegian 2009 60 000 60 000 Oslo- Sun Air 2008 5 000 10 000 Oslo-Stord Danish Air Transport 2009 12 000 12 000 Oslo-Ålesund Norwegian 2008 50 000 200 000

Stavanger-Kristiansund City Star Airlines 2006 9 000 - Stavanger-Kristiansund SAS 2006 6 000 10 000 Stavanger-Rygge Norwegian 2007 10 000 50 000

Troms0-Bod0 Norwegian 2008 30 000 60 000

Trondheim-Bod0 Norwegian 2008 35 000 60 000 Trondheim-Rygge Norwegian 2008 20 000 100 000 Trondheim-Stavanger SAS 2006 15 000 65 000

Arbeidsdokument KT/1523/2010 3 Tabell 2: Ruter som er lagt ned i perioden 2003-2009

Nedlagte ruter Selskap År Bergen-Haugesund Coast Air 2007 Bergen-Kristiansund Coast Air 2006 Bergen-Skien Coast Air 2005 Bergen-Stavanger Widerøe 2006

Haugesund- Coast Air 2007

Oslo-Haugesund Coast Air 2004 Oslo-Longyearbyen Norwegian 2008 Oslo-Molde Norwegian 2004 Oslo-Stord Golden Air 2004 Oslo-Stord Coast Air 2007 Oslo-Ålesund Norwegian 2004

Stavanger-Kristiansund City Star Airlines 2007

Trondheim-Kristiansund Coast Air 2005 Trondheim-Troms0 Norwegian 2005

Arbeidsdokument KT/1523/2010 4 Tabell 3: Trafikkutviklingen på utvalgte relasjoner. PAX 2003-2009 Endring

2003 2004 2005 2006 2007 2008 2009 2003-09 20 07-09 Oslo- Trondheim 1 313 007 1 324 612 1 386 556 1 487 654 1 624 085 1 618 141 1 534 150 17 % -6 % Oslo- Bergen 1 312 258 1 322 404 1 399 407 1 516 478 1 631 848 1 576 133 1 513 370 15 % -7 % Oslo- Stavanger 991 520 1 029 927 1 099 465 1 201 151 1 298 468 1 347 089 1 248 966 26 % -4 % Oslo- Troms0 628 205 656 948 703 792 769 763 804 556 796 038 749 505 19 % -7 % Oslo- Bod0 454 812 500 539 525 683 596 224 635 889 622 121 599 321 32 % -6 % Bergen- Stavanger 510 723 508 281 487 955 589 013 612 371 616 918 577 473 13 % -6 % Oslo- Ålesund 382 616 436 349 415 675 430 813 466 782 472 282 477 191 25 % 2 % Oslo- Kristiansand 372 273 395 386 409 045 414 826 422 455 462 258 446 136 20 % 6 % Oslo- Haugesund 262 577 263 863 263 675 309 648 336 883 355 745 360 051 37 % 7 % Oslo- Molde 215 107 234 643 255 563 284 685 265 589 237 939 248 151 15 % -7 % Oslo- Kristiansund 133 467 142 231 149 314 153 066 160 738 163 903 166 907 25 % 4 %

Tabell 4: Norwegians markedsandeler på relasjoner hvor de opererer i konkurranse med SAS Relasjon 2009 2007 2005 2003 Oslo-Stavanger 46 38 28 20 Oslo-Bergen 50 44 34 22 Oslo-Trondheim 48 44 35 23 Oslo-Bod0 39 35 25 12 Oslo-Harstad/Narvik 55 38 24 18 Oslo-Troms0 41 36 31 21 Oslo-Alta 51 43 18 11 Bergen-Stavanger 38 37 - - - Oslo-Kristiansand 40 - - - Oslo-Haugesund 16 - - - Oslo-Ålesund 42 - - - Oslo-Molde 22 - - - Oslo-Kirkenes 35 - - - Trondheim-Bod0 19 - - - Trondheim-Troms0 29 - - -

Arbeidsdokument KT/1523/2010 5 100 % 90 % I I I I I I I I I I I I I I 80 % I I I I I I I I I I I I I I 70 % I I I I I I I I I I I I I I 60 % I I I I I I I I I I I I I I 50 % I I I I I I I I I I I I I I 40 % I I I I I I I I I I I I I I SAS 30 % I I I I I I I I I I I I I I DY 20 % I I I I I I I I I I I I I I 10 % I I I I I I I I I I I I I I 0 % I I I I I I I I I I I I I I

Figur 4: Markedsandeler for punkt-til-punkt trafikken. 2009

Arbeidsdokument KT/1523/2010 6 Flybillettpriser og konkurranse 1998-2007

170 Vedtak om bonusforbud Ikke-inngrep i SAS- mars 2002 Flypassasjer- 160 SSBs prisindeks for flyreiser Braathens-fusjonen avgiften avskaffes okt 2001 april 2002 -Konsumprisindeksen

150 - Flypassasjer- avgiften utvides 140 - apr 2001

130

120

110 -

100 -

SAS, Braathens SAS, Braathens SAS SAS Braathens, Norwegian 90 Color Air

Figuren viser utviklingen i flyprisene i forhold til den generelle utviklingen i konsumprisene fra oktober 1998 til juli 2007. SSB fortok en endring i sin beregningsmetode for prisindeks for flyreiser fra august 2007. Den nye beregningsmetoden gir svært store svingninger fra måned til måned. De store svingningene gjør det vanskelig å si med sikkerhet hvordan prisene har utviklet seg i tidsrommet etter at den nye beregningsmetoden ble innført. Mehamn Honninasväa Berleväg Hammerfest Hasvik

Statlig kj0p av Andenes - regionale •i flyruter i Norge:

• 21 ruteomräder 29 regionale lufthavner Krav til om lag 50 forbindelser

Kristiansund Molde Om lag 1.1 million Älesund 9M , 0rsta - Volda rutepassasjerer

)A + Sandane ioandal per år Gjennomsnittlig tilskudd BERGEN Stord pr. passasjer ca 629 kr,

Haugesund Notodden men varierer en god del ARygge SkienA ± Stavangei/anger fiSandefjord

Kristiansand