RESPONSE BY EUROPEAN REGIONS AIRLINE ASSOCIATION (ERA)

to

DG COMPETITION (EUROPEAN COMMISSION) CONSULTATION PAPER

Concerning the revision and possible prorogation of Commission Regulation 1617/93 on the application of Article 81(3) to certain categories of agreements and concerted practices concerning consultations on passenger tariffs on scheduled air services and slot allocation at airports

1. Introduction

1) The IATA Interline System and Passenger Tariff Conferences

This response explains the importance of the current IATA interline fares system to many of Europe’s air passengers and airlines, with particular reference to the more than 50 ERA member airlines that are based in EU member states (see Appendix 4).

The focus of this response is on intra-EU routes, both domestic within one state, and international across member states’ borders. However, the arguments apply equally to routes between EU member states and third countries. In this regard, ERA members’ interests primarily lie in routes between the EU and non-EU European states, Russia, the Middle East and North Africa.

ERA’s response does not specifically answer the detailed questions in the consultation paper. ERA fully supports the detailed submission of IATA.

2) Slot Allocation and Airport Scheduling Conferences

The ability to obtain slots at congested airports effectively and efficiently is of the utmost importance to many ERA member airlines.

ERA is making no direct response to this aspect of the consultation paper, ERA fully supports the submission made by IATA.

Throughout this document, references to paragraph numbers are to those in the consultation paper.

The Baker Suite, Fairoaks Airport, Chobham, WOKING, Surrey, GU24 8HX, UK Telephone: +44 (0)1276 856495 Fax: +44 (0)1276 857038 E-mail [email protected], Web site www.eraa.org and www.fly-safely.org 2. Summary

• Whilst the majority of passengers travelling within the EU make simple out and back journeys on relatively thick routes, many millions of other passengers each year make other journeys on airlines that make use of the IATA Interlining System. Many of these journeys are facilitated by the IATA Interlining System.

• Many of Europe’s independent major and regional airlines offer services on routes that might become less viable in the absence of the IATA Interlining System. These services increase competition and consumer choice.

• The Commission’s analysis of the organisation of European air transport, and the associated model of traffic flows, has five serious flaws:

a) it fails to take full account of EU enlargement – in 11 of the 25 member states, the principal airline is independent rather than a member of an alliance. Some of these airlines operate hubs in their own right, but all are competing with alliance carriers;

b) it fails to take account of two major route types on which ERA’s independent member airlines are currently able to compete effectively against other airlines or alliances,

c) it makes the false assumption that routes between hubs of competing carriers and/or alliances “appear to be among the thickest intra-Community routes on which carriers operate almost exclusively at a high number of frequencies”;

d) it makes the false assumption that virtually all passengers travelling on thin/very thin routes between two secondary/regional airports will use a direct service if available, irrespective of the frequency offered; and

e) it makes the erroneous assumption that the top 25 EU airports in passenger number terms are “hub” airports.

• The Commission’s assertion that “it appears that the benefits identified by IATA in respect of ‘through fares’ and ‘through check’ of baggage have to a large extent been overtaken following the development of airline alliances” is based on incorrect analysis and is gravely flawed.

• The Commission has attempted no impact assessment of the effect of outlawing the IATA Interlining System or its associated passenger tariff conferences, although ERA accepts that the Commission has only recently commenced its consultation process. ERA believes that, in line with its own Communication on “Better Regulation”, an impact assessment should form a substantial part of the Commission’s work prior to making its decision.

• ERA supports the ongoing consultation process by the Commission. ERA intends to be fully involved in all stages of the process leading up to the Commission’s decision, including the development of the required impact assessment. 3. Use of interline fares by passengers

Paragraph 7 in the consultation paper describes three reasons for the use of interline fares: a) to continue a journey onwards on a different airline b) to use one airline for a single-sector outward journey and a different airline for the return journey c) to allow reservation changes onto flights by different airlines

While c) is a passenger benefit alone, both a) and b) allow independent carriers to compete more effectively with alliance carriers – see Section 4 below.

4. Benefit of interline fares for airline competition

The Commission recognises the existence of some benefits of interline fares for smaller and regional carriers in Paragraph 69. These benefits are described in more detail in this Section. a) Continuing a journey onwards on a different airline

The ability for a passenger to continue a journey onwards on a different airline allows airlines that are not otherwise in partnership to market connecting flights on a competitive basis.

There are hundreds of “city-pair” and “airport-pair” routes within Europe that are either not served by direct non-stop flights, or are served at very low frequency (up to twice daily). On these routes, many passengers will seek alternative connecting flights for journeys in one or both directions. Many such connections may be offered by single carriers or by two carriers in the same alliance. However, many such connections are also offered by two airlines working independently. Removal of interline fares will reduce these airlines ability to compete with single carriers or alliance combinations.

Without the basis of published interline fares, fares for such connections would need either to be negotiated individually or would be sold at higher “sum of sectors” prices. Many small airlines do not have the resources to enter into negotiations over fares with each airline with whom they are currently able to offer competitive connections.

Some independent airlines offering flights on sectors heavily dependent on connecting passengers may withdraw their services in the event that the absence of interline fares makes their services uncompetitive.

This would reduce actual competition in the affected markets. b) Using one airline for a single-sector outward journey and a different airline for the return journey

The ability for a passenger to book a return journey on a different airline from that used for the outbound journey allows airlines that are not otherwise in partnership to market round trips on a competitive basis. There are hundreds of “city-pair” and “airport-pair” routes within Europe with competing non-stop services offered by two or more carriers. At least one of these carriers may be operating at very low frequency (up to twice daily). On these routes, many passengers who travel outward on a carrier with a low number of frequencies may wish to return at a time not offered by that carrier. These passengers will choose to use a different carrier on the return journey. In some cases the return may be on an alliance partner of the original carrier. In other cases, the return may be on a carrier working independently of the original carrier.

Without the basis of published interline fares, fares for such round trips on airlines working independently of each other would need either to be negotiated individually or would be sold at higher “sum of sectors” prices. Many small airlines do not have the resources to enter into negotiations with each airline with whom they are currently able to offer competitive round-trip flights.

Some independent airlines offering low-frequency non-stop flights on sectors that compete with non-stop flights operated by other carriers may withdraw their services in the event that the absence of interline fares makes their services uncompetitive.

This would reduce actual competition in the affected markets.

5. The organisation of air transport in the European Union

In paragraphs 29-32, and in paragraphs 54-60, the Commission describes its perception of the evolution of traffic flows within the EU. Whilst the analysis is partially correct, it contains five critical errors. ERA gives below its explanation for its belief that each of these five analytical errors is critical. a) The analysis fails to take full account of EU enlargement - in 11 of the 25 member states, the principal airline is independent rather than a member of an alliance. Some of these airlines operate hubs in their own right, but all are competing with alliance carriers.

For the reasons described in Section 3 above, removal of interline fares will damage the competitiveness of the EU’s independent airlines. In addition to independent regional airlines, these airlines include the major airlines in the following 11 EU states:

• (SN Brussels Airlines) • Cyprus (Cyprus Airways) • Estonia ( – partly owned by SAS, potentially a member) • Greece (Olympic Airlines) • Hungary (Malev) • Latvia (Air Baltic – partly owned by SAS, potentially a Star Alliance member) • Lithuania (Lithuanian Airlines) • Luxembourg (Luxair) • Malta (Air Malta) • Slovakia (Slovak Airlines) • Slovenia (Adria) EU enlargement has, in fact, led to a higher proportion of independent airlines based in the EU. These airlines all benefit from the existence of interline fares as outlined in Paragraph 69, and described in more detail in Section 4 above. Over a period of time, ERA expects that many of these airlines will either merge with other airlines or enter alliances. However, it is premature to assume that the model is the dominant model throughout the EU. b) The analysis fails to take account of two major route types on which ERA’s independent member airlines (and the independent airlines listed above) are currently able to compete effectively against other airlines or alliances. These are:

i) routes with no, or low frequency, non-stop flights, but with a choice of indirect connecting flights offered by single carriers, alliance partners and two airlines that operate independently of each other, and

ii) routes with low frequency non-stop services by independent airlines operated in competition with other airlines’ non-stop services.

The nature of competition and cooperation on these route types are described more fully in Section 4 above.

Many routes are served by more than one single carrier or alliance operation. However, the existence of these services does not obviate the need for interlining. Very many of these routes are operated at low frequency, leading to a frequent requirement to travel one way on one carrier or alliance, returning on a different carrier or alliance. c) The analysis makes the false assumption that routes between hubs of competing carriers and/or alliances “appear to be among the thickest intra-Community routes on which carriers operate almost exclusively at a high number of frequencies”;

There are approximately 100 airport pairs between hubs of the competing alliances. There are 24 such routes between Oneworld and Skyteam hubs, 30 between Oneworld and Star Alliance hubs, and 48 between Skyteam and Star Alliance hubs. In addition, there are another 72 routes between the alliance hubs and the hubs of independent airlines, and 6 routes between the hubs of independent airlines. See Appendices 2 and 3 for underlying assumptions.

Many of these routes have either no non-stop service or very limited frequency. For example, there are no services on routes such as Lisbon-Athens and only one or two daily services other routes such as Dublin-Munich. See Appendix 1 for further details.

Whilst one of these routes (London-Paris) is among the thickest of intra-EU routes, the vast majority of the thickest routes are routes between major airports served within a single alliance. Examples are domestic routes within the largest states (, , Greece, , Spain, UK), and cross-border routes within Scandinavia and between Ireland and UK. d) The analysis falsely suggests that “the overwhelming majority of passengers” on thin/very thin routes between two secondary/regional airports “actually fly point to point” (in Paragraph 34 Question 2 - although ERA recognises that the Commission itself asks whether the assumption is correct). These routes generally fit into the category described in b) i) above. They have a low frequency non-stop service operated by a . They are also served by one or more of the following: single carrier connecting services, alliance connecting services, and connecting flights operated by carriers independent of each other. The very nature of the low-frequency of the non- stop services will lead many passengers to fly one way (or even both ways) on connecting flights rather than on the low-frequency non-stop flights. It is therefore not true that “the overwhelming majority of passengers on such routes actually fly point to point”. These routes must not be disregarded in an analysis on interlining. e) The assumption that the EU’s top 25 airports, defined as those with the greatest number of passengers, constitute the major alliance hubs is false (paragraph 71 footnote 37). In fact only 13 of the top 25 are alliance hubs, and two of the top 25 are operated as hubs by carriers that are not members of an alliance. The remaining ten airports in the top 25 should not be described as hub airports, even where there is a dominant alliance.

Thus many millions of passengers flying on intra-EU routes between major airports are not flying between hub airports. The Commission must treat responses to the third question in Paragraph 71 with caution.

The details of this analysis are shown in Appendix 3.

Because of these errors, ERA believes that the assertion in Paragraph 61 that “it appears that the benefits identified by IATA in respect of ‘through fares’ and ‘through check’ of baggage have to a large extent been overtaken following the development of airline alliances” is based on incorrect analysis and is gravely flawed.

6. Objectivity and unsubstantiated claims

In Paragraph 49, the Commission restates its own guidelines for the application of Article 81(3) of the Treaty:

“only objective benefits and efficiencies may be taken into consideration”

“the assessment at stake should not be conducted from the subjective standpoint of the undertakings concerned”

ERA believes that any assessment that places these burdens (however reasonable) on the undertakings, but does not require the same standards for claims by the Commission, breaches the principles of natural justice. Therefore, ERA expresses its concern that, on a number of occasions in the consultation paper, unsubstantiated claims are made by the Commission.

Examples of these unsubstantiated claims by the Commission are:

• “these cost related uncertainties appear to have some inflationary effect on the of fares agreed in the IATA passenger tariff conferences” (Paragraph 18) • “because a pricing structure must in the long run remain coherent with product offering it relates to and therefore adequately reflect product differentiation, where one or more carrier and/or airline alliance serve a given route, those carriers/alliances have no choice but to give appropriate consideration to the level of IATA fares on that route and to the conditions attached thereto. The restriction of competition flows from the unavoidable consideration given by airlines to the coordinated level of IATA fares” (Paragraph 43)

• “moreover, IATA Tariff Conferences provide a forum wherein airlines exchange information on costs, prices and general industry developments, which can only reinforce the above mentioned restrictive effects” (Paragraph 44)

• “IATA specific itinerary flexibility may be at the root of some of the most anti-competitive effects that result from the presently existing IATA Interlining System” (Paragraph 65 – this is stated without any evidence of actual anti-competitive effects being offered)

• “the IATA Interlining System and most particularly therein the passenger tariff conferences would give to member carriers the possibility to actually eliminate competition on a substantial part of the overall market of air transport within the Community” (Paragraph 70)

It is ERA’s contention that none of the above claims can be supported by facts that demonstrate an actual restriction of competition.

7. “Better Regulation”

The impact of a decision to end the block exemption for consultations on passenger tariffs will have far- reaching effects on the nature of the European air transport business. In particular, such a decision will reduce the competitiveness, and hence the viability, of Europe’s many independent airlines that take part in the IATA Interlining System.

The impact of revising Commission Regulation 1617/93 may similarly have a significant effect, depending on the specific revisions that are proposed.

ERA therefore requests the Commission to ensure that a full impact assessment is carried out if, following this consultation, it is still considering the termination of the block exemption for passenger tariff conferences or any other significant amendment to Regulation 1617/93.

ERA expresses its willingness to cooperate fully with the Commission throughout the period of consultation, and to assist the Commission with the necessary impact assessment. Appendix 1

Air traffic model

The Commission has, in the consultation paper, effectively identified six different route types:

1 Between hubs of the same carrier or alliance

ERA assesses that there are less than 50 of these routes (Oneworld: 6, Skyteam: 15, Star Alliance: 28, Independent carriers: 0). They represent a very small proportion of total intra-EU routes.

These routes vary considerably in volume. They include some routes that are among the busiest routes within the EU (eg Dublin – London).

There may be no non-stop flights on some international routes (eg Oneworld Helsinki - Madrid), as few as one daily non-stop flight (eg Star Alliance Madrid - Warsaw) or as many as 20 or more flights per day (eg Skyteam Amsterdam - Paris).

See Appendices 2 and 3 for an assessment of which airports are included as hubs. Including additional airports as hubs will increase the number of these routes but it is unlikely that the number will exceed 100.

2/3/8/9 Between a carrier/alliance hub and a regional/remote airport with a non-stop service by that carrier/alliance

These routes vary considerably in volume.

They include many domestic routes that are the busiest routes within the EU (eg Glasgow - London (Heathrow), Malaga - Madrid, Milan (Linate) - Rome, Paris - Toulouse). Other airlines operate competing non-stop services on almost all of the thick routes.

They also include many routes with one or fewer flights per day (eg Athens - Berlin). These thinner routes are almost always served in addition by type 4/5 routes.

4/5 Between a carrier/alliance hub and a regional remote airport without a non-stop service by that carrier/alliance but where a connecting service is offered by another carrier/alliance via one of its hubs

Many hundreds of the EU’s thinner routes are served by these operations. Note that these operations are also competitive for type 2/3/8/9 routes that are operated at low frequency.

10 Between two regional/remote airports where no single carrier/alliance offers connecting services over a hub

There are almost certainly thousands of these routes. They will generally each only have a small number of passengers, but in total they almost certainly add up to several million passenger journeys each year. 11 Between two airports that are hubs of two different carriers/alliances

There are less than 200 of these routes.

These routes vary considerably in volume. Whilst there are no domestic routes, they include some of the busiest international routes (eg London-Paris).

There may be no non-stop flights on some routes (eg Lisbon - Athens), as few as one daily non-stop flight (eg Dublin - Munich) or as many as 40 or more flights per day (eg London - Paris).

See Appendices 2 and 3 for an assessment of which airports are included as hubs. Including additional airports will increase the number of these routes.

6/7 Between two regional/remote airports served by a single carrier/alliance with connecting services over a hub – see 12 below.

12 There is a seventh very common route type, in fact one of the most common in the Community. It is a route between two regional/remote airports that is served by more than one carrier and/or alliance with connecting services over their respective hubs. In terms of Exhibit 1 and paragraph 55, it is a route between airports that should be shown as RA AB1 and RA AB2. Let us call this route type 12.

There are many hundreds, perhaps even thousands, of type 6/7/12 routes. The frequency will vary from one connection a day to 20 or more. Many are competed for by more than one carrier/alliance, perhaps both or all offering a low frequency. For example, Oneworld, Skyteam, Star Alliance, and SN Brussels Airlines all offer low frequency connections on Bilbao - . Appendix 2

The EU’s hub airports

Oneworld hub airports:

Dublin (Aer Lingus) Helsinki (Finnair) London Heathrow (British Airways) Madrid (Iberia)

Skyteam hub airports:

Amsterdam (KLM) – assuming KLM’s application to join Skyteam is accepted Milan Malpensa () Paris Charles de Gaulle (Air France) Paris Orly (Air France) Prague (Czech Airlines) Rome Fiumicino (Alitalia)

Star Alliance hub airports

Copenhagen (SAS) Frankfurt (Lufthansa) Lisbon (TAP Air Portugal) London Heathrow (bmi) Madrid () Munich (Lufthansa) Vienna (Austrian Airways) Warsaw (LOT Polish Airlines)

Independent airlines’ hub airports

Athens (Olympic Airlines) Brussels (SN Brussels Airlines) Budapest (Malev) Larnaca (Cyprus Airways) Appendix 3

The top 25 EU Airports

Airport Rank in Alliance Hub Non-Hub Non- Alliance Hub EU (2) Airport with or (1) Dominant Non-hub airport with Alliance (3) no Dominant Alliance (4) London Heathrow 1 Oneworld (BA) Star (BD) Frankfurt 2 Star (LH) Paris Charles de Gaulle 3 Skyteam (AF) Amsterdam 4 Skyteam (KL)(5) Madrid 5 Oneworld (IB) London Gatwick 6 Oneworld (BA) Rome Fiumencino 7 Skyteam (AZ) Munich 8 Star (LH) Paris Orly 9 Skyteam (AF) Barcelona 10 Oneworld (IB) Manchester 11 Oneworld (BA) Star (BD) Copenhagen 12 Star (SK) Palma de Mallorca 13 None Zurich Swiss Milan Malpensa 14 Skyteam (AZ) Stockholm 15 Star (SK) London Stansted 16 None Dublin 17 Oneworld (EI) Dusseldorf 18 Star (LH) Brussels 19 SN Brussels Airlines Oslo 20 Star (SK) Vienna 21 Star (OS) Athens 22 Olympic Airlines Berlin Tegel 23 Star (LH) Malaga 24 None Helsinki 25 Oneworld (AY)

(1) Airports are ranked according to passenger numbers in year ending January 2003 (2) A primary alliance hub is a major hub for the operating carrier (3) A non-hub airport is one from which the dominant alliance serves only a subset of its destinations (4) The major carrier is shown if it operates a hub at that airport (5) It is assumed that the application by Air France Group member KLM to join Skyteam is successful

Note: Airports not included in the list above may legitimately be considered hub airports. For example Prague may be classified as a hub airport because of the nature of operations by Czech Airlines. Appendix 4

ERA MEMBER AIRLINES (August 2004) LATVIA AirBaltic LITHUANIA Air Lithuania (Austrian Lithuanian Airlines Arrows) Welcome Air MOROCCO Regional Air Lines Trade Air Denim Air KLM Cityhopper Air Danish Air Transport KLM exel SAS Commuter Widerøe’s Flyveselskap ESTONIA Aero Airlines POLAND EuroLOT FINLAND PORTUGAL ATA Aerocondor Finnish Commuter Airlines PGA Portugália SATA Air Açores FRANCE Brit Continental Airways Carpatair Régional – CAE SERBIA AND Montenegro Airlines MONTENEGRO GERMANY Augsburg Airways SLOVENIA Adria Airways Contact Air SPAIN Air Nostrum European Air Express Binter Canarias Eurowings European Executive Express Hahn Air Lufthansa CityLine Malmö Aviation Express GREECE Aegean Airlines Olympic Aviation West IRELAND Aer Arann SWITZERLAND Club Airways CityJet Helvetic Airways EU Jet Swiss ISRAEL and Arkia-Israeli Airlines Air Urga The PALESTINIAN Palestinian Airlines AUTHORITY ITALY Air Dolimiti UNITED KINGDOM Air Southwest Alitalia Express Air Wales Azurra Air Eastern Airways Club Air Flightline Flybe. JORDAN Royal Wings