Interline agreements, which let passengers travel on multiple airlines on just one ticket, are coming under European Commission competition rule scrutiny
Heat haze rises from the runway as the jet’s wheels touch down in Palma de Mallorca. Passenger Smith takes his baggage from the carousel and hails a taxi to town. It is a far cry from rainy Cork, Ireland, the airport 30km (19 miles) from his home in Lispatrick where Smith last saw his bags, three flights ago.
Price fixing
Behind the scenes, two regional airlines and one major had agreements in place to ensure passenger Smith’s conference notes and clean shirts arrived at the same time and in the same place that he did.
Interline agreements, allowing passengers to use one ticket for a journey involving flights on several different airlines, have worked since the Second World War. However, things could be about to change as the European Commission investigates the price-fixing that goes with interline agreements. As delegates gather in Gothenburg for the European Regions Airline Association (ERA) annual meeting, the prospect of a future without interline deals is on the top priority list.
The EC’s antitrust body, the competition directorate general (DG-Comp), has renewed interlining’s exemption from competition rules several times since the creation of pan-European competition rules in 1993, but has expressed increasing unease at the restrictive business practices inherent in the tie-ups.
Every year airlines meet at International Air Transport Association multilateral passenger tariff conferences to sign deals with other carriers and agree how much revenue to pass on in return. This amounts to price fixing, the EC alleges, and in June last year, as the EC was granted power over air transport within the European Union, it set about a consultation process to find out whether this practice benefited consumers more than it compromised them.
Benefits vs restrictions
Competition commissioner Nellie Kroes said at the time: “Interlining is in principle good for consumers, but price fixing is not. We need to safeguard the benefits, but get rid of the restrictions.” The EC failed to reach any conclusions after receiving around 40 submissions, with airlines arguing for an extension of the status quo, but travel agents and large companies complaining about higher fares.
This lack of common ground has left the industry in limbo, as the last exemption, agreed in 2000, expired at the end of June and has yet to be renewed. Large airlines, especially those in alliances, are troubled, but the situation is of greater concern to independent regional airlines as 30% of their traffic connects with other carriers, says Andrew Clarke, the ERA’s director of air transport policy. “The ERA board has asked the directorate to consider [interlining] as a priority,” he says.
The urgency is because, unlike major airlines with route planning teams, smaller independents often prefer to clear all deals in one go at the IATA tariff conferences rather than face negotiations with larger carriers looking to squeeze prices. The conferences, held regionally, set guidelines for fare splits that would be absent if the conferences were replaced with ad hoc bilateral agreements. Some independents worry that, on their ticket margins, the 200km feeder sector of a 5,000km flight will attract income of less than the cost of operation if pro-rata percentages replace fixed fares.
Filling a niche
Yet private deals are booming. At the recent World Route Development Forum network planning meeting in Copenhagen, of the 20,000 scheduled meetings, around 3,000 were between airlines rather than between airports and carriers, says organiser Airport Strategy & Marketing. As air transport grows, regional carriers fill a niche in connecting travellers from more remote spots to destinations via major hubs.
Cimber Air, an independent carrier based in the southern Danish city of Sonderborg, faces a typical dilemma. It has interline agreements at Copenhagen with Scandinavian Airlines (SAS) as well as in Munich with German flag carrier Lufthansa. Cimber Air group president Jørgen Nielsen says: “We need the ability to connect freely with other operators and I don’t think the system harms passengers, rather it helps them.” He points to the 45min connection time most passengers enjoy as an example of the level of service regionals have to be able to deliver, and that would not be possible without interline agreements. But the system is not all good, he concedes, as major carriers are bringing their own cost-cutting agendas to the table at tariff conferences. “This business is trying to sell a $10 bill for $5; there has to be a stop to price cutting [or else] things will come to a grinding halt,” Nielsen says.
The problem for the network carriers is the emergence of a savvy new breed of traveller. “We offer point-to-point tickets as well as connecting flights and, with the internet, people now connect services themselves because it’s sometimes cheaper,” says Nielsen. When these travellers attempt to use both tickets together the airline is faced with a choice of offering bad service and denying connections or else subsidising the passenger for a service that is usually a chargeable component of the ticket.
Low-fare airlines such as Ryanair force passengers arriving at its London Stansted base to collect their bags and clear customs and immigration before heading to check-in and repeating the process, often to arrive at a gate adjacent to where they disembarked. Furthermore, one of the frills cut by true no-frills carriers is the guarantee of connection. As regional carriers and network carriers are forced to compete with low-fare airlines on prices, providing interline check-in places them at a severe disadvantage, says Turner. BMI and other carriers have also stopped transferring the baggage of passengers combining tickets.
The EC says that it is not against interlining per se, but rather the market distortion created. It says that rather than fear change, regional airlines could be freed to carve out one-on-one deals with mainline airlines. There is another bonus: “At present regional carriers do not actively market long-haul routes even though they theoretically can, due to marketing arrangements with big carriers,” the DG-Comp says. A review of the rules would make it possible for an airline based in a remote region of Europe to commercialise services to New York via an interline partner, but renegotiated each time to reduce fares, the Commission adds.
Some regional airlines already have private deals in place, mainly within the scope of partnership arrangements. The EC points to such agreements, as well as the inclusion of several smaller airlines into alliances as regional members, as proof that private deals can replace multilateral tariff conferences. Yet it is not clear what kind of system the EC would like to see replace interlining, if any, although it has stated that a system of seasonal posted prices from the majors could retain the benefits and provide a level of transparency hitherto unknown in the secret deals.
Nigel Turner, chief executive of BMI, says: “If we want to do the world from Manchester, we need more than just the Star Alliance.” BMI plays both sides of the fence, not only as a London Heathrow-based carrier connecting with feeders, but with 23 routes operated by its regional arm feeding into other carriers in London.
After a further brief round of soliciting feedback in April, the EC has pledged a fresh round of consultations. Clarke says the worst-case scenario would involve ad hoc prices fluctuating, adding that the ERA would back a compromise with the EC that would allow interline agreements to continue, but abolish the conferences.
However, the ERA say the Commission has failed to invite the association to argue its members’ case. Instead Clarke says the EC has taken the unusual step of asking the association to appoint two of its member carriers to represent it alongside IATA and other trade bodies. The EC declines to comment on the exact composition of the panel, but insiders say that while IATA has a slick team of industry lobbyists and the Association of European Airlines has a couple of experienced government affairs staff, the ERA’s less diplomatic style of lobbying, especially on the recent passenger compensation issue, has ruffled feathers among the bureaucrats in Brussel’s corridors of power.
Crunch time
November will be a crunch time, people familiar with the process point out, as new schedules are agreed for the northern summer season and, without a valid exemption, there is less certainty in route planning. Ahead of this, the ERA will hold working groups and feed its members’ views into the two carriers nominated to meet Brussels policy makers.
Meanwhile, as passenger Smith opens his suitcase in the el Continetale suite, he must feel relieved that his swimwear, along with the rest of his clothes, made it with him this time, as it is far from certain whether they will do so in future. -
Source: Flight International
