The result has been a significant increase in the amount of competition on international flights between member states of the European Union and on domestic EU services. New competition has come primarily from three sources: the expansion by 'national' incumbent airlines commencing or expanding operations in other markets (such as British Airways through TAT and Deutsche BA); the commencement of new routes or the expansion of existing services by existing, but much smaller European airlines; and the entry into the market of wholly new airlines (such as EBA, EasyJet and Spanair).
When faced with new and unwelcome competition, the incumbents may be sorely tempted to use whatever means are available to protect their market position and eliminate, or substantially weaken, new entrants. However, the freedom of such airlines to adopt what they may consider to be 'competitive' behaviour is restrained by the application of EC (and sometimes domestic) competition law.
This can result in what an airline considers to be wholly legitimate commercial behaviour in reaction to new entry being judged anti-competitive. The misbehaving airline can then be the object of remedial action by the competition/regulatory authorities as a result of complaints made by the affected carrier.
When, for example, Aer Lingus ended its interline agreement with British Midland, after the latter announced it was launching services on Aer Lingus' prime Heathrow-Dublin route, the Commission forced the flag carrier to reinstate the agreement.
Anti-competitive behaviour can be divided into two types. First, airlines facing unwelcome competition may seek agreements with other airlines or companies which provide ancillary air transport services, such as tour operators, travel agents or CRS providers, that favour the incumbent and disadvantage the newcomer. They could for example seek to incentivise providers of crucial ancillary services to discriminate in their favour and against the new entrant.
The second type of behaviour does not require any agreement or understanding between companies but concerns airlines or other service providers which occupy a dominant or monopolistic position in a substantial part of the common market. Under EC competition rules they are prohibited from abusing that position.
At present, EU competition/regulatory law only applies to the provision of air transportation services between member states, or within member states to the extent that inter-state trade is affected. Unlike the provision of maritime liner shipping services, the competition rules do not presently apply to international air transport routes from member states to non-member states in such a way that the European Commission can effectively enforce them.
However the rules on the abusive exploitation of a dominant position may be applied in private litigation before the domestic courts of the member states. The European Commission therefore had very little power to take action over Virgin Atlantic's allegations about BA's behaviour on UK-US routes.
Any form of agreement or informal understanding which restricts competition and affects trade between EU member states is prohibited. Unless the parties to such an anti-competitive agreement or understanding submit a notification to the Commission to obtain an individual exemption, or the agreement or understanding falls within the scope of a so-called block exemption, not only will the agreement or understanding be unenforceable as a matter of law but the parties to it may be subject to fines of up to 10 per cent of their worldwide annual turnover.
Should two major airlines get together and agree to take concerted and aggressive pricing action against a start-up airline on their routes, they would be infringing EC competition law and subject to substantial fines. But if the same airlines took the aggressive pricing action independently and not as part of any unlawful agreement or understanding, they would be perfectly entitled to do so, provided the unilateral pricing of each airline was not predatory and therefore an abuse of that airline's dominant position.
Similarly, two or more established airlines might agree with one another not to compete on price on those routes on which they are the only carriers, but to take concerted and aggressive pricing action on, say, three other routes on which there is a smaller or new entrant carrier. Such behaviour would be a serious infringement in relation, firstly, to the agreement to fix prices or to limit price competition on those routes with no third carrier and, secondly, with regard to the concerted predatory behaviour against the smaller airline.
The prohibition of anti-competitive agreements or understandings also applies to marketing agreements between an airline and, say, a major chain of travel agents, as a result of which the travel agent agrees to give preference to the sales of the tickets of that airline in return for an annual bonus payment or an additional override commission payment. To the extent that the arrangement may be exclusive or discriminatory, it may well be prohibited.
The rules on anti-competitive agreements or understandings also relate to ancillary air transport services, including CRS or ground handling services. For example, if the ground handling companies at a particular airport agreed to raise their prices by a specified amount, or to adopt common tariff structures, the resulting restriction in price competition would be an infringement of Article 85 of the Treaty of Rome. Similarly, if a major airline - perhaps as part of an overall strategy of attacking an unwelcome new entrant - incentivised the relevant ground handling companies or other operators of essential services to discriminate against or exclude the new entrant, that too would be a serious infringement of competition law.
Airlines which occupy a dominant position in a substantial part of the common market are prohibited from behaving in a manner which constitutes an abuse of their market power. This principle of law, drawn from Article 86, is a significant constraint on the ability of dominant airlines to operate in what may be deemed an anti-competitive manner towards new entrant and start-up airlines.
Indeed, if an airline occupies a dominant position within a substantial part of the common market, and is faced by an unwelcome competitor, it is effectively obliged by competition law to compete with one arm and one leg tied behind its back! Although the new entrant airline may price aggressively below its costs and grant override commission payments to travel agents designed to incentivise them to sell its services, similar actions by the dominant airline could be deemed an abuse of its dominant position and result in the indignity of a Commission investigation and the imposition of fines.
The behaviour of incumbent airlines will only be subject to the control of Article 86 if each one of three separate conditions is satisfied. First, the airline concerned must enjoy a dominant position in the relevant, economically defined, market. Second, the market within which the carrier has a dominant position must constitute a substantial part of the common market. Third, the action taken by the airline must be clearly identified as an abuse. The mere existence of a dominant position is not, in itself, an abuse of that position. For there to be abuse, there must be abusive behaviour.
An airline occupies a dominant position if it exercises a significant degree of market power in the relevant market. The measure of dominance requires a detailed economic assessment of the relevant market, but, broadly, where an airline holds market share on a particular route or group of routes that exceeds 40 per cent, it may well be considered dominant. For that dominance to be exercised within a substantial part of the common market it is necessary for the route, or the route group concerned, to link economically significant parts of the EU or for a fairly significant number of passengers and/or cargo to be involved.
Crucially, not every form of behaviour can be considered abusive and it is essential to determine whether the action taken by the dominant airline against the new entrant or start-up falls into one of the accepted categories of abuse.
What are, therefore, the types of behaviour that a dominant airline may resort to in order to eliminate or weaken competitors?
When faced with new competitive threats, a dominant airline may be tempted to take action to eliminate or discipline smaller competitors or new entrants through predatory or exclusionary behaviour.
One key weapon in the armoury of a dominant airline wishing to inflict damage on an unwelcome competitor is the use of predatory pricing. This can be closely linked to adjustments of capacity and scheduling designed to 'swamp' and/or 'sandwich' the services of the preyed-on airline.
Other forms of predatory behaviour could be adopted, including restricting access to facilities that are essential for the smaller airline to compete, or making such facilities available on discriminatory terms. These essential facilities would include slots, in circumstances in which the dominant airline had control or influence over slot allocation; airport facilities; ground handling; and repair or maintenance facilities.
The most notorious category of abusive behaviour, and one of the most difficult to prove, is that of predatory pricing. A dominant airline which drops its prices on a particular route in reaction to new entry will not, in itself, be considered to be abusing its dominant position. For this to be the case the price reduction would need to satisfy the two-tier cost-based test specified by the European Court in Akzo and applied subsequently by the European Commission in a number of cases.
The first test provides that the behaviour is abusive if a dominant airline sets its tariffs below its average variable costs. If the first test is not satisfied the second test comes into play, namely, that if a dominant airline sets its tariffs at a level higher than its average variable costs but lower than the sum of its average total costs, this will be deemed abusive if such pricing behaviour falls within the context of a plan intended to eliminate a competitor from the market.
The complexity of the predatory pricing rules and their lack of suitability for the air transport sector - for example very few airline costs vary in relation to the number of passengers carried on individual flights - have made it extremely difficult to apply them successfully. A number of airlines have been investigated by the Commission but no decisions have been adopted despite evidence that in respect of the services being investigated at least some of the airlines concerned were pricing below average total cost and sometimes below average variable cost.
The competition rules also apply to member states through the highly contentious but increasingly used Article 90. This provides that in the case of public undertakings and those with special or exclusive rights, member states must neither enact nor maintain in force any measure contrary to the rules contained in the EC Treaty. As a result, the Commission is entitled in certain circumstances to adopt decisions under Article 90 attacking member state legislation which grants or extends monopoly rights, or in some way requires dominant undertakings to abuse their position. A recent example was the Commission's condemnation of Belgian legislation requiring the operator of Brussels airport's runways to discriminate in favour of Sabena.
EC competition law applies to a wide range of air transport-related activities and, although the Commission has carried out many investigations of alleged anti-competitive behaviour, only a handful have produced actual decisions. And some major problems remain.
First, the Commission currently has no power to take effective action against anti-competitive agreements or behaviour affecting air transport routes between member states and non-member states. Only the member states can extend the Commission's powers in this area and they show no sign of being willing to do so. However there are new proposals from the Commission in the pipeline.
Second, the Commission services which are responsible for applying the competition rules to the air transport sector are under-resourced and have to prioritise their activities.
Third, there has been a noticeable switch in emphasis in recent years away from aviation enforcement towards other transport modes, particularly liner shipping and rail.
Fourth, the Commission's lengthy procedures are ill adapted to taking rapid and effective action against abusive or predatory behaviour. As a result the Commission is generally unable to take any interim measures decisions within six months, or any final decisions within two years of the initial complaint. Nor have any interim measures decisions have ever been adopted under special so-called 'fast-track' aviation procedures, introduced by former transport commissioner Sir Leon Brittan.
The danger is that unless there is a greater level of resourcing and flexibility of approach in Brussels, the fragile wave of new startups that is essential to healthy competition in Europe could find its guard dog and protector sadly lacking in bite.
Source: Airline Business
