Now that the European Commission finally has produced its conditions for approving the American Airlines/British Airways alliance, lawyers will be scrambling to examine the detail. The Commission's competition directorate, DGIV, has presented the Lufthansa/SAS/United Airlines alliance with a similar set of demands.
To the dismay of some, the KLM/Northwest Airlines and Delta Air Lines/Swissair alliances, widely expected to have been examined simultaneously, have been given a breathing space. The Commission does not expect to produce a preliminary decision on these two until later in the year.
Those alliances on which the Commission has ruled predictably cry that they are being asked for too much.Competitors insist the Commission has not gone far enough. But its demands have met with broad approval in London, while Bonn is less happy and Washington regulators see the EC as both lightweight and heavy-handed.
As American and BA feared, they will have to make sacrifices. They will not only have to give up takeoff and landing slots without compensation - some 70 more than they were willing to relinquish - but they will also have to cut frequencies on their key hub-to-hub routes. BA/AA, however, remain cautiously optimistic they can persuade DGIV that its prescriptions are misplaced. The Lufthansa/United/SAS partners, with US antitrust immunity already under their belt, have not ruled out taking the Commission to court.
DGIVhas also conjured up what it describes as 'horizontal remedies' for frequent flier programmes, computer reservation systems, relations with travel agencies and corporate customers, and interlinings.
All interested parties have been given a chance to voice their objections within 30 days of the official document's publication at the end of July. The targeted airlines are likely to argue that the rules are both impractical and do not achieve their stated aim of ensuring competition.They each will claim that the other alliance has come off lightly, and that the Commission's 'even-handed' approach is inadequate for cases that are so different. They also will argue that the conditions do not inject new competitive elements and that they promote interhub, not intrahub, competition.
Persistent leaks, public statements by competition commissioner Karel Van Miert, and a summary of its key demands published 8 July ensured that DGIV's position on the two alliances became common knowledge well before the document was published. However, publication of the details has made the picture clearer. Although the exact slot numbers will not be known until the Commission revises them in the light of 1997 traffic figures, based on 1996 volumes BA/AA will have to renounce up to 267 slots in London - of which more than 200 must be at Heathrow - and Lufthansa/ United/SAS 108 slots, all but 15 at Frankfurt. At Heathrow, AA/BA's sacrifice totals 87 slots to New York, 57 to Boston, 32 to Philadelphia, 17 to Seattle, and seven to Los Angeles; plus 24 slots on the hub-to-hub route to Chicago and 10 on the hub-to-hub route to Miami. At Gatwick, BA/AA will be forced to give up 17 slots to Charlotte and 16 on the hub-to-hub route to Dallas. At Frankfurt, the Star alliance transatlantic partners would have to renounce up to 19 slots to Boston, 17 to San Francisco route, 16 to Miami, 14 to Los Angeles and three to Dallas-Fort Worth. Up to 15 Copenhagen to New York slots may also have to be given up.
In addition, the Commission wants both alliances to reduce combined weekly frequencies on hub-to-hub routes where total annual traffic is greater than or equal to 120,000 passengers and in which the alliance partners operate more than 12 frequencies per week. This will ensure each alliance has no more than a 45 per cent share of frequencies. Where there is only one competitor, the threshold is 50 per cent. Van Miert's spokesman says this is generous compared with European Union antitrust rules applied to other industries, where DGIV's cap is 40 per cent. If a competitor requests a transfer of frequencies, the alliance must reduce frequencies for six months after the first day of the Iata season that follows approval of the alliance.
At worst, BA/AA will have to cut frequencies by 12 per week between London/ Heathrow and Dallas, by five between London/Gatwick and Miami and by five between London and Chicago. Lufthansa/United/ SAS would have to cut frequencies by up to five on Frankfurt-Washington DC routes and by seven between Frankfurt and Chicago.
Van Miert's spokesman refutes arguments - put forward by Heathrow and backed by numerous independent airline analysts - that it will take two years or more to redistribute slots. 'Two years is an exaggerated figure and not acceptable,' says the spokesman. He adds that measures proposed on frequency reductions must dovetail with slot restrictions - both must come into force simultaneously on the hub-to-hub routes.
The transatlantic slots, providing they cannot be obtained via the normal EUregulations, must be for within one hour of the time requested by rivals. 'Slots suitable for smaller aircraft will be no good, and they cannot be to somewhere two miles out of Heathrow', says Van Miert's spokesman. He points out that the whole thrust of the Commission's actions, and the statistics upon which the precise number of slots and frequencies to be relinquished are calculated, is to ensure there is competition for the time-sensitive passenger. DGIV favours competition from carriers that offer services which are both frequent and regular - for example, daily or twice weekly and point-to-point. These guidelines would effectively prevent BA and American from simply giving up less meaningful slots - such as those serving short-haul services - as American has suggested might be possible.
Further, slots given up 'may be used only to operate services on the markets for which they were given up', states the Commission. For Lufthansa/United/SAS, this is 'on the specified route only', while for AA/BA this means 'in the market between the UK and US by direct or indirect flights'.
In addition, if AA/BA transfers, say, its London-Dallas flight from Gatwick to Heathrow, the measure calling for the reduction of frequencies, and the transfer of slots which accompanies it, is to apply to Heathrow. Airlines that have already obtained frequencies and slots at Gatwick will be entitled to ask the alliance to exchange them for frequencies and slots at Heathrow and the alliance must accept such an exchange. Wherever necessary, the alliance should also give up the airport facilities needed for the use of such slots, both in Europe and the US.
Some of the horizontal remedies are also controversial. The Commission is concerned that codesharing, which leads to flights being shown more than once on CRS displays, displaces competitor flights. According to the Official Journal, where '. . . a display on two lines of flights operated in the relevant markets under the cooperation agreement' of the alliance partners and their associate airlines results in the first screen being filled 'on routes where the number of frequencies is high', DGIV may require these flights to appear on just one line. The EC wants to ensure that members of an alliance would still allow any airline in the US or EU to '. . . conclude an interlining agreement on the terms usual in the industry.' This should apply 'at least' to fully flexible fares.
Meanwhile, to combat possible abuse of the alliances' market power, the Commission wants to prevent members of the alliances using systems of remuneration that effectively secure the loyalty of travel agents to members of the alliance in the relevant markets and any remuneration based on a sales threshold system. This applies also to corporate customers.
DGIV also wants the alliances to open their joint frequent flier programmes to competitors without comparable FFPs and alliances are threatened with losing their own joint FFPs if they do not comply. According to BA's head of competition and governmental affairs, Chris Allen, this will not have any great impact. 'Most airlines have got their own frequent flier programmes and wouldn't want to participate [in a competitor's scheme] anyway,' he says.
As for the CRS regulations, a Lufthansa executive points out that, 'If an airline in an alliance has a CRS partner who is not part of the alliance, then you cannot force the CRS provider to change the display.'
Peter Mackenzie Williams, director of aviation at the Symonds Group consultants firm in London, says, 'I have my doubts whether the EC has the resources or expertise to understand fully how CRSs work or, even if they did, how to translate the understanding into some means of applying rules to prevent competitive abuse.'
There are also doubts about how the interlining rules will work in practice. According to the Lufthansa executive, this remedy 'will have to be seen in the context of the US regulators remedies. When they approved the Lufthansa/ United tie up, the alliance airlines were no longer allowed to attend Iata conferences. Without this access, the airline in an alliance has no way of discussing or agreeing on fares.'
But it is the sacrifice of slots and frequencies that remains the chief concern. Allen is fearful of differing approaches by regulators on either side of the Atlantic. 'The US regulators consider frequency reductions as anticompetitive. We wouldn't want to find the US regulators need something else in order to compensate for that,' he says.
According to one Washington-based lawyer, DGIV's position on frequency reductions will face major opposition from the US regulator. The German authorities also seem on track for a head-on collision with the Commission. A senior official at the German Ministry of Transport says the Commission describes the proposal as disproportionate and says his government will '. . . advocate a guarantee that the conditions are made proportionate.' He says that, if the Commission is concerned about the threat to competition for time-sensitive passengers, then the number flying between Frankfurt, Washington and Chicago represents 'a maximum of 6 per cent of overall demand.' That 6 per cent, however, contains the high-yield passengers so keenly sought by the alliance partners. The official also notes that the six month period for frequency reductions indicates that the only new competitors expected are those able to introduce a competitive service into the market overnight. 'According to realistic assumptions, only big US carriers would be able to do this,' he says.
Part and parcel of approving the AA/BA alliance is a US-UK open skies agreement, which remains a tough and drawn out process that might still end up putting a spanner in the works. The Commission view that bilateral open skies agreements break EU law has not budged an inch. In what is seen as a bid to keep direct EU-US traffic rights negotiations on the agenda, the Commission is demanding that the green light for both the AA/BA and Lufthansa/United/SAS alliances only be given if the UK, German, Danish, Swedish and Norwegian authorities commit themselves to allowing access to their transatlantic markets for all European Economic Area (EEA) carriers - EU member states plus Norway and Iceland. The UK's Department of Trade and Industry has broadly supported the Commission's conditions for AA/BA, but has not made clear where it stands on this point. However, there is sure to be opposition from the US and from Germany, which signed an open skies agreement in February 1996.
An official at the German ministry of transport points out that the Commission's obligation to open up its transatlantic market to other EEA carriers '. . . impairs the obligation incurred' by Germany as a party to the open skies agreement and '. . . cannot be accepted' by either the US or Germany. The German government would also be pushing for reciprocal market access rights to be established, he says. While reciprocity would be feasible with carriers based in European countries that already have open skies agreements with the US, it would not be workable elsewhere, says one US aviation lawyer. 'To the extent that the EC draft proposals invite non-US open skies third parties into the transatlantic markets of countries with US open skies agreements, the US's agreement would have to be sought. The US will insist on sealing open skies agreements with third countries that have no open skies agreement with the US. If, say, Alitalia was allowed access to London-US traffic, the US will want access to Italy,' says the lawyer.
Opening of the transatlantic market to all EEA carriers would also devalue the AA/BA alliance, reckons Mackenzie Williams. 'If it gave Lufthansa access to the UK-US market, that would make the deal less attractive for BA,' he says.
Alfred Merckx, of London-based lawyers Sinclair, Roche & Temperley, says that under existing procedures, the Commission does not necessarily have to take the observations of interested parties into account once it has received all their comments. 'In the end, the alliance issue may be a question of political wills of the member states,' he says.
If Merckx is right, the German and British flag carriers would be wise to invest as much energy in convincing the Commission as their own politicians.
Source: Airline Business
