Select Committee on European Communities Minutes of Evidence

Examination of witnesses (Questions 60 - 79)



  60.  Yes.
  (Mr Egli)  Yes, they would. In fact, in our case we have been codesharing both with Sabena and Delta prior to receiving the antitrust immunity.
  (Mr Lobbenberg)  We are about to start codesharing with Air France on quite an intensive basis without antitrust immunity. So the situation there is substantially different to the situation we have in our relationship with Swissair, Austrian and Sabena, so that most Air France and Delta flights between the US and France will, as of next week, have both our flight numbers and so on and we will both be selling those flights and we will be selling them in competition with one another. So we will have a block of seats on a given Air France flight and we will sell those seats as our own in competition against Air France.


  61.  That is a concept that I find hard to grasp.
  (Mr Lobbenberg)  What, competing against the French?

  62.  I refrain from comment on that. It is competing against yourselves effectively. You have got a codesharing agreement and yet you are in competition. If you have got a codesharing agreement with Air France then Air France have a codesharing agreement with you and yet you are both battling for the same market.
  (Mr Lobbenberg)  Correct.
  (Mr Egli)  The combination of those two will lead to more scheduling options across the Atlantic. In other words, if there are two flights a day to Atlanta and we codeshare on one operated by Air France it will give more connection possibilities that we can sell on a Delta ticket, even though it is operated by an Air France plane and vice versa, that is the case as well, but it is clearly the fact that it will increase competition between the two. The main reason for that is airlines buy these seats from their partner on a fixed price allotment and that means we will have to pay the seat price irrespective of whether a body is on. Most likely what will happen is we will make sure that those seats will be filled, i.e. prices will go down because we do not want to have the fixed cost of paying those seats if no passengers are on them and that has been seen in many markets and it has led to lower prices and more competition between those carriers.
  (Mr Lobbenberg)  Another illustration, perhaps similarly, is a partnership that we have with Finnair between New York and Helsinki. Previously Delta operated a flight and there was a Finnair flight and the two airlines competed. Delta withdrew that service about four years ago because it was very uneconomic. So the prospect facing the consumer then was that it would be a monopoly, it would be Finnair, game over. Delta entered a codeshare agreement with Finnair under which we purchased from Finnair a block of seats on every single flight and we market them as our flights and so competition is preserved on that route. We sell seats, Finnair sell seats and our sales reps are out there banging on the doors of travel agencies and their sales reps are out there.


  63.  Basically they operate the aircraft.
  (Mr Lobbenberg)  Yes, and we compete.
  (Mr Egli)  It is almost like a virtual aircraft. The two airlines are operating and they are competing head on.

Chairman]  Can I just get slightly more general and again raise something at this stage of the enquiry that has concerned us and that is the, almost by definition, conflict between the US antitrust immunity, to which you have referred and with which we are familiar, and the overt aim of DG IV in Brussels which is to avoid any such antitrust immunity, if I can use the US term. How do you think these two are ever going to get together?

Lord Haslam

  64<fb.  Could I add another point on that? I have been involved in many businesses in America for a long time and the idea that any other industry could have this kind of immunity is beyond belief. If I go back to my ICI days, we had to bust up every joint company with DuPont. Some sort of arrangements you have we had. We were forced to divorce them not only in America but in every other part of the world. This seems to me an absolute anathema even in relation to the US never mind the EU.
  (Mr Lobbenberg)  It is an interesting question and area. The fact that airlines in the US and in Europe and, indeed, down the road also in other parts of the world are seeking antitrust immunity is a reflection of the bizarre set up of international aviation which is different to other industries because if you work for ICI or if you work for a baked bean manufacturer and you want to enter the baked bean market in South Africa, you can buy a baked bean company in South Africa and it is yours. There are concerns about having monopolies here or there, but you can purchase companies in other parts of the world. In the airline industry that is not permitted because there are these bizarre arcane rules about national ownership and control so that if a US carrier completely bought out a European carrier it would lose all its operating rights, which is strange and completely different to other industries. In the light that you are not allowed to actually purchase other companies or have true mergers between companies, which is not the case in other industries, airlines have resorted to or have been pushed to this system of moving towards antitrust immunity. I think that is the general point. In terms of the specific potential conflict between the US granting antitrust immunity and the EU being completely opposed, I am not convinced that that is my understanding of the EU's attitude. They are very, very anxious to ensure that competition is retained in all markets and they are taking a vigorous attitude towards that and in some of their areas of vigour we perhaps differ with them. In terms of having a complete conflict between the US authorities and the whole concept of antitrust, I do not think I would agree with that.
  (Mr Egli)  I share that, absolutely. I think they are generally open to open skies and increased competition. I think it is more the fact that these countries went ahead by themselves and did that was the major issue. If I may just add one issue that Mr Lobbenberg raised, about the ownership restrictions, you can turn this question around and say that all the consolidation that goes on in industries such as pharmaceuticals or banking, one could ask the question why is that not happening in the airline industry; because airlines are extremely capital intensive businesses and so therefore the logic that you would do such a thing would be even higher and the main reason why it is not happening is exactly what Mr Lobbenberg explained, it is the ownership restrictions. If they were not there then there would not be any antitrust immunity for sure.

Lord Skelmersdale

  65.  So to encapsulate what you have just said, it is protectionism by the individual governments, is it?
  (Mr Lobbenberg)  It is the institutionalised bizarre system of regulation which has come up through history.


  66.  Do you think that the stand that the EU are taking will, at whatever speed remains to be seen, slowly erode this position of maintained ownership?
  (Mr Egli)  I think we would hope so. I am not convinced that that would be the case because I think there is a lot more behind the reason for the ownership restrictions than just pure economics. It does not affect, in Europe, all carriers or national flight carriers. There is the question of national pride, the fact that states needs an airline that they can call themselves, something that is for the US completely unheard of. Mergers have been going on there many, many times.

  67.  With respect, that is itself slowly but surely being eroded within the EU.
  (Mr Lobbenberg)  Within the EU it is being eroded—good emphasis on the "slowly"! Within the European Union single aviation market the EU has taken a good swipe at the rules by defining a European airline as one that is owned and controlled by nationals or companies from the EU rather than from a national Member State and that is all well and good, but as soon as one of those airlines wants to fly outside the European Union it is still subject to the bilaterals and those bilaterals require the airlines to be owned and controlled by nationals of the state and not of the EU. Therefore, that is a major handbrake on the freeing up of ownership and control within Europe. It is not just Europe. If you move outside of Europe to Asia, to Africa, to Latin America you also see concerns about a national flag carrier and you see bilateral restrictions. I guess there is one other point to touch on the ownership and control thing, a point which is frequently raised. I do not think we necessarily want to endorse it, but there is frequently the concern of national security and certainly as a US carrier we do have certain obligations to hand over airplanes to the US military in the event of a conflict.

  68.  It is straying slightly wide off the mark, but I would be interested in your brief comments. Why does the same thing not apply to the shipping industry?
  (Mr Egli)  Good question!

  69.  The basic rationale would be exactly the same and it does not apply to the shipping industry.
  (Mr Egli)  It is a very sound question.

  70.  You have no answer?
  (Mr Egli)  No. It is a restraining system of regulation.

Lord Berkeley

  71.  Mr Lobbenberg, can I go back to follow up the point you made in your previous answer to me. You mentioned a very large proportion of your traffic in fact hubbed at Atlanta and probably hubbed at centres that you fly to in Europe. You mentioned there was a problem with London because London was the closest capital city—except for Dublin, of course—to the United States and people had a psychological objection to flying backwards to Paris or somewhere else before they go forwards. I think that is what you said, if I understood you right. Is there an argument for having slightly separate competition arrangements with respect to London than other capital cities because the same would apply to Lisbon south and somewhere else in the north presumably?
  (Mr Lobbenberg)  I do not think it necessarily dictates that you would have different competition rules or different regulators but it would certainly dictate that any rational regulator should treat London as different from some of the other markets because it clearly is different. You cannot apply the absolute same regulatory stamp and same rules in the same way to an alliance based on London as you would to an alliance based elsewhere, just as perhaps you might not apply it to an alliance based in Athens, were there to be one, because the geography is so different.

  72.  Does the business of going backwards (if I can use that shorthand) apply at the United States end as well or is it just a European problem?
  (Mr Lobbenberg)  I think it is exacerbated departing London, because not only are people going to be disinclined to fly the wrong way but also from London there are very high frequencies available, so that if you are going from London to, say, Chicago, you are not going to be very tempted to sell a backtrack via Brussels or Paris, though I must say we certainly do try to sell it because we work with Sabena and our sales people think it is a very good way to travel, but the thing is from London there is a very high level of direct service between London and Chicago, which again is not the case from the other European cities, which are smaller: the markets are smaller and the levels of frequency are smaller. So there is both the backtracking issue and the high level of frequency in London which makes it slightly different.


  73.  I would like to come back to the Air Services Agreements and the hypothesis I put to you at the beginning, that the present draft Regulations are more a de jure situation than a de facto one, but if the same process develops as has developed on other European Union air regulations, if I may call it that, both inter- and intra-Community, do you think it is inevitable that the Commission will eventually take over responsibility for negotiation of Air Services Agreements for all Member States, and if that is so, would you, as a United States carrier, welcome that?
  (Mr Lobbenberg)  I do not think we have a clear view as to whether they are likely to take them over. There is obviously a whole realm of political issues between the various Member States and the Commission and different Member States have different attitudes and it is very hard to predict which way it is going to go. In terms of whether we would welcome it, I am afraid we have to come back somewhat parrot-fashion or in the manner of a broken record to our testimony, which is that liberalisation is good; if this were to bring about liberalisation it would be good, but then weighed against that we could see concerns that it would be, or it could be, a very unwieldy mechanism and that negotiations could become very protracted and then that on the flip-side might not be good.
  (Mr Egli)  The only thing I would add is that I do agree it would be good, but realising again how many countries already have open skies policies, that up-side potential of increased competition is actually relatively small. The second point, that it most likely will slow down the process, we certainly are very much concerned about that element and that, it would be my personal opinion, weighs in more heavily.

  74.  For the benefit of this Committee, could you explain to us why the bilateral between the United States and the United Kingdom, the approach you are taking on page six of your written evidence, is uncertain?
  (Mr Lobbenberg)  Yes. We do not know what is going to happen. We "um'd" and "ah'd" quite a lot about how to put it. It is clear that in the context of moving towards the potential BA/AA partnership, then if it were to go through with antritrust it would go for open skies, but what is going to happen is unclear. As I can see, and I am sure some of you have, in the clippings from today's papers it is very uncertain as to what will happen. We also read with interest a few weeks ago that an MP was in Washington saying, "If anyone thinks open skies is coming soon, they are very much mistaken." So it is quite hard to predict with any clarity which way it is going.

Lord Methuen

  75.  On this business of liberalisation, do you think there has to be some method of re-allocation of slots, because you have this perennial problem about slot allocation at Heathrow but this seems to me to be a limitation on the whole liberalisation situation?
  (Mr Egli)  I think it applies to few airports in Europe and I think the danger again, if this happens as a general policy throughout all the European countries, is that we would tend again to slow down the process of having services starting at different points. On the other hand, there are clearly a number of airports that are so restricted in terms of slots that we of course are extremely concerned about that, and in the light of the discussions between the United States and United Kingdom it really becomes the most important element for us to ensure that that process is granted and, in fact, competition is actually effectively allowed against a possible alliance. So I think yes, in terms of Heathrow and that specific example, there has to be a mechanism as to how that would be allocated.

Lord Thomas of Macclesfield

  76.  The written evidence you have given us is comprehensive and quite clear as to what your position is. It is a pity my colleagues did not have more time to read it before you appeared before us, but there are two points that come up. First of all, I want to be sure what are the essential points in terms of real competition that I extract from your evidence, and those are slots, quality of slots, the monopoly of luggage-handling, business travel, frequent flyers and travel agents. Are there any I have missed or are those the ones that are the key issues in terms of competition?
  (Mr Egli)  Yes. I think the only one to add would be the corporate agreements. It is agency and corporate agreements that have been questioned.

  77.  I am sorry, I do not understand that.
  (Mr Egli)  It is agreements that airlines have with large corporations and in an antritrust immunised relationship those agreements can be made with company X, Y and Z. With the three airlines or four airlines that are immunised you can have a joint agreement with that same company and that is being reviewed as well.
  (Mr Lobbenberg)  Another area that we did not put in the submission but is crucial is computer reservation system (CRS) displays, so that you go into a travel agent and say you want to go London to Timbuctoo and they type in "London-Timbuctoo", and how the different flight options are displayed and specifically how codeshare partnerships are displayed is obviously absolutely critical.

  78.  In the evidence you refer to the need to hand over aircraft to the military. What are the financial arrangements behind that in terms of buying aircraft in the first place, or in terms of confiscation of the aircraft in the second place?
  (Mr Lobbenberg)  I have to be honest, I am not familiar with the precise details. I think we hand them over with our pilots because the military do not have pilots on hand. Many of our pilots are military reserve and I am sure there is some charter rate that the military pay, but I must admit I am not familiar with the details.

  79.  But does that enter into the agreement when you purchase the aircraft in the first place?
  (Mr Lobbenberg)  I think the aircraft remain the property of the company. They are not confiscated but—what is the correct word?

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