Examination of witnesses (Questions 80
-100)
THURSDAY 11 JUNE 1998
MR STEPHAN
EGLI and MR
ANDREW LOBBENBERG
Lord Berkeley
80. Appropriated?
(Mr Lobbenberg) Thank you, yes.
Lord Thomas of Macclesfield
81. What I am trying to get at is, is there
some reduction in the price of the aircraft in the first place
because of this commitment?
(Mr Lobbenberg) No, that is all part of your getting
an airline licence from the United States. So if you apply to
the United States authorities, "I want to run an airline,"——
82. That is the condition?
(Mr Lobbenberg) Yes.
Lord Berkeley
83. Could I return to paragraph 2 of your
paper, page 6. We discussed briefly when the Lord Chairman questioned
you about whether you would prefer the European Commission to
negotiate bilaterals or not and you gave a very polished and "on
the fence" answer, but may I probe you a bit more on that?
I detected a feeling that you felt that the Commission would negotiate
in a manner of liberalisation and it did not have to go checking
out with every Member State involved and, therefore, take ten
years about it, and you would prefer that even though you would
lose the ability of playing the Member State off against the Commission,
as might perhaps be seen to be happening at the moment? Would
you prefer it if it were seen to be a clean, quick and comparatively
simple process?
(Mr Lobbenberg) We like competing in open, liberal
markets and having the complete Europe-United States market as
an open, liberal market would, I think, be far preferable to playing
politics.
(Mr Egli) Absolutely. It would be the best thing
that could happen. We are still, if you think about it, the major
carrier across the Atlantic. We fly 37 flights every single day
across the North Atlantic with our own aircraft.
(Mr Lobbenberg) With our own aircraft, and then
in addition we have the codeshare partnerships.
(Mr Egli) It is an over $2 billion business we
run just over the North Atlantic and in the majority of countries
we are severely restricted. That is true for Italy, that is true
for France, it is true for the United Kingdom.
(Mr Lobbenberg) And in many countries outside
the European Union.
Chairman
84. Restricted by what?
(Mr Egli) By bilaterals. We are not allowed to
fly to most of these places.
(Mr Lobbenberg) And routes that we want to.
(Mr Egli) That is three out of the four most important
markets in Europe that make up about 80 per cent of the total
transatlantic business. The only one truly liberalised that is
of any significance is Germany; the rest are blocked. In France
obviously we are very happy about the agreement that has been
signed. We have been supporting that because it will lead eventually
to a fully liberalised marketplace, and if you look at the numbers
of frequencies that the authorities have agreed to increase over
the next few years, they are significant, absolutely significant.
But it still remains the fact that other major countries such
as Italy are extremely restricted. We would say that internally
we would fly from Atlanta to several places in Italy tomorrow
if we could.
85. That is one of the areas where you are
strongly behind Commissioner van Miert and his proposals, would
that be correct?
(Mr Egli) If that process leads to a very fast
process of full liberalisation, then, yes, as we mentioned before,
we have some doubts whether it will be faster than the current
set-up is.
86. Ignoring for a moment the speed, as
the proposal stands it would oblige all Member States, or, to
put it round the other way, the Commission would take over the
control of the Air Services Agreements, so presumably you would
be in favour of that, would you not?
(Mr Lobbenberg) But we are not in favour of the
Commission taking control of agreements or of Member States making
the agreements. We are on this fence here. We are clearly in favour
of liberalised agreements. Who negotiates them we do not much
care, whoever can do it quicker and better.
87. As long as the skies are open you will
be happy?
(Mr Egli) Absolutely.
(Mr Lobbenberg) And we will fly there, yes.
88. In your discussions in Brussels—presumably
they have taken place in Brussels—with DG IV, have you formed
an opinion of DG IV's attitude to EU/US bilaterals? Have you got
a feel?
(Mr Lobbenberg) I would not be confident enough
to give an answer on that, no.
89. So your negotiations, your discussions
with them, have been much more specific than that? You are talking
specifics?
(Mr Lobbenberg) Yes, they are quite pinned down.
90. Your present arrangements and your codesharing
with Air France?
(Mr Lobbenberg) And the restrictions. Our discussions
with the European Union are, I believe, limited to our partnership
with Swissair, Austrian and Sabena, although Swissair is not a
European Union carrier but is still included.
Lord Haslam
91. I was living in the States when deregulation
took place in 1978 or thereabouts and that had a profound effect
on the pricing. In fact, you could fly to most places, I reckon,
in the United States at that time at half the price for the equivalent
distance in Europe. I think that situation has changed, from my
recent observations. The prices in the United States have come
up. Am I suspicious in suggesting again that this open sky and
ability to discuss pricing and so on has had some impact on that
situation from the purity of the deregulation phase?
(Mr Egli) I would not believe so. It is true that,
on average, fares have increased but if you were to take an analogy
between the airline fares and the prices of cars, for example,
in the United States, you would see that, on average, the prices
of air fares have risen a lot less than any other consumer goods,
maybe with the exception of computer hardware which has gone through
a major technology increase. And the other key thing to this question
is that none of the carriers within the United States has any
antritrust immunity. None of these is allowed to talk about fares
with other carriers and the only thing that has happened, or could
happen in the future again, is that if carriers want to grow,
they can grow internally or they will actually merge, but there
is no antritrust immunity between any of the United States carriers
at this point.
92. The fact that one has these groupings
which are ever-growing means there is so much clubbing in this
situation that it makes the Chinese Wall principle of pricing
very difficult to apply, I would have thought?
(Mr Egli) If you refer to the groupings, and the
codeshare that has been proposed, again the same logic as we have
explained between Air France and Delta would apply to those proposed
codeshare alliances between United and Delta as well as US Airways
and American. They would, in effect, compete very fiercely against
each other because they are not allowed to discuss price. They
will be selling on their own code all the aircraft of those two
carriers in question and that, in effect, by itself clearly will
not lead to any increased fares.
(Mr Lobbenberg) I think our perception is that
the United States domestic market remains very fiercely competitive.
Chairman
93. What restrictions, if any, are there
within the United States on mergers and acquisitions between United
States carriers?
(Mr Lobbenberg) That is a good and pertinent point.
At the moment we are on the threshold of three partnerships that
have been announced, one between ourselves and United, one between
US Airways and American and then one between North West and Continental
Airlines. Only that last one is proposed to have any equity involvement;
the other two are not. There is very tight scrutiny by the United
States authorities in terms of co-operation in the context of
all those three alliances, and, as my colleague Mr Egli said,
there is going to be no co-operation in terms of marketing in
any of those partnerships as proposed at the moment.
94. So what will the co-operation be in
if it is not in marketing?
(Mr Lobbenberg) It will be in codesharing. So
just as we have the situation with Air France, where there are
two airline codes, the two airlines compete.
(Mr Egli) As an addition, I would like to add
frequent flyer, which I probably would have to consider marketing,
but I guess what you were trying to say is there is no pricing
co-ordination, to be correct, on this point, but frequent flyers
is a point that is suggested not only by us but all the other
three alliances.
95. Is not the inevitable result of these
regulations and the way the airline industry is going, that you
are going to get fewer and larger groupings, and if that is so,
what chance does a new entrant have?
(Mr Lobbenberg) I think it is a reasonable expectation
that you will see some airlines disappear as independent operators
and become part of a larger grouping. I think there are likely
still to be opportunities for good, well thought-out new entrants.
In the United States it was already a very concentrated business
when South West Airlines appeared from nowhere. The major airlines
had quite a concentrated share, or a relatively concentrated share,
of the market, albeit still a very competitive one, and South
West Airlines, which is based in Texas, grew out of internal operations
within Texas to become one of the largest airlines in the United
States over the last decade with a very well thought-out, slightly
different product, but has become very much a viable competitor
in the United States domestic market, for example. You can look
at Virgin Atlantic as well, which has obviously been a new entrant.
Lord Berkeley
96. Chairman, I have two questions. Just
to follow up your last comment about South West Airlines, I have
heard evidence that within the United States the prices on different
routes per kilometre or per mile are very variable depending on
whether there is real competition, as from South West Airlines,
and certainly on some routes where there is not competition from
a low-cost airline prices have not come down that much since before
deregulation. That is the first question. The second one is somewhat
related. In this Utopia of open skies which you are saying you
would like to see in your own liberalisation and possibly negotiated
by the European Commission on behalf of all the Member States,
would that apply the other way round? In other words, would it
be possible for an airline from another Member State to apply
for and get a route on, say, Brussels to Atlanta in competition
with you, or what would the view of the United States authorities
be to such a thing?
(Mr Lobbenberg) Let us take the first point, the
remark that in the United States the prices per seat mile or seat
kilometre can vary a lot by route, the analysis does back that
up. I think the point is there that it is a completely liberalised,
deregulated market and that airlines, in setting their fares,
are responding to the size of the market and to the market conditions,
and if there is a potential profitable opportunity for a carrier
to enter a market where perhaps the established carriers are charging
higher fares than might be justified, then another carrier will
come in and fares will come down. If the market is not large enough
to support multiple operations on a point-to-point basis between
that city fare, then passengers will have options of connecting
via other points, but it is a free and open market and there are
not, other than very specific exceptions, slot constraints as
there are often in Europe. If we take the second point, would
an EU/US deal lead to what the airline in its jargon world calls
seventh freedom operations, which would be operations, say, by
British Airways between Brussels and New York——
97. Or Continental?
(Mr Lobbenberg) Continental Airlines today can
fly between Brussels and New York.
98. I am sorry, I did not say New York,
I said Atlanta.
(Mr Lobbenberg) Also Atlanta. Any United States
carrier can fly between any city in the United States and Belgium,
but in terms of giving freedom for other European Union carriers
to operate from other European Union Member States, it is conceivable,
I guess. It would depend on how the European Union were to negotiate
it with its Member States. If that were to happen then, coming
back to the point we previously made, it would be good for the
market-oriented airlines and bad for the airlines that are not
market-oriented.
Chairman
99. You have given us a great deal of your
time, for which we are very grateful. I would like to finish on
one rather specific one which you have mentioned twice in your
evidence and which rather intrigued me. That was the ground handling
situation and you have twice put a big plea for ground handling
liberalisation. Would you like to expand a bit on that?
(Mr Egli) I think the one element we are concerned
about there is the timing of the liberalisation. Ground handling
costs are an important part of any airline's cost structure and
the fact is that still a great number of airports have a very
restrictive policy and I think that is in line with our overall
policy. It should be liberalised and airlines should be allowed
to choose whoever they wish or even to handle themselves if they
would prefer to do so. It is our clear view that we want to support
that and we want to see that process move as fast as possible.
100. To what extent would that particular
subject be a part of these proposed Regulations?
(Mr Lobbenberg) It is not completely obvious where
it would fit in. It is a very important factor which is hindering
our operations. We are certainly working with the United States
government, so that wherever we have negotiations with third countries,
including Member States of the European Union, we are pushing
to get ground handling issues included in the bilateral, because
otherwise the ground handling liberalisation is dragging, even
given the European Union Ground Handling Directive. So as you
can tell from our submission, it is an important matter for us.
(Mr Egli) And if I may add so, it is, even though
we ourselves, Delta Airlines, are in the business of ground handling,
which means we will see in that part of the business here in Europe
more competition, but we are convinced that the opportunities
for us to be effective in other places are larger than that increased
competition that we would see on elements where we do the ground
handling today. We are a 50 per cent shareholder of GHI, Gatwick
Handling International, and that increased competition will be
anywhere in Europe, including Gatwick, so we are not afraid of
that and we support that.
Chairman] You have
justifiably used your written evidence as a good opportunity to
put a plug in on that, with respect, and I do not begrudge that
at all, it is perfectly fair. Mr Egli and Mr Lobbenberg, thank
you very much for giving us so much of your time. It has been
very interesting hearing a transatlantic viewpoint on this extremely
vexed and rather topical question. We are very grateful. Thank
you.
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