Select Committee on European Communities Thirty-Second Report



Code sharing Alliances (see paragraphs 43 and 47)

  76.    In recent years, the development of the global airline industry has been marked by the growth of code sharing alliances between carriers, often involving carriers in the European Union and those in the United States. This was one of the reasons why the Commission had proposed the Regulations. The CAA thought that this development was largely explained by the nationality restrictions on ownership of airlines which limited cross-border shareholdings and control of airlines. AUC argued that alliances were formed because of the need to feed traffic at each end of a transatlantic route. Without the ability to carry fare paying passengers domestically within the United States, European Union carriers had to form a relationship with a United States carrier. The problems lay in the fact that these alliances were being formed between "erstwhile competitors" which represented "a far greater threat to competition than the prospect of Community carriers buying in to second-rank carriers in the United States" in order to enter the domestic market in the United States (Q 122).

  77.    Code sharing was however perceived by several witnesses as a two-edged sword. In certain instances it had had the effect of promoting competition, whilst in others it had the opposite effect. Whilst an alliance between two major operators could significantly reduce competition in a point to point[25] market, it could at the same time strengthen a carrier's ability to compete for passengers requiring to make a connection at a hub airport such as Heathrow. British Midland cited their own operations, which involved 17 code sharing alliances with other carriers, as an example of an airline using such alliances to strengthen competition against dominant carriers. However, the Lufthansa-SAS code sharing alliance on services between Germany and Scandinavia was an example of an alliance which had effectively excluded any real competition (Q 31). Commissioner van Miert expressed concern that "on really a lot of routes the competition has gone because of code sharing agreements" (Q270). He drew attention to the fact that there was now no competition on the Brussels-Vienna and Brussels-Lisbon routes as a result of code sharing alliances established between the respective national carriers (Q 268).

  78.    British Midland thought that the United States Government had "become hostile to consolidation of alliances on a global scale" and that the Department of Justice had noticed that the benefits perceived in the earlier stages of these consolidations were now being outweighed by disadvantages to consumers (QQ 5, 35). Virgin Atlantic's view was that in the US during the Bush and Reagan administrations there had been "blatant anti-competitive behaviour which the authorities chose to ignore". The United States Department of Transportation had now expressed "a willingness to take much more aggressive attitudes towards such behaviour by the major carriers" (Q 205)


  79.    The allocation of slots at congested airports is a major issue impinging on airline competition. Airport Coordination Limited (ACL) described a slot as "a package of infrastructure at an airport" and said that slots were a multi-dimensional problem—"we look at the supply and demand for all the facilities at the airport—the runways, the terminal, the [aircraft] parking places, the capacity of the baggage halls and so on" (Q 416).

  80.    Considerable confusion arose concerning the question of who owned slots at any given airport: the Government were "very clear" that they did not own them (Q 391); ACL understood that slots were owned by airports (Q 418); British Airways did "not know who owned slots", did not think that the question really arose, and regarded the ownership of slots "as a metaphysical question" which "probably cannot be answered" although the company retaining slots increases in value as their slots appreciated in value (QQ 251, 254).

  81.    A growing number of European airports do not have enough slots to satisfy demand. The CAA pointed out that 70 per cent of the 30 busiest routes within the EU had a seriously congested airport at one or both ends (p 4).

  82.    The administration of slots is undertaken by slot co-ordinators who adhere to guidelines established by the IATA. Enshrined in this process is the principle of grandfather rights, which provides existing slot users with guaranteed access to airport infrastructure. Prior to 1992 slot allocation at major United Kingdom airports was undertaken by British Airways with, in the words of ACL, a "Chinese Wall" between the co-ordination team and the rest of British Airways (until 1991) and then by a separate subsidiary company, ACL, (1991-2). In 1992 ACL became an independent, non-profit making company owned by eleven UK carriers. ACL collects and processes data, co-ordinates schedules and allocates slots at twelve airports, including all five serving London, under contract to the airport operators, who provide 75 per cent of its funding. As purely an administrative organisation, it has no policy-making role (Q 474).

  83.    Heathrow is one of the most congested airports in Europe with 440,000 movements a year, representing 95 per cent of available capacity. According to ACL, of these movements, 425,000 were covered by historic grandfather rights, the rest being accounted for by ad hoc flights with no future right of access (Q 436). Whilst there had been a small increase in the total number of slots over the years due to improvements in operating efficiency, the numbers available to new entrants were extremely few. ACL stated that the "process of squeezing a bit more out of the system only yielded two more slots a day for the whole [of the current] summer season". Of the fourteen airlines which were not currently operating out of Heathrow and which had applied for slots at the airport during this period, only two were offered slots and these were at the margins of the day (Q 442).

  84.    An additional problem concerned what constitutes a "new entrant". Under the current Slot Regulation[26] a carrier is defined as a new entrant if (a) it has fewer than four slots a day at an airport, or (b) it is allocated less than four slots per day for direct flights between two Community airports where this route is served by, at most, two incumbent operators. An airline with more than four slots wishing to enter a new route is not regarded as a new entrant, even though its entry may significantly enhance competition.

  85.    Slots at airports are not route-specific: they are not tied to a particular journey. ACL reported that it was quite common-place "for a company like British Airways to use a nine o'clock departure this year on a Monday to fly to Jersey and a nine o'clock departure on a Monday next year to fly to Washington". Each airline concerned determines which route a particular slot will be used to service (Q 440).

  86.    At airports like Heathrow where there are not enough slots to satisfy demand the availability of so few unused slots results in slot co-ordinators undertaking predominately administrative tasks. As the vast majority of slots have been allocated to incumbent carriers who retain them under the system of grandfather rights, it is apparent that the task of actually allocating slots to specific destinations rests with the slot holders, namely the airlines themselves.

  87.    In the event of a carrier being forced to give up a certain number of its slots at Heathrow, ACL pointed out that it was beyond the scope of their remit to get involved in decisions concerning matters of competition and consumer benefits. The process of allocating particular slots to specific routes is known as "ring-fencing". ACL thought that "any sort of ring-fencing process reduces the supply of slots in the system and one of the areas of flexibility in this whole system is the ability to swap slots between airlines" (QQ 454, 476). BALPA viewed the problem of slot allocation as insoluble within current policy parameters, which excluded the common sense solution of allocating slots on the basis of regulatory judgement (p 1).

  88.    A separate issue was whether airlines were allowed to, or did, engage in slot trading[27]. Most witnesses agreed that "like any scarce resource, they have value". Commissioner van Miert made it clear that under the Slot Regulation "slot trading is illegal" (Q281-82, 420). However, the Government believed that "the current Regulations [were] not sufficiently clear to make it absolute that slot trading is illegal" (Q390). Lufthansa thought that the current Regulation allowed for "slot exchange" but not slot trading and admitted that whilst Lufthansa did not currently engage in slot trading, "some carriers believe they are entitled to trade" (QQ 172, 183).

Ownership and control

  89.    A key issue concerning any bilateral agreement is that the airlines licensed to operate scheduled services must be designated by either side. In nearly all circumstances the carriers must be owned and controlled by the nationals of the respective country and be based within its territory. Such terms are in stark contrast to the basis on which European Union carriers operate within the Community. In the Community there exists a multilateral regime which gives any European Union owned and managed airline the right to operate without restriction between and within any of the Member States. So, for example, while a carrier from any Member State is entitled to operate services between Paris and Rome, only airlines owned and registered in France and the United States are eligible to carry passengers between Paris and Boston, subject to their being designated to do so by their respective governments.

  90.    DG VII considered that nine Member States had established bilateral agreements with the United States which contained provisions that were not compatible with Community law. They stated that "traffic rights are only given to airlines which are substantially owned and controlled by nationals of the Member State in question ... contrary to the freedom of establishment within the European Community" (Q 325). Delta Airlines considered it "somewhat ironic" however, that the Commission was considering legal action against those Member States that had negotiated liberal bilateral agreements, which had resulted in providing consumers with better and cheaper services (Q 48).

  91.    Several witnesses shared the opinion that the ownership and control restrictions that prevented non-United States carriers acquiring no more than 25 per cent of the voting equity of US airlines and, in Europe, non-EU carriers purchasing no more than 49.9 per cent of an EU airline were "outmoded" (BA, Q 238). Virgin Atlantic thought that air transport was now a mature industry and "strongly supported" the idea that it should be treated "just like any other business" (Q 188). There was also general agreement with Commissioner van Miert's assertion that only by the European Community acting as one entity, rather than each Member State acting individually, could real pressure be applied to the United States to relax, or remove, these restrictions (Q 261).

  92.    The granting of anti-trust immunity by the US Government was a feature of the eight "Open Skies" bilateral agreements[28] established between Member States and the United States. Delta Airlines stated that the reason airlines were seeking immunity from US anti-trust legislation was because of "the bizarre set up of international aviation which is different to other industries". Because carriers were "not allowed to actually purchase other companies or have true mergers between companies ... airlines have resorted or have been pushed to this system of moving towards anti-trust immunity" (Q 64).

25   This refers to journeys which do not involve a connection or transfer. Back

26   Council Regulation (EEC) 95/93 on common rules for the allocation of slots at Community airports. Back

27   There is a distinction between primary and secondary slot trading. Primary trading involves buying slots at source-a one-shot purchase in the original allocation of slots at any given airport. Secondary trading, which is what we are concerned with here, involves the sale of slots between airlines after the initial allocation. Back

28   The eight European countries involved are Austria, Belgium, Denmark, Finland, Germany, Luxembourg, the Netherlands and Sweden. Back

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