Select Committee on European Communities Minutes of Evidence

Examination of witnesses (Questions 47 - 59)




  47.  Thank you very much for agreeing to come and give evidence before this enquiry. Mr Egli, I think you are the leader of your delegation of two. I think you are aware that we are doing a short enquiry into the proposed EU airline regulations and you have been kind enough to submit written evidence to us, for which we are most grateful, albeit we have all had to read it rather quickly having just received it so we may not be completely up to speed. If you would like to introduce yourself and Mr Lobbenberg and then if you wish to make any opening remarks, please do. We always say to witnesses that we find we get most benefit from these sessions of oral evidence on a question and answer basis rather than on a long monologue. With that minor plea, please introduce yourself and your colleague.
  (Mr Egli)  Thank you for the opportunity to share Delta's view on air traffic regulation with the House of Lords Sub-Committee. My name is Stephan Egli, and I am Vice-President for Europe and Asia for Delta Airlines based here in London. With me is Andrew Lobbenberg, Manager, Planning for Europe and Asia. Before taking your questions, I have a brief prepared statement based on the fuller document which we have faxed to you earlier on. If I may start with a brief introduction of Delta as we are not as well known in the United Kingdom as we would like to be. Delta is a very large airline and has carried more passengers than any other airline in the world; in fact, we have carried 103 million passenger over the last 12 months which compares to about 40 million passengers that British Airways carries in a year. Delta has 550 aircraft in its fleet and employs about 63,000 employees worldwide. On the North Atlantic we are the largest US carrier, that accounts for about 16 per cent of our total revenue. Our most important single market is Germany, where ten of our 37 daily flights over the transatlantic operate. The most important market for us other than Germany is the United Kingdom, where we have five daily flights, and then France. In spite of the rather modest service we are a significant employer in the United Kingdom. We have located a pan-European reservation call centre here in London. This employees about 220 staff taking calls from 12 countries in 12 different language. Our Atlantic regional office which is based here in London employs about 50 staff. Delta is very keen to offer an increased level of service from the United Kingdom, in particular to offer a service to London Heathrow. In terms of liberalisation our position is straightforward. We support liberalisation of air transport markets and have been a very keen advocate of the US government policy initiative that led to open skies being implemented between the US and various European countries. Delta supports air transport globalisation. Delta is also a firm advocate of pro-competitive international airline alliances. Delta has an alliance with Swissair, Austrian and Sabena, which has been granted antitrust immunity by the US authorities and was at that time approved by the European Commission. This alliance is currently subject to a fresh review by the European Union competition authorities. Delta also has a substantial codeshare partnership with Air France which will commence on 19 June this year. We have additional codeshare relationships with TAP Air Portugal, Finnair, Malev as well as Aer Lingus. If I can turn now to the key topic of the EU Regulation. As a US carrier we do not seek to tell Member States or the Commission how to structure their relationship. Nonetheless, as a major carrier serving Europe and as a major employer in Europe Delta is significantly affected by the EU legislation. Just before we continue, I note that the Sub-Committee is not considering the merits or otherwise of the proposed British Airways (BA)/American Airlines (AA) alliance, even though it is not possible to sensibly discuss EU competition policy and international air politics without making a reference to this case which lies at the heart of developments in the UK/US air transportation market. I will now hand over to Mr Lobbenberg who will summarise our response to the five key questions that we have received. What we would propose to do is to go through each question separately and then have a discussion or if you would like to do it otherwise, we can certainly do that.

  48.  Thank you very much. I am most grateful to you for mentioning the BA/AA alliance. This enquiry is very much wider than any such alliance, whether it happens, does not happen, to what extent it happens. We think it is completely outside the scope of this enquiry to go into any—and I emphasise the word any—of the details of that proposed alliance. I am sure I will not have to, but I give notice from the Chair that if that does come up and in my opinion I think excessively so, I am afraid I will stop it. I do not want to sound rather fierce on that, but we are saying this consistently to all witnesses. Thank you for those opening remarks. Mr Lobbenberg, do you want to address our particular questions? We have your written answers already. So if you would be kind enough to summarise your opinion because we would like to get into more general questions.
  (Mr Lobbenberg)  In terms of Delta's viewpoint towards the strengths and weaknesses of competition policy in Europe on aviation, we are very supportive of the liberalisation that has happened within the EU through the successive packages and we can see that there is a great increase in service options, price flexibility and now we are seeing new low cost entrants coming into the market which is a good clear sign of a competitive marketplace. Given that competition is increasing within Europe it is unsurprising that there is increased attention from the competition authorities as to what determines fair or unfair competition within Europe. We have also seen the same within the United States. In judging and analysing what determines fair or unfair competition it is very very important that the competition authorities do not compromise the benefits that have arisen from air transport liberalisation by creeping re-regulation in terms of competition policy. Of course, we recognise the need for competition authorities to review various co-operative arrangements between airlines and we certainly support appropriate intervention when the interests of consumers are perhaps jeopardised or threatened by such co-operative arrangements, as we certainly argue is the case with BA/AA. However, that said, we are certainly very concerned by some of the proposals that have been reportedly suggested by the Commission to limit the operation of the pro-competitive alliances such as the one operated by Delta, Swissair, Sabena and Austrian. Some of these areas of limitation include limits on our flexibility to market our services jointly to traffic agents and to corporations and limits on our co-operation in terms of frequent flier agreements amongst the partners. The review being undertaken presently by the European Union competition authorities is after the fact, the alliance was previously approved, and we believe that this review is threatening the efficiency and consumer benefits that have arisen from this previously approved alliance. In this context we are certainly encouraging dialogue between the US and European Union authorities as well as with the national authorities. If we could move on to talk briefly about the matter of transferring the authority to the Commission to negotiate bilateral agreements. The table that you have in our written submission[1] makes clear that the majority of European Union Member States already have open skies agreements with the United States. Any move towards centralized negotiations by the European Union must preserve the operational flexibility that the current open skies bilaterals include, and this should include the flexibility that has been negotiated for European Union carriers as well as for United States carriers to operate services based on market demands and also freely to codeshare between and beyond EU Member States. Just a final remark relating to the second area, which is that we find it somewhat ironic that the European Union is pursuing legal action against Member States that have negotiated open skies agreements insofar as the Commission is one of the strongest advocates of liberalisation. These Member States have put in place good liberal bilaterals which are encouraging and increasing competition on the North Atlantic. If we move briefly to the third question. Here, assuming authority was transferred to the Commission to undertake negotiations with other countries, we can see a danger that negotiations could become very long and drawn out and inflexible unless the European Union authorities or the Commission negotiators had very, very clear mandates and very, very clear guidelines. If things did get very drawn out that would obviously be against the interests of carriers, both European and US or in other third countries and would be against the interests of passengers because the implementation of more liberal regulatory regimes could be delayed. In terms of the impact of harmonising bilateral agreements, we think that that could be positive insofar as it could bring to an end restrictive bilaterals that are in place between some of the less liberally orientated Member States and third countries. If harmonising means dragging bilaterals up to the highest standard of liberal bilaterals we think that could be positive and that could increase competition amongst carriers and service options for consumers. Finally, to the fifth question, considering the harmonisation of competition rules: we really do not want to take a position on whether the Commission should be permitted directly to implement competition rules. However, we would like to point out that the current regulatory system involving the US authorities, the EU and the national authorities is very cumbersome and very slow to meet the needs of consumers who want low cost, good quality air transportation, to meet the needs of airline shareholders and also to develop opportunities for airline employees in Europe and elsewhere. What we need is a much more quick, direct system of regulation. The airline industry is globalising and as it globalises airlines very much need clear regulatory guidelines to guide their strategic planning and they need that from all competition agencies who have relevant jurisdiction. So that completes our prepared statement. We would be happy to take your questions.

  49.  Thank you very much. There are a number of things that trouble the Sub-Committee, but we are, you must appreciate, only at the very early stages of our enquiry. The Regulations appear—but I would appreciate your comments on this—to try and put forward what I would call a de jure situation rather than a de facto situation. I was particularly interested in Mr Lobbenberg's comments about bilateral status because there are a large number of bilateral agreements already in existence. As we read the Regulations, but please either agree or disagree with my comments, it seems that they would give the Commission the authority initially to look rather than initially to negotiate. Is that a fair comment? Is that how you read them?
  (Mr Egli)  Absolutely, I think that is a very fair comment. We are very concerned that the current bilateral agreements that are in place, namely the open skies agreements which we have been very, very supportive of and which we are very happy with, and if you look at the countries that have concluded them, I would say that the national carriers of those countries are actually very happy with them as well, it would be very, very dangerous to open up the discussions on those again. I think it would harm competition and it would not be in the best interests of the flying public.

  50.  From the evidence that you have both given us in writing and from what you have said this morning it seems that the Commission are proposing or maybe they are actually re-investigating your present Belgian-Swiss agreement. Why do you think they are doing that?
  (Mr Egli)  The focus probably on our current alliance is probably not as much as on another alliance based in Germany simply because of the scope of the carriers involved. As to why they are doing this, we cannot really make a judgment on that.
  (Mr Lobbenberg)  The Commission certainly are investigating it. They have said that they are going to pronounce on the Lufthansa/United alliance at the same time as the proposed BA/AA alliance and that ours will not be announced at the same time, but we are certainly in very regular discussions and dialogue with the Commission regarding their investigations of our alliance.

  51.  Do you get a sympathetic ear? I do not mean are they necessarily agreeing with your point of view because that would be premature. Do you find that those officials with whom you are talking at the Commission do listen or are you talking to a rather blank wall?
  (Mr Lobbenberg)  I think the discussions are lively between Delta and the Commission and we have some fairly fundamental differences of opinion which I alluded to in the areas where we have concern about how they are reportedly investigating potential limitations on co-operation in various important marketing areas. They are lively but they are perfectly cordial, I believe.

  52.  From your knowledge, and I appreciate that you are looking at it purely from Delta's viewpoint and therefore slightly more generally as a US carrier, would carriers in any particular Member State of the EU or, indeed, a third country be advantaged or disadvantaged by these proposals? Are there going to be big winners and big losers or do you think it is going to go across the board?
  (Mr Egli)  I would say the carriers who have not reconstructed themselves, who are not in shape to compete effectively today are certainly at a much greater risk than the carriers that are extremely successful today and that are in a healthy position.

  53.  Would you define those who have not yet got to that stage as those who do not have any significant codesharing arrangements?
  (Mr Egli)  I would not necessarily say so, no. I think they are probably those countries who have not necessarily agreed to open skies for that same reason, because they do not seem to be ready internally for increased competition, although there are exceptions to that statement. In general I think that is the case.
  (Mr Lobbenberg)  We are thinking, perhaps to be a little more blunt, of various Southern European Member States perhaps who have not embraced privatisation, who have not embraced market economics with perhaps the same vigour as the United Kingdom, as Germany, as Holland, and so in our thinking at least, which perhaps may not match with that of BA, we think that the less market orientated carriers like Olympic, for example, from Greece stand to lose more from any liberalisation than the more market orientated carriers such as British Airways, Lufthansa, KLM.
  (Mr Egli)  I would say that the codesharing element really is outside this question. We have a very successful codeshare with Malev, for example, which has been going on for many, many years. I think that is also a carrier that has not necessarily reconstructed themselves to the fullest extent, but the codesharing relations that we have with them are very successful.

  54.  You have put in your written evidence that you have a codeshare arrangement with Air France commencing in a week's time. How do you think Air France is going to be affected?
  (Mr Lobbenberg)  I think that is a good 6 million dollar question!

Lord Thomas of Macclesfield]  I think you have answered it!


  55.  You were talking about Southern European states and you referred specifically to Olympic.
  (Mr Lobbenberg)  Air France are at a crossroads in terms of how they are going to develop. Are they going to become a market orientated successful international airline or are they going to remain in the realm of the state controlled less market orientated airlines (and we have certainly been watching with great interest how the strike has been handled most recently)? It will be very interesting to see.

Chairman]  A very good answer, if I may say so.

Lord Berkeley

  56.  You mentioned what you call pro-competitive alliances with the Austrian, Belgian and Finnish airlines in particular. I think they include codesharing, maybe they include frequent flier schemes. Together it could be argued, and maybe this is what the Commission is looking at, that that is taking a pretty high market share from the capital cities of those particular Member States to Atlanta, for example. Is there much competition on those particular routes, for example? What is your joint market share on those routes? Could you give me one or two examples?
  (Mr Egli)  The competition is clearly there. Atlanta, for example, is one of the largest hubs in the world. Interesting enough, though, over 60 per cent of the traffic that goes to Atlanta goes beyond. So we are not talking about traffic to Atlanta, we are talking about traffic that might originate from Stuttgart and go to New Orleans. In that aspect we are in full competition with any other alliance, be it via Frankfurt, be it via any other gateway. The reason why we believe it is pro-competitive is because if you look at the service between those countries, it has increased dramatically, which means simply more capacity for consumers, more scheduling options and more capacity in almost all cases means lower fares. I think one crucial element that I would want to add to this point is the fact that all three countries have signed open skies agreements. The fact that none of these three countries is constrained by facility constraints, in other words slots, no gates or any other problem, means effectively any US carrier or any other carrier for that matter who would wish to enter into this marketplace can do so without any questioning and that is a very, very crucial element in the whole question.

  57.  Can I just press you? Say between Brussels and Atlanta, what is the marketplace of Delta and Sabena together?
  (Mr Lobbenberg)  I honestly do not have the precise market share in my head. It will be reasonably high certainly. There are two additional points. One is that in our alliance cities, Vienna, Brussels and Zurich, there is very viable competition via other European gateways so that passengers who are in Zurich and want to go to Atlanta could go via London or Frankfurt on British Airways or Lufthansa. If they want to connect in Atlanta and go somewhere else, as the vast overwhelming majority of our passengers do, and they are going from, say, Zurich to Atlanta to Miami, they could connect in London, Frankfurt, Amsterdam, Paris or wherever. There is good healthy competition. That is not the case for a certain other alliances which we are supposed to not discuss too much! But from the United Kingdom, people are not going to backtrack to Europe to make connections. So the situation is different from Belgium, Austria and Switzerland as compared to the situation in the United Kingdom. One final point before you want to press me because I know you will want to make the obvious comeback: what about the poor passengers who do not want to connect in Zurich, do not want to connect in Atlanta, but genuinely are travelling between Zurich and Atlanta, are they going to get stitched up? Leisure passengers, ie, people paying with their own money and going on holiday, will willingly take a connection in Frankfurt or Amsterdam or London if they will get a fare that is going to be £20 cheaper because they are travelling on their money and they are price sensitive. For business people who are perhaps less price sensitive the terms of our antitrust immunity with Swissair, Austrian and Sabena means that that very small niche market of your businessmen going between Atlanta and Zurich is excluded from our antitrust immunity and we compete in that tiny niche market, but it is tiny.
  (Mr Egli)  That city pair did not have another carrier prior to antitrust immunity. There was no-one there. The reason for that is the local traffic between Zurich and Atlanta is tiny. Atlanta is not a destination where people go, it is a hub. 65 per cent of all the passengers who fly into Atlanta connect within two hours. So the market is very very tiny compared to other major city players which show a lot of local traffic.

  58.  That kind of exclusion from antitrust I think is very interesting. To your knowledge, does that apply to most of the antitrust immunity that has been sought by different airlines from the US; in other words, from their hub to the other end of the bilateral, if you like?
  (Mr Egli)  It certainly is true for the immunised relationship between Lufthansa and United. It is only true on their major hub connections; in other words, Frankfurt, Chicago would also be carved out, yes.

Lord Skelmersdale

  59.  Would any of those agreements in fact be signed without the antitrust immunity? Without the negation or involvement of the US government would any of these things exist?
  (Mr Egli)  I am not sure I understand what you mean. Would the codeshare exist without antitrust immunity?

1   See page 16. Back

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