Examination of witnesses (Questions 47
- 59)
THURSDAY 11 JUNE 1998
MR STEPHAN
EGLI and MR
ANDREW LOBBENBERG
Chairman
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!
Chairman
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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