Examination of witnesses (Questions 60
- 79)
THURSDAY 11 JUNE 1998
MR STEPHAN
EGLI and MR
ANDREW LOBBENBERG
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.
Chairman
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.
Chairman
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.
Chairman
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.
Chairman
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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