Select Committee on European Communities Minutes of Evidence

Examination of witnesses (Questions 80 -100)



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.


  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.


  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.


  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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