Select Committee on European Communities Minutes of Evidence

Examination of witnesses (Questions 160 - 179)



  160.  We shall not have the benefit of being able to talk to them ourselves. How do you believe they would view the situation? Is that asking you too much?

  A.  I have the impression they would welcome the comments I have just made because for the first time we have spoken out in favour of what they have been doing. We have not said so in the past. I think their approach is somewhat similar to what I have just presented. They would be inclined to believe that on the basis of subsidiarity national competition authorities should continue to enforce the EU competition rules with respect to third countries for as long as possible.

  161.  Has there been any evidence that the Kartellamt would take a fairly strong line with the airline industry just as they have done in many other industries? Have they fined people for price fixing?

  A.  Yes, they have. They have initiated a case against Lufthansa for pricing on Frankfurt-Berlin. They are investigating pricing on Frankfurt-Munich. We took issue with that. It is under litigation so the outcome has not yet been settled. They are investigating alliances. They have investigated frequent flyer programmes. So they are very active in the field of aviation, yes.

Lord Berkeley

  162.  Do you have any competition on those routes you have just mentioned? What market share do you have between Frankfurt and Berlin, for example?

  A.  The argument that was raised by the Kartellamt was that our pricing is different depending on whether there is competition on the route or not. We disputed their market definition. The issue of market definition is one which competition authorities in general have difficulties with and that is the reason why it is under litigation. On Frankfurt-Munich there is indeed competition. British Airways was a former competitor and decided to move out of that route. I believe that some of the competitors that we have domestically under-estimate the fact that as a privatised company we have become far more market orientated than before and we are now not only more readily able but willing to take up any challenge that presents itself in the market.


  163.  You have an agreement, as I understand it, between Lufthansa and SAS. If there was to be this pan-European competition authority, which is what you are advocating, how would you suppose their view would differ from that of DG IV?

  A.  Are you referring to the Lufthansa and SAS case which is one which was decided upon by DG IV based on the assumption that the Lufthansa-SAS alliance is one which is between two European carriers for routes within the European Union? We received approval from DG IV for that alliance subject to a number of remedies and that alliance has now been in place for a number of years. It has not dominated competition. We believed that the remedies were appropriate. I do not have any notion that any pan-European competition authority would have decided otherwise. The issue with the Lufthansa-United SAS case, which is a different case because it involves a non-European airline for North-Atlantic routes, is one where I believe the pan-European competition authority could indeed take a different view, first of all, because such an authority would need to try and determine how one could try and establish such a common denominator rule governing competition on that transatlantic market. They would not take the approach favoured by DG IV which would be to act completely irrespective of what US authorities had actually decided in the Lufthansa-United SAS case because this alliance received approval from the US authorities for North Atlantic routes by the US authorities subject to completely different remedies.

  164.  In earlier evidence to this enquiry it was put to us that the proposed Regulations made a great deal of sense if one was talking of the European periphery and, indeed, Switzerland was mentioned which is right in the middle. I think you take the point. That evidence agreed with you that it made little sense to do it to further away third countries. Would you go along with that?

  A.  Yes and no. Yes to the extent that we already have negotiations with middle-European and eastern-European countries and it would be wise to await the outcome of these discussions so that we can ascertain to what extent they have been beneficial for both sides. No to the extent that I do not think it is a question of geographic distance, it is a question of aviation policy. The only country we can currently conceive where it would be worthwhile to pursue this approach of creating a joint aviation area is the United States. These have pursued a liberal aviation policy in the past. They have signed a number of open skies agreements with European countries and it appears worthwhile to have a closer look at whether or not it would be possible to create a framework for a truly transatlantic single aviation market with them other than the United States. If you were to take countries like China, Japan, Indonesia, Vietnam, Australia, whatever, I would perceive enormous difficulties for these countries being able to agree with the notion of now taking up negotiations with the Commission and having an array of European carriers flying from any point in Europe to their respective country.

  165.  That is just a question of volume really or mass. There are that many more transatlantic ones. You get equality, is that really what you are saying? Take Australia as an example with Qantas, I think what you are saying is Qantas would be all on its own and it would get flooded by Lufthansa, Air France, Sabena, BA, you name it.

  A.  The question is what the added value would be for Qantas to pursue the notion of now wanting such an agreement with the European Union or the Australian government for that matter. What would the incentive for them be to begin negotiations with the Union either because of trade pressure exerted outside the realm of traditional aviation policy or the threat of discontinuing air services until they do negotiate? I do not think that that is necessarily an avenue one should pursue. I would agree with you that yes, it is also a question of negotiating leverage and here again the US would be the only country that would be able to act as a partner in such negotiations.

  166.  Let us come back to your advocacy of an independent competition authority within Europe. Do you have much support for that line amongst your friendly rivals in other EU countries?

  A.  The notion of a truly independent aviation authority was one which was presented by the German government several years ago and I do not think it found any support at all. I do not believe that we would find support for this notion either for the time being. However, as other airlines begin to see the implications of the powers that the Competition Directorate is now advocating they may well also dread the future ramifications of such a political entity driving competition policy and change their opinions.

Lord Thomas of Macclesfield

  167.  In your evidence you referred several times to a political agenda and you have just now mentioned it yet again. Could I be clear in my mind what Lufthansa's view is of this political agenda from the Commission and is it restricted to DG IV or DG VII or is it the whole Commission? What is this political agenda you are referring to?

  A.  It appears to me that the Commission is confronted with an awkward situation of Member States on the one hand agreeing in principle with the basic ideals of the European Union and agreeing in principle that sovereign rights should be transferred from them to the European Union, but when it comes down to practicalities, certainly in the aviation area, they are not actually walking their talk. Member States are still negotiating with third countries air service agreements that discriminate between airlines depending on the nationality of the airline. The Commission is finding it difficult to accept this and from a purely legal point of view I have some sympathy with that. There is a practical implication in that, of course, which is that you cannot really expect the Member States to cease all kinds of negotiations and have the Commission take this up with immediate effect and you cannot really ask the Commission to intervene in these negotiations with immediate effect either. Given the fact that the Commission has a point which is from a legal perspective valid but has no means of changing anything in the situation as it currently appears, they are now taking the question of alliances and investigating these alliances, threatening severe remedies for the alliances in the course of the investigations and treating all alliances equally. They are making appearances in the media as if alliances were by definition bad, as if size were bad for the consumer or for competition. They have dramatised the potential drawbacks of alliances in such a way that one has the impression that only if Member States were to act by giving them additional competency, would they be prepared to accept the situation as it is as outlined at the outset. The political agenda is one where there is not a market definition and the consequences of market behaviour that drives a competition authority to act but considerations that lie outside of those two phenomenon.

  168.  With respect, is that not you and Lufthansa acting politically as well? Why is this peculiar to the aircraft industry? No other industry has those forms of protection. Why do you use the word political agenda when the European Commission is trying to act in the best interests of all the Community?

  A.  Are they really trying to act in the best interests of all the Community?

  169.  Are you saying they are not?

  A.  They may well believe that they are, but I do not believe that the approach that they have adopted in the case of the alliances is in the interests of the Community. US and Asian carriers are beginning to query, first of all, whether they can rely on bilateral arrangements to remain in place. I do not believe that that is in the interests of Member States and I do not believe that is in the interests of European airlines because European airlines (and they currently account for eight per cent of global air traffic) need alliances to be able to position them in the globalised aviation market. Without such alliances we would not be able to compete globally. By acting in the way they are they are undermining the potential value of European airlines as strategic partners in global alliances.

  170.  Is there a good alliance or a bad alliance?

  A.  To the extent that alliances have networks which compliment each other and do not overlap, thereby increasing presences on certain routes, but compliment each other and thus offer the consumers transportation opportunities that these did not have before, to the extent that the alliances compete against each other by offering different options for the routings so that a passenger who is in Northern Germany can either travel with one alliance over London to the United States or with another alliance over Amsterdam to the United States or with a third alliance over Paris and so on and so forth, to the extent that there is such competitive pressure and an additional product quality these alliances are good for the consumers, yes. I do not believe they are good to the extent that they do not provide for such additional opportunities.


  171.  How does that square with anti-trust immunity in the States because that by definition is reducing competition, is it not?

  A.  The anti-trust immunity granted by the United States for the alliances, Lufthansa-United-SAS, was precisely for the reasons mentioned, because the networks are complimentary and because the alliance partners were able to demonstrate what the potential benefits of their alliance would be for the consumers. To that extent the anti-trust immunity granted does square with what I have just said.

Lord Methuen

  172.  I would like to go back to this business of slots. Any open skies policy or liberalisation within Europe surely needs to reconsider the method of allocating slots, particularly as you start going out of Europe. Would you like to comment on that?

  A.  First of all, slot scarcity is a symptom of the problem and not the cause of the problem. What we lack is infrastructure. Were there to be additional infrastructure certainly at key airports and also over the regional airports and were there to be a truly unified European air traffic control system with no bottlenecks we would not have the constraints that we currently have. We do have them, however, and therefore the question of slot allocation becomes increasingly important. We feel that at this point in time the current slot allocation procedure provides the sort of flexibility that the competing carriers require. It has the grandfathering for those that need long-term planning safeguards and it also provides for slot exchange to take place should individual competitors find that they can mutually agree to optimise the slots that they currently have. These elements of flexibility are ones which at least to our knowledge most carriers can live with. The more aviation agreements are liberalised and the greater the tendency for new market entrants to want to enter the market the greater the problem of slot scarcity will become, which is why we are currently in the process of reviewing our position on slot trading. We believe that that could indeed provide a viable solution, but we have not really finalised our position on that so far for the simple reason that we are not quite sure what the implications would be. We have been hearing from a number of airports that should secondary slot trading be permitted between airlines then the airports themselves would want to have some kind of value attached to what they had at the very outset before the slots were allocated to the airlines. That in turn would seem to complicate matters more than solve them. There are a number of questions that we still need and want to consider internally before coming up with a final position.

  173  Do you think there should be some European-wide consistency in the method of handling slots which there certainly is not at the moment? Heathrow is notorious.

  A.  Yes, I do.


  174.  DG IV has intimated that it might ask Lufthansa to give up 150 slots at Frankfurt.

  A.  It actually went beyond that, it said that the alliance would have to give up slots and the alliance means United Airlines, which is a US carrier. The question is whether the Commission can, at this point in time, force a non-European airline to give up slots either in the US, which would raise the question of extra territorial applications of EU competition law, or in Europe, which raises the question of the validity of bilateral agreements in place. United claims that they have an open skies agreement that gives them free market access and they are not prepared to accept the notion of a third institution somewhere also telling them they can no longer fly to Germany because the slots that they have at Frankfurt are going to be taken away from them. That is the complication. The slot withdrawal issue is one which was first raised in the Lufthansa-SAS case. In that case Lufthansa and SAS agreed in principle to accept the idea that if a competitor wished to enter certain routes and was not able to gain access to the infrastructure through the normal process we would then seal the number of slots that that competitor wished to have up to a certain ceiling. That as a matter of principle is one that we accepted in that case and with the same logic we would be prepared to accept it in other cases. If as a result of the alliance being in place in the market a market entrant were to want to enter certain routes and was not able to do so because of slot constraints and not able to gain access to those slots through the normal means then we would be prepared to seal slots.

Lord Skelmersdale

  175.  Who is to dictate the ceiling? Are you to dictate it or the competition authorities? If it is you then surely by definition you have the opportunity to limit competition.

  A.  That is a point that we also raised with the Commission. Clearly they are saying that a certain given number of slots would need to be sealed in order to enable slots——

  176.  I understand that.

  A.  We accept that as a principle, that they determine what the ceiling is. We would want to know under which criteria they choose the routes in question and how they come up with a certain number of slots. That gives rise to this question of a politically-driven agenda. In the case of the US-UK their approach was, "Tell us which competitors are out there wanting to go on to certain routes. Tell us how many frequencies they want to have. We will then calculate the number of slots that will have to be withdrawn from the incumbent carriers and given to those competitors. Then you come up with a certain figure." The Commission did not do that. The Commission came up with a figure out of the blue and said, "This number might fit here and if the other number is substantially larger then we can demonstrate that we consider the other airlines to be not so beneficial for the consumers". They have no competition theory that would help them substantiate the number, ie, why is 150 slots adequate in the case of Lufthansa and United? Why not 50 or 300? That is one of the reasons why cannot really come up with a sensible dialogue with the Commission, because they have a political agenda of some sort.

Lord Berkeley

  177.  I think you heard the evidence from the Air Transport Users Council who said that if an alliance was formed between two airlines competing on a route other than across the Atlantic or somewhere else with a feeder one that was bad for the customer by definition because it reduced competition and therefore reduced choice. You do not agree with that by the sound of it.

  A.  We believe in analysing traffic flows rather than looking at specific routes. The consumers in North Rhine Westphalia, a region I happen to know in Germany, that wish to travel to the United States can do so by travelling from Dusseldorf to Frankfurt and the United States or Dusseldorf and London and the United States. I ask myself which are the routes that I need to look at to be able to determine whether there is competition? As long as the consumer in Dusseldorf has the options that not only have the result of leading to a pricing ceiling but also the routing options then he has competitive options and therefore there is sufficient competition. If I now look at Dusseldorf-Frankfurt I am not really addressing the issue and the issue is the person wants to go from Dusseldorf to the United States. It is not Dusseldorf-Frankfurt that is the relevant market. Therefore, if an alliance was in place to reduce the number of carriers competing on Dusseldorf-Frankfurt I would have to ask what is the market I am talking about and if I come up with a sufficient number of destinations between Dusseldorf and Frankfurt I would say that if those passengers now have less competitive options than they had before I would agree with you. I would agree with them as well. That alliance has the effect of reducing competition on that route. These routes have been defined by the US competition authorities in the case of the Lufthansa-United SAS alliance. There are two routes out of over 150 where they determined that there was now less competition than before and for these two routes they identified remedies.


  178.  Can I come back to this question of slots again because there has been so much recently in the press and we are taking evidence which has also addressed the issue. You said that you would be in favour of trading in secondary slots. First of all, would you explain what you mean by secondary slots?

  A.  I am not sure whether I have the technical definition for you, my Lord Chairman.

  179.  Give it in lay terms because we are not technical people.

  A.  I believe that the experts like to distinguish between the trading of slots between airlines, which they call secondary slot trading, and any other kind of slot trading, primary slot trading so to speak, which would then have to involve an entity that had the slots from the very outset. Whether you say this is the airport or the government is a matter of definition. The implication is that someone has to allocate at the very outset from a given cake an individual slot to an airline and then that airline can either trade it or give it up or use it, but he gets it from somewhere. If he decides to trade it he would derive his rights to be able to deal with that slot from that first entity and it would therefore be secondary slot trading.

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