iata - response to dg comp discussion paper - 4 april 2005

International Air Transport Association

IATA Centre, Route de l’Aéroport 33 P.O. Box 416 CH-1215 Geneva 15 Airport, Switzerland

INTERNATIONAL AIR TRANSPORT ASSOCIATION

COMMENTS ON DG COMPETITION MARCH 2005 DISCUSSION PAPER

CONCERNING COMMISSION REGULATION 1617/93

NON-CONFIDENTIAL VERSION 4 April 2005

IATA COMMENTS ON 4 APRIL 2005 DG-COMP DISCUSSION PAPER NON-CONFIDENTIAL VERSION

Introduction These comments are provided by the International Air Transport Association (“IATA”) in

response to the recent Discussion Paper issued by DG Competition in respect of Regulation

1617/93, the block exemption applicable inter alia to airline tariff consultations.1 The

Discussion Paper provides DG Competition’s summary of the responses to the Consultation

Paper issued by DG Competition in June 2004 and sets out certain preliminary conclusions

regarding the legal assessment of the current system under Article 81 EC. IATA has already

made extensive submissions to DG Competition that detail the significant benefits of the

IATA interline system, the inability of any realistic alternative system to duplicate those

benefits, and the lack of demonstrable negative effects of that system. IATA does not intend

to duplicate those arguments here. The Discussion Paper does, however, focus on two issues

that deserve further attention: (i) the extent to which the IATA interline system or IATA tariff

conferences generate “specific benefits” that are not provided by expanded airline or alliance

networks; and (ii) whether IATA tariff conferences create “a great risk to competition”.

These issues are addressed in turn below.2

1. Does the IATA interline system generate specific consumer benefits?

IATA has shown in its submissions that the IATA interline system provides significant

benefits to consumers in terms of flexibility (the ability to choose between a wide range of

schedules and itineraries as well as to change carriers and/or routings after booking or even

after the journey has commenced) and in pricing (where a journey involves an intermediate

stop). The Discussion Paper provides three grounds for disputing these benefits. First, the

Discussion Paper suggests that these benefits are not “specific” to the current IATA system –

the tariff conferences provided for in Regulation 1617/93 are not necessary to achieve those

benefits. Second, the Discussion Paper suggests that these benefits are not significant

because “alliances” and code-share agreements now provide many of the benefits formerly

generated by the IATA system. Third, the Discussion Paper concludes that the figures for

1 DG COMPETITION DISCUSSION PAPER Concerning the revision and possible prorogation of Commission Regulation 1617/93 on the application of Article 81(3) to certain categories of agreements and concerted practices concerning consultations on passenger tariffs on scheduled air services and slot allocation at airports, issued on 2 March 2005 (the “Discussion Paper”). 2 Beyond these points, IATA’s detailed critique of the errors and flaws in the Discussion Paper is contained in Annex I (to follow by 8 April 2005).

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use of the IATA Interlining System appear “rather modest” so that “only a small percentage

of the travelling public” benefit from the IATA system.

The IATA multilateral interline system generates benefits that are specific to the IATA system and to the continued operation of tariff conferences.

In order to put the arguments of the Discussion Paper in perspective, it may be useful to

consider how the position will change for airline travellers in the EU if the current system of

tariff conferences is terminated:

Where a passenger wishes to travel on an itinerary that requires an intermediate stop and wishes to travel on two different airlines, the fare for that itinerary will be based on the total of the full fare for each of the single airline city pairs included in that itinerary, unless the airlines have a bilateral agreement in place that allows a lower through fare.

Over time the current arrangements in place to facilitate transfer of passengers and

baggage between airlines are likely to atrophy. Without revenue-sharing in the context of the IATA joint product, through-ticketing and through-baggage checking are likely to disappear outside alliances (as is increasingly the case in the United States), which may mean having to check in multiple times for a multi-sector journey and having to personally transfer one’s luggage between the different carriers involved in that journey.

Where a passenger wishes to change travel plans to use a different airline, that traveller

will need to purchase a new ticket, unless the new airline has a bilateral agreement with the original airline to accept both the ticket issued and the fare applied by the first airline. This will be a particular problem for passengers who wish to change their itinerary in mid journey and may not be able to recover the fare for the unused part of the original ticket from the first airline or may not have the time necessary to have the fare checked and a new ticket issued in exchange by the second airline.

If airlines choose to reduce even a small part of these negative effects for consumers,

they will need to negotiate additional bilateral agreements (including agreements outside the structure of “alliances” as discussed below). The substantial transaction costs of negotiating these agreements (including their legal assessment) as well as of maintaining these commercial relationships, will raise overheads across the airline sector and will be passed on to consumers in the form of higher fares or lower service levels. Furthermore, it is likely that many smaller, regional or new entrant airlines will not be invited to participate, particularly where the “alliance” believes it has sufficient feeder flights to a particular region in order to force passengers from that area through its hubs (regardless of how inconvenient that might be for people living in such areas).

All of these positive effects that flow from the existing IATA system, and that would be lost

if the tariff conferences are terminated, are directly attributable to the conference system for

two reasons.

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First, without the conference system there is no “industry fare.” This includes both the

agreed industry fare for specific city pairs and the agreed add-ons. The industry fare makes it

possible for airlines to accept a revenue split that does not require recovery of their full fare.

The industry fare also makes it possible for an airline to accept a ticket issued on another

carrier, because the second (accepting) carrier can be sure that its revenue requirements are

met without an ad hoc assessment with associated transaction costs.

Second, determination of the industry fares within a conference, where each conference

participant has an equal vote (and therefore the right to veto a change from the current fares)

means that every airline has “bought in” to the fare levels in effect. This provides the basis

for the obligations on airlines under the Multilateral Interline Ticket Agreement (“MITA”) to

accept bookings or tickets at the industry fare. In the absence of the opportunity to exert

control (albeit negative control) on industry fare levels through the conference system, it

cannot be assumed that airlines will continue their current open-ended commitment to accept

interline bookings.

Thus the suggestion in the Discussion Paper that the benefits identified by IATA are not

specific to the IATA tariff conferences is simply incorrect.3 Without the conference system,

there would be no agreed industry fare. Without the conference system, the basis for general

agreement by airlines to accept the industry fare would fall away as well. Participation by

airlines in interline bookings would probably be subject to limitations in respect of specific

routes or specific interline partners. Without general acceptance of an agreed industry fare,

the benefits of flexibility and through-ticketing at a fare below the “sum-of-sectors” would be

lost.

“Alliances” and code shares do not replace or eliminate the benefits of the IATA Multilateral Interline System

The Discussion Paper attempts to downgrade the significance of the benefits of the current

system by reference to the increased role of alliances, code shares and the greater scope of

individual airline networks. The Discussion Paper suggests that the benefits of IATA 3 The Discussion Paper fails to recognize that the “benefits of interlining” that are described and quantified by IATA are the benefits of the IATA multilateral interline system, excluding the benefits (which are also real) of interlining under bilateral agreements.

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multilateral interlining are limited where the passenger is travelling on a city pair that is

served by a single airline or alliance. The Discussion Paper suggests further that the benefits

of IATA multilateral interlining are particularly limited for passengers purchasing simple

return tickets on routes where individual airlines have a large number of frequencies. As a

threshold point it is worth noting that even if these assertions were true, it does not follow

that the IATA system produces no benefits within the meaning of Article 81 EC.

As a further preliminary point, IATA would note that it is misleading to refer to “alliance

interlining” as an alternative to the IATA system. The alliances that currently operate in the

EU function principally as platforms for bilateral arrangements between their members.

Thus, for example, if four airlines A, B, C, D are members of the same alliance, it does not

follow that a business class passenger on a connecting itinerary between two cities combining

flights on A and B will be able to change to an alternative itinerary using C and D, without

purchasing a new ticket.4 The ability of the passenger to change plans will depend on the

bilateral relationships between each of the airlines. Thus the real question is whether the

extension of individual carrier networks combined with bilateral arrangements that allow

airlines to offer “on-line” fares to points that they do not serve directly (including bilateral

agreements between alliance partners and alliance carriers/non-alliance carriers), render

multilateral interlining through the IATA system superfluous.

As a third preliminary point, IATA would emphasise that the consumer benefits of these

bilateral agreements between airlines, whether on an ad hoc basis or under the umbrella of an

alliance, are not in dispute. Indeed, a real benefit of the IATA multilateral interline system is

the role played by the interoperability standards that provide the basis for the multilateral

system (including the prorate mechanisms set out in the Multilateral Prorate Agreement) in

providing a platform for more extensive bilateral cooperation. In describing and quantifying

the benefits of the IATA multilateral system, IATA has restricted itself to the benefits that are

4 For example Lufthansa-Austrian and Lufthansa-SAS have exempted joint ventures, but SAS and Austrian do not as DG COMP opposed the joint venture (see Press Release IP/00/1159). Similarly for OneWorld, BA-Iberia have an exempted joint venture but there is not an equivalent level of cooperation extending to Finnair or Aer Lingus. The SkyTeam alliance arguably has the most comprehensive scope in terms of joint fare-setting, but that investigation has been pending since 2000 suggesting that not all bilateral relationships even within alliances are straight-forward. Furthermore, even within an exempted joint venture it is not the case that every route is a code share route with the implication that often there will not be a common fare. Where there is no code share/common fare the traveller may have difficulty changing her/his routing and may need to purchase a new ticket and/or pay the fare difference, all of which the traveller may not have time to accomplish if the change is last minute.

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specific to the multilateral interline system. In particular, IATA has focused on those benefits

that currently lead consumers to purchase a fully flexible IATA interlineable ticket. These

benefits are acknowledged in the Discussion Paper in respect of passengers who travel on a

connecting city-pair itinerary where there is no single carrier or “alliance” providing an on-

line alternative. The multilateral interline system also generates real consumer benefits,

however, on city pairs where on-line services exist, even including relative short sectors with

frequent services from competing alliances, such as the Paris-Frankfurt route that is the focus

of extensive attention in the Discussion Paper.

Benefits of the existing IATA system where no carrier or alliance provides an on-line service.

As regards the many city-pairs where there is no “on-line” alternative (whether on a single

airline or on a code-share service) or where the “on-line” alternative is not convenient, the

benefits of the IATA multilateral interline system are clear by again considering the situation

that would prevail without the current IATA system:

Without the IATA multilateral interline system, consumers wishing to fly between airports where there is no/inconvenient on-line service will need to purchase separate tickets for each of the sectors in a connecting itinerary to the final destination.

Since the services are sold in two separate transactions (i.e., two separate contracts),

the passenger will need to check-in again at the connecting airport. The minimum time between flights for a practical connection will therefore need to be longer – likely at least 120 minutes compared to the 45-60 minutes now applicable at most European airports.

The price of the two carrier-specific fares will often exceed that of the through IATA

fare.5 (In the event that the passenger’s return journey requires more than two airlines, which is now an option under the IATA system, the sum of the one-way fares will be even higher.)

There will be no through-checking of baggage and therefore whenever passengers

change carriers/alliances at intermediate points, they will need to collect any luggage they were required to check and personally bring it to the second carrier when

5 The Discussion Paper at point 144 suggests that IATA’s argument on sum of sectors is based on comparing IATA fares or “carrier full price fares”. This is incorrect as the examples in Annex 3 of IATA’s 6 September 2004 submission demonstrate. IATA’s analysis used flexible carrier business class fares that were available for interlining. There is no reason to expect that such public, available-to-all interlineable fares would be lower without the IATA system, rather the likelihood would be that they would be significantly higher unless carriers had a bilateral agreement, which will often not be the case. Furthermore, it is also accurate to use carrier fully flexible fares since this is the product that comes closest to the flexibility inherent in the IATA system.

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checking-in for the onward flight. This is the likely result because the first airline will have little incentive to assume liability for misdirected or mishandled baggage.

The airline providing the second sector will be under no obligation to accommodate the

passenger, or provide a refund, if the incoming flight is cancelled or delayed.

The passenger will not have the flexibility to change to different airlines via different connecting points once the trip has commenced.

While these benefits accrue to passengers flying between two points where there is no on-line

or only inconvenient on-line service, the generation of these benefits involves the full range

of routes in respect of which the conferences establish tariffs. This results from the fact that

for many city pairs where there is no on-line service, an industry fare will need to be

“constructed” based on fares set for sectors where there is an on-line service. Furthermore,

where long-haul services to or from the EU are involved, any proviso that may be asserted by

a carrier providing a final short sector within the EU generally requires that there be an

applicable industry fare for the sector where the proviso is claimed.6 (These points are

important concerns for regional carriers as well as their passengers, and are particularly acute

in the many situations where alliances are likely to judge that it makes more sense to force

traffic through their hubs then cooperate with a small regional carrier with limited services.7)

Thus it is not really possible to segregate the clear benefits on routes where there is no on-line

service from the operation of the multilateral interline system as a whole.

Benefits of the existing IATA system where on-line services are available.

As regards the city-pairs where there is an on-line service available, the Discussion Paper

challenges the existence of significant benefits that are specific to the IATA interline system.

To assess the merit of this claim, it is useful to consider why an intelligent consumer, with

access to competent professional advice or independent internet-booking services, would

purchase a ticket at an IATA fare, to travel on a city-pair where there are on-line alternatives

6 See the Annex to IATA’s submission of 16 February 2005 on posted prices for an explanation of provisos (pp. 4-8). 7 It is notable that the phenomena of “regional” alliance members is relatively new. Despite the recent addition of some small regional airlines to the major alliances, it is clear that the core network carriers must limit such regional partners in order to maximize the network economies of scope and scale associated with their hubs. While as a policy matter DG Competition might not have any problem with these negative impacts that would flow from eliminating the IATA system, it must be clearly recognized that geographically isolated populations will bear the burden of this policy choice.

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available. There are three important reasons why an intelligent consumer will still purchase a

fully-flexible IATA ticket under these circumstances: (i) Schedule flexibility; (ii) Itinerary

flexibility; and (iii) Ability to change schedules and itinerary.

Consumers value schedule flexibility – the ability to depart at different times during the day –

even on routes where there is an on-line alternative. Particularly in cases where the on-line

service only departs once or twice a day, an interline booking may allow passengers to leave

and arrive in a time frame that better suits their personal schedule. Even where on-line

services are more frequent, those services may be fully booked for the day and time that the

customer wishes to travel. In either case, the interline option provides a value for the

consumer beyond that of the carrier-specific ticket.

The value of itinerary flexibility – the ability to choose a different connecting point – is

equally evident. Where individual airlines offer connecting itineraries on an on-line basis

they can usually only offer a booking via a single hub airport. Some passengers will prefer to

connect at a different airport, because they can use the opportunity to break their journey at

that airport to conduct business. For those consumers, the interline option provides a benefit

that cannot be reproduced by the carrier-specific ticket.

The ability to change schedules and itinerary once a journey has commenced is particularly

important for consumers who are time sensitive and not price sensitive. Even where a

passenger is almost certain to travel at the originally planned times, that passenger can still

value the ability to change either the time of departure or the itinerary or both where

circumstances change. These changes in circumstances may include changes in the

passenger’s own plans (e.g., meetings have been cancelled, lasted longer than expected, or

finished early), changes due to weather problems, or changes due to airline technical

problems. The ability to change to services of a different airline for some or all of the

remaining itinerary, without the need to purchase a new ticket, provides a value to the

consumer that exceeds that of a ticket limited to a specific carrier.

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The example of Frankfurt-Paris as an illustration of why travellers even on hub-to-hub routes frequently and for good reasons choose the IATA product.

The benefits of schedule flexibility and the ability to change a booking in mid-itinerary apply

even on relatively dense short routes like Frankfurt-Paris.8 A passenger who is travelling

from Paris to Frankfurt for a business meeting may still value the ability to change from Air

France to Lufthansa, even though Air France offers frequent services in both directions.

Thus, for example, if a passenger originally booked on Air France arrives at the Frankfurt

airport in mid-morning, that passenger may be too late to catch the Air France flight at 1040.

Rather than waiting for the next Air France flight (at 1350) the passenger may save valuable

time by taking the Lufthansa flight at 1150 or 1310. These options may be more attractive if

the Air France flight is delayed and more attractive still if the Air France flight is cancelled.

For the passenger whose meeting runs late, the attractiveness of interline flexibility is even

more evident. The last Air France flight to Paris departs at 2040, while Lufthansa offers a

flight 50 minutes later at 2130. Furthermore, a Lufthansa passenger who missed the 1715

flight can save almost an hour by changing to the 1830 Air France flight or even fifteen

minutes by changing to the 1905 (perhaps more if Lufthansa is delayed). Even where both

airlines offer services at the same time (early morning or early evening), the ability to change

to the other airline may be valuable where the passenger wishes to change from the original

booking – because the first carrier may be full. Particularly at busy times when even the top

fare classes may be fully booked, the interline option can increase the likelihood that the

passenger can find a seat quickly at a time convenient to that passenger.

Of course in most cases meetings finish on time (not too early and not too late). In most

cases, there is no traffic accident on the way to the airport, there is no equipment problem

with the flight originally booked, and weather conditions have not led to delays either in

flight operations or ground transport. Furthermore, in many cases a passenger who does need

to change plans is able to use an alternative service provided by the airline used in the

original booking. It is therefore not surprising that the flexibility feature of the interline ticket

is only used in a relatively small number of cases. The situations where it is used, however,

will often be precisely those where the stress level for the individuals involved will already

8 The current schedule for FRA-CDG services is as follows:

AF: 0725; 1040; 1350; 1600; 1750; 1830; 1905; 2040. LH: 0730; 0845; 1150; 1310; 1540; 1640; 1715; 1920; 2015; 2130.

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be high. It should not be too surprising that less price-sensitive consumers will be willing to

pay more for a product that reduces that stress level if plans do change.

On the basis of the above, there are entirely rational reasons for an informed consumer to

purchase a fully flexible IATA ticket on a city pair where an on-line service from an

individual airline or alliance is also available. Where passengers choose this option, other

features of the multilateral system (in particular those that ensure “seamless service”) also

provide direct benefits to the consumer that are specific to the product that the consumer has

chosen.9 The fact that consumers do value the interline option is demonstrated by their

willingness to pay a premium over carrier-specific fares in order to purchase fully-flexible

tickets at the IATA fare, even on routes where there are clearly carrier-specific alternatives

available.

The Benefits of the IATA Multilateral Interline System Remain “Important”

The “importance” of these benefits cannot be measured by a simplistic reference to the

percentage of passengers that “use” the interline product – i.e., that actually use two different

airlines in an itinerary or change their plans during a trip to use another airline. Where

consumers value flexibility, the welfare gain to those consumers is captured even if none of

the customers purchasing a ticket actually takes advantage of the ability to change airlines.

The premium that these customers pay is a form of insurance – an upfront payment today in

order to avoid potential higher costs tomorrow. Nor can the “importance” of the benefit of

the IATA multilateral interline system be measured by the number of tickets sold at IATA

fares as a percentage of all airline sales. Even if the relative percentage may be small, the

absolute numbers involved are high. It is striking in this regard to note the acknowledgement

in the Discussion Paper that the total number of tickets sold at IATA fares for travel within

the EEA in 2003 was approximately 7.7 million.10 If the average premium paid for an IATA

ticket over a carrier-specific ticket is € 80, this means that consumers placed a value on the

special features of the IATA product at € 620 million for travel within the EEA, not including 9 The Discussion Paper concludes (at point 124) that the “seamless travel benefits” of the IATA system cannot be considered “specific” to the IATA system and therefore are not benefits shared with consumers for purposes of Article 81(3) “where carrier and/or alliance specific offers exist in the market next to IATA interlineable offers.” This assertion does not make legal or economic sense. Where a consumer prefers the IATA option for any of the reasons discussed in the text, the benefits available from other products do not detract from the benefits associated with the product that they have chosen. 10 At point 50.

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the ten new Member States.11 Furthermore, the sum-of-sectors analysis IATA conducted for

the 6 September 2004 response suggests that the multi-sector interlining benefits could be in

the order of € 325 million for travel within the EEA, not including the ten new Member

States.12 Combining these estimates and adjusting for overlaps produces a total benefit for

2003 of approximately € 810 million for travel within the EEA, not including the ten new

Member States.13 A benefit of these dimensions cannot be dismissed as small or

unimportant.14

11 This is a conservative estimate. Previous work for DG Competition in 1998 estimated that the average difference was approximately ECU 130 (CERNA III, 1998b). 12 Annex III of IATA’s 6 September 2004 submission (A Comparison of IATA and Carrier Fares) showed the savings a traveller would achieve on 27 sample multi-sector itineraries. The unfounded doubts the Discussion Paper raises regarding this analysis are addressed above in footnote 5. The average savings in this sample is € 425 (with the range being from € 6 to € 999). If the 1,693,455 coupons in 2003 that were actually interlined were all part of multi-sector itineraries and the average coupons per itinerary is 2.2, then a savings of € 425 on average across the approximately 770,000 journeys produces a total savings of approximately € 325 million. This estimate is obviously rough but it provides an order of magnitude for the potential benefits of the multi-sector aspect of the IATA multilateral interline system. 13 The Discussion Paper at point 119 questions the rough quantification of potential benefits contained in the CRA paper that was Annex VI of IATA’s 6 September 2004 submission (The Extent and Benefits of IATA Interlining: An Economic Assessment by Charles River Associates). CRA’s rough estimate was based on an extensive economic analysis conducted by Economics Plus/GRA in 1998 for US-third country traffic. In fact, CRA’s initial analysis now appears to be very conservative in light of this new methodology based on the 2003 EEA interline data submitted pursuant to Regulation 1617/93. However, the crucial point is that it is impossible to have a high degree of precision with such an analysis and that regardless of which methodology is used, the benefits of the IATA multilateral interline system remain significant in absolute terms and are substantially greater than zero. 14 The Discussion Paper makes two assertions that could cast doubt on the flexibility aspect of this valuation: (i) that airlines routinely close off lower booking classes to force consumers to purchase the high price IATA ticket (point 105); (ii) that the premium charged for the IATA ticket for flexibility is excessive compared to the actual advantages provided to consumers.

As regards the first assertion, although IATA is highly sceptical of the accuracy of the statement, it is not within our capabilities to provide the evidence necessary to counter the assertion since yield management (which is itself a form of internal capacity allocation among products defined by price and routing) is not transparent, involves sensitive business secrets not appropriate for discussion or investigation within an industry trade association, and appears to vary significantly across airlines as the wide variety of fares available at anyone time for a particular journey demonstrates. The emphasis in modern airline management on capturing traffic for the airline network and keeping that traffic on the network, however, makes it intuitively unlikely that any airline will close off its highest carrier-specific fare in most circumstances. Only in the case of a last-minute booking at a time of peak demand, where the likelihood that the passenger will in fact use a rival service is limited, would this practice make commercial sense. This would probably account for a very limited proportion of total sales of IATA tickets. Furthermore, only DG COMP has the powers to investigate this issue and it is highly questionable for the Commission services to put forward assertions of a such a serious nature without undertaking an independent and thorough investigation. A simple assertion, even if supported by alleged evidence from CTAG or otherwise, is not a valid legal basis for concluding that the high number of IATA tickets purchased, and captured in the data collected pursuant to Regulation 1617/93, do not reflect the free choice of travellers.

As regards the second assertion, it is flatly inconsistent with the insistence in the Discussion Paper that the IATA interline product and carrier-specific products are “very similar” and are present in the same product market. The fact that where “flexibility” is concerned the consumer does have a choice for a less-flexible lower price option means that the consumer will not purchase the IATA ticket where the price premium exceeds the

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2. Do IATA Tariff Conferences Lead to an Appreciable Restriction of Competition for Purposes of Article 81 EC Treaty?

IATA has explained in its previous submissions that the IATA multilateral interline system

and the tariff conferences necessary to operate that system do not have the object or effect of

creating an appreciable restriction of competition in the modern air transport environment in

the EEA. As IATA has pointed out, this issue is important for two reasons. First, if the

current system does not have the object or effect of restricting competition, then Article 81 is

simply inapplicable. Second, if the system does result in some restriction of competition, it is

important to identify the nature and extent of that restriction in order to determine whether

the consumer benefits of the current system exceeds its costs.

The 30 June Consultation Paper did not focus extensively on the question of whether the

IATA system leads to a restriction of competition. The Discussion Paper has properly

acknowledged that full discussion of this issue is necessary as part of the consultation

exercise15 and introduces the following arguments:

The setting of IATA interline tariffs has the object of restricting competition because the differences between the interlineable product and carrier-specific products are not “really appreciable.”

Tariff conferences facilitate collusion between competing airlines, either through direct

agreement or by “eliminating strategic uncertainty”.

The extent of these effects is demonstrated by conditions on the Paris-Frankfurt route.

These arguments are not valid, however, for the reasons set forth below.

added value. For some customers the premium may indeed be too high – those customers will purchase a carrier-specific ticket even if they might prefer a more flexible option. (This is reflected in the fact that sales of IATA tickets are higher where the differential between the IATA fare and the highest carrier fares is relatively small.) For those customers that do purchase the IATA ticket, however, their willingness to pay the differential is decisive evidence from an economic perspective that they assign a value to the benefits of at least the amount that they are willing to pay. 15 Point 76.

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IATA Tariff Conferences do not have the “object” of restricting competition because they provide the basis for a joint product that the no single airline or alliance could provide on its own

According to the Commission’s own guidelines, a practice constitutes a restriction of

competition by object where experience has shown that the practice is inherently likely to

lead to a restrictive effect on competition so that no detailed assessment is necessary. It is

well understood that “price-fixing” – agreement by competitors regarding the price that they

will charge for their respective products in competition with each other – constitutes a

practice that is restrictive by object. It is equally well understood that there are situations

where firms may produce a joint product and where it will be necessary to set the price for

that product. In these circumstances, the setting of the price for the joint product does not

constitute classic price-fixing, because the setting of the joint price is a condition for the

availability of the joint product. Thus even where the firms creating the joint product are

competitors, their discussion of the price for the joint product does not have the object of

restricting competition. Application of Article 81 must depend on whether the practice has

the effect of appreciably restricting competition between the firms involved outside the scope

of the collaboration.16

In its initial submission, IATA argued that this well established rule applies to the IATA

Interline System. Since the interline product is a joint product, the agreement on the price for

that product (which is necessary for that product to be sold) does not in itself restrict

competition. The appropriate issue to consider is whether the IATA system leads to a

restriction in competition in respect of competition between airlines (and alliances) in respect

of carrier-specific products.

The Discussion Paper asserts that this proposition (which it refers to as the “joint service”

argument) is not applicable because “for certain routes on which IATA and carrier/alliance

specific fares coexist, it remains unclear whether the difference between the two types of

16 See Commission Guidelines on the Applicability of Article 81(3) of the Treaty, OJ [2004] C101/97, points 21-22; Commission Guidelines on the Application of Article 81 to Horizontal Cooperation, OJ [2000] C291/1, footnote 18; and the analysis/cases cited in IATA’s previous submission of 6 September 2004, pp. 6-8 as well as Annex I to that submission (Legal Context for Assessing IATA Tariff Conferences), pp. 4-7, and notably the Commission decision in Visa International – Multilateral Interchange Fees, COMP/29.373 OJ [2002] L318/17 as well as the case law cited at footnote 22 of Annex I.

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tickets is really appreciable.”17 The Discussion Paper refers in this regard to its discussion of

the relevant market and to its assessment of the “value” of the interline product on a “busy

hub-to-hub route”, using the example of Paris-Frankfurt. The argument appears to be that the

close identity of the IATA product and the carrier-specific product means that agreement on

the price for the IATA product amounts to agreement on the price of the carrier-specific

product as well.

The reference in the Discussion Paper to market definition is simply not relevant to the issue

of whether the IATA ticket constitutes a joint product. A “product market” for competition

law purposes is not the same as the market for a product. A product market constitutes rather

a product sold by one firm plus those other products the sale of which together constrains the

ability of the first firm to raise price or restrict output with respect to the first product. In

other words, product markets typically involve different products, which may be partial

substitutes for each other. The fact that the IATA ticket is sold as part of a product market

that includes carrier-specific products, does not mean that the IATA ticket is not a properly

differentiated product. Likewise, the fact that airlines sell the IATA product through their

own distribution networks and integrate the IATA product in their own product offerings

does not change the fact that it is a distinct product, just as the airline will itself offer a

number of distinct carrier-specific products (with different prices and conditions) on the same

route.

The argument that the IATA product is so similar to the on-line product that they must be

regarded as the same product is simply incorrect. An interline return ticket on Frankfurt-

Paris issued by Air France is different from an on-line ticket because it entitles the passenger

to travel on Lufthansa without buying a new ticket. This additional feature constitutes an

objective difference between the IATA product and the on-line product which, as the

discussion above indicates, is valued by some consumers. The Discussion Paper implies that

these consumers are wrong – they should not be willing to pay more for a feature that “may

not be of overarching importance and may not truly differentiate IATA from carrier/alliance

specific tickets”.18 In a system of competition enforcement based on proper economic

assessment, however, the willingness of consumers to pay a premium should by itself

17 Point 84. 18 Point 70.

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demonstrate that the IATA product has additional features that add value. The Commission

staff has no discretion to substitute its subjective appraisal or that of associations that claim to

represent the “informed” views of corporate customers or travel agents for the verdict of the

market.

The IATA Interline System Does Not Facilitate Collusion between Airlines

The principal argument advanced in the Discussion Paper regarding the restrictive effects of

the IATA system involves the role of the tariff conferences meetings. According to the

Discussion Paper, “IATA Tariff Conferences, in particular CBC [country-by-country]

discussions are a great risk to competition in intra EU air transport markets.”19 The

Discussion Paper identifies four ways in which the conferences supposedly facilitate

collusion among competing airlines. First, it is suggested that airlines use the conference

meeting structure as a cover for making secret bilateral agreements on carrier-specific fares in

country-by-country meetings. Second, it is suggested that airlines use the conference to

cover a tacit agreement on their own fares by agreeing the price for an IATA product that is

virtually indistinguishable from their own products. Third, it is suggested that the exchange

of commercially sensitive information within the conferences eliminates strategic uncertainty.

Fourth, it is suggested that agreement on the conditions attached to IATA fares at the

conferences “has the effect of reinforcing market transparency.”

The question of whether the IATA conference system does in fact facilitate collusion is

properly a matter of economic analysis. As such it is analysed in the separate paper by

Charles River Associates that is attached to this submission.20 Since, however, the

conclusions in the Discussion Paper appear to be at odds with the common understanding of

how the air transport industry operates in Europe today, some general comments are in order.

First, as regards the supposed use of the conference meetings (in particular county-by-country

discussions) to allow secret bilateral agreements, there is no evidence that this has actually

occurred. Airline representatives have unlimited opportunities to meet or communicate with

each other outside the tariff conference structure. It seems unlikely that they would use an 19 Point 108. 20 See Annex II (to follow by 8 April 2005) which analyses the entire restrictive effects arguments contained in the Discussion Paper.

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IATA meeting as the opportunity to reach such agreements when other people are around

who can see what they are doing.21

Second, as regards the alleged link between setting the IATA fare and setting the fare for the

supposedly similar carrier-specific product, CRA explained in their December paper that if

this link existed, it should exist across a range of markets. The fact that the UK CAA

analysis, including the additional data provided in February 2005, could only identify the link

in a limited number of city pairs, however, suggests that there is no systematic relationship.

Where a relationship is identified, it more likely or at least equally likely to reflect the

interaction of the separately determined unilateral pricing policy of each of the carriers

involved.

Third, as regards the exchange of supposedly commercially sensitive information, the link

between the information exchanged at IATA conferences and the supposed elimination of

strategic uncertainty is not evident. The conferences do involve discussions of general

demand trends as well as changes in input prices, such as fuel costs. This supposedly

sensitive commercial information is, however, of limited value either for collusion on current

price levels or for collusion on future activities (where elimination of strategic uncertainty

could be significant). The real information that airlines would need for effective collusion –

information on non-published fares; terms of agreements with corporate customers; current

capacity allocation between fare classes; future plans for increasing or reducing capacity –

are not exchanged as part of the IATA tariff conference process nor do the infrequent IATA

tariff conferences create any structure or conditions for the exchange of the information that

21 It is interesting to note that this is the first time in the 17 years that IATA has been in dialogue with the Commission concerning the block exemption that the possibility of illicit bilateral agreements has been identified as an issue, even though Commission representatives have attended conference meetings in the past, observed country-by-country discussions, and were otherwise made fully aware of the way that the system functioned. As those Commission officials who attended the conferences in the past will know, there is a pervasive concern to comply with competition/antitrust law constraints and the delegates are frequently reminded of the limitations on the conference activities. Furthermore, IATA has increased its competition law compliance activities in recent years including by hiring Mr. Colin Flynn, a US antitrust lawyer now based in Geneva, who has direct responsibility for the tariff conferences. IATA is therefore, fully committed to ensuring that the conference structure is not used as a platform for unlawful activity and would be willing to consider further safeguards to reduce the perceived risk of unlawful conduct should the Commission now deem additional precautions to be necessary.

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goes into the daily or even more frequent pricing decisions that are evident in city pairs with

multiple carriers contesting the route.22

Finally, as regards the setting of conditions for restricted fares, the Discussion Paper suggests

that the agreement on the restrictions applicable to IATA fares – e.g., minimum advance

purchase requirements, minimum stay requirements, maximum stay requirements – facilitate

collusion by reinforcing market transparency. According to the Discussion Paper, airlines

adopt similar conditions to the IATA conditions, which leads to similar tariff structures,

which allows more effective monitoring of other carrier fares, which allows airlines to detect

deviation from agreed upon conduct, and which reinforces the stability of possible collusion

between airlines. This analysis may be attractive in theory, but it betrays a fundamental lack

of understanding of how air transport markets currently operate in the EEA.

It is not at all clear that the initial premise is correct. Anecdotal evidence suggests that there

are substantial variations between the fare restrictions applied to leisure fares among various

airlines. While combinations of weekend stay restrictions, advance purchase requirements, or

maximum/minimum stay restrictions occur in many pricing systems, these would appear to

be pretty obvious ways for airlines to define products in order to segment demand. Even if

the IATA interline system were abolished tomorrow, the use of these categories is likely to

persist for the foreseeable future.

More important, this argument suggests that collusion is likely or at least plausible in the

leisure air travel sector in Europe.23 Yet the Commission has recognised on numerous

occasions that the competition for the price-sensitive, non-time-sensitive passenger is

intense.24 The numerous alternatives available to consumers, including those provided by no-

22 The Discussion Paper attempts to support this argument by quoting a passage from the IATA website that refers to sharing knowledge through the conference structure regarding market intelligence required to price airline products. The Discussion Paper does not, however, quote the sentence that follows: “This shared market knowledge forms the basis for collective industry decision-making in which Members have a voice and an equal vote in establishing a rational global interline product”. In other words, the passage in question describes the benefits of participating in the setting of interline tariffs, not the benefits of collusion outside the IATA system. 23 This argument is really only applicable to leisure traffic, since the “restrictions” applicable to full fare traffic (one year validity, calculation of child discount, availability of “open jaw” return) do not appear likely to affect comparability of fare levels. 24 Furthermore, when the Commission conducted an extensive economic analysis on this issue with the assistance of outside economists in 1998, the conclusion was that the IATA fares led to no discernable

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frills carriers, mean that collusive agreements whether tacit or explicit, would need to involve

a large number of parties with different interests in order to be effective. Furthermore, since

the primary determinant of real market prices for airlines is the capacity made available in the

market (including on a seat-by-seat basis through yield management), the lack of

transparency regarding present and future capacity would make deviation from any

agreement impossible to police. In short, the argument that agreement on restrictions

applicable to IATA fares has any effect in terms of making collusion more likely in airline

markets has no basis in market realities or real-world economics.

The Paris-Frankfurt route is not an obvious example of collusion in practice

The Discussion Paper uses the Paris-Frankfurt route as its example of the “restrictive

potential of IATA tariff conferences.” The Discussion Paper focuses on three aspects of

pricing on this route that are deemed significant, based on statistical analysis undertaken by

the UK CAA. First, the Discussion Paper observes that the Air France “flexible economy”

fare is set at 90% of the IATA fare. Second, again based on the work of the CAA, the

Discussion Paper observes that where IATA fares have increased, this fare has also increased,

maintaining the differential. Third, the Discussion Paper observes that the other airlines on

routes studied (in this case Lufthansa) matched the prices and fare conditions set by Air

France.25 The Discussion Paper concludes (after noting that there are substantial barriers to

new entry on the route) that “it is not evident that there remains appreciable competition on

the basis of published fares between carriers operating on the route between Paris and

Frankfurt for time-sensitive passengers.” The Discussion Paper concludes that this example

shows why the tariff conferences “are a great risk to competition.”

restrictive effects on leisure fares (see CERNA II, 1998a), even though agreements on “conditions” applicable to IATA fares, now challenged in the Discussion Paper, had been in effect for many years. 25 The Discussion Paper also refers to the high percentage of consumers purchasing fully flexible fares that purchase an interline ticket (40%) compared to the percentage that “use” the facility (5%). It is unclear why this fact is relevant to the discussion of restrictive effects, but it may be intended to provide the basis for arguing that the restrictive effects outweigh the benefits in this particular market. Putting aside the point that the benefits/restrictive effects analysis cannot be performed on a market by market basis (since the markets are clearly “related” and some consumers in every market benefit), the “one from eight” use of flexibility seems like a reasonable usage given its nature as a form of insurance. The high percentage of IATA tickets sold may reflect the low price differential. A large number of time-sensitive consumers may regard the 10% premium as a reasonable charge for the added benefit. On the other hand, 40% appears to be far too large a number to reflect last minute closing off of booking classes in a yield management system. Furthermore, the corporate agreement in the CTAG submission contained Lufthansa back-end discounts on the fully flexible fares (C and Y class), suggesting that these coupons represent corporate customer choices not limitations in the yield management system.

Page 17


CRA has already assessed the data gathered by the CAA, including the most recent data

relied on by the Commission. CRA has shown that this data cannot be relied on to

demonstrate a link between the setting of industry prices at tariff conferences and the level of

carrier fares. The detailed assessment by CRA of the data presented for the Frankfurt-Paris

route is included in their attached report. The CRA Report explains why the existence of a

correlation on any given route does not indicate collusion with respect to that route or more

generally. Here again, however, some general comments are appropriate.

As in the discussion of consumer benefits, it is appropriate to consider how the position in the

Frankfurt-Paris route would change if there were no IATA tariff conferences. In particular,

(i) would the prices still be the same for both major airlines? and (ii) would the price be

higher or lower than it is today?26 As far as the first question is concerned, the very strong

likelihood is that the published full fare tariff for Air France and Lufthansa on this route will

be the same, regardless of whether there is an IATA fare on the route agreed at a tariff

conference. The product quality is perceived as similar, frequencies are comparable, and the

published price is fully transparent. All the elements for non-collusive “intelligent

adaptation” of pricing are present. As far as the second question is concerned, we simply do

not know whether prices would be higher or lower in the absence of an agreed IATA tariff.

The CAA “coat hanger” analysis assumes that they would be lower. But it is equally possible

that the IATA tariff acts as a ceiling for price increases when the differential is as low as in

this case.27 Even if conditions on this route would support a larger increase in carrier fares,

the conference may not agree a higher percentage increase for this route than for other routes

between Germany and France. In other words, the existence of “appreciable competition” at

published fares for point-to-point business passengers on the Frankfurt-Paris route depends

26 It should be recalled that, as set out in the Commission’s Guidelines, an agreement or practice will be restrictive “by effect” under Article 81 EC only if prices are higher or output is lower than would be the case in the absence of the agreement or practice. 27 It is interesting to note that, in contrast to other EEA fares, the Paris-Frankfurt fares remained unchanged at the last tariff conference and carrier-specific fares have also remained unchanged as the UK CAA data clearly showed.

Page 18


on the structural features of that route and is not really affected by the existence of IATA

tariff conferences.28

Conclusion

For the reasons set out above, IATA submits that it remains appropriate to maintain the

existing block exemption and also extend it to cover air transport services to third countries,

including cargo.29 Contrary to the suggestion in the Discussion Paper30 there is no

contradiction between this submission and IATA’s argument that the present system does not

have appreciable restrictive effects on competition. As IATA pointed out in its initial

submission,31 the role of block exemption regulations in the post-modernisation environment

is to provide legal certainty even in cases where there is a strong argument that the

arrangements are not restrictive.32 In this case, the continued assertion by national

competition authorities and the Commission that the current system leads to serious

anticompetitive effects underscores the need for action by the Commission to clarify this

situation.

28 It should be recalled that for the fourth requirement of Article 81(3) to be relevant, it is not sufficient to show that there is no appreciable competition, it is also necessary to show that competition has been eliminated as a result of the agreement under review.

In any case, the focus in the Discussion Paper on competition at published fares is misplaced. As with any city pair served by network carriers that are not affiliated in an alliance or bilateral arrangement, the focus of competition on this route is almost certainly on unpublished fares (particularly discounted corporate fares that account for an increasing proportion of “business” travel). Furthermore, even in the context of city pair markets, the existence of network competition, which impacts all city pairs, must be taken into account. This is particularly important on hub-to-hub routes where decisions on scheduling and capacity are likely to reflect network considerations as much as the needs of point-to-point traffic. In short, the assessment in the Discussion Paper does not consider the issues that would actually be relevant to considering the degree of competition on the Paris-Frankfurt route, and certainly provides no basis for concluding that there is no effective competition on the route. 29 IATA notes that the Discussion Paper does not discuss cargo issues and that none of the opposing third party comments published on the Commission website have provided any analysis beyond the meagre four paragraphs DG Competition devoted to cargo in the June 2004 Consultation Paper. The much more extensive analysis in IATA’s comments of 6 September 2004, and which show that cargo rate consultations are beneficial and do not restrict competition, remain unchallenged. 30 Point 110. 31 IATA Comments of 6 September 2004, pp. 18-20. 32 Even the block exemptions under the old competition regime often included a white list of “restrictions” that were generally not restrictive of competition but were exempted anyway. The clear intent of modern block exemption regulations such as the vertical restraints regulation or the technology transfer regulation is to provide certainty in respect of agreements that the accompanying guidelines indicate are probably not caught by Article 81.

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IATA has taken note of the reference in the Discussion Paper to the Commission’s plans to

make a formal proposal with respect to prorogation and/or amendment of Regulation 1617/93

on the basis of the responses to the Discussion Paper. IATA also notes, however, that the

Discussion Paper itself reveals major gaps in the information required for the Commission to

make an informed assessment. The press release issued by Commissioner Kroes likewise

indicates an interest on the Commission’s own part to obtain a more complete record for

resolving these issues. In the interest of allowing a fully informed assessment, IATA

formally requests that the Commission convene an open oral hearing to consider the status of

Regulation 1617/93, as was done in the case of the motor vehicle block exemption and the

maritime conference block exemption. IATA is confident that a full consideration of the

present system in its real factual and legal context will confirm that it continues to benefit

consumers without leading to serious harm to competition.

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ANNEX I

COMMENTS ON DISCUSSION PAPER CONCERNING COMMISSION REGULATION 1617/93

PARAGRAPH –BY- PARAGRAPH COMMENTS ON DG-COMPETITION DISCUSSION PAPER

IATA ANNEX I

PARAGRAPH-BY-PARAGRAPH COMMENTS ON DG-COMPETITION DISCUSSION PAPER

This table supplements IATA’s main submission by providing additional comments on the errors and flaws contained in DG-Competition’s Discussion Paper. It does not attempt to restate IATA’s main submission or the results of the CRA analysis contained in Annex II.

Non-Confidential 8 April 2005

IATA PARAGRAPH-BY-PARAGRAPH COMMENTS ON DG-COMPETITION DISCUSSION PAPER

Paragraph(s) in DG-Competition Discussion Paper

DG-Competition Assertion or Statement IATA Criticism/Comment

3, 5-6 “In response to this paper, DG Competition has received some 55 submissions from various stakeholders and public authorities, including authorities from third countries.” (para. 3)

“On the basis of the submissions, there are some key areas of substance where further discussion is necessary before the Commission makes a proposal on the revision of Regulation 1617/93.” (para. 5)

“These areas relate in particular to the possible exemption under Article 81(3) EC of IATA Passenger Tariff Conferences where a high number of diverging responses have been received.” (para. 6)

These statements do not fully describe the results of the comment process. The vast majority of the responses to the initial Consultation Paper were supportive of the IATA position that the block exemption should be extended in time, scope and geography.

Only nine submissions were not supportive of IATA’s position.

Six of these were from national authorities, mainly competition authorities.

One was from ECTAA/GEBTA, associations representing travel agents which are pursuing a separate complaint against IATA regarding the passenger agency programme.

Another was a response from “Corporate Travel Action Group” – CTAG. According to the Discussion Paper, this organisation “reflects the views of two corporate travel professional associations, namely the Association of Corporate Travel Executives [ACTE] and Paragon.” The only internet reference to CTAG is found on ACTE’s website in conjunction with a task force in which GEBTA participates and which has lobbying objectives very close to those contained in the ECTAA/GEBTA complaint mentioned above.

The other “negative” response was from an unidentified “large multinational company” though even this response was not entirely negative.

The Discussion Paper does not disclose the fact that no adverse comments were received from non-government entities within the comment period. ECTAA/GEBTA, affiliated organisations seeking Commission support for action against IATA on other matters, responded on 1 October 2004. The Discussion Paper also does not reflect the fact (indicated in the “Notes on Comments from Corporate

Annex I – Non-Confidential Page 1 8 April 2005




Customers” published on the Commission website) that DG Competition had to solicit further comments after the comment period had closed from organisations supporting its work in other areas. Even after this attempt to “drum up” comments supporting the DG Competition position, which lead to CTAG’s submission and three corporate customers responses, two of these three sets of comments from actual corporate customers turned out to be either neutral or broadly supportive of the IATA position.

The summary of the process does not reflect the areas where the consultation process did not generate new comment favourable to the Consultation Paper. IATA is also seeking an exemption for Cargo Tariff Consultations for EU-third country transport and has provided extensive evidence and analysis supporting such an exemption, yet the Discussion Paper is silent on this issue. See further below IATA’s comments regarding the applicability to cargo of the EU-third country analysis for passenger (comments on Discussion Paper para. 148-160 at the end of this document).

10, 17, 66, 75 “On the whole, respondents to the consultation paper do not appear to question that a hub and spoke airline model has emerged in the EU and that this will likely remain so in the foreseeable future. Moreover, respondents tend to agree there has been a proliferation of cooperation agreements between air carriers in the form not only of global alliance agreements but also of code share agreements that have been concluded outside the scope of such alliances. On the whole, it is also acknowledged that the above developments result in a significant increase in alternative offers to traditional IATA interlining.” (para. 10)

“The above suggests that air transport networks in the European Union, at least in the former EU15, are now of such density and interconnected in such a way by means of various bilateral cooperation agreements between carriers that the market provides for viable alternatives to the IATA Interlining System as regards, intra EU air services.” (para. 17)

The Discussion Paper ignores the numerous comments that recognise that the IATA Multilateral Interlining System continues to play a valuable role, despite the existence of “hub-and-spoke” systems and the increased role of “alliances” – which IATA does not dispute. Numerous non-airline and airline responses to the June 2004 Consultation Paper confirmed that alliances including code shares outside alliances do not fully duplicate the existing IATA system for intra-EEA travel. See in particular the responses of the Air Transport Users Council (AUC), the French authorities, the Belgian Civil Aviation Administration (CAA), the Finnish CAA, the Portuguese CAA, and certain members of ECTAA/GEBTA.

It is particularly notable that some members of ECTAA/GEBTA (i.e., travel agents) support such a view, as was clear from ECTAA/GEBTA’s response:





“The responses by ECTAA/GEBTA and CTAG show evidence that, where they exist next to each other, there is from the standpoint of corporate customers a high degree of substitutability between IATA and carrier/alliance specific tickets. This evidence is further confirmed by the submissions received from three individual multinational corporations who have responded to the consultation paper. In their response to the consultation paper, the UK consumer organisation Air Transport User Council explain that the increase in available carrier/alliance alternatives to traditional IATA Interlining may result in fewer passengers requiring IATA tickets. Such a statement implies that, for private consumers too, carrier/alliance specific tickets may be deemed reasonable substitutes to IATA tickets.” (para. 66)

“Accordingly, the above data appear to confirm statements by consumers in response to the consultation paper that differences between IATA and carrier/alliance specific fares are not so significant in the majority of instances, particularly less so it seems on thicker intra EU hub to hub routes.” (para. 75)

“Today, some Members of ECTAA and GEBTA retain the view that there is no objection against the renewal of the block exemption for tariffs conferences, to the extent that it is necessary for the functioning of interlining. Hence, a global interlining system is needed outside alliances in various cases, such as feeding flights, and thus remains a significant feature of the air transport system.”

The AUC’s comments, a UK consumer organisation funded by the UK CAA and the only consumer association to have responded to the Consultation Paper, are also particularly important in this regard:

“The Commission’s paper suggests that the increase in airline alliances in Europe reduces the need for the IATA interlining system. We acknowledge that airline alliances can to [sic] certain extent mirror the benefits of the interlining system. But we are not persuaded that ‘intra-alliance interlining’ is sufficiently a ‘growing phenomenon in the Community’ to be able to replace the benefits consumers gain from it. Furthermore, passengers would be restricted to using airlines of the same alliance, whilst under the present system they are able to use any IATA carrier. IATA carriers’ combined route network offers passengers a range of interline connecting options that a variety of separate (and competing) airline alliances would not be able to match.”

It is difficult to understand how DG Competition came to the conclusion that AUC was suggesting that the IATA system has somehow been made or will be made redundant by the growth of alliances and code shares.

Similar comments apply concerning the three corporate customers responses – see below IATA comments on paragraph 17.

The Discussion Paper’s reference to the development of hub and spoke networks and the growth of code shares (neither of which are new developments in the 2002-2005 period) is necessary to the conclusion that there has been an expansion of alternatives, but it is not sufficient as a description of today’s air traffic services and does not describe how





within the EEA such arrangements could achieve the scope of the IATA system. In reality, the existence of substitute networks suggests that self-assessment has or will lead many carriers to conclude that bilateral price coordination may be problematic under EC competition law though this point is at best obliquely acknowledged in the Discussion Paper.

13 “The airline industry developments referred to in the consultation paper have been described and analysed in numerous studies, academic and policy papers published over the past decade, which underline the actual importance of these developments. Moreover, these papers and studies confirm that these developments result in wide ranging alternatives to IATA Interlining.”

These “studies, academic and policy papers” do not deal with the central issue in the consultation, whether alternatives can deliver the full benefits of the existing IATA system. While ‘wide-ranging’ alternatives may be available none provide the degree of flexibility and convenience of the IATA system. The existence of alternatives is not enough where unique consumer benefits – attributable to the IATA system – continue to be present.

It is also important to recall that these analyses are mostly based on US data and on complementary networks in the US – yet experience has shown that the US model is categorised by a few very large airlines and a number of under-utilised or non-slot constrained airports.

Furthermore, the US economic literature suggests that complementary networks should bring substantial benefits and IATA agrees with this analysis. The economic literature, however, also suggests that substantial overlaps and possible monopolies on routes will lead to losses of consumer welfare. Attempting to duplicate the existing benefits without the IATA system would require combining overlap networks in ways that are likely to produce exactly such consumer welfare losses as are detailed in the literature.

14 “It appears that the density of air transport networks and availability of direct flights in the EU is very high (some 85%).” (para. 14)

This figure is too high and the data in general is of questionable value for purposes of the 1617/93 review. The 85% figure is incorrect. The actual figure is 80% - see table at para. 22 (when using this data to analyze IATA interlining it is only relevant to consider that data which excludes non-international traffic since the IATA conferences do not cover air fares for domestic journeys).





This analysis is based on data provided by IATA to DG TREN for a different purpose. Although IATA has consented to the use of this data, IATA did caution that its usefulness could be limited. In particular, it is not at all clear that this data is actually representative of traffic patterns even for the EU 15 since it is based on tickets sold in only six EU Member States including four with the lead carriers in each of the global alliances (Germany, France/the Netherlands, and the UK in addition to Belgium and Luxembourg).

15 “Yet it appears that the overwhelming majority of tickets issued for travel within the EU, some 85% [sic – 80%] are for direct flights and may therefore involve no or little interlining.” […]

“By virtue of the same generally applicable principle that supply normally adapts to match demand, it is reasonable to assume that the thicker routes within this subset of thin routes are served on an indirect basis by individual carriers and/or alliances. It may therefore be presumed that a substantial portion of the remaining 15% [sic – 20%] of the public actually travelling on connecting flights actually reach their final destination using solely carrier/alliance specific services. These passengers do not require IATA interlinable tickets.”

The key question is not how many passengers “require” IATA tickets – it is how many passengers continue to value the unique features of IATA tickets. Attempting to ignore or downplay the use of IATA interlining on direct services causes DG Competition to miss an important benefit of the existing system – interlining between competing alliances/carriers in order to achieve the most efficient travel option for a particular customer’s needs. While this benefit may not be important to the vast majority of travellers, it is crucial to those time-sensitive passengers who have chosen, particularly on hub-to-hub routes, the IATA product over the other numerous options. The interline data collected under Regulation 1617/93 captures these choices and directly contradicts the “assumptions” DG Competition is making in this paragraph.

16 “These [code share] agreements appear to have particularly positive network effects on non-overlap routes, inter alia because they enable carriers who are not members of an alliance to interconnect all or part of the network they operate with all or part of that of a carrier who is a member of an alliance.”

This passage overstates both the ubiquity and the utility of code shares. The footnote to this statement points to Annex 1 where there is a description of the code share agreements for some of the main carriers in the 10 new Member States. As this annex shows, it is rare that code share agreements are for all of another carrier’s network unless the two carriers are members of one of the three global alliances. Rather, the code share agreements are generally limited to specific routes or even specific flights. Even within alliances, frequently the code share agreements are limited. Furthermore, this discussion fails to acknowledge that certain types of code share agreements between





competitors on a specific route (e.g., competing alliance carriers), in particular those where a common fare would be set, may not be straight-forward from a competition law perspective. This last point is recognized obliquely in footnote 11, where DG Competition states that its reference to code shares is without prejudice to whether such agreements are consistent with Article 81 EC.

17, 44

“According to the responses received, big corporate customers who are heavy air transport consumers appear to purchase only a small fraction (some 5% of their airline tickets) at IATA rates.” (para. 17)

“Figures mentioned in the CTAG submission should not be considered to have accounting precision. Rather, they may be considered reliable orders of magnitude which a group of professional corporate travel buyers are comfortable with.” (para. 44)

Other evidence suggests that “five percent” understates the proportion of non-leisure tickets sold “at IATA rates” – but even five percent equates to a large number of tickets in absolute terms. The assertion in paragraph 17 is taken from the CTAG submission, yet as IATA pointed out in its submission of 22 December 2004, the figure given is directly contradicted by the interline data collected pursuant to Regulation 1617/93 and by the examples of a “typical” corporate contract attached to CTAG’s submission. This “typical” contract includes discounts for the IATA fully flexible Y and C class fares.

Furthermore, DG Competition has made no attempt to investigate the validity of these figures with any airlines since it has chosen to only address questions on this issue to organizations that are alleged to be representative of corporate customers. Although IATA could theoretically collect such data from the airlines, in practice it is highly confidential and more suited to direct investigation by the Commission. The content of the three anonymous “large multinational company” submissions can in no way substitute for investigation of this issue given the importance DG Competition gives to this assertion.

However, it should be recognized that 5% of all tickets purchased by corporations is a significant amount of travel in absolute terms and that the ongoing importance of the IATA interline option was in fact confirmed by the three anonymous corporate customer responses DG Competition received:

“All travel in our company is based on the rules as defined in our travel policy. IATA fare tickets do not fall outside corporate travel





policy because buying these expensive tickets is sometimes the only way to get to a destination in a reasonable time.” (company “x”)

“More or less airline code share and alliances have substituted traditional IATA interlining.”; “Regarding the above mentioned traditional IATA interlining is more exception than rule.”; “Within Europe max 2-3%” [the total air travel spending of this company is not clear from the submission] (company “y”)

“Do corporations continue to purchase tickets issued at IATA fares? […] Yes, depending on route and availability. Frequent routes are covered with negotiated fares.” (company “z”)

19 “The main benefits of the IATA Interlining System for consumers appear to relate to the ability to travel seamlessly (through check in of baggage, through fare, . ..) from their point of origin to their final destination.”

This comment demonstrates that DG Competition’s analysis in the Discussion Paper has fundamentally misunderstood the benefits of the IATA system. See section 1 of IATA’s main response.

20 “Where they exist, direct flights provide consumers with the ability to travel seamlessly to their final destination. Without prejudice to other specific benefits some consumers may enjoy when purchasing tickets issued at the more flexible IATA fares, it appears that where the availability of direct flights is high, the overall benefits of interlining may be expected to be lower.”

The Discussion Paper ignores the value of consumer choice. The main benefit from IATA interlining is the ability for the customer to choose the schedules and flights that suit his/her purpose. The benefits from interlining are not related to the availability of direct flights – but the ability to pick and choose from a wide range of options.

21- 23, 125 “As regards the questions raised by IATA and ERAA with specific respect to the new Member States, the above data shows that the differences existing between the former EU 15, the 10 new Member States and the average EU 25 do not appear to be so substantial. Existing offer in the market and availability of direct flights appears today already to be high in all three instances.” (para. 21)

“When the data is restricted to international intra EU traffic [because IATA fares are not set for purely domestic journeys], the availability of direct flights remains very high. On the whole, the orders of magnitude

The Discussion Paper manipulates the statistics to minimize the real importance of the IATA Multilateral Interline System in the new Member States. The actual data in paragraph 21 shows that for the EU 15 and EU 25 the importance of indirect flights in the 10 new Member States is more than twice as important than in the EU 15 (27% vs. 12%). When domestic traffic is excluded in para. 22, the figures come closer together as the EU 15 figure nearly doubles, but the importance of indirect flights in the new EU 10 is still over 1/3 higher than in the EU 15 (20% vs. 27%). Furthermore, for business or full economy, the new EU





and patterns showed by the data are very similar.” (para. 23)

“The above ‘theoretical’ finding is corroborated by the available data concerning the density of air transport networks in the EU. This data and the conclusions which may drawn out of it suggest that only a very small proportion of the public travelling on intra EU air routes may actually require IATA Interlinable tickets to travel in reasonably seamless conditions.” (para. 125)

10 has figures closer to third-country travel than the EU 15 figure (31%/30% for the new EU 10 compared to 39%/38% for third countries and 17/18% for EU 15). These statistics in fact support the conclusion that indirect options are significantly more important at the outer edges or under-served regions of the EU.

DG Competition’s attempts to gloss over this point by bringing in the EU 25 numbers (13%/20% indirect) only serves to show that, in terms of total passenger volumes, the new EU 10 are relatively small. However, a consumer in one of these new Member States (or in another under-served region of the EU) may be surprised to learn that she or he forms part of a minority that DG Competition deems too small to merit serious study or even acknowledgment.

25 “The objections raised by IATA and ERAA regarding airlines in the new Member States would also be justified in the event that these carriers would not have been able so far to enter into such bilateral cooperation agreements (bilateral interline, “naked” or “standalone” code share agreement or full fledged alliance) as may result in alternatives to the IATA Interlining System.”

It cannot be assumed that additional bilateral agreements, particularly agreements with regional airlines, could fully replace the IATA system. The statement in the Discussion Paper suggests that these arrangements may be an alternative to IATA Interlining. While they may return some benefits to consumers, none of them returns or could ever return the full benefits of the IATA system.

It is also notable that the phenomena of “regional” alliance members is relatively new. Despite the recent addition of some small regional airlines to the major alliances, it is clear that the core network carriers must limit such regional partners in order to maximize the network economies of scope and scale associated with their hubs.

28 “Accordingly, the evidence available regarding airline cooperation agreements does not suggest either that the possible non prolongation of the existing block exemption for IATA Passenger Tariff Conferences may have a particularly adverse effect on either airlines or consumers in the new Member States.”

There is evidence that both consumers and airlines could be harmed by eliminating the IATA Multilateral Interline System (which would be the result of eliminating the block exemption for tariff conferences). The assumption in paragraph 28 is mistaken. Removing the fully flexible IATA product reduces consumer choice by potentially eliminating the most efficient/convenient routing or schedule including through the mixing of different alliances and/or alliance and non-alliance carriers. These are both direct adverse effects on consumers and on those airlines





that are not able, or not willing (on the terms offered), to enter into agreements with the large network carriers, with significant follow-on effects for the airports (often small regional airports) that they serve and for the surrounding area.

37, 40-41 “Accordingly, monitoring the proportion of ‘flown’ and ‘billed’ flight coupons gives an insight into the proportion of tickets which were actually interlined, and thereby an insight into the actual usage rate by consumers of the ‘interlining feature’ attached to the airline tickets they purchase. Billed coupons account for interlined journeys whilst flown coupons account for on-line, i.e. not interlined, journeys.” (para. 37)

“According to IATA, one passenger trip is on average 2.2 coupons. This average encompasses one way and round trip journeys. In the overwhelming majority of instances, however, issued tickets are for a round trip. It should be borne in mind therefore that the figures reported by IATA should be divided by slightly more than two, to obtain an estimate number of roundtrip journeys.” (para. 40)

“Some 22% (for the year 2003) of the said IATA normal fare tickets were effectively interlined, representing some 770,000 passenger journeys.” (para. 41)

These figures significantly understate the proportion of tickets where the consumers “use” the unique features of a ticket sold at the IATA fare. The description of the available data is not fully accurate. Tickets usually have multiple coupons. A simple out and back ticket will have two coupons. If these are used on different airlines, both coupons are part of an interline journey even though for purposes of the data reported pursuant to Regulation 1617/93 only the ‘billed’ coupon would be counted as part of an interline journey. Where an interline journey consisted of more than two coupons, which will often be the case, the existing data will have understated the extent interlining.

Although it is accurate that the CRA analysis in Annex VI of IATA’s 6 September 2004 submission referred to the 2.2 average coupon figure and provided the 770,000 passenger journey figure, this data was a conservative estimate of the extent of interlining for the reason described above as well as because it did not attempt to adjust the figures of the hub-to-hub routes which generally would be two coupon interline journeys.

38 “Data in the IATA reporting concerning ‘flown’ and ‘billed’ coupons is available for all tickets issued at so-called ‘normal fares’ (See section 3.1.3 below), whether the said normal fares are ‘IATA normal fares’, i.e. agreed by carriers in the relevant IATA Passenger Tariff Conference for the purpose of interlining, or whether the said normal fares are specific to one individual carrier and decided upon unilaterally by the carrier concerned. Passengers holding a ticket issued at an IATA fare may in principle fly with any carrier who is a signatory of the Multilateral Interline Traffic Agreement (MITA). Similarly, passengers holding a ticket issued at a carrier specific fare can in principle fly only

These statements are not entirely correct. One airline can issue a ticket at another airline’s fare – for travel solely on that other airline. This would not be a common occurrence, but could occur when two, or more fares, are being sold on the same ticket. The vast majority of carrier fares will be issued by that airline but the MITA and IATA Tariff system allows other airlines to issue ‘other’ carrier fares on their tickets. Whether that other carrier will accept such a ticket when it is not at an IATA fare may depend on whether there is a bilateral agreement and whether the fare chosen is one that the other carrier will accept for interline purposes – this will not always be the case though there are





with the carrier who has issued the ticket. carrier-specific interline fares in existence as the IATA sum-of-sectors analysis showed (see Annex III of 6 September 2004 submission).

Fn 17 “As the case may be, it appears that there may also exist alliance specific fares. Such alliance specific fares are Non IATA fares. Where later in this paper it is referred to carrier specific fares, that will mean unless specified otherwise carrier and alliance specific fares.”

“Alliance fares” are of very limited importance – nearly all travel on alliance services involves a single carrier ticket at a carrier-specific fare on a code share service. Alliance fares (i.e., fares applicable on the services of any alliance member) as such do not exist except perhaps for certain special leisure products (e.g., OneWorld’s Explorer or Circle fares). Carriers who are members of an alliance and who benefit from an exempted joint venture often jointly set fares on specific routes, but even these agreements do not automatically cover all routes served by each joint venture partner. In contrast to such a situation, there are many alliance partners for which there is no exempted joint venture or equivalent in place (e.g., BA-AY; BA-EI; SK-OS). SkyTeam may come closest in light of the nature of the pending DG Competition investigation, but the fact that this investigation has been ongoing since 2002 shows that such levels of integration are not always straight-forward even between alliance partners (SK-OS is another example of the problems that can arise, see IP/00/1159).

41 “Given the strong seasonality factor in air transport, variations over time should preferably be considered on a year basis. On the basis of the four reports available, a comparison may therefore be drawn on a rolling twelve months basis between the 1st July 2002 to 30th June 2003 period and the 1st July 2003 to 30th June 2004 periods. This comparison shows that the proportion of tickets issued at an IATA normal fare in the total number of tickets issued at a normal fare (i.e. carrier specific + IATA normal fares) for travel within the EEA & Switzerland has declined from 41% to 36% and the proportion of effectively interlined IATA normal fare tickets has declined from 24% to 23%.”

The Discussion Paper has manipulated this data to suggest a greater decline in use of IATA product than the actual data shows. Normal fare traffic (both IATA and carrier specific) is not strongly affected by seasonality though overall business traffic levels do fall off during school breaks and other peak vacation travel periods. The periods selected in the Discussion Paper appear to be the best means DG Competition could come up with to avoid the fact highlighted in IATA’s 22 December 2004 submission that the percentage of IATA tickets had actually increased slightly to 37% in January-June 2004 compared to the 36% figure in July-December 2003. It is also notable that comparing the same periods year on year shows a smaller decline than that highlighted by DG Competition (the figure in January-June 2003 was 39% compared to 37% in the same period of the following year). The 41% figure is taken from July-





December 2002.

43-44 “Judging by the submissions received from individual corporations in response to the consultation, it appears that the CTAG response is in general representative of the views of corporate customers.” (para. 43)

“This overall representativity of the CTAG submission may be of particular importance in that it contains various figures, in particular an estimate that, on average, fully interlinable IATA fares account for less than 5% corporate tickets purchased on intra EU air services. Figures mentioned in the CTAG submission should not be considered to have accounting precision. Rather, they may be considered reliable orders of magnitude, which a group of professional corporate travel buyers are comfortable with.” (para. 44)

The consultation exercise has not generated sufficient information to allow any conclusions regarding the real views of corporate customers. It is extremely difficult to understand how DG Competition could reach the conclusion that the CTAG response was representative on the basis of three anonymous “large multinational company” submissions, which were only received after consultation between DG Competition and CTAG. First, it is hard to say that three submissions are representative of anything except three points of view (particularly when anonymity makes it impossible to know whether there is any relationship to those behind the CTAG submission). Second, two of the three submissions contain no estimate of the proportion of tickets at IATA fares. One of these two submissions does not in any way support CTAG’s allegations either on restrictive effects or on the proportion of tickets sold at IATA fares unless somehow the following statements can be equated with 5%:

“Do corporations continue to purchase tickets issued at IATA fares? […] Yes, depending on route and availability. Frequent routes are covered with negotiated fares. […] While the most [sic] of our destinations can be flown non-stop the use of IATA fares is not that big.”

46-47 “Figures and comments in the response by ECTAA and GEBTA to the consultation paper show that the interest of corporate customers in IATA interlinable fares has declined substantially, partly due to an overall shift in corporate travel policies. However, according to the overall estimate given by travel agents IATA fares account for some 15% of the total number of tickets issued in the EU. This is somewhat higher than the estimate given by CTAG and individual corporations who have responded to the consultation paper.”

“Since both the submission by CTAG and by the individual corporations who have responded may represent the situation of bigger undertakings who apply a corporate travel policy, the above suggests

There is no reliable basis for drawing conclusions on the relative importance of IATA multilateral interlining for different groups of corporate customers. The conclusion that the 15% figure represent small customers, SMEs and/or final consumers who do not have a corporate travel policy is inconsistent with the fact that ECTAA/GEBTA also represents many travel agencies that frequently run the travel programs for large corporations (e.g., TQ3, AMEX, Carson-Wagonlit Travel).

Also, it is again curious (at the very least) that DG Competition refers to estimates given by individual corporations when only one of the three anonymous responses contained any concrete estimate.





that smaller customers, SME’s and/or final consumers, who do not have a corporate travel policy, purchase a higher proportion of IATA interlinable tickets.” (para. 47)

48-50 “Judging only from the data submitted by IATA, it appears that the IATA Interlining System remains used by an important proportion of the travelling public.” (para. 48)

“At first sight, this conclusion may contradict the indications given by other sources of available data namely: • The data on network density, as may be complemented by academic papers and research on the benefits for passengers stemming from alliances operating according to a hub and spoke model, which suggest that the scope for IATA interlining has reduced very substantially; and • The data available from corporate customers and travel agents.” (para. 49)

“As indicated in section 3.1.3 above, the IATA reporting is limited in scope to ‘normal fares’, i.e. the more expensive fully flexible fares. This appears a posteriori to be a rather severe limitation in scope. In particular: The IATA reporting accounts for a total of 20.7 million flight coupons issued at a normal fare (i.e. carrier specific + IATA normal fares) on intra EEA & Switzerland journeys for the year 2003, representing some 9.3 million passenger journeys. The latter should be put in a balance with a conservative estimate of some 65 to 70 million passenger roundtrip journeys for the year 2003, on international scheduled air services within the EEA & Switzerland area. When turning to the actual number of tickets issued at an IATA normal fare for an intra EEA & Switzerland journey, the figures provided in the IATA reporting appear rather modest in comparison with the above mentioned 65 to 70 million passenger journeys: a mere 3.5 million journeys were flown in 2003 on the basis of IATA normal fare tickets, out of which 770,000 were effectively interlined.” (para. 50)

Despite the efforts of the Discussion Paper to minimize the importance of the IATA product for intra-EU services – a “mere” 3.5 million journeys is still a lot. There is no dispute that the relative importance of IATA interlining has declined, but the benefits are clearly not zero and in focusing on decline and relative pictures DG Competition has either failed to investigate why passengers still prefer the IATA product or is trying to obscure those ongoing benefits.

Even accepting the 5% and 15% figures as valid, they still represent millions of passengers who are making informed and professional choices. Corporations with professional travel departments and travel agents must only be choosing the IATA fare if it makes sense for their customers. (The allegations concerning yield management restrictions are dealt with below – see comments on para. 63 etc.)

3.5 million passengers that purchased IATA normal fare tickets is significant. As noted above, the number that actually interlined is between 1.7 million and 770 000 with the likely figure being closer to 1.7 million than 770 000. This is also a significant number of consumers in absolute terms.

The absence of special fare data is due to irresolvable technical difficulties, which DG Competition well knows. It is disingenuous to compare the normal fare data to total passenger journeys in these circumstances.





52 “There are two main types of air tickets: restricted tickets and unrestricted (also called fully flexible) tickets.”

In reality, the two main types of tickets in the industry are IATA and carrier/alliance tickets. Carrier/alliance tickets are “restricted” because they cannot be used on other airlines. IATA fares, including special fares, provide consumers with additional options that single airlines/alliances simply cannot offer even with code shares.

60 “The main specificity of IATA restricted tickets appears to be that they allow passengers the possibility to choose their preferred carrier(s), and to choose their routing up to 120% of the shortest operated mileage. Because of the restrictions regarding rebooking and rerouting however, consumers’ choice of preferred carrier or routing is in principle limited in time up to the moment where the ticket is purchased and issued. However, it could be argued that consumers enjoy similar possibilities with carrier/alliance specific tickets. This is because until they have purchased their ticket, consumers enjoy similar possibilities in terms of choosing their preferred carrier/alliance specific services and/or routes. Therefore, the main difference between IATA and carrier/alliance specific restricted tickets appears to be that the possible combinations of all IATA member carriers’ services (within the limit of the 120% of the shortest operated mileage rule) results in greater choice than the offers available from individual carriers or alliances for a given O&D pair.

This description of the main differences with IATA and carrier fares is incomplete. Rarely are IATA fares completely non-refundable and non-reroutable. Should the passenger need to make a change, most IATA fares permit this, either for no charge or a small proportion of the ticket price. In contrast, many carrier fares are ‘non-refundable’ after ticket purchase with no rebooking, and no re-routing allowed. The IATA fare is a differentiated product that expands consumer options.

63, 105 “In principle, it is therefore possible that a carrier, through its Yield/Revenue management techniques, reduces the proportion of seats at carrier/alliance specific booking classes, which has the automatic effect of increasing the proportion of seats sold at IATA fares and conditions.” (para. 63)

“Several busy hub to hub route show a similar pattern in terms of the low proportion of IATA tickets actually giving rise to interlining. This finding is difficult to explain given that IATA tickets are in principle available only at a price premium. This could mean that consumers value the IATA product, in particular its specific advantages in terms of flexibility, i.e. consumers would be ready to pay a price premium in

The assertion that carriers are forcing consumers to buy IATA fares they do not need or want is a serious allegation that does not correspond to commercial realities. Airlines would be taking a significant revenue risk in pursuing this strategy unless there are no alternative carriers or no space on such alternative carriers at the time of booking. In this circumstance, though, the IATA system would clearly act as a ceiling on the maximum fare that could be charged and therefore would be a curb on market power. Given the possibility that a traveller may use another airline, on average there is no question that the expected revenue from carrier fares is higher than the expected revenue from IATA tickets.





order to be able to interline without necessarily doing so in the end. Alternatively, it could mean that consumers are induced into purchasing a product which is more flexible than what they actually need, and are thereby induced in paying a price premium for this ‘unnecessary’ flexibility. This would be the case if, by way of yield management, on such routes carriers do not make a sufficient number of (cheaper) flexible carrier/alliance fares available. Responses to the Consultation paper received from corporate customers tend to give more credit to the latter than to the former explanation. However, before drawing conclusions on how best to interpret the data, further views and information from consumers would be particularly welcome.” (para. 105)

Concerning the hub-to-hub data, there are many plausible explanations for the high percentage of IATA fares. As CTAG’s corporate contract examples showed, some airlines offer back-end discounts off such fares. In other cases, the price differences between an IATA fare and a carrier fare may be small enough that a consumer more frequently chooses the added flexibility provided by the IATA fare. Perhaps most obvious and most significant is that hub-to-hub services are both feeder and point-to-point services, meaning that network dynamics and the revenue the airline could achieve with a multi-sector itinerary (and thereby make a greater contribution to its significant fixed costs) will lead to pricing at or close to the IATA fare. Again though the IATA fare is acting as a ceiling in a situation where without the IATA fare, a point-to-point passenger may be asked to pay even more particularly in peak periods where seats will be scarce.

Against these plausible explanations, the so-called corporate customer evidence appears to consist of statements from only one customer (company “x”):

“We only purchase tickets at IATA fares without discount when we do not have an alternative in timing and availability of an airline. Also airlines refuse often to provide discounts on fares when they have a monopoly position for that destination (Annex C clause of KLM). The client is than [sic] forced to pay the full IATA fare and airlines play with the availability of seats in a way that full IATA fares are more used. It is my belief that IATA fares are also unnecessary [sic] high in relation with a monopoly position of there [sic] members for a particular destination.”

“Airlines provide discounts based on the IATA full fares but revenue management of the airlines often block the availability of seats for low fares per flight in a way that the full IATA fares must be used to the maximum.”

These statements in fact support the plausible explanations given above and suggest that in reality the IATA fare, where it might be the only fare





available – which is likely an extremely rare occurrence – actually prevented the customer from paying even more.

Before drawing any negative inferences on this point it is imperative that DG Competition conduct a proper investigation of the issue, as only it can do. Given the sensitivity of yield management, IATA is not in a position to solicit such information or conduct the required investigation.

70, 73 “Judging by the operated capacity and frequencies, it appears prima facie that this possibility [to switch] which is specific to IATA tickets may not be of overarching importance and may not truly differentiate IATA from carrier/alliance specific tickets on the PAR-FRA route.” (para. 70)

“The data shows that fewer than 5% of passengers flying with an IATA unrestricted ticket actually interline. This is a low rate, which suggests that the advantages specific to IATA tickets are in the particular instance of the PAR-FRA route of no great use.” (para. 73)

From an economic perspective, the IATA product is a differentiated product, but again DG Competition has manipulated the data to distort the facts. The concepts of “overarching importance” and “true differentiation” are subjective assessments that ignore the objective differences between the IATA product and a carrier-specific product. On a short hub-to-hub route like PAR-FRA the principal objective difference between the IATA product and a carrier specific product is the ability to change to another carrier, where the passenger’s plans change. If this feature were not valued by consumers, consumers would limit purchases to carrier-specific tickets.

People buy the IATA ticket in the face of multiple carrier options and then do sometimes interline – 2000 people for 6 months or 5% is not insignificant. However, it should be noted that the figure chosen is not representative for PAR-FRA. In fact, the most recent data available to DG Competition (January-June 2004) showed that the number jumped to 4,000 or 13% and that the other periods were also significantly higher than the 5% figure (July-December 2002: 2,300 or 9%; January-June 2003: 2,705 or 7%).





74 “Clearly, not all intra EU routes are busy hub to hub routes like Paris – Frankfurt. The above report, however, suggests that, on average across the entire EEA & Switzerland area, less than 1 out of 4 passengers flying with IATA tickets actually interline. It appears that this is the case on some 17 routes out of the 24 specific markets reported for where the actual interlining rate (column 3,5) is below 25%

The statement that 17 out of 24 routes shows actual use of interlining to be below 25% is misleading. The figure for the EEA as a whole is 22%. In 11 out of 24 city pairs in the sample, the figure was in fact 22% or higher. Furthermore, data, which DG Competition conveniently neglects to note, also demonstrates that in almost all cases the percentage of IATA interlining is always higher than the non-IATA options – this suggests if travellers need or prefer to interline, it is the IATA product they are choosing.

84 & fn. 51 “However, as explained in sections 4.3 and 4.4 above, for certain routes on which IATA and carrier/alliance specific fares coexist, it remains unclear whether the difference between these two types of tickets is really appreciable. In particular, in dense hub-to-hub markets where operating carriers already offer a substantial number of frequencies at regular interval and spanning the entire day, the added value of the IATA ticket appears doubtful. On such markets both IATA and carrier/alliance specific fares seem to be close substitute.” (para. 84)

“It should be borne in mind that combination of frequency from different carriers could also achieved by other means, such as a code sharing agreement.” (footnote 51)

Contrary to the suggestion in the Discussion Paper, the IATA product is properly viewed as a differentiated product that generates distinct consumer benefits – even on city pairs where carrier/alliance products are also offered. As IATA’s main response explains, there are many realistic situations where a traveller on a dense hub-to-hub route would choose the IATA product – see p. 8-9. These examples and the hub-to-hub Regulation 1617/93 interline data show that the IATA product is a valued option regardless of DG Competition’s doubts.

The real issue is whether there is any (or sufficient) justification for depriving consumers of this option. The carrier/alliance and code share options DG Competition highlights are not and never will be perfect substitutes for the IATA differentiated product. To suggest that the same level of flexibility could be achieved through a combination of carrier/alliance networks and code shares is not accurate. Flexibility will depend on the fare and will require verification to assess any restrictions (non-refundable; non-transferable). Furthermore from a competition law policy perspective, it is highly questionable whether beyond intra-alliance cooperation, encouraging a series of inter-alliance and non-alliance bilateral code share discussions that would involve the fare coordination necessary to achieve IATA-level flexibility is less restrictive compared to a controlled and limited industry system.

87& fn. 53 “• Most proposals would not be immediately adopted in the plenary session but would be referred to so-called country-by-country

This discussion of the “mechanics” of the Tariff Conferences is not fully accurate. It is inaccurate to suggest that CBC discussions consist of





discussions (CBC); in CBC discussions, carriers discuss the proposals on a bilateral basis; these discussions may result in amended proposals or in proposals being withdrawn altogether; IATA Secretariat or employees appear not to be present during CBC discussions;

• After CBC discussions, proposals are reviewed in the plenary session again where they may be adopted.” (para. 87)

“It is therefore possible for the least efficient carrier in a conference to veto a proposed tariff until it is sufficiently high for that carrier to cover its costs. This does not foster economic efficiency. In contrast, economic/academic literature suggests that price co-ordination in relation to the offering of complementary products on a bilateral basis such as in airline alliances does not have such adverse effects. See footnote 1 above.” (footnote 53)

discussions on a bilateral basis and that no IATA employee ever participates. CBC discussions are open to any interested member and frequently members other than those providing services between the relevant countries participate. The Meeting Chairman and IATA employees also regularly sit in on such discussions.

Furthermore, industry fares/rates can only be changed in the conference plenary which means that CBC discussions do not automatically decide the applicable fare. CBC results are not always accepted by the conference plenary since it requires only one opposition from any voting carrier to veto the result (even if that carrier did not participate in the CBC discussion).

Although DG Competition has the minutes and although the ‘least-efficient’ allegation was made previously and challenged by IATA, DG Competition has failed to produce any examples where this occurred. In reality, the minutes show that the veto is most frequently used to prevent fare increases. As DG Competition will be aware, if there is not unanimity, the fare/rate does not change.

91 “The standardisation of pricing rules is suspicious because it remains unclear how this benefits consumers.” (para. 91)

This “suspicion” is misplaced. Agreement on conditions, just like the agreement on price is a necessary element of a joint product. Without agreement on conditions, there would be no joint product since each carrier would impose different conditions as in fact more and more frequently occurs for carrier fares in the internet age.

97 & fn. 62 “However, it appears that the provision of ‘joint services’ on such routes has the potential to restrict competition on one or more related routes. This is because carriers do not agree on fares between each and every ‘small’ airport in IATA Conferences. Rather, fares for services to/from smaller airports are often agreed on the basis of so called add-on tariffs, i.e. of a supplement to be paid on top of the applicable fare to the nearest medium/bigger well serviced airport. Add-ons are in

The Discussion Paper’s presentation of add-ons is incomplete. Some add-ons are established at zero – in effect establishing the same fare for more than one city. Add-ons are virtually always lower than an equivalent fare would be between the same points. Add-ons also have an important difference to a local fare – there is no requirement that travel be via the construction point (e.g., Manchester may be an add-on over London but passengers are not required to travel via London enroute to





principle not available for separate sale.” (para. 97)

“Add-on tariffs appear to enable IATA to greatly expand the number of city pairs for which interlinable fares are available and be of major importance: at present, there appears to be some 114 cities in the EEA & Switzerland area from which specific IATA fares are agreed to a city in another State in that area, whilst no less than a further 301 cities in that same area appear to be ‘served’ by means of add-on tariffs.” (footnote 62)

Manchester).

Add-ons exist in parallel to specified fares for most airports/cities. In the case of Manchester the airlines have agreed to specify fares in many, but not to all destinations. Applying add-ons extends the reach of IATA normal and special fares to all airports in the EEA.

115 “With regard to the latter [possible consumer benefits from the system of tariff conferences], such benefits are difficult to see, as the tariff conferences mainly lead to private communication between competing carriers in a non-transparent structure.”

Tariff conferences and the setting of an industry fare in particular are integral to the universal acceptance of the IATA fare – conferences are not about “private communications”. Without the conference and agreement on an industry fare that the conferences achieve, the unique benefits of an industry system would be lost. It is inaccurate to state that tariff conferences “mainly lead to private communication between competing carriers in a non-transparent structure”. If there were fundamental problems with the way in which the conferences are run, it is surprising that DG Competition only raises them now after 17 years during which an exemption has been in place. In any event, IATA remains committed to complying with the requirements of EC competition law as its actions on antitrust/competition law compliance over the years demonstrate.

118 “As regards the third and final category of benefits identified in the CRA report in relation to ‘reduced transaction costs’, it appears that any such possible efficiencies may benefit the airline industry rather than consumers. This may be recognised in the CRA report itself where it reads in this matter: ‘Another key benefit of the IATA interline system in its current form is that it generates the benefits identified above using a unique joint product at a very low transaction cost for the participating airlines, […]’ (emphasis added)”

This comment is inconsistent with the established interpretation of Article 81(3) which assumes that savings are passed on to consumers in competitive markets. The transaction costs in question are those that airlines would otherwise bear in setting or accepting fares on an ad hoc or bilateral basis. These costs for additional personnel and systems are substantial and would need to be reflected in the price of the product or in the overall overheads of the airlines and covered by their overall price structure. Thus consumers currently benefit from these lower costs. Unless DG Competition is suggesting that all EEA air transport markets are non-competitive, then it is well accepted that such transaction cost





savings will be passed on to consumers.

122, 124 “However, there exist many alternatives in the market which enable consumers, independent from IATA Interlinable fares, to reach their final destination in reasonably efficient, comfortable and competitive conditions. For example, there is every reason to believe that a passenger boarding a direct flight with a ticket restricted to the airline operating this flight will reach his final destination reasonably seamlessly. Similarly, a passenger on a connecting flight within the network of a sole carrier or alliance will in principle reach his final destination in a reasonably seamless way even if he does not have an IATA interlinable ticket.” (para. 122)

“In principle, a journey within the network of a sole carrier or alliance can be considered seamless with respect to the ‘baggage transfer’ and ‘through fare’ benefits, i.e. with respect to the ‘seamless travel’ benefits. It follows that, where carrier and/or alliance specific offers exist in the market next to IATA interlinable offers, the ‘seamless travel’ benefit will not be considered specific to IATA. Therefore, it is questionable whether such benefits qualify under the second condition of Article 81(3).” (para. 124)

The benefits of “seamless” travel are specific to the IATA system. It is an error to compare the IATA system to a single direct flight or a single connecting service within a carrier or alliance network. The multilateral IATA interline system is about those situations where passengers wish to combine or have the possibility of combining, even at the last minute, competing carriers/alliances to achieve maximum efficiency and flexibility. It is artificial to split the seamless travel and flexibility benefits of the IATA system. In effect, where a passenger opts for an IATA product, either because that product best meets that passenger’s travel needs or because that passenger values “flexibility”, the seamless travel aspect enhances the value of the product that the customer has chosen. Concerning the table in paragraph 124, there is a specific IATA “seamless travel” benefit available on all routes that combine any segment where more than one carrier/alliance operates, thus most likely on all types of routes.

130-131 “The CTAG submission is of particular interest in this matter where, further to the estimate that no more than 5% of purchased tickets are IATA tickets, it states that: ‘[...] In general, corporate purchasing managers look for the most flexible fare, at the lowest cost, in line with travel policy. They are happy to accept airline-only restrictions in return for substantial discounts. […] Carrier specific and alliance fares have replaced the traditional interlining fare. In today’s commercial world the airlines make their offers so attractive that purchasing full fares is no longer a financially viable option. […].” (para. 130)

“Accordingly there appears to be evidence that the price to be paid in order to enjoy the IATA specific ‘liberal interlining’ benefits is too high compared to the value of these benefits for corporate customers. If

The subjective estimates in the CTAG submission cannot be preferred to the objective data contained in the interline statistics. The CTAG assertions are directly contradicted by the Regulation 1617/93 data where even on the hub-to-hub routes the percentage of IATA fares is much higher. It is legally insufficient to disregard this data on the basis of the mere supposition that passengers were “forced” to buy the tickets because of yield management restrictions – some evidence is required particularly in light of the plausible explanations noted above in IATA’s comments on paragraph 63. Without any evidence and without undertaking any investigation of such allegations, the interline data is far more compelling than CTAG’s estimates. IATA’s main response contains a quantification of the benefits of the IATA system based in part





confirmed, this may imply that benefits actually passed on to time sensitive passengers under the ‘liberal interlining practices’ may be rather low.” (para. 131)

on the average premium paid by passengers. This calculation is an objective means to quantify the value of such benefits. The conservative estimates places a value of € 810 million on intra-EEA interlining excluding the 10 new Member States, which clearly is not “rather low”.

145 “Should some consumer benefits be lost, it remains unclear whether this loss would be so substantial that posted prices systems could not be considered a less restrictive alternative for the purposes of the indispensability test under 81(3) EC.”

From a legal perspective this point does not “remain unclear”. A posted prices system cannot, by definition, generate the full benefits of an industry fare and as such there is no doubt that consumer benefits would be sacrificed. In these circumstances, EC law is clear that a posted prices system does not constitute a less restrictive alternative for purposes of the indispensability test under 81(3) EC. See Annex I of IATA’s 6 September 2004 submission, p. 14-15 and the case law cited therein establishing that any alternative must reproduce the entire benefits of the agreement in question.

146 “Although Tariff Conferences may be an important feature of the present IATA system, it is not evident that they are indispensable to achieve interlining. Interlining may materialise in ways other than the present IATA system. It is unclear what the specific benefits of multilateral price co-ordination are for the purposes of interlining. Indeed, it remains unclear whether the benefits of interlining under a different system would be substantially different from the benefits achieved under the current system.”

The issue is not whether the conferences are “indispensable to achieve interlining” – the issue is whether the conferences are indispensable to obtaining the benefits of the present IATA multilateral interline system. This statement shows that DG Competition has failed to differentiate between the unique benefits of an industry interline system compared to carrier-specific or alliance variants including in the framework of code shares. The specific benefits of an industry system are precisely the ability to combine any carrier or alliance with any other at any time. Non-IATA interlining occurs and will continue to grow but by definition it will never be able to produce the full benefits of a universal industry system.

The accurate version of this statement would admit that ending the IATA system will either sacrifice the unique benefits of an industry-wide system or will force DG TREN or the Commission more broadly to come up with a new industry system imposed by regulation.

155 “Accordingly, it appears that the regulatory restrictions stemming from bilateral air services agreements may impede the conclusion of bilateral

Bilateral air transport agreements are not the only or principal reason that the IATA Multilateral Interline System is particularly important





cooperation agreements between airlines, the very type of which has been found to result in alternatives to the IATA system for passengers to interline.”

for third country services. While IATA agrees that the benefits of the IATA interlining are more significant for EU-third country transport, it is inaccurate to suggest that the limitations on bilateral code share agreements are the explanation. IATA interlining provides travellers maximum network flexibility and when the relevant network shifts from the EEA to the world, the “value” of this flexibility is multiplied manifold and could never be replicated by the combination of alliances and code shares. Furthermore, extending an alliance/carrier network through bilateral agreements on a global basis involves significant transaction costs that will also impose a natural limitation on the growth of such bilateral relationships. These conclusions apply not only to passenger tariff consultations but equally to the cargo rate consultations.

160 “Moreover, there appears to exist markets and services for which IATA Tariff Conferences are not (any more) allowed, without this having created any compelling and/or disproportionate difficulty for either the airlines or their customers. In particular:

• As regards the EU and cargo services: following the discontinuation of the previously existing exemption in respect of intra EU Cargo Tariff Conferences, it appears that the scope of these conferences was reduced so as to cover only routes between the EU and third countries.”

The Commission has not investigated the extent to which airlines and customers have been disadvantaged by the termination of cargo rate consultation within the EU. In fact, the end of intra EU Cargo Tariff Conferences, has made it difficult for carriers outside the EU to provide cargo services to points that require interlining. Anecdotal evidence suggests that consumers are simply paying more for such services since no posted-prices system has emerged to allow for easy and efficient interline shipments.

148-160 Differences between the regulatory regimes applicable to EU routes and to routes to third countries – passenger air services.

This analysis applies equally for cargo consultations. The analysis in these paragraphs applies equally to the IATA system for EU-third country cargo transport and therefore the same reasoning justifies an exemption for the IATA EU-third country cargo tariff conferences. IATA’s submission of 6 September 2004 (p. 14-18) showed that the four paragraph discussion of cargo in the June 2004 Consultation Paper was clearly inaccurate and inadequate in terms of the application of Article 81 EC. In these circumstances DG Competition must either follow the analysis for passenger air services or identify the reasons and evidence that justify a different conclusion.




ANNEX II

COMMENTS ON DISCUSSION PAPER CONCERNING COMMISSION REGULATION 1617/93

CHARLES RIVER ASSOCIATES

SOME COMMENTS ON DG COMPETITION’S DISCUSSION PAPER OF MARCH 2005 ON THE IATA TARIFF

CONFERENCE SYSTEM

Some comments on DG Competition’s discussion paper of March 2005 on the IATA tariff conference system

By

Nils von Hinten-Reed

Paul Muysert

Charles River Associates

1 Undershaft

London EC31 8EE

PUBLIC VERSION 8 April 2005

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system

Introduction

DG Competition has published a discussion paper (March 2005) as part of its review of Regulation 1617/93 and the IATA Interlining System. In its discussion paper, DG Comp reaches the preliminary conclusion that:

109. In the light of the above discussion, IATA Passenger Tariff Conferences, i.e. the Conferences themselves, the way in which they are organised as well as the subject matters under discussion and/or for agreement such as described in paragraph 89 above, appear to be by their very nature a restriction of competition in the meaning of Article 81(1) with a very high potential for negative effects in the air transport markets.

DG Comp reaches this conclusion after considering the potential for different effects in different areas of the market – on routes where IATA and carrier/alliance-specific fares overlap, and then on routes where no single carrier or alliance can serve the route in its entirety.

On routes where IATA and carrier/alliance-specific fares overlap, DG Comp argues that:

89. In the light of the above, it appears that:

• IATA Tariff Conferences constitute a forum that enables actual and potential competitors to routinely exchange sensitive information;

• In conferences, carriers discuss and agree on the level of fares for IATA tickets, i.e. for products very similar to their own, which all belong to the same product markets in which they compete, and which they have integrated to their own product offering;

• IATA Tariff Conferences give rise to bilateral discussions between direct competitors on a route by route basis which are not entirely transparent.

DG Comp also argues that conditions on tickets are standardised as part of the IATA process and system, and that this is used to aid monitoring, which may assist the stability of collusive agreements. In short, and with respect to overlap routes, the IATA Tariff Conference system is argued to increase the risk of collusion between airlines.

With respect to non-overlap routes, DG Comp accepts that the joint service argument is valid, as the IATA ticket is not a product that could be offered on its own. However, DG Comp notes that these non-overlap routes (if viewed in their entirety, from origin to destination) will often consist of core routes where overlap exists, plus add-ons for the thinner routes where there is no overlap, and that the restriction of competition relevant to overlap routes therefore applies at least partially to these routes also. DG Comp therefore concludes that:

99. It appears that even if the scope of these Conferences was in theory limited to routes which no single carrier/alliance serve in their entirety, the competition concerns identified in section 5.1.2 above would in principle still arise.

This is because Tariff Conferences facilitate collusive behaviour, whether tacit or explicit, regarding prices or other matters.

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 DG Comp then supports this view with the data from eight routes between Germany and Paris, operated by Lufthansa and Air France, which is argued to be an example of this potential for collusion in practice. DG Comp states:

107. In the light of the above evidence and description of the market concerned, it is not evident that there remains appreciable competition on the basis of published fares between carriers operating the route between Paris and Frankfurt for time sensitive passengers.

In summary, DG Comp is arguing that the IATA system has restrictive effects because the tariff conferences allow competing airlines to meet, discuss and agree IATA fares and conditions that are in the same market as carrier specific fares, and indeed may be a forum for collusion more generally. This position is primarily supported by evidence from the Frankfurt – Paris route and supplemented by UK Civil Aviation Authority (CAA) generated data which suggests that fares are the same for regional routes between France and Germany.

CRA Response

The modern approach to assessing antitrust allegations on conduct requires:

• A coherent economic theory to show how the conduct leads to competitive harm.

• An accurate description of the facts.

• Empirical evidence to show that the conduct has in fact lead to (anti-) competitive effects as defined by and consistent with the theory of harm.

CRA agrees that the right competitive effects theory in the case of Regulation 1617/93 is coordinated effects. That is, a concern that the discussion between airlines within the context of the IATA tariff conference could lead to airlines being able to tacitly (and perhaps actively) collude on their own fares. It is important to note however, that for time-sensitive passengers the published carrier fares are only a part of the competitive offer due to the growth of confidential individual carrier contracts with companies based around the world.

Tacit coordination is not easy to achieve and competition authorities around the world have increasingly adopted the economic approach to analysing such allegations. There are a number of necessary conditions for tacit (or explicit) coordination to be successful: being able to agree, being able to monitor deviations, and availability of a credible punishment mechanism. Further, as discussed in our 6 September paper (Annex IV), if effective coordinated behaviour at the level of carrier fares is to occur, the key variables that would require agreement are capacity and how capacity is allocated, and the effective market price a passenger pays for carrier business fares. If any one of these conditions is not met, then sustainable coordination will not be possible.

DG Comp is suggesting that there is tacit (or explicit) coordination involving time-sensitive customers (business) occurring, at least partially facilitated by the IATA tariff conference.1 1 See paragraph 107-108 of DG Comp discussion paper.

3

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Whether one calls the alleged coordination based on the IATA fare a “focal point” or a “coat hanger” effect resulting from the IATA fare facilitating tacit collusion the coordinated effects analysis should be the same. It is necessary to ascertain whether tacit collusion is possible in these markets and then show how the IATA tariff conference mechanics facilitate this. The issue is whether the facts of the particular market and the incentives of the parties exist to facilitate and sustain tacit collusion.

Although the DG Comp discussion paper has largely adopted an appropriate theory of competitive effects2 that could arise from the IATA tariff conferences, it has summarily failed:

• to define and analyse the market properly and fails to analyse contradictory evidence;

• to sustain the competitive effects theory with evidence that shows the IATA tariff conferences actually cause any alleged competitive effects; and

• to conduct serious analysis or investigation, including consideration of alternative explanations, that could undermine the unsubstantiated and serious allegations of anticompetitive conduct by two leading EU airlines contained in the discussion paper.

In the next sections we look in detail at each of these points.

Market definition - Differentiated products – ‘A seat is not just a seat’

DG Comp argues that the joint IATA product and the carrier specific product are close substitutes and part of the same market by means of a product market definition based on an O & D pair:

65. …on routes where IATA and carrier/alliance tickets are both available, it would be highly unlikely that a permanent but significant fare increase on unrestricted IATA would be profitable. In response to such a fare increase, a sufficient number of time sensitive passengers would certainly purchase unrestricted non-IATA fares, making the fare increase unprofitable in the first place.

A similar reasoning applies to restricted IATA tickets. In conclusion, when IATA fares coexist with non-IATA fares, they are likely to belong to the same product market.

It is argued that IATA tickets are sufficiently close substitutes that their price could not significantly diverge from carrier tickets, and this claim is supposedly based on support from a small number of submissions. However, the hypothetical analysis and anecdotal submissions relied upon by the Commission are not supported by the available empirical analysis.

CRA produced analysis in its paper on the restrictive effects of the IATA system that showed that IATA and carrier fares can diverge in price very significantly over time.3 For a sample of

2 On this point, we would emphasise that competitive concerns over the IATA tariff system cannot seriously be

based on the differentiated products point which appears to underpin the ‘coat-hanger’ effect. The reasoning behind this is explained in brief below, and in full in the September 2004 and December 2004 CRA submissions dealing with the restrictive effects of the IATA tariff conference system.

4

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 more than 40 European routes between May ’01 and August ’04, fully flexible IATA and carrier fares diverged by more than 9% on average, with the divergence frequently exceeding 20%. Further, there was a relatively even split between routes where IATA and carrier fare changes had moved in the same direction, or had moved in opposite directions. Observing the prices of two goods moving in the same way over time is consistent with products being in the same market, though it does not show that this is the case, while opposite movements suggest they are not in the same market.

The empirical analysis also does not support the idea that IATA and carrier tickets can be treated as if they were relatively homogenous and hence very close substitutes. Rather, the empirical analysis is consistent with the view that IATA and carrier tickets are partial substitutes and necessarily differentiated products in the minds of consumers and in the market. This should not come as a surprise, as they are in fact clearly differentiated products. The only exception to this would be the highly theoretical monopoly route with no possible indirect service — where the passenger was only travelling on the origin/destination route that was monopolised. In this case — a single carrier operating the entire route — an IATA ticket and carrier fully flexible ticket would be identical. However, in all other cases, the carrier or alliance online fare cannot replicate the degree of flexibility of the IATA ticket. It is true that the degree of differentiation varies by route — being at its minimum on very dense hub to hub routes (assuming the passenger is flying with the carrier with the most departures on the route), through to its maximum on routes where the carriers on an IATA ticket are fully complementary (no single carrier could perform the service on its own), but nonetheless the products are clearly differentiated.4

The fact that the market involves differentiated products and not just products that can be classified as in or out of the market is critical to the analysis of competitive effects. As shown in the CRA paper of September 2004 covering the restrictive effects of the IATA system, as differentiated products there is no set relationship between the IATA fare and carrier specific fares. Annex 5 of the DG Comp discussion paper appears to agree with CRA on this point. Furthermore, viewed as differentiated products a decision to remove the IATA fare from the market risks, if anything, increasing carrier fares even on ‘overlap’ routes. This in turn implies that a coherent theory of anticompetitive effects needs to focus on a theory of co-ordinated effects.

In summary, market definition is a process that attempts to define what is ‘in’ and ‘out’ of the market. It is well known that this approach is inappropriate and problematic when applied to

3 The Restrictive Effects of the IATA Tariff Conference System: An Economic Assessment, September 2004,

Annex A. 4 The failure to recognise that IATA and online carrier fares are differentiated products also leads to erroneous

conclusions on the benefits to consumers.

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Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 differentiated products. Products are neither in or out in such an environment, but rather are closer or more remote substitutes.5,6

Growth of Alliances: partial substitutes for IATA product

Even if the delineation of relevant markets made by DG Comp may lead to erroneous assessment of the competition between IATA and carrier online fares, it is welcome that DG Comp have recognised that “alliances” — or more appropriately joint ventures — involving codeshares have brought benefits to consumers through improving interline connectivity. Alliances do bring economic benefits, but against this the economic literature also tells us that there are instances where the growth of alliances may lead to potential anti-competitive effects, in particular, where the networks of the hitherto competing carriers substantially overlap.7

In most cases the addition of a codeshare with another airline leads to benefits to consumers and potentially lower average fares due to the exploitation of economies of scale, density and scope, and the introduction of complementary pricing. It must also be recognised that in European airspace, which is not free of restrictions on who can fly to and from where, there is the potential for codeshares to have competitive implications. Hence, there will necessarily be limits placed on the integration between airlines schedules, baggage handling and pricing absent the IATA mechanism, and this is the case even within alliances. Therefore it is not enough to simply assert that the growth of codeshares has enabled cities to be joined up: the essential point is whether the consumer has seamless travel options. This is an empirical question and two IATA papers8 have illustrated that the IATA interline mechanism remains a (differentiated) product which provides benefits to the time-sensitive passenger not available by other means, including the current or likely future level of integration within alliances and through code share agreements both within and outside alliances.

The discussion paper notes that DG Comp has received diverging views on the extent to which the development of alliances and code share agreements are far reaching enough to represent a fully viable alternative to IATA for intra EU travel, and that questions have been raised in 5 To put it slightly differently, market definition is but a first stage in the assessment of competitive effects. The

analysis contained in the DG Comp discussion paper treats market definition as a box to be ticked, assumes that the two types of ticket are homogenous when from a consumer’s perspective the two products are clearly differentiated (though often partial substitutes).

6 This has implications for competitive effects. In this case there is a further complication when attempting to globally analyse competitive effects, as each O & D pair may have different characteristics (for example need for connecting passengers / mix of business / economy etc.) that in turn defines the economics of the route and the nature of competitive interaction. Flying from Frankfurt (which relies on connecting passengers) may have different implications for Air France and Lufthansa pricing than flying from Paris.

7 A recent presentation for the ACE on Airline Alliances noted a variety of competitive effects from Alliances: • Hub-Hub: Traffic volumes depend on local and connecting traffic, which increases capacity on route and

mitigates unilateral effects. • Empirical studies indicate alliances reduce fares but most based on complementary networks. • Notes that additional code shares where there is prior overlap may lead to anti-competitive concerns.

8 IATA submissions of 6 September 2004 and 4 April 2005.

6

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 particular with respect to connections with the 10 new member states. In section 2.2.1 the Commission shows a table of itineraries by ticket type and final destination, and concludes at paragraph 24 that the data: ‘… appears not to suggest that there exists such a dividing line within the internal market for air transport services, that the possible non prolongation of the existing block exemption for IATA Passenger Tariff Conferences may have a particularly adverse effect on either airlines or consumers in the new Member States’.

The data reported by the Commission shows distinct differences between the connections available within the former EU15 and those available within the 10 new member states. For business travel, the data shows 17% of flights are indirect for destinations within the former EU15, whereas 31% of flights are indirect for destinations in the 10 new members. The results for flights to the new member states are closer to those for flights to third countries external to the EU at 39%, than it is to the result for the former EU15. In our view the data does not support the view that there is no significant dividing line in the quality of connections between the old and new EU members.9

The fact remains that alliances that do not fully overlap in their network coverage (and indeed are not fully integrated within their own networks) will only ever be partial substitutes for IATA interlining, and will not substitute for schedule flexibility. The ability to interline between carriers and alliances, and offer the highest level of schedule flexibility are benefits of the IATA product that cannot be replicated by alliances unless DG Comp is advocating closer bilateral relations between alliances. However, we note that this goes against the most basic premise that in general competitors should not meet and discuss fares and conditions concerning products on which they directly compete.

9 It should be noted that the data is for tickets sold in only six of the EU15 and includes four Member States that

are home to the major European hubs of each of the three global alliances (suggesting a potential distortion in favor of direct flights). While we understand that this may be the only data of this type currently available, the limitations and weaknesses in this data recommend a cautious approach when drawing conclusions as we understand IATA has pointed out when providing the data to DG Competition. Such caution, however, is missing from DG Competition’s analysis in the discussion paper.

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Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Time-sensitive passengers

Issues related to the pricing of corporate travel deals, and alleged relationships with IATA fares, are extensively discussed and analysed in the IATA submission of 22 December 2004.10 For convenience, we summarise here very briefly some of the key points.

CTAG provided data from one large corporate client that does not pay the published Lufthansa / Star Alliance fares. Analysis of the CTAG data did not support the view that the fares actually paid by large firms are significantly influenced by the level of IATA fares. This observation is supported by the statements from a number of airlines that carrier fares are more commonly used as the benchmark from which discounts are agreed in any case.

The CTAG data and the three anonymous submissions from “large multinational compan[ies]” highlight the expanding role of corporate programs designed to give discounts off the published fares in the market.

Overall conclusion on market definition and development of code shares

A rigorous economic analysis of airline markets today would suggest:

• Products offered by IATA, alliances and individual airlines are differentiated from the perspective of consumers.

• In some instances they may be partial substitutes or complements but the ability to switch alliances will be hard to replicate with carrier fares without extensive bilateral contacts between alliances.

• We have seen the growth of codeshare relationships within Europe and between Europe and third countries which will bring benefits to consumers. However, since the term codeshare encompasses many different types of economic relationship between airlines, it is meaningless to assert that the growth of such relationships undermines the benefits of the IATA ticket. Only close empirical examination of the extent and depth of such codeshares would enable such a public policy conclusion to be drawn—and the DG Comp paper has not done this.

• The benefits of the IATA ticket are its flexibility, which is likely to be valued most by time-sensitive passengers. An indepth analysis of the market for time-sensitive passengers (normally business travellers) would indicate that airlines compete fiercely for this type of passenger and that competition is often not simply based on the published fare. Further, it is increasingly the case that many business travellers are travelling in economy class and economy class fares are therefore increasingly constraining the ability

10 Refer to: DG-Competition Consultation on Regulation 1617/93: IATA Observations on Third-Party Comments,

22 December 2004.

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Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005

of airlines to raise business class prices (other non-price factors differentiate the service provided).

If we have established that the market for time-sensitive passengers is not homogenous, that effective fares paid for carriers’ business class tickets in the market are unlikely to be transparent, we have already eliminated some of the necessary conditions for tacit coordination.

The next section analyses whether the discussions within the IATA context provide any additional transparency on competition between airlines on their own carrier fares than already exists in the market. In other words, whether it is likely that the IATA system actually causes any competitive harm.

IATA conferences: no increased transparency

Our September paper has discussed what happens at the IATA tariff conferences. Proposals from airlines are vetted to ensure no competitive information is transmitted from country lead airline to others. Importantly, we note that key airline costs and changes in those costs (such as fuel prices, general wage increases, aircraft lease prices, airport charges and so on) are transparent to the market, and therefore there is little prospect for sharing additional cost information. In any case IATA advises us that they would excise this information from the meeting agenda.

We note that DG Comp has not challenged the fact that IATA tariff conferences do not discuss either non-public or public (transparent) market data. Instead, DG Comp focus on the country to country discussions between airlines within the context of agreeing any increase in the access price for airlines selling a ticket for travel on another airline’s network.

Bilateral discussions: commonly happen between airlines

We note that the DG Comp paper has, in effect, said that airlines meeting bilaterally leads to the result that published fares in the market and conditions attached to the fares are broadly similar and that this is indicative that the bilateral discussions are having an impact and adding transparency to carrier’s own actions on their own fares. As a preliminary point we would note that the discussion are country by country and not carrier by carrier. The country by country discussions noted by DG COMP are attended by any participant with an interest in the route, not only those airlines in direct competition. For example, in a France - Germany country by country discussion it is likely that both Air France and Lufthansa would attend, but so would Luxair and possibly SN Brussels.

It is not unnatural for a competition authority to believe that nothing good can come from two competitors meeting. We can understand this instinctive reaction, but when considering the future of a system that generates substantial benefits to consumers, we would presume that a competition authority would be concerned to consider carefully the ways in which this

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Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 instinctive reaction might be tested in order to avoid policy mistakes that ultimately harm consumers.

In particular, if a coordination story based on bilateral country-to-country discussions is to hold up to evidentiary scrutiny, we would expect that:

• The extensive bilateral country-to-country discussions would have a systematic impact (though not necessarily identical) across carrier published fares. As discussed further below, there has been no convincing evidence produced of widespread issues. Further, published fares are transparent and it is not surprising on a route with a duopoly that those fares are roughly the same. This can be seen in Table 1 below, which shows published fares for Air France and Lufthansa on four routes.11 In effect the core of the issue is whether removing the two IATA fares on each route would result in the rest of the published fares behaving quite differently and forming different patterns. If competition were only on published fares, what would stop Air France and Lufthansa from replicating the IATA tariff or increasing their tariffs absent the ceiling provided by the joint product? It is difficult to see that removing the IATA fares would make much difference, and nothing in the DG Comp paper provides any indication that there would be a result more favourable for consumers.

• To be fully effective, the extensive bilateral country to country discussions would have to address details of carrier’s own corporate programs with individual companies (and compare terms and conditions).

• Bilateral discussions would have to lead to business strategies that no airline would have an incentive to deviate from: if terms and conditions based on an IATA standard were not an appropriate means to differentiate types of customer (and hence price) then there would be every incentive for an individual airline to offer different terms and conditions (indeed, the growth of LCAs is an example of this). If on the other hand the IATA terms and conditions are the natural set the market will gravitate to anyway, then removing the IATA system will have no impact on the structure of fare terms and conditions.

11 Note that the carrier fares listed in the table that are exactly equivalent to the IATA fare are in fact the IATA

fare, listed in the reservation system as being available on that carrier. In two cases (Bremen and Nuremburg) the Lufthansa IATA fare is slightly lower than the IATA rate. Although we cannot be certain, it appears most likely that this apparent anomaly is due to a delay in updating the new IATA fare on 1 March.

10


Table 1: Air France (AF) and Lufthansa (LH) Published Fare Structure on Selected Routes12

Empirical data on coordinated effects

In this section we briefly summarise the empirical evidence available to date. We also provide a summary of new analysis of fares on 30 (directional) hub-to-hub routes, showing that there is no evidence supporting a concern of systematic co-ordination across major routes.

Previous CAA analysis

The original CAA data analysis (Appendixes 1 & 2 ) provided no evidence of coordinated effects across routes. Indeed the UK submission accepted this was the case. Rather, if there is any issue that has been identified it relates to the unilateral actions of three airlines, not the membership of the IATA conference system. Further, the CRA paper of 22 December, which commented on the UK CAA’s analysis, noted a number of other issues including the fact that the analysis relies on published rather than actual fares, which does not take account of tariff structures and discounts on actual prices paid, and various strategy issues (such as identical prices to destinations in very similar locations) that produce misleading regularity in the data. These points have not been refuted by DG Competition in the discussion paper and as a result the conclusions in the discussion paper based on the CAA data are suspect.

12 Source: Fares available in late March on the Amadeus reservation systems supplied to CRA by IATA.

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Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 New CAA data (Appendix 3)

The new analysis by the UK CAA in February 2005, focussing on Lufthansa and Air France and received as Appendix 3, does not undermine the analysis in the 22 December CRA paper. Indeed the focus on these two carriers underlines the fact that there is at this point in the investigation no evidence available that suggests widespread collusion issues related to the IATA system.

The last worksheet (‘FLEX increases’) appears to show that as IATA fares changed between 28 February and March 1 of this year, the published fares of Lufthansa from Frankfurt to a number of cities responded likewise to maintain a similar IATA fare/carrier fare ratio. As an evidentiary point, we note that the analysis only has four destinations with price changes are analysed. CRA has extended the number of cities and the results do not hold in general. This is shown at Annex B. The analysis shows that across a wider selection of routes the ratio of Lufthansa fares analysed to IATA fares is not constant. It is true that in general, when the ratio varies the change is small. However, given the small size of fare changes (typically 2%: for example the IATA fare for Frankfurt – Athens increased by €32 on a fare of €1565), it is not surprising that large shifts in the ratio are rarely observed.

The Air France Worksheet

The Air France worksheet shows that published economy fares match competitor fares on 15 routes out of Paris. However, we note that on four of the city pairs the match is with Air France alliance partners where exemptions are either in place or pending. Of the remaining matches only four airlines are involved, and six of those matches are with Lufthansa. Furthermore, the variability in the percentage relationship between Air France and IATA fares, which ranges from 50 to 91 percent of the IATA fare, means that this analysis does not provide any evidence that Air France uses a simple rule setting its full economy fares as a percentage of IATA fares.

The Lufthansa Worksheet

The Lufthansa worksheet appears to suggest that (a) Lufthansa full economy fares as a percentage of IATA fares are variable, (b) that on restrictive economy class fares (min stay 2 days / max 5 days) there are some (11) matches with competitor fares, four of which are with immunized alliance partners, but where fares do not match the differences are quite marked. There are no calculations comparing the fully flexible Lufthansa economy fares with competitors, but the note on the worksheet suggests that these "often" also match, which presumably suggests that there are less matches than the 11 they have highlighted for restricted economy.

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Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 The Air France/Lufthansa Worksheet

Fares between Paris and eight destinations in Germany do show that published fares have the same relationship to IATA fares in percentage terms.13 Nonetheless, the question remains, how should this be interpreted? Certainly it suggests that Lufthansa and Air France monitor each others published fares closely. However, does this mean that competition is limited, or does it reflect particularly intense competition on the routes involved?

A major problem with trying to draw any useful conclusions is that even if the published tariffs are all close or identical, with yield management systems it still tells us very little about what price customers are actually paying. Indeed the evidence available to DG Competition is that, at least with respect to IATA tickets, the mix of IATA tickets sold by Air France and Lufthansa is very different indeed.14 If these differences exist in other fare classes as well, then it is not even possible to say that on average similar customers are actually paying similar fares in practice. Beyond this issue, there is also the issue of discounts, particularly on business fares.

Overall we therefore believe that these spreadsheets cannot definitively tell us anything very useful at all beyond the statement that the two airlines are clearly keenly aware of each others pricing. In itself, it would be difficult to categorise this as evidence of anticompetitive behaviour, let alone evidence that the IATA system is the source of anticompetitive behaviour.

Air France/Lufthansa – some closing comments

The consultation paper notes that 40% of unrestricted tickets on Frankfurt – Paris route are sold at the IATA fare, but only 5% of those passengers travelling with IATA ticket use the benefits by interlining (at paragraph 104), and that several hub–to–hub routes exhibit a similar pattern of low proportion of IATA tickets actually giving rise to interlining (paragraph 105). This would suggest that either consumers value the benefits or that they are being induced to purchase a product which is more flexible than they need because airlines reduce the number of seats needed (demanded) for carrier specific fares.15

13 We note that on routes to Paris some of the fares differ by up to three Euro, so the percentage match is very

close but not exact. Putting aside this relatively minor issue however, we note more seriously that some of the IATA fares appear to be inconsistent. For example on the AF/LH worksheet, the IATA fare from Paris to Frankfurt is listed as €737, whereas on the Air France worksheet the fare is listed as €756. Similar inconsistencies exist on other routes, for example see Hanover and Stuttgart.

14 The data submitted to DG Comp on fully flexible fares showed that for 2003 Lufthansa issued [ ]% of fares on Paris - Frankfurt at IATA rates, whereas the equivalent figure for Air France was [ ]%. Refer to interline data for Jul – Dec 2003, sheets A and M.

15 The discussion paper at paragraphs 63 and 105 suggests that yield management is being used by the airlines to effectively force their customers to purchase the IATA fare. The discussion paper states that “[r]esponses to the Consultation paper received from corporate customers tend to [support this] explanation.” However, only one “large multinational company” submission contains this allegation and it is both contradictory and unsubstantiated (see submission “x” at pages 2 and 3). This can hardly be sufficient evidence to support such a serious allegation.

13

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 One problem with the suggestion that carriers are deliberately forcing consumers to purchase the IATA fare is that it is not clear why any airline would follow such a strategy.16 The IATA ticket given its inherent flexibility has a higher risk of revenue loss due to the passenger switching to another carrier. Hence the expected value of the IATA ticket is less than its face value except perhaps when it is purchased at the last minute in a situation of peak demand. A carrier therefore would more likely prefer to sell its own ticket at a lower price. If a carrier was free to ‘funnel’ demand to specific tickets, it would always be able to price an own carrier fare such that it was more profitable than the IATA fare if it chose to do so.

Returning to the 40% of unrestricted tickets sold at IATA fares on Frankfurt – Paris, the Discussion paper failed to recognize the very significant differences in the percentage of unrestricted tickets at IATA levels sold by Lufthansa and Air France. Clearly, very different business strategies are being pursued (amongst other factors, different approaches to corporate programs may explain these differences). Cities on either side of this Frankfurt – Paris route are very different, and the Frankfurt service requires both origin and connecting traffic to a much greater extent than Paris. In support of this point, data showing that the number of fare classes available on a flight exceed those available for a particular route is provided at Annex E. This is important, because without understanding the role of these other fare classes and fares, it is difficult to understand the drivers of pricing on a particular route. As an important example, if a large number of seats are allocated to passengers connecting to long-haul flights (which tend to be relatively high revenue tickets), then the actual capacity on the aircraft available for point to point traffic will be much more limited than the size of the aircraft might appear to indicate. This is turn implies the fares offered for point to point traffic will be commensurately fewer in number and, all else equal, priced higher than would be the case if the same aircraft was operated on the same route by an operator carrying only (or mostly) point to point traffic. With all these fundamental differences, it is very difficult to reach meaningful conclusions from the limited observations made to date.17

Hub-to-hub analysis

We have carried out an analysis of fares on 30 (directional) hub-to-hub routes. The purpose of this analysis is to provide data to compare and contrast with the data that has been presented to date, and in particular with the focus on the Paris – Frankfurt route. The analysis shows that there is no evidence supporting a concern of systematic co-ordination across major routes examined. The analysis is presented in full in Annex C, and shows that: 16 Note that while checking the data supplied to us in Annex C with actual fares offered by carriers over the

internet, we found that (in the cases we checked) where a carrier fare lower than the IATA fare was shown in the data provided to us, that (cheaper) carrier fare was offered to us by the carrier’s internet booking system.

17 We also note that relatively critical and simple explanations other than anticompetitive behaviour have not been investigated. In particular, pricing on the Paris – Frankfurt route in particular may be significantly driven by capacity constraints (most likely slots). The existence of capacity constraints also needs to be considered in the context of arguments that punishment strategies will involve capacity expansions or significant price cuts. These simply may not be possible.

14


• In general a variety of fares are available in business class, and certainly there are far more options than just the IATA fare. On most routes there are several unrestricted (or very close to unrestricted) options available aside from the IATA fare.

• Carrier business fares as a percentage of the IATA full fare are not constant across routes and not even across carriers within the same route in most cases.

• Combined with the interline statistics at Annex D, which shows amongst other things quite different patterns for Air France and Lufthansa, one cannot a priori suggest that the combination is evidence of tacit collusion.

As well as the different fares available in the snapshot of data shown in Annex C, yield management systems mean there will be far more flexibility over time, including the numerous special fares of various types put into the market on an ongoing basis in response to changes in market conditions. Beyond this, there are also significant discounts available using corporate programs,18 and there are further competitive constraints available from economy fares (with a long tail of economy fares with restrictions).19

Overall, the hub-to-hub analysis at Annex C and interlining analysis at Annex D shows that airlines are ‘doing their own thing’, i.e. unilateral behaviour. Interlining statistics are different across airlines and routes, and even when published fares are similar across the pricing structure, sometimes the number of fares are different. At other times the published fares themselves are simply different, despite the level of transparency of published fares. Beyond this, we know that with airlines’ yield management systems, the addition of special fares over time and the existence of significant discounts, that actual fares paid will be far more variable than implied by this static analysis which is a snapshot at a single point in time of published fares only. This is not a data set that suggests tacit collusion.

Restrictive effects evidence: summary

One alleged example of coordination does not make an industry-wide coordinated effects case, even if the allegation were well-founded. At this point we do not believe DG Comp has produced empirical evidence to support a collusion story either at an industry level or even on the one city pair (Frankfurt – Paris):

• The CAA data (Appendixes 1 and 2) were refuted in CRA 22nd December paper.

• The further CAA data (Appendix 3) does not add anything – it shows the pricing behaviour of Lufthansa and Air France only, it cannot differentiate between

18 Although these discounts are not visible in this analysis, the CTAG data demonstrates that these discounts can

be very significant. Further, the three anonymous ‘large multination company’ submissions to the Commission provide further evidence on these points. For example, see the anonymous submissions from (in particular) corporate customer "x" at p. 3; "y" at p. 21; "z" at top of p. 2.

19 On the use of full flexible economy fares, see for example the anonymous submission of "x" at p. 3.

15


competition and collusion, and does not demonstrate that the behaviour depends upon the IATA conference system.

• The CTAG data has been refuted in CRA’s 22nd December paper.

• At least two of the three anonymous ‘large multinational company’ submissions either support the IATA case or are at best neutral, but provide no evidence of coordinated effects.

• The hub-to-hub and interlining analysis shows that there is no evidence supporting a concern of systematic co-ordination across the major routes examined.

Conclusion

IATA interline tariff conferences are one of the pillars of a system which enables consumers to achieve flexibility in terms of the means of getting around Europe. The central issue is whether these (significant) benefits are achieved at the expense of the restrictive effects claimed by DG Competition and whether alternative alliance (codeshare) arrangements can achieve the same benefit.

It is welcome that DG Competition has come out and endorsed the benefits of alliances. Economic literature also signals that there are potential anti-competitive impacts between potential members of an alliance with overlapping networks. DG Competition has simply failed to apply the lessons of the literature to today’s relationships and has assumed that “seamless” travel can be achieved through codeshares without any reference to potential anti-competitive effects that may arise intra Europe. If DG Competition has been overly optimistic on how we get from today to a world of no restrictions on airlines being able to offer service from wherever to wherever while coordinating on fares, they have fallen well short of the required standard for concluding that airlines are (tacitly) colluding today.

Modern antitrust analysis requires robust analysis of data to support an anti-competitive theory. DG Competition’s discussion paper does not come close to sustaining its basic anti-competitive story with systematic data (or even on the basis of one single observation) that suggests that IATA tariff conferences have led to significant anti-competitive effects. If the central claim of DG Competition is that airlines have met, discussed and decided on anti-competitive outcomes, we would have expected a systematic response across routes and across networks which is simply not present in the data presented in the DG Competition paper, or present in the more substantial analysis of published fares and interline statistics conducted by CRA between a sample of hub to hub routes. The data simply does not support the conclusion that there is tacit collusion between airlines facilitated by the IATA tariff conference system.

In the light of this, we recommend that DG Competition should be minded to follow its own guidance and ensure that European consumers continue to enjoy the benefits of multilateral interlining.

16

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Annex A - March Consultation – Annex 5 Comments in Response The following comments relate to a number of specific comments made in Annex 5 of the “Discussion Paper” on the CRA papers submitted as part of the IATA submission data 6 September 2004. It should be noted that, beyond these detailed points, we believe that the latest consultation shows that there is now more agreement on the key issues than at the time of the previous consultation round. In particular, we believe that it is now clearer that DG Comp is focussing on issues related to collusion rather than product differentiation, the former being a more appropriate focus of attention.

Although the analysis is coherent, it just simply fails to tackle one major question, which is at the heart of the competition problem, why do airline[s] meet to jointly set IATA fares?

We are rather surprised to see this comment in the discussion paper, as we believe that in general it is accepted that the IATA system involves the production of a joint product, which allows more and/or better services to be provided to consumers than would otherwise be the case. To efficiently price a joint product requires joint pricing.20 To offer the product and price it efficiently, they must set a price for the joint product and this explains why they must meet.

There is therefore nothing inherently anticompetitive in the basic need for the tariff conference. For complementary routes it is clearly pro-competitive, resulting in lower prices and higher volumes than would be expected absent the conference. We believe that these basic motivations are accepted by DG Comp: the discussion paper accepts both these points for at least some of the routes affected by the IATA system, if not all. As such we did not believe (nor do we believe now) that the basic rationale for the conference system is in dispute. What is in dispute is whether there are also anti-competitive detriments, that DG Comp argues may arise from the existence of the IATA system, and whether these are sufficiently large and/or the benefits sufficiently small that, on balance, the system is no longer in the net public interest. As these are the questions of interest, these are the points that have been addressed.

It is reasonable to consider that based on this agreed-upon IATA fare airlines set the fares of inferior products (less frills/more restrictions) to maximise their profits. But CRA fails to address this important consideration.

We disagree with the statement that the previous paper failed to address this point. Indeed, it specifically dealt with this issue, and in doing so showed that DG Comp needs to consider very carefully exactly how the IATA fares might impact this optimisation process. If the IATA and other fares are viewed as differentiated products that interact, and we believe that this is the approach being used by DG Comp to analyse the IATA system and its potential impacts on carrier fares, then the expected interactions depend upon assumptions both about the state of

20 This principle is generally accepted and is the reason why many forms of carrier cooperation, including price

coordination, are authorised by competition authorities.

17

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 competition and the shape of the supply curve. In summary, the paper showed that in general for differentiated products:

o If the market for each differentiated product is competitive and capacity is not constrained, then there is no long term impact on price (although volume changes will occur).

o If capacity is constrained,21 then the impact of the IATA fare on optimal price setting is that increasing the IATA price may increase the optimal carrier price - but this is due to changes in demand. Increasing the price of one product (the IATA fare) diverts demand to another (carrier fares) increasing its optimal price. Critically however, the implication is that the maximum price increase possible will occur if the IATA fare is removed from the market.22

Both of the above conclusions will be relevant to various airline markets. However, the conclusion to be drawn is the same in both cases. That is, if it is to be argued that the IATA system is in anyway anticompetitive, it is not due to its role as a differentiated product in the market. From the perspective of an economic analysis of differentiated products, and compared to the counterfactual being considered (prohibition of the system within the EU), carrier fares will either be unaffected or depressed by the presence of the IATA fares.23

This is not to argue that the system cannot possibly have anticompetitive effects. However, those effects — which must be judged as consumer detriment compared with the relevant counterfactual of system prohibition — cannot be argued to occur because ‘…based on this agreed-upon IATA fare airlines set the fares of inferior products (less frills/more restrictions) to maximise their profits’. If airlines behave this way, individually optimising their profits, then the analysis clearly shows that the IATA system is pro-competitive for the reasons summarised above. If anticompetitive effects occur it must be because the system facilitates either tacit or actual collusion. In other words, airlines are no longer individually maximising profits given the level of IATA fares, but instead are taking into account each others actions, and are doing so more effectively than would be the case absent the IATA system.

Regarding establishing the terms of coordination it is undisputed that the IATA conference system allows airlines to agree to the IATA fully flexible fare. And that this fare could serve as a focal point is not discussed at all by CRA. Further CRA put emphasis on the fact that the industry mostly offers differentiated products, and as a result collusion is unlikely.

21 Or for that matter if each carrier is thought of as a differentiated supply with an individual downwards sloping

demand curve. 22 This can be thought of as increasing the price of the IATA fare to infinity. 23 This is similar to a model of a differentiated products merger – removing market players increases, rather than

decreases, the prices of other players in the market.

18

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 While the possibility that the setting of IATA fare(s) might establish a focal point is a valid discussion point, we do not believe it is a significant concern. Focal points are necessary when it might otherwise be difficult to establish agreement on the actual price to be set in the market. However, it is not clear that the IATA price can have a role as a traditional focal point mechanism for setting of carrier fares. As noted by DG Comp, it is undisputed that IATA conference system allows airlines to agree to the IATA fully flexible fare, so the issue is how this influences the setting of carrier fares across their tariff structure, which is the core of the debate over the existence or otherwise of a ‘coat-hanger’ effect. It is therefore not clear that the ‘focal point’ question introduces anything new to the debate. Further, to the extent that a ‘focal point’ might be used to establish co-ordinated carrier fares, standard fully flexible carrier ‘book fares’ that are available on reservation systems are transparent, and could arguably be used to fulfil this role – with or without the existence of the IATA fare. It is not clear that the IATA system and fares materially improve the potential for successful co-ordination of prices.

CRA also writes that transparency exists to some degree, but IATA is not responsible for it…such transparency clearly favours monitoring conditions.

DG Comp appears to be arguing that conditions are suited to tacit collusion because both IATA and (some) carrier fares are visible on reservation systems and this allows monitoring. If it is to be argued that the IATA system has anticompetitive detriments and should therefore be prohibited, it must be the case that the detriment is worse than would be the case absent the IATA tariff system. This is a critical point. If carriers can effectively monitor each others fares,24 then this is because of the nature of the market as a whole. The question here is not whether airlines can monitor the IATA fares to establish whether carriers are setting the agreed IATA price (although this is an interesting issue), but rather what impact the presence and operation of the IATA tariff conference system has on carrier fares. This is a different issue. On this issue, our view is that this comes down to an argument over tacit collusion, and on this point the IATA system does not enhance the effectiveness of airlines monitoring of each others’ (effective) prices.

Although it is clear that yield management based on load factors make pricing not as transparent, rival airlines observe the type of aircraft competitors used on any given route, as well as the number of frequencies operated.

We agree with DG Comp that given the difficulties of price monitoring in the market, successful capacity co-ordination would be key to any successful tacit co-ordination. However, capacity is not a subject of discussion in the conferences, and it is not clear how the IATA system augments the ability to tacitly collude on capacity.25

24 A debatable point given the inability to monitor how many seats are sold at particular prices and the presence of

other discounts. 25 On the issue of transparent pricing, it is also of note that there can be unpublished fare classes on aircraft.

Please see Annex E for further information.

19

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 ‘Another troubling aspect of CRAs cursory analysis concerns its handling (or lack thereof) of punishment mechanism. It seems relatively reasonable to consider that a capacity increase by rivals (frequency and/or size of aircrafts) would lead any maverick to incur immediate losses, and therefore be severely punished. Because most alleged predatory episodes in the airline industry are concerned with frequency increase to punish the entrant, such a punishment mechanism is not far-fetched.’

In our view it would be difficult to argue that examples of predatory capacity expansions in airline markets can easily be classed as good examples of the type disciplinary action designed to sustain collusion in airline markets. Predation, by definition, is an action designed to remove a competitor from a market, which in turn removes the need to co-operate. Further, while it is certainly correct that most (if not all) punishment strategies will have a cost both to the punishing firm as well as the punished, capacity based predation can be expected to be very expensive to the predator as well as the target.26 For this reason it is only likely to occur when very large gains can be expected as a result, as might be the case if an actual or potential competitor is expected to leave the market. Indeed, it can be argued that such examples of predation show that if anything, collusion is difficult to sustain, otherwise accommodating entry and setting cooperative prices would be preferred to very expensive episodes of predatory behaviour which only have some chance of success.

Finally, and as noted in response to a number of DG Competition’s points, to the extent that the ability to undertake such a punishment strategy is correct in practice, this will still be the case absent the IATA system, and it is not clear how the IATA system either improves either the potential for or effectiveness of retaliation strategies of various types including capacity expansion.

For each of the 44 routes examined, CRA has only two data points on business fares, one in May 2001 and one in May 2004. Based on these two data points, CRA undertakes to compare changes in fares between these two dates for IATA fare and carrier business fares. Needless to say, one can hardly draw much on fare variability with so few data points.

On this point we note that the 44 routes were defined by the existing analysis available from 2001. It is however certainly true that we would prefer more data. We would welcome a more comprehensive analysis from the Commission if it is able to source suitable data.

26 As well as the ‘across the board’ impact on the predator airlines own fares, given the air traffic and

infrastructure constraints on certain European routes, retaliation by way of capacity expansion may require sacrificing operations on other routes.

20


Annex B – Lufthansa and IATA Fares The data, provided to us by IATA is a selection of data on both Lufthansa economy class and IATA fares on specified routes. The database shows the tariffs for two different dates: 28 February 2005 and 01 March 2005 and for three different fare types: IATA and Lufthansa’s YFLEX1 and BFLEX1 for round-trips from Frankfurt to 15 different destinations across Europe.

The analysis shows that across a wider selection of routes the ratio of Lufthansa fares analysed to IATA fares is not constant. In general, when the ratio varies the change is small. However, given the small size of fare changes (typically 2%), it is not surprising that large shifts in the ratio are rarely observed. Table 2: YFLEX1 and BFLEX1 fares as a percentage of IATA fares and percentage changes in the

three fares from 28 Feb 2005 to 01 Mar 2005.

YFLEX1 / IATA BFLEX1 / IATA

28-Feb-05 01-Mar-05 28-Feb-05 01-Mar-05

Amsterdam 89.9% 90.1% 76.5% 76.6%

Athens 90.0% 90.0% 72.3% 72.3%

Barcelona 92.1% 92.0% 73.8% 73.7%

Dublin 80.0% 80.0% 48.0% 47.9%

Edinburgh 90.0% 90.0% 76.5% 76.5%

Helsinki 78.2% 78.2% 60.8% 60.8%

London 90.1% 90.0% 76.6% 76.5%

Madrid 92.1% 92.0% 73.7% 73.5%

Oslo 90.0% 90.0% 76.5% 76.5%

Paris* 90.2% 90.2% 76.7% 76.7%

Prague 89.6% 90.0% 76.0% 76.3%

Riga 90.0% 87.3% 76.5% 74.2%

Rome 90.1% 90.0% 66.1% 66.1%

Warsaw 95.0% 95.0% 80.9% 80.9%

Zurich 79.9% 80.1% 71.2% 71.2% Source: IATA

*As of 01 July 2004.

21


Annex C – Hub-to-Hub Analysis The data analysed by CRA was provided to us by IATA. The information corresponds to various carrier business and economy class fares for 30 different hub-hub routes across Europe for the 1st of June 2005.

In particular, the data provides fare information for the main carriers for all hub-hub routes across six of the largest airports in Europe: Amsterdam (AMS), Paris (CDG), Rome (FCO), Frankfurt (FRA), London Heathrow (LHR) and Madrid (MAD). In every case the corresponding IATA fare was also provided.

Analysis

For purposes of this analysis “flexible” and “restricted” fares were defined as follows:

• Flexible – fares with no restrictions , or cash penalties for ticket changes or cancellations.

• Restricted – fares with advance purchase and/or min/max stays restrictions. It also includes non-refundable and non-changeable tickets.

It is important to note that carriers often offer more than one fare of each type for a given route. We understand that the differences arise from the additional conditions not considered in the definition of “flexible” and “restricted” fares. These conditions involve restrictions in relation to transfers, stopovers, and/or routing, but did not impact to the hub-to-hub analysis which concerns direct flights.

Charts 1-6 show the different carrier fares (as a percentage of the IATA fare) grouped by the city of destination for the different carriers for “business flexible” fares. As can been seen, there is a considerable fare dispersion across carriers within the same route. Significant examples include routes from Amsterdam, Rome, London and Madrid. Charts 7-12 display the equivalent information for “Economy Flexible” fares.

Tables 3-6 display the raw data used in the analysis for the different fare types, i.e., “business flexible”, “business restricted”, “economy flexible” and “economy restricted”.27

27 One observation was excluded. This is was an Alitalia fare between Rome and Frankfurt that appears to be

intended to be a one way rather than a return tariff.

22


Figure 1: Business Flexible carrier fares (as % of IATA) from Amsterdam to five destinations

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

AF - 1AF - 2

KL - 1KL - 2

KL - 3AZ - 1

AZ - 2AZ - 3

KL - 1KL - 2

KL - 3 TVKL - 1

KL - 2KL - 3

LH - 1LH - 2

LH - 3BA - 1

BA - 2BA - 3

BD - 1BD - 2

KL - 1KL - 2

KL - 3 IB - 1

IB - 2

IB - 3

KL - 1KL - 2

KL - 3

Carrier

AMS - CDG AMS - FCO AMS - FRA AMS - LHR AMS - MAD

Source: IATA

Figure 2: Business Flexible carrier fares (as % of IATA) from Paris to five destinations

0%

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30%

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50%

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AF - 1AF - 2

KL - 1KL - 2

KL - 3 AF AZ AF LH

AF - 1AF - 2

BA - 1BA - 2

BA - 3BD - 1

BD - 2 AF IB

Carrier

CDG - AMS CDG - FCO CDG - FRA CDG - LHR CDG - MAD

Source: IATA

23

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Figure 3: Business Flexible carrier fares (as % of IATA) from Rome to five destinations

0%

10%

20%

30%

40%

50%

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70%

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100%

110%

AZ - 1AZ - 2

KL - 1KL - 2

KL - 3AF - 1

AF - 2AZ - 1

AZ - 2AZ - 1

AZ - 2LH - 1

LH - 2AZ - 1

AZ - 2AZ - 3

BA - 1BA - 2

BA - 3AZ - 1

AZ - 2AZ - 3

IB - 1

IB - 2

UX - 1UX - 2

Carrier

FCO - AMS FCO - CDG FCO - FRA FCO - LHR FCO - MAD

Source: IATA

Figure 4: Business Flexible carrier fares (as % of IATA) from Frankfurt to five destinations

0%

10%

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30%

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50%

60%

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KL - 1KL - 2

KL - 3 LH AF LH AZ LHBA - 1

BA - 2BA - 3

LH - 1LH - 2 IB JK

LH - 1LH - 2

Carrier

FRA - AMS FRA - CDG FRA - FCO FRA - LHR FRA - MAD

Source: IATA

24

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Figure 5: Business Flexible carrier fares (as % of IATA) from London HR to five destinations

0%

10%

20%

30%

40%

50%

60%

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100%

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BA - 1BA - 2

BD - 1BD - 2

KL - 1KL - 2

KL - 3AF - 1

AF - 2AF - 3

BA - 1BA - 2

BD - 1BD - 2

AZ - 1AZ - 2

AZ - 3BA - 1

BA - 2BA - 1

BA - 2LH - 1

LH - 2LH - 3

BA - 1BA - 2

BD - 1BD - 2 IB

- 1IB

- 2

Carrier

LHR - AMS LHR - CDG LHR - FCO LHR - FRA LHR - MAD

Source: IATA

Figure 6: Business Flexible carrier fares (as % of IATA) from Madrid to five destinations

0%

10%

20%

30%

40%

50%

60%

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110%

IB - 1

IB - 2

KL - 1KL - 2

KL - 3 AF IBAZ - 1

AZ - 2AZ - 3

IB - 1

IB - 2

UX - 1UX - 2 IB JK LH

BA - 1BA - 2

BA - 3BD - 1

BD - 2 IB - 1

IB - 2

IB - 3

Carrier

MAD - AMS MAD - CDG MAD - FCO MAD - FRA MAD - LHR

Source: IATA

25

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Figure 7: Economy Flexible carrier fares (as % of IATA) from Amsterdam to five destinations

0%

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110%

AF - 1AF - 2 KL AZ KL KL LH BA BD KL IB

KL - 1KL - 2

Carrier

AMS - CDG AMS - FCO AMS - FRA AMS - LHR AMS - MAD

Source: IATA

Figure 8: Economy Flexible carrier fares (as % of IATA) from Paris to five destinations

0%

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100%

110%

AF - 1AF - 2 AF AZ AF LH AF BA BD AF IB

Carrier

CDG - AMS CDG - FCO CDG - FRA CDG - LHR CDG - MAD

Source: IATA

26

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Figure 9: Economy Flexible carrier fares (as % of IATA) from Rome to five destinations

0%

10%

20%

30%

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110%

AZ KL TVAF - 1

AF - 2AZ - 1

AZ - 2AZ - 1

AZ - 2 LHAZ - 1

AZ - 2 BA AZ IBUX - 1

UX - 2

Carrier

FCO - AMS FCO - CDG FCO - FRA FCO - LHR FCO - MAD

Source: IATA

Figure 10: Economy Flexible carrier fares (as % of IATA) from Frankfurt to five destinations

0%

10%

20%

30%

40%

50%

60%

70%

80%

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100%

110%

KL LH AF LHAZ - 1

AZ - 2 LH BA IB JK LH

Carrier

FRA - AMS FRA - CDG FRA - FCO FRA - LHR FRA - MAD

Source: IATA

27

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Figure 11: Economy Flexible carrier fares (as % of IATA) from London to five destinations

0%

10%

20%

30%

40%

50%

60%

70%

80%

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110%

BA BDKL - 1

KL - 2AF - 1

AF - 2 BA BDAZ - 1

AZ - 2 BA BA LH BABD - 1

BD - 2 IB

Carrier

LHR - AMS LHR - CDG LHR - FCO LHR - FRA LHR - MAD

Source: IATA

Figure 12: Economy Flexible carrier fares (as % of IATA) from Madrid to five destinations

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

KL AF IB AZUX - 1

UX - 2 JK LH BABD - 1

BD - 2 IB

Carrier

MAD - AMS MAD - CDG MAD - FCO MAD - FRA MAD - LHR

Source: IATA

28

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Table 3: Business Flexible

Business Flexible Restrictions

Route Carrier Fare Code Fare (% IATA) AP Ref /Pen Min/Max Change

AMS - CDG AF D2 € 498 72.9% * * * *

AMS - CDG AF CRT1 € 604 88.4% * * * *

AMS - CDG KL ZRTKL € 448 65.6% * * * *

AMS - CDG KL CRTKL € 498 72.9% * * * *

AMS - CDG KL JRTKL € 604 88.4% * * * *

AMS - FCO AZ IRTNL4 € 919 66.3% * * * *

AMS - FCO AZ DRTNL4 € 1,029 74.2% * * * *

AMS - FCO AZ CRTEU € 1,386 100.0% * * * *

AMS - FCO KL ZRTKL € 925 66.7% * * * *

AMS - FCO KL CRTKL € 975 70.3% * * * *

AMS - FCO KL JRTKL € 1,025 74.0% * * * *

AMS - FCO TV YCOW € 810 58.4% * * * *

AMS - FRA KL ZRTKL € 475 79.6% * * * *

AMS - FRA KL CRTKL € 525 87.9% * * * *

AMS - FRA KL JRTKL € 575 96.3% * * * *

AMS - FRA LH ZFLEX12 € 475 79.6% * * * *

AMS - FRA LH DFLEX12 € 525 87.9% * * * *

AMS - FRA LH CRT € 597 100.0% * * * *

AMS - LHR BA D2EUCBAO € 388 69.2% * * * *

AMS - LHR BA JFLBAO € 461 82.2% * * * *

AMS - LHR BA JFL1RT € 561 100.0% * * * *

AMS - LHR BD C2OWBMI € 414 73.8% * * * *

AMS - LHR BD CBMI € 560 99.8% * * * *

AMS - LHR KL ZRTLHR € 305 54.4% * * * *

AMS - LHR KL CRTLHR € 355 63.3% * * * *

AMS - LHR KL JRTLHR € 405 72.2% * * * *

AMS - MAD IB IEUCNL € 875 58.5% * € 4 * *

AMS - MAD IB DEUCNL € 945 63.2% * * * *

AMS - MAD IB CEURT1 € 1,015 67.8% * * * *

AMS - MAD KL ZRTKL € 875 58.5% * * * *

AMS - MAD KL CRTKL € 925 61.8% * * * *

29




AMS - MAD KL JRTKL € 975 65.2% * * * *

CDG - AMS AF D2 € 639 93.7% * * * *

CDG - AMS AF CRT1 € 672 98.5% * * * *

CDG - AMS KL ZRT1FR € 608 89.1% * * * *

CDG - AMS KL CRT1FR € 639 93.7% * * * *

CDG - AMS KL JRT1FR € 672 98.5% * * * *

CDG - FCO AF CRT1 € 1,314 99.2% * * * *

CDG - FCO AZ CRT3 € 1,314 99.2% * * * *

CDG - FRA AF CRT1 € 762 98.7% * * * *

CDG - FRA LH CRT € 772 100.0% * * * *

CDG - LHR AF D2 € 575 84.2% * * * *

CDG - LHR AF CRT1 € 673 98.5% * * * *

CDG - LHR BA D2EUCBAO € 518 75.8% * * * *

CDG - LHR BA JFLBAO € 598 87.6% * * * *

CDG - LHR BA JFL1RT € 683 100.0% * * * *

CDG - LHR BD C2OWBMI € 558 81.7% * * * *

CDG - LHR BD CBMI € 682 99.9% * * * *

CDG - MAD AF CRT1 € 1,243 99.2% * * * *

CDG - MAD IB CRT1 € 1,243 99.2% * * * *

FCO - AMS AZ DRT8C € 1,039 73.1% * * * *

FCO - AMS AZ CRTEU € 1,421 100.0% * * * *

FCO - AMS KL ZRT1T € 890 62.6% * * * *

FCO - AMS KL CRT1T € 1,040 73.2% * * * *

FCO - AMS KL JRT1T € 1,190 83.7% * * * *

FCO - CDG AF D2 € 1,126 81.7% * * * *

FCO - CDG AF CRT1 € 1,378 100.0% * * * *

FCO - CDG AZ DRT8M € 1,126 81.7% * * * *

FCO - CDG AZ CRT3 € 1,378 100.0% * * * *

FCO - FRA AZ DRT8C € 970 85.8% * * * *

FCO - FRA AZ CRTEU € 1,130 100.0% * * * *

FCO - FRA AZ COWEU € 1,190 105.3% * * * *

FCO - FRA LH DLEX18 € 970 85.8% * * * *

30




FCO - FRA LH CRT € 1,130 100.0% * * * *

FCO - LHR AZ DRT8C € 959 77.5% * * * *

FCO - LHR AZ CRT8T € 1,139 92.1% * * * *

FCO - LHR AZ CRTEU € 1,237 100.0% * * * *

FCO - LHR BA D2EUCBA € 959 77.5% * * * *

FCO - LHR BA J2FLBA € 1,139 92.1% * * * *

FCO - LHR BA JFL1RT € 1,237 100.0% * * * *

FCO - MAD AZ DRT8C € 1,119 87.4% * * * *

FCO - MAD AZ CRTEU € 1,146 89.5% * * * *

FCO - MAD AZ COWEU € 1,274 99.5% * * * *

FCO - MAD IB CRT € 1,118 87.3% * * * *

FCO - MAD IB CRTOI € 1,152 90.0% * * * *

FCO - MAD UX DRTIT € 960 75.0% * * * *

FCO - MAD UX CRT € 1,118 87.3% * * * *

FRA - AMS KL ZRTDE € 467 78.1% * * * *

FRA - AMS KL CRTDE € 494 82.6% * * * *

FRA - AMS KL JRTDE € 534 89.3% * * * *

FRA - AMS LH CRT € 598 100.0% * * * *

FRA - CDG AF CRT1 € 769 100.0% * * * *

FRA - CDG LH CRT € 769 100.0% * * * *

FRA - FCO AZ CRTEU € 1,130 100.0% * * * *

FRA - FCO AZ COWEU € 1,190 105.3% * * * *

FRA - FCO LH CRT € 1,130 100.0% * * * *

FRA - LHR BA D2EUCBAO € 709 86.1% * * * *

FRA - LHR BA JFLBAO € 751 91.3% * * * *

FRA - LHR BA JFL1RT € 823 100.0% * * * *

FRA - LHR LH YFLEX1 € 741 90.0% * * * *

FRA - LHR LH CRT € 823 100.0% * * * *

FRA - MAD IB CRTDE1 € 1,501 100.0% * * * *

FRA - MAD JK CRT1 € 1,501 100.0% * * * *

FRA - MAD LH C7RT € 1,501 100.0% * * * *

FRA - MAD LH CRT € 1,501 100.0% * * * *

31




LHR - AMS BA JFLBA £404 85.1% * * * *

LHR - AMS BA JFLRT £471 99.2% * * * *

LHR - AMS BD C2OWBMI £404 85.1% * * * *

LHR - AMS BD CBMI £470 98.9% * * * *

LHR - AMS KL ZRT1LHR £274 57.7% * * * *

LHR - AMS KL CRT1LHR £342 72.0% * * * *

LHR - AMS KL JRT1LHR £434 91.4% * * * *

LHR - CDG AF D2 £406 76.9% * * * *

LHR - CDG AF C2 £446 84.5% * * * *

LHR - CDG AF CRT1 £528 100.0% * * * *

LHR - CDG BA JFLBA £459 86.9% * * * *

LHR - CDG BA JFLRT £528 100.0% * * * *

LHR - CDG BD C2OWBMI £458 86.7% * * * *

LHR - CDG BD CBMI £528 100.0% * * * *

LHR - FCO AZ DRTGB7 £609 76.5% * * * *

LHR - FCO AZ CRT £671 84.3% * * * *

LHR - FCO AZ CRTEU £796 100.0% * * * *

LHR - FCO BA JFLBA £671 84.3% * * * *

LHR - FCO BA JFLRT £796 100.0% * * * *

LHR - FRA BA JFLBA £548 91.0% * * * *

LHR - FRA BA JFLRT £602 100.0% * * * *

LHR - FRA LH CFLEX11 £548 91.0% * * * *

LHR - FRA LH C6RT £548 91.0% * * * *

LHR - FRA LH CRT £602 100.0% * * * *

LHR - MAD BA JFLBA £648 91.3% * * * *

LHR - MAD BA JFLRT £710 100.0% * * * *

LHR - MAD BD C2OWBMI* £398 56.1% * * * *

LHR - MAD BD CBMI £710 100.0% * * * *

LHR - MAD IB CFLUK £648 91.3% * * * *

LHR - MAD IB CFLRTUK £710 100.0% * * * *

MAD - AMS IB DEUCNL € 900 57.0% * * * *

MAD - AMS IB CEURT € 1,005 63.7% * * * *

32




MAD - AMS KL ZRTES € 849 53.8% * * * *

MAD - AMS KL CRTES € 899 57.0% * * * *

MAD - AMS KL JRTES € 949 60.1% * * * *

MAD - CDG AF CRT1 € 1,282 100.0% * * * *

MAD - CDG IB CEURT € 1,282 100.0% * * * *

MAD - FCO AZ DRTES2 € 1,019 79.6% * * * *

MAD - FCO AZ CRTEU € 1,152 90.0% * * * *

MAD - FCO AZ COWEU € 1,280 100.0% * * * *

MAD - FCO IB DAP7DI € 960 75.0% * € 75 * € 50

MAD - FCO IB CEURT € 1,152 90.0% * * * *

MAD - FCO UX DRTIT € 860 67.2% * * * *

MAD - FCO UX CRT € 1,280 100.0% * * * *

MAD - FRA IB CRTDE1 € 1,501 100.0% * * * *

MAD - FRA JK CRT1 € 1,501 100.0% * * * *

MAD - FRA LH CTR € 1,501 100.0% * * * *

MAD - LHR BA D2EUCBA € 962 80.0% * * * *

MAD - LHR BA J2FLBA € 1,083 90.0% * * * *

MAD - LHR BA JFL1RT € 1,203 100.0% * * * *

MAD - LHR BD C2OWBMI* € 600 49.9% * * * *

MAD - LHR BD CBMI € 1,202 99.9% * * * *

MAD - LHR IB DEUCES € 962 80.0% * * * *

MAD - LHR IB CFLES € 1,083 90.0% * * * *

MAD - LHR IB CFLRTES € 1,203 100.0% * * * * Source: IATA

33

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Table 4: Economy Flexible

Economy Flexible Restrictions

Route Carrier Fare Code Fare Fare (% IATA) AP Ref /Pen Min/Max Change

AMS - CDG AF S € 448 65.6% * * * *

AMS - CDG AF YRONECAB € 604 88.4% * * * *

AMS - CDG KL XPXKL € 418 61.2% * € 75 * € 25

AMS - FCO AZ YRTNL4 € 889 64.1% * * * *

AMS - FCO KL XPXKL € 885 63.9% * € 75 * € 25

AMS - FRA KL XPXKL € 435 72.9% * € 75 * € 25

AMS - FRA LH YFLEX12 € 425 71.2% * * * *

AMS - LHR BA YFLBAO € 362 64.5% * * * *

AMS - LHR BD YBMI € 360 64.2% * * * *

AMS - LHR KL XPXLHR1 € 275 49.0% * € 75 * € 25

AMS - MAD IB YBB1 € 835 55.8% * * * *

AMS - MAD KL SPXKL € 665 44.5% * € 75 * € 25

AMS - MAD KL XPXKL € 835 55.8% * € 75 * € 25

CDG - AMS AF S € 608 89.1% * * * *

CDG - AMS AF YRONECAB € 672 98.5% * * * *

CDG - FCO AF S € 1,185 89.5% * * * *

CDG - FCO AZ YBBFR € 1,185 89.5% * * * *

CDG - FRA AF S € 659 85.4% * * * *

CDG - FRA LH YFLEX8 € 659 85.4% * * * *

CDG - LHR AF S € 486 71.2% * * * *

CDG - LHR BA YFLBAO € 518 75.8% * * * *

CDG - LHR BD YBMI € 518 75.8% * * * *

CDG - MAD AF S € 1,038 82.8% * * * *

CDG - MAD IB Y2R5 € 1,038 82.8% * * * *

FCO - AMS AZ YRTAZ € 789 55.5% * * * *

FCO - AMS KL XRT1T € 790 55.6% * € 80 * € 80

FCO - AMS TV YCOW € 730 51.4% * * * *

FCO - CDG AF RWEEKIT € 867 62.9% * 50% * € 80

FCO - CDG AF S € 985 71.5% * * * *

FCO - CDG AZ OBB8M € 867 62.9% * 50% * € 80

FCO - CDG AZ YRTAZ4 € 985 71.5% * * * *

34




FCO - FRA AZ BPX8C7 € 799 70.7% * * * € 50

FCO - FRA AZ YRTAZ € 899 79.6% * * * *

FCO - FRA LH YFLEX18 € 900 79.6% * * * *

FCO - LHR AZ BPX8C2 € 539 43.6% * 30% * € 50

FCO - LHR AZ YRTAZ € 899 72.7% * * * *

FCO - LHR BA Y2FLBA € 899 72.7% * * * *

FCO - MAD AZ YRTAZ € 979 76.5% * * * *

FCO - MAD IB YRT3 € 1,038 81.1% * * * *

FCO - MAD UX MPXIT € 749 58.5% * € 75 * € 50

FCO - MAD UX YRT € 1,038 81.1% * * * *

FRA - AMS KL XRTDE € 420 70.2% * € 75 * € 50

FRA - AMS LH YFLEX1 € 539 90.1% * * * *

FRA - CDG AF S € 693 90.1% * * * *

FRA - CDG LH YFLEX1 € 694 90.2% * * * *

FRA - FCO AZ BPXGE2 € 779 68.9% * * * € 50

FRA - FCO AZ YRTGE € 999 88.4% * * * *

FRA - FCO LH YFLEX1 € 1,017 90.0% * * * *

FRA - LHR BA YFLBAO € 699 84.9% * * * *

FRA - MAD IB YRTDE € 1,381 92.0% * * * *

FRA - MAD JK YFLEXY € 1,381 92.0% * * * *

FRA - MAD LH YFLEX1 € 1,381 92.0% * * * *

LHR - AMS BA YFLBA £368 77.5% * * * *

LHR - AMS BD YBMI £368 77.5% * * * *

LHR - AMS KL BRT1LHR £233 49.1% * £50 * £50

LHR - AMS KL XRT1LHR £244 51.4% * * * *

LHR - CDG AF KBDGB £269 50.9% * 20% * £30

LHR - CDG AF S £309 58.5% * * * *

LHR - CDG BA YFLBA £318 60.2% * * * *

LHR - CDG BD YBMI £318 60.2% * * * *

LHR - FCO AZ BPXGB7 £404 50.8% * 30% * £35

LHR - FCO AZ YRTGB £573 72.0% * * * *

LHR - FCO BA YFLBA £573 72.0% * * * *

35




LHR - FRA BA YFLBA £502 83.4% * * * *

LHR - FRA LH YBB04 £553 91.9% * £90 * *

LHR - MAD BA YFLBA £594 83.7% * * * *

LHR - MAD BD Y2OWBMI £398 56.1% * * * *

LHR - MAD BD YBMI £594 83.7% * * * *

LHR - MAD IB YFLUK £594 83.7% * * * *

MAD - AMS KL XPXES € 749 47.5% * € 75 * € 25

MAD - CDG AF S € 1,120 87.4% * * * *

MAD - CDG IB Y2 € 1,120 87.4% * * * *

MAD - FCO AZ YRTES € 949 74.1% * * * *

MAD - FCO UX MPXIT € 576 45.0% * € 75 * € 50

MAD - FCO UX YRT € 1,152 90.0% * * * *

MAD - FRA JK YFLEXY1 € 1,350 89.9% * * * *

MAD - FRA LH YFLEX55 € 1,350 89.9% * * * *

MAD - LHR BA Y2FLBA € 920 76.5% * * * *

MAD - LHR BD Y2OWBMI € 600 49.9% * * * *

MAD - LHR BD YBMI € 830 69.0% * * * *

MAD - LHR IB YFLES € 920 76.5% * * * * Source: IATA

36

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Table 5: Business Restricted

Business Restricted Restrictions


AMS - LHR BD JOWBMI € 304 54.2% * NRF * € 45

AMS - LHR BD DOWBMI € 369 65.8% * NRF * € 45

CDG - FCO AF DWEEK7 € 1,194 90.2% 7 € 200 * No

CDG - FCO AZ DRTFR7 € 1,194 90.2% 7 € 200 * No

CDG - FRA AF DWEEK7 € 685 88.7% 7 € 200 * No

CDG - LHR AF DWEEK7 € 516 75.5% 7 € 200 * No

CDG - LHR BD DOWBMI € 518 75.8% * NRF * € 45

CDG - MAD AF DWEEK7 € 1,112 88.7% 7 € 200 No No

CDG - MAD IB DAP7FR € 1,112 88.7% 7 € 200 * No

FCO - AMS AZ IRT8C € 889 62.6% * NRF * € 50

FCO - MAD AZ IRT8C3 € 959 74.9% 7 NRF 1M No

FCO - MAD IB DAP7DOI € 960 75.0% 7 € 90 1M € 50

LHR - AMS BA CEUCBA £352 74.1% * NRF * No

LHR - AMS BD DOWBMI £352 74.1% * NRF * £45

LHR - CDG BA CEUCBA £418 79.2% * NRF * No

LHR - CDG BD DOWBMI £418 79.2% * NRF * £45

LHR - FCO BA CEUBA £609 76.5% * NRF * No

LHR - FRA BA CEUCBA £496 82.4% * NRF * No

LHR - FRA LH DFLEX11 £496 82.4% * * 6M *

LHR - FRA LH YFLEX11 £502 83.4% * * 6M *

LHR - MAD BA DEUCBA £482 67.9% * NRF * No

LHR - MAD IB DEUCUK £617 86.9% * NRF * No

MAD - FCO AZ IRTES3 € 960 75.0% 7 NRF 1m No Source: IATA

37

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 Table 6: Economy Restricted

Economy Restricted Restrictions


AMS - CDG KL SAPKL € 398 58.3% 3 € 75 1 € 25

AMS - FCO AZ BPXNL4 € 699 50.4% * 30% 1 € 50

AMS - FCO KL BPXKL € 650 46.9% 7 € 75 1 € 25

AMS - FCO KL SPXKL € 700 50.5% 3 € 75 1 € 25

AMS - FRA KL SAPKL € 385 64.5% 3 € 75 1 € 25

AMS - FRA LH BFLEX12 € 360 60.3% * € 75 1 *

AMS - LHR BA BNCEUR € 282 50.3% * NRF * € 50

AMS - LHR BD SOWBMI € 300 53.5% * NRF * € 45

AMS - LHR KL SPXLHR1 € 265 47.2% 3 € 75 1 € 25

CDG - AMS AF KPX0 € 412 60.4% * € 120 SU/3M € 60

CDG - AMS KL BPXT1FR € 412 60.4% * € 120 SU/3M € 60

CDG - FCO AF RWEEK € 1,066 80.5% * NRF * € 60

CDG - FCO AZ OBB8M € 1,066 80.5% * NRF * € 60

CDG - FRA AF RWEEK € 584 75.6% * NRF * € 60

CDG - FRA LH BFLEX8 € 584 75.6% * NRF * € 75

CDG - LHR AF KPX0 € 341 49.9% * € 120 SU/3M € 60

CDG - LHR BA BEUCBAO € 379 55.5% * NRF * € 50

CDG - LHR BD SOWBMI € 438 64.1% * NRF * € 45

CDG - MAD AF RWEEK € 936 74.7% * NRF SU/3M € 60

CDG - MAD IB YFLR € 936 74.7% * NRF * € 60

FCO - AMS AZ BPX8CN € 589 41.4% * 30% 2/ € 50

FCO - AMS KL SPX1T € 477 33.6% * € 80 SU € 80

FCO - AMS TV BVOW € 550 38.7% * NRF * € 50

FCO - FRA LH BFLEX18 € 690 61.1% * € 100 2 € 100

FCO - LHR BA BEUCBA2N € 539 43.6% * NRF * € 50

FCO - MAD AZ MPX8C2 € 539 42.1% * 30% SU 2 Min € 50

FCO - MAD AZ BPX8C8 € 719 56.2% * 30% 1 € 50

FCO - MAD IB BOIEU € 719 56.2% * 30% 1 € 50

FCO - MAD IB YRTOI € 980 76.6% * € 90 * No

FRA - AMS KL SPXDE € 330 55.2% * € 75 SU € 50

FRA - AMS LH BLEX1 € 458 76.6% * * 2/5 *

38


Economy Restricted Restrictions


FRA - CDG AF RFLEXDE € 590 76.7% * * 2/5 *

FRA - CDG LH BFLEX1 € 590 76.7% * * 2/5 *

FRA - FCO LH BFLEX1 € 747 66.1% * * 2/5 *

FRA - LHR LH BLEX1 € 630 76.5% * * 2/5 *

FRA - MAD IB BRTDE € 1,105 73.6% * * 2/5 *

FRA - MAD JK BFLEXY € 1,105 73.6% * * 2/5 *

FRA - MAD LH BFLEX1 € 1,105 73.6% * * 2/5 *

LHR - AMS BA BEUCBA £277 58.3% * NRF * £30

LHR - AMS BD SOWBMI £276 58.1% * NRF * £45

LHR - CDG BA DEUCBA £286 54.2% * NRF * No

LHR - CDG BD SOWBMI £298 56.4% * NRF * £45

LHR - FCO BA BEUCBA £404 50.8% * NRF * £30

LHR - FRA LH BLEX11 £387 64.3% * * 6M *

MAD - AMS IB BAP2DEU € 690 43.7% 2 € 75 * € 50

MAD - AMS IB YBBNL € 749 47.5% * 10% * No

MAD - AMS KL SPXES € 649 41.1% * € 75 1 € 25

MAD - CDG AF KPXES € 680 53.0% * € 100 SU/6M € 100

MAD - CDG IB HKAP1M34 € 434 33.9% 7 NRF SU/1M No

MAD - FCO AZ BPXES € 719 56.2% * * 1 € 50

MAD - FCO IB BAP4DI € 576 45.0% 4 € 75 * € 50

MAD - FCO IB YEURT € 980 76.6% * € 90 * No

MAD - FRA IB BAP4DDE € 1,029 68.6% 4 € 75 * No

MAD - FRA IB YBBDE1 € 1,350 89.9% * € 90 * No

MAD - FRA JK YFLEXY2 € 1,030 68.6% 3 * 6M *

MAD - FRA LH BFLEX61 € 690 46.0% 7 * 6M *

MAD - FRA LH YFLEX57 € 1,030 68.6% 3 * 6M * Source: IATA

39


Annex D – Interline Data Table 3: Share of normal fares sold at IATA fares

Total Air France Alitalia British Airways

IBERIA KLM Lufthansa

Amsterdam - London 22.36% [ ] [ ] [ ] [ ] [ ] [ ]

Frankfurt - London 54.39% [ ] [ ] [ ] [ ] [ ] [ ]

Frankfurt - Paris 44.07% [ ] [ ] [ ] [ ] [ ] [ ]

Frankfurt - Rome 63.14% [ ] [ ] [ ] [ ] [ ] [ ]

London - Paris 21.98% [ ] [ ] [ ] [ ] [ ] [ ]

Madrid - Rome 65.05% [ ] [ ] [ ] [ ] [ ] [ ]

Source: Interline data submitted by IATA to DG Comp. Data for July – December 2003.

The table above shows the share of normal (fully flexible) fares sold as IATA fares, for a selection of routes and airlines. The routes and airlines selected are those that are both part of our hub-to-hub analysis at Annex C, and are reported in the data supplied to the Commission. The data is coded as follows:

• Blue observations, no bold: The operator has a relatively minor share of the routes normal traffic sold at IATA fares. Minor is defined as approximately 10% or less of total IATA fares for the route.

• Bold observations: The operator has a significant share (all significant levels of IATA ticket sales that are reported but are not defined as minor by the above definition).

• The ‘Total’ column is the average level of IATA fares as a percentage of all normal fares on the route, for the carriers that provide data in the report.

A number of significant observations can be made:

• On routes where carriers report a very high percentage of IATA tickets they are, in general, not very significant players on that route (in terms of normal fare traffic).

• Where airlines are significant on a major route, they generally issue no more than 20-30% of tickets as IATA fares. The striking exception is [ ], which has a high percentage across all routes.

• Air France and Lufthansa, the focus of significant attention in the discussion paper, [ ].

40

Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 [ ].28

28 Refer to: IATA Observations On Results Of Interline Consultation, 22 December 2004, footnote 12

(Confidential Version).

41


Annex E – Fares Classes or ‘Buckets’ on Five European Hub-to-Hub Routes Table 4: Number of fare classes revealed – comparison of ‘availability’ and ‘public fare’ displays

Ond Carrier Availability Display Published Fare Display

Business Economy Business Economy

AMSCDG AF 4 17 3 8

KL 3 12 3 8

AMSFCO AZ 3 11 3 10

KL 3 12 3 8

LHRAMS BA 4 11 3 10

BD 4 15 2 9

KL 3 12 3 8

LHRMAD BA 4 11 3 8

BD 4 15 1 9

IB 3 10 3 8

CDGFRA AF 3 17 2 10

LH 3 8 1 7 Source: IATA

The availability display of the reservation system shows the fare classes29 that are open for general sale on GDS systems. This shows all of the buckets (fare classes) that can possibly be sold on a particular segment. The number of fares may vary by route or aircraft type but it is usually a set number. Not all buckets are displayed in public GDS systems — some are kept internal for Revenue Management purposes. The published fare display lists the published fares that have been filed and were available on the particular origin and destination (OND) pair that we had requested data on. The difference between the two figures represents that fact that there are other fare classes operating on the segment, but not available on the OND pair being analysed. In other words, the published fare display does not give a complete picture of all the 29 The difference between ‘fare code’ and ‘fare class’ is as follows. A fare code is a combination of letters or

numbers that are used to designate the rules and conditions for a particular fare. "DWEEK7"is an example of a fare code. The first letter of the fare code designates the fare class or what is also called the bucket in the industry. A fare class or bucket is a letter that is used to designate the inventory domain of a particular value class of fares. "D" class in the previous example. A bucket can be made up of many different fare codes, but a fare code can only be attached to one fare class or ‘bucket’.

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Some comments on the DG Competition discussion paper of March 2005 regarding the IATA tariff conference system Public Version - 8 April 2005 possible fare classes (let alone fare codes) that may be on the aircraft. The difference includes fare classes that cover unpublished fare passengers, frequent fliers, or flow passengers travelling between different OND’s who happen to be travelling over that segment. Within these there may be several or even many fare codes.

This analysis is important when it comes to understanding route pricing. If the objective is to understand pricing on a particular OND pair, then it is important to understand that these other fare classes exist, and will in some cases absorb considerable capacity on the route. On CDG – FRA for example, the analysis suggests that Lufthansa may have two business fare classes available in its aircraft operating this route that are not available to point to point business passengers, while Air France has seven fare classes of this type in economy class. This suggests that pricing on this route for point to point passengers may be heavily influenced by the number of seats being utilised by these other classes.

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iata - response to dg comp discussion paper - 4 april 2005

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