Examination of witnesses (Questions 160
- 179)
THURSDAY 18 JUNE 1998
MR ULRICH
SCHULTE-STRATHAUS
160. We shall not have the benefit of being
able to talk to them ourselves. How do you believe they would
view the situation? Is that asking you too much?
A. I have the
impression they would welcome the comments I have just made because
for the first time we have spoken out in favour of what they have
been doing. We have not said so in the past. I think their approach
is somewhat similar to what I have just presented. They would
be inclined to believe that on the basis of subsidiarity national
competition authorities should continue to enforce the EU competition
rules with respect to third countries for as long as possible.
161. Has there been any evidence that the
Kartellamt would take a fairly strong line with the airline industry
just as they have done in many other industries? Have they fined
people for price fixing?
A. Yes, they
have. They have initiated a case against Lufthansa for pricing
on Frankfurt-Berlin. They are investigating pricing on Frankfurt-Munich.
We took issue with that. It is under litigation so the outcome
has not yet been settled. They are investigating alliances. They
have investigated frequent flyer programmes. So they are very
active in the field of aviation, yes.
Lord Berkeley
162. Do you have any competition on those
routes you have just mentioned? What market share do you have
between Frankfurt and Berlin, for example?
A. The argument
that was raised by the Kartellamt was that our pricing is different
depending on whether there is competition on the route or not.
We disputed their market definition. The issue of market definition
is one which competition authorities in general have difficulties
with and that is the reason why it is under litigation. On Frankfurt-Munich
there is indeed competition. British Airways was a former competitor
and decided to move out of that route. I believe that some of
the competitors that we have domestically under-estimate the fact
that as a privatised company we have become far more market orientated
than before and we are now not only more readily able but willing
to take up any challenge that presents itself in the market.
Chairman
163. You have an agreement, as I understand
it, between Lufthansa and SAS. If there was to be this pan-European
competition authority, which is what you are advocating, how would
you suppose their view would differ from that of DG IV?
A. Are you referring
to the Lufthansa and SAS case which is one which was decided upon
by DG IV based on the assumption that the Lufthansa-SAS alliance
is one which is between two European carriers for routes within
the European Union? We received approval from DG IV for that alliance
subject to a number of remedies and that alliance has now been
in place for a number of years. It has not dominated competition.
We believed that the remedies were appropriate. I do not have
any notion that any pan-European competition authority would have
decided otherwise. The issue with the Lufthansa-United SAS case,
which is a different case because it involves a non-European airline
for North-Atlantic routes, is one where I believe the pan-European
competition authority could indeed take a different view, first
of all, because such an authority would need to try and determine
how one could try and establish such a common denominator rule
governing competition on that transatlantic market. They would
not take the approach favoured by DG IV which would be to act
completely irrespective of what US authorities had actually decided
in the Lufthansa-United SAS case because this alliance received
approval from the US authorities for North Atlantic routes by
the US authorities subject to completely different remedies.
164. In earlier evidence to this enquiry
it was put to us that the proposed Regulations made a great deal
of sense if one was talking of the European periphery and, indeed,
Switzerland was mentioned which is right in the middle. I think
you take the point. That evidence agreed with you that it made
little sense to do it to further away third countries. Would you
go along with that?
A. Yes and no.
Yes to the extent that we already have negotiations with middle-European
and eastern-European countries and it would be wise to await the
outcome of these discussions so that we can ascertain to what
extent they have been beneficial for both sides. No to the extent
that I do not think it is a question of geographic distance, it
is a question of aviation policy. The only country we can currently
conceive where it would be worthwhile to pursue this approach
of creating a joint aviation area is the United States. These
have pursued a liberal aviation policy in the past. They have
signed a number of open skies agreements with European countries
and it appears worthwhile to have a closer look at whether or
not it would be possible to create a framework for a truly transatlantic
single aviation market with them other than the United States.
If you were to take countries like China, Japan, Indonesia, Vietnam,
Australia, whatever, I would perceive enormous difficulties for
these countries being able to agree with the notion of now taking
up negotiations with the Commission and having an array of European
carriers flying from any point in Europe to their respective country.
165. That is just a question of volume really
or mass. There are that many more transatlantic ones. You get
equality, is that really what you are saying? Take Australia as
an example with Qantas, I think what you are saying is Qantas
would be all on its own and it would get flooded by Lufthansa,
Air France, Sabena, BA, you name it.
A. The question
is what the added value would be for Qantas to pursue the notion
of now wanting such an agreement with the European Union or the
Australian government for that matter. What would the incentive
for them be to begin negotiations with the Union either because
of trade pressure exerted outside the realm of traditional aviation
policy or the threat of discontinuing air services until they
do negotiate? I do not think that that is necessarily an avenue
one should pursue. I would agree with you that yes, it is also
a question of negotiating leverage and here again the US would
be the only country that would be able to act as a partner in
such negotiations.
166. Let us come back to your advocacy of
an independent competition authority within Europe. Do you have
much support for that line amongst your friendly rivals in other
EU countries?
A. The notion
of a truly independent aviation authority was one which was presented
by the German government several years ago and I do not think
it found any support at all. I do not believe that we would find
support for this notion either for the time being. However, as
other airlines begin to see the implications of the powers that
the Competition Directorate is now advocating they may well also
dread the future ramifications of such a political entity driving
competition policy and change their opinions.
Lord Thomas of Macclesfield
167. In your evidence you referred several
times to a political agenda and you have just now mentioned it
yet again. Could I be clear in my mind what Lufthansa's view is
of this political agenda from the Commission and is it restricted
to DG IV or DG VII or is it the whole Commission? What is this
political agenda you are referring to?
A. It appears
to me that the Commission is confronted with an awkward situation
of Member States on the one hand agreeing in principle with the
basic ideals of the European Union and agreeing in principle that
sovereign rights should be transferred from them to the European
Union, but when it comes down to practicalities, certainly in
the aviation area, they are not actually walking their talk. Member
States are still negotiating with third countries air service
agreements that discriminate between airlines depending on the
nationality of the airline. The Commission is finding it difficult
to accept this and from a purely legal point of view I have some
sympathy with that. There is a practical implication in that,
of course, which is that you cannot really expect the Member States
to cease all kinds of negotiations and have the Commission take
this up with immediate effect and you cannot really ask the Commission
to intervene in these negotiations with immediate effect either.
Given the fact that the Commission has a point which is from a
legal perspective valid but has no means of changing anything
in the situation as it currently appears, they are now taking
the question of alliances and investigating these alliances, threatening
severe remedies for the alliances in the course of the investigations
and treating all alliances equally. They are making appearances
in the media as if alliances were by definition bad, as if size
were bad for the consumer or for competition. They have dramatised
the potential drawbacks of alliances in such a way that one has
the impression that only if Member States were to act by giving
them additional competency, would they be prepared to accept the
situation as it is as outlined at the outset. The political agenda
is one where there is not a market definition and the consequences
of market behaviour that drives a competition authority to act
but considerations that lie outside of those two phenomenon.
168. With respect, is that not you and Lufthansa
acting politically as well? Why is this peculiar to the aircraft
industry? No other industry has those forms of protection. Why
do you use the word political agenda when the European Commission
is trying to act in the best interests of all the Community?
A. Are they really
trying to act in the best interests of all the Community?
169. Are you saying they are not?
A. They may well
believe that they are, but I do not believe that the approach
that they have adopted in the case of the alliances is in the
interests of the Community. US and Asian carriers are beginning
to query, first of all, whether they can rely on bilateral arrangements
to remain in place. I do not believe that that is in the interests
of Member States and I do not believe that is in the interests
of European airlines because European airlines (and they currently
account for eight per cent of global air traffic) need alliances
to be able to position them in the globalised aviation market.
Without such alliances we would not be able to compete globally.
By acting in the way they are they are undermining the potential
value of European airlines as strategic partners in global alliances.
170. Is there a good alliance or a bad alliance?
A. To the extent
that alliances have networks which compliment each other and do
not overlap, thereby increasing presences on certain routes, but
compliment each other and thus offer the consumers transportation
opportunities that these did not have before, to the extent that
the alliances compete against each other by offering different
options for the routings so that a passenger who is in Northern
Germany can either travel with one alliance over London to the
United States or with another alliance over Amsterdam to the United
States or with a third alliance over Paris and so on and so forth,
to the extent that there is such competitive pressure and an additional
product quality these alliances are good for the consumers, yes.
I do not believe they are good to the extent that they do not
provide for such additional opportunities.
Chairman
171. How does that square with anti-trust
immunity in the States because that by definition is reducing
competition, is it not?
A. The anti-trust
immunity granted by the United States for the alliances, Lufthansa-United-SAS,
was precisely for the reasons mentioned, because the networks
are complimentary and because the alliance partners were able
to demonstrate what the potential benefits of their alliance would
be for the consumers. To that extent the anti-trust immunity granted
does square with what I have just said.
Lord Methuen
172. I would like to go back to this business
of slots. Any open skies policy or liberalisation within Europe
surely needs to reconsider the method of allocating slots, particularly
as you start going out of Europe. Would you like to comment on
that?
A. First of all,
slot scarcity is a symptom of the problem and not the cause of
the problem. What we lack is infrastructure. Were there to be
additional infrastructure certainly at key airports and also over
the regional airports and were there to be a truly unified European
air traffic control system with no bottlenecks we would not have
the constraints that we currently have. We do have them, however,
and therefore the question of slot allocation becomes increasingly
important. We feel that at this point in time the current slot
allocation procedure provides the sort of flexibility that the
competing carriers require. It has the grandfathering for those
that need long-term planning safeguards and it also provides for
slot exchange to take place should individual competitors find
that they can mutually agree to optimise the slots that they currently
have. These elements of flexibility are ones which at least to
our knowledge most carriers can live with. The more aviation agreements
are liberalised and the greater the tendency for new market entrants
to want to enter the market the greater the problem of slot scarcity
will become, which is why we are currently in the process of reviewing
our position on slot trading. We believe that that could indeed
provide a viable solution, but we have not really finalised our
position on that so far for the simple reason that we are not
quite sure what the implications would be. We have been hearing
from a number of airports that should secondary slot trading be
permitted between airlines then the airports themselves would
want to have some kind of value attached to what they had at the
very outset before the slots were allocated to the airlines. That
in turn would seem to complicate matters more than solve them.
There are a number of questions that we still need and want to
consider internally before coming up with a final position.
173 Do you think there should be some European-wide
consistency in the method of handling slots which there certainly
is not at the moment? Heathrow is notorious.
A. Yes, I do.
Chairman
174. DG IV has intimated that it might ask
Lufthansa to give up 150 slots at Frankfurt.
A. It actually
went beyond that, it said that the alliance would have to give
up slots and the alliance means United Airlines, which is a US
carrier. The question is whether the Commission can, at this point
in time, force a non-European airline to give up slots either
in the US, which would raise the question of extra territorial
applications of EU competition law, or in Europe, which raises
the question of the validity of bilateral agreements in place.
United claims that they have an open skies agreement that gives
them free market access and they are not prepared to accept the
notion of a third institution somewhere also telling them they
can no longer fly to Germany because the slots that they have
at Frankfurt are going to be taken away from them. That is the
complication. The slot withdrawal issue is one which was first
raised in the Lufthansa-SAS case. In that case Lufthansa and SAS
agreed in principle to accept the idea that if a competitor wished
to enter certain routes and was not able to gain access to the
infrastructure through the normal process we would then seal the
number of slots that that competitor wished to have up to a certain
ceiling. That as a matter of principle is one that we accepted
in that case and with the same logic we would be prepared to accept
it in other cases. If as a result of the alliance being in place
in the market a market entrant were to want to enter certain routes
and was not able to do so because of slot constraints and not
able to gain access to those slots through the normal means then
we would be prepared to seal slots.
Lord Skelmersdale
175. Who is to dictate the ceiling? Are
you to dictate it or the competition authorities? If it is you
then surely by definition you have the opportunity to limit competition.
A. That is a
point that we also raised with the Commission. Clearly they are
saying that a certain given number of slots would need to be sealed
in order to enable slots——
176. I understand that.
A. We accept
that as a principle, that they determine what the ceiling is.
We would want to know under which criteria they choose the routes
in question and how they come up with a certain number of slots.
That gives rise to this question of a politically-driven agenda.
In the case of the US-UK their approach was, "Tell us which
competitors are out there wanting to go on to certain routes.
Tell us how many frequencies they want to have. We will then calculate
the number of slots that will have to be withdrawn from the incumbent
carriers and given to those competitors. Then you come up with
a certain figure." The Commission did not do that. The Commission
came up with a figure out of the blue and said, "This number
might fit here and if the other number is substantially larger
then we can demonstrate that we consider the other airlines to
be not so beneficial for the consumers". They have no competition
theory that would help them substantiate the number, ie, why is
150 slots adequate in the case of Lufthansa and United? Why not
50 or 300? That is one of the reasons why cannot really come up
with a sensible dialogue with the Commission, because they have
a political agenda of some sort.
Lord Berkeley
177. I think you heard the evidence from
the Air Transport Users Council who said that if an alliance was
formed between two airlines competing on a route other than across
the Atlantic or somewhere else with a feeder one that was bad
for the customer by definition because it reduced competition
and therefore reduced choice. You do not agree with that by the
sound of it.
A. We believe
in analysing traffic flows rather than looking at specific routes.
The consumers in North Rhine Westphalia, a region I happen to
know in Germany, that wish to travel to the United States can
do so by travelling from Dusseldorf to Frankfurt and the United
States or Dusseldorf and London and the United States. I ask myself
which are the routes that I need to look at to be able to determine
whether there is competition? As long as the consumer in Dusseldorf
has the options that not only have the result of leading to a
pricing ceiling but also the routing options then he has competitive
options and therefore there is sufficient competition. If I now
look at Dusseldorf-Frankfurt I am not really addressing the issue
and the issue is the person wants to go from Dusseldorf to the
United States. It is not Dusseldorf-Frankfurt that is the relevant
market. Therefore, if an alliance was in place to reduce the number
of carriers competing on Dusseldorf-Frankfurt I would have to
ask what is the market I am talking about and if I come up with
a sufficient number of destinations between Dusseldorf and Frankfurt
I would say that if those passengers now have less competitive
options than they had before I would agree with you. I would agree
with them as well. That alliance has the effect of reducing competition
on that route. These routes have been defined by the US competition
authorities in the case of the Lufthansa-United SAS alliance.
There are two routes out of over 150 where they determined that
there was now less competition than before and for these two routes
they identified remedies.
Chairman
178. Can I come back to this question of
slots again because there has been so much recently in the press
and we are taking evidence which has also addressed the issue.
You said that you would be in favour of trading in secondary slots.
First of all, would you explain what you mean by secondary slots?
A. I am not sure
whether I have the technical definition for you, my Lord Chairman.
179. Give it in lay terms because we are
not technical people.
A. I believe
that the experts like to distinguish between the trading of slots
between airlines, which they call secondary slot trading, and
any other kind of slot trading, primary slot trading so to speak,
which would then have to involve an entity that had the slots
from the very outset. Whether you say this is the airport or the
government is a matter of definition. The implication is that
someone has to allocate at the very outset from a given cake an
individual slot to an airline and then that airline can either
trade it or give it up or use it, but he gets it from somewhere.
If he decides to trade it he would derive his rights to be able
to deal with that slot from that first entity and it would therefore
be secondary slot trading.
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