Airline deals remain stuck on runway

Date: 24/02/2000

By Renée Cordes

Competition Commissioner Mario Monti appears to be in no rush to deliver verdicts on a string of transatlantic airline alliances awaiting regulatory approval on this side of the ocean.

It is anyone's guess when the European Commission will issue a final ruling on the Star global airline alliance led by Deutsche Lufthansa, UAL Corp. (parent company of the world's largest carrier United Airlines) and SAS Scandinavian Airlines.

It also remains unclear when EU competition officials will take a preliminary decision on a tie-up involving KLM, Alitalia and Northwest - even though both of these ventures have already received anti-trust immunity from the US.

And with the partnership between Delta and Air France announced last summer yet to be filed to EU regulators, not to mention several all-European alliances, the Commission's caseload is set to become even heavier.

Surprisingly, however, neither the airlines involved (many of whom had been expecting decisions from former Competition Commissioner Karel van Miert last summer) nor US officials keen to protect the interests of their own carriers and consumers appear to mind the wait.

In large part, the delay has been caused by the seemingly endless changes in alliance constellations world-wide. New airlines have, for example, joined the Star grouping since it was formed and Air France took the industry by surprise last June when it announced that that it had chosen Delta Air Lines as its exclusive partner for the next ten years.The move stunned Continental Airlines, another US carrier which has a code-sharing agreement with Air France, and KLM, which had been planning to lure the French carrier to its own alliance with Alitalia and Northwest.

The long wait for decisions on the raft of aviation alliances has also been caused, in part, by personnel shifts within the EU executive since the demise of the Santer team last year.

But even more important, the Commission is still struggling to find the right formula for evaluating whether partnerships between two or more airlines - from simple code-sharing arrangements to much closer cooperation - will have a damaging impact on competition or not.

It currently has to do so by applying the Union's rules governing intra-EU flights to transatlantic deals since there are no specific articles in the Union treaty governing international partnerships.

The industry believes that the delay in ruling on these cases has also been caused by a fundamental rethink within the institution over the best way forward.

"The Commission is re-evaluating its whole approachto alliances," says Emmy Koridima, an aviation lawyer at Oppenheimer, Wolff & Donnelley.

While some of this may be wishful thinking, the Commission has asked airlines to suggest what market definition should be applied in these cases, signalling its willingness to listen to their views.

Lufthansa, United and SAS are expected to reply to the Commission's questionnaire soon. Their answers, and Monti's subsequent response, will be watched closely by the rest of the sector, which is increasing pressure on the Commission to change the whole way it views alliances.

Airline officials argue that regulators should focus on the expanded networks' benefits to passengers of tie-ups - lower prices, more travel options - rather than only scrutinising competition on indiv-idual hub-to-hub routes.

In 1996, the Commission granted Lufthansa and SAS an eight-year exemption from the Union's normal competition rules for a programme of joint network planning, pricing and reciprocal access to frequent-flyer schemes. In return, the carriers had to agree to renounce eight hourly take-off and landing slots per day between Frankfurt, Hamburg, Munich and Düsseldorf and Stockholm, Oslo, Copenhagen and Gothenburg if a 'new entrant' wanted them.

But when no rival airlines asked for the slots, the Commission second-guessed itself, asking whether it should have imposed even stricter conditions.

Executives at the airlines contended that competitors had not bid for the slots because they were able to gain others through the normal channels. But the Commission nevertheless added to its demand for concessions two years later, asking the carriers to release a further 100 slots, mainly at Frankfurt, and to reduce flight frequencies between Frankfurt and Chicago and Washington.

The industry insists that the EU executive must change its approach towards such tie ups in light of changing market conditions. Commission officials say it is too early to say whether Monti will heed the airlines' warnings, but add that regulators will closely examine any new arguments the industry puts forward. Responses are expected as early as next month.

In the meantime, officials insist they cannot give a timetable for decisions on the pending cases, or say whether the EU executive will issue rulings on all of them simultaneously - as Lufthansa and its partners have repeatedly demanded, arguing that they could otherwise be put at a competitive disadvantage.

However, not all airlines have been willing to wait patiently for the Commission to make up its mind. Last autumn, American Airlines and British Airways announced a scaled-back plan to code share on flights serving about 75 destinations in the UK, Europe and Africa, abandoning proposals for a more full-scale merger. However, that agreement also needs regulatory approval and has been held up by a dispute between the US and the UK over traffic rights between Pittsburgh and London's Gatwick airport.

No matter what side of the fence industry and regulatory officials are on, everyone agrees the sector will continue to consolidate and that carriers which want to remain competitive in today's environment will have no choice but to link up with competitors in other markets.

"Alliances are an inevitable trend in the industry and bring consumer advantages," said one European airline official, arguing that this should naturally lead to a broader view of such tie-ups. "There is growing recognition that purely regulating alliances according to position at an individual airport or route is not the way to do it."

Competition Commissioner Mario Monti appears to be in no rush to deliver verdicts on a string of transatlantic airline alliances awaiting regulatory approval on this side of the ocean.