ENec.europa.eu/competition/antitrust/others/consultation...interlining 1.2.1.1 Interlining in the...

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DG COMPETITION CONSULTATION PAPER

Concerning the revision and possible prorogation of Commission Regulation 1617/93 onthe application of Article 81(3) to certain categories of agreements and concerted

practices concerning consultations on passenger tariffs on scheduled air services and slotallocation at airports

The views expressed in the present document are purely those of Directorate General for

Competition at the time of writing and may not in any circumstances be regarded as stating

an official position of the European Commission.

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1. Introduction.................................................................................................................. 3

1.1 Purpose of the consultation paper .......................................................................... 3

1.2 Regulation 1617/93 and the categories of agreements concerned ......................... 4

1.2.1 Interlining in the meaning of Regulation 1617/93, the IATA interliningsystem and IATA passenger tariff conferences, industry practices in respectof multilateral interlining ................................................................................. 4

1.2.2 Slot allocation and airport scheduling conferences.......................................... 9

1.3 Background - Developments in the airline industry ............................................ 10

1.4 Background - Regulatory developments in the area of Community law on theallocation of slots at Community airports ............................................................ 12

1.5 Background � Regulatory developments in the area of Community competitionlaw........................................................................................................................ 13

2. Passenger Tariff Conferences (Routes within the Community) ................................ 14

2.1 Application of Article 81(1)................................................................................. 14

2.2 The four conditions of Article 81(3) .................................................................... 15

2.2.1 ��improving the production or distribution of goods or [] promotingtechnical or economic progress �� ............................................................... 15

2.2.2 ��while allowing consumers a fair share of the resulting benefit �� ......... 16

2.2.3 �� [without] imposing on the undertakings concerned restrictions which arenot indispensable �� ..................................................................................... 21

2.2.4 �� [without] affording such undertakings the possibility of eliminatingcompetition in respect of a substantial part of the products in question.� ..... 22

3. Passenger Tariff Consultations (Routes between the European Community and thirdcountries).................................................................................................................... 23

3.1 The multifaceted regulatory framework applicable to such routes: bilateral airservices agreements.............................................................................................. 23

3.2 ICAO ATConf/5 � �Challenges and Opportunities of Liberalisation�................ 24

3.3 Application of Article 81(1)................................................................................. 26

3.4 The four conditions of Article 81(3) .................................................................... 26

3.4.1 ��improving the production or distribution of goods or [] promotingtechnical or economic progress,� ................................................................... 27

3.4.2 ��while allowing consumers a fair share of the resulting benefit �� ......... 28

3.4.3 �� [without] imposing on the undertakings concerned restrictions which arenot indispensable �� ..................................................................................... 29

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3.4.4 �� [without] affording such undertakings the possibility of eliminatingcompetition in respect of a substantial part of the products in question.� ..... 30

4. Cargo Tariff Consultations (Routes between the European Community and thirdcountries).................................................................................................................... 31

5. Slot allocation at airports ........................................................................................... 32

5.1 Routes within the Community ............................................................................. 32

5.2 Routes between the Community and third countries ........................................... 33

6. Next steps ................................................................................................................... 34

Annex 1 - IATA Tariff Consultations� description provided by IATA ................................... 35

Annex 2 - Interlining according to a posted price system on routes between hubs andregional/secondary airports ........................................................................................ 40

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DG COMPETITION CONSULTATION PAPER

Concerning the revision and possible prorogation of Commission Regulation 1617/93 onthe application of Article 81(3) to certain categories of agreements and concerted

practices concerning consultations on passenger tariffs on scheduled air services and slotallocation at airports

1. INTRODUCTION

1.1 Purpose of the consultation paper

1. Agreements between undertakings in the air transport sector, decisions byassociations of such undertakings and concerted practices between such undertakingsconcerning consultations on passenger tariffs on scheduled air services and slotallocation at airports are liable to restrict competition and affect trade betweenMember States. However, pursuant to Article 81(3) of the EC Treaty and subject tothe provisions of Commission Regulation 1617/931, Article 81(1) of the EC Treatydoes not apply to such agreements, decisions or concerted practices provided theyconform to the provisions of Regulation 1617/93, which grants them a blockexemption.

2. Regulation 1617/93 applies only until 30 June 2005. Accordingly, the services of DGCompetition wish to:

• identify the main issues that are pertinent for the revision, possible prorogationand extension in scope of the Regulation, and

• consult and gather information from interested parties with a view to conductthe competition assessment of the issues identified in view of that revision,

which is the purpose of this consultation paper.

3. Specific questions and elements which may be of particular interest for the purposeof this paper are identified throughout the document. Further to these specificquestions and elements, respondents are nevertheless invited to submit anydata/information which they consider may be useful to the Commission with a viewto revising Regulation 1617/93.

1 Commission Regulation (EEC) No 1617/93 of 25 June 1993 on the application of Article 85 (3) of the

Treaty to certain categories of agreements and concerted practices concerning joint planning andcoordination of schedules, joint operations, consultations on passenger and cargo tariffs on scheduledair services and slot allocation at airports, OJ L155, 26.6.1993, p. 18

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1.2 Regulation 1617/93 and the categories of agreements concerned

4. Council Regulation 3976/87 on the application of Article 85 (3) of the Treaty tocertain categories of agreements and concerted practices in the air transport sector2

empowers the European Commission to grant Article 81(3) exemptions to certaincategories of agreements between undertakings in the air transport industry. It is onthe basis of Regulation 3976/87 that Regulation 1617/933 was adopted by theCommission on 25 June 1993. Since its adoption, it was amended by CommissionRegulations 1523/964, 1083/19995, 1324/20016 and 1105/20027.

5. The successive amendments of Regulation 1617/93 have resulted in a significantnarrowing of the scope of the block exemptions granted under the Regulation. Atpresent, only two of the initial four block exemptions remain in force, namely theexemption in favour of:

• consultations on passenger tariffs on scheduled air services between points inthe Community, and

• slot allocation and airport scheduling in so far as they concern servicesbetween airports located in the Community.

Further, the specific conditions set out in Regulation 1617/93 to be met for theArticle 81(3) exemption to apply have been reinforced over time. For example, in thelast amendment to Regulation 1617/93, a mandatory data collection requirement wasadded in respect of passenger tariff consultations to facilitate the evaluation by theCommission of both the consumer benefits and the anti competitive effects of thesaid conferences.

1.2.1 Interlining in the meaning of Regulation 1617/93, the IATA interlining system andIATA passenger tariff conferences, industry practices in respect of multilateralinterlining

1.2.1.1 Interlining in the meaning of Regulation 1617/93

6. Article 4(1)(b) of Commission Regulation 1617/93 defines interlining as :

�[the ability for] air transport users [�], in respect of the types of fares or rates andof the seasons which were the subject of the consultations:

i. to combine on a single transportation document the service which was thesubject of the consultations, with services on the same or on connecting routes

2 OJ L374, 31.12.1987, p. 9, as modified by Council Regulation (EEC) No 2344/90 of 24 July 1990 (OJ

L217, 11.8.1990, p. 15), Council Regulation (EEC) No 2411/92 of 23 July 1992 (OJ L240, 24.8.1992,p. 19), Council Regulation (EC) No 1/2003 of 16 December 2002 (OJ L1, 4.1.2003, p. 1) and CouncilRegulation (EC) No 411/2004 of 26 February 2004 (OJ L68, 6.3.2004, p. 1)

3 OJ L155, 26.6.1993, p. 184 OJ L190, 31.7.1996, p. 115 OJ L131, 37.5.1999, p. 276 OJ L177, 30.6.2001, p. 567 OJ L167, 26.6.2002, p. 6

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operated by other air carriers, whereby the applicable fares, rates and conditions areset by the airline(s) effecting carriage; and

ii. in so far as is permitted by the conditions governing the initial reservation, tochange a reservation on a service which was the subject of the consultations onto aservice on the same route operated by another air carrier at the fares, rates andconditions applied by that other carrier;

provided that an air carrier may refuse to allow such combinations and changes ofreservation for objective and non-discriminatory reasons of a technical orcommercial nature, in particular where the air carrier effecting carriage is concernedwith the credit worthiness of the air carrier who would be collecting payment for thiscarriage; in such case the latter air carrier must be notified thereof in writing�.

7. Accordingly, passengers may for example start a journey with a given carrier, whowould issue the ticket for the entire journey, and continue their journey onwards todestinations not served by the carrier who has issued the ticket. Alternatively, apassenger may on a single segment roundtrip journey leave on the issuing carrier andreturn on another airline. Moreover, to the extent that the conditions governing theinitial reservation allow it, interlining extends to reservation changes onto otherairlines� flights8.

8. As to the applicable fares and rates, these are set by the carrier actually effectingcarriage. Accordingly, where airline tariffs are different, a refund or extra paymentmay be made.

9. The provisions of Regulation 1617/93 must be seen against the background ofArticle 81 of the EC Treaty: it was important to ensure that passengers had the abilityto interline, i.e. travel using a single ticket across the networks of different airlineswhere that was necessary for them to reach their final destination, without themechanisms put in place therefore to be unduly restrictive.

10. Unless expressly provided otherwise, where further in this consultation paper areference is made to �interlining�, that will mean interlining in the meaning ofArticle 4(1)(b) of Regulation 1617/93.

1.2.1.2 The IATA interlining system9

11. In practice, the exemption for passenger tariff consultations applies to the activitiesof just one organisation, the International Air Transport Association (IATA). Thestated aim of IATA passenger tariff conferences is to facilitate interlining and enablepassengers to use a single ticket to travel on more than one airline, which mayhappen for instance where a passenger knows in advance that he will be carried bydifferent airlines for different segments of his trip or where a passenger has a "fullyflexible" ticket allowing him to switch airlines at any time during his trip (forexample if he misses his flight).

8 For example, where two (or more) airlines operate on a route, for instance Paris � Madrid, the ability for

a passenger to change his reservation would imply, assuming his initial reservation is with Air France,that he may change it and fly with Iberia instead.

9 See in Annex 1 a description of IATA Tariff Consultations provided by IATA.

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12. The IATA Interlining System rests on four main pillars:

• the Multilateral Interline Traffic Agreement (MITA) is an agreement managedby IATA and signed by some 300 airlines on a worldwide basis. The MITA is at theheart of the IATA Interlining System in so far as it binds signatory airlines (who neednot be full IATA members) to issue and accept each others tickets on a reciprocalbasis according to the fares and conditions set by the carrying airline. Further, underthe MITA, signatories may match, for interline purposes, the IATA tariffs agreed bythe IATA Tariff Conferences and the associated standards in the knowledge thatparticipants in the Conferences will accept the passengers at the fare collected;

• the IATA Clearing House, which is meant to enable the world�s airlines tosettle their interline billings. At present, some 80% of the interline billings are settledthrough the IATA Clearing House via a netting process requiring no movement offunds. The IATA clearing house appears to provide for some protection against losseswhich may otherwise be incurred in the event of airline bankruptcies;

• the IATA proration system according to which the revenues generated by aninterline ticket are divided (�prorated�) between the airlines having actually effectedthe carriage of a passenger. This process is administered by IATA and governed bythe Prorate Manual � Passengers, the Prorate Agency Agreement and the MultilateralProrate Agreement. These agreements govern amongst others how the amount to beprorated must be determined, how that must then be prorated among the differentflown segments according to the prorate factors set out in the Prorate Manual, whatrelevant dates must be taken into consideration therefore, how the rerouting ofpassengers, whether voluntary or involuntary, influences the calculation, � ;

• and the IATA passenger tariff conferences in which non-binding prices forinternational journeys involving interlining all over the world are agreed. Thepassenger tariff conference covering Europe has 25 EEA10 members (all EEA flagcarriers plus 9 regional airlines) and meets three times a year. Both business and fulleconomy fares are agreed for all EEA city pairs for one year at a time. For some citypairs APEX and other discounted fares are also agreed. The passenger tariffconferences also agree on conditions for different types of interlining tickets. Forexample, that APEX tickets must be booked two weeks in advance and include aSaturday night stay or that child fares must be 75% of adult fares. Further, passengertariff conferences agree on worldwide standards and rules in the areas of currencyconversion and agreed mileage11 for the purpose of fare construction.

13. Further to these four pillars, IATA manages a number of other agreements thatparticipate in the multilateral interlining system to a varying degree. In particular, theIATA Passenger Agency Programme is an agreement between airlines and travelagents which sets out the conditions under which agents can issue tickets for allIATA airlines. While some aspects of these other IATA agreements may be thesubject of investigations by DG Competition they are not considered in the present

10 The existing block exemptions cover services between Community airports. By extension however,

through respectively the EEA agreement and EC-Switzerland Air Transport Agreement, the saidexemptions cover the entire EEA and Switzerland area in respect of air services within that area.

11 See also below, paragraphs 18 and 19.

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paper. They are not covered by the block exemption in Regulation 1617/93 andwould not be affected by any decision to prolong, end or amend the exemption.

1.2.1.3 The industry practice in respect of interlining

14. According to the definition of interlining set out in Regulation 1617/93 (see aboveparagraphs 6 to 8), passengers must have the ability to combine on a single ticket oneor more segments �which [were] the subject of the consultations�, i.e. in practicewhich were the subject of the IATA passenger tariff conferences, with one or moresegments �operated by other air carriers�, i.e. operated by a given carrier andproposed by that carrier at various fares, rates and conditions specific to the carrier inquestion.

15. Without prejudice to the question whether this ability is actually given to passengers,it appears that the above does not exactly match actual industry practices. In fact,where a ticket comprises one or more IATA interlinable segments, the generalpractice appears to be that all the segments on the ticket are then IATA interlinable12,unlike what is foreseen in Regulation 1617/93.

16. Moreover, the air fares agreed in IATA tariff conferences are not binding (see above,paragraph 12 � 4th bullet point), i.e. no obligation is in theory imposed on individualsignatory airlines to the MITA to charge passengers the IATA rates for interliningjourneys when they issue a ticket to a passenger. However, the MITA appears toprovide that the issuing carrier, i.e. the airline issuing the ticket and actuallycollecting all the revenue from the passenger, compensates the carrier(s) actuallyeffecting carriage at the pro-rated amount of the IATA rate agreed in the tariffconferences. Hence, since fully flexible IATA tickets entitle passengers to change thebooking if they so wish and not use the services of the ticketing carrier at all (see alsoparagraph 18 below), the issuing carrier may be liable to compensate the airline(s)actually effecting carriage for the entire journey of the passenger on the basis of a prorate of the agreed IATA fare. For that reason apparently, airlines seem to be veryreluctant to grant any up front rebates on IATA interlinable tickets and the bulk ofthese tickets appear to be issued at the actual rates agreed in the IATA passengertariff conferences. In practice, on the main computerised reservation systems, theIATA interlinable fares offered by airlines participating in the tariff conferences areall the same.

12 E.g. , on a route from Prague to Strasbourg:

- the definition set out in the regulation foresees the possibility that for example the Czech carrier CSAwould issue a through ticket providing for a first segment Prague-Paris to be flown with CSA and for asecond segment Paris-Strasbourg to be flown outside of CSA�s network, for example with Air France,on the basis of coordinated rates �set� in IATA tariff conferences;- general practice appears to be however that all segments on the ticket will be IATA interlinable andthat the passenger is provided with a through ticket from Prague to Strasbourg, irrespective of therouting (subject however to the so called agreed mileage rules discussed in paragraph 18 below). Whenmaking his booking, the passenger chooses between various possibilities and �logical� routings, asproposed by the travel agent�s Computer Reservation System. In this example he may have to choosebetween a connection in Paris, Lyon, Brussels, Munich, Amsterdam, or even other hubs. He may thenopt for a reservation with CSA to Brussels and SN Brussels Airlines onwards to Strasbourg but may aswell book via Amsterdam on a combination of flights by KLM Exel and KLM.

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17. Article 4(1)(e) of Regulation 1617/93 makes the Article 81(3) conditional on the factthat the consultations �are not binding on participants, that is to say, following theconsultations the participants retain the right to act independently in respect ofpassenger tariffs�. Although it appears that carriers retain the theoretical right to actindependently, it may be questionable whether the way in which the IATAinterlining system is structured may impose some form of de facto economicobligation (See paragraph 16 above) to issue IATA interlinable tickets at the actualrates agreed in the conferences. Accordingly, it may be necessary to discuss, for thepurpose of the present consultation paper and in view of the possible prolongation ofthe existing block exemption, whether this practice conforms with the provisions andunderlying rationale of Article 4(1)(e) and whether the latter ought to be modified inany way.

18. Finally, inherent to the IATA interlining system are the agreed mileage rules (Seeabove paragraph 12, 4th bullet point). These rules provide passengers, subject to theconditions governing their initial reservation, with significant flexibility in terms ofchanging routes (subject to certain distance limits) and adding or deletingintermediate stopping points. Where passengers would make use of this flexibility, itis possible that the overall costs incurred by the airlines should be higher than thosethat would be incurred in the case of a more or less standard and straightforwardjourney. These cost related uncertainties appear to have some inflationary effect onthe level of fares agreed in the IATA passenger tariff conferences in so far as, wherecarriers agree on an interlinable fare for a given segment, they have to take intoconsideration the possibility that passengers may split the segment(s) in question intwo or more segments13, which would likely result in higher overall operational costsfor the airline community14.

19. According to IATA, this routing flexibility is important for the purpose of assessingconsumer benefits which stem from the IATA interlining system. However, itappears that the said flexibility may not be related to the definition of interlining setout in Regulation 1617/93 (See above paragraph 6). Moreover, it seems that theflexibility in question and/or some of the agreements and practices, which arerequired in order to produce that flexibility, may produce restrictive effects, such asthe potentially inflationary effects on fares mentioned in paragraph 18 above.

20. For the reasons set out above in paragraphs 14 to 19, it appears that the industrypractice in respect of the interlining system set up by IATA may depart to a certaindegree from the scope and definition of �interlining� in the meaning of Regulation1617/93, and/or from one of the conditions upon which the block exemption isconditional.

21. Where further in this consultation paper a reference is made to �the IATA interliningsystem�, that will mean the system set up by IATA as put in practice by the industry.

22. Questions & elements of specific interest to the services of DG Competition

13 For example, split a Milan-Paris ticket into a Milan-Turin-Geneva-Paris ticket.14 It seems that unit cost variations are also reflected and taken into consideration for the purpose of

interlining in the prorate factors set out in the Prorate Manual � Passengers, in so far as prorate factorsper flown distance would generally be higher for short distance segments.

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• Are there differences between the regulatory definition of interlining providedin Article 4(1)(b) of Regulation 1617/93 and the industry practice in respect ofinterlining as it results from the IATA Interlining System?

• To what extent do these differences make the system more restrictive?

1.2.2 Slot allocation and airport scheduling conferences

23. According to IATA15, the original purpose of Schedule Coordination Conferenceswas to improve interline connections and handling arrangements. Over time, that wasovertaken by the increasing difficulties posed by airport congestion and resulted inthe elaboration by IATA of, after endorsement by all airlines attending thescheduling meetings, the IATA Worldwide Scheduling Guidelines, which set out therules and principles according to which to allocate in all fairness scarce airportresources. The guidelines have been refined and modified where necessary to takeaccount of changing circumstances on several occasions up to the presentlyapplicable 9th edition of the guidelines16.

24. The IATA Worldwide Scheduling Guidelines appear to provide for an industryelaborated system whereby:

• all air carriers concerned can participate in the discussions and negotiations17,

• the allocation of slots at congested airports is made on a non-discriminatoryand transparent basis,

• entry to congested airports appears to remain possible, which is consideredimportant for the purpose of safeguarding competition.

25. Scheduling conferences appear to reflect an operational necessity for airlines whenconfronted with airport congestion. For example, a carrier wanting to serve a routebetween two congested airports like London Heathrow (LHR) and FrankfurtInternational Airport (FRA) may request slots to depart from LHR at 7:30 and landin FRA at 9:55. Due to serious airport congestion at LHR and FRA, that carrier mayinstead be proposed a slot to take off from LHR at 7:10 am and another to land inFRA at 11:00 am, where according to flight time and time difference he would, onthe basis of a departure out of LHR at 7:10 am require his arrival slot to be at 9:35am local time in FRA. In such instances, the concerned carrier could simply notoperate the service in question. Many other airlines might find themselves confrontedwith similar situations.

26. Accordingly, there appears to be good practical reasons why gathering together on aregular and worldwide basis all carriers and competent authorities in the area of slotallocation at airports allows for a better and more efficient use of airport capacitywhere such capacity is scarce. Indeed, such gatherings in scheduling conferencesmay provide for a forum where the necessary bilateral discussions between airlines

15 See http://www.iata.org/sked/aboutus16 See full text of the present guidelines available on the Internet at the following address:

http://www.iata.org/NR/ContentConnector/CS2000/Siteinterface/sites/ps/file/WSG_9th_Edition.pdf17 Subject to their being registered in a State which is eligible for membership in ICAO.

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and/or between airlines and airport coordinators can take place to resolve, throughschedules adjustments and slots exchanges, cases such as that described in paragraph25 above.

27. This is reflected in Recital 6 of Regulation 1617/93 which reads that �arrangementson slot allocation at airports and airport scheduling can improve the utilization ofairport capacity and airspace, facilitate air-traffic control and help to spread thesupply of air transport services from the airport�. However, for these gatherings to beaccepted against the basic principles of competition policy, they have to afford all aircarriers equal opportunities to access congested airports, where the demand exceedsthe supply throughout the day or at specific hours, certain conditions have to be met.These conditions are contained in article 5 of Regulation 1617/93 and are designed toensure that the block exemption benefits only these Conferences which safeguard theconditions in question.


• Are there any industry developments, changes in the IATA SchedulingGuidelines and/or in industry practices which might question the idea thatarrangements on slot allocation at airports and airport scheduling can improve theutilization of airport capacity and airspace, facilitate air-traffic control and help tospread the supply of air transport services from the airport?

1.3 Background - Developments in the airline industry

29. The number of carriers in the Community who have joined an airline alliance hasincreased steadily since the mid nineties. Further the scope of these alliances hasbroadened and co-operation between carriers in the framework of these allianceagreements has often reinforced over time. This trend in the industry was furtherconfirmed when the first major airline merger took place in the Community at theend of the year 2003.

30. These developments, which relate directly to the liberalisation of intra EC airtransportation, form part of a major reshaping of air transport in Europe in particularwith respect to carriers� network planning and operations, and consequently withrespect to overall traffic flows in the Community. With the noticeable exception of�no-frills� carriers18, airline economics and air traffic flows in the Community nowlargely follow the �Hub & Spoke Model�, which has been in effect functioning in theUnited States for more than a decade, and is represented in the following exhibit.

18 �No-frills� carriers offer point to point services only. The specific �no-frills� business model requires

that carriers keep away from connecting traffic (whether in an IATA or other framework) for the sakeof avoiding complexity in their operations.

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RA ABRA B1

RA A1

RA B2RA A2

RA A3 RA B3

Hub to hub route Feeder RouteRA AB: Secondary/remote airport served by Alliances A and B

TRAFFIC FLOWS(Hub and Spoke airline model)

RA Ax: Secondary/remote airport "x" served by Alliance ARA By: Secondary/remote airport "y" served by Alliance B

Hub Alliance A Hub Alliance B

H A H B

H A

Exhibit 1

31. The actual organisation of air transport in Europe increasingly follows a hub & spokemodel, structured along three global airline alliances that have applied for and/orhave already partially or totally received an exemption under Article 81(3) of the ECTreaty. This evolution is also reflected in the submissions made by airlines andalliances to the Commission to obtain Article 81(3) exemptions19 wherebycompetition now occurs on a network basis, in so far as network carriers andalliances would compete fiercely to increase the size and scope of their network.

32. In effect, the reach of airlines is becoming increasingly global, either directly orthrough alliances. It has now become very common for passengers to interline withinalliances� networks (see for example in exhibit 1 above a route from �RemoteAirport A1� to �Remote Airport AB�), i.e. to travel on aircrafts actually operated bydifferent carriers of the same alliance, using a single ticket, with more or lessflexibility attached to it subject to the conditions governing their booking, for whichthey were charged a �through fare� and enabling them to �through check� theirbaggage.

33. Almost all of these, IATA claims, are consumer benefits generated by the IATAinterlining system (see below paragraph 52). Hence, this evolution raises severalquestions in respect of the revision of Regulation 1617/93, particularly with regard tothe IATA Passenger Tariff Consultations block exemption. It may prove necessary toreassess the benefits for consumers that may be attributed specifically to the IATAinterlining system, i.e. which would not be readily available to consumers in themarket, whether through airline alliances or other forms co-operation amongst aircarriers which would be less restrictive. A preliminary analysis on this question isoutlined in sections �2. Passenger Tariff Consultations (Routes within the

19 These submissions date back prior to the entry into force and applicability of Regulation 1/2003.

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Community)� and �3. Passenger Tariff Consultations (Routes between theCommunity and third countries)� below.


• Does Exhibit 1 above adequately represent the main patterns of air trafficwithin the EU for the purpose of analysing interlining?

• The activities of regional airlines as traffic feeders into the mainairlines/alliances� hubs may be properly represented by Exhibit 1 above. Conversely,Exhibit 1 above may not adequately represent some of the services operated byregional carriers on thin/very thin routes between two secondary/regional airports. Itmay however be assumed that such routes may be served only where there existssufficient point to point demand, and that the overwhelming majority of passengers onsuch routes actually fly point to point. Should this assumption be correct, may suchroutes, alike those operated by no-frills carriers, be disregarded for the purpose ofconducting an analysis on interlining?

1.4 Background - Regulatory developments in the area of Community law on theallocation of slots at Community airports

35. As of the end of July 2004, Regulation (EC) No 793/200420 of the EuropeanParliament and Council amending Council Regulation 95/9321 on common rules forthe allocation of slots at Community airports will enter into force. It appears that thisrevision of Regulation 95/93 essentially amounts to a technical update seeking toclarify the application of the existing regime on a number of different points,including the independent status of coordinators and the functioning of slot allocationprocedures.


• Does the future entry into force of Regulation No 793/2004 undermine theassumption that arrangements on slot allocation at airports and airport schedulingcan improve the utilization of airport capacity and airspace, facilitate air-trafficcontrol and help to spread the supply of air transport services from the airport?

1.5 Background � Regulatory developments in the area of Community competitionlaw

37. Since 1 May 2004, Council Regulation (EEC) No 3975/87 of 14 December 1987laying down the procedure for the application of the rules on competition toundertakings in the air transport sector22 is effectively repealed with the exception ofArticle 6(3), which shall continue to apply to individual exemption decisions adoptedpursuant to Article 81(3) of the EC Treaty until their date of expiry.

20 OJ L138, 30.04.2004, p.5021 OJ L 14, 22.1.1993, p.1, as last amended by Regulation (EC) No 1554/2003 of the European Parliament

and the Council (OJ L221, 4.9.2003, p.1)22 OJ L374, 31.12.1987, p. 1

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38. The rules for the implementation of Articles 81 and 82 of the EC Treaty are now setby Regulation 1/200323, which introduces as a central feature the direct applicabilityof Article 81(3)24, thereby bringing an end to the granting by the Commission ofindividual exemptions to undertakings.

39. However, Regulation 1/2003 does not modify the empowerments received by theCommission to declare Article 81(1) of the Treaty inapplicable to certain categoriesof agreements. Accordingly, where the Commission has been empowered by aCouncil Regulation such as, for air transport, Regulation 3976/87, Article 81(3)exemptions may still be delivered in respect of certain categories of agreements bymeans of the adoption of block exemption regulations. However, Regulation 1/2003introduces a new feature in respect of block exemption regulations, which derivesfrom the principle of shared competencies between the Commission and nationalcompetition authorities: the latter may, subject to the conditions laid down in Article29(2), withdraw the benefit of such block exemption regulations within the territoryof their Member State.

40. Finally, Council Regulation (EC) No 411/2004 of 26 February 2004 repealingRegulation (EEC) No 3975/87 and amending Regulations (EEC) No 3976/87 and(EC) No 1/2003, in connection with air transport between the Community and thirdcountries25 extended the scope of the Commission�s investigation and enforcementpowers with regard to infringements of Article 81 and 82 of the Treaty so as toinclude air transport between the Community and third countries.

Moreover, the Commission is now empowered to grant block exemptions in airtransport, not only in respect of routes within the Community but also to and fromthird countries, which for the purpose of revising Commission Regulation 1617/93, istaken into consideration in this paper�s sections �3. Passenger Tariff Consultations(Routes between the Community and third countries)�, �4. Cargo TariffConsultations (Routes between the Community and third countries)� and �5.2 (Slotallocation at airports) Routes between the Community and third countries� below.

2. PASSENGER TARIFF CONFERENCES (ROUTES WITHIN THE COMMUNITY)

41. The present section focuses on the revision of the existing block exemption andtherefore concentrates on the Community. The possible extension of the geographicalscope of the existing exemption to services to and from third countries is discussed insection �3. Passenger Tariff Consultations (Routes between the Community and thirdcountries)� below.

42. In view of a possible prolongation beyond 30 June 2005 of the existing blockexemption in respect of IATA Passenger Tariff Consultations, a preliminarydiscussion under Article 81 of the agreements and concerted practices at stake is setout below.

23 Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on

competition laid down in Articles 81 and 82 of the Treaty, OJ L1, 4.1.2003, p. 124 See the provisions of Article 1(2) of Regulation 1/2003.25 OJ L68, 6.3.2004, p. 1

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2.1 Application of Article 81(1)

43. Without prejudice to the legal question whether IATA Tariff Conferences may beconsidered a restriction of competition by object in the meaning of Article 81(1), theservices of DG Competition take the preliminary view that they actually restrictcompetition. The underlying rationale for this consideration is that an IATAinterlinable ticket to fly from A to B is comparable to a carrier specific ticket to flyfrom A to B (where such a carrier specific ticket exists) in so far as both ticketsentitle a consumer to travel by air from a point of origin to a point of destination. Thedifferences lay in product differentiation, i.e. additional flexibilities/frills which theone or the other may have.

Because a pricing structure must in the long run remain coherent with the productoffering it relates to and therefore adequately reflect product differentiation, whereone or more carrier and/or airline alliance serve a given route, those carriers/allianceshave no choice but to give appropriate consideration to the level of IATA fares onthat route and to the conditions attached thereto.

The restriction of competition flows from the unavoidable consideration given byairlines to the coordinated level of IATA fares.

44. Moreover, IATA Tariff Conferences provide a forum wherein airlines exchangeinformation on costs, prices and general industry developments, which can onlyreinforce the above mentioned restrictive effects.

45. Since the pricing decisions at stake cover air transport between Member States, theyappear to affect trade between Member States. On a preliminary basis, it is thereforeconsidered that IATA tariff conferences are caught by Article 81(1)26.

2.2 The four conditions of Article 81(3)

46. On the basis of the above, it appears that the continuation of IATA passenger tariffconferences in respect of scheduled air services between Community airports mayrequire that the four conditions set out in Article 81(3) continue to be cumulativelyfulfilled. These conditions are tentatively and briefly discussed below.

2.2.1 ��improving the production or distribution of goods or [] promoting technical oreconomic progress ��

47. The IATA multilateral interlining system as it exists may produce benefits. Central inthis system are the IATA Tariff Conferences. According to IATA, these TariffConferences produce benefits, which are shared between carriers, consumers andgovernments.

48. The reasons for which participation in Tariff Conferences are advantageous forcarriers according to IATA are briefly set out below27:

26 See also Recital 33 of Commission Decision 92/213/EEC of 26 February 1992 relating to a procedure

pursuant to Articles 85 and 86 of the EEC Treaty (IV/33.544, British Midland v. Aer Lingus), OJ L96,10.04.1992, p. 34

27 For further detail: www.iata.org/tariffs/aboutus/benefitsforairlines.htm

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• Access: increased market access (Opportunity for airlines to compete on aninterline basis in markets where they do not provide direct service with carriers whodo, see paragraph 69 below), access to market knowledge (Sharing with otherparticipants market and other types of intelligence required to price passenger andcargo tariff products), access to a worldwide government filings system28, access tocoordinated implementation29;

• Efficiency gains: efficiency through meetings (Meeting in one place and at onetime to establish global and regional fare/rate coverage is more efficient than a never-ending series of bilateral meetings and agreements), efficiency through tariffdissemination (ensures that the fare levels published are reflected correctly andconsistently and that they are disseminated swiftly and efficiently), efficienciesthrough the development of standards (tariff coordination enables the establishment ofindustry tariff standards, which are important for interlining);

• Equality: each voting Member regardless of size has an equal vote. Noagreement is adopted unless each voting Member has given their approval to it.

• Worldwide Anti-Trust Immunity: the IATA tariff conferences enjoy immunityfrom anti-trust and competition laws.

49. It must be underlined in respect of the above that only objective benefits andefficiencies may be taken into consideration for the purpose of assessing whether thefirst condition of Article 81(3) is fulfilled. The assessment at stake should not beconducted from the subjective standpoint of the undertakings concerned30.Accordingly, of the advantages identified by IATA in paragraph 48 above, it wouldappear that only the efficiency gains summarised in the second bullet point hereabove may qualify to form part of that assessment.

50. Further, it appears that the IATA Interlining System generates objective benefits infavour of consumers. These are discussed below with the second condition of Article81(3) which deals with the share consumers enjoy of the resulting benefit. Finally,IATA identifies on its website benefits for governments. These relate largely tobilateral air services agreements providing for some regulation of fares on services toand from third countries. Accordingly these benefits may be of little relevance inrespect of intra Community air services and these benefits are discussed furtherbelow in section �3. Passenger Tariff Consultations (Routes between the Communityand third countries)�.


28 The Government Filings System may be of little use within the Community. However, in respect of air

services to/from third countries, the situation is largely different. Accordingly, this benefit is identifiedbelow in section �3. Passenger Tariff Consultations � Routes between the Community and thirdcountries�.

29 Coordinated implementation relates to the implementation of fares filed with governments. See footnote28 above.

30 Communication from the Commission, Notice, Guidelines on the application of Article 81(3) of theTreaty, paragraph 49, OJ C101, 27.4.2004, p. 97

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• Further to the efficiencies identified under the second bullet point ofparagraph 48 above, are there other benefits which may be qualified as objectivelyattributable to the IATA Interlining System or to IATA Tariff Conferences for thepurpose of an analysis under the first condition laid down in Article 81(3)?

• How important are the benefits which may be objectively attributed to theIATA Interlining System and to IATA Tariff Conferences in particular?

2.2.2 ��while allowing consumers a fair share of the resulting benefit ��

52. The IATA multilateral interlining system as it exists may produce benefits. Theservices of DG Competition understand from IATA that some of these are sharedwith consumers. According to IATA31, the consumer benefits are in the area of

• baggage transfer (Consumers have the ability to check-through their baggage,i.e. despite their travelling across the networks of different carriers, they need notcollect, and repeat the check in of their baggage at intermediate connecting points)

• establishment of through fares between almost any two points in the world,which are easy to buy and understand for consumers, and

• liberal interlining practices, which give consumers a choice of airline androuting and enable them change airlines on their itinerary, and to be easily transferredto an available flight of any other IATA airline.

53. In assessing consumer benefits generated by the IATA interlining system, it isimportant to identify and focus on those benefits which may be specifically attributedto it. Identical or similar consumer benefits which may otherwise be readily availableto consumers in the markets concerned should be disregarded since the concernedpractice at stake would most likely fail to be �indispensable� in respect of the saidbenefits32.

54. On this particular point, the services of DG Competition wonder to what extent theincreasing reach of airlines, the growing importance and scope of alliances asdescribed above in paragraphs 29 to 31 may readily allow consumers to interline on ahigh number routes within the Community. Assuming that the air transport systemand the main traffic flows in Europe may be described as follows:

31 For further detail: www.iata.org/tariffs/aboutus/benefitsforconsumers.htm32 Communication from the Commission, Notice, Guidelines on the application of Article 81(3) of the

Treaty, paragraphs 74 and 75, OJ C101, 27.4.2004, p. 97

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RA ABRA B1

RA A1

RA B2RA A2

RA A3 RA B3





H A H B

H A

Exhibit 1

55. the following types of routes may then be identified,

Type of route

DescriptionFrom/to Origin - to/from Destination Carriers/Alliances serving the entire route

1 Hub of Carrier/Alliance A - Hub of Carrier/Alliance A Carrier/Alliance A2 Hub of Carrier/Alliance A - Regional/remote Airport Ax Carrier/Alliance A3 Hub of Carrier/Alliance B - Regional/remote Airport Bx Carrier/Alliance B4 Hub of Carrier/Alliance A - Regional/remote Airport Bx Carrier/Alliance B5 Hub of Carrier/Alliance B - Regional/remote Airport Ax Carrier/Alliance A6 Regional/remote Airport Ax - Regional/remote Airport AB Carrier/Alliance A7 Regional/remote Airport By - Regional/remote Airport AB Carrier/Alliance B8 Hub of Carrier/Alliance A - Regional/remote Airport ABy Carrier/Alliance A, Carrier/Alliance B (Connection in Hub B required)9 Hub of Carrier/Alliance B - Regional/remote Airport ABy Carrier/Alliance B, Carrier/Alliance A (Connection in Hub A required)10 Regional/remote Airport Ax - Regional/remote Airport By None11 Hub of Carrier/Alliance A - Hub of Carrier/Alliance B Carrier/Alliance A, Carrier/Alliance B

Exhibit 2

56. In the first 7 route types, a single carrier/alliance will in most instances serve theentire route, i.e. all the segments of such routes. Accordingly, passengers will havethe ability to interline within the network of that alliance, which may be referred toas �intra-alliance interlining�. With reference to the consumer benefits identified byIATA, it appears that airline alliances are likely to provide passengers with thepossibility to purchase a �through fare� for such journeys (See above paragraph 52,second bullet point), �through check� their baggage (See above paragraph 52, firstbullet point), and be more or less liberal in terms of interlining policy within thenetwork they serve subject to the conditions governing purchased tickets (See aboveparagraph 52, third bullet point).

It follows from the development and increasing importance of airline alliances thatintra-alliance interlining is a growing phenomenon in the Community. Accordingly,

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on an ever greater number of routes within the Community, passengers can reachtheir final destination without the need for any multilateral interlining system.Assuming that all other things remain equal, it may therefore seem logical toconclude that the overall consumer benefit which may be specifically attributed tothe IATA interlining system in the Community has decreased in a correspondingproportion to the increase in size and importance of airline alliances.

However, it should be noted that the IATA Interlining System also providesconsumers with significant flexibility in terms of changing their itinerary (See aboveparagraph 18, 19 and 52). The flexibility at stake appears to be subject in particularto flown distances limitations which stem from the so-called �agreed mileage rules�but appears not to be limited to the network of a particular carrier or alliance. Incertain circumstances, en route changes of itinerary may require to fly across thenetworks of more than one airline alliance, which is normally not possible in the caseof intra alliance interlining. Accordingly, it appears that the said �itineraryflexibility� may be considered a consumer benefit, which is specific to the IATAInterlining System.

57. Where a route is not served by a single carrier/alliance, i.e. either where nocarrier/alliance serves all the segments concerned, or where one or more of thesegments concerned is served by more than one carrier/alliance, the situation, whichcorresponds to type of routes 8 to 11 may be different. The following distinctions andcomments may be worth doing in that respect:

58. Route types 8 and 9 (for example a route from Hub A to Remote Airport AB): onthese routes, an IATA interlinable ticket will provide passengers with some specificadditional flexibility in terms of the number of services and frequencies available tohim in order to reach his final destination. This additional flexibility stems from theitinerary flexibility which is specific to the IATA system. However, making use ofthat additional flexibility will in most instances imply one or more additionalconnections for passengers (Flying from Hub A to Remote Airport AB withcarrier/alliance B will in most instances require an additional connection in Hub B).It should be borne in mind in that respect that the scope of the existing blockexemption is limited to the Community, which implies that the flight stagesconcerned are exclusively short and medium haul, for which it is generallyacknowledged that additional connections may be considered quite inconvenient. Forintra Community journeys therefore, unless an en-route change should per se beconsidered valuable by a passenger, it may be fair to assume that consumer benefitsgenerated by the IATA system range from low to moderate.

59. Route type 10 (for example from Remote Airport A1 to Remote Airport B2): onthese routes, absent bilateral agreements between carriers or a multilateral interliningsystem such as the IATA Interlining System, travel with a single ticket may in mostinstances simply not be possible33.

33 Route type 10 may be a route category with a relatively high number of individual Origin and

Destination pairs in the Community, whose individual importance is likely to range from thin to verythin in terms of actual numbers of passengers.

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Accordingly, it may be considered that the IATA Interlining system generatesspecifically all consumer benefits identified by IATA in paragraph 52 above.

60. Route type 11 (from Hub A to Hub B): these routes are between the hubs ofcompeting carriers and/or alliances. Such routes appear to be among the thickest intraCommunity routes on which carriers operate almost exclusively at a high number offrequencies.

Accordingly, it may be questionable whether the ability to interline on such routesproduces any material consumer benefit, except as the case may be for those timesensitive passengers travelling mostly at peak times and who may be likely to beconfronted with overbooked planes.

Finally, it should also be noted that it may be in respect of routes between hubs ofcompeting carriers/alliances that the restrictive effects may be particularlyproblematic as discussed below in section �2.2.4 � [without] affording suchundertakings the possibility of eliminating competition in respect of a substantialpart of the products in question� concerning the fourth and final condition of Article81(3).

61. In view of the above discussion by route types, it appears logical to conclude on apreliminary basis that consumer benefits that may be attributed specifically to theIATA interlining system (i.e. that are not partly or totally available to consumersthrough individual airlines alliances and/or other bilateral agreements between aircarriers) have decreased significantly, due to the growing importance and scope ofairline alliances in the Community. In particular, it appears that the benefitsidentified by IATA in respect of �through fares� and �through check� of baggagehave to a large extent been overtaken following the development of airline alliances.

Throughout all route categories, itinerary flexibility appears to be a consumer benefitwhich is specific to the IATA Interlining System. However, it remains uncertain towhat extent consumers actually make use of that specific feature of the IATAInterlining System.

62. In the last amendment to Regulation 1617/9334, a mandatory data collectionrequirement was added in respect of passenger tariff consultations to facilitate theevaluation by the Commission of both the consumer benefits and the anti competitiveeffects of the said conferences. The data reported up to the time of drafting of thepresent paper unfortunately provides only partial information in respect of thequestions discussed here above under the second condition of Article 81(3). Inparticular, the reported data allows neither to compare the importance of intraalliance or code share interlining35 with that of IATA Interlining nor to measure the

34 See Article 4(3) of Commission Regulation 1617/93.35 The data reported by IATA relies on the distinction between so-called �flown� and �billed� coupons.

This distinction is useful because interlining implies that the carrier actually effecting carriage on thesegment of a journey bills the issuing carrier for the value of that coupon. Accordingly, the number of�billed� coupons provides a measurement of the interlining activity.However, in the reported data, it appears that coupons used on code shared flights are not reported as�billed� but as �flown�, even though there must be some form of compensation between the carriersconcerned pursuant to their code share or alliance agreement.

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actual usage by consumers of the IATA specific itinerary flexibility embedded inIATA interlinable tickets.


• How adequate/complete is the route categorisation presented in Exhibit 2 forthe purpose of conducting an analysis of interlining? As the case may be, justify anyidentified shortcoming.

• How much interlining is actually done through the IATA system as opposed tothrough alliances and/or bilateral agreements between carriers?

• To what extent does intra alliance interlining, where such intra allianceinterlining is available to consumers, match/overtake IATA Interlining in terms ofconsumer benefits in respect of through ticketing and through check of baggage?

• In what proportion do consumers actually use the specific IATA ItineraryFlexibility?

2.2.3 �� [without] imposing on the undertakings concerned restrictions which are notindispensable ��

64. It appears from the discussion conducted here above that the IATA InterliningSystem generates benefits which may be considered objective and specific to it.Accordingly, for the purpose of assessing whether this third condition of Article81(3) is fulfilled, it would further be required to discuss whether the restrictionsgenerated by the IATA system are reasonably necessary in order to produce the saidbenefits and efficiencies36. In other words, there would have to be someproportionality between the benefits and the restrictive effects at stake.

65. An assessment of the proportionality between the benefits and the restrictive effectsinduced by the IATA specific itinerary flexibility may in particular have to beconducted in so far as the said flexibility may be at the root of some of the most anti-competitive effects that result from the presently existing IATA Interlining System.

66. In conducting this �indispensability test�, due regard should also be given toalternatives that would be less restrictive than the existing system, whilst securing allof or the bulk of existing benefit. One could for example consider whether the abilityfor passengers to interline should not be considered sufficient on the basis of, on onehand the existing intra alliances interlining possibilities, and on the other hand all theadditional potential city pair combinations which would stem, when combined withthe possibilities of intra alliances interlining, from a system of posted prices forroutes between hubs and regional/secondary airports. A brief description of such an

For example, on a route from Prague to Strasbourg, it is possible to fly the Czech carrier CSA fromPrague to Paris and CSA (operated by Air France) from Paris to Strasbourg because CSA has enteredinto a code share/alliance agreement with Air France. Even though such a journey would in practiseclearly amount to interlining, it appears that all flight coupons of such a journey would be reported as�flown� in the data reported by IATA.

36 Communication from the Commission, Notice, Guidelines on the application of Article 81(3) of theTreaty, paragraph 78, OJ C101, 27.4.2004, p. 97

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alternative is attached in Annex 2 to this paper, together with a short explanation whythis may perhaps be considered as

� a sufficient alternative to the existing system on routes where intra allianceinterlining does not provide consumers with sufficient ability to interline and wheresuch ability would actually be needed;

� less restrictive, in so far as the �tariff coordination� pillar in the present system,which may be considered the element most restrictive of competition in the IATAInterlining System, may not be necessary any more in the described alternative.

67. It should be noted that the alternative described in Annex 2 does not represent aparticular preferred policy option of the Commission or DG Competition, nor is itcontended that it may replace the existing IATA system and reproduce its entirebenefits. Rather, it is provided on an exemplary basis, for the purpose of discussionand consultation, in order to assess whether there may exist realistic and attainablealternatives, particularly in respect of those situations and route types where airlinealliances appear not to offer sufficient interlinable services.


• To what extent may the restrictions and the benefits generated by the IATAInterlining System be considered proportional?

• What are the restrictive effects of those agreements and practices within theIATA Interlining System, which allow for the IATA specific itinerary flexibility?

• Are there any less restrictive alternatives to the IATA Interlining System whichwould provide for the same/similar benefits? If so, please describe such alternatives.

• If one were to set aside the IATA itinerary flexibility, would there be any lessrestrictive alternatives to the IATA Interlining System which would provide for thesame/similar benefits? If so, please describe such alternatives.

• In the light of the preceding question, can the alternative system described inAnnex 2 to this paper be considered viable/practicable, if considered a complement toexisting intra alliances interlining? If so, would there be an improvement in terms ofthe proportionality between restrictive effects and generated benefits?

2.2.4 �� [without] affording such undertakings the possibility of eliminating competitionin respect of a substantial part of the products in question.�

69. The IATA multilateral interlining system and IATA tariff conferences in particularensure that all participating IATA members can interline with each other at a givenprice and that smaller airlines are not refused interlining opportunities by largercarriers so long as both participate in the tariff conferences. Some argue on thatbasis that the tariff conferences are more important for smaller carriers than for largerairlines because without them smaller airlines would find it difficult to offerpassengers onward connections or a high number of frequencies per day (particularlyimportant for business travellers). If so, it could mean that IATA tariff conferencesexert a pro-competitive influence in certain parts of the market. In assessing the

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importance and relevance of this argument, the question may also be raised whether,in the absence of the existing IATA interlining system, smaller and regional carriersmay run some risk of market foreclosure.

70. On the other hand, it must be underlined that the restrictive effects on airlinecompetition on routes of type 11, i.e. routes between hubs of competingcarriers/alliances, may be quite problematic in respect of the fourth and last conditionof Article 81(3). Indeed, the importance of these routes (in numbers of point to pointpassengers) may represent a substantial part of the overall intra Community airtransport market, may be particularly so for time sensitive passengers. Accordingly,it cannot be excluded that the IATA Interlining System and most particularly thereinthe passenger tariff conferences would give to member carriers the possibility toactually eliminate competition on a substantial part of the overall market of airtransport within the Community.


• How important is the IATA Interlining System to smaller airlines? Should adistinction be made in this respect between franchisee/feeder carriers to majornetwork carriers/alliances and independent carriers?

• To what extent may the obligation to interline imposed as a remedy in theframework of an alliance or merger operation on an airline �dominant� in aparticular hub prove satisfactory in terms of avoiding market foreclosure detrimentalto small/regional carriers operating out of/into the said hub?

• What proportion measured in number of passengers of the intra Communitypassenger scheduled air transport market do routes between the hubs37 of competingcarriers/alliances represent?

3. PASSENGER TARIFF CONSULTATIONS (ROUTES BETWEEN THE EUROPEANCOMMUNITY AND THIRD COUNTRIES)

3.1 The multifaceted regulatory framework applicable to such routes: bilateral airservices agreements

72. At the end of World War II, it appeared that the future of aviation was going to beparticularly bright and promising, and that the airline industry was going to be asector of key importance both in economic and strategic terms. Accordingly, nationalgovernments involved themselves heavily in developing and controlling thatindustry, with respect to both domestic and international aviation. As regards thelatter, they did so in exercising the national sovereignty rights they enjoyed over theair space situated over their territory.

73. Hence, with reference to and/or within the internationally agreed principles whichthe Chicago Conference had provided, national authorities of sovereign States started

37 Such routes would be routes of category 11 in exhibit 2 above. For practical purposes with a view to

address that question, airports which are in top 25 European airports in numbers of passengers could beconsidered to be a �hub�.

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concluding air services agreements amongst themselves to provide for a regulatoryframework applicable to air services between them. The said agreements were thesubject of real and sometimes tough negotiations between sovereign States in so faras their object and purpose was not only to control the development of this newindustry but also for each government to protect the interests and ensure thedevelopment of its national carrier at times where it was considered of strategicimportance to have such a national �flag carrier�.

74. Bilateral air services agreements regulate still today all key economic aspects ofinternational aviation, in particular the qualitative (agreed routes which may beserved, carriers/number of carriers authorised to serve the routes, �) and quantitativeoffer of transport services (capacity in number of weekly/monthly seats, number ofweekly/monthly frequencies, size of aircrafts, � on the agreed routes) as well asprices (ranging from agreements where the parties� competent authorities agree onthe prices to be charged and impose them on airlines, to agreements where pricing isentirely free, not even subject to a filing requirement with the parties� competentauthorities). The resulting regulatory framework is extremely diverse, reflecting notonly differences in terms of more or less restrictive approaches to internationalaviation by civil aviation authorities and governments worldwide but also the factthat air services agreements are the result of a negotiation between parties whoseleverage and priorities may differ widely.

75. As regards the subject of fare regulation in the framework of bilateral air servicesagreements, it should be noted from a historical perspective that some governmentsand aeronautical authorities found that they were not best placed to decide on thelevel at which air fares must be set. Accordingly, some governments and authoritiesdecided to �delegate�, whilst usually keeping some regulatory means of intervention,their competencies in that area to the industry. For that reason, a certain number ofair service agreements refer, in a more or less binding way, to the fares decided in themultilateral forum provided by IATA namely the Tariff Conferences, which may insome instances prove contrary to Article 81 of the Treaty.

76. From a historical perspective, it is equally worth noting that air transport betweenMember States of the European Community used to be regulated through the samediverse web of bilateral agreements between sovereign States. Although many ofthese may remain in force with respect to indirect services to and from thirdcountries, they have largely been overtaken by the entry into force more than adecade ago of the third package38, which harmonised the applicable regulatoryframework and opened aviation markets within the Community.

3.2 ICAO ATConf/5 � �Challenges and Opportunities of Liberalisation�

77. The fact that air services agreements may be very far reaching in terms of economicregulation and the diversity in the provisions and types of these agreements results ina very complex and sometimes very restrictive regulatory framework for airlines tooperate in, which is not the best warrant for economic efficiency. This was

38 Council Regulation (EEC) No 2407/92 of 23 July 1992 on licensing of air carriers, OJ L240,

24.08.1992, p. 1, Council Regulation (EEC) No 2408/92 of 23 July 1992 on access for Community aircarriers to intra-Community air routes, OJ L240, 24.08.1992, p. 8, Council Regulation (EEC) No2409/92 of 23 July 1992 on fares and rates for air services, OJ L240, 24.08.1992, p. 15

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recognised in the 5th Worldwide Air Transport Conference held by ICAO39 inMontreal from 24 to 28 March 2003, which gathered some 800 participants from 145ICAO Contracting States and 29 organisations (amongst which the EuropeanCommunity and the European Commission).

78. IATA submitted several working papers for the consideration of the Conference, oneof which is of particular relevance for the present consultation paper and was called�Maintaining the Multilateral Interline System40�. In that paper, IATA described itsinterlining system and underlined the benefits it generated before drawing theattention of governments and participants in the Conference to �some national or[�] regional measures aimed at furthering �liberalisation� [which may] lead tofragmentation of the global system�, and expressing the view that �differentapproaches to the application of competition laws may oblige some airlines towithdraw from parts of the multilateral [interlining] system, undermining itseffectiveness as well as its benefits and ultimately threatening to destroy itcompletely.�

79. ICAO ATConf/5 Conference ended with the approval of consolidated conclusions,model clauses, recommendations and a declaration with a view to "create anenvironment in which international air transport may develop and flourish in a stable,efficient and economical manner without compromising safety and security andwhile respecting social and labour standards". The Declaration recognised theultimate goal of giving international air transport as much economic freedom aspossible, in keeping with the needs of the travelling public and the industry, whilerespecting its specific characteristics and striving to limit its environmental impact.

80. With respect to the particular point of IATA Tariff Conferences, the detailedconclusions highlighted in particular that:

�the extraterritorial application of national competition laws can affect cooperativearrangements regarded by many as essential for the efficiency, regularity andviability of international air transport, certain forms of which benefit both users andair carriers alike. Consequently, where antitrust or competition laws apply to sucharrangements, decisions should take into account the need for inter-carriercooperation, including interlining, to continue where they benefit users and aircarriers41.�

81. The following ought to be noted in respect of the 5th Worldwide Air TransportConference:

� The conclusions agreed at the conference do not produce legally bindingeffects. However, the said conclusions constitute recommendations for ICAO

39 Since October 1947, the International Civil Aviation Organisation (ICAO) is the specialized agency for

international civil aviation of the United Nations where it is linked to Economic and Social Council(ECOSOC). See http://www.icao.org/cgi/goto.pl?icao/en/history.htm for details about the history ofICAO and the acts of international law founding the organisation.

40 Full text available at: http://www.icao.int/icao/en/atb/atconf5/docs/ATConf5_wp028_en.pdf41 Consolidated Conclusions, Model Clauses, Recommendations and Declaration of ATConf/5, Agenda

Item 2.3 - Fair competition and safeguards, paragraph e), see full text of the conclusions at the address:http://www.icao.int/icao/en/atb/atconf5/docs/ATConf5_conclusions_en.pdf

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contracting States and may be considered a set of good practices and principles toabide by;

� Moreover, the Member States of the European Community and theCommunity institutions were represented at the conference.

Accordingly, when making a proposal for the purpose of revising, repelling, orproroguing Regulation 1617/93, the Commission may, in enforcing the Community�scompetition law, take the above into consideration.

3.3 Application of Article 81(1)

82. It should be noted that the present paper does not address the question of theconformity with Community law, and with article 81 of the Treaty in particular, ofbilateral air services agreements concluded by Member States with third countries.The present consultation paper is limited in scope to discussing whether, in respect ofroutes between the Community and third countries, the IATA Interlining System andIATA Tariff Conferences in particular may qualify for a block exemption. As thecase may be, it is the understanding of the services of DG Competition that such anexemption would have to be conditional upon enabling/facilitating interlining as ispresently the case for the exemption applicable in respect of intra Community routes.

Accordingly the following discussion under Article 81 applies only in respect of thescope of this paper.

83. The industry has submitted on several occasions to the Commission that indirectservices constitute a reasonable alternative to direct services for medium to long haulflights. This was acknowledged to some extent by the Commission in its practice ofcompetition law.

In almost all instances, where an additional connection is inserted in a journey toprovide for an alternative/competitive route, the additional connection at stake willtake place at a hub airport located in another Member State42.

It follows therefore that price coordination in respect of routes between theCommunity and third countries may materially affect trade between Member States.

84. Hence, it is not clear to the services of DG Competition if, and as the case may bewhy, IATA tariff consultations should be, on a preliminary basis, qualifieddifferently under Article 81 in respect of routes within the Community (See aboveparagraph 43) than in respect of routes between the European Community and thirdcountries.

3.4 The four conditions of Article 81(3)

85. The present preliminary discussion of the four conditions of Article 81(3) is made ona comparative basis with reference to the discussion conducted above on the same

42 For example, instead of flying direct London � Johannesburg, a passenger may wish to fly London �

Paris � Johannesburg. The added connection in Paris is located in a Member State other than that ofdeparture.

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subject in respect of intra Community air services (See above, paragraphs 46 to 70).In other words, this section consists in a tentative identification of differences and/orsupplementary elements of fact or of law to those identified above, which may berelevant for the purpose of conducting an Article 81(3) assessment in the case ofroutes between the Community and third countries.

3.4.1 ��improving the production or distribution of goods or [] promoting technical oreconomic progress,�

86. Passenger Tariff Conferences appear to produce benefits, which are shared betweencarriers, consumers and governments. According to IATA43, benefits for the latterrelate in particular to:

• Minimised disputes: tariff coordination minimises inter-governmental disputes,by providing governments with a collective agreement, which already represents thecombined wishes of all the carriers with regional interests.

• Control: Governments ultimately exercise their control on tariff agreementsmade in tariff coordinating conferences, because these agreements can beimplemented only to the extent to which they are approved by governments.

• Observation: Governments can "attend" meetings as observers. IATA TariffConferences are conducted in an open and transparent manner and are open toobservation by regulatory bodies. Minutes of the meetings, which are provided togovernments, provide them with a clear understanding of the processes and content ofconference activity. Governments can see the reasoning, relationship and structurebetween the tariff levels of various countries.

• Communication: IATA communicates any government position on filedagreements to all tariff conferences� members. This provides members with importantinformation for the formulation of future tariff proposals and limits the need for directgovernment intervention, thus making the process of tariff formulation andcoordination more efficient.

• Efficiency: Tariff agreements developed in tariff coordinating conferencessignificantly reduce the volume of individual airline filings. Instead, the national tariffconference member, or IATA where there is no national member, files the agreementwith the appropriate government on the behalf of the entire industry. Governmentscan, if they so wish, review a single document, which contains all the consolidatedtariff filings, which come from the conference agreements, and which represent alltariff coordination participants, and they can act on it swiftly and efficiently. Byproviding a forum for airlines to meet and coordinate tariffs with immunity fromcompetition laws, IATA tariff coordinating conferences mean that time spent onadministration between governments and airlines is greatly reduced. Less time andmoney is spent, resulting in a more efficient marketplace.

87. As discussed above (See paragraph 49), only objective benefits and efficiencies maybe taken into consideration for the purpose of assessing whether the first condition of

43 For further detail: www.iata.org/tariffs/aboutus/benefitsforgovernments.htm

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Article 81(3) is fulfilled. Accordingly, the advantages identified by IATA under thesecond and third bullet point above may have to be discarded for the purpose of thepresent analysis since national authorities and governments have the actual authorityto approve filed fares, whether such fares have been set unilaterally by a singleairline or collectively by the industry, and since transparency may not so much bequalified as a specific advantage of IATA tariff conferences than a requirement formany anti trust authorities and for the Commission in particular44.

88. Without prejudice to the conformity with Community law of the concerned bilateralagreements, it may however be considered that, where air services between aMember State of the European Community and a third country are governed by abilateral air services agreement providing in particular for the filing and approval offares by competent aeronautical authorities prior to their entry into force, IATA tariffconferences may generate specific benefits which would qualify under the firstcondition of Article 81(3).


• How important are the benefits which may be objectively attributed in respectof routes between the Community and third countries to the IATA Interlining Systemand to IATA Tariff Conferences in particular

3.4.2 ��while allowing consumers a fair share of the resulting benefit ��

90. As regards the second condition of Article 81(3), the analysis conducted above (Seeparagraphs 52 to 61) questioned to what extent the ability to interline may beconsidered a consumer benefit specifically attributable to the IATA InterliningSystem. Central to this question was the fact that airlines have gathered within theCommunity into airline alliances so as to considerably extend their reach within thesaid area.

91. When turning to routes between the Community and third countries, it must berecognised that the area within which it may be valuable and/or necessary forpassengers to be able to interline broadens from Europe to the World. Althoughairline alliances may like to say for commercial reasons that their reach is global andworldwide, the situation is not necessary so.

92. Further, it may be disputed whether the so-called �hub & spoke model�, asrepresented in exhibit 1 above, provides an adequate description of the main patternsof air traffic between the Community and third countries. It may probably beassumed that carriers will gather into alliances and/or mergers when operating in bigliberalised markets such as the US and/or the EU and that they will try in suchmarkets to structure traffic according to the hub & spoke model in order to capturethe efficiencies, which stem from that model. However, it is not obvious that airlineshave done/would do the same when operating in smaller markets which remain moreor less constrained from a regulatory standpoint due to the myriad and diversity ofbilateral air services agreements.

44 See the provisions of Article 4(2) of Commission Regulation 1617/93.

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93. Accordingly, it may appear that the reach of individual alliances, even less so forindividual carriers, ought to be considered neither sufficiently global nor efficientfrom a purely economic standpoint for the purpose of offering from the consumers�perspective a credible and valuable alternative to the IATA Interlining System asregards routes between the EU and the rest of the world.

94. Unlike the preliminary conclusion drawn in respect of the consumer benefits of theIATA Interlining System for intra Community passenger air services (See paragraph61 above), it appears that all consumer benefits identified by IATA (i.e. not only theIATA specific �itinerary flexibility� but also through ticketing and through check ofbaggage � see paragraph 52 above) may on the whole be considered specific for thepurpose of assessing whether the second condition of Article 81(3) is fulfilled inrespect of routes between the European Community and third countries.


• How inadequate would the description of main air traffic flows according toExhibit 1 above be for the purpose of conducting an analysis of interlining on routesbetween the Community and third countries? As the case may be, is it possible toidentify regional international aviation markets wherein, following somelongstanding liberalisation in terms of market access and prices, the hub & spokemodel would nonetheless have developed?

• Where a Community carrier has entered into an alliance agreement with athird country carrier and the alliance agreement encompasses intra allianceinterlining on a number of individual international routes, should the concernedcarriers benefit of a block exemption in respect of the said routes? Pleasesubstantiate any positive or negative submission in this regard.

• On routes between the Community and third countries, how much interlining isactually done through the IATA system as opposed to through alliances and/orbilateral agreements between carriers?

3.4.3 �� [without] imposing on the undertakings concerned restrictions which are notindispensable ��

96. It appears from the discussion conducted here above that the IATA InterliningSystem generates benefits which may be considered objective and specific to it.Accordingly, for the purpose of assessing whether this third condition of Article81(3) is fulfilled, it would further be required to discuss whether the restrictionsgenerated by the IATA system are reasonably necessary in order to produce the saidbenefits and efficiencies. In other words, there would have to be someproportionality between the benefits and the restrictive effects at stake.

97. Assuming that the elements identified here above in respect of the first and secondcondition would be confirmed, the verification of the proportionality at stake mayprove easier than in the case of intra Community air services since not only theoverall benefits and efficiencies but also the consumers� share of the said benefitsand efficiencies appear to be greater.

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98. The Commission may also consider whether the international recognition of theexisting IATA multilateral system and the agreed conclusions of ICAO ATConf/5whereby that system ought to be preserved from some excessive and/orextraterritorial application of competition law may constitute an element of factsuggesting that the said system would not be unreasonably restrictive in order toproduce the benefits at stake.

99. Finally, it goes almost without saying that, in as much as the alternative systembriefly described in Annex 2 may constitute an alternative to the IATA system onthose intra European routes where such an alternative may prove a necessarycomplement to intra alliance interlining, it may not provide a credible or viablealternative in respect of routes between the EU and third countries45. In their currentknowledge, the services of DG Competition actually fail to know of any systemwhich would be less restrictive than the existing one whilst satisfactorily enablingpassengers to interline on (almost) all routes from the Community to third countries.


• To what extent may the restrictions identified in the question above beconsidered proportional to the benefits generated by the IATA Interlining System?

• Are there any less restrictive alternatives to the IATA Interlining System? If so,please describe such alternatives.

3.4.4 �� [without] affording such undertakings the possibility of eliminating competitionin respect of a substantial part of the products in question.�

101. Assuming that it may not be possible to achieve a more or less systematic breakdownon a worldwide basis of all routes to and from the Community into differentcategories, it may prove difficult to argue that the existing IATA interlining systemaffords undertakings the possibility of eliminating competition in respect of asubstantial part of the market, and as the case may be which part of the market maybe concerned.

102. In the present case, a global and pragmatic approach to competition policy ininternational aviation may lead to the preliminary conclusion that the most importantbarriers to increased competition stem from the applicable regulatory framework,namely the hundreds if not thousands of bilateral air services agreements containingexplicit restrictions on capacity and/or pricing (some of which may be infringingCommunity law) rather than the IATA Interlining System.

103. To some extent, taking into consideration the in some instances far reachingrestrictive effects of the applicable regulatory framework, the IATA InterliningSystem may even be considered pro competitive. In fact, despite the restrictionswhich may stem from bilateral air services agreements, passengers have de facto the

45 The alternative described in Annex 2 is intimately linked to the adequacy of the �hub & spoke model�

for the purpose of describing the main air traffic flows. Accordingly, where that model as described inexhibit 1 above would prove not to be adequate for a substantial part of the traffic concerned, therelevance and significance of the alternative described in Annex 2 would be undermined in acorresponding proportion.

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possibility, in using the itinerary flexibility provided by the IATA system for somecategories of fares, to choose the carrier they want to fly with for the longer part oftheir journey. Hence, it may be argued that the existing multilateral interliningsystem may allow for some form of competition between airlines in respect of thequality of the services provided.


• How restrictive of airline competition may the IATA Interlining System onroutes between the Community and third countries be in comparison to restrictionswhich stem from the regulatory framework formed by bilateral air servicesagreements?

4. CARGO TARIFF CONSULTATIONS (ROUTES BETWEEN THE EUROPEAN COMMUNITYAND THIRD COUNTRIES)

105. IATA appears to seek the extension of existing block exemption Regulation 1617/93so as to let it equally apply in respect of cargo tariff conferences to routes within theEuropean Union and to routes to/from Community airports, i.e. between theCommunity and third countries46.

106. As regards the former, the services of DG Competition see prima facie no reason torevisit the decision taken by the Commission to withdraw the former blockexemption applicable to cargo tariff conferences for routes within the EuropeanEconomic Area47.

107. As regards the latter, without entering into a detailed analysis, a preliminaryexamination of some of the key facts at stake suggests that there may be substantialdifficulties with the �indispensability test� required under Article 81(3). In fact, theservices of DG Competition fail to see, in their present knowledge of the marketsconcerned, how the IATA Cargo Interlining System may be considered indispensablein the meaning of Article 81(3) where:

• no less than three competing multinational undertakings active in the expresscargo/courier sector, namely Federal Express, UPS and DHL have developed on aunilateral basis worldwide networks providing for the transportation of cargoshipments using both air and surface transportation means,

• some of the key benefits identified by IATA itself relate to so-called �timesensitive cargo�, precisely the kind of cargo which tends to constitute the corebusiness of the above mentioned undertakings48,

• there appears to be a large overlap between the markets served by the airlineindustry in respect of cargo and the express cargo/courier sector since it appears thatthe overwhelming majority of shipments carried by IATA member airlines are

46 See Annex 1, IATA Tariff consultations description provided by IATA, paragraph iv.47 The block exemption was removed as of 30 June 1997 by Commission Regulation 1523/96 of 24 July

1996, OJ L190, 31.07.1996, p. 1148 See Annex 1, IATA Tariff consultations description provided by IATA, paragraph xviii.

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�small� shipments of less than 250 kilograms, there again precisely the kind ofservice upon which express cargo/courier sector appears to have a business focus on.

108. Accordingly and unless proven wrong in matters of fact or of law with respect to theabove, in line with the policy established by the Commission when it decided towithdraw the previously existing block exemption for the cargo sector on intraCommunity routes, the services of DG Competition do prima facie not intend topropose to exempt IATA Cargo Conferences of the prohibition of Article 81(1) inrespect of routes between the Community and third countries.

5. SLOT ALLOCATION AT AIRPORTS

5.1 Routes within the Community

109. Council Regulation 95/93 as modified by European Parliament and CouncilRegulation 793/2004 makes mandatory in EU law certain principles set out in theIATA Scheduling Guidelines and the industry practice which derives from that forthe purpose of allocating slots at airports in the Community. On that basis, and on thecondition that slot allocation conferences be open to all interested carriers and thatthe criteria for slot allocation be transparent and non discriminatory, the Commissionhas so far considered49 that IATA Schedules Conferences conformed to theconditions laid down in Article 81(3) of the Treaty and could therefore benefit from ablock exemption. The services of DG Competition are not aware of any changes inthe IATA Scheduling Guidelines and/or the industry practice in respect of slotallocation which may justify that the said exemption be questioned.

110. Similarly, it is the understanding of the services of DG Competition that Regulation(EC) No 793/2004 of the European Parliament and Council amending CouncilRegulation 95/93 on common rules for the allocation of slots at Community airportsmainly amounts to a technical update of the existing regulatory framework (Seeabove paragraph 35) bringing even closer the Community system to the practices setout in the worldwide scheduling guidelines. Accordingly they take the preliminaryview that the revision of Council Regulation 95/93 should not result in thequestioning of the existing block exemption either.

Conversely, in the event that significant changes would be introduced in theregulatory framework applicable to slot allocation at Community airports, theservices of DG Competition would likely want to reassess the situation andjustification for the block exemption.

5.2 Routes between the Community and third countries

111. By definition, routes between the Community and third countries involve one ormore airports located in the Community, to which Community law � in particularRegulation 95/93 � is applicable, and one or more airports located in third countries,to which Community law does in principle not apply.

49 See Article 5 of Commission Regulation 1617/93.

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112. Accordingly, a key question with respect to a possible extension of the existing blockexemption to routes between the Community and third countries may be whether theregulatory framework applicable in third countries in the area of slot allocation atcongested airports may result in an unfair treatment of carriers requesting a slot andthereby in difficulties as regards Community competition law.

113. The following may be noted in that respect:

• although IATA Worldwide Scheduling Guidelines constitute by definition aset of non binding principles and rules in the area of slot allocation, the saidGuidelines appear to be a worldwide reference and standard in that matter for theconsideration of sovereign States when elaborating rules on slot allocation atcongested airports even though these Guidelines explicitly provide for regional ornational rules to take precedence over the Guidelines;

• following the submission by IATA of a working paper to the ICAO ATConf/5Conference50, the Conference has endorsed in its conclusions some of the mainprinciples underlying the IATA paper and system51 and underlined the importance ofworldwide compatible slot allocation systems;

• Article 12 of Council Regulation 95/93 as amended by regulation 793/2004deals with relations with third countries; following a description in the first paragraphof the difficulties which Community carriers may encounter to obtain slots at thirdcountry airports, the second paragraph of Article 12 imposes on Member States toinform the Commission of any �serious difficulties encountered�; the Commissionhas so far not been informed of such serious difficulties pursuant to Article 12 ofCouncil Regulation 95/93 and it must therefore be presumed that there exist no suchdifficulties. Furthermore, the Commission is empowered to decide that a MemberState has the obligation to take specific measures with a view to remedying thediscriminatory behaviour of the third country concerned. Such measures may includethe suspension in whole or in part of the application of that Regulation.

114. On the basis of the above and taking into consideration that the Commission maypursuant to Article 29(1) of Regulation 1/2003 withdraw the benefit of an existingblock exemption, for instance where the above presumption should be reversed andwhere that should lead to one of the four conditions of Article 81(3) not to befulfilled any more, there appears not to be reasons why the existing block exemptionon slot allocation and airport scheduling conferences should not be extended toroutes between the Community and third countries.

115. For that purpose however, and in so far as conflict of laws should be avoided, theprovisions of Article 5(1)(d) may have to be amended and/or complemented in so faras they directly refer to, as a condition to benefit from the block exemption,definitions and rules laid down in Council Regulation 95/93.

50 See http://www.icao.int/icao/en/atb/atconf5/docs/ATConf5_wp027_en.pdf51 See Agenda Item 2.2 �Market Access�, Part 1 �Liberalisation of Market Access�, paragraph g): any slot

allocation system should be fair, non-discriminatory and transparent, and should take into account theinterests of all stakeholders. It should also be globally compatible, aimed at maximizing effective use ofairport capacity, simple, practicable and economically sustainable, full text available athttp://www.icao.int/icao/en/atb/atconf5/docs/ATConf5_conclusions_en.pdf

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• Have some of the Community�s international aviation partners enactedlegislation in the area of slot allocation which may conflict with Regulation 95/93?Ifso, please identify the countries concerned and specify in terms of substance wherethe conflicts of law may reside.

6. NEXT STEPS

117. Comments and answers to the following paper should be sent by 6 September 2004to:

Hubert Beuve-MéryDG Competition - D270 Rue Joseph IIBrussels 1040Belgium

Fax: 0032 (02) 296 9812E-mail: [email protected]

118. The services of DG Competition will assess in fact and in law the submissions,comments and answers received in answer to the present consultation paper.

On that basis, the Commission will make a proposal with respect to the possibleprorogation and/or amendment of Regulation 1617/93, which will then be subject tothe procedure laid down in Article 6 of Council Regulation 3976/87.

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ANNEX 1 - IATA TARIFF CONSULTATIONS� DESCRIPTION PROVIDED BY IATA

i. IATA is the industry body representing the world's airlines. IATA works withgovernments, directly and through ICAO, to provide safe, efficient and reliableinternational air transportation. It was established in 1945 by a Special Act of theCanadian Parliament. IATA membership consists of over 270 of the world's majorairlines, of which 134 participate in the Cargo and Passenger Tariff CoordinatingConferences.

ii. International airline operations to, from and within the European Union areunderpinned by long standing industry-wide arrangements established throughIATA. Those arrangements include tariff consultations, which are essential forinterlining and which meet the requirements of many governments that internationalfares and rates should be agreed multilaterally through IATA. These requirementsare found in the bilateral Air Service Agreements (ASAs) � see infra.

iii. IATA tariff consultations for routes within the European Union have benefited froman exemption under Article 81(3) of the European Treaty since the Commission firstgained direct enforcement authority regarding application of the competition rules toair transport between Community airports. Since 1988, the Commission hasrepeatedly found that the requirements of Article 81(3) were satisfied.

iv. Now that the Commission has authority to enforce competition law (and grant blockexemptions) in respect of routes to and from Community Airports, IATA is seekingto extend the existing block exemption for tariff consultations in three ways:

• In duration, beyond its 30 June 2005 expiry date;

• geographically, to apply equally to routes within the European Union and toroutes to/from Community Airports; and

• in scope, to apply equally to consultation on cargo tariffs, in addition topassenger tariffs.

v. Continuation and extension of the exemption is important because of the legalcertainty it provides to the participants, and the transparency it lends to the processfor third parties.

The international regulatory regimevi. The right to operate international scheduled air services is not an open or free right.

All countries, including those belonging to the European Union, reserve the right toauthorise airlines of other nations to operate services to or through their territory.These operating rights traditionally were negotiated between countries on a bilateralbasis, although recently the European Commission has entered into negotiationsrepresenting all Member States.

vii. There are over 3,000 bilaterally negotiated Air Service Agreements registered withICAO. These, and the many more which are not registered, regulate virtually allaspects of international commercial aviation, including:

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• the specific airlines (or specific number of airlines) permitted to operatebetween the two parties to the agreement;

• the routes (including intermediate stopping points) designated airlines arepermitted to operate, and/or the specific cities those airlines are permitted to serve andthe traffic rights they are permitted to exercise;

• the frequency of flights, the capacity and/or the size of the aircraft permitted onthe authorised routes;

• the nature and extent of cooperative arrangements available to the airlines ofthe contracting countries (such as code share arrangements); and

• the tariffs (prices and related conditions for the carriage of passengers andcargo) to be charged to the consumer, and (possibly) the requirement that such tariffsbe submitted for approval before implementation.

viii. Many governments, including European Union Member States, still exercise theirrights to approve international airfares and rates before they may be implemented.Many of these governments have historically relied on their airlines, actingcollectively through the multilateral tariff development mechanism provided byIATA, to undertake the task of developing tariffs for their approval.

ix. The European Member States are signatories to many hundreds of bilateral AirService Agreements, and many of these agreements refer specifically to establishingtariffs, wherever possible, �through the rate-fixing machinery of the International AirTransport Association�. The relevant clauses also provide for government approvalof the tariffs established in this manner and for arbitration where no agreement canbe reached.

IATA Tariff Consultations �what are they?x. The meetings of the IATA Tariff Coordination Conferences are the forum in which

any IATA member airline may participate in development of interlinable passengerfares and/or cargo rates on international routes of relevance to that airline. Theseroutes include those actually operated by the airline concerned and routes todestinations that they do not serve, but where their customers wish to travel.

xi. It is the airlines themselves, not IATA management, which determine the outcome ofa meeting, and an outcome is only achieved with the unanimous agreement of allairlines participating in the relevant Tariff Coordinating Conference.

xii. Tariff Coordination has two distinct and different roles. The first provides thecommercial basis for multilateral interlining. The second role recognises theprocesses mandated by some governments in their Air Service Agreements, requiringfares and rates be jointly established by the designated airlines, before beingsubmitted for government review and approval.

xiii. Once an agreement has been reached IATA produces a package of memorandacontaining the minutes of the deliberations, newly adopted and amended resolutionsand tables of agreed prices. This package is then submitted, where required, togovernments either by a national airline or by IATA management for approval. Each

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member has advised IATA if its government�s approval is necessary, and IATA willonly declare an agreement effective with the approval of all necessary governments.

xiv. No airline is under any compulsion to charge the fares or rates established withinIATA Tariff Coordinating Conferences for its on-line52 transportation. Each airline isfree to apply whatever airfare, condition, standard or procedure it wishes for such on-line traffic, subject only to any applicable government requirement.

xv. However, airlines are aware that if they issue an interlinable ticket or air waybillusing the Conference resolutions, other participating airlines will accept thatdocument without any formality. The connecting passenger or shipment will beaccepted without question. The passenger's baggage, or the shipment, will betransferred between participating airlines at connecting airports seamlessly, withoutthe need for the passenger or shipper to be involved and without the need for furtherpaperwork.

xvi. Tariff Coordination is thus essential to the interlining system. Without TariffCoordination multilateral interlining as it applies today would not be possible.

What is interlining?xvii. The IATA multilateral interline system is a unique facility. It is universal in that it

allows a passenger or cargo to move to and from almost anywhere in the world. Itprovides flexible alternatives where no such alternative would exist otherwise.

With Interline:

• passengers may travel on multiple airlines under a single contract on a singleticket, bought in a single transaction, using a single currency. Interlining offers apassenger through-checked baggage, and a high degree of flexibility as to timing,routing, and carrier;

• cargo may be shipped on multiple airlines, under a single contract, using oneair waybill bought in a single transaction, paid for in the currency of the shipper, or ofthe consignee; and

• airlines, system providers and consumers are provided common standards andprocedures for reservations, tickets, waybills, passenger handling, baggage handling,currency conversion and acceptance, cargo handling and data transfer deliveringtangible benefits.

• IATA interlining rests on a number of commitments made by participants:

• acceptance of qualifying bookings for passengers and freight without question;

• acceptance of qualifying tickets held by passengers who have changed theirplans;

52 That is, where a passenger or a shipment only uses that airline for transport.

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• acceptance of qualifying air waybills when freight needs to be transhippedbetween airlines;

• coordination of booking information and baggage and freight handling; and

• the ticketing airline�s commitment to pay booking costs and reimburse airlinesthat actually carry the passenger or freight at qualifying fares or rates.

xviii. The IATA Interlining system is a facilitative system that enhances consumer choiceand gives airlines an efficient method of accessing a worldwide route network. Thekey benefits are:

• Access to �through� fares and rates which typically are less than the sum ofthe fares and rates applicable on each sector of the journey;

• Access to connecting services - the opportunity for passengers to travelbetween cities that are either not served by a single airline�s on-line service or forwhich the on-line services are inconvenient or full, and for freight to be movedefficiently between airlines to reach world markets;

• Flexibility for time-sensitive passengers53 providing the ability to:

• change the date and time of their ticket;

• cancel their ticket and receive a refund;

• depart without a return reservation;

• change airlines;

• change routes (subject to certain distance limits); and

• add or delete stopping points.

• Flexibility for time sensitive cargo providing:

• connection to world markets;

• opportunities to use a variety of routes and airlines to efficiently serveremote markets;

• smooth hand over and transportation of cargo where serviceinterruptions occur; and

• lower transaction costs than would be involved if airlines had to agreebilaterally to transfer cargo. These cost savings are reflected in lower airlinecosts and therefore lower cost to the consumer and shipper.

A refund, rerouting or rebooking of some fares, particularly lower special fares, may result in theapplication of a service charge.

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• Opportunity for smaller airlines to compete by allowing access to networkeconomics for all airlines, rather than only for those that are large enough to operatesubstantial networks or are in alliances;

• Expanded route networks allowing airlines to offer service beyond their ownroute networks, offering consumers, particularly those resident outside of major cities,access to the worldwide aviation market;

• Universality - around 335 airlines currently participate in the IATA interlinearrangements, providing scheduled international and domestic air services to almostany airport in the world; and

• Efficient use of assets - airlines achieve greater utilisation of their aircraft andinfrastructure, which provides cost and environmental benefits, reducing pressure onairport and ATC infrastructure.

xix. Where an airline issues an interline ticket, or air waybill at an IATA fare or rate, theother airlines accept that booking (subject to availability) without entering an ad hocnegotiation of its share of the revenue. The sharing of revenues is made according toa preset formula based on the agreed tariff. This allows the immediate creation of abooking and provides a fare or rate that is almost always lower than the sum of thesector fares of each airline involved.

xx. The extent and degree of interlining has always been difficult to quantify, however astudy done for IATA54 showed that in 1998 at London�s Heathrow airport, almostone third (or nearly 20 million) of passengers transferred between flights. Half ofthese passengers change between flights operated by the same airline (on-lineconnections) and there were nearly 10 million passengers transferring betweenairlines. Of these passengers, most (7.2 million) transferred between airlines thathave no apparent alliance affiliation and almost one third were changing flights morethan once.

54 An economic assessment of the IATA interline system. October 2000. Prepared by Economics-Plus

Limited and GRA, Incorporated

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ANNEX 2 - INTERLINING ACCORDING TO A POSTED PRICE SYSTEM ON ROUTES BETWEENHUBS AND REGIONAL/SECONDARY AIRPORTS

i. It is necessary for the purpose of describing the own merits of such a system toremember how air traffic is organised in the Community, and how that may berepresented. As discussed in the body of the consultation, main traffic flows inEurope may be described as follows:

RA ABRA B1

RA A1

RA B2RA A2

RA A3 RA B3





H A H B

H A

Exhibit 1

and the following types of routes may be identified,

Type of route

DescriptionFrom/to Origin - to/from Destination Carriers/Alliances serving the entire route

1 Hub of Carrier/Alliance A - Hub of Carrier/Alliance A Carrier/Alliance A2 Hub of Carrier/Alliance A - Regional/remote Airport Ax Carrier/Alliance A3 Hub of Carrier/Alliance B - Regional/remote Airport Bx Carrier/Alliance B4 Hub of Carrier/Alliance A - Regional/remote Airport Bx Carrier/Alliance B5 Hub of Carrier/Alliance B - Regional/remote Airport Ax Carrier/Alliance A6 Regional/remote Airport Ax - Regional/remote Airport AB Carrier/Alliance A7 Regional/remote Airport By - Regional/remote Airport AB Carrier/Alliance B8 Hub of Carrier/Alliance A - Regional/remote Airport ABy Carrier/Alliance A, Carrier/Alliance B (Connection in Hub B required)9 Hub of Carrier/Alliance B - Regional/remote Airport ABy Carrier/Alliance B, Carrier/Alliance A (Connection in Hub A required)10 Regional/remote Airport Ax - Regional/remote Airport By None11 Hub of Carrier/Alliance A - Hub of Carrier/Alliance B Carrier/Alliance A, Carrier/Alliance B

Exhibit 2

ii. Assuming that the key benefit of the existing interlining system that ought to besecured is the ability for passengers to travel within the Community from almost anypoint of origin to almost any point of destination on the basis of a single ticket, whichwould have to be available for purchase against a �through fare� and would give the

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right, subject to the applicable security requirements, to �through check� one�sbaggage, it would appear on the basis of exhibit 2 here above that an alternative hasto be found in respect of route type nr 10, i.e. routes between two regional/secondaryairports which are served exclusively by competing carriers/alliances.

iii. On all other route types, it may appear that passengers would have sufficientpossibilities thanks to the increasing reach of air carriers and the growing importanceand scope of airline alliances.

iv. In a system of posted prices on routes between hubs and regional/secondary airports,airline/alliances A and B would unilaterally post wholesale prices, for the usage ofother carriers, out of their respective hubs to the regional/secondary airports theyserve. In doing so, they would commit to accept interlining passengers provided thatthey are compensated with the amount they have posted for that purpose.

v. At the other end, carriers issuing a ticket whereby passengers have to interline oncompeting carriers/alliances networks would have to commit to compensate the saidcarriers/alliances with the requested amount as posted by the latter.

vi. Accordingly, there may have to remain some form of technical co-operation amongstcarriers participating in such a system, for the purpose in particular of ensuring thatissuing carriers are bound to compensate those effecting carriage at the proper postedrate and/or as the case may be provide for the appropriate settlement mechanisms.With reference to the existing four pillars of the IATA Interlining system, there maytherefore have to remain some form of MITA agreement (with a more or lessreduced scope as appropriate) and some form of IATA Clearing House. But therewould remain no need for tariff �coordination�.

vii. In practice, such a system would for example allow Airline/Alliance A to issue aticket on a route from Remote Airport A1 to Remote Airport B2 (see exhibit 1above) providing for a through fare and through check in of luggage, and using forthat purpose

• The applicable tariff structure within Carrier/Alliance A to fly from RemoteAirport A1 to Hub B on aircrafts operated by Carrier/Alliance A;

• the prices posted for interlining purposes by Carrier/Alliance B for the segmentfrom Hub B to Remote Airport B2, to be flown on aircrafts operated byCarrier/Alliance B

viii. Further, in the absence of IATA tariff consultations, such a system of posted priceswould enable Airline/Alliance B to continue to secure the revenues it presently earnsfrom interlining passengers. Accordingly, there may even be a market incentive forAirline/Alliance B to post interlining prices. The same incentive may be applicable tosmaller carriers serving Hub B.

ix. However, it should be acknowledged that the specific �itinerary flexibility� which itwas recognised may form part of the specific consumer benefits of the present IATAInterlining System would not be secured by means of such a system of posted prices.

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