IATA Third-Party Comment Submission -- Annex I - Summary of ...

International Air Transport Association

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

INTERNATIONAL AIR TRANSPORT ASSOCIATION

DG-Competition Consultation on Regulation 1617/93:

IATA Observations on Third-Party Comments

NON-CONFIDENTIAL VERSION 22 December 2004

IATA OBSERVATIONS ON 22 DECEMBER 2004 RESULTS OF INTERLINE CONSULTATION NON-CONFIDENTIAL VERSION

INTRODUCTION

The International Air Transport Association (“IATA”) is the international trade association of the airline industry. One of the principal activities of IATA is organising the conferences that are at the core of the multilateral global interline system. It is in these conferences that airlines meet, under carefully controlled conditions, to deal with many of the technical standards that underpin the IATA interline system and to agree the tariffs applicable to interlineable tickets.1 Since the liberalisation of air transport within the EU began in the 1980’s, these conferences have benefited from a block exemption under Article 81(3) EC. The current block exemption regulation, Commission Regulation 1617/93, was renewed in 2002, effective until the end of June 2005.

On 30 June 2004, DG Competition issued its Consultation Document on the Revision and Possible Prorogation of Commission Regulation (EC) No 1617/93 (IATA Tariff and Slot Conferences) (the “Consultation Paper”). In the Consultation Paper, DG Competition outlined its preliminary conclusions on the renewal of Regulation 1617/93.2 The Consultation Paper suggested that the conditions for application of Article 81(3) are no longer satisfied as regards discussions for tariffs within the EU, citing in particular the supposedly reduced importance of IATA interlining compared to interlining within airline alliances and to expanded online services.3 The Consultation Paper accepted that Article 81(3) may be applicable for passenger services to countries outside the EU, but concluded that Article 81(3) cannot be applied to consultations on cargo tariffs.4

IATA provided its comments on the consultation in a paper dated 6 September 2004. In that paper, IATA made the following key points:

IATA tariff consultations do not restrict competition within the meaning of Article 81(1), because there is no predictable causal link between the fares agreed for interlineable tickets in IATA conferences and those charged by individual airlines that can be used only on their own services. An economic study prepared for IATA by Charles River

1 Interlineable tickets (i) involve an itinerary with multiple city-pair segments that includes travel on different airlines and/or (ii) allow a customer to use the ticket without further charge on the services of another airline or to change routing (within certain distance limitations), stopovers and timing. 2 The Consultation Paper clearly states that the views set out therein do not reflect Commission policy: “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.” 3 The Consultation Paper attempts to validate its assessment by reference to a complex model of different route “types” as a basis for isolating the nature of consumer benefits and purported competitive harms that arise from the current interline system. As IATA points out in its comments, DG Competition has failed to put forward any empirical basis for the conclusions that it draws from this abstract model, which does not fully reflect real market conditions. 4 IATA explained in its comments why tariff coordination regarding cargo shipments to third countries has minimal restrictive effects and clear (if limited) benefits. Although some national authorities have made comments supporting the Commission position on air cargo, none provide any additional arguments or evidence.

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Associates (“CRA”) supports this point. IATA also noted that DG Competition has not provided any empirical economic analysis to support its assertion that such a link exists.5

IATA tariff consultations create direct and substantial consumer benefits. These result from (i) less expensive services on multi-airline connecting itineraries; and (ii) the benefit for consumers of the flexibility inherent in interchangeable tickets. As regards, the second benefit, IATA has shown that since intelligent consumers fully aware of their options purchase these tickets, the economic value to these customers is clear. Here again IATA has provided a careful economic analysis by CRA that validates these benefits from an economic perspective.

IATA tariff consultations are indispensable to full realisation of these benefits. Other systems, including the “posted prices” system mooted in the Consultation Paper may not work at all and cannot deliver the full extent of the benefits generated by the present system.

The Consultation Paper’s approach to these issues is based upon a fundamentally flawed understanding of the legal application of Article 81 in the post-modernisation environment, as reflected in the Commission’s recent Guidelines on the Application of Article 81(3) of the Treaty and other notices providing guidance on application of Article 81. Under the modern approach, proper economic analysis is essential for application of both Article 81(1) and Article 81(3). Furthermore, it is absolutely clear that the central issues in applying Article 81 are whether (i) the benefits of the current arrangements outweigh their restrictive effects (if any); and (ii) whether there is a less restrictive way to achieve those benefits. The Consultation Paper, in contrast, focuses on two issues that are entirely irrelevant to the Article 81(3) analysis – the relative importance of IATA interlining compared to other forms of airline cooperation and whether alternative, supposedly less restrictive, arrangements could achieve some of these benefits.

In addition to IATA, some 40 other interested parties made submissions in response to the Consultation Paper, most of which have been posted on the Commission website. Of these submissions, eight are broadly supportive of the DG Competition position that was expressed in the Consultation Paper. It is evident, however, that these comments were made without the benefit of the analysis set out in IATA’s response, which deals fully with many of the points that are raised. The third-party comments and the relevant points in IATA’s response are summarized in Annex I.

There are nonetheless several points that clearly troubled a number of commentators, particularly enforcement authorities from Member States. In particular, two submissions contain data that purport to demonstrate a link between the interlineable fares set in IATA tariff conferences and the setting of “carrier-specific” fares. Two submissions also present proposals for alternative systems that supposedly would be less restrictive than the system of IATA conferences while delivering the same benefits. The purpose of this supplementary submission is to provide the Commission services with IATA’s views on these issues, particularly as it now appears that there may be only limited time for further comments

5 IATA’s arguments in this regard are fully supported by a number of submissions, including those of the French Authorities, the Belgian Civil Aviation Administration, the Finnish Civil Aviation Administration, SITA and the Air Transport Users Council, as explained in more detail in Annex I.

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following publication of the next DG Competition paper, which may include formal proposals for resolving these issues.

In the discussion below, IATA addresses the following points:

The relevance of the additional statistical data provided by CTAG and the UK Authorities. IATA shows that this data does not in fact constitute evidence that the IATA conference system has the effect of restricting competition for purposes of Article 81.

The adequacy of data provided by IATA member airlines to support renewal of Regulation 1617/1993. IATA shows that the data the airlines have provided in compliance with Regulation 1617/93 confirms that the IATA interline system continues to generate significant benefits for consumers.

Whether a “posted-prices” system provides a fully comparable alternative to the current IATA conference system. IATA explains why alternative systems proposed by two of the commenting national authorities, do not constitute a less restrictive alternative matching the benefits of the IATA conference system.

1. The New Evidence of Alleged Restrictive Effects is Not a Basis for Finding a Restriction of Competition Under Article 81(1) EC

The submissions from the UK authorities and CTAG contain “evidence” alleged to be relevant to the issue of restrictive effects. These comments are clearly important, in light of IATA’s submission that there is no economic evidence that the IATA conference system actually has a restrictive effect on competition. Careful assessment of the information in these submissions, however, shows that they do not provide a basis for finding that the IATA interline system has a restrictive effect on competition for purposes of Article 81.

1.1 The UK Submission – does it show a “coat-hanger” effect?

The UK submission alleges that “where a non-interlineable carrier-specific fully flexible fare is introduced, its level may be influenced by the level of the fully flexible IATA fare and […] changes in the level are likely to mirror those of the IATA fare – the so-called ‘coat-hanger’ effect.”6 To support this assertion, the UK submission relies on an analysis conducted by the UK CAA. The CAA examined flexible fares offered by EU national carriers on at least 15 intra-EU routes in July 2004. The UK submission states that “[i]n most markets a snapshot of fares in late July 2004 showed no obvious correlation across routes between these non-IATA fares and the IATA fare.” The UK submission though goes on to state that there were some “notable exceptions” to this generalization. These “notable exceptions” are certain Air France fares from/to Paris, certain Lufthansa fares from Frankfurt and Munich, as well as certain Air Malta fares from/to Malta. The implication of this assertion is that the purported effects on these routes constitute a restrictive effect of the IATA tariff conferences for purposes of Article 81(1).

In light of the importance of this issue, IATA commissioned CRA to examine the discussion of the supposed “coat-hanger” effect and the supporting data contained in the UK submission. 6 See UK submission, para. 15. This is one of four points the UK submission makes concerning restrictive effects. The other points, including the allegation of information sharing (discussed in Annex I) were dealt with in the IATA submission of 6 September 2004.

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This analysis is attached as Annex II. It includes a partial replication of the CAA analysis. CRA shows that the data provided in the UK submission does not allow any economically viable inference of a restriction of competition for purposes of Article 81.

The main conclusions of CRA’s analysis are:

There is no basis in economic theory or literature for a “coat-hanger” effect as a stand-alone analytical tool. To be significant the effect must be analyzed and shown to be a restriction of competition in empirical terms.

If there is a valid theoretical and empirical basis for showing that such evidence amounts to a restrictive effect on competition within the meaning of Article 81(1), it is on the basis that it would show tacit collusion leading to higher non-IATA fares (i.e., carrier-specific fares) than would otherwise be the case in the absence of the IATA fares set in the tariff conferences.

The CAA’s findings do not constitute evidence of industry or selective airline tacit and/or explicit collusion, but rather highlight unilateral pricing actions by only three EU carriers on one type of business class or normal fare offered on a limited number of routes.

Referring to the more detailed analysis in their paper that was included as Annex IV to the IATA submission of 6 September 2004, CRA points out that there is a significant likelihood that removing the IATA fares would lead to even higher carrier-specific fares where the IATA fare is actually being used as a benchmark because the IATA fare is likely constraining market power on a route where competition is limited.

The CAA’s analysis is also flawed in terms of demonstrating anticompetitive effects since by focusing on one published fare type the analysis fails to take into account both the full range of business class or normal fares available and actual sales.7

Thus the CAA analysis does no more than provide a “snapshot” of the pricing strategies of three airlines on a limited number of routes. These strategies are neither common to airlines in general, nor common practice for Air France and Lufthansa on the routes that they serve.8 Furthermore the data is not presented in the context of actual sales or pricing by the airline and its competitors. The CAA data does not therefore provide the basis for a “proper market analysis” as that term is understood in the Article 81(3) Guidelines.9 Moreover, as acknowledged by the CAA and confirmed by CRA’s analysis, even the selective data focused on in the CAA study does not show such restrictive effects.

7 This last point is supported by the example contained in the comments from Alitalia which illustrates the diversity of fares that now exist in the market. SAS also highlighted in their comments that the “large majority of fares are fares that are set individually, thereby enhancing competition.” Although the specific example in Alitalia’s submission may not apply to routes where there is less competition, it is exactly such routes that would most likely see fare increases if the IATA fares were removed, given the analysis of CRA and the impact of eliminating the IATA unanimity requirement (i.e., since unanimity is required in order to increase an IATA fare for a particular segment, the requirement can be a curb on the exercise of market power that would not otherwise exist – see further below in section 3.1). 8 Given the limited significance attributed to the Air Malta data in the UK submission, IATA only explored this issue for Air France and Lufthansa. 9 Commission Guidelines on the application of Article 81(3) of the Treaty, OJ [2004] C 291/1 at para. 24.

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1

.2 The CTAG submission – Is it industry practice for airlines to use IATA fares as a “benchmark” for corporate fares?

CTAG – a group claiming to represent travel organisers within companies10 – suggests in its submission that airline corporate agreements normally use the IATA fully interlineable fare as a “benchmark fare” when giving discounts so that “[a]s these fares increase so does the discounted fare.” Thus CTAG appears to allege that discussion of fares in IATA tariff conferences could lead to a restriction of competition between airlines in respect of the fares charged to corporate customers.

The precise nature of CTAG’s allegation is not clear, because the nature of the practice to which it refers is not clear.11 The CTAG comment could refer to “back-end” type incentives that are sometimes given post-facto on certain point-of-sale fares, including IATA fares, when a corporate customer actually uses the ticket on the airline offering the discount.12 The existence of customer-specific discounts applying to IATA fares where the customer actually flies on the airline offering the discount, does not indicate any relationship between the IATA

10 It is not clear who the CTAG represents. The only electronic reference to CTAG is on the ACTE IATA Task Force web pages (see http://www.acte.org/initiatives/IATA_taskforce.shtml). Examining the “changes” the IATA Task Force is seeking (see http://www.acte.org/initiatives/acte_for_change.shtml) and their draft petition (see http://www.acte.org/initiatives/petition.shtml), it is clear that the issues are mainly those in the ECTAA/GEBTA complaint against the IATA passenger agency programme which the Commission is currently investigating. Although this relationship to the ACTE IATA Task Force and ECTAA/GEBTA does not automatically disqualify CTAG’s comments, the possibility that the intervention is meant to put pressure on IATA concerning other unrelated issues should be taken into account by DG Competition, and a thorough investigation of CTAG’s assertions should be a precondition to any reliance on those assertions. Such a thorough investigation must necessarily include input from any airlines implicated by CTAG’s allegations. 11 CTAG states:

“It is customary for airlines to use the full interlinable fare as a benchmark fare when giving discounts. In other words, a % discount will be linked to the highest fare. As these fares increase so does the discounted fare. e.g.

Discount at point of sale Interlinable fare =1,000 euro 20% Discount = 200 euro Net fare = 800 euro

Interlining is further eroded by airline alliances offering discounts where a passenger completes a journey within an alliance group.”

This is an excerpt from CTAG’s response to a question numbered six, which appears to be a question asked by DG Competition to three corporate customer organizations – see “Note on Comments from Corporate Customers” published on DG Competition’s Regulation 1617/93 webpage. This DG Competition note states that “[o]n 6 September 2004, the services of DG Competition had barely received any responses from corporate customers in reaction to the DG Competition Consultation paper […]. After consultation with the three corporate customer organisations, i.e., ACTE, Paragon and Cortas, DG Competition produced a more concrete list of questions to facilitate the work of corporate travel executives in contributing to the Consultation paper.” Given the nature of the questions asked it is surprising that DG Competition was not and has not been interested in raising the same issues with IATA or its member airlines. 12 This interpretation is supported by the comments in CTAG’s submission that refer to examples of corporate contracts included with its comments and points to one type of discount that it describes as “Fixed discount off full fare e.g. 10% […] e.g. 110 euro less 10% = 99 euros”. The excel sheet titled “Backend POS France” that is included with CTAG’s comments contains examples of such discounts granted by Lufthansa, United Airlines, Thai Airways, ANA and Singapore for “C” class fares which normally are or include the fully flexible IATA fare.

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fare and the airline’s own “carrier-specific” fares. The fact that the amount of the discount fluctuates with the amount of the IATA fare does not show such a link. Such discounts are clearly pro-competitive and there is no suggestion or any evidence to suggest that airlines are colluding to limit such discounts.

Alternatively, the CTAG submission may be read as suggesting that corporate net discount fares are pegged to the IATA fully flexible fare. These fares are offered to a corporate customer for travel on specified city pairs on the offering carrier only.13 If CTAG’s submission is read on this basis, the allegation would be that since “it is customary” to calculate corporate net fares on the basis of IATA fares, agreement on IATA fares is a means for airlines to tacitly collude regarding increases in discounted carrier-specific corporate fares. This allegation must fail, however, because it clearly is not “customary” to benchmark corporate net fares on this basis.

IATA has contacted a number of airlines to confirm the actual practice in the industry concerning the setting of corporate discount net fares.14 It is clear from those responses that it is not at all “customary” across the airline industry to base corporate net fares on the IATA fully flexible fare. Instead these comments suggest that corporate net fares are usually set on the basis of some publicly available carrier-specific fare or on the basis of customer purchases, market circumstances etc. and completely independent of the IATA fare. In the occasional cases where the IATA fare is used as a point of reference, it is clear that there is no fixed relationship between corporate net fares and the IATA fares – negotiations with the particular customer and market circumstances will determine the final net fare. Thus these responses show that an increase in an IATA fare does not necessarily lead to an increase in a corporate net fare and that where fare increases do occur the amounts will often vary.

The sample corporate contracts that CTAG included with its comments illustrate these points. A review of the excel sheets titled “POS” shows: (i) a wide variation in the discount percentages calculated on the basis of IATA fare; and (ii) that in the 2003-2004 period covered by the data, the percentages often differed in 2004 compared to 2003, which means that the net fare did not change either in the same way or by the same amount as the IATA fare. Analysis by CRA confirms this conclusion and shows that there was not a strong correlation between the discounted fares and IATA fares even for this limited sample.15

Together these responses and the CRA analysis confirm that the CTAG allegations do not amount to evidence of a restriction of competition under Article 81(1). There is no widespread industry practice, contrary to CTAG’s allegation, and simply presenting a relationship for the convenience of the customer or for ease of negotiation does not amount to a restriction of competition. Furthermore, even where a corporate net rate-IATA fare relationship is discussed, those relationships are completely variable (except perhaps where

13 In CTAG’s terminology, such corporate discounted net fare would fall in CTAG’s category “Fixed fare available at point of sale for city pair […] e.g. 100 euro LHR - CDG return”. 14 The confidential responses are attached as Annex III to this submission. 15 See Annex II, p. 8 and Attachment B to Annex II, p. 2-3. This was the clear conclusion for France and Germany where the most observations were available. The data for Spain showed some degree of correlation but the number of observations was very small. The data for the United Kingdom showed a correlation, but CRA concluded that “this is mainly driven by one outlier” and the “number of observations with prices is limited and seems to be biased.”

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Article 82 EC may require that certain customers be treated equally). Last, the data included in CTAG’s response undermines the suggestion of any link.

1.3 Conclusion on the alleged new evidence of restrictive effects.

The evidentiary value of the UK and CTAG submissions can only be considered in light of the legal test for finding a restriction of competition by effect under Article 81(1). To demonstrate a restrictive effect it is necessary to show that “on the relevant market negative effects on prices, output, innovation, or the variety and quality of goods can be expected with a reasonable degree of probability.”16 Applying this test requires a thorough market and economic analysis. In the case of the IATA multilateral interline system, the test requires showing that the IATA tariff conferences lead to an increase in prices or reduction in output on airline markets. Neither the UK nor CTAG submissions satisfy this test. The conclusion in IATA’s submission of 6 September 2004, therefore, continues to apply – there is no economic evidence to support the conclusion that IATA tariff conferences are restrictive of competition under Article 81(1).

2. Does Data Provided by IATA Member Airlines Support Renewal of Regulation 1617/93?

Some commentators have questioned whether the data available to the Commission supports renewal of the block exemption. These comments follow two arguments advanced in the Consultation Paper. The first argument, supported by ECTAA/GEBTA in their comments, questions the application of Article 81(3) in light of the supposedly reduced relative importance of IATA interlining within the EU. The second argument, supported by the authorities in the United Kingdom and Germany, is based on supposed inadequacies in the information provided by airlines pursuant to the reporting requirements of Regulation 1617/93. These submissions suggest that the airlines have thus far failed to provide sufficient data to demonstrate the ongoing benefits of the IATA system, particularly as concerns the “use” of IATA multilateral interlining. Neither of these arguments provides a basis for terminating the block exemption. The argument regarding the supposedly reduced relative importance of IATA interlining is not relevant to application of Article 81, as long as benefits can be shown. The data provided by the airlines under Regulation 1617/93 not only comply with the requirements of that regulation, but also provide strong additional evidence of the benefits of the current system.

2.1 The “relative importance” of IATA interlining does not matter.

According to the modern approach to EC competition law, the goal of Article 81 is to maximize consumer welfare in the economic sense. The purpose of Article 81(3) is to allow arrangements between undertakings that create identifiable welfare benefits, provided that those benefits exceed any welfare loss associated with the arrangements and that alternative less restrictive arrangements readily implementable by the parties could not achieve the same benefits. Thus the key comparison is between the level of harm (if any) and the level of benefit. Whether arrangements are less beneficial today than they were at some previous time is not relevant to application of Article 81(3). Likewise whether other arrangements

16 Article 81(3) Guidelines at para. 24. See the detailed discussion in the IATA submission of 6 September 2004, pp. 8-9 and Annex I – The Legal Context for Assessing IATA Tariff Conferences, pp. 8-10.

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operated by some of the parties also generate benefits that are similar to those of the arrangements under consideration is also not relevant to application of Article 81(3). 17

The ECTAA/GEBTA suggestion that the IATA multilateral interline system “may not provide outstanding benefits to consumers” must be considered in light of this legal framework. The initial ECTAA/GEBTA submission of 1 October 2004 states that “IATA fares represent only 10 to 15% of all tickets, including business premium fares”. Their 9 November 2004 submission, providing data for Italy, Belgium and the UK, suggests that IATA fares account for 10% of all tickets (compared to 17% three years ago). CTAG for its part stated that “IATA fares account for less than 5% of corporate tickets purchased” and for “major corporations with a managed travel policy, this figure is virtually nil.”18

What is striking about the figures provided by ECTAA/GEBTA is not that 10-15% is a low percentage – as explained above, the relative use of IATA fares does not matter. What is interesting is that in real terms a high number of consumers, advised by travel professionals, choose IATA fares.19 Expressing such data as percentages hides the millions of passenger trips captured by the data. These trips represent a clear consumer welfare benefit regardless of the percentage they may account for in total EU air travel.20 Far from supporting the Consultation Paper position, the data provided by ECTAA/GEBTA demonstrates that the requirements of Article 81(3) are met.

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.2 The data provided by the airlines demonstrates the substantial ongoing benefits of the IATA system.

Both the United Kingdom and German authorities comment that the airlines have failed to provide sufficient data demonstrating the benefits of the IATA system, making specific reference to the discussion in the Consultation Paper of the alleged failure to provide the data required under Article 4(3) of Regulation 1617/93.21 (It does not appear though that these

17 See Article 81(3) Guidelines, para. 85 and the discussion at pp. 10-11 of the IATA 6 September submission as well as Annex I to that submission, pp. 12-13 and in particular the references at footnote 50. 18 These statements though were contradicted to some extent by the examples of corporate contracts “typical of all carriers” included with CTAG’s submission since the contracts included an example of incentives given expressly on IATA fully flexible fares. See excel sheet titled “Backend POS FR” included as an annex to the CTAG submission. 19 The decision by consumers to purchase IATA fares, in the face of options, and the market value of those purchases provides strong evidence of the extent to which the system continues to generate benefits of value to consumers (see Article 81(3) Guidelines, para. 49 and the discussion at p. 11 of the IATA 6 September submission as well as Annex I to that submission, p. 13 and in particular footnote 58). 20 Indeed both the ECTAA/GEBTA and CTAG submissions concede that there is an ongoing need for multilateral interlining, particularly for those customers not well served by alliances (though they question whether the IATA tariff conferences are necessary for such benefits – those arguments are dealt with below in section 3). 21 The UK paper states (at para 41)

“The Consultation Paper states that the data provided so far is only partial because interlining between codeshare carriers is treated as on-line carriage, and because usage of the itinerary flexibility allowed by IATA fares is not measured. The UK authorities consider it regrettable that the data provided is not sufficient to allow a proper assessment of the role IATA fares actually play in the EU market and would like to see more information about what data has already been received. The UK authorities believe that the onus should be on the industry to provide this information, in a sensible format, to support their case for a block exemption.”

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authorities have made an independent assessment of the data – as their critique refers to the conclusions drawn in the Consultation Paper.) The issue of whether the information provided by the airlines in fact meets the requirements of Article 4(3) has been the subject of further discussions between the Commission staff and IATA. On 15 November 2004, IATA filed a detailed submission that showed that the airlines have clearly provided data as required under Article 4(3) and pursuant to the methodology agreed with DG Competition. The IATA response also showed that the deficiencies in the data referred to in the Consultation Paper, and noted with concern by the UK authorities, are in fact limited to data from one carrier and do not affect the validity of the data as a whole.22 DG Competition has now responded to IATA’s submission acknowledging that IATA has complied with the requirements of Article 4(3).23

Thus far from being “inadequate” or “incomplete”, the data provided by the airlines pursuant to Article 4(3) fully satisfies the requirements of that provision. Moreover, this data fully supports IATA’s contentions regarding the continuing importance and value of IATA interlining. The CRA Report submitted with IATA’s Response assessed the two interline data reports for 2003 to show that almost 8 million of the approximately 21 million normal fare coupons for intra-EEA travel were at IATA fares.24 Taking this same data and examining the highest volume passenger market covered by the report (London-Paris) it is apparent that almost 80,000 of the nearly 400,000 coupons on the city pair were sold at IATA

See also the comments at paras 12 and 33 of the UK submission. At paragraph 33 the UK submission points to lack of data concerning so-called “itinerary flexibility on indirect routings” (i.e., the ability to change routings within certain distance limitations):

“Unfortunately it is unclear what proportion of passengers buying an IATA ticket utilise the itinerary flexibility, because of the lack of adequate data. In order to claim this benefit for the IATA system, IATA should substantiate the value of this flexibility to demonstrate that passengers are not paying a premium for a product characteristic that is little used.”

The German Federal Cartel Office (“FCO”) makes a similar criticism referring to the comments of DG Competition in the Consultation Paper and states that the airlines have missed an opportunity to prove that the IATA system continues to generate significant benefits. See Germany’s submission, p. 8-9. 22 See DG Competition letter of 8 October 2004 and IATA response of 15 November 2004. In light of the evident importance attached to this issue by interested third parties, IATA has authorized DG Competition to make the non-confidential version of this submission available on the Regulation 1617/93 website. 23 Letter from Marie José Bicho, dated 16 December 2004.

The letter of 16 December also refers to “special fares” which are not included in the data because of technical difficulties in collecting the relevant information. It should be noted in this context, that restricting the data (and therefore the evidence of potential benefits) to normal fares can only understate the benefits of the IATA system.

Furthermore, the absence of special fare interline data is not a barrier to concluding that IATA interline special fares, taken in isolation, satisfy the requirements of Article 81. First, from the perspective of restrictive effects, a previous study on behalf of DG Competition concluded that there is no evidence that IATA fares in this category give rise to any restrictive effects (see CERNA III) and the highly competitive nature of this segment makes it extremely unlikely that any restrictive effects would occur. Second, most of the benefits identified by IATA apply equally to both special fares and normal fares. Third, airlines continue to include such fares as part of the products offered to consumers, which itself suggests that there is ongoing consumer demand for such fares. 24 The only full year data available at present is for 2003. The first interline data report covered July-December 2002. The interline data covers only IATA and carrier “normal” or flexible fares as agreed with the DG Competition services. The interline data therefore does not include any “special” or non-fully flexible fares (i.e., most economy fares).

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fares.25 As CRA observed, this data clearly shows that a significant number of consumers made a choice for the additional benefits of the IATA fully flexible product over the restrictions of cheaper, online flexible fare alternatives. The data also shows that these coupons are actually used for interlining to a significant extent: 1.6 million coupons or 21.9% of total IATA coupons for all intra-EEA travel were interlined and 6,000 or 7.9% of IATA coupons on London-Paris were interlined.

Since CRA completed its analysis earlier in the summer, the January-June 2004 interline data has become available and allows for further observations covering the two-year period during which the interline data has been collected and provided to DG Competition. This data shows that IATA fares accounted for 15 million of the total 40 million normal fare coupons in the July 2002-June 2004 period. On London-Paris, 154,000 of the 764,000 coupons were at IATA fares. The actual use for interlining was approximately 3.6 million or 23.6% for the EEA as a whole and 16,000 or 10.4% on London-Paris. Examining trends across the July 2002 to June 2004 period shows a slight decline on average, but the January-June 2004 figures nevertheless confirm that IATA fares continue to account for a significant amount of travel: 3.36 million coupons were at IATA fares and 800,000 or 23.8% interlined. On London-Paris, 42,000 coupons were at IATA fares, and 5,627 or 13.2% interlined.26

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.3 Conclusion – The third-party comments provide no basis for questioning the benefits of IATA interlining.

IATA described at length the benefits of the present interlining system in its initial submission: more convenient and lower cost services for connecting passengers, flexibility for all passengers choosing the fare, and reduced transaction costs. These benefits are also described in the various submissions from other interested parties, most notably the Air Transport Users Council, the Council of Europe Congress of Local and Regional Authorities, SITA, and British Airways. Although each benefit can be isolated, in reality the benefits overlap both in terms of motivations for the observed consumer choices and as elements that underpin the continued relevance of an integrated multilateral system from the perspective of air carriers. The ECTAA/GEBTA evidence confirms the existence of these benefits. The data provided pursuant to Article 4(3) of Regulation 1617/93 confirms the existence of those benefits.

3. Is the IATA Tariff Conference System “Indispensable” for Achieving the Benefits of the Multilateral Interlining System?

A number of commentators, while accepting that the multilateral interline system generates benefits for consumers, question whether IATA tariff conferences are necessary to achieve those benefits. Some of these commentators urge that further consideration be given to a system of “posted prices” as a method for setting interlineable fares. The comments from the UK authorities and the German authorities go furthest in this regard, proposing alternative systems for setting interlineable fares.

25 CRA in its paper highlighted London-Amsterdam where for full year 2003 approximately 50,000 coupons were sold at IATA fares out of the total 250,000 coupons (and 5,800 or 11.7% were actually used for interlining). 26 The non-confidential, consolidated summary sheets for each of the periods for which Interline Data has been submitted along with the combined total sheet for July 2002-June 2004 are included in Annex IV of this submission.

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These comments raise the legal issue of “indispensability” under Article 81(3). Where an agreement is deemed restrictive under Article 81(1), that agreement can only qualify for clearance under Article 81(3) if the restriction is necessary to achieve the full consumer welfare benefits of the agreement. The issue is not whether some other, less restrictive, arrangements might achieve some of the same benefits, but rather whether the restriction is linked to the benefits of the arrangements under review. In the words of the Article 81(3) Guidelines:

“The question is not whether in the absence of the restriction the agreement would not have been concluded, but whether more efficiencies are produced with the agreement or restriction than in the absence of the agreement or restriction.”27

Part of this analysis involves whether “having due regard to the circumstances of the individual case, the parties could have achieved the efficiencies by means of another less restrictive type of agreement.”28 The Commission accepts that such an alternative must be “economically practical […] market conditions and business realities facing the parties to the agreement must be taken into account.” Furthermore, parties are not expected to “consider hypothetical or theoretical alternatives.” The proffered alternatives must be “realistic and attainable.”29

Thus to assess the proposed alternatives it is necessary to consider: (i) the relationship between the benefits of the multilateral interline system and the IATA tariff conferences; (ii) whether alternatives are “realistic and attainable” in light of the “market conditions and business realities in the airline industry; (iii) whether the alternatives are “less restrictive” than the arrangements under discussion; and (iii) whether the alternative can deliver the same benefits as the current IATA system.30

3

.1 Tariff conferences are an integral part of the IATA interline system.

The multilateral interline system is based on a system of city-pair prices agreed on an ex ante basis. The existence of this price structure, together with the rules for prorating and the various technical arrangements that facilitate interoperability, allows an airline to issue an interlineable ticket with a minimum of transaction-specific costs. Without prices agreed in advance, each interline ticket would require a bilateral agreement between the airlines involved in the itinerary or an equivalent exercise (e.g., in a posted-prices system) to price the ticket at a level that covers the component fares of other carriers involved in the ticket. Without prices agreed in advance, a flexible transferable ticket cannot be issued, since there will be no assurance that the second carrier will accept it. Thus the multilateral interline system requires some mechanism for setting ex ante prices.

IATA tariff conferences provide an effective and efficient way of establishing the IATA price structure. In particular, the conference structure creates a natural control on the ability of carriers to demand excessive compensation on routes where they have a strong position, for

27 Article 81(3) Guidelines, Point 74. 28 Id. at point 76. 29 Id. at point 75. 30 The Guidelines clearly indicate that, while the burden is generally on the parties to show that Article 81(3) is satisfied, with respect to indispensability the “parties must only explain and demonstrate why such seemingly realistic and less restrictive alternatives would be significantly less efficient” id.

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two reasons. First, the IATA conferences tend to discuss the factors impacting prices between countries and then arrive at an agreement for each country pair as a whole (a “country adjustment”). If the general analysis is not appropriate for a specific city pair, it is up to individual airlines to make and justify an alternative proposal. Since fare changes require unanimity, there is a built-in restriction on carriers that may attempt to exploit a strong position on a specific route by proposing a fare above the country adjustment. Carriers accept this adjustment approach because discussing all individual city pairs would be impossible. Second, there is an element of reciprocity in the system. A carrier with a strong position on certain routes can accept the IATA system (and thus forego extra revenue from interlineable fares on those routes) in the expectation that other carriers will be required to do the same (to the benefit of the first carrier and to consumers who thereby gain access to a product at a lower fare). Overall, the reciprocal expectations of airlines participating in the IATA system and the control inherent in the unanimity rule lead to a real reduction in price and expansion in output compared either to the position where there is no multilateral agreement at all, or to the position under any realistic alternative system.31

3

.2 Are the suggested alternatives “realistic and attainable?

The United Kingdom authorities and the German authorities have proposed a variety of systems for generating an ex ante pricing structure. The United Kingdom structure is a variant on the posted-prices system proposed by the Commission in 2001 and raised as a discussion point in the Consultation Paper.32 The German authorities propose their own system based on posted prices (with two options – one that constructs industry rates based on weighted posted prices and one that allows passengers to combine posted prices to price their itinerary).33 The German authorities also suggest an alternative system using mileage-based interline rates.

In assessing these alternatives, it is important to recall that under the Commission’s indispensability test alternatives must be “economically practical” and that “market conditions and business realities facing the parties to the agreement must be taken into

31 From an economic perspective, if any route is not contestable then the posted price system allows individual airlines to exercise market power – it is possible for the outcome to become a negative sum game. Given complementary monopolies it is then better for a cooperative solution than individual airlines setting prices unilaterally. 32 The UK submission suggests a “wholesale” price system that “would require each airline that wished to participate in interline tickets to set the reimbursement it requires if it carries a passenger on a ticket sold by another airline (the ‘posted price’).” In suggesting that such a system is “workable”, the UK points to the “provisos” that airlines now often set in the proration system that is part of the IATA multilateral system and the practical experience drawn from the UK block exemption for public transport ticketing schemes. See UK submission, para. 43. 33 The German submission reflects the FCO belief that posted prices would by definition be lower than the existing fares because either the fares would be set on the basis of a weighted average of individual airline posted prices or each individual carrier’s costs. Under the mileage system each airline would post a price per mile for interlining that would be applied to total interline miles (or a weighted total) for that airline and then would be consolidated on a periodic basis for each pair of airlines.

All three systems are described in theoretical terms with no attempt to relate them to the realities of the airline industry and in particular how airlines set fares and manage capacity. The German FCO notes that volume systems are common in fuel markets in the form of volume swaps between the major fuel producers, but this statement does not make the proposal realistic for the airline industry. Seats on airlines are not a commodity that could somehow be exchanged to even out supply-demand imbalances across airlines.

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account.” The market conditions and business realities are particularly important in this context, because it cannot be assumed that any system of multilateral interlining in the EU will survive the demise of the current IATA tariff conference structure. The current structure evolved in a very different commercial environment, in which airlines had a stronger mutual interest to create a workable industry-wide system. Whether there would be sufficient interest in the airline community to develop a new system with the same level of market penetration is questionable. It is also questionable whether the standards for baggage handling, ticket issuance and other protocols developed and maintained by IATA to support the multilateral interline system will be supported to the same extent once that system is abandoned.34

These criticisms are particularly relevant to the various suggestions put forward by the German authorities. These involve systems that have not evolved naturally anywhere in the world for setting airline fares. To implement the systems would require new accounting systems for airlines and could require more intervention (at greater expense) by IATA or some other third party/regulator that would collate and publish the applicable fares. Such requirements are not economically practical given the cost cutting and financial difficulties that have been pervasive for network airlines in recent years. In short, these systems clearly fall into the category of “hypothetical or theoretical alternatives” that do not require consideration under the Commission guidelines.35

3

.3 Are the alternatives “less restrictive”?

IATA contends that the current system does not have a restrictive effect for purposes of Article 81, which therefore means that an alternative system cannot be “less restrictive”. Even assuming for purposes of argument that the current system has some restrictive effect, however, it cannot be assumed that this effect exceeds that of alternative systems.

As regards posted prices, the UK submission recognizes that a posted-prices system could have the same effects as the present system on “non-interlineable fares”, and this result flows from the basic nature of air transport markets.36 The Finnish Competition Authority identifies

34 As noted in IATA’s submission of 6 September 2004 (pp. 4-5), alliance carriers would have a strong incentive to enhance alliance brands at the expense of multilateral cooperation in order to create the impression that alliance travel is more hassle-free than travel outside the alliance context. Such a trend would lead to lower standards of interoperability at the industry level (e.g., more time consuming processes for making changes where non-alliance carriers were involved; requiring that travellers collect luggage and move it between carriers in certain circumstances), with inevitable consequences for non-aligned carriers and for consumers where an alliance offering is not a realistic option. 35 The UK submission suggests that the UK Public Transport Ticketing Schemes Block Exemption (“UK PTTS”) provides a relevant practical example of a posted-prices system. However, the UK PTTS actually has three different types of tickets (i.e., through fares, multi-operator individual tickets, and multi-operator travel cards). Of these three types only one relies on a posted-prices system (i.e., through fares), while another lets revenue “lie where it falls” (i.e., multi-operator individual tickets) and the other relies on jointly set prices (i.e., multi-operator travel cards – see further citation from the OFT included at footnote 72 of Annex I to the IATA submission of 6 September 2004). The IATA system includes elements of all three types of tickets in the UK PTTS and addresses a very different economic and commercial context than the UK PTTS. The UK PTTS, therefore, cannot be considered an economically practical solution for reproducing the existing IATA system 36 At para. 45, the UK states: “One disadvantage of using posted prices is that it could be possible for airlines to set wholesale prices that enable them to collude to achieve monopoly retail prices. […] This problem is less likely to be overcome on routes that are dominated by point-to-point traffic, although even here collusion is no

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the further risk that a posted-prices system would lead the major carriers “that dominate certain hubs or routes” to use the system to raise rivals costs and thereby discourage industry interlining.37 Thus, there is a real risk that a posted-prices system, in particular, could be at least or even more restrictive in its effects than the current system, so that the availability of this “alternative” does not affect the indispensability of the current arrangements.38

As regards the German proposals, the supposedly less restrictive effects are based on the premise that combining two value-based posted-prices would definitively lead to lower interline fares. This assertion is based on the unsubstantiated assumption that current IATA fares reflect the fares of the least efficient or most expensive carrier and that travellers pay for the additional costs that allegedly arise because of the flexibility inherent in the IATA fares.39 The FCO suggests that removing the tariff conferences would give carriers “leeway downwards” on price and also allow a calculation based on the actual interlining behaviour of each carrier’s passengers or, alternatively, would allow carriers to set fares based on their own costs without having to take into account “the price inflating risk of unplanned stopovers”.

This theoretical benefit is far removed from the commercial realities of the network carriers that participate in the IATA system. Most of these carriers operate integrated hub-and-spoke networks in which most of the costs are fixed and in which it is artificial to speak of costs of a

more likely than if fares are agreed at tariff conferences.” Thus the potential for collusion arises from the nature of the route and transparency in the airline industry, not how the fare is set.

The UK in this same paragraph suggests that such anticompetitive effects would be less likely “[w]here a significant proportion of passengers on a direct route is connecting”. However, this assertion is highly questionable in the absence of evidence of actual collusion outside the IATA system that is leading carriers to sacrifice revenue opportunities by not offering a “combinable” fare lower than existing IATA fare. In reality, if there were such opportunities nothing prevents a carrier from putting such a fare in the market today. Where no such fare alternatives exist today, it suggests that the UK’s prediction of lower fares under an alternative system is unlikely to materialize. 37 See Finnish Competition Authority submission at p. 1. The Finnish Competition Authority proposes “to formulate the conditions of the posted prices system in such a manner that strong or dominant players cannot foreclose their hubs or networks with excessive pricing or overtly strict and unjustifiable conditions.” It is highly questionable whether it makes any sense in a deregulated environment for the Commission or any other governmental entity in the EU to be regulating pricing and sales conditions in this way. 38 Unanimity, universality and the various rules in the prorate system are among the elements in the IATA system that prevent the more restrictive potential effects feared by the Finnish Competition Authority in a posted-prices system. 39 This suggestion is similar to an equally unsubstantiated assertion in the DG Competition Consultation Paper (at para. 18):

“These rules provide passengers, subject to the conditions governing their initial reservation, with significant flexibility in terms of changing routes (subject to certain distance limits) and adding or deleting intermediate stopping points. Where passengers would make use of this flexibility, it is possible that the overall costs incurred by the airlines should be higher than those that would be incurred in the case of a more or less standard and straightforward journey. These cost related uncertainties appear to have some inflationary effect on the level of fares agreed in the IATA passenger tariff conferences in so far as, where carriers agree on an interlinable fare for a given segment, they have to take into consideration the possibility that passengers may split the segment(s) in question in two or more segments, which would likely result in higher overall operational costs for the airline community.”

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particular route.40 For network carriers there is not a significant change in costs when a passenger decides to change her/his itinerary – the flight will depart whether the seat is filled or not.41 As concerns the leeway to price downward, that leeway exists today and nothing prevents any carrier from putting either a combinable fare in the market that undercuts the IATA fare or a fare that does not have the additional product feature of flexibility. In reality, both of these types of “carrier-specific” fares already exist today or could exist where market circumstances make them attractive. The more likely outcome is that discount rates for interlining would not emerge and instead the existing fares would be used. This is what has happened in the US and, as noted above, this is what to some extent is already happening today with combinable fares. Thus there is no basis to suggest (and given the theoretical basis of the alternative it is impossible to prove) that the German solutions would in the end be less restrictive than the current system.

3

.4 Can a posted-prices system fully match the benefits of the existing system?42

The Consultation Paper explicitly acknowledges that a posted-prices system would not replicate the full benefits of the IATA system.43 Since from a legal perspective “indispensability” is satisfied if no alternative can fully match the benefits of the existing system, this conclusion by itself means that the existence of a posted-price alternative does not put in question the IATA system’s fulfilment of the indispensability requirement. Nonetheless, in view of the comments urging further consideration of a posted-prices system, it is worth summarizing the reasons why such a system can not fully match the benefits of the current system:

A posted-prices system would significantly increase transaction costs. No matter what variant is used, each participating airline would be required to set an “interlineable” fare or undertake an equivalent analysis for each city pair on which it wished to interline. This would clearly be a far more costly and time consuming process. Both British Airways and Lufthansa confirm this view in their comments.44

A posted-prices system would likely lead to increased fares. A further factor that undermines the option of a posted-prices system is that it would likely lead to increased fares for a number of consumers. The IATA fares covering more than one sector are “through fares” that in general are cheaper than the sum of the sectors even when carrier-specific fares are taken into account. This point was highlighted in the examples contained in Annex III of IATA’s 6 September 2004 submission and is supported in the

40 A particular “route” is inevitably one leg of a large number of multi-segment routes and therefore the costs of the one “route” are actually costs of all the multi-segment routes. Since these multi-segment routes overlap and change constantly depending on consumer needs and choice, the costs are really costs of the network. 41 The only real cost change are those specific to the passenger which perhaps might be the cost of a meal but not much more. 42 This discussion focuses on posted prices but almost all of the objections listed in this section would also apply to the alternative mileage system proposed by the German authorities. 43 At para. 67 of the Consultation Paper, DG Competition writes “nor is it contended that it [the posted-prices alternative described in Annex 2 of the Consultation Paper] may replace the existing IATA system and reproduce its entire benefits.” The UK submission also acknowledges this point as concerns itinerary flexibility, but appears to suggest that this element of the IATA system can be eliminated and that the “few passengers” affected could deal with the higher costs (see UK submission at para. 44). 44 See Lufthansa submission, p. 2 and British Airways submission, pp. 3-5.

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submissions of Air France, Austrian Airlines, British Airways, Finnair, Lufthansa, SAS, Swiss, and United Airlines.45 Increased fares are likely in particular because the factors inherent in the conference structure that limit the demand for higher interline payments will be absent in a posted-prices environment.

A posted-prices system would cover fewer routes. British Airways predicts that the additional costs of a posted-prices system would inevitably lead carriers to set individual “interlineable” fares only on the thickest routes where the revenue potential could justify the additional expense.46 Furthermore, a number of other carriers highlight the incentive of carriers/alliances to set posted-prices in a way that maximizes revenues within a carrier or alliance network at the cost of potentially more convenient “industry” interline options.47

A posted-prices system would not provide the flexibility of the IATA system. A primary benefit of the IATA system is the flexibility inherent in the fully-interlineable ticket. Using IATA fares consumers may choose the itinerary which best suits their needs via any reasonably direct routing. As the data provided by airlines to the Commission shows, sophisticated consumers continue to pay a premium for a ticket that allows them to change airlines/routings/stopovers etc. without difficulty if and when their plans change. Their willingness to do so shows that this feature has a real economic value. In a posted-prices system, however, there can be no assurance that a rival airline would accept a ticket issued by another carrier, if it does not meet or exceed the posted price (which the consumer cannot be expected to know in advance). Each change in airline, routing or stopover/connecting point would require a recalculation in the fare, adding significantly to the transaction costs and time required, with the likely result that certain “last minute” changes that now take place would no longer be possible.

45 The practice of setting “provisos” in the current IATA system, referred to in the UK submission as evidence of the practical effectiveness of a posted-prices system, does not provide comfort in this regard. Under the current IATA system, where two or more carriers are entitled to apply a proviso on an itinerary, the provisos cancel out leaving the normal prorate rules in place. In other words, as the sum of the carriers’ provisos exceed the fare collected by the issuing airline, the proviso amounts do not apply. For this reason, it is very rare for a proviso to be applicable on a multi-sector itinerary within the EU. If the prorating restrictions are removed (as they inevitably would be in a posted-price environment), then the effects of applying provisos on each side would be to increase fares very significantly on a typical intra-EEA route. 46 See British Airways submission, pp. 3 and 5. 47 The Finnair and Austrian Airlines submission contain concrete examples of how alliance considerations in a posted-prices scenario would likely reduce multilateral interline options (see Finnair submission, pp. 2-3 and Austrian Airlines submission, p. 3). Such conduct would be normal revenue maximization and would not qualify as an abuse of a dominant position. Carriers and alliances will earn more and therefore make a greater contribution to offsetting their large fixed costs if they are able to keep a passenger on their network as opposed to interlining. Such revenue maximization could occur simply by pricing an interlineable leg that could be combined with a service from a competing airline/carrier so that it is unattractive compared to a more indirect and time consuming option on the single carrier’s/alliance’s network. Today the unanimity and non-discrimination elements of the IATA system are a protection against such a result. At the same time, alliances and individual carriers clearly do price to attract passengers that do not place value on flexibility and/or convenience.

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3

.5 Conclusion – The IATA system is indispensable to obtaining the full benefits of multilateral interlining – there is no realistic basis to conclude that any other system would provide these benefits.

The reality regarding alternatives to the IATA system was summarized in the comments of the UK’s Air Transport User’s Council:

“The Commission’s proposal for a posted prices system indeed offers an alternative to the interline arrangement. We are concerned, however, that such a system would not give passengers the ‘itinerary flexibility’ in timing, routing and in choice of carriers that they currently receive under the IATA Interlining system. Neither would it appear to retain the levels of co-operation between carriers over ground and baggage handling. Furthermore we continue to question whether such a system could be made to work in practice and do not see any benefit in dismantling a system that provides proven practical benefit to consumers for a system that continues to exist only in theory.”48

CONCLUSION

Nothing in the third-party comments received by DG Competition affects the basic points made by IATA in its initial submission of 6 September 2004. There remains no economic evidence that the IATA tariff conference system has a restrictive effect on competition – neither the 2001-2002 consultation nor the current consultation have produced any such evidence. In 2002, the Commission put in place a system to collect interline data and the data that the airlines have provided, together with other evidence from the commenting parties, reinforces IATA’s argument that the current system produces real and economically significant benefits. Finally, the alternatives to the current IATA system proposed by some commenting parties do not constitute realistic alternatives that can fully match the benefits of the current system.

In these circumstances, and in light of the more focused approach to DG Competition resources in the post-Modernisation era, IATA urges the Commission to provide long-term certainty for the IATA global interline system by renewing Regulation 1617/93 and extending its scope to the Cargo and Passenger Tariff Consultations for routes to and from the EU.

48 Air Transport Users Council submission, pp. 3-4. See also the comments of the Council of Europe Congress of Local and Regional Authorities: “we respectfully doubt it would be possible to operate interlining on the basis of a totally different system – such as ‘posted prices’ – for the internal EU market, and another one for routes to and from the European Union.”

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ANNEX I

IATA OBSERVATIONS ON THIRD-PARTY COMMENTS

BRIEF SUMMARY OF THIRD-PARTY COMMENTS

IATA OBSERVATIONS ON ANNEX I – BRIEF SUMMARY OF RESULTS OF INTERLINE CONSULTATION THIRD-PARTY COMMENTS

This annex describes the principal comments made in response to the Consultation Paper. It covers first those comments opposed to continuing the present interline system and then explains the way in which these issues have already been addressed in IATA’s submission of 6 September 2004. It concludes by summarizing the comments supportive of IATA’s submission, explaining the relevance of those comments to the Commission’s procedure.

1. Comments opposed to the existing conference system

Of the approximately 40 submissions made in response to the Consultation, only eight are opposed to maintaining the existing system.1 Six of the negative submissions are from national authorities, mainly competition authorities, and the two others are from groups dominated by travel agent organizations that are pursuing unrelated complaints against IATA.2 The main points that have been raised in opposition to the extension of the exemption contained in Regulation 1617/93 in these submissions are as follows:

• The IATA tariff conferences, including the information exchange they entail, allegedly give rise to clear restrictive effects and therefore an alternative must be found that separates the benefits of multilateral interlining from the negative effects of the tariff conferences.

• New data has been provided that is alleged to demonstrate that IATA fares have an influence on non-IATA fares. The UK’s submission refers to a so-called “coat-hanger effect”, while CTAG’s submission suggests that IATA fares are generally used as the “benchmark fare” when giving discounts to corporate customers.

• The way the current IATA system functions allegedly violates Regulation 1617/93 and these violations produce adverse effects on competition.

• New data concerning the relative importance of IATA fares compared to all fares has been provided by ECTAA/GEBTA and is intended to put in question the ongoing benefits of the IATA system.

• A number of submissions suggest that it is highly questionable whether the tariff conferences, which are said to be at the origin of the restrictive effects, are indispensable to multilateral interlining given the existence of alternatives such as a posted-prices system.

1 These figures include 5 submissions favourable to the existing system that as of 22 December 2004 did not appear on the DG Competition website. These additional submissions, including the submission of British Airways, are available at http://www.iata.org/whatwedo/government_industry/block_exemption. The French government’s submission is counted as favourable though as noted below, the submission does not support extending the existing exemption to cargo shipments between the EU and third countries. 2 Although in this submission the comments of ECTAA/GEBTA are classified as being opposed to extending the existing exemption, it should be noted that the ECTAA/GEBTA membership is split on this issue with “some Members” supporting renewal of the existing exemption (see page 2 of ECTAA/GEBTA letter of 1 October 2004). It should also be noted that an electronic search for the “Corporate Travel Action Group” (“CTAG”), the other non-governmental group with comments opposed to the existing system, produced only one reference in addition to the comments on DG Competition’s website and that was on the Association of Corporate Travel Executive’s (“ACTE”) website where CTAG is linked to GEBTA in a task force whose objective is to lobby concerning issues related to ECTAA/GEBTA’s pending complaint against the IATA passenger agency programme. These issues have nothing to do with the IATA multilateral interline system (see further footnote 10 in IATA’s main observations).

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• DG-Competition’s conclusions and reasons for not extending Regulation 1617/93 to IATA multilateral cargo interlining and tariff conferences are supported by a number of Member States.

A number of the arguments underlying the points above have been dealt with in IATA’s submission of 6 September 2004. It is also apparent that virtually all of the comments were made without the benefit of reviewing IATA’s submission of 6 September and for that reason the focus of IATA’s main observations is on the small number of new points that have been raised: (i) the new data on alleged restrictive effects; (ii) the new data and other issues regarding the ongoing benefits of the IATA system; and (iii) the alternatives proposed, in particular a posted-prices system.

Below is a summary of the main points above that been dealt with previously and the implications of the analysis/facts in IATA’s previous submission:

Alleged restrictive effects of tariff conferences – information exchange and excessive fares. The information sharing concerns raised by the UK authorities and the related points in the submission of the German authorities concerning how tariff conferences function have been extensively dealt with in the economic assessment by Charles River Associates (“CRA”) of the alleged restrictive effects of the IATA tariff conference system.3 The CRA paper carefully analyzed the nature of both the tariff conferences and competition in the air transport industry. CRA’s conclusion was that there is no evidence to suggest that IATA conferences lead to a coordination of carrier-specific fares or that the fares which result from the conference are “excessive” compared to the levels that would prevail in the absence of the IATA conferences. The descriptions of the conference process contained in the UK and German submissions are factually inaccurate and unsubstantiated. The conferences are open to government officials and the minutes of all conferences have been provided to the European Commission. In the absence of any reference to actual facts, the information exchange and excessive fare concerns must be dismissed as unsubstantiated and inconsistent with the actual nature of the IATA tariff conferences and competition in the air transport industry.4

Compliance with Regulation 1617/93. The Finnish Competition Authority and the German Federal Cartel Office (“FCO”) repeat the suggestions in the Consultation Paper that the way the IATA interline system functions in practice violates Regulation 1617/93 and thereby produces adverse effects on competition. These suggestions are not supported by the obligations created under Regulation 1617/93 as was explained in Annex I of IATA’s submission of 6 September 2004.5 Furthermore, although the practices being questioned have been in existence since the original block exemption, the first time they were raised by DG

3 See IATA submission of 6 September 2004, Annex IV – The Restrictive Effects of the IATA Tariff Conference System: An Economic Assessment by Charles River Associates, pp. 5-6; and Annex V – IATA Tariff Conferences: What They Do and Do Not Do, p. 8. 4 Concerning the suggestion in the German comments that the IATA tariff conferences inevitably lead to excessive fares given that such fares are alleged to be set on the basis of the least efficient carrier, see also the discussion in the main observations at sections 3.1 and 3.3 concerning the likelihood of certain fares increasing absent the IATA tariff conferences and the countervailing influence of the unanimity requirement. 5 See IATA submission of 6 September 2004, Annex I – The Legal Context for Assessing IATA Tariff Conferences, pp. 16-19.

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Competition was in the Consultation Paper of July 2004 even though the Commission has always had powers to deal with such alleged violations.6

Analysis of the IATA cargo interline system. France, the German FCO, Denmark and the United Kingdom support DG-Competition’s reasoning for not extending Regulation 1617/93 to include cargo shipments between the EU and third countries. However, none of these submissions or any other submission brings forward any evidence supporting such a conclusion. IATA’s submission of 6 September 2004 explained the flaws in DG-Competition’s four paragraph analysis of the IATA cargo interline system and the counter reasons that support extending the existing exemption to this system. Unless DG-Competition is able to articulate a valid justification for not extending the existing exemption and for provoking the negative consumer effects IATA has identified, the preponderance of evidence unquestionably supports including cargo tariff conferences for third countries when amending Regulation 1617/93.

2. Comments Supporting IATA’s Analysis and the Extension of Regulation 1617/93

Below is a brief summary of the main elements of IATA’s previous submission that have been supported in the comments of other parties which, as noted above, make up by far the majority of responses received:

• A number of the non-airline comments state that there is no evidence and/or theoretical basis for asserting that the IATA multilateral interline system produces restrictive effects. This is the case of the comments from the French Authorities, the Belgian Civil Aviation Administration (“CAA”), the Finnish CAA, SITA and the Air Transport Users Council.

• The Air Transport Users Council and numerous other submissions support the conclusion that the IATA interline system continues to provide significant consumer benefits that no alternative system could fully reproduce.7

• The IATA multilateral interline system provides important benefits to regions at the periphery of Europe and dismantling the system in favour of alliances risks further marginalizing those regions through a clear reduction in overall services.8

6 Under Article 7 of Council Regulation 3976/87, OJ [1987] L 374/9, the Commission had the power to address recommendations to persons that were breaching a condition or obligation that attached to a block exemption and take other actions to remedy the situation including decisions requiring certain acts or, ultimately, withdrawing the benefit of the exemption. Article 41(2) of Regulation 1/2003 repealed Article 7 of Regulation 3976/87 as of 1 May 2004, but the Commission continues to have the power to withdraw the benefit of a block exemption where it finds that there are certain effects which are incompatible with Article 81(3) of the Treaty (see Article 29(2) of Regulation 1/2003, OJ [2003] L 1/1). 7 See in particular the comments from the French Authorities, the Belgian CAA, the Finnish CAA, the Council of Europe Congress of Local and Regional Authorities, SITA, and the airlines (notably British Airways, Austrian Airlines, Finnair, LOT). It should also be noted that the ECTAA/GEBTA members supporting renewal of the existing exemption do so on the basis that “a global interlining system is needed outside alliances in various cases, such as feeding flights, and thus remains a significant feature of the air transport system” (see ECTAA/GEBTA letter of 1 October 2004, p. 2). 8 See the submissions from the Council of Europe Congress of Local and Regional Authorities, the Finnish CAA, the Airports Council International Europe, the European Regional Airline Association, the Association of

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• All carriers that are members of alliances as well as many other observers are of the view that alliances are complementary to and not a substitute for the IATA multilateral interline system in terms of providing travellers with a global network and maximum flexibility.9

The quality and extent of the submissions favouring the IATA multilateral interline system, particularly those of key industry observers such as the Belgian CAA, the Finnish CAA, the Air Transport Users Council, the Airports Council International Europe,10 pose a significant impediment to DG Competition’s ability to reach contrary conclusions. At the very least, DG Competition must develop evidence and analysis that goes well beyond the first Consultation Paper of June 2004 and, for that matter, any of the submissions opposed to extending the existing exemption as IATA’s main observations explain in more detail.

European Airlines, Estonian Air, Finnair, Austrian Airlines, SN Brussels Airlines, and Swiss Airlines. 9 As concerns the alliance carriers, see the comments of Air France, Alitalia, Austrian Airlines, British Airways, KLM, LOT, Lufthansa, SAS. No airline suggests a different conclusion and a number of other important industry observers support this view, notably the Belgian CAA, the Finnish CAA, the German Authorities, SITA and the Airport Users Council. See also the views of the members of ECTAA/GEBTA supporting renewal of the exemption quoted in footnote 7 above. 10 The quality and significance of these submissions derives not just from the actual comments but the fact that these particular commentators are close observers of the air transport industry with no direct interest in the IATA multilateral interline system.

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ANNEX II


SOME COMMENTS ON THE UK AND CTAG SUBMISSIONS TO DG COMPETITION

BY CHARLES RIVER ASSOCIATES

Some comments on the UK and CTAG submissions to DG Competition

By

Nils von Hinten-Reed

Paul Muysert

Charles River Associates

1 Undershaft

London EC31 8EE

22 December 2004

Some comments on the UK and CTAG submissions to DG Competition

INTRODUCTION

On 30 June 2004, DG Competition published a consultation paper concerning the revision and possible prorogation of Commission Regulation 1617/93 on the application of Article 81(3) EC to International Air Transport Association (IATA) multilateral interline tariff conferences for passengers and cargo. The Consultation Paper analysed the IATA tariff conferences in terms of their restrictive effects and the potential benefits from enabling passengers and cargo to pass onto the networks of different airlines in the context of the IATA multilateral system. As part of the consultation process, the UK’s competition and transport authorities (collectively the “UK”) and an association called the Corporate Travel Action Group (CTAG) submitted comments and data to DG Competition that purported to provide evidence that the IATA tariff consultations resulted in a restrictive effect, in particular, that the consultations led to a “coat hanger” effect when carriers set their own fares.

Charles River Associates (CRA) has been asked by IATA to analyse the theoretical and empirical basis contained in these submissions for a potential restrictive effect within the meaning of Article 81(1) EC. We set out a possible theoretical basis for the “coat hanger” effect below and then look at the data and analysis submitted by the UK submission, partially replicate the UK submission (which relied on analysis conducted by the UK Civil Aviation Authority) and conduct some statistical analysis on the data provided by the CTAG. Attachment A to this paper contains the further data replicating the UK submission and Attachment B contains a summary of statistical work carried out on the CTAG dataset.

THE COAT HANGER EFFECT: THEORETICAL ASPECTS

It is important to note that we do not believe a coherent economic theory has been articulated by any party making submissions to the Commission explaining clearly how any “coat-hanger” operates, and in particular why the current market outcome would be improved by prohibiting the current IATA tariff system. Articulating clearly a theory and mechanism of competitive harm is important, as this facilitates examination of key assumptions and coherent empirical analysis. It is important to emphasise that – according to the Commission’s own Guidelines – the modernisation of European Competition law is about better economic assessment of the impact of competition restrictions, rather than mere unsubstantiated speculation not based on empirics.1

1 See Commission Guidelines on the application of Article 81(3) of the Treaty [2004] OJ C 101/97, paragraphs 4-6.

Some comments on the UK and CTAG submissions to DG Competition 22 December 2004

IATA and Airline Price Setting

Understanding how the fare setting process is conducted within both IATA and individual airlines is key to gaining an understanding of how the IATA consultation process is supposed to influence the setting of airline fares. A detailed discussion of these processes is contained in pages 3 to 6 of the CRA paper contained in Annex IV to the IATA submission of 6 September 2004

It was established that airlines meet within the confines of IATA conferences to set tariffs for the purpose of enabling interlining by consumers. Because of the need to submit agreements to regulatory authorities these meetings are held as much as six months in advance of the intended effective date of any changes. The fares and rates established in the conference (and resolution) process are available for travel on their services and on the services of any other airline that wishes to participate.

Airlines systems for determining their own fares are complex. Carrier on-line pricing is theoretically set based upon a multitude of factors, which may include, but is not limited to the following:

• Current economic conditions within the country of sale.

• Carrier economic cost factors.

• Competitors fare levels.

• Distribution channel variances.

• Traffic demand on the specific segment.

An airline will typically have a multitude of fares for any market. Price variances with competitors may be acceptable or deemed unacceptable in a particular market based on the particular market and competitive environment, customer preferences and so on. Each individual market has different competitive variables, but the common theme will be the need to match a price level with customer demand for the different fare products that cater to different customer needs. Revenue Management techniques also allow carriers to offer competitive pricing while at the same time limiting that product if it is deemed to be diluting the overall revenue generation on a particular flight segment.

The market for airline tickets is thought to be particularly transparent given the ready availability of published fares through modern CRS systems. However, that transparency has been both enhanced and diminished by recent developments, as airlines have been increasingly selling their tickets directly to their customers via, for example, their own internet sites and by the proliferation of corporate contractual arrangements with companies. Thus whilst there are

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aspects of the market that are transparent to all, other competitive parameters such as business travel relationships are increasingly conducted with contractual arrangements that may substantially differ across customers and airlines. In other words, the effective fares in a market for two airlines offering a similar product may differ substantially including in those cases where IATA fares appear on the ticket but where a corporate discount is later applied on the basis of actual travel on an airline with which the company has a contractual agreement.

Another issue that automatically limits the potential for IATA fares to ‘lead’ actual market fares is the fact that carriers today react to individual market conditions much faster than can be achieved under the IATA tariff conference system, for both passengers and cargo. Even though resolutions may change IATA tariffs, the systems is not suited or designed to react to the constant adjustments that characterize individual carrier’s pricing strategies.

A theoretical basis for a “coat-hanger effect”

We have set out above, and in the 6 September 2004 paper, the basis for IATA and airline fare setting. Clearly, there are important differences today between the timing and the way in which IATA conferences and individual airlines set fares. If there is to be a “coat-hanger effect”, there needs to be an identifiable link between the two price-setting mechanisms. Further, if some restrictive effect is to be posited, we consider that it must flow from the behaviour in the IATA tariff conferences and not, for example, from the transparency of published fares through today’s CRS systems, by which any published fare might theoretically be used to co-ordinate behaviour, not just IATA fares.

In our view the coat-hanger concern, if it exists, would be that individual airlines are setting prices for non-IATA fares at levels that exceed those that would prevail absent the IATA tariff setting process. The issue is to determine whether this concern is properly grounded in theory and empirical observation in order not to destroy important consumer benefits on the basis of speculative links being made based upon speculative restrictive effects.

In the 6 September 2004 paper, CRA established that there is no general theoretical support for the idea that two differentiated products – IATA and a carrier’s own fares – must be priced at a necessary price differential from each other (or as the UK submission suggests, one being a set percentage of the other).

If the IATA and airlines fares are partial substitute products then there will be competitive interactions with – depending upon the circumstances – changes in the price of one changing the price, volume or both of the other product. However, this effect is the result of the interaction of supply and demand. It does not represent some simple fixed value relationship between the two products, nor does it indicate some form of anticompetitive outcome, or market distortion. Further, it does not imply that removing the IATA fully flexible fare will necessarily result in lower market fares. The regulatory concern must therefore be behavioural. In other words, that

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the IATA tariffs and the tariff-setting process result in unilateral or collective behaviour that results in higher prices (or lower service quality) than would otherwise be present in the market, absent the IATA process. We consider first the possibility of anticompetitive unilateral effects, before considering the potential for co-ordinated effects.

Unilateral effects

Suppose an airline is operating in a market where it is able to use a unilaterally applied rule of thumb based on IATA fares. In this case it would also be able to apply an equivalent rule of thumb based on, for example, its own costs. The question is whether there is any reason to believe that an individual airline would have an incentive to set lower prices for its fares absent the existence of the IATA fares. If it is assumed that the current rule of thumb based on the IATA benchmark establishes a market price that the airline believes is optimal, it is not clear why it would choose to lower those prices if the IATA fares were removed. By definition, lowering prices would be suboptimal, with or without the IATA fares in place (all else equal). If an IATA rule of thumb of the form that the airline A sets its fares at IATA – X% was not available (due to the removal of the IATA fare), it would simply move to a similar rule of thumb based on cost + Y%. While the method would be different, the optimal price would not.

It might be argued that the IATA fare is important in a unilateral setting because of the quality comparison issue. That is, airline A sets its prices at IATA – X%, because it believes X% is the minimum discount it must offer to compete with the higher quality IATA product. However, if this is the case, and an airline is in a position to otherwise unilaterally set its fares (it is not tightly constrained by direct competition) then, as described in our previous paper,2 absent the existence of IATA fares demand for airline A’s own fares will, if anything, increase, increasing the price that would be set absent the IATA fares rather than decreasing it. So, as a matter of economic theory, one might expect a firm using rule of thumb pricing to increase its own fares if the IATA fares were removed from the market. There is no obvious reason to expect such an action to lead to a decrease in the fares set.

If the coat-hanger effect cannot be adequately theoretically grounded in terms of unilateral effects, we now turn to the possibility that coordinated effects may be a concern.

Coordinated effects

In our view, the most credible explanation of why a rule of thumb that is used by individual airlines and based on IATA fares would be anticompetitive is simply that if all airlines used a similar rule of thumb then optimal prices would be higher than would otherwise be the case. This is because each individual airline would be confident that, in setting prices based on the IATA fares, it would not be undercut by competitors who were employing a similar rule of

2 See page 8-19 of the CRA paper contained in Annex IV to the IATA submission of 6 September 2004.

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thumb. In effect, this argument amounts to suggesting that the IATA tariff conference system facilitates tacit collusion between the carriers on their own carrier-specific fares, based on the IATA price point. In other words, airlines will act collectively, based on the IATA fares.

In the 6 September paper (Annex IV), CRA established the general conditions for coordinated behaviour and analysed the role of information exchange within the IATA tariff conference system. We found that if effective coordinated behaviour at the level of carrier fares was to occur, the key variables that would require agreement are capacity and how capacity is allocated, and the effective market price a passenger pays for carrier business fares.

A great deal of information about airline costs is public and competing published fares are immediately available through the CRS systems. However, both the nature of the carrier product and the way in which it is sold means that it is difficult to see how this market is open to tacit collusion. We concluded that it was difficult to see how IATA provided any mechanism for any concern of tacit collusion as the statistics and/or IATA tariff discussions did not add much to any transparency. If the present system of conferences were to end, the general bilateral or multilateral negotiations that would be required to replace them could well give rise to much more serious opportunities for tacit or explicit collusion.

EVIDENCE PRODUCED ON THE “COAT-HANGER” EFFECT

Based on the above discussion, we consider that to make a case against the IATA tariff conference system, there needs to be concrete evidence of tacit3 collusion based upon:

• An alignment of fares across the effective fares in the market. This alignment needs to (a) be across all fare types to be successful and (b) take account of the differing strategies of airlines on particular routes - some routes are necessary to transport passengers point-to-point, others have more relevance for maintaining a network of services from a hub.

• A necessary casual link needs to be made between the IATA tariff conference system and the alignment of effective fares in the market.

UK Data

The UK has, unlike most other respondents, submitted data and analysis in addition to that contained in the original DG Competition consultation document. The UK analysis is based upon work by the UK Civil Aviation Administration (CAA) and therefore we refer to the CAA from now onwards.

The CAA examined flexible fares offered by EU carriers on at least 15 intra-EU routes in July 2004. We note that the UK submission contains no evidence of collective behaviour by the

3 We assume that DG Competition or other respondents to the consultation process are not alleging explicit

collusion on carrier fares.

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industry and the UK (or the CAA in particular) has not asserted that there is any evidence of collective behaviour. In paragraph 15, the UK submission states that: “[I]n most markets the snapshot of fares in late July 2004 showed no obvious correlation across routes between these non-IATA fares and the IATA fare.” In other words, there is no broad correlation across routes and airlines that would begin to satisfy the necessary and sufficient conditions for the potential existence of tacit collusion.

The CAA has identified what appear to be three possible examples of individual airlines (Air France, Air Malta and Lufthansa) adopting unilateral pricing strategies. The CAA has produced data, which it suggests shows that these three airlines may be using a rule of thumb pricing system for some of their fares based on the IATA fares.

There are a number of issues with the data from the three airlines and analysis drawn from them:

• The CAA has explicitly agreed that any relationship observed between these three airlines does not extend to other EEA or third country airlines. Furthermore, the CAA also notes that no relationship was found in markets to and from the EEA.

• The data produced does not indicate a causal link between IATA tariff setting and the actions of these three airlines.

o The analysis is based on published fares that does not take account of the full tariff structure or the effective fare paid by passengers.

o In most cases the IATA fare is a similar (not always the same) percentage of the carrier specific fare for similar routes (within a region or country). This may reflect the internal pricing policy of the carrier in treating similar routes within a geographic area alike rather than necessarily following the IATA fare. An example are the Air France fares for Geneva and Zurich, which are set the same.

o Competitor airlines on the same route may have different competitive strategies and hence a seat may be used for point-to-point traffic on one airline but may serve different purposes on another (feeder into a network and point-to-point), which has different implications for pricing given the opportunity costs of taking a point-to-point passenger. We may expect that on hub-to-hub routes the published carrier fares will be similar and high relative to the IATA fare based upon the need to avoid dilution of the feeder traffic on international services (see earlier section on carrier fare setting.)

o Finally, even on the basis of the data,4 we observe that when the IATA fares rose, Air Malta business fares fell in July 2004.5 Similarly, when IATA fares remained unchanged in October 2004, Air France fares rose by 2%.

4 Note that in the case of Air Malta, in addition to the CAA data, further information on IATA and carrier fares

was available to us for an extra date in July so that it was possible to analyse changes in prices during July.

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CRA has asked IATA for data from some more airlines to check the conclusion reached by the CAA that there is no obvious correlation between IATA and non-IATA fares on other airlines. We obtained data for British Airways, LOT Polish Airlines, Alitalia and Finnair. In all four cases analysed, the carrier fares (as a percentage of IATA fare) remain variable within each region and in some cases the level of variability is very high (e.g. Finnair). Moreover, when comparing across regions no concentration around a particular value is observed in any case.

CTAG Data

In another submission, the CTAG has suggested that corporate discounts are “benchmarked” against the IATA fare such that increases in IATA fares automatically lead to increases in corporate discount fares. The CTAG provided an example of an actual corporate contract that appears to be for one customer covering Lufthansa and other Star Alliance airlines (“carrier fares”) for four countries. CRA has conducted some statistical analysis of the data provided by the CTAG and this is contained in Attachment B to this paper. In summary, the results show that:

• Germany: there is no correlation between IATA fares and carrier fares for percentage change from 2003 to 2004. Discount levels varied significantly across routes and therefore the relationship between the actual carrier fares and IATA fares was highly variable.

• France: there is a very small positive correlation between IATA fares and carrier fares for percentage changes from 2003 to 2004. Discount levels varied significantly across routes and therefore the relationship between the actual carrier fares and IATA fares was highly variable.

• Spain: prices show some degree of correlation although the number of observations in the example is very small. Discounts varied considerably across routes.

• UK: percentage changes between 2003 and 2004 are correlated, but this is mainly driven by one outlier. Further, the number of observations with prices is limited, and seems to be biased. Discounts for 2003 and 2004 show larger dispersion across the different routes than prices, as more observations are considered, and this strengthens the view that the correlation observed on relative prices is exaggerated.

Overall our conclusion from the analysis of the limited CTAG data is that it suggests that the public fares reported in the dataset did not drive the associated actual carrier fares over the period analysed and as such does not provide evidence to support the contention that IATA fares support tacit collusion that impacts on the actual fares paid. We made no attempt to adjust for factors (such as cost in particular) that should in any case produce a positive link between IATA

5 Except for Malta – Geneva, which rose slightly. These observations apply to the routes for which data was

available (refer to Table 4, Attachment A).

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and carrier fares. Nonetheless, in France and Germany, where the data was most extensive, the results do not provide strong evidence of any significant link. For discounts the results are more striking as the discount data was more extensive in all four cases than the pricing data available for the correlation analysis. The high degree of variability in the discount percentages observed in this data in all four cases points to market-specific or case-specific factors driving the results. Finally, we note that the dataset covers only one corporate customer, selected by CTAG, and as a result we cannot comment on the extent to which this dataset may or may not be representative of the wider market.

CONCLUSION

In summary, the data provided by the UK, based on the CAA analysis, and the data provided by the CTAG does not constitute evidence of tacit collusion. The CAA data and analysis is not evidence of any causality between IATA and carrier fares and the data even shows some carrier fares rising at the same time, as IATA fares have remained unchanged. Moreover, the analysis is flawed as the data fails to take account of discounts, which would increase considerably the variability of actual fares paid on any particular route and fails to analyse actual prices paid across the tariff structure used by airlines to ensure aircraft have generated as much revenue as possible for the network at the time of their departure. Meanwhile, analysis of the CTAG data indicates little or no correlation between changes in IATA (Public) and discounted fares for an important corporate customer. However, given that the data provided is for one customer we are unable to make any generalisations to the wider corporate market.

To undertake an analysis of the possibility of tacit collusion flowing from IATA tariff setting, that is consistent with the Article 81(3) Guidelines, would imply a market analysis of the airline system in the EEA and beyond across all fare types, that took proper account of the differing incentives of airlines based on the actual network economics of their operations. This would have to involve the analysis of actual sales and fares (with a detailed knowledge of carriers’ actual discount policies) on a large number of routes and encompassing all the carriers on each route. None of the respondents or DG Competition have so far come close to providing such data and analysis.

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Attachment A: Data Analysis on IATA and Carrier Fares

INTRODUCTION

This annex presents an analysis of the relationship between IATA and the fares of seven carriers on a variety of routes within European countries. The purpose of the analysis is to determine the extent to which carriers set up business and/or economy fares in line with IATA fares. More specifically, we want to test the assertion that carrier fares represent a fixed proportion of IATA fares across different routes.

DATA

IATA provided a database containing information for seven different airlines: Air France, Lufthansa, Air Malta, Finnair, Alitalia, LOT and British Airways. Air France, Lufthansa and Air Malta are chosen as these were the airlines specifically reported by the UK CAA study as allegedly showing stable relationships of some type with IATA fares. The other four were selected as they represent two major operators (British Airways, Alitalia) and two airlines from more peripheral regions of the European Community (LOT and Finnair).

The data show IATA and business and/or economy class carrier fares as quoted on 01 July 2004 for different routes across Europe served by these airlines. In every case the fares refer to round-trip tickets and they are stated in the country of origin’s currency.

Partial information for subsequent months (August–November 2004) was also available for a few airlines and routes. However, this is not analysed as in most cases the additional data shows that fares either remained unchanged (mainly IATA fares) or they increased by the same percentage across all different routes (e.g. Finnair increased prices by 12% across all routes from July to August and Air France by 2% from July to October). Hence the relative price patterns across routes were unaltered.

Note that in many cases both IATA and the different carriers set the same price for tickets covering similar routes (e.g. Air Malta business class tickets from Malta to either Geneva, Zurich or Vienna cost 285 MLT). As we explain below, this has important implications for the interpretation of the results.

We describe below the data used for this analysis.

Air France

• IATA and Air France economy class fares from Paris to 25 different destinations across Europe.

Attachment A: Data Analysis on IATA and Carrier Fares 22 December 2004 Lufthansa

• IATA and two Lufthansa economy class fares (YFLEX1 and BFLEX1) from Frankfurt to 21 cities across Europe.

• IATA and two Lufthansa economy class fares (YFLEX1 and BFLEX1) from Munich to 21 cities across Europe.

Air Malta

• IATA and Air Malta business and economy class fares from Malta to 15 destinations across Europe.

Finnair

• IATA and economy class Finnair fares from Helsinki to 24 destinations across Europe.

Alitalia

• IATA and economy class Alitalia fares from Milan to 23 destinations across Europe.

LOT

• IATA and economy class LOT fares from Warsaw to 24 destinations across Europe.

British Airways

• IATA and economy class BA fares from London to 24 destinations across Europe.

ANALYSIS

For each one of the routes served by the different airlines, carrier fares relative to IATA fares (i.e. Carrier Fare / IATA Fare) were calculated. These were subsequently classified into one of the following geographical regions: Austria & Switzerland, Eastern Europe, Germany, Greece, Italy, Netherlands & Belgium, Scandinavia, Spain & Portugal and the UK & Ireland.

Air France

As Table 1 shows Air France fares, as a percentage of IATA fares vary considerably across routes from 50% (Paris-Dublin) to 91% (Paris-Amsterdam). When looking at the data within the same geographical region the picture changes notably. For all Eastern Europe destinations Air

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Attachment A: Data Analysis on IATA and Carrier Fares 22 December 2004 France economy fares represents 85% of the IATA fares. Similar patterns are observed for Italy and Scandinavia. Moreover, for all six cities in Germany, the carrier fares, as a percentage of the IATA fare, are always between 87% and 90%. Table 1: Air France fare: percentage of IATA fares, from Paris to 25 destinations across Europe

City Region Carrier (economy)/ IATA

Vienna Austria & Switzerland 86%

Geneva Austria & Switzerland 71%

Zurich Austria & Switzerland 74%

Budapest Eastern Europe 85%

Prague Eastern Europe 85%

Warsaw Eastern Europe 85%

Berlin Germany 90%

Düsseldorf Germany 90%

Frankfurt Germany 87%

Hanover Germany 89%

Munich Germany 87%

Stuttgart Germany 90%

Athens Greece 80%

Milan Italy 90%

Rome Italy 90%

Amsterdam Netherlands 91%

Copenhagen Scandinavia 85%

Oslo Scandinavia 85%

Stockholm Scandinavia 85%

Barcelona Spain & Portugal 83%

Lisbon Spain & Portugal 85%

Madrid Spain & Portugal 84%

Dublin UK & Ireland 50%

London UK & Ireland 75%

Manchester UK & Ireland 73% Source: Airline Tariff Publishing Company database and SABRE (Paris to Manchester)

Lufthansa

As Table 2 shows, variability on YFLEX1 fare (as a percentage of the IATA fare) within each region is minimal. This is even evident when comparing across different regions, in 23 out of the 42 cases, the YFLEX1 ticket was sold 10% below the IATA ticket.

The BFLEX1 ticket price, as a percentage of the IATA price, shows more dispersion across the different routes. In 24 out of the 42 routes though the carrier fare is around 75% of the IATA fare. Some degree of concentration in the YFLEX1 fare becomes more evident when comparing

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Attachment A: Data Analysis on IATA and Carrier Fares 22 December 2004 fares at region level. However a few contra examples also stand out (e.g. Helsinki within the Scandinavia region) Table 2: Lufthansa fares: percentage of IATA fares, from Frankfurt to 21 destinations in Europe

City Region YFLEX1 BFLEX1

Budapest Eastern Europe 90% 77%

Prague Eastern Europe 90% 76%

Warsaw Eastern Europe 95% 81%

Nice France 90% 77%

Paris France 90% 77%

Milan Italy 90% 66%

Rome Italy 90% 66%

Malta Malta 90% 67%

Amsterdam Netherlands and Belgium 90% 76%

Brussels Netherlands and Belgium 90% 76%

Copenhagen Scandinavia 90% 77%

Helsinki Scandinavia 78% 61%

Oslo Scandinavia 90% 76%

Stockholm Scandinavia 90% 76%

Barcelona Spain & Portugal 92% 74%

Lisbon Spain & Portugal 94% 80%

Madrid Spain & Portugal 92% 74%

Geneva Switzerland 80% 71%

Zurich Switzerland 80% 71%

Dublin UK & Ireland 80% 48%

London UK & Ireland 90% 77%

Source: Airline Tariff Publishing Company database

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Attachment A: Data Analysis on IATA and Carrier Fares 22 December 2004 Table 3: Lufthansa fares: percentage of IATA fares, from Munich to 21 cities across Europe

City Region YFLEX1/ IATA BFLEX1/ IATA

Budapest Eastern Europe 91% 77%

Prague Eastern Europe 90% 76%

Warsaw Eastern Europe 95% 76%

Nice France 90% 77%

Paris France 88% 75%

Milan Italy 90% 66%

Rome Italy 90% 66%

Malta Malta 90% 62%

Amsterdam Netherlands and Belgium 90% 77%

Brussels Netherlands and Belgium 80% 68%

Copenhagen Scandinavia 90% 77%

Helsinki Scandinavia 73% 57%

Oslo Scandinavia 90% 76%

Stockholm Scandinavia 90% 77%

Barcelona Spain & Portugal 92% 74%

Lisbon Spain & Portugal 94% 71%

Madrid Spain & Portugal 92% 74%

Geneva Switzerland 80% 71%

Zurich Switzerland 80% 71%

Dublin UK & Ireland 80% 48%

London UK & Ireland 90% 77%

Source: Airline Tariff Publishing Company database

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Attachment A: Data Analysis on IATA and Carrier Fares 22 December 2004

Air Malta

Table 4 shows Air Malta business and economy class prices as a percentage of IATA prices for round-trips tickets from Malta to various destinations in Europe.

For business class tickets we can observe that prices are set in many cases at 68% of the IATA price. However, this largely reflects the fact that both IATA and carrier tickets are set at the same prices across different routes (e.g. round trips tickets to Geneva, Vienna and Zurich have the same IATA price and the same carrier price, consequently the relative price in always the same). Fares for other routes, particularly Rome and Athens are very different though.

Regarding economy class fares, variation is relatively small; in most of the cases the carrier ticket is 35-40% of the IATA ticket. The main exception is the Malta-Rome route, which costs 58% of the IATA ticket. Again the low variability reflects the fact that IATA tickets and economy class Air Malta tickets are sold at the same price across different destinations. Table 4: Air Malta fares: percentage of IATA fares, from Malta to 15 destinations across Europe

City Business Fare / IATA Fare Economy Fare / IATA Fare *

Amsterdam 45% 38%

Brussels 68% 38%

Athens 40% 40%

Barcelona 40%

Madrid 34%

Frankfurt 68% 37%

London 70% 34%

Manchester 70% 33%

Rome 87% * 58%

Milan 62% * 45%

Oslo 35%

Paris 68% 38%

Vienna 68% 38%

Geneva 68% 38%

Zurich 68% 38% * Based on data quoted on 16 July 2004: Source: Airline Tariff Publishing Company database.

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Finnair

As Table 5 shows Finnair shows a considerably different pattern compared to the previous airlines. Fares (relative to IATA fares) vary considerably across routes from 42% (Helsinki-Dublin) to 77% (Helsinki-Frankfurt). This is even apparent within each one of the geographical regions. Table 5: Finnair fares: percentage of IATA fares, from Helsinki to 24 destinations across Europe








Paris France 68%

Berlin Germany 50%



Munich Germany 59%


Athens Greece 56%

Rome Italy 52%










Manchester UK & Ireland 57% Source: IATA

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Alitalia

With the exception of Scandinavia, Alitalia fares (relative to IATA fares) for routes starting in Milan observe high variability within each region. An example showing this pattern are the routes to Prague and Warsaw (both within Eastern Europe), which represent 54 and 91% of IATA fares, respectively. Table 6: Alitalia fares: percentage of IATA fares, from Milan to 23 destinations across Europe

City Region Carrier (economy)/IATA







Paris France 84%

Berlin Germany 81%



Munich Germany 86%


Athens Greece 98%











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LOT

As Table 7 shows, apart from routes involving German cities and the other two East Europe destinations, Polish Airlines fares from Warsaw also vary across routes within the same region.

Table 7: LOT: percentage of IATA fares, from Warsaw to 24 cities across Europe







Paris France 62%

Berlin Germany 92%



Munich Germany 94%


Athens Greece 63%

Rome Italy 62%



Helsinki Scandinavia 66%









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British Airways

Although BA fares from London to Austria & Switzerland are concentrated around 72-74% of IATA fares, no other region shows similar levels of concentration at a given ratio of prices. Table 8: BA fares: percentage of IATA fares, from London to 24 destinations across Europe

City Region Carrier (economy)/IATA







Paris France 60%

Berlin Germany 85%



Hanover Germany 81%

Munich Germany 71%


Athens Greece 81%

Milan Italy 68%

Rome Italy 72%








Dublin UK & Ireland 55% Source: IATA

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CONCLUSIONS

For the four airlines analysed in addition to those examined by the UK CAA, carrier fares (as a percentage of IATA fare) remain variable within each region and in some cases the level of variability is very high (e.g. Finnair). Moreover, when comparing across regions no concentration around a particular value is observed in any case.

The analysis has also confirmed that there exists some evidence that a few carriers (particularly Air France and Lufthansa) set published fares at what appear to be fixed proportions of IATA fares across cities within the same geographical region.

It is also important to emphasize that some of the results of this analysis suggest that relative prices concentrate around certain values across routes largely because some carriers set the same price for tickets covering similar routes. For instance this is almost always the case for routes from and to Geneva and Zurich, although there are many more examples. This implies that carriers, at least in some cases, might not be setting prices in line with IATA, but rather that there are internal pricing policy reasons for treating similar routes within a geographic area alike.

Furthermore, the results above do not constitute any evidence of a direction of causality between IATA and carrier fares. Indeed, the data show that some of the carriers analysed increased prices between July and November 2004 while IATA fares remained unchanged within this period. Specific examples are Finnair, which increased prices by 12% across all routes from July to August and Air France, which increased prices by 2% from July to October 2004. Nonetheless, IATA fares remained largely unchanged within the same period of time.

The relation between the IATA and carrier fares might also be a consequence of common factors such as similar demand conditions, the degree of competition in each route and similar costs.

A final and important caveat is that the carrier fares reported are published fares, and do not include discounts. Including discounts will increase the variability of actual prices paid on any particular route, as prices are almost continually adjusted to reflect changes in both demand and supply conditions. Actual carrier prices can vary very significantly from published prices, as shown in the analysis contained in Annex 2. Hence, the comparisons reported misrepresent the degree of stability in actual market prices and do not take any account of the full complexity of actual fare setting in practice which would mean analysing the actual fares and sales across the whole tariff structure.

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Attachment B: Public versus Actual Fares 2003-2004 data supplied by CTAG

INTRODUCTION

This annex presents an analysis carried out by CRA examining the relationship between the public and actual (CNR) fare data within selected European countries submitted to DG Competition by the Corporate Travel Action Group (CTAG) within the context of the review of Regulation 1617/93. It appears that the data contains information for one major customer (selected by CTAG). Assuming the dataset covers all of that customers business, then the analysis provides a fair reflection of the actual pricing patterns experienced by that customer. However, we cannot comment on the extent to which this dataset may or may not be representative of the wider corporate travel market.

Overall, the analysis shows that a wide range of discounts are given, and that there is little or no correlation between changes in Public and Discounted fares. Given that we would expect some correlation between these two variables to be evident (because of common factors such as cost), the lack of significant correlation strongly suggests that the public fares reported in this dataset do not drive the associated actual fares.

SUMMARY OF THE ANALYSIS

The information in the database is provided at route level, and provides public (IATA)1 and actual fares for the years 2003 and 2004 for four different countries: Germany, France, Spain and the UK. The level of discount – how much lower the actual fare paid is in relation to the public fare – is also shown. Note that in many cases the discount figure for a particular route is provided, but data on the relevant public and actual fare is not provided. Therefore, the number of observations for discounts is in general larger than the number of observations for either public or actual fares.

This annex is divided into four sections, one for each one of the countries supplied. The following variables have been calculated and analysed:

• Percentage change in public fare from 2003 to 2004;

• Percentage change in actual fare from 2003 to 2004;

• Actual fare as a percentage of public fare for 2003;

• Actual fare as a percentage of public fare for 2004;

• Discount applied in 2003;

1 The CTAG submission states in response to question 6 that ‘It is customary to use the full interlinable fare as a

benchmark fare when giving discounts’. We have assumed from this that the ‘Public Fare’ used as the base price in the spreadsheet supplied is therefore the (IATA) fully interlinable fare. However, if this is not the case, and the fare is a public carrier fare, the results of the analysis do not change. If there is little or no relationship between a carrier public fare and actual fare paid, then there is equally little or no relationship to IATA fares.

Attachment B: Public versus Actual Fares 2003-2004 data supplied by CTAG 22 December 2004

• Discount applied in 2004.

The first figure in each section shows a scatter diagram of the percentage change in public fare vs. the percentage change in actual fare. Each point on the diagram represents a different combination of route and class of fare for which data was available.

The second figure in each section shows the distribution of the actual fare expressed as a percentage of the public fare for 2003. The y-axis in these diagrams indicates the number of observations within different ranges of values. The third figure shows the same distribution for 2004.

Figures 4 and 5 in each section show the distribution of discounts in 2003 and 2004. Note that although some of the data in these two charts contains equivalent information to that supplied in figures 2 and 3, as mentioned above, there are more observations available for the raw discount rate and hence these charts are constructed from a larger dataset.

A statistical summary for each country is shown at the end of each section.

Summary by nation

Germany:

• Between 2003 and 2004 the Public fare increased by 3.8% while actual fares increased by 2.1%.

• Percentage changes from 2003 to 2004 in public and actual fares show no correlation between the different routes (101 matched observations).

• Actual fares expressed as a percentage of public fares vary across routes for 2003 and 2004 from 55% to 96%. However, during the year of 2004 there was a significant increase in the count of fares around 95% of public fare level (accounting for 30% of cases).

• Similarly, discounts for 2003 and 2004 vary across routes from 4% to 50%. However, during 2004, in 38 out of 169 discounts were around the 5% level.

France:

• Between 2003 and 2004 the Public fare increased by 5.4% while actual fares increased by 2.4%.

• Percentage changes from 2003 to 2004 in public and actual fares show a small positive correlation across the different routes (183 matched observations).

• Actual fares expressed as a percentage of public fares in both years vary considerably between 19% and 92%.

• Similarly, discounts for 2003 and 2004 show a large dispersion across routes.

2


Spain:

• Between 2003 and 2004 the public fare fell by -2.1% while actual fares fell by -0.9%.

• Percentage changes from 2003 to 2004 in public and actual fares show some correlation (25 matched observations). However, the number of route-class combinations is very small so that this conclusion might not be robust. Note also that the change in the public fare change was a fall in prices.

• Actual fares as a percentage of public fares vary across routes with some concentration around 80% in both years.

• Similarly, discounts in 2003 and 2004 show a large degree of dispersion across routes with some concentration around 20%.

UK:

• Between 2003 and 2004 the Public fare fell by –0.6% while actual fares increased by 1.2%.

• Percentage changes from 2003 to 2004 in public and actual fares are significantly correlated (23 matched observations). However, this result is largely driven by one outlier, the number of observations with a price supplied is limited compared to the total population, and most seriously the price sample seems to be biased as its distribution is significantly different to the distribution of all discounts for the UK.

• Actual fares as a percentage of public fares are concentrated in the 60-80% interval. Again, this result is not reliable given the small number of observations.

• Discounts for 2003 and 2004 show larger dispersion across the different routes as more observations are considered. This strengthens the previous conjecture that the high concentration observed on relative prices is overestimated.

CONCLUSION

In general, we believe that some correlation between these two variables should be expected.2 However the lack of a significant correlation in Germany and France is striking. Further, the markets showing the strongest apparent correlations, Spain with 0.34 and the UK with 0.65, both suffer from limited datasets affected by outliers, and in both cases the net change in public fares was negative. The analysis also shows that a wide range of discounts are given, and that the distribution of discounts changes over time.

A reliable positive correlation between the variables would not prove the hypothesis that public fares drove discounted fares, as we expect common market impacts to affect both price sets.

2 This is because both will be driven to some extent by the same underlying changes in market conditions. For

example, even a pure monopolist of public fares will adjust prices in response to cost changes, with the adjustment being in the same direction (though not necessarily of the same magnitude) as the movement that would be seen in an effectively competitive market.

3


However, a lack of correlation is inconsistent with this hypothesis. Overall, we believe that the data strongly suggest that the pubic fares reported in this dataset do not drive the associated actual fares over the period analysed.

ANALYSIS

GERMANY

Figure G1. Percentage Change in Actual Fare VS. Percentage Change in Public Fare.

-10

-5

0

5

10

15

20

-20 -15 -10 -5 0 5 10 15 20

Change Public

Cha

nge

Act

ual

4


Figure G2. Distribution of Actual Fares as a Percentage of Public Fares 2003.

0

5

10

15

20

25

(52.5,57.5) (57.5,62.5) (62.5,67.5) (67.5,72.5) (72.5,77.5) (77.5,82.5) (82.5,87.5) (87.5,92.5) (92.5,97.5)

%

Obs

erva

tions

Figure G3. Distribution of Actual Fares as a Percentage of Public Fares 2004.

0

5

10

15

20

25

30

35

40

(52.5,57.5) (57.5,62.5) (62.5,67.5) (67.5,72.5) (72.5,77.5) (77.5,82.5) (82.5,87.5) (87.5,92.5) (92.5,97.5)

%

Obs

erva

tions

5


Figure G4. Distribution of Discounts 2003.

0

5

10

15

20

25

30

(-2.5,2.5) (2.5,7.5) (7.5,12.5) (12.5,17.5) (17.5,22.5) (22.5,27.5) (27.5,32.5) (32.5,37.5) (37.5,42.5) (42.5,47.5) (47.5,52.5)

%

Obs

erva

tions

Figure G5. Distribution of Discounts 2004.

0

5

10

15

20

25

30

35

40

(-2.5,2.5) (2.5,7.5) (7.5,12.5) (12.5,17.5) (17.5,22.5) (22.5,27.5) (27.5,32.5) (32.5,37.5) (37.5,42.5) (42.5,47.5) (47.5,52.5)

%

Obs

erva

tions

6


Table G1: Statistical Summary for Germany

Change in Public

(IATA) Fare

Change in Actual Fare

Actual/Public 2003

Actual/Public 2004

Discount 2003

Discount 2004

Average 3.8% 2.1% 76.9% 79.1% 24.5% 23.3%

Minimum -17.3% -10.8% 55.5% 54.0% 5.7% 3.0%

Maximum 17.4% 14.6% 94.3% 97.0% 50.6% 51.0%

SD 4.0% 4.4% 10.7% 13.5% 12.0% 13.1%

Maximum – Minimum 34.7% 25.4% 38.8% 43.0% 44.9% 48.0%

Observations 103 164 102 124 166 169

Correlation Coefficient -0.01 Source: CTAG data supplied at CTAG submission, Annex 1. CRA analysis.

7


FRANCE Figure F1. Percentage Change in Actual Fare VS. Percentage Change in Public Fare.

-40

-30

-20

-10

0

10

20

30

40

50

60

70

-40 -20 0 20 40 60 8

Change Public

Cha

nge

Act

ual

0

Figure F2. Distribution of Actual Fares as a Percentage of Public Fares 2003.

0

5

10

15

20

25

(17.5,

22.5)

(22.5,

27.5)

(27.5,

32.5)

(32.5,

37.5)

(37.5,

42.5)

(42.5,

47.5)

(47.5,

52.5)

(52.5,

57.5)

(57.5,

62.5)

(62.5,

67.5)

(67.5,

72.5)

(72.5,

77.5)

(77.5,

82.5)

(82.5,

87.5)

(87.5,

92.5)

%

Obs

erva

tions

8


Figure F3. Distribution of Actual Fares as a Percentage of Public Fares 2004.

0

5

10

15

20

25

30

35

(17.5,

22.5)

(22.5,

27.5)

(27.5,

32.5)

(32.5,

37.5)

(37.5,

42.5)

(42.5,

47.5)

(47.5,

52.5)

(52.5,

57.5)

(57.5,

62.5)

(62.5,

67.5)

(67.5,

72.5)

(72.5,

77.5)

(77.5,

82.5)

(82.5,

87.5)

(87.5,

92.5)

%

Obs

erva

tions

9


Figure F4. Distribution of Discounts 2003.

0

5

10

15

20

25

(7.5,1

2.5)

(12.5,

17.5)

(17.5,

22.5)

(22.5,

27.5)

(27.5,

32.5)

(32.5,

37.5)

(37.5,

42.5)

(42.5,

47.5)

(47.5,

52.5)

(52.5,

57.5)

(57.5,

62.5)

(62.5,

67.5)

(67.5,

72.5)

(72.5,

77.5)

(77.5,

82.5)

%

Obs

erva

tions

Figure F5. Distribution of Discounts 2004.

0

5

10

15

20

25

30

35

(7.5,1

2.5)

(12.5,

17.5)

(17.5,

22.5)

(22.5,

27.5)

(27.5,

32.5)

(32.5,

37.5)

(37.5,

42.5)

(42.5,

47.5)

(47.5,

52.5)

(52.5,

57.5)

(57.5,

62.5)

(62.5,

67.5)

(67.5,

72.5)

(72.5,

77.5)

(77.5,

82.5)

%

Obs

erva

tions

Table F2: Statistical Summary for France

10


Change in Public

(IATA) Fare


Actual/Public 2003

Actual/Public 2004

Discount 2003

Discount 2004

Average 5.4% 2.4% 50.3% 51.7% 49.7% 48.3%

Minimum -28.6% -29.8% 18.6% 19.4% 10.0% 7.5%

Maximum 72.5% 59.0% 90.0% 92.5% 81.4% 80.6%

SD 8.1% 9.9% 19.3% 17.5% 19.3% 17.5%

Maximum – Minimum 101.1% 88.8% 71.4% 73.1% 71.4% 73.1%

Observations 200 198 183 291 183 291

Correlation Coefficient 0.18 Source: CTAG data supplied at CTAG submission, Annex 1. CRA analysis.

11


SPAIN Figure S1. Percentage Change in Actual Fare VS. Percentage Change in Public Fare.

-20

-15

-10

-5

0

5

10

15

-30 -25 -20 -15 -10 -5 0 5 10

Change Public

Cha

nge

Act

ual

Figure S2. Distribution of Actual Fares as a Percentage of Public Fares 2003.

0

1

2

3

4

5

6

7

8

(32.5,37.5) (37.5,42.5) (42.5,47.5) (47.5,52.5) (52.5,57.5) (57.5,62.5) (62.5,67.5) (67.5,72.5) (72.5,77.5) (77.5,82.5) (82.5,87.5) (87.5,92.5)

%

Obs

erva

tions

12


Figure S3. Distribution of Actual Fares as a Percentage of Public Fares 2004.

0

2

4

6

8

10

12

14

(37.5,42.5) (42.5,47.5) (47.5,52.5) (52.5,57.5) (57.5,62.5) (62.5,67.5) (67.5,72.5) (72.5,77.5) (77.5,82.5) (82.5,87.5) (87.5,92.5)

%

Obs

erva

tions

Figure S4. Distribution of Discounts 2003.

0

1

2

3

4

5

6

7

8

(7.5,12.5) (12.5,17.5) (17.5,22.5) (22.5,27.5) (27.5,32.5) (32.5,37.5) (37.5,42.5) (42.5,47.5) (47.5,52.5) (52.5,57.5) (57.5,62.5) (62.5,67.5)

%

Obs

erva

tions

13


Figure S5. Distribution of Discounts 2004.

0

2

4

6

8

10

12

14

(7.5,12.5) (12.5,17.5) (17.5,22.5) (22.5,27.5) (27.5,32.5) (32.5,37.5) (37.5,42.5) (42.5,47.5) (47.5,52.5) (52.5,57.5) (57.5,62.5)

%

Obs

erva

tions

Table S3: Statistical Summary for Spain

Change in Public

(IATA) Fare


Actual/Public 2003

Actual/Public 2004

Discount 2003

Discount 2004

Average -2.1% -0.9% 64.9% 68.6% 35.1% 31.4%

Minimum -24.2% -16.3% 34.0% 38.3% 10.0% 10.0%

Maximum 6.6% 12.3% 90.0% 90.0% 66.0% 61.7%

SD 6.9% 6.3% 17.6% 17.6% 17.6% 17.6%

Maximum – Minimum 30.8% 28.6% 56.0% 51.7% 56.0% 51.7%

Observations 25 25 25 31 25 31


14


UK Figure UK1. Percentage Change in Actual Fare VS. Percentage Change in Public Fare.

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

-10 -8 -6 -4 -2 0 2 4 6

Change Public

Cha

nge

Act

ual

Figure UK2. Distribution of Actual Fares as a Percentage of Public Fares 2003.

0

1

2

3

4

5

6

7

8

9

10

(52.5,57.5) (57.5,62.5) (62.5,67.5) (67.5,72.5) (72.5,77.5) (77.5,82.5) (82.5,87.5) (87.5,92.5) (92.5,97.5)

%

Obs

erva

tions

15


Figure UK3. Distribution of Actual Fares as a Percentage of Public Fares 2004.

0

2

4

6

8

10

12

14

(52.5,57.5) (57.5,62.5) (62.5,67.5) (67.5,72.5) (72.5,77.5) (77.5,82.5) (82.5,87.5) (87.5,92.5) (92.5,97.5)

%

Obs

erva

tions

Figure UK4. Distribution of Discounts 2003.

0

2

4

6

8

10

12

14

16

(7.5,12.5) (12.5,17.5) (17.5,22.5) (22.5,27.5) (27.5,32.5) (32.5,37.5) (37.5,42.5) (42.5,47.5) (47.5,52.5) (52.5,57.5) (57.5,62.5) (62.5,67.5) (67.5,72.5) (72.5,77.5)

%

Obs

erva

tions

16


Figure UK5. Distribution of Discounts 2004.

0

2

4

6

8

10

12

14

16

(7.5,12.5) (12.5,17.5) (17.5,22.5) (22.5,27.5) (27.5,32.5) (32.5,37.5) (37.5,42.5) (42.5,47.5) (47.5,52.5) (52.5,57.5) (57.5,62.5)

%

Obs

erva

tions

Table UK4: Statistical Summary for the UK.

Change in Public

(IATA) Fare


Actual/Public 2003

Actual/Public 2004

Discount 2003

Discount 2004

Average -0.6% 1.2% 71.5% 72.6% 27.5% 26.4%

Minimum -8.9% -10.0% 65.0% 66.0% 10.0% 10.0%

Maximum 5.2% 7.7% 81.0% 80.0% 73.0% 61.8%

SD 3.1% 4.9% 6.7% 5.0% 12.1% 9.8%

Maximum - Minimum 14.1% 17.7% 16.0% 14.0% 63.0% 51.8%

Observations 23 23 23 23 47 47


17



ANNEX III


CONFIDENTIAL AIRLINE RESPONSES TO CTAG BENCHMARK ALLEGATIONS

Non-Confidential Version

IATA OBSERVATIONS ON NON-CONFIDENTIAL VERSION OF ANNEX III – RESULTS OF INTERLINE CONSULTATION AIRLINE RESPONSES TO CTAG

[This annex contains confidential airline responses to the CTAG allegation that IATA fares are used as a “benchmark” when setting discounted fares under corporate agreements. A non-confidential summary of the airline responses can be found at page 6 of IATA’s main observations.]

Page 1



ANNEX IV


CONSOLIDATED INTERLINE DATA PROVIDED PURSUANT TO ARTICLE 4(3) OF REG. 1617/93

Reporting Period: July 2002 - June 2004 (Total data for four reporting periods)1.1 1.2 1.3 1.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7

Flown Flown IATA Billed Billed IATA TotalNormal Fare

CouponsNormal Fare

CouponsNormal Fare

CouponsNormal Fare

CouponsPassenger

Trips# # # # # # % # % # %

33574110 11666255 5951958 3599282 39526068 15265537 38.62% 3599282 23.58% 2352676 9.70%2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7


CouponsNormal Fare

CouponsNormal Fare

CouponsNormal Fare

CouponsPassenger

TripsBetween And # # # # # # % # % # %

Amsterdam London 488871 78079 20640 12443 509511 90522 17.77% 12443 13.75% 8197 1.96%Athens Rome 12688 5689 1451 1174 14139 6863 48.54% 1174 17.11% 277 3.81%Bilbao Edinburgh 612 274 145 92 757 366 48.35% 92 25.14% 53 13.55%Copenhagen Genoa 1177 519 2673 1214 3850 1733 45.01% 1214 70.05% 1459 68.92%Dublin London 79554 16541 8781 5280 88335 21821 24.70% 5280 24.20% 3501 5.26%Dublin Rotterdam 54 44 39 22 93 66 70.97% 22 33.33% 17 62.96%Dusseldorf Madrid 22928 16849 5709 4788 28637 21637 75.56% 4788 22.13% 921 13.16%Dusseldorf Naples 5727 3252 1763 1339 7490 4591 61.30% 1339 29.17% 424 14.63%Frankfurt London 479829 221835 28902 26072 508731 247907 48.73% 26072 10.52% 2830 1.09%Frankfurt Paris 329616 128329 16704 11342 346320 139671 40.33% 11342 8.12% 5362 2.59%Frankfurt Rome 41770 26525 6966 6146 48736 32671 67.04% 6146 18.81% 820 5.10%Geneva Stockholm 8377 3071 2628 1821 11005 4892 44.45% 1821 37.22% 807 13.20%Hamburg Thessaloniki 2698 1245 754 527 3452 1772 51.33% 527 29.74% 227 13.51%Helsinki Munich 18257 9197 6296 4361 24553 13558 55.22% 4361 32.17% 1935 17.60%Las Palmas London 2987 1578 880 645 3867 2223 57.49% 645 29.01% 235 14.29%Lisbon Madrid 33972 7752 23739 6372 57711 14124 24.47% 6372 45.11% 17367 39.84%Lisbon Nuremberg 1891 940 367 256 2258 1196 52.97% 256 21.40% 111 10.45%London Paris 728015 138357 36557 16012 764572 154369 20.19% 16012 10.37% 20545 3.37%London Nice 104103 23294 5970 4889 110073 28183 25.60% 4889 17.35% 1081 1.32%Madrid Rome 21868 14193 4829 3149 26697 17342 64.96% 3149 18.16% 1680 17.96%Oslo Strasbourg 1379 659 699 405 2078 1064 51.20% 405 38.06% 294 28.99%Paris Porto 19294 4699 812 652 20106 5351 26.61% 652 12.18% 160 1.08%Paris Salzburg 2898 2622 1999 1808 4897 4430 90.46% 1808 40.81% 191 40.90%Paris Tenerife 708 415 121 80 829 495 59.71% 80 16.16% 41 12.28%

Procedure Paragraph:

All Markets at IATA Fares


Passenger Tripsat IATA Fares which were

interlined

Within EEA & CH

Specific Markets at non-IATA Fares which were interlined

at non-IATA Fares which were interlined

at IATA Fares which were interlined

Passenger Trips

at IATA Fares

Reporting Period: July - December 20021.1 1.2 1.3 1.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7


CouponsNormal Fare

CouponsNormal Fare

CouponsNormal Fare

CouponsPassenger

Trips# # # # # # % # % # %

8069819 3066424 1736263 1105820 9806082 4172244 42.55% 1105820 26.50% 630443 11.19%2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7


CouponsNormal Fare

CouponsNormal Fare

CouponsNormal Fare

CouponsPassenger






Passenger Trips

at IATA Fares





interlined

Within EEA & CH

Reporting Period: January - June 20031.1 1.2 1.3 1.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7


CouponsNormal Fare

CouponsNormal Fare

CouponsNormal Fare

CouponsPassenger

Trips# # # # # # % # % # %

9466534 3395322 1627431 944729 11093965 4340051 39.12% 944729 21.77% 682702 10.11%2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7


CouponsNormal Fare

CouponsNormal Fare

CouponsNormal Fare

CouponsPassenger






Passenger Trips

at IATA Fares





interlined

Within EEA & CH

Jan-Jun '03

Reporting Period: July - December 20031.1 1.2 1.3 1.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7


CouponsNormal Fare

CouponsNormal Fare

CouponsNormal Fare

CouponsPassenger

Trips# # # # # # % # % # %

8255705 2645943 1303508 748726 9559213 3394669 35.51% 748726 22.06% 554782 9.00%2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7


CouponsNormal Fare

CouponsNormal Fare

CouponsNormal Fare

CouponsPassenger






Passenger Trips

at IATA Fares





interlined

Within EEA & CH

Reporting Period: January - June 20041.1 1.2 1.3 1.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7


CouponsNormal Fare

CouponsNormal Fare

CouponsNormal Fare

CouponsPassenger

Trips# # # # # # % # % # %

7782052 2558566 1284756 800007 9066808 3358573 37.04% 800007 23.82% 484749 8.49%2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7


CouponsNormal Fare

CouponsNormal Fare

CouponsNormal Fare

CouponsPassenger






Passenger Trips

at IATA Fares





interlined

Within EEA & CH

Definitions:

EEA (European Economic Area) The 15 European Union States and Iceland, Liechtenstein, Norway and Switzerland.Within the EEA A ticket for an itinerary, other than a wholly domestic itinerary, for which all fare construction

points are in the EEA.Interline Evidenced when an airline bills another airline for its flight coupons.IATA Normal Fares IATA fares governed by Resolution 062a (Economy Class Fares) and Resolutions in the 095

series (Budget, Eurobudget fares). A carrier fare which is simply a duplication of an IATA fare (i.e. same fare level and conditions) is also considered to be an IATA fare.

Carrier Normal Fares Flexible fares without:i) minimum/maximum stay requirements and/orii) penalties, fees for rebooking or rerouting (an amount paid in upgrading to a higher fare is not considered a penalty or fee).

1 For flight coupons of own tickets issued in the EEA, analyse those for which all Fare Construction Points are within the EEA,

1.1 Identify and count all own flown coupons, at which travel was at a Normal fare, Enter this total in Cell C61.2 Of 1.1, identify and count those at which travel was at an IATA Normal fare, Enter this total in Cell D61.3 Identify and count all billed coupons, at which travel was at a Normal fare, Enter this total in Cell E61.4 Of 1.3, identify and count those at which travel was at an IATA Normal fare. Enter this total in Cell F62 For flight coupons of own tickets issued in the EEA, having a fare component (one way or round trip)

between (24 identified origin/destination markets).2.1 Identify and count all own flown coupons, at which travel was at a Normal fare, Enter these totals in Cells C11~C342.2 Of 2.1, identify and count those at which travel was at an IATA Normal fare, Enter these totals in Cells D11~D342.3 Identify and count all billed coupons, at which travel was at a Normal fare, Enter these totals in Cells E11~E342.4 Of 2.3, identify and count those at which travel was at an IATA Normal fare. Enter these totals in Cells F11~F343 Report for each of 1 and 2 the following: 3.1 The total number of passenger trips (1.1 + 1.3 and 2.1 + 2.3) This is calculated automatically and shown in Column G3.2 The number of passenger trips at an IATA normal fare (1.2 + 1.4 and 2.2 + 2.4) This is calculated automatically and shown in Column H3.3 The percentage of passenger trips at an IATA normal fare (3.2 ÷ 3.1 x 100) This is calculated automatically and shown in Column I3.4 The number of passenger trips at an IATA normal fare which were interlined (1.4 and 2.4) This is calculated automatically and shown in Column J3.5 The percentage of passenger trips at an IATA normal fare which were interlined (3.4 ÷ 3.2 x 100)

This is calculated automatically and shown in Column K3.6 The number of passenger trips at an non IATA normal fare which were interlined (1.3-1.4 and 2.3-

2.4) This is calculated automatically and shown in Column L3.7 The percentage of passenger trips at an non IATA normal fare which were interlined (3.6 ÷ (3.1 -3.2)

x 100) This is calculated automatically and shown in Column M4 Please update reporting period in Cell C1. Completed spreadsheet to be sent to IATA not later than

October/April 15, covering coupons used or billed during the previous January – June and July – December periods respectively.

5 IATA will consolidate individual airline results and produce industry totals. Individual airline information will be disguised in respect of the reporting airline (a key will be provided on a ‘confidential’ basis to the EC if they request) and will be reported to the Commission with industry totals each November and May

Please Note:

The worksheet is 'protected' except for some cells in columns C, D E, F (rows 1, 6 and 11~34). Should you wish to input your own totals in Columns G, H, J unprotect the sheet by selecting [Tools][Protection][Unprotect sheet]. Please do not delete or insert rows or columns between A1 and M34. Work outside of this range if necessary.Once the sheet has been unprotected delete the formulas in columns G, H, J and replace with your data.Send completed spreadsheet to Darius Gedminas [email protected] and Les Bolingbroke [email protected] as an attachment to an e-mail message

Procedure

IATA Third-Party Comment Submission -- Annex I - Summary of ...

Documents

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