European Commission, DG Competition, Chief Economist Team

Oneworld Airline AllianceCET empirical work

Manuel Godinho de Matos* and Szabolcs Lorincz*Chief Economist Team

DG Competition, European Commission*Disclaimer: the views expressed are those of the authors and cannot be regarded as stating an official

position of the European Commission.

Association of Competition Economics Annual ConferenceUniversity of East Anglia, Norwich11 November 2010

European Commission, DG Competition, Chief Economist Team

• The context• The process• Market definition & data• Competitive assessment

– Harm– Efficiencies– Remedies

Outline

European Commission, DG Competition, Chief Economist Team

Context - Art 101

• Airlines: wish to reinforce their collaboration within an alliance (i.e. revenue-sharing)

• Why not merge? regulatory restrictions on ownership, limits to traffic rights to foreign countries è Art. 101 TFEU

• Oneworld: BA + IB + AA

European Commission, DG Competition, Chief Economist Team

Economic principles

London

Chicago

Newcastle

Cincinatti

BA

BA

AAAA

• Connecting pax likely to benefit– routes are complementary goods

• Non-stop, hub-to-hub pax likely harmed– reduction in competition

European Commission, DG Competition, Chief Economist Team

Connecting vs. Non-Stop passengers

• Empirical literature: significant reduction in prices for connecting pax

• Whalen (2007): code-sharing 5-9%; immunity 13-20% – relative to interlining

• See also Brueckner & Whalen (2000) and Brueckner (2003 JATM&RESTAT)

European Commission, DG Competition, Chief Economist Team

Timing

• Jul 2008 Investigation opened ex-officio

• Feb 2009 Virgin Atlantic files complaint

• Sep 2009 Statement of Objections

• Dec 2009 Reply to SO - no Hearing.

• Dec-May 2010 Remedies proposal and assessment

• Jul 2010 Art. 9 decision of the Commission

• End of Dec 2010 Appeal deadline

European Commission, DG Competition, Chief Economist Team

Non-stop routes of concern• London – Boston [250K-300K] O&D pax/yr 3 to 2• London – Chicago [250K-300K] O&D pax/yr 4 to 3• London – Dallas [50K-100K] O&D pax/yr 2 to 1• London – Miami [250K-300K] O&D pax/yr 3 to 2• London – New York [1300K-1500K] O&D pax/yr 5 to 4• Madrid – Miami [50K-100K] O&D pax/yr 2 to 1

• 10% of all (affected) routes• Strong market position (combined market shares)

– [60-100]% on the premium market – [60-90]% on the non-premium market

• Relatively large proportion of hub-to-hub passengers (see Brueckner JATM 2003)• Harm: revenue sharing restricts competition

European Commission, DG Competition, Chief Economist Team

Market definition: most relevant issues

• O/D city pair vs. network approach (demand vs supply side)

• Premium vs. Non-Premium– P first, business, fully flex. economy, premium ec.

– NP restricted economy

• Non-stop vs. One-stop flights– for NP pax, they are substitute

– for P pax likely not

European Commission, DG Competition, Chief Economist Team

Data (1)• Data collection: following the published Best Practices Guidelines

• Parties provided– Own data: revenues, pax numbers (O&D + B&B), costs, flight characteristics,

presence at airports and route (mkt shares, load factor, capacity, frequency) – Airport/city level data: structural features, route competition, capacity– Competitors data: pax numbers (based on MIDT) and presence at airports and

route (mkt shares, load factor, capacity, frequency)

• Complainant provided– Own revenues, pax numbers (O&D + B&B), costs, load factor, capacity,

frequency

European Commission, DG Competition, Chief Economist Team

Data (2)– Non-stop and 1-stop transatlantic flights on 49 directioneless city-

pairs with direct or 1-stop overlaps– Sep 2003 to Sep 2008 – at the level of airport-pairs (or trios if 1-stop flight)– compiled as monthly averages (based on flight date)– not controlled for moment of purchase– split by home airport and flight direction

=(at least 4 lines per airport-pair/month/carrier – could be more if 1-stop present)

– split by cabin class, flexibility (based on booking class) and corporate purchase (for non-fully flexible tickets)

=(each line has separate pax and revenue info on each of these)

– includes all types of itineraries (returns, one-ways and open jaws)

European Commission, DG Competition, Chief Economist Team

Premium/Non-Premium paxCorrelation analysis

Results:– Restricted economy fares do not co-move with fares in

• first, • business, • flex premium economy and • flex economy

– relatively strong co-movement of fares in the lower fare classes (restricted economy and restricted premium economy)

– weaker correlations within higher fare classes (first, business, flex premium economy and flex economy)

(non-price elements more important?)

è Corroborates qualitative evidence and pax survey results on Premium/Non-Premium segmentation

European Commission, DG Competition, Chief Economist Team

Art 101(1): harm quantification

• price = f(concentration, other factors)– Price: log average revenue per return ticket– Concentration: number of competitors– Factors: frequency, aircraft size, slots, GDP, population,

time&carrier effects

• Data– 88 non-stop, directional hub-to-hub routes, 4 carriers– 2049 observations (Q1 2004 to Q3 2008)– FE, FD & Arellano-Bond estimators

European Commission, DG Competition, Chief Economist Team

Art 101(1): harm quantification

• Results: price impacts of higher concentration– Economy restricted ~5%

– Business flexible ~2%– Average across all routes

– Complementary to other qualitative/quantiative evidence

• Business– Factors other than price relatively more important

– (as shown by the other qualitative evidence)

European Commission, DG Competition, Chief Economist Team

General efficiency discussion:Conditions in Art 101 (3) guidelines

• Four cumulative conditions for efficiency to be considered: the restriction of competition must:1. Improve production or distribution or promote technical/economic

progress2. Allow consumers a fair share of benefits3. Be indispensable for the attainment of those benefits4. Not eliminate competition in respect of a substantial part of the

products in question

• 3 involves the definition of a counterfactual:– the RALRA (realistic and less restrictive alternative)– e.g. could simple code-sharing be enough?

European Commission, DG Competition, Chief Economist Team

Remedies

• Three main set of remedies: slots, feeder traffic, data reporting obligation

• London routes with slot remedies:– New York [5 to 4 – parties’ share of Prem. pax: 60-70%]: 3 daily slots– Boston [3 to 2 – parties’ share of Prem. pax: 80-90%]: 2 daily slots– Miami [3 to 2 – parties’ share of Prem. pax: 70-80%]: 1 daily slot– Dallas [2 to 1 – parties’ share of Prem. pax: >=90%]: 1 daily slot

• Procedure for slot allocation - complex

European Commission, DG Competition, Chief Economist Team

Slots remedies: procedure• No fix-it-first: parties can implement the JV if nobody picks the slot up• Procedure: the Commission to select the best applicant• Best applicant: strongest competitive constraint• Compensation can be amongst the selection criteria (tie breaker)• Slots are earmarked to the route - duration 10 years (if picked up before

Winter 2012/13)• As of Summer 2013, Dallas and Miami become available to one-stop

entrants (i.e. flex slots)• Review clause: after 5 yrs the Commission can review the commitments• Number of ancillary conditions: number of early morning slots, size of the

time window, “Continental” clause etc.