Strategic airline alliances and restrictions of competition by object under EU competition law

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Strategic airline alliances and restrictions of competition by object under EU
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Remetei-Filep, Ádám
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T itle:
Strategic airline alliances and restrictions of competition by object under EU
competition law

A uthor:Ádám Remetei-Filep
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Strategic airline alliances and restrictions
of competition by object under EU
competition law

Ádám Remetei-Filep
King’s College London

Thesis submitted for PhD in Law

Supervised by Professor Richard Whish
Second supervisor: Senior Lecturer David Bailey

21 January 2013

1
Abstract
In this thesis, the question is asked whether, in the light of the ‘more economic
approach’ adopted in recent years, it is correct to classify metal-neutral revenue-
sharing airline alliances as restrictive of competition by object and interpret this
concept in a wider sense under Article 101(1) TFEU. By relying on the example and
analysis of airline alliances and in particular metal-neutral revenue-sharing alliances,
the thesis argues that the ‘orthodox’ or wider interpretation of restriction by object is
correct and, as such, does not contradict the idea behind the more economic
approach of EU competition law. However, the analysis of restriction by object has
to take into account the effects of Article 101 TFEU as a whole, including Article
101(3) TFEU. Therefore this wider interpretation of object restrictions must be
complemented by a realistic application of Article 101(3) TFEU, in order to achieve
the desired outcome of an administrable and efficient enforcement regime that
minimises error costs. This is a legal thesis. It will review the EU competition law
approach to airline alliances and use the example of airline alliances to explore the
issue of restriction by object and its interaction with Article 101(3) TFEU. The thesis
examines both from an economic and legal point of view all those aspects of
strategic alliances, air transport and strategic airline alliances that are essential for a
thorough understanding of their characteristics when analysed under Article 101(1)
and 101(3) TFEU. The research question concentrates on the dichotomy of Article
101 TFEU, and it is concluded that the experience of the aviation industry supports
the thesis.

2
Contents
Abstract ........................................................................................................................ 2

Contents ........................................................................................................................ 3

1 Introduction ............................................................................................................... 6

1.1 Background of the research and the thesis question .......................................... 6

1.2 Relevance of the thesis question ...................................................................... 10

1.3 Scope and subject matter of the research ......................................................... 11

1.4 Structure of the thesis ....................................................................................... 13

2 History and current state of global airline alliances ................................................ 17

2.1 Star Alliance ..................................................................................................... 17

2.2 oneworld ........................................................................................................... 21

2.3 SkyTeam .......................................................................................................... 23

2.4 Summary .......................................................................................................... 25

3 Strategic alliances in general ................................................................................... 27

3.1 Strategic alliances: an economic perspective ................................................... 28

3.1.1. Concept of strategic alliances ................................................................... 28

3.1.2 Motives and objectives of strategic alliances ............................................ 29

3.1.3 Types of strategic alliances ....................................................................... 33

3.1.3.1 Alliances between non-competitors ................................................... 33

3.1.3.2 Alliances between competitors .......................................................... 34

3.1.3.2.1 Complementary alliances ............................................................ 35

3.1.3.2.2 Shared-supply alliances ............................................................... 35

3.1.3.2.3 Quasi-concentration alliances ..................................................... 36

3.2 Strategic alliances: a competition law perspective ........................................... 36

3.2.1 Competition law concept of strategic alliances ......................................... 38

3.2.2 The general approach of the EU Commission .......................................... 39

3.2.3 Forms of strategic alliances and their treatment ....................................... 41

3.2.3.1 Strategic alliances, which are concentrations ..................................... 41

3.2.3.2 Strategic alliances as restrictive agreements ...................................... 42

3.3 Summary .......................................................................................................... 46

4 Legal and economic background of air transport .................................................... 47

4.1 International law on air transport ..................................................................... 48

4.1.1 The Chicago System ................................................................................. 48

4.1.2 System of bilateral air service agreements ................................................ 50

4.1.3 Multilateralism in international air transport ............................................ 52

4.2 Deregulation in the US ..................................................................................... 52

4.2.1 The years of regulation .............................................................................. 53

4.2.2 Deregulation and its effects on the industry .............................................. 54

4.2.3 More liberal bilaterals as an effect of deregulation ................................... 57

4.3 Liberalisation in the EU ................................................................................... 57

4.3.1 Road to liberalisation in Europe ................................................................ 58

4.3.2 The third package and the present regulatory system of the EU ............... 61

4.3.2.1 Licensing ............................................................................................ 62

4.3.2.2 Market access ..................................................................................... 63

4.3.2.3 Fares ................................................................................................... 63

4.3.2.4 Slot allocation ..................................................................................... 63

4.3.2.5 Computerised reservation systems ..................................................... 64

4.3.2.6 Ground handling ................................................................................. 65

3
4.3.2.7 Airport charges ................................................................................... 66

4.3.3 External aviation policy of the EU ............................................................ 66

4.3.3.1 The road leading to the Open Skies judgments .................................. 67

4.3.3.2 The Open Skies judgments ................................................................. 69

4.3.3.3 Aftermath of the Open Skies judgments, external aviation relations at
present ............................................................................................................ 70

4.3.3.3.1 The ECAA and other neighbouring countries ............................. 72

4.3.3.3.2 Open aviation area with the US .................................................. 73

4.3.3.3.3 Targeted negotiations with other third countries ........................ 75

4.4 Basic airline economics .................................................................................... 75

4.4.1 Drivers and characteristics of air transport demand .................................. 76

4.4.2 Supply-side characteristics of air transport ............................................... 79

4.4.3 Drivers and characteristics of airline costs ................................................ 80

4.4.4 Characteristics of pricing .......................................................................... 84

4.4.5 Airline networks, hub-and-spoke system .................................................. 86

4.5 Summary .......................................................................................................... 89

5 Strategic alliances in the airline industry ................................................................ 91

5.1 Background of alliance formation within the industry .................................... 92

5.1.1 Business models in the liberalised markets ............................................... 92

5.1.2 Low-cost airlines ....................................................................................... 94

5.1.3 The response of network airlines .............................................................. 97

5.1.4 Competition in long-haul markets ............................................................. 99

5.1.5 Summary ................................................................................................. 101

5.2 The motives and objectives of forming airline alliances ............................... 102

5.3 Forms of cooperation in airline alliances ....................................................... 109

5.4 Success and failure of airline alliances, lasting/non-lasting alliances ............ 119

5.5 Summary ........................................................................................................ 123

6 EU competition law analysis of airline alliances .................................................. 125

6.1 Market definition in air transport cases .......................................................... 127

6.1.1 Origin & destination approach ................................................................ 129

6.1.1.1 Network market definition ............................................................... 132

6.1.1.2 Airport substitution .......................................................................... 136

6.1.1.3 Non-stop and one-stop flights .......................................................... 140

6.1.1.4 Substitution with other modes of transport ...................................... 143

6.1.2 Differentiation according to different passengers groups ....................... 145

6.1.3 Charter operations and low-cost competition ......................................... 152

6.2 Article 101 TFEU and airline alliances .......................................................... 153

6.2.1 Agreement between undertakings ........................................................... 155

6.2.2 Appreciable effect on competition .......................................................... 157

6.2.3 Restriction of competition ....................................................................... 159

6.2.3.1 The more economic approach in EU competition law ..................... 166

6.2.3.1.1 Restrictive agreements .............................................................. 168

6.2.3.1.2 Merger control ........................................................................... 170

6.2.3.1.3 Abuse of dominant position ...................................................... 171

6.2.3.2 Administrability of efficient antitrust enforcement system ............. 173

6.2.3.2.1 The US experience .................................................................... 180

6.2.3.2.2 Comparison with the EU approach ........................................... 187

6.2.3.3 Conclusion ........................................................................................ 202

6.2.4 Legal and economic context of airline alliances ..................................... 203

6.2.4.1 Negative effects of airline alliances ................................................. 210

4
6.2.4.1.1 Elimination of horizontal competition ...................................... 210

6.2.4.1.2 Hub dominance ......................................................................... 215

6.2.4.1.3 Vertical foreclosure ................................................................... 219

6.2.4.1.4 Multimarket contact .................................................................. 224

6.2.4.2 Benefits of airline alliances .............................................................. 225

6.2.4.2.1 Supply-side benefits .................................................................. 226

6.2.4.2.2 Demand-side benefits ................................................................ 232

6.2.5 Different assessment standards of revenue-sharing joint ventures and
airline mergers .................................................................................................. 236

6.2.6 Airline alliances under Article 101(1) TFEU .......................................... 241

6.2.7 Assessment under Article 101(3) TFEU ................................................. 248

6.2.7.1 Efficiencies ....................................................................................... 251

6.2.7.2 Fair share to consumers .................................................................... 260

6.2.7.3 Indispensability ................................................................................ 262

6.2.7.4 No elimination of competition ......................................................... 263

7 Conclusion ............................................................................................................. 265

Bibliography ............................................................................................................. 274

Table of cases ........................................................................................................... 304

Table of international agreements ............................................................................ 318

Table of legislation ................................................................................................... 320

5
1 Introduction
1.1 Background of the research and the thesis question
In his 2005 book,1 Okeoghene Odudu makes reference to a speech delivered by
Richard Whish at a conference in June 19972 where he declared that ‘the debate
about what is meant by a restriction of competition under Article [101(1) TFEU] has
been with us for 30 years, but I do not believe we are any closer to an acceptable
solution to this central conundrum of competition law’.3 In 2012, Whish made the
same statement at the ‘New Frontiers of Antitrust’ conference in Paris; the only
difference being the number of years mentioned. Remarkably, after nearly 50 years
of jurisprudence, EU competition law dwells more than ever on the meaning of
‘restriction of competition’ and the definitions of ‘restriction by object’ and
‘restriction by effect’.
In order to be caught by the prohibition laid down in Article 101(1) of the Treaty on
the Functioning of the European Union (TFEU),4 an agreement must have ‘as [its]
object or effect the prevention, restriction or distortion of competition within the
[internal market]’.5 It is settled case law that the alternative nature of that
requirement, indicated by the conjunction ‘or’, leads, first, to the need to consider the
precise purpose of the agreement in the economic context in which it is to be applied.
‘Where, however, an analysis of the clauses of that agreement does not reveal the
effect on competition to be sufficiently deleterious, its consequences should then be
considered and for it to be caught by the prohibition it is necessary to find that those
factors are present which show that competition has in fact been prevented or
restricted or distorted to an appreciable extent’.6
In recent years the Court of Justice of the European Union (Court of Justice) has

1 O Odudu, The boundries of EC compeition law – the scope of Article 81 (OUP 2006) 97.
2 The Second Workshop on European Competition Law in Florence June 1997.
3 C-D Ehlermann and L Laudati (eds), European Competition Law Annual - no. 2 European
Competition Law Annual 1997 - Objectives of Competition Policy (Hart Publishing 1997) 461.
4 OJ [2008] C 115/47; With effect from 1 December 2009, Articles 81 and 82 of the EC Treaty
have become Articles 101 and, respectively, 102 of the TFEU. The two sets of provisions are in
substance identical. For the purposes of this thesis references to Articles 101 and 102 of the
TFEU should be understood as references to Articles 81 and 82 of the EC Treaty when
applicable.
5 Case 56/65 Société Technique Minière v Maschinenbau Ulm [1966] ECR 235, 249.
6 See eg case C-209/07 Competition Authority v Beef Industry Development Society Ltd [2008]
ECR I-8637 (Beef Industry) para 15.
6
handed down a series of judgments that have tried to shed more light on the issues of
restriction by object7 yet these problems remain prominent in the legal literature.8
Some commentators urge9 that under the ‘more economic approach’, EU
competition law should also change with regard to the meaning of object restrictions.
Further, the concept of restriction by object should be interpreted in a very narrow
sense, limited to truly hard-core restrictions without any redeeming virtues. The
more economic approach implies a strengthened role for economic analysis, thus a
shift in emphasis from the legalistic, form-based assessment to an effects-based
economic approach with an increased focus on consumer welfare. Accordingly, it is

7 Case C-551/03 P General Motors v Commission [2006] ECR I-3173; Beef Industry (n 6); case
C-8/08 T-Mobile Netherlands [2009] ECR I-4529; case C-501/06 P GlaxoSmithKline Services
Unlimited v Commission [2009] ECR I-9291; case C-439/09 Pierre Fabre Dermo-Cosmétique
SAS [2011] ECR not yet reported; cases C-403/08 and C-429/08 Football Association Premier
League [2011] ECR not yet reported.
8 O Odudu, ‘Interpreting Article 81(1): object as subjective intention’ (2001) 26 European Law
Review 60; O Odudu, ‘Interpreting Article 81(1): the object requirement revisited’ (2001) 26
European Law Review 379; A Jones, ‘Analysis of agreements under U.S. and EC antitrust law –
Convergence or divergence?’ (2006) 51 The Antitrust Bulletin 691 (Jones 2006); O Kolstad,
‘Object contra effect in Swedish and European competition law’ (2009)
Uppdragsforskningsrapport 2009:3, available at:
<www.kkv.se/upload/Filer/Trycksaker/Rapporter/uppdragsforskning/forsk_rap_2009-
3_object_contra_effect.pdf> accessed 31 December 2012; O Odudu, ‘Restriction of competition
by object – What’s the beef?’ (2009) 8(1) Competition Law Journal 11; V Cerulli Irelli, ‘Article
81(1) EC: some remarks on the notion of restriction of competition’ (2009) 20 European
Business Law Review 287; A Jones, ‘Left behind by modernisation? Restrictions by object
under Article 101(1)’ (2010) 6 European Competition Journal 649 (Jones 2010); A Jones, ‘The
journey towards an effects-based approach under Article 101 TFEU – the case of hardcore
restraints’ (2010) 55 The Antitrust Bulletin 783 (Jones 2010 Antitrust Bulletin); A Gerbrandy,
‘Case C-8/08, T-Mobile Netherlands BV, KPN Mobile NV, Orange Nederland NV, Vodafone
Libertel NV v. Raad van bestuur van de Nederlandse Mededingingsautoriteit, Judgment of the
Court of Justice (Third Chamber) of 4 June 2009’ (2010) 47 Common Market Law Review
1199; E Loozen, ‘The application of a more economic approach to restrictions by object: No
revolution after all (T-Mobile Netherlands (C-8/08))’ (2010) 31 European Competition Law
Review 146; A Andreangeli, ‘From Mobile Phones to Cattle: How the Court of Justice is
Reframing the Approach to Article 101 (Formerly 81 EC Treaty) of the EU Treaty’ (2011) 34
World Competition 215; S King, ‘The object box: law, policy or myth?’ (2011) 7 European
Competition Journal 269; L Kjølbye, ‘Escaping effects analysis: the Commission’s new
approach to restrictions by object’ (2011) CPI Antitrust Journal 2 (Kjølbye 2011); D Bailey,
‘Restrictions of competition by object under Article 101 TFEU’ (2012) 49 Common Market Law
Review 559 (Bailey 2012); MR Mahtani, ‘Thinking outside the object box: an EU and UK
perspective’ (2012) 8 European Competition Journal 1.
9 See, for example, Jones 2010 (n 8); Jones 2010 Antitrust Bulletin (n 8); Jones 2006 (n 8);
Nazzini 2006 (n 8); Kjølbye 2011 (n 8); AP Reindl, ‘Resale Price Maintenance and Article 101:
developing a more sensible analytical approach’ (2011) 33 Fordham International Law Journal
1300; D Gerard, ‘Effect-based enforcement of Article 101 TFEU: the “object paradox”’ (Kluwer
Competition Law Blog, 17 February 2012) available at:
<http://kluwercompetitionlawblog.com/2012/02/17/effects-based-enforcement-of-article-101-
tfeu-the-%E2%80%9Cobject-paradox%E2%80%9D/> accessed 31 December 2012; D Gerard,
‘The effects-based approach under Article 101 TFEU and its paradoxes: modernisation at war
with itself?’ (Ten years of the effects-based approach in EU competition law, Brussels, 27-28
October 2011); H Zenger, ‘Theories of harm: Conception, reliability and selection’ (Ten years of
the effects-based approach in EU competition law, Brussels, 27-28 October 2011).
7
argued that EU competition law should move away from the extensive use and wide
interpretation of restriction by object and rely more on the insights provided by
current economic thinking and effect analysis through restrictions by effect. This
should enhance the efficiency of the European enforcement regime and decrease its
error costs.
However, in an era where Regulation 1/200310 introduced a system of legal
exception, self-assessment and the decentralised application of Article 101 TFEU in
its entirety, one might also argue that the legal distinctions of restriction by object or
effect and the separate roles of Articles 101(1) and 101(3) TFEU have lost much of
their significance. Undertakings are, or at least should be, well aware of the cartel
prohibition due to its straightforward nature; and should know that this is the main
priority of all competition authorities. As regards other relationships, eg horizontal
cooperations, undertakings are indifferent to the legal qualification of their conduct;
all they care about is the antitrust risk it represents and how this can be handled
swiftly. Nevertheless, these seemingly theoretical questions can be decisive from an
enforcement efficiency point of view due to the allocation of the burden of proof in
competition cases and the bifurcated nature of Article 101 TFEU. Under Article 2 of
Regulation 1/2003, the burden of proving an infringement of Article 101(1) TFEU is
on the party or authority alleging the infringement, while the other side must prove
the benefit of Article 101(3) TFEU if it wants to argue the inapplicability of the
general prohibition of Article 101(1) TFEU.
In theory, decision-makers can commit two types of error (administrative
inefficiency) when examining the conduct of market participants. Firstly, they can
prohibit behaviour that is pro-competitive and beneficial for consumers. This is
known as a ‘false positive’, or ‘type I’ error (over-enforcement). Secondly, they can
erroneously permit behaviour that produces harmful effects on the market, which is
called a ‘false negative’ or ‘type II’ error (under-enforcement). Each jurisdiction tries
to minimise the possibility of false positives or false negatives. As Frank
Easterbrook puts it: ‘the legal system should be designed to minimize the total costs
of (1) anticompetitive practices that escape condemnation; (2) competitive practices

10 Council Regulation (EC) 1/2003 of 16 December 2002 on the implementation of the rules on
competition laid down in Articles 81 and 82 of the Treaty [2003] OJ L1/1.
8