The past two years have seen many established names in the aviation industry blemished by convictions for cartel activities around the world: in the United States alone, fifteen airlines were fined in excess of US$ 1.5 billion by the Department of Justice for price-fixing. Competition authorities in other American countries but also in Europe, Asia-Pacific and Africa are reported to be investigating similar conduct. Many carriers currently face private antitrust (competition) claims for millions of US dollars in damages in the UK , Canada, the United States and Australia. In several countries individuals can also face personal sanctions such as prison sentences and fines for competition law infringements - for example, a Qantas executive was recently sentenced to six months imprisonment in the US and four British Airways executives are facing a UK criminal trial early next year with the possibility of up to five years’ imprisonment if found guilty.
These cases show that corporate competition compliance policies limited to general compliance statements and good intentions are not enough to protect an airline from antitrust liability. Effective corporate compliance requires a compliance culture at all levels of the organisation and specific commercial and legal management processes tailored to a carrier’s business. However, complying with competition and antitrust regulation remains a particular challenge for companies with operations in many different jurisdictions, at a time where more than 100 countries have adopted competition law rules.
This article begins a two-part series that explores how airlines can use competition compliance solutions to their commercial benefit. In this first part we look at the main differences between compliance policies for low cost carriers and traditional carriers, before outlining the main features of a compliance policy for the latter. In the next edition we will consider in more detail the features of a compliance policy for a low cost carrier.
Compliance policies generally
Expectations and benefits
Compliance policies typically serve two primary functions: to prevent or minimise the risk of competition law infringements in the future, and to detect any current or historic infringements to allow remedial action to be taken. While not prescriptive, competition authorities have provided some general guidance on what they expect to find in a competition compliance policy:
- clearly established compliance standards;
- an effective governance and enforcement structure with ultimate responsibility resting on senior executives;
- effective communication of standards and procedures and regular staff training;
- appropriate disciplinary mechanisms in cases of breach; and
- appropriate remedial action when a violation is detected to prevent re-occurrence.
Adoption of a compliance policy that fits these requirements will however be of little benefit if its implementation is ineffective. If the policy allows the early detection of possible competition law infringements, which are reported to relevant competition authorities as part of leniency or amnesty programmes, the company (and its employees and directors) may benefit from the mitigation or avoidance of any sanction. However, if the policy is ineffective and does not prevent competition law infringements, regulators will rarely mitigate the penalty imposed on account of the company having adopted a compliance policy. On the contrary, competition authorities and courts sometimes rely on the existence of a compliance policy to show that the individuals concerned knew or should have known that they were committing a competition law infringement. However, this should not discourage a company from implementing a compliance policy as if a company is found to have infringed competition law and does not have a compliance policy in place, it will often be forced to adopt one subject to judicial or regulatory supervision, so making administration of the policy more costly.
There is therefore very little choice but to commit the necessary resources to introduce a competition compliance policy and to ensure that it is effective.
A competition compliance policy is a business management tool: it must fit a company’s business and governance culture
Every business is different. The success of a compliance policy depends on how well it is adjusted to a company’s culture, operations and business environment. The latter is of some significance in the airline industry: the end of antitrust exemptions for the traditional IATA tariff setting mechanisms, together with the increase in competition regulatory oversight of the industry, have prompted airlines to adopt comprehensive compliance policies. While the contents and structure of an airline’s compliance policy will vary, there are four pillars that are common: compliance standards; scope and governance; training and communication; and audit.
Competition compliance tools are not significantly different from other corporate management policies. A competition compliance policy can be modelled on other policies dealing with delegation of powers which establish responsibility for signing contracts or for authorising expenses. It is well understood that only a limited number of staff members should have the authority to commit the company’s financial resources. Similarly, a competition compliance policy is based on the premise that most employees should not be involved in discussing competitively sensitive matters with third parties. Only a limited number of personnel with the appropriate training and knowledge should be entrusted with the management of such sensitive matters.
Low cost carriers and traditional carriers have different business models
In our experience the different business models of low cost and traditional “hub and spoke” carriers require a different approach to competition compliance. The following table illustrates the main differences.
| ||Traditional carriers||Low cost carriers|
|Interline relationships ||Typically rely on IATA membership and interline agreements to generate part of their revenues.|
Compliance policy needs to address negotiation of interline agreements and information exchanges with interline partners.
|Typically not engaged in interline relationships|
Compliance policy can be more strict about contacts with competing airlines as there is less justification for information exchanges in the absence of an interline business relationship.
|Joint ventures and codeshares ||Typically enter into joint ventures for a great variety of purposes: distribution (e.g. GDS ), maintenance, catering, joint operation of routes, joint purchasing, etc. Also frequently conclude codeshare agreements.|
Compliance programme should provide for adequate information barriers in competitor contacts, in order to guard against exchange of sensitive business information.
|Less likely to form joint ventures or codeshares with competitors, which reduces the scope for legitimate contacts with competitors.|
Compliance policy may therefore be very strict on competitor interaction.
|Cargo activities ||Freight operation due to “hub and spoke” model.|
Compliance policy should address cargo activities, reflecting the differences between cargo and passenger service (e.g. markets are typically broadly defined on the cargo side).
|Limited freight operations.|
|Sales and distribution ||Rely both on their direct sales platform and on third parties (agents, consolidators, general sales agents, tour operators, and other airlines) to sell their seat inventory or freight capacity.|
Compliance policy should consider both vertical and horizontal relationshipss, as well as the importance of not using third parties as conduits for communication with competitors.
|Mostly use direct sales model, but act as distributors for other travel-related products.|
Compliance policy should focus on the airline’s position as a seller and as a distributor.
|Dominance issues ||Core activity is typically the transport service, with ancillary activities (ground handling, maintenance, tour operator services, catering, etc) meant to bring additional revenues and achieve economies of scope.|
Compliance policy mainly concerns conduct in (i) the sale of passenger tickets in a given geographical area, (ii) the air transport service between an origin and destination, and (iii) purchasing markets at certain airports.
|Often derive substantial revenues from the sale of other services either during the trip or at the time of the booking.|
Compliance policy should not only cover the three traditional air transport services ((i) the sale of passenger tickets in a given geographical area, (ii) the air transport service between an origin and destination, and (iii) purchasing markets at certain airports), but also other services.
|Multi-jurisdictional dimension ||Typically derive the bulk of their profits from long haul travel and have sales or representative offices in destinations where they operate.|
Compliance policy needs to be adjusted to jurisdiction-specific aspects of competition law and must account for the minimal management structure of small operations in many countries.
|Typically operate short to medium haul flights, with centralised management functions and very limited or no market-facing operations at the various destinations.|
Compliance policy likely to consider competition rules of only one or a few jurisdictions, with governance structures focused on headquarters-based staff.
|State Aid (in Europe) ||Normally do not face state aid issues as part of their regular business operations, apart from the operation of specific routes pursuant to public service obligations. |
State aid issues may arise for national carriers in difficulty, while EU anti-subsidy rules may be relevant for non-EU carriers.
|Often depend on advantages granted by public or semi-public authorities to operate from a given airport.|
Compliance policy needs to address state aid issues in many aspects of their business development.
|Using competition law to combat anti-competitive practices ||As incumbent operator in most of its activities, less likely to be target of exclusionary behaviour.|
However, recent investigations highlight how easily anti-competitive practices can arise.
Compliance policies need to focus on management of this risk and allow rapid implementation of remedial strategies where appropriate.
|Frequently face situations as a new entrant where competition law might be used to attack behaviour of incumbent operator or airport.|
Compliance policy needs to focus on making personnel aware of these opportunities.
A compliance policy for the “hub and spoke” model
Having regard to their “hub and spoke” business model, the following outlines the main issues relevant to the design of an effective competition law compliance programme for traditional carriers.
There is no reason to depart from the traditional management model of delegation of authority: there should be a general set of behavioural standards applicable to everyone with commercial responsibility in the company, with specific guidelines that create safe harbours for a limited number of staff members.
General competition law compliance policy
The general policy will contain a list of prohibitions applicable to all staff with some limited safe harbours for interline relationships and some general recommended best practices.
Specific policies and safe harbours
The contents of specific policies will depend on a variety of factors:
- Is the airline part of an alliance? If yes, provide for alliance-specific rules applicable to the airline’s alliance team.
- Does the airline benefit from antitrust immunity or a similar exemption for any part of its business? If yes, provide for specific rules applicable to relevant personnel.
- Is the airline active in jurisdictions with different approaches to competition law enforcement? If yes, consider country-specific variations to the policy.
- Does the airline operate from congested airports? If yes, consider specific rules for staff in charge of slot management.
- Is the airline involved in joint ventures? If yes, consider whether appropriate safeguards and information barriers must be part of the compliance policy.
The need for specific policies will depend on answers to the above questions and on business needs. Specific policies may include some of the following examples.
Relationship with legal requirements
The main purpose of the policy is to manage competition law risk. Accordingly, its content will be based upon the applicable legislation, but more importantly will reflect best practices adopted by the company to deliver business solutions that are both commercially sound and legally compliant.
Scope and governance mechanisms
There is little argument that flight deck and cabin crew as well as junior check-in and airport staff need not be subject to an airline’s competition compliance policy. Most, if not all, other members of staff above a certain level of seniority will fall within the scope of the general compliance policy. Specific guidelines with safe harbours will apply to senior management, certain cargo staff, certain passenger revenue management staff, individuals in charge of aeropolitical affairs, procurement staff, etc. There may also be a need for different compliance procedures and policies at outports and at headquarters, depending on the scope of operations at each airport.
In terms of governance, the airline’s Chief Compliance Officer should be entrusted with organising internal functions to assist staff in applying the competition compliance policy and promoting a compliance culture within the organisation. The policy should be endorsed at Board level and benefit from strong support from senior management. It should also clearly identify what staff can do alone and where they need to involve legal or compliance staff.
A delicate part of the policy will be the management of disciplinary action. This is an essential part of an effective competition compliance policy. Breaches should not remain unsanctioned. As airline staff will be subject to different sets of employment laws and regulations in the various countries where the airline operates, it is often best to refer to existing disciplinary procedures as opposed to creating ad hoc processes to sanction breaches of the competition compliance policy.
Training and communication
Proper internal communication is vital to ensure that a compliance policy is effective.
The first step in ensuring effective communication is to produce content that airline staff can relate to. We would suggest the following steps in designing an effective programme:
- favour business language with clear examples rather than lengthy descriptions of the legal framework;
- provide management solutions for the reader, such as when to end a discussion, when to put a negotiation on hold, who to contact for assistance, etc;
- inform staff personally via email from the airline’s CEO or the Chief Compliance Officer or otherwise of any new major compliance policies;
- include antitrust compliance training in staff induction processes; and
- organise regular refresher training.
The audit of corporate compliance procedures can be a complex affair. The work of a company’s financial audit team will typically involve the review of some typical transactions, of whether internal control mechanisms and accounting procedures are complied with, and of whether reporting systems are effectively used. Auditing a competition compliance policy will involve similar steps. However, checking whether a department or a port has complied with internal reporting rules and made the appropriate competition compliance checks will not always lead to a true and fair view of the state of compliance within an organisation.
In this respect, competition compliance is similar to anti-corruption rules: it is the undocumented part of an airline’s commercial life which is likely to raise the most risks. Auditing the effectiveness of a competition compliance policy therefore often requires the use of techniques that are not part of the traditional audit repertoire, such as surprise audit visits, review of a team’s full electronic and hard copy archives and detailed staff interviews.
The second part of this article in the next edition of LegalFlyer will outline the main features of a compliance policy for low cost carriers.
Marc Waha is a partner in the Competition department, Norton Rose Hong Kong.