On 8 February 2011, the European Commission decided to initiate two separate antitrust investigations with a view to ascertaining whether a particular form of codeshare agreement entered into by two groups of airlines could infringe EU antitrust laws.
The first investigation concerns a codeshare agreement on routes between Belgium and Portugal implemented by Brussels Airlines and Transportes Aéreos Portugueses S.A (TAP Portugal). The second investigation relates to an agreement with similar features entered into between Deutsche Lufthansa and Turkish Airlines on routes between Germany and Turkey.
In both investigations, the Commission will assess whether the particular agreements entered into by the relevant airlines infringe Article 101 of the Treaty on the Functioning of the European Union (TFEU), which prohibits anti-competitive agreements and concerted practices, and, if so, whether such agreements can be exempted under Article 101(3) TFEU.
Codeshare agreements are a common form of cooperation between airlines. What was originally aimed at a mere sharing of the airlines’ designator codes has slowly become more sophisticated, integrating an increasing number of additional features. Interestingly, these two investigations will focus on a type of codeshare agreement which, from an antitrust perspective, is most likely to give rise to concerns because of the degree of integration and cooperation between the parties.
Assessment of the agreements under antitrust rules
As with any antitrust investigation, the Commission is likely to undertake a legal and economic analysis of the restrictive effects of the arrangements on the relevant markets (here the routes covered by the codeshare agreements) and will consider whether the potentially redeeming benefits resulting from the arrangements outweigh their anti-competitive effects.
The relevant markets
As in most air transport cases, the Commission will probably ascertain the relevant markets by reference to the “point of origin/point of destination” system. In the Deutsche Lufthansa/Turkish Airline investigation the segments covered by the agreement are Munich - Istanbul and Frankfurt - Istanbul. The relevant segment in the investigation concerning TAP Portugal and Brussels Airlines is Brussels - Lisbon. For many passengers, the relevant markets will therefore be the segments covered by the agreements. However, passengers flying on the codeshared routes may well continue their travel by transferring to another flight and other markets may therefore be affected.
Restrictive effects of the arrangements
The Commission will most likely focus on three characteristics of the codeshare agreements, which, if combined together as is the case here, are most likely to raise antitrust concerns.
The first point is the fact that the airlines both operate on the relevant segments and are therefore actual competitors. Cooperation among competing airlines is subject to close scrutiny, in particular with regard to the degree to which they remain independent in terms of scheduling, pricing and determining capacity.
In addition, the segments under investigation link the airlines’ respective hubs. These routes are particularly important for airlines, as they feed traffic to the rest of their networks. The competitive dynamics on these routes are likely to influence competition in other parts of the airline networks.
Second, the codeshare agreements are “free flow”, which means that each party has direct and real-time access to the other carrier’s seat inventory. Antitrust authorities usually consider this form of codeshare agreement as lessening the incentive for companies to compete against each other. For example, each company has the opportunity to monitor through the booking reservation system information on capacity utilisation of the other carrier, potentially favouring tacit collusion between the companies to allocate capacity amongst them.
In addition, the Commission will also take into account in its assessment other factors such as the market power of the parties in the relevant markets. In the case of the TAP Portugal/Brussels Airlines investigation, the parties are the only airlines operating on the Brussels - Lisbon segment, leaving them subject to limited if not complete absence of competitive constraint from other airlines on this segment.
It is therefore not surprising that the Commission has concerns that this form of parallel, free-flow, hub-to-hub codeshare agreement may distort competition, leading to higher prices and less service quality for customers.
However, if the airlines can persuade the Commission that the codeshare agreements bring about substantial quantitative and qualitative efficiencies and award a fair share of the resulting benefit to the flight passengers, then the agreements could be held to be pro-competitive. The parties would furthermore have to demonstrate that these benefits could not have been obtained by less restrictive alternatives and that competition is not eliminated.
There is no doubt this will be a challenge in relation to non-transferring passengers: providing evidence that a codeshare agreement concluded between direct competitors on a route operated solely by them can lead to pro-competitive effects is not an easy task. Airlines have been successful in the past in demonstrating benefits where traffic volumes were low, or where one of the airlines was a new entrant. However, the most likely arguments for the routes under review relate to the airlines’ respective networks. They are all members of Star Alliance, and their codeshare agreements are useful tools to generate traffic for the rest of their respective networks. There may be significant benefits on the other, multi-segment, markets, where passengers may obtain better prices, easier booking, and seamless transfer. The question will be whether parties could have brought these benefits to their passengers without agreeing to mutual, free flow codeshare agreements on these hub-to-hub routes.
Marc Waha is a partner in the antitrust, competition and regulatory team, Norton Rose Hong Kong and Clémence Perrin is a consultant in the antitrust, competition and regulatory team, Norton Rose LLP, Brussels.