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Commission approves alliance between BA and Iberia

The European Commission has cleared an alliance between British Airways, Iberia and GB Airways, a franchisee of BA….

The European Commission has cleared an alliance between British Airways, Iberia and GB Airways, a franchisee of BA. The Commission initially had concerns that the alliance would reduce consumer choice and increase prices on a number of routes where the two partners have a strong position. But those concerns have been successfully resolved and the Commission can now grant antitrust immunity for the usual period of six years set in a 1987 Regulation, which defines the application of competition rules to the airline sector.



Commenting on the case, Competition Commissioner Mario Monti said: This positive outcome shows that the application of competition rules does not stand in the way of the consolidation of the airline sector or of alliance agreements. The alliance will allow BA and Iberia to offer a greater choice of destinations to air passengers while, at the same, retaining sufficient competition between London and Spain to the benefit of business travellers and holidaymakers alike.



On 19 July 2002, British Airways, Iberia and GB Airways notified to the Commission a number of co-operation agreements and applied for an exemption under Article 81 (3) of the Treaty(1). The agreement will enable them to co-operate across their respective networks in terms of pricing, scheduling and capacity.



The analysis showed that the parties` networks are largely complementary. Iberia customers will enjoy a wider range of routes to the Middle and Far East, while the passengers of BA will have greater choice when flying to Latin America.



However, the Commission also identified a number of routes between London and Spain where the combination of the forces of the Spanish flag carrier, BA and its franchisee GB Airways would control between around 50 and 100 pct of the market. Such a situation, if not properly addressed, would most likely give rise to higher prices since market entry is rendered difficult by limited landing and take off slots at Europe`s airports.



The routes where the Commission identified concerns link London, on the one hand, to Barcelona, Madrid, Bilbao, Seville and Valencia, on the other hand.



Slot surrender is the solution



The alliance partners currently compete on the two main routes between the two countries, i.e. London-Madrid and London-Barcelona, where together they operate a total of 15 and 11 flights a day respectively. There are three other competitors to Madrid and two to Barcelona. The Commission`s market review asserted that a competitor needs to offer at least four flights a day out of Heathrow or Gatwick to be able to compete for business and leisure passengers. While EasyJet, one of the competitors, provides such competition between Gatwick and Barcelona, no other competitor provides the same offer on the Madrid route.



In order to solve the Commission`s competition concerns, the parties undertook to release enough landing and take-off slots at London Gatwick and Madrid for one competitor to be able to operate four daily services.



London-Bilbao is another route where problems were identified since BA and Iberia were until very recently the only operators with one daily flight each: one from Heathrow and another from Gatwick. Easyjet started one daily service out of Gatwick at the beginning of the winter season. While welcoming this development, , the Commission took the position that one additional daily service would be needed to ensure that business passengers have sufficient competitive alternatives on this routeThe parties remedied this by committing themselves to provide slots for another daily service on the route Gatwick – Bilbao.



Iberia and GB Airways are also the only two airlines to operate on the London-Seville and London-Valencia routes. Whilst there are no capacity constraints at the two Spanish airports nor at London`s airports of Stansted and Luton, the same cannot be said for Heathrow and Gatwick, which are the preferred gateways for business passengers. Since the routes are predominantly used by leisure passengers and the number of business passengers might not be sufficient for two independent competitors, the Commission accepted the parties` commitment to surrender slots for one daily service out of Gatwick on each route, if and when the number of business passengers increases to a certain level.



Background



The agreement was notified under regulation 3975/87 which applies competition rules to the European aviation sector. The Regulation foresees that if the Commission does not object within 90 days of the publication, in the Official Journal, of a summary of the agreements, the latter are automatically exempted for a maximum period of six years. The summary was published on 12 September 2003(2) and the 90-day period would have expired on 10 December 2003. The three airlines have committed themselves to release take-off and landing slots on the above mentioned routes. The text of these commitments will be published on the Commission`s web-site.



The number of international airline alliances and similar forms of co-operation agreements has significantly increased in recent years. This process of consolidation and economic repositioning in the air transport sector is likely to accelerate as a consequence of the Court`s ruling in the open skies cases.



The Commission takes a broadly positive approach to airline alliances and mergers. Alliances can bring benefits to consumers and the economy as a whole from cost savings as well as from service improvements resulting from combined networks. However, there is a risk that these efficiency gains are achieved at the expense of the elimination of competition in certain markets. Such problems arise particularly on the routes between the hubs of alliance partners, where the partners may be the only competitors and where significant market entry barriers exist. When this happens the Commission tries to ensure continued competition by removing entry barriers.



The BA, Iberia alliance is one of the latest to be examined by the Commission. Others include Lufthansa/Austrian Airlines and BA/SN Brussels Airline. The Commission is also still looking into the Air France/Alitalia and is hoping to conclude soon according to the same standards.



(1) Notification of a case under Art 81(3) does not have a standstill effect. Companies can go ahead with their co-operation agreements if they feel reasonably confident that they would not be significantly challenged



(2) OJ C217 of 12 September 2003, p. 2-6.

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