Competition impact of airline code-share …

1 Final ReportJanuary 2007 Competition impactof airline code -share agreementsPrepared forEuropean CommissionDirectorate General for CompetitionUnit D-2 Transport B-1049 BrusselsBelgiumPrepared bySteer Davies GleaveBeaumont & Son Aviation at Clyde & CoLewis Scard ConsultingCompetition I mpac t of airline code -Share Agreements Competition impact OF airline code -SHARE AGREEMENTS Final Report January 2007 Prepared for: Prepared by: european commission DG Competit io n St eer Davies Gleave 28-32 Upper Ground London SE1 9PD +44 (0)20 7919 8500 om Competition I mpac t of airline code -Share Agreements Competition I mpac t of airline code -Share Agreements P:\projects\7000s\7016\Work\10 Draft Reports\Fi nal Report\Main Report\Final report oc Content s Contents Page 1. INTRODUCTION 1 Background 1 Objectives of the study 1 Content of the report 2 2.

2 APPROACH AND METHODOLOGY 3 Stakeholder interv ie ws 3 Desktop data research and analysis 3 Development of the Competition assessment framework 5 3. DEFINITION AND FEATURES OF code shares 7 Introd uction 7 Definition and basic types of code -sharing 7 Motivation for code -sharing 8 Basic provisions of code -sh are agr ee ments 9 Pr ici ng, revenue allocation and commission payments 12 Frequent Flyer Programme (FFP) participation agreements 18 Implications for Competition assessment 18 4. REVIEW OF CASE LAW AND PREVIOUS STUDIE S 21 Relevant case law and decisions within the EU 21 Approach taken by the US authorities 21 Review of previous studies 22 5. SUMMARY OF STAKEHOLDER INTERVIEWS 27 Introd uction 27 Summary of Responses to Questions by code -Sharing airlines 28 Summary of responses by other organisations 33 6. ANALYSIS OF code shares IN THE E UROPEAN UNION 35 Summary of code -sh ar e activity by EU carriers 35 Inventory of code -share agreements 39 Distribution o f code -share agreements by type 40 7.

3 QUANTITATIVE ANALYSI S AND CASE STUDIES 45 Overview 45 Fares and capacity analysis 45 Case studies 54 Conclusions 59 Competition I mpact o f airline code -Share Agreements P: \projects\7000s\7016\Work\10 Draft Reports\Final Report\Main Report\Final report 2 8. DEVELOPMENT OF Competition ASSESSMENT FRAMEWORK 61 Introduction 61 Characteristi cs of code -sh are agreements and relat ed airline markets 62 Elements of commission investigation 63 Final assessment 67 9. APPLICATION OF THE FRAMEWORK 69 Introduction 69 Air lines motivation for code - shares 70 Features specific to the different geographical variants 71 Ass ociated and deeper inter- airline agreement s 76 10. CONCLUSIONS 79 TABLES Table Summary o f code -share activity for EU-domiciled airlines Table code -share routes and seats operated by EU-domiciled carriers Table code -share routes and seats marketed by EU-domiciled carriers Table Examples of code -sh are routes operated, by category Table Sample of routes Table Comparison of trend in seats provided Table Fares sample Table Long ha ul fares (sample averages) Table Intra- european fares (sample averages) Table Case studies - historical f ares trends: Business class fares Table Case studies - historical f ares trends: Full economy class fares Table Case studies - historica l f ares trends: Cheapest available fares Table Case Studies connectiv ity of code -share and comparator routes Competition I mpac t of airline code -Share Agreements P.

4 \projects\7000s\7016\Work\10 Draft Reports\Fi nal Report\Main Report\Final report oc Content s FIGURES Figure Key features of code -share and r elated agreements 19 Figure Cumulative di stribution of se at s op erated by EU-domiciled carriers 37 Figure Cumulative distribution of flight operations marketed by EU-domiciled carri ers 39 Figure Capacity trend where code -share introduced 2003-5 48 Figure Capacity trend on routes with no new code -share agreement 48 Figure Relationship between competit ion and fare levels on each route 52 Fig ure Relationship between market power and fares charged by each carri er 54 Figure Development of Competition assessment framework 61 Figure Schemat ic of applicatio n of Competition assessment framework 70 APPENDICES A GLOSSARY OF TERMS B EXAMPLES OF code -SHARE FEATURES AND PRACTICE C LITERATURE LIST D IN VENTORY OF EU airlines code -SHARE ROUTES Competition I mpac t of airline code -Share Agreements P:\projects\7000s\7016\Work\10 Draft Reports\Fi nal Report\Main Report \Final report oc 1 1.

5 INTRODUCTION Background code -sharing amongst air carriers became popular within the United States following the deregulation of the domestic air travel market at the end of the 1970s, from there spreading into international mar kets. In Europe, code -sharing similarly became more popular following EU deregulation in 1993. The scale and importance of code -sharing is demonstrated by the fact that in the latest annual airline alliance survey of the largest 200 airlines pu bl ished by airline Business magazine (in September 2006), virtually all of the over 100 airlines that responded had code - shares , usually with se ve ral partner airlines . Although most airline alliance partners code -share on fl ights (whenever permitted by regula tors), not all code -share agree men ts are between al liance partners. While code -share agreements therefo re represent a lower level of co-operation than full membership of the airline alliances, they nevertheless involve significant levels of co-or dinat ion between the airlines involved.

6 In addition to the use of an airl ine s code on a flight operated by a different airline , code -share agreements al ways involve an underpinning set of operational and commercial agreements concerning at least access to , and prices for, seat in ventory, and in many cases additional features such as change s to separate agreements allocatin g revenue and shared frequent flyer pr ogrammes. Objectives of the stu dy With the continuing growth in air li ne code -share agreements, as liberalisati on and conso lidation in the industry continues (and with the added Competition of low cost carriers spurring network carriers towards closer co-operation in response), the commission has identified the need to enhance its understanding and experien ce of the mechanisms and implications of co de -share agreements, in order better to fulfil its ro le of ensuring fair Competition within EU airl ine markets.

7 Although the commission has significant experience in consideration of the competit ion impacts of airline alliances, its knowledge of the impact of code -share agreements per se is less extensive, hence the particu lar focus of this study. The commission re quired two major areas of work relati ng to this task. The first was to provide a typology of airline code - shares , listing the various types of agreement (and circumstances in which they obtain) and their associated features, in particular access to capacity and financial settl ement arrangements. The benefits to airlines , and the association of code - shares with other forms of cooperation also needed to be considered. Finally, the commission require d a full inventory of existing code -share ag reements involving EU carriers. The second major area of work was the development of a conceptual framework for the assessment of the competitive effec ts of code -share agreements.

8 The framework was to t ake into account the different types of code - shares already identified, a nd in particular, the various co ntractual features found in different agreements. The fr amework was to address the extent to which code - shares affect market entry into the markets i n which they operate, and to what extent they impact other markets. The Competition I mpact o f airline code -Share Agreements P: \projects\7000s\7016\Work\10 Draft Reports\Final Report\Main Report\Final report 2 welfare impacts of code -share agreements were to be assessed, in particular the effects on prices paid by consumers. Content of the report Our approach to the Study included a combination of desk research, interviews with industry stakeholders, workshops and analysis, which is described in Chapter 2. The definition, and key features , of code -share agreements in the industry are de scribed in Chapter 3.

9 Chapter 4 contai ns a review of case law and previous studies, while Chapter 5 presents a summary of stakeholder views. Chapter 6 contains a summary of the code -share agreements involving EU-domiciled airlines , while Chapter 7 contains analysis of fares and capacity data for selected pairs of comparable routes, in each case where one is a code -share and the other not: a subset of these has been used as the case studies giving deeper insight into particular agreements. Chapter 8 ou tlines the Competition assessment framework and Chapter 9 gives examples of the practic al application of the framework. Some conclusions from the study are d is cussed in Chapter 10 . A glossary is included in Appendix A. Theoretical examples of key code -share agreement features, and of their practical application, are given in Append ix B. Appendix C contains a bibliography of the literature reviewed.

10 Appendix D contains an inventory of code -share routes operated, or marketed by EU-domiciled ai rl ines. Competition I mpac t of airline code -Share Agreements P:\projects\7000s\7016\Work\10 Draft Reports\Fi nal Report\Main Report \Final report oc 3 2. APPROACH AND METHODOLOGY In order to deliver the various outputs of the study (including the typology and inventory of code -share ag reements and the framework for Competition assessment), it has been necess ary to undertake a number of parallel workstreams. These include an initial internal worksho p, stakeholder interviews, desktop research (both qualitative and quantitative), and detailed da ta analysis. Stakeholder interviews airlines interviewed / planned for interview Interviews were held (either i n person or by teleconference) with 14 airlines that code -share. In all cases , a high degree of cooperation was given, and in a number of cases, the airlines have provided additi onal information detailing the agreements they have in place.