Notice pursuant to Article 5 of Council Regulation (EEC) No 3975/87 of 14 December 1987(1) concerning case COMP/D2/38.479

British Airways/Iberia/GB Airways

(2003/C 217/02)

(Text with EEA relevance)

THE APPLICATION LODGED BY BRITISH AIRWAYS, IBERIA AND GB AIRWAYS

1. By letter of 19 July 2002, British Airways ("BA"), Iberia and GB Airways(2) notified to the Commission close commercial cooperation arrangements envisaged by the parties, applying for exemption under Article 5 of Regulation (EEC) No 3975/87.

MAIN CONTENT OF THE AGREEMENTS

2. On 19 July 2002 BA and Iberia signed an Alliance Agreement, which forms the basis for their intended cooperation and which became effective immediately. The detailed terms and conditions of the cooperation will be laid down in further implementing agreements. In addition, BA and Iberia intend to sign a Tripartite Alliance Agreement with GB.

3. Through these arrangements the parties will coordinate and eventually integrate their commercial and marketing strategies, distribution methods and practices on a world-wide basis and in particular between the United Kingdom and Spain (and vice versa). The cooperation is intended to achieve the benefits usually associated with a merger. However, the parties will retain their separate corporate identities.

4. The envisaged commercial cooperation between the three parties comprises the extension of code-sharing services (in particular on routes between the United Kingdom and Spain and vice versa)(3); coordination of pricing and commission policy; common network planning; common approach towards cargo activities; revenue and profit sharing, both in the passenger and cargo sectors; exchange of data with regard to customer service performance and customer satisfaction; coordination in the control of their respective of inventory and yield management and any other joint or coordinated activities as may be agreed between the parties.

5. In addition BA and Iberia plan to cooperate in the following areas: development of frequent flyer programs (FFP), in particular for EU passengers; coordination of sales and marketing e.g. through the combination of retail outlets and joint advertising, while maintaining their individual brands; ground-handling; joint contracting with travel agencies, distributors, general sales agents and other organisations and individuals; harmonisation of service and product standards; joint purchasing initiatives and information technology.

6. According to the parties their fundamental goal is to improve their network service and overall efficiency in order to serve a wider range of destinations more effectively. The parties consider their networks as complementary, with BA having extensive schedules to the Middle and Far East and Iberia serving all major destinations in Latin America. The logic of their transaction is according to the parties therefore not to improve their position on United Kingdom-Spain point-to-point routes, although their capacities and frequencies on trunk routes are the indispensable requisite for the transaction.

ARGUMENTS INVOKED BY THE PARTIES IN SUPPORT OF THEIR APPLICATION

General

7. According to the parties the transaction does not raise competition concerns. The parties are said to fly only on a limited number of overlapping city-pair routes between the United Kingdom and Spain(4). These routes are according to the parties subject to strong competition. Apart from scheduled carriers also charter flights play an important role on routes between the United Kingdom and Spain. Moreover, the routes are according to the parties under competitive pressure of potential new entry.

8. In particular, the parties submit that the Commission's market analysis should take account of the following elements:

(a) Marginal substitution renders price increases unprofitable and is therefore the key to assessing competitive constraints. In other words, it is not necessary that competitors be able to compete effectively for all customers in a given market.

(b) There is strong competitive interaction between business and leisure passengers. Airlines can freely shift capacity between flexible and less flexible tariffs in response to demand. Business passengers can and do trade down to less-than-fully flexible fares. Moreover, business passengers use both traditional and no-frills carriers, which for European short-haul destinations constitute a viable and highly competitive alternative.

(c) All London airports from which services to the identified destinations in Spain are provided by the parties (that is, Heathrow, Gatwick, Stansted and Luton) are in the same relevant market, both for time-sensitive and for non-time sensitive passengers.

(d) From the Spanish side catchment area overlap between the airports of Valancia/Alicante and Seville/Jerez respectively should be taken into account.

(e) Charter flights play a very significant role on the United Kingdom-Spain routes, in particular on the London-Alicante and London-Malaga routes where they carry about half of all passengers, representing viable alternatives for both leisure and business passengers.

(f) Thin routes (according to CAA estimates routes with less than 250000 passengers per year), particularly if predominantly leisure oriented (business passengers volumes of less than 10000 pax/year), could a priori not have any appreciable effect and therefore do not warrant anti-trust scrutiny.

(g) New entry has occurred recently on the seven overlap routes between the United Kingdom and Spain and potential entry operates as a constant disciplinary constraint. With regard to barriers to entry, the parties accept that there are slot constraints at a limited number of Spanish and United Kingdom airports (and notably at LHR) but contend that slot availability is not a significant constraint on service on any of the overlap routes.

9. The parties have also identified a number of non-overlap routes, that is routes which were prior to the cooperation served by one of the parties. However, on none of these routes would any of the other parties have a real commercial interest to enter, either because these routes are too thin to bear more than one carrier or because these routes are typical holiday routes with the majority of traffic generated by charter carriers. Neither BA nor Iberia with their higher cost structures could profitably enter these holiday routes. Therefore, in the parties view there is no substantial risk of a potential competition being restricted on any of these routes.

Reasons for the application for exemption

10. According to the parties their envisaged cooperation arrangements fulfil the four cumulative conditions for an exemption under Article 5 of Regulation (EEC) No 3975/87 laying down the conditions for the application of Article 81(3) of the EC Treaty.

Contribution to improving production or distribution, and/or promoting technical or economic progress

11. The parties argue that through the combination of complementary networks important efficiencies and enhanced services for their customers will be achieved. In particular, the parties expect that their cooperation will improve connectivity at relevant hubs through the efficient use of high frequency connecting flights to provide a better range of services to points not currently available from all points of origin, lead to new on-line connections, better support and coverage on thin routes and cost savings.

Fair share of the benefits accruing to consumers

12. The parties claim that a proper share of the above benefits accrues to consumers. The parties expect to achieve customer benefits in particular by improving quality and availability of services (e.g. better flight schedules and timing, new on-line connections) and passing on cost savings to customers, resulting in lower fares.

The restrictive provisions of the agreement are indispensable to the attainment of the objectives of the agreement

13. The parties are of the view that the agreement, laying down a high-frequency and closely coordinated service, is inconceivable to realise fully the benefits of their complementary networks in the absence of the envisaged close cooperation.

No elimination of competition in respect of a substantial part of the goods or services concerned

14. According to the parties the proposed cooperation will not have an appreciable adverse impact on competition. The identified overlapping point-to-point routes are said to be all subject to intensive competition and some of them are furthermore considered as thin routes and principally leisure destinations. Also, the parties consider that there are very low barriers to entry on routes between the United Kingdom and Spain, slots readily being available both at London and Spain airports.

PROPOSED COMMITMENTS

15. Following the notification of their cooperation arrangements notified on 19 July 2002, the Commission services have been in discussions with the parties. As a result of these discussions, with a view to obtaining an exemption according to Article 81(3) of the EC Treaty pursuant to Article 5(3) of Regulation (EEC) 3975/87, the parties have submitted proposed commitments in order to remedy any competition concerns in particular with regard to point-to-point time sensitive passengers on the routes: London-Madrid, London-Bilbao, London-Valencia and London-Seville.

16. These commitments shall be binding on the parties, their subsidiaries, successors and assigns and the parties commit to cause subsidiaries, successors and assigns to comply with these commitments.

Commitments pertaining to slots

17. The commitments pertaining to slots relate to the following routes (the Routes):

- London-Heathrow/Gatwick-Madrid

- London-Heathrow/Gatwick-Bilbao

- London-Heathrow/Gatwick-Valencia

- London-Heathrow/Gatwick-Seville

18. The parties shall provide to an airline independent of the parties, wishing to commence or increase services on one or more of the Routes after the exemption becomes effective (the Competitor), slots as set out below (the Slot Conditions), subject to the provisions contained in these commitments:

- London-Heathrow/Gatwick-Madrid: up to a maximum of four daily slot pairs at London Gatwick and at Madrid Barajas for one single Competitor. The maximum of four daily slot pairs to be provided shall be reduced by the number of services already operated by such Competitor on this Route.

- London-Heathrow/Gatwick-Bilbao: a maximum one daily slot pair at London Gatwick.

- London-Heathrow/Gatwick-Valencia: a maximum one daily slot pair at London Gatwick, but only after an average of at least forty point-to-point passengers can be shown to be travelling daily one way between London Heathrow/Gatwick and Valencia at unrestricted fares (i.e., business and unrestricted economy) in any two consecutive IATA traffic seasons(5).

- London-Heathrow/Gatwick-Seville: a maximum one daily slot pair at London Gatwick, but only after an average of at least forty point-to-point passengers can be shown to be travelling daily one way between London-Heathrow/Gatwick and Seville at unrestricted fares in any two consecutive IATA traffic seasons.

19. If more than one Competitor applies for the slots on the Route(s), the slots shall be provided to the Competitor chosen by the parties subject to the Commission's approval. The Commission shall favour the Competitor that could viably operate the greatest number of services on the Route(s).

20. The parties shall answer any enquiry by the Competitor concerning the applicability of the Slot Conditions on London-Heathrow/Gatwick-Valencia or London-Heathrow/Gatwick-Seville by providing the Commission or, if appropriate an independent third party approved by the Commission, within two weeks from the date of the enquiry with all relevant internal data permitting the Commission to verify whether the Slot Conditions can be triggered on the Route(s) in question.

21. Slots obtained from the parties under these Conditions shall be used only to operate services on the Route for which the Competitor requests them.

22. The parties shall not be required to make a slot available to the Competitor for a Route insofar as this would result in the parties' operating less than 60 % of the frequencies or capacity on that Route at the time of the Competitor's request.

23. The Competitor shall make a clear written request to the parties concerning its intended service(s) on the Route(s) and required slots at least six weeks prior to the IATA slot conference for the traffic season in which the Competitor intends to commence service, the earliest such conference following the grant of the exemption, and for purposes of these commitments, being scheduled for June 2004.

24. The Competitor shall be eligible to receive or keep slots under the Slot Conditions only if it can demonstrate failure of all reasonable efforts to obtain slots for the Route(s) in question through the normal workings of the slot allocation procedure at the slot conference following the Competitor's written request, including the final allocation of slots by the coordinator following the Slot Return Date. The Slot Return Date shall be the deadline for returning unwanted slots, as defined in Appendix 2 of IATA's Worldwide Scheduling Guidelines (7th Edition, effective 1 December 2002).

25. The Competitor will not be deemed to have exhausted all reasonable efforts if slots were offered through the regular slot allocation procedure within 45 minutes of the times requested but not accepted by the Competitor and/or slots were offered through the regular slot allocation procedure more than 45 minutes from the times requested and the Competitor did not give the parties the opportunity to exchange those slots for slots within 45 minutes of the times requested.

26. The parties shall answer the Competitor's written request within two weeks after the final allocation of slots by the coordinator following the Slot Return Date. The parties shall make slots available within 45 minutes of the time requested by the Competitor at the slot conference, provided the parties hold slots within the relevant time period and the Competitor has complied with the above conditions and procedure in 23. to 25.

27. If the Competitor has obtained slots pursuant to the Slot Conditions for a particular IATA season and requests some or all of the slots at the same times for the following season, the parties shall make slots available as close as possible to the slot granted in the preceding season, and in any event within 45 minutes of, the time requested, provided the parties hold slots within the relevant time period and the Competitor has complied with the conditions and procedure in 23. to 25. above.

28. During the period between the parties' receipt of the written request and the end of the respective IATA scheduling period the Competitor shall maintain an "open book" policy for the respective airports. A slot obtained by the Competitor through the regular slot allocation procedure within 45 minutes of a slot made available by the parties shall count towards the total number of slots the Competitor is entitled to receive under the Slot Conditions.

29. If the Competitor has obtained slots pursuant to the Slot Conditions, but decides not to use some or all such slots, it shall inform the parties immediately and return the unused slots to the parties. If the Competitor has begun using slots obtained pursuant to the Slot Conditions, slots shall be deemed unused if the Competitor and its subsidiaries have not used such slots for at least 80 % of the scheduling season for which they had been allocated for the Route(s) in question, unless this non-use is justified on one of the grounds referred to in Article 10(5) of Council Regulation (EEC) No 95/93 or in any other regulation that amends or supersedes it.

30. If the Competitor returns to the parties some or all slots obtained pursuant to the Slot Conditions, the parties shall make such unused slots immediately available to another Competitor, which had applied for the slots for the season in which the slot return takes place in compliance with the conditions and procedure in 23. to 25. If this offer is not taken up within one month, the parties may use the unused slots or return them to the slot pool. This shall extinguish any obligation on the parties to make the unused slots available to another Competitor.

31. Should the Competitor notify the parties too late in a scheduling season for them to use the returned slots pursuant to Article 10(3) of Regulation (EEC) No 95/93 with immediate effect or after the deadline provided for in Article 10(4) of that Regulation and before the effective start of the scheduling season, the parties may require that the Competitor transfer them a comparable slot. If the Competitor is unable to do so for any reason, they may seek to justify the non-use of the surrendered slot on the basis of Article 10(5) of Regulation (EEC) No 95/93.

32. A mechanism shall be agreed between the parties and the Competitor allowing the Parties to monitor how the slots are being used to ensure that the slots provided by the Parties are used in a manner consistent with these conditions. The parties shall inform the Commission about the agreed mechanism.

33. Slots provided under the Slot Conditions shall be offered without compensation.

Frequency freeze

34. The parties shall not add frequencies on the Routes and on London Heathrow/Gatwick-Barcelona for a period covering the remainder of the IATA season in which the exemption becomes effective and the two following IATA seasons, save in the case of exceptional events (e.g. international football matches) requiring additional flights on a particular day. In the case of GB's operations, GB shall retain the right to operate up to two daily services on London Gatwick-Valencia and up to one daily service on London Gatwick-Seville.

Interlining

35. At the Competitor's request, the parties shall conclude one interline agreement concerning the Route(s) operated by it if it does not have an existing interline agreement with the parties. Such an interline agreement shall:

(a) apply to the first class, business class and leisure travel categories only;

(b) provide for interlining on the basis of the parties' published one-way fares when a one-way ticket is issued or half of the parties' published round-trip fares when a round-trip ticket is issued;

(c) be limited to true origin and destination traffic operated by the Competitor;

(d) be subject to the MITA rules and/or normal commercial conditions; and

(e) include the possibility for the Competitor, or travel agents, to offer a return trip comprising services provided one-way by the parties and one-way by the new entrant.

36. Subject to seat availability in the relevant fare category, the parties shall carry a passenger holding a coupon issued by a new entrant for travel on a new entrant city pair. However, to avoid abuse, the parties may require that the Competitor or the passenger, where appropriate, pay the positive difference between the fare charged by the parties and the fare charged by the Competitor. In cases where the Competitor fare is lower than the value of the coupon issued by them, the parties may endorse their coupon only up to the value of the fare charged by the Competitor. The Competitor shall enjoy the same protection in cases where the parties' fare is lower than the value of the coupon issued by it.

37. All interline agreements entered into pursuant to this section for a particular Route shall lapse as soon as the Competitor ceases to operate that Route.

Frequent flyer programmes (FFPs)

38. If the Competitor does not participate in one of the parties' FFPs or does not have its own comparable FFP, the parties shall allow it, on request, to participate in their joint FFP at market competitive rates for the Route(s) it operates. Any agreement relating to a particular Route and concluded pursuant to this section shall lapse if the new entrant ceases to operate the Route.

Duration of exemption and conditions

39. The conditions shall apply from the date on which the exemption becomes effective and shall lapse as soon as the exemption expires.

40. Should the exemption be revoked, annulled, or expire, or should the parties terminate the notified cooperation agreements, the conditions shall be null and void as from the date of revocation, the date of the annulment or the date of termination. In such a case, the parties shall have the right to demand the return of any slots provided under these commitments to an airline which, at the time of the revocation, annulment or termination, is operating services on the Routes. They shall also have the right to terminate any interlining or FFP agreements concluded pursuant to these commitments.

41. If the Competitor is required to transfer back any party's slots to that party with historic preference (as outlined and described in the IATA Worldwide Scheduling guidelines) and fails to do so, the relevant party may give the Competitor a written notice requiring the Competitor to make the transfer immediately. If the Competitor then fails to make the transfer within three business days the party may give the Competitor a written compensation notice requiring the Competitor to pay compensation for the loss of the slots. The compensation notice shall state the amount of compensation the party requires to be paid and should be based on the prevailing market rates. Any compensation due shall be paid to the party by the Competitor not later than 15 business days after receipt of a valid compensation notice from the party.

42. The parties may apply to the Commission for these commitments to be amended or revoked, if appropriate.

CONCLUSION

43. The Commission has established prima facie that the agreements in question are caught by Article 81(1) of the Treaty, but it has not taken a position as to the applicability of Article 81(3). In accordance with Article 5 of Regulation (EEC) No 3975/87, the Commission invites interested parties to send their comments concerning the cooperation agreement between BA, Iberia and GB Airways, within 30 days of the date of publication of this notice, to: European Commission Directorate-General for Competition

Unit D2 (Transport)

Office J-70, 2/237 B - 1049 Brussels Fax (32-2) 296 98 12 e-mail: Carsten.Bermig@cec.eu.int

(1) OJ L 374, 31.12.1987, p. 1.

(2) GB Airways is a BA franchisee, and flies under the BA name to nine destinations in Spain.

(3) This has already been implemented, e.g. from the start of the winter schedule on 27 October 2002 BA and Iberia have expanded their current code sharing agreements to all flights from London-Heathrow to Madrid and Barcelona (press release of BA and Iberia of 8 October 2002).

(4) According to the parties there are three routes where Iberia and BA overlap, i.e. the routes from London to Madrid, Barcelona and Bilbao respectively and four routes where Iberia and GB overlap i.e.: from London to Alicante, Valencia, Malaga and Seville respectively.

(5) The figure of 40 unrestricted fare-paying passengers on these Routes has been calculated taking into account that (i) a 130 to 156-seater aircraft (B737/A320) could be expected to be used on each of these Routes, and that (ii) IB, GB and a third party would expect each to carry at least 13 unrestricted fare passengers (8 %-10 % of capacity offered) one way on their respective once daily services to achieve sufficient revenue to justify services on each of these Routes.