Commission notice concerning the Alliance between KLM Royal Dutch Airlines and Northwest Airlines, Inc. (case COMP/D-2/36.111 - procedure under Article 85 (ex 89) of the EC Treaty)

(2002/C 181/03)

(Text with EEA relevance)

1. PROCEDURAL ASPECTS

1. KLM Royal Dutch Airlines ("KLM") and Northwest Airlines Inc. ("NW") concluded since the beginning of the nineties various cooperation arrangements. In January 1993 their cooperation took the form of an "Alliance agreement" pursuant to which KLM and NW, while remaining their corporate identities, de facto acted as a single entity(1). The KLM/NW Alliance has not been notified to the Commission.

2. On 3 July 1996 the Commission opened a procedure under Article 85 (then Article 89) of the EC Treaty(2) in order to examine the compatibility of the Alliance between KLM and NW ("the parties") with Article 81 of the EC Treaty (Case COMP/D-2/36111). This procedure relates exclusively to the transatlantic services covered by the KLM/NW Alliance.

3. In 1997 and 1998 notices were published in the Official Journal, giving descriptions of the various KLM/NW cooperation agreements and inviting comments from third parties(3). Between 1996 and 2002 the parties provided the Commission on its request with further information on a number of issues.

2. THE PARTIES

4. KLM is engaged in the business of operating national and international scheduled and chartered airline services, as well as certain airline related business. The State of the Netherlands owns 14,1 % of the shares in KLM. The remainder of the shares (84,9 %) are held by private shareholders. KLM's shares are quoted on various stock exchanges. KLM has its hub in Amsterdam Schiphol. In 2000 KLM operated direct scheduled services to 144 destinations, of which 66 beyond Europe and transported 16,2 million passengers, of which 17 % on the North Atlantic. Its turnover amounted to EUR 6960 million in 2000/2001. KLM ranks 22nd worldwide in terms of passengers transported.

5. NW, a subsidiary of Northwest Airlines Corporation, is a US air carrier engaged principally in the commercial transportation of passengers and cargo, directly serving more than 155 cities in 24 countries in North America, Asia and Europe. Northwest's global airline network includes domestic hubs at Detroit, Minneapolis/St. Paul and Memphis, as well as an extensive Pacific route system with hubs at Tokyo and Osaka, and a global alliance with Continental Airlines, Inc., which does however not cover any transatlantic routes. NW is the world's fourth largest airline in terms of passengers transported.

3. THE ALLIANCE AGREEMENT

6. The cooperation between KLM and NW started in 1991 when KLM and NW entered into blocked-space agreements on their hub-to-hub routes Amsterdam-Minneapolis ("AMS-MSP") and Amsterdam-Detroit ("AMS-DTW"). Under these blocked-space agreements KLM operated services and NW purchased and re-sold seats on the KLM operated planes for its own financial risk.

7. The blocked space agreements were replaced by a code sharing agreement between the parties on 9 March 1992. Following the "Open Skies Agreement" which was concluded between the US and the Netherlands in the same year, the cooperation between KLM and NW was further intensified on 9 September 1992, when KLM and NW signed the KLM-Northwest Commercial Cooperation and Integration Agreement, with effect as from January 1993. By the latter agreement ("the Alliance")(4) the parties, while retaining their corporate identities, integrated their services and operated as if they were a single carrier. The Alliance relates to operations on the North Atlantic routes, the routes between the Netherlands and India and related feeder routes. The main elements of the Alliance can be described as follows(5):

(a) code sharing: KLM and NW engage in code sharing on all flights operated within the joint venture and on all flights where there are other forms of financial cooperation between KLM and NW;

(b) revenue and cost sharing on the basis of a joint venture: each partner contributes the difference to the joint venture between its traffic revenues and operating expenses and shares on a 50/50 basis in the total contribution generated;

(c) joint pricing: KLM prices both KLM and NW services for passengers originating in Europe, while NW prices services for all passengers originating in North America;

(d) coordination of capacity: a network working group coordinates and assigns capacity to the joint venture and determines seasonally which joint venture partner will operate which services. Capacity for the North America-Europe portion of non-stop transatlantic routes are provided to the joint venture on a 50/50 basis between KLM and NW;

(e) coordination of network development, marketing and sales activities: KLM and NW avoid duplicating each other's sales coverage; sales coverage for KLM and NW in North America is NW's responsibility. NW represents KLM for non joint venture sales in Europe;

(f) combined frequent flyer programmes (FFP's): KLM and NW maintain separate but fully coordinated FFP's. The reward structures are identical in markets where both parties' FFP's are present;

(g) coordination of a number of infrastructure activities such as ground handling, catering, maintenance.

4. THE SERVICES CONCERNED

8. Both parties are active in the provision of scheduled air transport of passengers between the EEA and the USA. The Alliance might in particular affect competition on the parties' hub-to-hub O & D markets AMS-DTW and AMS-MPS, where both KLM and NW were prior to the Alliance offering services under the above mentioned blocked-space agreements.

5. THE ARGUMENTS OF THE PARTIES

9. As concerns the relevant market, the parties have submitted that traditional market definition should take into account that transatlantic air services are characterised by network competition among airline alliances. Moreover, according to the parties Schiphol airport faces competition from other gateways within its catchment area, in particular from Zaventem and Frankfurt. Also, according to the parties there are various (indirect), one-stop alternative routes on the routes AMS-DTW and AMS-MSP.

10. With regard to the applicability of Article 81(1) of the EC Treaty the parties argue that the Alliance does not amount to a restriction of actual or potential competition. The parties contest that they were actual competitors prior to the Alliance. The parties argue that the situation before the blocked-space agreements of 1991 should be taken into account rather than the Alliance, which became effective in 1993. Prior to the blocked-space agreements the parties had no overlapping activities. Moreover, according to the parties the 1991 blocked-space agreements created only "artificial and temporary" competition between them.

11. According to the parties they can not be considered either as potential competitors on the identified routes. They note that before 1990 KLM did not have the bilateral authority under the US-Netherlands Air Service Agreement to enter the routes. Moreover, they submit that prior to the blocked-space agreements of 1991 neither KLM nor NW would have entered the routes independently because of the limited amount of local traffic. According to the parties local traffic (defined as direct and indirect O & D traffic) amounts to about 60000 passengers/year on AMS-DTW and about 36800 passengers/year on AMS-MPS(6). According to the parties the vast majority (about 94 %) of the total passengers flying from Amsterdam to the US are connecting passengers.

12. In so far as the Commission would nevertheless conclude that the Alliance would fall within the scope of Article 81(1) of the EC Treaty, the parties have submitted the following arguments in favour of their view that the conditions of Article 81(3) of the EC Treaty are fulfilled(7). According to the parties the Alliance has expanded and improved transatlantic services. In particular, according to the parties the Alliance has initiated significant new services between Europe and the US. Between 1993 and 2001 twelve new services were started, some of them serving relatively thin non-stop routes. The number of transatlantic flights by the parties increased from about 100 weekly flights in 1990 to about 200 flights in 1999. According to the parties, the number of non-stop passengers flying from Amsterdam to the US has almost tripled from approximately 680000 in 1990 to over about 2 million in 1999. The parties have pointed out that the Alliance has not only resulted in expanded transatlantic flights from Amsterdam to NW hubs, but also led to additional connecting services, providing services to destinations, which were previously unserved or poorly served for transatlantic traffic.

13. According to the parties the Alliance has brought benefits for passengers travelling across the Atlantic not only through expanded and improved service but also through lower prices. The parties refer in this regard to a study carried out by the University of Illinois in 1999, showing a reduction in interline fares and concluding that the benefits of the KLM/NW Alliance are about USD 185 million annually in terms of lower ticket prices.

14. According to the parties integrating their services enables them to provide services on markets where neither carrier could do so on its own. Moreover, the parties have advanced that the Alliance enables them to operate more efficiently. According to the parties a less extensive cooperation would not be sufficient for the purpose of obtaining an efficient and fully integrated network of services, in competition with in particular Star and OneWorld.

15. According to the parties the cooperation does not result in the elimination of competition on a substantial part of the AMS-DTW or AMS-MSP routes. According to the parties a number of reasonable alternative indirect services is available to passengers. Moreover, according to the parties there exists an important level of potential competition resulting both from the possibility for competitors to commence new services and to adjust existing services. According to the parties there are no barriers to entry the hub-to-hub routes concerned. There would be no regulatory barriers and slots would be available at both ends of the hub-to-hubs routes. In this context the parties have provided information for winter 2001/2002 and summer 2002 from which it appears that legitimately requested slots at Schiphol airport were eventually also allocated. Furthermore, according to the parties in many cases market entry is possible without commencing a new service and will only require a schedule adjustment to improve connecting time in order to make the service a "reasonable substitute" to the existing non-stop service. The parties also note that the hub-to-hub routes concerned must, with respectively 60000 (AMS-DTW) and 36800 (AMS-MSP) O & D passengers a year, be considered as "thin" and are highly unlikely to support two or more competitive non-stop services. According to the parties a minimum level of local traffic of at least 63000 passengers a year would be required for a route to support competing non-stop services.

6. THE INTENTION OF THE COMMISSION

16. In view of the foregoing, the Commission intends to adopt a favourable position concerning the KLM/NW Alliance and to close its pending Article 85 proceeding. Before doing so, it invites interested third parties to send their comments within one month of the publication of this notice in the Official Journal of the European Communities. These observations should be submitted, quoting reference Case COMP/D-2/36.111 - KLM/NW, to: European Commission Directorate-General Competition

Unit D2 (Transport), Office J 70 2/237

B - 1049 Brussels Fax (32-2) 296 98 12 E-mail: Monique.Negenman@cec.eu.int

(1) The US Department of Transportation gave its approval and granted anti-trust immunity to this alliance agreement on 11 January 1993 (DoT Final Order 93-1-11).

(2) Regulation (EEC) No 3975/87 (OJ L 374, 31.12.1987) being applicable only to air transport between Community airports.

(3) OJ C 117, 15.4.1997, p. 8, and OJ C 177, 10.6.1998, p. 10.

(4) The Alliance Agreement was further enhanced by the KLM-Northwest Enhanced Alliance Implementation Agreement of 30 September 1997. In addition, the parties concluded a number of accompanying agreements. Where hereinafter reference is made to "the Alliance" this includes the enhanced alliance agreement and the accompanying agreements.

(5) For further details see the notices referred to in footnote 3 above.

(6) Based on MIDT data (bookings) from 2000 provided by the parties.

(7) In the framework of Article 85 of the EC Treaty the Commission is not empowered to grant an exemption under Article 81(3) of the EC Treaty. However, in order to determine whether there is an infringement of EC competition law and what measures are necessary to bring it to an end the Commission must apply the principles of Article 81 of the EC Treaty as a whole.