Notice pursuant to Article 5 of Council Regulation (EEC) No 3975/87 of 14 December 1987 concerning case COMP/38.712 - British Midland Ltd/Deutsche Lufthansa AG/Scandinavian Airlines System

(2001/C 83/03)

(Text with EEA relevance)

I. The application lodged by British Midland (BD)/Deutsche Lufthansa AG (Lufthansa) and Scandinavian Airlines System (SAS)

On 9 November 1999, British Midland, Lufthansa and SAS concluded a tripartite joint venture agreement ("TPJVA"). This agreement was notified to the European Commission on 1 March 2000 in accordance with Regulation (EEC) No 3975/87 for a decision applying Article 81(3) of the EC Treaty and Article 53(3) of the EEA Agreement.

II. Provisions of the agreement

Under the TPJVA, the parties agree to coordinate their respective current and future scheduled passenger air transport services within the EEA to and from London Heathrow airport (and London Stansted airport to the extent that London Heathrow services are displaced as a result of the implementation of the TPJVA) and Manchester International airport. Services that do not depart from or arrive at these airports fall outside the scope of the TPJVA.

The coordination between the parties is organised through the tripartite joint venture (TPJV). The cooperation between the parties consists in:

- the establishment of a joint route system - with regard to the services which fall within the scope of the TPJVA, the parties will decide jointly on the capacity used on the routes, and will specify for each of these services which will be the operating party. On each service, the operating party will code-share with one of the two remaining parties,

- fare structure - the parties will establish a fare structure for the services which fall within the scope of the TPJVA,

- schedule coordination - flight schedules will be coordinated to achieve optimum integration.

With regard to the services which fall within the scope of the TPJVA, the parties also coordinate, through the TPJVA, their efforts in the field of sales and marketing. They use all reasonable efforts to harmonise service standards, product standards and in-flight amenities where commercially and technically practical and agree, where commercially and logistically reasonable, to share facilities and services at airports served within the framework of the TPJVA. In the field of ground handling, each party agrees to do the ground handling for the other partners at its "home" airports. Finally, the TPJVA also provides for the sharing of profits and losses made by the services operated under the TPJVA according to a set formula.

For services not covered by the TPJVA, whether within or outside the EEA, the parties coordinate their activities pursuant to separate bilateral alliance agreements concluded between BD and SAS, and BD and LH respectively on 9 November 1999 (hereafter referred to as the "bilateral agreements").

The Bilateral Agreements cover code sharing, the coordination of schedules and the establishment of through check-in facilities in order to achieve the efficient and seamless transfer of passengers. However, they do not provide for any sharing of profits and losses and provide for only a limited degree of fare structure cooperation to the extent necessary for the smooth operation of the code-share arrangements.

The parties retain their corporate identity. Each of the parties remains responsible for the actual operation of the TPJVA services, according to their own business practices. Each of the parties is responsible for maintaining the requisite aviation operation authorisations and all other permits, licences, certificates and insurance policies required by the relevant authorities to be able to operate the services in question.

III. Reasons for exemptions

According to the parties, before entering into the agreement, there was no overlap between the parties' passenger air transport services on any origin/destination pair apart from London-Frankfurt. On all other routes parties were neither actual nor potential competitors. The parties have put forth the following arguments in support of the application of Article 81(3):

1. Improvements in the provision of airline services and promotion of economic progress

According to the parties, the arrangements give rise to the following improvements in distribution and technical progress:

Reorganisation and expansion of the parties' existing networks

For a number of reasons, such as structural difficulties at its main UK airport London Heathrow, BD has been unable to develop its network independently. The agreement allows the parties, and in particular BD, to extend and reorganise their services. Thus, for example, BD will be able to offer services between London and Madrid or Rome. It will also enable SAS and LH to sell online services between London and a number of intra-UK regional destinations, as well as between London and Dublin. The TPJVA allows the parties to optimise the use of their slots and airport facilities portfolio at Heathrow in order to reorganise the services currently offered and to be able to commence services on additional routes.

The reorganisation within the TPJVA of the parties' services at London Heathrow also includes the move of a number of services from London Heathrow to Stansted. The parties will seek to ensure that the expansion of their networks is not to the detriment of existing services which are commercially and operationally viable. They envisage, therefore, that certain services that currently are operated from London Heathrow to, for example, Germany (such as Cologne) will move to London Stansted.

The TPJVA will also increase the importance of Manchester allowing the parties to increase and improve their Manchester services. This development will establish network competition on services from the north-west of England for the first time.

Increased network competition

According to the parties, in addition to the reorganisation and extension of the Parties' networks, the notified arrangement will increase the degree of network competition between alliances in the European aviation market as it will enable:

- LH and SAS to compete for domestic UK traffic as well as for traffic between the UK and Ireland. The notified arrangement will allow both SAS and LH to transport passengers profitably from any point in the network to regional destinations in the UK,

- the parties to commence services to important destinations where currently there is no competition between alliances such as London-Barcelona and London-Madrid; or increase existing alliance competition on other large origin/destination pairs such as London-Rome and London-Milan,

- each of the parties and, in particular SAS and LH, to market their services to third countries not served by the other parties.

Exchange of know-how and increased efficiency

The parties claim that the notified arrangement will lead to technical progress. An exchange of know-how is envisaged between the parties in the fields of sales and marketing and, on the basis of the relevant provisions in the bilateral agreements, IT (such as pricing, revenue management and network planning systems).

2. Consumers will share the benefits from the cooperation agreement

According to the parties, the notified arrangement leads to important consumer benefits. It allows the parties to compete more vigorously and to commence services on large origin/destination pairs which hitherto were operated by only one alliance (for example, London-Barcelona or London-Madrid). The notified arrangement will also lead to important cost savings and efficiencies which will enable the parties to continue offering competitive services. Travellers will have a wider choice of air transport services to more destinations at very competitive fares. They will also benefit from a better connection between the services, more convenient scheduling and seamless travel. Existing arrangements relating to lounge access, through check-in etc. will be improved and will be extended to services which hitherto were not covered in the bilateral arrangements between the parties.

3. The cooperation agreements do not impose on the parties restrictions which are not indispensable to the attainment of the objectives of the agreement

The parties argue that the arrangements are necessary to achieve the above-mentioned benefits. BD does not have the financial or operational resources to develop further its network independently. It is further handicapped by not being permitted to operate from Heathrow on long-haul, profitable transatlantic routes.

According to the parties, the provisions of the TPJVA are necessary to allow the parties to re-organise their networks and optimise their use of slots and airport facilities. The joint sales and marketing of the TPJVA air transport services is necessary to maximise the effectiveness of the parties' cooperation within the framework of the TPJVA.

4. The cooperation agreement does not afford the parties the opportunity of eliminating competition in respect of a substantial part of any market

As set out above, the parties have put forward that there was an actual overlap between the parties' services on only one origin/destination pair, namely London-Frankfurt. On none of the other origin/destination pairs on which the parties cooperate under the arrangement, the parties claim that they are actual or potential competitors. On these origin/destination pairs, the cooperation will not result in significant market power of the parties.

IV. Proposed commitments

Following their notification of the joint venture agreement notified on 1 March 2000, the Commission services have been in discussions with the parties. As a result of these discussions, with a view to obtaining an Article 81(3) of the EC Treaty exemption 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 business class passengers on the London-Frankfurt pair.

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

1. Commitments pertaining to new entrants

If an airline that is not currently operating air transport services between Frankfurt and London ("the new entrant"), which is independent of the parties, wishes to commence a new service within six months of the date that the Article 81(3) of the EC Treaty exemption becomes effective, the parties undertake to make four pairs of slots available at Frankfurt Main airport ("FRA") for such a new service (hereinafter "new entrant slots"). Subsidiaries, franchisees or alliance partners of any airline currently operating services between FRA and London (hereinafter "FRA-LON") shall not be considered a new entrant. The undertaking to make slots available to a new entrant is subject to the general conditions set out in Part 3 of these commitments.

The new entrant slots are to be understood as the six slots BD used for daily services between Frankfurt Main and London Heathrow airports prior to entering into the joint venture agreement with LH and SAS and which are currently being used by LH or BD ("BD slots") as well as two additional slots to be chosen by the parties. The parties undertake to ensure that the two additional slots will be within 45 minutes of the time requested by the new entrant as long as the parties possess slots within the relevant time period.

If a new entrant is not a participant in or does not have its own comparable frequent flyer programme then upon request, the parties undertake for the services offered on FRA-LON to allow the new entrant to participate in one of their frequent flyer programmes or in their joint programme, if such a joint programme exists. A contract with a new Entrant will be concluded on reasonable and non-discriminatory conditions including as to compensation for any costs incurred by the parties.

Upon request, the parties also undertake to enter into an interline agreement with the new entrant for services on FRA-LON in any case where the new entrant does not have an existing interline agreement with the parties. Any new agreement will provide for interlining on industry standard terms.

2. Commitments pertaining to incumbents on FRA-LON and return of slots to the pool at FRA

In the event that a new entrant requests some, but not all of the four pairs of new entrant slots, the parties undertake to make the remaining number of FRA slots available, to any airline currently operating services on FRA-LON ("Incumbents on FRA-LON" or "Incumbent(s)") for the purposes of creating "additional frequencies" on FRA-LON, provided a request is made to the parties within 12 months of the date that the Article 81(3) of the EC Treaty exemption becomes effective. The undertaking to make slots available to incumbents pursuant to this paragraph is subject to the general conditions set out in Part 3 of these commitments.

In the event that no new entrant seeks slots from the parties for a new service on FRA-LON, the parties undertake to make three pairs of FRA slots available to incumbents on FRA-LON for the purposes of creating "additional frequencies" on FRA-LON, provided a request is made to the parties within 12 months of the date that the Article 81(3) of the EC Treaty exemption becomes effective. The undertaking to make slots available to incumbents pursuant to this paragraph is subject to the general conditions set out in Part 3 of these commitments.

The term "additional frequencies" shall be understood to mean that slots will only be made available to incumbents for the purposes of adding one or more frequencies beyond the number operated at the time that the notice pursuant to Article 5 of Regulation (EEC) No 3975/87 is published in the Official Journal of the European Communities. If at any time an incumbent eliminates any of the frequencies operated on FRA-LON at the time that the notice pursuant to Article 5 of Regulation (EEC) No 3975/87 is published in the Official Journal, and if the service is not continued by a subsidiary of the incumbent within no more than two months of the elimination of the service by the incumbent, the incumbent will be required to return the slots obtained pursuant to these commitments to the parties. The parties will then make available the released slots for other incumbents or new entrants for a further period of 12 months from the date the slots are returned to the parties on the same terms and under the same conditions as applied to the original slots transferred. If no other incumbent or new entrant requests the released slots within the 12 month period, the parties undertake to return the released slots to the FRA slot pool at the end of the then current IATA season.

The parties undertake that the slots provided to incumbents pursuant to this part will be within 45 minutes of the time requested by the incumbent as long as the parties possess slots within the relevant time period.

The initial obligation to make slots available to other airlines for services on FRA-LON terminates 12 months after the date that the Article 81(3) of the EC Treaty exemption becomes effective. In the event that no new entrant seeks slots from the parties and incumbents do not request all six slots available to incumbents, British Midland undertakes to return any of the six "BD slots" to the FRA slot pool at the end of the then current IATA season. Any slots returned to the FRA pool will be allocated by the slot coordinator in accordance with the slot allocation procedure set out in Council Regulation (EEC) 95/93 or any other Regulation that may amend or supercede it.

3. General conditions concerning slots

Slots will only be made available by the parties pursuant to the terms set out above provided that the airline seeking slots can demonstrate that all reasonable efforts to obtain slots at FRA for the FRA-LON service through the normal workings of the slot allocation procedure have failed. Requests have to be made in writing. In order to address competition concerns with regard to point-to-point time-sensitive customers, when making slots available, preference will be given to companies operating between FRA and London Heathrow/Gatwick/and London City airports.

Any slots made available by the parties under these commitments will be offered without any compensation. Slots obtained by any new entrant or incumbent carrier shall be exclusively used to operate additional services on FRA-LON. The new entrant must make a clear request for the slots needed within three months and it must commence the service within six months of the date that the Article 81(3) of the EC Treaty exemption becomes effective. The incumbent must make the request within 12 months of the date that the Article 81(3) of the EC Treaty exemption becomes effective and it must commence such services within no more than 18 months of the Article 81(3) of the EC Treaty exemption becoming effective. If any new entrant or incumbent which has obtained slots pursuant to these commitments ceases to operate the new or additional service on FRA-LON, it shall be required to immediately return the obtained slots to the parties. The parties will in such a case make available the released slots for other new entrants or other incumbents for a further period of 12 months from the date the slots are returned to the parties on the same terms and under the same conditions as applied to the original slots transferred. If no other new entrant or other incumbent requests the released slots within the 12 month period, the parties undertake to return the released slots to the FRA slot pool at the end of the then current IATA season. For the purposes of this paragraph, a carrier and its subsidiaries will be deemed to have ceased operating the additional service on FRA-LON where it or they, as the case may be, do not make at least 80 % use of the slots in question for a service on FRA-LON, unless it is justified on one of the grounds referred to in Article 10(5) of Regulation (EEC) No 95/93 or any other Regulation that may amend or supercede it.

If a new entrant or incumbent breaches the agreement concluded for the provision of slots pursuant to these commitments, all slots covered by the agreement shall be returned immediately to the parties. The parties will in such a case make available the released slots for other new entrants or other incumbents for a further period of 12-months from the date the slots are returned to the parties on the same terms and under the same conditions as applied to the original slots transferred. If no new entrant or incumbent requests the released slots within the 12 month period, the parties undertake to return the released slots to the FRA slot pool at the end of the then current IATA season. Subsidiaries or franchisees of the new entrant or incumbent that originally received the slots released from the parties shall not be eligible to receive any slots released pursuant to this paragraph.

In the event the Commission revokes the Article 81(3) of the EC Treaty exemption of the joint venture agreement pursuant to Article 6 of Regulation (EEC) No 3975/87 or an equivalent provision in any successor regulation, the Article 81(3) of the EC Treaty exemption is annulled, or the parties terminate the notified joint venture agreement, the slots provided under these commitments to an airline operating services on FRA-LON shall be returned to the parties if the parties so request.

To ensure that the slots provided by the parties are used consistently with these commitments, a mechanism will be agreed between the parties and the carrier receiving slots that will allow the parties to monitor how the slots are being used.

4. Duration of exemption and commitments

These commitments are offered on the understanding that the exemption granted pursuant to Article 5(3) of Regulation (EEC) No 3975/87 will be for a period of six years from the date of publication in the Official Journal of the notice concerning the joint venture agreement. These commitments will only take effect from the date that the Article 81(3) of the EC Treaty exemption becomes effective pursuant to Article 5(3) of Regulation (EEC) No 3975/87. The obligations of the parties pursuant to these commitments will expire on the date that the Article 81(3) exemption terminates.

In the event the Commission revokes the Article 81(3) exemption of the joint venture agreement pursuant to Article 6 of Regulation (EEC) No 3975/87 or an equivalent provision in any successor regulation, the Article 81(3) exemption is annulled, or the parties terminate the notified joint venture agreement, these commitments will be null and void as from the date of revocation, the date of the annulment judgment, or the date of termination, as the case may be. As provided for in Part 3, the parties will also have the right to demand return of any slots provided under these commitments to an airline which is at the time of the revocation, annulment judgment, or termination, operating services on FRA-LON using those slots.

V. Conclusion

The Commission having established prima facie that the agreement in question meets the test of Article 81(1) of the EC Treaty, has not taken a position as to the applicability of Article 81(3). According to Article 5(3) of Regulation (EEC) No 3975/87, if the Commission does not notify the parties within 90 days of the date of this publication, the arrangements, as described above, would be exempt from the prohibition under Article 81(1) for a maximum of six years.

In accordance with Article 5 of the same Regulation, the Commission invites interested parties to send their comments concerning the cooperation agreement between British Midland, Lufthansa and SAS and the proposed commitments, within 30 days of the date of publication of this notice, to: European Commission Directorate-General for Competition for the attention of Oliver Stehmann Unit COMP/D2

Office J-70 2/82

Rue de la Loi/Wetstraat 200 B - 1049 Brussels Fax (32-2) 296 29 11 e-mail: Oliver.Stehmann@cec.eu.int