COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT - IMPACT OF THE THIRD PACHAGE OF AIR TRANSPORT LIBERALIZATION MEASURES
Date: 1996-10-22
Institutions: European Commission
Subjects: air cabotage, air transport, liberalisation of the market, market access, transportation tariff

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

Brussels,  22.10.1996 
COM(96)  514  final 

COMMUNICATION  FROM  THE  COMMISSION 
TO  THE  COUNCIL  AND  THE EUROPEAN  PARLIAMENT 

IMPACT  OF  THE THIRD  PACKAGE  OF 
AIR  TRANSPORT  LIBERALIZATION  MEASURES 

GENERAL  EVALUATION  AND  FOLLOW-UP 

Liberalisation  of  civil  aviation  in  Europe  was  established  between  1993-96.  Certain 
experts believe that three years  is too short  a period  to carry  out an objective  evaluation 
of  its  impact..  However,  with  only  six  months  before  the complete  liberalization  of  the 
market,  with  unrestricted  cabotage,  the  Commission  feels  it necessary  to present  a  first 
evaluation. 

The fact,  which certainly hits the average traveller,  is that the single aviation market  has 
not occurred with a "Big Bang": there has been no spectacular reduction  in the fares,  nor 
any dramatic  disappearance  of the more important  carriers, nor a substantial  penetration 
of  the  domestic  markets  by  foreign  competitors.  Liberalization  has  happened  in  a 
progressive  way  and  without  major  upsets.  This  contrasts  with  the  situation  that  the 
United  States  experienced  at  the  time  of  the  deregulation  of  the  aviation  market.  The 
Community  has found  the correct balance between competition and control  mechanisms. 
Competition  and  consumer  have both  benefitted. 

The  effects  of  this  process,  although  slow,  are  nevertheless  quite  clear  and  it  is 
satisfactory  to  note  that  in  the  end  almost  all  operators  have  made  use  of  the  new 
possibilities  offered  by  the third  package. 

For example, when the third package was introduced there were 490 routes, there are now 
approximately  520.  This  increase  contrasts  with  the  situation  which  prevailed  in  the 
United  States.  30%  of  the  Community  routes  are  served  by  two  operators  and  6%  by 
three  operators  or  more.  It  should  be  noted  that  out  of the  64% of routes  operated  as  a 
monopoly  a  large  number  of  them  have  low  levels  of traffic  and  are  of  no  interest  to 
most  other  carriers.  Furthermore  a  certain  number  of  the  other  routes  experience  real 
competition  from  neighbouring  routes,  from  charter  services  or  from  other  modes  of 
transport.  One  of  most  interesting  developments  certainly  is the fact  that  the number  of 
operators, on a significant  number of domestic routes, passed from  one to two. Moreover, 
the dominant carrier's market  share often  fell to the advantage of the second carrier.  The 
possibilities of access to the market have been used: there are now 30 routes operated on 
a  5th  freedom  basis  as  opposed  to  14  in  January  1993; routes  operated  with  cabotage 
traffic  grew  from  0 in  1993 to  20 today. The public  service  obligations  have  been  used 
on  a  hundred  routes  in  Ireland,  Sweden,  the  United  Kingdom,  Portugal,  France  and 
Norway. 

Capacity  increased  but  did  not  reduce  the  load  factors  in an unacceptable  way. 

K 

It  is certainly  in respect  of  the  creation  of  new  airlines that  market  dynamics  have  been 
most  visible.  Over  the  three  years  800  licences  has  been  granted,  the majority  going  to 
small  operators  :80  companies  has  been  created,  for  the  most  part  private  companies, 
while 60 have disappeared.  Increased competition  from  the charter companies on regular 
routes should also be highlighted.  More important, new entrants appeared on the markets 
of the United Kingdom, France, Germany, Denmark, Ireland, Spain, Italy, Greece, Austria 
and  Belgium.  Their  entry  into  the  market  has often  contributed  to a fall  in the  fares. 

The downside of liberalisation  is that the fall  in air fares  has been felt  only  on the  routes 
where  competition  has  been  fully  realised  i.e.  where  more  than  two  airlines  operate. 
Certain categories of fares  have fallen  significantly  on routes such as Barcelona/Madrid, 
UK/Ireland, Paris/London, certain domestic routes in Germany, in France, in Italy, in UK 
and  in Belgium  towards  a number  of  European  destinations.  In general,  the  structure  of 
the  fares  on  scheduled  flights  remains  complex  and  sometimes  seems  non-transparent 
thus preventing  the  users  from  benefiting  from  the  competition. 

If  the  third  package  has been  implemented  in  1993 and  1994  because  of  the  economic 
recession,  the  pace  has  accelerated  since  1995  and  1996  and  results  are  encouraging. 
However, it is clear that, if the "foundations" of liberalization have been well established, 
much  still  remains  to  be  done  to  make  it  a complete  success. 

> 

Four  grey  areas  can  be  identified: 

Air  Fares 

Liberalization  is  not  an  end  in itself.  The  opening  of  the markets  is only  meaningful  if 
the increased competition brings to the consumer better goods and services at lower costs. 
Expected  beneficial  effects  of  competition  on  fares  has not  materialised.  An  impressive 
number of promotional  fares has developed and the share of the passengers  travelling on 
scheduled  flights  with tickets at reduced prices has passed from  60.5% in  1985 to 70.9% 
in  1995  and,  taking  into  account  that  the  share  of  the  charter  market  accounts  for 
approximately  50-55% of the total market,  it is estimated  that 85-90% of the  passengers 
travel  at  reduced  prices.  A  sharp  drop,  of  almost  20%, of  the  yield  also  confirms  this 
tendency.  However,  these  tickets  are  often  accompanied  by  restrictions  with  regards  to 
schedules  flexibility  and  are  available  only  for  a  limited  number  of  seats.  The  new 
distribution  techniques  (Internet  etc)  should  facilitate  access  to  these  fares  by  the 
individual traveller: however, the existence of these techniques must be known and access 
to them must be established. The Commission is examining ways of informing  the public 
on  this  subject  to  ensure  the  necessary  transparency  for  the  consumer  and  to  avoid 
differences  in tariffs  which  cannot  be justified  on objective  grounds. 

In  contrast  to  the  promotional  fares  most  of  the  fully  flexible  fares  have  continued  to 
increase.  On  certain  routes  these  fares  can  be  described  as  excessive.  A  detailed 
examination  will  consequently  be  necessary  in  order  to  pinpoint  the  cases  of  excessive 
fares  under  Regulation  2409/92  and the rules  of  competition.  Where necessary  the 

H 

lb 

Commission  will  use  the  powers  of  enquiry  conferred  by  this regulation  to  put  an  end 
to  excessively  high  fares.  The  Commission  could  in  certain  cases  examine  potential 
abuses  of  dominant  position  under  Article  86 of  the  Treaty. 

Capacity  restrictions 

It would be unrealistic to seek to  liberalize civil  aviation in Europe, with the  consequent 
increase  in  traffic,  without  envisaging  adjustments  to  the  capacity  available.  In  recent 
years  the  majority  of  airports  have  had  to  re-examine  their  development  plans,  both  as 
regards  capacity  of terminals  and use of runways.  Similar problems exist  with  air  traffic 
control,  where  the  fragmentation  of  the  European  airspace  continues  to  pose  serious 
management  problems.  The  Commission  is active  in these areas: 

•  As  regards  airports, 
the  Commission  has  just  conducted  a  series  of 
consultations  on the  question  of  slot  allocation.  In the light  of  these  discussions 
it  will  present,  during  the  last  quarter  of  1996,  a  proposal  for  amendments  to 
Regulation  95/93.  One of the objectives  sought by the system  of  slot  allocation 
is  to  allow  optimum  use  of  capacity  while encouraging  increased  competition. 

•  With regard  to air traffic  control,  the Commission published  in March  a White 
Paper on "the management of air traffic".  One of the fundamental  ideas proposed 
by this document  is to guarantee  that common rules apply at the widest  possible 
European  level  and  cover  the  largest  possible  geographical  space  in  order  to 
abolish 
the 
administrative/political  parcelling  out  of  the  airspace. 

connected  with 

restrictions 

artificial 

capacity 

the 

The costs of  air  transport 

When the aim of  liberalization  is to give operators  more choice and  provide  users  with 
better  services  at competitive  prices,  it  is  necessary  to  examine  the  costs.  It  has  been 
estimated  that  infrastructure  charges  alone account  for  25 % of  total  operational  costs 
these  are  believed  to  be  40%  higher  than 
in  the  United  States.  These  costs  not  only 
concern  air  traffic  control  but  also  airport  fees  and  ground  handling: 

•  A  directive  on  the  liberalization  of  ground  handling  has  been  adopted  by  the 
Council  on  October  15 this  year.  The  aim  is  to  open  the  market  for  ground 
handling  and  should,  in the  long term,  reduce  prices  for  these  services. 

111 

I  C 

•  With regards  to  air traffic  management,  the aim of the above mentioned  White 
Paper  is to improve  service  levels and  recommends  the separation  of  regulatory 
activities  from  the  provision  of  services  to  the  users.  This  should  give  more 
freedom  to  the  airlines  and  reduce  costs.  Indeed  until  now  the  system  of  air 
traffic  management  has been such that the ATM  service providers  are  not at all 
encouraged  to  seek  the best  cost/effectiveness  ratio.  Decentralized  services  will 
encourage  rigorous  management  and  a better  control  of  the costs. 

•  Lastly,  as  regards  airport  fees,  the  Commission  plans  to  submit  a  proposal 
before 
the  end  of  1996.  It  will  be  based  on  three  major  principles: 
non-discrimination,  transparency  and  cost  effectiveness. 

Access to  the  market 

The  internal  market  remains  fragile  in sofar  as  it remains  incomplete External  relations 
continue  to be  subject  to  bilateral  agreements  between  the Community  Member  States 
and  non-member  countries.  These  agreements  always  contain provisions  incompatible 
with  the  internal  market,  such  as  the  nationality  clauses,  and  their  existence  is  partly 
responsible  for  the  loss  of  competitive  pressure  on  the  Community  market,  it  is  to 
preserve  the  internal  aviation  market  and  to  be  in  a position  to control  the  impact  that 
the  bilateral  agreements  can  have  on  the  Community  market  that  the  Commission 
proposes  negotiations  with  third  countries.  Based  in part  on such  considerations,  the 
Council  has  granted  a  Community  negotiating  brief  with  the  United  States  in  several 
fields.  The  Council  has  granted  a  negotiating  brief  with  the  associated  countries  of 
Central  Europe. 

The effects  on competition of the alliances,  which have increased  rapidly,  can only  be 
appreciated  on a case by case basis.  Certain of these alliances have  ended fairly  quickly 
whilst others are too recent  to evaluate.  Nevertheless their  association with the practice 
of  code-sharing,  coupled  with  the  frequent  flyer  programmes,  can  cause  a  number  of 
difficulties  in  respect  of  access  to  the  market  for  the  small  operators  who  are  not  in  a 
position to cope with such  dominant positions.  Similarly by using such practices,  certain 
non  Community  carriers  can  overcome  the barriers  of  entry  to the Community  market 
by  making  use  of  the  services  of  a  Community  carrier  which  is  permitted  to  operate 
without  restrictions  between  Community  airport  to  the  detriment  of  certain  Member 
States.  These  practices  merit  examination  by  the  Commission  under  the  competition 
rules. 

IV 

Id 

We  have  seen  above  that  public  service  obligations  (PSO)  have  been used  frequently. 
It will  be advisable  to check  that  PSOs  do  not  become  a disguised  means  of  restricting 
the  market.  In  this  context  the  Commission  will  have  to  ensure  that  the  provisions 
concerning  PSOs  are  carefully  monitored. 

in April  1997,  when  the  last 
Access  to  the  market  will  only  be completely  liberalized 
restrictions  on cabotage traffic  are removed.  However,  it is prudent,  as of now  ,to take 
the necessary  measures,  as described  above,  in order  to prevent  obstacles  for  access  to 
the market being  retained.  There  are  still  numerous  routes  which are not operated,  or 
are  operated  with  low  traffic  densities,  where  the  lack  of  competition  provides  very 
good  opportunities  for  a  new  carrier  to  take  advantage.  The  Community  market  is  not 
yet  optimal: 
is  on  going  privatizations  continue.  During  this 
restructuring  exercise,  it will be the Commission's  role to ensure that  competition  rules 
continue  to be applied  rigourlously  With the  completion  of  the single  aviation  market 
in  1997  "the  Commission  will  not  be  able  to  authorize  restructuring  aid  unless  under 
very  stringent  conditions"1 

its  restructuring 

The  Commission  is  also  conscious  of  the  potential  implications  of  the  liberalisation  of 
air  transport  on  employment.  In  this  context,  a  study  of  the  social  impact  of  the 
liberalisation  of  air  transport  is  underway 

Lastly,  and  although  it  is  not  the  purpose  of  this  analysis,  it is  important  to  recall  that 
improvements  in the Community  aviation system  will have to be accompanied by  more 
stringent  safety  measures  and  better  consideration  of  the  environment.  Proposals  will 
be tabled  to  this  end. 

with  regard  to  this,  see  the  guidelines  of  the  Commission  on  the  Application  of 
articles 92 and 93 of the Treaty and article 61 of the EEA agreement to state aids 
in the  aviation  sector  (OJ  C 350  du  10.12.94) 

1<L 

INTRODUCTION 

On  1  January  1993,  the  third  package  of  measures  for  the  liberalization  of  the 
Community's  air  transport  market  entered  into  force.  The  aim  of  the  liberalization 
policy,  which began in  1987,  is the gradual  creation of a truly  single market based  upon 
the  freedom  to provide  services  throughout  the Community  in accordance  with  a single 
set  of  rules. 

The  third  package  consists  of  the  following  elements  : 

common  rules  on the  licensing  of  air  carriers,  laid  down  in Council  Regulation 
(EEC)  No 2407/921; 
rules  on access  for  Community  air  carriers  to  intra-Community  air  routes,  laid 
down  in Council  Regulation  (EEC)  No 2408/921; 
rules  on fares  and  rates  for  intra-Community  air  services,  laid down  in  Council 
Regulation  (EEC)  No  2409/921; 
the  full  application  of  the  competition  rules  of  the  Treaty  to  the  liberalized  air 
transport  market in accordance with Council Regulations (EEC)  No 3975/87 and 
(EEC)  No  3976/87  (as  amended)1. 

As of  1 July  1994, the third package  is also fully  applicable within the framework  of the 
Agreement  establishing  the  European  Economic  Area  (EEA),  thus  further  including 
Norway  and  Iceland. 

Article  13  of  Regulation  (EEC)  No  2408/92  and  Article  9  of  Regulation  (EEC) 
No  2409/92  oblige  the  Commission  to publish  a report  on the application  of  those  two 
Regulations  by  1 July  1994 and periodically  thereafter.  In June  1994, the  Commission 
adopted  a communication  entitled  "The  way forward  for  civil  aviation  in Europe"2.  In 
the  meantime,  a number  of  major  factual  and  legal developments  have  occurred  which 
necessitated  the  drawing-up  of  a  more  detailed  report  on  the  functioning  of  the  third 
package.  This  report  is  based  on  the  experience  acquired  by  the  Commission  with 
regard  to the functioning  of the  internal  air  transport  market  from  1 January  1993 until 
1  January  1996. 

Nevertheless,  the  findings  are  sufficient  to  show  that  the  liberalization  process  is 
producing  a significant  number  of positive  results  without the instability  that some  may 
have  feared.  Market  access  possibilities  are being used.  New routes  and  services  are 
being created.  On some of the most heavily travelled routes,  new entrants  are bringing 
competitive  pressure  to bear  on  traditional  duopolies.  Indeed  the number  of  European 
companies offering  regular service is increasing substantially  and most are now privately 
owned.  The market  share  of  the  dominant so-called  flag  carriers  has also  fallen 

1  OJL  249 of 28.8.1992 
2  COM(94) 218 final. 

I) 

i 

noticeably.  The charter  market continues to grow.  Alliances and partnerships  are being 
formed.  Carriers  have taken advantage of new opportunities.  After  several  loss-making 
years,  most carriers  regained their profitability  in 1995.  As to fares,  on average  prices 
are beginning  to fall,  with particularly  notable  reductions  where more than two  carriers 
are competing on the same route.  The full  liberalization of cabotage in  1997 should  give 
further  impetus  to the process. 

On the other hand, as yet,  many routes continue to be served by monopolies or duopolies 
and  in those  circumstances  significant  consumer  benefits  have  not appeared.  In  some 
cases this situation is attributable  to limits on capacity  in congested airports  but in others 
such  constraints  are  not  present,  suggesting  that  the  full  benefits  of  the  present 
liberalization  regime  have yet  to be  realized.  Also  the ability  of carriers  to exploit  the 
full potential of the internal aviation market is constrained by limitations on access to the 
ground handling market,  producing high costs and inadequate service and is also  affected 
by  the  diverse  bilateral  arrangements  maintained  between  Member  States  and  third 
countries.  Finally,  while  the  development  of  alliances  and  partnerships  may  in  part  be 
positive,  it  also  involves  the  risk  of,  if  taken  too  far,  limiting  competition  to  the 
disadvantage  of  the  consumer. 

In brief,  the third package is already bringing considerable benefits  to the aviation sector 
and  the consumer  and  shows  potential  for  the  realisation  of  further  benefits  in  coming 
years.  At the same time,  the process  is far  from  complete and is subject  to constraints, 
actual  and  potential,  which  need  to  be  effectively  addressed  if  the  full  benefits  of  the 
process  are  to be  realized. 

Impact  of  the  third  package  of  air  transport  liberalization  measures 

The  third  package  of  air  transport  liberalization  measures  has  had  a definite  impact  on 
the Community air transport  market.  However,  the changes brought about have not been 
sudden or spectacular,  due partly to the fact that the liberalization process  itself got under 
way  initially  in  a  period  of  economic  recession.  Some  were  a  long  time  coming  (the 
major developments on domestic markets did not happen until  1995, for example),  while 
others  had  occurred  well  before  1993 (alliances,  capacity  increases,  etc.).  The  fact  that 
the  third  package  got  off  to  a  slow  and,  at  times,  patchy  start  -  coupled  with  the 
extremely  short  period  covered  by  this  study  -  frequently  makes  the  task  of  analysis 
difficult,  all the  more  so  as  it  is  sometimes  hard  to distinguish  the direct  consequences 
of  the  third  package  from  actions  or  measures  that  would  have  come  about  anyway  in 
view of current  international developments (globalization, alliances, etc.).  Furthermore, 
while it is true that the charter  sector  is carrying  more passengers,  the data available  are 
scanty.  For  this  reason,  certain  results  need  to be  interpreted  with  caution just  as,  by 
the  same  token,  certain  conclusions  cannot  yet be  regarded  as  definitive. 

I.  FARES 

The rules and their application 

The principle  of price  freedom  for Community  air carriers  on intra-Community  air routes was 
established  under Articles  3 and 5(1) of Regulation  (EEC) No 2409/92.  Consequently, 
Member  States are no longer allowed  to subject  air  fares  to the requirement  of prior 
authorization.  This freedom  has advantages just as much for the scheduled  carriers  as for the 
charter  flight  operators. 

-  Articles  6(1), 7(1) and 7(2) of Regulation  (EEC) No 2409/92 allow, on the one hand, the 

Member  States, under certain  conditions,  either to withdraw an excessively  high basic fare  or 
to stop an excessive  downward  spiral  in air fares,  while at the same time empowering  the 
Commission  to examine,  at the request  of a Member State or on the basis of a complaint,  the 
legality  of any action taken by the national civil aviation  authorities under Article 6(1).  So far, 
neither the Member  States nor the Commission  have used their powers under the Regulation. 
As far  as the evolution of tariffs  is concerned,  the Commission  has deemed  it appropriate, 
however,  to draw up guidelines  which it can use in the future,  as and when it is called  upon to 
exercise  its powers. 

For the air  traveller,  the most tangible aspect of air transport  liberalization  in Europe  is 
unquestionably  its impact on fares.  This  new freedom  was demonstrated  in  spectacular 
fashion just one day after  the introduction of the internal air transport market,  when right 
at the beginning  of  1993 Lufthansa  offered  the European market a very  simplified  range 
of  fares  (3  levels)  to  all  European  destinations.  Although  it  lasted  only  until 
31 March  1993, the  scheme  had  a dramatic  impact  in that  it marked  the beginning  of a 
new  phase  in  European  fares  competition. 

1.  Observation  of  the market  in  general 

Contrary  to what happened in the United States in the wake of air transport  deregulation, 
there have been no across-the-board  or high-profile  fare reductions  in Europe.  Instead, 

the  European  airlines  have  preferred  to  pursue  a  more  selective  policy  introducing, 
alongside the thousands of official  rates  laid down in the I ATA conferences,  their own 
prices under  their code with their own restrictions  and periods  of validity. 

Fare  categories 

Three  categories  of  fares  are  available  on  the  European  market: 

- 

the  most  flexible  fares,  also  called  full  fares,  which  are  the  no-restriction  economy  fares, 
business  fares  and  first-class  fares; 
-  promotional  fares  (APEX,  PEX,  etc.); 
-  special  fares  (special  offers  for  limited  periods). 

In the  European  market  the  proportion  of  passengers  travelling  on  scheduled  flights  with  cut-price 
tickets  rose  from  60.5%  in  1985 to  70.9%  in  1995.  Allowing  for  the  fact  that  the  charter  market 
accounts  for  some  50 to  55% of  the  total  market,  it  is  reasonable  to  assume  that  90 to  95% of 
passengers  are  currently  travelling  at  reduced  fares.  The  acceleration  in this  decline  can  be  traced 
back  to  the  end  of  1991  and  is due,  on  the  one  hand,  to  the  overcapacity  on  the  market  and,  on  the 
other,  to  the  effects  of  the  competition  rules  and  the  Community  provisions  liberalizing  fares. 
According  to  the  AEA  there  was  a constant  and  gradual  fall  in yield  in  Europe  by  about  20% 
between  1991 and  1995. 

The market has been characterized  by a proliferation  of promotional  offers  and special 
fares  for  limited periods,  which usually  have the effect  of complementing,  rather  than 
modifying,  the  existing  fares  structure.  These  fares  are  fed  into  the  Computerized 
Reservation System (CRS) virtually in real time, since prior authorization by the national 
authorities is no longer required.  It is to be hoped that the new distribution  techniques 
(Internet,  etc.) will make it easier for  the average traveller  to obtain the best bargains. 
However,  these fares  are subject  to considerable  restrictions,  and the number  of  seats 
offered  at  these  prices,  by  the  major  carriers  at  least,  is  often  limited.  Within  this 
special-offer  market,  one has to distinguish between two types of competitor:  the large 
airlines,  which compete with each other  on markets  or routes with equivalent  services 
and frequencies,  and offer  a wide range of fares with some seats offered  at special prices 
as a function  of yield management,  and the other airlines,  which compensate  for  their 
limited  services  and/or  frequencies  with genuinely  attractive prices  applying to  all the 
seats  sold.  Examples  of  this  second  category  are  EuroBelgian3  and  Ryanair,  both of 
which offer  a limited service but at very competitive prices. 

from September  1996 Virgin  Express 

Return  fares 
(in BF)  from 
Brussels  to: 

Jan. 
93 

January  1995 

July  1995 

IATA 

SN 

BQ 

IATA 

SN 

BQ 

IATA 

Madrid 

14570 

11230 

Vienna 

16290 

17790 

Rome 

18730 

9990 

5600 to 
9000 

5600  to 
9000 

5600  to 
9000 

14500 

8490 

17790 

6990 

20170 

5600 

5600 to 
9000 

5600 to 
9000 

5600 to 
9000 

14500 

17790 

20170 

Table  1 - Source:  REED database  (fares) 

As  Table  1 clearly  shows,  the  introduction  of  these  special  prices  has  had  the  effect 
of reducing  the fares  charged by the national carrier,  in this instance SABENA. 

2.  Observation  of the market by routes 
a)  By intra-Community  routes 

Competition has had little effect  on the routes  run as a monopoly or a duopoly,  which 
represent  94% of intra-Community  routes.  Since the introduction of the third package 
in 1993, fares  have continued to rise on a large number of these routes, both in the case 
of the most flexible  fares  (no-restriction  business  and economy  fares)  and promotional 
economy fares  (PEX,  APEX, etc.). 

On  the  other  hand,  on  routes  operated  by  more  than  two  carriers  (6%  of  intra-
Community  routes)  a number  of  initiatives  designed  to increase  market  share  through 
fare reductions have been observed.  On the markets to and from  the United Kingdom, 
British Midland has been one of the principal protagonists  in the fares war,  reducing its 
business  class  fares  by  10:20  % on  the  London-Amsterdam/Paris/Brussels/Frankfurt 
routes over the  1992-1995 period.  Mention should also be made of the routes to and 
from  Belgium operated by EuroBelgian. 

b)  By  domestic  routes 

Compared with fares  on international routes, domestic published fares  (other than special 
offers)  tend  to be simpler  in structure.  In addition,  above all, prices  are  lower  relative 
to  distances,  as  a  consequence  among  other  things  of  greater  intermodal  competition. 
The  graph  below  (source:  REED,  January  1996)  shows  that there  is still  room  for  fare 

Air fares  on selected domestic and  intra Community 
routes with equivalent distances 

— i — I — U ^ — i — I — L. 
I 
I 

8 
l 

I 
Î 

i 
I 

I 
1 

! 
I 

I 
$ 

t 
i 

§ 
l 

I 
l 

I  É 
2 
3 

Note:  For  city  codes  see  list of  abbreviations  (Annex  II) 

reductions  on  the  international  routes,  all  the  more  so  as  a  recent  study  published  by 
American  Express  (New  York Times,  20.12.95)  indicates  that the  fares  on  international 
European routes are roughly double those charged for comparable distances  in the United 
States. 

On the domestic markets  Europe  has become divided up into open markets  (sensitive  to 
competition  on fares)  and  closed  markets.  In the case of  the open markets,  major  fare 
wars were witnessed,  especially  in  1995, on the German market (DBA and Euro wings), 
the French market  (with the arrival of AOM,  Air Liberté and TAT), the Spanish market 
(Air  Europa  and  Spanair)  and  the  Italian  market  (with  Air  One  on  the  Rome-Milan 
route).  These  are  four  markets  where  the arrival  of new carriers  on certain  routes  has 
sparked  off  considerable  competition. 

In  the  closed  markets  we  find  Italy  (with the  exception  of  Rome-Milan),  Portugal  and 
Finland,  where  the fares  structures  adhere  to the conventional  pattern and  new  entrants 
benefit  the service  to the detriment  of prices.  Lastly,  Ireland,  Austria,  the  Netherlands 
and  Greece  remain  inflexible  markets,  in so far  as all the domestic  lines continue to be 
operated  as  monopolies. 

c) By fifth  freedom  or cabotage routes 

These  routes  account  for  only  1 % of  total  European  production,  and  it  is  therefore 
difficult  to  draw  meaningful  conclusions.  Nevertheless,  although  they  are  of  little 
significance  in  terms  of  European  output  as  a  whole,  fifth  freedom  and  cabotage 
operations  allow a new type of competition on fares  (examples: Alitalia,  on its French 
domestic routes (Lyon to Nantes and Toulouse), introduced a return fare more than 30% 
lower than that of Air  Inter.  Conversely,  none of the fares  offered  by Finnair,  which 
has developed a series of fifth  freedom  flights departing from Stockholm, are  my lower 
than those of its third  and fourth  freedom  competitors. 

Conclusions 

Fares  competition  has  been characterized,  by  and  large,  by the  launching  of new 
promotional  and special  fares  rather  than reductions  in existing  fares. 

The proportion  of  passengers  travelling  on scheduled  flights  with cut-price  tickets 
rose from  60.5% in  1985 to 70.9% in 1995.  Allowing for the fact that the charter 
market accounts for  some 50 to 55 % of the total market,  it is reasonable to assume 
that 90 to 95% of passengers  are currently  travelling at reduced  fares. 

Such reductions  as have occurred have not affected  the most flexible  fares.  On the 
contrary,  these fares  have even risen slightly,  notably  on the duopoly  routes,  i.e., 
on 93%  of all intra-Community  routes.  A detailed investigation clearly needs to be 
carried  out  in  order  to  identify  instances  of  excessive  fares  in  the  context  of 
Regulation (EEC) No 2409/92. 

Competition has not played any role except on (intra-Community or domestic) routes 
operated  by  more  than  two  carriers.  Furthermore,  initiatives  aimed  at  securing 
market  share by reducing  fares  have been confined  to a few carriers  only. 

Certain domestic markets  (Italy  (with the exception of Rome-Milan), Portugal and 
Finland,  Ireland,  Austria,  the  Netherlands  and  Greece)  are  still  strangers  to  real 
competition, either because competition is confined solely to quality and service and 
not fares,  or because the domestic lines are operated as monopolies. 

II  ACCESS  TO THE  MARKET 

The  rules  and  their  application 

-  Inasmuch  as  it  establishes  the  principle  that  Community  air  carriers  are  free  to provide  services  on 
intra-Community  air  routes,  Article  3 of  Regulation  (EEC)  No 2408/92  is the  cornerstone  of  the 
third  package.  This  freedom  brings  to  an  end  the  exchange-of-traffic-rights  arrangements  that  had 
existed  hitherto. 
-  The  Commission  has  received  many  requests  for  information  and  interpretation  concerning 
Regulation  No 2408/92,  as  well  as  several  complaints.  The  Member  States  have  been  closely 
involved  in examining  the  latter  through  the  Advisory  Committee  on Market  Entry  set  up  under 
Article  11.  The  Commission  has  therefore  been  required  to take  decisions  on: 

the  scope  of  the  Regulation; 
authorization  procedures  for  traffic  rights; 
safeguard  clauses  provided  for  in the  Regulation. 

-  Among  the cases  that  have  been  resolved,  mention  may  be  made  of  the  following:  the  definitive 
national  regulation  in  February  1996  allowing  seat-only  sales  on non-scheduled  return  flights  to  the 
Greek  islands;  the  Commission  reaffirmed,  pending  the  introduction  of  specific  rules  on  the  subject, 
that  this practice  was  covered  by  the  principle  of  free  market  access;  as  regards  public  service 
obligations,  more  than  100 intra-Community  routes  (in  Ireland,  Sweden,  Portugal,  the  United 
Kingdom  and  France)  had  been  opened  up under  the  new  Regulation. 
-  But  the  major  areas  where  Commission  interpretations  and  decisions  were  required  were  Articles  5 
(exclusive  concessions)  and  Article  8(1)  (distribution  of  traffic  within  the  same  airport  system),  with 
particular  reference  to  the  TAT  case  (Orly-Marseille  and  Orly-Toulouse)  and  access  to  the  Orly-
London  routes.  The  provision  of  access  to  Orly  Airport  has  been  particularly  crucial  in ensuring  the 
effective  liberalization  of  the  air  transport  market  in  France  to the  extent  that  85% of  domestic  traffic 
was  handled  by  this  airport.  The  French  authorities,  after  appealing  to the  Court  of  Justice, 
eventually  accepted  the  Community  decision. 

Following the introduction of complete freedom of access to the market, except for a few 
restrictions  affecting  cabotage until April  1997,  it has finally  been possible  to break the 
duopoly  situation  resulting  from  the  bilateral  agreements,  both  with  respect  to  the 
scheduled  airlines  and  the  companies  previously  classified  as  charter  operators. 
Nevertheless,  evidence is emerging that the new spirit of competition, which benefits the 
consumer  enormously,  may prove  to be a mixed blessing. 

1.  Development  and competition on the intra-Communitv routes 

Since  1992, while the number of intra-Community routes has increased somewhat, there 
has  been  a  marked  drop  in  the  number  of  routes  with  two  carriers,  both  relatively 
(compared with the total number of routes) and in absolute terms.  The number of routes 
(airport  to  airport)  for  which  more  than  two  airlines  compete  has  remained  limited, 
accounting  for only  2% of  all the intra-Community  routes  operated  at the beginning  of 
1993  and 6%  at the beginning  of  1996  (see  following  table). 

Intra-Community  routes  (airport to airport)4 

Jan.  1992 

Jan.  1993 

Jan.  1994 

Jan.  1995 

Jan.  1996 

510 

488" 

482 

522 

518 

283 
(56%) 

208 
(40%) 

296 
(61%) 

182 
(37%) 

318 
(66%) 

150 
(31%) 

342 
(66%) 

154 
(29%) 

329 
(64%) 

158 
(30%) 

19 (4%) 

10(2%) 

14(3%) 

26(5%) 

31  (6%) 

28 

20 

22 

39 

38 

Total 

Monopoly 

2  carriers 

More  than  2  carriers 
(airport  -  airport) 

More  than  2  carriers 
(city  - city) 
Source:  Reed  data  base. 

In contrast,  operating  frequencies  on these same intra-Community  routes have  increased 
considerably,  and  it  will  be  noted  that  the  proportion  of  flights  operated  on  intra-
Community  routes  with  more  than two carriers  has risen  from  12% at the  beginning  of 
1992 to  16%  at  the  beginning  of  1996 with  an even  higher  capacity  share  since  all  the 
major  routes  are  included  such  as:  Heathrow-Roissy,  Dublin-Heathrow,  Arlanda-
Copenhagen,  Brussels-Rome,  Amsterdam-Heathrow,  etc. 

While  it  is  true  that  there  has  been  a  relative  increase  in  the  number  of  monopoly-
operated routes,  the majority  of these routes are still in low traffic-density  sectors,  which 
are of  little  interest  to the big carriers  and,  as a result,  offer  a certain protection  to new 
entrants. 

It  should  also  be  stressed  that  a  large  number  of  these  monopoly-operated  routes  have 
faced  real competition not only  from  neighbouring  routes  but also from  charter  services 
or  other  modes  of  transport. 

2.  Development  and  competition  on domestic  routes 

It  is certainly  on the domestic  routes  that competition has been most  in evidence,  albeit 
in varying  degrees  from  one country  to another,  inspite  of the restrictions  of article  3.4 
of  the  Regulation  2408/92  which  are  applicable  until  the end  of  1996. 

Since the liberalization of market access, the traditional hiatus between, on the one hand, 
countries  where  even  prior  to  1993  a  multitude  of  small  companies  have  existed 
alongside  the  major  carriers  and,  on  the  other,  countries  where  the  national  carrier 
enjoys  a quasi-monopoly,  is  tending  to  disappear. 

Routes without intermediate touchdowns, from  airport to airport,  for which the capacity on offer  is more than once a week 

and  more  than  100  seats  a  week. 

Whereas  at  the  beginning  of  1992  some  90%  of  domestic  routes  were  still  operated  on 
a  monopoly  basis,  by  the  beginning  of  1996  this  figure  had  dropped  to  80%.  The 
number  of  routes  operated  by  two  competitors  or  more  almost  doubled,  going  from  65 
in January  1993 to  114 in January  1994.  The  biggest  change  occurred  in  1995,  mainly 
on  the  French,  Spanish  and  German  markets. 

Spain,  for  example,  changed  in the space  of  one year  (1994)  from  a situation  where  all 
domestic  flights  were  operated  on a monopoly  basis  to a situation  where  17 routes  (i.e. 
almost  30%  of the total)  had  been opened  to competition.  Air  Europa,  Spanair  and,  to 
a  lesser  degree,  Air  Nostrum  were  the  main  instigators  of  this  change. 

In  France,  the  biggest  Community  domestic  market  with  more  than  20  million 
passengers,  the situation  has changed  radically  in three years.  Between  1 January  1993 
and  1 January  1996  the  number  of  flights  increased  by  36%  on  the  French  domestic 
market,  and the number of departures  to the airports  of Toulouse,  Nantes  and Mulhouse 
more  than  doubled.  TAT,  AOM,  Air  Littoral,  Euralair  and  Air  Liberté  were  the 
operators  most  actively  involved. 

In  Germany  Lufthansa  dominates  a domestic  market  of  around  15 million  passengers. 
Of  the  13 competitors  no  fewer  than  6 are  new  since  the end  of  1992.  Their  activities 
are  still  limited,  however,  on routes  where  there  is practically  a monopoly.  In total,  a 
little  more  than  20%  of  domestic  routes  are  not  monopoly-operated. 

The  number  of  domestic  markets  where  more  than  two  carriers  are  active  on  certain 
routes  increased  from  three  in  1993 (United Kingdom,  German,  Portugal)  to six in  1996 
(the  same  three  plus  Spain,  France,  Denmark). 

Lastly,  in  the  Netherlands,  Austria,  Ireland  and  Greece,  the  national  carrier  alone 
operates  all  domestic  routes.5 

3.  Fifth  freedom,  cabotage,  seventh  freedom 

Regulation  (EEC)  No  2408/92  abolished  all  restrictions  to  fifth  freedom  operating. 
Thus,  whereas  as  at  1 January  1993  only  14 routes  were  operated  with  fifth  freedom 
rights,  by January  1996 no fewer  than 30  intra-Community  sectors,  including  six routes 
operated  on  a  code-sharing  basis,  were  on  offer.  This  change  has  also  affected  the 
carriers,  inasmuch  as,  now  in  1996,  all the major  Community  national  carriers  operate 
at  least  one  fifth  freedom  link,  whereas  in January  1993  only  eight  did  so.  However, 
certain  carriers,  notably  Finnair,  Iberia,  Alitalia  and  Luxair,  have  been  using  fifth 
freedom  links more extensively.  Furthermore,  it would appear that fifth  freedom  sectors 
are mainly operated by national carriers,  with the exception of certain flights by Regional 
Airlines and Portugalia and, more recently,  Lauda Air.  Lastly,  it should be stressed  that 
only four  routes have been operated  continuously  by the same carrier  between  1993 and 
1996,  which  can  be  explained  by  the  fact  that  this  kind  of  operation  is more  expensive 
than  direct  services  and  is  also  subject  to  greater  operational  constraints. 

With  the  exception,  in Ireland,  of  a number  of  interregional  services provided  by Aer Arann  with  nine-seater  planes,  in 
Austria,  of  three  flights  provided  by  Lauda  Air  and,  in  Greece,  of  the  brand  new  service  by  Venus  Airlines  between 
Athens  and  Thessalonika. 

10 

11  -

The  fact  that  cabotage  is  still  subject  to  a  number  of  restrictions  provides  a  possible 
explanation  why  the Community  carriers  have used  this  freedom  only  on a very  limited 
scale.  Thus,  in  1992 three  cabotage  services  were  provided  by  three  different  airlines. 
As  at  1 January  1993,  18 different  sectors  were  being  operated  on a cabotage  basis  by 
11  Community  carriers,  including  three  on  a  code-sharing  basis.  Between  1993  and 
1995 nearly  20 sectors  were operated  in cabotage,  only to be discontinued,  generally  not 
long  after  being  introduced.  By  January  1996  the  situation  had  hardly  changed,  with 
only  22 different  sectors  operated  in cabotage  (15  under  their  own codes  and  seven  on 
a code-sharing  basis).  With the exception of Aer Lingus,  however,  all the main carriers 
have been using cabotage services  during  the period  under consideration.  Nevertheless, 
by the beginning  of  1996, Lufthansa,  SAS and Air  France were no longer providing  any 
service  of  this  type. 

The  seventh  freedom,  which  is the freedom  to be established  in and to operate  from  any 
Member  State, has also been used  on a moderate scale.  As examples,  one could cite the 
two  special  experiments  of  DBA  and  TAT,  if  operating  under  the  BA code  as  used  by 
these  two carriers  (and not under  the code of the principal  shareholder)  is considered  to 
be seventh  freedom.  While DAB continues  to develop  without major  hitches,  TAT  has 
had  to  review  its  international  development.  These  two  airlines  have  developed 
international  links  on  the  basis  of,  and  in  parallel  with,  domestic  activities.  At  the 
instigation  of  its  shareholder  Lufthansa,  Lauda  Air,  for  its  part,  switched  some  of  its 
activities to Milan-Malpensa  airport  so as to provide a whole range of European  services 
as from  the summer of  1995.  However,  this experiment has not been continued.  Lastly, 
as  far  as  the  charter  companies  are  concerned,  TEA  was  the  first  to  relocate  its 
operations  by  setting  up  subsidiaries  in  Italy,  France,  the  United  Kingdom  and 
Switzerland  before  1993  in  anticipation  of  the  future  liberalization  of  the  European 
market.  Indeed,  it  is  the  charter  services  that  have  used  seventh  freedom  on  a  really 
significant  scale. 

4.  Under-capacity  routes  with  potential  for  new  entrants 

Between  European  capitals  (see map on next page),  at the end of  1995, there were  still: 

10 routes  without  any  link; 
10 routes  without  a daily  link; 
6  routes  without  a direct  link. 

This  state  of  affairs  is  due  in  part  to  the  fact  that  most  big  carriers  are  engaged  in 
restructuring  and  rationalization  programmes  and  are  concentrating  on  their  main 
operating  bases  and  on  certain  routes  rather  than  diversifying.  With  the  exception  of 
Luxembourg,  it is usually  the capitals  farthest  away  from  the centre that are affected  by 
this  phenomenon.  On  the  other  hand,  all  these  capitals  are  linked  via  "turntable" 
services  (e.g.,  Copenhagen  for  SAS). 

12 

r.:~j-

-  13  -

In its CAP 654 report  the British  CAA estimated  that,  out of 33 intra-Community  routes 
registering  more  than 250  000 passengers  per  year  and still  operating  as  monopolies  or 
duopolies,  15 could  cope  with  increased  competition  and  accommodate  new  entrants 
The  report  also  identified  34 domestic  routes  in Europe  operating  at the end  of  1994 on 
a  monopoly  or  quasi-monopoly  basis  which  could justify  additional  competition. 

5.  Code-sharing 

The  term  "code-sharing"  refers  to  a form  of  commercial  arrangement  between  two  air 
carriers,  whereby  a carrier  operating  a certain service allows the other carrier  to provide 
this same service under  his own code or under  a shared  code.  On an international  scale, 
more than 70% of alliances nowadays involve code-sharing arrangements.  This practice, 
developed  in the  United  States,  has secured  the transatlantic  links and  over  the  last  few 
years  has  been  making  considerable  inroads  into  the  intra-Community  routes. 
In 
proportion  to their  activities,  at the beginning  of  1993 Sabena  and  Air  France  were  the 
biggest  users  of  this  formula  among  the  main  carriers  and  Eurowings  (NFD), 
Maersk  UK,  Hamburg  Airlines  and  Lauda  Air  among  the  regional  carriers.  At  the 
beginning  of  1996  British  Midland,  TAP,  Iberia,  Austrian  and  Luxair  were  the  most 
active operators  in this sector.  For some companies, especially medium-sized  or regional 
companies,  code-sharing  activities have grown  to such an extent that at the beginning  of 
1996 they accounted for the main bulk of their intra-Community  operations.  Transwede, 
Air  Dolomiti,  Lauda  Air,  Eurowings,  Portugalia  and  Air  UK,  for  example,  were 
cooperating  with other  carriers  using  code-sharing  formulas  on more than 50%  of  their 
intra-Community  flights  (more  than  90%  for  the  first  three).  It is  also clear  that  since 
1993  these  agreements  are  no  longer  limited  to  a  single  partner,  at  least  as  far  as  the 
principal  carriers  are  concerned.  With  the  exception  of  Luxair  and  Olympic,  they  all 
have several different  partners depending on the sector concerned.  Finally,  code-sharing 
has  also  tended  to  develop  on  domestic  routes  and  British  Midland  has  concluded 
agreements  with  a whole  raft  of European  airlines  whereby  the  latter  attach their  codes 
to domestic  flights  of British  Midland  out of  London.  Furthermore,  BA has  developed 
franchised  code-sharing  services  with  a large  number  of  companies. 

14 

Conclusions 

The monopoly-operated  routes  still  account  for  64% of all  intra-Community  routes. 
In addition,  the  routes  served  by  more  than  two carriers  have  risen  from  2%  of  all 
intra-Community  routes  at  the  beginning  of  1993 to  6%  at  the  beginning  of  1996. 
It  is  at  the  domestic  level  where  the  impact  of  competition  has been  more  marked, 
in  that  the  number  of  routes  operated  by  two  or  more  competitors  has  almost 
doubled,  increasing  from  65  in January  1993 to  114 in January  1996.  The  greatest 
expansion  has  occurred  on  the  French,  Spanish  and  German  markets. 

Although  the  number  of  fifth  freedom  routes  has  doubled  between  1993  and  1996 
from  14 to  30,  this  type  of  operation  still  retains  its  secondary  character. 

Under  Regulation  (EEC)  No  2408/92,  the use  of  cabotage  is authorized  only  as  an 
extension of an international  service up to 50% of the seasonal capacity on the initial 
service. 

Seventh  freedom  has  been used  on a  limited  scale  only. 

The  Community  market  is capable  of  sustaining  increased  competition  on  both  the 
intra-Community  and  the  domestic  routes.  This  has  been  supported  by  the 
Commission  for  example  as  it  has  been  illustrated  in  the  crucial  case  of  access  of 
Orly  airport. 

the  international 

Reflecting 
the  practice  of  code-sharing  has  evolved 
considerably  on the Community  market to the extent that,  for  some companies,  this 
activity  accounts  for  the  bulk  of  their  operations. 

trend, 

15 

III.  DEVELOPMENT  OF AIRLINES 

The rules  and their  application 
Regulation  (EC)  No 2407/92 laid down rules on the issuing of the Community licence.  Under these 
rules the Member  States have issued  more than 800 licences  during the period  under consideration. 
An extremely  limited  number of these  licences  have been revoked,  mainly  because  of  financial 
difficulties  or bankruptcies. 
Discussions over these three years have centred  basically  on the question of ownership  and  effective 
control. This was clarified  as a result of the Swissair/Sabena  case,  the general  aim being to protect 
the interests  of the Community's  air transport  industry  - until such time as the Community  airlines 
are permitted  to invest freely  abroad  - by ensuring  that non-Community  operators  cannot  unilaterally 
exploit  the liberalized  Community  market  by means of financial holdings. 
As regards  the question of leasing  of aircraft,  the Commission  has  reaffirmed  that,  at this stage, the 
authorization  of leasing  arrangements  under Regulation  (EEC) No 2407/92 is required  solely  for the 
purpose of ensuring compliance  with safety  and liability  standards.  Accordingly,  the national 
licensing  authorities  must not prevent  air carriers  from  entering  into leasing  arrangements  for  reasons 
other  than ensuring  safety  and liability  (for  example,  for  aeropolitical  considerations). 

1.  General development of company capacity 

Capacity  has  developed  to  a  limited  extent  and,  in the case  of  scheduled  services,  is 
mainly the result  of the activity  of  small and medium-sized  enterprises  and the arrival 
of some new entrants  in certain markets.  In general,  output (expressed  in numbers of 
flights  or  seats  available)  of  virtually  all airlines  increased  and  load  factors  improved 
because  of renewed growth  in traffic.  The breakdown of output between the  different 
categories  of airline on the European market  is as follows: 

Breakdown  of output on the European market 

Major  airlines  (AEA) 

Medium  and regional  airlines  (ACE) 

Medium and regional  airlines  (ERA) 

Charter  airlines  (ACE)7 

114.791 

25.384 

24.0756 
(32.100) 
206.4708 

31  % 

7 % 

6  % 

56  % 

APK (million): 

370.720 

100% 

Estimate,  excluding  non-EC airlines and subsidiaries  of  AEA carriers. 

Whose  main activity  is charter operations. 

Considering  that  75 % of  their overall  traffic  is  intra-European. 

16 

In terms  of  the creation  of  companies,  some  spectacular  developments  have  occurred, 
so  much  so  that  the  number  of  European  companies  operating  scheduled  services  in 
Europe  has  increased  by just  over 50%. 

Total number of Community air  carriers 
operating  scheduled  airlines 

250  T 

200 

100 

99 

130 

T ?a  125 

122 

13G  _  J*i 
132 

156 

D 
• 

All air lines 
Major airlines 

44  M £j  <5 

49  |_52j I 48 I I 49 I LHJ  Ul 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

Source 

REED  - Market  Analysis 
CAA  London  - CAP  654 

Years 

Around  80 new  businesses  have been set up as against 60 closures,  including  a certain 
number of  absorptions  (Air  Vendée,  Brymon)  and re-absorptions  (ATI,  Viva). 

With the exception of the UK, each of the Member States still has a sizeable share in its 
"national  airline".  These  companies  have  experienced  a further  increase  in output  in 
1995. 
It  should  be  noted,  however,  that  the  total  market  share  (domestic  and  intra-
Community) of the national carriers departing from each Member State has declined vis-
à-vis  their  direct  competitors.  Thus,  whereas  in  1993  the  principal  carriers  of  10 
countries  still  accounted  for  over  three-quarters  of  the  available  seats  in  their  home 
market,  by  1996  the decline  in concentration  is  such that only  six  countries  are still  in 
this  situation.  However,  while  concentration  is  declining,  there  are  still  considerable 
differences  between the national carriers and their nearest rivals.  Nevertheless, the latter 
are making considerable  advances  in boosting  their output. 

-  17-

Output of the second  largest  carrier  in relation to the largest9 

Ryanair/Aer  Lingus 

1990 

16 % 

British  Midland/British  Airways10 

29 % 

Ireland 

United 
Kingdom 

Austria 

Lauda  Air/Austrian 

Portugal 

Portugalia/TAP 

France 

Belgium 

TAT/Air  France  (Air  Inter) 

EBA/Sabena 

Denmark 

Maersk/SAS 

Germany 

DBA/Lufthansa 

Italy 

Spain 

Meridiana/Alitalia  (ATI) 

Air  Europa/Iberia  (Aviaco) 

Netherlands 

Transavia/KLM 

Sweden 

* 

.._—= 

Transwede/SAS 

2.  Scheduled  and non-scheduled  airlines 

1993 

27 % 

28 % 

5 % 

31 % 

6 % 

-

28 % 

8 % 

14 % 

-

4 % 

2 % 

1996 

60 % 

24 % 

28 % 

29  % 

12 % 

6  % 

31 % 

13 % 

14 % 

10 % 

6  % 

16 % 

-

-

6 % 

-

2 % 

-

7 % 

-

6 % 

-

The  third  package  has  removed  the  distinction  between  scheduled  and  non-scheduled 
services.  Henceforth,  charter  specialists  can sell tickets to private  individuals  at both 
ends of the route on a seat-only basis.  Furthermore, like scheduled airlines, they can set 
up in any European  market.  Some of them have benefited  from  these new provisions 
to  enter  the  scheduled  market  (Air  Europa,  Spanair,  Air  Liberté,  LTU,  etc.)  while 
retaining their purely charter  activities  in parallel. 

Despite these changes, the charter market has continued to grow in terms both of output 
and traffic.  In the case of certain destinations such as Spain and Greece, charter  traffic 
still  accounts for  more than 80% of the total traffic  (scheduled  and non-scheduled). 

The  European  non-scheduled  market  involves  some  40  companies,  600 aircraft  and 
65 million passengers.  The United Kingdom, Germany and Spain operate 80% of this 
traffic.  The charter  airlines continue to fall  into two main groups:  those dependent on 

Comparison  based  on  the output  for  a week  in January  (Reed  data base). 

10 

British  Airways  and  the  franchisees  sharing  its code. 

18 

a  national  carrier  (Sobelair/Sabena,  Condor/Lufthansa,  etc.)  and  those  linked  to  or 
controlled  by  a major  tour  operator. 

3.  Alliances  and  partnerships 

In  a  world  of  global  markets  and  trade  liberalization,  airlines  have  taken  to  thinking  in  terms  of 
cooperation,  alliances  and  holdings.  The  obvious  objective  is  to  achieve  economies  of  scale  at  all 
levels,  by  combining  or  developing  joint  activities,  but  it  is also  seen  as  a way  of  gaining  access  to 
markets  that  are  otherwise  difficult  to  penetrate. 

Some  agreements  are  of  a  marketing  type  and  purely  commercial.  Some  tend  to  reflect  a  control 
strategy  through  the  acquisition  of  holdings,  while  others  constitute  a new  approach:  franchising.  All 
have  the  generic  name  of  alliances. 

These  alliances  may  also  be  divided  into  two  categories:  tactical  and  strategic.  The  tactical  or 
ad hoc  alliances  focus  more  particularly  on  a  range  of  activities,  a joint  marketing  technique  (code-
sharing)  or  even  a particular  route,  while  the  strategic  alliances  generally  cover  a wide  variety  of 
activities  (marketing,  technical  aspects,  representation,  administration,  code-sharing,  etc.)  and 
theoretically  have  a  long-term  objective. 

While  it  is  true  that  these  alliances  are  not  a  direct  consequence  of  air  transport 
liberalization  in the  Community,  the  provisions  of  the third  package  have  nevertheless 
facilitated  this  type  of  agreement.  From  59  alliances  in  1990  there  has  been  a 
progressive  increase  to  138 in  1994 and  171  in  1995 (Airline  Business,  June  1994 and 
June  1995). 

Although  acquisitions  of  financial  holdings  were  rare  at  the  beginning  of  the  1990s,  a 
number  of  companies  were  still  able  to  attract  potential  investors:  Tyrolean,  Brymon, 
Air  UK,  Martinair,  I^uda  Air  and  Business  Air.  Conversely,  Air  France  severed  all 
links with Sabena (49.5%  of whose capital has meanwhile been taken over by Swissair). 
Nevertheless,  the trend remains one of link-ups and consolidation.  All the European  flag 
carriers  have  subsidiaries  or  more  or  less  sizeable  holdings  in other  European  or  even 
non-European  airlines.  These  link-ups  are  motivated  by  a threefold  strategy: 

Gaining  control  of  your  own  market 
Airways/British  Caledonian/Dan Air,  Austrian/Tyrolean) 
Getting established on another Community market (Lufthansa/Business  Air/Lauda 
Air,  British  Airways/Deutsche  BA/TAT). 
Seeking a more global alliance at world level (KLM/Northwest,  Iberia/Aerolineas 
Argentinas,  British  Airways/US  Air). 

(Air  France/Air 

Inter,  British 

19 

In  many  cases,  alliances  without  financial  participation  are  still  planned.  The  first 
important  example  in Europe  dates  from  1990:  the  European  Quality  Alliance  between 
SAS,  Swissair  and Austrian until  1991.  Since then,  there have been alliances  of a  more 
global nature,  as between Lufthansa  and SAS (integration of frequent-flyer  programmes, 
ground-handling  services,  development  of code-sharing,  etc.),  under  certain  conditions 
imposed  by the Commission  (freeze  on frequencies,  release of slots,  etc.).  It should  be 
noted  that  most  of  the  alliances  not  involving  financial  participation  have  one  thing  in 
common:  the  development  of  code-sharing  arrangements. 

With franchising,  a new concept has emerged.  Five British carriers  (City  Flyer,  Manx, 
GB  Airways,  Loganair,  Maersk)  now  fly  under  the  British  Airways  code  and  livery. 
Through  these  agreements,  British  Airways'  partners  are  authorized  to  use  the  British 
Airways'  logo (British Airways Express)  and colours (uniforms,  cabin furnishings,  sales 
desks,  etc.)  and  certain  services  (control  of  cash  receipts,  management  of  the  frequent-
flyer  programme,  reservations,  etc.). 
In  exchange,  in  addition  to  a  fee,  they  must 
undertake  to  respect  British  Airways'  standards  of  service.  The  advantages  of  such 
cooperation are real for  both parties.  The partners  acquire a name and a system.  British 
Airways,  for  its  part,  develops  its  operations  at  zero  cost  on  a  wide  variety  of  highly 
diversified  routes  and  benefits  from  the  feed-in  of  passengers  to  its  European  or  long-
haul  services.  The  concept  also  has  advantages  for  consumers,  since  British  Airways 
undertakes  to  deal  with  and  solve  any  problems  that  may  arise  in  the  course  of  their 
journey,  which  is  not  always  the case  where  code-sharing  only  is  practised. 

4.  Airline  traffic 

The AEA airlines have seen a steady growth in their traffic  in geographical  Europe  since 
1992.  Overall  traffic  increased  by  8.1%  in  1994,  the biggest  rise  for  15 years  leaving 
aside  the  9.1%  in  1992  following  the  drop  in  traffic  recorded  in  1991.  This  trend 
continued  in  1995  with  growth  reaching  6.1%, and  a new  record  of  8.3%  in terms  of 
PCK  for  all  the  AEA  airlines  taken  together.  This  fairly  sustained  growth  in  traffic, 
coupled  with  a  more  moderate  increase  in  output,  was  reflected  in  an  improved  load 
factor  for  all  the  national  carriers  which,  like  the  productivity  improvements,  brought 
many  of  them  back  into  profit  ability. 

After  running a deficit for  several years, most airlines managed to get back into the black 
in  1995.  Net  profits  for  the  12  main  Community  airlines  are  in  the  region  of 
US$  800 million  against  a net  overall  loss  on the  same  scale  in  1994.  However,  only 
British Airways, Finnair and KLM achieved universally favourable results over the entire 
period  from  1990 to  1994.  Among  the medium-sized  and regional  airlines  which  have 
been  particularly  active  since  the  introduction  of  the  third  package,  good  results  were 
achieved  in  1995 by Regional Airlines  and Air Littoral  with net profits  of  FF  9  million 
and FF  8.5  million respectively,  by EBA (net profit  of BF 200 million) and by Tyrolean 
Airways  (net  profit  of  US$  3 million). 

20 

As  part  of  the  effort  to  increase  productivity,  most  airlines  have  reorganized  and  cut 
staff.  For  example,  the  AEA  carriers,  which  are  the  main  companies  involved  in 
reducing  numbers,  shed  5 000  staff  in  1994,  so  that  the  total  number  of  employees  is 
now  the  same  as  in  1986.  Together  with  traffic  increases  and  improved  output,  these 
staff  cuts  have  had  the  effect  of  improving  productivity  per  person  considerably. 

5.  Employment 

While there  have been no dramatic  disappearances  among the more  important  carriers, 
the  Commission  is  conscious  of  the  potential  implications  of  the  liberalisation  of  air 
transport  for  employment  in the  sector. 

The  creation  of  greater  competition,  and  the  growth  in  total  air  traffic  which  this  is 
bringing  about, should counterbalance to some extent the restructuring  already  underway 
among  existing  operators. 

Furthermore,  the  Commission  continues  to  consult  the  social  partners  in  the  Joint 
Committee  on  Civil  Aviation  on  the  measures  to  implement  air  transport  liberalisation 
and  in  this  context,  a study  on the  Social  Impact  of  Liberalisation  is  in progress. 

Conclusions 

-  A large  number  of  airlines  have been  set up  since  1993 (some  80 new airlines  were 

created  while  60 disappeared). 

- 

In  the case  of  scheduled  traffic,  the development  of capacity  (expressed  in  numbers 
of flights  or seats available) has been mainly  attributable to the activities of the small 
and  medium-sized  enterprises. 

-  The  share  of  the  national  carriers  in  total  output  is  declining  compared  with  their 
main direct  competitors  (example: Ryanair's  output  is already  over  half  that  of  Aer 
Lingus). 

-  The charter  market  is continuing to grow  as a result  of the changes brought  about by 
the third package.  In certain countries charter traffic  may account for more than 80% 
of  the  total  traffic. 

- 

In keeping with the international trend, alliances within the Community are continuing 
to  develop. 

-  1995  stands  out  as the year  when most  of  the  European  scheduled  airlines  got  back 
into the black thanks,  among  other  things,  to  a  sustained  growth  in traffic,  coupled 
with a moderate increase  in output,  which was reflected  in improved load factors  and 
increased  productivity. 
It  is  striking  to  observe  that  throughout  the  same  period 
almost  all  the charter  companies  made  a  profit. 

21 

IV.  OBSTACLES  TO  COMPETITION 

The third  package has now been  in place for  three years.  However,  despite  the ensuing 
liberalization,  the anticipated  results have not been fully  achieved.  Indeed, there are still 
a number of factors preventing the air transport  market of the Europe of the Fifteen  from 
achieving  its  full  potential. 

-  First and foremost,  attention must be drawn to the problems linked to  infrastructures: 
airports  with  limited  capacity,  overcrowded  runways  and  time-slot  problems.  An 
IATA  study  predicts  that  by  2005  European  passenger  traffic  will  double,  which 
means  that  there  will  be  about  600  million  additional  passengers  and  7  million 
additional  landings  and  takeoffs.  In contrast,  more  than  10 European  airports  could 
well  be operating  below  their  actual  capacity. 

-  For  years,  airports  and governments  have restricted  access  to the market  in  ground-
handling  services  with  the  result  that  the  national  carrier,  one  of  its  subsidiaries  or 
sometimes an independent company has exercised  a monopoly  in these services.  The 
rates  charged  are  frequently  excessive,  if  not  prohibitive. 

-  The  absence  of  a common  external  policy  leaves  the internal  air  transport  market  in 
a  fragile  state  and  at  the  mercy  of  positions  acquired  through  bilateral  agreements 
concluded  between the Member  States and third  countries.  Because  of the  diversity 
of these agreements  the Member  States and their  air carriers  have to work  with non-
harmonized  systems  and  rules  in their  dealings  with  non-member  countries.  These 
rules  are  in  some  cases  even  incompatible  with  the  internal  market  (e.g.  national 
designation  clauses,  obligatory  trade  agreements,  etc.).  Lastly,  the  open  sky 
agreements concluded recently by certain Member States with the United States make 
no provision  for  any accompanying measures  ensuring  the proper  functioning  of this 
liberalized  environment. 

-  To these should be added a number of external factors,  such as disparity  in social and 
tax legislation or the environmental  aspect to which some Member States attach more 
importance  than others.  Historical  factors,  such as situations  resulting  from  bilateral 
agreements  (designated  national carriers,  designated  single national carriers)  are also 
still 
traffic, 
recapitalization)  and  thus  form  an obstacle  to  competition. 

some  companies 

intercontinental 

(generating 

favour 

likely 

to 

During  the  period  under  consideration,  the  Commission  took  action  on  all  of  these 
problems,  and  continues  to  do  so,  in collaboration  with the  relevant  organizations  and 
authorities  with  the  aim  of  achieving  total  liberalization,  without  obstacles  or 
discrimination. 

22 

Examples  of  this  action  include: 

-  Council Regulation (EEC) No 3089/9311 amending the code of conduct for  computerized 
reservation  systems  in accordance  with  the  rules  introduced  by  the  third  package; 

-  publication at the beginning of  1996 of the White Paper on Freeing  Europe's  Airspace, 
which  deals  with  the  problems  posed  by  the  fragmentation  of  European  airspace  into 
incompatible systems  and the serious  implications this has in terms of air traffic  control; 

-  Directive on the gradual liberalization of access to the ground-handling  services  market; 

-  Council  Regulation  (EEC)  No  95/9312,  adopted  in  January  1993, on  the  allocation  of 
slots; this is now being revised  and should be the subject  of new Commission  proposals 
during  1996; 

-  efforts  by  the  Commission,  in  the  context  of  the  common  external  policy,  to  obtain  a 
Community mandate for negotiating air agreements with non-member countries;  in this 
context  the Commission  also intends shortly to submit its proposals to expand the scope 
of  Council  Regulations  (EEC)  3975  and  3976/87. 

- 

- 

introduction  by  the  Commission,  before  the  end  of  1996,  of  a  proposal  on  airport 
charges based on the three major principles of non-discrimination,  transparency  and true 
reflection  of  costs. 

In  addition,  at  the  end  of  1994  the  Commission  adopted  strict  rules  on  state  aid  and 
reiterated  the  principle  that  state  aid  should  be  paid  only  once.  The  Commission's 
policy  in  this  respect  is  to  permit  airlines  which  benefit  from  such  aid  to  re-establish 
their  viability  while  limiting  as  much  as  possible  distortive  effects  on  competition.  In 
addition the Commission continuously  monitors that conditions under which the aid was 
approved are respected.  To this end in the case of restructuring  aid the Commission  will 
normally  request  that  a  progress  report  on  the  implementation  of  the  restructuring 
programme  together  with the respect  of the conditions  is submitted at regular  intervals. 

OJL  278  of  11.11.1993 
OJL  14 of 22.1.1993 

23 

Finally,  the  Commission  continues  to  work  on  new  legislation  to  step  up  consumer 
In  this  connection,  the  National  Aviation 
protection,  quality  of  service  and  safety. 
Authorities,  combined  in  the  JAA,  have  also  worked  out  a  set  of  technical  and 
operational  conditions  (JARs)  which  have  to  be  submitted  for  examination  for  their 
incorporation  in Community  legislation  on the basis  of Regulation  (EEC)  3922/9113  so 
that the  various  national  practices  in this  field  may  be harmonized.  In particular,  this 
will  include  provisions  to  harmonize  the  implementation  of  Article  10  of  Regulation 
(EEC)  No  2407/92  on the  leasing  of  aircraft. 

13  OJL 373 of 31.12.1991 

24 

Selected  Fully Flexible Air Fares  in the EU 

Y fares  for  100 - 500 Km 

-  July  1996 

Lowest  Domestic 

Highest  Domestic 

Preveza-Athens 

Alexandroupolis-Athens 

Thessaloniki  - Ioannina 

Corfu  - Athens 

Kavala  - Athens 

ECU 

ECU/Km 

ECU 

ECU/Km 

32 

46 

25 

53 

45 

0.11 

0.12 

0.12 

0.13 

0.13 

Limoges  - Lyon 

Toulouse  -  Clermont-Ferrand 

Turku  - Tampere 

Lille  - Metz 

Eindhoven  -  Amsterdam 

188 

187 

87 

199 

75 

0.65 

0.67 

0.67 

0.70 

0.71 

Lowest  International 

Highest  International 

Belfast  - Cork 

Exeter  - Dublin 

Cardiff  - Dublin 

Bristol  - Paris 

ECU 

ECU/Km 

119/  124 

0.34  /  0.35 

Brussels  - Luxemburg 

126 /  131 

0.35  /  0.37 

Mariehamn  -  Stockholm 

108 /  113 

0.36  /  0.38 

Le Havre  -  Southampton 

185 /  241 

0.41  /  0.53 

Luxembourg  -  Frankfurt 

London -  Dusseldorf 

197/ 

0.41 

Le Havre  - London 

ECU 

166 

ECU/Km 

0.89 

112/  115 

0.92  /  0.93 

184 /  179 

0.89  /  0.96 

182 /  177 

1.04/  1.01 

255  /  210 

1.42/  1.17 

Source  : OAG 

All routes  are  operated  at least  on all weekdays. 

fe\ 

Selected Fully Flexible Air Fares in the EU 

C fares for  100 - 500 Km  -  July 1996 

Lowest  Domestic 

Highest  Domestic 

ECU 

ECU/Km 

ECU 

ECU/Km 

Thessaloniki  - Athens 

Oporto  - Lisbon 

Paris  - Bordeaux 

East  Midlands  - Aberdeen 

Munich  - Berlin 

70 

74 

138 

156 

158 

0.23 

0.28 

0.28 

0.32 

0.33 

Frankfurt  - Dusseldorf 

Leipzig  - Hamburg 

Frankfurt  - Munster 

Hamburg  - Rostoch 

Stuttgart  -  Frankfurt 

149 

246 

184 

131 

138 

0.79 

0.82 

0.83 

0.86 

0.89 

Lowest  International 

Highest  International 

London  -  Waterford 

Bristol  - Brussels 

Cork  - Birmingham 

London  - Dusseldorf 

London  - Amsterdam 

ECU 

ECU/Km 

170 /  177 

0.37  /  0.38 

Hanover  - Brussels 

200/ 

188/ 

197/ 

149/ 

0.40 

0.41 

0.41 

0.42 

Leipzig  -  Copenhagen 

Bremen  -  Copenhagen 

Luxembourg  -  Frankfurt 

Rônneby  -  Copenhagen 

ECU 

291/ 

ECU/Km 

0.73  / 

387 /  361 

0.83  /  0.77 

320 /  306 

0.85  /  0.81 

157 /  148 

0.90  /  0.85 

221 /  218 

1.25/  1.23 

Source  : OAG 

All routes are operated at least on all weekdays. 

Selected  Fully  Flexible  Air  Fares  in the EU 

Y fares  for  over  500 Km 

-  July  1996 

Lowest  Domestic 

Highest  Domestic 

ECU 

ECU/Km 

ECU 

ECU/Km 

142 

165 

142 

142 

165 

0.16 

0.16 

0.16 

0.17 

0.17 

Mulhouse  - Nantes 

Toulouse  - Mulhouse 

Rennes  - Lyon 

Toulouse  - Rennes 

Lyon  - Le  Havre 

262 

264 

251 

252 

260 

0.39 

0.41 

0.44 

0.46 

0.47 

Lowest  International 

Highest  International 

ECU 

353 

ECU/Km 

0.20 

Hamburg  - Strasburg 

335 /  427 

0.20  /  0.26 

Munich  - Nice 

119/  124 

0.20  /  0.21 

Luxemburg  - Hamburg 

319 

343 

0.20 

0.20 

Paris  - East  Midlands 

Stuttgart  - Nice 

ECU 

371 

399 

ECU/Km 

0.63 

0.63 

340 /  328 

0.66  /  0.55 

331 /  243 

0.66  /  0.48 

404 

0.70 

Paris  -  Ajaccio 

Milano  - Catania 

Paris  - Biarritz 

Paris  - Calvi 

Verona  - Catania 

London  - Helsinki 

London  - Malaga 

London  - Shannon 

London _  Lisbon 

London  -  Faro 

Source  : OAG 

AU routes  are operated at least on all weekdays 

H 
^ 

Selected  Fully Flexible  Air Fares in the EU 

C  fares  for  over  500  Km 

- 

July  1996 

Lowest  Domestic 

Highest  Domestic 

ECU 

ECU/Km 

ECU 

ECU/Km 

Canary  Islands  - Barcelona 

Marseille  - Paris 

Genova -  Cagliari 

Paris  - Nice 

London  -  Belfast 

178 

146 

134 

167 

136 

0.08 

0.22 

0.23 

0.25 

0.25 

Friederichshafen  - Berlin 

Stuttgart  - Hamburg 

Saarbrucken  -  Dresden 

Stuttgart  - Berlin 

Saarbrucken  -  Hamburg 

258 

237 

223 

224 

249 

0.42 

0.43 

0.43 

0.43 

0.47 

Lowest  International 

Highest  International 

ECU 

ECU/Km 

London  - Palma  Majorca 

150 /  155 

0.11  /  0.11 

Niirnberg  - Paris 

Manchester  - Palma  Majorca 

180 /  186 

0.11  /0.12 

Strassburg  - Vienna 

London  - Athens 

434 /  574 

0.18/0.24 

Luxemburg  -  Hamburg 

East  Midlands  - Malaga 

343 /  384 

0.19/0.25 

Paris  - East  Midlands 

London - Helsinki 

353 

0.20 

Stuttgart  - Nice 

ECU 

377 

395 

ECU/Km 

0.61 

0.61 

330  /  284 

0.63  /  0.55 

331 /  235 

0.66  /  0.47 

404 

0.70 

Source  : OAG 

All routes  are  operated  at least  on all weekdays. 

ANNEX  II 

List of  abbreviations 

SOT  GOT 
STO  OSL 
MAD  AGP 
MAD  OPO 
LON  NCL 
LON  DUB 
FRAHAM 
FRAPAR 
HEL  KOK 
HEL  STO 
PAR  BOD 
PARAMS 
VCE  ROM 
VCE  STR 

ATM 
JAA 
JAR 
IATA 
APEX 
PEX 
AEA 
CAA 
ACE 

PKT 

Stockholm  -  Gothenburg 
Stockholm  - Oslo 
Madrid  - Malaga 
Madrid  -  Oporto 
London  -  Newcastle 
London  -  Dublin 
Frankfurt  -  Hamburg 
Frankfurt  - Paris 
Helsinki  - Kokkola 
Helsinki  -  Stockholm 
Paris  -  Bordeaux 
Paris  -  Amsterdam 
Venice  - Rome 
Venice  -  Strasbourg 

Air  Traffic  Management 
Joint  Aviation  Authorities 
Joint  Aviation  Regulations 
International  Air  Transport  Association 
Advanced  purchased  excursion  ticket 
Purchased  excursion  ticket 
Association  of  European  Airlines 
Civil  Aviation  Authority,  UK 
Association  des  Compagnies  Aériennes  de  la 
Communauté  Européenne 
Passagers  kilomètres  -  transportés 

l°l 

ISSN  0254-1475 

COM(96) 514  final 

DOCUMENTS 

EN 

07  08 

Catalogue  number  :  CB-CO-96-541-EN-C 

ISBN  92-78-10653-4 

Office  for Official  Publications of the European Communities 

L-2985 Luxembourg