2002/746/EC: Commission Decision of 5 July 2002 relating to a proceeding pursuant to Article 81 of the EC Treaty and Article 53 of the EEA Agreement (COMP/37.730 — AuA/LH) (Text with EEA relevance) (notified under document number C(2002) 2502)
Date: 2002-07-05
Institutions: European Commission
Subjects: air transport, economic concentration, exchange of information, law of obligations, merger control, restriction on competition

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 5 July 2002

relating to a proceeding pursuant to Article 81 of the EC Treaty and Article 53 of the EEA
Agreement

(COMP/37.730 — AuA/LH)

(notified under document number C(2002) 2502)

(Only the German text is authentic)

(Text with EEA relevance)

(2002/746/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community,

Having regard to the Agreement on the European Economic
Area,

Having regard to Council Regulation (EEC) No 3975/87 of 14
December 1987 laying down the procedure for the application
of the rules on competition to undertakings in the air transport
sector (1), as last amended by Regulation (EC) No 2410/92 (2),
and in particular Article 5 thereof,

Having regard to the notice (3) published pursuant to Article
5(2) of Regulation (EEC) No 3975/87,

Having regard to the notice (4) published pursuant to Article
16(3) of Regulation (EEC) No 3975/87,

Having consulted the Advisory Committee on Agreements and
Dominant Positions in Air Transport,

Whereas:

1. INTRODUCTION

(1)

On 10 December 1999 Deutsche Lufthansa AG (Lufth-
ansa) and Austrian Airlines (together hereinafter called
the ‘Parties’) notified under Regulation (EEC) No 3975/
87 a cooperation agreement concluded on 19 October

(1) OJ L 374, 31.12.1987, p. 1.
(2) OJ L 240, 24.8.1992, p. 18.
(3) OJ C 193, 11.7.2000, p. 7.
(4) OJ C 356, 14.12.2000, p. 5.

1999. The Parties aim to forge a lasting alliance by
creating an integrated air traffic system built on close
cooperation in commercial activities, marketing and
operational activities. A framework agreement sets out
the main features of the cooperation. In addition, the
two companies have negotiated a number of more
specific implementation agreements and a special pro-
rate agreement defining their joint pricing policy. Under
a ‘neighbourhood agreement’, they have created a joint
venture for traffic between Germany and Austria, with
profits and losses being shared.

Pursuant to Article 5 of Regulation (EEC) No 3975/87,
the Parties request an exemption under Article 81(3) of
the EC Treaty and Article 53(3) of the EEA Agreement.

On 11 July 2000 a summary of the application for
exemption was published in the Official Journal of the
European Communities pursuant to Article 5(2) of Regula-
tion (EEC) No 3975/87.

On 4 October 2000, pursuant to Article 5(3) of Regula-
tion (EEC) No 3975/87, the Commission notified the
Parties by letter of its serious doubts about the compati-
bility of the agreement with the common market.

On 10 May 2001 the Commission sent Austrian Airlines
and Lufthansa its statement of objections, in which it
notified the Parties of its preliminary assessment that the
cooperation agreement between them could not be
exempted under Regulation (EEC) No 3975/87.

(2)

(3)

(4)

(5)

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(6)

(7)

(8)

(9)

(10)

(11)

(12)

(13)

(14)

(15)

It set out

On 14 December 2001 the Commission published a
notice in the Official Journal of the European Communities
pursuant to Article 16(3) of Regulation (EEC) No 3975/
87.
the notified
cooperation agreement for six years on the basis of the
commitments given by the Parties and the declared
intention of several competitors to enter the market.
Interested third parties were given the opportunity to
submit comments.

its intention to exempt

2. THE PARTIES

2.1. Lufthansa AG

Lufthansa is the holding company of
the Lufthansa
group, which provides air transport for passengers and
goods and is engaged in activities relating to air trans-
port.
It was fully privatised in 1997 and has some
350 000 shareholders.

Lufthansa's main subsidiaries are: Lufthansa Cargo
(100 %), Lufthansa Technik (100 %), LSG (100 %),
Lufthansa City Line (100 %), Eurowings (25 %), British
Midland (20 %), Air Dolomiti (26 %) and Luxair (13 %).

In 2000 Lufthansa had a turnover of EUR 15,2 billion,
of which EUR 7,926 billion was achieved in the
Community as a whole and EUR 4,799 billion in
Germany.

In terms of revenue passenger-kilometres (RPKs) flown
in Europe in 2000, Lufthansa ranked first with 18,0
billion, ahead of British Airways with 17,0 billion. Air
France came third with 10,3 billion.

In terms of world traffic, among Community carriers
Lufthansa was second with 94,17 billion RPKs after
British Airways with 118,89 billion and closely followed
by Air France with 91,801 billion.

In Europe Lufthansa operates 148 routes with more
than 100 000 passengers a year, the main ones being
Frankfurt-Berlin […] (*) and Frankfurt-Hamburg […] (5).

In terms of fleet size, Lufthansa was in first place in
Europe in 2000 with 327 aircraft in service and 48 on
order. British Airways was in second place with 309
aircraft in service and 62 on order.

In scheduled cargo transport, Lufthansa is the leading
European airline, both for intra-European traffic and for
intercontinental traffic.

Lufthansa Cityline concentrates on domestic flights in
Germany and regional flights within Europe. Its main
routes are Bremen-Stuttgart (42 frequencies/week), Flor-
ence-Munich (28 frequencies/week) and Munich-Münster
(42 frequencies/week).

(*) Business secret.
(5) One direction, 1999 figures.

2.2. Austrian Airlines (AuA)

(16) AuA provides air transport for passengers and goods
and is engaged in activities relating to air transport. It is
controlled as follows: 39,7 % by the Austrian State,
10,6 % by institutional
investors; 38,2 % by private
investors; 10 % by Credit Suisse First Boston; and 1,5 %
by Air France.

(17)

(18)

(19)

(20)

(21)

(22)

(23)

In 2000 the AuA group (Austrian Airlines, Lauda Air
and Tyrolean Airways) achieved a turnover of EUR 1,54
billion, of which EUR 850 million in the EU, EUR 393
million in Austria and EUR 199 million in Germany.
AuA's main subsidiaries are: Tyrolean Airways (100 %),
Lauda Air (99 %) and Rheintalflug (100 %). In terms of
fleet size, AuA, Tyrolean and Lauda Air together had 92
aircraft in service in 2000.

In terms of passenger-kilometres in Europe in 2000,
AuA ranked 17th among member airlines of the Asso-
ciation of European Airlines with 2,4 billion, just after
BMI British Midland (also 2,4 billion). In terms of world
traffic in 2000, AuA was the 14th-largest European
carrier with 8,8 billion passenger-kilometres. Worldwide,
it came 67th. In Europe AuA operates 16 routes with
more than 100 000 passengers per year, the main ones
being Vienna-London […], Vienna-Frankfurt […] and
Vienna-Paris […].

Lauda Air (Lauda) provides air transport for passengers
and goods and is engaged in activities relating to air
transport. Its shares are held by AuA (99 %) and private
investors (1 %).

In 2000 Lauda achieved a turnover in the Community of
EUR 158 million, of which EUR 73 million in Austria
and EUR 37 million in Germany. In terms of passenger-
kilometres worldwide in 2000, Lauda, with 4,6 billion,
did not rank among the top 20 airlines in Europe.

Lauda's main business is concentrated on charter flights
routes) and long-haul
within Europe (medium-haul
routes toward Asian/Pacific destinations under AuA
flight numbers.
is Vienna-Sydney/
Melbourne […].

Its main route

Tyrolean Airways (Tyrolean) provides air transport for
passengers and goods and is engaged in activities
relating to air transport. Tyrolean is 100 %-controlled by
the latter acquired 42,85 % in 1994,
AuA.
42,85 % in 1997 and the remainder in 1998).

(after

In 2000 Tyrolean had a turnover of EUR 231 million in
the Community, EUR 106 million in Austria and
EUR 77 million in Germany.
revenue
passenger-kilometres, Tyrolean ranked 176th in the
world with 1,2 billion, well behind Crossair (118th with
3,5 billion RPKs ) and Lufthansa City Line (116th with
3,6 billion RPKs).

In terms of

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(24)

Tyrolean's air transport services are concentrated on
domestic flights in Austria and regional flights in Europe
with planes carrying up to 80 passengers.
Its main
routes are Innsbruck-Vienna […], Klagenfurt-Vienna
[…], Vienna-Budapest […] and Vienna-Stuttgart […].
from further developing the domestic market,
Apart
Tyrolean aims above all to increase the number of flights
to central and eastern Europe and between Austria and
Germany.

(25) Austrian Airlines acquired 100 % control of Rheintalflug
in February 2001. In 2000 Rheintalflug carried a total of
250 000 passengers. It currently operates the following
routes:
Vienna–Geneva,
Vienna–Tallinn, Vienna–Warsaw and Vienna-Milan
under AuA flight numbers. Its turnover in 2000 was
EUR 31 million.

Altenrhein–Vienna,

(26)

(27)

3. THE

COOPERATION

AGREEMENT

BETWEEN

AUSTRIAN AIRLINES AND LUFTHANSA

The long-term objective of the cooperation agreement
between Lufthansa and AuA is worldwide integration of
their networks. The network arrangement was intro-
duced in the summer of 2000. It comprises passenger
transport, maintenance, airport facilities and groundhan-
dling. On 1 January 2000 the companies introduced a
joint pricing policy and began coordinating schedules
for all flights.

Their cooperation is closest as regards Austrian-German
traffic, which is governed by a ‘neighbourhood agree-
ment’. This agreement provides for a joint venture for
traffic between the two countries. The Parties pool
revenues for trunk routes, excluding, however, feeder
services to hubs. The conclusion of the cooperation
agreement with Lufthansa marked the completion in
1999 of a switch from the Qualiflyer alliance to the Star
alliance. AuA accordingly terminated its cooperation
with the Qualiflyer partners at the end of December
1999.

(28)

The cooperation agreement contains mainly declarations
of intent. In all major areas, as described in greater detail
below, the Parties have concluded implementation agree-
ments.

The main elements of the cooperation agreement are:

(29)

3.1. Joint venture for Austrian-German traffic

The neighbourhood agreement establishes a list of joint
services covered by the terms of
It
the agreement.
provides that, after an initial
transition period, both
Parties will share […] the revenues and costs derived
from the joint services. An ‘Alliance Steering Committee’
supervises the development and performance of the joint
services and may give binding instructions
to the
management of the joint services, the so-called Traffic
Committee (Tracom). Tracom consists of an equal
number of representatives of both Parties who remain
on the payroll of the company they represent.
It is
responsible for administering the joint services, the busi-
ness plan, the traffic system, etc. The neighbourhood
agreement provides explicitly that the Parties remain

autonomous and preserve their independent decision-
making powers.

(30)

The traffic plan consists of a joint route system, fare
structure and flight schedule. The Parties are not allowed
to enter into regular arrangements with third parties to
provide scheduled services on a joint service route.

3.2. Worldwide cooperation

(31) AuA and Lufthansa aim to establish an integrated trans-
port system worldwide, with joint network planning, a
joint pricing policy and joint budgeting. This includes
reciprocal access to frequent-flyer programmes, code
sharing, harmonisation of service levels, and integration
of data processing. In information technology the Parties
combine their systems to some extent in areas such as
flight data, reservation systems, ticketing, inventory, etc.
By agreeing to joint use of airport facilities for passenger
clearance, they hope to offer a smooth transfer to their
customers.

(32) With a view to the joint development of their respective
networks, the Parties intend to set fares jointly world-
wide on the basis of a special prorate agreement
covering all groups of tariffs. According to the Parties, a
joint pricing policy is necessary where their networks are
combined; for instance, where the outward flight is with
AuA and the return flight with Lufthansa or where AuA
carries out
flight via a
the first part of an indirect
Lufthansa hub. On a route where one Party offers a
direct and the other an indirect flight (6), the former is
the price leader. Apart from setting prices jointly, the
Parties also coordinate their frequencies in order to
avoid overlaps.

(6) For example, Lufthansa offers a direct flight from Frankfurt to
Kiev, whereas the AuA Frankfurt-Kiev flight involves a transfer in
Vienna.

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(33)

The aim of the code-sharing agreement is to provide a
seamless product to passengers. Code-sharing implies
that an aircraft of one airline operating a given flight
carries its own flight number as well as that of the other
airline. As a result, the code-sharing agreement allows
the non-operating airline to sell the flight as its own.
The Parties intend to coordinate their schedules in order
to feed traffic to each other. They can add individual
flights or routes at any time, provided that they notify
the other Party in advance.

3.3. A single marketing strategy

(34)

The sales departments of both companies continue to
exist independently. In Austria AuA remains responsible
for marketing and sales, while Lufthansa is responsible
in Germany. However, they intend to cooperate in many
areas, such as creating a joint representation in Austria
and Germany, cooperating on third markets, with AuA
leading sales in central and eastern Europe, and cooper-
ating in e-ticketing (over the Internet).

(35)

Each Party remains
services
between its domestic market and foreign destinations,
where this is economically possible.

free to operate direct

(36) As regards domestic traffic, each airline continues to
operate in a completely independent manner.

3.4. Subsidiaries and associated companies

(37)

The Parties include their respective subsidiaries and asso-
ciated companies in the cooperation arrangements. One
is to
objective with regard to network development
improve services provided by Lauda Air in Germany.

3.5. Organisation of the hub system

(38)

Through the agreement, the Parties aim to improve the
use of their respective hubs in Frankfurt, Munich and
Vienna. Vienna and Munich are to become complemen-
tary hubs, with Vienna concentrating on central and
eastern Europe and Munich on traffic from and to
Germany,
intra-European traffic and traffic between
Europe and other continents. Hub development should
take into consideration the objectives and respective
networks of the Parties and should provide for reci-
procal feeder services.

3.6. Airport facilities and services

(39) With regard to groundhandling services, the Parties had
agreed to give preference to GlobeGround, a wholly-
owned subsidiary of Lufthansa, as long as it offered
competitive prices. At the end of May 2001 Lufthansa
sold 51 % of its shares in GlobeGround to the French
firm Penauille Polyservices. The remaining shares will be
transferred to Penauille on 30 June 2002. The agreement
relating to GlobeGround was therefore set aside by the

Parties. Groundhandling services will thus not be consid-
ered in what follows.

3.7. Freight transport

(40)

The Parties do not envisage integrating their freight
transport operations. However, in order to increase effi-
ciency, they plan to cooperate in the long term in the
area of logistics.

4. APPLICABLE PROVISIONS

(41)

(42)

(43)

The joint venture for traffic between Germany and
Austria is run jointly and equally by the Parties. It does
not have the necessary resources
to carry on its
economic activity on its own. It will remain permanently
dependent on the Parties.

The object and effect of the joint venture is to coordi-
nate the competitive conduct of the two parent compa-
nies, which remain independent. The neighbourhood
agreement establishes a cooperative joint venture and
not a full-function joint venture as defined in the
Commission notice on the concept of full-function joint
ventures under Council Regulation (EEC) No 4064/89
on the control of concentrations between undertak-
ings (7),
forms part of a much wider cooperation
agreement that falls within the scope of Article 81 of the
EC Treaty.

It

Regulation (EEC) No 3975/87 lays down the procedure
for applying Article 81 of the EC Treaty with regard to
air transport between Community airports and Article
53 of the EEA Agreement with regard to air transport
between member countries of the European Economic
Area. It covers only air transport between EEA airports.
Traffic between the EEA and third countries is not
caught by Regulation (EEC) No 3975/87 and, as a result,
is not covered by this Decision.

5. THE RELEVANT MARKET

5.1. Services concerned

(44)

The activity affected by the agreement is the scheduled
air transport of passengers and goods. The Parties offer
scheduled flights, charter flights and freight transport.

(7) OJ C 66, 2.3.1998, p. 1.

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(45)

(46)

In the Commission's view, charter flights do not form an
alternative to scheduled flights in this case, in particular
since most of
the customers involved are business
customers. Unlike leisure travellers, business customers
do not accept the uncertainties connected with charter
flights. As the Parties do not envisage merging their
cargo transport activities, apart
from some technical
cooperation, air cargo transport is also disregarded in
what follows.

5.2. Air transport markets

To demarcate the relevant market in air transport, the
Commission has developed the point-of-origin/point-of-
destination (O&D) pair approach in a number of deci-
sions backed by case law (8). According to this approach,
every combination of point of origin and point of desti-
nation should be considered to be a separate market
from the customer's point of view. In order to establish
whether there is competition on a given route, a bundle
of services is looked at. They include:

(a) the

direct
concerned;

flights

between the

two airports

(b) the direct flights between the airports whose catch-
ment areas significantly overlap with the catchment
areas of the airports concerned at each end;

(c) the indirect flights between the airports concerned in
so far as these indirect flights are substitutable with
the direct flights; substitutability of direct routes with
indirect routes depends on a number of factors such
as the flight time or the frequencies (and schedules)
of routes;

(d) other available transport means (car and/or train) to
the extent that these are substitutable with direct or
indirect flights in terms of journey time and frequen-
cies (9).

(47)

The Commission further distinguishes ‘time-sensitive’
and ‘non-time-sensitive’ customers. The former wish to
reach their destination in the shortest possible time, they
are not flexible in terms of time of departure/arrival and
they need to have the option of changing their reserva-
tion at short notice. Non-time-sensitive customers, on
the other hand, are more price-sensitive and accept
longer journey times (10).

(8) See Commission Decision of 11 August 1999 in Case

COMP/JV.19 — KLM-Alitalia:
http://europa.eu.int/comm/competition/mergers/cases.

(9) The Parties argue in this respect that high-speed trains and the
car offer alternative transport modes in competition with air
transport for distances of less than 600 km.

(10) Generally speaking, business travellers are more time-sensitive
than leisure travellers and tend to book fully flexible tickets. The
second group of passengers are not time-sensitive but pay more
attention to the price. These passengers accept longer journey
times and may choose indirect flights if they are less expensive
than direct ones.

(48) According to the Parties, business passengers have
become more price-sensitive and often buy economy-
class tickets for flights of less than six hours, where their
schedule permits. Accordingly, the proportion of time-
sensitive passengers is much higher than the proportion
of business-class travellers.

(49)

(50)

The Parties argue that, as a result of globalisation,
respective
airlines compete on the basis of
networks and hubs, rather than on individual routes. In
their view, a route-by-route analysis would not therefore
be justified.

their

The Parties' approach is supply-based. Airlines may well
feel that they are clearly competing with other networks.
However, this is not decisive for the definition of the
relevant market since it does not correspond to the
consumer's point of view. A consumer wishes to fly
from a specific point of origin to a specific point of
destination. He or she benefits from competition only if
there is a choice between airlines on that particular
origin and destination O&D pair. From a demand point
of view, therefore, there is justification for assessing the
effects of the cooperation agreement using the O&D
approach.

(51)

For the purposes of the Commission's assessment of the
Parties' cooperation,
it is possible to distinguish three
categories of passenger air transport service within the
EEA which are affected by the agreement:

(a) services between Austria and Germany;

(b) services between Austria or Germany and a third

EEA country (e.g. Frankfurt-Rome);

(c) services between two third EEA countries

(e.g.

London-Rome).

(52) As explained in Section 8, the neighbourhood agreement
in particular raises concerns. The following assessment
of the above aspects therefore focuses on bilateral traffic
between Austria and Germany.

5.2.1. Indirect flights

(53)

In principle, there is a correlation between the extra time
a traveller is willing to spend by travelling via an inter-
mediate airport and the overall travelling time. On short
distances, with the resulting short travelling time, such
as between Austria and Germany, it can be assumed that
only very few non-time-sensitive
travellers would
consider replacing a direct by an indirect flight as a

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result of a price increase for direct flights (11) and that
the share of such passengers is therefore too small for
indirect flights to exert competitive pressure on direct
ones for traffic between Austria and Germany. Further-
more, only indirect flights offered by competitors of the
Parties can be taken into account for competition policy
purposes. However, such flights exist on only a limited
number of routes. Indirect flights are therefore disre-
garded in the following assessment.

5.2.2. Overlapping catchment areas

(54)

(55)

they wish to fly. This

Passengers who begin or end their journey in a catch-
ment area of two or more airports can choose from or
to which airport
increases
competition if the choice between different airports also
implies a wider choice between different airlines, to the
extent that the latter are independent of each other (i.e.
they are not alliance partners or franchisees). In this
instance, however, this applies only to a few minor
cases (12).

There is a correlation between the extra time a traveller
is willing to spend by travelling to an airport which is
farther away and the overall travelling time. For flights
within Europe, it can be assumed that the radius of an
individual airport's catchment area is small, given the
short travelling time. Overlapping catchment areas are
therefore of
flights within the
Community. Flights between Austria and Germany are
among the shortest flights even within the Community.
Given the short travelling times on these routes, the
Commission assumes, bar a few exceptions (13), that for
bilateral traffic the overlap between the catchment areas
of two airports is too small to have any effect on the
market.

little relevance for

(56)

The Commission therefore concludes that overlapping
catchment areas do not play an important role for traffic
between Austria and Germany. This conclusion is
confirmed by estimates provided by the Parties them-
selves, who assume that only about 2 to 3 % of the

investigation in the KLM-Alitalia

(11) This conclusion is generally backed up by the findings of the
Commission's
case. The
Commission found that the proportion of travellers using indi-
flights on the Amsterdam-Rome and Amsterdam-Milan
rect
routes was very low. This
that neither category of
passenger (time-sensitive or non-time-sensitive) considers indirect
flights to be substitutable for direct flights. See Commission deci-
sion of 11 August 1999 in KLM-Alitalia.

suggest

(12) The Parties have claimed that passengers living in Voralberg (the
westernmost part of Austria) would prefer Zürich airport
to
Innsbruck. At
the agreement,
Swissair operated five flights daily from Zürich to Berlin. Such
passengers would therefore have the choice between Swissair and
AuA/LH.

the conclusion of

the time of

(13) Such an exception may exist

for non-time-sensitive travellers
living in the catchment areas for Innsbruck and Salzburg who
wish to travel from Munich to other German destinations since
competitors of Lufthansa operate on these routes.

airline passengers who travel between Austria and
Germany live in overlapping catchment areas.

5.2.3. Alternative transport modes

(57)

The Parties have argued that on the Austrian-German
market road and rail offer alternative transport options
for distances of up to 600 km.

(58)

(59)

The Commission, on the other hand, takes the view that,
besides qualitative factors, total travelling time rather
than distance is the decisive factor for consumers. For
time-sensitive passengers, alternative means of transport
are substitutable for air transport only where the travel-
ling time is not significantly longer. This, of course, is
less important for non-time-sensitive passengers, who
are more interested in reducing travelling expenses.

Table 1 shows a series of factors that are relevant for the
routes involved in this case. According to these data, the
travelling time from city centre to city centre by car or
train is comparable to the time taken by air only for the
Salzburg-Munich and Linz-Munich routes. For Vienna-
Munich, the time difference is more than two hours and
car or train travel increases the travelling time by more
than 70 %. In the case of a return trip, the additional
travelling time would be more than four hours. This
does not seem to be an alternative for time-sensitive
customers. It can be an alternative only for a limited
number of non-time-sensitive travellers.

(60) A comparison of prices can also show the extent of
competition between the different modes. A comparison
of a business-class air ticket with a first-class rail ticket
and an Air-PEX ticket with a second-class rail ticket
reveals that air travel in general is more than twice as
expensive as travelling by train (the difference in price is
also significant if the comparison is between air travel
and car travel). This conflicts with the Parties' assertion
that alternative transport modes compete with air trans-
port. If this were the case, one would expect prices to
converge or,
if prices of alternative transport modes
were too low for airlines to match, no air transport to
be offered. A price comparison does not,
therefore,
support the Parties' view that air transport and other
means of transport form one and the same market.

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(61)

It can therefore be concluded that, as a rule, other means of transport do not offer an alternative for
time-sensitive travellers on direct routes between Austria and Germany. Apart from considerations of
journey time and comfort, however, they may do so for non-time-sensitive travellers (14).

Table 1:

Distance, prices and travelling time on different routes between Austria and Germany (Source: OAG/ January
1999)

Approximate travelling time from city centre to city
centre (one way)

Travel expenses for a two-way journey (in euros)

Route

Distance in
km (by
road)

Air (1)

Rail

Car

Air
Business-
Class (2)

Air-PEX and
Sunday rule

Rail First
Class

Rail Second
Class

Car (3)

Vienna-Frankfurt

715

3:15h

8:37h

8:30h

853

518

292

194

319

Vienna-München

450

2:45h

4:51h

5h

550

358

164

112

201

Vienna-Düsseldorf

927

3:25h

12:20h

11h

1 027

617

403

267

414

Graz-Frankfurt

730

3:15h

9:20h

9h

853

517

302

205

326

Salzburg-Frankfurt

543

3:45h

5:34h

6:30h

584

365

238

158

242

Salzburg-Munich

140

2:50h

1:30h

1:30h

—

398

65

43

62

Vienna-Berlin

634

3:05h

11:11h

8h

837

501

248

163

283

Vienna-Stuttgart

682

3:30h

7:28h

8h

768

464

272

179

304

Linz-Frankfurt

554

2:55h

6:12h

6:30h

685

418

245

162

247

Innsbruck-Frankfurt

517

3:05h

6:15h

6h

636

312

254

167

231

Linz-Munich

276

2:35h

2:55h

3:15h

—

425

122

79

123

(1) Times include actual flying time, servicing time (45 mins) and travelling time from the city centre to the airport (one hour).
(2) Lufthansa and AuA offer the same prices on these routes. The full price for economy class is the same as the business-class rate.
(3) A rate of EUR 0,22 per km was used for the calculation.

6. THE PARTIES' POSITION ON THE RELEVANT MARKET

(62)

(63)

In Section 5.2 three categories of air transport service were identified. As will be shown in detail in
Section 8, competition concerns arise principally in connection with the first category, i.e. services
between Austria and Germany. The following assessment will therefore focus on the Parties' position
on this market.

In 1999 there were 33 routes between Austria and Germany. Only one route was not operated by
the Parties (15). In terms of both the total number of direct flights and total passenger numbers on
direct flights, the Parties have a combined market share of 100 % on 27 of these 33 routes. These 27
routes account for more than 90 % of total traffic between the two countries. Thus, the Parties are by
far the strongest competitors on the Austrian-German air transport market.

(14) For example, on the Munich-Salzburg, Munich-Linz and Munich-Vienna routes.
(15) Rheintalflug operated 86 flights between Vienna and Friedrichshafen in 1998. However, Rheintalflug was taken

over by AuA in 2001.

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Table 2:

Number of flights per week on individual routes between Austria and Germany

Flights per week (winter 1999/2000)

AuA

Lufthansa

Lauda

Total

Lufthansa/AuA (inclu-
ding Lauda) combined
market share for
direct flights (%)

Route

Vienna-Frankfurt

Vienna-Munich

Vienna-Düsseldorf

28

14

14

Graz-Frankfurt

7 (*)

Salzburg-Frankfurt

Vienna-Berlin

Vienna-Hamburg

Vienna-Stuttgart

Linz-Frankfurt

(*) Tyrolean Airways.

0

14

0

20 (*)

0

34

26

21

20

28

21

20

10

28

0

13

0

0

0

0

14

0

0

62

53

35

27

28

35

34

30

28

100

100

100

100

100

100

100

100

100

(64)

In order to determine the Parties' market position, in addition to considering the number of direct
flights and total passenger numbers on direct flights it is also necessary to distinguish between
different passenger categories. Even though, with the conclusion of the cooperation agreement, the
Parties together had a market share of 100 % in the case of direct flights on all routes of importance
in terms of passenger numbers, they nevertheless continued to face competition in respect of the
important category of transfer passengers.

(65) Generally speaking, a distinction can be drawn between O&D (point-to-point) passengers and
transfer passengers, who take connecting flights. Unlike O&D passengers, transfer passengers have a
wider choice of flights, with the result that there is greater competitive pressure on the Parties as
regards such customers (16).

(66)

(67)

This means that each flight combines passengers with very different point-of-origin/point-of-destina-
tion pairs. Long-haul travellers, for example, have the choice of various European hubs and may
therefore benefit from competition. When the cooperation agreement was concluded, this was not
the case for O&D passengers and regional transfer passengers flying locally between Austria and
Germany (17). Thus, the different passenger groups form separate markets.

For an overall competition assessment of the cooperation or alliance between airlines, it has to be
established therefore whether the category of O&D passengers and regional transfer passengers forms
a significant customer market. This is the case at least for all the major routes between Austria and
Germany shown in Table 3, even though the proportion differs considerably from route to route. On
other routes between the two countries that do not involve a hub, the share will be even higher still.
The effects of the cooperation between the Parties on this category of travellers must therefore be
considered.

(16) For example, to fly from Vienna to the United States, a passenger may fly direct, or indirect via Frankfurt,

Amsterdam, Paris, London, etc. He or she would thus have the choice of several competing airlines.

(17) Regional transfer passengers take a regional flight before or after flying on an Austrian-German route (regional
transfer). A passenger who wishes to travel from Klagenfurt to Leipzig may do so via Frankfurt, for example.
However, such passengers, like direct travellers, depend as a rule on one of the Parties for at least one section of
their journey.

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Number of passengers on the main routes between Austria and Germany

Table 3:

Route

Number of passengers (1998(
(both directions)

Share of business class passen-
gers

Share of O&D and regional
transfer passengers

Vienna-Frankfurt

Vienna-München

Vienna-Düsseldorf

Graz-Frankfurt

Salzburg-Frankfurt

Vienna-Berlin

Vienna-Hamburg

Vienna-Stuttgart

Linz-Frankfurt

560 000

290 000

214 000

140 000

138 000

135 000

116 000

104 000

91 000

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

E x a m p l e o f

t h e V i e n n a - F r a n k f u r t

r o u t e

(71) As shown in Table 3, about […] of all passengers in
1999 were either point-to-point passengers or regional
transfer passengers. These passengers have no choice but
to fly on this route with the Parties.

(68)

The Parties' position on the market for traffic between
Austria and Germany can be illustrated on the basis of
the main Austrian-German route. The Vienna-Frankfurt
route links the AuA and Lufthansa hubs.

O t h e r b i l a t e r a l

r o u t e s

(69)

Indirect flights and alternative modes of transport are of
secondary importance on this route and can be disre-
garded. As pointed out above, indirect flights cannot be
considered to be substitutes on short-haul routes. If the
‘600 km rule’ is applied, as suggested by the Parties, the
train and the car cannot be considered to be alternative
transport modes since the distance between the two
cities exceeds 600 km. This is valid at least for time-
sensitive passengers. Non-time-sensitive travellers may
choose to travel by train or car despite the distance.
However, as indicated in Section 5.2.3, the significant
price differences between air transport and other modes
of transport lead to the conclusion that they form sepa-
rate markets. Some travellers may choose other trans-
port modes on the basis of quality criteria. For example,
the car offers greater independence and more flexibility
at the place of destination. It is therefore assumed that
for most non-time-sensitive air passengers too transport
by land does not offer an alternative.

(70)

The Parties have not argued that there is competition on
this route by virtue of overlapping catchment areas for
various airports. This means that only the direct flights
offered can be considered for this route. The AuA/Lufth-
ansa joint venture therefore has a 100 % market share
on this route.

(72)

The above analysis for the most important route (in
passenger terms) between Austria and Germany also
applies to those that carry less traffic. As indicated in
Section 5.2, on most of the 33 existing routes, neither
indirect flights nor other modes of transport are rele-
vant. On these routes, the share of direct and regional
transfer passengers is even higher than on the Vienna-
Frankfurt route, which links two hubs. Thus, the share
of passengers who depend exclusively on the Parties for
travel on these routes is also higher.

(73) With the conclusion of

the cooperation agreement,
around half of all air passengers travelling between the
two countries depend exclusively on AuA/Lufthansa.

7. COMMENTS BY THIRD PARTIES

(74)

In response to the notices published in the Official
Journal of the European Communities pursuant to Article
5(2) and Article 16(3) of Regulation (EEC) No 3975/87,
the Commission received comments from third parties
that essentially made the following points:

(a) The

cooperation agreement between AuA and
Lufthansa will significantly restrict competition on
the market for traffic between Austria and Germany;

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(b) The cooperation agreement enables the members of
the Star alliance to build on their already strong
position in Europe;

exclude any competition between themselves on this
market.

(c) The very high prices applied by the Parties on
Austrian-German routes are a burden on consumers;

(78)

(d) An exemption should be granted only subject to
extensive conditions. In particular, barriers to entry,
such as the shortage of slots, should be reduced;

(e) Their cooperation gives both Parties a very strong
position on the German-Austrian market. Smaller
competitors should be protected from anticompeti-
tive behaviour, such as price dumping and keeping
overcapacities in reserve;

(f) A process of concentration is

taking place in
Europe's air transport industry. It is vital for AuA to
join the Star alliance in order to preserve its inde-
pendence;

(g) (Large) customers will share in the savings that result
from the cooperation. They will also benefit from
the wider network of routes and the more extensive
range of flights on offer within the alliance.

8. ARTICLE 81(1) OF THE EC TREATY AND ARTICLE

53(1) OF THE EEA AGREEMENT

8.1. The agreement between the undertakings

(75)

The cooperation agreement between Lufthansa and AuA
is an agreement between undertakings within the
meaning of Article 81(1) of the EC Treaty (18).

8.2. Restriction of competition

(76) Under

the cooperation agreement,

the two former
competitors cooperate as regards all traffic within the
EEA. Such cooperation includes in particular a joint
pricing policy and the sharing of markets through the
coordination of schedules,
frequencies and capacity.
Thus, the agreement therefore restricts actual and poten-
tial competition between the Parties.

8.2.1. Traffic between Austria and Germany (both directions)

(77) On all routes for local

traffic between Austria and
Germany, the Parties have coordinated their activity with
regard to capacity,
fares and marketing
frequencies,
policy by setting up a joint venture. Costs and revenues
are shared between them equally. The Parties thus

(18) Article 53 of the EEA Agreement contains the same provision as
Article 81 of the EC Treaty. All references to Article 81 of the
EC Treaty should be understood to extend automatically to
Article 53 of the EEA Agreement.

Their cooperation increases the Parties' market power
even further by raising additional entry barriers for other
suppliers as a result of the coordination of resources,
networks and frequencies. The same applies to the joint
frequent-flyer programme as a large proportion of
customers are business customers. The latter prefer
airlines with a joint frequent-flyer programme allowing
them to collect airmiles more easily. A joint frequent-
flyer programme can therefore represent a significant
entry barrier
similar
programme. The Parties' position is further strengthened
by their share of slots at the main airports in Germany
and Austria and by the relatively high number of
services which they already operate on the routes in
question.

airlines not offering a

for

(79)

By excluding any actual and potential competition
between the Parties and given their position on the
venture
market,
restricts
appreciably
joint
competition for air
transport between Austria and
Germany.

the

8.2.2. Other routes within the EEA

(80) As mentioned in Section 5.2, apart from the bilateral
traffic between Germany and Austria,
the agreement
affects traffic between Germany or Austria and a third
EEA country and between two third EEA countries. AuA
and Lufthansa cooperate on these routes in particular
with regard to joint network planning, a joint pricing
policy and the harmonisation of service levels. The
Parties apply a joint pricing policy on all routes which
allow them to combine their networks,
i.e. where a
passenger can fly out with Lufthansa and fly back with
AuA. This applies, in principle, to all routes within the
EEA. AuA and Lufthansa also coordinate their frequen-
cies in order to avoid overlapping flights.

(81)

To the extent that there is competition on these routes
between direct and indirect flights, competition between
one Party's direct services and the other Party's indirect
services is restricted or eliminated for services between
Austria or Germany and another EEA country (19).
However, with regard to flights between two other EEA
countries, e.g. London-Rome, the cooperation agreement
probably does not
restrict competition significantly.
While the Parties might have been actual or potential
competitors by offering indirect services on some of
these routes, their respective market position on these
routes is presumed not to be significant.

(19) For

instance, a non-time-sensitive passenger

travelling from
Hamburg to Rome could have chosen either to fly direct with
Lufthansa or indirect with AuA via Innsbruck.

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(82)

The agreement therefore has the effect of restricting
competition between the Parties on routes between
Austria or Germany and another member country of the
EEA.

The Parties also expect to make cost savings by jointly
developing new sales channels (e-ticketing).

8.3. Effect on trade between Member States

(83)

The cooperation agreement between AuA and Lufthansa
covers passenger and freight transport within the EEA
and therefore affects trade between Member States.

9. ARTICLE 81(3) OF THE EC TREATY

(84) According to Article 81(3) of the EC Treaty, the provi-
sions of Article 81(1) may be declared inapplicable in
the case of an agreement between undertakings which
contributes to improving the production or distribution
to promoting technical or economic
of goods or
progress, while allowing consumers a fair share of the
resulting benefit and which does not:

(a) impose on the undertakings concerned restrictions
which are not indispensable to the attainment of
these objectives;

(b) afford such undertakings the possibility of elimi-
nating competition in respect of a substantial part of
the products in question.

(85)

(86)

(87)

9.1. The cooperation agreement's contribution to

economic progress

The Parties have argued that the cooperation agreement
contributes in a number of ways to economic progress.
In particular, passengers will benefit
from improved
possibilities for transfers and connections.

Except as regards bilateral traffic, the Parties' networks
largely complement one another. While AuA has
focused on medium-haul routes in Europe, especially
central and eastern Europe, Lufthansa has focused much
more on long-haul
these
complementary networks results in important syner-
gistic effects and attractive connections for consumers.
The coordination and extension of the Parties' scheduled
networks will create a more efficient network and, in
particular, improve connections with eastern European
cities.

services. The merger of

The establishment of a more comprehensive European
network will produce cost
the Parties
through an increase in traffic throughout the network,
improved network connection, better planning of
frequencies, a higher load factor and improved organ-
isation of sales systems and groundhandling services.

savings

for

(88)

In concluding a cooperation agreement with Lufthansa,
AuA has switched from the Qualiflyer to the Star alli-
ance. In AuA's case, the cost savings resulting from the
cooperation can be calculated only in relation to the
change of alliance. AuA's supervisory board put a figure
of some […] million on the potential synergy to be
gained from joining the Star alliance as opposed to
remaining in the Qualiflyer alliance. Since the cost
savings described must also have applied to some extent
in the Qualiflyer alliance,
it can be assumed that the
synergistic effects of the cooperation agreement would
be even greater compared with a situation in which AuA
did not belong to any alliance.

(89)

The Commission accordingly considers that the agree-
ment will contribute to economic progress within the
meaning of Article 81(3) of the EC Treaty.

(90)

(91)

(92)

9.2. Benefits for consumers

The linking of the two scheduled networks means coor-
dinated schedules, shorter waiting times, no moving
service
between terminals and harmonised in-flight
quality. Consumers also benefit from a wider choice of
direct flights between the two countries and connections
to eastern European destinations in particular. As a
result of the cooperation agreement, frequencies have
increased in bilateral traffic on the Frankfurt-Klagenfurt,
Munich-Graz, Frankfurt-Innsbruck and Vienna-Nürnberg
routes and new connections have been added between
Graz-Stuttgart and Vienna-Friedrichshafen.

The extension of their respective hub connections has
also opened up the possibility of more feeder services
from regional
for
It
consumers, these benefits of a shared network will also
lead to an increase in traffic overall and thus to better
capacity utilisation for the Parties.

expected that,

airports.

is

Consumers are also benefiting from the introduction of
transit services and the extension of reciprocal code-
sharing on services to third countries beyond hub-
to-hub flights. The partners' networks have thus become
accessible to passengers of both airlines, increasing the
number of available destinations and the choice of times
for outward and return flights.

(93) However, the Commission is not convinced that the
cooperation agreement ensures
that consumers will
share in the benefits of the expected cost savings, e.g.
through lower prices. This is to be ensured by the condi-
tions set out below.

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9.3. Indispensability

restricted by barriers to entry. The reasons are as
follows:

(94)

The Commission accepts that the envisaged cost reduc-
tions could materialise only if the Parties cooperated
closely on their respective business strategies. The bene-
fits of an improved range of services as a result of joint
route planning and network development in particular
can be obtained only through close cooperation. This is
particularly true of routes linking the hubs of the two
companies. The Commission therefore recognises that
the extent of the integration envisaged in the coopera-
tion agreement is necessary to achieve the objectives set.

(95)

that conditions
The Commission considers, however,
must be imposed to ensure that
the restrictions of
competition do not go beyond what is necessary and
that competitors are present on the market.

9.4. Elimination of competition

(96) As to whether the cooperation agreement eliminates
competition, a distinction must be made, as explained in
Section 5.2, between the German-Austrian market and
services to other EEA countries. In the former case, the
establishment of a joint venture means that cooperation
between the Parties is much closer and their market
position especially strong (see Section 6.2.1).

9.4.1. The German-Austrian market

(97) As can be seen from Table 2, the Parties were not
subject on any main Austrian-German routes
to
competition from other airlines in the case of direct
flights when the joint venture was set up. The coopera-
tion thus eliminated actual competition on a large
number of individual routes.

(98)

By establishing the joint venture,
the Parties have
ensured that there is no longer any actual or potential
competition between them on routes between Austria
and Germany. Although the liberalisation of air trans-
port in the Community has removed legal barriers to
market entry, the Parties cooperation creates new entry
barriers and enhances the difficulties for third carriers to
enter the market. This eliminates competition on a
substantial part of the market, as illustrated below taking
the Vienna-Frankfurt route as an example. The situation
on other routes between the two countries is compar-
able.

(a) at

least

the main airport

is very
congested and new entrants find it very difficult to
obtain slots at peak times;

in Frankfurt

(b) together, the Parties operate a relatively high number
of frequencies. This makes it more difficult for new
entrants to establish themselves on the market with
additional flights;

(c) more than half of all passengers are transfer passen-
gers. New entrants on routes between Austrian and
German hubs must therefore attract regional and
international
to fill
capacity. However, as the Parties develop a joint
network,
their flights fill most slots which feed
flights from and to their hubs;

transfer passengers in order

(d) the Parties' market power will increase as a result of
the agreement since they will coordinate resources,
create a larger European fleet, exploit the scope for
interlining, and coordinate networks and frequencies;

(e) the pooling of

frequent-flyer programmes will
in
strengthen the Parties' position on the market,
particular on the market
for business
customers. A joint frequent-flyer programme consti-
tutes an important entry barrier for airlines which do
not have comparable programmes;

segment

(f) a large proportion of total tickets sold on a specific
route are tied to a specific airline because of
corporate customer deals (20) and other
reasons.
Thus, new entrants can actually compete on price
for only a small proportion of customers, at least in
the short run. Small carriers would probably find it
difficult
large
customers as they cannot offer a similar range of
network services (high frequencies, well-connected
flights at hub airports, etc.);

to offer similar deals to potential

(g) the Parties operate with relatively low load factors
on routes between Austria and Germany. They thus
have sufficient capacity on these routes to react
quickly to price changes which could result from a
new competitor entering the market.

V i e n n a - F r a n k f u r t

(99) As explained in Section 6, the Parties have, by setting up
a joint venture, eliminated actual competition in respect
of O&D passengers on this route. It can be assumed that
potential competition has also been at least severely

(100) Since, following the cooperation agreement, only the
joint venture has offered direct flights on this route and
in view of the high barriers to entry, the Parties have
eliminated competition on this route as regards the
market for time-sensitive and non-time-sensitive O&D
passengers and regional transfer passengers.

(20) For example, on routes between Austria and Germany some
38 % of all AuA customers fly under a ‘corporate customer deal’.

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O t h e r b i l a t e r a l

r o u t e s

10. CONDITIONS AND OBLIGATIONS

(101) As explained in Section 6, the Parties' starting point on
other bilateral routes is the same as on the Vienna-
Frankfurt route. This also applies to the barriers to
market entry. However, on routes with fewer passengers,
these have even greater weight. As demand for flights on
these routes is lower, an entrant is obliged to obtain a
higher share of total passengers on the route in order to
break even.

(105)

In the light of the considerations in Section 9.4, it can
be concluded that the cooperation agreement has elimi-
nated competition on a substantial part of the market in
bilateral
and Austria.
between Germany
According to the Commission, the cooperation agree-
ment can only be accepted on the basis of conditions
which significantly reduce the barriers to market entry.

traffic

(102) While it might be accepted that competition is not
eliminated on some routes this only holds for routes of
secondary importance. Thus, given the dominant posi-
time-sensitive
tion on the market
customers
for
(point-to-point and regional
transfer) and the strong
position on the market for non-time-sensitive customers,
the cooperation agreement affords the Parties the poss-
ibility of eliminating competition for a substantial
number of services for time-sensitive and non-time-
sensitive customers.

(106) On the basis of

the reservations expressed by the
Commission in its statement of objections, the Parties
gave extensive commitments which were published on
14 December 2001 in the Official Journal of the European
Communities. Following comments by third parties, these
commitments were extended. They are set out in detail
in the Annex to this Decision. The Annex forms an
integral part of this Decision, and the exemption is
subject to the conditions set out therein.

P o t e n t i a l c o m p e t i t i o n

potential

competitors. However,

(103) The Parties have argued that all European airlines can be
considered
the
Commission has carried out a market test and, on the
basis of its findings, it considers that the extent to which
there is potential competition from other airlines is
small. Although the legal entry barriers have been
dismantled, the entry of other airlines onto the market is
not actually guaranteed. Large airlines endeavour to
develop their networks around their respective hubs.
Consequently, other major European airlines would
probably operate on the Austrian-German routes only if
they developed a second hub to which these routes
could be connected. This, however, does not seem to be
an option for the foreseeable future. Moreover,
the
numerous barriers to entry make it difficult for low-cost
and regional airlines to enter the market. It is therefore
essential to reduce or remove these barriers to entry in
order to enable such competitors to enter the market.

(107) The main purpose of the conditions contained in the
Annex is to ensure that
there can be viable new
competition by removing existing entry barriers for
potential competitors. In addition, they should ensure
that consumers share in the benefits resulting from
cooperation. The main aspects are summarised below.

(108) New competitors depend on obtaining appropriate slots
at each airport. However, a number of airports are full at
peak times. The Parties are therefore required to make
slots available to a new entrant for a route chosen by it
up to a maximum of 40 % of the slots the Parties
operated on the route in question at the time of the
notification. In addition, they must make ‘technical slots’
from a third country to
available to a new entrant
position aircraft at the beginning or end of operations.

(109)

In view of the economic weight of the Parties and their
strong presence on the routes concerned, the Commis-
sion considers it necessary that their daily frequencies on
new entrant city pairs be frozen for two years. This is to
them from increasing their frequencies as a
prevent
means of forcing out new entrants.

9.4.2. Routes involving other EEA countries

(110)

(104) As pointed out in Section 6.2.2, the cooperation agree-
competition on certain routes
ment may restrict
between Austria or Germany and another EEA country.
However, the Commission does not have any indication
that, with regard to these routes, the cooperation agree-
ment would eliminate competition on any of the afore-
mentioned markets.

In the light of experience and the information it
possesses on the relevant market,
the Commission
assumes that no one will enter the market quickly on a
number of Austrian-German routes. Many of the lighter
routes (in terms of passenger numbers) are of limited
attraction to potential competitors. The interests of
consumers using such routes must also be taken into
account. The Parties are thus required to apply any price
cuts
to
competition to three other Austrian-German routes on

introduce on routes

subject

they

that

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10.9.2002

which they do not face competition. The Parties have
some discretion when it comes to choosing these three
other routes. By making the costs of price dumping
significantly higher for the Parties, this condition affords
new entrants some protection from predatory pricing by
the Parties.

(111)

to utilise their capacity sufficiently, new
In order
entrants depend on making an attractive offer to the
various customer segments. To enable them to do so for
business customers, the Parties are required to reserve
for new entrants up to 15 % of the seats offered on a
service. This blocked space can be used by the new
entrant in order to offer customers greater flexibility as
regards outward and return flights. The option for
competitors to take part in the Lufthansa/AuA frequent
flyer programme is also designed to make it easier for
them to attract business customers.

while Air Alps has operated the Vienna-Stuttgart route.
Two other airlines from central and eastern Europe have
expressed a serious interest in entering the market on
two major Austrian-German routes once the exemption
has been granted. On the basis of the Parties' commit-
ments, a new Austrian airline has been created with a
view to starting operating on several routes between
Austria and Germany in autumn 2002.

(116) Given the various conditions and the duration of the
exemption, the Parties must provide the Commission
with information on a regular basis to show that they
are complying with the conditions,

HAS ADOPTED THIS DECISION:

Article 1

(112) Given the high share of transfer passengers, it is also
important for a new entrant to obtain access to the
market
it can
in transfer passengers. To this end,
conclude an interline agreement with Lufthansa/AuA
that, at its request, includes a special prorate agreement.
The terms of such special prorate agreements must
correspond to the terms entered into by the Parties with
their alliance partners or other carriers in connection
with the route concerned.

Pursuant to Article 81(3) of the EC Treaty and Article 53(3) of
the EEA Agreement, Article 81(1) of the EC Treaty and Article
53(1) of the EEA Agreement are hereby declared inapplicable
to the cooperation agreement concluded on 10 December
1999 between Deutsche Lufthansa AG (Lufthansa)
and
Austrian Airlines Österreichische Luftverkehrs AG (AuA) for
the period from 10 December 1999 to 31 December 2005.

(113) On short-haul routes between Austria and Germany,
competition can also be promoted to a limited extent by
intermodal services. At the request of a railway or other
surface transport company, the Parties must enter into
an intermodal
they provide
agreement whereby
passenger air transport on their services between Austria
and Germany as part of an intermodal service.

(114) The Commission has established that, on the basis of
these undertakings, there are several competitors who
are seriously interested in entering the market on major
routes and are able to obtain the necessary traffic rights.
This is an important factor that allows the Commission
to exempt the cooperation under Article 81(3) of the EC
Treaty. Should this situation change, the Commission
might be obliged to revoke or amend the exemption
pursuant to Article 6(3)(a) of Regulation (EEC) No 3975/
87.

(115) On their own initiative, the Parties announced that they
would keep to the conditions described above vis-à-vis
potential competitors even before the Commission
granted an exemption. On this basis, other firms have
since entered the market. Since 2001 Adria Airways has
been flying twice daily between Vienna and Frankfurt,

Article 2

The exemption granted pursuant to Article 1 shall be subject to
the conditions listed in the Annex. These conditions shall apply
to all routes operated by the Parties between Germany and
Austria. They shall be binding on the Parties, their subsidiaries,
legal successors and authorised representatives. The Parties
shall ensure that their subsidiaries, legal successors and author-
ised representatives comply with them.

Article 3

1.
Until termination of the exemption granted pursuant to
Article 1, AuA and Lufthansa shall provide the Commission
with the following information:

(a) detailed information on the tariffs applied on all routes
between Austria and Germany on which the Parties offer
direct flights in competition with other airlines;

(b) detailed information on how they comply with the require-
ment to apply tariff reductions on three other Austrian-
German routes;

(c) a list of all contracts and agreements that the Parties have
entered into with competitors on the Austrian-German
market with regard to slots, frequent flyer programmes,
blocked space,

interlining and intermodal traffic;

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(d) information on tariff developments on all routes between

Article 4

Austria and Germany;

(e) a list of the daily frequencies applied and total capacity
offered per month by AuA and Lufthansa on the ten most
important routes in passenger terms;

(f) information on the Parties' progress in implementing their

cost-cutting plans.

2.
Information under paragraph 1, points (a) and (b) shall
reach the Commission within a week of publication of the
tariffs. Information under paragraph 1, points (c) to (f) shall be
sent to the Commission at the end of each summer scheduling
period.

This Decision is addressed to:

Austrian Airlines Österreichische Luftverkehrs AG
Fontanastr. 1
PO Box 50
A-1107 Vienna

Deutsche Lufthansa Aktiengesellschaft
Von-Gablenz-Straße 2-6
D-50679 Cologne

Done at Brussels, 5 July 2002.

For the Commission

Mario MONTI

Member of the Commission

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ANNEX

CONDITIONS

1. Conditions pertaining to slots

If an airline which did not operate air transport services between Austria and Germany on the date of notification (a new
entrant) and which is independent of Austrian Airlines and Lufthansa (the Parties) wishes to commence a new non-stop
service on one or more Austria-Germany city pairs (the ‘new entrant city pair or pairs’), the Parties shall make slots avail-
able subject to the conditions described below. For the purposes of these conditions, a non-stop service includes a multi-
stop service using a single aircraft that begins and/or terminates in Austria, Germany or a third country and has at least
one non-stop segment between Austria and Germany.

The parties are obliged to make available to a new entrant for a particular new entrant city pair (the ‘new entrant slots’)
at least one pair of slots and, to the totality of new entrants, up to a maximum of 40 % of the slots the parties operated
on the city pair in question at the time of notification. However, any voluntary advance slot release by the Parties shall
count towards the 40 %.

The new entrant slots shall be within 45 minutes of the time requested by the new entrant and shall permit, in the case
of one-stop services, a transit-groundtime of the aircraft of not more than 90 minutes, provided that the Parties hold
slots within the relevant time period.

The new entrant shall make a clear written request to the Parties concerning the intended service at least six weeks prior
to the IATA slot conference for the traffic season in which the new entrant intends to commence service. A new entrant
shall be eligible to receive slots pursuant to these commitments only provided that it can demonstrate that all reasonable
efforts to obtain slots for the new entrant city pair through the normal workings of the slot allocation procedure at the
subsequent slot conference (including allocation of slots by the coordinator following the slot-return deadline) have
failed. During the entire period (between the written request and the end of the respective IATA scheduling period) the
new entrant shall maintain an ‘open book’ policy for the respective airports. Any slots obtained by the new entrant
through the regular slot allocation procedure shall count towards the total number of slots the new entrant is entitled to
receive pursuant to these commitments unless the Parties have a share of total frequencies on the city pair concerned that
is in excess of 60 %. Requests for slots pursuant to this section are valid only for a specific scheduling season. Where, on
the route in question, a new entrant has not commenced service, has commenced service at a lower frequency than
planned or wishes to operate an additional frequency, the requirements of this section shall apply to any request for addi-
tional slots in a subsequent scheduling season.

On all routes between Austria and Germany which involve at one end Vienna or Frankfurt airports, new entrant slots
shall be used exclusively to operate services on the new entrant pairs with aircraft having a capacity of 46 or more seats.
This condition shall not apply to other routes between the two Member States or where a new entrant has commenced
service prior to the date of publication of the exemption decision in the Official Journal of the European Communities.

Where a new entrant wishes to use for services on a route between Austria and Germany an aircraft that is stationed at
an airport in a third country, it can obtain slots pursuant to these provisions (including limitations on the number of
slots available to support service on a city pair) for services to or from that third country to position the aircraft at the
beginning or end of operations (technical slots). The Parties shall be required to provide technical slots only where the
new entrant requesting such slots and/or its franchiser operate fewer than three daily frequencies to/from third countries
from the airport concerned at the time that the request is made. Furthermore, the Parties shall make technical slots avail-
able within 180 minutes of the time requested by the new entrant, provided that they hold slots within the relevant time
period.

Where the new entrant operates a service involving a third country and one of the airports included in the new entrant
city pairs (a third-country service) and reduces frequencies on or ceases to operate the third-country service, it shall be
required to use the slots previously assigned to the third-country service for service on the new entrant city pairs. It shall
return the same number of new entrant slots to the Parties as were previously assigned to the third-country service.

Where a new entrant which has obtained slots pursuant to this procedure decides not to commence services on the new
entrant city-pair or to operate a lower number of services, it shall inform the Parties immediately and return the slots to
them. If a new entrant ceases to operate services on the new entrant city pair or has to cease operations for other reasons
(e.g. misuse), it shall inform the Parties immediately and shall return the slots to them. For the purposes of this section, a
new entrant and its subsidiaries will be deemed to have ceased operating on a new entrant city pair where it or they, as
the case may be, have not used at least 80 % of their slots during the scheduling season for which they had been allo-
cated for the city pair in question, unless this non-use of the slots is justified on one of the grounds referred to in Article
10(5) of Regulation (EEC) No 95/93 or in any other regulation that amends or supersedes it.

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

To ensure that the slots provided by the Parties are used in a manner consistent with these conditions, a mechanism shall
be agreed between the Parties and the new entrant that will allow the Parties to monitor how the slots are being used.
The Parties shall inform the Commission about the agreed mechanism.

Slots made available by the Parties under these commitments shall be offered without any quid pro quo.

2. Conditions pertaining to frequencies

The Parties shall not add any frequencies on a particular new entrant city pair for a minimum of four consecutive IATA
traffic seasons including the traffic season in which the new entrant commences service on the new entrant city pair.

3. Conditions pertaining to fares

If the Parties reduce a published fare on a new entrant city pair, they shall apply an equivalent fare reduction (in percent)
on three other Austria-Germany city pairs on which they do not face any competition. This requirement shall apply only
as long as the fare reduction on the new entrant city pair remains effective. For the purposes of this requirement, a
published fare shall include applicable IATA fares, carrier fares that are distributed to computerised reservation systems
via the public tariff data base of ATPCO (Airline Tariffs' Publishing Corporation) and fares marketed to the general public
on the Internet.

The three comparable Austria-Germany city pairs where the Parties must apply equivalent fare reductions will be deter-
mined as follows: the Parties will choose two city pairs out of the next five largest Austria-Germany city pairs by
passenger volume on which they do not face any competition. The only condition to be met when selecting the third
Austria-Germany city pair is that it must be operated solely by the Parties.

This condition shall not apply in those exceptional cases where the Parties can demonstrate to the Commission that a
fare reduction on a specific city pair is attributable to factors, such as a reduction in costs, that are independent of the
competitive activities of the new entrant.

4. Conditions pertaining to blocked space agreements

At the request of a new entrant, the Parties shall enter into a blocked space agreement pertaining to the new entrant city
pair(s) operated by it if the number of frequencies offered by it is lower than the number operated by the Parties.

Any such agreement shall be based on a fixed number of seats (hard block basis) and apply for at least one entire IATA
traffic season. The number of seats covered by such an agreement shall be a maximum of 15 % of the seats offered on a
particular frequency and in any event not less than 12 seats and not more than 25 seats in a particular aircraft. The new
entrant shall carry the full commercial risk attaching to the seats covered by the blocked space agreement.

5. Conditions pertaining to interlining

At the request of a new entrant, the Parties shall enter into an interline agreement concerning the new entrant city pair(s)
operated by it if it does not have an existing interline agreement with the Parties.

Such an interline agreement shall be subject to the following restrictions:

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

(b) it shall provide for interlining on the basis of the Parties' published one-way fares when a one-way ticket is issued or

half of the Parties' published round-trip fares when a round-trip ticket is issued;

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(c) it shall be limited to true origin and destination traffic operated by the new entrant;

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

(e) it shall include the possibility for the new entrant, or travel agents, to offer a return trip comprising services provided

one-way by the Parties and one-way by the new entrant.

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

All interline agreements entered into pursuant to this section for a particular new entrant city pair shall lapse as soon as
the new entrant ceases to operate that city pair.

At the request of a new entrant, the Parties shall enter into a special prorate agreement with it for traffic with a true
origin and destination in either Germany or Austria and/or beyond Austria or Germany. The conditions shall be compar-
able to those entered into with third non-alliance/other alliance carriers in connection with such route. In the case of a
special prorate agreement covering international transfer traffic, this commitment shall apply only to routes where inter-
national transfer traffic exceeds 35 % of the total traffic volume on the new entrant city pair.

6. Conditions pertaining to frequent flyer programmes (FFPs)

If a new entrant does not participate in one of the Parties' FFPs or does not have its own comparable FFP, the Parties shall
allow it on request to participate in their joint FFP for the new entrant city pairs operated by it. The agreement with the
new entrant shall be concluded on reasonable and non-discriminatory conditions, including compensation for any costs
incurred by the Parties.

Any agreement relating to a particular new entrant city pair and entered into pursuant to this section shall lapse if the
new entrant ceases to operate that city pair.

7. Conditions pertaining to intermodal services

At the request of a railway or other surface transport company operating between Austria and Germany (an intermodal
partner), the Parties shall enter into an intermodal agreement whereby they provide passenger air transport on their
services between Austria and Germany as part of an itinerary that included surface transportation by the intermodal
partner (an intermodal service).

Any intermodal agreement entered into pursuant to this section shall be based on the MITA principles (including the
Intermodal Interline Traffic Agreement — Passenger and IATA Recommended Practice 1780e) and normal commercial
conditions.

The Parties shall accept full pro-rating according to the terms applied by MITA members, including on routes where only
rail services are provided. Where the rail operator requires notification of a sector mileage, a location identifier or an
add-on fare, the Parties shall make such a request to IATA under normal IATA procedures.

At the request of a potential intermodal partner, the Parties shall make efforts in good faith to reach an agreement on
conditions comparable to those granted to other intermodal partners, provided that the necessary requirements are met
especially with regard to safety, quality of service, insurance coverage and liability limits. The conditions of such an
agreement shall override the general obligations arising pursuant to this section.

8. Duration of exemption and conditions

The conditions shall apply from the date on which the Commission has adopted the exemption decision under Article
5(4) of Regulation (EEC) No 3975/87. They shall lapse on the date on which the Article 81(3) exemption no longer
applies.

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Should the Commission revoke the Article 81(3) exemption of the cooperation agreement pursuant to Article 6 of Regu-
lation (EEC) No 3975/87 or an equivalent provision in any subsequent regulation, should the Article 81(3) exemption be
annulled, or the Parties terminate the notified cooperation agreements, the conditions shall be null and void as from the
date of revocation, the date of the annulment or the date of termination. In such a case, the Parties shall have the right
to demand the return of any slots provided under these commitments to an airline which, at the time of the revocation,
annulment or termination, is operating services on routes between Austria and Germany using those slots. They shall
also have the right to terminate any blocked space, interlining, FFP, or intermodal agreements entered into pursuant to
these commitments.