Commission notice concerning the Alliance between KLM Royal Dutch Airlines and Northwest Airlines, Inc. (case COMP/D-2/36.111 — procedure under Article 85 (ex 89) of the EC Treaty) (Text with EEA relevance)
Date: 2002-07-30
Institutions: European Commission
Subjects: air transport, competition law, cooperation agreement, fixing of prices, marketing, sale, transport capacity

C 181/6

EN

Official Journal of the European Communities

30.7.2002

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

(2002/C 181/03)

(Text with EEA relevance)

1. PROCEDURAL ASPECTS

2000/2001. KLM ranks 22nd worldwide in terms of
passengers transported.

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

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

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

2. THE PARTIES

4. KLM is engaged in the business of operating national and
international scheduled and chartered airline services, as
well as certain airline related business. The State of the
the shares in KLM. The
Netherlands owns 14,1 % of
remainder of the shares (84,9 %) are held by private share-
holders. KLM's
stock
exchanges. KLM has its hub in Amsterdam Schiphol. In
2000 KLM operated direct scheduled services to 144 desti-
nations, of which 66 beyond Europe and transported 16,2
million passengers, of which 17 % on the North Atlantic.
EUR 6 960 million in
to
Its

shares are quoted on various

amounted

turnover

(1) The US Department of Transportation gave its approval and
immunity to this alliance agreement on 11

granted anti-trust
January 1993 (DoT Final Order 93-1-11).

(2) Regulation (EEC) No 3975/87 (OJ L 374, 31.12.1987) being
applicable only to air transport between Community airports.
(3) OJ C 117, 15.4.1997, p. 8, and OJ C 177, 10.6.1998, p. 10.

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

at Detroit, Minneapolis/St. Paul

3. THE ALLIANCE AGREEMENT

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

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

(‘the Alliance’) (4)

(4) The Alliance Agreement was

the
KLM-Northwest Enhanced Alliance Implementation Agreement of
30 September 1997. In addition, the parties concluded a number
of accompanying agreements. Where hereinafter reference is made
to ‘the Alliance’ this includes the enhanced alliance agreement and
the accompanying agreements.

enhanced

further

by

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

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

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

(c)

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

for

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

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

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

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

4. THE SERVICES CONCERNED

5. THE ARGUMENTS OF THE PARTIES

9. As

the

concerns

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

catchment area,

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

the US-Netherlands Air

11. According to the parties they can not be considered either
as potential competitors on the identified routes. They
note that before 1990 KLM did not have the bilateral
Service
authority
under
to enter the routes. Moreover,
Agreement
they submit
that prior
to the blocked-space agreements of 1991
neither KLM nor NW would have entered the routes inde-
pendently because of the limited amount of local traffic.
According to the parties local traffic (defined as direct and
to about 60 000
indirect O & D traffic)
about 36 800
passengers/year
passengers/year on AMS–MPS (6). According
to the
the total
parties
passengers
flying from Amsterdam to the US are
connecting passengers.

the vast majority (about 94 %) of

on AMS–DTW and

amounts

12. In so far as the Commission would nevertheless conclude
that the Alliance would fall within the scope of Article
81(1) of the EC Treaty, the parties have submitted the
following arguments in favour of
the
conditions of Article 81(3) of the EC Treaty are fulfilled (7).
According to the parties the Alliance has expanded and
improved transatlantic services. In particular, according to
the parties
initiated significant new
services between Europe and the US. Between 1993 and

the Alliance has

their view that

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

(6) Based on MIDT data (bookings) from 2000 provided by the parties.
(7) In the framework of Article 85 of the EC Treaty the Commission is
not empowered to grant an exemption under Article 81(3) of the
EC Treaty. However,
in order to determine whether there is an
infringement of EC competition law and what measures are
necessary to bring it to an end the Commission must apply the
principles of Article 81 of the EC Treaty as a whole.

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Official Journal of the European Communities

30.7.2002

2001 twelve new services were started, some of them
serving relatively thin non-stop routes. The number of
transatlantic flights by the parties increased from about
100 weekly flights in 1990 to about 200 flights in
1999. According to the parties, the number of non-stop
passengers flying from Amsterdam to the US has almost
tripled from approximately 680 000 in 1990 to over
about 2 million in 1999. The parties have pointed out
that the Alliance has not only resulted in expanded trans-
atlantic flights from Amsterdam to NW hubs, but also led
to additional connecting services, providing services to
destinations, which were previously unserved or poorly
served for transatlantic traffic.

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

service

but

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

for

15. According to the parties the cooperation does not result in
the elimination of competition on a substantial part of the
AMS–DTW or AMS–MSP routes. According to the parties
a number of reasonable alternative indirect services is
according to the
available
parties
level of potential
competition resulting both from the possibility for
competitors to commence new services and to adjust

to passengers. Moreover,
exists an important

there

existing services. According to the parties there are no
barriers to entry the hub-to-hub routes concerned. There
would be no regulatory barriers and slots would be
available at both ends of the hub-to-hubs routes. In this
context the parties have provided information for winter
2001/2002 and summer 2002 from which it appears that
legitimately requested slots at Schiphol airport were
eventually also allocated. Furthermore, according to the
parties in many cases market entry is possible without
commencing a new service and will only require a
schedule adjustment
to improve connecting time in
order to make the service a ‘reasonable substitute’ to the
existing non-stop service. The parties also note that the
hub-to-hub routes concerned must, with respectively
60 000 (AMS–DTW) and 36 800 (AMS–MSP) O & D
passengers a year, be considered as ‘thin’ and are highly
unlikely to support two or more competitive non-stop
services. According to the parties a minimum level of
local traffic of at least 63 000 passengers a year would
be required for a route to support competing non-stop
services.

6. THE INTENTION OF THE COMMISSION

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

the Official

Journal

the

of

in

European Commission
Directorate-General Competition
Unit D2 (Transport), Office J 70 2/237
B-1049 Brussels
Fax (32-2) 296 98 12
E-mail: Monique.Negenman@cec.eu.int