Commission notice concerning the alliance between Lufthansa, SAS and United Airlines (cases COMP/D-2/36.201, 36.076, 36.078 — procedure under Article 85 (ex 89) EC) (Text with EEA relevance)
Date: 2002-07-30
Institutions: European Commission
Subjects: air transport, competition law, restriction on competition

C 181/2

EN

Official Journal of the European Communities

30.7.2002

Commission notice concerning the alliance between Lufthansa, SAS and United Airlines (cases
COMP/D-2/36.201, 36.076, 36.078 — procedure under Article 85 (ex 89) EC)

(2002/C 181/02)

(Text with EEA relevance)

1. PROCEDURAL ASPECTS

1. On 3 July 1996 the Commission initiated a proceeding
pursuant to Article 85 (ex Article 89) of the EC Treaty
with a view to examining the compatibility under EC
competition
agreements
concluded between Lufthansa and United Airlines and
between SAS and United Airlines (1). On 18 September
1996 the Commission did the same in respect of the
tripartite
concluded between
Lufthansa, SAS and United Airlines (2).

coordination agreement

coordination

law of

the

(‘the parties’)

2. The Commission proceeding is concerned with these coop-
eration agreements between Lufthansa, SAS and United
to
Airlines
passenger air transport between the Community and the
United States. It is not concerned with the cooperation
agreements between the parties as they relate to the rest
of the world or to cargo services.

they relate

in so far

as

3. On 2 October 1996 the Commission published a
summary of the agreements in the Official Journal of the
European Communities (3) asking Member States and other
interested parties to submit observations.

the agreements at

infringed Article 81(1) of

4. On 28 July 1998 the Commission communicated to the
parties a ‘Draft Proposal’ under Article 85(1) of the EC
the Commission's
Treaty. This Draft Proposal set out
issue (‘the
preliminary view that
alliance’)
the EC Treaty.
Applying the principles of Article 81 as a whole, the
Draft Proposal stated that in order to bring an end to
the infringement, appropriate measures were needed in a
regulatory framework which should actually permit the
introduction of a sufficient level of competition on the
relevant markets. The Draft Proposal described the draft
measures then envisaged by the Commission and invited
the parties to comment on the Commission's preliminary
analysis and the draft measures.

5. In order to receive the comments of Member States and
other interested third parties the Commission, on 30 July
1998, published a notice in the Official
the
Journal of
European Communities (4) setting out
the envisaged draft
measures and explicitly stating that the communication
of the Draft Proposal to the parties and the publication

(1) Case COMP/D-2/36.076/LH/UA and case COMP/D-2/36.078/SAS/

UA respectively.

(2) Case COMP/D-2/36.201.
(3) OJ C 289, 2.10.1996, p. 8.
(4) OJ C 239, 30.7.1998, p. 5.

of the notice were preliminary steps only and without
prejudice to the Commission's final position on the
compatibility of the alliance under EC competition law.

6. Both the parties and other interested parties submitted
in writing to the Commission. An oral
comments
Hearing was held on 14 and 15 December 1998.
Following these comments the Commission undertook a
thorough review of the various issues and entered into
negotiations with the parties and discussions with the
regulatory authorities.

2. THE PARTIES

Lufthansa

7. Lufthansa AG (‘Lufthansa’), the holding company of the
is controlled for about 90 % by the
Lufthansa Group,
private sector and 10 % by MGL (Gesellschaft für Luftver-
kehrswerte). Its turnover in 2000 amounted to EUR 15.2
billion. Lufthansa's main hubs are Frankfurt/Main and
Munich. In 2000 Lufthansa transported about 47 million
passengers. In terms of world wide traffic, Lufthansa is the
second biggest EU carrier, after British Airways.

SAS

(‘SAS’)

8. Scandinavian Airline Systems

is a consortium
owned by SAS Sverige AB (3/7), SAS Danmark A/S (2/7)
and SAS Norge ASA (2/7). Each of the three companies is
50 % owned by the State and 50 % by industry. The
turnover of SAS in 2000 amounted to EUR 4,9 billion.
Its main hubs are Stockholm, Copenhagen and Oslo. In
1999 SAS transported about 22,2 million passengers.

United Airlines

9. United Airlines (‘United’), a wholly-owned subsidiary of
is 55 % owned by its employees and
UAL corporation,
two trade unions. United is one of the world's leading
airlines with revenues amounting to about USD 18
billion in 1999. United has hubs at Chicago O'Hare,
Denver, Los Angeles, San Francisco and Washington
Dulles.
In 1999 United transported about 82,8 million
passengers.

10. All three parties are members of the Star Alliance (5).

(5) With Air Canada, Air New Zealand, All Nippon Airways (ANA),
Ansett Australia, Austrian Airlines, British Midland, Lauda Air,
Mexicana Airlines, Singapore Airlines, Thai Airways International,
Tyrolean and Varig Brazilian Airlines.

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Official Journal of the European Communities

C 181/3

3. THE ALLIANCE AGREEMENTS

11. The agreements at issue are (6):

(i) The

‘Alliance

Expansion Agreement’

between
Lufthansa and United which was concluded on 9
January
and
enhanced an existing alliance agreement between
Lufthansa and United that was concluded on 3
October 1993.

agreement

expanded

1996.

This

(ii) The ‘Alliance Expansion Agreement’ between SAS and
United which was concluded on 28 June 1996. This
agreement expanded and enhanced an existing alliance
agreement between SAS
and United that was
concluded on 1 September 1995.

(iii) The ‘Lufthansa/SAS/United coordination agreement’
concluded on 9 August 1996. This
agreement
creates a framework for the three parties to discuss
and coordinate the activities they have undertaken or
plan to undertake in establishing and implementing
any or all of the alliances.

12. The agreements have the object and effect of establishing a
long term alliance between the three parties, coordinating
their commercial, marketing and operational activities
In
while maintaining their distinct corporate identities.
particular the parties will coordinate in the following
areas: route and schedule planning; establishment and
management
and
distribution networks, coordination of travel agents and
including the
other commissions; branding/co-branding,
logos and corporate marking; code-sharing;
creation of
sharing of
pricing,
information
revenues;
distribution
systems,
channels;
Programs;
sharing of facilities and services at airports.

inventory and yield management;
integration and development of
and
information
Flyer
coordination of

of marketing,

technologies

advertising,

Frequent

sales

4. THE SERVICES CONCERNED

13. All parties are active in the provision of scheduled air
transport of passengers between the EEA and the USA.
in particular affect competition on
The Alliance might
the parties' hub-to-hub O & D markets for the transport
of passengers on the origin and destination pairs
Frankfurt–Chicago, Frankfurt–Washington, Frankfurt–Los
and Copenhagen–
Angeles,
Chicago where the parties were prior to the Alliance
actual or potential competitors.

Frankfurt–San

Francisco

prior to the alliance: both Lufthansa and United operated
a direct service on these routes. One other airline offers a
direct service on the Frankfurt–Chicago route and the
parties' combined market share on this market is over
Frankfurt–Washington, no other
70 %. As
airline offers
the parties
and
a non-stop service
combined markets share is over 95 %.

concerns

15. On the Frankfurt–Los Angeles and Frankfurt–San Francisco
markets Lufthansa operated a non-stop service prior to the
alliance, and on the Copenhagen–Chicago route SAS
operated a non-stop service prior to the alliance. No
other airlines provide direct services on these routes and
the parties' combined market shares on these markets
range from 55 % to 80 %.

16. According to the parties the total O & D passengers on
these routes amount
to: 306 869 (Frankfurt–Chicago),
225 152 (Frankfurt–Washington), 212 245 (Frankfurt–Los
Angeles), 208 871 (Frankfurt–San Francisco) and 54 665
(Copenhagen–Chicago) (7).

5. THE ARGUMENTS OF THE PARTIES

17. According to the parties, to the extent city pairs constitute
meaningful markets in this case, the Alliance only restricts
competition when it can be shown that there was either
meaningful actual or potential competition between the
Alliance partners prior to the creation of the Alliance. In
this regard the parties have submitted that on none of the
three hub-to-hub city pairs in respect of which either
Lufthansa
Frankfurt–San
Francisco) or SAS (Copenhagen–Chicago) operated a
non-stop service, United Airlines would have been a
potential entrant (8). According to the parties the mere
fact that there is a United hub at one end of the route
is not
for United to be a potential
entrant, prior to the Alliance.

(Frankfurt–Los Angeles

in itself sufficient

and

18. United has in this context submitted data, based on
United's QSI (9) model which is used to forecast whether
a new non-stop service on a given city-pair would be able
to attract a sufficient number of passengers generating a
satisfactory return for the new service to be profitable to
United.
In United's view the Alliance could not be
considered to lead to the elimination of United as a
Chicago–Copenhagen,
potential
Frankfurt–Los Angeles or Frankfurt–San Francisco and
any remedy designed to deal with the alleged elimination
of competition on these three city-pairs would not be
justified.

competitor

on

14. On the Frankfurt–Chicago and Frankfurt–Washington
markets the activities of the parties actually overlapped

(6) As said above, a summary of these agreements has been published
in the Official Journal of the European Communities (see footnote 1).

(7) Figures based on MIDT bookings for 2000.
(8) Or on any of the other potential overlap routes referred to in the

1998 notice referred to in footnote 4 above.

(9) Quality of service index.

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Official Journal of the European Communities

30.7.2002

19. 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
their view that
following arguments in favour of
the
the EC Treaty are
conditions of Article 81(3) of
fulfilled (10).

(i) Improvements in the provision and distribution of airline services

and promotion of economic progress

20. The parties take the view that the alliance between them
will enable them to offer a more competitive network,
especially to passengers travelling between Europe and
the United States, as a result of externalities from the
combining of
three networks. They will be able to
provide a larger number of direct and indirect routes, a
frequencies on these routes, greater
larger number of
capacity and improved connections.

21. In fact, since the alliance agreement were concluded the
parties have: commenced new non-stop services on at least
four routes; increased the frequency of their services on
several other non-stop routes and been able to increase
greatly the number of
they can
indirect
offer their customers. On indirect routes connections are
improved as a result of better synchronisation of time-
tables, connection times have been reduced and extra
connecting traffic from alliance partners has allowed
member airlines to start new connecting services.

routing that

22. In addition the alliance allows cost savings to be pursued
in such areas as: the sharing of ground handling facilities;
the elimination of duplicated marketing and distribution
costs; and,
fuel, equipment,
catering services etc.

the joint purchasing of

(ii) Consumers will share the benefits flowing from the alliance

23. According to the parties passengers benefit directly from
the improvements in the services offered by the parties
described above. In addition new customer services have
been introduced such as the automatic checking in of
passengers and luggage to their final destination at the
point of departure harmonised in-flight
services and
centralised data on the three airlines flights and passengers
enabling passengers to use the airport services of any of
the three airlines rather than those of the ‘own’
flight
operator only.

24. According to the parties customers will also benefit from
cost reductions as these will be passed on to them as lower

(10) 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.

fares through the operation of competition with other
airlines.

(iii) The alliance does not impose on Lufthansa, SAS and United
restrictions which are not indispensable to the attainment of the
benefits of the alliance

25. According to the parties, given their goal of operating as a
single integrated network,
it would not be feasible for
them to structure their alliance in a manner where the
parties retained the independent ability to compete for
traffic on any market.

(iv) The alliance does not afford the parties the opportunity of elim-
the
inating competition in respect of a substantial part of
markets for air transport

26. According to the parties the alliance does not lead to the
elimination of competition in respect of a substantial part
in order to
of any market for air transport. However,
competition concerns
resolve
the
the
Commission,
the parties have proposed certain under-
takings, as described below.

identified by

27. These undertakings relate to the above mentioned routes
except for the route Copenhagen–Chicago. According to
the parties the O & D traffic on this route is relatively
small, amounting to 58 049 passengers/year in 2001 and
would be too thin for UA to be considered a potential
entrant. Also, there would be effective competition from
indirect services. Moreover, on the Copenhagen–Chicago
routes there are according to the parties no regulatory
constraints on indirect service providers since the Danish
Authorities do not exercise any price control on 6th
freedom traffic and the airports would not be slot
constrained. Therefore,
the
alliance will not lead to the elimination of competition
and in their view remedies would not be necessary.

the parties consider

that

6. UNDERTAKINGS SUBMITTED BY THE PARTIES

28. The parties have offered to surrender slots at Frankfurt
airport to allow one or more prospective new entrants
to provide new or additional competitive non-stop or
indirect (11) scheduled passenger air services. In particular,
the parties have offered to make available sufficient slots to
allow one additional daily competing air service on the
city pairs Frankfurt–Chicago, Frankfurt–Los Angeles and
Frankfurt–San Francisco, and two additional services on
the city pair Frankfurt–Washington. The slots will only
the prospective new entrant can
be made available if
demonstrate that all
to obtain the
reasonable efforts
necessary slots for the provision of such competitive air
services through the normal working of the slot allocation
procedures have failed.

(11) That is an indirect service with a connecting time of not more than

150 minutes.

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Official Journal of the European Communities

C 181/5

29. In addition, the parties have offered that a new entrant
using the slots which operates a non-stop service, will be
admitted to the frequent flyer programme of the parties
and will be offered the possibility of entering into an inter-
lining agreement with the parties. The parties have also
offered not to participate in that part of the IATA tariff
conference concerning services on the routes in question.

30. According to the proposed undertakings, any carrier that
has the right to operate air passenger services between at
least one or more EU Member States and the USA is
considered as ‘eligible carrier’, provided its is not legally
controlled by the parties, a franchisee of the parties, or an
alliance partner of the parties.

7. PROPOSED REGULATORY CHANGES

31. The German aviation authorities require that published
fares for indirect services are filed with them and they
then may prohibit fares that undercut fares for non-stop
services offered on the same route by a German or US
carriers providing third/fourth freedom services (12). The
possibility of
(sixth
freedom services) (13) has been considered as an entry
barrier by some potential competitors.

control on indirect

this price

comparable conditions

under
where necessary
assessment of comparable transatlantic alliance cases.

in other EEA markets
the Commission's

result of

as

a

8. THE INTENTION OF THE COMMISSION

33. In view of the foregoing, the Commission intends to adopt
a favourable position concerning the LH/SAS/UA Alliance
and to close its pending Article 85 proceeding.

34. Any position of the Commission in this case is without
prejudice to the Commission's position in the pending
open skies proceedings before
Justice
the
against various Member States, and in particular
legality under EC law of bilateral open skies agreements
between those Member States, including Germany, and the
US.

the Court of

35. Before closing the pending Article 85 proceeding, it invites
interested third parties to send their comments within one
month of the publication of this notice in the Official
the European Communities. These observations
Journal of
Case
quoting
be
should
COMP/D-2/36.201 — LH/SAS/UA, to:

submitted,

reference

32. In order to meet these competition concerns the German
Government has stated that it will not exercise any control
on fares of indirect services from Germany to the US on
the four identified routes from Frankfurt. The German
Government has made this declaration in the under-
standing that German air carriers will receive equivalent
to sixth freedom price control
treatment with respect

European Commission
Directorate-General for 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

(12) The third freedom is the right to carry passengers from the airline's
home State to another State and the fourth freedom is the right to
carry passengers to the home State.

(13) The sixth freedom is the linkage of a fourth and a third freedom
service, thereby enabling airlines to carry passengers from one
State via their home State to a third State.