This essay briefly discusses the reality that I have experienced in air transport for some time. In this field, the world is still ruled by bilateral air transport agreements. Such bilateral agreements are even in force in Europe. This essay asks several questions.  First, what does successful deregulation in Europe really mean? Would deregulation be successful if many low-cost carriers flew throughout Europe and carried mostly point-to-point traffic from point A to B? I personally think that very few routes are suitable for this point-to-point traffic

Wolfger, Robert

English

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Deregulation of Air Transport Agreements

Fordham University School of Law

Fordham International Law JournalVolume 23, Issue 6 1999 Article 16Deregulation of Air Transport AgreementsRobert Wolfger∗∗Copyright c©1999 by the authors. Fordham International Law Journal is produced by The Berke-ley Electronic Press (bepress). http://ir.lawnet.fordham.edu/iljDeregulation of Air Transport AgreementsRobert WolfgerAbstractThis essay briefly discusses the reality that I have experienced in air transport for some time.In this field, the world is still ruled by bilateral air transport agreements. Such bilateral agreementsare even in force in Europe. This essay asks several questions. First, what does successful dereg-ulation in Europe really mean? Would deregulation be successful if many low-cost carriers flewthroughout Europe and carried mostly point-to-point traffic from point A to B? I personally thinkthat very few routes are suitable for this point-to-point traffic.DEREGULATION OF AIRTRANSPORT AGREEMENTSDr. Robert Wolfger*Thank you for making it possible for me to take part in thisSymposium. Normally, it means trouble for an airline when it issurrounded by so many lawyers. It means trouble because formany airlines, economic considerations, in whatever form, comefirst, and then competition law may hit.I represent a national airline here. Austrian Airlines is fifty-one percent owned by the Austrian state, a small state. Withinthis small state, there is limited competition. On the otherhand, Austrian Airlines is a very small airline with only a two per-cent market share in Europe. In absolute size, Austrian Airlinesranks forty-ninth in the world. Austrian Airlines has a limitednumber of aircraft, and has shown positive results for a couple ofyears now.Shortly before this meeting, Dr. Romina Polley asked me if Iwas offended after reading her presentation. I told her that Iwas used to the arguments she used in her Essay. Having beenwith Austrian Airlines for almost twenty years, I know about thepast fairly well, and I follow present developments closely. Istarted with market research, worked in personnel administra-tion for some time, and have been with international relationsfor fourteen years, which means, in the first instance, care forgovernment relations. I must admit that we have very good rela-tions with the Austrian government. I have to admit as well thatwhen Lauda Air-now our daughter company-was owned byLufthansa, Lauda Air had even better relations with the Austriangovernment.Let me talk briefly about the reality that I have experiencedin air transport for some time. In this field, the world is stillruled by bilateral air transport agreements. Such bilateral agree-ments are even in force in Europe. For example, there is still abilateral agreement between Germany and Austria, which hasnot been canceled but has, to a great extent, been overruled bythe three European liberalization packages and the declarationof applicable competition laws to air transport within the Euro-* Head of International Relations for Austrian Airlines.S209S210 FORDHAMINTERNATIONALLAWJOURNAL [Vol. 23:S209pean Union ("EU"). Not much more than ten years ago, trafficbetween Germany and Austria was nearly reciprocally allocatedto Lufthansa and Austrian Airlines by means of a so-called poolagreement. We sat together every other month in a relaxed at-mosphere, talked about figures, talked about costs, and how toallocate the revenues between us. There was an agreement toshare the revenues-in principle, half and half. Of course, Luf-thansa had much more revenue than we did, as we were a smallairline, and therefore the payments resulting from that poolagreement flew in our direction. Although the pool paymentshad a limitation of one percent of the revenues of the payingpartner, we received about seven million Austrian shillings everyseason for conceding that Lufthansa was allowed to offer somemore seats to Austria than we did to Germany. That is over.That is finally over within the European Economic Area.It is still the case, however, between the EU and other coun-tries of the world. Not long ago, I returned from bilateral nego-tiations with Israel. There is a bilateral agreement between Aus-tria and Israel, just as one is in effect between Germany andIsrael-an air services agreement of a rather pre-deterministictype. This agreement stipulates that every airline that is desig-nated on each side has, on principle, the right to offer fifty per-cent of the capacity, but only one airline on each side should bedesignated for offering this capacity. This agreement also stipu-lates that both designated airlines must agree on their capacityto be offered in advance, and if the airlines agree, then the re-spective governments would give their consent. Within this bilat-eral agreement, Austrian Airlines transports more passengersthan El Al. Within this environment, adding frequencies be-tween Austria and Israel is hardly possible. For years, there hasbeen a pool agreement between El Al and Austrian Airlines.Even if code sharing is offered, or eventually the pool paymentmight be raised, one never takes for granted that the partner willagree to that capacity increase. That is air traffic under a bilat-eral agreement, especially one with a predetermination clause.The same scenario goes for Russia, with the new Eastern Eu-ropean countries, and still with almost all Central Europeancountries. It is also the case for most of the air traffic betweenEurope and Latin America, and between Europe and Asia. Be-tween Austria and Tokyo, one cannot offer the capacity accord-ing to market needs. There is a limitation to the capacity the2000] DEREGULATION OF AIR TRANSPORT AGREEMENTS S211other partner, or the other party, is ready to grant to you. It is abuilt-in limitation, as it is not only the one party in Europe thatcan liberalize or deregulate. There is also the other party thathas a say in bilateral agreements. If the European Commission("Commission") obtained an unlimited mandate to negotiatewith these countries, then I fear that from some countries, whichare not as liberal regarding air traffic as in our part of the world,we would get much less than we have now.Let me discuss, as an example of an air transport agreementthat had some importance for Austrian Airlines in the past, theair transport agreement between Austria and Spain. Normally,the annex to a rather liberal agreement says that the designatedairlines of Spain are allowed to fly from any point in Spain to anypoint in Austria, and the designated airlines of Austria are al-lowed to fly from any point in Austria to any point in Spain. Thisair transport agreement, however, was not that liberal. It saidthat the designated airlines of Spain could serve any point fromSpain to Vienna, and the designated airlines of Austria could doso from any point in Austria to Madrid. One can already seefrom this formula, however, that the chances are not evenly dis-tributed because Spain has so many interesting points for an air-line, while Austria has, at most, only Vienna and Salzburg to of-fer. Graz, Klagenfurt, and Linz might not have been so attractivefor new air services within these agreements. Even with such anair transport agreement the points are limited, and in this situa-tion, they were even more limited. The designated airlines ofSpain flew from two limited points in Spain-Madrid and Barce-lona-to Vienna, while the Austrian airline was allowed to flyfrom points in Austria (the only economically reasonable pointwas Vienna) to Madrid. I do not think that this was fair, but itwas, let us say, a reciprocal formula and logically clear: frompoints here to one point there-the reciprocal way. So Iberiawas allowed to fly from Madrid to Vienna, from Barcelona toVienna, from Malaga to Vienna, from wherever in Spain theywanted to Vienna, and we were allowed to fly from Vienna toMadrid, from Graz, Klagenfurt, Linz, and Salzburg to Madrid.If, under a pre-determinative type of agreement, one finds sucha situation, then the small country normally, through repeatednegotiations, can negotiate more points in the other, largercountry. So, after a while, we were allowed to get Barcelona, toget Malaga, and even a fourth point. We got a little bit moreS212 FORDHAMINTERNATIONALLAWJOURNAL [Vol. 23:S209than a logical formula of reciprocity would permit. Now, if onetakes all the European countries, especially the small ones, nego-tiating in the same way with Spain, they often got more rightsthan they deserved out of these reciprocal agreements. I thinkthis is still the case between smaller countries in Europe andlarger third countries, where the governments still show a ratherrestrictive attitude.This conclusion is even valid if we consider the relations be-tween single European countries and the United States. ManyEuropean countries have concluded Open Sky agreements withthe United States, which mainly offer every European countrysuch an Open Sky agreement. I must say that for Austria, thisOpen Sky agreement might be the optimum it could get. I sup-pose that for the German carriers, the Open Sky agreement be-tween Germany and the United States might also offer the bestavailable chances. I don't know if the Dutch agreement is suffi-cient for the Dutch carriers, but for the Spanish and Portuguesecarriers, I also suppose that such an agreement would beenough. For most of the European carriers, an Open Sky agree-ment with the United States might be the best they could get.Why the best? Because most European carriers operate from orto one single hub, and they try to build up, maintain, or expandthis single hub. The more spokes they add to this hub, the bet-ter their competitive advantage is, and the cheaper the fare theycan offer to the public. If some spokes are taken out of thesehubs, however, as the Commission thinks they must be in thecase of British Airways/American Airlines and maybe Lufthansa/SAS/United Airlines, then the cost of the network operationwould naturally go up, and the prices for the public would in-crease. So, if the European carriers build hubs in their owncountries they need not, in the first instance, build second orthird hubs in other countries if there is no severe capacity con-straint at their main hub. Lufthansa, in my opinion, need not tobuild up a hub in Madrid. Lufthansa need not build a hub inRome or in Milan, because, with their hubs in Frankfurt and Mu-nich, and their cooperation network, they can serve the whole ofEurope. Europe is not the United States, where the situation iscompletely different, and carriers possibly need more hubs be-cause the country is so much larger.So, cui bono, what happens if the Commission negotiates forthe whole European air traffic-if single countries, in the long2000] DEREGULATION OF AIR TRANSPORT AGREEMENTS S213run, could gain more, vis-i-vis more restrictive countries, and ifthe single countries are rather happy with their Open Sky agree-ments? I doubt that it would bring about an added value forexisting carriers, in case the Commission negotiates.In general, one could ask, what does successful deregulationin Europe really mean? Would deregulation be successful ifmany low-cost carriers flew throughout Europe and carriedmostly point-to-point traffic from point A to B? I personallythink that very few routes are suitable for this point-to-point traf-fic. I might offer you an example. Just at the time Austriajoinedthe EU, there was a Belgian entrepreneur who wanted to fly withhis low cost airline between Vienna and Brussels, between Brus-sels and Rome, and between Brussels and Barcelona. He startedthis operation between Vienna and Brussels. The airline's nameat that time was Eurobelgium, although now it is Virgin Express,as the entrepreneur sold the airline to Mr. Richard Branson. Atthat time we made the following calculation: Eurobelgium oper-ated with a 737, and offered a price of DM130 from Vienna toBrussels one way. No frills were included. The airline, whichoffered its services daily, needed a break-even of seventy percentjust to cover its cost. The managers of this airline thought therewas more than enough point-to-point traffic on this route.There was not enough, however, and there is still not enough. Ifairlines operate between two hubs-in the case of Vienna andBrussels, these airlines have been Sabena and Austrian Airlinesfor years-then almost fifty percent of the traffic, or even more,is hubbing traffic. It is network traffic, not point-to-point traffic.So, if an airline goes into such a route and wants to have only thepoint-to-point traffic, it can only gain a very limited number ofpassengers from the incumbent airlines.After two years of making losses, Mr. Hasson, who was theowner of that airline, called us. We went to Brussels to have talkswith Mr. Hasson. He told us the following:Look, I tried, but have not been successful in my way. I offeryou one thing. Give me, let's say, 70 seats from your middayflights at a price of 80 Deutsche marks. In such a case I willput these passengers on your planes, they will get no service,except an apple from time to time, but the passengers willknow, that they are on my no-frills part of the plane, notyours.We asked him not to pursue this idea any further, but to use aS214 FORDHAMINTERNATIONALLAWJOURNAL [Vol. 23:S209smaller aircraft, as we offer a different standard of service qual-ity. We want to offer quality service to the passengers on ourplanes, and such an idea does not fit our flights. He told us thathe would to have to give up the route and consult another air-line about the idea of cooperating on his other routes. Finally,he went to Sabena. Maybe this suited him better because he-and now Virgin-cooperates with Sabena, though in a slightlydifferent fashion. Sabena accepted his flights to London, Rome,and Barcelona under its umbrella, and operates these flightsunder its own name.With this example, I just wanted to mention that evenwithin Europe, we have mostly network operations. The Com-mission is investigating purely on the basis of routes. On theroute, the Directorate General IV officials say that if you havemarket power, you have market dominance. They argue thesame way when investigating third country routes. When theyexamine the U.S.-Austria traffic, they almost solely look at theNew York-Vienna route. A rather limited number of passengersfly on this route; approximately 120,000 passengers a year. Withthis limited demand, we can hardly operate two frequencies aday. Let us say it is not enough potential to operate two frequen-cies a day, but we must operate them in order to have connec-tions from and to the United States via Vienna. So you have tooperate two frequencies, but the load factor does not justifythem if you operate on your own. If we did not have our partnerDelta Airlines cooperating on this route, which contributes sub-stantially to the route, then we would have to bear losses. TheCommission says, however, that by cooperating you have a domi-nance on this route, and they have to see if they might have totake something away here-slots, frequencies, the cooperationvis-A-vis travel agents, companies, etc. Although the route isopen to competitors, nobody else in Europe is interested in op-erating this route.There is a difference, of course, between small airlines andbig airlines. If there is a very big airline on the very west end ofEurope, then this airline could have a dominance, as no passen-ger would be interested in going eastwards first in order to con-tinue westwards. In this connection, one must say that the Com-mission is investigating business traffic, in the first instance, be-cause the Commission considers this kind of traffic as having noother choice than going on the direct flight. We made a study2000] DEREGULATION OF AIR TRANSPORT AGREEMENTS S215together with the Roland Berger company, however, and thisstudy shows that from Austria-or from Germany-to theUnited States, this is not true, because only thirty to forty per-cent of the business traffic goes on the direct flights to theUnited States. Seventy percent of the business traffic, at leastfrom Austria, is going via other European points. Traffic, includ-ing business traffic, which the Commission considers time-sensi-tive, to or from the United States, is network traffic. It is notpurely third and fourth freedom route traffic. It is network traf-fic, and you have to investigate the traffic flows within networks.This result is also true in case of business traffic.One last remark, maybe a short one about prices in airtransport. Fifteen years ago, we had real networking in prices.There were the International Air Transport Association agreedfares, and there was a world wide network in fares. Small Aus-trian Airlines had a world wide network offer. What does thatmean? When we sold a ticket from Vienna to Los Angeles-wedid not even fly to New York in those days-any airline acceptedthis ticket, any airline. So the passenger had the choice to fly viaFrankfurt, via Paris, via London, via Madrid, wherever hewanted, because there were agreed tariffs around the world, andso-called interlining between all airlines was granted. I do notsay this was good in all aspects, because this mechanism in somecases kept the fares at high levels. But, on the other side-andlet us say, under the table-for travel agents and for big compa-nies, there existed other, and, in all cases, lower prices. So, forexample, if the official gross tariff to Los Angeles was, let us say,12,000 shillings, big companies got a rebate, and then the netrate might have been, for them, let us say, 8000 Shillings. Air-lines that had on-line connections to Los Angeles-via Frank-furt, Paris, London, Amsterdam, etc.-could sell at 8000 shil-lings because they pro-rated this fare internally over their ownflights. If we sold this 8000 shilling fare via our connecting flightto Amsterdam, then KLM would have taken from us a pro-ratedAmsterdam-Los Angeles fare based on the 12,000 shilling fare,and this might have been the 8000 shillings in all. Now it is pos-sible to sell the 8000 shilling fare with our partners, because if wesell at these 8000 shillings, we are able to keep 4000 shillings forthe New York route, and Delta takes 4000 shillings for the NewYork-Los Angeles route. If we did not have these internal agree-ments, then we could not even interline with our partners. SoFORDHAM INTERNATIONAL LA WJO URNALpricing agreements and interlining agreements are good for thepassengers, as well as for the interlining partners, because theycreate new products. If, for example, we have a low tariff, nowwe can offer this low-tariff together with all our partners, but wecannot offer this low tariff on Lufthansa, on KLM, or on otheralliances-they have their own low internal tariffs. This resultkeeps the alliances apart, and it keeps them apart while, in otherfields, there necessarily remain connections between alliances,especially if small airlines are concerned. When we could nolonger afford to operate to Dusseldorf-we experienced a loss oftwenty million shillings within one year-then we had to ask Luf-thansa if they could be so kind as to offer us some seats on itsflights in order continue feeding our hub in Vienna. The otheralternative was to go out of this route. Lufthansa kindly agreed.We offer our prices there, Lufthansa offers its prices on thisroute, and there is competition on this route. With the Commis-sion, however, we still might have a problem. The Commissionmight say that there should be absolutely no cooperation be-tween alliances, whatever cooperation it might be. This rule can-not be the case for small airlines, however, because if it were so,the diversity of route offers would be killed in favor of an over-simplified theoretical construct.S216

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