Competition officials in Brussels celebrated November by resigning in disgust at the lack of resources available to them. These overseers in the Belgian capital couldn't even clear their desks; they didn't have any.

Fortunately for supporters of airline competition in Europe, the departures were from Belgium's own fledgling anti-trust authority rather than the offices of the European Commission. However, Belgium's problems highlight the emergence of a new class of regulators which could take policy into areas which the Commission remains powerless to touch.

European deregulation has not only forced airlines to unshackle themselves from state control. The region's regulators have grasped the opportunities created by the third package to take a more proactive role in the shaping of the industry. The catch is that they have run up against legislative impotence and confusion about their role.

Increased competition in domestic and international markets has brought a surge of activity from domestic regulators who used in the past to turn a blind eye to the eccentricities of state-owned carriers. New entrants have encountered a slew of problems relating to pricing, airport access and distribution. While the Commission remains the primary conduit for complaints, airlines still find Brussels understaffed and instead have turned to the same domestic regulatory authorities which often failed to act in the past.

Domestic regulation in Europe has lagged behind the three liberalisation packages, but the clear contrast between the theory of a level playing field and its enforcement, has seen a reawakening of action in markets from Norway to Italy. While it remains a patchwork at present, it serves as a warning to officials in Brussels that their authority is not sacrosanct and sends a signal to predatory airlines that inaction from Brussels is not necessarily the end of the story.

European competition rules, enshrined in Articles 85 and 86, are applicable to intra-EU services and, since last April, to domestic services as well. The Commission remains sanguine about the increased activity by member states. 'In many instances we have tried to make a division of labour between national authorities and the Commission,' says a senior Commission transport official. This is particularly clear in the mergers field where the thresholds of the Merger Control Regulations specifically delegate powers to national authorities for smaller deals.

However, the absence of coordination between the Commission and national regulators was highlighted when Braathens and KLM sought clearance for the latter to take a stake in the Norwegian carrier. Auden Tjomsland, vice-president corporate affairs at Braathens, say the pair sent information on the deal to the Commission. 'We assumed that Brussels would be interested in this so we sent the papers. Then the local authority asked for a copy.' Neither regulator made any further contact.

Commission officials face a juggling act in ensuring consistency between the application of European rules and domestic regulations. While its investigation into the impact of transatlantic alliances has opened a new phase of cooperation between Brussels and domestic agencies, the contrasting findings of the Commission and UK investigations into the British Airways/American Airlines alliance highlight the potential for conflict. One UK analyst cites the gap between the slot concessions demanded by the UK and Brussels as evidence of the dangers of divergent policy making. 'The 148 Heathrow slots demanded by the UK OFT versus the 300-plus slots demanded by Brussels shows how wide the gap can get,' he says.

Domestic competition policy in Europe continues to lag behind and is a patchwork of developed policy and embryonic anti-trust bodies. The Bundeskartellamt in Germany and Scandinavian authorities have the most powerful and advanced systems of policing and enforcement within the EU, while at the other end of the spectrum the Netherlands is just starting to create its own anti-trust agency. Italy and Spain have also emerged with a tougher stance against anti-competitive practices while the French market remains the most protective, usually requiring plaintiffs to resort to the national and European courts to secure action.

The Bundeskartellamt has emerged as the most active domestic authority in Europe, with two high-profile cases in 1997 which cut across the breadth of airline operations from pricing to marketing and alliances. The Bundeskartellamt has the power to open its own investigations but officials admit they have privately encouraged complainants to come forward to give the authority more leverage in its action.

By December the BK had ruled on one of three complaints against Lufthansa from Dortmund-based Eurowings, and was still investigating Lufthansa's pricing on Frankfurt-Berlin where fares remain 25 per cent higher than on comparable routes, such as Frankfurt-Munich, where it faces competition from Deutsche BA.

So far the agency has tended to pursue 'change in behavioural conduct' according to one official, though it can impose fines. While some attribute its emergence as the inevitable result of increased competition, the BK dismisses the timing. 'We examine a case if we think that it will have an economic impact on the German consumer,' says Andreas Knochenhauer, head of the BK's air transport section. 'Complaints and action are unrelated to deregulation at this stage in the game,' he says. '[But] we expect a huge impact following the introduction of domestic cabotage.'

In Italy, Alitalia's preparation for the sale of a major stake by the state is taking place against the background of a tougher stance by the domestic competition authority, Altorita Guaranti, set up in 1990. The authority, which is independent and run by an elected board, launched its own campaign against restrictive practices on the Italian telecoms industry and laid the groundwork for October's privatisation of Telecom Italia after first requiring the spin-off of Stet, the state-owned cellular phone company.

The authority made its first mark in the airline industry in November 1996, finding Alitalia guilty on three counts after a joint complaint from Meridiana and Air One. Alitalia was fined L415 million (US$260,000) for pressurising travel agents not to sell its rivals' tickets, colluding with slot coordinators, and selectively changing its own schedules to undermine competition on two routes from Milan/Linate to Brindisi and La Metia. The fine represented 1 per cent of sales on the two routes, though the authority can levy fines of up to 10 per cent. 'It was symbolic and there is still much to do in this country,' says an official at the Altorita Guaranti.

In addition, the agency is acting independently to require Italian airports to allow self-handling and third party catering, and is watching carefully the new slot co-ordination system introduced in June, he says. It has already thrown out the favoured candidate of Alitalia for the head of the new body, Asso Clearance, after an open vote by airlines and airports described by one independent operator as 'a farce'. A new head - unaffiliated to Alitalia - was chosen after a secret ballot.

'The authorities are still coming to terms with their new role but are finding it a bit difficult,' says a Rome-based airline official. 'There was some confusion when the third package came in as Rome saw it as an addition, not a substitute, to their own practices.

The recent action by the Bundeskartellamt in the Eurowings-Lufthansa case highlights the ability of domestic authorities to operate in areas where the Commission lacks full competence. The agency ruled that Lufthansa's Miles & More frequent flyer programme distorted the German market and ordered the flag carrier to open Miles & More to Eurowings and its other domestic rivals.

The Commission has so far failed to determine policy over FFPs, due to disagreements on how to proceed between the transport and competition directorates which jointly oversee enforcement. Officials in both directorates privately welcome the action of the Bundeskartellamt though, like Eurowings, they question the decision to open up Lufthansa's FFP rather than impose some limitations.

The case also highlights the grey area over the relevant market in which competition rules apply. Technically, the Commission has jurisdiction in crossborder markets while the Bundeskartellamt restricts itself to the impact on German consumers. However the impact of Miles & More clearly extends beyond German borders.

The Norwegian authorities have also opened an investigation in an area which has so far escaped any action by the Commission. The Norwegian tax authority has launched a test case into the impact of corporate discount programmes and asked SAS and Braathens to supply the records of their top 15 frequent flyers to cross check corporate and personal tax records. The airlines have appealed but the move signals that airline marketing arrangements are facing a new form of scrutiny.

British Airways also faces a long-standing complaint, lodged with the European Commission by Virgin Atlantic, in relation to its own corporate client pricing policy. However, it is British Airways' plans to launch a low-cost, no-frills service at London/Stansted which threaten to open up a division between Brussels and UK competition authorities.

The UK is governed by a confused muddle of regulatory authorities, with responsibility split among the Office of Fair Trading, the Monopolies and Mergers Commission and the Department of Trade and Industry. Crucially, UK legislation is unique among EU member states in being unsuited to apply the Commission's competition rules. Trade and industry secretary Margaret Beckett has signalled a change of policy under the new Labour administration, but many analysts believe cases will continue to fall between the revised remits of the OFT and DTI, and be acted upon by neither.

The UK Civil Aviation Authority was the original protagonist of deregulation in Europe, opening up domestic UK routes and extending the policy to international routes well before the first package. Its interventionist role in policing uneconomic and predatory fares has diminished since the arrival of the second package and its remaining powers have highlighted what some see as the European Commission's remoteness.

For example, the CAA regularly bundled together cases of uneconomic fares in the UK market and sent them to the Commission only to be frustrated by the lack of action from Brussels. Former CAA chairman Sir Christopher Chataway campaigned for the right for domestic authorities to continue to enforce action against unjustified fare levels. 'The Commission could certainly improve its response time,' says one CAA official.

In late November the UK Office of Fair Trading said it still had no plans to investigate BA's plans to establish a low-cost, no-frills airline at London/Stansted, codenamed Operation Blue Sky. Luton-based startup EasyJet has already fired a warning shot by threatening to take the issue up with the Commission.

Competition officials elsewhere in Europe remain surprised that the UK has failed to take action, given what they see as a clear potential for conflict between Blue Sky and BA's European services at Heathrow and Gatwick. One Spanish official even states that, while his office doesn't have the resources to examine FFPs or corporate discounts, Blue Sky is exactly the type of case he would like to get his hands on.

The Commission is standing back for now, but officials insist they will act if the UK does not, raising fears of a fresh conflict to add to the disagreement over the proposed BA tieup with American Airlines. However Brussels is anxious not to step on the UK too much at a time when it needs to secure the country's support for its own campaign to confirm its competence to oversee competition rules on routes to third countries.

The Commission remains concerned that a failure to confirm its competence will channel intra-EU affairs back to member states. 'Their role could diminish as people simply won't bother with them,' says one Brussels lawyer. Commission officials concede that the globalisation of the industry requires them to be able to regulate cross-border alliances. They are hampered at present, with only the weak weapon of Article 89 at their disposal, but they have sought to foster improved links with member states which can employ the stronger powers under Articles 85 and 86.

The Commission is already boosting its position by including domestic authorities in a wide-ranging examination of the transatlantic alliances, liaising with Germany in particular on the impact of Lufthansa/United. 'We've got a very good relationship with the Commission,' says Knochenhauer. 'We're jointly examining Lufthansa's involvement in the Star Alliance. If we disagreed the Commission would have the last say, but that's never happened.'

The resurgence of domestic competition authorities over the past 18 months can be traced back to two factors, neither of which relate wholly to the spread of competition and deregulation. First, a new breed of bureaucrats has emerged in countries where state control over industry has gradually loosened. The more fundamental reason is the policy split over a wide range of issues between the EU's competition and transport directorates, DG-IV and DG-VII. This indicates that, while Brussels has put the fabled level playing field in place, it is incapable of enforcing it in its present form. 'There is a need to resolve the roles of [Neil] Kinnock and [Karel] Van Miert,' notes one analyst.

Failure to fix the long-running divisions will damage the European Commission's chances of securing oversight over third country services and hand power back to national authorities.

Source: Airline Business