Several broad developments are putting pressure on the system. The trend towards international airline alliances and cross-border shareholdings, the need for access to wider sources of capital, and an increasing recognition of the importance of commercially motivated airline management - often achievable only through privatisation - should together help to break down the traditional culture. We cannot expect the widespread dismantling of bilateralism in the short run, but this should not prevent European Union member states and other developed countries whose markets make up the bulk of world aviation from firmly espousing such a policy.
There is no doubt that external aviation policy will eventually be decided in Brussels. Within this wider framework, and given a willingness on both sides, it should be perfectly possible to reach agreements with countries such as the US allowing free and fair competition. Indeed, it is impossible to see how the single European aviation market can be completed while external competence remains with national governments.
But this will not happen soon, primarily because of the absence so far of anything approaching a common view between EU governments as to what policies they should follow. It would be unacceptable for the EU to take a substantial international relations role if the result were merely to be the recreation at EU level of the restrictions found today or, worse, an attempt to use the EU's bargaining strength to secure further restrictions. This is a real risk given the attitudes of some in the EU, who believe that competition policy should be softened.
Meanwhile, there are ways in which governments may already act more liberally within existing bilaterals. For example, our report suggests a relaxation of the conditions under which airlines are permitted to hold out and market their products in other countries. In the UK, the CAA's latest Statement of Licensing Policies makes explicit our willingness to approve fares on indirectly competing services - allowing fifth and sixth freedom operators to offer publicly the fares they wish.
There are other hopeful signs. Traditionally, airline representatives - but not other interested parties - take part in bilateral air services negotiations and calculations of the balance of airline benefits count above all else. Now in some countries governments are paying more attention to wider interests, such as users, airports, regional development and tourism. UK transport secretary Dr Brian Mawhinney has announced his willingness to authorise, without bilateral price, new services by US airlines to any UK regional airport as well as to London's Stansted and Luton.
Going beyond bilateral issues, we need to find ways to promote greater competition, especially where it is presently weak. In particular we should try to encourage competition from smaller airlines. At present only five nonflag European airlines operate scheduled routes in major longhaul markets - LTU, Virgin, Martinair, AOM and Lauda Air. They account for no more than 10 per cent of European intercontinental output.
The problems facing would-be competitors in longhaul markets are different to those in the shorthaul sector. Financial barriers to entry are more formidable, while the size, ownership and number of potential competitors are all more forbidding.
Probably the most important difference is the extent to which there is intrinsically less scope for competition from smaller non-network carriers on longhaul routes. There is a relatively small number of dense point-to-point longhaul markets, and there are few niche routes. So any smaller airlines seeking to provide more than just leisure services on intercontinental routes are bound to face the full force of competition from the major network carriers across the whole of their operations.
Given such impediments, it is important that the major airlines' commercial strategies are not allowed to threaten the continuation of the competition which has developed. There has been growing concern amongst smaller airlines about the ability of large airlines to exploit their size and the spread of their networks to gain greater control over distribution channels through the use of agency commission overrides, special corporate rebates, frequent flyer programmes and the like.
The CAA has concluded that there is an insufficient case for intervening in airlines' commission override agreements with agents. Agency deals do not give the same exclusivity or ability to influence individual journeys as corporate deals.
In the longer term, agents have little to gain by boosting further the share of a dominant airline. Generally, these deals seem most likely to create a pressure towards locking-in market share among those airlines which are given preferred status by an agent. But, in the UK at least, it is typical for several carriers, including all those of any real size, to be members of this 'club'. While these arrangements may risk a reduction in the level of competitive tension generally, we believe their effect on competition between airlines which have entered into override agreements is broadly neutral.
The rebate debate
Other special rebate deals between airlines and individual companies seem different in kind, and here some action may well be warranted. Of particular concern are agreements which link financial incentives directly to the overall use of major airlines' global networks in a way not open to smaller airlines.
Given the obvious desire of companies to keep travel budgets as low as possible, regulatory intervention should be kept to an absolute minimum and it would not make sense to ban them altogether. One solution might be to limit corporate deals to route groups where competition is strong enough to prevent any one airline from exploiting a high degree of market power. Thus a corporate deal covering the whole of, say, American Airlines' or British Airways' North Atlantic network might well be acceptable.
But each agreement would need to be considered on its merits. One covering a major national carrier's entire intra-European network or applying to a wide range of longhaul routes outside the North Atlantic would seem more problematical, while 'global' clauses, linking together different route groups with additional rebates dependent on achieving targets across the board, would generally seem to be unacceptable.
An issue like this can only be dealt with properly at supranational level. Special corporate deals are widely applied, especially by the major US and European airlines and the broader international environment must be taken into account. Thus some form of common approach will be needed, involving at least the European Commission and the US authorities and probably others.
We believe airlines should be free to offer the services and products and to charge the prices they wish where competition is working, but where it is prevented from doing so users will continue to need some protection. Given wide variations in competition on longhaul routes, it would be unrealistic to assume that governments can simply stand back from any intervention. In some markets competition is strong enough to make intervention unnecessary, but in others this is not so.
Fair fares
In many longhaul markets the CAA no longer regulates fares, but we do seek to safeguard the position of passengers requiring basic fully flexible travel where they are being exploited through bilateral or other restrictions.
The fares comparisons in the report show how UK travellers benefit from CAA fares policies. For example, the lowest fully flexible return fare from London to Tokyo is £1,366 ($2,135). This is much less than from other cities, whose Tokyo return fares range from Milan's £2,542 to Frank furt's £3,295. And the comparable return fare from Tokyo to London, and other major European points, is £3,163.
Similarly, the effects of earlier interventions have left basic fares on US routes from London at around half the levels from Frankfurt and Paris. The fully flexible economy return fare from London to New York is £738, compared with £1,340 from Paris and £1,504 from Frankfurt. These contrast sharply with business class fares where the CAA has not intervened, and where London levels are the highest in Europe - £2,122 return compared with £1,448 from Milan.
In recent years, the CAA has become increasingly concerned about the fixing of fares between airlines, usually under the auspices of Iata. Particularly at the high end of the fares spectrum, it will always be in airlines' interests for prices to move in step. But the very existence of formal and highly developed fare-fixing machinery provides the culture and climate for anti-competitive behaviour.
Of course on many routes the problem lies as much with governments as airlines. One example - although by no means a unique one - is the Europe/Japan market. Here fares are agreed in Iata, but with the Japanese authorities exerting a powerful influence in the background. The result is some of the highest fares in the world. For example, the lowest return business class fare from Tokyo to London is over £4,500, around two and a half times the fare from Hong Kong.
The problem is illustrated by events in the last year or so in the UK/US market. Until 1991 the CAA refused increases in the basic fully flexible economy fare where our economic studies showed that an airline was exploiting its market power and overcharging in relation to cost. With the entry in that year of American and United to Heathrow and Virgin's transfer of its New York and Los Angeles services, it seemed that price competition was beginning to spread beyond the leisure sector into the more price-sensitive end of the business and on-demand market.
Fares became noticeably more volatile, with real differences developing between the different airlines' offerings. Accordingly, in early 1992 we accepted the airlines' arguments that competition was active enough for the CAA to stand back from regulation. However, we decided to monitor developments closely.
Collusion
The results proved disappointing. For the most part the widening of choice and the limited, but nevertheless encouraging, reductions in basic fares which took place in 1991 and 1992 have not lasted or spread as we hoped. In many cases fares have been increased substantially and differences between the major carriers' fares have all but disappeared.
The airlines have reacted to signs of increasing competition by seeking wide-ranging agreement within Iata. The 1992 and 1994 Iata agreements clearly played an important part in the increases in those years. This needs serious consideration: the onus of proof must now lay firmly on those who argue that allowing effectively unconstrained fares agreements between airlines is in the interests of air travellers. In the meantime, if collusion continues to have its effect the CAA will have no choice but to reconsider its decision not to intervene to hold down the levels of UK/US basic fares.
Source: Airline Business
