Strategic Management in the Aviation Industry

Herbert Baum, Stefan Auerbach, Werner Delfmann, Sascha Albers, Herbert Baum, Stefan Auerbach, Werner Delfmann

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351897679
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Aviation
• Index: Technology & Engineering

This book provides a comprehensive overview of current strategic challenges and measures required to meet those challenges in a dynamic industry. Experts from aviation practice and management, in addition to acknowledged scholars, contribute to this volume and combine academic expertise with economic and business perspectives in an unprecedented way for the aviation field. The focus is not restricted to passenger airlines. The five parts of the book additionally include chapters on alliance management and formation, strategic issues for air freight carriers and airport companies, as well as impacts the airline industry exerts on its environment. The book combines both concepts and results from recent academic research with applications and case studies from major industry players. Readership includes academics, students on advanced aviation courses, senior aviation professionals in airline, airport and supplier companies, international organizations and governmental agencies.

PART I
—
PASSENGER AIRLINES

1
COMPETITION POLICY IN EUROPEAN AVIATION MARKETS

CARSTEN BERMIG

1 Introduction

2 European Competition Rules Applicable to Air Transport

3 Competition Policy Objectives in Aviation Markets

4 Enforcement of Competition Rules in European Aviation Markets

5 Conclusion and Policy Outlook

6 References

Summary:

This chapter outlines legal and economic aspects of current European competition and state aid policy in European aviation markets. It describes the liberalization process, the applicable competition rules and competition policy objectives. With regard to competition enforcement, the chapter illustrates assessment criteria concerning airline alliances, predatory pricing, travel agents’ commissions and state aid. Finally, a policy outlook on the Commission’s regulatory review projects is given.

1 Introduction

The most spectacular growth over the last 20 years among all transport sectors has occurred in aviation, where increasing competition between network carriers has been given added impetus by the emergence of new, low cost carriers. The wider choice of frequencies and fares has spawned a mass market and this, coupled with a quantum leap in the number of destinations served, has cemented greater cohesion and sense of European identity among the traveling population. In terms of passenger kilometers, air transport has increased by over 7% a year and air traffic movements within the old EU 15 have increased five fold.¹ Taking into account the impact of enlargement, it is confidently predicted that air transport will have doubled its market share by 2010. All this is a direct result of EU liberalization.

The liberalization process² has already triggered a process of consolidation and restructuring in the European aviation sector. Further liberalization of international air transport will bring about even more challenges to an industry that is already in transition.

In its ruling of 5 November 2003, the European Court of Justice concluded that the current “Open Skies” bilateral agreements signed by eight different Member States infringed EU law on two main aspects (“open-skies judgement”).³ The Court confirmed the principle that Community competence for international relations is established wherever internal EC rules have been agreed (here the Internal Market in air transport). It also considered that the clause on the ownership of airlines incorporated in these bilateral agreements (“nationality clause”) is contrary to the rules on the right of establishment (Article 43 of the EC Treaty). In essence, a very large number of bilateral agreements has to be renegotiated in order to introduce the so-called “Community carrier principle”.⁴

The introduction of the Community carrier principle in air services agreements concluded between EU Member States and third countries will certainly affect industrial organization in European aviation. Thus, it can be expected that the internal EU aviation market will see further restructuring and consolidation efforts by way of mergers and alliances, rendered possible by liberalization and caused by growing globalization in the international airline industry, i.e. the extension in scope of global alliances. Moreover, the increasing importance of the low cost sector is putting pressure on traditional network carriers to cut costs, in particular in the field of distribution (for example the growing importance of direct internet booking) and Computer Reservation Systems (CRSs). Finally, congestion problems at European airports have an impact on the allocation of slots, airport charges and environmental regulation.

2 European Competition Rules Applicable to Air Transport

Competition in a market economy is the driving force for economic welfare to be obtained by favoring an efficient resource allocation and technical progress. It moreover provides for containing economic power.⁵ From the consumers’ point of view competition is a simple and efficient means of guaranteeing high level products and services in terms of the quality and price. In order to be effective, competition assumes that the market is made up of suppliers who are independent of each other, each subject to the competitive pressure exerted by the others.

Agreements which restrict competition are prohibited (Article 81 of the EC Treaty). This is for example the case of price-fixing agreements and cartels between competitors. On the other hand, some horizontal agreements between competitors might bring concrete benefits to consumers, e.g. airlines alliances. To this latter type of agreements Article 81(3) is applicable, if the companies involved can demonstrate that the agreement cumulatively fulfills four conditions.⁶

Firms in a dominant position may not abuse of that position (Article 82 of the EC Treaty). This is for example the case for predatory pricing aiming at driving another carrier out of a certain route.⁷

Since 1 May 2004 a new merger Regulation is in force. The economic rationale underlying the merger control regulation⁸ is that competition is a means to achieving efficient market outcomes and increased economic welfare. Consequently, distortions to the structure of a market, such as large-scale mergers that may “significantly impede effective competition in the common market or in a substantial part of it, in particular by the creation or strengthening of a dominant position”,⁹ ought to be screened and if necessary prevented by the Commission. However, mergers may not always be harmful for competition. When motivated by the companies’ desire to become more efficient and competitive, mergers may contribute to the very process of optimal resource reallocation and improve the competitive performance of affected markets. Merger-specific efficiency gains can offset price increases or other anticompetitive effects caused by the creation or strengthening of a dominant position resulting from a merger.¹⁰

State aid that distorts intra-Community competition is prohibited by the EC Treaty (Article 87 and 88 and for transport also Article 73). State aid can frustrate free competition, seriously disturb the most efficient allocation of resources and posing a threat to the smooth running of the Internal Market. In many cases, the granting of state aid reduces economic welfare by preventing the most efficient resource allocation and weakens the incentives for firms to improve efficiency. Aid may also enable the less efficient to survive at the expense of the more efficient, delaying structural change and hindering productivity growth and competitiveness. Another basic reason for having a system of state aid control is “the risk of a subsidy race where Member States might outbid each other”¹¹ which would result in wasting tax payers’ money. Accordingly, by giving certain carriers an advantage or air services favored treatment to the detriment of other carriers or services, it seriously disrupts competitive forces in European aviation markets.

But in certain cases, the Commission will apply the exceptions allowed by the Treaty and have regard to potential welfare enhancing effects of state aid and authorize aid where it is justified for example in case of market failure¹² or for regional development. In the aviation sector state aid is mainly granted for rescue and restructuring of ailing airlines, public service obligations or more recently for regional development purposes.

3 Competition Policy Objectives in Aviation Markets

Competition policy in this sector is underpinned, first, by the Lisbon process, one requirement of which is that liberalization of sectors such as transport should be “speeded up”; and, second, by the Cardiff process, which set in motion the integration of environmental objectives – chiefly sustainable development – into EU policy generally. Concretely, this means pursuing the liberalization agenda as a means of encouraging people to abandon their cars in favor of public transport and of persuading freight customers to shift from road haulage to more environmentally friendly modes; and using antitrust enforcement to ensure that progressive and pro-competitive market integration is maintained and not undermined by restrictive or exclusionary business practices.

Competition policy should not stand in the way of pro-competitive restructuring and efficiency enhancing co-operation between carriers. However, the Commission cannot allow industry agreements or unilateral conduct by carriers that are intended or have the effect of purely defending established positions on the market without a...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Preface
• List of Figures
• List of Tables
• Introduction — Moving Targets: Strategic Trends in the Aviation Sector
• Part I — Passenger Airlines
• Part II — Alliances
• Part III — Airports
• Part IV — Air Cargo
• Part V — Airport and Airline Strategy Impacts
• About the Editors
• List of Authors
• Index