Competition and Regulation in the Airline Industry

Puppets in Chaos

Steven Truxal

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136315336
• Edition: 1
• Topic: Law
• Subtopic: Commercial Law
• Index: Law

An examination of the relationship between competition and the deregulation and liberalisation of the US and European air transport sectors reveals that the structure of the air transport sector has undergone a number of significant changes. A growing number of airlines are entering into horizontal and vertical cooperative arrangements and integration including franchising, codeshare agreements, alliances, 'virtual mergers' and in some cases, mergers with other airlines, groups of airlines or other complementary lines of business such as airports.

This book considers the current legal issues affecting the air transport sector incorporating recent developments in the industry, including the end of certain exemptions from EU competition rules, the effect of the EU-US Open Skies Agreement, the accession of new EU Member States and the Lisbon Treaty. The book explores the differing European and US regulatory approaches to the changes in the industry and examines how airlines have remained economically efficient in what is perceived as a complex and confused regulatory environment. Competition and Regulation in the Airline Industry will be of particular interest to academics and students of competition law as well as EU law.

1 Introduction

Airlines operate within what is often perceived as a complex and confused regulatory environment. Despite the difficult competitive atmosphere in the sector, many US and European airlines have remained ‘economically efficient’¹ or at least ‘survived’. The remarkable level of innovative strategies devised and adopted by airlines, particularly through multilateral cooperation within the air transport sector and with firms in sectors complementary to air transport, is supporting evidence of this. Whilst the perceived impetus for this strategizing is that airlines are finding a way to ‘cope’ in a difficult regulatory environment, the actual impetus is a result of the combination of the industry’s current structure as influenced or restricted by the respective regulatory regimes and the creative adaptation of the law to these business strategies, wedged within the confines of the current regulations.

Analysis of the US and European regulatory environments, in the international context and comparatively, reveals confusion – due to different approaches and rules – which, in addition to a number of separate theories that support cooperation and the inherently complex competitive markets, encourage private ordering through integrated business strategies. Through these, airlines are able in effect to utilize the law on liberalization and deregulation to achieve a competitive advantage, notwithstanding that the practices do at times skirt along the edges of competition rules. Thus, airline sector deregulation has impacted on and implicated airlines in the context of ‘workable competition’ which, taking the orthodox, Chicago School of economics view on market regulation, public ordering should produce. Despite the uncertainties of liberalization and deregulation as economic principles, the advent by airlines of market and non-market strategies has yielded a ‘successful’ sector. In other words, the examples of airline innovation provided in this book demonstrate workable business strategies for the sector; whether these are survival or success strategies remains to be determined.

The purpose of this book is to evaluate whether the state of intense industry cooperation and apparent innovation through tactical and strategic cooperation, which most would consider to have been ushered in by deregulation and liberalization² as economic policies and air transport sector re-regulation, are a welcome outcome to what was envisaged by the neoclassical ideals of deregulation and liberalization as economic principles.³ This book will demonstrate that the lack of certainty over deregulation and liberalization ideals and objectives has produced ineffectual deregulation and liberalization policies. This has resulted in poorly constructed regulatory frameworks that have brought about policy confusion and, at times, the risk that policymakers protect competitors rather than competition.⁴ A level of complex and stated confusion by the industry of the regulatory frameworks, which are coincidental and consistent with policymakers, has reflected market innovation. However, the degree to which the innovation is a welcome policy outcome varies.

This book posits that, while there is a difference in approach in that the European Union (EU) system forces fair and transparent competition and the United States (US) system catches proven anti-competitive behaviour, market innovation is global. Despite the aforementioned complex and confused regulatory environment, airlines have demonstrated innovation through the conception of a myriad of economic efficiency-seeking commercial practices.⁵ Thus, whilst the environment is perceived as difficult in terms of competitiveness, airlines appear in fact to be quite able to manoeuvre successfully within or along the edge of the competition rules to achieve efficiencies. It is clear that, before deregulation, regulators were puppets and their strings were pulled by airlines under regulatory capture. Now, post-deregulation, it remains unclear whether the regulators, as one might expect, or the airlines are pulling the strings. It is possible that the lessons learnt in the case of the airline industry should guide future regulators towards drafting more coherent policies, taking into account the significance of the market environment, with a greater emphasis on achieving a compromise between policy and the ideal industry situation, rather than adapting to the market-consequential behaviour of the industry.

Although on a fundamental level European competition law and American antitrust law agree in their definition of ‘efficiency’ as enhancing consumer welfare, their interpretations of ‘consumer welfare’ are divergent. The European approach recognizes efficiencies under Article 101(3) of the Treaty on the Functioning of the European Union (TFEU),⁶ e.g. public service obligations and a history of block exemptions from the provisions of Articles 101 and 102 TFEU⁷ as well as provisions on certain types of state aid under Articles 107 to 109 TFEU. American antitrust enforcers consider the key statutory ‘rule of reason’⁸ in the Sherman Antitrust Act,⁹ e.g. where a combination or agreement between two firms unreasonably constrains trade.

The aim of the European competition rules is ‘workable competition’ in oligopolistic industries and therefore practices which European competition law deems procompetitive are evidence of this. On the other hand, the American antitrust law adopts an allocative efficiency¹⁰ model, which is supply and demand-driven. Unsurprisingly then, the two respective policy methodologies are also dissimilar.

The European definition of ‘economic efficiency’ is adopted in this book in the context of these business practices. Rather than falling foul of Articles 101 and 102 TFEU, these business practices are evidence of ‘workable competition’ and are therefore ‘efficient’. This takes into account efficiencies recognized by competition law under Article 101(3) TFEU with respect to enhancing consumer welfare such as public service obligations as qualifying exemptions from the competition rules.¹¹ The rationale for this methodology is that the EU system of competition law forces fair competition and operates alongside sector-specific market regulation, whereas the US antitrust system is concerned with anti-competitive behaviour that can be proved to have caused loss. Veljanovski sums up the positions:

Competition law seeks to support the market and differs from the ex ante rules and standards which characterise much of economic and social regulation by being reactive, or as is often termed ex post regulation . . . However, generally ex post competition law stands in contrast to statutory regulation which is typically a prescriptive ex ante approach.¹²

There are always two systems of competition legislation impacting on the transatlantic sector. Again, despite the complex and confused regulatory environment, the advent of non-market and market strategies has yielded a successful sector. This study argues that this ‘efficiency’ is achieved in the air transport sector through this innovation and cooperation.

It is put forward in this book that many of the business practices devised by airlines in the deregulated and liberalized sectors are innovative. The presumption is that the innovation and cooperation through tactical and strategic alliances and other commercial manoeuvring is evidence of healthy competitive behaviour. It is accepted that some practices may not be ‘workable’, notwithstanding whether the practices are discriminatory. Thus the contractual collaboration between airlines and with firms in industries complementary to air transport is innovative in the deregulatory context. If the practices are not discriminatory under applicable competition rules, then they are prima facie evidence of workable competition and are therefore efficient in the European context.¹³

The complexities surrounding the regulatory environment in which airlines operate comprise economic, social and political elements. The influence of economic theory on the development of competition policies and regulations varies by jurisdiction, creating disparity in the interpretation of competitive behaviour. The sector also has a significant ‘public interest’ character, as it exists within the public domain and is influenced to a certain extent by ‘legacy’ flag carriers through national identity, which evidently carries political weight. The degree to which this public interest rhetoric (on social welfare) influences regulators towards domestic competition policies impacts on the air transport sector.¹⁴

As pioneers of deregulation and privatization of the airline industries and on the basis of the magnitude of the transatlantic market, the EU and US are the most appropriate forums, as they provide an appropriate model from which to examine the two approaches to market regulation. First, a distinction must be made between the deregulatory policy approach taken in the US – as in the removal of government regulation – in the late 1970s and the liberalization – in the sense of relaxation of government restrictions – of the European market a decade later. It should be remembered that the situations in the respective markets were very different at the start of the deregulation and liberalization processes. This shaped the measures taken subsequently in the respective sectors. Although classically the economic concepts of deregulation and liberalization have similar objectives, they should not be regarded in the present study as a single deregulation–liberalization concept.¹⁵

In the US, deregulation meant a relatively swift withdrawal of governmental micromanagement of the industry, replaced by a market system policed by antitrust laws applied, for the most part, similarly across industries. European liberalization took the shape of a process with several steps, accounting for the unification of several national markets into a single market under the competition rules set out in Articles 101 and 102 TFEU. The application of competition rules in the EU takes a more direct approach, as they are often tailored to specific industries.¹⁶ The general ‘blanket’ approach of US antitrust law, on the other hand, is slightly more comprehensive in the broad sense, which is likely a product of robust consumerism and capitalism at play in the American markets.

This study approaches certain aspects of the law from public and private¹⁷ perspectives, including deregulation and liberalization as economic concepts applied to markets through policy, competition rules and antitrust, the socio-political concept of public utility, and economic theories on efficiency. The trend, or for now ‘phenomenon’,¹⁸ in the airline sector is towards consolidation and commercial manoeuvring through various business strategies, which leads one to question ‘what is the relief airlines seek’ within what they perceive as a difficult regulatory environment under current European and US regulatory regimes?

To begin, this study recognizes that deregulation engenders autonomy. Airlines operatin...