Ray of Hope for Airline Alliances: Consideration of Out of Market Efficiencies by the European Commission

Abstract

The article will analyze the application of 'out of market efficiencies' to airline alliance agreements by the European Commission. The Commission in May 2013 issued a decision in relation to the revenue-sharing joint venture on certain routes offered by Air Canada, United Airlines, and Lufthansa (who are all members of Star Alliance). This decision is the first instance where the Commission accepted the argument of out of market efficiencies. Generally, the assessment of efficiencies by the Commission is confined to 'in market efficiencies' i.e., the markets where concerns were identified by the Commission. Out of market efficiencies are efficiencies which are generated on the market other than the markets where concerns were identified by the Commission. According to the standard test set out by the Commission in its Guidelines, efficiencies on other markets can be accepted where: (i) two markets are related; and (ii) group of consumers affected and benefitting are substantially the same. The Parties contended that the cooperation created efficiencies on the Frankfurt-New York route (market on which Commission raised concerns) and on other related behind and beyond routes (e.g., Prague-Frankfurt-New York or Frankfurt-New York-Seattle). In its decision the Commission broadened the standard test in that it did not require the Parties to demonstrate that the groups of consumers travelling on the Frankfurt-New York route and the related routes are 'substantially the same'. It was sufficient for the parties to demonstrate 'considerable commonality' between passengers travelling on the route of concern and the related behind and beyond route. This article also considers whether the Commission is justified in restricting the application of out of market efficiencies only to those markets which are related to the relevant market.