Understanding the Strategic Alliance in Airline Industry with Reference to EU Competition Law
A strategic alliance is a relationship between two or more entities that agree to share resources to achieve a mutually beneficial objective. For instance, a company manufactures and distributes a product in the United States and desires to sell it in other countries. Another company wants to expand its product line with the type of product the first company creates and has a worldwide distribution channel. The two companies establish an alliance to expand the distribution of the first company’s product. The EU competition laws provide a strict mechanism in which the strategic alliance can be done without affecting the other market player so that there can be a fair and healthy competition in the Industry.
“Relevant Market” definition in Air Transport cases
In one of its early cases, the Court of Justice of the European Union (hereinafter referred as Court of Justice) states that ‘The definition of the relevant market is of essential significance, for the possibilities of competition can only be judged in relation to those characteristics of the products in question by virtue of which those products are particularly apt to satisfy an inelastic need and are only to a limited extent interchangeable with other products’. For the purposes of EU competition law analysis, the EU Commission’s 1997 notice on the definition of the relevant market is of particular importance. Defining the relevant market seeks to restrict attention only to those products and services which have a significant impact on competition. The relevant market is usually comprised of two dimensions, a product-specific and a geographic dimension. However, as an air transport service inherently involves a geographic dimension, it is less useful to draw a clear dividing line between the product and geographic dimensions of air transport.
“Origin” and “Destination” Approach
The Ahmed Saeed case was the first that dealt with market definition concerning scheduled air transport in EU competition law. Here, the Court of Justice adopted a test which sought to determine whether a scheduled flight on a particular route can be distinguished from alternatives, like charter flights, railways and road transport ‘by virtue of specific characteristics. The Court of Justice states that the test can result in different outcomes depending on the case. The analysis may conclude that there exists an airline route where no effective competition is likely to arise but in principle, within the EU, air transport on O&D city pairs or several substitutable O&D pairs can be defined as the relevant market. This O&D or route-specific approach focuses on demand-side substitution, i.e. the consumers’ point of view. Somebody with the intention to travel from A to B, will not seriously consider flying from A to D as an alternative since he needs to get from A to B. Each route constitutes a separate market. This approach, applied from the early years of the Commission’s practice, is not surprising. In the market definition notice, demand substitution is identified as the main source of competitive constraint, and the consumer’s viewpoint is deemed the most important.
Restricting the Competition
To come under the scope of Article 101(1) of the Treaty on the Functioning of the European Union (hereinafter referred to as “TFEU”) an agreement must have either the object or the effect of restricting competition. The meaning of restriction of competition has served as a crucial point for the enforcement and development of EU competition law particularly in the first decades of economic integration. By interpreting restriction of competition in an overly broad manner, the Commission could widen the application of EU competition law and exert a decisive influence over its development. Given the Commission’s exclusive role in applying Article 101(3) TFEU under the old regime of Regulation 17, it preserved its role of the main protagonist in shaping EU competition law. The Commission used this method to ‘develop its own view of what goals EU competition law should serve. The Commission’s White Paper on Modernization provides some insights into this.
Although the Commission elucidated in the White Paper the reasons for centralized application of Article 101(3) TFEU, the broad interpretation of Article 101(1) TFEU served the same purpose by enabling the application of Article 101(3) TFEU. As per the Commission, the system was ‘necessary and proved very effective for the establishment of a “culture of competition” in Europe’. At a time when the primary objective was the integration of national markets, the Commission’s approach enabled the establishment of a uniform application of competition rules and the promotion of market integration. Through the broad interpretation of restriction competition, the Commission included many practices in its assessment that, based on a pure consumer welfare test and would not have qualified as a restraint.
About the Author:
Mayank Khari is currently pursuing his B.A.LLB (Hon) from Faculty of Law, Jamia Millia Islamia, New Delhi. He has worked with the Competition Appellate Tribunal, New Delhi.
He has previously interned at the Competition Appellate Tribunal, New Delhi.