Overview on Code-Share Agreements Under Competition Law
In today's economy, each passing day it gets more difficult for airlines to compete and survive only with their own resources and capabilities. New developments on information technologies, communication sector and cross-border economic activities force companies to compete each other in every level of their business field. Even the top companies choose the way of strategic mergers and collaborations with other companies in order to use their resources efficiently and increase its power regarding competition. At this point, code sharing on international markets has become a significant opportunity for airlines which has grown rapidly in recent years across the airline industry.
Although code-share agreements provide airlines several opportunities, since they are horizontal agreements, they may have some harmful effects on competition. Those agreements restraint price fixing, market sharing or limiting capacity and will almost always be prohibited. In some jurisdictions, parties will need to apply for a formal exemption or immunity from the competition authority; in other jurisdictions (as is the case in the EU) parties will have to make this assessment themselves, with limited scope to obtain formal comfort from the authorities.
On 26.11.2013, news from Lufthansa caused global reaction in air transport industry. Lufthansa's spokesman expressed that, Lufthansa decided to drop code share agreement with Turkish Airlines because the current set-up no longer "makes financial sense" and not profitable anymore after Turkish Airlines built its own route network from its Istanbul base to regional airports in Germany and Austria. In fact, this recent development on Lufthansa side is not a surprise.
The very first obstacle for this commercial arrangement started in February 2011, when the EU Commission has started formal antitrust investigations of free flow code-sharing agreements between Lufthansa and Turkish Airlines (on the Munich – Istanbul and Frankfurt – Istanbul routes). According to the Commission's press release, it is suspected that co-operation on ticket sales may have anti-competitive effects particularly on parallel, hub-to-hub free flow code-share agreements where the services of both parties overlap. Those parties are supposed to be a potential competitor with the other. As the conclusion of a code-share agreement between the operating carrier and a potential competitor may result in the suppression of that competitive constraint. The code share agreement between Lufthansa and Turkish Airlines allow the carriers concerned to sell as many seats on their partner's flights as they want (free-flow), as long as there are seats available, on routes connecting their hubs (parallel hub to hub). This type of code share is different from another common form whereby a company sells seats on a partner's flights on routes it does not operate itself in order to extend the reach of services and broaden the choice for customers. However, free-flow, parallel, hub-to-hub code share agreements may limit competition among airlines and leading to higher prices and low-quality services for customers on routes between Germany and Turkey. The routes being the subject of the investigation are Munich-Istanbul and Frankfurt-Istanbul, on which Lufthansa and Turkish Airlines are the major operators. Under EC competition law, companies are prohibited from entering into agreements and concerted practices which restrict competition within the EU unless the conduct can be exempted on account of redeeming economic benefits.
The Commission's investigation in fact base on the Article 101 of the Treaty on the Functioning of the EU, which prohibits agreements and concerted practices which may have effect the prevention, restriction or distortion of competition. The application of this provision is defined in the Antitrust Regulation (Council Regulation No 1/2003).
Article 11(6) of the Antitrust Regulation provides that the initiation of proceedings by the Commission relieves the competition authorities of the Member States of their authority to apply Articles 101 and 102 (ban on abuse of dominant market positions) to the practices concerned. Article 16(1) provides that national courts refrain from giving decisions, which could conflict with a decision contemplated by the Commission in proceedings that it has initiated.
When we consider Turkish legislation, it is possible to see similar regulations as EU. According to the Law no 4054 The Act on The Protection Of Competition Article 4, agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services are illegal and prohibited.
For the purposes of the article, the term agreement is used to refer to all kinds of compromise or accord to which the parties feel bound, even if these do not meet the conditions for validity as regards the Civil Law. It is not important whether the agreement is written or oral. Even if the existence of an agreement between the parties cannot be established, direct or indirect relations between the undertakings that replace their own independent activities and ensure a coordination and practical cooperation are prohibited if they lead to the same result. Thus, it is intended to prevent the undertakings from legitimizing acts limiting competition via fraud against law. Most of the time, in order to deal with their common problems, undertakings form associations among themselves that may or may not have a legal personality. These associations can take decisions that serve to generate more earnings for their members by preventing competition between the members. Such decisions are also against the competition system and are prohibited.
Although code-sharing allows airlines to offer their passengers a wide range of travel options which can extend beyond their own network and route structure and for passengers it provides easier connections, more convenient connecting times, arrangements for making connections and the ability to check baggage, code-share agreements can have harmful effects when this commercial arrangement leads to monopolistic effects. Especially parallel hub to hub type of code share agreements has advantageous effect for one airline where it may endanger the other airline's business. Instead of parallel hub to hub types, behind and beyond routes, which a carrier puts its code on sectors that is not operated by itself but operated by another carrier and provide connections with its own operated services can be more beneficial and competitive for airline industry and less trouble regarding competition law for parties of the code-share agreement. Types of cooperation will need to be analyzed more carefully in order to assess their potential negative effects on the market and whether they may on the other hand lead to substantial economic benefits for consumers.