Airline

ISSN 1¯45-638X ,Online,
THE tuHPETITIuN LAW REVIEW
Volume S Issue 2 pp J93-2J3 July 2009
Competition Law and the International 1ransport Sectors
´oc/·Yovg Pbavg
·


1his article charts the e·ol·ing regulation oí cooperation and coordination between
international transport íirms, in particular those operating within the liner shipping and
international air transport sectors. 1here has been a long history oí exemption oí these sectors
írom the rules and regulations oí antitrust or competition law. In the past three decades,
regulatory reíorms and pri·atization ha·e, howe·er, subjected these sectors to competiti·e
íorces that ha·e transíormed these industries. \ith the introduction oí competition law in
many jurisdictions, the justiíications íor their continued exemption ha·e come under intense
scrutiny. In the late 19¯0s, the US initiated deregulation oí its domestic airline sector and
introduced reíorms in the regulation oí liner shipping which resulted in greater competition and
lower prices. In 2006, the LU adopted a tougher stance by becoming the íirst jurisdiction to
remo·e exemption íor IA1A passenger tariíí coníerences írom 200¯ and íor liner shipping
coníerences írom 2008. \hile arguments íor the beneíits oí competition can be generally made,
the lack oí harmonization oí competition laws together with the international nature oí these
sectors ,which are íurther complicated by high concentration, network characteristics, and
go·ernment sanctioned barriers to entry, continue to present challenges íor competition
authorities.
J. IN1RODUC1ION
1he international liner shipping and airline sectors are íoundational pillars íor global
trade ílows and passenger mo·ements. Arising írom their percei·ed strategic
importance to a nation`s trade and security, there has been a long history oí exemption
oí these sectors írom the rules and regulations oí antitrust or competition law. In the
past three decades, regulatory reíorms and pri·atization ha·e, howe·er, subjected these
sectors to competiti·e íorces that ha·e transíormed the structure oí these industries.
\ith the introduction oí competition law in many jurisdictions,
1
the justiíications íor
their continued exemption ha·e come under intense scrutiny. 1he international nature
oí these sectors and the dependence oí countries on the ser·ices oí íoreign íleets and
airlines ha·e constrained national competition authorities írom implementing policies
that depart írom the norm set by the major economic powers, in particular, the US and
LU.


Proíessor oí Lconomics, Singapore Management Uni·ersity and Commission Member, Competition
Commission oí Singapore. 1he ·iews expressed here are personal and do not reílect those oí the
Commission.
1
In 2008, the International Competition Network ,ICN, has a membership oí 102 competition agencies írom
91 countries. 1he list oí members can be íound at the ICN website at:
·http:,,www.internationalcompetitionnetwork.org,·.

Competition Law and the International 1ransport Sectors
,2009, 5,2, CompLRe·

194
1his article presents the historical arguments both íor as well as against the exemption
oí these sectors and the practices adopted. It then discusses the current state oí
competition policy in these two sectors, íocusing, in particular, on the landmark change
in LC policy íor liner coníerences írom October 2008. \hile arguments íor the
beneíits oí competition can be generally made, the lack oí harmonization oí
competition laws together with the international nature oí these sectors ,which are
oíten íurther complicated by high concentration, network characteristics, and
go·ernment sanctioned barriers to entry, continue to present challenges íor
competition authorities.
1he subject matter oí this article in·ol·es both law and economic policy and ser·es as a
good reminder, once again, that competition law is best understood when ·iewed in its
extralegal historical as well as economic contexts. 1his is especially important in the
context oí the international transport sectors where we íind strong interaction between
market de·elopments and economic policies on the one hand and the gradual
de·elopment oí competition laws on the other.
Let us turn now to the íirst oí these sectors, ri¸., liner shipping.
2. LINLR SHIPPING
2.J. J87S ÷ J998: A Century of Antitrust Immunity
Liner shipping is distinct írom tramp shipping in that liners publish a íreight tariíí,
operate on scheduled routes and lea·e at scheduled times. 1he íormal history oí liner
shipping cartels dates írom 18¯5, the opening year oí the Calcutta Coníerence
2
and
thereaíter the practice rapidly spread to most oí the main world trade routes. 1hese
cartels ha·e been ·ariously known as liner coníerences, shipping coníerences, and
ocean shipping coníerences. A coníerence is essentially an association oí shipping lines,
all tra·elling the same route and in the same direction, members explicitly and íormally
agree to common prices, a set schedule, and renegotiation and dispute settlement
procedures. An agreement establishing a coníerence may include pooling proíits or
re·enues, managing capacity, allocating routes, and oííering loyalty discounts.
3

1he beginnings oí liner coníerences in the nineteenth century ha·e been attributed to
the ad·ent oí íast steamships which brought a considerable amount oí instability into
the liner shipping sector which was then dominated by obsolescent sailing ships. last
steamships also increased the predictability oí sailing times, which made coordination
possible. 1he o·er-supply oí capacity resulted in sharp rate drops which moti·ated

2
More detailed iníormation relating to the historical origins oí shipping coníerences may be íound in Morton,
Lntry and Predation: British Shipping Cartels 18¯9-1929` ,199¯, 6,4, Journal oí Lconomics and
Management Strategy 6¯9. Morton studies a small sample oí price wars initiated by shipping cartels at the
turn oí the 20th century and uses the characteristics oí the entrants that are íought to e·aluate se·eral
theories oí predation. le íinds support íor the long purse` theory oí predation as weaker` entrants are more
likely to be íought.
3
See Sjostrom Ocean shipping cartels: a sur·ey` ,2004, 3,2, Re·iew oí Network Lconomics 10¯.
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British shipping lines, the dominant players at that time, to opt íor íormal agreements
amongst themsel·es to limit capacity and íix rates.
4
1hese shipping coníerences were
subsequently gi·en sanction by the British courts in 1889 ,and the louse oí Lords in
1892, when they held in a predatory pricing case that the law did not prohibit cartel
agreements.
5

In the United States, with the passage oí the Sherman Act in 1890, íederal courts
írequently íound coníerence conduct illegal. A major go·ernment in·estigation at the
turn oí the 20
th
century recommended that coníerences be tolerated but subject to
go·ernment o·ersight.
6
Shortly aíter, the US Congress passed the Shipping Act oí 1916
which exempted the US international liner shipping industry írom íederal antitrust.
¯

lowe·er, the Act required coníerences in the US íoreign trades to be open` and not to
restrict entry and exit oí any shipping company.
In the rest oí the world, coníerences ha·e historically gone completely unregulated.
Despite Canada`s Competition Act oí 1889 ,the oldest antitrust statute in the world,, it
was not until 19¯0 that the ´bi¡¡ivg Covferevce. í·ev¡tiov .ct, which íollowed a similar
model to the US legislation, was passed.
8
Coníerences continued to enjoy immunity
írom competition regulations e·en as new competition regimes were established.
According to a recent OLCD report, there were around 150 liner coníerences
worldwide in 2002, with membership ranging írom two to as many as 40 separate
lines.
9

Besides liner coníerences, there exist other íorms oí operational cooperation between
shipping lines. Consortia agreements began at the end oí the 1960s with the start oí
container ser·ices. Consortia agreements are aimed primarily at sharing íixed costs on a
maritime route through ·arious technical, operational or commercial arrangements such
as joint use oí ·essels, port installations, marketing organizations, etc. 1hese
cooperati·e agreements were moti·ated by the need íor high le·els oí capital

4
See OLCD, Competition Policy in Liner Shipping, linal Report, 16 April 2002, at Sections 2.4 and 2.5. 1he
report is a·ailable at the OLCD website: ·http:,,www.oecd.org·.
5
In the seminal Lnglish decision oí Mogvt ´teav.bi¡ Co r McCregor, Cor, ava Co, both the Court oí Appeal ,in
,1889, 23 QBD 598, and the louse oí Lords ,in ,1892, AC 25, held that a number oí shipowners who
íormed a cartel which oííered artiíicially low charges íor the carriage oí tea írom certain Chinese ports with
the aim oí dri·ing out oí business other shipowners who were competing with them were not liable to those
other shipowners when they succeeded in their aim, see, generally McBride, 1he Classiíication oí
Obligations and Legal Lducation`, in Birks ,ed.,, 1be Cta..ificatiov of Obtigatiov., London, Society oí Public
1eachers oí Law, Oxíord Uni·ersity Press, 199¯, at p 85.
6
See Report oí the Committee on the Merchant Marine and lisheries on Steamship Agreements and
Aííiliations in the American loreign and Domestic 1rade, l.R. Doc. No. 805, 63d Cong., 2d Sess., at 415
,1914,, routinely reíerred to as the Alexander Report` aíter the chair oí the committee, Rep Joshua
Alexander.
¯
See Sagers, 1he Demise oí Regulation in Ocean Shipping: A Study in the L·olution oí Competition Policy
and the Predicti·e Power oí Microeconomics` ,2006, 39,3, Vanderbilt Journal oí 1ransnational Law ¯¯9.
8
See lea·er, 1he Shipping Coníerences Lxemption Act: Re·iew and Suggestions oí Positions Appropriate
íor the Panel` ,2001,, paper commissioned by the Canada 1ransportation Act Re·iew Panel.
9
See OLCD, op cit, n 4, at p 19.
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,2009, 5,2, CompLRe·

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in·estment in new ·essels, containers and port íacilities. Unlike coníerences, they do
not contain price-íixing pro·isions and generally in·ol·e lower market shares than
coníerences. Members oí a consortium may be independent lines or they may be
members oí the same coníerence. It is widely recognized that consortia agreements lead
to cost reductions deri·ed írom risk sharing and economies oí scale.
10

Discussion or talking agreements emerged in the 1980s when coníerences were unable
to con·ince independent liners to join them. 1hey íacilitate exchange oí iníormation
about íreight rates, costs, capacity and conditions oí ser·ice on a particular trade route,
on non-binding terms. 1hese agreements exist mainly in the US and Australia trade
routes. In periods oí scarce demand, competition may be limited by agreements
between coníerence and non-coníerence liners such as Capacity Stabilization
agreements ,binding, and Discussion Agreements ,which are non binding,, by which
liners attempt to control the supply capacity and the le·el oí rates.
11

In the mid-1990s, the liner industry underwent another period oí restructuring arising
írom the íormation oí global strategic alliances amongst leading container carriers.
Unlike the route speciíic nature oí pre·ious agreements, these alliances represent a new
le·el oí cooperation o·er major route networks. 1heoretically, members are not
in·ol·ed in price setting ,as this takes place within coníerences, but in the
rationalization oí their ser·ices on a global basis and optimization oí each carrier`s
assets through schemes such as sharing oí ·essels, ports, charters, terminals, joint
scheduling and where permitted, coordination oí inland ser·ices.
12
1he establishment
oí alliances was moti·ated by the rapid globalization oí world trade and in·estments
and the resulting unprecedented le·els oí demand íor world-wide ser·ices, supply chain
management and the pro·ision oí logistics ·alue added ser·ices.
13

1he usual arguments íor the long standing exemption oí these collusi·e acti·ities in the
shipping sector are summarized below.
14

,i, 1he structure oí the liner industry predisposes it to decreasing short run marginal
costs. Consequently, a íree market may result in destructi·e competition, which
undermines the basic characteristics oí the liner ser·ice, such as írequency and

10
See OLCD, op cit, n 4, at Section 2.¯.
11
See Benacchio, lerrari and Musso, 1he liner shipping industry and LU competition rules` ,200¯, 14
1ransport Policy 1.
12
1996 witnessed the íormation oí íour large strategic alliances: Global Alliance, Grand Alliance,
Maersk,Sealand, and lanjin,1ricon. Membership oí alliances in the initial years was characterized by a high
le·el oí instability according to a study by Midoro and Pitto, A critical e·aluation oí strategic alliances in liner
shipping` ,2000, 2¯,1, Maritime Policy and Management 31.
13
A study oí the changes in the container shipping industry as a result oí strategic alliances is to be íound in
Slack, Comtois, and McCalla, Strategic alliances in the container shipping industry: a global perspecti·e`
,2002, 29 ,1, Maritime Policy and Management 65.
14
Ryoo and Lee, 1he role oí liner shipping co-operation in business strategy and the impact oí the íinancial
crisis on Korean liner shipping companies`, in Grammenos ,ed.,, 1be íavaboo/ of Maritive ícovovic. ava
ßv.ive.., London, LLP, 2002, pro·ides a list oí arguments oíten ad·anced by carriers to justiíy exemption oí
the sector.
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,2009, 5,2, CompLRe·

19¯
reliability oí schedules, and the certainty that ser·ices will be pro·ided ahead oí
demand. 1his argument represents the economic íoundation íor rate íixing, yet it
implies that in order to stabilize rates, coníerences will charge rates in line with the
a·erage cost oí their less eííicient members.
,ii, 1he standard in·estment íor each ship has increased o·er time in order to exploit
the economies oí scale so that only large shipping lines can bear the íinancial
burden oí new ships.
,iii, 1here are substantial imbalances in traííic ílows on the diííerent routes ser·ed by
liners in nearly all markets, resulting in ·oyages made with part oí the ship`s
capacity used to carry ballast.
Other arguments include:
15

,i, 1he theory oí the empty core, that is, a natural market equilibrium does not exist.
1his is a characteristic oí markets where íew competitors generate supra-normal
proíits íor the incumbents which then attracts entry and írenzied competition and
results in losses íor all the market participants. Consequently, exit and solidiíication
oí market shares by the remaining competitors once again attracts entry.
,ii, Containerization and the de·elopment oí the hub-and-spoke structure ha·e
encouraged íurther mergers and alliances. Coníerences remain a sort oí bulwark in
deíense oí a certain degree oí competition within the market.
,iii, Inelastic demand in the short run.
,i·, 1he important role oí liner shipping in the de·elopment oí international commerce
and economic de·elopment.
Carriers were generally successíul in pushing these arguments until the 1980s. In 1984,
the US Shipping Act was passed to clariíy the boundaries oí antitrust immunity. 1he
legislation subjected all liner agreements to o·ersight írom the lederal Maritime
Commission as to the agreement`s coníormity with the public interest.
16
lor the íirst
time, ocean common carriers were permitted to enter into ser·ice contracts with
shippers. 1he 1984 act allowed carriers to legally oííer discounted rates so long as these
were made public and communicated to other coníerence carriers. 1he eííect was to
make íreight rates íor ser·ice contracts transparent to all carriers as well as shippers.
lowe·er, aíter passage oí the Act, coníerences either reíused to allow their members
to enter indi·idually into ser·ice contracts, or they quickly withdrew that right aíter
witnessing dramatic íalls in íreight rates. Not unexpectedly, independent carriers were
aggressi·e in oííering ser·ice contracts.
1¯


15
As presented by Benacchio et al, op cit, n 11, and Sjostrom, op cit, n 3.
16
Reitzes and Sheran, Rolling seas in liner shipping` ,2002, 20 Re·iew oí Industrial Organization 51.
1¯
Ibid.
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2.2.1. 1986 and 1995 LU block exemptions
1he LU in 1986 allowed liner coníerences a block exemption írom antitrust legislation.
Council Regulation ,LLC, 4056,86 which came into íorce on 1
st
July 198¯ ended years
oí speculation and uncertainty about whether Articles 81 and 82 LC 1reaty applied to
the liner coníerences. 1his block exemption has oíten been called the most generous
exemption e·er gi·en as it co·ered traditional hard-core restrictions and íurthermore
did not contain a re·iew clause and was to remain in íorce íor an unlimited period oí
time.
18

Unlike other competition regimes that do not distinguish between diííerent types oí
liner shipping agreements in granting immunity írom competition law, the LC makes a
distinction between liner coníerences and liner consortia. lirst adopted in 1995, the
consortia exemption sunsets e·ery íi·e years.
19
It was extended in 2000 in Regulation
823,2000 and again in 2005 and pro·ides automatic exemption íor joint ser·ice
agreements that exclude price íixing.
20
It also sets a market share threshold oí less than
30° ,35° in the case oí non-coníerence consortia, to qualiíy íor exemption. 1he
íormation oí consortia with market shares between 30° ,35° in the case oí non-
coníerence consortia, and 50° must be notiíied to the Commission. Unlike the LU,
the US does not distinguish between diííerent types oí agreements in its regulation oí
shipping. Canada requires coníerence agreements to be íiled and does not regulate
consortia agreements.
21
Signiíicant diííerences thus exist in liner shipping regulation
and institutional mechanisms in diííerent jurisdictions.
22

1he adoption oí the block exemptions in the LU was íollowed by a long period oí
conílicts o·er the interpretation oí the regulations. During the 1990s, the Commission
made a number oí decisions that clariíied the scope oí the exemptions which were
subsequently upheld by the Court oí lirst Instance ,ClI,. 1he decisions include
prohibiting: ,i, inland haulage collecti·e price íixing íor the inland leg oí multi-modal
transport operations,
23
,ii, coníerence prohibitions on member companies entering into

18
OJ 1986 L3¯8,4 Council Regulation ,LLC, No. 4056,86 laid down detailed rules íor the application oí
Articles 81 and 82 oí the 1reaty to maritime transport: see Benacchio, et al, op cit, n 11 and Pozdnako·a,
íiver ´bi¡¡ivg ava Cov¡etitiov íar, 1he Netherlands, Kluwer Law International, 2008, at Section 9.2.
19
Commission Regulation 8¯0,95 on the application oí Article 81,3, oí the 1reaty to certain categories oí
agreements, decisions and concerted practices between liner shipping companies ,consortia,, OJ 1995 L89,¯:
see OLCD, op cit, n 4, at p 26 and Benacchio, et al, op cit, n 11.
20
OJ 2000 L100,24 Commission Regulation ,LC, No. 823,2000 expired on 25 April 2005 and was amended
by OJ 2005 L101,10 Commission Regulation ,LC, No. 611,2005.
21
lea·er, op cit, n 8, at p 12.
22
In Australia, Canada, Japan, New Zealand, and the United States, consortia agreements are entitled to
immunity írom anti-trust law, without reíerence to whether the agreement pro·ides that ship operators
should operate under uniíorm or common íreight rates ,OLCD, op cit, n 4, at p 25,.
23
1he Commission objected to inland haulage tariíí íixing in two 1994 cases in·ol·ing the 1rans-Atlantic
Agreement ,1AA, and the lar Last lreight Coníerence ,lLlC, and in the 1998 1rans-Atlantic Coníerence
Agreement ,1ACA,: OJ 1994 L3¯6,1, OJ 1994 L3¯8,1¯, and OJ 1999 L95,1, respecti·ely. 1he
Commission`s decisions were upheld by the Court oí lirst Instance in three judgments issued on the same
day 28.2.2002 ,Case 186,95 Cav¡agvie Ceverate Maritive ava otber. r Covvi..iov |2002| LCR II-1011, better
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indi·idual contracts, ,iii, restricti·e clauses applied to indi·idual ser·ice contracts, and,
,i·, the íixing oí ancillary charges such as íreight íorwarders commissions.
24
In
No·ember 2002, íollowing the ClI coníirmation oí its earlier decisions, the
Commission granted an indi·idual exemption íor the re·ised 1rans-Atlantic
Coníerence Agreement aíter it held that pro·isions in the agreement regarding ser·ice
contracts and multi-carrier ser·ice contracts to be outside the scope oí the block
exemption.
25
1he decision came aíter members agreed to make substantial concessions,
and in the words oí the then Luropean Commissioner íor Competition Policy, only
because oí circumstances peculiar to the market on which the Re·ised 1ACA
operates`.
26

2.2 J999 - 2008: 1he Gradual Demise of Liner Conferences
2.2.1. 1he US Ocean Shipping Reíorm Act
In 1998, the US passed the Ocean Shipping Reíorm Act ,OSRA, which continued to
grant immunity to all types oí liner coníerence agreements but stipulated a list oí
permissions,conditions which ser·ed to undermine successíul collusion, hence limiting
the extent oí anti-competiti·e beha·iour. 1he list includes: ,i, shippers and carriers may
negotiate coníidential ser·ice agreements and keep the terms oí the contracts saíe írom
other carriers and shippers, ,ii, coníerence tariíís still had to be published, and, ,iii,
allowing independent rate action íor carriers to co·er multiple trade lanes, making it
easier íor larger shippers to do one-stop shopping`. Allowing independent rate action
across multiple trade lanes dealt a íurther blow to coníerences organized on the basis oí
indi·idual trade lanes. 1he OSRA by eliminating tariíí íiling requirements also
eííecti·ely eliminated lMC`s role oí eníorcing tariíí rates. In essence, the OSRA
transíormed ocean shipping in the US írom the concept oí common carriage` to
contract carriage` whereby tariíí íiling with íederal authorities and strict eníorcement
oí these tariíís ha·e been replaced by coníidential contracts between shippers and
carriers`.
2¯


known as the íííC case, Case 1395,94 .ttavtic Covtaiver íive c otber. r Covvi..iov |2002| LCR II-8¯5,
better known as the 1.. case, and Case 118,9¯ .ttavtic Covtaiver íive c otber. r Covvi..iov |2002| LCR II-
1125, the 1.C. ívvvvit, case,.
24
1he 1998 Commission decision on 1.C., ibid, was wide ranging in scope and dealt with íixing oí íreight
íorwarder commissions, coníerence restrictions on member companies entering into indi·idual contracts,
restricti·e clauses applied to indi·idual ser·ice contracts, and inducing competitors to join the coníerence
,Benacchio, et al, op cit, n 11,.
25
1he indi·idual exemption, cleared in No·ember 2003, replaced the agreement prohibited by the Commission
in 1998: see Re·ised 1ACA, OJ 2003, L26,53. See also Marlow and Nair, Ser·ice Contracts - An
instrument oí international logistics supply chain: Under United States and Luropean Union regulatory
írameworks` ,2008, 32 Marine Policy 489.
26
Monti, A time íor change· - Maritime competition policy at the crossroads`, speech to the Luropean
Shipper`s Council by then Luropean Commissioner íor Competition Policy, Antwerp, 12 June 2003.
2¯
As succinctly described in Shipping Coníerences Lxemption Act, 1989, Consultation Paper`, July 1999,
1ransport Canada Policy Group, Canada.
Competition Law and the International 1ransport Sectors
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By reducing the transparency oí íreight rates and gi·ing coníerence members
independent contracting rights, the Act increased cartel eníorcement costs. 1he US
shipping market was eííecti·ely íreed, except íor the íact that carriers are still not
subject to antitrust - they may share price iníormation, agree to non-binding guidelines
íor rates and terms oí ser·ice, adopt common non-binding tariíís, and so on. 1here
ha·e been se·eral eííorts since 1999 to do away with US coníerence antitrust
exemption entirely.
28

Since 1 May 1999, the day that OSRA became eííecti·e, the íollowing impacts ha·e
been obser·ed:
,i, 1here has been uphea·al in liner coníerences` - se·eral coníerences operating US
trade routes ha·e disbanded. \hile 32 coníerence agreements were in eííect in
199¯, the number had dwindled to 22 by May 2000. Coníerences that remained lost
signiíicant membership.
29

,ii, 1here has been an increase in the number oí discussion agreements in·ol·ing
coníerence carriers and independent carriers.
,iii, 1he use oí coníidential ser·ice contracts increased dramatically. 1he lMC reported
that between 1 May 1999 and 30 June 1999, 15,000 ser·ice contracts were signed in
comparison with 3,400 in the same period oí the prior year.
30

,i·, Many coníerences stopped issuing joint ser·ice contracts - only íour coníerence
ser·ice contracts remained in eííect in May 2000, as compared with o·er 400 a year
earlier.
31

,·, Price discrimination increased.
,·i, 1here has been consolidation oí shipping lines through mergers and acquisition.
,·ii, Data published on the website oí Containerization International showed an
increasing gap between westbound and eastbound íreight rates in the transatlantic
and transpaciíic routes írom 1999. lrom approximate parity in 1999, a·erage
eastbound ,US-Lurope, íreight rates were approximately 80° below a·erage
westbound ,Lurope-US, rates on the transatlantic route by 2005. A·erage
westbound ,US-Asia, rates were hal·ed a·erage eastbound ,Asia-US, rates on the
transpaciíic route by 2005. \hile a part oí the rate imbalance is due to trade
patterns, US exports,shippers ha·e undoubtedly beneíited írom a large reduction
in íreight rates as a consequence oí the OSRA.
32


28
Sagers, op cit, n ¯, re·iews the US deregulation oí the liner shipping sector and concludes that the experience
suggests that liner markets can períorm well under normal price competition, contrary to long-standing
claims írom the industry and some academics.
29
Statistics írom the lederal Maritime Commission as reported by Reitzes and Sheran, op cit, n 16.
30
As reported by Reitzes and Sheran, op cit, n 16.
31
Ibid.
32
See Benacchia et al, op cit, n 11, íor graphs oí the trends in íreight rates.
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2.2.2. 2006 LU repeals block exemption íor liner shipping coníerences
1he eííects oí the 1998 US reíorm oí ocean shipping practices were closely monitored
across the Atlantic. In March 2003, íollowing an OLCD report
33
which se·erely
criticized the need íor coníerences to ha·e antitrust exemption, the LU competition
commission decided to re-examine Regulation 4056,86. 1he Commission adopted a
three stage approach: the íirst being a consultation paper in March 2003,
34
íollowed by
a \hite Paper published in October 2004,
35
and thereaíter, a legislati·e proposal íor a
Council regulation to repeal the coníerence exemption on 14 December 2005.
36
1he
proposal to repeal the block exemption was thus the result oí a thorough three year
long process oí consultation, re·iew and studies. 1he Commission íindings were that
the exemption did not íulíil the íour cumulati·e conditions oí Article 81,3, which were
necessary íor it to continue, these being:
3¯

,i, concrete beneíits resulting írom price íixing and capacity regulation are identiíied,
,ii, a íair share oí the pro·ed beneíits are passed on to consumers,
,iii, the indispensability oí price íixing and capacity regulation íor the pro·ision oí
reliable ser·ices, and
,i·, competition is not eliminated on a substantial part oí the market.
Instead, the Commission`s re·iew process íound:
38

,i, no causal link between price íixing and reliable liner ser·ices as coníerences are not
able to eníorce the coníerence tariíí nor do they manage the capacity a·ailable.
lowe·er, the coníerence tariíí still acts as the benchmark which impacts on the
negotiation oí indi·idual contracts. Oí greater concern was the joint íixing oí
charges and surcharges ,on a·erage 30° oí the price oí transport, where there is no
competition between coníerence members as well as non-coníerence members.

33
See OLCD, op cit, n 4. 1he OLCD report recommended that member countries seriously consider
remo·ing antitrust exemptions íor price íixing and rate discussions. Lxemptions íor other operational
arrangements may be retained so long as these do not result in excessi·e market power.
34
See Commission, Consultation Paper on the re·iew oí Council Regulation ,LLC, No 4056,86 laying down
detailed rules íor the application oí Articles 81 and 82 oí the 1reaty to maritime transport`, 2¯ March 2003.
A·ailable at DG Competition website, section Maritime 1ransport under Antitrust - Legislation`:
·http:,,ec.europa.eu,competition,antitrust,legislation,maritime,·.
35
See Commission, \hite Paper on the re·iew oí Regulation 4056,86, applying the LC competition rules to
maritime transport`, COM ,2004, 6¯5 íinal. A·ailable at DG Competition website, ibid.
36
See Commission, Proposal íor a Council Regulation repealing Regulation ,LLC, No 4056,86 laying down
detailed rules íor the application oí Articles 85 and 86 to maritime transport, and amending Regulation ,LC,
No 1,2003 as regards the extension oí its scope to include cabotage and international tramp ser·ices`, COM
,2005, 651 íinal. A·ailable at DG Competition website, ibid.
3¯
See Impact Assessment`, Annex to the Commission Proposal, ibid. Also L·ans, 1he íuture regulatory
íramework íor liner shipping`, speech at 8th Global Liner Shipping Coníerence, London, 2¯th April 2006,
and Benacchia et al, op cit, n 11.
38
Ibid.
Competition Law and the International 1ransport Sectors
,2009, 5,2, CompLRe·

202
,ii, transport users ha·e opposed the coníerence system which they do not consider to
deli·er adequate ser·ices.
,iii, reliable scheduled liner ser·ices are pro·ided in se·eral ways.
,i·, gi·en the extent oí relationships between carriers in coníerences, consortia,
alliances and ·essel sharing agreements, determining the extent to which a
coníerence is subject to outside competition is a complex analysis that must be
carried out on a case by case basis. lowe·er, the Commission noted that all carriers
operating on the same trade tend to apply the same charges and surcharges.
1he Commission also assessed the expected impact oí the repeal on the basis oí
independent consultancy reports and concluded that it would lead to a moderate drop
in ocean transport prices and considerable reductions in charges and surcharges. It also
expected ser·ice quality and inno·ation to be impro·ed.
39

1he Luropean Parliament subsequently issued a report in July 2006 and on 25
September 2006, the Competiti·eness Council agreed to repeal Council Regulation
4056,86. 1he repeal oí the block exemption makes the LU the íirst jurisdiction to put
an end to the possibility íor liner carriers to meet in coníerences, íix prices and regulate
capacities with eííect írom October 2008 ,Council Regulation 1419,2006 oí 25
September 2006 repealing Regulation ,LLC, 4056,86,.
40
In July 2008, the Commission
published guidelines on the application oí Article 81 oí the LC 1reaty to maritime
transport ser·ices.
41
Regulation 823,2000 on maritime consortia which has been
extended until 2010 is not aííected by the repeal and liner carriers will continue to be
allowed to oííer joint ser·ices.
2.3 1HL IU1URL: LIILC1S OI 1HL LU RLPLAL IROM OC1OBLR 2008
\ith the LU repeal oí the block exemption íor liner coníerences írom October 2008,
two questions are raised here with regard to the íuture: ,i, the likely market eííects, and
,ii, expected changes in regulatory regimes in other jurisdictions.
2.3.1. \hat will be the market eííects oí the LU repeal·
1he commission has predicted that with newíound competition, prices will decline and
ser·ice quality will either be unaííected or will impro·e`.
42
Proíessor laralambides oí
Lrasmus Uni·ersity has, howe·er, continued to push the traditional argument that the
liner coníerence system produces much-need certainty and predicted that rates would

39
Ibid.
40
OJ 2006 L269,1. 1he documents relating to the re·iew process are a·ailable in the DG COMP website:
·http:,,ec.europa.eu,comm,competition,antitrust,legislation,maritime,·.
41
Commission oí the Luropean Communities, Guidelines on the application oí Article 81 oí the LC 1reaty to
maritime transport ser·ices`, published on 1 July 2008, may be accessed at: ·http:,,ec.europa.eu,
comm,competition,antitrust,legislation,maritime,guidelines_en.pdí·.
42
LUROPA Press Release, Competition: repeal oí block exemption íor liner shipping coníerences - írequently
asked questions` ,25 September 2006, MLMO,06,344 Brussels.
Sock-\ong Phang
,2009, 5,2, CompLRe·

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instead rise as carriers consolidate íurther. Logistics costs would also rise, he said, while
carriers may consider a return to the use oí smaller ·essels as capacity sharing declines.
1he Luropean oííicials are making a big blunder -- they are looking inside themsel·es
when their competitors are thinking globally`.
43
lowe·er, contrary to the ·iews
expressed by laralambides, studies on the eííects oí the US OSRA ha·e shown clearly
that competition in the liner shipping sector can work and can bring prices down.
\ith the repeal oí the block exemption, the market conduct oí shipping companies will
be subject to the íull application oí the LC 1reaty competition pro·isions. Gi·en the
industry`s pri·ileged position historically and the existing complex links among
competitors, interpreting and applying the competition rules oí the LC 1reaty present
legal problems in their own right.
44
Many issues remain to be clariíied while in some
cases existing interpretation oí competition law may not be appropriate in the speciíic
context oí liner shipping. \ithout doubt, the shipping industry will continue to
consolidate and most existing coníerences will be transíormed into consortia. 1he LU
Competition Commission will necessarily need to study the net economic beneíits oí
proposed mergers and indi·idual applications íor exemptions. In concentrated markets,
the market conduct oí dominant íirm,s, becomes potentially subject to prohibition oí
abuse oí dominance laid down in Article 82 LC. 1he Commission will ha·e to de·ote
substantial resources to in·estigating alleged abuses oí dominance as well as gathering
e·idence oí price íixing acti·ities which are likely to go underground.
2.3.2. \hich is a preíerred way to regulate the maritime transport sector·
Other jurisdictions including Australia, Japan and Brazil ha·e also been re·iewing
exemptions íor liner shipping agreements. In 2006, the newly íormed Competition
Commission oí Singapore decided to grant a íi·e year block exemption to all liner
shipping agreements, subject to a list oí conditions.
45
1he decision was made a íew
months prior to the LU announcement oí the repeal oí block exemption íor liner
shipping. As a major transshipment hub competing íor transshipment cargo with other
regional ports, a non-exempt decision could ha·e risked the di·ersion oí cargo to
nearby ports without a competition law regime or with antitrust exemption íor the
sector. 1hese considerations also weighed in Canada`s 1999 re·iew oí its Shipping
Coníerences Lxemption Act where the íollowing ·iews were expressed: lor Canada to
remo·e the exemption while others, particularly the U.S. do not, would in all likelihood
result in a shiít oí some cargo being mo·ed through U.S. ports rather than Canadian
ports due to the imbalance in antitrust protection. Signiíicant economic harm to

43
International lerald 1ribune, 22 No· 2006. lree llow: A maritime cartel nears its end`.
44
Pozdnako·a, op cit, n 18, is a recent book based on the author`s doctoral thesis that analyzes the application
oí Articles 81 and 82 LC 1reaty to the market conduct oí liner shipping companies.
45
On 14 July 2006, the Singapore Minister íor 1rade and Industry issued the Competition ,Block Lxemption
íor Liner Shipping Agreements, Order 2006, exempting a category oí liner shipping agreements írom the
section 34 prohibition oí Singapore`s Competition Act. 1he order is a·ailable online at the Competition
Commission oí Singapore`s website at: ·www.ccs.go·.sg,Legislation,Block-Lxemption-Order,·.
Competition Law and the International 1ransport Sectors
,2009, 5,2, CompLRe·

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Canadian shippers, railway and trucking íirms, and ports could result ií the Act were to
be abolished at this time.`
46

\ith the LU repeal, existing competition authorities will need to consider the
íollowing: Is the US likely to íollow the LU in remo·ing antitrust exemption íor liner
shipping coníerences· Is the US present maritime regulatory model oí conditional
antitrust exemption suííiciently competiti·e and eííicient in its outcome, or should the
LU strict repeal oí liner coníerences be íollowed· Nascent competition authorities
would also ha·e to consider whether to make distinctions between the diííerent liner
shipping agreements when granting exemptions. International competition policy íor
the maritime sector now stands at the crossroads, with íuture de·elopments dependent
on whether the US chooses to align its policy with the LU.
\e now turn to a discussion oí competition issues in the international a·iation sector.
3. IN1LRNA1IONAL AIRLINLS
3.J. 1he Past: 1he Arcane Web of Aviation Regulation
1he a·iation industry has been shaped largely by go·ernment policy íor most oí its
history. \ithin the US domestic interstate market, the Ci·il Aeronautics Board ,CAB,
regulated entry, exit, and íares oí pri·ately owned airlines as well as undertook merger
re·iews and other antitrust íunctions írom 1938-19¯8.
4¯
1he result was relati·ely high
íares, ineííicient operations, and airline earnings ·olatility as rents were dissipated
through competition on ser·ice quality.
In the area oí international a·iation, the 1944 Chicago Con·ention
48
established the
íramework íor market beha·iour that discouraged competition as it was based on
bilateral agreements between go·ernments írom which airlines deri·e the right to
operate international air ser·ices. It led to the general adoption oí a one country one
airline policy. State ownership and subsidies íor ílag carriers became the norm in the
international a·iation sector. Restrictions on íoreign ownership oí domestic air carriers
were uni·ersal. International ser·ices were tightly controlled by bilateral Air Ser·ices
Agreements ,ASAs,
49
and prices generally established jointly by airlines themsel·es
under the ASAs or International Air 1ransport Association ,IA1A, coníerences ,IA1A

46
Shipping Coníerences Lxemption Act, 1989, Consultation Paper`, op cit, n 2¯.
4¯
Ci·il Aeronautic Act oí 1938, 52 Stat. 9¯3. lor a historical o·er·iew oí US regulation and deregulation oí the
domestic a·iation sector, see Borenstein and Rose, low airline markets work, or do they· Regulatory reíorm
in the airline industry` in Rose ,ed.,, ícovovic Regvtatiov ava ít. Reforv: !bat íare !e íearvea., Chicago, 1he
Uni·ersity oí Chicago Press, 2006, and Bailey, A·iation policy: past and present` ,2002, 69 ,1, Southern
Lconomic Journal 12.
48
International Ci·il A·iation Organization ,ICAO,, Con·ention on International Ci·il A·iation, Doc ¯300,9,
9th edition, Montreal, 200¯. 1his and all earlier editions are a·ailable at the ICAO website at:
·http:,,www.icao.int,icaonet,dcs,¯300.html·.
49
1he íirst bilateral agreement was signed between the US and UK at Bermuda on 11 lebruary 1946 ,known as
Bermuda I,: Agreement between the United Kingdom and the United States`, 11 lebruary 1946, 60 Stat.
1499.
Sock-\ong Phang
,2009, 5,2, CompLRe·

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is a trade association representing some 260 airlines worldwide,. 1he bilateral
agreements oíten did not permit íiíth íreedom which enables airlines to carry
passengers to one country, and then íly on to another country rather than back to their
own.
50

1he US became the íirst country to deregulate its domestic airline industry in 19¯8
when the US Congress passed the Airline Deregulation Act.
51
1he Act pro·ided íor a
phase out oí the CAB by January 1983 its elimination by 1985. Under the CAB Sunset
Act oí 1984,
52
CAB`s antitrust authority was transíerred to the Department oí
1ransportation ,DO1,. lowe·er, DO1`s antitrust powers with respect to domestic air
transportation expired on 1 January 1989 and this was transíerred to the Department oí
Justice ,DOJ, Antitrust Di·ision. lor international intercarrier arrangements, both
DO1 and the DOJ are empowered.
1he result oí airline deregulation has been tremendous growth in capacity, lower íares
and more eííicient operations - all oí which ha·e beneíited the majority oí consumers.
Competition has resulted in inno·ations in the íorm oí hub-and-spoke networks,
complex yield management systems, price discrimination among tra·ellers, as well as
the de·elopment oí computer reser·ation systems initially and internet sales in recent
years. 1he initial entry oí about one hundred new low cost carriers was íollowed by a
wa·e oí airline mergers, insol·encies and consolidation oí the industry. Volatility in
industry earnings has continued and a·erage earnings ha·e declined.
53
1he industry
continues to contain a complex mix oí competiti·e, cooperati·e and regulated elements
with airport slot allocations and international route allocations still not competiti·ely
determined.
1he US experience with deregulation was íollowed with much interest around the
world. New Zealand abolished the go·ernment control oí íares and entry barriers in
1983 with subsequent pri·atization oí Air New Zealand in 1989. Canada mo·ed to
partially liberalize its airline sector in 1984 and 1988, deregulation in Australia was
introduced through the passage oí the Airline Agreement ,1ermination, Act oí 1990.
54

Deregulation in the LU was implemented in phases starting írom 1988.
55
1he íirst
phase allowed multiple designations, íiíth íreedom rights and automatic appro·al oí

50
Jennings has described the resulting íramework as the insane world oí international a·iation regulation`.
Jennings, 1he insane world oí bilateral international a·iation regulation` ,2003,, a·ailable at:
·http:,,www.samizdata.net,blog,archi·es,005229.html·.
51
1he Airline Deregulation Act oí 19¯8, 92 Stat. 1¯44.
52
1he Ci·il Aeronautic Board Sunset Act oí 1984, 98 Stat. 1¯03. See Lu, ívtervatiovat .irtive .ttiavce.: íC
Cov¡etitiov íar, |´ .vtitrv.t íar ava ívtervatiovat .ir 1rav.¡ort, 1he lague, Kluwer Law International, 2003,
at p 26.
53
See Borenstein and Rose, op cit, n 4¯.
54
See Sinha, Deregvtatiov ava íiberati.atiov of tbe .irtive ívav.tr,: ..ia, ívro¡e, ^ortb .verica ava Oceavia, Lngland,
Ashgate, Aldershot, 2001, íor the experiences with domestic airline deregulation in New Zealand, Australia,
Canada, Lurope and India.
55
See Lu, op cit, n 52, at Section 2.2.1, and Gil-Molto and Piga, Lntry and exit in a liberalised market`,
Discussion Paper Series, Department oí Lconomics, Loughborough Uni·ersity, UK, 2006.
Competition Law and the International 1ransport Sectors
,2009, 5,2, CompLRe·

206
discount íares.
56
1his package, and the second in 1990, loosened the constraints oí
bilateral agreements by íreeing capacity limitations, allowing additional airlines to be
designated and creating additional route rights.
5¯
1he third and most signiíicant package
implemented írom 1993 to 199¯ replaced the bilateral system with a multilateral system
oí air transport regulation.
58
Most signiíicantly, there was to be no restrictions on
pricing, no regulatory distinction between scheduled and charter airlines, and
mo·ement away írom the requirement oí national ownership. lrom 199¯, íull cabotage
,occasionally reíerred to as the ninth íreedom, granted permission to Luropean carriers
to operate domestic ílights in member countries other than their home market.
59

1he íirst package also contained three block exemptions íor the air transport sector íor
joint planning, coordination oí schedules, joint operations, and consultation on tariíís
and slot allocation agreements, categories oí agreements between undertakings relating
to computer reser·ation systems, and ground handling ser·ices.
60
1he majority oí the
exemptions had been allowed to expire with the exception the block exemption íor
IA1A tariíí coníerences, and IA1A slots and scheduling coníerences which was
renewed in 1993.
61

3.2. 1he Present: 1he Age of Budget Airlines and Alliances
1he past decade has seen increased liberalization which has resulted in worldwide
growth in the ·olume oí air passengers, the proliíeration oí low cost carriers worldwide
and the increased cooperation between airlines in the íorm oí global alliances and code-
sharing arrangements. Increased liberalization has also been accompanied by the greater
írequency in the application oí competition law to a ·ariety oí issues within the airline
sector.

56
1he íirst package contains íour pieces oí legislation: Council Regulation 39¯5,8¯, OJ 198¯ L3¯4,1, Council
Regulation 39¯6,8¯, OJ 198¯ L3¯4,9, Council Directi·e 8¯,601, OJ 198¯ L3¯4,12, and Council Decision
8¯,602, OJ 198¯ L3¯4,19.
5¯
1he second liberalization package contains íi·e regulations: Council Regulation 2342,90 re·oking Council
Directi·e 8¯,601, Council Regulation 2343,90 re·oking Council Decision 8¯,602, Council Regulation
2344,90, Commission Regulations 83,91 and 84,91. See OJ 1990, L21¯,15 and OJ 1991, L10,14.
58
Council Regulation 240¯,92, OJ 1992, L240,1. See Morrell, Air transport liberalization in Lurope: the
progress so íar` ,1998, 3,1, Journal oí Air 1ransportation \orld \ide 42.
59
Chang and \illiams in·estigate how Luropean major airlines responded to the liberalized policy. 1hey
conclude that British Airways and the SAirGroup ha·e pursued a policy oí acquiring airlines in LU countries,
with the íormer íinding it an expensi·e and questionable strategy and the latter disastrous: see Chang and
\illiams, Luropean major airlines` strategic reactions to the 1hird Package` ,2002, 9 1ransport Policy 129.
60
See supra, n 56. 1he air transport sector had enjoyed special exemption írom LC competition law dating
back to 1962 under Council Regulation 141,62, OJ 124, 28.11.62, p 2¯51, Lnglish Special Ldition 1959-62, p
291.
61
Commission Regulation 161¯,93 ,IA1A 1ariíí and Slot Coníerences,, OJ 1993 L155,18. See iníra, text
accompanying n ¯5 and n ¯¯.
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20¯
3.2.1. Low cost carriers ,LCCs, take oíí worldwide
In the aítermath oí deregulation, low cost carriers ha·e car·ed a sizeable niche oí the
industry íor themsel·es. In the US, Southwest Airlines, America`s most proíitable
airline, and JetBlue ha·e shown that the low cost segment can be ·ery lucrati·e.
62
In
Lurope, low cost air carriers such as Ireland`s Ryanair and UK`s LasyJet ha·e been ·ery
successíul as well.
63
1he success oí LCCs in the US and Lurope helped to break down
resistance to a·iation liberalization globally. In the past íi·e years in the Asia Paciíic, the
growth oí LCCs has been the single most important íactor shaping the airline industry
in the region. In the Asian Paciíic region, LCCs ha·e emerged in India, Japan, Malaysia,
New Zealand, Philippines, 1hailand, Australia and Singapore.
64
1he growth oí LCCs
internationally howe·er continues to be constrained by regulations on íoreign
participation in ownership and management and bilateral agreements between
go·ernments.
3.2.2. Alliances and other íorms oí cooperation
Increased competition in the a·iation sector has been paralleled by increased
cooperation between airlines in the íorm oí both domestic and global alliances and
code-share agreements. Since the íormation oí the Star Alliance global network in 199¯,
other major global alliance groups ha·e been íormed. At present the three major global
alliances are Star Alliance, oneworld and Sky1eam, each in·ol·ing major carriers írom
at least ten diííerent nationalities. Alliances may represent diííerent le·els oí
cooperation írom joint marketing to integration oí businesses. Alliance cooperation can
include code-sharing agreements which allow airlines to market seats on ílights
operated by partner airlines where the ílight carries both airline identiíiers and airline
speciíic ílight numbers. lowe·er, non-alliance airlines also make use oí code-share
agreements which allows partner airlines to jointly set íares.
65

1he most important reason íor the pre·alence oí alliances is that generally, cross-
border mergers and acquisitions oí airlines in order to expand route networks are not
possible. 1he obstacle deri·es írom bilateral air ser·ices agreements ,ASAs, between
pairs oí states which pro·ide that a state may reíuse to allow an airline írom the other
state to operate ií it is not substantially owned and eííecti·ely controlled by that other
state or its nationals. Gi·en that a change oí ownership could result in the withdrawal

62
Ito and Lee, Low Cost Carrier Growth in the U.S. Airline Industry: Past, Present, and luture` ,2003, Brown
Uni·ersity Department oí Lconomics Paper No. 2003-12.
63
Gil Moto and Piga, op cit, n 2¯, Paul and lartmann, 1he \orld Airline Industry: A Luropean Perspecti·e`
,2003,, Case 303-0¯3-1, Luropean Case Clearing louse Collection.
64
lindlay and Goldstein, Liberalization and loreign Direct In·estment in Asian 1ransport Systems: 1he Case
oí A·iation` ,2004, 21,1, Asian De·elopment Re·iew 3¯, also presents case studies oí de·elopment in China,
1hailand and India.
65
Czerny, Code-sharing and its eííect on airline íares and welíare` ,2006, CNI-\orking Paper No. 2006-15,
Center íor Network Industries and Inírastructure ,CNI, at Berlin Uni·ersity oí 1echnology.
Competition Law and the International 1ransport Sectors
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208
oí operating permission, alliances which do not in·ol·e the acquisition oí substantial
ownership or eííecti·e control are the next best option.
66

Regulators and competition authorities can either appro·e or prohibit an alliance or
adopt a decision with remedies. A database on Regulatory Actions on Major Airline
Alliances` can be íound on the website oí the International Ci·il A·iation Organization
,ICAO,.
6¯
Most applications íor immunity concern air traííic on routes between the US
and Lurope. Although there are at present more than a hundred jurisdictions with
competition law regimes, the database contains only regulatory actions oí the US DO1
,39 cases,, Luropean Commission ,24 cases,, the UK Oííice oí lair 1rading ,3 cases,,
the Australian Competition and Consumer Commission ,8 cases, and the New Zealand
Commerce Commission ,2 cases,.
68

Legal procedures and requirements íor appro·al oí alliances diííer between countries.
69

In the US, international airline alliances apply to the Department oí 1ransportation
,DO1, íor immunity írom antitrust litigation, which DO1 has the sole authority to
coníer or withhold. DO1 considers se·eral broadly deíined íactors such as the public
interest` and íoreign policy`, and also relies on the Department oí Justice ,DOJ, to
complement its qualitati·e approach with a more quantitati·e analysis oí the proposed
alliance similar to the approach DOJ utilizes íor domestic airline mergers.
¯0
DO1
generally grants antitrust immunity subject to a re·iew aíter íi·e years. DO1 has also
granted antitrust immunity íor alliance partners to jointly set íares on an indi·idual
basis. lowe·er, in some instances, coordinate pricing between alliance members has
not been permitted. According to Chang and \illiams, the US DO1`s policy in the
1990s was to strategically grant anti-trust immunity to transatlantic alliances subject to
the conclusion oí Open Skies Agreements with the go·ernments oí the airlines
in·ol·ed.
¯1


66
See Balíour, LC competition law and airline alliances` ,2004, 10 Journal oí Air 1ransport Management 81.
6¯
ICAO`s database oí regulatory actions on major airline alliances is at: ·http:,,www.icao.int,
icao,en,atb,epm,ecp,AirlineAlliances.pdí·.
68
Since competition law came into eííect in Singapore in 2006, the Competition Commission oí Singapore has
excluded two airline agreements írom Section 35 prohibition oí the Competition Act: the Qantas-British
Airways Joint Ser·ices Agreement and the Qantas-Orangestar Co-operation Agreement, both decisions were
made in 200¯. Details oí the decisions may be íound online at the Competition Commission`s website at:
·http:,,www.ccs.go·.sg,PublicRegister,Notiíications-Decisions---Public-Register.htm·.
69
Lu, op cit, n 52, is a detailed study oí the problems íacing international airlines due to conílicts arising írom
the applications oí ·arying competition laws by the US and LC on airline alliance acti·ities.
¯0
See Schlangen, Diííering Views oí Competition: Antitrust Re·iew oí International Airline Alliances` ,2000,
Uni·ersity oí Chicago Legal lorum 413. Schlangen highlights the similarities and diííerences in the antitrust
analysis by DO1 and DOJ.
¯1
Switzerland and Belgium signed open skies agreements with the US in 1995, in 1996 Swissair, Austrian
Airlines Sabena and Delta Air Lines were granted antitrust immunity by the US authorities. A íull Open Skies
deal was signed by the lrench and US go·ernment in Oct 2001, which enabled the Air lrance-Delta alliance
to be granted antitrust immunity: see Chang and \illiams, op cit, n 59. In lennes` ·iew, the US opens skies
policy and its twin arrangement, the enticing bait oí antitrust immunity, represents one oí the most important
breakthroughs in changing the international regulatory íramework oí commercial air transport .`: see
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209
1he Luropean Commission`s approach to a proposed alliance has been to in·estigate
its eííect on competition by considering market shares on the rele·ant routes as well as
legal and,or practical barriers to entry by potential competitors. Alliances ha·e oíten
been permitted to proceed subject to remedies. 1he types oí remedies ordered by the
Commission in order to mitigate the potential negati·e eííects on competition ha·e
included:
,i, íreezing or reducing írequencies on the routes in question,
,ii, constraints on íare reductions íor the ser·ices oííered by the parties to make it
more diííicult íor them to engage in anti-competiti·e pricing strategies,
,iii, parties agreeing to allow would-be competitors access to their írequent ílyer
programs and airport slots, as well as allowing competitors to interline with the
parties,
,i·, relaxation oí bilateral constraints by go·ernments in order to allow competition,
and
,·, wider remedies such as undertakings írom the airlines not to oííer ·olume related
discounts or bonus commissions.
¯2

1he welíare and competition eííects oí alliances and code-sharing ha·e been intensely
studied.
¯3
Amongst the oít cited beneíits are that alliances oííer more extensi·e
networks where partners are complementary resulting in decreased costs and íares, and
better quality oí ser·ice. lowe·er, they also raise competition concerns on routes
where partners are competitors as this reduces competition and may preclude
competitors írom entering the markets ser·ed by alliances. \hile on some routes there
is strong competition between alliances, this is not the case in e·ery instance. On some
routes, a particular alliance might be the only operator and competitors íace too high

lennes, 1he Luropean Community and the United States: expanding horizons and clipped wings`, Luropean
Air Law Association, Lle·enth Annual Coníerence in Lisbon, 5 No·ember 1991.
¯2
Balíour examines in detail the Commission`s decisions on the Luíthansa , SAS alliance in 1996, the KLM ,
Alitalia alliance in 1999, the Luthansa ,Austrian Airlines alliance in 2002, the British Airways , SN Brussels
Airlines cooperation agreement in 2003, as well as three transatlantic alliances íor which in·estigations
stretched írom 1996 to 2002. See Balíour, op cit, n 66.
¯3
1he literature analyzing the eííects oí these cooperation agreements is extensi·e and includes Bilotkach,
Price competition between international airline alliances` ,2005, 39,2, Journal oí 1ransport Lconomics and
Policy 16¯, Brueckner, International airíares in the age oí alliances: the eííects oí codesharing and antitrust
immunity` ,2003, 85,1, 1he Re·iew oí Lconomics and Statistics 105, Brueckner and \halen 1he price
eííects oí international airline alliances` ,2000, 43,2, Journal oí Law and Lconomics 503, Clougherty,
Globalization and the autonomy oí domestic competition policy: an empirical test on the world airline
industry` ,2001, 32,3, Journal oí International Business Studies 459, lassin and Shy, Code-sharing
agreements and interconnections in markets íor international ílights` ,2004, 12,3, Re·iew oí International
Lconomics 33¯, Oum, Key Aspects oí Global Strategic Alliances and the Impacts on the luture oí Air
Canada and other Canadian Air Carriers` ,2001, Research paper commissioned by the Canada 1ransportation
Act Re·iew, Park and Zhang, An empirical analysis oí global airline alliances: cases in North Atlantic
markets` ,2000, 16 Re·iew oí Industrial Organization 36¯, and \halen, A panel data analysis oí code
sharing, antitrust immunity and open skies treaties in international a·iation markets` ,200¯, 30,1, Re·iew oí
Industrial Organization 39.
Competition Law and the International 1ransport Sectors
,2009, 5,2, CompLRe·

210
hurdles to ha·e any chance to access such markets. Recently, increasing public concern
in the US o·er the possible anticompetiti·e eííects oí international airline alliances
prompted a congressman to propose legislation in lebruary 2009 that calls íor a íederal
go·ernment study oí alliances and the antitrust immunity they recei·e.
¯4

3.3 1he Iuture: Competition Policy for Imperfect Aviation Markets
3.3.1. LU re·ises block exemption íor IA1A coníerences
In 2005, the Luropean Commissioner íor Competition made a proposal to liít the
exemption íor IA1A passenger tariíí coníerences which allows members to discuss
interlining prices íor scheduled passenger ílights.
¯5
1his was íollowed in July 2006 by
the US DO1 proposal to re·oke long standing antitrust immunity held by the IA1A to
set passenger and cargo prices íor US-Lurope and US-Australia ílights, claiming the
growth oí airline alliances has made the pricing coníerences unnecessary.
¯6
Competition
authorities argued that the growth oí international a·iation alliances has enhanced
competition, lowered íares and oííered consumers more choices, making it diííicult to
justiíy a continuation oí the exemption.
In October 2006, Luropean Commission acted decisi·ely to re·oke the exemption
IA1A passenger tariíí coníerences ha·e enjoyed in phases.
¯¯
lor routes within LU,
tariíí coníerences ceased to be exempt írom January 200¯, íor routes between the LU
and the US and Australia, írom June 200¯ and routes between LU and other non-LU
countries, írom October 200¯. 1o prolong the exemption íor routes to non-LU
countries, IA1A will ha·e to pro·ide data to the commission showing that IA1A
interlining continues to beneíit consumers. 1he new regulation also ended the block
exemption íor IA1A slots and scheduling coníerences. Since the LC decision,
Australia`s ACCC has also ended immunity íor IA1A tariíí coníerences at the end oí
June 2008 íor markets to and írom Australia.
3.3.2. US-LU Open Skies
1he success oí domestic deregulation oí airlines in the US and the LU naturally led to
considerations íor Open Skies` between Lurope and the US. 1he US had negotiated
bilateral Open Skies` agreements with se·eral indi·idual Luropean go·ernments in the
1990s. lowe·er about 10 LU Member States including Britain, which account íor

¯4
Legislation introduced by Rep. James Oberstar, l.R. 831, A Bill to Lnsure Adequate Airline Competition
Between the United States and Lurope`, 3 lebruary 2009. Its pro·isions ha·e since been attached to the
lederal A·iation Administration ,lAA, Reauthorization Bill.
¯5
Commission`s Discussion paper on Regulation 161¯,93 ,IA1A 1ariíí and Slot Coníerences, may be ·iewed
at the Commission`s website at: ·http:,,ec.europa.eu,competition,antitrust,others,air_transport.html·.
¯6
See US DO1 proposal at the agency`s website: ·http:,,www.dot.go·,aííairs,dot¯506.htm·.
¯¯
Commission Regulation 1459,2006, OJ 2006 L2¯2,3. See Luropean Commission. Competition:
Commission re·ises Block Lxemption íor IA1A passenger tariíí coníerences` ,2 Oct 2006, IP,06,1294,
Brussels.
Sock-\ong Phang
,2009, 5,2, CompLRe·

211
about halí oí all LU-US traííic, had not signed Open Skies agreements with the US.
¯8

One outcome was the íailed merger oí KLM and British Airways in 2000 because oí
the risk oí jeopardizing routes to US under the bilateral treaties.
1he Luropean Commission had argued throughout the 1990s that the bilateral Open
Skies Agreements between US and indi·idual member states resulted in íragmentation
oí Lurope`s common a·iation market and thereíore iníringed LU law. On 5 No·ember
2002, the Luropean Court oí Justice made a landmark decision that declared the then
existing national bilateral treaties illegal.
¯9
\ith the uncertainty hanging o·er the
bilateral treaties, the Luropean Commission was gi·en the mandate it had long sought
to begin negotiations íor an open a·iation area with the US in 2003. 1he US-LU
a·iation pact
80
that was íinally announced in March 200¯ ,íor open skies írom March
2008, ended the dangerous legal uncertainty that has clouded transatlantic a·iation íor
íi·e years`. It is expected to result in cheaper ílights that will boost transatlantic traííic
by 50° or 26 million passengers a year within íi·e years as well as trigger íurther
consolidation oí LU airlines through mergers.
81

Under the pact, Luropean and American airlines can íly any route between any
Luropean city in the 2¯-nation bloc and one city in the US. lowe·er, while US carriers
can operate ser·ices between Luropean countries, Luropean airlines will not be allowed
to íly írom city to city within the US. Restrictions on íoreign in·estment in US airlines
remain. Second stage talks ha·e begun in May 2008 and are aimed at opening up the US
domestic market and at easing current ownership restrictions on íoreign in·estment in
US airlines. 1he most signiíicant outcome oí the pact has been to open up access to
London`s leathrow Airport which had pre·iously limited rights to íly between US and
leathrow to íour carriers ,British Airways, Virgin Atlantic, United Airlines and
American Airlines,.
1he landmark US-LU Open Skies deal has prompted discussion oí airspace
liberalization in Japan
82
as well as within ASLAN.
83
1he US and China ha·e also began
discussions on a US-China open skies deal.
84
1he pace oí liberalization has howe·er
been painíully slow, with go·ernments ha·ing to weigh the beneíits oí traííic growth

¯8
Robyn, Reitzes and Moselle, Beyond Open Skies: 1he Lconomic Impact oí a US-LU Open A·iation Area`,
in lamilton and Quinlan ,eds,, Dee¡ ívtegratiov: íor 1rav.attavtic Mar/et. are íeaaivg Ctobati¸atiov, Johns
lopkins Uni·ersity Center íor 1ransatlantic Relations, \ashington, D.C. and Centre íor Luropean Policy
Studies, Brussels, 2005.
¯9
Judgments oí the Court, in Case C-466,98 Covvi..iov r |K |2002| LCR I-942¯, Case C-46¯,98 Covvi..iov r
Devvar/ |2002| LCR I-9519, Case C-468,98 Covvi..iov r ´reaev |2002| LCR I-95¯5, Case C-469,98
Covvi..iov r íivtava |2002| LCR I-962¯, Case C-4¯1,98 Covvi..iov r ßetgivv |2002| LCR I-9681, Case C-
4¯2,98 Covvi..iov r ív·evbovrg |2002| LCR I-9¯41, Case C-4¯5,98 Covvi..iov r .v.tria |2002| LCR I-9¯9¯,
and Case C-4¯6,98 Covvi..iov r Cervav, |2002| LCR I-9855.
80
LC-US Air 1ransport Agreement, OJ 200¯, C301 L,143.
81
LU agrees US open skies deal`, 1he linancial 1imes, 23 March 200¯.
82
Japan in open skies airport access push`, 1he linancial 1imes, 31 March - 1 April 200¯.
83
ASLAN Open Skies seen to gain momentum this year`, 1he Inquirer, 9 April 200¯.
84
US presses China íor Open Skies deal`, 1he Straits 1imes, 14 April 200¯.
Competition Law and the International 1ransport Sectors
,2009, 5,2, CompLRe·

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against threats to the commercial interests oí their own country`s carriers. National
carriers in many instances, íearíul oí íoreign competition, continue to lobby íiercely íor
the protection oí their own interests.
4. CONCLUSION: 1HL ABANDONLD OCLANS AND CON1LS1LD
SKILS
Despite the international liner shipping and a·iation sectors being key inírastructure
pro·iders íor global trade and mobility, competition in these two sectors is a íairly
recent phenomenon. 1he two sectors ha·e presented diííerent kinds oí challenges to
antitrust and competition authorities, generating numerous studies both íor as well as
against their exemption írom competition laws. Beginning in the late 19¯0s, the US was
the íirst mo·er to deregulate the airlines sector and to introduce reíorms in the
regulation oí the international shipping sector -- which ha·e resulted in greater
competition and lower prices in both sectors. In 2006, the LU adopted a tougher stance
by becoming the íirst jurisdiction to remo·e exemption íor IA1A passenger tariíí
coníerences írom 200¯ and íor liner shipping coníerences írom 2008. Other íorms oí
cooperati·e agreements in both sectors howe·er continue to recei·e ía·ourable
treatment under competition laws worldwide.
Gibson and Dono·an
85
ha·e highlighted the increasing comparati·e disad·antage oí
the US, íirst, in shipbuilding and, later, in operating a US ílag íoreign going merchant
marine íleet. 1he exemption oí the shipping coníerences írom antitrust law íor most oí
the pre·ious century helped to preser·e an industry that was in ob·ious decline, that is,
until the passage oí the OSRA in 1998. Reitzes and Sheran ha·e argued that this policy
change to ía·our shippers o·er carriers was not unexpected, gi·en the general
importance oí international trade to US businesses and the íurther diminution in the
already small number oí US ílag carriers. 1he two largest US ílag carriers, American
President Lines and Sealand, ha·e been acquired by íoreign-owned carriers ,Neptune
Orient Line in 199¯ and Maersk in 1999, respecti·ely, in recent years.`
86
As a result, the
industry structure oí international shipping has become increasingly concentrated
through acquisitions and mergers e·en as íreight rates ha·e declined with increased
competition.
\hile many nations ha·e chosen to íollow the US lead in abandoning national ílag
carriers íor the oceans, the international skies remain a contested domain, greatly
distorted by an arcane web oí restricti·e national a·iation policies. Immunity íor
cooperation between airlines through ASAs, code sharing and alliances continues to be
justiíied and justiíiable as a result oí market distorting regulations: íoreign ownership
restrictions that obstruct eííiciency enhancing cross-border mergers and acquisitions,
state aids íor national carriers, bilaterally negotiated air rights, as well as restrictions to
airport access. 1he spread oí the 19¯0s US inno·ation, the low cost carrier, to other

85
Gibson and Dono·an, 1be .bavaovea Oceav: . íi.tor, of |vitea ´tate. Maritive Potic,, Columbia, Uni·ersity oí
South Carolina Press, 2000.
86
See Reitzes and Sheran, op cit, n 16, at p 56.
Sock-\ong Phang
,2009, 5,2, CompLRe·

213
regions oí the world ,only, in the past decade, has certainly beneíited passengers
greatly. 1he terms oí the recent US-LU Open Skies agreement howe·er illustrate that
restrictions on substantial íoreign ownership oí airlines and on domestic ílights by
íoreign-owned airlines within the US remain obstacles in the liberalization process.
1he international transport sectors, with their network characteristics, continue to pose
challenges to national competition policy which must be tailored to deal eííecti·ely with
their unique characteristics - not so much in terms oí traditional concerns oí
competiti·e prices and abuse oí dominance but, rather, conílicting national interests,
especially with regard to íoreign ownership and air rights. L·en as the international
shipping sector consolidates and adjust to the íull application oí competition law in the
LU, there will be greater con·ergence oí competition policy in the airline sector, albeit
at a pace that continues to lea·e much to be desired. 1he clear desirability íor
international harmonization and compatible regulatory approaches to reduce the
potential íor conílicting application oí competition laws is apparent. Proposals íor an
integrated international policy position, leading to the e·entual establishment oí an
independent supranational airline regulation authority` are not new.
8¯
\hile this will be
beneíicial globally, national agendas and local conditions diííer. 1he uncertain
distribution oí beneíits causes one to be sceptical that we will be able to witness the
establishment oí such a supranational airline regulation authority in the near íuture.
88



8¯
Round and lindlay, Competition policy in international airline markets: an agenda and a proposed solution`,
presentation at 1¯th International LCM1,OLCD Symposium on 1ransport Lconomics and Policy, Berlin,
25-2¯ October 2006.
88
1his scepticism is shared at the general le·el by Guzman, Is international antitrust possible·` ,1998, ¯3 New
\ork Uni·ersity Law Re·iew 1501. Guzman suggests that negotiations on antitrust policy be combined with
negotiations oí other issues as concessions in other areas oí negotiations may be necessary to compensate
countries that will suííer a loss under a cooperati·e antitrust policy.