When Regulators Do Too Much

Surprisingly, last week, the Court of Justice of the European Union, in a final ruling after 16 years of proceedings, condemned a (so-called) cartel of airlines for collusion on service prices in the air cargo sector. This concerns Air France, KLM and their subsidiary Martinair, but also British Airways and Singapore Airlines, among others. The amount of the fines is not insignificant: 183 million euros for Air France and 127 million euros for KLM, for example.

One can legitimately question the validity of these sentences. How could an agreement between airlines, sometimes competitors, affect the smooth running of this sector of activity? As far as I know, Air France, KLM, and Martinair are part of the same capital group, and it is reasonable to try to improve the profitability of the whole. Instead, they will have to pay 340 million euros. For whose benefit?

Of course, I understand that the European Commission, as well as the U.S. federal government, seek to fight against dominant positions in order to avoid monopolies that would be built to the detriment of consumers. But then why authorize the acquisition of capital shareholdings? And, speaking only of Europe, has this in any way hindered the fierce competition between the major operators on this continent?

Let’s go a little further. Air transport has been built for more than 80 years on agreements, or even collaboration, between carriers. This is evident both in the technical field, with the safety rules imposed by the ICAO (International Civil Aviation Organization), and in commercial cooperation carried out within IATA (International Air Transport Association) which, in particular, manages the BSP (Billing and Settlement Plan), the global tool for the distribution and repatriation of passenger sales. Why accept joint ventures between competing carriers, such as Delta Air Lines and Air France/KLM or American Airlines and British Airways, on the major international route, the Transatlantic?

Moreover, the practice of codesharing, which consists of selling flights operated by another carrier under the brand name of a different airline, is commonly used without regulatory authorities seeing any disadvantage, while there could be much to complain about from the consumers’ point of view.

I also note that the decision of the European Court of Justice may have new consequences, particularly with regard to the latent conflict between Lufthansa and Deutsche Bank over the fuel surcharge cartel. The bank’s claims on behalf of some of its large clients amount to several billion euros.

I do not see how agreements between carriers would be reprehensible, provided that they do not aim to create a monopolistic situation, which is difficult to imagine on a continent where the freedom to operate is granted to any company approved by civil aviation authorities. Freedom of trade is a major factor in economic expansion, and the relentless struggle between competitors whose aim is only to lower selling prices—or at least display them—can only weaken a sector where margins are, on average, less than 7% of turnover, while capital requirements are considerable.

It is conceivable that the courts, and particularly the supreme authorities, have other concerns than controlling the way operators conduct their commercial strategies. The best protection for consumers remains free competition. All that remains is the allocation of operating capacity at the major airports. These are subject to ecological constraints, many of which are nevertheless highly demagogic.

The accounts of the major companies affected by the Court of Justice’s decision will not be impacted because the fines in question had been provisioned for a long time. Even if this does not change anything in the current economic situation, it is a bad sign for air transport—in freight for the moment, but perhaps for passengers in the future as well.