Framework for Interlining Agreements

Alfredo Cabellos Ballenilla.

24/10/2007 International Law Office


Earlier this year the Supreme Court issued a significant ruling in the context of an appeal against a decision on interlining agreements in the air transport sector. Specific features of the sector make certain agreements, decisions and concerted practices exempt from general competition rules.

Facts

On April 25 1997 some of the main passenger carriers entered into several cross-collateralized direct interlining agreements within the Iberian market. The one-year agreements concerned:

  • ticket sales;
  • endorsements;
  • acceptance; and
  • refund systems.

In addition, the airliners adjusted their tariffs to align their ticket prices, with effect from April 25 1997.

Interlining Arrangements

The Supreme Court set out the main parameters in assessing the legality of interlining agreements. Upon analyzing Law on the Defence of Competition (16/1989), the court stated that - provided that they meet certain requirements - interlining agreements between airlines concerning the sale, endorsement and acceptance of tickets, compensation, refunds or pro-rata systems, including accounting systems used for such purposes, should not be considered prima facie as falling under the scope of the general prohibition of collusive agreements set out in Article 1 of the law.

The ruling sets out the specific requirements for those agreements to comply with competition regulations. For example, they must not involve the creation of a tariff coordination system between airlines, or have a direct or indirect effect on price increases or on the quality of air transportation services. The agreements should contribute instead to:

  • opening the markets;
  • increasing competition;
  • enhancing the business development of smaller companies in an oligopoly sector; and
  • facilitating the free movement of persons - for instance, by allowing passengers to acquire a single ticket to travel to several locations.

The ruling issued by the National Court, which was subsequently annulled by the Supreme Court, assumed that the interlining agreements infringed the provisions of Article 1 of the law. This reasoning was based on the fact that the agreements did not include a clause establishing compensation for possible ticket price variations, taking into account the differences in tariffs between airlines at the time. The Supreme Court held that the National Court had based its decision on evidence which was insufficient to determine whether an agreement that was contrary to competition law had been executed. The Supreme Court could not determine the existence of a prohibited agreement by analyzing the specific clauses of the contracts executed among the airlines.

The court further analyzed the case in light of EU Regulation 3975/87, which lays down the procedure for the application of competition rules to undertakings in the air transport sector. The court stated that the interpretation of Spanish law complied with the regulation.

Alignment of Ticket Prices

The court held that the simultaneous tariff increase, as a consequence of which identical prices were established on certain routes, was evidence of an agreement among the passenger carriers. The court rejected their arguments based on market characteristics or specific sector cost structures. The companies claimed that the uniformity of the prices and tariffs was due to their own separate commercial decisions based on issues such as the increase in dollar exchange rates, the increase in fuel prices and the reduction of slots in the Madrid and Barcelona airports.

The court stated that the uniform prices could be construed only as the result of an agreement between the market players. The companies involved were held responsible for infringing the provisions of Article 1 of the law.

Comment

The Supreme Court has set out the main parameters for Spanish airlines operating in the context of interlining agreements. The ruling confirms the special characteristics of the air transport sector in terms of coordination between market players, and establishes penalties which apply when the agreements exceed what is necessary for the achievement of technical improvement or cooperation.