AS354 - IMPOSITION OF PUBLIC SERVICE OBLIGATIONS ON SCHEDULED AIRLINES OPERATING TO AND FROM SARDINIA UNDER ARTICLE 4 PARAGRAPH 1 A) OF EC REGULATION NO. 2482/92 AS IMPLEMENTED IN ARTICLE 36 OF LAW NO. 144 OF 17 MAY 1999
PRESS RELEASE
PRESS RELEASE
Antitrust says system of public service obligations for air links with Sardinia should be reviewed
Present mechanism may restrict competition
The present mechanism regulating public service obligations in air transport to Sardinia, whose objective is to ensure "territorial continuity", presents risks of competitive restrictions such as to require a general overhaul of the system. That is the thrust of a statement by the Italian Competition Authority contained in a report approved at its meeting on 27 July 2006 and forwarded to the Minister of Transport.
Specifically, the Authority identified three different critical profiles:
the system of obligations imposed on a number of routes such as those to Turin, Verona, Florence, Bologna and Palermo (which is not yet operational), does not seem to meet the criterion of proportionality between a reduction of competition on the routes in question and the protection of the demand for transport.
The system, by discriminating between categories of users, can create cross-subsidies between assisted and unassisted passengers. In fact, the present system is based on an opaque mechanism of subsidies between users: the subsidized fares for those born or resident in Sardinia are financed indirectly by the full fares of other passengers. This analysis is confirmed by the fact that on the routes between Sardinia and Rome and Milan in recent years (since 2004) the airlines have accepted the obligations without receiving compensation from the State. The obscurity of the system makes it difficult to identify the real extent of the service subject to such obligations, which inevitably means it is impossible to minimize the subsidies.
The imposition of public service obligations as currently configured creates incentives for competing airlines to coordinate amongst themselves: after accepting the obligation regime in its entirety, they split up the relevant routes amongst themselves and sign conventions with ENAC in order to reduce any over-capacity. In this way, by excluding competitive discipline on the individual routes, it becomes impossible to implement any potential reduction in the fares foreseen by the obligation regime. Such fares, in effect, are considered to be the maximum fares.
The recent code-sharing agreement signed by Meridiana and Alitalia looks, in this context, like a pathological event which shows just how widespread collusion between competitors has become in instances where there is extensive use of public service obligations.
In the Authority's view, instead of the existing mechanism it would be possible to identify various systems which could, on the one hand, satisfy the need for “territorial continuity” with Sardinia and, on the other, minimize the competitive restrictions resulting from the satisfaction of that need. Basically, the requirement is to identify precisely that part of the public service which, in the absence of the service obligations, might not be guaranteed by competitive processes, and to leave the rest of the market to free competition; this would have a positive impact on fares, given that low-cost airlines would be tempted to enter the market. The implicit ban on low-cost airlines flying to and from Sardinia if they do not accept the public service obligations in their entirety may in fact at present be damaging even subsidised users who otherwise might benefit from low-cost fares which could be even lower than the subsidised ones.
In particular, the obligation regime could be limited to those periods of the year and/or those times of day when the routes in question would not be flown if the airlines looked only to their own commercial interests. For each route, then, a minimum service obligation could be established in terms of frequency and fare structures, leaving the market to cover any excess demand. The public service obligations could be split uniformly over the course of the year or, on routes having high seasonal demand, they could be concentrated in the months that are least profitable commercially.
In the Authority's view, the alternative methods mentioned could certainly be applied to the so far unassigned secondary routes subject to obligations: in fact, these are links whose characteristics are such, unlike the Rome and Milan routes, that they would be unlikely to be operated without compensation from the State.
Besides, even for the Rome and Milan routes, a more precise identification of the service obligations using the above criteria would not lead to any particular increase in costs for the Public Administration. It should be noted that up until 2004 the compensation paid by the State for these routes amounted to only a few tens of millions of euros per year. The existence now of a “non-transparent cross-subsidy” paid by unassisted passengers does not allow a correct identification of the size of the compulsory service and consequently has prevented the minimization of the subsidy. If a regime of service obligations were defined which was limited only to the demand not guaranteed by market mechanisms, any subsidy would be explicit and would aim to cover only certain periods of the year, thus minimizing expenditure by the State.
Rome, 3 August 2006