The General Court of the European Union has struck down a European Commission requirement that Lufthansa periodically lower fares for flights between Zurich and Stockholm as part of the conditions on the airline’s 2005 acquisition of Swiss International.

The General Court found the commission made a “manifest error of assessment” when the enforcer rejected Lufthansa’s request to waive commitments regarding fares on a Zurich-Stockholm flight route. However, the court upheld a fare commitment for a Zurich-Warsaw flight route.

In 2005, the European Commission cleared Lufthansa’s €217 million acquisition of rival airline Swiss International subject to two fare commitments. The airline was required to reduce fares on its Zurich-Stockholm and Zurich-Warsaw flight routes each time it reduced a published fare on a comparable route.

At the time, Scandinavian Airlines and LOT Polish Airlines offered flights on the Zurich-Stockholm and Zurich-Warsaw routes respectively. However, the commission determined that these airlines did not have an incentive to compete for these routes, as they were members of the Star Alliance alongside Lufthansa and Swiss, and Lufthansa had a separate joint venture agreement with Scandinavian.

In 2013, Lufthansa asked the European Commission to waive the commitments. The airline argued the waiver was justified because it had ceased its joint venture with Scandinavian. Moreover, Lufthansa said, the commission had changed its policy regarding alliance partners and competition existed between Swiss, Scandinavian and LOT Polish.

The European Commission rejected Lufthansa’s request in 2016. It said the joint venture’s termination was irrelevant, as Lufthansa and Scandinavian remained the only carriers flying the Zurich-Stockholm route, and a 2006 codeshare agreement restricted competition between them.

The commission also said changing the way it analysed competition among alliance partners did not amount to a “long term market evolution” that called for an amendment to the fare commitments.

In October 2016, Lufthansa appealed against the commission’s decision to the EU General Court. The airline argued that terminating its joint venture with Scandinavian in 2013 amounted to a change in contractual relationships that justified waiver of the fare commitment on the Zurich-Stockholm route. It also presented data showing the number of passengers using the routes had doubled between 2005 and 2014 and fares were significantly lower, which amounted to a “long-term market evolution”.

The court’s ruling

The General Court yesterday said the commission should waive the fare commitments imposed on the Zurich-Stockholm flight route but maintain the commitments on the Zurich-Warsaw route. It found the commission had failed to take into account all the relevant information regarding the competing airlines’ contractual relationships – a “manifest error of assessment”.

A trustee responsible for monitoring compliance with the commitments agreed with Lufthansa, the court noted, but the commission did not incorporate the trustee’s opinion when it denied Lufthansa’s waiver request.

“Although the commission is not bound by the trustee’s opinion, it is nevertheless required, in principle, to take it into account, particularly since the commission itself asked the trustee for an opinion,” the court said.

It also admonished the commission for failing to explain adequately why an alliance partnership was considered to restrict competition in the current matter, but not during the enforcer’s 2009 decision approving Lufthansa’s takeover of Brussels Airlines, which involved similar factual circumstances. That merger approval was “one of the main grounds for the waiver request” yet “no answer has been provided by the Commission” to explain the discrepancy, the court said.

The commission argued that the change in relationship between Lufthansa and Scandinavian was irrelevant because there was no joint venture agreement between Lufthansa and LOT Polish, yet the enforcer had still imposed a fare commitment.

However, the court rejected this argument, stating it is “advanced on the basis of merely hypothetical considerations, is not supported by any concrete examination of the relevant information relating to each of the routes and is based on a somewhat circular argument.”

The enforcer also asserted that the codeshare agreement between Swiss and Scandinavian/LOT Polish shows the airlines exert a limited competitive constraint on each other, as an airline is unlikely to accept having seats on its flights sold at lower fares by a codeshare partner.

But the court found this to be a “purely speculative” argument that did not justify rejection of Lufthansa’s waiver request, particularly as Lufthansa said operating carriers frequently offer lower fares for their own operated flights than they offer for flights operated by the codeshare partner.

The court concluded the commission had “not taken into account or carefully examined the arguments concerning the Lufthansa/Brussels Airlines decision, a change of policy with regard to alliance partners and the existence of competition between Swiss and [Scandinavian]/LOT”. The court therefore annulled the fare commitment regarding the Zurich-Stockholm route.

However, it noted that the fare commitment on the Zurich-Warsaw route should remain, as the contractual relationship between Lufthansa/Swiss and LOT Polish has not changed.

The court also rejected Lufthansa’s claims that the European Commission misused its powers and breached the principle of good administration; “the mere fact that the commission disputed and rejected Lufthansa’s arguments does not in itself prove that the commission was biased with regard to the waiver request.”

A European Commission spokesperson said the authority “took note” of the decision and will “carefully analyse the judgment that the commission did not adequately assess Lufthansa's arguments before deciding on possible next steps."

Lufthansa said it appreciates the General Court’s partial annulment of the European Commission’s decision, and will “review the judgment and consider its ramifications” before thoroughly assessing whether to take any further action.

Counsel to Lufthansa Latham & Watkins Partner Sven Völcker in Brussels

This story was originally published on ALN’s sister publication Global Competition Review.