Deutsche Post must repay Euro 572 million used to subsidise price undercutting in commercial parcel services

IP/02/890

Brussels, 19 June 2002

Deutsche Post must repay Euro 572 million used to subsidise price undercutting in commercial parcel services

After a careful analysis, the European Commission has concluded that Deutsche Post AG (DPAG) has used € 572 million, funds it received from the State to finance its public service mission, to finance an aggressive pricing policy intended to undercut private rivals in the parcel sector between 1994 and 1998. This behaviour breaches the key principle according to which companies that receive State funding for services of general interest cannot use these resources to subsidise activities open to competition. The German government has two months to inform the Commission of how it intends to recover the money unlawfully used by Deutsche Post in the commercial sector.

"Today's decision is a further reminder that beneficiaries of State support for public interest services must not use this support to finance sectors open to competition. A strict enforcement of this rule ensures that consumers get a healthy level of competition with a diversified offer and competitive prices and creates a level playing field for businesses which guarantees lasting jobs and economic growth", said Competition Commissioner Mario Monti.

In 1994 United Parcel Service (UPS), a private operator specialising in door-to-door parcel services for business customers lodged a complaint accusing DPAG of selling its own parcel delivery service below cost. In 1997, the German association of private parcel undertakings, BIEK, joined in this complaint stating that, without the State support, DPAG would not have been able to survive in the commercial parcels sector.

As opposed to the general letter mail service, parcel deliveries in Germany are open to competition. Since the 1970s private undertakings have entered this market, specialising on the so-called « door-to-door » services for business customers. Since then, a number of private parcel operators has emerged, creating new job opportunities and, for the first time, a choice of suppliers for businesses and consumers resulting in improved services and price competition. By the 1990s the market saw the emergence of faster and safer parcel delivery services exemplified by the 24-hour door-to-door services offered by a variety of private operators. Besides Deutsche Post and UPS there are many other suppliers of door-to-door parcel services, such as Deutscher Paket Dienst, German Parcel, Hermes Versand Service.

For Deutsche Post this new competitive environment brought about new challenges. Initially constrained by regulatory control in Germany over its parcel prices, Deutsche Post in 1994 was granted the commercial freedom to offer rebates to door-to-door parcel customers .

Door-to-door parcel services are provided to business customers which send large volumes and, therefore, prefer to have the parcels collected by DPAG directly at their premises, rather than carry those volumes to the local postal counter for processing. DPAG only offers special prices to customers who do not use the postal counter. Users of the traditional "over-the-counter" service pay the generally applicable uniform tariff.

Between 1994 through 1998, DPAG engaged in an aggressive rebate policy with respect to commercial door-to-door parcel services. Throughout this period, certain business customers paid significantly less than the uniform tariff deemed affordable to all other users. This generated total losses of € 572 million in the parcel delivery business between 1994 and 1998, which were covered by State funding DPAG received for the discharge of its public service mission. The situation was corrected in 1999, when revenues covered costs in the door-to-door parcel delivery business.

Following an antitrust case under Article 82 of the EU treaty (abuse of dominant position) also triggered by a UPS complaint, Deutsche Post last year decided to create a separate business parcel company to avoid this situation of cross-subsidisation arising again.

It should be noted that Deutsche Post's behaviour cannot be explained by regulatory constraints or by public service obligations. The public service mission did not oblige DPAG to favour any door-to-door customers with prices significantly below the affordable and uniform tariff. In consequence, there is no link between the losses incurred due to the rebate policy and the public mission entrusted on DPAG.

Although not causally linked to the public service mission, the €572 million loss was ultimately financed through State resources, which was unlawful. This distorted the competitive situation in the parcel delivery market to the detriment of the private operators. In order to remedy this distortion, the German authorities have to recover the amount of State support used to undercut parcel competitors.

The German government has two months to inform the Commission of how it intends to recover the money unlawfully used by Deutsche Post in the commercial sector.

Application of state aid rules in the postal sector past and present

This is not the first time Commission has conducted a state aid investigation in the postal services sector. The Commission in March this year, cleared subsidies to the Italian post office, Poste Italiane, but the case was completely different. The Italian case was not about the subsidisation of activities open to competition through monopoly profits, but about the financing of the public service mission itself.

Furthermore, the investigation in the Italian post case did not reveal the existence of an aggressive rebate strategy in a postal market open to competition. Contrary to the present case, Poste Italiane was neither present in any postal markets open to competition to any significant extent nor were there any competitors that alleged that their competitive opportunities were hindered by a particular pricing policy pursued by Poste Italiane.

The Commission in 1997 also took the view that no state aid was involved in the relationship between the French Post Office, La Poste, and its express courier subsidiary Chronopost. But this decision was overturned by the Court of First Instance in December 2000 on the grounds that the Commission failed to verify whether La Poste, in providing logistical assistance to Chronopost, received remuneration that an undertaking operating under normal market conditions would have charged for this logistical assistance. According to the Court of First Instance, the Commission now needs to verify whether La Poste, by virtue of its monopoly, granted logistical services to Chronopost at a lower price than an undertaking operating under normal market conditions.

AP WORLDSTREAM 19th June 2002
EU ORDERS DEUTSCHE POST TO REPAY HEFTY SUM DEEMED TO BE ILLEGAL STATE AID
BRUSSELS, Belgium (AP) _ European Union regulators on Wednesday ordered German mail carrier Deutsche Post to pay 572 million euro (dlrs 540 million) for offering door-to-door parcel delivery services at below-cost during the 1990s.

The German government, which retains a majority stake in Deutsche Post, has two months to notify the European Commission how it intends to recover the money, commission spokesman Michael Tscherny said.

Between 1994 and 1998, Deutsche Post was offering the door-to-door service at "dumping prices," undercutting private competitors and racking up "substantial losses," Tscherny said.

After a three-year probe, regulators concluded that Deutsche Post was covering the deficit _ put at 572 million euro _ either with revenue from areas where it still has a monopoly, such as letter deliveries, or other state resources.

"Today's decision is a further reminder that beneficiaries of state support for public interest services must not use this support to finance sectors open to competition," EU Competition Commissioner Mario Monti said in a statement.

The probe was sparked by complaints from competitors, including U.S.-based United Parcel Service.

Tscherny said it was up to Berlin to propose how it intended to recover the amount deemed to be illegal state aid. He declined to comment on suggestions Deutsche Post might propose cutting stamp prices.

Deutsche Post began an ambitious effort a decade ago to expand into the express mail and parcel business, building dozens of ultramodern parcel centers in Germany and acquiring dozens of delivery companies around Europe, including DHL International.

In a related case, EU antitrust regulators fined Deutsche Post 24 million euro in March 2001 for abusing its dominant position in Germany by offering special rates to companies in exchange for sending all parcels of a certain size with them, and shipping packages for special customers at below cost prices.

Deutsche Post agreed then to set up a new company to handle business parcel operations to avoid cross-subsidization from monopoly areas.