The Legal Constraints upon Competition in the Airline Industry - Case Study Example

The legal constraints upon competition in the airline industry as illustrated by the BA v Virgin dispute and others. I Introduction The competition laws applicable to the airline industries are generally aimed at protecting competition. In the United States, the applicable law is primarily the Sherman Act. There are however several other loose acts that also constitute its competition laws called anti-trust law and enforced by its Department of Justice. In the United Kingdom jurisdiction, the competition law applicable to the airline industry is the Competition Act of 1998 and because it is part of the European Community, also the European Community Treaty of Amsterdam specifically sections 81 and 82 thereof which treat of prohibited acts and abuse of dominant position, respectively. Since big airlines operate in trans-Atlantic manner, they become subject not only to the competition law of the jurisdiction where they are incorporated but also in others where their acts have effect on. However, different jurisdictions have different application and appreciation of what constitute anti-competition conduct. The reason for this disparity may be the fact that competition laws may be have different forces dominating and affecting their directions. This is evident in the case of the rivalry between the British Airways and the Virgin Atlantic, both incorporated under the UK laws, which long-running competition have brought them to courts of different jurisdictions and were handed contrasting decisions for similar causes of action. II The Competition Law as Applied to the British Airways and Virgin Atlantic Rivalry In 1972, the British European Airways merged with the British Overseas Airways Corporation and became the state-owned British Airways. It was an industry leader even after its privatization in 1987. If faced stiff competition however when in 1991, the Civil Aviation Authority of the United Kingdom recommended the opening of Heathrow Airport to smaller airlines, among which is Virgin Atlantic. In a rather vindictive act, Lord King, chairman of BA stopped its annual contribution of £40,000 to the ruling Conservative Party. Despite this however, BA continued to be the “largest carrier of international passengers serving 150 destinations in 69 countries” (Bridgewater 1998). The 1991 Libel Suit in London. In 1990, despite the global economic downturn and the United States deregulation of air travel, both of which gad a crippling effect on the airline industry, BA managed to sustain significant profits seen as the best in the industry. Its credibility however was tarnished when Virgin Atlantic sued the airline for libel in 1992 in a London court for engaging in dirty tricks for the purpose of eliminating the VA as a strong competitor especially in its most lucrative route which is the UK-US route. The dirty tricks consisted of tapping by BA personnel into the computer system of VA to access the list of passengers and their address and calling these passengers claiming that their flights were cancelled or overbooked and offering them alternative booking in BA. During the course of the case, VA also alleged that BA staff broke into the homes of VA personnel and journalists who were involved in the case and also used a public consultant for the purpose of digging dirt into the past of VA CEO Richard Branson to embarrass him publicly. In the end, BA admitted its guilt and settled the case for £2.5 million and issued a public apology (Thakur 1997). The 1993 Antitrust Case in New York. In the same year, viz., 1993, VA brought another suit against BA this time in the Federal Court of New York. The cause of action this time was antitrust under the Sherman Law on grounds of “predatory foreclosure and the bundling of ticket sales” causing injury on the part of VA for delayed entry in five routes namely San Francisco, Washington DC, Chicago, Los Angeles and New York. The purported cause of the injury was the incentive agreements in the form of discounts and commissions that BA entered into with travel agencies and corporate customers. These incentives were granted to travel agents and consumers once they have achieved certain amount of sales or revenues. VA alleged that these pushed bookers and agents to promote the BA flight over the other airlines. What was more damaging however, according to VA was that the loss that BA suffered as a result of these discounts and incentives in transatlantic routes were recouped by upping its prices in routes on which it had monopoly (Virgin Atlantic Ltd v British Airways Plc, CA 99-9402; Collin 2007). The NY Court however decided, in a summary judgment, in favor of BA on the ground that VA failed to show through evidence that there was restraint of trade under s1 of the Sherman Act nor attempted monopolization of trade under s 2 of the same Act. In the first instance, VA failed to show that BA acted in conjunction with another or other entities to make it fall within the ambit of concerted action under the Monsanto Co v Spray-Rite Serv. Corp, 465 US 752, 761 (1984) which held that under the Sherman Act “independent action is not proscribed.” In addition to the element of concerted action, there was also failure to prove on VA’s part that the incentive agreements of BA have anti-competition effects ultimately resulting in the injuring of consumers. VA’s failure to compete therefore was not enough to qualify BA’s incentive schemes as violation of s 1 of the Sherman Act. In the second instance, VA did not succeed in establishing that BA “has engaged in predatory or anticompetitive conduct with a specific intent to monopolize and a dangerous probability of achieving monopoly power” to satisfy the requirements of s 2 of the Act as held under the Spectrum Sports Inc v McQuillan, 506 US 447, 456 (1993). On the other hand, BA showed evidence that bookings which resulted from the implementation of the incentive schemes with agents and corporate customers did not amount to a significant percentage of its flights. Moreover, VA was not able to substantiate its claim that “the additional flights to British Airways’ schedule were entirely attributable to the use of incentive agreements” (Virgin Atlantic Ltd v British Airways Plc, CA 99-9402). The Virgin/British 1993Case in the European Commission. At about the same that VA initiated a court case against BA in the US, it also lodged a complaint against BA in the European Commission. The complaint focused on the same marketing schemes that BA employed to urge travel agents to sell BA tickets. The incentives which came in the form of rebates were given to travel agents once they were able to sell BA tickets at a certain threshold. Normally, the agents are given commission on the basis of the tickets they sell but the BA incentives scheme called “loyalty rebates” give additional incentives in the event the agents were able to meet certain targeted number of tickets. The rebates came in the form of retroactive discounts for all the tickets purchased conditioned on the meeting of the threshold of sales. VA alleged that these were loyalty-inducing to the injury of all other airlines because agents it pushed travel agents to actively sell BA tickets only to their customers and therefore anti-competitive and has exclusionary effects (Jones 2007; Monti 2007; Shepherd & Wedderburn). The VA succeeded in its European complaint both in the Commission level and at the European Court of Justice. The BA was fined a whopping €6.8 million for offering incentive schemes that can be characterised as “exclusionary” because they fall under the term “loyalty discounts” as defined under the Michelin v Commission, [1983] ECR 3461, [1985] 1 CLMR 282 and the Hoffman-La Roche v Commission, [1979] ECR 461, [1979] 3 CLMR 211. In reaching its decision, the Commission relied on Article 82 (c) of the EC which states that: Article 82. Any abuse by any one or more undertakings of a dominant position within the common market or in a substantial part by it of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States. Such abuse in particular consist in: [........] (c) applying dissimilar conditions to equivalent transactions with other trading partners, thereby placing them at a competitive disadvantage; [............] The Commission identified BA in the dominant position as a purchaser of air travel agency services as evinced in its overall ticket sales share sold by travel agents as between 39 and 46 per cent as opposed to the 10 per cent of its competitors. The Commission therefore ruled the incentive schemes as abusive and discriminatory as they violated s 82 (c) in that they result in different levels of commissions and had the effect of destroying competition among the airlines (Monti 2007). The CFI to which the BA brought the decision of the Commission in British Airways v Commission [2003] ECR 11-5917 likewise found that the incentive schemes of BA were in the nature of “fidelity-building” which it was not able to justify as based on economic consideration (Monti 2007). In 2007, the European Court of Justice dismissed the appeal lodged with it by BA, affirming the abusive character of the incentives scheme as violation of s 82 of the EC law on the ground that they produced exclusionary effects. The exclusionary effect, according to the ECJ, is determinable by considering whether the scheme produces difficulty or impossibility on the part of the competitors of the dominant entity to enter the market or industry and whether the scheme also produces difficulty on the part of customers to choose from among the different competitors in the same industry. It affirmed the CFI findings of exclusionary effect on the basis of the following measures: it was based on individual targets by individual agents; it rewarded retroactively the entire sales for a certain period and not only the sales above the threshold achieved; it would compel BA’s competitors to offer higher rebates to prod agents to change loyalties from BA (Shepherd & Wedderburn). The 2006 Price-Fixing Collusion Investigation in UK and US. In 2007, the Office of Fair Trading and the US Department of Justice rendered a decision against BA for violating competition law and fined it to the tune of £270 million - £121 million by OFT and £148 million ($300 million) by the US DOJ. The case stemmed from an investigation of price-fixing collusion instigated by some BA executives. The VA leaked to the authorities that BA senior executives called up their counterparts at the VA in 2004 and informed them that BA will raise the fuel surcharges on long haul flights. Fuel surcharges was raised six times since 2004 from £5 to £70 and the patterns of raising fuel surcharges during the contested period showed that BA and VA raise their fuel surcharges within matters of days and at almost the same levels. Leaking out impending price change is illegal and constitutes collusion under competition law because it is death knell on competition which is supposed to instigate the lowering of prices to benefit consumers. Although VA, at this instance, was part of the collusion of price-fixing, it gained immunity when it took on the role of a whistleblower (2007, Q&A: BA Price-Fixing Investigation; Barrow et al 2006). III Analysis of the Legal Constraints upon Competition in the Airline Industry As can be seen from the BA versus VA cases since 1991, the applicable law for competitors in the airline industry are its antitrust laws which is primarily the Sherman Act although there are other antitrust laws like the Wilson Tariff Act, the Clayton Act, the Federal Trade Commission Act, and others. In the UK, which is part of the European community, the applicable law is the Competition Act 1998 which reflects Articles 81 and 82 of the Treaty of Amsterdam, in cases where the agreements are applicable only within the UK jurisdiction (Joelson 2006). However, since transatlantic airlines traverse several jurisdictions in the course of their business, they are subject to different competition laws. In the case of BA and VA, for example, which are both incorporated under UK law and which do business all over Europe, the USA, they can be sued in those different jurisdictions for as long as they affect the consumers in the said jurisdictions. A salient point that emerged in the BA and the VA disputes is the resolution of the case of the incentives schemes which BA employed towards travel agents and corporate consumers. This is a significant issue because it highlighted the distinctions of the competition law between the US and the UK and the differences in their appreciation of the same facts. According to author Giorgio Monti, antitrust and competition laws in general are characteristically “open-textured” so that the goals of competition laws in each country can change overtime even without formal amendment. Thus, the best way to comprehend competition laws should not be limited to the examination of legislative and judicial enactments but to discover the forces that are driving it. Competition law are normally driven by three forces, one of which may be dominant than the others resulting in the specific thrust of the law. These forces are: political; economic, and; the institutions (see fig 1). If the political force is dominant, the competition law will be more likely underpinned by public interest concerns and if primarily driven by economic forces control, by economic concerns and lastly if by institutions, the competition law’s main characteristic is its domination by an agency which primarily affects competition cases decisions (Monti 2007). The dominance of certain forces might explain the disparity in the US and UK decisions on the BA case involving incentive schemes. The Commission’s decision, according to Monti, can be read using the dominant forces theory either the EC law on competition, and therefore the UK law since it is largely derived from the latter, is aimed at protecting competition and to this end has institutionalised the Public Policy Aims Structural Approach Politics Economics Competition Law Independent Agencies Decisions by the Government Institutions Figure 1 Influences on Competition Law Source: Monti 11 following prohibitions: entering into agreements that will curtail competition; harming by dominant firms of the competitive process, and; entering into mergers that harm the competitive process. In the BA v VA case brought before the European Commission, the latter’s decision was primarily anchored on the abuse of dominant position principle, a principle that burdens firms which is considered to occupy a substantial position within an industry with the obligation not to do acts which could harm competition and to alter their practises if the latter is potentially harmful to competition (2008). Monti posited that the abuse doctrine is driven by any of the following: the neo-classical approach which seeks to protect the market from dominant firms when the latter diminish output and increase prices; the post-Chicago perspective that seeks to protect the market from dominant firms which harm competitors for the purpose of being able to lessen output and raise prices; the political approach which is to protect market participants from the dominant firms, and; to protect the internal market which is also a political approach (2007). In the BA case, Monti argued that the Commission’s decision was underpinned by a tension between the post-Chicago approach and the economic paradigm standard as evidenced from the rationale of the censure of the loyalty rebates, namely: (1) depriving the travel agents the freedom to select its customers; (2) distorting competition among the agents through discriminatory commissions, and; harming competition in general and ultimately the consumers. The first two reasons are characteristically economic driven as they injure freedom of trade whilst the last one is politically-driven because of the resulting diminution of consumer welfare (Monti 2007). In contrast, the US ruling on the incentives scheme did not find an anti-competitive or anti-trust nature in the said schemes, noting that they instead promoted competition as the rewards were deemed to be “competition on the merit” and as a matter of fact, the same incentives schemes were being practised by several airlines in the US jurisdiction. Thus, the US court explained that the US anti-trust law was crafted precisely to foster competition which fosters consumer welfare and was not intended to protect individual competitors but competitive conduct. V Conclusion Although competition laws are generally crafted to benefit the consumers ultimately, different jurisdictions have different ways of appreciating what constitute anti-competition behavior. This is evident in the BA versus VA case where the latter filed a suit against the latter both in the US and in the UK for employing incentives scheme that allegedly harm its operations. What constituted as harmful to one jurisdiction however did not so constitute as one to the other. The disparity is due perhaps to the fact that different jurisdictions are driven by different forces in their implementation of their competition laws. However competition laws are applied and implemented by the different jurisdictions, the fact remains that these laws provide very vital protections to consumers who may be squeezed in between giant airline firms out to demolish each other. The intervention for example, of the OFT and US DOJ in the price-fixing collusion between BA and VA under the name of competition laws was a very welcome one considering that the surreptitious raising of fuel surcharge fees on top of other taxes on airline fares constituted a very alarming development that was injurious to the airline industry consumers. 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