UK: The Office of Fair Trading (“OFT”) has decided to take no further action in its Competition Act 1998 investigation of Flybe for alleged predatory pricing on the Gatwick-Newquay route, concluding that there is insufficient evidence of predatory conduct. This was based on various factors, including findings that Flybe’s losses on the route were not out of the ordinary allowing for the fact that initial losses in the early phases on a route were normal practice for an airline. Moreover the agreed purchase of the complainant and alleged target by another airline were taken to indicate an absence of barriers to entry.
In February 2009, Flybe entered the London Gatwick – Newquay route in competition with Air South West. Air South West complained to the OFT that Flybe’s conduct was predatory, and that Flybe intended to eliminate it from the route, with the wider intention of forcing Air South West to close, thus eliminating almost all of Flybe’s competition in Devon and Cornwall. The OFT opened an investigation under Chapter II of the Competition Act 1998/Article 102 for alleged abuse of a dominant position.
The OFT concluded that Flybe was not dominant on the Gatwick – Newquay route. At the time of the alleged abuse, Flybe had only recently entered the market in competition with Air South West. The fact of Flybe’s entry itself indicated the possibility of market entry as a constraint on the exercise of market power.
The OFT also investigated a theory that Flybe might be dominant on routes from Exeter Airport, where Flybe is based. It found that Flybe was dominant on the routes to Jersey and to Guernsey.
Links between dominated markets and market on which alleged abuse occurred.
The OFT considered whether Flybe’s conduct in entering the Gatwick – Newquay route was abusive, taking into account the finding that it was dominant only in relation to other routes.
The OFT considered the proximity of the markets on which they found dominance and the market in which abuse was alleged. The OFT, quoting the ECJ in Tetra Pak II, stated that “special circumstances” would be required to engage Article 102 in cases of abuse in related markets. The OFT’s theory was that there could be an abuse of a dominant position where conduct on a market distinct from the dominated market could have an effect on the distinct market, provided that there were sufficiently proximate links between the markets in question. The OFT found that those links were not sufficiently strong.
OFT theory of harm
The OFT considered whether Air South West’s exit from the market would strengthen Flybe’s dominant position in relation to the routes at Exeter Airport. The OFT’s view was that there was a plausible rationale for Flybe to attempt to eliminate Air South West. The OFT examined whether Flybe was capable of eliminating Air South West. The OFT considered that Flybe could potentially undermine Air South West but also found that Flybe might have launched the route regardless of the effect it would have had on Air South West.
Barriers to entry
Air South West was put up for sale in May 2010 and its sale to Eastern Airways was announced in September 2010. The OFT considered that the proposed sale and apparent continuation of services suggested that there were no particularly strong barriers to entry that would prevent another airline entering and imposing a constraint on Flybe.
The OFT found that Flybe’s anticipated losses in the first year of operation of the route were not exceptional, and that initial losses were normal commercial practice for an airline. These supported a finding that Flybe had an objective justification in launching the route. The OFT was not convinced that efficiency gains could all be attributed to Flybe.
The OFT therefore concluded that it did not have sufficient evidence that Flybe’s conduct was a departure from normal competition, or that its conduct was intended to be predatory.
This case was the first fully-reasoned airline predation decision by the OFT. The 2007 investigation into BA’s alleged predation on the Edinburgh – London City route was closed prior to a full decision, partly on grounds of priority.
The Flybe case is also unusual in examining predation in relation to market entry, in contrast to the more usual scenario or predation to protect the position of an incumbent.
Source: OFT decision in Flybe Limited: Alleged Abuse of a Dominant Position; http://www.oft.gov.uk/OFTwork/competition-act-and-cartels/ca98/decisions/flybe