Kuang-Yu Hu Senior Specialist, the First Department of Fair Trade Commission, Executive Yuan Taiwan
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Determination of Concerted Action by Companies in an Oligopoly Market: The Case of the Punishment Imposed on Domestic Airlines for Their Collective Reduction of Flights Kuang-Yu Hu Senior Specialist, the First Department of Fair Trade Commission, Executive Yuan Taiwan I Origin of Investigation The newspapers reported that passenger rates among the different domestic airlines had declined as a result of increasing domestic airline rates. In an effort to lower operational costs, Far Eastern Air Transport, Uni Air, TransAsia Airways, and Mandarin Airlines on 1 May 2000 reduced the number of their weekly domestic flights by 109 roundtrips (218 flights), or an average of about 16 roundtrips daily. Flight reductions were mainly for the Taipei-Kaohsiung route, and a total of four airline companies forwarded their flight reduction plans. The Fair Trade Commission subsequently took the initiative to investigate whether the said flight reductions were in violation of the Fair Trade Law, which prohibits concerted action among companies. II Background 1. Market Structure Statistics from the Civil Aeronautics Administration (CAA) under the Ministry of Transportation and Communications (MOTC) show that there are currently six domestic airline companies, namely, Far Eastern Air Transport, TransAsia Airways, Uni Air, Mandarin Airlines, U-Land Airlines (its flight discontinued since May 2000), and Daily Air Corp. (non-fixed wing aircraft operator). The four companies involved in the complaint are the largest among the domestic airline companies. Based on the passenger count, in 1999, the four-firm concentration ratio (CR4) is 95.55%1, which is typical of an oligopoly market. 1 Far Eastern Air Transport had the highest market share at 29.7%, followed by Uni Air at 27.8%, TransAsia Airways 23.7%, Mandarin Airlines 14.35%, U-Land Airlines 4.4%, and Daily Air Corp. 0.15%. 1 2. Ticket Price Increase As domestic airlines suffered heavy losses in recent years, the MOTC on 16 December 1999 approved the upper limit of domestic airfares and allowed airline companies to offer 50% discount as the minimum fare. However, the upper limit far exceeded the then prevailing ticket fares, and the increase was in the 5% to 68% range. In addition, since consumers were no longer able to purchase tickets at 40% to 50% discounts from travel agencies, domestic airfares in effect nearly doubled from the consumers’ perspective. 3. Joint Promotion and Flight Reduction Newspapers thereafter reported that the Taipei Aviation Transportation Association planned to call on the domestic airlines to carry out a joint promotion offering free tickets starting 1 May 2000. The Commission believed that the joint promotion campaign would deprive domestic airlines of trade opportunities based on more beneficial promotional campaigns. It would thus be detrimental to market competition and was at risk of violating the Fair Trade Law, which restricts concerted actions. After the Commission issued a press release stating its position, the Association cancelled the joint promotional activity2. To alleviate the financial burden on their operations, however, the airline companies forwarded to the CAA a flight reduction plan, which was implemented on 1 May. III Investigation Process 1. Legal Analysis The case involved the Civil Aviation Law, the Regulations Governing Civil Air Transport, and the Guidelines on the Management of Domestic Airport Time Slots. Investigation showed that the relevant laws and regulations did not stipulate that airline companies may collectively apply for flight reductions. In addition, in accordance with 2 After the media reports, the Commission immediately analyzed the possible market impacts of the joint promotional campaign and, within one week, submitted its report to the Commissioners’ Meeting for discussion. On 26 April 2000 during the 442nd Commissioners’ Meeting, it was determined that if the airline companies proceeded with the joint promotional campaign, such action would be considered in violation of the fair Trade Law. 2 the Guidelines on the Management of Domestic Airport Time Slots and the Regulations Governing the Quota on Aircraft Landing and Take-off in Domestic Airports, if more than 10 percent of the allotted time slot is cancelled within the a quarter, and if quota usage rate is less than 80 percent for three consecutive months, the CAA may reclaim the unused time slots and quota for reallocation. Therefore, drastic flight reductions will lead to loss of time slots and quota, resulting in adverse impact on the long-term operations of an airline company. 2. Visit to the Competent Authority Since the case involved regulation policies in the aviation market, FTC investigators visited CAA, the aviation competent authority, and formally requested in writing for CAA’s comments. The CAA said that flight adjustments carried out by the airline companies in May 2000 were voluntary actions based on the fleet capacities of the individual airline companies and market supply and demand; the CAA did not invite the airline companies for negotiations or moral persuasions. In other words, the CAA clearly stated that they were not involved in the coordination of the airline companies’ flight reduction activities. 3. Investigations on the Airline Companies Involved FTC investigators sent letters to the four airline companies involved requesting their presence at the Commission to explain the reason for flight reductions and whether there was concerted action. The airline companies denied having prior agreement on the flight reduction, and claimed that flight reductions in May were part of the routine flight adjustments. The airline companies claimed that the flight reductions were mainly due to the poor overall demand in the domestic market. They said that although flight reductions were detrimental to the long-term development of an airline company, they were necessary to prevent more losses to the companies. The airline companies said both the CAA and the Taipei Aviation Transportation Association did not convene meetings to discuss issues relating to the flight reductions. In addition, the flight reduction tables that the companies forwarded to the CAA for approval were confidential information and there was no way for the companies involved to know of each other’s flight reduction plan in advance. 4. Investigation at the Taipei Aviation Transportation Association 3 FTC investigators went to the Taipei Aviation Transportation Association for investigation. The Association said that its members began sending letters to the Association by the end of March 20003, hoping that the Association would request the CAA to approve their flight reduction plans and allow them to retain their time slots and flight quota after flight reduction. The Association subsequently drafted a flight reduction table of the different airline companies after inquiring with the airline companies through telephone about the flight reduction plans. The Association then forwarded the table to the CAA, requesting the CAA to approve the flight reduction plans and at the same time allow the airline companies to retain their time slots and flight quota after flight reduction. The Association said that the flight reduction plans were determine by the airline companies on their own, and that the Association was merely forwarding the intentions of the said airline companies. In addition, the Association said that it did not request its member companies to abide by the flight reduction plan. 5. Market Information Analysis To investigate the case, the Commission gathered and compiled information on the domestic airline market, including the domestic aviation network, market demand, passenger rates of the airline routes and their changes, states of operations of the airline companies, market structure, previous flight reduction records of the airline companies, time slots, and how the airline companies used their flight quota after the flight reduction at issue. In addition, investigation showed that Far Eastern Air Transport, Uni Air, TransAsia Airways, and Mandarin Airlines each increased its fares by 29.6%, 43.1%, 35.0%, and 17.6% respectively in May 2000. Although the number of passengers declined during the period covering January to May 2000, revenues of the airline companies were up compared to the same period the previous year4. 3 In the past there were instances where trade associations took on a leading role in concerted actions by enterprises. It was thus necessary for the Commission to further investigate the role taken by the Taipei Aviation Transportation Association in this case. FTC investigator further learned that the airline companies forwarded letters to the Taipei Airlines Association on the following dates: Uni Air, 24 March 2000; TransAsia Airways, 27 March; Mandarin Airliners, 29 March; and Far Eastern Air Transport, 30 March. Since the letters were forwarded within days of one another, it was possible that a prior agreement was in place. 4 Revenues of Far Eastern Air Transport, Uni Air, TransAsia Airways, and Mandarin Airliners in May 2000 were up 14.1%, 11.3%, 10.5%, and 56.9%, respectively, compared to the same period the year previous. 4 IV Determination of Facts For the case at issue, Far Eastern Air Transport, TransAsia Airways, Uni Air, and Mandarin Airlines in May 2000 filed applications to each reduce the number of flights by 40 to 60 per week, for a total of 218 flights. Although the different airline companies had in the past adjusted the number of their flights