Domestic airlines collectively reduced flights in May 2000 in violation of the Fair Trade Law
Case:
Domestic airlines collectively reduced flights in May 2000 in violation of the Fair Trade Law
Key Words:
domestic airlines, reduction of flights collectively, uniform acts, time slots
Reference:
Fair Trade Commission Decision of December 14, 2000 (the 475th Commissioners' Meeting); Disposition (90) Kung Ch'u Tzu No. 1
Industry:
civil aviation transportation industry (6131)
Relevant Laws:
Summary:
1. According to media reports, the number of passengers who flying with domestic airlines dropped sharply after domestic airfares were raised. To lower their operating costs, domestic airlines cut flights on 1 May 2000. Having made inquiries with the Civil Aeronautics Administration, MOTC ("CAA"), the Fair Trade Commission (the Commission) learned that 109 flights (218 departures) had been cut, approximately 16 flights per day. Most of flights be cut belong to the Taipei-Kaohsiung route. A total of four domestic airlines - Far Eastern, Trans Asia, UNI and Mandarin Airlines - submitted flight reduction plans. The CAA received a letter from the Taipei Aviation Transportation Association asking the CAA to take note of a [alleged] drop in the number of passengers and agreeing to the airlines' flight reduction plan. The Commission then investigated under its ex officio powers, seeking to discover whether the airlines had violated the Fair Trade Law (the Law) by reducing flights 2. According to the investigation, the Commission found that in early April 2000 Far Eastern, Trans Asia, UNI and Mandarin Airlines submitted flight schedules for May 2000 and flight adjustment plans to the CAA. Starting from 1 May 2000, Far Eastern cut 56 flights per week, respectively with Trans Asia 68 flights, UNI 56 flights, and Mandarin Airlines 40 flights. The total flight cut was 220 flights per week. Most of the cut flights were on the Taipei-Kaohsiung route to which 180 flights were cut. In view of past flight cut of the airlines the Commission found that, although the disposed parties ever reduced flights in the past, the reduction of this occasion was relatively large, particularly on the Taipei-Kaohsiung route. In the past, these airlines had seldom reduced more than ten flights on this route unless ordered to do so by the CAA. Thus, the flight reduction on this occasion was uniform in terms of both timing and scale. The Commission also learned that at the end of March 2000 each of the airlines sent a letter to the Taipei Aviation Transportation Association asking the Association to seek approval from the CAA on the airlines' behalf for their flexible flight reduction plans on domestic air routes. The letter, accompanied with a chart of per week flight cut by each airline, also asked the CAA to permit the airlines to retain the number of flights that they had cut and the time slots for those flights. The Commission also learned that before it sent the letter to the CAA, the Association had made inquiries with the airlines regarding flight reductions. The Association then made the flight reduction chart based on the answers received from the airlines. Furthermore, it was discovered that the Association sent its letter to the CAA before some of the airlines had sent letters to the Association asking the Association to act on their behalf. It was therefore clear that before they applied for flight reductions to the CAA, the airlines had indirectly communicated their business strategies to one another through the Association. Under the current regulatory regime and market conditions, domestic airlines cannot easily obtain time slots and flights on domestic routes. If an airline reduces its flights beyond a certain extent, it will bear the risk of having its flights and time slots taken back by the CAA. If another airline then obtains those flights and time slots, the airline reducing its flights will find its long-term operational basis and competitive position greatly degraded. However, if the airlines come to a meeting of the minds and reduce flights by an identical or similar number, no degradation of operational bases or competitive positions will occur. On the contrary, by adjusting market demand through uniform flight reductions, the airlines can maintain high airfares, reduce fixed cost expenditures, and mobilize idle assets. Consequently, when an individual airline reduces flights on a large scale unilaterally, it does so at great cost to itself. Whereas when the airlines take concerted action to reduce flights, th ey reduce their costs or even advance their interests. After reducing flights on a large scale in May 2000, the disposed parties were in fact on the verge of having their flights and time slots taken back by the CAA, particularly those on the Taipei-Kaohsiung route. Given that the disposed parties were nonetheless willing to ignore past market conditions and taking an enormous risk by uniformly reducing flights demonstrates that the airlines had reached an earlier consensus. Although the airlines claimed that they reduced flights because market demanded so, the Commission found that after the changes in the overall market environment in March 2000 neither the number of passengers nor the average number of filled seats declined. In fact, with two fare hikes in recent years, the rise of ticket prices was sufficient to offset the decline in the number of passengers and even to create revenue growth. Consequently, there is no reasonable economic explanation to support the argument that the decision to reduce flights was an independent and necessary one. If markedly fewer passengers fly in May and the airlines therefore reduced flights, one might be able to see a convincing economic rationale for the flight reduction. After reviewing passenger and flight figures for the past five years however, the Commission failed to find any such drop in passenger numbers or a corresponding reduction in the number of flights. The Commission also noted that the airlines had chosen to keep ai rfares at the upper end of the range set by the CAA and had even planned promotional activities through the offices of the Taipei Aviation Transportation Association to stabilize market demand and ticket prices. These efforts combined with the letters written by the airline to the Association asking the Association to request that the CAA allow them to retain the flights that they had reduced make it clear that the flight reductions constituted concerted action. 3. In sum, Far Eastern, Trans Asia, UNI Airways and Mandarin Airlines, who fully understood that large-scale flight reductions could lead to their losing flights and time slots, applied to the Taipei Aviation Transportation Association and other means to reach a consensus of agreeing to restrict the supply of domestic air transportation services. As a result, these four airlines uniformly cut flights in May 2000. However, they also sought to protect their interests by applying through the Association to the CAA for permitting them to retain the flights that they had cut. By cutting flights uniformly, the airlines fixed up ticket prices or obtained other economic gains. After considering the overall effects of the May 2000 flight reductions, the absence of any plausible economic explanation, and the fact that the disposed parties control 100 percent of the market in question, the Commission found that the concerted action had an impact on market supply and demand in violation of Article 14 of the La w. Pursuant to Article 41 of the Law, the Commission imposed fines of NT$ 3 million on Far Eastern and Trans Asia and NT$ 2 million on UNI Airways and Mandarin Airlines. Appendix: Far Eastern Air Transport Corp.'s Uniform Invoice Number: 03522003 Trans Asia Airway's Uniform Invoice Number: 11719802 UNI Airways Corp.'s Uniform Invoice Number: 22958771 Mandarin Airlines Corp.'s Uniform Invoice Number: 23988865 Summarized by Chi-Jung Liu; Supervised by Kuang-Yu Hu