China Airlines Co., Ltd. & EVA Airways Corp.

Case:

Key Words:

cross-strait direct flight, airfare, Airline Company, China Airlines, EVA Air

Reference:

Fair Trade Commission Decision of March 9, 2011 (the 1009th Commissioners' Meeting), Dispositions Kung Ch'u Tzu No. 100032 and 100033

Industry:

Air Transport (5100)

Relevant Laws:

Subparagraph 6 of Article 19 , and Article 24 of the Fair Trade Law

Summary:

1. On April 7, 2010, the media reported that the cross-strait airfares were overpriced and the prices did not come down in spite of the increased numbers of flights and shortened flight distances. The FTC therefore initiated an ex officio investigation to find out whether the pricing practice of the airlines involved violation of the Fair Trade Law (FTL).
2. Findings of the FTC after investigation:
   (1)According to the plane ticket marketing mechanism of China Airlines Co., Ltd. (hereinafter referred to as China Airlines) and Eva Airways Corporation (hereinafter referred to as EVA Air), the rebate per ticket for ticketing centers (hereinafter referred to as the T/C) for cross-strait direct or transfer flights was merely NT$150, considerably lower than the rates for other routes, normally between NT$600 and NT$700. This rebate is the maximum room allowed for price competition among travel agencies when selling plane tickets. The two airline companies would call up the T/C to understand the ticket sales conditions, especially whether travel agents were selling tickets at prices beyond the rebate would allow. Eva Airways even signed with the T/C the "Memorandum of Understanding of Sales of Eva Airways Tickets by T/C in Taiwan" in which it was stipulated that the T/C were required to sell tickets according to the busy and slow season rates of each air route defined by the company and any violations could lead to termination or suspension of the ticketing agent status, depending on the gravity. The said practice not only greatly impair the possibility for price competition among travel agencies when selling cross-strait air tickets but also facilitated the airline companies in the upstream to perform price supervision on one another and thus allowed them to avoid price war and indirectly helped maintain the price rigidity of the agents (the T/C) in the downstream. Judging from the intention of the said conduct of China Airlines and Eva Air – the two companies, China Airlines 29.2% and Eva Airways 20.6%, together accounting for almost 50% of the cross-strait direct flight market – as well as the highly limited supply-demand adjustment function of the cross-strait air transportation market, the FTC considered the two companies' use of their dominant status on the market to set the said ticketing rebate per ticket for travel agencies for both direct and transfer cross-strait flights at a rate considerably lower than that for any other route an unjustifiable restriction on the business activities of travel agencies and an act of restriction on market competition in violation of Subparagraph 6 of Article 19 of the FTL.
   (2)Airfares vary greatly with the ticket type, ticket class, and its valid period, with the Y Class being the most expensive among economy seats. The findings of the FTC's investigation showed that after China Airlines and Eva Air lowered the airfares in April 2010, the number of Y Class seats apparently increased compared to cheaper economy class seats. As a result, the average total prices of tickets issued by the T/C were either equivalent to or only slightly lower than in March and April 2010 before the airfare decreases took place. Since travel agents and consumers could only make reservations through online booking systems, information asymmetry obviously existed between airline companies and consumers. Despite their airfare decrease announcements, China Airlines and Eva Air readjusted the ratio of economy class seats in their planes as a response to the price decrease. Meanwhile, consumers thought the prices had really come down and thus planned their trips. However, due to the said seat ratio adjustment, they found it difficult to obtain tickets for lower-price classes after the price decrease. On the contrary, they had no choice but to make reservations for seats of more expensive classes because the market supply and demand was highly limited. What the two airlines did was deceptive and obviously their conducts are sufficient to affect the trading order of the cross-strait air transportation market in violation of Article 24 of the FTL.
3. Grounds for disposition:
   (1)China Airlines and EVA Air stipulated in their T/C ticketing rebate regulations the rebate rate for T/C for cross-strait direct and transfer air tickets considerably lower than that for any other international route. It was an unjustifiable restriction on the business activities of their trading counterparts and an act of competition restriction in violation of Subparagraph 6 of Article 19. They announced price decreases starting in April 2010 but changed the ratio of seats of different economy classes in their planes and therefore the price decreases did not achieve the desired goal. It was deceptive and obviously unfair conduct able to affect trading order in violation of Article 24 of the FTL.
   (2)In addition to applying the first section of Article 41 of the FTL and ordering the two companies to immediately cease the unlawful act, the FTC also imposed on China Airlines an administrative fine of NT$10,000,000 and on EVA Air NT$7,000,000 for their violation of Subparagraph 6 of Article 19 of the FTL as well as an administrative fine of NT$10,000,000 on China Airlines and NT$5,000,000 on EVA Air for their violation of Article 24 of the FTL. In total, China Airlines was fined NT$20,000,000 and EVA Air NT$12,000,000. The aggregate of the fines was NT$32,000,000.

Appendix:
China Airlines Co., Ltd.'s Uniform Invoice Number: 11145904
EVA Airways Corp.'s Uniform Invoice Number: 23225229

Summarized by: Shen, Li-Wei; Supervised by: Liou, Chi-Jung