1. 6 th Annual Conference Moscow, 30 May 2007 1 Unilateral Conduct Working Group Case Study in the Assessment of Dominance British Airways plc v. Commission

2. 6 th Annual Conference Moscow, 30 May 2007 2 Presentation Structure 1.Case history 2.Dominance assessment by COM/CFI –Definition of Dominance –Market share assessment –Other criteria: Network effects Entry barriers Buyer power 3.Issues for Discussion

3. 6 th Annual Conference Moscow, 30 May 2007 3 Case History Commission Decision 2000/74/EC (14 July 1999) (found BA to abuse a dominant position in the U.K. market for air travel agency services). Case T-219/99 British Airways Plc v. Commission, judgment of 17 Dec. 2003 (upheld Commission’s decision). Case C-95/04P British Airways Plc v. Commission, judgment of 15 March 2007 (dominance not appealed) U.S. litigation in the Second Circuit (dominance not addressed)

4. 6 th Annual Conference Moscow, 30 May 2007 4 Definition of Dominance “Position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on a relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately consumers” (ECJ in United Brands, Hoffman-La Roche) BA found to be the dominant purchaser in the U.K. market for air travel agency services BA Travel Agents Purchase agency services Sell Airline Tickets £ Commission Revenue UpstreamDownstream

5. 6 th Annual Conference Moscow, 30 May 2007 5 Market Share Assessment COM: ‘A combination of factors can lead to the conclusion [of dominance] although market share is the most direct indicator.’ BA shares much higher than those of its closest rival, Virgin BA share was over twice the combined share of 4 largest rivals Position of BA had been maintained for several years % of total sales to IATA BSPUK travel agents 1992199319941995199619971998 BA46.345.643.542.740.342.039.7 Virgin2.83.03.74.0 5.85.5 AA-5.47.37.77.63.63.8 BMI3.63.43.23.02.7-- Qantas3.02.73.02.66.43.03.3 KLM2.5----3.85.3

6. 6 th Annual Conference Moscow, 30 May 2007 6 Durability in Market Power CFI: Reduction in BA’s share cannot, by itself, constitute proof that there is no dominant position –Decline in market position not substantial enough to call into question BA’s dominant position –Substantial gap remained between BA and competitors Total Virgin growth: 96% Total BA loss: 14%

7. 6 th Annual Conference Moscow, 30 May 2007 7 Other Criteria: Network Effects Network effects in downstream market for passenger air travel Largest U.K. network, offering significantly more routes to and from the U.K. than any other airline BA holds twice as many slots at LHR than its nearest rival BA operates several times the number of routes served by each of its nearest rivals operating from LGW and LHR “Operation of hub network in the UK allows [BA] to offer many more flights and carry a larger number of passengers than rivals operating point-to-point services…..”.

8. 6 th Annual Conference Moscow, 30 May 2007 8 Other Criteria: Entry Barriers –Legal/regulatory: For example « grandfathering » of slot allocations –Structural: BA has a very powerful negotiating position vis-à-vis the travel agents High hurdle for new entrants: have to pay very high commissions to win business –Strategic: BA created contractual barriers by concluding global and marketing agreements with the most important agents, and implementing its performance award schemes.

9. 6 th Annual Conference Moscow, 30 May 2007 9 Other Criteria: Lack of Buyer Power Agents tied in by contracts; They risk losing their commission if selling tickets from other airlines; No supply side substitutability with other services (such as hotel rooms or charter flights); BA is thus an obligatory business partner! –Supporting evidence: BA in a position in 1998 to Unilaterally impose a reduction of its base travel agent commissions; Extend its new performance reward scheme to all travel agents in the UK.

10. 6 th Annual Conference Moscow, 30 May 2007 10 Some Issues for Discussion Dynamic Considerations –Did the COM fail to consider the impact of sales through other channels (internet/direct telephone) and how this may affect BA’s ability to act independently? Market Share –The a bsolute figures were not overwhelming (40%) –The COM found dominance notwithstanding a net decline in the % of BA’s total sales, while competitors’ shares increased Buyer Power –If travel agents need to offer a range of airlines, why are they dependent on BA? –If travel agents can use supply side substitution by increasing other revenue producing activities, why are they dependent on BA’s business? BA’s Behaviour –If BA was dominant, would it then have invested substantial amounts into improving its services to compete more effectively against other airlines? –While new structure reduced BA’s base commissions, incentives made greater commissions (up to 11%) possible