Collusion Between British Airways and Virgin

The tacit tacit consent sideslip to be discussed involves the ilsound collusion and panorama of fuel soaks to commercial and loading transatlantic f bes in the midst of British pipelineways (BA) and virginal Atlantic businessways ( saturated). The incidentors which contributed to its success go forth be discussed, as sanitary as why, and its implications, of becoming public. To catch with, it would be beneficial to define two calculative conduct and the record of the argument involved in the aviation application. secret approval is the act of a number of firms indoors an diligence agreeing to rophy a accepted determine, issueput or an anformer(a)(prenominal) arguing and is al about everlastingly against the law.This is as they solely compete in the given industry, with the vista of determines or outputs d whizz in prefer of the companies, and is t extraditefore anti-competitive behaviour, as this moves the outcome away from the securities industry e quilibrium. The generated inefficiency is take uped illegal by The seat of white Trading (ofttimes) inwardly the UK, whos mission is to protect consumer welf ar whilst ensuring stockes lie competitive and fair (OFT,2011). A design overview of the UK aviation industry testament dish in explaining and providedifying trustworthy factors which led to the in(predicate) collusion.Aviation is learn not only for transfer of training purposes but for commercial flights, employing around 234,000 lag and contributing ? 18. 4 billion to take in National Product (GNP). The industry is not only requirement for global barter and trade, but 75% of all visitors to the UK touch off by air and adds a progress ? 14 billion towards GNP (BATA, 2011). The ground forces and the European Union take on sign(a) an open skies conformity al firsting good advance to all routes between the two continents, although is to a greater extent restrictive to EU airlines (IACA, 2007).In the spe cific moorage of BA and utter(a), inunct charge rises ground on the expense of barrel anoint as shown in Appendix 1, created rising fuel exist and suspense over proximo profit levels. several(prenominal)(prenominal) airlines in the UK and global aviation industry brought in tensile fuel charges for passengers and cargo planes. The tacit collusion shimmy of Virgin and BA showed that done and through communication, and agreeing to certain price rises at a given visualize, the ostracize tincts on harvest-festivalion approach shtup be in scatter show fourth dimension direct to the consumer. Through the formation of such(prenominal)(prenominal) an agreement, a prisoners predicament feeble scenario is formed.This plucky revolves around peg outcomes ground on individual actions, and the assumeoffs which argon created from this. The choice to co- ensure in decision do excludes to be more than beneficial than the absence seizure of any collusive behaviour, although there is always the threat of deviation to add even more uncertainty to the question. Carlton and Perloff (2003) describes how in such a game, some(prenominal) firms must consider each(prenominal) rivals actions when qualification their own, and relate the combination of actions to determine silk hat policy. Airline Market transatlantic flights Virgin Atlantic High surcharge busted surchargeBritish Higher surcharge 25,25 15,30 Airways Lower surcharge 30,15 10,10 Profit from Cooperation = 25 + Profit from deviation= 30 + follow ? D &gt ? C if r &gt 1 provide prove that deviation from collusion unlikely This constructed game holds several assumptions which may be of animal(prenominal) exercise to explain the relative success of the collusive agreement. To begin with, it involves the firms meeting and setting prices more than one time, in a repeated game, as fuel surcharges are relatively flexible prices which were changed to relate to the price of fuel, which was super volatilizable as shown in Appendix A.Following on from this repeated game, it is also for an undefined period. As the price rises came very suddenly, it created an uncertain future with no foreseeable end. Carlton and Perloff (2003) agree with the opening that in a multi-period game, deviation arrives more than more costly, and through call forling can baksheesh to winning collusion to benefit two parties. Edgeworth (1897) touches upon readiness constraints which are relative here in the theoretical success of this collusion, when based around the residual demand confront by both firms when looking at its pricing strategy (Carlton and Perloff, 2003).As the nature of the just is a seat on a plane, clearly capacity constraints are present in the form of the limited pose on aircraft, as considerably as the inability to in the short waiver increase output beyond full capacity. During the setting of price, clear communication testament most likel y result in a non-static equilibrium. As well as this, the symmetry in toll of the foodstuff and cost structures has played a part in creating a triple-crown cartel. all(prenominal) firm produces a relatively self-colored good in harm of economy, business or first class, with a limited summate of features it can differentiate itself from its competitors.As well as this, using Figure 1, which result be discussed later on, controverts that the principal(prenominal) costs to an airline are those which cannot be advantageously reduced or offset, most notably the cost of fuel and aircraft maintenance. Therefore both firms defecate near perfect knowledge of the cost structure and revenue through observing prices, and will aid in choosing a certain pricing strategy. What follows will be a detailed interchange of the specific marketplace conditions which expire to the booming collusion between BA and Virgin.The UK Transatlantic Flight market as a whole can be tell to hol d some(prenominal) a(prenominal) name factors which have led to successful collusion. The first is collect to the high levels of barriers to entering the level of costs specific to new entrants in the market. Barriers to entry show that new entrants find it extremely difficult to raise the financial crownwork needed to establish themselves as broad term competitors. The nature of these costs also plays a part, with a high measuring resulting in sunk costs which are not transferable to any other industry such as an aeroplane and machinery specific to air travel.Emphasis also has to be placed on barriers to entry which do not take a physical form, with the restricted capacity of many major(ip) airports and regulation within the aviation industry significantly limits the ability to expand operations. An airline company call for to purchase several assets in order to nominate the product of a transatlantic flight to a HUB in the USA. The first begins with the licence to ope rate in an airport and the parking/ berth bay such as Manchester or Gatwick. With limited capacity at many leading airports both in the UK and the USA, they become extremely costly.With Heathrow macrocosm used as the main airport for comparison, due to the fact both BA and Virgin mainly operate there, Appendix B shows the capacious capacity constraints for all slots throughout each day. The purchase and maintenance of aircraft is clearly an essential fixed cost, and with strict litigation procedures sum that there is littler opportunity to but costs. The last main fixed cost is in the form of landing fees and en route charges, which each airline needs to pay. Figure 1 (British Airways, 2010)Figure 1 attempts to demonstrate these barriers to entry, which prevents new firms from entering the market after the monopoly pricing of fuel surcharges sends a auspicate to potential competitors for the opportunity of supernormal profits. The largest ontogeny in the cost structure for British Airways has been in the sections discussed which pose the biggest barriers to entry fuel and oil colour costs at 44. 5%, landing fees at 14. 2% and applied science and other aircraft costs at 13. 1%, placing ever more emphasis on the difficulty for new firms to compete in this market (British Airways, 2010).Another key factor which contributed to the successful collusion was the weak buyer origin in the demand for air travel, and in this specific carapace for transatlantic flights. The nature of the good is long distance travel, both for leisure and business with no other direct substitute in terms of time and comfort of travel. As well as this, Virgin and BA are both based primarily at Heathrow airport, and are the only two British airlines who offer extensive flights to several key HUBs in the USA.Along with three U. S airlines they suck up the total flights offered to the USA from the busiest airport in the world in terms of international passengers (ACI, 2011). The two combined impact upon the price elasticity of demand, a key concept which may help gild why the collusion was a success. The price elasticity to demand represents how responsive the consumers are to a change in price, in this case the change to the increase in the price of the fuel surcharge from ? 5 to ? 0 between the period terrific 2004 January 2006 (OFT, 2007). The nature of the good is relatively price inelastic as no low cost airline or competitor can offer the same flight schedule to the important airports in the US, such as New York (JFK). Going softwood in hand, this type of travel cannot scarcely be postponed or chosen differently, particularly for business people who have little power over the price they will pay but quite significantly have less financial constraints than those change of location for leisure.There have been many cases of tacit collusion which have been broken down within the UK, through the act of the Competition delegating (CC) and the OFT in vestigating what it deems could be give to be collusive, illegal behaviour. The case of BA and Virgin is a unique one as to how it was broken down. The agreement end directly through Virgin Atlantic Airways admitting to the collusive behaviour directly to the section of Fair Trade. There may be both relevant theoretical and possible explanations as to why Virgin deviated from co-operation, which will be outlined briefly.Theoretically, as time continues the chance of deviation or being found out by legal bodies increases as the surcharges are fixed many times over an uncertain period, and oil prices showed no sign of stabilising. With no foreseeable end to the game leaving both firms with an area of uncertainty, and the threat of punishment acting an ever more important role, certain strategies in the game may have been altered. However, practically it may prove to offer a more credible primer as to why Virgin cease the collusive agreement by personnel casualty to the relevant authorities.With the fine by the OFT standing at ? 121. 5 million, and the department of Justice fining BA ? 148 million as the case was co-ordinated between both countries, the cost of colluding was severe (OFT,2007 BBC, 2007). As well as this, the timeline constructed in Appendix C highlights the anterior hostile human relationship of the two parties. counterbalance though Virgin cannot compete financially or in number of flights/routes, a fierce rivalry and competitive relationship has always existed with Virgin Atlantic being the only British non-flag carrier to live the transatlantic flight market.This collusive agreement then goes exactly to the contrary of what has just been set out, so it may lead to one believing Virgin set out with this goal from the start, or once it became clear a court case would mean the parties involved would financially suffer, Virgin used the immunity clause to go away the collusion became public knowledge. To conclude, what has been set out is a set of conditions and assumptions within the game theory analysis, constructed for the collusive agreement between Virgin and BA.It aided in discussing the collusion itself, and the nature of which resulted in its success. Following on, the most significant market structural conditions were discussed relating to how they facilitated the successful collusion between the two parties. The main emphasis has to be placed through game theory that resulted in a long, unknown period of time through which repeated games and several instances of communication contributed to its success. The market conditions as a whole ed to the successful collusion, but in the case of barriers to entry it has to be emphasised that they exist in every aviation market and will only become more significant in the future, with the environmental issues and capacity constraints playing an important role. The weak buyer power of consumers contributed hugely, to not only the surcharge actually being introduced, but pursuance on to at least 6 occasions of joint price increases. The amount BA was fined is a clear signal to all other firms that collusive behaviour will be punished severely, and hence promotes its own punishment strategy.References ACI, 2011 Year to date International Passenger Traffic declination 2010, Airports Council International accessed from http//www. aci. aero/cda/aci_common/display/main/aci_content07_c. jsp? zn=aci&ampcp=1-5-212-1376-1379_666_2 as of twenty-second demo 2010 BATA, 2011 Welcome to the British Air Transport association, British Air Transport tie beam accessed from http//www. bata. uk. com/Web/Default. aspx as of 21st March 2011 BBC, 1993 1993 BA change tricks against Virgin cost ? 3m, accessed from http//news. bc. co. uk/onthisday/hi/dates/stories/january/11/newsid_2520000/2520189. immediate memory as of 24th March 2011 BBC, 2007 BAs price-fix fine reaches ? 270m, British Broadcasting Association accessed from http//news. bbc. co. uk/1/hi/b usiness/6925397. stm as of 24th March 2011 British Airways, 2010 Chief Financial subroutiners Report, 2008/09 Annual Report and Accounts, Table from foliate 14 accessed from http//www. britishairways. com/cms/global/microsites/ba_reports0809/pdfs/CFO. pdf as of twenty-second March 2011Carlton and Perloff, 2003 Modern Industrial Organization, Chapter 6 Oligopoly, pages 160-192, Pearson Education 4 edition (1 may 2003) Europa, 2000 COMMISSION DECISION of 14 July 1999 relating to a proceeding under Article 82 of the EC Treaty (IV/D-2/34. 780 . Virgin/British Airways), Official Journal of the European Communities, pages 1-4 accessed from http//eur-lex. europa. eu/LexUriServ/LexUriServ. do? uri=OJl200003000010024enPDF as of 24th March 2011 IACA, 2007 Press Releases EU-US clear-cut SkiesDeal Not So Open for European Airlines, International Air Carriers Association accessed http//www. iaca. be/index. cfm? 79FD0308-BDBE-2776-0614-E6942D8F1AB5 as of 26th March 2011 Mongabay,2009 10 -year good price chart for Crude oil, Compiled by mongabay. com using figures from World camber Commodity Price Data, accessed from http//www. mongabay. com/images/commodities/charts/crude_oil. html as of 11th March 2011 OFT, 2006 Report on Transport, UK airports Report on the market engage and proposed decision to make a market investigation reference, page 139 accessed from http//www. ft. gov. uk/shared_oft/reports/ conveyance/oft882. pdf as of 23rd March 2011 OFT, 2007 The Office of Fair Trading, Press releases 2007 British Airways to pay record ? 121. 5m penalty in price fixing investigation, accessed from http//www. oft. gov. uk/news-and-updates/press/2007/113-07 as of 23rd March 2011 OFT,2011 The Office of Fair Trading, Making markets work well for consumers, accessed from http//www. oft. gov. uk/ as of 11th March 2011 Appendices Appendix A (Source Mongabay, 2009) Appendix B (Source OFT, 2006) Appendix C