British Airways' 14-year long wrangle with Virgin and the European Commission ended yesterday, when Europe's highest court confirmed that the Commission was right in fining BA EUR6.8m. For BA this comes at an inopportune moment, as it is currently under investigation by both the US Federal Trade Commission and the EU Commission for alleged breaches of anti-cartel provisions.
This particular dispute arose from a performance bonus offered by BA to travel agents over and above their regular commissions. The bonus system had the effect of boosting BA sales at the expense of Virgin, the then new entrant.
Virgin complained to the Commission that this discount structure kept Virgin from expanding in the market. The Commission agreed and fined BA for the breach of competition law. This decision had already been upheld by the European Court of First Instance and it was against this judgment that BA brought this latest and final appeal to the European Court of Justice. The court dismissed BA's appeal on all counts, finding that BA's claims were largely 'inadmissible' or 'unfounded'.
This is not only good news for smaller airlines are trying to target new markets or new routes, dominated by one or two incumbents. More importantly, the ruling has wider application beyond the airline industry. It is also good news for any small player faced by a dominant company that is using its discount structure to flex its muscles.
While companies are largely free on how they set their prices and discounts, the ruling confirms the limitations that companies are subjected to, once they become dominant. This happens, broadly speaking, when a companies reaches a market share of around 40%. If a dominant player offers a rebate that might exclude other players from the market and if that dominant company cannot point to an objective economic justification for the rebate, then the rebate will be illegal under the competition rules.
The range of what amounts to an objective economic justification is severely limited. In essence, the dominant player has to show that the foreclosure of the competitor is outweighed by benefits to customers, typically through cheaper prices.
For companies with a large market share, this creates a fine line between responding to price competition from smaller competitors and thereby enhancing price competition and forcing them out of the market through particular pricing structures. If they end up on the wrong side, they could, like BA, be fined either by the Commission or by the UK's Office of Fair Trading. Even if the competition authorities do not pursue the case, competitors who have been forced or kept out of a market can sue for damages in the courts.
The judgment also throws a spanner into current proposals to reform the abuse of dominance rules. While the Commission and the OFT are keen to allow for a broader range of economic justifications, the judgment leaves only very little scope for a fundamental reform in the absence of changes to the Treaty itself.
John Schmidt is a partner specialising in competition law with the commercial law firm Shepherd and Wedderburn.