Collusion Between British Airways and Virgin
The tacit collusion case to be discussed involves the illegal collusion and setting of fuel surcharges to commercial and cargo transatlantic fares between British Airways (BA) and Virgin Atlantic Airways (Virgin). The factors which contributed to its success will be discussed, as well as why, and its implications, of becoming public. To begin with, it would be beneficial to define both collusive behaviour and the nature of the competition involved in the aviation industry.
Collusion is the act of a number of firms within an industry agreeing to set a certain price, output or another parameter and is almost always against the law. This is as they all compete in the given industry, with the setting of prices or outputs done in favour of the companies, and is therefore anti-competitive behaviour, as this moves the outcome away from the market equilibrium. The generated inefficiency is considered illegal by The Office of Fair Trading (OFT) within the UK, who’s mission is to protect consumer welfare whilst ensuring businesses remain competitive and fair (OFT,2011).
A brief overview of the UK aviation industry will help in explaining and justifying certain factors which led to the successful collusion. Aviation is key not only for transportation purposes but for commercial flights, employing around 234,000 staff and contributing £18.4 billion to Gross National Product (GNP). The industry is not only essential for global business and trade, but 75% of all visitors to the UK travel by air and adds a further £14 billion towards GNP (BATA, 2011). The USA and the European Union have signed an ‘open skies agreement’ allowing full access to all routes between the two continents, although is more restrictive to EU airlines (IACA, 2007).
In the specific case of BA and Virgin, oil price rises based on the price of barrel oil as shown in ‘Appendix 1’, created rising fuel costs and uncertainty over future profit levels. Several airlines in the UK and global aviation industry
Collusion is the act of a number of firms within an industry agreeing to set a certain price, output or another parameter and is almost always against the law. This is as they all compete in the given industry, with the setting of prices or outputs done in favour of the companies, and is therefore anti-competitive behaviour, as this moves the outcome away from the market equilibrium. The generated inefficiency is considered illegal by The Office of Fair Trading (OFT) within the UK, who’s mission is to protect consumer welfare whilst ensuring businesses remain competitive and fair (OFT,2011).
A brief overview of the UK aviation industry will help in explaining and justifying certain factors which led to the successful collusion. Aviation is key not only for transportation purposes but for commercial flights, employing around 234,000 staff and contributing £18.4 billion to Gross National Product (GNP). The industry is not only essential for global business and trade, but 75% of all visitors to the UK travel by air and adds a further £14 billion towards GNP (BATA, 2011). The USA and the European Union have signed an ‘open skies agreement’ allowing full access to all routes between the two continents, although is more restrictive to EU airlines (IACA, 2007).
In the specific case of BA and Virgin, oil price rises based on the price of barrel oil as shown in ‘Appendix 1’, created rising fuel costs and uncertainty over future profit levels. Several airlines in the UK and global aviation industry
References: (Source: Mongabay, 2009) Appendix B (Source: OFT, 2006) Appendix C (Sources : BBC, 1993; Europa, 1999)