Price Fixing: Curtailing Air Cartel

Many airlines see de-cartelisation as the shortest path to ruin. But recent experience has shown how hollow the opposition to air competition really is, writes WOLE SHADARE

 

Unconvincing

The past weeks have seen airline operators try to make passengers believe that the N50,000 base fare for a one-hour trip was arrived at by them independently without colluding to fix fares. They denied ever holding a meeting to determine what airfare should be

Not many were convinced. They used all manner of words such as ‘collusion’ ‘cartel’ and other expletives to describe the action of the carriers. They were not also convinced because the new fare regime took place almost the same day and almost at the same time.

Consumers’ protections

The action further brought to the fore the insistence of having a strong aviation regulatory body and other bodies to protect consumers and not to give powers to a collection of operators to take advantage of the situation to fix prices, a situation that has the tendency to kill competition and stifle the ability to allow market forces determine the price of goods and services.

The Nigerian Civil Aviation Authority (NCAA) may have gone to sleep by allowing airlines to hide under deregulation excuses to form a new cartel in the aviation industry.

There is no reason, however, why NCAA could not demand that every carrier set its price independently even in a deregulated market.

Agreed that the airline industry in Nigeria, like many others across the world, is deregulated, it makes sense to have a body under the law to checkmate actions that are not only predatory but one that makes a mockery of regulations.

Irukera

 

FCCPC rises to the occasion

While NCAA may have allegedly gone to sleep on calling the airlines to order over glaring cases of price-fixing, the Federal Competition and Consumer Protection Commission (FCCPC) has indeed attributed the action of the carriers to price-fixing, saying detailed investigations by the Commission showed glaringly that the airlines did so.

Executive Vice Chairman/Chief Executive FCCPC, Mr. Babatunde Irukera, in a statement entitled: “Coordinated increase in airfares by certain scheduled domestic airline operators,” made available to New Telegraph, said FCCPA prohibited conduct or any coordination between competitors, including on the platform of trade associations.

Consequently, the Commission has asked all the airlines that colluded to raise airfares by 100 percent to, in the interim, find urgent corrective actions required to restore free-market forces

In a letter sent to Air Peace and other airlines and sighted by our correspondent, the Commission urged them to comply in line with powers vested with it. It stated that such actions by the carriers had materially distorted the domestic aviation market.

According to Irukera, “specifically, Section 107 (1)(a) forbids competitors from fixing prices and Section 108 prohibits any conspiracy, combination, agreement, or arrangement between competitors in any manner that unduly restrains or injures competition.”

Right infringement

He further stated that coordination in increasing prices (otherwise known as a cartel) was an unambiguous infringement of FCCPA, stressing that the current and prevailing Nigerian Civil Aviation Regulations (Air Transport Economic Regulations) in regulation 18.15.2 (i) and (iii) expressly prohibits airlines from engaging in any contract, arrangement, understanding, conspiracy or combination in restraint of competition, which includes directly or indirectly fixing a charge, fee, rate, fare or tariff and any collusive action.

 

According to him, “the FCCPA, Civil Aviation Act and implementing regulations of both legislations respect the right and prerogative of airlines (as other businesses) to set their fares independently subject to, and in accordance with prevailing law and applicable processes. However, prevailing law expressly prohibits coordination, agreement or cooperation between competitors in setting fares.”

Before now, Nigerian carriers have always had difficulty agreeing on a common fare policy for many of the routes, but they have generally managed to compromise, leaving travelers to face a uniform fare structure.

Travelers may be bewildered by the price and service choices, but the competition had worked to fill empty seats and lower fares.

Celebration, however, is premature as what they tried to gain as a result of a 100 percent hike in fares occasioned by the high cost of operations is leading to fewer people taking to air travel as many airlines find it difficult to fill seats.

Cartel agreements continue to dominate fares on most other international routes as well. That is why rate changes, now contemplated by the American Civil Aeronautics Board to bar cartel pricing altogether. Under the United States antitrust laws, price agreements among airlines that serve the country are legal only when the board approves. Low‐fare packages have opened travel opportunities to millions. And by filling planes that used to depart half empty, the discounts have raised profits.

Is the airline industry an oligopoly?

An oligopoly can introduce complications for consumers in a number of ways. For one, a smaller number of firms (less competition) means that firms can raise prices more easily without the threat of losing a large number of customers. In addition, although new entrants have greater potential gains from entering a less-competitive market, it can be difficult to enter an oligopolistic industry because of high barriers to entry.

Although a healthy level of competition is important to maintain the best services for the lowest possible prices, competition does not always ensure the stability of the industry. Airlines have high fixed costs, which are costs that do not vary with the level of output in the short run. For airlines, fixed costs include buying and maintaining aircraft fleets.

Conversely, variable costs fluctuate with the level of output. For airlines, these costs include fuel and salaries. Variable costs tend to be relatively low, although they can be volatile (e.g., fuel prices).

Stakeholders said firms with a combination of high fixed costs and relatively low variable costs often attempt to spread their fixed costs across many units of output (e.g., airline tickets). For airlines, this combination they said creates economic incentives to grow very large.

Economists explain this combination of factors as economies of scale and it often results in a handful of very large companies dominating an industry.

 

Aftermath of deregulation

The airline industry has undergone a number of major shifts, starting with the deregulation of the industry in the 1980s.

After deregulation, competition pushed fares so low that, for many airlines, only variable costs were covered. Airlines won’t typically lower prices below variable costs because then it would be cheaper for them to not fly at all. But keep in mind that covering only variable costs means that fixed costs haven’t been accounted for. After deregulation, many airlines weren’t covering the full cost of running the company.

Last line

It is possible that another structural shift could cause the airline industry to look very different from the way it looks today.

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