Corporate Strategy and Competition Law
Globally, the air hoses industry grew by 6.8 % in 2005, making a entire value of $ 319 billion, and is forecast to hold a entire value of $ 475 billion by 2010, a entire addition of about 50 % since 2005. Not merely is the industry turning in value, but in rider Numberss excessively, with about 2.5 billion riders winging in 2005, a twelvemonth on twelvemonth addition of 7.7 % , and with 3.25 billion riders predicted yearly by 2010. Despite the bead in rider figure from 2001-2003, caused by terrorist act and uncertainness in the planetary economic system, the industry still experienced a compound one-year growing rate of 2.6 % in value footings and 5.5 % in rider footings from 2001-2005 ( Datamonitor Global, 2006 ) . The anticipation of 50 % growing from 2006-2010 represents an even higher CAGR of 8.3 % , demoing that the air hose industry worldwide is turning stronger on the dorsum of a strong planetary economic system, enlargement at major universe airdromes, and technological progresss in fuel efficiency and scopes.
However, the air hose industry can non needfully be viewed as a individual market covering the full Earth, with different companies offering different paths ; and with variable degrees of control over the landing slots at the major airdromes. As such, the “Notice on the Definition of Relevant Market for the Purposes of Community Competition Law, EC Communication 97/C 372/03” ( European Commission, 1997 ) will be used in this piece as the footing for spliting the planetary market into its relevant sections. British Airways’ competitory place in each market will so be assessed, utilizing Porter’s ( 1980, 1985 ) approaches to competitory scheme and competitory advantage. A relevant corporate expansive and/or defensive scheme for British Air passages to prosecute in each of these markets will so be considered, and discussed. The impacts of competition jurisprudence on each of these suggested schemes will be considered and discussed.
The European Commission’s definition of the relevant geographic market, which is the definition used in all European competition and anti-trust ordinance instances, was originally influenced by the United Brands instance: instance 27/76, ECR 1978 ( European Commission, 1997 ) . The instance of United Brands versus the EC is seen as a cardinal case in point in the competition and anti-trust Torahs of the Commission, as it covers the bulk of cardinal issues. The instance addresses the definition of a relevant market ; the construct of a dominant, or monopolistic, place ; and assorted other possible classs of market maltreatments which are defined by Article # 82 of the European Treaty.
The United Brands instance was brought approximately when the European Commission claimed that the suspect held a dominant place in the importation of bananas from Latin America, and that the company was mistreating this place. United Brands was the major importer of bananas from Central and South America, selling them in majority to assorted distributers and maturing agents through the ‘Chiquita’ trade name. The company’s selected administering agents bought the green bananas in majority and, one time they had been ripened in particular processing workss, distributed them to retail merchants across the European Union. Normally United Brands distributed the bananas to a selected distributer or distributers in each state, taking advantage of the agents’ local market cognition. ( Reckon, LLP, 2007 )
In the initial instance, in 1975, the European Commission decided that United Brands had infringed the so Article # 86, which became known as Article # 82 in ulterior old ages, by puting prejudiced monetary values for different providers ; declining to provide to some providers ; and working their place as the dominant provider in the market. However, United Brands appealed this determination to the European Courts ; ab initio claiming that although the company was the major provider from Latin America, it was non dominant within the full fruit importing market in the EU. United Brands besides filed a 2nd defense mechanism, claiming that even if it could be seen as a dominant provider, it was non mistreating its market place. The European Court decided that both statements had virtue, nevertheless finally it upheld the Commission’s findings on United Brand’s laterality of the market, and on the company utilizing this laterality to repair monetary values and pull strings its supply. The Court overruled the Commission’s determination that United Brands was guilty of ‘exploitative abuse’ on the evidences of ‘lack of concluding and analysis.’ ( Reckon, LLP, 2007 )
The European Commission took advantage of this opinion to set up its ain guidelines on market relevancy and maltreatment ; with the United Brands instance jurisprudence as its case in point. In 1997, the EC published the “Notice on the Definition of Relevant Market for the Purposes of Community Competition Law ; EC Communication 97/C 372/03” , which are now accepted as the primary guidelines for specifying relevant markets, together with competitory and dominant places within these markets ( European Commission, 1997 ) . This Notice has now become a basis of Commission competition and anti-trust jurisprudence.
Within this Notice, the European Commission recognises that “firms are capable to three beginnings of competitory constrains: demand replaceability, supply replaceability and possible competition.” ( European Commission, 1997 ) The Commission’s position on relevant markets is that the most of import of these competitory restraints demand replaceability, i.e. the ability of consumers to happen a utility point. From the EC’s point of position, demand replaceability is the primary consideration when specifying a relevant market, and any effort by a company to cut down or command substitutes for its merchandises is likely to be seen as anti-competitive by the EC. The committee argues that supply replaceability can be used as a method of specifying a relevant market, but merely “in those state of affairss where its effects are tantamount to those of demand permutation in footings of effectivity and immediacy.” ( European Commission, 1997 ) In sum-up, the European Commission holds that merchandises, parts and services should be included within the same relevant market, provided that they are all feasible replacements from the point of position of the terminal client.
As such, to specify the relevant air hose markets, several factors need to be considered:
- The traveller’s intent of the journey
- The traveller’s budget for the journey
- The grade of flexibleness around the start and terminal points of the journey
- The grade of flexibleness around the start and terminal times of the journey
- The length of the journey
- The urgency of the journey
- The comfort degree required for the journey
The comparative importance of these considerations besides needs to be considered.
For illustration, for a pupil rider going from Edinburgh to London to see friends, the budget is likely of primary concern, with reasonably high flexibleness around urgency, together with the start and terminal times and points of the journey. The pupil has the option of winging straight from Edinburgh to London, but is improbable to take this if it is an expensive option. They may be willing to take a train to Watford, and take the resistance into the Centre of London if this saves on costs. The pupil may besides be willing to go tardily at dark, take a coach or take several trains with several alterations.
In contrast, for a professional traveling on concern for an pressing meeting, the journey is pressing and they will probably take a firm stand on a nice degree of comfort. At this point, options such as coachs are non feasible demand replacements. However, the train may still be a feasible replacement for winging, as there are moderately fast, direct trains between London and Edinburgh Besides, when taking the train, clip is saved by non holding to look into in at the airdrome, and by the fact that train Stationss are frequently closer to the Centre of metropoliss than airdromes. Other factors such as the professional’s employer’s travel policies may besides impact on this determination.
However, whilst there are several replacements for domestic journeys made within the UK, there are about no replacements for transatlantic journeys. Whilst picture and teleconference are options for business communities, some concerns will still take a firm stand on face to confront meetings, or personal attending at major conferences. Besides, for a tourer life in the UK who wishes to see a specific portion of North America, such as the Grand Canyon, their options are really limited. They must either fly or confront a long sea journey. However, they do hold several different flight options, such as winging via Canada ; via assorted different US airdromes ; and even doing an intermediate halt in a European finish if it saves on the considerable cost of the journey.
There is besides another facet to this definition, raised in European Court instance T-219/99: British Airways v. Commission, [ 2003 ] ECR, II-5917 ( Legal, 2005 ) . This instance concerned the payments made by British air hoses to go bureaus in exchange for services provided, including booking flights and merchandising Tourss. There was argument over whether the relevant market was the market for the proviso of travel services by the bureaus, as argued by the EC and the CFI, or for the proviso of air conveyance services, in which the travel bureaus acted simply as mediators between the travelers and the bearers. The Court upheld the position of the European Commission, which was “consistent and convincing in its research of facts” ( Legal, 2005 ) , leting the definition of farther markets within the market for air travel. This governing implicitly demonstrated that the Commission’s 1997 Notice is non absolute, but allows the EC to exert a considerable grade of leeway in the manner it approaches a competition instance, provided it bases its opinion on facts and consistence.
This instance evidently complicates affairs when trying to specify relevant markets. For illustration, riders from the UK wanting to take a vacation in Florida may, after sing their options and confer withing with a travel agent, make up one’s mind that a vacation in Cornwall is a suited replacement for their intent. However, within this paper, as we are sing British Air passages and its competitory environment, we will presume that clients do non see a domestic journey an acceptable replacement for an international journey. Furthermore, given that British Airways preponderantly operates flights to and from the UK, we will see journeys within Europe as separate to journeys to other continents. This is because Europe is in closer propinquity to the UK than the remainder of the universe, and EU citizens can freely travel, work, and trade within the European Union, which is where the huge bulk of intra-European flights occur.
This leads to the definition of three relevant markets in which BA operates: domestic flights within the UK, flights between the UK and European finishs and flights between the UK and the remainder of the universe. These markets all have their ain competitory environments, which will now be defined utilizing Porter’s Five Forces theoretical account.
The UK air hoses industry generated entire grosss of $ 26.3 billion in 2005: a compound one-year growing rate of 3.5 % between 2001 and 2005. The volume of riders besides increased significantly from 2001 to 2005: with a CAGR of 6 % , about 230 million riders were carried in 2005, although this is non merely UK domestic flights. Indeed, the UK air hoses industry growing is forecast to speed up to 2010, with CAGR predicted to be 7.7 % for the five twelvemonth period from 2005 to 2010, making a entire value of $ 38 billion by 2010. This growing is despite a terrible downswing in 2002, following the panic onslaughts on US domestic flights and the corresponding security additions. Indeed, over the last five old ages, the UK air hose industry has grown faster than both the German and the Gallic air hose industries. However, over the following four old ages to 2010, Germany is expected to surpass the UK air hose industry. ( Datamonitor UK, 2006 ) Within the UK, British Airways is the taking air hose, with grosss of $ 15.5 billion in the twelvemonth stoping March 2006, an addition of 9.6 % on the old fiscal twelvemonth. However, BA’s rider Numberss fell by 0.2 % in 2005, to 35 million, which has deductions for the company ; given that rider flights are responsible for approx 80 % of its gross.
Within the UK market, there are several possible replacements for air travel, given the comparatively little size of the state and the clip taken to go to an airdrome and complete cheque in processs. Particularly with the reaching of new high velocity train services on the mainlines: for illustration London to Manchester now takes merely 2 hours 15 proceedingss during the hebdomad, which can be quicker than winging ; as the 45 minute flight clip is supplemented by look intoing in, repossessing luggage and going to the airdromes which, peculiarly in London, can take some clip to make from the metropolis Centre, with associated extra costs. Indeed, for some travelers, driving within the UK will be more convenient than winging, as driving allows complete flexibleness and lets the traveler set their ain timetable. However, the handiness of replacements agencies that new entrants to the UK market will hold limited impact on the competitory environment, as the limited figure of set downing slots at major airdromes and the fact that rail lines are franchised agencies that new entrants would be improbable to be able to vie good on monetary value or convenience. The merely feasible new entrants would probably be route based replacements which, although cheaper, would probably be less convenient and slower.
Buyer power is besides rather limited in the UK, as clients are frequently purchasing flights separately, with small ability to negociate on monetary value. Whilst a widespread consumer boycott of domestic flights would hold a major impact on the market, actions by single consumers will hold fringy impact and be of minimum concern. Even larger purchasers, such as travel bureaus, will hold a limited impact, peculiarly in the UK, where tourers will by and large prefer to book flights themselves instead than utilize an bureau. Often, a buyer’s merely recourse if air travel is excessively expensive or inconvenient is to take a replacement method of travel. Besides, with the UK market being rather concentrated, with comparatively few air hoses runing and offering a big figure of flights, supplier power will besides be limited. This is compounded by the fact that many providers, such as catering companies, operate in much more competitory markets with much lower entry barriers. Merely BAA and other airdrome operators have important supplier power over BA, and this is tempered by the fact that airdrome operators have a strong dependance on the air hoses for their gross. The lone country in which providers can hold a important impact on air hoses is when their staff, peculiarly ground staff at airdrome operators, decide to strike. This occurred at Heathrow in 2005 when TGWU workers went on work stoppage in understanding over redundancies at Gate Gourmet, marooning 1000s of riders and hitting BA’s gross figures ( BBC News, 2005 ) .
The competitory environment within the UK air hose industry is ferocious, with aggressive advertisement by many companies seeking to pull riders to them. British Airways operates as a full service air hose within this market, but its chief rivals operate as decreased service, or ‘no frills airlines’ . In peculiar, bmi is a major rival within the UK, involved in both rider and lading flights, and chiefly focused on paths around the UK body mass index is the 2nd largest full service air hose in the UK after British Airways, but besides operates a low cost, no service air hose called bmibaby, which competes with BA on several internal paths, frequently breaking BA on monetary value. Ryanair Holdings and easyJet, as strictly low cost air hoses, are other important rivals to BA, although they have a limited pick of UK paths when compared to BA and body mass index.
As such, BA’s current UK scheme, traveling frontward to 2008, is to cut down its cost base, with the purpose of accomplishing a 10 % runing border ( Datamonitor UK, 2006 ) . This will be chiefly of usage in the short-haul section where, in response to the competition from budget bearers, BA should follow a scheme of offering lower menus and more flexible engagements, to promote people to utilize flights for their journeys around the UK. The at hand gap of a 5th terminus at Heathrow airdrome, which is BA’s chief UK hub, combined with the gap of the Heathrow Express, will let the company to consolidate its operations at this location, assisting to fend off low cost competition from Stansted, Luton and Gatwick, which are primary locations for BA’s rivals.
With respects to EU competition jurisprudence, BA has small concerns in the UK, as the high handiness of replacements and the inclination for clients to book direct with bearers agencies that the relevant market will probably be excessively loosely defined for accusals of anti-competition. However, BA presently holds 41.5 % of the takeoff and set downing slots at Heathrow airdrome, which remains the major airdrome in Britain and one of the largest in the universe ( Hotten, 2007 ) . These retentions could be seen to smother competition, but this would chiefly be a concern in transcontinental flights which, due to their longer continuance, require the larger, more developed installations at Heathrow.
The European market has besides experienced a period of fluctuating gross growing over the last six old ages, with diminutions after the September 11Thursdayand other terrorist onslaughts and besides the planetary economic slack. However, over the following five old ages, growing rates in the European air hose market are expected to increase well, with peculiar betterments in both the Gallic and German markets as their economic systems begin to see stronger growing. The European air hoses market was deserving over $ 100 billion in 2005, after a CAGR of 2.5 % from 2001 to 2005. Passenger volumes besides increased well, with a CAGR of 5.6 % from 2002 to 2006, making a volume of over one billion riders carried in 2006. This figure is expected to lift to 1.35 billion by the terminal of 2010, a CAGR of 5.3 % , with a CAGR in value footings of about 8 % , forcing the value of the market to over $ 150 billion by 2010 ( Datamonitor Europe, 2006 ) .
Within the European market, replacements are much less prevailing than in the UK, chiefly because many journeys can take topographic point over longer distances and over H2O. For illustration, going from the UK to Spain can affect either a three hr flight, or at least 20 hours in a auto, ferry, manager and/or train. For shorter journeys, particularly in Continental Europe, managers, autos and particularly high velocity trains can be feasible, and even preferred, replacements for flights. However, in this piece, and from the position of BA as a rival, flights to and from the UK are the primary concern. In this regard, there are really small feasible replacements for medium draw flights from the UK to, for illustration, Portugal, Italy or Eastern parts of the EU. However, the Eurotunnel and cross channel ferries provide tourers with replacements when sing closer European states, such as France, Germany and the Low Countries The potency for new entrants into the European market besides has a ample consequence on the competitory market, particularly as they can utilize smaller airdromes such as Liverpool or Newcastle, and avoid many of the high charges associated with runing out of London. This besides opens up the market to people from far outside London, who would otherwise be unable to wing to more distant finishs such as Bulgaria and Romania, which have late joined the EU and therefore opened their boundary lines to British tourists.
Although purchaser power within Europe is still rather low, with many riders booking flights independently, travel bureaus have an increasing grade of power in this market, peculiarly thanks to the EC’s determination that, for competitory intents, flights booked as portion of bundle vacations fall into a separate market from those booked straight. Besides, the prevalence of monetary value comparing websites gives purchasers excess power when looking for European flights, as they make it easy to compare the monetary values of several flights with different bearers at different times and on different day of the months. Supplier power remains comparatively little, due to the disconnected nature of most provider markets and the fact that air hoses are frequently their biggest clients. Indeed, within Europe, the provider power of most of the major airdromes is being eroded, with secondary airdromes, such as Girona, near Barcelona, enabling low cost bearers to avoid the high charges associated with major airdromes. The lifting importance of these secondary airdromes has besides increased purchaser power, as clients can now take to pay less in exchange for geting at a somewhat more inconvenient finish.
Within the European market, Lufthansa, Air France KLM and Iberia are BA’s primary full service and concern category rivals, with strong presences on the paths from the UK to Germany, France, Spain, Portugal and other European finishs. Indeed, Lufthansa, with gross of $ 22.5 billion in 2005, and Air France KLM, with gross of $ 26.7 billion in the twelvemonth ended March 2006, are both significantly larger than BA, with well more power over providers. However, BA’s primary competitory advantage over these rivals in the European market is its laterality of Heathrow, and strong presence in Gatwick, enabling it to run more frequent services between the UK and Europe, with larger aircraft. Indeed, the low cost air hoses, such as Ryanair, easyJet, bmibaby and other European operators have become more of a concern to the full service bearers. Low entry barriers, such as the ability to rent or charter planes and usage secondary airdromes ; means that there is by and large a low cost option on the huge bulk of popular paths in Europe Hence, clients who are willing to endure short and medium draw flights without complementary refreshments or important legroom are progressively taking low cost bearers over full service options.
Similar to UK flights, BA will necessitate to cut down its costs, to enable it to offer lower menus on shorter European flights, to repossess riders from low cost bearers, Eurotunnel and the ferries. Again, when Terminal 5 clears at London Heathrow, this will enable BA to consolidate its place in the UK, offering more paths and more convenient times. Indeed, given the increased competition for tourers and other economic system category riders from low cost bearers, BA’s best scheme in Europe might be to take advantage of the increasing EU integrating to seek and transport more high-margin concern category riders. Whilst cost fight will stay a concern for concerns, they are improbable to demand that valued staff usage low cost bearers, and if BA can keep and better its client and in-flight service degrees, it should be able to bring forth sustained gross growing through the addition in concern category travel, whilst keeping a defensive, cost film editing, place for economic system category riders.
In footings of European competition jurisprudence, the EC has already regulated the European market for flights, opening up more paths to competition and modulating province subsidies to flag transporting air hoses. Besides, given that the market is extremely competitory and has low entry barriers, there are improbable to be any competition issues originating, as any effort at anti-competitive patterns would be probably to harm the practising firm’s market portion. The merely major concern here would be the possible for monetary value repairing on cardinal paths, but given that there are so many rivals and possible entrants, a trust trying to put unnaturally high monetary values would probably pull new competition to their path.
As with the UK and Europe, the planetary air hose industry experienced a important downswing in 2002. However, the industry had recovered good by 2004, and has since shown considerable growing, with grosss of over $ 300 billion in 2005, a CAGR of 2.6 % from 2001 to 2005. In the period to 2010, the industry is predicted to demo increasing degrees of growing, with a predicted CAGR of 8.3 % expected to ensue in a value of $ 475 billion in 2010. This is on the dorsum of a predicted addition in rider volume of 5.6 % CAGR until 2010, ensuing in over 3.25 billion riders winging in 2010, up from 2.5 billion in 2005 ( Datamonitor Global, 2006 ) . The Americas history for the greatest proportion of the planetary air hoses industry given the long distances between major population Centres in parts of the US. Transatlantic flights from Europe to the US are besides a major constituent of the industry, and should be boosted by the new ‘Open Skies’ understanding between the EU and the US ( Hotten, 2007 )
Competitively, transcontinental flights from the UK have about no possible replacements, with the big distances doing it about impossible for tourers or business people to happen alternate methods of travel. The lone existent options to utilizing a flag bearer are to utilize charter flights or private jets, which by and large require a big concentration of purchaser power, such as on a bundle vacation, and important fiscal resources severally. There are possible options for tourers, such as sails or long distance rail journeys, but these are by and large undertaken as portion of the vacation, such as Caribbean sails or the Trans-Siberian railroad. Equally, it is much more hard for a new entrant to come in the market, particularly within the UK, as they will necessitate entree to a landing slot at a major airdrome, such as Heathrow, Gatwick or Ringway, as frequently merely the big airdromes will be able to back up long draw planes Besides, as transcontinental flights do non fall wholly under the legal power of the EU, there are frequently more done for costs in footings of admin and obtaining blessing to wing to states such as the US. Finally, the fact that the flights are longer means that fuel and pay costs are greater per flight, therefore there is more hazard if a company fails to make full a flight.
In footings of purchaser power, it is frequently more important for transcontinental flights, with travel bureaus taking a much more active portion in organizing trips, particularly if a tourers will necessitate support in obtaining visas or other certification. These travel bureaus non merely have a important grade of power in their ain right, but besides the protection under the EC’s determination that they operate in a separate market, and should be protected from market maltreatment by the air hoses. Suppliers besides have somewhat more power, due to the larger figure of services expected on long draw flights, such as excess catering and amusement. Larger airdrome operators in peculiar have much more power, due to the demand for specific service, fuel and gate installations for the larger planes such as 747s used on long draw flights. This power is being increased by the remotion of regulative loads, such as the ‘Open Skies’ understanding, which has seen demand for slots at Heathrow rise, as it now becomes easier to utilize these slots on the moneymaking transatlantic paths to the USA.
In footings of major transcontinental rivals to BA, the company’s laterality of Heathrow means that no major rival can offer the same sum and scope of direct flights to and from the UK. However, several European bearers have managed to short-circuit this by offering flights with short way stations at their hub airdromes, such as Iberia which flies from the UK to the America via Spain, or AirFrance KLM which offers many flights via Paris. In this instance, the Eurostar becomes a complementary service, as it enables UK riders to go to France via train and so take a flight from Paris should they prefer. Besides, the major US flag bearers, such as American Airlines, the largest air hose in the universe ( Datamonitor Global, 2006 ) , have important economic systems of graduated table and are concentrating on their more moneymaking transatlantic paths, due to immense monetary value force per unit areas in the US domestic market. Finally, other major flag bearers, such as All Nippon Aiways and Japan Airlines are concentrating on spread outing their place hubs and offering more transcontinental services, and therefore may be looking for chances to increase their figure of flights to the UK, peculiarly when Terminal 5 at Heathrow opens.
In order to vie with these challenges, BA will necessitate to put peculiar focal point on its premium long-haul flights, appealing to purchasers with better service and installations. Service is a much higher precedence on long draw flights, where riders are by and large unwilling to digest the same conditions as in short draw, such as less legroom and no amusement. In peculiar, BA will necessitate to keep good relationships with BAA to guarantee that its planes experience speedy turnarounds at Heathrow, and that the company can use the new terminus to the fullest.
In footings of EC competition jurisprudence, given the deficiency of replacements, and the fact that most paths can be viewed as standalone markets, BA will necessitate to be cautious and guarantee that it is non perceived to be mistreating its laterality of Heathrow. In peculiar, now that the ‘Open Skies’ understanding will open up the paths between Europe and the USA to new rivals, BA will necessitate to be careful when supporting its current place. On the one manus the company doesn’t want to lose any of the significant gross that this path generates, and so wants to maintain monetary values and volumes high. On the other manus, if the EC perceives the company to be moving to forestall competition, it faces possible punishments, and possibly even ordinances coercing it to give up some of its critical Heathrow slots. Defending all its transcontinental paths without put on the lining ordinance is possibly the biggest competitory challenge to BA in the close hereafter ; and one that it will hold to successfully turn to in order to stay competitory in the planetary air hose industry.
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