Turkey: Predatory Pricing Allegation In The Airlines Industry Withdrawn: Turkish Competition Board’s Investigation Against Turkish Airlines Has Been Concluded With No Condemnation

The Competition Board initiated an investigation on July 8, 2010, with investigation number 10-49/923-M, against Türk Hava Yolları A.O. ("Turkish Airlines") based on the complaint that was made by Pegasus Hava Taşımacılığı A.Ş. ("Pegasus"), low-cost airline that has the widest flight network in Turkey, alleging that Turkish Airlines abused its dominant position by way of engaging in exclusionary practices with its domestic and international flights departing from Istanbul.

ELIG, Attorneys-at-Law has represented Turkish Airlines in all of its defense work concerning this investigation procedure of the Turkish Competition Authority. As officially announced on January 5th, 2012, the Competition Board's investigation was concluded at its meeting held on December 30, 20111, after extremely high levels of data collection and processing, three sets of written defenses and one oral hearing, during the course of the investigation that lasted 18 months. In its unanimous decision, the Competition Board decided the following:

  • Turkish Airlines did not abuse its dominant position by way of engaging in exclusionary practices, within the scope of Article 6 of Law No. 4054 on Protection of Competition ("Law No. 4054"), with its domestic and international flights departing from Istanbul, against the competing undertaking, and for this reason, administrative monetary fine could not be imposed.
  • Nonetheless, the Competition Board's decision should be notified to the relevant undertakings and public institutions and organizations in order to preserve a healthy competition milieu in the relevant market, in view of issues such as slot allocations and international bilateral aviation conventions.

The Investigation Committee of the Turkish Competition Authority, as assigned by the Competition Board to conduct the investigation, had brought forward the following allegations against Turkish Airlines and suggested to the Competition Board that an administrative monetary fine be imposed on Turkish Airlines due to infringement:

  • Turkish Airlines is in a dominant position and conducting predatory pricing. For this reason, it violated Article 6 of Law No. 4054.
  • In the determination of the geographic market that was used to evaluate dominant position, the Sabiha Gökçen International Airport ("SGIA" or "SAW") and the Istanbul Atatürk Airport ("IAA"), which are located on two different sides of Istanbul (i.e. the Anatolian side and the European side, respectively), were substitutable and for this reason, both airports should be considered within the same relevant geographical market.
  • In evaluating dominant position, matters such as market shares, status of flag carrier airline, slot allocation, historical rights, the structural junction with the General Directorate of State Airports Authority, horizontal and vertical agreements, hub and spoke facilities, allocation of airport gates, marketing strategies and brand value were taken into consideration.
  • Flights departing from and arriving at SGIA were scrutinized separately, on a route basis and that, save for a very small number of routes, such as Trabzon, Diyarbakır, Van, Ercan, Köln and Basel, Turkish Airlines was dominant in all other routes.
  • Turkish Airlines' revenue – cost balances were reviewed. The state of play for revenue and cost in routes whose points of departure and arrival was from SGIA was compared and within this framework, predatory pricing was observed in routes where sales below the average avoidable costs were made.
  • It has been alleged that when calculating the administrative monetary fine, a higher rate should be taken into consideration given Turkish Airlines' market position and economic power.

In response to the three sets of allegations brought by the Investigation Committee, ELIG, Attorneys-at-Law principally argued the following in both the three rounds of written defenses and the oral hearing that took about three hours in total:

  • There is neither a demand-side nor a supply-side substitutability between SGIA and IAA.
    • SGIA and IAA are geographically distant from each other in a substantial manner and there are significant differences in terms of the means of transportation to both airports. The difficulties encircling Istanbul's means of transportation have also been substantiated by the field work conducted by ELIG.
    • In flights of same point of arrival, the IAA market can take on relatively higher prices due to demand and the market dynamics. IAA's occupancy rate is higher than SGIA or at par with SGIA. Further, there is no passenger transition observed from IAA to SGIA. The same also holds true for an analysis that is to be made vice versa: with a sustained small but significant price increase that may be observed at SGIA, there will be no passenger transition from SGIA to IAA. As a matter of fact, there is no passenger transition from SGIA to IAA.
    • There are extremely significant differences between the two airports in terms of the flight services rendered to passengers.
    • There are significant differences between the two airports in terms of customer preferences.
    • The two airports have different hinterlands.
    • There are significant differences between the two airports in terms of operational costs.
    • IAA is a central airport for transit flights. The same is not the case for SGIA.
    • There are indisputable differences between the two airports in terms of factors such as number of passengers, the capacity that is used, size, runway facilities and routes.
    • There are significant differences between the two airports in terms of slot allocations.
    • The statements submitted by Turkish Airlines' competitors to the Competition Board made evident that SGIS and IAA are indeed different markets.
    • In a correctly defined relevant market (i.e. where points of origin and destinations determined based on the airport rather than city), Turkish Airlines is not in a dominant position given the dynamic nature of the market and the evolution it undergoes.
  • None of the criteria that should be sought for the determination of predatory pricing was satisfied.
    • Instead of only assessing profitability on a route basis in determining whether prices in the aviation and passenger transportation industries are below the costs, total revenue and profitability, ticket prices, number of flights and occupancy rate at a certain route should be taken into consideration.
    • In cases where the prices of the undertaking which is in a dominant position are higher than those of its competitors and/or the average market, sales made below costs cannot be construed as an infringement.
    • The pre-requisite for allegations of predatory pricing is the competitor exiting the market or being under the risk of exiting the market.
    • In order for the arguments on predatory pricing to succeed, the intention to exclude competitors should be justified.
    • The effect on competitors and the market dynamics of sales made below cost in the short-term is also restricted in direct proportion. Accordingly, competitors cannot exit the market and a risk to exit the market does not arise.
    • Direct interventions on prices in competition law should always be the last resort.
    • Competition law's aim is not to protect the competitor, but to protect the competition process.

Naturally, it is not possible prior to the publication of the reasoned decision to foresee what the balance induced between the foregoing allegations and defenses was so as to result in a conclusion that there was no infringement. However, it can readily be anticipated that the Competition Board's decision includes a rather insightful evaluation on whether airports located in cities can be automatically substitutable with each other in the airline and passenger transportation industries, on which points of interest must be laid out when making predatory pricing analyses, and on how utmost sensitivity must be shown when intervening with those markets that currently have a competitive vista.

Footnote

1. The Competition Board's reasoned decision has not been published yet. However, the short form decision has been published at the Turkish Competition Authority's official website. The press release notifying the short form decision can be accessed through the following link: http://www.rekabet.gov.tr/dosyalar/images/file/tefhimler/metin.pdf. ELIG Attorneys-at-Law ("ELIG") acted on behalf of Turkish Airlines in the investigation. For this reason, this work product, which was written shortly after the notification of the Competition Board's short form decision, comprises of the evaluations of the allegations and defenses, as ELIG directly is acquainted with, and aims to delineate the central issues which culminated in the final decision, without breaching any obligation that may arise as a result of confidentiality in respect of the investigation. This work product does not include or constitute any expression, finding, inference or evaluation on the Competition Board's reasoned decision regarding the investigation, nor can it be construed to include as such.

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