Van Miert set to make example of BA over ticket incentive scheme

Date: 03/06/1999

By Peter Chapman

BRITISH Airways faces EU fines of up to €20 million for running a cash incentive scheme allegedly aimed at inducing travel agents to sell more tickets for its flights at the expense of rival carriers.

The move, which will jolt other Union flag-carrying airlines operating identical programmes, is likely to be confirmed by the full European Commission next month, according to leading officials and industry sources.

Retiring Competition Commissioner Karel van Miert wants to make an example of the troubled UK airline, which reported last week that its profits had plunged 61% to €345 million in the year to March, in the face of cut-throat competition in the tourist ticket market.

" We are aware of the fact that other airlines apply similar schemes but we are persuaded that a decision on BA will have a strong pedagogic effect," said a Van Miert aide.

The Commission discussed the case last week, but a final decision cannot be taken without further debate by national competition officials and Commissioners' anti-trust policy aides. However, Van Miert's staff are said to be recommending a heavy fine.

" It would have some fairly fundamental repercussions in the way BA markets its services," said one specialist lawyer.

The Commission's inquiry was triggered by two formal complaints from BA's bitter rival, long-distance carrier Virgin Atlantic. "If they do find against BA, it would be a vindication of our complaint," said Paul Moore, public affairs chief at Virgin Atlantic. "We have always felt that the way BA structures its arrangements with the travel trade and larger corporate accounts represents an abuse of its dominant position."

Virgin claimed that BA was offering travel agents extra commission if they could display growth in the national carrier's ticket sales at the expense of rivals.

Richard Branson's company alleged that the incentive scheme was so structured as to put maximum pressure on agents to give preference to the largest carrier in the market regardless of price, quality of service or scheduling, and that the pressure was stepped up every year. Agents are said to fear their commission from BA will drop unless they sustain their target ticket growth for the year.

The Commission sent a warning letter to BA last year stating that these schemes were illegal under the EU's treaties, which ban the use of restrictive contracts to reinforce a dominant market position.

BA subsequently introduced a new programme, known as the 'performance rewards scheme', to which Virgin responded with a second complaint to the Commission.

Aviation lawyers believe the fines are likely to be in the Commission's top punishment category - above €20 million - reserved for "very serious" breaches of EU anti-trust rules, to reflect the "longevity and scale" of the alleged abuses. However, officials think BA's violations only count as "serious", so attracting fines of less than €20 million.

This will be the first time the Commission has ruled in a case of a services company granting scaled rebates pegged to ever greater increases in sales performance ('fidelisation').

But there are precedents in manufacturing industry. Swiss drugs giant Hoffmann-La Roche and the Dutch unit of French tyre firm Michelin were hit with fines of €200,000 in 1976 and €300,000 in 1981 respectively.

BA argues that it would be unfair for the Commission to target it with fines while ignoring other airlines. During hearings with the institution, the airline's lawyers lodged a series of complaints against other market players.

The Commission has no plans to launch new anti-trust inquiries into similar schemes operated by other flag-carriers, since this issue is already under the microscope as the Directorate-General for competition (DGIV) investigates a spate of transatlantic alliances.