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VIRGIN ATL. AIRWAYS LTD. v. BRITISH AIRWAYS PLC

December 30, 1994

VIRGIN ATLANTIC AIRWAYS LIMITED, Plaintiff against BRITISH AIRWAYS PLC, Defendant.


The opinion of the court was delivered by: MIRIAM GOLDMAN CEDARBAUM

 CEDARBAUM, J.

 The parties are competing international airlines. Plaintiff Virgin Atlantic Airways Limited charges defendant British Airways PLC with a wide variety of anticompetitive conduct and asserts claims under the United States antitrust laws and the common law. British Airways moves to dismiss on the grounds of (1) act of state, (2) political question, (3) international comity, and (4) forum non conveniens. It also argues that the complaint fails to state a claim. For the reasons discussed below, the motion is granted in part and denied in part.

 Background

 British Airways is one of the oldest and largest airlines in the world. Its predecessors were nationalized by the British Government in 1939, and remained state-owned until 1987. Today it offers service to well over 100 cities around the world. By contrast, Virgin Atlantic began airline passenger service in 1984 with one airplane offering service between London and Newark. Since then it has grown significantly and now competes directly with British Airways in airline passenger service. The conduct Virgin Atlantic complains of in this lawsuit must be viewed in the context of the structure of the transatlantic airline industry and the way in which airline tickets are sold.

 A. Structure of the Transatlantic Airline Industry

 A complex web of treaties, international agreements and domestic regulations limit the type and amount of service individual airlines may offer. The most important is a 1977 agreement between the United States and the United Kingdom known as "Bermuda II." *fn1"

 Bermuda II regulates air service between particular cities in the United States and the United Kingdom. No airline can fly any route, schedule specific flights, or set fares except in accordance with Bermuda II. Under Bermuda II, service is permitted to London only from 24 "gateway cities" in the United States. To fly a particular route, an airline must be "designated" by the appropriate regulatory agencies in both countries. Presently, British Airways is designated to fly between London and 21 gateway cities in the United States. No other airline is designated to serve more than seven United States gateway cities. Virgin Atlantic flies between London and six gateway cities: Boston, New York, Newark, Orlando, Miami, and Los Angeles. The parties are direct competitors on these routes.

 Another major constraint on transatlantic passenger air travel is that Heathrow Airport is operating at full capacity. Heathrow is the preferred international airport in London, but it cannot handle the volume of air traffic to and from that city. This has two significant consequences. The first is that the right to use a runway at Heathrow at a particular time is extremely valuable. The right to land or take off at a particular time is known as a "slot." Heathrow is one of a small number of slot-restricted airports. Slots are allocated at Heathrow under a grandfather system. An airline keeps the right to a particular slot as long as it uses it. An airline can obtain new slots only by purchasing them from other airlines or by applying for slots as they are relinquished by other carriers. British Airways controls approximately 40 percent of the slots at Heathrow.

 The second significant consequence of congestion at Heathrow is that growth in passenger air service to and from London can only occur through Gatwick Airport which serves as an overflow facility for Heathrow. Thus, Virgin Atlantic must fly from Gatwick to three of the gateway cities it serves in the United States, whereas British Airways is able to offer transatlantic service from Heathrow to all of its gateway cities. British Airways does use Gatwick, however, and it controls 31 percent of the Gatwick slots.

 The complaint alleges that British Airways has monopoly power at both Heathrow and Gatwick. (Compl. PP 56, 57) It points to the percentage of slots controlled at each airport and a variety of other numbers to support those allegations. For example, according to the complaint, British Airways controls approximately 39 percent of the market for airline passenger services between cities in the United States and the United Kingdom; Virgin Atlantic controls 11 percent. (Compl. P 62) More specifically, British Airways controls 40 percent of the market for air passenger service between London and gateway cities in the United States; Virgin Atlantic controls approximately 12 percent. (Compl. P 63)

 The complaint also discusses travel between particular cities, which it defines as "city-pair markets." For example, the complaint alleges that British Airways holds approximately 51 percent of the market for air passenger travel between London and New York and approximately 45 percent of the market for air travel between London and Los Angeles. (Compl. P 59) Further refining this analysis, the complaint also discusses travel between particular airports, which it refers to as "airport-pair markets." The complaint alleges that British Airways controls approximately 46 percent of the market for air passenger travel between Heathrow and New York's John F. Kennedy International Airport, and 45 percent of the market for air passenger travel between Heathrow and Los Angeles International Airport. (Compl. P 60)

 B. Loyalty Programs

 Loyalty programs are marketing devices which airlines use to attract customers. The most familiar are frequent flyer programs under which individual travellers are given rewards, incentives and discounts for repeatedly patronizing a particular airline. Travel agent commission override ("TACO") programs are incentive programs designed to encourage travel agents to book their customers on a particular airline. Typically, a TACO pays a travel agent a bonus when he or she has sold a specified number of tickets. The complaint alleges that "when the TACO commission or bonus increases more than proportionally to the revenue generated with a particular airline, the travel agent has very significant economic incentives to steer consumers to a particular airline in order to reach the target that triggers the TACO." In addition to targeting individual travellers with frequent flier programs and travel agents with TACOS, airlines may offer incentive programs to institutional customers which purchase large numbers of tickets. These are referred to generically as "corporate travel programs" and can be designed in a variety of ways.

 C. Conduct Alleged in the Complaint

 In a 50 page narrative complaint, Virgin Atlantic complains about the following five categories of conduct by British Airways.

 1. Predatory Activities

 2. "Dirty Tricks"

 The complaint alleges that British Airways has pursued a prolonged and deliberate campaign of underhanded tactics designed to drive Virgin Atlantic out of business. According to the complaint, British Airways "initiated a campaign to publicly discredit Virgin and [Virgin's Chairman] Richard Branson." (Compl. P 81) In 1991 British Airways made a series of false statements to the press about Virgin Atlantic. (Compl. P 82) British Airways attempted to steal Virgin Atlantic's customers by contacting them directly and attempting to persuade them to switch airlines. (Compl. P 83) In some instances this poaching was accomplished by falsely telling Virgin Atlantic ticketholders that their flights had been delayed or overbooked. (Compl. P 84) According to the complaint, British Airways employees approached Virgin Atlantic customers in airports and offered them incentives to switch airlines. (Compl. P 85) British Airways improperly accessed confidential Virgin Atlantic flight information. (Compl. P 86) British Airways destroyed documents to cover up its dirty tricks. (Compl. P 88)

 3. British Airways' Investment in USAir

 In 1993 British Airways made a significant investment in USAir, and the two companies have entered into an "alliance" to provide airline service between the United States and the United Kingdom. As part of this alliance, British Airways and USAir will engage in "code-sharing," an industry practice whereby one airline's flight is listed in published schedules as a flight of the other airline. This practice facilitates connections between the two airlines' flights. British Airways and USAir have also combined their frequent flier programs. USAir customers now receive mileage credit for flights on British Airways. In addition, British Airways and USAir have agreed to a "wet lease" arrangement whereby British Airways will fly between Gatwick and certain gateway cities using USAir aircraft and crews.

 4. TACOs and Corporate Travel Programs

 Virgin Atlantic charges that British Airways has structured its TACOs and corporate travel programs in such a way as to exploit its existing monopoly at Heathrow to gain a competitive advantage and foreclose competition in the market for transatlantic passenger airline service. (Compl. PP 100-09) It alleges that British Airways' TACOs and corporate travel programs operate as exclusive dealing arrangements between the airline and participating companies and travel agents. (Compl. P 102)

 Specifically, Virgin Atlantic charges that British Airways grants rebates and incentives to corporate customers and travel agents only on the condition that they purchase all or a certain high percentage of their travel requirements from British Airways. (Compl. P 103) This system, Virgin Atlantic alleges, makes it "economically irrational" for corporations and travel agents not to use British Airways. The key to the system is that British Airways offers discounts and rebates based on the number of tickets a customer purchases on all of its flights, not just on flights between the United States and the United Kingdom. Because British Airways serves so many more destinations from Heathrow than any other airline, inevitably, major customers will have to purchase ...


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