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VIRGIN ATLANTIC AIRWAYS v. BRITISH AIRWAYS PLC

October 22, 1999

VIRGIN ATLANTIC AIRWAYS LIMITED, PLAINTIFF,
v.
BRITISH AIRWAYS PLC, DEFENDANT.



The opinion of the court was delivered by: Cedarbaum, District Judge.

OPINION

Virgin Atlantic Airways Limited ("Virgin") sues British Airways PLC for using incentive agreements that Virgin argues are anti-competitive. Virgin claims that the agreements have foreclosed its access to substantial passenger traffic, and that the foreclosure delayed its initiation of service between Heathrow airport and San Francisco and Washington, D.C.; deterred its initiation of service between Heathrow and Chicago; deterred its addition of a second Heathrow flight to Los Angeles; and deterred its addition of a third Heathrow flight to New York (JFK). Virgin charges British Airways with monopoly leveraging and attempted monopolization in violation of Section Two of the Sherman Act, 15 U.S.C. § 2, arguing that British Airways used the incentive agreements to leverage or achieve monopoly power in the market for air travel to, through and from Heathrow airport. Virgin also claims that the incentive agreements unlawfully restrain trade in violation of Section One of the Sherman Act, 15 U.S.C. § 1. British Airways moves for summary judgment on all the claims. For the following reasons, the motion for summary judgment is granted.

BACKGROUND

Because this is British Airways' motion for summary judgment, the evidence is viewed in the light most favorable to Virgin, and all justifiable inferences are drawn in Virgin's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

British Airways began airline passenger service in 1939. It offers flights to 94 cities from its hub at Heathrow airport in London. (VA Ex. E; VA Tab 18 at BAL 0100572). Virgin started its operation in 1984. (Branson Decl. ¶ 7). Since then, Virgin has grown significantly and, at the close of discovery, was flying thirteen long-haul routes, including ten U.S.-U.K. routes, six of which were Heathrow-based. (BA Ex. H; VA Ex. W; Griffiths Decl. ¶ 3). Virgin entered the Heathrow routes to the following U.S. destinations in the following years: New York (JFK) in 1991-1992: Los Angeles in 1991-1992; Newark in 1992-1993; San Francisco in 1994-1995; Washington D.C. in 1996-1997; and Miami in 1997. (BA Ex. H).

Virgin claims that it would have initiated Heathrow service to Chicago, San Francisco, and Washington, D.C. and would have expanded its Heathrow service to New York (JFK) and Los Angeles earlier than it actually did if British Airways had not used the incentive agreements.

A. Relevant Markets

British Airways assumes, for purposes of this summary judgment motion, that the product markets pleaded in the complaint — "Heathrow airport," (Compl. ¶ 56), "Gatwick airport," (Compl. ¶ 57), and scheduled airline passenger services between both city pairs and airport pairs, (Compl. ¶¶ 58-60) — are properly identified as such.

B. British Airways' Dominance at Heathrow

It is undisputed that British Airways' share of the runway slots at Heathrow has remained approximately 39% since 1989. British Airways' next largest competitor, British Midland, controls approximately 13.5% of Heathrow slots. (VA Ex. C). Virgin controls approximately 1.9% of Heathrow slots. (Id.) The availability of slots at Heathrow over the past several years has been insufficient for any carrier to replicate British Airways' route network at Heathrow. (Griffiths Decl. ¶ 17).

As of July 1997, British Airways flies to 94 destinations from Heathrow. (VA Ex. E). Nineteen of those Heathrow routes are monopoly routes. (Id.) Three of the monopoly routes are to the U.S. (Detroit, Philadelphia, and Seattle) and the remainder are to cities in the U.K. and other countries (including, for example, Bologna, Italy; Dhahran, Saudi Arabia; Manchester, U.K.; Leipzig, Germany; Madras, India; Venice, Italy; and Newcastle, U.K.). (Id.) Forty-four of British Airways' Heathrow routes are duopolies. (Id.) On twenty-two Heathrow routes, British Airways competes with two other airlines, and on the remaining routes it competes with three or more airlines. (Id.)

British Airways serves between 43% and 45% of all Heathrow passengers, (VA Tab 18 at BAL0100584; BA Tab 11 ¶ 3), and accounts for 53% of all Heathrow transfers. (VA Tab 18 at BAL0100593).

The North Atlantic has become more competitive in recent years in terms of number of carriers and number of flights offered. (BA Tab 13 at 486-87). From 1986 to 1996, when competition on the North Atlantic routes starting growing, British Airways' fares on those routes dropped by 40 percent. (BA Tab 12 at 276-77; BA Tab 15 at 56).

C. British Airways' Incentive Agreements

British Airways enters into incentive agreements with repeat customers who need air travel within British Airways' network. These customers fall into two main categories: travel agents (acting as aggregators of demand for individual customers) and corporate customers. The agreements with travel agents provide an extra commission payment each time an agent reaches a certain sales target. Similarly, the agreements with corporate customers give the customers special discounts each time their British Airways purchases reach a certain threshold level.

British Airways has used incentive agreements with travel agents and corporate customers since at least the mid-1980s. (Branson Decl. ¶ 3). British Airways' incentive agreements share several features: (1) they "bundle" routes by setting targets for purchases on all or a regional group of routes in British Airways' network rather than on a route-by-route basis; (2) they generally contain more than one target, and as the customer or travel agent meets higher targets, British Airways pays commissions and discounts that increase more than proportionally to the extra revenue that British Airways earns from the incremental purchases; and (3) they have dollar-one clauses which promise incentive payments "back to dollar one" — that is, not only on purchases beyond the target, but also on all purchases up to the target. (Bernheim Aff. ¶¶ 87-88, 92). The dollar-one clauses create a significant jump in the total incentive payment paid to a travel agent or corporate customer each time it meets a targeted level of purchases. (VA Ex. H; VA Tabs 145-147).

Some of the targets are market-share targets (i.e. targets based on British Airways' percentage share of the corporation's U.S.-U.K. flights). (Bernheim Aff. ¶ 89; BA Tab 30 ¶ 3 & Ex. A; BA Tab 31 ¶ 4). Others are total-revenue targets. (Bernheim Aff. ¶ 89; VA Tab 223 at BAL 1001588).

The geographic breadth of the corporate deals varies. Companies and travel agents which concentrate their travel on one route or region in British Airways' network often enter into "Focussed Route Deals" which provide an incentive payment if the company meets a threshold level of purchases on a single specified route (or small group of routes). (VA Tab 98 at BAL 0322872; VA Tab 236 at BAL 0560441). At the other end of the spectrum are "Global Deals" for travel agents and corporate customers which demand network-wide air travel from Heathrow. The Global Deals set one world-wide revenue target, many discrete regional or individual country targets, or some combination thereof. (VA Tab 241 at BAL 0385989; VA Tab 242 at BAL 0385934).

British Airways readily admits that it is "selling the network" by providing incentives based on network-wide usage rather than single route usage. (Feb. 13, 1998 Tr. at 42). Excerpts from British Airways' guidelines and memoranda on structuring incentive agreements suggest that British Airways considers the global and umbrella deals to be more effective than specific-route deals in generating additional ticket sales to customers with network-wide needs. (VA Tab 179 at BAL 0322827; VA Tab 236 at BAL 0560441-42).

The incentive agreements are not exclusive dealing agreements by their terms, and do not require anyone to buy or sell any British Airways tickets, but merely provide larger commissions or discounts if the targets are met. (BA Tab 30 ¶ 2; BA 56.1 ¶ 40).

There is evidence that global incentive deals cause British Airways' revenue from globally-incentivized corporate customers to increase by 15% to 20% on average. (VA Tab 176 at BAL 0386090-154; VA Tab ...


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