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English High Court concludes that terms of Luton Airport’s coach concession agreement are an unlawful abuse of its dominant position




by:
Becket McGrath
Trupti Reddy
Edwards Wildman Palmer LLP - London Office

 
February 12, 2014

Previously published on February 10, 2014

Air passengers landing at an airport typically have a range of options for onward travel, including taxi, train or bus. Where available, dedicated airport buses are often a popular choice for passengers, as they offer convenient city centre connections and are generally cheaper than trains, albeit journey times may be longer or at least less predictable due to traffic. Providing such airport services can be highly profitable for bus operators, given the relatively predictable demand and air passengers’ willingness to pay a premium fare for a frequent, direct service to their desired destination. Given this profitability, and airports’ understandable desire to maximise the revenues generated by their expensive assets, it is unsurprising that many airports demand a concession fee from bus operators wishing to drop off and pick up passengers at their terminals (typically expressed as a share of the bus operator’s revenues). It is also understandable that fare revenue, and hence the profitability of a service, is likely to be greater if a bus operator has a monopoly on a particular route. Given the linkage with revenues, this may be expected, in turn, to lead to higher concession fee revenue for airports that grant exclusive access to just one bus operator.

Given this context, it is perhaps surprising that, on 28 January 2014, the High Court (Court) held that Luton Airport Operations Ltd (Luton Airport) unlawfully abused a dominant market position, contrary to section 18 of the UK Competition Act 1998 (the Chapter II prohibition), by granting a seven-year exclusive concession to National Express to operate buses between Luton Airport and central London.

Background

For 30 years up to the end of April 2013, Arriva The Shires Ltd (ATS) operated a regular coach service between the Luton Airport bus station, which is located directly next to the terminal building, and London’s Victoria station, more recently under a formal concession agreement with the airport. Although that agreement was not exclusive, it appears that ATS was the only operator of a regular fast bus service between Luton Airport and central London, except for a limited service using minibuses operated by easyBus. According to the Court, ATS enjoyed a profit margin of 46 per cent on this route, which accounted for 8 per cent of the company’s annual turnover but 32 per cent of its annual profit.

In early 2013, rather than simply rolling over the ATS concession as it had done previously, Luton Airport held a tender for the right to operate the London route in future. ATS, National Express and one other operator that specialises in running airport bus services submitted bids. On the grounds that it offered the highest revenue share, and hence the highest concession fees for the airport, the new concession was granted to National Express. As a result, from April 2013 ATS was prevented from accessing the airport to pick up or drop off passengers travelling directly to or from central London. Although ATS continued to run a bus service to central London from a bus station located in Luton city centre, air passengers wishing to use this service had to a connecting shuttle bus to the airport. As a result, this option was less popular than the previous direct service, which led to a significant loss of revenue for ATS.

ATS brought an action before the Court claiming that Luton Airport had abused its dominant position in the “market for the grant of rights to use the [Luton] Airport land to operate bus services from the airport”, contrary to the Chapter II prohibition (which largely mirrors Article 102 of the Treaty on the Functioning of the European Union (TFEU)). The Chapter II prohibition prohibits any unilateral conduct by a firm in a dominant position that amounts to an abuse of that dominant position. Conduct that would otherwise be abusive may nevertheless be lawful if the dominant firm has an objective justification for the conduct.

ATS claimed that Luton Airport had abused its dominant position in two ways: (i) the manner in which it had run the tender process and awarded the concession was unfairly weighted against ATS; and (ii) the terms of the concession were abusive, in particular the grant of a seven-year exclusivity period, the fact that National Express had a right of first refusal over the operation of new services on routes between the airport and other London destinations, and the fact that a carve-out from the exclusivity allowing easyBus to continue its own service amounted to unlawful discrimination against ATS.

Interestingly, the parties agreed to proceed with trial on the assumption that Luton Airport was dominant on a market for the supply of facilities at Luton Airport bus station. Whether Luton Airport is in fact dominant on such a market has been left to be addressed at a later date, as have the issues of quantification of damage and the relief to be granted. Consideration of the question of abuse was expedited and went to trial in October and November 2013.

The Judgment

ATS’s first claim of abuse, relating to the manner in which Luton Airport ran the tender and awarded the concession to National Express, failed. Specifically, ATS alleged that the tender process was unfair, in that it was not given the same level of information as other bidders and the process for identifying the winner was unfair. While noting that there were no previous cases in which the way in which a tender was conducted was found to have amounted to an abuse of dominance (rather than, for example, a breach of public procurement rules), the Court was prepared to accept that it was possible for a tender to be conducted by a dominant firm in such an unfair manner that this amounted to an abuse of its dominant position. However, on the facts of the case it was held that Luton Airport’s running of the tender was broadly fair and so did not amount to an abuse of its dominant position.

ATS had more success in its claim that the terms of the concession itself amounted to an abuse of Luton Airport’s dominant position.

A key feature of this case, as highlighted by Luton Airport, was that the exclusivity granted by the airport did not fit into any of the established categories of exclusionary abusive behaviour identified by the European Commission or the European Courts. Luton Airport identified two recognised categories of exclusionary abuses: (i) a firm that is dominant on an upstream market is itself competing on a downstream market and is acting to foreclose the competition that it faces on that downstream market to its own advantage; and (ii) the dominant firm’s conduct distorts competition between itself and its competitors on the upstream market on which it is dominant, eg by entering into exclusive contracts with its customers to foreclose its competitors. In both categories, it was argued, the dominant firm gains a direct commercial benefit from conduct that forecloses its competitors. In this case, Luton Airport argued, there was a complete absence of competing downstream interest, because Luton Airport did not itself operate any coach services or have any shareholding interest in any company that was operating a coach service.

The Court, referring to EU case law, held that it is not necessary for a dominant firm to gain any commercial benefit from its conduct before that conduct can be condemned as abusive, provided that it has some impact on downstream competition. Since the exclusivity enjoyed by National Express clearly had an impact on the ability of other bus operators to compete with it on the route between Luton Airport and central London (indeed, this was arguably its purpose), this test was met. As the Court noted, the grant of exclusivity created serious barriers to entry on the downstream coach services market, which presumably resulted in higher fares for passengers than would otherwise have been the case in a competitive market. The Court also rejected the notion that Luton Airport had to be directly active on the downstream market for an abuse to be made out. In any event, the Court noted that, since the new concession was predicated on payments that were linked to the profit made by National Express, this gave Luton Airport an indirect commercial interest in the downstream market, even though it was not active on it itself.

The Court went on to reject the arguments put forward by Luton Airport as objective justification for the exclusivity. Specifically, it found that the grant of access to just one bus company was not justified by congestion at the Luton Airport bus station or by health and safety concerns. Rather oddly, Luton Airport does not appear to have focused its objective justification argument on what appears to have been the true justification for the exclusivity (which was proposed as a term by all three bus operators bidding for the concession, not by Luton Airport), namely that it was a measure to increase the commercial value of the concession to the winning operator and, by extension, to the airport itself (which is owned by the local municipality). As a result, there was no assessment by the Court of the relative efficiencies arising from the grant of exclusivity compared with its anticompetitive effect, or its necessity, as is anticipated by European Commission guidance on Article 102 and applied in cases in which the legality of agreements between non-dominant entities is assessed under Article 101(3) TFEU. The absence of such a balancing exercise seems odd, given the centrality of this issue.

The Court also held that the grant of a right of first refusal to National Express for new services to other destinations in London increased the distortive effect of the exclusivity. On this issue, Luton Airport was more open that the commercial justification for this provision was to prevent the National Express service being challenged by rival operators offering to take passengers to central London via alternative routes, on the grounds that this would undermine the basis on which it was prepared to pay the minimum guaranteed sum under the concession. The Court disagreed that this was a legitimate justification, however. The Court noted that there was no uncertainty about the level of demand for the service and the infrastructure and marketing were already in place. On this basis, there was no justification for protecting National Express from the erosion of its customer base if a rival service was introduced to another London route. This suggests that, if Luton Airport had sought to use such an argument to justify the exclusivity itself, rather than just the right of first refusal, it would not have been successful.

In the Court’s view, another distortive factor was the fact that the new concession provided an exception to the exclusivity in favour of easyBus, which operated services between the airport and central London using 19 seat minibuses rather than the full sized coaches used by National Express and ATS. The Court held that there was “no doubt” that ATS and easyBus had been treated differently, and that no explanation had been put forward by Luton Airport as to why easyBus should be put in this favoured position. It therefore concluded that this formed part of the abuse.

On this basis, the Court concluded that, on the assumption that Luton Airport was dominant, the terms of the new concession amounted to an unlawful abuse of its dominant position.

Comment

This judgment serves as a stark reminder of the “special responsibility” not to distort competition that is placed on dominant firms by the Chapter II prohibition and Article 102 TFEU. While the dividing line between legitimate and illegitimate conduct is often far from clear, the unambiguous impact of the law is that certain conduct that is perfectly legitimate when carried out by a non-dominant firm may be unlawful if carried out by a dominant firm. While, in principle, even a dominant firm is free to choose its trading partners, the case law applied by the Court in this case amounts to a substantial interference with a dominant firm’s freedom to decide who should have access to its property and on what terms. In effect, the Court applied earlier cases concerning access to so-called ‘essential facilities’, including harbours and airports, to impose a broad obligation on Luton Airport not to act in any way that could restrict competition on any market, even if, as was the case here, it is not itself present on the affected market, let alone dominant on it.

In this respect, this judgment can be contrasted with the High Court’s judgment in Purple Parking Limited and Meter Parking Limited v Heathrow Airport Limited, in which Heathrow Airport was found to have abused its dominant position in a market for access to Heathrow Airport by discriminating in favour of its own in-house valet parking operation, to the exclusion of rival valet parking operators. In the Luton Airport case, the Court had no issue with the fact that the exclusivity in no way protected Luton Airport’s own dominant position. Neither was there any analysis of whether National Express might itself be dominant on a relevant market. (In fact, the Court saw no need to establish where there was a distinct market for bus travel between the airport and central London.) Rather, the Court was concerned that the exclusivity conferred an unacceptable commercial advantage on National Express, and hence an indirect financial advantage for Luton Airport, by excluding competing bus operators from the airport bus station, even though ATS itself had requested similar exclusivity in the event that its tender had been successful. The Court also failed to place any weight on the fact that the abusive term was proposed by the bus companies, not the dominant airport operator.

The Court’s hostility to the concept of exclusivity in transport contracts contrasts with the fact that the UK rail passenger sector is run on a franchising model, under which Government awards wholly or largely exclusive franchises to the operator that promises to pay Government the most money, or require the lowest subsidy, over the lifetime of the franchise. The approach taken by the Court in this case can also be contrasted with that taken by the Office of Fair Trading (OFT) in its investigation of exclusive agreements between the owners of London rail and underground stations, on the one hand, and newspaper publisher Associated Newspapers Limited, on the other. In that case, the OFT was concerned that the entry into long-term agreements, giving Associated the exclusive right to distribute newspapers in stations, may have amounted to an abuse of Associated’s dominant position in the London newspaper market, since it prevented other newspaper publishers from accessing stations to distribute their own papers, even at times when Associated’s free morning newspaper was not being distributed. That case was resolved when Associated committed to waive its exclusivity during times when it was not distributing its newspaper, freeing up stations for distribution by rivals in the evening peak. It is notable that the OFT’s decision of 1 March 2006 accepting Associated’s commitments explicitly acknowledged that “a certain degree of foreclosure is inherent in an exclusive agreement” and that this may be justifiable for a limited period, for example to permit the launch of a new and innovative product. The OFT also acknowledged that the desire to protect Associated’s investment and prevent free-riding by rivals was in principle a legitimate basis for exclusivity, albeit not the 24 hour a day exclusivity enjoyed by Associated.

The approach taken by the Court also differs from that taken by the Office of Rail Regulation in 2006 when assessing the legality of freight carriage rebates granted to large users of coal by the rail freight company, EWS. In that case, the ORR ultimately found that the rebates infringed the Chapter II prohibition, since they excluded competition to EWS from other rail freight operators and therefore amounted to an abuse by EWS of its dominant position on the market for the haulage of coal by rail. In other words, there was a clear connection between the exclusionary rebates granted by EWS and the protection of its dominant position.

It is particularly unfortunate that the Court did not clarify in this case whether it objected to the duration of the exclusivity or the simple fact that National Express enjoyed any degree of exclusivity at all. Although the Court’s rather strained reference to the terms on which the English Premier League settled an investigation by the European Commission regarding its sale of audiovisual rights might suggest that the Court would have viewed a three year term as acceptable, the general thrust of the judgment indicates that any exclusivity would in its view have been abusive. Given that any property owner may be viewed as dominant in a ‘market’ for access to its own facilities, this suggests a rather radical implication that no property owner can limit access to its premises to just one other party, if this has an effect on the manner in which that party competes with others on a related market.

While there is no suggestion that Luton Airport did not get a fair hearing in this case, there is perhaps a hint in the judgment that the judge disliked the “tough” negotiating style of Luton Airport’s Commercial Director. Perhaps Mrs Justice Rose felt that a less combative style would have been more appropriate for a dominant airport operator, notwithstanding the fact that even a dominant company may reasonably expect that it should be able to run its business in a way that maximises its profits. After all, the traditional argument against monopolies is that the absence of competition makes them lazy, not that they are too aggressive.

On a more positive note, this case does show that the English courts can provide an effective remedy for companies who feel that they have been the victim of anticompetitive behaviour. Due to the Court’s decision to expedite the trial, and to address the issue of abuse separately, the key issue at dispute in this case has been resolved less than a year after the allegedly exclusionary conduct arose. If, rather than bringing legal proceedings, ATS had instead made a complaint to the OFT requesting a formal investigation, any resulting investigation would still have at least another year to run and probably longer (assuming, of course, that the OFT had not already rejected the complaint).

Assuming that the Court proceeds to confirm its assumption that Luton Airport is dominant, the effect will presumably be to render the existing concession agreement with National Express null and void. At that point, Luton Airport will be forced to decide what to do next. Presumably, it will have to grant access to the airport bus station to ATS, and indeed to anyone else wishing to operate a bus service from the airport to central London, up to the point at which the bus station becomes full. (Fortunately, the bus station is due to be expanded in the next few years, as part of a redevelopment of the airport.) Assuming that the airport continues to charge bus operators concession fees for that access, it will be interesting to see whether the loss of the exclusivity premium currently paid by National Express does indeed result in less revenue for the airport and its ultimate owners, the Borough of Luton. It is also possible that this judgment is subsequently overturned on appeal or, perhaps more likely, that the parties decide to settle rather than proceed with a trial of the outstanding issues.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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Becket McGrath
Trupti Reddy
 
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