Collusion Between British Airways and Virgin Essay

2508 Words Nov 3rd, 2012 11 Pages
The tacit collusion case to be discussed involves the illegal collusion and setting of fuel surcharges to commercial and cargo transatlantic fares between British Airways (BA) and Virgin Atlantic Airways (Virgin). The factors which contributed to its success will be discussed, as well as why, and its implications, of becoming public. To begin with, it would be beneficial to define both collusive behaviour and the nature of the competition involved in the aviation industry.
Collusion is the act of a number of firms within an industry agreeing to set a certain price, output or another parameter and is almost always against the law. This is as they all compete in the given industry, with the setting of prices or outputs done in favour of the
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The nature of these costs also plays a part, with a high amount resulting in ‘sunk costs’ which are not transferable to any other industry such as an aeroplane and machinery specific to air travel. Emphasis also has to be placed on barriers to entry which do not take a physical form, with the restricted capacity of many major airports and regulation within the aviation industry significantly limits the ability to expand operations.
An airline company needs to purchase several assets in order to offer the product of a transatlantic flight to a HUB in the USA. The first begins with the licence to operate in an airport and the parking/docking bay such as Manchester or Gatwick. With limited capacity at many leading airports both in the UK and the USA, they become extremely costly. With Heathrow being used as the main airport for comparison, due to the fact both BA and Virgin primarily operate there, Appendix B shows the extensive capacity constraints for all slots throughout each day. The purchase and maintenance of aircraft is clearly an essential fixed cost, and with strict litigation procedures meaning that there is little opportunity to save costs. The last main fixed cost is in the form of landing fees and en route charges, which each airline needs to pay.

Figure 1 (British Airways, 2010)
Figure 1 attempts to demonstrate these barriers to

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