The Italian Competition Authority fines the managers of airports of Milan and Rome for excessive pricing and margin squeeze practices
In the space of a month the Italian Competition Authority or ICA fined ADR and SEA, the managers of the airports of Rome and Milan, respectively, for setting excessive airport fees for access to certain airport facilities. ADR and SEA were so condemned to pay a fine of € 1.668.000 and € 1,549,000, respectively. (Autorità Garante della Concorrenza e del Mercato or AGCM, case A376, decision of 23 October 2003, Aereoporti di Roma-Tariffe Aereoportuali, Bollettino 40/2008, and AGCM, decision of 26 November 2008 case A377, SEA-Tariffe Aereoportuali.
ADR enjoyed a dominant position at the Rome’ airports of Fiumicino and Ciampino, as holder of an exclusive licence for the joint management of the airports until 2044. SEA, instead, has a dominant position at the Milan’s airports of Linate and Malpensa as holder of an exclusive licence for the joint management of the airports until 2041. ADR has been found guilty of violating Art. 82 EC for imposing excessive airport fees for refuelling and sub-letting office space to freight operators and for having carried out margin squeeze practices with regard to access to Fiumicino’s “Cargo City”. SEA has abused its dominant position by setting excessive prices for jet refueling and access to certain airport facilities.
The aversion of competition authorities for excessive prices practicing. A condemnation for excessive pricing is a rare event in competition law enforcement due to the difficulties in proving such anticompetitive practice. Thus the ICA decision in the Aereoporti di Roma-Tariffe Aereoportuali and SEA-Tariffe Aereoportuali cases are worth reading, especially as far as the methodology applied in order to find the excessive practice pricing.
Before embarking on the discussion of the methodology, it may be helpful to have a look at the regime for the setting of airport fees. Under Italian law airport fees for access to the airport facilities considered in the ICA investigation have to be cost-oriented and conform to principles of transparency and non-discrimination. Such fees are set in a contractual framework (Contratto di Programma) subjected to governmental approval. Yet, because at the time of the contested conducts this regime was not in force, ADR and SEA acted in a situation of legal uncertainty. So they set the airport fees in a unilateral and non transparent manner.
That said, coming back to the methodology for the assessment of the alleged excessive prices, the ICA opted for a qualified cost plus test. Under this test, the ICA compared the level of airport fees with the real economic value of the supplied services, the best proxy of which was the costs borne by ADR and SEA to supply them, plus a fair return on capital invested. To this end, the ICA has taken into consideration the data submitted by ADR and SEA in view of the drafting of the Contratto di Programma and the findings of the ENAC, the Italian aviation authority.
Importantly, only airport fees by far exceeding the level of costs constitute an excessive pricing under Art. 82 EC. Instead, fees not so much higher than regulated costs fall foul of the scope of application of Art. 82 EC.
In light of the above qualified cost plus test, the ICA reached the following conclusions:
A)ADR and SEA set excessive airport fees for the provision of:
•Refuelling services. The airport fees set by ADR and SEA for the 2004-2005 years did not conform to the principle of cost orientation, being 50% higher than the value of the service supplied as calculated by the ENAC.
•Provision of common and individual infrastructure for cargo handling activities. Here the ICA considers the sub-letting rents of office space to freight operators. Since 2002 the rent SEA and ADR charged on independent cargo carriers was about double those applied to cargo handling operators, which was taken as a benchmark for the economic value of the service. In the view of the ICA the rent for freight handlers was substantially aligned with costs. In contrast, the rent for independent cargo carriers being as twice as high as the economic value of the services was deemed to be excessive.
B)SEA only set excessive airport fees for the provision of:
Provision of common and individual common catering service. Over the 2004-2005 period SEA charged non cost-based airport fees linked to the yearly revenue of caterers. The fees SEA set in the region of 9% of yearly revenue of caterers were much higher than costs. As already shown in ADR-Tariffe aeroportuali, the costs calculated by the ENAC upon the basis of the number of meals served are about 3% of yearly revenue of caterers
C)ADR and SEA set no excessive airport fees for the provision of:
•Access to centralized facilities. Though the access charges set by ADR and SEA are non cost-based, the proceeds gained by airport managers through such charges covered only partially the costs related to access to certain facilities, while access to others facilities, especially BHS for baggage handling, was supplied at loss. The key factor to dismiss any allegation of excessive pricing was that ADR and SEA were unable to extract any supracompetitive profits from the provision of access to all centralized facilities.
•Provision of security services. The amount of the airport fees levied for additional checks for sensitive flights (the so-called profiling) was too low to be considered as excessive.
D)ADR only set no excessive airport fees for the provision of:
Access to exclusive and/or common catering service. The non cost-based fees, linked to the yearly revenue of caterers ADR applied until 2007, when it introduced new cost-oriented fees linked to the number of meals served, were substantially in line with the economic value of the service, and therefore not excessive.
In addition, as hinted above, ADR also carried out a margin squeeze practice. In 2004 and 2005 ADR applied a full fixed charge per flight to all freight to be forwarded from Fiumicino’s Cargo City regardless of whether the goods was prepared by competing cargo handlers outside the airport facilities. If it was the case, ADR granted a fixed rebate to the carrier but the amount of the deducted sum did not cover the whole costs incurred by a cargo handler as efficient as ADR for the handling of freight. ADR competitors faced higher costs than ADR, as unlike the latter they also had to bear access charges to cargo city. Thus for a carrier to entrust the preparation of freight to competing cargo handlers was more expensive than entrust it to ADR. Through the rebates ADR outpriced competing cargo handlers with the result that the latter were unable to market their services at the same prices as ADR and the ensuing hindering of the competitive development of markets. That lead to a market foreclosure in the shape of a margin squeeze practice prohibited by Art. 82 EC, which took place.
Conversely, the charges system ADR has applied starting from 2006 ADR complies with Art. 82 in that it allows independent cargo handlers to effectively compete with ADR for the provision of freight handling services.
In conclusion, the ICA task under the qualified cost plus test of apportioning costs to each supplied service in order to calculate the real economic value has been to a certain extent facilitated by the regulated nature of services. The ICA took into account of the level of regulated costs calculated by the ENAC and it sanctioned only the airport fees much higher, at least 50%, than the regulated costs whereas fees slightly higher than costs are not excessive.
To understand how the cost data supplied by the ENAC in ADR- Tariffe aeroportuali was of help for the ICA in order to furnish the proof of excessive pricing, one may look at an earlier case in which, again, the ICA examined excessive airport fees allegedly applied by ADR (AGCM, case A11, decision of 17 March 1993, IBAR/Aereoporti di Roma, Bollettino 6/1993). Also in IBAR/Aereoporti di Roma, the ICA sanctioned ADR for excessive prices, but contrary to ADR- Tariffe aeroportuali, the condemnation was based on the unfair contractual terms imposed by the airport manager rather than the high level of airport fees, due to the difficulty to prove an excessive prices.
However, it must be stressed that reliable cost data are contingent on dominant firms adopting sound accounting systems which correctly represent costs. ( See, AGCM, opinion AS274 of 29 January 2004, Liberalizzazione e privatizzazione delle attività aeroportuali, Bollettino 5/2004).
That does not appear to be the case in ADR-Tariffe aeroportuali and in SEA-Tariffe aeroportuali with regard to provision of access to centralized facilities. In particular, the ICA and the ENAC had some reservations about the criteria followed by SEA for the apportionment of costs, which were thought to not accurately represent the whole cost sustained for the provision of these services. The regulators’ concerns focused mainly on the costs related to BHS, which accounted for most of the losses suffered by SEA in providing the services at hand.
Additionally, the ICA was unconvinced by the SEA and ADR pricing policies. Though they were aware of the unprofitability of the provisions of access to centralized facilities because the proceeds of fees covered only a portion of costs, they did not adjust the charges to the level of costs as required by the regulation in force and continue supplying the services at lost.
Eventually, the ICA acquitted ADR and SEA of all allegations of excessive prices with relation to the fees for access to centralized facilities. The decisive argument in its reasoning was that ADR and SEA were unable to extract any supracompetitive, notwithstanding the above problems with their accounting systems and pricing policies.
ADR enjoyed a dominant position at the Rome’ airports of Fiumicino and Ciampino, as holder of an exclusive licence for the joint management of the airports until 2044. SEA, instead, has a dominant position at the Milan’s airports of Linate and Malpensa as holder of an exclusive licence for the joint management of the airports until 2041. ADR has been found guilty of violating Art. 82 EC for imposing excessive airport fees for refuelling and sub-letting office space to freight operators and for having carried out margin squeeze practices with regard to access to Fiumicino’s “Cargo City”. SEA has abused its dominant position by setting excessive prices for jet refueling and access to certain airport facilities.
The aversion of competition authorities for excessive prices practicing. A condemnation for excessive pricing is a rare event in competition law enforcement due to the difficulties in proving such anticompetitive practice. Thus the ICA decision in the Aereoporti di Roma-Tariffe Aereoportuali and SEA-Tariffe Aereoportuali cases are worth reading, especially as far as the methodology applied in order to find the excessive practice pricing.
Before embarking on the discussion of the methodology, it may be helpful to have a look at the regime for the setting of airport fees. Under Italian law airport fees for access to the airport facilities considered in the ICA investigation have to be cost-oriented and conform to principles of transparency and non-discrimination. Such fees are set in a contractual framework (Contratto di Programma) subjected to governmental approval. Yet, because at the time of the contested conducts this regime was not in force, ADR and SEA acted in a situation of legal uncertainty. So they set the airport fees in a unilateral and non transparent manner.
That said, coming back to the methodology for the assessment of the alleged excessive prices, the ICA opted for a qualified cost plus test. Under this test, the ICA compared the level of airport fees with the real economic value of the supplied services, the best proxy of which was the costs borne by ADR and SEA to supply them, plus a fair return on capital invested. To this end, the ICA has taken into consideration the data submitted by ADR and SEA in view of the drafting of the Contratto di Programma and the findings of the ENAC, the Italian aviation authority.
Importantly, only airport fees by far exceeding the level of costs constitute an excessive pricing under Art. 82 EC. Instead, fees not so much higher than regulated costs fall foul of the scope of application of Art. 82 EC.
In light of the above qualified cost plus test, the ICA reached the following conclusions:
A)ADR and SEA set excessive airport fees for the provision of:
•Refuelling services. The airport fees set by ADR and SEA for the 2004-2005 years did not conform to the principle of cost orientation, being 50% higher than the value of the service supplied as calculated by the ENAC.
•Provision of common and individual infrastructure for cargo handling activities. Here the ICA considers the sub-letting rents of office space to freight operators. Since 2002 the rent SEA and ADR charged on independent cargo carriers was about double those applied to cargo handling operators, which was taken as a benchmark for the economic value of the service. In the view of the ICA the rent for freight handlers was substantially aligned with costs. In contrast, the rent for independent cargo carriers being as twice as high as the economic value of the services was deemed to be excessive.
B)SEA only set excessive airport fees for the provision of:
Provision of common and individual common catering service. Over the 2004-2005 period SEA charged non cost-based airport fees linked to the yearly revenue of caterers. The fees SEA set in the region of 9% of yearly revenue of caterers were much higher than costs. As already shown in ADR-Tariffe aeroportuali, the costs calculated by the ENAC upon the basis of the number of meals served are about 3% of yearly revenue of caterers
C)ADR and SEA set no excessive airport fees for the provision of:
•Access to centralized facilities. Though the access charges set by ADR and SEA are non cost-based, the proceeds gained by airport managers through such charges covered only partially the costs related to access to certain facilities, while access to others facilities, especially BHS for baggage handling, was supplied at loss. The key factor to dismiss any allegation of excessive pricing was that ADR and SEA were unable to extract any supracompetitive profits from the provision of access to all centralized facilities.
•Provision of security services. The amount of the airport fees levied for additional checks for sensitive flights (the so-called profiling) was too low to be considered as excessive.
D)ADR only set no excessive airport fees for the provision of:
Access to exclusive and/or common catering service. The non cost-based fees, linked to the yearly revenue of caterers ADR applied until 2007, when it introduced new cost-oriented fees linked to the number of meals served, were substantially in line with the economic value of the service, and therefore not excessive.
In addition, as hinted above, ADR also carried out a margin squeeze practice. In 2004 and 2005 ADR applied a full fixed charge per flight to all freight to be forwarded from Fiumicino’s Cargo City regardless of whether the goods was prepared by competing cargo handlers outside the airport facilities. If it was the case, ADR granted a fixed rebate to the carrier but the amount of the deducted sum did not cover the whole costs incurred by a cargo handler as efficient as ADR for the handling of freight. ADR competitors faced higher costs than ADR, as unlike the latter they also had to bear access charges to cargo city. Thus for a carrier to entrust the preparation of freight to competing cargo handlers was more expensive than entrust it to ADR. Through the rebates ADR outpriced competing cargo handlers with the result that the latter were unable to market their services at the same prices as ADR and the ensuing hindering of the competitive development of markets. That lead to a market foreclosure in the shape of a margin squeeze practice prohibited by Art. 82 EC, which took place.
Conversely, the charges system ADR has applied starting from 2006 ADR complies with Art. 82 in that it allows independent cargo handlers to effectively compete with ADR for the provision of freight handling services.
In conclusion, the ICA task under the qualified cost plus test of apportioning costs to each supplied service in order to calculate the real economic value has been to a certain extent facilitated by the regulated nature of services. The ICA took into account of the level of regulated costs calculated by the ENAC and it sanctioned only the airport fees much higher, at least 50%, than the regulated costs whereas fees slightly higher than costs are not excessive.
To understand how the cost data supplied by the ENAC in ADR- Tariffe aeroportuali was of help for the ICA in order to furnish the proof of excessive pricing, one may look at an earlier case in which, again, the ICA examined excessive airport fees allegedly applied by ADR (AGCM, case A11, decision of 17 March 1993, IBAR/Aereoporti di Roma, Bollettino 6/1993). Also in IBAR/Aereoporti di Roma, the ICA sanctioned ADR for excessive prices, but contrary to ADR- Tariffe aeroportuali, the condemnation was based on the unfair contractual terms imposed by the airport manager rather than the high level of airport fees, due to the difficulty to prove an excessive prices.
However, it must be stressed that reliable cost data are contingent on dominant firms adopting sound accounting systems which correctly represent costs. ( See, AGCM, opinion AS274 of 29 January 2004, Liberalizzazione e privatizzazione delle attività aeroportuali, Bollettino 5/2004).
That does not appear to be the case in ADR-Tariffe aeroportuali and in SEA-Tariffe aeroportuali with regard to provision of access to centralized facilities. In particular, the ICA and the ENAC had some reservations about the criteria followed by SEA for the apportionment of costs, which were thought to not accurately represent the whole cost sustained for the provision of these services. The regulators’ concerns focused mainly on the costs related to BHS, which accounted for most of the losses suffered by SEA in providing the services at hand.
Additionally, the ICA was unconvinced by the SEA and ADR pricing policies. Though they were aware of the unprofitability of the provisions of access to centralized facilities because the proceeds of fees covered only a portion of costs, they did not adjust the charges to the level of costs as required by the regulation in force and continue supplying the services at lost.
Eventually, the ICA acquitted ADR and SEA of all allegations of excessive prices with relation to the fees for access to centralized facilities. The decisive argument in its reasoning was that ADR and SEA were unable to extract any supracompetitive, notwithstanding the above problems with their accounting systems and pricing policies.
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