The Luthansa-Germania Case (2002): a Standard for More Severe Predatory Pricing Rules?



The Luthansa-Germania Case (2002): a Standard for More Severe Predatory Pricing Rules?

Authors

K Hueschelrath, WHU Graduate School of Management, DE

Description

Abstract

In February 2002 the German Antitrust Authority ? The ?Bundeskartellamt? - announced that it sees the pricing strategy of Deutsche Lufthansa AG (DLH) on the Frankfurt/Main-Berlin/Tegel route as an attempt to squeeze its new competitor, Germania Fluggesellschaft mbH (Germania), out of the market and fears that emerging competition will be substantially impaired as a result. Therefore, the Bundeskartellamt has prohibited DLH from demanding a price (including passenger fees) for a one-way ticket per passenger on the Frankfurt-Berlin route, which is not at least 35 Euro above Germania?s price, as long as DLH does not have to charge more than 134 Euro as a result. This allegation remains valid for two years, as within this period Germania should have gained sufficient recognition and established a clientele base. Germania?s operational procedures and other competition factors should have also improved to such an extent that protection against predatory conduct on the scale as provides by this decision should no longer be necessary.

The story behind the decision can be described in short as follows: Germania started a scheduled flight service between Berlin/Tegel and Frankfurt/Main on 12 November 2001. The company offers tickets at 99 Euros for a one-way, fully-flexible and rebookable flight. The conditions correspond to DLH?s economy tariffs suitable for business travelers. Immediately after entry of Germania in the Berlin-Frankfurt market, DLH reacted by introducing a fully-flexible economy tariff of a total of 200 Euro for an outward and inward flight to be booked separately, i.e. at an average of 100 Euro per single journey (including fees). Compared with the full-flexible economy tariffs DLH previously offered this constitutes a price reduction from 485 Euro to 200 Euro, i.e. of almost 60 per cent.

In the decision, the Bundeskartellamt indicates that with this price DLH has in effect clearly undercut Germania?s price of 99 Euros as it includes services which are not offered by Germania, e.g. the higher daily flight frequencies of DLH, the better access to travel agencies, catering, frequent flyer miles, the integration into the Star Alliance network or its reputation among business travelers. Given these advantages the Bundeskartellamt estimates a price advantage of approx. 35 Euro one-way.

The Bundeskartellamt therefore concludes, that the price of DLH is set clearly below its average operating costs per passenger. The only rational explanation for this pricing strategy is that it is an attempt to force Germania from this route and to recoup resulting losses at a later stage by discontinuing the price tariff and resorting to previous ones. Recent cases on the Munich-London/Stansted and Munich-Frankfurt routes are further evidence of this strategy. In both cases DLH significantly raised its prices after its rivals, Go-Fly and Deutsche BA, had abandoned these routes.

Against this background, the paper first examines the economic arguments and motivations behind the decision of the Bundeskartellamt in greater detail. Afterwards, a special focus lies on the question, whether their reasoning is consistent with the so-called strategic theory of predatory pricing (e.g. ?The Long Purse?, Reputation theory, Signaling theory, Managerial incentives). Subsequent, a discussion whether and under what conditions the case might create a standard for more severe predatory pricing rules in the airline industry follows. A summary of the central insights concludes

Publisher

Association for European Transport