FAS should change aviation regulation, rather than probe carriers - industry sources

31.03.2014

Federal Antimonopoly Service (FAS), Russia’s competition authority, should tackle the airlines ticket pricing system through regulatory changes, not antitrust cases, industry sources said.

FAS is determined to replace the existing ticket pricing system for airlines, as previously reported by PaRR. The authority is concerned that under the current system, even when there is less demand for flights, airlines maintain high ticket prices and fly with empty seats instead of offering them to customers cheaper, FAS head Igor Artemyev reportedly said.

In December, FAS met representatives of the Russian carrier Aeroflot, who promised to analyse the possibilities of modifying its ticket pricing politics, the deputy head of FAS Anatoly Golomolzin told PaRR, adding that FAS has been discussing the ticket pricing system with airlines for almost two years.

However, seeing no significant progress, in February Artremyev reportedly said antitrust investigations into airlines – including foreign operators – were not ruled out, if companies do not agree to cooperate.

But, FAS should instead aim to influence federal aviation agency Rosaviation, said a Russian competition lawyer. This way FAS will be able to change regulations and avoid complex antitrust cases. Rosaviation is capable of reforming the ticket pricing system because all airlines use the same system, he added.

The ticket pricing system is not strictly speaking a sole FAS jurisdiction. The Ministry of Transport and Ministry of Finance (for example, regarding VAT air tickets issues) are supposed to address this problem as well, said Vitaly Dianov, a senior competition lawyer at Goltsblat BLP.

If FAS decides to initiate cases against airlines, it has two options: cartel charges and abuse of dominance allegations, said Dianov. However, both approaches are problematic. Cartel accusations require real evidence, while abuse of dominance allegations will require FAS to define a market, said Dianov. If the agency decides to confine it to certain roots, it may challenge airlines but would not solve the issue of ticket pricing system as such, he noted.

FAS has already investigated ticket price fixing by airlines on the Rostov-Moscow-Rostov route in 2012, Dianov pointed out.

Rostov OFAS, a regional arm of FAS, found Russian airlines Aeroflot, S7 and UTair guilty of price fixing, and fined them RUB 8m in total.

FAS may launch an investigation into an aviation case cartel, suggested a second Moscow-based competition lawyer. But, it will be very difficult, he added, noting that there has been no similar precedent in the world.

The regulator may also find it challenging to initiate cases against foreign airlines because international flights are regulated by various bilateral governmental agreements, said Dianov.

The changes which FAS wants to introduce will affect low cost airlines as well, said the second competition lawyer noting that even they do not significantly reduce ticket prices on the last day before a departure.

FAS does not want to break the current system, said Golomolzin. Minor modifications of existing airline software will ensure that if the demand for tickets is low, prices go down rather than stay at existing levels, explained Golomolzin.

Current pricing scheme follows global tariff rules

It will be difficult to change such a complex system on the basis of straightforward directives from FAS, observed Dianov. The system is too complex to change it quickly, the second lawyer agreed.

Currently airlines determine their ticket pricing in accordance with tariff rules existing in civil aviation globally.

Aeroflot uses a methodology, developed at the end of 80s in the US, which determines revenue policies for airlines, according to Aeroflot’s press office. This system is upheld by all reservation systems.

Aeroflot, like the majority of carriers, uses a multi-group structure of tariffs, according to the company’s representative. Rates are determined by a specialised software programme AirMax, which takes into account many different factors such as the statistics of previous periods, transit flights and so on.

Aeroflot has more than 20 tariffs, the company’s spokesperson said, adding that if you buy a ticket in advance (for example, a few months before the flight), the prices will be the cheapest. The closer the departure date, and the more seats sold, the less chance to buy cheap tickets.

FAS is scheduled to meet representatives of major airlines in order to discuss ticket pricing in March, said Golomolzin.

Aeroflot has declined to comment on FAS’ proposal to reform the ticket pricing scheme.

easyJet has not been approached by FAS regarding proposed changes to pricing, according to easyJet’s press office. British Airways declined to comment on the issue.

From an economic point of view, FAS’ proposal is quite controversial as it may lead to a situation where passengers buy tickets a day before departure, which may cause chaos, said Denis Vorchik, a sector analyst from Uralsib Capital.

Economic slowdown, pressure on the rubble as well as the introduction of low cost airlines in Russia will decrease prices on tickets anyway, he added.

FAS actively argues against Russia's bilateral agreements on air transport tariffs, as previously reported by PaRR. The regulator also initiated the process of adding more jet fuel stations at airports dominated by major Russian energy companies.

Author: Natalia Lapotko in London

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