Cardiff Bus

No. CA98/01/2008

Summary of the infringement

By this decision, of which Annexes 1 and 2 form an integral part, ('this Decision'), the OFT has decided that, during the period from 19 April 2004 to 18 February 2005, Cardiff City Transport Services Limited (trading as Cardiff Bus) infringed the prohibition imposed by section 18(1) (the Chapter II prohibition) of the Competition Act 1998 (the Act), by engaging in predatory conduct which amounted to the abuse of its dominant position in the relevant markets.

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The Chapter II prohibition provides that any conduct on the part of one or more undertakings that amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom.

This Decision arises from a complaint made by 2 Travel Group plc (2 Travel) in November 2004.

In response to 2 Travel's entry into the market with a new no-frills bus service, Cardiff Bus introduced its own no-frills bus service (the 'white service', or 'white services'). Cardiff Bus' white service buses ran on the same routes and at similar times of day as 2 Travel's no-frills services and were run at a loss until shortly after 2 Travel's exit, when Cardiff Bus withdrew them.

Cardiff Bus claimed that it had introduced the white service in reaction to 2 Travel's introduction of no-frills services, with the intention of market testing the no-frills concept. Cardiff Bus also claimed that its decision to withdraw the white service was taken on the basis of an unexpected lack of customer demand, as well as driver shortages. 

In this case, in defining the relevant markets, the OFT has considered the scope for demand and supply side substitution. The OFT concludes that the relevant markets are the provision of no-frills and normal bus services as part of the Cardiff Bus network together with urban bus services, and also interurban bus services and urban rail services (to the extent that they serve the same flows) into and out of Cardiff city centre. In geographic terms, the OFT has considered the supply of these services both on the relevant routes operated by the white services and on a network basis in the Cardiff County area (to capture the effect of network tickets).

While defining the relevant markets both on a route level and a network basis, the OFT considers that the network market is the most relevant for the assessment of dominance because Cardiff Bus relies on its network for its market power. On this basis, the OFT finds that Cardiff Bus' share of this market was over 66 per cent, and that it faced only fragmented actual competition, with no other operator having notable market share.  

On a flow-by-flow basis, in terms of the city centre, Cardiff Bus accounted for 72 per cent of all bus services stopping at Cardiff Central Bus Station by frequency. Outside the city centre, Cardiff Bus had a market share on each of the small flows typically above 75 per cent.  

Although the OFT considers that supply side substitutability is unlikely to constrain Cardiff Bus, as a cross-check, the OFT has also considered the implications for the definition of the relevant market of taking into account supply side substitution. On this basis, Cardiff Bus' market share was 69 per cent within a 30-minute isochrone from Cardiff Central Bus Station.

In terms of actual competition, therefore, on the basis of its frequency shares, Cardiff Bus was by far the largest operator of bus services both on a flow-by-flow and network basis. Furthermore, Cardiff Bus was the only significant provider of urban commercial bus services in the County with its actual competitors focusing on operating either tendered or interurban services. Cardiff Bus' rivals therefore did not have sufficient presence on the relevant routes, either individually or collectively, to exert a significant constraint on it. In addition, Cardiff Bus' independence from actual competitors was reinforced by the lack of potential for supply side substitution.

Potential competition from train operators, in the short- to medium-term at least, was very unlikely and the potential for entry and expansion on the part of bus operators was also limited, both at the network level and on individual routes. Barriers to entry and expansion by existing bus operators included the strength of Cardiff Bus' network, the costs of entry, and the perception on the part of smaller operators of Cardiff Bus' reputation for responding aggressively and selectively to entry or expansion on particular routes. Potential competition from this source was therefore limited.

Overall, taking the evidence in the round, the OFT concludes that the limited actual and potential constraints on Cardiff Bus at the time of the operation of the white service support the conclusion that Cardiff Bus had sufficient market power to be able to act independently of its competitors, customers and consumers. Therefore, the OFT concludes that Cardiff Bus held a dominant position in the relevant markets.

Cardiff Bus provided little in the way of contemporaneous documents to support its explanation that the white services were introduced to test market demand for no-frills services, rather than merely to divert passengers from 2 Travel. The OFT identified evidence that conflicted with Cardiff Bus' explanation that it was conducting a market test. This included evidence that Cardiff Bus planned to launch its no-frills white services not as a true market testing exercise, but in order to divert potential customers away from 2 Travel. There was also evidence that Cardiff Bus publicly disparaged the concept of no-frills services and avoided promoting them. 

Further to this, the OFT identified evidence that Cardiff Bus launched its white services with exclusionary intent - in other words, with the intention of diverting prospective customers away from 2 Travel and thereby forcing 2 Travel out of the market, thus protecting Cardiff Bus' dominant position, and not with the intention of competing on the merits or carrying out a genuine market test. This includes the fact that the white services were launched at or around the same time, and on the same routes, as 2 Travel's no-frills bus services. It also includes the substantial preparations made by Cardiff Bus to respond aggressively to 2 Travel's entry, and ongoing assessment by Cardiff Bus of the threat posed by 2 Travel. In particular, the evidence demonstrates that the launch and continued operation of the white services was loss-making for Cardiff Bus. Overall, the revenues generated by the white services did not even cover the costs of paying the wages of the drivers who drove the white buses.

There is little evidence that Cardiff Bus considered the likely impact on its profits of launching the white services. Rather, the contemporaneous evidence suggests that Cardiff Bus simply wanted to divert passengers away from 2 Travel and did not consider whether or not the white services would be profitable in their period of operation. In the OFT's view, this failure to consider whether the white services would be profitable does not undermine, but rather supports, a conclusion that the launch of those services was motivated by exclusionary intent. Once the white services were running, it would have quickly become evident to any objective observer in the position of Cardiff Bus that the services as run were loss-making and a commercial failure.

In all the circumstances, the OFT concludes that the evidence is sufficient to demonstrate that Cardiff Bus was reacting to 2 Travel's entry by attempting to force the entrant to retreat from the market. Cardiff Bus' white services were not, therefore, launched as a market test but were launched and operated simply for the purpose of driving out 2 Travel, rather than making profits for Cardiff Bus or fulfilling any other legitimate commercial strategy.  

In the OFT's view, Cardiff Bus' conduct contributed to maintaining and strengthening its dominance and did not constitute 'normal competition on the merits', but was predatory and an abuse of Cardiff Bus' dominant position. Cardiff Bus' operation of its white services lasted from 19 April 2004 to 18 February 2005, which is therefore the duration of its predatory conduct. 

Proposed action by the OFT

The Act provides that the OFT may impose on an undertaking, which has intentionally or negligently committed an infringement of the Chapter II prohibition, a financial penalty and/or directions to bring the infringement to an end. 

Cardiff Bus benefits from immunity under section 40 of the Act, which provides limited immunity from financial penalties for conduct of minor significance in relation to infringements of the Chapter II prohibition. Conduct is considered to be of minor significance if the annual turnover of the undertaking considered to have infringed the Chapter II prohibition does not exceed £50 million. In this case, the OFT is not imposing a financial penalty on Cardiff Bus.

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