The Competition Commission of Pakistan (CCP) has issued a Policy Note to the Civil Aviation Authority (CAA) to address competition concerns and create a level playing field for all players in the establishment of flight kitchen at the New Islamabad International Airport.
In this regard, the CCP has issued a policy note for the amendment in the CAA’s order on flight catering services at CAA airports.
In April 2016, the CAA floated a Tender Notice for the establishment of Flight kitchen on joint venture basis at the New Islamabad International Airport. In response to certain concerns received from consumers, the CCP held an open hearing on 22 September 2016 and after hearing all the stakeholders, issued an Opinion on 14 December 2016 urging the CAA to address the competition concerns in the award of the contract.
Accepting the CCP’s recommendations, the CAA on 16 January 2017 re-advertised the tender and invited the Airlines, Flight Caterers and Hotels to participate in an open tender for the award of land space to establish non-exclusive flight kitchen facility at the New Airport.
Although the Joint Venture Model was not incorporated in the tender document, an obligation of royalty per meal was imposed on the successful bidder i.e. US$ 1.39 per meal on international routes and PKR 50 per meal on domestic routes. Meal royalty is essentially a tax levied by PCAA which is passed on, by the airlines/private catering company, to the final consumer. M/s Kitchen Cuisine (Pvt.) Limited (the ‘KCL’) was awarded flight kitchen 01 after a due tender process.
The CCP said that subsequent to the award of tender, CAA vides its Order dated 20 March 2018 implemented a new policy i.e. CAA Order introducing two types of flight catering services, i.e. (i) outside CAA premises and (ii) inside CAA premises. The inside CAA premises has been further divided into two sub-categories i.e. (i) Airline/JV and (ii) Private Caterers. The CAA Order shuns the requirement of the competitive bidding process for the Airlines/JVs and they will be allotted space on the CAA premises on open space charges as an incentive. Whereas, the Private Caterers would have to acquire the space inside CAA premises after competing through an open bidding process.
The CCP found that discriminatory treatment is meted out to the New Airport Kitchen licensee no.1, i.e. Kitchen Cuisine, with reference to the meal royalty on domestic routes as well as international routes. While Kitchen Cuisine is required to pay the royalty on international routes, including the local/Pakistani carriers’ international routes, the Airline/JV are required to make the payment of royalty to the meals supplied to foreign carriers only. This essentially means that the local carriers including the Airline/JV operating the flight kitchen inside CAA premises are not obliged to pay a royalty on meals supplied to its own airline or any other local/Pakistani airline operating on the international route.
Further, any private caterer operating from outside CAA premises is also exempt from the meal royalties on the meals supplied to Pakistani/local airlines operating on international routes. This discriminatory application of per meal royalties puts private caterers operating inside CAA premises, such as the Kitchen Cuisine at a competitive disadvantage and prima facie distorts the level playing field in the relevant market of flight catering services.
The private caterers operating from inside CAA premises have to apply this royalty on the provision of meals for all international routes (whether by local/ Pakistani or foreign airlines) whereas the Airlines/JVs will apply this royalty only for meals to foreign airlines. For example, if a private caterer (located within CAA premises) provides meals to an international route operated by a local/Pakistani airline it would charge US$1.39 per meal. However, if the same local/Pakistani airline operated its own kitchen and supplied to the same route no royalties would apply. Similarly, if this local/Pakistani airline supplied meals to an international route operated by another local/Pakistani airline no royalties would be applicable. The royalty would only be applicable if this airline supplied meals to a foreign airline for their international routes.
It is noted that airline operated flight kitchens and private caterers whether (located inside or outside CAA premises) compete with each other in the market for inflight catering services. This selective application of meal royalties renders private caterers (operating inside CAA premises) at a competitive disadvantage, since, it would be feasible for airlines to either (a) operate their own kitchens or (b) contract from companies located outside CAA premises as no royalties would be applicable to meal uplift from these sources. The inherent advantage given to Airlines/JVs arises not because of efficiency on their part but is rather due to the discriminatory application of meal royalty by CAA.
Moreover, the CAA Order provides incentives to Airlines/JVs for establishing a kitchen inside CAA premises which are not provided to private caterers.
Based on various clauses of the CAA Order the difference in incentives offered to Airlines/JV versus private caterers ensures that private caterers have to participate in a tender process as opposed to airlines/JV which can be granted space upon request (Clause D2.4.1). Private caterers have to pay a license fee over and above prescribed open/covered/paved space rental charges whereas, airlines/JV will be provided space on prescribed open space charges, the cost of construction is adjusted for airlines/JV and not for private catering companies inside PCAA premises.
It is noted that through the aforementioned incentives, airlines/JV are given an advantage over private caterers in terms of the cost of establishment and operation of flight kitchen. Since all the players operate in the same market any incentives must be given equally so as to provide a level playing field to all.
In order to create level playing field vis-à-vis the application of royalty, the CCP recommended that CAA Order may be suitably amended and the Royalty of USD 1.39 per meal be charged from Airline/JVs on the meals provided to local/Pakistani airlines for international routes; or the Royalty of USD 1.39/- per meal charged from private caterers located inside CAA premises, for the meal supplied to local/Pakistani airlines operating on international routes may also be waived. Similarly, meal royalties of Rs. 50/- per meal for domestic routes may be applied uniformly on all operators whether airlines/JV or private caterer; or IIAP Kitchen No.1 licensee i.e. KCL may also be exempted from the same.
Moreover, the CAA may amend Clause 2.4.1 of the Order to make provision for tender for allotment of space in case of airline/JV in a similar manner to that applied on private caterers. Further, incentives with respect to adjustment of construction cost as provided to airlines/JV in Clause 2.4.3 of the CAA Order should also be provided to private caterers located in CAA premises, in order to create a level playing field, CCP policy note recommended.