Highland Scottish Omnibuses Ltd: A report on the conduct of Highland Scottish Omnibuses Ltd in respect of its operation of local bus services in the Inverness area

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On 22 September 1989 the Director General of Fair Trading published a report on the conduct of Highland Scottish Omnibuses Ltd (HSO) in respect of its operation of local bus services in the Inverness area, with particular regard to the use of additional vehicles on registered services and the reduction of fares to a level similar to those of a competitor, Inverness Traction Ltd (ITL). The Director General found HSO's course of conduct to be anti-competitive (see Appendix 1.1) and sought undertakings from HSO that in his view would prevent the anti-competitive practice. However, HSO was not prepared to offer undertakings that the Director General thought acceptable, and on 14 December 1989 he asked us to investigate HSO's course of conduct, with particular regard to HSO's revenue from, and cost of operating, its Inverness services. Under the Competition Act a reference of this sort requires us to report on whether, at any time in the 12 months previous to the reference, ie the period from 15 December 1988 to 14 December 1989, HSO was engaging in an anti-competitive practice, and if so whether that practice operated, or might be expected to operate, against the public interest. (The full terms of reference are at Appendix 1.2.)

HSO is chiefly engaged in providing local bus services in urban areas in the Highlands. It is a subsidiary of the Scottish Bus Group (SBG), which is owned by a public corporation, the Scottish Transport Group (STG). In common with the other SBG subsidiaries HSO will be privatised within the next 12 months or so, with preference to be given to management and employee buyout (MEBO) ventures.

In Inverness town HSO had a virtual monopoly of the local bus services until May 1988, when ITL began to operate. ITL was set up as a workers' co-operative by a group of drivers, most of whom had worked, or were working, for HSO; they had local knowledge of the market, but lacked management skills. ITL ran leased minibuses on most of HSO's Inverness town routes, charging a low fare common to all services. HSO responded with a 60 per cent increase in service mileage, coupled with fare cuts to match ITL, so incurring substantial losses. Competition between the two firms was intense and there was much ill feeling about allegedly unfair behaviour. ITL's revenues proved to be much less than expected, and its outgoings greater; it was under-capitalised, and unable to stand losses; it soon met acute financial difficulties and went into receivership in April 1989.

The services which ITL had operated were immediately continued (under the IT name) by Alexanders (North East) Ltd (A(NE)), a recently-established bus company based on Aberdeen. HSO continued with its vigorous competitive response, incurring further losses. A(NE) was itself in grave financial difficulty and went into receivership in November 1989.

After a brief interval the goodwill of the IT services and some of its assets were bought by Magicbus (Scotland) Ltd (MSL), a subsidiary of Stagecoach (Holdings) Ltd, a major group in the bus industry. HSO quickly recognised that it could no longer sustain the role of the predominant bus operator in Inverness town and progressively moderated its competitive response.

We recognise that HSO had to react vigorously to ITL's highly aggressive entry to its market, but it went too far: its provision of new services and of duplicates was grossly excessive, incurring losses that were unjustified. This was anti-competitive action, against the public interest, and likely to have the adverse effects of inhibiting competition by small bus companies and reducing investors' confidence in MEBO ventures when the SBG subsidiaries are sold.

HSO behaved similarly towards A(NE).

If HSO had been left as the sole operator in Inverness town when A(NE) failed we might well have recommended remedial action: the full recovery of overheads, sought by the Director General, would have been an appropriate and effective measure. Other constraints might have been considered. However, with the advent of MSL HSO's position changed fundamentally. MSL is a powerful operator and HSO recognises it is no longer predominant. The two companies have reduced the excessive volume of services that prevailed in 1989 but still appear to be competing in a way that is satisfactory to the consumers. How long that will last is impossible to say. In 12 months or so the situation will change again, when HSO is sold into private ownership.

Given these uncertainties we do not think remedial action is appropriate at the present time. That does not mean we approve of HSO's conduct towards ITL and A(NE). The bus industry should note that in circumstances less exceptional than those prevailing in Inverness in 1988/89 this Commission will recommend brisk remedial action for anti-competitive behaviour of the sort evinced by HSO.

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