Investigating Monopoly Pricing in Kazakhstan’s Aviation Industry: The Antitrust Authority’s Approach

Introduction

The liberalization of economic activity in the Republic of Kazakhstan opened significant opportunities for Kazakhstani businesses and companies to develop, attract investment, and grow. At the same time, it brought considerable public dissatisfaction — particularly around high prices in recently privatized industries where state oversight had been relaxed, such as the transport and aviation sectors.

The domestic aviation market was liberalized in 2012, when the competitive allocation of domestic air routes was abolished. In 2015, state price regulation of domestic passenger air travel was lifted entirely. Today, ticket prices for Kazakhstani airlines are set through dynamic pricing based on supply and demand — where fares may vary depending on demand, advance purchase timing, day of the week, time of departure, and other factors.

The resulting public frustration prompted government officials and members of the Kazakhstani Parliament to call for price intervention — including the imposition of price caps and radical structural reforms such as separating Air Astana and FlyArystan into distinct legal entities to be privatized under new shareholders.

Alongside these pressures, several structural problems continue to impede competition in the sector:

1. High customs duties on aircraft and spare parts;
2. The high cost of aviation fuel due to unproductive intermediaries (fuel accounts for roughly one-third of all airline operating costs);
3. A lack of competition among service providers (fuel storage, refueling, airport services), creating a monopoly component in fuel pricing;
4. Limited access to natural monopoly infrastructure and airport fueling facilities;
5. The unequal competitive footing of domestic carriers versus Russian airlines within the EAEU, where Russian companies benefit from legislatively mandated zero-VAT on aviation services.

Legal Framework — Republic of Kazakhstan

Article 174 of the Entrepreneurial Code of the Republic of Kazakhstan prohibits dominant firms from abusing their dominant or monopoly position. It expressly forbids actions by market participants that restrict access to the relevant product market, prevent or eliminate competition, and/or infringe the legitimate rights of market actors or an indeterminate circle of consumers — including the establishment or maintenance of monopolistically high (or low) or monopsonistically low prices.

The Methodology for Detecting Monopolistically High (or Low) Prices (approved by Order No. 173 of the Minister of National Economy, 4 May 2018) defines a monopolistically high price as one set by a dominant or monopoly market participant that exceeds both: (a) the sum of necessary production and distribution costs plus profit, and (b) the price formed under competitive conditions on the relevant or a comparable product market.

Legal Framework — European Union

Similar prohibitions exist in EU law. Article 82 of the Treaty Establishing the European Community expressly prohibits a dominant firm from directly or indirectly imposing unfair purchase or sale prices or other unfair trading conditions. Prohibited abuses include:

1. Imposing unfair prices or trading conditions;
2. Limiting production, markets, or technical development to the detriment of consumers;
3. Applying dissimilar conditions to equivalent transactions;
4. Making contracts conditional on supplementary obligations unconnected to their subject matter.

Because the competition laws of most EU member states derive from the Treaty, analogous provisions exist throughout EU jurisdictions. However, EU law may decline to pursue cases of excessive consumer pricing, leaving such matters to national authorities.

The United States Approach

The US approach differs markedly from Kazakhstani competition law. Under US precedent, high or excessive prices are not in themselves an antitrust violation, provided the dominant company does not erect barriers to entry. High prices may signal market attractiveness, drawing in new investment and competitors who will ultimately bring prices down.

There is also a view that high prices can become self-correcting: a firm that overcharges risks losing customers to rivals and, ultimately, bankruptcy. US law is concerned exclusively with abusive conduct directed at competitors — by both dominant and ordinary firms — and does not intervene in cases of consumer-directed abuse.

Identifying a Candidate for Investigation: Criteria Across Jurisdictions

The primary task antitrust authorities in OECD countries set themselves is identifying a suitable candidate for investigation, including through the hypothetical monopolist test. Several criteria frameworks have been developed.

Evans & Padilla (2005) — Strictest Criteria

Intervention is warranted only if all three conditions are met:

1. The firm holds a (near-)monopoly position that did not arise from past investment or innovation and is protected by insurmountable legal barriers to entry.
2. The prices the firm sets significantly exceed average total costs.
3. There is a risk that such prices may prevent the emergence of new goods or services in adjacent markets.

O’Donoghue & Padilla (2006)

Intervention should be limited to industries that are:

1. Protected by high barriers to entry;
2. In which a single firm has substantial market power;
3. Where investment and innovation play a relatively minor role.

Paulis (2007)

A single test: the existence of high, insurmountable barriers to entry for competitors — i.e., competition is simply not functioning in that market.

The Situation in Kazakhstan

Kazakhstan’s Entrepreneurial Code (Article 174) contains a list of prohibitions but no candidate-identification criteria and no hypothetical monopolist test. In practice, investigations have been opened on the basis of passenger complaints to the Civil Aviation Committee, bypassing the screening steps recommended by OECD best practice. The complaints typically contain no specific facts — merely general statements about expensive fares — and lack details such as routes, prices paid, or dates of travel.

It is therefore necessary to embed into Kazakhstani law more objective criteria for identifying candidates for monopoly-pricing investigations, eliminating populist and political motives whose sole purpose is to satisfy consumer wishes under the banner of consumer-rights protection.

Methods of Investigation: Kazakhstan vs. European Practice

Both Kazakhstani and European law provide several methods for detecting monopolistically high prices. Article 175 of the Entrepreneurial Code and the associated Methodology establish the following sequential approach:

1. Comparative Analysis: The antitrust authority first compares the price set by the dominant firm with prices for the same good on the same product market.
2. Benchmarking: If a direct comparison is impossible, the price is compared with the price on a comparable product market — including markets outside Kazakhstan.
3. Cost-Plus Method: Only where a competitive benchmark price cannot be determined on any comparable market does the authority analyze the firm’s costs and profit to derive a justified price.

In practice, however, a critical inversion occurs: the antitrust authority tends to rely on the cost-plus method as its primary tool, bypassing comparative analysis and benchmarking entirely — even though the Code mandates the reverse order.

The likely reason is that benchmarking might reveal that the airline’s fares are entirely competitive relative to peers in Kazakhstan or abroad, producing no finding of violation. The cost-plus method, by contrast, allows investigators to scrutinize salaries (particularly executive compensation) and procurement expenditures — generating narratives about excessive profit that appeal to popular sentiment rather than market reality.

Conclusions: Pros and Cons of Antitrust Action Against Excessive Pricing

Because measures against excessive pricing should be taken only in exceptional circumstances — and because every available methodology has inherent weaknesses — antitrust authorities must test any alleged price excess using the maximum number of methods. They should not limit themselves to a simple price-versus-cost comparison. Deeper market analysis is required: if different tests produce inconsistent results, or if the price does not materially deviate from comparable competitors’ figures, charges should be dropped.

Price regulation in Kazakhstan also carries a strong political dimension. Politicians, under pressure from consumers or voters, frequently promise lower prices — including airfares — and call on the government or antitrust authority to impose fare caps on domestic routes, even where no objective market conditions justify such intervention.

A further counter-argument to excessive-pricing enforcement is that it may lead to de facto unworkable price regulation. Periodic intervention in a dominant firm’s pricing will not solve the underlying problem; it may deter market entrants, depress long-term investment and innovation, and — perversely — leave the market less competitive than before. The antitrust authority would find itself acting as a permanent sectoral regulator without the expertise or mandate to do so. Unlike industry-specific regulators, antitrust bodies lack both the experience and the authority to tell firms what prices will be deemed acceptable.

References

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