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Competition Policy Newsletter Ryanair/Aer Lingus: Even “low-cost” monopolies can harm MERGER CONTROL consumers Richard GADAS, Oliver KOCH, Kay PARPLIES, Hubert BEUVE-MÉRY (1) I. Introduction more than 30 Irish routes (4). Since also a “low- cost” or “low-fares” monopolist ultimately aims at The Ryanair/Aer Lingus case, which concerned a maximising its profits, Ryanair would thus have proposed merger of the two leading airlines oper- had the ability and incentive to raise prices (by ating from Ireland, raised a number of interest- increasing fares or various associated charges) ing procedural, legal and economic questions and 2 and/or decrease quality of its services on these required a particularly careful investigation ( ). routes. This would have had an immediate effect The Commission found that the acquisition would for more than 14 million passengers who are have led to very high market shares on more currently flying each year on the routes directly than 30 routes from/to Ireland, reducing choice affected by the merger. for consumers and exposing them to a high risk of price increases. The merger would have com- The in-depth investigation of the Commission bined two airlines with a similar operation model not only made use of the “classic” investigative (“low-frills”) and with a significant presence in techniques such as questionnaires and telephone particular at Dublin Airport, where they would interviews. In addition, the Commission has com- together account for approximately 80% of Euro- missioned a specific customer survey at Dublin pean short-haul traffic. Based on these findings, Airport, and has complemented its work with a the Commission ultimately prohibited the trans- number of detailed econometric analyses which action in June 2007 (3). It was the first prohibition are further described in a separate article in this decision since December 2004 and the first time issue (5). an airline merger was prohibited. II. The parties and the transaction The acquisition of Aer Lingus by Ryanair was in many aspects different from previous airline Ryanair is an airline offering point-to-point merger cases, which involved “network” carriers scheduled air transport services on more than and combined two airlines with operations at dif- 400 routes across 24 European countries. Ryanair ferent airports, often in different countries. Unlike operates more than 75 routes between Ireland those rather “complementary” mergers, Ryanair’s (mainly Dublin, but also Shannon, Cork, Kerry and proposed acquisition of Aer Lingus would have Knock) and other European countries. The com- combined the two by far largest airlines at one pany has a fleet of around 120 aircraft and more and the same airport (Dublin), both operating than 20 bases across Europe, the most important according to “point-to-point” and “low-cost/low- ones being London-Stansted and Dublin. fares” business models. Although an expansion of Aer Lingus is a Dublin-based airline. Like Ryanair, Ryanair, the European pioneer for cheap flights, it offers point-to point scheduled air transport might intuitively sound like being in the interest services on more than 70 routes connecting the of consumers, the Commission found that the Irish airports of Dublin, Shannon and Cork with transaction would not have been a good deal for a number of European and several non-European the affected passengers, since it would have elimi- destinations. In addition Aer Lingus offers long- nated Ryanair’s only significant competitor on haul flights, mainly to the Unites States, and cargo transport services and seats to tour operators. Aer Lingus is based principally at Dublin Airport (and to a smaller extent in Cork and Shannon) (1) Directorate-General for Competition, units D-4, B-1, 02 with a total fleet of 30 short-haul and 9 long-haul and F-1 respectively. The content of this article does not aircraft. necessarily reflect the official position of the European Communities. Responsibility for the information and views expressed lies entirely with the authors. (2) See also the article «Econometric and survey evidence in (4) It should be noted that the merger would, in addition to the competitive assessment of the Ryanair / Air Lingus actual competition on these routes, also have eliminated merger» in this issue of the Competition Policy Newslet- potential competition on a number of further routes. ter (page 73). (5) See also the article “Econometric and survey evidence in (3) COMP/M.4439 — Ryanair/Aer Lingus, decision of the competitive assessment of the Ryanair / Air Lingus 27.6.2007; see: http://ec.europa.eu/competition/mergers/ merger» in this issue of the Competition Policy Newslet- cases/index/m88.html#m_4439. ter (page 73). Number 3 — 2007 Merger control The transaction concerned a proposed acquisi- short-haul flights from/to Ireland, which would tion of sole control by Ryanair of Aer Lingus by have been based in particular on the supply-side way of a public bid for all outstanding shares not substitutability between different routes from the already acquired announced on 5 October 2006. common base of the parties in Dublin, was not The fact that Ryanair’s bid had technically lapsed upheld, mainly because the supply-side substitu- after the opening of the Phase II did not remove tion (switching capacity between routes to/from the Commission’s jurisdiction, since Ryanair had Dublin by airlines) would not be sufficiently announced to make a new bid should the Com- immediate and effective. Further, this market def- mission clear the transaction. inition would disregard the lack of demand-side substitution between different routes for a large Like in previous airline merger cases, the Com- majority of customers. However, the relevant sup- mission had to find a meaningful method for the ply side considerations were not disregarded but allocation of the turnover of the Merging Parties’ were addressed within the framework of the com- in the respective Member States. After a careful petitive assessment of individual routes. assessment of this issue and the different calcula- tion methods, the Commission concluded that the “City-to-city” approach transaction fulfils the criteria of Article 1(3) of the Merger Regulation and thus fell within the juris- Ryanair argued that the relevant O&D markets diction of the Commission. should be limited to airport-to-airport pairs as, according to Ryanair, even in cases where there III. Market definition are more airports in or in the vicinity of a particu- lar city, the customer do not regard these airports The activities of Ryanair and Aer Lingus overlap as substitutable. By contrast, the Commission’s in the field of scheduled passenger air transport investigation showed that a large number of these services within the EEA. airports are regarded by the customers as substi- Ryanair is no market of its own tutable and that the relevant O&D pairs should for many routes rather be defined on a city-to-city Ryanair argued that due to the specificity of its basis. The qualitative 6( ) as well as the quantita- business model and its extremely low cost basis, tive (7) analysis confirmed the substitutability of its pricing is not constrained by any airline but airports for final passengers for 18 out of the in rather by consumers’ overall discretionary spend- total 20 routes with exclusively city-to-city but ing. While the Commission acknowledged that not airport-to-airport overlaps. Serving different Ryanair is indeed a “classic” no-frills carrier, the airports is thus only an element of differentiation market investigation did not support that Ryanair between competing airline services within one was not in competition with other airlines. Both market and does not justify defining two different airlines are active in the differentiated market for markets. scheduled passenger air transport services, where different airlines operate with a number of dif- Indirect flights are disregarded ferent business and service models. Aer Lingus is The market investigation also confirmed that indeed positioned somewhat more “up-market” indirect flights and other means of transport can- than Ryanair, i.e. it provides some additional serv- not in general be regarded as substitutes for the ices (for instance it also flies into more expensive direct flights of the parties on the overlap routes. main airports while Ryanair flies only into sec- Only intra-European flights with their short jour- ondary ones), which is reflected by the fact that ney times are affected by the transaction. The Aer Lingus’ average fares are higher than Rya- Commission also in the past in general excluded nair’s. However, both Ryanair and Aer Lingus are indirect flights for these types of routes (subject considered as “low-frills” carriers by customers, and despite a certain level of product differentia- (6) The qualitative analysis focused on a number of factors tion, both companies currently compete with each such as distance and travelling times from the airports other on the affected routes. to the relevant city, available transport connections, travel costs for different airports, available flight sche- Point-to-point services dules and quality of services at different airports, views of competitors and customers, studies conducted by the In line with the previous decision practice of the airports (if available) or how the relevant airport is mar- Commission, the relevant product market was keted by the carriers flying there. defined as point-to-point scheduled air transport (7) The quantitative analysis consisted inter alia in the cor- services, whereby each route between a point- relation analysis of the parties’ fares for flights to dif- ferent airports over time. In a number of cases, a high of-origin and point-of-destination is defined as correlation between fares for flights to different airports a separate market (O&D approach). The other further confirmed the conclusions of the qualitative option, namely to define an overall market for analysis about airport substitutability.

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