Competition Policy Newsletter
Ryanair/Aer Lingus: Even “low-cost” monopolies can harm CONTROL MERGER consumers Richard GADAS, Oliver KOCH, Kay PARPLIES, Hubert BEUVE-MÉRY (1)
I. Introduction more than 30 Irish routes (). 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 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 (). It was the first prohibition are further described in a separate article in this decision since December 2004 and the first time issue (). 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).
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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 ( ) as well as the quantita- business model and its extremely low cost basis, tive () 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.
66 Number 3 — 2007 Competition Policy Newsletter to some case-by-case exceptions). Further, as this Conclusion on market definition CONTROL MERGER case concerns primarily point-to-point passengers with no (Ryanair) or only limited (Aer Lingus) On the basis of this market definition and in connecting services, indirect flights are even more view of the flights offered by the merging parties unattractive for the customers. In view of the geo- at the time of the Commission decision, the pro- graphic characteristics of Ireland, other means of posed transaction led to actual overlaps between the merging parties in 35 markets defined as transport are either not available (e.g. high speed trains) or not competitive with air transport (e.g. individual O&D pairs ( ). Further, the proposed bus/ferry). transaction also raised competition concerns on some other markets where currently only one of No significant impact of charter airlines the merging parties operates and where the other party is considered as the most likely potential Ryanair put forward that in particular on the pre- entrant. dominantly leisure routes, charter airlines provide significant competitive constraints to the services IV. Competitive Effects of the Merger of the parties. However, the market investigation did not confirm that charter airlines would to a As already mentioned above, the Ryanair / Aer significant extent constrain the merging parties Lingus merger was different from the previous on the Irish routes. Charter seats are predomi- air transport cases assessed by the Commission, nantly sold in Ireland as part of package holidays, combining two “low-frills” carriers concentrat- are distributed largely through tour operators, ing on point-to-point traffic within Europe, with a provide less flexibility as the flights are often oper- significant presence at their strong bases at Dublin ated only on weekends and only seasonally. In Airport. Ireland, unlike in other countries, charter airlines Indeed, Ryanair and Aer Lingus would have offer only very few so-called “dry seats”, i.e. seats together accounted for approximately 80% of that are sold separately and not as part of a holi- European short-haul traffic to and from Dublin day package to end customers and are more closer post-merger, by far exceeding their next com- to services offered by the merging parties. The petitors on these routes, as set out in the diagram Commission left open whether “dry seats” sold below: by charter airlines may be considered as belong- ing to the affected relevant markets as even if “dry Graph 1: Shares of European passengers to and seats” sales were taken into account, the competi- from Dublin (2006) Ryanair & tive assessment of the case would not be affected Aer Lingus: due to their insignificant volumes. ~ 80 % No separate market for “time-sensitive” Aer passengers Lingus Further, the Commission has in the past cases involving network carriers such as Lufthansa or British Air Lufthansa: Aer BMI: Others: Air France differentiated between time-sensitive Airways France: Arann: Ryanair < 5 % and non time-sensitive passengers (or business < 5 % < 5 % < 5 % < 5 % < 5 % each and leisure passengers). However, the market investigation confirmed that the specific charac- teristics of the merging parties’ operation model, in particular the focus on “low-frills” customers, (8) These routes included direct flights between Dublin did not justify defining separate markets in the and the following cities/airports: Alicante/Murcia, present case. Even though a certain differentiation Barcelona/Reus/Girona, Berlin, Bilbao/Vitoria, Birmin- of the two customer segments may exist, it was gham/East Midlands, Bologna/Forli, Brussels/Charle- not possible to define two distinct and separate roi, Edinburgh, Faro, Frankfurt/Hahn, Glasgow/Pres- groups of customers, as both merging airlines do twick, Hamburg/Lübeck, Krakow, London (including Heathrow, Gatwick, Stansted, Luton and London City not discriminate between these types of passen- airports), Lyon/Grenoble, Madrid, Malaga, Manchester/ gers (no “business” tickets) and as there is rather Liverpool/Leeds Bradford, Marseille, Milan/Malpensa/ a continuum of various passenger types between Bergamo, Newcastle/Durham Tees Valley, Paris/Beau- these two extremes. Therefore, although the over- vais, Poznan, Riga, Rome, Salzburg, Seville, Tenerife, all proportion of more time-sensitive passengers Toulouse/Carcassonne, Venice/Treviso, Vienna/Bra- tislava and Warsaw. Further the overlap routes include was taken into account in the competitive analy- flights between Cork and London (all airports), Cork sis, there were no distinct markets defined for and Manchester/Liverpool/Leeds Bradford as well as these groups of passengers. Shannon and London (all airports).
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Very high market shares on a large number ties are not the closest competitors as they are dif- of routes ferent and occupy different spaces in the markets in which they operate. Further, Ryanair argued Not the least because both airlines operate from that there are no significant barriers to entry the same main airport, Aer Lingus’ and Ryanair’s due to airport congestion and that the position operations overlap on an unprecedented large of the merging parties in Dublin and in Ireland number of individual routes, as shown in the fol- in general would not prevent competing airlines lowing graph: from entering the affected markets or even from Graph 2: 35 direct route overlaps between basing aircraft in Ireland. Ryanair claimed that Ryanair and Aer Lingus (2007) there are a number of competing airlines which would be able to enter the overlap routes in case the merged entity would increase prices. Accord- ing to Ryanair these potential competitors do not have to be based at Dublin airport to constitute an effective constraint but could enter the relevant routes either from their existing base at the desti- nation non-Irish airport or even without any base at either end of the route. These arguments were, however, not confirmed by the Commission’s in- depth market investigation. Elimination of competition between the closest competitors on Irish routes Despite being a former state-owned Irish flag car- rier, Aer Lingus has significantly changed its busi- Ryanair’s and Aer Lingus’ operations do not over- ness model recently and has repositioned itself as lap only insignificantly on these 35 routes. On the a “low-frills” airline, focussing on point-to-point contrary, on all these routes Aer Lingus and/or services on its short-haul routes. The services Ryanair are the strongest airline(s), and the trans- included in the Aer Lingus base fare are broadly in action would lead to monopoly on not less than 22 line with those included in the Ryanair base fare. routes, and to very high combined market shares Even though there continue to be some differences on a further 13 routes, as can be seen from the fol- in the services offered by both carriers, which are lowing table. also reflected in their different fare level, this does not exclude existence of effective competitive con- Routes Combined straints between them. On the contrary, the market market share investigation confirmed that on the routes where Dublin — Alicante; Berlin; Bilbao/Vitoria; 100% both operate, each of them takes into account the Birmingham; Bologna; Brussels; fares and services offered by the other and adjust Edinburgh; Faro; Hamburg/Lübeck; Lyon; its operations and fares accordingly. Further, most Marseille; Milan; Newcastle; Poznan; Rome; Salzburg; Seville; Tenerife; of the competitors present on the overlap routes Toulouse/Carcassonne; Venice are either full-service network carriers or smaller Shannon — London; Cork — London regional airlines, often focusing on business cus- tomers, which cannot be considered as close com- Dublin — Glasgow; Malaga; Manchester [90-100%] petitors to the parties. Finally, the customer survey Dublin — Frankfurt; Paris [80-90%] conducted as part of the investigation among the passengers at Dublin airport showed that passen- Dublin — Barcelona; Krakow; London; [70-80%] Riga; Vienna/Bratislava gers consider the parties to be closer substitutes than other carriers. The investigation has thus Dublin — Madrid; Warsaw [60-70%] confirmed that the services of the merging parties Cork — Manchester are close substitutes in a differentiated market for passenger air transport services. There is a high Despite these high market shares, the Commis- degree of competition between Ryanair and Aer sion has, as in previous airline cases, investigated Lingus for destinations, capacity, schedules, prices to what extent these shares do actually translate and service to/from Ireland. into a significant impediment to effective compe- tition. Ryanair has indeed provided several argu- The Commission has notably found that both air- ments why the merger would not lead to competi- lines regularly monitor the prices of the other on tion concerns: It argued that the two merging par- the overlap routes with the help of specialised soft-
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ware and adjust their prices in reaction to the price riers would be in a position to effectively replace CONTROL MERGER level of the other. This is confirmed by the fact that Aer Lingus with its current flexibility and cost effi- in marketing campaigns they both present their ciency to compete on a number of routes to/from low fares as a key argument and they often com- Ireland. Any new entrant would face a strong and pare themselves to one another. The merger would established merged entity with substantial cost thus remove the important competitive rivalry advantage which would be able to react quickly to between the two parties on a number of routes any selective entry on only a few routes. on which their activities overlap and thus lead to higher prices. This was also confirmed by the The significant entry costs and risks relate to the Commission’s regression analysis which provided fact that Irish intra-European flights are now additional quantitative evidence about the effect dominated by Ryanair and Aer Lingus who have of the presence of Ryanair on Aer Lingus fares. well established brands and a portfolio of a large number of routes. Competing against these two Apart from competing on direct overlap routes, brands makes competition much more difficult the fact that both carriers have significant bases at than in other countries where there are not such the same airport () leads to a dynamic competitive two well-established low-frills carriers present environment where both carriers frequently enter with large bases. Further, there are significant and exit new routes to/from Dublin. The transac- shares of Irish-originating passengers on many tion therefore would not only remove the actual of the overlap routes. Therefore, any new entrant competition between the parties on the overlap would have to invest substantial amounts into routes, but eliminate Ryanair and Aer Lingus as marketing and promotion in Ireland. In addition, the most likely potential entrant on existing routes there were several examples of aggressive reaction to/from Ireland currently served by only one of by Ryanair against new entrants on the Irish mar- them, i.e. it would remove potential competition kets who were subsequently driven out of the Irish between the parties. The merger would remove routes. A number of competing airlines thus indi- the competitive rivalry between Ryanair and Aer cated that, taking into account the limited volume Lingus on routes to/from Ireland which was at of the Irish market and the investments and risks least one of the sources for a major expansion of involved in establishing a presence in this market, the Irish short-haul routes in recent years. they would have better opportunities elsewhere in Europe. Barriers to entry to the affected markets are high As regards the capacity constraints in terms of slots, such constraints played a less prominent The Commission’s investigation confirmed that role compared to previous air transport merger there are substantial barriers to entry to the routes cases, since in particular Ryanair mainly flies to where the activities of the merging parties over- “secondary”, non-congested airports. At some lap. These barriers to entry relate in particular to: airports, however, congestion was identified as a (i) a disadvantage of not having large operations barrier to entry by the Commission. Notably at (“bases”) in Dublin; (ii) significant entry costs and Dublin Airport, where the congestion problems risks for any new competitor in a market which were limited to the peak hours of the day, con- is already served by two strong airlines with gestion was mentioned as a significant barrier well-established brands in particular in Ireland; by potential entrants to compete effectively with (iii) Ryanair’s reputation to react aggressively to Aer Lingus and Ryanair in particular on those entrants; (iv) capacity constraints at Dublin air- routes where high frequency services covering port as well as at some destination airports. peak times of the day are necessary. Further, on a The Commission found evidence confirming that number of these routes, congestion at the destina- a large base in Dublin provides important cost tion airports (in particular London, Paris, Frank- advantages and flexibility for any carrier operat- furt or Milan) also created a barrier to entry for ing routes to/from Dublin. Therefore, removal of those carriers which for the supply-side reasons Aer Lingus as the main actual or potential com- do not have the possibility to efficiently use any petitor of Ryanair based in Dublin would inevi- possible substitute airport (such as Paris-Beauvais tably soften the competitive constraints faced by or Frankfurt — Hahn). Ryanair on the Irish routes. None of the other car- Competitors were not likely to replace the
(9) At the time of the Commission decision, Ryanair and loss of competition Aer Lingus based at Dublin airport 20 and 23 short-haul In view of the barriers to entry described above, aircraft respectively while the other Dublin based airli- nes, Aer Arann and Air France/Cityjet, had only 4 and the Commission’s market investigation further 3 smaller aircraft based in Dublin and several other air- focused on identifying any carriers which would lines overnighted only one aircraft each. have the ability and incentive to enter the over-
Number 3 — 2007 69 Merger control lap routes and provide efficient competitive con- to Ryanair, this would enable it to lower Aer Lin- straints to the merged entity. The Commission gus’ operating costs towards its own levels. The has carefully assessed to what extent individual claimed efficiencies would originate in the fields competitors might have the intention and ability of aircraft ownership costs, ground operations, to enter into direct competition with Ryanair/Aer staff costs, maintenance costs, airport charges, Lingus post-merger in case of a price increase. The ancillary sales and distribution efficiencies. Commission’s investigation showed that there is As regards the first criterion (verifiability), the a likelihood of post-merger entry only on very Commission found that Ryanair’s efficiency claim few routes and that this limited entry would not was hardly verifiable, mainly because it consisted be likely to provide a significant competitive con- essentially of a general assertion that Ryanair straint to the merged entity. would transfer its business model and in particular The potential entrants analysed in more detail the related cost levels to Aer Lingus, without tak- in the decision include Air France/CityJet, Aer ing into account implications for product charac- Arann, easyJet, British Airways, bmi/bmibaby, teristics and revenue of Aer Lingus. With respect Flybe/BA Connect, SkyEurope, Air Berlin, and to the condition of “merger specificity”, the analy- Clickair. However, most of these carriers were sis revealed that a number of the claimed efficien- reluctant to compete directly with Ryanair/Aer cies were not merger specific, since they could be Lingus, referring to the above described barriers achieved by Aer Lingus even without the merger to entry and difficulties they would face in estab- and did not originate from economic synergies lishing their operations against the strong posi- between the two carriers. Finally, the claimed effi- tion of the merged entity. The investigation clearly ciencies would affect primarily Aer Lingus’ fixed showed that no airlines could be expected to enter costs, which makes it uncertain that they would in competition against Ryanair/Aer Lingus on the be passed on to consumers. In addition, as indi- short-haul routes to/from Ireland at a larger scale, cated in the Horizontal Merger Guidelines, the providing a competitive constraint on the merged Commission noted that it is highly unlikely that entity comparable to the constraint currently a merger leading to a market position approach- exercised by Aer Lingus. ing that of a monopoly, can be declared compat- ible with the common market on the ground that Therefore, the market investigation did not con- efficiency gains would be sufficient to counteract firm that potential entry or expansion on the indi- its potential anti-competitive effects 11( ). vidual overlap routes would be likely, timely and sufficient to constitute a competitive constraint For these reasons the Commission was not in a for the merged entity and would thus compensate position to conclude that the merger would give for the loss of the rivalry between Ryanair and Aer rise to efficiencies that would counteract the iden- Lingus on the affected routes. tified significant impediment to effective competi- tion. Conclusion The Commission therefore concluded that the VI. Proposed remedies transaction would significantly impede effective During the Commission’s proceedings, Rya- competition on a large number of routes to and nair submitted several sets of remedies aimed at from Ireland. removing the identified competition concerns. Following the model of previous airline cases, V. Efficiencies Ryanair’s commitments mainly aimed at remov- The Commission has also analysed whether effi- ing entry barriers for other airlines, in particular ciencies brought about by the merger might have in the form of the transfer of airport slots. The last outweighed its anti-competitive effects. In the set of remedies submitted within the legal dead- most detailed discussion of efficiencies in a merger line of the Phase II proceedings included the fol- decision so far (10), the Commission analysed lowing main elements: whether the conditions of the Horizontal Merger a) Heathrow slots: Ryanair offered to make avail- Guidelines (i.e. verifiability, merger specificity able slots for the Dublin — London Heathrow and benefit to consumers) were met. Ryanair route, which were exclusively reserved for Brit- claimed that efficiencies would result essentially ish Airways and Air France. from applying Ryanair’s low-cost business model and management skills to Aer Lingus. According b) Slots for other routes from/to Dublin, Shan- non and Cork: Ryanair offered to make avail- able slots for other overlap routes from and to (10) See already cases M.4000 — Inco/Falconbridge; M.4057 — Korsnäs/Assidomän Cartonboard; M.3732 — Procter & Gamble/Gillette. (11) See paragraph 84 of the Horizontal Guidelines.
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Dublin, Shannon and Cork. With respect offered, the scope of such entry would still have CONTROL MERGER to Dublin, these slots would, according to been far too small to address the parties’ com- Ryanair, allow airlines to operate with up to petitive overlap. The market test confirmed [4-8] aircraft based in Dublin. Ryanair fur- that slots for the offered number of aircraft ther offered to make available an equivalent based in Dublin would not suffice to replace number of slots at specific destination airports the competitive constraint currently exercised on the overlap routes. by Aer Lingus. Aer Lingus and Ryanair operate in Dublin with 23 and 20 aircraft respectively. c) “Up-front buyer” provision: Ryanair offered Although Aer Lingus does not only serve the not to complete the acquisition of Aer Lingus overlap routes with its 23 aircraft, the investi- before it has found a competitor/competitors gation confirmed that [4-8] 12( ) aircraft would that commit to taking up the slots for the [4-8] be insufficient to serve all overlap routes from/ based aircraft operation at Dublin. to Dublin and provide sufficient competitive d) Fare/brand-related commitments: Ryanair constraints on the merged entity. offered to reduce immediately Aer Lingus’ — Slots at some important destination airports short-haul fares by at least 10%, to eliminate were missing from Ryanair’s proposal. immediately the fuel surcharges Aer Lingus applies on its long-haul flights, to retain Aer — The commitments did not ensure a significant Lingus’ brand and to continue to operate Rya- entry of one single airline with a suitable busi- nair and Aer Lingus separately. ness model which would ensure that the rivalry between the two most important low-frills car- e) “Frequency freeze”: Ryanair offered not to riers operating to/from Ireland eliminated by increase the number of frequencies on any of the merger is restored. the claimed overlap routes in the event of a new entrant to the route, in excess of the fre- — There were, in addition, significant doubts that quencies jointly operated by Ryanair and Aer Ryanair could legally relinquish Aer Lingus’ Lingus on each route for a period of six IATA Heathrow slots. The airline’s Articles of Associ- seasons. It also offered not to reduce the fre- ation confer certain veto rights to the minority quencies on these routes unless a route is or shareholders (including the Irish government becomes unprofitable. or the Aer Lingus employees’ trust), which would enable them to block the slot transfer. Having analysed the proposed commitments and — With regard to the various behavioural com- conducted an extensive market test, the Commis- mitments offered by Ryanair (10% reduction of sion concluded that they fall significantly short of Aer Lingus’ fares, abolition of fuel surcharges, remedying the identified competition problems frequency freeze, maintaining separate and are, on both formal and substantive grounds, brands), it should be noted that they do not insufficient to remove the competition concerns. directly address any of the identified competi- The conclusion of the Commission was based in tion problems. In addition, they raise numer- particular on the following considerations: ous questions with regard to monitoring and — It was doubtful whether the instrument of slot enforceability. These commitments even con- remedies is appropriate for the transaction at tain elements that could lessen, rather than hand. Indeed, Aer Lingus and Ryanair are low- strengthen, competition. frill airlines, flying to secondary and often to — The content of the commitment proposal con- other non-congested airports. Airport conges- tained numerous contradictions and vague or tion is not the main reason why other airlines ambiguous formulations which put into ques- do not enter Ireland. A slot based remedy thus tion the viability of the commitments as such, failed to address many of the other identified since it was doubtful whether the commit- barriers to entry described above. ments as submitted would be at all workable — The market testing of the proposed remedies and enforceable. clearly showed that the offered remedies are not likely to trigger any substantial entry on At a very late stage of the proceedings (more than the overlap routes. Except for a very limited four weeks after the legal deadline for commit- number of routes, there were no indications ments) Ryanair submitted a slightly revised set that new entry was likely on the basis of the of draft commitments. This text was provided proposed remedies. explicitly in “draft” form, without signature and without complying with the necessary formal — The scope of the commitments was insufficient. Even if, hypothetically, the remedies would (12) The precise number of aircraft is confidential to Rya- have triggered entry to the maximum extent nair.
Number 3 — 2007 71 Merger control requirements. Following an informal reaction by solved problems included, in particular, the legal the Commission to the draft modified remedies, uncertainty with respect to the London Heathrow Ryanair chose not to submit them formally. Leav- slots and the unspecific criteria for the upfront- ing apart this fact, it must be acknowledged that buyer. the Commission can in exceptional circumstances For these reasons, the Commission concluded that accept modifications of submitted remedies even the commitments offered by Ryanair are not suf- when a renewed market test is no longer possi- ficient to remedy the identified significant imped- ble. Such commitments must, however, resolve iment to effective competition and, thus, cannot all identified competition problems in a clear-cut render the proposed concentration compatible fashion. This was not the case as even the modified with the common market. commitments would clearly have not been suffi- cient to address all of the identified shortcomings of the previous set of commitments. In particular, VII. Conclusion the draft modified commitments were still based The Commission thus concluded that the pro- primarily on slot transfers and did not provide posed acquisition by Ryanair of Aer Lingus would any new elements which would address the other significantly impede effective competition and identified barriers to entry and thus enable the declared the concentration incompatible with the Commission to re-evaluate the negative results of common market. In view of the identified nega- the market test as to the likelihood of actual entry. tive effects of the transaction and clearly insuffi- Furthermore, the scope of the guaranteed new cient remedies proposed by Ryanair, the prohibi- entry pursuant to the “up-front buyer” provision tion was the only way how the Commission could was still insufficient. The draft modified remedies ensure that a competitive environment beneficial also did not provide for the transfer of slots at all to passengers on the routes to/from Ireland is relevant destination airports. Additional unre- maintained.
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