Alpha Flight Group Limited and LSG Lufthansa Service Holding AG A report on the proposed joint venture between Alpha Flight Group Limited and LSG Lufthansa Service Holding AG 14 March 2012 Competition Commission 2012 Website: www.competition-commission.org.uk Members of the Competition Commission who conducted this inquiry Malcolm Nicholson (Chairman of the Group) Roger Davis Ian Jones Stephen Oram Chief Executive and Secretary of the Competition Commission David Saunders The Competition Commission has excluded from this published version of the final report information which the Inquiry Group considers should be excluded having regard to the three considerations set out in section 244 of the Enterprise Act 2002 (specified information: considerations relevant to disclosure). The omissions are indicated by []. Some numbers have been replaced by a range. These are shown in square brackets. Non-sensitive wording is also indicated in square brackets. iii Contents Page Summary .............................................................................................................................. 3 Findings ................................................................................................................................ 9 1. The reference .................................................................................................................. 9 2. The in-flight catering services industry............................................................................. 9 Costs in the airline industry ............................................................................................. 9 Airlines and their different catering requirements ........................................................... 10 Short- and long-haul catering .................................................................................... 10 Heathrow Airport ....................................................................................................... 11 The Regions ............................................................................................................. 11 Recent trends in in-flight catering services .................................................................... 12 Market participants ........................................................................................................ 13 Vertically-integrated in-flight caterers ........................................................................ 13 Non-vertically-integrated supply models ................................................................... 14 3. The companies and the proposed merger ..................................................................... 15 LSG ............................................................................................................................... 15 Alpha ............................................................................................................................. 17 The proposed merger .................................................................................................... 19 The rationale for the merger ..................................................................................... 19 4. Jurisdiction .................................................................................................................... 20 Arrangements in progress or in contemplation .............................................................. 20 Relevant merger situation ............................................................................................. 20 Enterprises ceasing to be distinct ............................................................................. 20 Share of supply ......................................................................................................... 21 Conclusion on jurisdiction .............................................................................................. 21 5. Counterfactual ............................................................................................................... 22 LSG ............................................................................................................................... 22 Alpha ............................................................................................................................. 23 CC analysis and conclusions ......................................................................................... 24 6. The relevant markets ..................................................................................................... 24 7. Competitive characteristics of the in-flight catering services market .............................. 25 Bidding markets ............................................................................................................ 25 Recent market entry and exit ......................................................................................... 26 Barriers to entry and expansion ..................................................................................... 27 Conclusion as to entry and expansion ...................................................................... 28 Pre-merger buyer power ............................................................................................... 30 Main parties’ views ................................................................................................... 30 Switching .................................................................................................................. 31 Contract terms .......................................................................................................... 31 Airlines’ ability to backward integrate ........................................................................ 32 Nominated supply ..................................................................................................... 32 Back-catering............................................................................................................ 33 Leveraging relationships in other markets ................................................................. 34 Conclusion as to pre-merger buyer power ................................................................ 35 8. Competitive assessment ............................................................................................... 35 Heathrow Airport ....................................................................................................... 36 Regional airports ...................................................................................................... 38 Heathrow BA ................................................................................................................. 39 Conclusion in relation to BA at Heathrow .................................................................. 39 Heathrow short-haul ...................................................................................................... 39 Pre- and post-merger rivalry ..................................................................................... 40 Conclusion in relation to short-haul airlines at Heathrow ........................................... 40 Heathrow larger long-haul ............................................................................................. 41 Catering provision ..................................................................................................... 41 1 Pre- and post-merger rivalry ..................................................................................... 42 Post-merger countervailing factors ........................................................................... 49 Conclusion in relation to larger long-haul airlines at Heathrow .................................. 50 Heathrow smaller long-haul ........................................................................................... 51 Pre- and post-merger rivalry ..................................................................................... 51 Catering provision ..................................................................................................... 51 Catering management and logistics services ............................................................ 52 Conclusion in relation to smaller long-haul airlines at Heathrow ............................... 53 Regional network airlines .............................................................................................. 53 Pre- and post-merger rivalry ..................................................................................... 54 Countervailing factors ............................................................................................... 56 Conclusion in relation to Regional network airlines ................................................... 57 Regional long-haul ........................................................................................................ 57 Overview of the Regional long-haul segment ............................................................ 57 Approach to the analysis .......................................................................................... 61 Detailed competitive assessment.............................................................................. 62 Conclusion in relation to Regional long-haul airlines ................................................. 63 Regional short-haul ....................................................................................................... 64 Pre- and post-merger rivalry ....................................................................................