EN Case No COMP/M.5747 - IBERIA/ BRITISH AIRWAYS Only the English text is available and authentic. REGULATION (EC) No 139/2004 MERGER PROCEDURE Article 6(1)(b) NON-OPPOSITION Date: 14/07/2010 In electronic form on the EUR-Lex website under document number 32010M5747 Office for Publications of the European Union L-2985 Luxembourg EUROPEAN COMMISSION Brussels, 14.07.2010 SG-Greffe(2010) D/10756 / 10757 C(2010) 5008 In the published version of this decision, some information has been omitted pursuant to Article 17(2) of Council Regulation (EC) No 139/2004 PUBLIC VERSION concerning non-disclosure of business secrets and other confidential information. The omissions are shown thus […]. Where possible the information MERGER PROCEDURE omitted has been replaced by ranges of figures or a general description. ARTICLE 6(1)(b) DECISION To the notifying parties: Dear Sir/Madam, Subject: Case No COMP/M.5747 – Iberia/ British Airways Notification of 10 June 2010 pursuant to Article 4 of Council Regulation No 139/20041 1. On 10 June 2010, the Commission received a notification of a proposed concentration pursuant to Article 4 of the Merger Regulation by which the undertakings Iberia Líneas Aéreas de España, S.A. ("Iberia" or "IB", Spain) and British Airways Plc ("British Airways" or "BA", United Kingdom) enter into a full merger within the meaning of Article 3(1)(a) of the Merger Regulation. I. THE PARTIES 2. British Airways serves some 150 cities in about 75 countries with an additional 215 cities served under various code-sharing relationships. It has several subsidiaries (CityFlyer, OpenSkies) and franchisees (Comair and Sunair). BA has its main hub at London Heathrow airport and also operates bases at London Gatwick and London City. In addition to passenger transport services, BA provides air transport of cargo services, aircraft maintenance and groundhandling services. 1 OJ L 24, 29.1.2004, p. 1 ("the Merger Regulation"). With effect from 1 December 2009, the Treaty on the Functioning of the European Union ("TFEU") has introduced certain changes, such as the replacement of "Community" by "Union" and "common market" by "internal market". The terminology of the TFEU will be used throughout this decision. Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) 299 11 11. 3. Iberia serves more than 106 destinations in over 43 countries with an additional 110 cities served under various code-sharing relationships. Its main hubs are in Madrid and Barcelona. IB's operations in Barcelona are carried out mainly through its subsidiary Vueling. IB's franchisee Air Nostrum operates mostly on Spanish domestic routes. In addition to passenger transport services, IB provides air transport of cargo services, aircraft maintenance and groundhandling services. 4. Both BA and IB are members of the oneworld alliance.2 II. CONCENTRATION 5. On 8 April 2010, IB and BA entered into a merger agreement according to which they will integrate the entirety of their activities. Pursuant to the merger agreement, a recently incorporated Spanish company TopCo, will become the holding company of both airlines that will remain separate entities operating under their respective trade names. TopCo's shareholders will be the existing shareholders of IB and BA. 6. The proposed transaction thus constitutes a merger within the meaning of Article 3(1)(a) of the Merger Regulation. III. EU DIMENSION 7. The undertakings concerned, BA and IB, have a combined aggregate world-wide turnover of more than EUR 5 000 million.3 Each of them has an EU-wide turnover in excess of EUR 250 million, but they do not achieve more than two-thirds of their aggregate EU-wide turnover within one and the same Member State. The methodology used by the notifying parties to calculate their turnover is the "point of sale" methodology, although in any event the thresholds would also be met under the "point of origin" or "50/50 split" methods.4 The notified concentration therefore has an EU dimension. IV. RELEVANT PRODUCT AND GEOGRAPHIC MARKETS 8. The activities of IB and BA overlap in air transport of passengers, air transport of cargo, groundhandling services and maintenance, repair, and overhaul services ("MRO"). 2 The oneworld members are: American Airlines, British Airways, Cathay Pacific, Finnair, Iberia, Japan Airlines (JAL), LAN, Malév, Mexicana, Qantas, Royal Jordanian. 3 Turnover calculated in accordance with Article 5(1) of the Merger Regulation. 4 These three methodologies are explained in Commission Decision of 27 June 2007 in Case No. COMP/M.4439 Ryanair/Aer Lingus, OJ C 47, 20.2.2008, p. 9-20, paragraph 13 et seq. 2 A. Passenger air transport services A.1 O&D approach 9. The Commission has traditionally defined the relevant market for scheduled passenger air transport services on the basis of the "point of origin/point of destination" (O&D) city-pair approach.5 Such market definition reflects the demand-side perspective whereby customers consider all possible alternatives of travelling from a city of origin to a city of destination which they do not consider substitutable to a different city-pair. As a result, every combination of a point of origin and a point of destination is considered to be a separate market. 10. The market investigation has confirmed this approach in the present case. While in particular the parties and some network carriers tend to believe that the market should be defined on a network basis, the O&D approach best reflects the demand-side perspective according to which both the point of origin and the point of destination should include all airports that are substitutable in the eyes of passengers. A.2 Time sensitive vs. non-time sensitive passengers 11. The Commission has traditionally found that a distinction may be drawn between time sensitive and non-time sensitive passengers. Time sensitive passengers tend to travel for business purposes, require significant flexibility with their tickets (such as cost-free cancellation and modification of the time of departure, etc.) and tend to pay higher prices for this flexibility. Non-time sensitive customers travel predominantly for leisure purposes or to visit friends and relatives, book long time in advance, do not require flexibility with their booking and are generally more price-sensitive.6 12. The parties submit that such a distinction is not meaningful as a chain of substitution (between fare classes or cabins) exists between the two categories of passengers. 13. The market investigation however showed that time sensitive passengers often have different requirements from non-time sensitive passengers, in particular as regards flexibility, the level of frequencies, convenient schedules, airport location, and comfort. Accordingly, time sensitive passengers are willing to pay a significant premium for such features.7 14. A relevant number of respondents amongst the parties' competitors had moreover indicated that airlines are able to identify and discriminate passengers according to their price elasticity based on their observable behaviour at the time of booking. In particular, passengers with lower price elasticity tend to purchase tickets with a high degree of 5 COMP/M.5440 Lufthansa/Austrian Airlines; COMP/M.5335 Lufthansa/SN Airholding; COMP/M.5364- Iberia/Vueling/Clickair; COMP/M.3280 Air France/KLM; COMP/M.3770 Lufthansa/Swiss. 6 COMP/M.5440 Lufthansa/Austrian Airlines; COMP/M.5335 Lufthansa/SN Airholding; COMP/M.5364- Iberia/Vueling/Clickair; COMP/M.3280 Air France/KLM; COMP/M.3770 Lufthansa/Swiss. In the present case, time sensitive and non-time sensitive passengers have been distinguished on the basis of CAA and MIDT data (see Section VI.A.1 and A.2). 7 Replies to the questionnaires to corporate customers (questions 9 et seq.), travel agents (questions 10 et seq.) and competitors (questions 12 et seq.). 3 flexibility and/or purchase their ticket close to departure and to have a short permanence at destination (which does not normally include a weekend).8 15. The Commission has requested and analysed sales data from the parties and their competitors. The analysis of the parties' data indicates the existence of strong correlation between business flexible and economy flexible fares, while no meaningful correlation is observed between business and economy restricted tickets.9 This result appears to suggest that, besides other key characteristics such as comfort of travel, flexibility is a key driving factor in determining the pattern of substitution between different types of tickets. 16. However, for the purpose of the present case, the conclusion on whether time sensitive and non-time sensitive passengers belong to the same market can be left open as no competition concerns arise under any alternative market definition. A.3 Direct (non-stop) vs. indirect (one-stop) flights10 17. The Commission has considered in previous decisions11 that with respect to short-haul routes (below 6 hours flight duration) indirect/one-stop flights generally do not provide a competitive constraint to direct/non-stop flights absent exceptional circumstances (for example the direct flight does not allow for a one-day return trip, or the share of indirect flights in the overall market is significant). However, with the increased flight time, indirect flights constitute a more credible alternative to direct flights and their attractiveness in the eyes of passengers should be assessed on a route-by-route basis.12 This is in line with Commission's practice to consider that with respect to long-haul routes (more than 6 hours flight duration), indirect flights constitute a competitive alternative to direct services under certain conditions (for example if they are marketed as connecting flights on the O&D pair in the computer reservation system).13 8 Replies to the questionnaires to competitors, corporate customers and travel agents. 9 Average revenue per ticket is used as a proxy for the actual fare paid.