Arriva Rail North and the Northern rail franchise A report on the completed acquisition by Arriva Rail North Limited of the Northern rail franchise 2 November 2016 © Crown copyright 2016 You may reuse this information (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit www.nationalarchives.gov.uk/doc/open-government- licence/ or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected]. Website: www.gov.uk/cma Members of the Competition and Markets Authority who conducted this inquiry Phil Evans (Chair of the Group) Katherine Holmes Andrew Popham Tim Tutton Acting Chief Executive of the Competition and Markets Authority Andrea Coscelli The Competition and Markets Authority has excluded from this published version of the 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 Some numbers have been replaced by a range.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. Contents Page Summary .................................................................................................................... 1 Findings .................................................................................................................... 14 1. The reference ..................................................................................................... 14 2. Industry background ........................................................................................... 14 The structure of the rail industry.......................................................................... 15 Franchised train operating companies ........................................................... 15 Open access operators ................................................................................. 16 Freight operating companies ......................................................................... 17 Network Rail .................................................................................................. 18 Rolling stock leasing companies .................................................................... 18 The funding of the rail industry ............................................................................ 18 The role of government and the industry regulator ............................................. 19 Office of Rail and Road ................................................................................. 19 Department for Transport .............................................................................. 19 Devolution of rail franchises ................................................................................ 20 Bus services ....................................................................................................... 21 Background to the industry ............................................................................ 21 Regulation of the bus industry ....................................................................... 23 3. The Parties ......................................................................................................... 24 Arriva .................................................................................................................. 24 Arriva UK Trains ............................................................................................ 25 Arriva UK Bus ................................................................................................ 26 Arriva Mainland Europe ................................................................................. 27 The Northern Franchise ...................................................................................... 27 4. The transaction and relevant merger situation .................................................... 28 The transaction ................................................................................................... 28 The rationale for the transaction ......................................................................... 28 Jurisdiction .......................................................................................................... 29 5. The counterfactual .............................................................................................. 30 The views of the Parties ...................................................................................... 31 CMA assessment ................................................................................................ 32 6. Market definition.................................................................................................. 33 Product market definition .................................................................................... 34 Competition for the market ............................................................................ 34 Competition in the market .............................................................................. 35 Geographic market definition .............................................................................. 41 Competition for the market ............................................................................ 41 Competition in the market .............................................................................. 41 7. The effect of the merger on competition for rail franchises ................................. 45 The views of the Parties ...................................................................................... 45 Third party views ................................................................................................. 45 CMA assessment ................................................................................................ 45 8. Regulatory constraints on rail and bus services .................................................. 46 Regulatory constraints on passenger rail operators ............................................ 47 Fare regulation .............................................................................................. 47 Franchise specification and other regulations................................................ 53 Regulatory constraints on bus operators ............................................................ 59 Commercial bus services .............................................................................. 59 Tendered bus services .................................................................................. 64 9. Filtering of overlapping bus and rail flows ........................................................... 65 The role of filters and prioritisation in the competitive assessment ..................... 65 Overlaps between the Parties’ rail services ........................................................ 66 Tyne and Wear services ................................................................................ 66 De minimis filter ............................................................................................. 66 Effective competitor filter ............................................................................... 67 Inter-available and regulated fares ................................................................ 68 Revenue increment filter ................................................................................ 69 Flows prioritised for detailed assessment ...................................................... 69 Overlaps between the Parties’ bus and rail services........................................... 70 Significance of overlap filter ........................................................................... 71 De minimis plus filter ..................................................................................... 71 Revenue increment filter ................................................................................ 73 Effective competitor filter ............................................................................... 73 Tendered bus routes ..................................................................................... 74 Rail de minimis .............................................................................................. 74 Intra-urban flows ............................................................................................ 75 Flows prioritised for detailed assessment ...................................................... 75 10. The effect of the Merger on overlapping rail services ......................................... 78 Theory of harm: The Parties’ ability and incentive to increase fares as a result of the Merger ..................................................................................................... 79 Initial assessment of overlapping flows ............................................................... 79 Assessing the closeness of competition between overlapping rail services .. 80 Framework for the detailed competitive assessment of the 11 overlapping rail flows................................................................................................................... 84 The views of the Parties and third parties ...................................................... 84 CMA assessment of evidence considered in relation to individual flows ....... 85 Entry and expansion in passenger rail services............................................