EN Case No COMP/JV.19 - */*** KLM / ALITALIA Only the English text is available and authentic. REGULATION (EEC) No 4064/89 MERGER PROCEDURE Article 6(1)(b) NON-OPPOSITION Date: 11/08/1999 Also available in the CELEX database Document No 399J0019 Office for Official Publications of the European Communities L-2985 Luxembourg COMMISSION OF THE EUROPEAN COMMUNITIES Brussels, 11.08.1999 PUBLIC VERSION MERGER PROCEDURE ARTICLE 6(1)(b) DECISION In the published version of this decision, some information has been omitted pursuant to Article 17(2) of Council Regulation (EEC) No 4064/89 concerning non-disclosure of business secrets and other confidential information. The omissions are shown thus […]. Where possible the information omitted has been replaced by ranges of figures or a general description. to the notifying parties Dear Sirs, Subject: Case M/JV-19 KLM-Alitalia Notification of 29 June 1999 pursuant to Article 4 of Regulation N°4064/89 1. On 29 June 1999, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EEC) No. 4064/891 as last amended by Regulation (EC) No. 1310/972 (the Merger Regulation) by which the undertakings Koninklijke Luchtvaart Maatschappij N.V. (KLM) and Alitalia Linee Aeree Italiane S.p.A. (Alitalia) will constitute a Joint Venture under the meaning of Article 3 (2) of the Merger Regulation. 2. In the course of the proceedings, the parties submitted undertakings designed to eliminate competition concerns identified by the Commission, in accordance with Article 6(2) of the Merger Regulation. After examination of the notification and in the light of these modifications, the Commission has concluded that the operation 1 OJ L 395, 30.12.1989, p.1; corrigendum OJ L 257, 21.9.1990, p.13 2 OJ L 180, 9.7.1997, p.1; corrigendum OJ L 40, 13.2.1998, p.17 Rue de la Loi 200, B-1049 Bruxelles/Wetstraat 200, B-1049 Brussel - Belgium Telephone: exchange 299.11.11. Telex: COMEU B 21877. Telegraphic address: COMEUR Brussels. falls within the scope of the Merger Regulation and does not raise serious doubts as to its compatibility with the common market and the EEA agreement. 1. THE PARTIES 3. The parties involved in this case are a) Koninklijke Luchtvaart Maatschappij N.V. (KLM). KLM is engaged in the business of operating national and international scheduled and charter airline services, as well as certain airline-related businesses. The Dutch State owns 25% of the shares in KLM. The remainder of the shares (75%) are held by private shareholders. KLM's shares are quoted on various stock exchanges. b) Alitalia Linee Aeree Italiane S.p.A. (Alitalia). Alitalia is engaged in the business of operating national and international scheduled and charter airline services, as well as certain airline-related businesses. Following the offerings of shares of Alitalia to the public and Alitalia's employees in May and June 1998, some 53% of Alitalia's shares are owned by the Istituto per la Ricostruzione Industriale S.p.A. ("IRI"). IRI is a holding company owned and controlled by the Italian State. The remainder of the shares are held by private shareholders and by Alitalia’s employees. 2. THE OPERATION 4. The notified operation is a long-term alliance (the «Alliance ») between KLM and Alitalia, as a result of which the parties will progressively integrate their scheduled passenger network, sales, revenue management and cargo business. The Alliance will include two separate ventures, based on the principle of sharing the corresponding costs and revenues, one for scheduled passenger services and one for cargo services. The two ventures are not separate corporate entities with legal personality. In this context, it is to be borne in mind that the bilateral air transport agreements between the individual Members States and third countries (e.g. the Italy/US agreement) set out restrictive requirements on control. In general, under the bilateral agreements the designated operating carriers must be controlled by nationals of the countries which are party to the agreements. Therefore, in legal terms, a corporate entity jointly controlled by KLM and Alitalia would risk not being entitled to operate on the international routes covered by the bilateral agreements. 5. The parties have agreed that KLM and Alitalia will keep operating as air carriers, but their operations will be jointly run and marketed by the Alliance. KLM and Alitalia will make available to the Alliance all the necessary assets and capacity (e.g. planes, crews, fuel and financing). The Alliance will process and market the capacity provided by the operating carriers, by defining schedules and timetables, managing the yield management system, fixing the tariffs, and promoting the Alliance. 6. The parties will share the profits (losses) generated by the Alliance according to an agreed sharing formula. Profits will be calculated as revenues minus costs; revenues 2 will be all the income deriving from the sale of the relevant transport services ; and costs will be those which are directly linked to the provision of the relevant transport services. For accounting reasons, certain costs […] will be accounted in standard terms, some others in actual terms […]. 7. The Alliance will be responsible for maximising revenues within the given cost framework. […] 8. KLM and Alitalia are not entitled to sell capacity to third carriers nor, with some limited exceptions, to operate on their own. The Alliance is obliged to make use of the whole capacity made available by the operating carriers. 3. CONCENTRATION 3.1. Joint control 9. The management of the Alliance will be entrusted to a team consisting of the CEOs’ meeting (a meeting between Alitalia’s and KLM’s respective CEOs); and the Network organiser, who will co-ordinate the Alliance’s operations with the support of a small team. The Network organiser will draft and implement the business plan of the Alliance and will be responsible for the day to day operations. […] Only unanimous decisions may be taken and no procedures to arbitrate possible conflicts are foreseen. In the CEOs meeting the business plan of the Alliance proposed by the Network organiser is adopted, and in that context each CEO makes investment proposals to their respective boards. 10. The boards of Alitalia and KLM, respectively, have the ultimate word on any decisions and no decision may be imposed on them either by the other party or by the Alliance. However, the autonomy of each board, and in particular their investment policy, is limited, in practice, by the Alliance. [Main strategic and commercial decisions pertaining to the scheduled air transport markets must be implemented through the Alliance.] This is equivalent to a de facto reciprocal veto right enjoyed by each of the partner airlines. 3.2. Full function entity 11. The Alliance is a contractual joint venture which performs on a lasting basis all the functions of an autonomous economic entity, and therefore constitutes a concentration within the meaning of Art 3 (2) of the Merger Regulation. The Alliance will be jointly controlled by Alitalia and KLM, and will bring about a lasting change in the structure of KLM and Alitalia. The two airlines will withdraw from the air transport market and will cease to operate independently. KLM and Alitalia will lose their autonomy as operating carriers since the main strategic and commercial decisions pertaining to their scheduled passengers and cargo businesses will have to be adopted jointly. 12. The fact that some portions of KLM’s and Alitalia’s businesses are excluded from the Alliance does not disqualify it as a full function joint venture. The parties have 3 explained that the main activities which will be excluded from the scope of the Alliance are maintenance, ground handling and charter flights. The reason for this is that, in these sectors, the parties’ businesses are substantially different and their combination is not expected to yield particular benefits to the Alliance. In any event, it should be noted that • maintenance and groundhandling are activities that are not core business to scheduled passengers or cargo air transport. These activities can easily be outsourced; • in respect of the charter business the parties consider that there are not appreciable synergies to be achieved between these markets given the fact that charter operations do not benefit from the hubbing effects which are the key element behind the Alliance’s economic rationale; • as far as scheduled air transport is concerned, two subsidiaries of KLM, KLM-UK and Transavia are not part of the Alliance while Alitalia will continue to have operations outside of the Alliance by means of co- operation agreements such as code-share, blocked space and franchising. 13. The Alliance will have unconditional access to the aircraft provided by the parents and to all the necessary resources to carry out the business plan and operate on the market. This position would not be weakened by the fact that the joint venture will operate on the basis of production capacity supplied by the parents. Under the Merger Regulation, in order to qualify as a full function joint venture the new entity must have access to sufficient resources, including finance, staff and assets. 14. In the present case, the parties will exercise joint decisive influence over all the key decisions of their scheduled air transport business. […] 15. Given the withdrawal of the parents from the scheduled air transport markets, there is no reason to believe that the Alliance will not be run in a profit maximising way by a dedicated management. 16. As to the access to capacity, the Merger Regulation requires that the joint venture has access to all the necessary resources, but does not require that the joint venture be the owner of such resources.