Anticipated acquisition by easyJet Airline Company Limited of GB Airways Limited

Affected market: Air transport

No. ME/3399/07

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 18 January 2008. Full text of decision published 24 January 2008.

Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.

PARTIES

easyJet Airline Company Limited (easyJet Ltd) is a wholly owned subsidiary of easyJet plc (easyJet). easyJet provides short haul scheduled passenger airline services on 339 [see note 1] routes between airports in Europe (and to some destinations in North Africa).

GB Airways Limited (GB Airways) is a subsidiary of Bland Group Limited. It owns 16 passenger aircraft and operates scheduled flights to 32 destinations from London Gatwick (LGW) and London Heathrow (LHR) airports, and six scheduled destinations from Manchester. These destinations are within Europe and North Africa, mostly around the Mediterranean Sea.

Since 1995 GB Airways' services have been provided as a franchisee of British Airways plc (BA), pursuant to a licence agreement with BA. GB Airways' flights are marketed by BA under the BA brand as BA scheduled flights. The service provided (travel classes, onboard service, aircraft livery, flight attendants' uniforms, etc.) is the same as for any other BA flight. Seats on these flights are also sold primarily using BA's distribution channels.

TRANSACTION

The transaction consists of the acquisition of the entire issued share capital of GB Airways by easyJet for a consideration of £103.5 million by means of a share purchase agreement signed on 25 October 2007. The transaction will result in GB Airways and easyJet ceasing to be distinct enterprises. For its last complete financial year (the year ended 31 March 2007) GB Airways achieved a turnover in the United Kingdom of £207,520,639.

The parties notified the transaction to the OFT on 9 November 2007, and the (extended) administrative deadline was 10 January 2008.

JURISDICTION

As a result of this transaction easyJet and GB Airways will cease to be distinct. The UK turnover of GB Airways exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

THIRD PARTY VIEWS

The OFT received a number of third party views on the merger, from competitors, customers, suppliers and industry bodies. As set out in the full text of the decision, views on a number of issues, including the substitutability of London airports, the constraint provided by charter airlines and airport congestion, were mixed. Overall opinions varied from a lack of concern, due largely to the small number of overlaps and the continuing constraint provided by BA and other airlines, to concerns regarding the ability to compete with the merged entity on the overlap routes and easyJet's overall position at LGW. These concerns have been addressed in the full text of the decision.

The OFT also received assistance from the Civil Aviation Authority in this case, and the competition authorities of Germany, Spain and the European Commission.

ASSESSMENT

The proposed merger involves the acquisition by easyJet of GB Airways, a franchisee of BA. Both airlines have a significant presence at LGW, and the parties overlap on a number of routes between the UK and 'fun and sun' destinations in Europe and North Africa.

The starting point for the OFT's analysis of the effect of the merger between the parties was the supply of scheduled passenger air transport services on overlapping O&D pairs. The OFT then considered whether the O&D pair should be widened or narrowed, based on a number of factors:

• 'no-frills' v full cost carriers: consistent with the European Commission's decision in Ryanair/Aer Lingus, and due to the nature of the overlap routes in this case (that is, 'fun and sun' leisure routes), the OFT did not consider it relevant to adopt separate markets for full service and no-frills carriers
• charter v scheduled: the OFT did not consider that package holidays were sufficiently substitutable with scheduled services, on either a demand-side or supply-side basis. On considering all of the available evidence, the OFT did not expect that a 5 – 10 per cent price rise to independent travellers would be sufficient for charter airlines to switch away from package holidays to seat-only sales. The OFT did find that, consistent with past OFT and European Commission decisions, there were strong arguments for including seat-only sales by charter airlines in the relevant product market. However, the OFT had difficulties in determining the actual number of seat-only sales on the overlap routes, and hence the strength of any constraint provided by seat-only sales was unclear. As the OFT's conclusion on the competitive assessment did not turn on the constraint provided by seat-only sales, the OFT has taken a cautious approach and considered that seat-only sales provide only a limited constraint on scheduled services
• flights from nearby airports: the OFT considered, in relation to the particular overlap routes in this case, that there was significant substitutability between the various London airports. The overlap routes in this case involve predominantly leisure passengers, who tend to be less time sensitive and find London airports substitutable. This view was supported by yield data provided by the parties, and was consistent with the European Commission's view in Ryanair/Aer Lingus. The OFT also considered Alicante and Murcia together for the purposes of the competition analysis
• other factors: given the nature of the overlapping routes, the OFT did not consider indirect flights constrained direct flights, nor that a distinction needed to be made between business and leisure passengers. The OFT also considered whether flights to other holiday destinations may constrain the parties' services on the overlap routes, on the basis that passengers were simply looking for 'a week in the sun'. However, evidence obtained by the OFT suggested that any such constraint was insufficient to merit a wider market definition.

The OFT therefore considered direct scheduled passenger airline services on the following O&D pairs as relevant to the competitive assessment: London to Alicante/Murcia, Malaga, Faro, Ibiza, Mahon, Palma, Marrakech, Innsbruck and Funchal.

On the overlap routes, market shares varied depending on the unit of measurement (capacity or passenger numbers) and seasonal factors. However, the combined market shares of the parties, based on 2007 capacities, was significant, ranging from just over 40 per cent to up to 80 per cent. Although the parties faced competition from at least one other significant competitor on each of these overlap routes, the OFT felt that this competition alone would not provide a sufficient constraint to dismiss any competition concerns that might arise as a result of the merger on a significant majority of the routes in question. The OFT therefore considered prospects for entry and expansion on the overlap routes.

In considering evidence on entry and expansion, the OFT was required to balance, on the one hand, the apparent congestion problems at the overlap airports (in particular the London airports) and difficulties in 'flexing' capacity against the relatively small number of overlaps in this case, and on the other hand, the presence of a number of airlines at the relevant airports, and instances of actual entry and expansion. The evidence obtained by the OFT suggested that, despite the congestion problems at the overlap airports, there had been a number of instances of recent entry and expansion at the overlap airports and onto the overlap routes themselves. In particular, substantial entry had been announced on the overlap routes since the merger was announced in October 2007, and third parties have indicated to the OFT that they will continue to review opportunities for entry and/or expansion on the overlap routes. Given the actual entry on the overlap routes in the short period since the announcement of the merger, and the evidence of entry and expansion prior to the announcement of the merger, the OFT considers that this, together with the likelihood of further entry and/or expansion on the overlap routes, is sufficient to constrain the parties post-merger.

The OFT also considered the implications of the merger for potential competition, and whether the merger would enhance the incentive or ability for coordinated behaviour. The OFT found that a number of potential competitors remained at both LGW and London airports generally, and that GB Airways was limited in its ability to compete with easyJet pre-merger by the terms of its franchise agreement with BA. The OFT found that the merger could even result in enhanced competition between easyJet and BA, and hence there would not be a weakening of potential competition as a result of the merger. In relation to coordinated behaviour, the OFT found that despite instances of coordinated behaviour in the airline sector (not involving the parties to this merger), the merger itself would not enhance the incentive or the ability for market operators to engage in tacit or explicit collusion in the supply of scheduled passenger airline services.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTE

1. As at 9 November 2007.

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