Acquisition by National Express of the Greater Anglia Franchise

Affected market: Passenger transport

No. ME/1602/04

Please note that the full text of the decision can be downloaded from the link on the right.  What follows are extracts regarding the parties, the transaction, jurisdiction, conclusion, and the decision.

The OFT's decision on reference under section 22(1) given on 27 May 2004

PARTIES

National Express Group plc (NEG) provides a broad range of transport services in a number of countries.  In the UK, its principal businesses include: the operation of train operating companies which provide inter-city, urban and rural passenger rail services in various areas across Great Britain; the operation of a network of scheduled express coach services; and the operation of bus services in the West Midlands and Dundee.  Prior to the merger, NEG operated eight rail franchises granted by the Strategic Rail Authority (SRA).

London Eastern Railway Limited (LERL) is the newly formed subsidiary of NEG, set up to operate the Greater Anglia franchise.  Year 1 revenue of the new Greater Anglia franchise was forecast to be £400m.

TRANSACTION

The SRA has selected NEG as the train operator for the new Greater Anglia franchise, which commenced in April 2004.  The newly remapped franchise combines the previous Anglia, Great Eastern and West Anglia rail services.  The term of the franchise is for a period of seven years, subject to extension for a further three years if specified performance targets are met.  The new franchise will operate all regular services out of London Liverpool Street and will do so within a framework of regulation of certain rail fares and service levels stipulated in the franchise agreement.  The statutory deadline for a decision on this transaction is 29 May 2004, and the administrative deadline is 27 May 2004.

JURISDICTION

As a result of the transaction, NEG and the Greater Anglia train franchise have ceased to be distinct.  The award of a rail franchise constitutes an acquisition of control by virtue of section 66(3) of the Railways Act 1993 as amended.  The transaction will create a relevant merger situation under section 23(1)(b) of the Enterprise Act 2002 (the Act) as the turnover test is met.  The ECMR does not apply.

CONCLUSION

The merger makes NEG the main provider of inter urban public passenger transport in the franchise region.  Actual competition between public transport services will depend on factors specific to the area in question.  Economic analysis of the available data points to competition between coach and off-peak rail, and between the London-Southend rail services.

NEG has asserted that an expectation of competition on these specific overlap routes is wrong, for reasons that vary from overlap to overlap but in many cases are plausible.  However, NEG has not been able to provide sufficient evidence, despite a prolonged investigation, to support its view that there is little or no competition between the London-Southend rail services, nor between coach and rail services.  Notwithstanding extensive regulation of rail services, off peak fares are unregulated and there is a degree of flexibility with regard to service levels.  No competing coach or rail service may be expected to enter on the routes under consideration in the foreseeable future.  On balance the evidence presented, although not always unambiguous, suggests that at least a degree of competition existed on some overlaps and that this was sufficient to induce some competition both on price and non-price parameters.
 
It is therefore reasonable to believe that competition may be expected to be reduced, in particular where NEG offers virtually the only long distance public transport on the overlaps under consideration.  Consequently, the OFT believes that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

Exceptions to refer

The parties cited exceptions to the OFT's duty to refer, namely that the markets are of insufficient importance to warrant reference, that customer benefits outweigh any detriments created by the merger, and that undertakings offered in lieu of reference remedy any detriments created.

The markets at issue are of sufficient importance to warrant reference (see note 1).   The annual revenue of the London to Southend overlap on off-peak alone is £ (see note 2) and total offpeak revenues from all stations on the route are £4 million.  The two largest coach and rail overlaps have combined coach and train revenue of £910,000 and £653,000 respectively.  Coach revenues for all 52 overlap routes amount to at least £1.2 million (see note 3).  

Customer benefits, in terms of improved rail services, must be clear, quantifiable and merger-specific for the OFT to rely on them (see note 1).   On the basis of the evidence presented to us, it was not clear that the customer benefits were derived from the merger, rather than the creation of the new franchise.

NEG offered undertakings in lieu of reference. 

• As to the London/Southend rail concerns, the undertaking in essence proposed to cap the price of the (unregulated) cheap day return fare between any stations between London and Southend to the current discount level off the (peak, regulated) standard day return fare for the same journey.  There are two concerns with this proposed remedy.  First, it is not clear that a price cap would in this case be sufficient to restore pre-merger incentives to compete on unregulated fares.  Second, it does not address concerns related to non-price competition.  For these reasons, the rail/rail undertaking cannot be described as a clear-cut remedy capable of ready implementation. 
• In relation to the coach/rail overlaps, NEG in essence offered a price cap and guarantee of service quality.  Again, this proposal does not appear to restore any pre-merger competitive relationship between coach and rail. 

Accordingly, the remedies proposed cannot be accepted as undertakings in lieu of reference. 

DECISION

This merger will therefore be referred to the Competition Commission under section 22(1) of the Act.

NOTES

1. OFT Mergers Guidelines: Substantive Assessment, p44.

2.  Actual figures excised at the request of the parties for reasons of commercial confidentiality.

3. NEG was unable to provide accurate revenue figures for return journeys.

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