Affected market: Buses
The OFT's decision on reference under section 33(1) given on 1 June 2006. Full text of decision published on 12 June 2006.
Please note that square brackets indicate figures or text which have been deleted or replaced with a range at the request of the parties for reasons of commercial confidentiality.
Arriva the Shires Ltd is a wholly owned subsidiary of Arriva plc (Arriva). Arriva is one of the UK's largest bus operators, with over 6,000 vehicles serving customers in various locations throughout the UK. In particular, it operates 638 vehicles in Bedfordshire, Buckinghamshire and Hertfordshire. Arriva is also one of the leading transport services organisations in Europe, operating extensive services including buses, trains, commuter coaches and water buses.
Premier Buses Ltd was solely the holding company of MK Metro Ltd (MK Metro). MK Metro operated 15 commercial bus services and 26 tendered bus services in Milton Keynes. Several other services were operated in Northampton, Bedford and Leighton Buzzard. MK Metro had 260 staff, a fleet of 110 PSVs (public service vehicles) together with 14 cars and support vans. It previously owned share capital in Centrebus Limited but this was divested prior to the completion of the current acquisition. MK Metro's total turnover for 2005 was £9 million.
By a share purchase agreement Arriva the Shires Ltd acquired the total issued share capital of Premier Buses Ltd. The acquisition was completed on 13 February 2006. The statutory deadline is 12 June 2006.
As a result of this transaction, Arriva and Premier Buses Ltd have ceased to be distinct. The UK turnover for MK Metro (and therefore Premier Buses Ltd) is less than £70 million therefore the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is not met.
However, the parties overlap in the supply of bus services in Milton Keynes and Buckinghamshire. Evidence suggests that they operate more than 25 per cent of bus services in those areas combined. The test in section 23(2) of the Act is therefore met and the OFT believes that it is or may be the case that a relevant merger situation has been created.
RELEVANT FRAME OF REFERENCE
Bus services can be segmented into tendered or commercial bus services. Tendered services are subsidised by the local authority in order to provide transport services where it would otherwise be unprofitable for private companies to do so. Bus operators bid for tendered contracts which are renewed every few years. Commercial bus services are run for profit, without subsidy from the local authority.
It is common for commercial operators to provide tendered services, and to a lesser extent, for operators of tendered services to provide commercial services. Despite this, there are different characteristics between these two types of services, in particular as detailed above, the different manner in which they are funded. The OFT considers them separately in this case.
The extent to which bus services compete with other modes of public transport (such as coach, train and tram) has previously been considered on a case by case basis. In this case, even under the narrowest definition of bus only, no concerns arise. It is therefore not necessary to conclude on this issue in this instance.
Previous decisions (see note 1) have considered whether private car transport is in a separate market from public transport. As no concerns arise in this case on the narrowest frame of reference, it is unnecessary to conclude on this issue in this instance.
The product scope employed in this case is therefore the supply of commercial bus services and the supply of tendered bus services.
Geographic scope – commercial services
The OFT and the CC have previously considered local markets on the basis of the substitutability of competing services on point-to-point flows (see note 2). In making a journey, passengers travel from a particular origin to a particular destination and other origin/destination combinations are not likely to be substitutable.
It is also relevant to consider the competitive effect of the transaction on a wider geographic area. Large operators with depots in neighbouring areas and access to a number of vehicles may easily provide services on nearby flows. This suggests that the market should be widened to include 'potential competition' from other operators with depots in surrounding areas.
The geographic markets for commercial services will therefore be considered on the basis of particular point-to-point flows and also on a wider, potential competition basis (see note 3).
Geographic scope – tendered services
Competition occurs for tendered services when operators with conveniently situated depots bid for contracts. Tendering authorities generally offer contracts for tendered services to a single operator so there is often no competition between operators for tendered services on a flow by flow basis. In addition, tendering authorities may set fares and frequencies so there is less scope for competition in cases where there are overlapping flows. There are no concerns in relation to overlapping flows in this case. Therefore, in this instance it is important to look at a wider geographic area for tendered services.
Commercial services – point-to-point flow analysis
In previous public transport cases (see note 4), the CC and the OFT have used a number of filters as a starting point to focus the competitive analysis on flows that are most likely to raise competition concerns. In particular, the 'overlap revenue percentage' filter has been used initially to eliminate flows on a particular route where revenue generated on each of the overlapping flows on that route accounted for less than 10 per cent of the total route revenue for all services covering that flow (see note 5). In this case, no overlap flow accounts for more than 10 per cent of the revenue on any service and on all but one service (MK Metro's service between Bletchley Bus Station and the Hospital) the overlap flows count for less than 1 per cent of the route revenue.
Previous CC and OFT decisions make clear that the application of the revenue filter is merely a way of focussing the analysis and does not necessarily exclude competitive harm (see note 6). However, in this case the proportion of revenue accounted for by each service on all but one of the overlapping flows is significantly less than 10 per cent and the lack of competitive harm is further supported by an absence of third party concerns over this aspect of the merger.
In addition, none of the flows generated a significant amount of revenue for Arriva or MK Metro in absolute terms. The largest overlap is the flow between Bletchley Bus Station and the Hospital, where MK Metro's service generated only £2300 per annum. The increment to Arriva's service by the acquisition of MK Metro is small in absolute and percentage terms, the parties submit that two other competitors also operate on this flow and no third parties have raised concerns in relation to this flow.
The OFT does not therefore believe that the overlap flows resulting from the merger give rise to concerns on a flow by flow analysis.
Commercial services - wide area analysis
As detailed above Arriva and MK Metro do not appear to compete for commercial services to any significant extent at present. However, the size and number of their depots are such that the threat of Arriva expanding in Milton Keynes, or of MK Metro entering Arriva's territory, may have provided a competitive constraint on each other's operation of commercial services prior to the merger.
The competitive threat from MK Metro may be evidenced by the fact that it had already expanded into Northampton. However, there is no other evidence that would lead one to the conclusion that the constraint presented by potential competition from MK Metro was significant. In particular, the investigation has not revealed any previous incidents of direct competition between the parties and third parties did not believe that the parties constrained each other in this way.
To the extent that a constraint exists, there is potential competition from Stagecoach, First and Go-Ahead, each of whom have depots a similar distance from Milton Keynes to the merged parties and good road access. There are also a number of smaller bus operators in Buckingham, Northampton, Hertfordshire and Bedfordshire. Third parties commented that these may provide some competitive constraint.
The OFT therefore does not believe that competition concerns arise in respect of potential competition in commercial bus services as a result of this merger.
Tendered services - wide area analysis
The parties each operate tendered services in Milton Keynes, Northamptonshire and Buckinghamshire. MK Metro is the most prominent operator of tendered services in Milton Keynes and Arriva is the most prominent operator of tendered services in Buckinghamshire. One third party raised a concern regarding the position of Arriva in respect of tendered services in Milton Keynes.
However, each party operates very few tendered services in the area where the other party is most prominent and there were no concerns from the relevant county councils. In addition, there are other third party operators in each area which could provide tendered services in competition with the merged entity. No concerns therefore appear to arise with respect to tendered services.
BARRIERS TO ENTRY AND EXPANSION
Limits to the availability of depot space may be a constraint to entry or expansion in the provision of bus services. However, given the lack of horizontal concerns in this case, it is not necessary to reach a conclusion on barriers to entry.
The customers for commercial services are individual bus passengers and are unlikely to have buyer power. Local councils may have some buyer power over tendered services but given the lack of horizontal concerns, it is not necessary to reach a conclusion on this issue.
The merger raises no vertical competition issues.
THIRD PARTY VIEWS
As mentioned above, the local councils had no concerns in relation to tendered services. We received no complaints from competitors. We received only one third party complaint which, has been addressed above.
The parties are major providers of bus services in Milton Keynes and Buckinghamshire. However, at present, the parties do not appear to compete to any significant extent for either commercial or tendered services. Given the location of its depots, it is possible that Arriva may have provided a potential constraint on MK Metro and vice-versa, but there is no evidence that this constraint was significant. To the extent that there is a constraint from potential competitors, a constraint on the merged parties existed and continues to exist from other large operators with depots near to the services operated by the merged entity.
Consequently, the OFT does not believe 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.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
1. CC report on the acquisition of Arriva plc of Sovereign Bus & Coach Company Ltd, January 2005 and CC report on the acquisition by First Group plc of the Greater Western Passenger Rail franchise, March 2006.
2. CC report on the proposed acquisition by FirstGroup plc of the Scottish Passenger Rail franchise currently operated by ScotRail Railways Limited, June 2004; OFT decision on the anticipated acquisition by FirstGroup plc of the Greater Western Franchise, 30 September 2005.
3. This is consistent with the OFT's approach in its decision on the completed acquisition by Stagecoach Group plc of Traction Group Limited, 12 April 2006.
4. CC report on the proposed acquisition by FirstGroup plc of the Scottish Passenger Rail franchise currently operated by ScotRail Railways Limited, June 2004; CC report on the acquisition of Arriva plc of Sovereign Bus & Coach Company Ltd, January 2005 and OFT decision on the completed acquisition by Stagecoach Group plc of Traction Group Limited, 12 April 2006.
5. See for example, CC report on the acquisition by FirstGroup plc of the Greater Western Passenger Rail franchise 8 March 2006; CC report on the acquisition of Arriva plc of Sovereign Bus & Coach Company Ltd, January 2005; CC report on the proposed acquisition by FirstGroup plc of the Scottish Passenger Rail franchise currently operated by ScotRail Railways Limited, June 2004 and OFT decision on the completed acquisition by Stagecoach Group plc of Traction Group Limited, 12 April 2006.
6. CC report on the acquisition by FirstGroup plc of the Greater Western Passenger Rail franchise 8 March 2006, Appendix E, paragraphs 9-11 and OFT decision on the completed acquisition by Stagecoach Group plc of Traction Group Limited, 12 April 2006.