Completed acquisition by Air France Finance SAS / City Jet Ltd of VLM Airlines N.V.

Affected market: Passenger air transport services

No. ME/3535/08

The OFT's decision on reference under section 22(1) given on 9 May 2008. Full text of decision published 28 October 2008.

PARTIES

Air France KLM S.A. (AFKL) is active principally in air transportation (passengers and freight) but also in ground services (for example, passenger handling). AFKL owns over 92 per cent of the economic rights in KLM Royal Dutch Airlines (KLM), a Dutch registered international carrier operating scheduled cargo and passenger services to more than 90 destinations principally from Amsterdam. AFKL is a founding member of the SkyTeam Alliance and has two international hubs at Amsterdam Schiphol and Paris CDG airports. AFKL's vehicles for this acquisition are its wholly-owned subsidiaries, Air France Finance S.A.S., and the latter's subsidiary, City Jet Ltd (City Jet), a regional European airline serving ten of its current seventeen routes from its hub at London City Airport.

VLM Airlines N.V. (VLM) is a Belgian-registered regional airline. VLM is active in the supply of scheduled short-haul point-to-point passenger air transport services, primarily focused on business customers. For the IATA summer 2008 season, VLM operates eight routes on a 'reverse-hub' basis at London City Airport, with most of its aircraft and personnel based in The Netherlands and in Belgium.

TRANSACTION

AFKL completed the acquisition of VLM on 14 February 2008.

JURISDICTION

The parties overlap in the provision of direct business and leisure passenger air transport services on London - Amsterdam and London - Rotterdam.

The transaction qualifies as a relevant merger situation on the share of supply test set out in Section 23(4) of the Act as the parties' combined share of supply in the UK for scheduled air transport services between London City Airport (LCY) and Amsterdam Schipol Airport (AMS) (in which both parties are active) exceeds the 25 per cent threshold.

Therefore, the OFT concluded in its decision of 9 May 2008 (the Decision) that two or more enterprises had ceased to be distinct and that the share of supply test pursuant to section 23 of the Act was met. Therefore, a relevant merger situation had been created for the purposes of section 22(1) of the Act.

BACKGROUND

The Decision concluded that, on the evidence available, 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, that is the supply of business passenger air transport services between LCY and AMS. On this basis, the OFT decided that the merger would be referred to the Competition Commission (the CC) unless the parties gave suitable undertakings pursuant to section 73 of the Act to address the competition concerns identified in the Decision.

To address the OFT's competition concerns, AFKL offered undertakings to make available to a new entrant onto this route (to the extent these could not otherwise be obtained) up to three slots at LCY during the morning peak period, up to four slots at LCY during the evening peak period, a parking stand for an early flight at LCY and the necessary corresponding slots at AMS for a weekday service. These slots were to be made available to the new entrant on an up-front buyer basis, that is to an actual named entrant to be identified in advance of acceptance of the undertakings in lieu. The OFT considered that this offer was capable of clearly addressing the competition concerns identified in the Decision and suspended its duty to refer on this basis.

Following suspension of the OFT's duty to refer, AFKL proposed Eastern Airways (UK) Limited (Eastern) as a proposed new entrant on the LCY-AMS route. The OFT considered carefully Eastern's proposal to enter the LCY-AMS route, having due regard to AFKL's offer to make available up to three slots at LCY during the morning peak period and up to four slots at LCY during the peak evening period (which would allow the new entrant to replicate precisely the frequency previously offered by KLM during the peak periods).

Eastern informed the OFT that, notwithstanding the scope of AFKL's undertakings offer, it considered that it would provide a more attractive proposition on the LCY-AMS route for business passengers with a preference for timetable flexibility by having a high-frequency weekday service of eight flights spaced more evenly throughout the day. Although Eastern's planned flight schedule would mean fewer departures from LCY and AMS than KLM operated during peak periods, Eastern's overall schedule would see it running eight flights per day in comparison to KLM's offering of seven. Furthermore, Eastern would have a flight leaving LCY at 6:50, some 55 minutes earlier than the earliest KLM flight, and a flight returning from AMS at 20:25, over an hour after the last KLM flight.

The OFT's starting position is that the undertakings in lieu should replicate the competitive constraint lost through the merger. In this case, the substantial lessening of competition in question is derived from the importance for business passengers to be able to rely on a frequent LCY-AMS service operating at peak times of the day. Given that, pre-merger, KLM operated a fewer number of services during peak times than VLM did, the constraint lost by the merger would therefore be most clearly resolved by a remedy in which a carrier other than the merging parties provided the same number of daily services from LCY-AMS, operating at times equivalent to those operated pre-merger by KLM.

However, the OFT considers that restoration of competition to pre-merger levels need not mean replicating precisely the pre-merger position. In this case, the OFT has due regard to the fact that Eastern already flies business passengers within the UK and beyond and had consulted with relevant business customers on what schedule would suit their needs in advance of submitting its business plan to the OFT. Therefore, on the basis of the evidence provided to the OFT by Eastern, and taking due account of Eastern's expertise as an operator of regional business routes in the UK and in Europe, the OFT provisionally considered, subject to consultation, that the transfer by AFKL to Eastern of two peak slots in the morning and two in the afternoon to enable Eastern to operate a proposed schedule of eight daily flights Monday-Friday from 4 January 2009 would restore competition to pre-merger levels on the LCY-AMS route.

On 29 September 2008, Air France S.A., CityJet Ltd, KLM Royal Dutch Airlines N.V. and VLM Airlines N.V. (the AFKL companies) entered into an agreement with Eastern to make available for the IATA Winter 2008/2009 season two slots at LCY in the morning peak period and two in the evening peak period to allow Eastern to operate its desired schedule of eight daily flights Monday-Friday. Eastern was able to obtain the other slots it required directly from LCY and AMS airports. The agreement provides for AFKL to apply for and transfer an equivalent number of peak time slots to Eastern for the IATA Summer 2009 season, to the extent that this is needed. In addition, the agreement provides for AFKL to make available an overnight parking stand at LCY for Eastern (should Eastern be unable to secure a stand from LCY) to enable it to park one of the two planes which will be used for its LCY-AMS service.

The agreement was made conditional on the OFT's formal approval of the transfer of slots and parking stand to Eastern and of the acceptance by the OFT of undertakings in lieu of reference by AFKL.

CONSULTATION

On 8 October 2008, the OFT published the proposed Undertakings, inviting interested third parties to give their views on them to the OFT by 23 October 2008.

Two responses were received from a customer on the LCY-AMS route during the consultation process, welcoming Eastern's introduction on the route. On of them indicated that Eastern's schedule should at least be comparable to other operators' in terms of the ability to offer a return day trip.

DECISION

The Decision concluded that the merger would be referred to the CC if the parties failed to give suitable undertakings pursuant to section 73 of the Act to address the competition concerns identified in the Decision.

The OFT considers that the undertakings in this case constitute a clear-cut remedy that - in line with the OFT's starting point for undertakings in lieu – restore competition to its pre-merger levels. In particular, the OFT considers that Eastern's intended schedule of eight daily flights during the working week between LCY-AMS, two of which will be operate during the peak morning period and two during the peak afternoon period, will be such as to provide effective competition to AFKL/VLM going forward.

The OFT notes that third party comment received during the public consultation period on the proposed undertakings was supportive of Eastern's entry and re-enforces the OFT's provisional conclusion that the undertakings in lieu will comprehensively restore competition in a clear-cut manner in this market.

The OFT has therefore decided to accept the proposed Undertaking (pdf 81 kb) offered by AFKL in lieu of reference to the CC, as they are, in the circumstances of this case, clear cut and appropriate to remedy, mitigate or prevent the competition concerns identified in the Decision.

This merger will therefore not be referred to the CC and the Undertakings which have been signed by AFKL will come into effect from this date.

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