Proposed acquisition by Avis Europe plc of certain assets of Budget Group Inc

No. ME/1042/03

A report under section 125(4) of the Fair Trading Act 1973 on the advice of the Director General of Fair Trading, given on 5 March 2003, to the Secretary of State for Trade and Industry under section 76 of the Act

ASSESSMENT

Jurisdiction

The merger satisfies the share of supply test of the FTA in respect of the supply of car rental services at airports in the UK.

The parties

Avis Europe plc (Avis) is principally involved in car rental services throughout Europe, Africa, the Middle East and Asia, which it operates through a combination of wholly owned subsidiaries and franchisee/licensee partners. Budget Group Incs subsidiary Budget Rent-a-Car International Inc (Budget) operates car rental services in Europe, the Middle East and Africa through a combination of wholly owned subsidiaries and franchisee/licensee partners. Budget Group Inc filed for bankruptcy in the USA on 29 July 2002.

Relevant market

The parties overlap in the supply of car rental services.

Product market

The parties consider the relevant product market to be the supply of short-term rental of passenger cars and vans to all types of customers, in line with the Monopolies and Mergers Commission's (MMC) report on Compagnie International Europcar and Godfrey Davis Limited (HC 94,1981).

Car hire can be distinguished from other forms of transport by virtue of the additional convenience and flexibility which it offers; it is also normally more expensive than other forms of transport. Car rental customers can be distinguished by the location of vehicle collection. Car rental firms at airport locations appear to attract a premium price particularly for business customers - […] (see note 1). These differences may be particularly pronounced for business customers as they generally value time more than leisure customers. The parties believe, however, that these higher airport prices are due to an airport rental typically being shorter than a downtown rental, so that the average daily price is higher, and they have stated that under corporate contracts the price for a business client is the same on or off airport.

For airline passengers, collecting a hire car at the airport offers flexibility and convenience over collection from locations outside the airport. The feasibility of off airport rental facilities varies depending on the distance of the airport from the city centre and on the public transport facilities available. Some car rental companies provide a 'meet and greet' service to airport customers. Although premises at which to store, maintain and check cars may be relatively cheaper off airport than on, one third party did not believe this was a viable option as it leads to a dwindling customer base and raises overall costs. This would seem to be supported by the fact that the parties estimate that this type of service represents only 1-5 per cent of business derived from airport passengers. While none of these factors rules out the possibility of downtown locations imposing some constraint on airport prices, such outlets are unlikely to present as immediate a constraint as other airport-located car rental companies.

Airport facilities for car hire businesses are awarded by the relevant airport operators as concessions via a bidding process. Concession tenders tend to be invited roughly every three years. Thus, in the short term, supply side substitution is constrained. Airport operators award concessions on the basis of the most attractive minimum guaranteed income offered. Concession holders are also required to pay a percentage of their revenues to the airport operator. Airport operators have indicated that they will award as many concessions as can viably be maintained given the requirement of a guaranteed minimum charge to each concession holder.

Consideration of demand and supply substitutability therefore suggest that the appropriate frame of reference for analysing the competition effects of this merger is the supply of car rental services at airports.

Geographic market

The relevant geographic markets are considered most likely to be individual airports. The effect of the merger is examined at each of the airports (see note 2) where the parties both offer car rental services.

Horizontal issues

In terms of the supply of car rental services throughout the UK, the parties' combined market share for the provision of car rental is [10-20 per cent] (see note 3) (increment [less than 10 per cent] ) (see note 3). Several other major national competitors including National […](see note 4) , Europcar, Hertz and Enterprise […] (see note 4) will remain following the merger. The merger is thus unlikely to lead to a substantial lessening of competition at the national level, and is not considered further from this perspective.

However, the merger will result in more substantial combined shares at some of the eight UK airports where the parties overlap. The increments gained will be [less than 10 per cent] (see note 5) in addition to existing shares of [less than 40 per cent] (see note 5) at six of these airports. At Belfast City and Belfast International airports the increments to share will be higher at [10-20 per cent] (see note 5) and [20-30 per cent] (see note 5) to give combined shares of [40-50 per cent] (see note 5) and [50-60 per cent] (see note 5) respectively, […] (see note 6). Nevertheless, between two and four major national competitors will remain at all eight airports, most of them already holding substantial market shares at each airport.

In addition, it appears that Budget is not currently Avis's closest competitor. Car rental companies appear to be differentiated by brand and type of fleet. Budget is characterized by third parties and a Mintel market research report as a niche player at airports focusing on leisure customers, although information provided by the parties suggests that it also has a significant proportion of business customers. With one exception, Budget is located at airports with five or more concessions. It appears that there is a core of three to four car hire operators (Avis, Hertz, Europcar and possibly National) who are best placed to bid for and win concessions, and that it is mainly where additional concessions exist that companies such as Budget are able to compete effectively for them (with Sixt Kenning, Enterprise and possibly National).

Barriers to entry and expansion

Some third parties expressed concern about the fact that following the merger, Avis would have the ability to make two bids for each concession rather than one, to the potential detriment of other bidders. In this respect, Avis has stated that it intends to maintain the Budget brand and that the Budget airport concessions will continue to be held by franchisees who bid for concessions themselves.

Moreover, the number of car rental concessions put out to tender is limited by the airport operators. Barriers to entry at individual airports are, therefore, dependent upon airport operators' decisions in respect of the number of concessions to award. It would appear that airport operators generally maintain a number of concessions. If an airport operator changed this policy, a less competitive situation might result. But it is not clear why any such lessening of competition would be attributable to this merger.

Several third parties have noted the importance of an international network in bidding for an airport concession. It does appear that car hire businesses with international networks are more successful, perhaps in part because of the importance of international passengers.

It appears, therefore, that barriers to entry to individual airports are largely dependent upon airport operators. If airport operators sought to restrict entry anti-competitively, this would not be an effect of the merger, and would need to be addressed separately.

Buyer power

Except for the larger corporate customers, customers are highly fragmented and are unlikely to have significant countervailing buyer power as such. But customers generally have readily available choice, including at airports, between a number of suppliers including well-known brands.

Vertical issues

The merger raises no significant vertical issues.

Third party views

The OFT received a number of representations from customers and competitors of the parties, which have been taken into account in the above assessment.

CONCLUSION

The merger qualifies for investigation under the share of supply test of the FTA. The parties overlap in the supply of car rental services at airports.

This merger is unlikely to raise competition concerns at a national level, given the parties' combined market share of [10-20 per cent] (see note 5) (increment [less than 10 per cent] ) (see note 5) , and the presence of several other major national competitors.

At the level of individual airports, the market shares and increments arising from the merger are more significant, particularly at the Belfast airports and – because of the limited number of concessions granted by the airport operators – the number of competitors is fewer than it is generally. In all cases, however, other major national competitors will continue to act as a constraint on the merged firm. Moreover, Budget does not appear to be Avis's most direct competitor. The merger is therefore judged unlikely to give rise to a substantial lessening of competition.

I therefore conclude and recommend that you should not refer this merger to the Competition Commission.

NOTES

1. Commercially sensitive information has been excised, at the request of the parties.

2. Belfast City, Belfast International, Birmingham, Edinburgh, Glasgow, Manchester, Southampton and Stansted airports.

3. Actual share information has been replaced with a range, at the request of the parties.

4. Share figures for national competitors have been excised.

5. Actual share information has been replaced with a range, at the request of the parties.

6. The remainder of this sentence has been excised as it contains commercially sensitive information.