Completed acquisition by Arriva plc through Arriva Trains Cross Country Limited of the Cross Country passenger rail franchise

Affected market: Rail and bus services

No. ME/3294/07

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 22(2)(a) given on 20 December 2007. Full text of decision published 31 December 2007.

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

PARTIES

Arriva Trains Cross Country Limited (ATCC) is part of Arriva plc (Arriva). Arriva is one of the UK's largest transport companies with operations in various locations throughout the UK and elsewhere in Europe.

The Cross Country Passenger Rail Franchise (Cross Country) is the most extensive rail franchise in the UK, and can be characterised as inter-city, cross-country and supra-regional. Arriva expects to achieve a turnover of around £600 million in the first year of operating Cross Country.

TRANSACTION

The transaction concerns the award of the Cross Country franchise to ATCC on 9 July 2007. ATCC will run Cross Country from 11 November 2007 to 31 March 2016. Cross Country was taken over from the incumbent operator, Virgin Cross Country.

The Office of Fair Trading's (OFT) statutory deadline for deciding whether to refer the merger to the Competition Commission (CC) is 16 January 2008.

JURISDICTION

The award of a rail franchise constitutes the acquisition of control of an enterprise by virtue of section 66(3) of the Railways Act 1993. Therefore, Arriva and Cross Country have ceased to be distinct. The anticipated UK turnover from the first year of operating Cross Country 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 a relevant merger situation has been created.

THIRD PARTY VIEWS

No third party raised any concerns in relation to the merger.
 
ASSESSMENT

Arriva commenced operation of the Cross Country Franchise on 11 November 2007. The merger resulted in rail-on-rail and bus-on-rail overlaps. As in previous cases, the frame of reference used by the OFT was considered on a flow by flow basis, on the basis that the degree of substitutability between different modes can vary from flow to flow.

The merger resulted in seven rail-on-rail overlaps, six of which do not raise any competition concerns due to low increments, no change in the number of independent competitors or sufficient effective competition remaining on the flow. The OFT however believes that the merger may give rise to a substantial lessening of competition on the Cardiff to Gloucester flow, in which Arriva is now the sole provider of public transport and may be able to increase prices or decrease service levels. Entry and/or expansion by competitors onto this flow is not expected to be timely, likely or sufficient to mitigate any competition concerns, and rail customers do not have buyer power.

The OFT does not believe that the merger caused competition concerns in any of the 22 rail-on-bus overlapping flows. In the five flows that were subject of a customer survey, either bus and rail do not compete to a significant degree or there would not be a strong profit incentive for Arriva to flex bus services to cause customers to switch to rail or vice-versa. The OFT considered that the merger did not cause competition issues on the other flows because the overlapping services are not effective competitors and/or there will remain sufficient competition post-merger.

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 pursuant to section 22(1) of the Act.

On this basis the OFT is under a duty to make a reference to the CC. However, the OFT has considered whether it would be appropriate to exercise its discretion to apply the exception to the duty to refer pursuant to section 22(2)(a) of the Act to the facts of this case.

Overall, given the cumulative weight of  the peculiar issues raised by rail franchise awards cases, the lack of a deterrence multiplier, the small scale of the issues at stake, and the lower 'realistic prospect' standard of belief the OFT has in relation to its SLC findings, the OFT considers that the total impact of the merger on consumer welfare is likely to be limited, and that the costs associated with a CC inquiry are disproportionate to the prospect of benefits from such action. Accordingly, taking into account all the relevant facts specific to rail franchise awards and this award in particular, the OFT exercises its discretion not to refer because the markets are of insufficient importance to warrant a reference.

DECISION

This merger will therefore not be referred to the Competition Commission pursuant to section 22(2)(a) of the Act. 

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