Anticipated acquisition by Flybe Group Limited of the BA Connect business of British Airways plc

Affected market: Scheduled passenger air transport services

No. ME/2795/06

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, assessment, undertakings in lieu and decision.

The OFT's decision on reference under section 33(1) given on 7 February 2007. Full text of decision published 15 February 2007.

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

PARTIES

Flybe Group Limited (Flybe) is one of Europe's largest low-cost airlines specialising in serving regional destinations. Its route network encompasses 140 routes from 45 airports spanning nine countries.
 
BA Connect is the regional arm of British Airways plc, and offers low fare scheduled services within the UK regions and between UK regional airports and European points. Flybe is acquiring eleven of BA Connect's aircraft [note 1] and all of the business that is associated with the BA Connect routes, with the exception of Manchester – New York JFK and routes out of London City Airport.

TRANSACTION

While the final terms of the transaction are yet to be agreed, the OFT understands that Flybe proposes to acquire the assets of BA Connect (with the exception of the routes described above) in exchange for a 15 per cent share in Flybe. [note 2] The OFT's analysis is predicated on the transaction being structured in this way.

The parties notified the transaction to the OFT on 8 December 2006. The administrative deadline expires on 7 February 2007.

JURISDICTION

The OFT believes that the business being acquired is an 'enterprise' for the purposes of the Enterprise Act 2002 (the Act) and that as a result of this transaction the enterprises of Flybe and BA Connect will cease to be distinct. The UK turnover of BA Connect exceeds £70 million, so the turnover test in section 23(1)(b) of the Act is satisfied. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.
 
EC Council Regulation 139/2004 on the control of concentrations between undertakings is not applicable to this transaction.

ASSESSMENT

The anticipated acquisition by Flybe of BA Connect brings together two of the UK's largest regional airlines. The OFT considered the 11 overlapping routes on which the parties provided services from similar or neighbouring airports. The OFT considered both actual and potential competition on a route-by-route basis, analysing factors such as the extent of actual competition on the airport O&D pair and the competitive constraint provided by services at neighbouring airports, alternative modes of transport, and potential entry. In considering these competitive constraints the OFT was aware that a large proportion of passengers on each of the overlap routes (with the exception of BHX – GVA) were travelling for business purposes.
 
In summary, for all of the overlapping routes in question -- with the exception of SOU – MAN (see below) -- the OFT's analysis revealed that entry/ expansion would be sufficient and timely to counter any reduction of direct competitive constraint as a result of merger.
 
In addition, the merged entity would face direct actual competition on most routes (or, in the case of BHD – MAN, competition from an airline at a competing airport) and the structure and practices of the airline market meant that the reduction of competitors from three to two on each of these routes unlikely to be a cause for concern. On each of these routes, there were no significant restrictions on the competitor airline expanding its services to further compete with the merged entity.
 
A more detailed summary of the OFT's route-by-route assessment of the post-merger competitive constraints on Flybe in relation to the overlapping routes is as follows:

• BHD – MAN: on the basis of the evidence regarding competition between BFS and BHD, bmibaby will continue to pose a significant competitive constraint on Flybe post-merger. In addition, there are no significant barriers to entry or expansion in relation to BHD, BFS and MAN and there is a lively history of recent entry in this industry. The OFT therefore does not believe that the merger will raise competition concerns on this route.
• BHX – EDI, BHX – ABZ and BHX – GLA: while Flybe and BA Connect are (or, in the case of BHX – ABZ [note 3], will be) direct competitors on these routes, bmibaby is also present. bmibaby has shown both the ability and intention to expand on the routes to compete with Flybe post-merger. In addition, there are no significant barriers to new entry on these routes and there is a lively history of recent entry in this industry. The OFT does not therefore believe that the merger will raise competition concerns on these routes.
• BHX – GVA: Flybe is only a marginal competitor on this route, and is more than matched by the presence of bmibaby. The strong emphasis on leisure travellers on this route suggests that both charter flights and flights from neighbouring airports (given the flight time) are also likely to constrain the parties on this route. Given these competitive constraints the OFT does not believe that the merger will raise competition concerns on this route.
• BHX – HAJ: this is a very thin route (in terms of passenger numbers), on which Flybe has only recently commenced operating. While the parties are the only direct competitors, we have not received any evidence to suggest that there are substantial barriers to entry on this route, and in particular that there are any significant structural barriers at either airport. In addition, a number of airlines have a substantial presence at either BHX or HAJ, such that, given the lively history of recent entry in this industry, entry may be considered sufficient in time, likelihood and scope should Flybe increase price or reduce service levels following the merger. The OFT does not therefore believe that the merger will raise competition concerns on this route.
• BRS / EXT routes: Flybe and BA Connect currently compete from different airports on each of the BRS / EXT routes, and easyJet is a significant competitor to BA Connect at BRS. Given this actual competitive constraint, the OFT does not believe that the merger will raise competition concerns on these route.
• SOU – EDI, SOU - MAN: on each of the SOU routes the parties are the only direct competitors. Each operates similar services, although a significant difference between the frequency of services is that BA Connect bases its aircraft on the SOU – EDI route at EDI, meaning it does not have an early morning departure at SOU for this route. On the basis of the evidence before it, the OFT found that any competitive constraint from LHR / LGW and alternative modes of transport would not be sufficient to outweigh any loss of direct competition that might be considered to arise on either of the SOU routes. The OFT also found that there were potential issues with entry/expansion on the SOU routes, in particular the absence of available parking stands.
  
  However, in relation to the SOU – EDI route, the evidence did not support the conclusion that the absence of available parking stands represented a material barrier to replicating the constraint currently provided by BA Connect on this route. BA Connect's existing SOU – EDI service operates from an EDI base without the use of a parking stand at SOU and while certain third parties suggested that entry might be more difficult from the EDI end, they did not suggest that this was sufficient to deter entry, and hence replicate the competitive constraint provided by BA Connect on SOU - EDI.
  
  In contrast, in relation to the SOU – MAN route, BA Connect's decision to continue to base an aircraft at both the SOU and MAN ends on this route suggested an early morning flight (and therefore a parking stand) from SOU was critical to this route. This indicates that the absence of an available parking stand at SOU could be a material barrier to entry on this route. The OFT therefore believes that it is or may be the case that the merger will lead to substantial lessening of competition on the SOU – MAN route.
  For the reasons set out above, the OFT believes that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

Undertakings in lieu

Where the duty to make a reference under section 33(1) of the Act applies, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, and for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect which has or may have resulted from it or may be expected to result from it, accept from such of the parties concerned undertakings as it considers appropriate.

The OFT has therefore considered whether there might be undertakings in lieu of reference which would address the competition concerns outlined above. The OFT's Mergers Substantive Assessment Guidance states that, 'undertakings in lieu of reference are appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut, and those remedies are capable of ready implementation.'[note 4]

Flybe indicated to the OFT that in order to remedy any substantial lessening of competition identified by the OFT and to avoid a reference to the Competition Commission, it would be prepared to offer undertakings in lieu to remedy any perceived harm at SOU. These undertakings – which were in addition to the 'slots' [note 5] which Flybe had indicated it might unilaterally vacate at SOU - included:

a) a commitment to deploying a 118 seater aircraft on the first northbound departure on the SOU – EDI route, to ensure continued high capacity on the route, or provide any other capacity or frequency guarantees that might be required

b) vacating a parking stand at SOU to allow a new entrant onto the SOU – EDI or SOU – MAN route, provided that the potential competitor has made reasonable efforts to secure one but has failed to do so.and/or

c) capping its fares on these two SOU routes for a period of one year.

The OFT believes that the release of a parking stand would be a clear cut remedy and could be capable of ready implementation. Further, we consider that this remedy clearly addresses the competition concerns which it has identified as arising from the merger, as it eliminates the primary barrier to entry in relation to the SOU – MAN route. The remedy is largely structural in nature, and is consistent with previous European Commission decisions [note 6] on mergers and joint airline alliances, which offer slot divestment in order to encourage entry. Furthermore, the remedy will only be required if the new entrant has been unable to obtain a parking space through other means (e.g. expansion of parking spaces at SOU or replacement of an exiting airline). The other undertakings offered by Flybe -- that is to deploy a 118 seater aircraft on the SOU - EDI route and fare caps -- are not necessary to remedy the OFT's concerns.

In light of the above, on the information currently available, the OFT has decided to exercise its discretion under section 73(2) of the Act to negotiate undertakings in lieu of reference based on Flybe's offer to vacate a parking stand at SOU.

DECISION

The OFT has therefore decided to refer the anticipated acquisition by Flybe of BA Connect to the Competition Commission pursuant to section 33 of the Act. However the OFT's duty to refer is suspended because the OFT is considering whether to accept undertakings in lieu of reference from Flybe pursuant to section 73 of the Act. 

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTES

1. Four of these aircraft are owned by BA Connect whereas the remainder are subject to an extended lease.
2. The transaction also involves payments by British Airways plc in relation to BA intergroup loans and pension deficits.
3. Entry was planned for March 2007.
4. Para 8.3.
5. Technically not all 'slots' but used here as shorthand for runway departure/arrival times.
6. See for example M.3770 Lufthansa / Swiss and M.3280 Air France /KLM.

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