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

Affected market: Air transport

No. ME/2795/06

The OFT's decision on reference under section 33(1) given on 20 June 2007. Full text of decision published on 26 June 2007.

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 was the regional arm of British Airways plc, and offered low fare scheduled services within the UK regions and between UK regional airports and European points.

TRANSACTION
 
On 5 March 2007 Flybe acquired the assets of BA Connect (with the exception of the assets associated with the Manchester - New York JFK route and routes out of London City Airport) in exchange for a 15 per cent share in Flybe [see note 1].

JURISDICTION
 
The OFT believed that the business being acquired was 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 would cease to be distinct. The UK turnover of BA Connect exceeded £70 million, so the turnover test in section 23(1)(b) of the Act was satisfied. The OFT therefore believed that it is or may be the case that arrangements were in progress or in contemplation which, if carried into effect, would result in the creation of a relevant merger situation.

BACKGROUND

By way of a decision (pdf 205 kb) of 7 February 2007 (the Decision) the OFT announced that, on the evidence available, it believed that it may be the case that the (then anticipated) merger may be expected to result in a substantial lessening of competition (SLC) in the supply of scheduled passenger air transport services between Southampton (SOU) and Manchester (MAN) airports. For reasons set out in the Decision, the OFT believed that there was a realistic prospect that a SLC could result on the SOU - MAN route, primarily because the lack of a parking stand at SOU would prevent entry on this route post-merger.

On this basis, the OFT decided that the merger would be referred to the Competition Commission unless Flybe gave suitable undertakings pursuant to section 73 of the Act to address the competition concerns arising from the proposed merger. Flybe offered a number of undertakings, including an option to vacate a parking stand at SOU to allow a new entrant onto the SOU - MAN route, provided that the potential competitor has made reasonable efforts to secure one but has failed to do so. The undertaking in relation to the parking stand appeared in principle to eliminate the primary barrier to entry in relation to the SOU - MAN route. Accordingly, the OFT believe that in principle, such a remedy was capable of preserving competition at its pre-merger level because the competitive discipline of threatened or actual entry by a rival to Flybe on the SOU - MAN route would not now be compromised due to any lack of a parking stand at SOU. 

On 13 April 2007, the OFT published the proposed undertakings inviting interested third parties to give their views on them to the OFT.

ISSUES RAISED BY THE CONSULTATION

Three responses to the consultation were received and the issues raised are summarised below [see note 2].

Deadline for application for a slot at SOU

The proposed undertakings provided that the Prospective New Entrant must apply to Airport Coordination Limited (ACL) five working days before the IATA Deadline for Submissions. One third party noted that the IATA Worldwide Schedule Guidelines state that early applications are treated as if received at the deadline and suggested an amendment to the notification requirement. As a result, we amended paragraph 2.1 of the proposed undertakings to require a potential new entrant to provide notice to the OFT of its intention to operate a SOU - MAN service 10 working days prior to the IATA Deadline for Submissions.

Minimum rotation requirement

One third party requested that the Prospective New Entrant commit to a minimum of two rotations each weekday to ensure that the Prospective New Entrant will provide effective competition to Flybe. However, the OFT, even if it could, did not wish to impose behavioural commitments on the Prospective New Entrant which will prevent it from making operational decisions. In addition, the definition of 'Prospective New Entrant' allows the OFT to consider whether the airline has 'financial resources, expertise, incentive and intention to operate a viable year-round SOU-MAN Scheduled Passenger Service in good faith in competition with Flybe on a lasting basis'.

Reasonable time frame

One third party suggested that we specify the 'reasonable time frame' within which a Prospective New Entrant must be unable to secure a Parking Stand. However, the OFT believes that it is reasonable to judge such a time frame (and whether reasonable endeavours have been used to secure a Parking Stand) on a case-by-case basis, consulting with industry participants if necessary.

Vacation of Parking Stands

A number of third parties noted that specifying that the parking stand should be released between 2100 and 0700 was potentially unworkable for a new entrant that may wish to arrive at SOU before 2100 or depart after 0700. As a result, we have replaced the timeframe with a general obligation for Flybe to vacate the stand 'for the purpose of providing overnight parking in support of a SOU-MAN Scheduled Passenger Service'.

Appointment of monitoring trustee

One third party requested that the OFT be required to consult both ACL and the Prospective New Entrant on the appointment of a monitoring trustee. While it is ultimately the OFT's decision to approve a monitoring trustee, it is likely that ACL and, possibly the Prospective New Entrant, will be consulted. However, this is at the OFT's discretion and we do not think that a requirement to consult needs to be included in the undertakings.

On the basis of the comments above, the OFT made some minor amendments to the proposed undertakings. However, the OFT does not consider that these commitments are sufficiently material to require a second consultation period on these points. For the reasons already given, the OFT is satisfied that these undertakings will prevent the substantial lessening of competition in the supply of scheduled passenger air transport services between SOU and MAN airports.

DECISION

The OFT decided on 7 February 2007 that the merger would have been referred to the Competition Commission pursuant to section 22 of the Act if Flybe failed to give suitable undertakings pursuant to section 73 of the Act to address the competition concerns identified in the Decision. The OFT has decided to accept the undertakings in lieu (pdf 276 kb) offered by Flybe, which address all of the competition concerns identified in the Decision for the reasons given in this decision.

This merger will therefore not be referred to the Competition Commission.

NOTES

1. The transaction also involves payments by British Airways plc in relation to BA intergroup loans and pension deficits.

2. Defined terms referred to below have, unless other specified, the meaning set out in the proposed undertakings (pdf 276 kb).

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