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Air France-KLM/VLM merger: OFT seeks slot divestment remedy for London City - Amsterdam route

60/08    9 May 2008

The OFT is considering whether to accept undertakings in lieu of reference from Air France-KLM (AFKL) in relation to AFKL's acquisition of VLM Airlines NV (VLM). If suitable undertakings are not obtained, the merger will be referred to the Competition Commission.

The OFT has concerns that the merger will substantially lessen competition in the provision of scheduled flights for business travel between London City Airport (LCY) and Amsterdam's Schipol airport (AMS). However, the OFT has suspended any referral as AFKL has offered to divest a sufficient number of take-off and landing slots at LCY and AMS to an up-front buyer. The OFT considers that this remedy, in principle, appears clear-cut and would restore competition on the LCY to AMS route.

The OFT's substantive concerns arise for the following three reasons:

First, there are good grounds for considering that LCY to AMS is a separate market, because enough business passengers on this route value the speed and convenience of using it compared to using Heathrow (LHR) or other London airports.

Second, the merging parties are each other's closest competitors on this route. Even allowing for entry by British Airways on this route in May 2008, the parties will clearly remain the principal choices for business travellers requiring peak-time outbound and inbound flights between LCY and AMS, with a combined share per week in the 70-80 per cent range of both seat capacity and number of flights.

Third, there is insufficient evidence to suggest that competitive responses by other carriers could replicate the lost competition between the parties, because rival airlines would face capacity constraints that limit the addition of flights at peak times from LCY - even if corporate customers were to guarantee them business if they did enter. Accordingly, the OFT believes that these entry barriers would permit AFKL to raise prices or reduce frequency or other service levels to business travellers on the LCY to AMS route post-merger.

The OFT will now consider AFKL's undertakings proposal further.

Simon Pritchard, OFT Senior Director of Mergers, said:

'While entry and expansion permitted us to clear the recent easyJet/GB airways case, the critical entry barrier here is that business travellers tend to fly at peak times, when LCY and LHR are severely congested. Even if corporate customers encourage them, this hinders other airlines from adding peak-time flights to AMS. As a result, we have concerns on LCY to AMS, a route worth over £50 million per year. We have taken on board the European Commission's learning from previous airline merger cases and insisted on divestment of the slots to an up-front buyer to be used on this route. This will provide a safeguard that direct competition will be restored, such that UK business travellers will again have two principal choices from LCY to AMS at peak times.' 

NOTES

1. AFKL has acquired VLM via AFKL's wholly-owned subsidiary, Cityjet Limited.

2. The Reference Test - the OFT has a duty to make a reference to the Competition Commission if the OFT believes that it is or may be the case that relevant merger situation has been created; and the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

3. Under the Enterprise Act 2002 a relevant merger situation is created if two or more enterprises have ceased to be distinct enterprises; and the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million; or as a result of the transaction, in relation to the supply of goods or services of any description, a 25 per cent share of supply in the UK (or a substantial part thereof) is created or enhanced.

4. Under section 73 of the Enterprise Act 2002 the OFT may, instead of making 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 as it considers appropriate undertakings to take such action as it considers appropriate. In doing so, the OFT will have regard to the need to achieve as comprehensive a solution as is reasonable and practicable to the substantial lessening of competition and any adverse effects resulting from it.

5. Upfront buyer - the OFT considered in this case that a necessary requirement to suspend the duty to refer and consider undertakings is that the divesture of the LCY slots should be to a suitable purchaser approved by the OFT before the OFT accepts the undertakings. This means that the OFT will consult publicly on the suitability of the proposed slot purchaser, as well as any other aspects of the draft undertakings, during the public consultation period. 

6. Before accepting any such undertakings the OFT shall give notice of the proposed undertakings under Schedule 10 of the Enterprise Act 2002, and consider any representations made in accordance with that notice.

7. The full text of this decision will appear in the mergers section.

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