Proposed acquisition by British Airways plc of British Regional Air Lines Group plc

No. ME/1058/01

Report under Section 125(4) of the Fair Trading Act 1973 of the Director General's advice, dated 25 April 2001, to the Secretary of State for Trade And Industry under section 76 of the Act

Jurisdiction

This transaction satisfies the assets test of the FTA. It also satisfies the share of supply test in respect of the supply of airline services in the UK. The ECMR does not apply.

The Parties

British Airways plc ("BA") is an international airline operating services to around 160 destinations world-wide. In 1999, BA's revenue was nearly £9bn, with around two thirds coming from the UK. British Regional Air Lines Group plc ("BRAL Group") is the holding company of two airlines: British Regional Airlines Ltd ("BRAL") and Manx Airlines Ltd ("Manx"). BRAL is a BA franchisee. It operates BA flights from 21 regional airports (predominantly from Manchester) to over 40 short-haul destinations. Manx operates scheduled services from the Isle of Man to ten UK destinations. On 31 December 1999, BRAL Group had total gross assets of around £148m. Its turnover in 1999 was £201m, 85% coming from intra-UK services.

Assessment

Relevant markets

The parties overlap in the supply of airline services.

In previous cases the European Commission and the Competition Commission have assessed airline mergers on:

• Loss of actual competition on city pair markets
• Loss of potential competition
• Slot portfolio power / hub dominance

Horizontal issues

Loss of actual competition

There are no overlaps, and therefore no loss of actual competition, between BA and Manx. Manx has 40 slots a week at Heathrow and BRAL has slots at Gatwick which are covered by the undertakings given by BA following the Competition Commission's BA/CityFlyer report. Both these airports are highly congested.

The only overlap is between BA and BRAL on the Manchester-London city pair. BRAL flies to Stansted, BA flies to Heathrow and Gatwick. Therefore, there is no airport-to-airport overlap. For the Manchester-London route, BA and BRAL together would account for 72% of frequency (ie aircraft movements) with an increment of 9%. The parties' share of total passenger movements is 78% (with a 2% increment). Most third parties consider the impact of the merger on this route to be small. Indeed, in the BA/CityFlyer enquiry, the Competition Commission considered the loss of competition between BA and a franchisee to be small.

Loss of potential competition

Prior to the merger, BA could have entered Manx's Isle of Man–Heathrow route. Manx is not a BA franchisee, but its pricing decisions may impact on the passenger numbers carried on to BA's network. However, 81% of passengers on this route are point-to-point passengers and not, therefore connecting to BA or other airlines. BA has not entered a UK regional route for five years and it is an unlikely use by BA of precious Heathrow slots; there also exists actual competition on this route (see note 1) from the British European airline.

It is possible that, without the merger, BA would decide to compete with BRAL on its routes, and vice versa. However, while the franchise arrangement remains, it is unlikely that it would do. Were the franchise arrangement brought to an end, competition would be more likely. BRAL might join another alliance or operate independently. There might, therefore, be some real loss of potential competition in these circumstances. It remains the case, however, that BA would be unlikely itself to enter these routes. That loss is, therefore, unlikely to be significant.

Vertical issues

Slot portfolio power / hub dominance

In 1999 the Competition Commission investigated BA's acquisition of CityFlyer (also formerly a BA franchisee). In this case there was an overlap in slots at Gatwick and seven city pair routes. The increment in slots was 12%. The Competition Commission considered the effect of BA's acquisition of CityFlyer's slots at Gatwick to be significant, strengthening BA's competitive position. First, by acquiring the slots, competitors are prevented from using them. Second, it increases BA's flexibility to reorganise its schedules and services ('shuffle power'). Shuffle power could enable BA to respond more rapidly than its competitors to new opportunities or competitive threats and to absorb into its network slots which airlines with a smaller portfolio of slots and services would have found it difficult to use. The share of slots at Gatwick used by BA its subsidiaries and franchisees was capped following the Competition Commission report. These caps operate until 2004.

I have considered whether the acquisition of airport slots in the case at hand may raise or exacerbate competition problems. In doing so I have taken as given the existing regime for slot allocation. Overlaps at airports other than Heathrow or Gatwick are small and many of these other airports are not, in fact, slot-constrained. At Gatwick, the slots are covered by the existing BA/CityFlyer undertakings.

The acquisition would result in BA (that BA, its subsidiaries and franchisees, other than Manx) having 34.1% (increment 0.4%) of slots at Heathrow, and 38.1% of movements (increment 0.4%). This increment is not very large, and in the present case there is no horizontal overlap. However, the slots acquired at Heathrow may have a strategic importance disproportionate to their number. Airfares from Gatwick may be constrained to some degree by Heathrow but the reverse is not also true. Therefore an increment even of 0.4% might confer a degree of additional market power, especially due to the fact that the slots are at Heathrow. But the small number of slots acquired by BA would be unlikely to confer substantial, additional market power. A series of such acquisitions, or a larger acquisition, might well be another matter.

Third party views

I have received representations from a number of third party competitors, a number of which were unsolicited complaints. Most third parties expressed concern about BA increasing its already significant presence on regional routes.

Conclusion

For the reasons described above, I recommend that you do not refer the transaction to the Competition Commission.

Notes

1. On the London to Isle of Man city pair.

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