Sir Richard Branson could make things interesting competition lawyers seeking to get a piece of the upcoming round of airline merger business.
Without going into specifics (in public at least), in mid-February Mr. Branson complained about the anti-competitive effects that would result if DG COMP were to allow IAG to acquire BMI giving the merged entity 53% of the slots at Heathrow. Is Mr. Branson complaining because he wants access to BMI’s slots for himself or is there a bigger at stake that DG COMP should consider when analysing this proposed merger?
I argue that IAG’s potential acquisition of BMI has strategic implications for BA’s operations and the development of Heathrow. The following is a short summary of how DG COMP currently reviews airline mergers. I then discuss how Mr. Branson is seeking to shift this analysis, then I show the strategic implications of his argument.
In its July 2010 judgment in Ryanair v. Commission[1] the EU’s General Court all but killed any possibility that clever legal and factual analysis would make the difference in securing competition authority approval for airline mergers. In this judgment the Court had confirmed the Commission’s reasoning that regulatory clearance would be based on primarily three factors:
(i) the number of overlapping routes the merging parties shared;
(ii) the market share which the merged entity would control on those routes; and,
(iii) the likelihood that new entrants could establish competing services in the event of a price increase.
If the merging airlines had a large number of overlapping routes, had high market shares on those routes and there was little chance for another airline to offer a competing service in the event of a price increase, the notified merger would likely fail.
The Commission has continued to push ahead with this analysis, blocking the acquisition of Aegean Airlines by Olympic Air at least in part because the transaction would create a quasi-monopoly on nine routes within Greece.[2] Unfortunately, Commissioner Almunia has yet to publish the non-confidential version of this decision.
Mr. Branson’s argument is a fundamental departure from this precedent. The question is why is it important?
To answer this one first has to look at how European airports are financed. In 2011 BAA (the owner of Heathrow) incurred slightly more than GBP 1.1 billion in operating expenses; generated slightly more than GBP 1.2 billion in aeronautical revenue; and, a bit more than GBP 500 million in retail income.[3]
In other words BAA derives its profit from retail sales to passengers, not from charges to the airlines. Heathrow is BAA’s biggest revenue maker catering to more than 84 million passengers a year each spending on average GBP 5.58.
It is well known that Heathrow is operating at maximum capacity in terms of the number of take offs and landings and that there is zero chance that a new runway will be built in the near future, if ever. Heathrow’s only chance at increasing revenue is to attract more long haul traffic because these routes are operated by airlines using larger aircraft. A simple calculation suggests that Heathrow generates approximately GBP 1,116 for every 737 that takes off and lands at the airport compared to GBP 2,232 for every 747. There is no question that Heathrow would rather see more 747s use their facility rather than 737s.
Airports, like any other service provider, needs to cater to its customer’s needs. If IAG were to strengthen its position at Heathrow then it will be in a stronger position to determine the future development of the airport. This will mean that terminals will be designed to suit the configuration and make up of IAG’s fleet of aircraft, lounges and other high revenue generating facilities will be developed to IAG’s customers. Over time Heathrow would become tailored made to suit IAG’s operations giving it a competitive advantage over any other airline wishing to operate out of the facility.
In my view this will be a positive development if DG COMP were to give serious consideration to Mr. Branson’s argument. The route by route analysis is too bureaucratic and fails to consider the vertical dynamics and long term development of the sector.
[1] T-342/07 Ryanair v Commission.
[2] See “Mergers: Commission blocks proposed merger between Aegean Airlines and Olypmic Air” 26 January 2011. http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/68
[3] See BAA (SP) Limited presentation “Results for year ended 31 December 2011″. Available at http://www.baa.com/assets/Internet/BAA%20Airports/Downloads/Static%20files/BAA-Debt-Investor-Presentation-FY-2011-final.pdf.