Exectuive Summary

1. On 22 August 2003 the Office of Fair Trading referred the proposed acquisition by Stena AB (Stena) of certain assets operated by The Peninsular and Oriental Steam Navigation Company (P&O) on the Irish Sea to the Competition Commission for investigation and report. The reference was made under section 33(1) of the Enterprise Act 2002. We are required to publish our final report by 6 February 2004.
   
   
2. The parties signed a Memorandum of Understanding (MoU) on 27 May 2003 setting out the arrangements for the proposed acquisition of P&O’s ferry operations on the Irish Sea between Liverpool–Dublin and Fleetwood–Larne and a second transaction concerning the establishment of a joint venture for port operations at the port of Cairnryan. The possible closure of P&O’s Mostyn–Dublin route was announced by P&O in its press release issued on the same day. Separate sets of conditional agreements relating to the two transactions were signed on 10 October 2003. The OFT only referred the first transaction to us. Under this transaction Stena would acquire five vessels currently operated by P&O on the two routes concerned, together with related assets, inventory and goodwill. It also agreed to time charter two vessels from P&O presently deployed on its Mostyn–Dublin route.
   
   
3. We found that the share of supply test was met in respect of both the tourist and freight services provided by Stena between Great Britain and Ireland. We also concluded that arrangements were in progress which, if carried into effect, would result in the creation of a relevant merger situation.
   
   
4. Our report focused on the freight market. We defined the relevant markets affected by the proposed merger to be the markets for transporting roll-on/roll-off and lift-on/lift-off freight between Great Britain and Ireland, first in the northern corridor (in relation to Fleetwood–Larne) and second in the central corridor (in relation to Liverpool–Dublin). We did not accept that these two markets should be further divided between driver-accompanied and unaccompanied freight, although we recognized that these could be regarded as two market segments.
   
   
5. Pricing in the freight ferry market is opaque. It is based on bilateral negotiations between individual customers and the ferry company concerned and results in agreed terms on specific routes. These are generally based on the previous year’s prices, expectations of volumes for the following year, and any other features specific to that particular customer. Prices may in part reflect the importance of that customer to the company as a whole, including business outside the Irish Sea. Different prices are charged for accompanied and unaccompanied traffic, and according to time of crossing. We found a high degree of variation in prices paid by individual customers. The opaque nature of this market means that ferry operators currently have the potential to price discriminate between customers.
   
   
6. There are currently three major operators in the market for freight traffic on the northern corridor: P&O, Norse Merchant Ferries and Stena. P&O’s Fleetwood–Larne route constitutes around 20 per cent of the relevant market on the northern corridor. Norse Merchant Ferries provides the most direct competition with its diagonal routes from Liverpool and Heysham to Belfast. Competition is also provided by the short-sea northern routes operated by P&O and Stena, and by Seatruck’s operation from Heysham to Warrenpoint.
   
   
7. As a result of the transfer of the Fleetwood–Larne route, Stena’s market share in the northern corridor would approximately double. Three significant ferry operators would, however, remain, but Stena would replace P&O as the largest ferry operator on the northern corridor. The merger reduces concentration in this market, at least in the short term. Despite the removal of Stena as a potential entrant on the diagonal routes, we concluded that the transfer of the Fleetwood–Larne route from P&O to Stena could not be expected to result in a substantial lessening of competition.
   
   
8. On the central corridor, there are currently four major operators. P&O has the largest share of the central corridor, followed by Norse Merchant Ferries, Irish Ferries and Stena. The freight transported on P&O’s Liverpool–Dublin route made up just over 20 per cent of central corridor traffic. Again the most direct competition to P&O’s Liverpool–Dublin route is from Norse Merchant Ferries, which provides a similar service on the same route out of the river berths at Birkenhead, although there is also competition from all other routes into Dublin, including the short-sea route Holyhead–Dublin.
   
   
9. Post merger, the four main competitors on the central corridor would reduce to three, as P&O would exit the market, and Stena’s market share would more than double. Market concentration on the central corridor would be significantly increased, and the merger would give Stena a market share significantly larger than its nearest rival. In addition, unlike its rivals, it would have a route on both the short and long central corridor crossings.
   
   
10. We believed that there was likely to be a reduction in capacity on the central corridor as a result of the proposed merger. We considered that the Mostyn–Dublin route would close regardless of the merger. However, if P&O were to retain the Liverpool–Dublin route, we believed that it would have a clear incentive to replace more of the withdrawn Mostyn–Dublin capacity than would Stena were it to acquire the route.
    
    
11. We concluded that there would be scope for Stena post-merger to exercise market power, for example by increasing prices to certain customers, and that this would be possible given the lack of pricing transparency in the market. In practice, such price increases would be likely to be focused on the Liverpool–Dublin route. We therefore expected Stena to increase prices on the Liverpool–Dublin route to encourage traffic to move to its Holyhead service, rather than to increase capacity on the Liverpool–Dublin route and continue to operate the Holyhead service at lower levels of utilization. In addition, there would be less of an incentive for Stena to reduce prices at Holyhead in an attempt to attract additional traffic to fill some of its spare capacity. Absent the merger, on the other hand, P&O would be more inclined to put additional capacity on the Liverpool–Dublin route and possibly to lower prices. We thought it unlikely that either Norse Merchant Ferries or Irish Ferries would seek to increase capacity on the central corridor to deter Stena from such a strategy.
    
    
12. We did not believe our findings in the central corridor to be very sensitive to the definition of the relevant market for the Liverpool–Dublin route in terms of accompanied and unaccompanied freight. We recognized that the hauliers and ferry operators in the two market segments may react differently to any potential price rises but believed that the effects that we described would apply similarly to the accompanied segment as they would to the market as a whole.
    
    
13. Although we believed that entry was not intrinsically difficult, and that potential entrants existed who would be prepared to come into the market under appropriate market conditions, it would be particularly important to have access to suitable berths and sufficient surrounding land available at peak times. We did not believe that at the current time, or within the next two to three years, we could rely on large-scale entry to offset any potential substantial lessening of competition in the central corridor.
    
    
14. We therefore concluded that, as a result of the proposed merger, we would expect there to be no substantial lessening of competition on the northern corridor but would expect a substantial lessening of competition on the central corridor. We did not expect that such a lessening of competition would be offset by other competitive constraints, in particular entry.