British Airways Plc and Sabena SA: A report on the merger situation

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On 26 March 1990 the Secretary of State for Trade and Industry asked the MMC to examine whether, as a result of arrangements entered into between Sabena SA, British Airways (BA) and KLM, a merger situation had been created or was in contemplation between BA and Sabena and if so whether it was against the public interest.

Under the arrangements Sabena, which is a Belgian airline company based in Brussels, has 60 per cent of the capital of Sabena World Airlines (SWA), a subsidiary company recently formed by it to take over all its air transport operations. BA and KLM are each investing 2 billion Belgian francs (about £35 million) for 20 per cent each of the remaining shares of SWA. The Board of SWA consists of ten directors. Six, including the Chairman, are representatives of Sabena, two of BA and two of KLM.

The main purpose of the arrangements is to develop a hub and spoke operation at Zaventem airport, Brussels, to link together through Brussels some 75 provincial cities in Europe (including some 14 in the United Kingdom), most of which at present have no direct flights linking them. It is contemplated that SWA will fly the services connecting the spokes with the hub.

A second purpose of the arrangements is for SWA to develop separately with BA and KLM a number of jointly operated long-haul international services.

We established that the assets of SWA at the material date exceeded £30 million and that as a result of the arrangements BA is in a position materially to influence the policy of SWA. A merger situation therefore exists.

This merger situation is different from those more usually investigated by the MMC in that it involves outward investment by a United Kingdom company in SWA, a Belgian company, the main purpose of which is the development of air services outside the United Kingdom. Its main effects fall outside the MMC's jurisdiction, and are presently being considered by the European Commission. Our investigation is concerned with those effects that bear upon the United Kingdom public interest.

We examined the effects of the arrangements on the United Kingdom public interest and in particular the extent to which they were likely to lead to lessened competition between the parties to the detriment of the United Kingdom consumer. We considered first competition on United Kingdom-Belgium routes and particularly on the Heathrow-Brussels route. BA and SWA are presently the sole operators on the latter route and their bilateral competition is less than vigorous. Their ability to raise fares is, however, constrained by the regulatory powers of the Civil Aviation Authority (CAA) and the potential entry of British Midland Airways (BM), in which Scandinavian Airlines System (SAS) has a 24.9 per cent interest. BM is the only other United Kingdom airline allowed to operate international services from Heathrow, and already has a licence to operate this route. We concluded that the changes brought about by the arrangements are unlikely to lead to any significant change in competition between BA and SWA on this route. If, however, BA and SWA attempted unduly to increase fares on the Heathrow-Brussels route, that increase would be an incentive for BM to come on the route. BM is planning to initiate a service there, and we see its potential entry as an effective constraint on fare increases.

Fears were expressed about the effects on United Kingdom airlines of SWA's entry into Gatwick-Brussels and Stansted-Brussels with BA support. Under the United Kingdom-Belgium Air Services Agreement, SWA is already free to enter these routes. BA has stated that it does not propose to offer support to SWA, for example by handing over slots at Gatwick. In any event, to hand over slots appears to us to be against its commercial interests. If, however, BA were to endeavour to assist SWA in a predatory way, either at Gatwick or Stansted (where BA does not at present operate), this would be visible and open to action by the CAA and the competition authorities. The only other United Kingdom-Brussels routes in which BA and SWA are currently in direct competition are Manchester and Birmingham. Given freedom of entry and absence of any significant congestion on these routes we see no reason why the replacement of Sabena by SWA should lead to any effective loss of competition.

Moreover we identified substantial potential benefits to United Kingdom consumers from the hub and spoke operation which if successfully implemented will provide travellers from airports outside London with new links through Brussels to other European destinations on routes where the traffic does not support direct flights, and may reduce pressures on Heathrow. The arrangements give BA an attractive opportunity to participate in the development of a new European hub and spoke operation and a stake in the development of an airport of increasing European importance, which might otherwise go to another overseas airline. Equally the financial and technical support by BA increases the chances of the successful development of the operation.

The proposed long-haul arrangements between BA and SWA should also increase choice of services and provide extra services to inter-continental destinations for United Kingdom residents, particularly for passengers from regional airports such as Manchester, Glasgow and Edinburgh. We do not expect the arrangements to create any new incentive or opportunity for increased co-operation between BA and KLM.

We therefore conclude that the arrangements do not, and may not be expected to, operate against the public interest.

We note that the European Commission is currently examining the arrangements and recognise that this scrutiny might lead to changes in the arrangements which might affect both the terms and the nature of any participation by BA and KLM. The effect of any changes on BA's relationship with SWA, if they were to occur, cannot be foreseen at this stage and we cannot usefully speculate on them.

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