Bond Helicopters Ltd and British International Helicopters Ltd: A report on the merger situation

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Summary

On 9 June 1992 we were asked (see Appendix 1.1) to investigate the proposed acquisition by Bond Helicopters Ltd (Bond) of the North Sea helicopter business of British International Helicopters Ltd (BIH). BIH was placed in administration on 12 December 1991 following the death of Mr Robert Maxwell whose private interests had acquired the company in 1986. The Administrators are trying to sell the company's businesses as going concerns and Bond's bid for the North Sea helicopter business and some other minor interests was one of a number received. A bid by Bristow Helicopters Ltd (Bristow), also referred to this Commission, was abandoned during our inquiry and the reference laid aside. Two other bids remain under consideration.

Helicopters are used in the North Sea primarily for the transport of personnel to and from the oil and gas fields. In 1991 the turnover of United Kingdom sector helicopter services was £168 million. These services were provided by three companies: Bristow, with 51 per cent of the market, Bond, with 29 per cent and BIH, with 20 per cent. Over recent years BIH's share of the market has declined, mainly in favour of Bond. The proposed merger would thus result in a market supplied by only two companies, each with about half the market.

Demand for helicopter services is expected to remain stable or to decline over the next few years. Business is mainly acquired through contracts but there is a small amount of `ad hoc' business. The customers, the oil and gas companies, conduct their own appraisals of the helicopter operators and are well informed about prices, costs and the availability of helicopters. Safety, maintenance and operating standards are laid down by the Civil Aviation Authority (CAA) and some companies have their own additional requirements. We were told that competition is mainly on price.

Bond argued that the merger would have no adverse effects on competition and that, by creating two firms of more equal size, it would intensify competition; BIH had not for some time been a competitive force; the oil and gas companies had the bargaining power to ensure that prices were kept under control after the proposed acquisition and were able, if dissatisfied, to operate their own services or to encourage new entry to the market. We noted, however, that most oil and gas companies attached importance to BIH's presence in the market and, while few were concerned that standards of safety or service would fall, almost all were concerned about the effect of the proposed acquisition on prices.

We consider that in this mature and transparent market, if only two operators are left, with roughly equal market shares, neither Bond nor Bristow will compete strongly to detach market share from the other and that prices will drift upwards to levels higher than would otherwise obtain, unless constrained by customer buying power or the prospect of new entry.

A new entrant needs finance, a proven safety record and aircraft and staff that meet stringent safety requirements. He is likely to face difficulty in finding suitable bases since, after the acquisition, existing facilities at the bases currently favoured by oil and gas companies would be occupied by Bond and Bristow. We concluded that, without promise of firm contracts from customers, successful entry on a scale likely to provide effective competition was unlikely within a reasonable period.

We accept that the oil and gas companies have some bargaining power. However, there is no practical alternative to the use of helicopters and, except at times when there is spare capacity, this bargaining power will be offset by their need to secure an essential service. If customers are dissatisfied with the extent of competition, we do not think that oil and gas companies are likely to operate their own helicopter services except as a last resort. They are more likely to encourage a new entrant but this may involve costs and an element of risk and we do not think that they would act until prices had risen, perhaps substantially.

We therefore conclude that if the acquisition takes place competition will be reduced and prices may be expected to rise. The proposed merger may therefore be expected to operate against the public interest. We were unable to identify any measures which would remedy this effect. We therefore recommend that the acquisition by Bond of BIH's North Sea helicopter operations should not be allowed to proceed.

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