P&O Princess Cruises plc and Royal Caribbean Cruises Ltd: A report on the proposed merger

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Summary

On 29 January 2002 the Secretary of State for Trade and Industry referred to the Competition Commission (CC) for investigation and report (under the merger provisions of the Fair Trading Act) the proposed merger between P&O Princess Cruises PLC (POPC) and Royal Caribbean Cruises Limited (RCCL). We were asked to report by 20 May 2002. Our terms of reference are at Appendix 1.1.

POPC was incorporated in July 2000 as part of a demerger that split The Peninsular and Oriental Steam Navigation Company (P&O) into two separately-quoted public companies. POPC is the holding company for all of the cruise lines formerly owned by P&O. It also owns a travel agency in the UK and land-travel and hotel subsidiaries in the USA.

POPC accounts for about 23 per cent of all cruises taken by UK customers. Most of them sail on P&O Cruises or Swan Hellenic, two lines that are focused very largely on the UK, though some choose Princess Cruises, another POPC line, which is based in Los Angeles and aimed mainly at North Americans.

RCCL, which is based in Miami, is the world's second largest cruise operator and owns two lines: Royal Caribbean International and Celebrity Cruises. It sails to a range of destinations, though its main focus is the Caribbean. Both its lines are focused mainly on North American customers, though around 3 per cent of their customers are drawn from the UK.

In May 2000, RCCL acquired a 17 per cent stake in the UK tour operator and travel agency, First Choice Holidays plc. The two companies also entered into a joint venture, Island Cruises, which began to offer cruises to British and European holidaymakers earlier this year.

The proposed transaction will involve POPC and RCCL being combined as a dual-listed company with its shares being quoted on both the London and New York Stock Exchanges. Both companies told us that all the cruise lines that they currently owned would continue to be operated as separate brands.

We began our inquiry by examining the considerable variety of cruise holidays that are provided to customers in the UK by operators from a wide range of countries. Although we were not able to reach a conclusion on the appropriate product market for our inquiry, we did all agree that the existence of a wider holiday market, and the availability of cruises of types other than those operated by POPC and RCCL, both constrained these companies' actions and limited commercial freedom-whether or not they were regarded as being in the same market. We also agreed that there were clear distinctions between the levels of quality and the national styles provided by different types of cruises, whether or not they constituted different markets.

We concluded that the geographic market for our inquiry was the UK, ie cruises taken by passengers drawn from this country, irrespective of whether they sailed on ships focused mainly on UK, US or European customers, or of whether they embarked here or flew to an overseas port.

We then examined a number of possible product market scenarios, ranging from a narrow to a broad definition. Although we found that the proposed merger might give rise to potential concerns in some of these markets, we also identified other factors that could offset or mitigate their effects.

The overall conclusion that we drew from our analysis was that the market for UK cruise customers was characterized by growth, variety and new entry, and that this could be expected to continue. The number of UK passengers carried more than tripled between 1990 and 2000 and around one-third of the berths provided in 2000 were being offered by operators that did not enter the business until 1995 or later. Furthermore, between one-third and one-quarter of UK passengers chose ships that were focused mainly on North American or mainland European customers rather than lines aimed at the domestic market. So, given this diversity and choice-and the widespread view among industry commentators that cruising capacity will continue to grow-we did not conclude that the proposed merger was likely to have a significant impact on competition.

Accordingly, we concluded that the proposed merger could not be expected to operate against the public interest.

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