British Airways Plc and CityFlyer Express Limited:
A report on the proposed merger
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On 20 January 1999, the Secretary of State referred to the Monopolies
and Mergers Commission (MMC) the proposed acquisition of CityFlyer Express
Limited (CityFlyer) by British Airways Plc (BA). The terms of reference
are set out in Appendix 1.1. Section 45 of the Competition Act 1998, which
came into force on 1 April 1999, dissolved the MMC and transferred its
functions to the Competition Commission. Those functions are to be carried
out by reporting panel members of the Competition Commission. Members
of the MMC immediately before the coming into force of section 45 became
members of the reporting panel. Thus the investigation was carried out
in part by the MMC and in part by the Competition Commission, and this
report is submitted by the latter. For convenience we use the term Commission
to refer to the Competition Commission or the MMC as the context requires.
In terms of total passengers carried, BA is the ninth largest airline
in the world but it carries more passengers on international services
than any other airline, operating to 167 destinations in 87 countries.
BAs traditional base is London Heathrow Airport (Heathrow) where
it provides a network of long-haul and short-haul services interconnecting
at the airport in a so-called hub operation. Because of growing
congestion at Heathrow, it has, since the early 1990s, developed a similar
hub operation at London Gatwick Airport (Gatwick) making use of franchisees
to operate services on many of the short-haul routes in its network. It
also provides low-cost, no-frills, air services from London Stansted Airport
(Stansted) through its subsidiary Go-Fly Limited (Go).
CityFlyer was set up by its managers in 1991 with backing from four institutional
investors. It became BAs first franchisee at Gatwick in 1993. It
now operates services from Gatwick to 12 destinations in the UK, Channel
Islands and elsewhere in Europe with aircraft painted in BAs colours,
using BAs cabin designs and crew uniforms and operating to BAs
service, maintenance and safety standards. It remains an independent company
able to set its own schedules and fares, but in practice virtually all
its flights operate under the franchise and at fares virtually identical
to those of BA. In terms of the number of flights operated, CityFlyer
is the second largest airline operating at Gatwick, after BA, and it has
been profitable in every year of its operation except the first. The proposed
acquisition by BA came about because CityFlyers institutional shareholders
wished to sell their shares to realize their investments.
To assess the effect of the merger on competition, we have considered
whether services from Heathrow, Stansted, Luton and London City airports
are substitutable for those from Gatwick. We have concluded that this
is generally not the case as far as passengers transferring between flights
at Gatwick are concerned. But there is evidence of growing competition
for these connecting passengers from airlines offering interconnections
at major hubs elsewhere in Europe or further afield. To that extent, services
from Gatwick operate in a much wider market. For point-to-point travellers
starting or finishing their air journeys in London we consider that Gatwick
services are subject to substantial competition from Heathrow. There is
also increasing competition from the other London airports. This is currently
less evident in the business sector than the leisure sector but there
is at least some overlap in both sectors and we would expect this to increase.
In considering the consequences of the merger for the public interest
we looked first at the loss of competition between CityFlyer and BA on
the routes served by both airlinesthe overlap routes.
We then looked at the wider effects of BAs acquisition of CityFlyers
substantial holding of take-off and landing slots, both in terms of the
extra flexibility that it gave BA to shuffle slots between
services and the possibility of foreclosure of further competition at
Gatwick. We also went on to address concerns put to us that the merger
would reduce other airlines access to the noise and night movement
quotas that govern night-time activity at Gatwick and that BAs influence
over the allocation of ancillary facilities at Gatwick would be increased
to the detriment of competitors.
We also considered what would happen if the merger were not to proceed.
As CityFlyers shareholders wished to sell the business it seemed
unlikely that the status quo would be maintained; and we took the view
that no single scenario from the range of other possibilities was sufficiently
likely to arise to be regarded as the probable alternative to the merger.
However, there were certain features common to most of the possible scenarios.
It was likely that there would be a degree of competition for BA that
would not exist if the merger were to proceed; it was unlikely that BA
would acquire control of CityFlyers slots and it would not therefore
be in a stronger position vis-à-vis its competitors; and it was
unlikely that all of CityFlyers current services would be maintained.
We considered that these were outcomes that could be expected to arise
if the merger were not to proceed and that we should take them into account.
We concluded that the merger would have little effect on the level of
competition on the overlap routes. Some of those routes were well served
by other airlines from one or more London airport and, in the case of
services to Newcastle, there was competition from high-speed rail. These
routes would remain competitive. Others were thinner routes and we considered
it unlikely, in any event, that CityFlyers services on these routes
would be maintained if the merger were not to proceed.
We considered the effect of BAs acquisition of CityFlyers
slots to be more significant. It would strengthen BAs competitive
position by increasing its flexibility to reorganize its schedules and
services. This would enable it to respond more rapidly than its competitors
to new opportunities or competitive threats and to absorb into its network
slots which airlines with a smaller portfolio of slots and services would
find it difficult to use. The merger would also preclude competition for
BA at Gatwick that might be expected to arise in the absence of the merger.
On the other hand, we noted that there was at least some scope for BAs
competitors to build up a portfolio of usable slots at Gatwick though
this was likely to be a gradual process. BA was also subject to competitive
pressures from airlines operating from other London airports and, in the
case of its connecting passengers, from the hub operations of its major
European and US competitors.
We found that the merger would have certain benefits to the public interest.
In particular, we consider that there would be a greater diversity of
routes which could profitably be operated if the merger were to proceed
than would otherwise be the case. The merger would also be of some benefit
in preserving coordinated transfer arrangements for more connecting passengers
at Gatwick than would otherwise be the case.
Taking into account the generally increasing level of competition in
BAs markets, we find that the detriments and benefits of this merger
are very finely balanced. But our judgment is that, on balance, the merger
may be expected to operate against the public interest primarily because
of its effects on competition, with the result that fares for air services
would be higher than would otherwise be the case.
We have considered and rejected the option of prohibiting the merger.
We believe that this would be disproportionate to the detriments, that
it could have adverse consequences in terms of a loss of route diversity
and that the detriments could be remedied in other ways.
We consider that the detriments can best be remedied by giving BAs
competitors more scope to access the slots becoming available at Gatwick
over the next five years.
To this end, we have recommended that the share of slots at Gatwick used
by BA and its subsidiaries should be capped at a level of 41 per cent
of available slots. This level was determined on the assumption that the
share of slots used by BAs franchisees for services licensed by
BA is no more than 5 per cent. Any usage above that level should be compensated
by an equivalent reduction in BAs usage. To ensure that the appropriate
capacity remains available to BAs competitors in the peak operating
periods, we have also recommended that there should be a cap of 70 per
cent on the share of slots available in any one hour held by BA and its
subsidiaries and franchisees and a cap of 65 per cent on their share of
slots in any two-hour period.
This would not require BA or its subsidiaries or franchisees to divest
any of the slots they have been allocated for the summer 1999 season;
and by the same token, would not require the withdrawal of any of their
Summary and Conclusions
Background and evidence
||The parties and background to the merger
||Regulation and other constraints on air services
||The market for air services
||Views of the main parties
||Views of third parties other than regulatory bodies
||Views of regulatory bodies
||List of signatories
|(The numbering of the appendices indicates
the chapters to which they relate)
||The reference and background
||Brymon: trading record
||BA: balance sheet summary
||BA: profit and loss summary
||BA: facilities used by CityFlyer
||Correspondence relating to Virgin Atlantics bid
||The freedoms of the air
||Extracts from the EC slot regulation
||Gatwick Scheduling Committee voting rights
||Analysis of Gatwick slot allocations
||Background to the development of Gatwick
||Parallel scheduled routes operating from Heathrow and
||Classification of fares
||International operators at Gatwick and Heathrow, 1996
||BA calculations of network contribution
||Estimates of CityFlyer network contribution
||Fare developments on sample UK routes
||Airlines included in CAA hub analysis
||Share of passengers travelling via major European hubs
to/from UK regional airports
||Peak week slot statistics, summer 1999
||Virgin Atlantic slot bids, allocation and use at Gatwick
||Note submitted by BA on its potential response to the
loss of the CityFlyer franchiseexample scenario
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