Ryanair/Aer Lingus Second Act: is it possible to remedy to competition concerns stemming from aviation mergers leading to route dominance scenarios?

For the third time in a space of few years (Ryanair/AerLingus, Ryanair/Aer Lingus III and Olympic Air/Aegen Airlines) the European Commission has blocked an airline merger leading to negative effects on competition. And for the second time in a row the Commission thwarted the attempts of Ryanair to purchase its Irish competitor Aer Lingus.

What the prohibition decisions of Ryanair/Aer Lingus, Olympic Air/Aegen Airlines and Ryanair/Aer Lingus III appear to have in common is the theory of competition harm relied on by the Commission. The Commission blocked those transactions because of route dominance rather than slot dominance. In other words, the expected negative effects of the banned concentrations on competition were thought to be due to the post-merger dominant position that the parties would have on a number of links. On the other hand, the availability of slots was not a relevant issue in these cases. The airports from which the merging parties operated did not suffer any dearth of slots that could weaken competition by making more difficult entry for new carriers. Logically, the traditional slot remedies could not apply to resolve the competition problems created by such transactions.

More precisely, the Commission did not authorized Ryanair/Aer Lingus and Olympic Air/Aegen Airlines because the merging airliners had large bases at their home airport. As a result, the parties enjoyed a considerable market power on many routes flown to/from their home airport. All that gave rise to the competition concerns of the Commission. With the market power of the merged carriers constituting a relevant entry barrier, it believed that competitors were unlikely to start operating such routes.

This line of reasoning was followed by the Commission also in assessing the competition impact of Ryanair/Aer Lingus III. Through the acquisition of its next competitor on many Irish routes, Ryanair would acquire a dominant position on 46 routes, 28 of which it would be a monopolist. Most of the problematic routes connected the airport of Dublin.

To deal with the above competition problems, Ryanair tabled four different sets of remedies. While the first one was outright discarded by the Commission as being plainly ineffective, the others were subjected to the market test. With the fourth package  Ryanair offered two basic commitments.

First, it committed to transfer to a UK-based regional carrier, Flybe, several assets for a period up to three years to enable the transferee to operate 43 routes on which the activities of the parties overlapped. The assets to be made available to Flybe included money, lease for several aircrafts, trade mark licenses, crews, contracts and so on. However, the Commission took the view that such measures were not suitable, considering that Flybe lacked the experience and financial resources required to be a viable competitor. For this reason the Commission believed that Flybe might not have enough strong incentive to continue operating those routes. What may have prompted the Commission to disregard Flybe as a credible Ryanair competitor is that the former has little experience in managing a pool of mainline jet airliners such as Airbus A320 that Ryaniar committed to transfer to it. Indeed, the corporate fleet of Flybe is mainly composed of turboprop aircrafts (Bombardier Q400) and a smaller number of regional jet  aircrafts (Embraer 195 and 175). Moreover, it has scarce experience in the Irish market. Its network mainly comprises flights between UK regional airports, destinations in Continental Europe and Jersey and Guernsey.

Second, Ryanair committed to enable IAG/British Airways to operate for at least three years 70 weekly frequencies on the Dublin-London route and 14 weekly frequencies on the Cork-Shannon and Shannon-London routes. To this end, it committed to transfer to IAG/British Airways the necessary slots it had at the airports of Heathrow and Gatwick. This remedy was also rejected by the Commission. Whether IAG/British Airways would have made use of the slots offered by the parties and started operating the above routes, the merged carrier would in any event be the dominant player on such routes. Therefore,  IAG/British Airways would have little or no incentive to keep flying on those links after the expiry of the three year period.

Ryanair/Aer Lingus III well embodies the tough approach of the Commission when assessing which remedies are suitable to address problematic airline mergers. The second generation remedies imposed to clear the latest slot dominance concentrations reviewed have been fashioned in such a way to being attractive for potential entrants (see here). In other words, in order to be accepted by the Commission, the remedies offered by the parties have to ensure that new operators would enter the market affected by the notified concentration, restoring the competition in the post-merger markets. This idea also emerges from Ryanair/Aer Lingus III. Neither IAG/British Airways nor Flybe appeared to have the incentives and/or the capacity to be exert a credible competition pressure on Ryanair on long-standing basis.

Whether the competition problems in slot-dominance concentrations can be resolved with a well-thought package of slot remedies, these tools cannot be relied upon in case of route dominance concentrations. Therefore, in such cases the parties have to think out of the box to propose effective alternative remedies. The issue now is which remedies can address the competition concerns of the Commission. In Ryanair/Aer Lingus III, apart from the rejecting the divestment of slots at the airports of Heathrow and Gatwick, the Commission also refused the other divestment package generously offered by Ryanair to Flybe by pooling several assets from its business and that of Aer Lingus. In that regard, Ryanair/Aer Lingus III confirms the dislike of the Commission for carving-out remedies. It can be then argued that in order to obtain a clearance of a problematic route dominance merger, the parties should offer the divestment of existing stand-alone businesses rather than simply commit to carve out a business from their activities and transfer it to a competitor. Will that be sufficient to secure the Commission authorization without putting at risk the economic rationale for the merger?