A merger that did not come to pass

Index

1. Introduction

2. Applying merger control policy - The case of Ryan Air and Aer Lingus
2.1. Background of the case
2.2. Reasons for the merger coming under EU jurisdiction
2.2.1. Legal framework
2.2.2. The definition of a “merger”
2.2.3. The “Community Dimension”
2.3. The Commission’s reasons for prohibiting the merger
2.3.1. Theoretical background
2.3.2. The Commission’s decision
2.3.2.1. Definition of the market
2.3.2.2. The merger’s effects on competition
2.3.2.3. Barriers to other firms’ market entry
2.3.2.4. Added efficiency
2.3.3. Possible amendments
2.4. Special problems of this merger case

3. Conclusion

1. Introduction

This essay examines the theoretical background and the practical application of the European Union’s (EU) “antitrust policy”. As mergers are one way for firms to gain a “dominant position” in the market, the European Commission (Commission) applies the merger regulation to control such developments. The operation of this policy is analysed with the case study of a prohibited merger “Ryan Air” and “Aer Lingus”. The case also shows the high degree of competences and responsibilities, i.e. legislative and executive powers, the EU-institutions have gained in the significant economic area of competition policy, thereby highlighting the process of EU-integration via eco- nomic integration.

Although seemingly of purely economic purposes, EU competition policy serves “in- tegrative” purposes too. “EU-Integration” can be defined as the EU-Member States (MS) voluntarily foregoing their power to formulate only national political and legal measures. Instead they formulate common policies which are determined in a coop- erative process of decision making. Cooperation can either take place in an intergov- ernmental framework or by transferring national sovereignty to the EU-institutions with the subsequent subjugation of national law under EU Law. The more specialized term of “Economic Integration” is defined as „ a process which involves the amalga- mation of separate economies” plus “the discriminatory removal of all trade impedi- ments” between the MS and a certain degree of cooperation and coordination be- tween them e.g. in a Customs Union (El-Agraa, 2007 p. 1). Since the Treaty of Rome in 1957 expressed the determination of the European Economic Community’s (EEC) MS to build an “ever closer union”, economic integration parented EU-integration. The MS empowered the supranational institutions of the EEC, especially the Com- mission and the Council of Ministers (Council), to create legal norms (“EU-Law”) that the MS have to respect. Had they transferred all the key political competences to the EEC, its structures had had the potential to develop into a European Federal State (Brunn, 2005 pp. 118-120). This was, however, not the MS’ intention and they cre- ated the EEC as a Customs Union with economic competences only, thereby prede- termining the precedence of economic integration. With the new Treaties from the Single European Act (SEA) onwards other than economic policies were added to the EU’s agenda, e.g. cultural policy, foreign or security policy, but economic integration stayed a top priority. The EU’s success is still believed to depend on its economic success and its ability to let the majority of the EU’s citizens profit from it. “Coopera- tion among European States, as long as it is beneficial to all in economic terms” would be supported (Blichner, 2004 p. 1), while economic failure could undermine people’s acceptance of the renunciation of national political independence (Jaeger, et al., 2005 p. 11). Therefore the Commission strives to ensure the Single Market’s success, among other things by applying a competition policy with merger controls.

2. Applying merger control policy - The case of Ryan Air and Aer Lingus

2.1. Background of the case

In 2006 the Irish Airlines Ryan Air and Aer Lingus notified the Commission of Ryan Air’s intention to purchase the entire share capital of Aer Lingus. Ryan Air operated more than 75 flight routes between five airports in Ireland (mainly Dublin) and 15 other places in other European Countries. Aer Lingus operated more than 70 routes between three of the five Irish airports and other countries, cargo flights and long dis- tance flights mainly to the USA. (European Commission, 2007a p. 3). 35 routes from Ireland (“overlapping routes”) were operated by both airlines (Gadas, et al., 2007 p. 65).

2.2. Reasons for the merger coming under EU jurisdiction

2.2.1. Legal framework

The founding fathers recognised that a Common Market required a competition policy to prevent companies from distorting competition. So the EEC Treaty contained pro- visions against the abuse of a dominant position, cartels and state aids, but not for the control of mergers. With secondary legislation in the 1960s responsibility for cross-border competition policy became the Commission’s responsibility, subject to appeal to the European Court of Justice (ECJ). Today Art 3 lit. g of the TEC obliges the EU to create “a system ensuring that competition in the internal market is not dis- torted”.

The legal basis of merger control is the “antitrust-regulation” of Art 81-83 TEC. Since the ECJ’s ruling on the “Continental Can Case” in 1973 it is assumed that Art. 81 TEC’s prohibition of “agreements between undertakings which impede competition”

gives sufficient legal ground for the ex-ante-appraisal of mergers¹ (Cini, et al., 1998 p. 117). With the recognition that the Single Market was likely to encourage cross border mergers, the Council passed supplementary secondary law: Council Regula- tion (EEC) No 4064/89 (Council of the European Union, 1990). The latest revision of this is Regulation 139/2004 (Council of the European Union, 2004) on the “con- trol of concentrations between undertakings (Regulation). The Commission has pub- lished guidelines for its methodological approach (European Commission, undated).

2.2.2.The definition of a “merger”

To be subject of the Commission’s jurisdiction, the planned merger of Ryan Air and Aer Lingus had to be a “single concentration” in the sense of the Regulation’s Art. 3. The planned merger of Ryan Air and Aer Lingus was such a “single concentration” because the purchase of 100 % of the share capital would give Ryan Air complete control over Aer Lingus, which would cease to exist as an independent company (European Commission, 2007a).

2.2.3.The “Community Dimension”

The Commission only has jurisdiction for mergers of a “Community Dimension”, which is defined by the annual worldwide or EU-wide turnover of the firms in ques- tion. This is based on the assumption that mergers of small firms cannot significantly impede competition in the Single Market. However, the takeover of an already big company with a significant share in the Single Market by another big undertaking might give the “surviving” company so dominant a position in the market that it can “dictate” consumer prices and effectively hinder other firms’ market entry. Another criterion of “Community Dimension” is transnational significance, i.e. the relevant turnover must be made in at least three MS. Otherwise national competition authori- ties would be responsible for the case.

The present case was of “Community Dimension” [Regulation Art. 1 (3)] because the combined annual worldwide turnover of both airlines was more than 2.500 Mio. €. The combined EU-wide annual turnover was more than 100 Mio. €. The case’s transnational significance was, however, arguable. To geographically allocate the turnover of cross-border operating airlines with many direct ticket sales via the Inter- net, i.e. without an identifiable “place of sale”, had proven difficult in former cases of airline mergers. Therefore a special method, mirroring the real market conditions of the case, was needed. The airlines used different systems of allocation, with Ryan Air’s method confirming the case’s transnational significance while the Aer Lingus’ method denied it (European Commission, 2007a pp. 6-7). The Commission de- cided to use Aer Lingus’ method of allocating turnover to the place of a customer’s departure with one important modification: Round-Trip tickets were not treated as one service, but split up 50/50 between the two places of departure, leading to the turn- over being achieved mainly in UK, Ireland and Spain. Consequently Aer Lingus’ claim that the merger had to be decided by Irish national authorities² was rejected (European Commission, 2007a pp. 8-9).

2.3. The Commission’s reasons for prohibiting the merger

2.3.1. Theoretical background

The Regulation’s Art 2 (2-3) states that a merger will be found “compatible with the common market” if it does not “significantly impede effective competition in the com- mon market or in a substantial part of it.” The Regulation embraces a “case-by-case” approach with an ex-ante-investigation of a merger’s presumable effects on competi- tion. (Sauter, et al., 2007 p. 249). This mirrors a certain ambiguity of economic the- ory:

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¹ The position with regard to takeovers where there is no agreement was not resolved by this judge- ment.

² as the necessary minimal turnover per MS of 25 Mio. € per airline and year would only be reached in two MS but not in three