I. Product and Market Structure
The airline industry in Europe has undergone a total paradigm shift after the entry of low-cost carriers pioneered by Ryanair. They initially entered the market to generate more passenger demand in those segments that were price sensitive to the airfares of the full service carriers. However, with their overall success, they started to take a chunk off the market shares of the larger airlines. The 9/11 impact, coupled with issues like fuel prices, the crises and other factors caused the detriment of some of the larger airlines. Low-costs, with their economical operating model, survived the troubled times pretty well.
All these have enticed some full service air carriers to change their operating model up to a certain point to the low-cost one. In order to narrow the gap with low-cost carriers’ prices, flag carriers have adapted their strategies to make them more cost efficient or have absorved low-cost carriers to enter different segments of the market (i.e. Iberia acquired Vueling and Clickair). Thus, flag carriers like Lufthansa, British Airways, Alitalia, Iberia, Aer Lingus and others are still responsible for a large segment of the aviation market shares individually. In recent years there is a trend trend of European airline consolidation, Lufthansa has acquired Swiss, Austrian, SN Brussels Airline and British Midland, as well as a large stake in SAS. Air France has acquired KLM and a large stake in Alitalia. British Airways and Iberia merged to form a third big EU airline.
II. Business Strategy
a. Merger Briefing
Ryanair’s stated motivation is to create an irish airline group. With the merger, the short-haul fleet would increase (now it consists of 6 Airbus A321 and 27 Airbus A320 in a single class, economic) to 66 airplanes during the next 5 years and it would create up to 1.000 jobs, and they could compete with the three biggest airline groups in Europe: Air France, British Airways and Lufthansa.
Moreover, with the acquisition of Aer Lingus, Ryanair could start offering transcontinental flights, since Aer Lingus operates a long-haul fleet with 15 Airbus A330, plus 6 Airbus A350 XWB to be received in 2014, besides it has alliances with Jetblue Airways, based in New York, to offer flights between Ireland and over 25 destinations in the US.
b. Dominant Firm Briefing
The acquisition would have combined the two leading airlines operating from Ireland which currently compete vigorously against each other. The antitrust authorities concluded that the merger would have harmed consumers by removing this competition and creating a monopoly or a dominant position on 35 routes operated by both parties.1 Then Ryanair-Aer Lingus could have raised profits by increasing the prices for more than 14 million EU passengers using these routes to and from Ireland each year, since the merger would have reduced choice.
Ryanair offered remedies to remove the competition concerns, but the Commission’s investigations and market tests of remedies demonstrated that these remedies were inadequate.3 In particular the limited number of airport “slots” offered was not likely to lead to competition sufficient to replace the competitive pressure currently exercised by each airline on the other. The Commission therefore concluded that the concentration would significantly impede effective competition within the European Economic Area (EEA) or a substantial part of it.4
III. Antitrust Policy Response
a. Merger Briefing
The scope of reference is critical when determining whether or not competition would be substantially lessened. If the focus is on Europe as a whole, then the Aer Lingus/Ryanair merger might not have warranted antitrust intervention. Even if the airlines fly the same routes, competition might not be lessened if they are not competing for the same passengers (luxury versus price sensitive). Aer Lingus had been the flagship airline of Ireland in the past, but Aer Lingus had moved away from that business model towards a low-cost and point-to-point model that mimicked and more directly competes with Ryanair. We believe that there is critical overlap between the two airlines, both of which are based out of Dublin, Ireland, Dublin. Irish passengers as well as any travelers going to or from Ireland would likely have been hurt by decreased competition in the form of higher airline ticket prices and lower quality. The European Commission determined that the merger of Ryanair and Aer Lingus would have created monopolies on 22 routes and 13 other routes would result in the merged entity of Ryanair and Aer Lingus holding over 60% market share.5
b. Dominant Firm Briefing
The dominant firm in this proposed merger, Ryanair, was pursuing a potentially illegal business practice by attempting to create near monopoly on 35 airline routes. The proposed merger was clearly not in compliance with Article 82 of the EU Antitrust Laws which states that any abuse of a dominant position in a substantial portion of the European common market shall be prohibited. The proposed merger would substantially reduce competition between two airlines who are each other’s closest competitor. Future competitors would have difficulty entering routes based out of Ireland despite the few slots offered by Ryanair to stimulate market entry and the and the European Commission was correctly forestalling an “abuse of dominance that would have eliminated actual and potential competition on many routes out of Ireland “as well as eliminate current base competition at Dublin airport.6 Aer Lingus and Ryanair currently constrain each other’s ability to raise prices on these 35 routes, meaning that customers benefit from their competition and would face higher fares in the long run if from the proposed merger.