UK: Court of First Instance Annuls Commission Decision in the Airtours/First Choice Merger Case

Last Updated: 7 June 2002
Article by Genevieve Johnston
Summary and Implications

The Court of First Instance of the European Communities (the "CFI") yesterday annulled a Decision of the Commission of the European Community taken in September 1999 blocking a proposed merger between Airtours and First Choice Holidays plc. The judgment is significant because:

  • It implicitly reconfirms that the Merger Regulation can apply to post-merger collective dominance;
  • It sets out a route map for merging parties and the Commission to apply when assessing the likelihood of post-merger tacit collusion:-

    First there must be sufficient market transparency for the members of the oligopoly to monitor each other's conduct and hence know that they are all following the same common policy (i.e. that they are tacitly colluding);
    Second there must be an expectation that the tacit co-ordination will last - in other words that there is sufficient incentive to co-ordinate behaviour to deter the members of the oligopoly from deviating from the co-ordinated behaviour; and,
    Third there must be proof that current and future competitors could not upset the implementation of the common policy of the oligopoly;

  • It makes clear that a high standard of proof will be required of the Commission, particularly in four-to-three or five-to-four cases; and
  • The Commission's fact-finding with regard to the establishment of post-merger tacit collusion has been subjected to harsh criticism.

The implications of the judgment may include:

  • New guidelines on the assessment of market power, which are much needed;
  • An increased likelihood that the outcome of the current review of the EU's Merger Control Regime will see the dominance test replaced by a substantial lessening of competition test;
  • Improved internal procedures to address some of the shortcomings identified by the CFI; and
  • Hesitancy, at least initially, to make novel and ground-breaking decisions in merger control cases.

It took the best part of three years for this appeal to be decided. This sort of timeframe means that the result of the appeal is of more relevance to other parties in future cases than to the parties to the blocked transaction. It remains to be seen whether the CFI's new fast track procedure (which may still take in excess of a year between notification and judgment) will prove more effective for the directly affected parties although there is clearly considerable scope for the Commission to improve its own procedure and safeguards.

Background to the judgment

In April 1999 Airtours plc (since rebranded MyTravel Group plc) publicly announced its bid for First Choice plc¹. The proposed merger qualified for investigation by the European Commission and a notification was duly made. First Choice's shareholders were advised by the Board not to do anything until the regulatory position was clear - on the grounds that there was a significant risk that the merger would not be cleared. On 3 June 1999 the European Commission decided to refer the merger to a more detailed investigation and on 22 September 1999 the merger was blocked.

The deal was blocked because the Commission considered that, following the merger, the combined group (Airtours/First Choice) would, together with Thomson and Thomas Cook, hold a collective dominant position in the UK market for short-haul foreign package holidays, and that this would significantly impede competition.

Airtours lodged an appeal against the Commission's decision with the CFI of the European Communities on 2 December 1999. Now, some two and a half years after the appeal was first lodged, the Court has published its decision.

Summary of the issues brought before the CFI

Airtours appealed against the Commission's decision on four grounds:

  • First, Airtours considered that the Commission's definition of the relevant product market was wrong - the Commission had concluded that the relevant market in the case was the supply in the UK of short-haul foreign package holidays - Airtours considered that long-haul holidays were competitive with short-haul holidays in quality and price and should therefore have been included in the assessment of the effects on the market;
  • Second, Airtours argued that the Commission had applied a new and incorrect notion of collective dominance - if the Commission had applied the usual test the merger would not have been blocked;
  • Third, the Commission had incorrectly found the notified merger to result in a collective dominant position - the facts did not support this finding; and

    Lastly, the initial undertakings offered by Airtours should have been accepted as they were sufficient to allay the Commission's stated concerns, moreover the revised undertakings offered by Airtours (which were presented following a meeting with the Commission discussing the case) should have been considered instead of rejected as being out of time.

It is the pleas relating to the notion of collective dominance which are of wider interest and we will focus on these in this briefing.

The arguments relating to collective dominance

The principal argument between Airtours and the Commission was what elements had to be shown to distinguish a benign oligopoly from an anti-competitive oligopoly.

Airtours argued that the distinguishing factor is the presence of "tacit collusion" or "co-ordinated effects" and that this is proved by showing (i) that the oligopolists are able to reach an agreement or a co-ordinated position whereby they restrict output and raise prices above competitive levels (ii) that they are able to detect deviations from the position and (iii) that deviations can be effectively punished. The Commission did not prove any of these three elements, Airtours argued, and so there could be no "tacit collusion". Since any oligopoly arising from the merger would not be subject to "tacit collusion" it was not anti-competitive and it should have been permitted.

The Commission disputed these arguments. It was enough for the Commission to find that following the merger there would be a market structure which made it rational for the oligopolists to adjust their conduct in line with each other so as to blunt competition between themselves and result in better profits for all. This could be proved by showing (i) that the conduct which is beneficial to all is apparent (ii) that the market is sufficiently transparent for the players to monitor that conduct and (iii) there were compelling reasons why a player would not depart from that conduct (for example not wanting to forego the long term profits that a return to competitive behaviour would entail).

The CFI's judgment

The CFI annulled the Commission's decision in a ruling which re-iterates the elements which must be present in order for a position of collective dominance to arise.

On the first plea regarding market definition Airtours' arguments were rejected.

Airtours' second plea (that the Commission's approach was novel and therefore unlawful as a departure from previous decisions on collective dominance) was addressed by the CFI by asking whether, on the evidence, the Commission was right to have found a position of collective dominance, having regard to the correct legal test of collective dominance. The importance of the decision is that it clearly and unambiguously re-states the law and in so-doing sets out the methodology to be used in determining the existence of post-merger collective dominance.

First the CFI noted that the Commission is bound to ascertain "whether the concentration would have the direct and immediate effect of creating or strengthening a collective dominant position which is such as significantly and lastingly to impede competition in the relevant market". In other words, it must assess the market pre-merger. Thereafter, the CFI confirmed that three conditions are necessary for a finding of collective dominance:

  • There must be sufficient market transparency for the members of the oligopoly to monitor each other's conduct and hence know that they are all following the same common policy (i.e. that they are tacitly colluding);
  • There must be an expectation that the tacit co-ordination will last - in other words that there is sufficient incentive to co-ordinate behaviour to deter the members of the oligopoly from deviating from the co-ordinated behaviour; and
  • There must be proof (to the requisite legal standard) that current and future competitors could not upset the implementation of the common policy of the oligopoly.

The CFI reiterated that it was incumbent upon the Commission to produce convincing evidence where a merger is to be blocked on the grounds that it will create a collective dominant position. As the Commission appeared² to consider that, prior to the proposed merger, the four leading operators did not enjoy a position of collective dominance, it was for the Commission to prove that the merger would have created a position of collective dominance which was restrictive of competition - enabling the remaining three operators to adopt a common policy with respect to capacity.

The evidence which the Commission cited as supportive of its findings of a position of collective dominance was insufficient and as such the Commission's decision was "vitiated" by a series of errors of assessment. Moreover these errors related to many of the factors which form the "checklist"³ against which, as confirmed by previous Commission and Court decisions, the likelihood of post-merger tacit collusion should be assessed. For example:

  • The Commission failed to consider the conditions on the market prior to the merger to assess the changes, as the merger must be shown to result in a significant change in the level of competition if it was to be blocked for creating a collective dominant position.
  • The Commission rightly considered market shares of the parties but wrongly concluded that market shares were stable. The Court said the Commission was wrong on the facts to ignore growth by acquisition in this respect and hence the Commission erred when it found that the operators' shares had remained stable;
  • The Commission correctly considered growth on the market but found that the market was characterised by low growth - where the facts did not support this assertion;
  • The Commission was wrong to suggest that, contrary to the usual checklist, in this case volatility of demand was a factor supporting a finding of collective dominance - there were no particular facts which supported this reversal of the usual economic theory;
  • The Commission was unable to prove to the requisite legal standard that the market was transparent so that the operators were able to monitor the total capacity offered by each of the others at the time that capacity decisions were taken;
  • The Commission had not shown that credible retaliation mechanisms existed which would have deterred the operators from departing from the common course of conduct;
  • The Commission failed to give sufficient weight to the likely response of the fringe players on the market - it could not be proved on the facts that smaller tour operators would be unable to challenge the common position of the oligopoly so as to make it unviable. The Court dedicated a significant part of its judgment to this issue, and considered that the likely reactions of smaller tour operators and their ability to increase capacity in the face of any tacit collusion to reduce capacity, was a credible threat to the oligopoly which would prevent the common policy being adopted on a lasting basis;
  • The Commission underestimated the role of the individual consumer (i.e. the existence of buyer power) - if prices for foreign package holidays offered by the major operators were to rise pursuant to a position of collective dominance, the Court considered that consumers might be expected to seek better prices from smaller operators.

The Court declined to rule on the other pleas raised, given that the third plea was well founded and sufficient in itself to warrant the annulment of the Commission's decision.

¹ Herbert Smith are First Choice's long term advisers and provided advice and guidance to First Choice throughout the Commission's merger investigations. First Choice was not a party to, and did not participate in, the proceedings before the CFI.

² There was some ambiguity in this respect as the Commission also referred to an existing "tendency" towards collective dominance on the market.

³ Full details of the checklist are not set out in this briefing although the checklist items considered by the Commission and CFI are highlighted in the list cited - further information is available from Herbert Smith on request.

© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.