UK: Commission Approves IAG Aer Lingus Merger Subject To Commitments

Last Updated: 7 March 2016
Article by John Milligan

The Commission has approved the acquisition by IAG of sole control of Aer Lingus. Previous attempts by Ryanair to increase its shareholding in Aer Lingus had been blocked by the Commission, and the UK competition authorities had ordered it to reduce its shareholding from 29% to 5%. Over 95% of Aer Lingus shareholders, including Ryanair, which has withdrawn legal challenges to the Commission and the UK authorities, and the Irish Government, which held 25%, voted in favour of the sale.

On 14 July 2015, the EC approved, subject to commitments, a merger whereby International Consolidated Airlines Group, S.A. ("IAG") the holding company of British Airways, Iberia, and Vueling Airlines acquired sole control of Aer Lingus, the publicly listed Irish-based airline.

The EU Merger Regulation 139/2004 is the European framework for control of mergers, requiring pre-notification of 'concentrations having a Community dimension'. A 'concentration' will be created where there is a change of control on a lasting basis which results from the acquisition, by one or more persons or undertakings of control of the whole or parts of another undertaking. Mergers which may significantly impede effective competition in the EU or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position, must be declared incompatible with the common market.

Dublin and Belfast/London routes

The routes giving rise to concern were those between Irish airports, notably Dublin and Belfast, and London. Within the O&D approach, all substitutable airports are included in the respective O&D if they are perceived as substitutable by travellers. In this regard, IAG and Aer Lingus both operated out of Heathrow, and Aer Lingus also operated out of Gatwick.

The Commission found that as regards Dublin-London, Heathrow was a differentiated airport as regards travellers seeking network connections but generally concluded that the parties' operations at Heathrow were constrained by other airlines' operations at Gatwick and London. The combined share of the parties was, however, significant (upwards of 60-70%) and this, coupled with high barriers to entry or expansion by other airlines, specifically as regards the very limited access to slots and terminals at Heathrow and Gatwick, gave the Commission concerns on this route. Similar analysis and conclusions were reached in relation to Belfast-London.

In order to address these concerns the Commission required the release of slots as follows: 2 daily frequencies between Gatwick and Dublin, 1 daily frequency between Gatwick and Belfast and 2 frequencies between Gatwick and either Belfast or Dublin and both. The agreement to release slots could provide for monetary or other consideration as long as terms were clearly disclosed.

The parties also agreed to enter agreements in relation to city pairs released by slot commitments if requested by another carrier wishing to operate new or increased services on the London-Irish city pair allowing the airline concerned to offer a return trip comprising a non-stop service provided by IAG one way and the other way by the airline at issue.

Further, if a carrier operating such services requested to be hosted on IAG's frequent flyer programme ('FFP') for the relevant city pairs, it must be allowed to participate on equal terms as compared to other members of the oneworld alliance, and the requesting carrier's customers may accrue points, and also benefit from other services such as airport lounge access or priority bookings.

There was consideration of overlaps on routes from Dublin to Barcelona, Madrid, Chicago and New York but there were no serious concerns.

Feed traffic issues

The Commission noted that Aer Lingus was an independent carrier, not a member of any alliance, and offered services to significant numbers of passengers connecting to hub airports such as Heathrow, Gatwick, Amsterdam, Manchester and Shannon to flights operated by another carrier. It considered that IAG, a major long haul carrier, could have an incentive to discontinue such services, terminating Aer Lingus's feed traffic agreements or otherwise imposing more onerous or restrictive terms, in order to benefit its own services on the long haul routes, thereby reducing competition on such routes.

In order to address these concerns the parties agreed to enter into special prorate agreements with carriers operating (or who would be operating) a non-stop service between Heathrow, Gatwick, Amsterdam, Manchester and Shannon and/or Dublin and certain long haul destinations, so as to enable connecting flights from relevant Irish airports to Heathrow, Gatwick, Amsterdam and Manchester.

IAG's position at Heathrow

Finally, while the share of IAG of slots at Heathrow was increased from 53% to 56-57%, the Commission considered that the impact on competitors would be neutral given it was already heavily congested, such that the situation would not be fundamentally changed given also the relatively limited incremental share.

The decision provided for the appointment by the parties of a monitoring trustee subject to Commission approval, to oversee the correct execution of the commitments.

Commission Approves IAG Aer Lingus Merger Subject To Commitments

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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