On Oct. 9, 2013, following a Phase II investigation, the European Commission cleared, under the EU Merger Regulation, the acquisition of Olympic Air by Aegean Airlines under the "failing firm" defense, whereby the Commission may approve a merger if deterioration in the competitive market structure would result even if the merger did not occur, through the forced exit of a market operator. Clearance was granted despite the fact that the merger was found to create a quasi-monopoly on five Greek domestic routes from Athens, and that new entry in the near future was unlikely.
A previous attempt to conclude the same merger was prohibited by the Commission in 2011 on similar grounds: the merger would have created a quasi-monopoly on nine domestic routes from Athens. At that time, the Commission rejected the arguments put forward that Olympic was a "failing firm." However, in its re-examination of the case, the Commission found that, although Aegean continues to be Olympic's closest competitor and the transaction may raise prices and decrease the quality of service on several domestic Greek routes, other relevant factors such as the condition of the Greek economy and the financial situations of the parties had changed since the 2011 prohibition.
In particular, the Commission was satisfied that, unlike in 2011, Olympic should be regarded as a "failing firm," which would likely exit the market absent the merger. The Commission considered that there was no other credible purchaser or less anticompetitive solution. In 2011, the Commission did not find convincing evidence that Olympic was severely underperforming against its business plan and budget, and that its sole shareholder was considering withdrawing financial support (which it subsequently did). In its recent decision, the Commission found Olympic's financial situation has worsened substantially since 2011. A detailed analysis of Olympic's business outlook showed that the company was unlikely to become profitable in the future under any business plan. Its main shareholder's decision to discontinue its support of Olympic was deemed convincing by the Commission this time.
The Commission concluded that absent the merger Aegean would become the only significant domestic provider of airline services in Greece and would capture Olympic's current market share. As such, any harm to competition would not be caused by the merger in itself.
This is the second merger case in a row that the Commission has authorized in Phase II based on a "failing firm" defense. The first (an acquisition by Nynas of certain of Shell's refinery assets) was reported in our previous newsletter here. The Commission's press release regarding the Aegean/Olympic approval is available here.
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