On 7 June 2012 the European Commission ("Commission") published its first phase decision approving the acquisition of British Midlands Limited ("bmi") by the International Consolidated Airlines Group ("IAG") (Case Comp/M.6447, the "Decision"). The transaction is subject to commitments by IAG. The Decision is interesting since it provides a reminder that the turnover of a non-controlled entity may be taken into account when assessing Commission jurisdiction. Furthermore, the Decision offers a useful example of the application of the so-called counterfactual in merger control.
The calculation of the turnover
For the purposes of determining jurisdiction over the transaction, the Commission reviewed the corporate structure of the acquiring undertaking. IAG is the holding company of both British Airways and Iberia Líneas Aéreas de España S.A. ("Iberia"). IAG owns less than 50% of the shares of British Airways while the majority of the shares is owned by a "UK Trustee". However, IAG's shares amount to almost 90% of the nominal share capital. With reference to Article 5(4)(b)(i) of the Merger Regulation the Commission decides that the turnover of British Airways should be taken into account for the purpose of the calculation of turnover of IAG. After also adding Iberia's turnover - over which IAG did exercise control - the Commission concluded it had jurisdiction to assess the concentration.
As a majority of the share capital does not lead to control in the absence of a majority of voting rights (European Commission Consolidated Jurisdictional Notice paragraph 56), this case offers an example of turnover attribution (i.e. to IAG) of an entity it does not control.
The Commission found that the transaction, as initially notified, would lead to high market shares and even monopolies on a number of domestic, European and international routes out of London Heathrow airport. Furthermore, the Commission was concerned whether there was a risk of IAG preventing passengers from connecting on long-haul flights operated by competing airlines out of London Heathrow.
Lufthansa, bmi's parent company, argued that in the absence of the transaction bmi would become insolvent and exit all markets, i.e. it referred to the so-called "failing firm defence". The Commission rejected this argument by pointing out that bmi was a fully owned subsidiary of Lufthansa and therefore not a failing firm, but rather a failing division. Furthermore, the Commission looked into the consequences of insolvency, more specifically into the airport slots of bmi at London Heathrow. In case of insolvency, a significant proportion of bmi's slots at London Heathrow are likely to be reallocated to other carriers than IAG. This outcome would be different from the post-transaction scenario where IAG would indirectly control all these slots. The Commission therefore argued that the assets of bmi, in the form of airport slots, would not exit the market while this is a prerequisite for a successful failing firm defence.
While not accepting the failing firm defence, the Commission did consider that the effects of the transaction should be assessed vis-à-vis a situation in which bmi would become insolvent (the "counterfactual"). In most cases the counterfactual situation is the situation at the time of the transaction. In some cases, however, the Commission takes into account future changes to the market insofar as they can be reasonably predicted. In the underlying case the parties convincingly argued that a stand-alone continuation of bmi was not an option and that insolvency would be the situation in the absence of a merger.
The Commission subsequently considered that in case of insolvency of bmi, British Airways would acquire around 40-50% of bmi's slot portfolio. Compared to this counterfactual, British Airways as a result of the transaction would obtain only 3% more slots at London Heathrow than in a situation without the acquisition of British Midlands. Furthermore, the Commission took into account that British Airways offered to release a number of slots. According to the Commission, the anti-competitive effects of the transaction were therefore limited.
Finally the Commission cleared the acquisition conditionally upon the release of fourteen daily slot pairs at London Heathrow in order to facilitate new entry. Moreover, IAG committed to entering into special agreements with the purpose of feeding the long-haul flights of competing airlines out of London Heathrow.
Competitor Virgin has announced that it will appeal against the Decision.