On 27 February 2013, the European Commission (the “Commission”) announced its decision to prohibit the proposed acquisition of control of Aer Lingus by Ryanair (the “Proposed Acquisition”). Ryanair has indicated that it intends to appeal the Commission’s decision.

This is not the first time that the Commission has blocked a proposed acquisition of control of Aer Lingus by Ryanair. In 2007, the Commission prohibited such an attempt, a decision which was later upheld by the EU General Court in 2010. In 2009, Ryanair launched a second bid for Aer Lingus, but which was subsequently withdrawn. In June 2012, Ryanair announced its intention to launch a new bid for Aer Lingus, and upon which the Commission has now delivered its substantive competition analysis.

In deciding to block the Proposed Acquisition, the Commission noted that the market position of the two companies on flights to and from Ireland is even stronger today than in 2007, with their combined share now resting at 87 per cent (up from 80 per cent) for short-haul flights out of Dublin. Further, that the number of routes where Aer Lingus and Ryanair compete directly against each other had increased from 35 to 46. The Commission also opined that the merger raised ‘unprecedented’ competition concerns regarding the 46 routes and that, on 28 of those routes, the Proposed Acquisition would have led to monopoly.

During the proceedings, Ryanair submitted four different sets of remedies aimed at addressing the Commission’s concerns. The final remedy package, submitted late in the process and described by Ryanair as ‘revolutionary and unprecedented’, consisted, broadly, of the divestiture of Aer Lingus' operations on 43 overlap routes to Flybe and the cession of take-off and landing slots to IAG/British Airways (“IAG”) at London airports (so that IAG would operate on three routes (Dublin-London, Shannon-London, and Cork-London). Further, Flybe and IAG committed to operate the routes for three years. Additional slot divestitures on London-Ireland routes were also offered. However, following a Phase II investigation involving market testing and the gathering and assessment of views from, among other things, competitors, customers, travel agents, consumer associations, public authorities and airport operators, the Commission considered that the remedies were not sufficient to remedy its substantive competition concerns.

The EU Competition Commissioner Joaquín Almunia noted that “remedying problems of such magnitude would have required a countervailing force capable of being a strong and viable competitor to Ryanair - precisely the kind of competitor that Aer Lingus is today”. In its press release, the Commission noted its concerns about whether Flybe would have the experience and resources to compete successfully with Ryanair or whether IAG would continue to compete on the 3 routes at the end of the 3 year period.

This is only the third time that the Commission has prohibited a merger in the sector, the other two being the 2007 proposed merger and the proposed merger between Olympic and Aegean Airlines in 2011.

Lessons learned from the Commission’s decision:

  • consolidation is welcome so long as it does not occur at the expense of competition;
  • acquisitions involving airlines with large bases at the same ‘home’ airport will likely raise more significant competition concerns than in other scenarios;
  • a remedy comprising divestiture of a combination of assets is likely to be less effective than one comprising divestiture of a viable business.

Now that the Commission has prohibited the Proposed Acquisition, it remains to be seen whether Ryanair will consider the divestment of, or hold onto, its existing minority stake of 29.8 per cent in Aer Lingus (and particularly in light of the UK Competition Commission’s on-going investigation into same, the final report on which is due to be published on 11 July 2013). It is also interesting to note that the Commission is currently considering a change to its merger control rules to require prior authorisation of the acquisition of minority shareholdings which fall short of conferring on the shareholder the ability to exercise ‘decisive influence’ over the undertaking proposed to be acquired. Currently the Commission has the power to prohibit transactions, but cannot order the sale of a minority stake which does not confer such ‘decisive influence’.