The European Commission yesterday approved the proposed merger of First Choice Holidays PLC (First Choice), a UK-based travel company, with the tourism division of TUI AG (TUI). Its decision is conditional on TUI divesting its Irish business. Herbert Smith acted for First Choice on this transaction.

Key points

The European Commission (Commission) has recognised, during a Phase I investigation, the huge changes that have taken place in the leisure travel industry since the proposed merger of First Choice and Airtours was blocked in 1999.

The notification of the First Choice/TUI deal came just days after the notification of the proposed merger of their competitors, Thomas Cook AG (Thomas Cook) and MyTravel PLC (MyTravel). The Commission closely examined the co-ordinated effects of each merger and indicated that its current approach to such a timing issue is that each merger should be assessed on its own merits.
First Choice and TUI are both vertically-integrated tour operators with world-wide operations. They each operate airlines, supply package holidays and provide travel agency services. First Choice and TUI notified their deal to the Commission on 4 April 2007. The notification was lodged shortly after that for the proposed merger between Thomas Cook and MyTravel, notified on 26 March 2007. It was well recognised amongst business analysts that consolidation in the leisure travel industry was vital in order for the vertically-integrated tour operators - First Choice, TUI, Thomas Cook and MyTravel - to survive in an increasingly competitive sector.

Market definition

The vertically integrated tour operators in the UK had last been closely examined by the Commission in 1999, in its review of the proposed merger between First Choice and Airtours (now MyTravel). In that decision, the Commission found that internet-based travel businesses and the low cost airlines were not sufficiently developed to act as any form of competitive constraint upon the supply of traditional package holidays. The proposed deal was therefore assessed on the basis of a narrow product market for "bucket and spade" foreign package holidays and was blocked on the grounds of collective dominance concerns amongst the vertically-integrated UK tour operators. Although Airtours subsequently abandoned the proposed merger, in June 2002 the Court of First Instance infamously annulled the Commission's decision.

With respect to market definition, First Choice and TUI submitted to the Commission that the leisure travel industry has changed significantly since 1999. The parties put forward a range of evidence showing that, on the supply side, exponential growth in both the number of internet-based travel businesses and the number and routes offered by the low-cost airlines now act as a significant constraint on the vertically-integrated tour operators. On the demand side, the parties demonstrated that customers are now much more willing to "independently package" flights, accommodation and other components of their holidays, either by purchasing each component separately, or by "dynamically packaging" the purchase of these components on a single website.

A final determination of whether the market definition adopted in 1999 is now out-of-date would have required a more lengthy analysis by the Commission in a Phase II investigation. Clearing the deal at the end of Phase I, the Commission left the issue open and instead considered all alternative market definitions. The Commission specifically noted that since its in-depth analysis in 1999, the leisure travel industry has changed dramatically. The Commission noted that the development of the internet has resulted in access to a range of travel websites which have given rise to a significant increase in independently booked holidays. A large number of smaller independent tour operators have continued to prosper. It also noted that in parallel, the success of low-cost airlines has resulted in a wider range of holiday destinations and also encouraged an increase in independent travel. The Commission found that broadband internet access and the range of independent travel options are currently less developed in Ireland, where First Choice and TUI would have a market share of more than 50% on the narrowly defined market, and therefore took up TUI's offer to divest its Irish business as a condition of Phase I clearance.

Consolidation and coordinated effects – UK

Coming hot on the heels of the Commission's clearance of the Thomas Cook / MyTravel deal, the Commission considered the fact that the First Choice / TUI deal would result in a consolidation of the number of major UK tour operators from three to two. First Choice / TUI submitted a range of evidence showing that this would not give rise to any competition concerns.

The Commission concluded that even on the basis of the narrow traditional foreign package holidays market, the First Choice / TUI deal would be unlikely to result in coordinated effects in the UK. Employing the test set out in the Airtours judgment and subsequently incorporated in the Commission's Guidelines on the assessment of horizontal mergers, the Commission found that the complexity of the capacity planning process, demand volatility and the rise in the number of independent holidays would make it difficult and unlikely for the leading market participants to reach terms of, or sustain, coordination.

First, the limited degree of transparency in the market was found to be a factor restricting the ability of the major tour operators to monitor deviations.

Secondly, it was found that the likelihood of retaliation or the existence of deterrent mechanisms would be limited, given the parties' relative inability to significantly increase capacity during a selling season and because any increases in capacity in a subsequent selling season may be too late to achieve any retaliatory effect.

Thirdly, both a range of effective competitors and very price-sensitive customers would react to any perceived coordination and as such would jeopardise the likelihood of achieving any outcome of coordination.
Other markets

The Commission also assessed the effect of the proposed merger in France, the Netherlands, Austria and Germany, and on the cruise markets in the UK and Ireland. No significant impediment to competition was found to exist. The market shares of the parties in Spain, Sweden, Denmark, Norway and Finland were considered insignificant and as such were not assessed.