Full text decision

Completed agreement between Aer Lingus Limited

and CityJet designated Activity Company

Decision on relevant merger situation and

substantial lessening of competition

ME/6782/18

Please note that [] indicates figures or text which have been deleted or replaced

in ranges at the request of the parties or third parties for reasons of commercial

confidentiality.

SUMMARY

1. On 28 October 2018 Aer Lingus Limited (Aer Lingus) entered into an

agreement (the Agreement) with Cityjet Designated Activity Company

(CityJet). As a result of the Agreement, Aer Lingus acquired landing slots at

Dublin Airport (DUB) and London City Airport (LCY), with certain existing

customer relationships also to be transferred, in addition to entering into a

‘wet lease’ under which CityJet would provide aircraft, crew, maintenance and

insurance (ACMI) to Aer Lingus. These three components together are

referred to as the Target and the transaction is referred to as the Merger.

2. Aer Lingus is a subsidiary of International Consolidated Airlines Group, S.A.

(IAG). IAG, its subsidiaries and CityJet are together referred to as the Parties.

3. In the circumstances of this case, these three components (ie, the slots,

customer relationships and wet lease) together amount to an enterprise, as

they were obtained simultaneously from a single source, were previously used

in combination, and their acquisition in combination resulted in economic

continuity between the provision of scheduled air passenger services on the

LCY-DUB route by CityJet until 27 October and the provision of scheduled

flights on the same route from 28 October by Aer Lingus.

4. As a result of the Merger, the enterprises of Aer Lingus and the Target have

ceased to be distinct. The share of supply test is met. The four-month period

set out in section 24 of the Enterprise Act 2002 (the Act) has not yet expired.

The CMA therefore believes that it is or may be the case that a relevant

merger situation has been created.

5. The Parties submitted that the correct counterfactual for the assessment of

the Merger is that, absent the transaction: (i) CityJet would have exited from

providing scheduled air passenger services on the LCY-DUB route; (ii) there

were no less anti-competitive counterparties available that could have entered

into an agreement with CityJet that would involve the counterparty providing

scheduled air passenger services on the LCY-DUB route; and (iii) the Merger

does not represent a substantially less competitive outcome than the exit of

CityJet and its sales from the LCY-DUB route.

6. The CMA is satisfied that CityJet had taken the decision, for strategic

reasons, to exit the market. The CMA went on to consider whether there was

any alternative counterparty to Aer Lingus which would have led to a less anti-

competitive outcome.

7. CityJet did not market the LCY-DUB route to any airline other than Aer

Lingus, as it considered Aer Lingus to be the only airline with the requisite

capabilities (such as brand presence in London and Dublin, and existing

infrastructure at LCY and DUB) and strategic focus to be able to provide

scheduled flights on the LCY-DUB route.

8. None of the third-party airlines contacted by the CMA expressed an intention

to enter the LCY-DUB route at this time (or suggested that they would have

been interested in the assets that comprise the Target). This position is

consistent with the available evidence in relation to those airlines’ commercial

strategies.

9. The CMA therefore believes that there was no realistic prospect of a less anti-

competitive counterparty than Aer Lingus entering into an arrangement with

CityJet for the LCY-DUB route.

10. Finally, the CMA considered what would have happened to its sales on that

route if CityJet had, in the absence of the Merger, exited from providing

scheduled air passenger services on the LCY-DUB route. As the assets that

comprise the divestment business would likely have been deployed by CityJet

to service other routes, the CMA considers that the capacity provided on the

LCY-DUB route would likely have been removed from the market. As BA

CityFlyer is the only other airline currently operating on the LCY-DUB route,

the CMA considers that a similar proportion of CityJet’s sales on the LCY-

DUB route would have diverted to IAG under either scenario (ie as a result of

the Merger or if CityJet exited the LCY-DUB route absent the Merger).

11. The CMA therefore believes that the requirements for an exiting firm

counterfactual are met and that, in the absence of the Merger, CityJet would

inevitably have exited the LCY-DUB route, with no replacement of the

competitive constraint previously exerted on BA CityFlyer by CityJet.

12. On the basis of this counterfactual, the CMA believes that the Merger will not

give rise to a realistic prospect of a substantial lessening of competition

(SLC).

13. The Merger will therefore not be referred under section 22(1) of the

Enterprise Act 2002 (the Act).

ASSESSMENT

Parties

14. Aer Lingus is a Dublin-based airline operating scheduled passenger flights to

destinations in the UK, Continental Europe and North America. Aer Lingus is

owned by IAG.

15. IAG owns Aer Lingus, British Airways, BA CityFlyer, Iberia, LEVEL and

Vueling (the IAG airlines). IAG is a Spanish-registered company with shares

traded on the London Stock Exchange and on the stock exchanges of Madrid,

Barcelona, Bilbao and Valencia (the Spanish Stock Exchanges) through the

Spanish Stock Exchanges Interconnection System. The corporate head office

for IAG is in London, UK.

16. CityJet is based in Dublin and was, until recently, one of Europe’s leading

regional airlines operating a fleet of around 45 aircraft. Since 2015, it has

moved away from providing scheduled flights (taking the decision in early-

2018 to exit operating scheduled flights completely), with its strategic focus

shifting to wet leasing. Following this transaction with Aer Lingus, CityJet will

no longer provide scheduled flights and will provide ACMI capacity to airlines

across Europe. CityJet’s turnover in 2017 was approximately £233 million

worldwide. Total turnover generated from the LCY-DUB route in 2017 was

approximately [] million.

Transaction

17. Aer Lingus and CityJet entered into the Agreement on 28 August 2018 and

the Agreement commenced on 28 October 2018. Its duration is [] years,

with Aer Lingus having the option to extend the Agreement for a further []

years. Under the terms of the Agreement:

(a) CityJet, as the lessor, is providing dedicated aircraft, as well as crew,

maintenance and insurance to Aer Lingus, the lessee. Subject to certain

changes that Aer Lingus can make to the flight schedule and route,

CityJet is operating - on behalf of Aer Lingus - six daily round trips from

DUB to LCY on weekdays, with a reduced service at the weekend. The

CityJet aircraft are to be painted in Aer Lingus livery.

(b) CityJet has also transferred certain slots at Dublin airport and London City

airport to Aer Lingus for the duration of the Agreement.

received by CityJet does not depend on the number of passengers on the

route or on the profitability of the route.

18. In addition to the assets transferred under the Agreement, CityJet has also

sought to facilitate the transfer of certain customer relationships. More

specifically, as further described below, nearly all CityJet customers who had

already booked with CityJet for a flight on or after 28 October 2018 were

transferred to Aer Lingus. Between the announcement of the Merger on 28

August 2018 and 27 October 2018, CityJet also referred prospective

customers searching for flights between London and Dublin after 28 October

2018 to Aer Lingus’ website.

19. CityJet submits that its strategic rationale for the Merger (as further described

in the CMA’s assessment of the counterfactual) was to implement its strategy

to exit the provision of scheduled flights and to move its strategic focus to wet

leasing. Aer Lingus submits that its strategic rationale for the Merger is: (i) to

build on its strength on the London-Dublin route through a competitive product

for point-to-point business travellers; (ii) to provide a competitive connecting

proposition over Dublin onto Aer Lingus’ North Atlantic network (which also

supports IAG’s ambitions to enhance its presence in hub-to-hub markets); and

(iii) to have the opportunity to partner with BA CityFlyer on the route,

presenting potential synergies.

Procedure

20. The CMA’s mergers intelligence function identified this transaction as

warranting an investigation.

21. The Merger was considered at a Case Review Meeting.

See Mergers: Guidance on the CMA’s jurisdiction and procedure (CMA2), January 2014, paragraphs 6.9-6.19

and 6.59-60.

See CMA2, from paragraph 7.34.

Background

22. The Parties supply scheduled air passenger services between London and

Dublin (including on the LCY-DUB route).

23. IAG operates several services between London and Dublin:

(a) Aer Lingus operates scheduled air passenger services (ie, flights) on the

London Heathrow-Dublin (LHR-DUB) and London Gatwick-Dublin (LGW-

DUB) routes. It has been providing scheduled flights on the LCY-DUB

route since 28 October 2018 as a result of the Merger;

(b) British Airways operates scheduled flights on the LHR-DUB route; and

24. Prior to the commencement of the Agreement, CityJet operated scheduled

flights on the LCY-DUB route (which was the last route on which CityJet

operated scheduled flights). Since the commencement of the Agreement,

CityJet no longer operates scheduled flights on any route, with only IAG

airlines providing scheduled flights on the LCY-DUB route.

25. The only other providers of scheduled flights between London and Dublin are:

(a) Ryanair, which also operates flights on LGW-DUB, Stansted-Dublin and

Luton-Dublin routes; and

(b) Stobart Air and Flybe, which operate a small number of flights on the

route between Southend and Dublin pursuant to a franchise arrangement.

Jurisdiction

26. A relevant merger situation exists if the following conditions are satisfied:

(1) two or more enterprises have ceased to be distinct enterprises at a time

(within four months prior to reference) or in circumstances falling within

section 24 of the Act;

and

(2) either:

(i) the value of the target enterprise’s UK turnover exceeded £70

million in its last fiscal year (the turnover test); or

Section 23 of the Act.

Section 24(1) of the Act.

(ii) the enterprises ceasing to be distinct have a share of supply in the

UK, or in a substantial part of the UK, of 25% or more in relation to

goods or services of any description (the share of supply test).

Enterprises

27. The Parties submitted that the Target does not amount to an ‘enterprise’

within the meaning of the Act on the basis that:

(a) The Target is not a business or part of a business as it concerns a single

route (rather than a network of routes), and an airline is in the business of

operating a network. Even if a single route could constitute part of an

airline’s activities, the Target’s composition did not contain certain

important components that are necessary to offer scheduled flight

services. Aer Lingus did not acquire CityJet’s above-wing or below-wing

ground handling operations, sales or revenue management back office

operations, or the CityJet brand. In addition, certain components that

would typically be indicative of an enterprise were missing from the

Target. The wet lease did not, for example, result in a TUPE Regulation

transfer of the pilots and other aircraft crew made available to Aer

Lingus.

(b) The slots transferred to Aer Lingus simply formed part of a collection of

inputs that will enable it to grow its operations organically. Aer Lingus

could have procured the slots though exchanging them with other airline

operators (including with another IAG carrier) given significant slot trading

takes place at LCY, and there is availability of peak week slots in the LCY

pool.

transferred to Aer Lingus was insignificant. CityJet’s existing bookings for

flights post-28 October 2018 represented an inconsequential proportion of

Aer Lingus’ total annual capacity and expected revenues on the LCY-DUB

route ([] seats with a value of approximately [] compared to the total

annual capacity of [] seats and expected revenues of approximately

[]).

The Parties also submitted that the CityJet website referring

passengers to aerlingus.com was not part of a joint strategy between Aer

Lingus and CityJet and that, having regard to the strength of Aer Lingus’

The Transfer of Undertakings (Protection of Employment) Regulations 2006.

IAG/Aer Lingus confidential response dated 3 December 2018 to CMA Issues Paper of 23 November 2018,

paragraph 2.2.3.

own brand and promotional activity, the effect of the notice was unlikely to

have been material.

(d) The fact that Aer Lingus obtained the Target (ie, ACMI, slots, the

facilitated transfer of certain CityJet customer relationships)

simultaneously from a single source did not give Aer Lingus anything

more than it might have acquired by going into the market and buying

each of these components individually.

28. The CMA’s assessment of whether assets being acquired amount to an

enterprise depends on the specific facts and circumstances of each case (an

assessment which can be, as the Supreme Court noted in Eurotunnel, finely

balanced).

In Eurotunnel, the Supreme Court noted that the question of

whether a given set of assets forms an enterprise ultimately turns on

‘economic continuity’.

29. The CMA notes that the scope of the Target assets did not include certain

activities that may typically form part of an airline’s business operations (eg

brand). It also did not involve a TUPE transfer (a recurrent feature of many

business transfers). However, in addition to the wet lease, Aer Lingus also

acquired landing slots at LCY and DUB and certain customer relationships.

The CMA notes that these latter two additional components appear to be core

elements of the business of providing scheduled flights and that, in the

particular circumstances of this case, the combination of these with the wet

lease appears to support a degree of economic continuity that may enable

Aer Lingus to carry on the CityJet business previously supported by them.

30. With regard to the wet lease, the CMA notes that:

(a) The absence from the Target of certain activities and assets (eg ground

handling and brand) previously deployed by CityJet in combination with

the wet lease does not prevent the finding of an enterprise if the Target

nevertheless allows economic continuity between CityJet’s and Aer

Lingus’ business (of providing scheduled flights on the LCY-DUB route).

The CMA believes in this respect that the fact that the Agreement covers

one route (rather than a network of routes) does not prevent the finding of

Société Cooperative De Production Seafrance SA (Respondent) v The Competition and Markets Authority and

another (Appellants), [2015] UKSC 75.

Eurotunnel notes at [39] ‘… if the assets of which the [acquirer] acquires control are to be regarded as

constituting an “enterprise”, (i) they must give him more than he might have acquired by going into the market

and buying factors of production and (ii) the extra must be attributable to the fact that the assets were previously

employed in combination in the “activities” of the target business. Plainly, the longer the interval between a target

enterprise’s cessation of trading and the acquisition of control of its assets, the less likely it is that either criterion

will be satisfied. The alternative is to conclude that the target enterprise has ceased to exist because its business

is no longer characterised by any “activities” capable of being continued by someone else. Ultimately the

question turns on … “economic continuity”.’

a business (and accordingly, an enterprise).

In this case, the CMA

believes (for the reasons set out further from paragraph 31 below), that

despite the fracturing of the Target from certain assets and activities that

CityJet previously employed in combination on the LCY-DUB route, the

Target amounts to an enterprise.

(b) While a TUPE transfer may be indicative of the transfer of an enterprise

within the meaning of the Act, it is not a necessary condition.

In this

case, the absence of a TUPE transfer did not prevent Aer Lingus from

obtaining, under the wet lease, the benefit of acquiring the necessary

workforce (ie, the aircraft crew) to work on the flights previously operated

by CityJet.

31. With respect to the landing slots, the available evidence indicates that the

landing slots at LCY and DUB are strategically critical assets within the

context of the LCY-DUB route – in particular, as both LCY and DUB are

capacity-constrained airports at which demand for slots exceeds supply.

CityJet acknowledged that DUB had a clear surplus of demand over supply.

Aer Lingus recognised that there had not been any recent slot trading at DUB,

and submitted that it considered it unlikely that appropriate slots could be

obtained through the pool allocation system to operate a LCY-DUB service

unless an existing operator ceased or reduced its operations.

32. This is also consistent with views submitted by third parties. Airport

Coordination Limited (ACL), the slot coordinator for 39 airports (including LCY

and DUB), noted that there was limited slot availability at DUB, especially

during the summer season. ACL therefore believed that it would be very

difficult for a new entrant to procure 3-4 rotations per day at DUB in the

summer season.

Virgin Atlantic noted that the limited availability of slots at

peak times at LCY and DUB also made it difficult for new airlines to enter the

LCY-DUB route.

The Act does not require that a business (or part thereof) be of any minimum scale in order to constitute an

enterprise. The CMA notes that an airline operating one scheduled route is still, in practice, operating an airline

business (albeit one limited in scale).

CMA2, para 4.8. CMA2 notes that an assessment as to whether there is an enterprise must be based on the

totality of all relevant considerations and may vary depending on the specific facts and circumstances of each

case (para 4.8 and 4.11). The CMA notes that CMA2 also pre-dates Eurotunnel and must, therefore, be read in

light of that judgment.

The CMA notes in this regard that according to CityJet’s statement in the issues meeting of 29 November

2018, there is currently a shortage of pilots.

CityJet’s response to Question 4 of the CMA’s section 109 notice of 17 October 2018.

IAG’s response to Question 1 of the CMA’s section 109 notice of 4 October 2018.

CMA note of call with ACL, 22 October 2018.

Virgin Atlantic submission dated 12 November 2018.

33. The CMA therefore believes that there is no basis to conclude that the slots

would have been readily available to Aer Lingus from alternative sources.

Rather, their inclusion as part of the Target has been critical in enabling Aer

Lingus to enter the LCY-DUB route. This also ensured that Aer Lingus did not

suffer the commercial risk of having aircraft, crew, and customer bookings, but

no slots through which to offer these flights.

34. With respect to the transfer and referral of certain CityJet customers, the CMA

notes that the transfer of customer relationships is not a typical feature of an

acquisition of ‘bare’ assets within the meaning of Eurotunnel. In this particular

case, Aer Lingus was able to commence its scheduled flights on 28 October

2018 with the benefit of pre-booked customers and referrals from CityJet.

This benefit was at least partly attributable to certain actions taken by CityJet

from the announcement of the Agreement. Specifically:

(a) CityJet offered customers already booked on its LCY-DUB flights from 28

October 2018 onwards either a refund or a default transfer to Aer Lingus if

they took no action after notification. CityJet could have (but did not) offer

customers the additional option of transferring to other airlines that

operated on the wider London-Dublin route (BA CityFlyer flights from

LCY, or to Ryanair or Flybe/Stobart flights from other London airports). In

practice, approximately [90-100]% of CityJet’s customers booked for

flights after 28 October were transferred to Aer Lingus (which was the

default outcome for customers who took no action, rather than opting for a

refund).

(b) Prospective customers who attempted to use the CityJet website to book

flights on the LCY-DUB route were re-directed by CityJet to (only) Aer

Lingus’ website. The CityJet website stated ‘CityJet will end scheduled

services on 27 October. For flights from 28 Oct please book on

www.aerlingus.com.’ Similarly (as with passengers who had already

booked post-28 October flights), CityJet’s website could have (but did not)

refer passengers to other airlines offering flights between London and

Dublin.

35. The CMA notes that CityJet’s actions – to focus customers’ alternative airline

options on Aer Lingus only – were not prescribed by its requirement under EC

Regulation 261/2004

to offer, in the event of a flight cancellation, customers

The response to FAQs issued by CityJet to answer customers’ queries also included the following: ‘[Q:] My

booking has a CityJet flight before and after 28

October [A:] Your outbound fight is unchanged. You will receive

a new itinerary for your return fight directly from Aer Lingus for the other flights’.

Regulation 261/2004 of the European Parliament and of the Council of 11 February 2004 establishing

common rules on compensation and assistance to passengers in the event of denied boarding and of

cancellation or long delay of flights, 2004 OJ L46/1.

a choice between reimbursement or re-routing at the customer’s convenience.

Rather, CityJet chose to fulfil its regulatory obligations in a way that made Aer

Lingus uniquely well-placed to capture diverting CityJet customers.

36. The CMA further notes that the fact that CityJet made these decisions

unilaterally (rather than as part of a joint strategy with Aer Lingus) does not

negate the fact that Aer Lingus’ path to acquiring customers on this route was

significantly facilitated by CityJet’s actions to transfer/refer its own customer

relationships. In addition, the CMA believes that little weight should be placed

on the allegedly limited importance of the transferred customers for Aer

Lingus’ overall revenues on that route. Irrespective of their commercial

significance for Aer Lingus, the transfer of some (rather than zero) CityJet

customers is indicative of economic continuity between the CityJet business

operating until 27

October 2018, and the Aer Lingus business that offered

those same flights to prior CityJet customers the next day.

37. Finally, the available evidence indicates that, absent the Merger, Aer Lingus

would have needed to undertake the following steps to enter the LCY-DUB

route:

(a) purchase, lease or otherwise contract with an ACMI or franchise provider

for the appropriate aircraft to fly to and from LCY (purchasing aircraft has

an estimated lead time of one to three years and the lead time for the

other options is dependent on the availability of suitable aircraft);

(b) either (i) hire appropriately located and trained crew or re-allocate a

selected group of its existing crew; or (ii) contract with an ACMI or

franchise provider to supply the appropriate crew (with either option being

liable to involve a significant lead time);

reallocation of slots within IAG (as Aer Lingus would be unlikely to obtain

the necessary slots through the pool allocation system due to limited slot

availability at DUB generally and LCY at peak times); and

(d) start its scheduled operations without the benefit of pre-booked

customers.

38. The CMA notes that by proceeding to acquire the wet lease, slots and

customer relationships from one single source simultaneously, Aer Lingus

avoided both (i) the commercial efforts that acquiring each component

separately would have entailed; and (ii) the risk that, once procured, these

IAG’s response to Question 1 of the CMA’s section 109 notice of 4 October 2018.

could not have been deployed immediately in combination. The simultaneous

transfer of CityJet’s customer relationships in addition to the wet lease and

slots reduced the risk for Aer Lingus that it would be short of customers in its

initial period post-commencement of the Merger. Conversely, the fact that Aer

Lingus was transferred slots ensured that its leased aircraft, crew and

transferred customers did not remain grounded.

39. Accordingly, the CMA believes, for the reasons set out above, that the Target

has provided Aer Lingus with more than it might have acquired by going into

the market and buying factors of production, given: (i) the difficulty of

acquiring strategically important LCY and DUB slots; (ii) the facilitated

acquisition of CityJet’s existing customer relationships (a benefit that is not

indicative of a collection of bare assets); and (iii) the benefits Aer Lingus

enjoyed as a result of acquiring the LCY and DUB slots, the existing customer

relationships and the wet lease simultaneously from a single provider.

40. The CMA also believes that the ‘extra’ that Aer Lingus has acquired is

attributable to the fact that the assets were previously employed in

combination by CityJet. Aer Lingus was able to deploy a seamless service to

customers on the 28 October, due (at least in part) to the fact that those

assets had previously been deployed in combination by CityJet in the same

way on the LCY-DUB route. This demonstrated economic continuity between

CityJet’s business and Aer Lingus.

41. Consequently, the CMA believes that the Target is, or at the least may be, an

enterprise within the meaning of section 129 of the Act.

Ceasing to be distinct

42. The Parties submitted that the transaction does not constitute a relevant

merger situation because two or more enterprises have not ceased to be

distinct. In particular, the Parties submitted that:

(a) The Agreement is akin to a supply agreement for service inputs and Aer

Lingus will not assume any assets under its control. Instead, Aer Lingus is

obtaining temporary access to capacity while CityJet retains full

operational control of the aircraft and crew to provide its services to Aer

Lingus.

(b) The Agreement is not of sufficient duration for enterprises to have ceased

to be distinct. The wet lease is a service agreement of limited duration:

[] years with a possible []-year extension.

43. However, the CMA believes that the enterprises of IAG, including Aer Lingus,

and the Target have ceased to be distinct on the basis that:

(a) As a result of the Merger, Aer Lingus has acquired the ability to control

the price, quality, service levels and timing of flights which were previously

controlled by CItyJet. It has therefore acquired the ability to determine

strategic commercial behaviour in relation to these flights. The fact that

ownership of assets has not been transferred from CityJet to Aer Lingus

does not exclude the possibility that enterprises have ceased to be

distinct (there being many enterprises which operate with leased rather

than with self-owned equipment).

(b) The Act does not require a merger to last for any minimum duration

before it can amount to a relevant merger situation.

The Agreement is

for [] years, with an option to renew for a further [] years and could

be further extended thereafter. There is no suggestion that the status quo

ante (ie CityJet resuming its scheduled operations on the LCY-DUB route)

will be restored when the Agreement expires. The CMA believes that the

Agreement (which covers [] to potentially [] seasons) is of sufficient

duration to have an impact on the competitive structure of the market for

air travel between London and Dublin.

44. The CMA therefore believes that as a result of the Merger, the enterprises of

IAG, including Aer Lingus, and the Target have ceased to be distinct.

Share of supply test

45. The CMA estimates, based on its analysis of data provided by the Civil

Aviation Authority, that following the Merger:

(a) Only airlines under the control of IAG are offering flights on the LCY-DUB

route post-Merger. IAG’s share of supply for scheduled air passenger

services on the LCY-DUB route is now 100%, with an increment of around

60% as a result of the Merger.

(b) Even taking a broader view and considering the share of supply on the

London to Dublin corridor, IAG’s share of supply post-Merger is over 55%,

with an increment of around 6% as a result of the Merger.

This contrasts with the position under the EU Merger Regulation. CMA2 at paragraph 4.38, in discussing

whether initial steps in a break-up bid would be investigated by the CMA, states: ‘Where it appears that the

subsequent steps may not take place within four months of the completion of the initial acquisition, the CMA will

not risk losing its ability to refer the initial acquisition simply on the basis that it is intended that the current

situation will not be permanent. To do so would risk the CMA breaching its duty to refer.’

The CMA’s Merger Assessment Guidelines (OFT1254/CC2), September 2010 at para 4.1.3 state that ‘The

Authorities will consider any merger in terms of its effect on rivalry over time in the market or markets affected by

it.’ The Merger Assessment Guidelines have been adopted by the CMA (see CMA2, January 2014, Annex D).

46. The CMA therefore believes that the share of supply test in section 23 of the

Act is met.

Time period

47. IAG, including Aer Lingus, ceased to be distinct from the Target on 28

October 2018. The four-month deadline for a decision on reference under

section 24 of the Act is therefore 28 February 2019.

Conclusion on jurisdiction

48. The CMA therefore believes that it is or may be the case that a relevant

merger situation has been created.

49. The initial period for consideration of the Merger under section 34ZA(3) of the

Act started 30 October 2018 and the statutory 40 working day deadline for a

decision is therefore 24 December 2018.

Counterfactual

50. The CMA assesses a merger’s impact relative to the situation that would

prevail absent the merger (ie the counterfactual), and generally adopts the

pre-merger conditions of competition as the counterfactual against which to

assess the impact of the merger. However, the CMA will assess the merger

against an alternative counterfactual where, based on the evidence available

to it, it believes that, in the absence of the merger, the prospect of these

conditions continuing is not realistic, or there is a realistic prospect of a

counterfactual that is more competitive than these conditions.

51. In the present case, the Parties submitted that the correct counterfactual is

one in which, absent the Merger, CityJet would have exited from providing

scheduled air passenger services on the LCY-DUB route. The CMA’s

assessment of this counterfactual is set out below.

Exiting firm counterfactual

52. The exiting firm counterfactual is most commonly considered when one of the

firms is said to be failing financially. However, exit may also be for other

Merger Assessment Guidelines, from paragraph 4.3.5.

reasons, for example because the selling firm’s corporate strategy has

changed.

53. For the CMA to accept an exiting firm counterfactual, it would need to believe,

based on compelling evidence, that the following cumulative conditions are

met:

(a) it is inevitable that CityJet would have exited the provision of scheduled

air passenger services on the LCY-DUB route absent the Merger (Limb

1);

(b) there was no substantially less anti-competitive counterparty than Aer

Lingus that would have entered into an agreement with CityJet that would

involve the counterparty providing scheduled flights on the LCY-DUB

route (Limb 2); and

than the exit of CityJet and its sales from the LCY-DUB route (Limb 3).

54. Where, based on the available evidence, the CMA cannot reach a sufficient

level of confidence in relation to each of these conditions, it will adopt as the

counterfactual the pre-merger conditions, provided this is realistic.

55. The CMA considers each of these limbs below.

Limb 1: would CityJet have inevitably exited from the provision of scheduled

air passenger services on the LCY-DUB route absent the Merger?

56. CityJet told the CMA that it decided over the course of late 2017 and early

2018 to focus on its wet lease operations and to exit scheduled flight

operations by the end of 2018, including on the LCY-DUB route. This followed

a change in strategic direction since 2015, when it was acquired from Intro

Aviation by a new business consortium led by CityJet’s original founder.

57. CityJet submitted that as its wet lease business grew and its scheduled

network decreased in size over the course of 2016 and 2017, it became more

difficult for it to operate its scheduled routes without generating losses. CityJet

told the CMA that the LCY-DUB route was CityJet’s last remaining scheduled

route and had made losses for at least the last three years, and that these

financial losses were a contributing factor for CityJet’s decision to exit this

route. CityJet did not, however, suggest that the LCY-DUB route was no

longer financially viable absent a change in strategic direction (and nor is

Merger Assessment Guidelines, para 4.3.9.

Merger Assessment Guidelines, para 4.3.10

there any compelling evidence to this effect). The CMA therefore does not

believe that it is inevitable that CityJet would have exited the provision of

scheduled air passenger services on the LCY-DUB route for reasons of

financial failure.

58. The CMA therefore considered, taking into account the losses incurred by

CityJet on the LCY-DUB route, whether CityJet would have ultimately exited

the route for strategic reasons.

59. Based on the available evidence, the CMA considers that the CityJet’s

decision to exit the LCY-DUB route was part of a wider strategic decision

(which preceded the decision to enter into the Agreement) to move towards

being a wet lease provider. In particular, CityJet’s internal documents confirm

that:

(a) From 2015, its new management team adopted a strategy that was

initially focused on building and growing its operations as a wet lease

provider, while retaining a small scheduled operation to act as a ‘shop

window’ for potential wet lease customers. As CityJet’s wet lease

business grew, and its scheduled network decreased in size over the

course of 2016 and 2017, it became more difficult for CityJet to operate its

scheduled routes without generating losses.

(b) Consequently, CityJet began throughout 2016 and 2017 to transition its

scheduled operations into a franchise operation in order to capitalise on

the brand awareness and marketing capabilities of a larger airline partner.

CityJet had discussions with Aer Lingus [].

focus on its wet lease operations and to exit its scheduled operations by

the end of 2018, including on the LCY-DUB route. In late-2017 and early-

2018, CityJet’s Board discussed how to implement the exit of CityJet’s

scheduled operations.

(d) Absent the Merger, CityJet would have exited its scheduled operations on

the LCY-DUB route and either: (i) re-utilised the aircraft being used on the

LCY-DUB route to service a wet lease arrangement for a different route;

or (ii) removed these aircraft from service and re-utilised the crew being

used on the LCY-DUB route for other operations.

CMA conclusion on Limb 1

60. The exiting firm scenario is most commonly considered when one of the firms

is said to be failing financially.

However, exit may also be for other reasons,

for example because the selling firm’s corporate strategy has changed.

Accordingly, whilst taking into account the fact that the LCY-DUB route had

been loss-making for CityJet, the CMA went onto consider whether it had

compelling evidence that CityJet would have ceased providing scheduled

flights on this route for strategic reasons.

61. CityJet’s strategic shift to focus on its wet lease business began around 2015,

following a strategic review by new management. Between 2015 and August

2018, CityJet systematically proceeded to end all its scheduled operations.

LCY-DUB was the final core scheduled operation that CityJet offered. This

route was making significant losses and it would have been unsustainable for

CityJet to continue operating scheduled operations on a single route.

Moreover, the need to have LCY-DUB as a shop window for its wet leasing

business had become less pressing, as CityJet was able to market its

services through the portfolio of wet lease provisions that it was offering to the

wider market.

62. The CMA has considered the available evidence carefully and reviewed

extensive contemporaneous documents which indicates CityJet was

committed to exit from the provision of scheduled air passenger services on

this final remaining route. On the basis of this compelling evidence, the CMA

concludes that Limb 1 of the exiting firm counterfactual has been met, and

that CityJet would have exited the provision of scheduled air passenger

services on the LCY-DUB route for strategic reasons (subject to the CMA’s

consideration of Limb 2 below). In other words, there is no realistic prospect

that CityJet would have continued the provision of scheduled air passenger

services on the LCY-DUB route absent the Merger.

Limb 2: was there a realistic prospect that, absent the Merger, a counterparty

who would have been substantially less anti-competitive than Aer Lingus

would have entered into an agreement with CityJet to provide scheduled

flights on the LCY-DUB route?

63. The Parties submitted that it was unrealistic that CityJet would have found

another airline to enter into a wet lease arrangement for the LCY-DUB route.

CityJet did not market the LCY-DUB route to any airlines other than Aer

Lingus, on the basis that it did not consider any other airlines to have either

Ibid, paragraph 4.3.9

Ibid

the requisite capabilities or strategic interest to enter the LCY-DUB route.

CityJet told the CMA that an airline would need to have ‘frequency, scale,

market awareness and sales presence, and/or the ability to offer onward

connections either over Dublin or over London City onto other parts of its

network to make the London City to Dublin route viable’ (and that only Aer

Lingus fits this profile).

64. The Parties submitted that in practice, this meant the pool of potential

counterparties was limited to airlines that had:

(a) Sufficient brand presence at both hubs: CityJet noted that Aer Lingus was

uniquely well-placed with strong brand awareness at both the Dublin and

London markets with the associated customer base and awareness of Aer

Lingus being a travel option in the LCY-DUB pair.

(b) Pre-existing infrastructure/base in either DUB or LCY, without which it

was considered that it would be difficult for an airline to operate a single

route profitably.

onto other parts of its route network: Aer Lingus hubs out of Dublin and

offers a significant transatlantic operation out of Dublin with 95% weekly

departures (approximately 70% of all transatlantic seats out of Dublin)

serving 13 gateways. This included US immigration and customs pre-

clearance at Dublin, enabling seamless onward connections.

65. The Parties submitted that network carriers based in continental Europe that

operate a hub-and-spoke model (ie a model in which an airline operates

flights from several non-hub (spoke) cities to the hub airport, with passengers

traveling between ‘spoke’ locations connecting through the hub) would not

satisfy all of these criteria. The CMA notes that this position is supported by

the available evidence, which indicates that no European network carrier

(other than Aer Lingus) has a hub located in either DUB or LCY and that there

are almost no examples of an airline operating a ‘stand-alone’ flight that does

not connect to one of its hub airports.

66. The Parties also submitted that it would not be commercially viable for low

cost carriers (LCCs) to operate this route. This was on the basis that LCCs

typically operate a model to generate revenues by high volumes and load

factors on aircraft with significantly larger capacity than LCY could

CityJet’s submission to the CMA dated 21 November 2018.

CityJet’s Response to the CMA’s Issues Letter of 23 November 2018, dated 28 November 2018.

accommodate (LCY requires smaller aircraft types due to limitations on

runway size).

67. For the CMA to conclude that Limb 2 has been satisfied, it would need (on the

basis of compelling evidence) to be confident that there was no substantially

less anti-competitive counterparty.

When considering the prospects for an

alternative counterparty, the CMA will look at available evidence supporting

any claims that there was genuinely only one possible counterparty.

68. The CMA contacted third party airlines, including airlines currently operating:

(a) on the London to Dublin corridor;

(b) transatlantic flights from London airports and/or Dublin airport to North

America; and

69. The CMA also contacted certain other third-party airlines that operate flights

within Europe.

70. The evidence received by the CMA from these third-party airlines supported

the Parties’ submissions that no other airline would have had either the

capabilities or strategic intention to enter into an arrangement with CityJet to

provide scheduled air passenger services on the LCY-DUB route. Specifically:

(a) Several airlines, including European airlines such as Lufthansa, Swiss

and Luxair, noted that to be sustainable as a point-to-point route under a

wet lease-type arrangement, it would be necessary to build market

presence and brand awareness at both ends of the route (ie in London

and Dublin) in order to attract a sufficient volume of passengers, which

would require significant marketing expenditure.

(b) A European airline stated that airlines, as a general rule, tend to focus on

their ‘home markets’ where the bulk of their infrastructure is located. A

single route outside of that market would be unlikely to generate the

required frequency and revenue volumes that would make the high

overhead costs of establishing adequate infrastructure at those ‘non-

home’ bases worthwhile.

IAG/Aer Lingus confidential response to the CMA dated 3 December 2018.

Merger Assessment Guidelines, para 4.3.10

Merger Assessment Guidelines, para 4.3.17

LCY-DUB route did not fit their business models given LCY would not be

able to accommodate its larger aircraft, and wet leasing was not part of

their strategic plans. This group included LCCs already active on the

London to Dublin route.

(d) One regional carrier confirmed that entering the LCY-DUB city pair was

not part of its current strategy []. The CMA notes in this respect that the

carrier has previously set out its strategy to reduce its overall fleet size

and concentrate on profitable routes.

[],

[]

[].

(e) Transatlantic carriers including Delta and [] indicated that the route was

not suitable to ‘feed’ their long-haul flights. London City Airport also

indicated that it would be difficult to operate LCY-DUB as a point-to-point

route without being able to feed connecting passengers into a wider

network, given LCY’s particularly high operating costs and restrictions on

the type of aircraft that could operate there.

71. Overall, none of the third-party airlines contacted by the CMA expressed any

credible interest in entering the LCY-DUB route at this time. This position is

fully consistent with and supported by the available evidence in relation to the

pre-existing commercial strategies of those third-party airlines, as well as the

available evidence in relation to the limited incentives for airlines to invest in a

single route (given the infrastructure and marketing costs that would be

required to operate the route effectively).

CMA conclusion on Limb 2

72. The Wet Lease Agreement was not marketed to any airlines other than

CityJet and therefore the CMA has sought to rigorously test the Parties’

submission that there was no alternative counterparty. The CMA believes, on

the basis of the views advanced from third parties, taken together with the

available evidence in relation to the pre-existing commercial strategies of

third-party airlines and the specificities of the LCY-DUB route, that there is

compelling corroborative evidence that there was no realistic prospect of a

less anti-competitive counterparty than Aer Lingus.

73. In light of the evidence set out above, the CMA believes that Limb 2 of the

exiting firm counterfactual is met. The CMA notes that this conclusion is highly

fact-specific (concerning as it does, a single airline route). In circumstances

[].

where exiting businesses fail to run a meaningful sale process, the CMA

would typically be unlikely to be able to reach the conclusion that there was

no realistic prospect of a less anti-competitive purchaser (and therefore to

adopt an exiting firm counterfactual), particularly within the context of a Phase

1 investigation.

Limb 3: would the exit of CityJet and its assets from the LCY-DUB route be a

substantially less anticompetitive outcome than the Merger?

74. The CMA considered what might happen in the absence of the Merger, given

there is no less anti-competitive counterparty willing to provide scheduled

flights on the LCY-DUB route (Limb 2). The CMA believes on the basis of the

available evidence that:

(a) CityJet’s exit absent the Merger would have resulted not only in a

reduction in customer choice on the LCY-DUB route, but also in a

reduction in capacity on that route. On ceasing to operate a LCY-DUB

service, CityJet would likely have been deployed by CityJet to service

other routes. Even if CityJet decided not to use the slots for another route

and instead returned them to the pool for allocation to other airlines, these

slots would not be reserved for new airlines that want to operate the LCY-

DUB route. ACL confirmed that it could choose to allocate the slots to an

airline that wants to operate a different route. This would reduce the

competitive constraint CityJet had previously posed to other airlines

operating between London and Dublin (in particular, Ryanair).

(b) As BA CityFlyer is the only other airline currently operating on the LCY-

DUB route, the CMA considers that a similar proportion of CityJet’s sales

on the LCY-DUB route would have diverted to IAG in either scenario (ie

as a result of the Merger or if CityJet exited the LCY-DUB route absent

the Merger).

75. In light of the evidence set out above, the CMA believes that the Merger does

not represent a substantially less competitive outcome compared with what

would have happened to CityJet’s sales in the result of its exit from the LCY-

DUB route.

The CMA was able to establish that there was no realistic prospect of a less anti-competitive purchaser in this

case because of the limited scope of the target business and the relatively limited, clearly defined group of

potential airline counterparties for CityJet (there being restrictions on the type of entities that may offer scheduled

air passenger services, and since non-industrial counterparties such as private equity funds would not realistically

have interest in acquiring a single airline route).

Decision

76. Consequently, the CMA does not believe that it is or may be the case that the

Merger has resulted, or may be expected to result, in an SLC within a market

or markets in the United Kingdom.

77. The Merger will therefore not be referred under section 22(1) of the Act.

Colin Raftery

Senior Director, Mergers

Competition and Markets Authority

21 December 2018