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April 17, 2014

Be Aware of the EU Watch Dog: Commission Blocks Merger Between Aegean Airlines and Olympic Air

Background

Against a background of the ongoing Greek economic crisis and the increased airline consolidation, in January 2011, the European Commission (Commission) decided that the proposed merger between the two most important Greek carriers, Aegean Airlines and Olympic Air, should be prohibited because it would have resulted in a quasi-monopoly on the domestic Greek air transport market.  The case is significant because it is only the second prohibition decision in the last five years.  It shows, among other things, that traditional airline merger remedies, such as slot releases, are sometimes insufficient to allay the Commission’s concerns.  Moreover, the case shows that the Commission will not shy away from blocking a merger, despite the dire economic situation of the parties themselves and strong political pressure to clear the merger for the sake of the domestic economy.

Facts

On June 24, 2010, the Commission received the notification of a proposed concentration whereby the Vassilakis Group of companies, Marfin Investment Group and the Laskaridis group of companies would acquire joint control over a newly merged entity, including the businesses of Aegean Airlines and Olympic Air.  Aegean Airlines is a publicly listed Greek airline company, while Olympic is the Greek flag carrier and the successor to state-owned Olympic Airways (later known as Olympic Airlines).  Together the two carriers controlled more than 90 percent of Greek domestic air transport.

The Commission’s initial investigation revealed that the transaction would have led to very high market shares and even monopolies on many domestic routes in Greece, as well as international routes.  A second phase in-depth investigation was thus launched in July 2010.  This second phase investigation confirmed the Commission’s initial concerns, and the proposed merger was subsequently prohibited on January 26, 2011. In March 2011, the Commission’s decision was appealed to the European Courts.

Significant Lessening of Competition on Domestic Routes

According to the Commission, the proposed merger between Aegean Airlines and Olympic Airlines would have led to a quasi-monopoly on the domestic routes, in particular between Athens and Thessaloniki, and between Athens and eight island airports.  In defining the relevant market, the Commission used its traditional approach of origin-destination (O/D) pairs.  The Commission found that the merged entity would have controlled more than 90 percent of the Greek domestic air-transport market.  With respect to intermodal competition on the national O/D pairs, the Commission’s investigation showed that ferry services do not as a general rule constitute a sufficiently close substitute to air services so as to discipline the merged entity’s post-merger pricing behaviour.  The only domestic route where ferry services were deemed to constitute a close substitute to air services was between Athens and the island of Mykonos, in which case the Commission concluded that there were no competition problems.  With respect to potential competitors, the Commission found that there was no realistic prospect of a new airline of a sufficient size entering the marketplace and engaging in airline operations on these national routes, and restraining the merged entity’s pricing in the future.  Therefore, the Commission found that extensive remedies where necessary for it to be able to approve the proposed transaction.

Slot Releases not Sufficient as Remedies

According to the Commission, an acceptable remedy package would have, for example, required the divestment of part of the parties’ airline fleet, or even the transfer of one of the  brand names of the parties to potential market entrants.

The parties to the proposed merger were unwilling to offer such a broad remedies package. Rather, the parties only offered to release slots at Athens and other Greek airports, as well as other remedies such as access to their frequent flyer programs and interlining agreements.  In the past, the Commission has accepted slot releases as an appropriate remedy because they were considered sufficient to attract new competitors to problematic markets.  However, in the present case, the Commission found that slot releases would not have removed the competition concerns.  Slots were already readily available at Athens airport and at most Greek airports.  Indeed,  the market test carried out by the Commission showed that the remedies proposed by the parties were unlikely to attract a credible new player who would set up a base at the Athens airport and exert a credible competitive constraint on the affected routes in this case.

Be Aware of the EU Watch Dog

The proposed merger of Aegean Airlines and Olympic Air reflects a growing trend in the airline business towards consolidation.  The Commission’s decision is the second prohibition decision in the airline sector, following the prohibited merger of Ryanair and Aer Lingus in 2007.  Similarities can be drawn with the Ryanair / Aer Lingus case in that both cases involved a country’s two most important domestic airlines, and in both the airlines’ operations were conducted out of a single airport. Moreover, in both cases, the argument that no credible competitor would enter the market proved decisive in the Commission’s decisions to prohibit the respective airline tie-ups.

The Aegean/Olympic decision also illustrates that the Commission will take a tough stance on competition policy, even when the economic existence of the parties is at stake.  The decision also shows that the Commission will not bend to strong political pressure—as was the case withAegean/Olympic, where high ranking officials cited the fact that Greece was (and still is) in the middle of its worst economic crisis in 50 years.  This stands in contrast to perceived political weakness on the part of the Commission in transatlantic cases in which the Commission has been accused of folding to pressure from the U.S., such as in the Oracle/Sun Microsystems merger.

© 2014 McDermott Will & Emery

About the Author

Partner

Martina Maier is a partner in the international law firm of McDermott Will & Emery, based in its Brussels office. Martina is head of the firm’s European Antitrust and Competition Practice Group and her practice focuses on German and European competition law, including State aid, single firm conduct, merger control and agreements restricting competition.   She has extensive experience in representing clients in a broad range of industries before the European Commission and national competition authorities and courts.

32 2 282 35 66

About the Author

Partner

Philipp Werner is a partner in the international law firm of McDermott Will & Emery, based in its Brussels office.   His practice focuses on European and German competition law including State aid, merger control, cartels and abuse of dominance, and his clients include companies in the automotive, infrastructure, transport and health care sectors.

32 2 282 35 67

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