|EUROPEAN COMMISSION |

Brussels, 30.03.2012

C(2012) 2320

PUBLIC VERSION

MERGER PROCEDURE

To the notifying party: |

Dear Sir/Madam,

Subject: Case No COMP/M.6447 - IAG/ bmi Commission decision pursuant to Article 6(1)(b) in conjunction with Article 6(2) of Council Regulation No 139/2004 [1]

1. On 10 February 2012, the European Commission received notification of a proposed concentration pursuant to Article 4 of the Merger Regulation by which the undertaking International Consolidated Airlines Group ("IAG" - United Kingdom), directly or via its subsidiary British Airways Plc. ("BA"), acquires within the meaning of Article 3(1) (b) of the Merger Regulation sole control of the whole of the undertaking British Midlands Limited ("bmi" – United Kingdom) by way of purchase of shares.

I. The Parties and the Transaction

2. IAG is the holding company of both BA and Iberia Líneas Aéreas de España, S.A. ("Iberia"). The IAG airlines (BA and Iberia) fly to around 200 destinations with a further 200 destinations served under various codesharing relationships. BA’s hub airport is at London Heathrow; it also has base operations at London Gatwick and London City. Iberia’s hub airports are at Madrid Barajas and Barcelona El Prat. Both BA and Iberia are members of the oneworld alliance.

3. bmi is currently owned by Deutsche Lufthansa AG ("LH") through its subsidiary LHBD Holding Limited ("LHBD"). It comprises three principal units, namely a London Heathrow-based mainline business ("bmi Mainline"), a regional business based in Aberdeen ("bmi Regional") and a low cost operation based at East Midlands Airport in the United Kingdom ("bmi baby"). Through its three units, bmi flies to over 70 destinations with more destinations served under various codesharing relationships. bmi is currently a member of the Star alliance.

II. The concentration

4. Pursuant to the sale and purchase agreement signed by IAG, BA, LHBD and LH on 22 December 2011 ("SPA"), IAG will acquire, directly or through its subsidiary BA, all of the issued share capital of bmi (hereinafter the "Transaction"). The Transaction would bring bmi into the oneworld alliance and into IAG's frequent flyer program ("FFP").

5. Although the SPA foresees the eventuality that LH could sell bmi Regional and/or bmi baby to other acquirers prior to the completion of the Transaction, none of the above-mentioned sales has been completed to date. Therefore, for the purpose of this decision, it is considered that the Transaction includes all three principal units in which the bmi business is currently divided (i.e. bmi Mainline, bmi Regional and bmi baby). [2]

6. As a result of the Transaction, IAG would therefore acquire sole control of the whole of bmi. The Transaction thus constitutes a concentration within the meaning of Article 3(1) (b) of the Merger Regulation.

III. Union dimension

1. Identification of the undertakings concerned for the purposes of determining jurisdiction over the Transaction – Calculation of the turnover under Article 5(4) of the Merger Regulation

7. According to the Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings [3] ('JN'), from the point of view of determining jurisdiction, the undertakings concerned are those participating in a concentration. [4] In case of an acquisition of sole control of an undertaking, the undertakings concerned will be the acquiring undertaking and the target undertaking. [5] On the target's side, the 'undertaking concerned' for determining jurisdiction over the proposed concentration will be bmi. On the acquirer’s side, the 'undertaking concerned' will either be IAG (if the acquisition were made by IAG) or BA (if the acquisition were made by BA). [6]

8. Paragraph 175 JN states that "When an undertaking concerned by a concentration belongs to a group, not only the turnover of the undertaking concerned is considered, but the Merger Regulation requires to also take into account the turnover of those undertakings with which the undertaking concerned has links consisting in the rights or powers listed in Article 5(4) (…)". The question which companies' turnover should be taken into account pursuant to Article 5(4) of the Merger Regulation on IAG's side is examined below:

1.1. On the assumption that IAG is the "undertaking concerned"

1.1.1. The turnover of BA should be added to that of IAG under Article 5(4)(b)(i) of the Merger Regulation

9. The aggregate value of the nominal share capital of BA is £289,541,407. The share capital is represented by three classes of shares: Class A1 and A2 shares (all with a nominal value of £289.7) and Class B shares (with a nominal value of £1). The shares are held as follows:

Shareholder |Class of shares |Number of shares |Nominal value per share |Aggregate nominal value |Percentage in total nominal share capital |

IAG |A1 |896,700 |£289.7 |£259,771,984 |89.7% |

Iberia |A2 |99,308 |£289.7 |£28,769,424 |9.9% |

UK Trustee |B |1,000,000 |£1 |£1,000,000 |0.3% |

10. The above shows that the UK Trustee holds (in numbers) a little bit more than half of the shares. However, the relevant criterion for Article 5(4)(b)(i) of the Merger Regulation is not the number of shares, but the capital they represent (i.e. the nominal value of the shares). The aggregate nominal value of the shares held by IAG represents far more than half of the capital of BA.

11. As a result, it can be concluded that the criterion of Article 5(4)(b)(i) of the Merger Regulation is satisfied and that the turnover of BA should be added to that of IAG.

1.1.2. The turnover of IB should be added to that of IAG, in particular under Article 5(4)(b)(iii), and in subsequent order also under Article 5(4)(b)(iv) and Article 5(4)(b)(ii) of the Merger Regulation

1.1.2. (1) IAG has the power to appoint more than half of the members of the Iberia's board of directors (Article 5(4)(b)(iii) of the Merger Regulation)

12. The Iberia operating company, Iberia Líneas Aéreas de España, Sociedad Anónima Operadora ('IB Opco') [7] , has a board of directors consisting of 11 members [8] . Five of them are directly appointed by IAG and four of them by the Spanish Nationality Entity [9] . The five directors directly appointed by IAG are the CEO of BA [10] , the CFO of IAG and three senior officers of IB Opco. For the two remaining directors, which are the Chairman and CEO of IB Opco, the following specific arrangements are in place with respect to their appointment and removal.

13. IAG has the right to remove the Chairman and CEO of IB Opco. Where a new Chairman or CEO is to be appointed, an ad hoc nominations committee is put in place. This committee consists of persons selected by IAG amongst the existing directors of IAG, BA and Iberia. IAG must select at least one member amongst the directors appointed by the Spanish Nationality Entity but is not constrained as regards the number of members on the committee.

14. The committee will nominate a person for the role (Chairman or CEO as the case may be). While the Spanish Nationality Entity has a formal right of veto over any person so nominated as Chairman or CEO, if it were to do so then IAG may arrange for the nominations committee to nominate another person in accordance with the same procedures or IAG may refer the matter to its own shareholders. [11] In the event of a vote by IAG shareholders on such an appointment, the voting rights of IAG shareholders who are Spanish nationals would be magnified so that they represent a majority of the total voting rights in IAG in relation to that matter. In case of such a dispute between IAG and the Spanish Nationality Entity, should IAG refer the matter to its shareholders, the decision taken by IAG shareholders according to the above-mentioned procedure would be binding. Should the person proposed by the nominations committee be approved by IAG shareholders, that person would be appointed.

15. From the above it is concluded that the criteria of Article 5(4)(b)(iii) of the Merger Regulation are satisfied and the turnover of Iberia should be added to that of IAG because IAG has the power to appoint more than half of the directors of Iberia. It is immaterial at which level of IAG the ultimate decision is taken, or how the voting rights of IAG’s shareholders are weighted in case of a vote, what matters is that IAG has the power to appoint seven of the eleven directors.

16. In subordinate order it is also noted that IAG has the right to manage the affairs of IB Opco Holding in the sense of Article 5(4)(iv) of the Merger Regulation and also de facto has the power to exercise more than half of the voting rights in the sense of Article 5(4)(ii) of the Merger Regulation.

1.1.2. (2) IAG has the right to manage IB Opco's affairs (Article 5(4)(b)(iv) of the Merger Regulation)

17. IAG’s structures provide for the BA and Iberia operating companies to be managed in a balanced way. In this respect, IAG, BA and Iberia have entered into an Assurances Agreement under which they agreed certain assurances and principles in respect of the operation of the business of the IAG Group, with the Nationality Entities having a role in monitoring compliance with the Assurances.

18. The IAG Group Instruction makes clear that the operating companies' decision making is subject to IAG Management Committee approval. A number of listed actions or decisions cannot be taken without the prior approval of the IAG Management Committee. These include development of the strategy for the Group (including IB Opco), including the implementation and monitoring of that strategy, the annual corporate business plans for IB Opco, and the annual budgets or financial plans for IB Opco (including capital, revenue and manpower).

19. Finally, IAG has the right, under the IB Opco Shareholders' Agreement, to issue recommendations to the board of directors of IB Opco (including on the approval of the business plan and annual budgets), which are binding, unless contrary to the above-mentioned 'Assurances' or the fiduciary duties of the directors. [12] Such recommendations are issued by IAG's CEO or board of directors.

20. IAG's right to issue binding recommendations to the board allows it to control IB Opco's board decisions in a number of areas including in relation to the business plan and annual budgets. The Assurances, which limit IAG's instruction right, are as follows:

· The BA and Iberia operating companies shall continue to operate as airlines with their respective main bases in the UK and Spain and will retain separate operating licences and air operator's certificates and preserve their codes;

· They shall take all reasonable steps to protect their respective slots and rights to operate to international destinations;

· They shall retain their respective brands;

· Their strategy will be developed in a way that reflects the importance of London Heathrow and Madrid Barajas which shall remain as fundamental parts of the multicentre strategy of the IAG Group;

· Promotions of employees shall be based on merits without any form of discrimination;

· Collective bargaining agreements and employment contracts shall continue to be organised within BA and Iberia operating companies respectively;

· Specific commitments relating to pension schemes.

21. In view of the relatively limited scope of these Assurances, these leave a very wide margin of freedom to IAG to issue binding recommendations determining the strategic behaviour of IB Opco, in particular in areas such as investment policy, pricing, capacity offered on various routes, annual budget etc.

22. As a result, in light of IAG's rights to issue binding recommendations to the directors of IB Opco, it is concluded that IAG has the right to manage IB Opco's affairs and that therefore the condition in Article 5(4)(b)(iv) of the Merger Regulation is met.

1.1.2. (3) IAG has the power to exercise more than half of the voting rights in Iberia (Article 5(4)(b)(ii) of the Merger Regulation)

23. All shares issued by IB Opco Holding [13] carry one vote. IB Opco Holding's shares and voting rights are held as follows:

- IAG: 43.1% of the shares and voting rights;

- BA: 6.8% of the shares and voting rights; and

- the Spanish Nationality Entity: 50.1% of the shares and voting rights.

24. The Spanish Nationality Entity, as shareholder in IB Opco Holding, is required to exercise its voting rights at shareholder meetings as directed by IAG (provided that the corresponding resolutions are not contrary to the Assurances (see above) and do not result in the corporate structure no longer meeting the nationality requirements). The Spanish Nationality Entity would not be bound to follow IAG’s orders if it considered that voting as directed by IAG would not be in the best interests of the Spanish national shareholders of IAG. If the Spanish Nationality Entity were considering not voting in accordance with an IAG recommendation or direction, IAG may refer the matter to the IAG shareholders. In the event of a vote by IAG shareholders on such a matter, the voting rights of IAG shareholders who are Spanish nationals would be magnified so that they represent a majority of the total voting rights in IAG in relation to that matter (according to the same rules as those foreseen in case of dispute between IAG and the Spanish Nationality Entity in relation to the appointment of the Chairman and CEO).

25. Paragraph 179 JN provides that the thresholds listed in Article 5(4)(b)(ii) of the Merger Regulation "are also met if the undertaking concerned de facto has the power to exercise more than half of the voting rights in the shareholders' assembly."

26. According to IAG, in practice, the Spanish Nationality Entity has not exercised its voting rights contrary to the directions or recommendations of IAG and it is difficult to imagine any circumstances in which the Spanish Nationality Entity might legitimately vote contrary to IAG’s instructions. Also according to IAG, there are no issues where it is expected that the Spanish Nationality Entity might vote contrary to the instructions of IAG.

27. The JN recognises the particularities of corporate structures in the airline sector, where it states in paragraph 23 the "The concept of control under the Merger Regulation may be different from that applied in specific areas of Community and national legislation concerning, for example, (…) air transport (…)". Furthermore, the liberty of the Spanish Nationality Entity to vote contrary to IAG's instructions is confined to a limited number of cases (namely only when resolutions would be contrary to the Assurances, when they would result in the corporate structure no longer being compliant with the nationality requirements or when they would not be in the best interests of the Spanish national shareholders of IAG). Finally, even if the Spanish Nationality Entity would seek to vote contrary to the instructions of IAG, the final word would still be with IAG (through a decision of its shareholders' meeting). When taking all these elements on balance, it is concluded that IAG de facto has the power to exercise more than half of the voting rights in the IB Opco Holding shareholders' meeting, such that the criterion of Article 5(4)(b)(ii) of the Merger Regulation is satisfied. [14]

1.2. On the assumption that BA is the 'undertaking concerned'

28. In this situation, the turnover of Iberia should be added to that of BA under Article 5(4)(d) of the Merger Regulation, given that IAG owns more than half of the capital of BA and enjoys one or more of the powers and rights of Article 5(4)(b) of the Merger Regulation in Iberia (as discussed above).

2. Conclusion

29. On the basis of the above, it is concluded that such links as those provided for in Article 5(4) of the Merger Regulation exist between IAG, BA and Iberia, and that as a result, their turnovers must be added together for the purposes of determining jurisdiction under the Merger Regulation (and this regardless of whether IAG or BA would be the buyer).

30. IAG and bmi (together "the Parties") combined aggregate worldwide turnover in 2010 exceeded EUR 5 000 million [15] and each of the Parties had an aggregate Union-wide turnover [16] of more than EUR 250 million. The Parties did not achieve more than two-thirds of their respective turnover within one and the same Member State. [17] The proposed Transaction therefore has Union dimension pursuant to Article 1(2) of the Merger Regulation (and this irrespective of the legal entity (be it IAG or BA) which will ultimately acquires bmi).

IV. Market definition

1. Air transport of passengers

1.1. O&D markets

1.1.1. Point of origin/point of destination (O&D) city-pairs

31. In its practice, the Commission has traditionally defined the relevant market for scheduled passenger air transport services on the basis of the "point of origin/point of destination" ("O&D") city-pair approach. [18] Such a market definition reflects the demand-side perspective whereby passengers consider all possible alternatives of travelling from a city of origin to a city of destination, which they do not consider substitutable to a different city-pair. As a result, every combination of a point of origin and a point of destination is considered a separate market. In the past, the Commission has also taken into consideration supply-side elements such as network competition between airlines based on the hub and spoke structure of traditional carriers. However, the Commission considered that the degree of supply-side substitutability between different O&Ds remains limited. It considered in this respect that, although from a supply-side perspective a network carrier could in theory fly from any point of origin to any point of destination, in practice network carriers build their network and decide to fly almost exclusively on routes connecting to their hubs. [19] In line with the Commission's notice on market definition, [20] the Commission has given pre-eminence to demand-side substitution, whereby it considered that customers still need the transportation from one point to another and that competition still takes place on an O&D city-pair basis (even though some customers, in particular corporate customers, may have concluded corporate agreements for a range of routes and the commercial advantages stemming from such agreements may lead them to prefer one airline among the different airlines that operate on the route). It has thus traditionally upheld the O&D approach.

32. The Parties do not object to the O&D approach. However, they also maintain that the market for scheduled passenger air transport services increasingly has a network dimension (in particular for full-service carriers operating long-haul flights).

33. During the market investigation, some competitors indicated that the O&D approach fails to capture the nature and extent of network competition and the issues of slot availability and market dominance of carriers in slot restricted airports. It was also mentioned that while the O&D approach is appropriate for customers that have a particular destination in mind, it would not be appropriate for customers that do not. Some respondents also indicated that the Commission should pay particular attention as to which airports to include in the relevant O&D market, since not all airports at a given city are necessarily substitutable. Nevertheless, a large majority of respondents to the market investigation questionnaires (competitors, travel agents and corporate customers) agreed with the O&D approach.

34. In the light of the above, the effects of the Transaction will be assessed on the basis of the city-pair O&D approach, while all substitutable airports will be included in the respective points of origin and destination provided that they are perceived as substitutable by travellers. As suggested by some respondents to the market investigation, and in line with the Commission's practice, the question of airport substitutability will be examined for those O&D routes where relevant (in particular see below Section IV.1.1.3 and Section VI.1.1.4).

35. The issues of slot availability and dominance of carriers at slot restricted airports are addressed as part the competitive assessment, notably in the assessment of airport congestion, the analysis of potential entry and exits in the route-by-route assessment, and the assessment of the strengthening of IAG’s position at London Heathrow.

1.1.2. Time sensitive vs. non-time sensitive passengers

36. In previous cases, when looking at O&D markets for air transport services, the Commission found that a distinction may be drawn between two main groups of passengers: (a) non-price sensitive passengers attaching, inter alia, a relatively high value to flexibility with respect to time and date of departure, and (b) more price sensitive passengers willing to trade off flexibility or premium services for a discounted ticket. Traditionally these two groups of passengers have been labelled as time sensitive ("TS") and non-time sensitive ("NTS") passengers, respectively.

37. The Parties argue that the line between TS and NTS passengers has never been a clear-cut one and has further blurred in recent years. They do not regard the distinction between TS and NTS passengers as meaningful given that there is a chain of substitution between them.

38. The market investigation revealed that the distinction between TS and NTS passengers is still relevant. Indeed, a large majority of respondents (competitors, travel agents, and corporate customers) agreed with the Commission's traditional distinction between TS and NTS passengers which is considered to reflect in a realistic way the different needs of these passenger groups.

39. Several respondents indicated however that the distinction had gotten blurred over the last years as business travellers tended to be increasingly price sensitive and to book economy tickets and as competition from low cost carriers increased. Besides, many of the responding competitors stated that they had a single cabin policy on certain routes. However, in this regard, a majority of the competitors, travel agents and corporate customers considered that this would not affect the importance of the distinction between TS and NTS passengers. It was mentioned in this respect that the attractiveness of a flight would be differentiated between the two groups of passengers on the basis of time of departure, duration and point of arrival, and for NTS passengers, price would be relatively more influential. The availability of a particular cabin class would be a secondary feature for both classifications of passengers.

40. A majority of the competitors that responded classify passengers on the basis of their willingness to pay. The willingness to pay is identified on the basis of, amongst others, the time of booking, flexibility requirements, services at the airport, cabin comfort, length of stay, priority check-in, length of stay and whether or not there is a weekend between the dates of arrival and departure. In addition to the class of travel, time sensitive passengers are indeed identified by means of other criteria such as a booking date close to the day of travel, a same day return flight, flexible fares, sales distribution through corporate accounts, airport location, frequency of schedule and the use of frequent flyer programmes. A large majority of the competitors that responded confirmed their ability to discriminate (i.e. charge different prices) between the various categories of passengers and to apply yield management techniques.

41. In terms of passenger preferences, the market investigation showed considerable differences between TS and NTS passengers: for example the existence of daily frequencies, timing of departure and return flights, airport location and ticket flexibility were generally considered very important for TS passengers, while these were considered to be less important for NTS passengers. Also, the possibility of a same day return was generally considered important for TS passengers, while not for NTS passengers.

42. In light of the above, the effects of the Transaction will be assessed on the narrowest possible markets, namely on a market for TS passengers and on a market for NTS passengers. [21]

1.1.3. Airport substitutability

43. When defining the relevant O&D markets for air transport services, the Commission previously found that flights from or to airports which have sufficiently overlapping catchment areas can be considered as substitutes in the eyes of passengers. In order to correctly capture the competitive constraint that flights from/to two different airports exert on each other, a detailed analysis taking into consideration the specific characteristics of the case at hand is necessary. [22] In the present case, airport substitutability is particularly relevant for London, Moscow and Vienna. [23]

1.1.3. (1) London

44. London has five main airports [24] , namely Heathrow, Gatwick, City, Stansted and Luton. The travel distances and times between these airports and the centre of London are summarised in Table 1:

Table 1 - Distances and travel times from London airports to London city centre

Airport |Distance to city centre |Private car |Public transport |

Stansted |59 km |85 min |bus: 75 minrail: 45 min |

Heathrow |28 km |65 min |Coach/bus: 65/135 min rail: 55 min |

Gatwick |46 km |85 min |Coach/bus: 90/145 min rail: 60 min |

Luton |54 km |44 min |bus: 60 min rail: 25 min |

London City |14 km |20 min |rail: 22 min |

Southend |68km |105 min |rail: 53 min |

Source: Form CO

45. The question of London airport substitutability for O&D passengers is of particular importance for the present case. For many of the O&D overlap routes, most frequencies (if not all) are offered from Heathrow. Also, often Heathrow has a higher ratio of TS passengers than other London airports. The Parties both have a strong presence at Heathrow and for a number of routes they are the only carriers operating out of Heathrow.

46. Previous Commission decisions determined that a certain degree of substitutability exists between the London airports, at least for NTS passengers. [25] Also, the Commission found in the past that at least the airports of Heathrow, Gatwick and City were considered substitutable for both TS and NTS passengers flying from London to Madrid and to Barcelona [26] and that the airports of Heathrow and Gatwick were considered substitutable for both TS and NTS passengers flying between London and Athens. [27]

47. The Parties, without distinguishing between TS and NTS passengers, consider that all London airports (Heathrow, Gatwick, City, Stansted and Luton and the new London Southend airport) and arguably also further airports in the South East of England are substitutable regardless of the city-pair serviced. [28]

48. The Parties refer in this respect to the Commission's Ryanair/Aer Lingus decision, [29] where the Commission observed that "all five London airports are within substantially less than 100 km from the centre of London, one of the most densely populate agglomerations in Europe". The Commission further noted that "Driving times by car between the city centre and the airports are below or not significantly above1 hour (1 hour and 25 minutes maximum)" and that "The fact that all the London airports are largely within the indicative 100 km / 1 hour driving time benchmark thus suggests that these airports are substitutable."

49. However, the 100 km/one-hour criterion was viewed as only a first "proxy". [30] Also, the 100 km/one-hour criterion was defined by the Commission in the specific case of routes served out of Dublin by two airlines with typical attributes of low-frills point-to-point carriers. This "rule" is thus not necessarily strictly applicable for other cases, such as routes served by two network carriers. [31] Therefore, a more detailed analysis taking into consideration the characteristics of the case at hand rather than a specific proxy should be used to correctly capture the competitive constraint that flights from/to two different airports exert on each other.

50. The Parties also refer to a number of papers recently prepared in the UK with respect to the various London airports. They first refer to the UK Competition Commission's final report on the BAA Airport Market Investigation. [32] In 2009, the UK Competition Commission investigated the effect on competition of the common ownership by BAA of seven UK airports, including the three London airports Heathrow, Gatwick and Stansted. In the context of its analysis, the Competition Commission looked amongst others at the question of substitutability of the three London airports. Evidence it found suggested a "significant substitutability of passenger demand between the BAA London airports, with significant overlaps between their catchment areas, although to an extent that varies between different categories of passenger". [33] It also found that Heathrow, Gatwick and Stansted are exposed to each other's catchment area to a significant degree (which is higher than their exposure to the catchment areas of Luton and London City). Also, it referred to passengers' surveys that suggested that passengers regard Heathrow, Gatwick and Stansted as better alternatives for each other than non-BAA airports (the only possible exception to this is whether Stansted or Luton is, after Gatwick, the next best alternative to Heathrow). These surveys also showed a relatively low passenger sensitivity to fare increases (83 to 91 per cent of passengers would not switch in response to a £5 increase in air fares). It found that airlines operating routes from Heathrow considered that their main competitors tended to operate from the same airport. It finally noted that "As regards terminating passengers, airlines had a range of views, but a number made the point that Heathrow was preferred to Gatwick by many passengers, in particular business passengers".

51. They further refer to a recently published working paper of the CAA, [34] analysing the catchment areas of Heathrow, Gatwick, Luton and Stansted [35] under three different angles: (i) it defined the airports' catchment areas in function of surface travel time to the airport; (ii) it looked at data about the districts from which passengers originated and (iii) it looked at the geographic distribution of actual airport usage. All three approaches suggested that there was a considerable extent of catchment area overlap between Heathrow, Gatwick, Luton and Stansted.

52. The Parties finally refer to a report published in January 2012 by the UK CAA, setting out its initial view of market power of Heathrow, Gatwick and Stansted. [36] This report indicates that "for passengers travelling on direct services, Heathrow appears to be competing over a relatively broad geographic area, extending to include the South East and Greater London regions, and extending towards the west and north, particularly when attracting passengers to long-haul services. Consequently, there are very significant overlaps in the airport's catchment area with Gatwick, Stansted and Luton (amongst other smaller airports), although many passengers appear to have a strong preference for using services at Heathrow".

53. These various reports, even though they do support that there is indeed a certain degree of overlap between the catchment areas of the various London airports, are as such not sufficient to conclude whether or not flights offered from these various airports are substitutable for passengers travelling on specific routes. [37] Moreover, the CAA found in its 2011 passenger survey [38] that only 10% of short-haul passengers at Heathrow would be willing to switch away from Heathrow to another airport in light of a £5 (single ticket) / £10 (return ticket) price increase. [39] . The CAA noted in this respect that "Overall, passengers at Heathrow appear to be the least willing to switch in response to an increase in price. This is perhaps not unexpected, as Heathrow has the largest proportion of passengers travelling for business reasons, who may be less price sensitive and may be more likely to travel under a corporate contract. Further, since prices at Heathrow are typically higher than at other London airports (with the possible exception of London City), Heathrow passengers responding to this question would have already revealed themselves as perhaps having a relatively high willingness to pay (albeit for a possible higher perceived service quality at the airport). (…) By contrast, approximately 20% of short haul passengers at Gatwick and Stansted would be willing to switch away from their current airport in light of a price increase, suggesting that they could be more price responsive than their Heathrow counterparts".

54. The Parties also refer to IAG's recent business cases prepared to assess whether it should launch services from City to Copenhagen and Stockholm, which are destinations already served by IAG from Heathrow. The Parties argue in this respect that nearly [20-30]% of the passengers that were expected to travel on the new services between City and Copenhagen and nearly [20-30]% of the passengers that were expected to travel on the new services between City and Stockholm were considered to be passengers who would, before the launch of the City services, have flown from Heathrow.

55. The Parties also argue that all six airports are attractive for TS passengers, and indicate that this is supported by the similarity of the "on the ground" products offered at each airport. Finally, they argue that the fact that some airlines have airport preferences in London should not prevent the Commission from concluding that services from any of the London airports are part of the same market.

56. The market investigation showed mixed and divergent results with respect to the question whether or not, for the routes which are currently operated by both Parties, flights offered from other London airports were valid substitutes for flights offered from Heathrow. In particular with respect to TS passengers, the results of the market investigation were inconclusive.

57. A natural experiment on the London-Glasgow route (exited by bmi in March 2011) indicates that after bmi's exit, IAG has been able to increase its average prices of Glasgow flights offered from Heathrow. The presence of competitors operating to Glasgow from City and Gatwick did not seem to constrain the ability of IAG to increase its prices significantly on the Heathrow-Glasgow route, even for economy restricted fares. Additional information provided by the Parties on 15 March 2012 on the effects of bmi's withdrawal from the London-Glasgow route does not contradict the conclusion reached by the Commission in this regard.

58. Given that results of the market investigation are inconclusive, the effects of the Transaction for each of the relevant routes will be examined on the narrowest possible market, namely a market comprising flights to and from Heathrow only. In line with the approach adopted in the decision relating to Case No COMP/M.5747 Iberia/British Airways, the effects of the Transaction will also be examined on a wider “London(three)” market comprising flights to and from Heathrow, Gatwick and City. Finally they will also be examined on an even wider “London(five)” market comprising flights to and from Heathrow, Gatwick, City, Luton and Stansted.

1.1.3. (2) Moscow

59. Moscow has three main airports, namely Domodedovo, Sheremetyevo and Vnukovo. The travel distances and times between these airports and the centre of Moscow are summarised in Table 2:

Table 2 - Distances and travel times from Moscow airports to Moscow city centre

Airport |Approximate distance to city centre |Private car |By aeroexpress |By shuttle bus |

Domodedovo (DME) |42km to the South East |47 min |45 min plus 11 min on metro |25-30 min plus 28 min on metro |

Sheremetyevo (SVO) |29 km to the North West |30 min |35 min plus 10 min on metro |25 min plus 27 min on metro |

Vnukovo (VKO) |28km to the South West |35 min |35-40 min plus 15 min on metro |25 min plus 25 min on metro |

Source: Form CO

60. The Parties consider that the airports of Domodedovo, Sheremetyevo and Vnukovo are substitutable. There are no previous Commission decisions regarding the substitutability of the Moscow airports.

61. The results of the market investigation were inconclusive with respect to the question whether or not passengers travelling between London and Moscow would be willing to fly to Sheremetyevo in case prices of flights to Domodedovo would increase with 5-10%.

62. However, since the Transaction leads to serious doubts with respect to the London-Moscow route irrespective of the question whether or not the Moscow airports are substitutable, this question can be left open for the purposes of the present Decision.

1.1.3. (3) Vienna

63. Bratislava airport is located at 87 km from Vienna Schwechat airport. There are frequent public transport services between Bratislava airport and Vienna City centre. The travel times between Bratislava airport to the centre of Vienna are summarised in Table 3:

Table 3 - Travel times from Bratislava airport to Vienna city centre

Airport Bus |Train |Twin City Liner (boat) |

110 min |Train: 60-90 min /Bus: 25 min |75-90 min |

Source: Form CO

64. The Parties consider that Vienna Schwechat and Bratislava Airport are substitutable.

65. The Commission has previously considered that services from and to Vienna and Bratislava airports are substitutable as regards air transport services to and from Dublin. [40]

66. The market investigation showed that, if prices of flights between London and Vienna Schwechat were to increase by 5-10%, only very few passengers (both as regards TS and NTS passengers) would switch to flights to Bratislava Airport.

67. Since the Transaction does not raise serious doubts with respect to the London-Vienna route irrespective of the question whether or not the airports of Vienna and Bratislava are substitutable, this question can be left open for the purposes of the present Decision.

1.1.4. Direct/indirect flights

68. The level of substitutability of indirect flights to direct flights largely depends on the duration of the flight. As a general rule, the longer the flight, the higher the likelihood that indirect flights exert a competitive constraint on direct flights. [41]

69. When defining the relevant O&D markets for air transport services, the Commission has considered in previous decisions [42] that with respect to short-haul routes (below 6 hours flight duration) indirect/one-stop flights generally do not provide a competitive constraint to direct/non-stop flights absent exceptional circumstances (for example the direct flight does not allow for a one-day return trip, or the share of indirect flights in the overall market is significant). The Commission has sometimes distinguished mid-haul routes, which are routes of more than three hours where direct flights normally do not provide the option of one-day return trips, so that indirect flights may be able to compete with direct flights. [43] With respect to long-haul routes (more than 6 hours flight duration), the Commission has considered in the past that indirect flights constitute a competitive alternative to direct services under certain conditions (for example if they are marketed as connecting flights on the O&D pair in the computer reservation system). [44]

70. The Parties have submitted market shares for all direct-direct, direct-indirect and indirect-indirect overlap routes. For those routes where their activities overlap on a direct-direct basis, they do not consider further the competitive constraint of indirect/one-stop flights when in aggregate they account for under 10% of travel on the O&D pair.

71. The question of the substitutability of direct and indirect flights, which is relevant for flights from London to Riyadh and Jeddah, will be examined in the competitive assessment of these routes.

1.1.5. Substitutability of charter flights and scheduled flights

72. When defining the relevant O&D markets for air transport services, the Commission has previously held that charter flights were not part of the same product market as scheduled flights. [45]

73. The Parties have only produced market shares both including and excluding charter services for routes on which charter services account for at least 1,000 passengers over the last four IATA Seasons, and in particular for London-Marrakech.

74. It can be left open for the purpose of this Decision whether passenger air transport services offered on charter flights belong to the same market as passenger air transport services offered on scheduled flights as the conclusion of the competitive assessment remains the same irrespective of the precise market definition.

1.1.6. Substitutability of train transports services with air transport services

75. When defining the relevant O&D markets for air transport services, the Commission has previously also considered other transport alternatives to the extent that they are substitutable to a flight (intermodal competition). [46] This has been considered in cases where alternative modes of transport on the respective O&D route can be considered comparable in terms of price, quality and (global) travel time and can therefore be considered as valuable alternatives by customers.

76. The question of substitutability of train transport services with air transport services is relevant in this case for the London-Manchester, London-Edinburg, and London-Aberdeen routes. This issue will be examined on the relevant route by route competitive assessment.

77. However, the reduction in travel time by train referred to by the Parties in the notification, relating to the HS2 project, is not relevant considering the time horizon of merger control. Indeed, the first phase of the project (high speed services between London and Birmingham) is expected to be completed in 2026 and the second phase (high speed services from London to Manchester and Leeds) in 2032-2033.

1.2. Market for the provision of access to flights of another carrier for connecting passengers in the context of interlining arrangements

78. "Connecting" or "transfer passengers" are passengers who fly indirectly on a given city-pair (e.g. Belfast-Chicago via London Heathrow). These passengers do not necessarily travel each "leg" or "sector" of such journey with the same carrier. In the air transport sector, there is a variety of agreements whereby single tickets may be sold for indirect journeys including two legs operated respectively by the two carriers which concluded the agreement. In the framework of such agreements, the carrier granting access to its flights to passengers connecting onto another carrier's flight and travelling with a single ticket issued by this second carrier provides an "input" to the latter and is remunerated for it. This "input" is used to supply the downstream service, i.e. a ticket for an indirect journey on a given city-pair.

79. Two carriers that interline are thus engaged in a vertical relationship when one of them sells tickets for indirect journeys including one leg operated by the other carrier. There are cases where both carriers can sell tickets for indirect journeys including one leg operated by the other party to the agreement. In such a situation, the vertical relationship is symmetrical: both carriers are active upstream and downstream in respect of one another. There are also cases where the ticket for the indirect journey is sold by a third party (e.g. a travel agent). In such situations, which also result from the existence of an agreement between the two carriers, these are active on closely related markets: they both provide inputs corresponding to each leg of the indirect journey, which are used to offer the downstream service (the indirect journey).

80. The carrier or distributor operating on the downstream market sells a ticket for an indirect journey between two cities to a passenger. This downstream market is the market for the provision of air transport services between these two cities. As assessed above, this market has to be defined on an O&D basis, i.e. by reference to the two cities (or as the case may be, to the two airports) at both ends of the indirect itinerary. Depending on the specific O&D, such a downstream market may include services to various airports serving the same city and / or transport services relying on another mode than air.

81. The carrier operating on the upstream market provides to the downstream carrier or distributor access to its flights between one end of the city pair on which the indirect journey is offered, and a connecting airport (e.g. for indirect journeys between Aberdeen and Los Angeles via London Heathrow, an upstream market for the provision of access to flights for connecting passengers corresponds to the Aberdeen- London Heathrow leg).

82. Such an upstream market has to be also defined on the basis of the city / airport pair between which the flight to which access is provided is operated. Indeed, a carrier or distributor wanting to supply indirect journeys e.g. between Aberdeen and Los Angeles via London Heathrow would need as an input access to flights between Aberdeen and London Heathrow. Indeed, flights between other cities cannot, in principle, constitute a valid substitute.

83. Moreover, for the purposes of defining such an upstream market, it appears that when London Heathrow is the connecting airport, it cannot be considered substitutable by other airports of the London area. It also appears that transport services on the city pair defining this upstream market by other modes than air, in particular train, cannot be regarded as a valid substitute for travel by air.

84. IAG underlined the possibility for passengers to reach London Heathrow from various cities in the UK by train or flights to other airports than Heathrow. However, the market investigation indicates that if "interline arrangements" between carriers operating from Heathrow with train operators or carriers flying to other airports than Heathrow may exist, they appear to be rather marginal, and in any event, access to such trains or flights would hardly be regarded as an acceptable substitute for flights to Heathrow, either by interlining carriers, travel agents or passengers connecting at Heathrow. This appears to be due in particular to significant extra travel time due to transfer between London airports or transfer between a railway station in London and Heathrow.

85. Indeed, for connecting passengers, Heathrow is neither their point of origin nor their point of destination as the flight between their original point of departure and Heathrow is only part of their journey. Therefore, for them and for the carriers or distributors that provide them with tickets for an indirect journey via Heathrow, a first leg of the journey arriving at another London airport than Heathrow, or based on another mode of transport than air, could not be regarded as a valid substitute for a flight arriving at Heathrow. This does not contradict the possibility than on downstream markets (markets for the provision of air transport services on a given city- pair), which are different in nature, services on the same city-pair between different airports and services based on different modes of transport may be substitutes in the eyes of consumers.

86. As a conclusion, it appears that the relevant markets for the provision of access to flights to Heathrow for connecting passengers in the context of interlining arrangements have to be defined on an O&D basis and include neither air services to other London airports than London Heathrow, nor transport services to London using other modes than air.

2. Air transport of cargo

2.1. Relevant product market

87. With regard to air cargo transport markets the Commission found in earlier decisions that the O&D approach to market definition is inappropriate. Indeed, cargo is generally less time sensitive than passengers and cargo is usually transported by trans-modal means of transport "behind" and "beyond" the points of origin and destination. [47] The relevant market should be therefore defined more broadly.

88. The market investigation in the present case showed that a wider market may exist as, unlike passengers, cargo may be routed with a higher number of stopovers and therefore any indirect/one-stop route is a substitute for any direct/non-stop route. [48] While some market players argued that a separate market could be identified including only direct flights used to transport specific goods (such as time-sensitive products, fruit and vegetables, live animals, pharmaceuticals, valuables, etc.), the majority of the respondents indicated that such a distinction is not material. [49]

89. With regard to cargo service operators, the market investigation confirmed that there is no reason to sub-segment the market according to the type of the provider as the four types of air cargo carriers, namely (i) cargo airlines with dedicated freighter planes; (ii) airlines with only belly space cargo capacity on passenger flights; (iii) combination airlines (i.e. airlines with both dedicated freighter airplanes and belly space cargo capacity); and (iv) integrators, [50] compete with each other for business with the same kinds of customers. [51]

90. In addition, as established in previous Commission decisions, air cargo transport markets are inherently unidirectional due to differences in demand at each end of the route and must hence be assessed on a unidirectional basis. [52] This was confirmed by a large majority of respondents in the market investigation. [53]

91. In previous cases, the Commission left open the question whether the market for air cargo transport should be further sub-divided according to the nature of the goods transported (for example, dangerous or perishable goods). [54] The Parties submit that no sub-segmentation according to the type of cargo should be made. The market investigation revealed that the majority of respondents (customers and competitors) agreed with the Parties that the cargo markets should not be segmented in this way. Indeed, nearly all cargo transporters declared that they carry all kinds of cargo in the same aircrafts. [55] Several respondents also pointed to the use of standardized packaging and to the fact that no different handling is required for loading and unloading.

92. Therefore, the competitive assessment in this case will be based on the market for air cargo transport that includes all kinds of transported goods.

2.2. Relevant geographic market

93. The Commission found in earlier decisions that the relevant market in intra-European routes of air cargo transport can be defined as European-wide and should include alternative modes of transport, notably road and train transport. [56] The Parties agree and the market investigation in the present case confirmed this view. [57]

94. As far as intercontinental routes are concerned, the catchment areas at each end of the route broadly correspond to continents for those continents where local infrastructure is adequate to allow for onward connections (for example, by road, train, or inland waterways), such as Europe. [58] As regards continents where local infrastructure is less developed, the catchment area corresponds to the country of destination.

95. Concerning routes from Europe to the Middle East, and in particular those from Europe to Saudi Arabia, the market investigation showed that the majority of respondents believes that the relevant catchment area is either the whole Middle East Region or a smaller area including Saudi Arabia and other neighbouring countries such as UAE, Bahrein, Oman and Qatar. [59] This would be due, in particular, to the recent improvements of the local road networks and to free movement agreements entered into by some countries of the region. Some respondents also mentioned that the relevant market definition should include alternative modes of transport, such as freight ships. [60]

96. In the case at issue it is however not necessary to conclude on the precise scope of the geographic market since no serious doubts arise on the routes from Europe to Saudi Arabia regardless of the market definition adopted.

3. Groundhandling

3.1. Relevant product market

97. Aircraft groundhandling refers to the servicing of an aircraft while it is on the ground. It covers a variety of airport services such as ramp services (including aircraft guiding and towing, baggage loading and unloading, freight and mail handling, refueling, de-icing, catering, lavatory drainage, water cartage, cleaning and ground power) and passenger services (including check-in counter services, gate arrival and departure services, transfer counters, customer service and airport lounges).

98. With regard to the product market definition, the Commission considered in earlier decisions that groundhandling services can be divided into distinct segments on the basis of either the International Air Transport Association ("IATA") Standard Ground Handling Agreement or the EU Directive on groundhandling services, [61] but the determination of whether each segment constituted a separate relevant market was left open. [62] In other previous decisions the Commission examined possible alternative product market definitions but finally left the precise definition open. [63]

99. The Parties agree, and the market investigation in this case confirmed, that the relevant product market for the provision of groundhandling services encompasses both passenger and aircraft handling. Indeed, while some market players indicated that a narrower market could be identified for specific services like aircraft re-fueling and catering or according to the contestable or non-contestable nature of the services considered, the majority of the respondents in the market investigation considered that groundhandling services include passenger and baggage registration, handling and leading the aircraft on the ground as well as aircraft cleaning and refueling. [64]

100. Therefore, for the assessment of the present Transaction, the relevant product market definition for the provision of groundhandling services encompasses both passenger and aircraft handling.

3.2. Relevant geographic market

101. The Commission considered in previous decisions that the geographic scope for the provision (or contracting) of groundhandling services was restricted to a specific airport given that the services required at a particular airport could not normally be substituted by services provided at other airports. The Commission therefore concluded that the relevant geographic market for the provision of groundhandling services was the area of a specific airport but ultimately left the question open. [65] The Commission also considered that a wider geographic market could be defined encompassing other airports within a catchment area that could attract airlines if groundhandling service providers were present at those airports. [66]

102. The Parties argue that the Commission does not need to reach a firm conclusion on the geographic market as, regardless of market definition, the Transaction will not give rise to serious doubts.

103. In the case at issue, the market investigation was not entirely supportive of a specific airport market definition. [67] In the first place, some respondents declared that groundhandling services offered at Spanish airports vary from airport to airport. Other respondents indicated that airlines operating on the Spanish market organize bids to select their groundhandling service provider for several airports, thus contracting with one groundhandling company for all or a number of airports from/to where they operate.

104. Therefore, it cannot be excluded that the market for groundhandling services in Spain may have a wider geographic dimension encompassing in some cases more than one airport. However, the precise definition can be left open as the Transaction does not raise serious doubts irrespective of the precise geographic market definition adopted.

4. Maintenance, repair, overhaul ('MRO')

4.1. Relevant product market

105. With regard to the product market definition, the Commission distinguished in earlier decisions four separate segments within the MRO market, namely (i) line maintenance, (ii) heavy maintenance, (iii) engine maintenance, and (iv) components maintenance. [68]

106. The Parties agree with the Commission's previously established product market definition and the market investigation confirmed the Commission's view. [69]

107. The precise scope of the product market definition for MRO services can be left open since the Transaction does not raise serious doubts under any possible product market definition.

4.2. Relevant geographic market

108. With regard to the geographic scope of the market for MRO services, the Commission has found that heavy maintenance services might be at least EEA-wide, whereas line maintenance could be local in scope [70] and engine maintenance world-wide. [71] With regard to MRO services for components, the Commission considered these services to be world-wide. [72] In recent decisions, the Commission left open the geographic market definition with regard to MRO services. [73]

109. The Parties submit that the precise scope of the geographic market definition for MRO can be left open as no serious doubts would arise under any plausible market definition.

110. For the purposes of this Decision, the precise scope of the geographic market definition for MRO can be left open since the Transaction does not raise serious doubts under any geographic market definition.

V. Context and analytical framework for the assessment of the Transaction

1. Competitive situation likely to prevail absent the Transaction

1.1. Most likely situation absent the Transaction

111. In assessing the competitive effects of a concentration, the Commission compares the competitive conditions that would result from the Transaction with the conditions that would have prevailed absent the Transaction ("counterfactual"). In most cases the competitive conditions existing at the time of the Transaction constitute the relevant comparison for evaluating its effects. However, in some circumstances, the Commission may take into account future changes to the market to the extent that they can be reasonably predicted. It may, in particular, take account of the likely entry or exit of firms if the merger did not take place when considering what constitutes the relevant comparison. [74] In the case at hand, the Commission conducted a prospective analysis to take into account likely developments in the market.

112. IAG underlined that the effects of the Transaction must be compared against the situation that would have prevailed without the Transaction on a route by route basis and referred to that end to the confidential counterfactual analysis made by Lufthansa. [75] Lufthansa argues that absent the Transaction, bmi would become insolvent and exit all markets since Lufthansa would no longer want to provide financial support to this loss-making company. In this context, Lufthansa argues that bmi meets the criteria of the "failing firm defence" (see Section VII).

1.1.1. bmi's history and attempts to restructure it

113. Lufthansa acquired control of bmi in 2009 following a "put" option exercised by one of bmi's other shareholders. Since then, bmi has been incurring losses of more than GBP […] per year and Lufthansa has been providing substantial funding to bmi in order to support its operations. Unsecured loans of GBP […] were granted and subsequently converted into equity. Moreover, bmi benefited from capital increases of GBP […] and GBP […] respectively in June 2010 and May 2011. bmi also received GBP […] through the sale of slots at Heathrow to Lufthansa and Swiss, which is part of the Lufthansa group, and GBP […] through loans granted by the Lufthansa group and secured by aircraft and slots [76] .

114. Table 4 provides bmi's net earnings in GBP million [77] . In 2010, bmi's negative earnings accounted for around -[…]% of its turnover, which is an indication of very substantial losses.

Table 4 : bmi's net earnings 2008-2012 (in GBP million)

2008 |2009 |2010 |2011 (unaudited) |2012 (forecast) |

-[…] | -[…] | –[…] |- […] | –[…] |

115. Lufthansa considers that bmi's persisting losses result from structural disadvantages: obsolete equipment, lack of a market niche with a respective brand and business model, and structural disadvantages stemming from high airport charges at Heathrow, which are designed to attract long-haul traffic rather than a short/ mid-haul business such as the one operated by bmi.

116. Lufthansa indicated that as with other Lufthansa affiliates, it had sought to have bmi benefit from synergies with the broader Lufthansa Group, e.g. by joint purchasing and other contracts, joint facilities with other Lufthansa Group companies (e.g. joint maintenance in London), use of other affiliates' services for handling and check-in, and joint marketing in particular with the access to Lufthansa's sales organization like corporate contracts in Germany. It also mentioned its attempts to restructure bmi since it acquired control of it. The first Lufthansa restructuring plan, “bmi Turn-around Plan”, dates back to 2009 and was aimed at downsizing the business, moving the focus from domestic to mid-haul routes, and operating wet leases to Lufthansa. According to Lufthansa, the new focus of mid-haul routes improved the overall cost structure, and the measures were generally considered as a success but were eventually insufficient to trigger a turn-around. [78]

117. Since the beginning of 2011, bmi has continued to generate significant losses. In May 2011, Lufthansa's management board asked bmi's management to work out a drastic restructuring plan On 24 August 2011, bmi's management presented the core elements of this plan called "Focus bmi" to Lufthansa's management board. bmi's management's proposal was based on four modules designed as separate steps: i) further network downsizing and increased focus on mid-haul routes, ii) increased role as a "production platform" for the Lufthansa group (e.g. through wet lease agreements), iii) specific approach towards domestic UK routes, iv) divestment of surplus slots.

1.1.2. Options considered by Lufthansa

118. In parallel to the development of the restructuring plan, Lufthansa explored sale options. As of August 2011, investment bank Morgan Stanley approached potential buyers on behalf of Lufthansa. [Redacted – Refers to Morgan Stanley's initial contacts]. Lufthansa eventually received offers only from IAG and Virgin Atlantic Airways (hereafter: "Virgin"). Lufthansa received an indicative offer from IAG on […] September 2011 and an expression of interest from Virgin on […] October 2011. [79]

119. Alongside sale and restructuring, Lufthansa's management board assessed other possible options, namely solvent wind-down, immediate insolvency and continuation of operations. However, in August 2011, Lufthansa's management board dismissed the solvent wind-down and continuation options, which it found too expensive. [80]

120. As of August 2011, Lufthansa's management board repeatedly held detailed discussions on the basis of cost simulations for the remaining options, namely restructuring, insolvency, sale to IAG, and sale to Virgin. By mid-December 2011, the costs of the various options were evaluated as follows:

Table 5: costs of the various options as estimated by Lufthansa

(in EUR million) |Restructuring (Focus bmi) |Insolvency |Sale to IAG (based on offer of 9/12/2011) |Sale to Virgin (based on offer of 11/12/2011) |

Estimated net cost of the option Excluding an additional cost of EUR […] corresponding to part of bmi's pension liabilities that Lufthansa would take up in all scenarios. Excluding an additional cost of EUR […] corresponding to part of bmi's pension liabilities that Lufthansa would take up in all scenarios. |EUR […] |EUR […] + […] In case of insolvency, unsecured trade claims of companies of the Lufthansa group vis-à-vis bmi would risk not being honoured, which would entail a direct cost for Lufthansa. Lufthansa’ exposure in case of bmi's insolvency from ongoing trading between Lufthansa and bmi is overall at a limited level, typically in the range of a few millions. In case of insolvency, unsecured trade claims of companies of the Lufthansa group vis-à-vis bmi would risk not being honoured, which would entail a direct cost for Lufthansa. Lufthansa’ exposure in case of bmi's insolvency from ongoing trading between Lufthansa and bmi is overall at a limited level, typically in the range of a few millions. |EUR […] The gross purchase price obtained by Lufthansa would be EUR […]. The net cost of the sale options corresponds to the gross purchase price obtained by Lufthansa netted off various adjustments such as deductions following due diligence findings, and taking into consideration interim funding of bmi by Lufthansa pending the closing of the sale as well as the effect of mitigation measures such as sales of slots. The gross purchase price obtained by Lufthansa would be EUR […]. The net cost of the sale options corresponds to the gross purchase price obtained by Lufthansa netted off various adjustments such as deductions following due diligence findings, and taking into consideration interim funding of bmi by Lufthansa pending the closing of the sale as well as the effect of mitigation measures such as sales of slots. |EUR […] The gross purchase price obtained by Lufthansa would be EUR […]. The gross purchase price obtained by Lufthansa would be EUR […]. |

Additional risks |[…] [Redacted – refers to risks for LH Group]. [Redacted – refers to risks for LH Group]. |[…] [Redacted – refers to risks for LH Group]. [Redacted – refers to risks for LH Group]. |[…] |[…] |

Source: Annex 4 to Annex 1 to the Form CO, Annex 17.2 to Lufthansa's reply to the request for information of 16 February 2012 and other documents provided by Lufthansa

121. It follows from Table 5 that all considered options involved a negative revenue (in other words, a cost) for Lufthansa. […] [87] :

· […]

· […]

122. [Redacted – Refers to LH Group decision making criteria] [88]

123. Lufthansa's supervisory board approved these proposals and Lufthansa continued negotiations with both IAG and Virgin.

124. On the basis of its due diligence investigation, [Redacted – Refers to confidential negotiations with Virgin]. On 22 December 2011, Lufthansa and IAG signed a sale and purchase agreement on the basis of a final offer by IAG [Redacted – Refers to IAG's final offer].

125. These elements constitute strong indications that if IAG had made no offer, or had proposed a price entailing […], bmi's insolvency would have been Lufthansa's preferred option.

126. The Commission conducted in-depth analysis to assess the overall consistency of the figures and statements put forward by Lufthansa. For instance, the Commission investigated the magnitude of Lufthansa's trading exposure to bmi on the basis of a report commissioned by bmi to assess the outcome of a possible insolvency scenario [89] as well as various other documents provided by Lufthansa. This analysis confirms the overall consistency of the elements provided by Lufthansa.

127. It was difficult for Lufthansa to calculate precisely certain relevant parameters for the purposes of comparing the various options, [Redacted – Refers to LH Group decision making criteria]. However, Lufthansa appears to have come to firm conclusions as to how these parameters should be globally quantified in that context, as evidenced by internal documents [90] . Besides, even if some additional value adjustments could have been considered on some cost/revenue items (such as the loss of air transport revenues for Lufthansa), these adjustments are in total not of such a magnitude as to affect the conclusion that Lufthansa considered restructuring far more costly than insolvency, and that Lufthansa would have sold bmi neither to IAG nor to Virgin [Redacted – Refers to LH Group decision making criteria] before the end of 2011. Moreover, all relevant cost/revenue elements appear to have been included in the assessment made by Lufthansa.

128. In addition, in 2011, bmi's critical financial situation required its directors to defer the filing of the 2010 statutory accounts, as a going concern declaration on a stand-alone basis would have required a "comfort letter", i.e. a guarantee by Lufthansa to cover bmi’s losses for the next financial year. […] [91] The signing of a term sheet and later the conclusion of a sale and purchase agreement with IAG allowed bmi to submit its accounts on a “going concern” basis only a few days prior to the possible commencement of criminal prosecution against its directors. This indicates that Lufthansa was keen to leave the insolvency option open until an agreement could be reached with a potential buyer.

129. [Redacted – Refers to measures adopted by bmi's management and Lufthansa] This confirms that insolvency was seriously considered by Lufthansa.

130. Therefore, the Commission considers that absent a sale of bmi to IAG, bmi would likely have gone insolvent and, as a consequence, would have exited the market quickly afterwards. [92]

131. [Redacted – refers to analysis of sale negotiations] [93] [94] [95]

132. Considering in addition that the cost of restructuring was by far higher than the cost of insolvency [Redacted – refers to analysis of sale negotiations], the Commission is of the view that in the absence of a firm offer by IAG [Redacted – Refers to LH Group decision making criteria], Lufthansa would have decided in favour of the insolvency scenario.

133. To conclude, the pre-Transaction situation is not likely to be sustainable absent the Transaction. Following a detailed analysis of the arguments put forward by the Parties, the most likely situation absent the Transaction would be an immediate/very short term insolvency. In view of bmi's limited cash balance at the end of 2011 (GBP […]), bmi would very likely stop operations at the beginning of the insolvency proceedings. Indeed, bmi would have quickly lacked all the vital inputs necessary to its business such as fuel, access to airports or aircraft maintenance. Therefore, the Commission considers that the relevant comparison to assess the effects of the Transaction in this case is with a scenario where bmi would have exited all markets.

134. During the market investigation, Virgin [96] claimed that he Transaction should be assessed against the position which existed prior to IAG's recent acquisition of six daily slot pairs from bmi, which was announced in September 2011, six weeks before IAG announced that it has reached an agreement in principle for the acquisition of bmi. According to Virgin, it would be wrong to assess the Transaction by reference to the situation which existed as at the date of announcement of the Transaction.

135. The Commission considers that this approach is incorrect. Indeed, the acquisition of six daily slot pairs by IAG from bmi and the Transaction are not interdependent. The transfer of these six slots took place even before a sale and purchase agreement was signed by IAG and Lufthansa. Moreover, since Lufthansa took its decisions as regards the future of bmi in December 2011, it appears clearly that in the counterfactual, absent an offer by IAG [Redacted – Refers to LH Group decision making criteria] bmi would not have become insolvent before December 2011. It would have become insolvent only after the transfer of the six daily slot pairs to IAG. Virgin's argument must thus be dismissed [97] .

1.2. Consequences of bmi's market exit – reallocation of slots at Heathrow

136. Pursuant to Article 8 (2) and 10 (2) of Council Regulation (EEC) No 95/93 of 18 January 1993 on common rules for the allocation of slots at Community airports [98] (hereafter: "the EU Slot Regulation"), a carrier holding a slot series in a given scheduling season is entitled to retain the same series in the next equivalent scheduling season if it can demonstrate to the slot coordinator that the series of slots has been operated for at least 80% of the time during the scheduling period for which it has been allocated for the operation of scheduled and programmed non-scheduled air services. This is referred to as the "use-it-or-lose-it" rule.

137. In case of bmi's exit from the market, its slots would then be made available to other carriers, either through sales (in the case of slots held at Heathrow) during or shortly before the insolvency proceedings [99] , or through fall back to the slot pools and subsequent reallocation by the relevant slot coordinators, with possible exceptions for two specific categories of slots at Heathrow. The first category concerns certain slots which are currently leased out by bmi to third parties for a period extending beyond the winter 2011-2012 IATA season and which account for around 9% of bmi's current slot portfolio [100] . Should bmi become insolvent, subject to possible specific clauses in the lease contracts, many of these slots (none of which are leased out to IAG) are likely to become permanently held by their lessees [101] . The second category concerns slots which, pursuant to an arrangement entered into by IAG and Lufthansa alongside the Transaction, have been transferred by bmi to Lufthansa, which currently makes them available to bmi, and will be transferred to IAG after and if the Transaction closes in exchange for a GBP 60 million interim funding provided by IAG. However, should bmi become insolvent, these slots (hereafter: "the security slots"), which account for around […]% of bmi's current slot portfolio at Heathrow, would be immediately transferred to IAG [102] .

138. In the absence of additional cash injection by Lufthansa, likely to trigger bmi's exit from all routes in a short timeframe, considering Airport Coordination Limited [103] (here after: "ACL")'s strict approach to the "use-it-or-use-it" rule [104] and consequently, the relatively short timespan before slots would be withdrawn in application of this rule, part – and probably most of - bmi's slots at Heathrow for the ongoing season (with the exception of the security slots and slots leased out to third parties) would end up in the slot pool. Indeed, bmi's liquidator / administrator would likely face difficulties to sell all or most of bmi's slots before these slots fall back to the pool in application of the "use-it-or-lose-it" rule. [105] As regards slots for the following season, bmi (or its liquidator) may have more time to sell them. However, for the reasons set out below, IAG would be unlikely to be the only acquirer of these slots, for the reasons explained below.

139. As regards Heathrow, the market investigation unambiguously confirmed that this airport is heavily congested, which means that available slots are insufficient to satisfy airlines' demand. In that context, in case of bmi's exit from the market, all the slots currently held by bmi would be very likely to be taken up, be it through sale (probably to a marginal extent), re-allocation via the pool, transfer to IAG in the case of the security slots, or permanent transfer in the case of slots leased out to third parties. Moreover, a significant proportion of bmi's slots at Heathrow would be likely to end up with other carriers than IAG [106] , unlike in the post-Transaction scenario where IAG would indirectly take control of all these slots, with the exception of slots leased out to third parties for so long as the lease agreement applies.

140. Several respondents to the market investigation indicated that if absent the Transaction bmi were to exit the market in the short term, they would consider entering some of the routes out of Heathrow exited by bmi. UK domestic and European short-haul routes were specifically mentioned. The fact that a relatively large portfolio of slots at Heathrow would be made available either through sale / lease or, probably to a far larger extent, through reallocation via the pool (in total, around 5% of all slots) would significantly facilitate the implementation of such entry plans.

141. Should bmi be able to sell / lease out slots, some of these slots may be acquired by IAG but there is no reason to believe that it would be the case for all or even a significant part of them. Indeed, according to data provided by IAG, a number of airlines other than IAG acquired slots at the Heathrow and Gatwick airports through purchases or leases between the summer 2008 and winter 2011 IATA seasons, including companies of the Lufthansa group, Delta, Aegean Airlines, United Continental Holding, Flybe, and Aer Lingus [107] . This indicates that IAG is not the only airline ready to pay for the acquisition of scare slots at the most congested London airport. This was confirmed by ACL which mentioned as potential buyers not only IAG but also Virgin, and US and Gulf carriers [108] .

142. It cannot be excluded that absent the Transaction, other carriers than IAG would try to purchase slots from bmi either before or during insolvency proceedings, in order to enter domestic or European short-haul routes. ACL indicated in this respect that should bmi exit from the market and sell part of its slots, it would expect such slots to be allocated to a mixture of long-haul and short-haul (including domestic) routes. It also pointed out that bmi's portfolio includes a proportion of slot pairs that would not be suitable to operate long-haul flights [109] . These elements tend to indicate that at least part of bmi's slots would be used on short-haul routes (including domestic routes) such as those on which bmi currently operates, and not necessarily by IAG.

143. As regards the slots that would fall back to the pool, pursuant to Article 10 (6) of the EU Slot Regulation, 50 % of the slots included in the pool are destined to incumbents and 50% to airlines which qualify as "new entrants" under the above-mentioned Regulation. In practice, numerous airlines would qualify as potential new entrants at London Heathrow. [110]

144. Slots that fall back to the pool would be allocated free of charge. According to ACL, the allocation criteria are in essence the following, both for the part of the pool reserved for new entrants and for the other part: in the first instance, according to the EU Slot Regulation, ACL would have to give priority to scheduled services. Then ACL would give priority to the applicants that are holding slots only in the winter or summer season and intend to offer year-round services. Finally ACL would consider a range of criteria such as: (i) priority to applicants that are already operating weekly frequencies (e.g. 3 operations per week) and want to offer daily services, (ii) the level of competition [111] on the routes for which the slots are requested [112] , (iii) the situation at the airport terminals, the runway limits and the stand limits, as it would be important that the timing requested matches the availability of space and facilities.

145. As regards the criterion related to the level of competition on routes for which slots are requested, ACL did not provide much detail about how it would apply concretely. Nevertheless, IAG specified that if absent the Transaction bmi were to become insolvent and a carrier were to ask for slots from the pool to operate on a route exited by bmi, the reduction in competition and consumers' choice due to bmi's exit from the route in question would be taken into consideration in the allocation of the slots [113] . Furthermore, in order to assess the competitive situation on a route, ACL would primarily consider airport pairs rather than city pairs. ACL specified in this respect that even the qualification of a carrier as a new entrant on a given intra Union route pursuant to Article 2 (b) of the EU Slot Regulation would not depend on whether services are offered on the same city pair but from different airports [114] .

146. These elements indicate that should bmi exit all markets, carriers other than IAG requesting slots from the pool for routes from Heathrow where IAG would enjoy a strong competitive position following bmi's exit would likely be granted a relatively high degree of priority. This would be likely the case in particular for the routes from Heathrow to Aberdeen, Edinburgh, Nice, and Basel, where IAG would enjoy a monopoly position following bmi's exit, but also routes from Heathrow to Moscow, Cairo and Riyadh, where IAG would hold a high market share. Similarly, carriers requesting slots for routes where IAG does not operate but where bmi currently enjoys a strong position would also be likely to be granted a high degree of priority.

147. If all or part of bmi's slots were to fall back to the pool, providing an accurate estimate of the share of the pool that IAG would obtain appears complex. As a very rough estimate ACL expects British Airways to obtain approximately 40 % of the slots' share destined to incumbents [115] , i.e. around 20% of the slots returned to the slot pool [116] .

148. Therefore, one difference between the counterfactual and the post-Transaction situations relates to the distribution of slots at Heathrow. In absence of the Transaction, the likelihood that other carriers than IAG may acquire part of bmi's substantial slot portfolio at Heathrow and enter routes where IAG would be in a monopoly or dominant position becasuse bmi's exit, or routes where supply would be significantly reduced following bmi's exit, would be higher than in the post-Transaction situation, where the entirety of bmi's slot portfolio would be controlled by IAG. Indeed, post-Transaction, due to the heavy congestion prevailing at Heathrow, entry opportunities would remain strongly limited by the scarcity of slots whereas in absence of the Transaction, entry barriers would be lowered by the reallocation of most of bmi's substantial portfolio between various carriers, through reallocation via the pool, slot sales (probably more marginally), an,d permanent transfer to lessees (in the case of slots leased out to third parties).

149. Other airports from which bmi currently operate in competition with IAG are much less congested than Heathrow. Therefore, the detrimental impact of the Transaction on slot availability for IAG's competitors, assessed by comparison to the counterfactual, is of much more limited importance for these other airports than for Heathrow, which is also bmi's main base.

150. The fact that slots can be – and are actually – traded at Heathrow does not affect the magnitude of the effects of the Transaction concerning the availability of slots at Heathrow as assessed by comparison to the counterfactual. Asked whether they could obtain necessary slots at Heathrow through purchases or leases in order to launch hypothetical new services, a majority of respondents to the market investigation that took a clear position on this question replied that they could not or that it would be either difficult or dependent on the requested timing [117] . Moreover, assuming that enough slots would be available on the secondary or lease market to satisfy all requests, the price itself may constitute a barrier under normal conditions [118] . A respondent to the market investigation noted in this respect that "slots at a commercially viable price are not available from the pool or in the market."

151. Moreover, according to data provided by IAG [119] , the number of daily slot pairs traded on average at Heathrow in each IATA season since 2009 has always been lower than 14, which represents around one quarter of bmi's slot portfolio only. In addition, bmi itself, unlike IAG, has been a significant seller and lessor of slots since 2009. For example, it sold 6 of the 14 daily slot pairs sold or leased out on average in the winter 2011 season. These elements suggest that the volume of slots available through sales or leases post-Transaction is likely to be significantly lower than bmi's overall portfolio of slots (the security slots being excluded), which would be reallocated to other airlines in the counterfactual.

152. Furthermore, several respondents to the market investigation stated that if absent the Transaction bmi were to exit the market in the short term, they would consider entering some of the routes exited by bmi. UK domestic and European short-haul routes were specifically mentioned. According to two respondents, a precise list of routes cannot however be defined. One of them underlined that that any decision would be predicated by its interpretation of actual and anticipated market conditions at the time. However, according to another respondent, "an exit of any competitor from the market presents opportunity for entry, as long as the charges at the airport are of an acceptable level." [120] The recent conduct of IAG itself illustrates that the exit of a carrier from a route, including a UK domestic route, creates incentives for other carriers to either enter or expand on this route. Indeed, following bmi's exit from the Heathrow-Glasgow route in March 2011, IAG significantly increased capacity on this route where it was already present [121] . Moreover, the exit of a carrier from a route does not necessarily mean that there was room only for the other carriers operating on the route when such exit is triggered by insolvency instead of a route-specific exit decision.

153. The Transaction is not expected to have a similar effect on potential new entrant's incentives to enter/expand on routes as bmi's market exit because the Transaction would not translate into a clear and immediate reduction in capacity on the routes where bmi currently operates. Indeed, other carriers' incentives to enter on relevant routes would appear to be more limited than in the counterfactual.

154. It thus appears that in the counterfactual, bmi's exit would have heightened other carrier's incentives to enter the exited routes, at least to some extent. Besides, as explained above, the ability of these carriers to enter would have been heightened by the reallocation/sale of bmi's slots at Heathrow.

155. In conclusion, it appears that, post-Transaction, IAG would be likely to be less threatened by new entries on the routes where bmi currently operates than in the counterfactual. This is due to lower incentives and higher barriers to entry in the post-Transaction scenario than in the counterfactual.

156. It is against this counterfactual that the Commission assessed the effects of the Transaction on the relevant markets.

157. Another consequence of the counterfactual identified by the Commission is that issues relating to potential competition within the meaning of the Horizontal Merger Guidelines, would not raise serious doubts as to the compatibility of the present Transaction with the internal market. Indeed, even if pre-Transaction, bmi would have been a potential entrant on routes operated by IAG, possibly acting as a kind of maverick constraining IAG, the counterfactual (i.e. bmi's market exit) would make such theory of harm irrelevant.

2. Treatment of alliance and code-share partners

158. Another issue regarding the conceptual framework for assessing the competitive impact of the Transaction relates to the treatment of airline alliances and codeshare partnerships.

2.1. Treatment of alliance partners

159. British Airways and Iberia are members of the oneworld alliance whereas bmi is a member of the Star alliance. Post-Transaction, the merged entity would be a member of the oneworld alliance.

160. In line with the Commission's earlier decisions [122] , IAG's alliance partners are not considered for the determination of affected markets except concerning routes and carriers concerned by the Transatlantic Joint Business. Pursuant to the Transatlantic Joint Business agreement, IAG and American Airlines have put in place extensive cooperation on their routes between Europe and North America, including revenue-sharing.

2.2. Treatment of codeshare partners

161. The Parties have currently no codeshare agreements between themselves.

162. British Airways and Iberia have codeshare relationships with a number of other carriers, notably members of the oneworld alliance.

163. bmi has codeshare agreements typically (but not only) with Lufthansa Group and Star alliance carriers, most of which are expected to terminate as a result of the Transaction.

164. According to IAG, the existence of a bmi codeshare relationship on a given city-pair should have no material impact on the competitive conditions existing on that city-pair, as it is unlikely to have any appreciable effect on the operating carrier’s strategy to continue flying on the city-pair in competition with IAG.

165. In some cases, bmi operates direct services on city-pairs on which IAG currently only codeshares on a third party carrier’s services. This is the case in particular for the Heathrow-Amman route. In circumstances where IAG proposes to continue bmi flying on such a city-pair, continuation of the codeshare post-Transaction would result in a "parallel codeshare" (i.e. IAG both operating direct service and codesharing on a third party carrier’s direct service). IAG indicated that in such cases, it was likely to discontinue the current codeshare relationship.

166. Existing codeshare relationships between either Party and third parties have been taken into account as appropriate and relevant in the competitive assessment.

VI. Competitive assessment

1. Air transport of passengers

1.1. Closeness of competition

167. Both IAG and bmi offer similar products to their passengers, including different travel classes, loyalty programmes and support for connecting passengers. They have a similar business model as traditional network carriers with a wide range of interline agreements with other carriers. The Commission's market investigation has also shown that IAG and bmi are perceived as having strong brands in particular on the UK domestic routes.

168. In addition to the general considerations below, the specific results of the market investigation as regards closeness of competition for each individual O&D route will be summarised in the relevant competition assessment sections of the route by route analysis, where relevant.

1.1.1. TS passengers

169. IAG submitted a "Customer Insight Survey" conducted by BA, […] [123] [124] . [Redacted – Analysis of confidential information stemming from the survey]

170. Despite the results of this survey, the Commission points out that easyjet generally operates from Gatwick, Luton and Stansted whereas IAG and bmi generally operate from Heathrow. It is therefore likely that easyjet may generally represent a weaker substitute to IAG's flights from Heathrow for those routes on which bmi has operations from Heathrow. This seems particularly relevant for TS passengers and for transfer passengers. In addition, the market investigation confirmed that TS passengers would consider flying with low cost carriers only if these would provide sufficient daily frequencies and if their schedule would be optimised for the needs of TS passengers. Furthermore, operating to a primary airport was identified during the market investigation as an important condition for choosing a low cost carrier on a certain route.

1.1.2. NTS passengers

171. According to the above-mentioned survey, [125] the Parties argue that easyJet is a particularly close competitor. [Redacted – Analysis of confidential information stemming from the survey]

172. The market investigation in this case also indicated that price is an important driver for NTS passengers, which would indicate that NTS passengers would be more likely to use low cost carriers than TS passengers.

1.2. Airport congestion in London

173. This Transaction has an impact on flights to and from the five London airports: Heathrow, Gatwick, City, Luton and Stansted. [126] This section will describe the airport congestion issue at these London airports while constraints at the other end of the route will be assessed where and if relevant in the respective route by route analysis (see below Section 1.4).

1.2.1. LONDON HEATHROW

174. Heathrow is a fully coordinated airport under the EU Slot Regulation (Level 3) [127] , meaning that each business and general aviation movement requires the prior allocation of a slot. At Heathrow there are constraints on airline access to slots across the whole operating day. It is therefore not currently possible for an airline to rely on the slot pool at Heathrow to launch or extend services and each season there is either very limited availability or no availability at all. ACL, the slot coordinator at this airport was unable to accommodate 38 daily slot pairs in Winter 2011 and in Summer 2012 they were unable to accommodate 41 daily slot pairs.

175. Currently, IAG, bmi and Virgin have bases at Heathrow [128] and they all currently hold slots at Heathrow. IAG with their 301 daily slot pairs (45% share of all slots) have the biggest portfolio of slots at this airport. bmi, in turn, has 56 daily slot pairs (8% of all slots), whereas Virgin has 20 slot pairs (3% of all slots).

1.2.2. LONDON GATWICK

176. Like Heathrow, Gatwick is designated as a fully coordinated airport under the EU Slot Regulation (Level 3). Demand currently exceeds capacity throughout most or all of the day at Gatwick. [129] ACL, the slot coordinator at Gatwick confirmed that at this airport, in the Summer 2012 season, some of the early morning and late evening hours are fully allocated to their capacity (both for arrival and departure) on all days of the week except for maybe Saturday and Sunday. ACL was therefore unable to accommodate requests for 20 daily slot pairs at Gatwick in Summer 2012. In the Winter 2011 season, ACL was not able to accommodate 9 daily slot pairs at Gatwick even though slots were generally available with the exception of some few hours on some days.

177. easyJet has a base at Gatwick and they are the first holder of slots at Gatwick with 36% of all slots at this airport. [130] As easyJet currently holds slots at Gatwick, the Parties argue that easyJet could reallocate slots within their own portfolio to increase frequencies on various routes. However, easyJet explained in their reply to the market investigation, that, as Gatwick is slot constrained at the beginning and end of the day, new services at these times would need to be operated at the expense of existing services. Furthermore, easyJet explained that it would also be difficult to obtain departure slots in the peak morning hours and therefore it would be difficult to operate a viable schedule on most of the relevant routes without replacing other flying. [131]

178. FlyBe also has a base at Gatwick, where they hold 8% of the slots. Other relevant airlines which have bases at Gatwick are Virgin and Ryanair.

1.2.3. LONDON CITY

179. Like Heathrow and Gatwick, City is designated as a fully coordinated airport under the EU Slot Regulation (Level 3). The Parties believe that City is partly slot constrained, i.e. that the availability of slots is only limited at certain times of the day. ACL, the slot coordinator at this airport explained that an airline can rely on the pool to launch or extend services at City in both the Summer and Winter seasons. For example in Summer 2012 ACL allocated an additional 2 daily services to new entrants. In addition there are still remaining 146 daily slot pairs available which have not been used by the airlines. In Winter 2011 ACL were able to accommodate all slot requests and in Summer 2012 as well with the exception of 0.5 daily slot pairs. There are however, besides the availability of slots, some other limitations at City. Due to steep approach conditions, only short haul aircrafts certified to operate at City are admitted so not all airlines will be able to operate into City as they may not have the appropriate aircraft. The airport also operates a curfew period between midday on Saturday through to midday on Sunday when no aircrafts are allowed to operate due to local noise restrictions.

180. Air France has a base at City and is the first holder of slots at that airport, with a portfolio totalling 40% of all slots. IAG also has a share of 33% of all slots at City and also has a base there.

1.2.4. LONDON LUTON

181. Luton is designated as a schedules facilitated (Level 2) airport in accordance with the IATA Worldwide Scheduling Guidelines, meaning there is potential for congestion during some periods of the day or week. However, there are no legally binding limitations or constraints on airlines access to the airport. . Indeed, ACL were able to accommodate all requests to operate services at Luton. In Summer 2012 ACL allocated an additional 5 daily services to new entrants and 9 daily services to incumbents and there are still remaining 131 daily timings available which have not been used by the airlines.

182. easyjet has a base in Luton and is the first holder of slots, with 46% of all slots. Ryanair and Wizzair also have a base at Luton and their share of slots at this airport is 12% and 23% respectively.

1.2.5. LONDON STANSTED

183. Stansted is designated as a fully coordinated airport under the EU Slot Regulation (Level 3). However, ACL, the slot coordinator at this airport, explained that an airline can rely on the pool to launch or extend services at Stansted in both the Summer and Winter seasons. For example in Summer 2012 ACL allocated an additional 19 daily services to incumbents. In addition there are still remaining 163 daily slot pairs available which have not been used by the airlines. As there are currently no limitations for airlines to get access to slots at this airport, ACL was able to accommodate all slot requests in Winter 2011 and in Summer 2012.

184. Ryanair, which operates a base at Stansted, is the biggest holder of slots at this airport with a share of 57%. easyJet is the second biggest holder of slots with a share of 22% of the slots available at this airport.

1.3. Routes exited by bmi pre-Transaction (not merger specific)

185. bmi decided to stop services on the routes London-Amsterdam [132] , London-Glasgow [133] , London-Palma de Mallorca [134] and London-Venice [135] before the negotiations with IAG started. bmi's exit from these routes is not Transaction specific. bmi (and IAG) also used to codeshare on Spanair's direct flight on Edinburgh-Barcelona, however Spanair has stopped operating on this route. [136] As such, for the purpose of this decision, there is no overlap between IAG and bmi on the routes London-Amsterdam, London-Glasgow, London-Palma de Mallorca, London-Venice and Edinburgh-Barcelona.

1.4. Direct / direct overlap routes by virtue of the Parties' operations [137]

1.4.1. London-Aberdeen

1.4.1. (1) Description of the route

186. In the Winter 2010 and Summer 2011 IATA seasons, a total of [600,000 – 650,000] O&D passengers travelled by air between London(five) and Aberdeen. Among them, [450,000 – 500,000] passengers travelled between London(three) [138] and Aberdeen. Among these, [350,000 – 400,000] travelled between Heathrow and Aberdeen. Over the same period, transfer passengers account