Commission Decision

of 3 July 2001

declaring a concentration to be incompatible with the common market and the EEA Agreement

Case COMP/M.2220 - General Electric/Honeywell

(notified under document number C(2001) 1746)

(Only the English text is authentic)

(Text with EEA relevance)

(2004/134/EC)

CONTENTS

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THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to the Agreement on the European Economic Area, and in particular Article 57 thereof,

Having regard to Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings(1), as last amended by Regulation (EC) No 1310/97(2), and in particular Article 8(3) thereof,

Having regard to the Commission's decision of 1 March 2001 to initiate proceedings in this case,

Having given the undertakings concerned the opportunity to make known their views on the objections raised by the Commission,

Having regard to the opinion of the Advisory Committee on Concentrations(3),

whereas:

(1) On 5 February 2001, the Commission received the notification of a proposed concentration pursuant to Article 4 of Regulation (EEC) No 4064/89 (hereinafter referred to as "the Merger Regulation") by which the General Electric Company (GE) of the United States of America has agreed to acquire the entire share capital of Honeywell International Inc. (Honeywell) of the United States of America.

(2) On 1 March 2001, the Commission decided in accordance with Article 6(1)(c) of the Merger Regulation and Article 47 of the EEA Agreement to initiate proceedings in this case.

I. THE PARTIES

(3) GE is a diversified industrial corporation active in fields including aircraft engines, appliances, information services, power systems, lighting, industrial systems, medical systems, plastics, broadcasting (through the NBC media channel), financial services and transportation systems.

(4) Honeywell is an advanced technology and manufacturing company serving customers worldwide with aerospace products and services, automotive products, electronic materials, speciality chemicals, performance polymers, transportation and power systems as well as home, building and industrial controls.

II. THE OPERATION

(5) On 22 October 2000, GE and Honeywell entered into an agreement under which "General Electric 2000 Merger Sub, Inc.", a wholly owned subsidiary of GE, will be merged with Honeywell. As a result, Honeywell will become a wholly owned subsidiary of GE.

III. CONCENTRATION

(6) Pursuant to the Agreement between GE and Honeywell, GE will exchange shares of GE stock for each outstanding share of Honeywell stock. All shares of Honeywell common stock will be cancelled, retired and cease to exist. As a result of this acquisition, GE will acquire sole control of Honeywell, giving rise to a concentration within the meaning of Article 3(1)(b) of the Merger Regulation.

IV. COMMUNITY DIMENSION

(7) The undertakings concerned have a combined aggregate worldwide turnover of more than EUR 5000 million(4) (for the full year 1999, EUR [...]*(5) for GE and [...]* for Honeywell). Both GE and Honeywell have a Communitywide turnover in excess of EUR 250 million (for the full year 1999, [...]* for GE and [...]* for Honeywell), but they do not achieve more than two-thirds of their aggregate Communitywide turnover within one and the same Member State. The notified operation therefore has a Community dimension.

V. COMPATIBILITY WITH THE COMMON MARKET

A. INTRODUCTION

(8) The product markets that are affected by the combination of the GE and Honeywell businesses are part of the aerospace and power systems industries. In these sectors, the transaction brings about significant horizontal, vertical and conglomerate effects.

B. AEROSPACE MARKETS

1. AIRCRAFT ENGINES AND RELATED MARKETS

1.A. Relevant markets

1.A.1. Product markets

1) Structure of the markets

(9) Jet engines are the propulsion system of jet aircraft. Competition in the jet engines markets takes place at two different levels. First, engines compete in order to be certified in a given airframe platform under development and second when airlines buying the aircraft platform select one of the available certified engines or when airlines decide on the acquisition of aircraft with different engines (whether or not the aircraft offers an engine choice). In the first case, engines compete in technical and commercial terms to power the specific platform; in the second, they compete also on technical and commercial grounds to be selected by the airline. Indeed, the demand for engines derives from the demand for jet aircraft. In this sense, an engine is a complementary product to the aircraft, the sale of the one being of no value without the sale of the other. As a consequence, in defining the relevant jet engines product markets one needs to take into account also competition between the end-use applications, that is, between the types of aircraft that final buyers consider suitable.

(10) In previous cases(6), the Commission has defined three distinct markets for jet aircraft on the basis of the aircraft mission profile, that is, the purpose for which the aircraft is purchased, which is in turn determined by its seating capacity, its flying range and its economics (i.e. price and operational cost). These are the markets for large commercial aircraft (i.e. aircraft with more than 100 seats, a range of greater than 2000 nautical miles and a cost in excess of USD 35 million), regional jet aircraft (i.e. aircraft with around 30 to 90+ seats, a range of less than 2000 nautical miles and a cost of up to USD 30 million) and corporate jet aircraft (i.e. aircraft designed for corporate activities and with a cost generally in the region of USD 3 million to USD 35 million).

(11) The demand of jet engines stems from two categories of buyers, namely airframe manufacturers, on the one hand and end-users, on the other hand. Airframe manufacturers are not the same across the distinct aircraft markets. For instance, Airbus Industrie (Airbus) and The Boeing Company (Boeing) only manufacture large commercial aircraft. Embraer, Bombardier, Fairchild Dornier and British Aerospace manufacture regional jet aircraft. Finally, several others, such as Cessna, Gulfstream, Raytheon, Bombardier and Dassault, manufacture corporate jets. Similarly, end-users of aircraft also differ from one aircraft market to another. For instance, large commercial aircraft and regional jets are purchased by airlines and leasing companies, whereas corporate jets are purchased by individuals or corporations and increasingly by airlines.

(12) When they develop a new aircraft platform, airframe manufacturers select the engines that will power the aircraft. For this selection, they usually take into account, inter alia the technical capability of the engine and the prospective demand of the final customers. In particular, airline companies may have preferences for specific makes of engines that can maximise their fleet and engine commonality benefits. Airframe manufacturers of large commercial aircraft often select more than one make of engine per platform. In doing so, they offer the purchaser of the aircraft the opportunity to choose among more than one makes of engines when it places the aircraft order. In some other cases, airframe manufacturers select only one make of engine (referred to hereafter as engine exclusivity or sole-source engine) and end-users have no choice but to purchase the aircraft/engine couple. In addition to several large commercial aircraft platforms, engine exclusivity is the norm in regional and corporate jet aircraft.

(13) In light of the above and for the purposes of the assessment of the notified concentration, there exist three broad categories of jet engines i.e. jet engines for large commercial aircraft, jet engines for regional aircraft and jet engines for corporate aircraft.

2) Jet engines for large commercial aircraft

(14) Large commercial aircraft can carry generally more than 100 passengers across long distances ranging from 2000 to 8000 nautical miles. This type of aircraft forms the largest part of commercial airlines' fleets and is generally divided between narrow-body and wide-body aircraft(7). Narrow-body or single-aisle aircraft have around 100 to 200 seats and are generally used to move passengers across medium distances (2000 to 4000 nautical miles) as well as to move passengers from "spokes" or "feeder" airports to larger airports (hubs) in the case of flight connections. Narrow bodies are currently manufactured by either Airbus (A318 and the A320 family) or Boeing (B717, B737 and B757). Most of the flights within the Community are made with narrow-body aircraft. Wide bodies or double-aisle aircraft are larger and can fly longer routes. They typically carry 200 to 400+ passengers and may fly distances ranging from 4000 to 8000 nautical miles. In the case of flight connections, hub airports use this type of aircraft to move passengers who have flown in from spokes to more remote, usually transcontinental, destinations. Airbus and Boeing are also the only producers of wide-body aircraft (for Airbus, the A300, A310, A330, A340 and A380 and their respective derivatives; for Boeing, the B767, B777 and B747 and their respective derivatives).

(15) There are currently three independent suppliers of engines for large commercial aircraft: GE, Rolls-Royce (RR) and Pratt & Whitney (P& W). These engine manufacturers have established joint ventures either among themselves or with other aerospace companies to manufacture and market engines for generic or specific applications. The most notable joint ventures are CFMI (a 50/50 joint venture between GE and SNECMA of France) and International Aero Engines (IAE)(8). The three independent engine manufacturers and suppliers are present, although at differing degrees of penetration, across the whole of the large commercial aircraft range.

(16) Table 1 shows the types of large commercial aircraft still in production or under development, as well as their certified engines.

Table 1

Large Commercial Aircraft and Engines

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(17) Airlines usually have mixed fleets composed of both narrow- and wide-body aircraft, although in varying proportions depending on both their size and the routes they serve(9). Whether or not there exist separate product markets for jet engines for narrow- or wide-body aircraft would not materially change the competitive assessment of the notified operation.

(18) Of the Parties to the concentration, only GE is a manufacturer of jet engines for large commercial engines. The notified operation does not create any horizontal overlap in this market.

3) Jet engines for regional aircraft

(19) The development of regional jets came as a response to the evolving conditions of air transport over the last 10 to 15 years. The growing demand for air travel and the increase in the number of smaller, regional airports created the need for a type of aircraft that could, in a more economic way than is possible with narrow-body aircraft, transport lower numbers of passengers (generally under 100) over relatively short distances (up to 1500 to 2000 nautical miles). Regional jets grew in number and importance in response to the fact that the majority of air traffic would consist of more frequent flights over shorter distances. As opposed to narrow-bodies, which have a longer flight range, a bigger seating capacity, higher landing fees and a lower turnaround rate(10), regional jets were conceived to carry fewer passengers, on a more frequent basis over short distances.

(20) Two distinct classes of regional jets can be distinguished, namely small regional jets (30 to 50 passengers) and large regional jets (70 to 90+ passengers). Owing to their different seating capacity, size, flying range and the resulting operating cost (i.e. seat-mile cost) these two types of regional jets serve distinct mission profiles and are not substitutable with one another. For an airline to fly 80 passengers from point A to point B there is no economically meaningful alternative between the use of two small or one large regional jet. Equally, to fly 45 passengers the use of a large regional jet is an uneconomical option. From a historical point of view, the first regional jets developed and put in the market were small regional aircraft, generally with less than 50 seats. However, the prospect of growing regional traffic coupled with technological advances enabled airframe and engine manufacturers to build longer airframes and more powerful engines, thereby responding to the current demand of airlines for larger rather than for small regional jets. In fact, large regional jets constituted 14 % of the overall European fleet in 1992 and 33 % in 1998.

(21) Embraer, Fairchild Dornier, Bombardier and BAe Systems are the manufacturers of large regional jets, and GE, Honeywell, RR and P& W are the manufacturers of engines that can power regional jets. GE, RR, P& W, but not Honeywell, are active on the market for small regional jet engines, whereas GE and Honeywell are the only engine manufacturers for large regional jets. The proposed concentration creates a horizontal overlap only in relation to large regional jet aircraft. Honeywell is the engine supplier to the first large regional jet put on the market, namely BAe Systems' Avro and BAe 146 jet. GE is the engine supplier to the three most recent and only available alternative large regional jets that Embraer, Fairchild Dornier, and Bombardier have recently developed. Table 2 indicates these types of aircraft and their corresponding engines.

Table 2

Large Regional Jet Aircraft and Engines

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(22) As Table 2 indicates, the merged entity will be the only available engine supplier to the large regional jet market. Until a new large regional jet platform is launched, competing engine manufacturers will not have the possibility to compete in this market.

(23) The Parties have raised two objections to the above considerations. Firstly, they contested the existence of a horizontal overlap in large regional jets, arguing that the BAe System type of aircraft is not a full-fledged competitor in this market. Secondly, they argued that such a market should also include the small Airbus and Boeing narrow-bodies, namely the A318, the B717.

(24) As far as the first objection is concerned, the Parties claimed that the Avro has special niche characteristics that make it unlikely to compete fully with the remaining three, GE-powered, regional jets and that, given the low number of orders placed for the Avro, the transaction could not materially and adversely affect post-merger competition. The Parties based their argument on the fact that the Avro has an exceptional short take-off and landing (STOL) airfield performance, which makes it particularly useful in airports at high altitude or with very steep approach or climb-out profiles, or combinations of both (such as London City Airport, Lugano and Stockholm Bromma).

(25) The market investigation did not support these views. Despite its special STOL capabilities, airlines do not necessarily limit the Avro to any particular niche use but operate it as a mainstream large regional jet. For instance, Belgium's Sabena, which has the largest fleet of Avros in the Community, flies this type of aircraft to destinations that do not display any niche characteristics, such as Frankfurt, Toulouse, Edinburgh, Hamburg and so forth, whilst flying turboprops to London City airport. The same applies to German airlines, which are also among the largest operators of Avros, which operate this type of aircraft in environments that do not correspond to the niche characteristics which the Parties have described. The market investigation has suggested that, although airlines may appreciate the special capabilities of the Avro, they in fact operate the Avro in the same manner as any other large regional aircraft and do not limit its flight operability to niche environments alone. In this sense, the Honeywell-powered Avro is an existing competing alternative to the other GE-powered large regional jets. Furthermore, although the low order backlog of the Avro may be an indication of the relative marketing performance of the various sellers(11), it cannot constitute a criterion for the purposes of product market definition. Although the sales forecasts are not optimistic, this disparity in the order backlog is to a large degree due to the recent substantial orders that GE Capital Aviation Services (GECAS, the aircraft leasing arm of GE) has placed for the Embraer, Fairchild Dornier, Bombardier large regional jets after GE secured the engine exclusivity on these platforms and, as such, does not necessarily reflect any typical demand pattern of airlines for large regional aircraft.

(26) As far as the second objection is concerned, the Parties argued that the small narrow-bodies of Boeing and Airbus should also be included in the market for large regional jets. These are the B717 (a 106 to 115-seat aircraft) powered by the BR715 engine(12) and the A318 (a 107 to 117-seat aircraft) powered by the PW6000 or the CFM56 engines.

(27) The market investigation did not confirm this view. Even if it is true that the seating capacity of those two narrow-bodies is close to that of a large regional jet, there are several reasons why airlines do not consider them as alternative choices for the mission profiles of large regional jets. Both the A318 and B717 are more costly than other large regional jets, both in terms of acquisition price and operating costs. The average acquisition price for the B717 and A318 is around USD 35 million, whereas the equivalent for large regional jets is USD 28 million. In addition, the operating costs of the two types of aircraft differ considerably. Their heavier airframe and the resulting higher fuel burn per seat make the two narrow-bodies more expensive to operate on a regional mission profile. Indeed, greater weight results in disproportionately higher landing fees when an aircraft is used on a frequent flight schedule which is typical of the regional jet aircraft market. It is quite characteristic that one of the parties' strategic analyses of the regional aircraft jet market states that "regional jets (are) distinguished by lower weights relative to narrow body jets" and that "regional jets offer much lower trip fuel burn and competitive per seat fuel burn relative to narrow body jets".

(28) The purchase behaviour of airlines confirms that the B717 and A318 correspond better to the profile of narrow bodies than to that of large regional jets. The first launch customer of the B717, the Scandinavian airline SAS, cancelled its initial B717 orders and placed orders for B737 aircraft instead, i.e. the most typical narrow-body large commercial aircraft. Other airlines' commercial choices indicate that the B717 and the A318 are regarded as interchangeable with mainstream narrow-bodies, such as the B737. Frontier Airlines, for instance, purchased a small fleet of B717s and A318s to replace its B737s. Such behaviour by customers shows that the B717 and A318 are operated by airlines as narrow bodies rather than as large regional feeder jets.

(29) On the basis of the above, it can be concluded that there exists a separate demand for large regional jet aircraft which is distinct from that for small regional jet aircraft and for small narrow bodies, such as the A318 and B717.

4) Jet engines for corporate aircraft

(30) Corporate jets are considerably smaller than regional jets, serve different mission profiles and have different engine needs. Such aircraft are purchased by corporations or individuals and increasingly by airlines, fly less frequently, carry fewer passengers and are not dedicated to specific routes, as are commercial passenger aircraft. There are fewer of these corporate aircraft in operation than there are commercial passenger aircraft.

(31) There are several manufacturers of corporate jets such as Bombardier (Learjet, Challenger), Cessna (Excel, Sovereign), Dassault (Falcon), and Raytheon (Hawker, Horizon). The manufacturers of engines for corporate jets comprise GE, Honeywell, RR/Allison and P& W Canada.

(32) Depending on their size and range, jets fall into three classes: heavy, medium and light corporate jets. These three classes appear to constitute distinct markets owing to their limited supply and demand-side substitutability. Indeed, not all the manufacturers are active in all categories (Falcon is a medium corporate jet manufacturer, not active in the light or heavy classes; Gulfstream manufactures only heavy corporate jets, and so forth). Moreover, from the demand-side, the three classes of aircraft cannot be substituted for one another. This is due to the difference in price and operating cost as well as to the different mission profiles that each class may serve. For instance, heavy corporate jets are more expensive, can carry more passengers and have transcontinental capability (that is, they have airworthiness certification to cross the ocean), which is not the case for medium and light jets. Conversely, light jets are smaller, can carry fewer passengers and have a more restricted flying range. However, for the purposes of this Decision, there is no need to take a final position on this issue since the competitive assessment of the proposed transaction will not be materially affected.

(33) Table 3 indicates the models of the three classes of corporate jets that are still in production, as well as their respective engine supplier.

Table 3

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(34) A distinct market for jet engines for corporate aircraft is defined for the purposes of the assessment of the notified concentration that results in a horizontal overlap (in particular in the medium segment).

5) Maintenance, repair and overhaul

(35) Jet engines are subject to intense wear-off and need to be serviced and reviewed according to specific maintenance and repair procedures. Adjacent to the market for jet engines there exists an aftermarket for the maintenance, repair and overhaul services (MRO) and the supply of spare parts for jet engines. Airlines and owners of corporate jets may have recourse to the MRO services of either the original engine manufacturers, the various airlines' maintenance departments or the independent service shops. These three categories of MRO suppliers are to a large extent substitutable both from the demand and the supply point of view. There is, therefore, a market for the provision of MRO services to airlines and other aircraft buyers.

1.A.2. Geographic Market

(36) As already stated in previous Commission decisions(13), all aircraft engine manufacturers market, sell and support their engines on a worldwide basis under similar conditions of competition. The transportation costs of delivery are negligible. The Commission therefore considers that the relevant geographic markets for the supply of jet engines for large commercial aircraft, regional jet aircraft and corporate jet is worldwide. For the purposes of this Decision, the related markets for MRO and spare parts need not be finally defined from a geographical point of view.

1.B. Competitive assessment

1.B.1. Functioning of the market

(37) The relevant engines markets are composed of engine manufacturers, on the supply side, and airframe manufacturers and final purchasers (airlines, leasing companies and corporations), on the demand side. Engine manufacturers may compete to sell engines to airlines in those cases where the purchased aircraft is offered with an engine choice, that is the case in most of the large commercial aircraft platforms or in cases where there is no engine choice and the airline must select between different aircraft powered by different engines for the same mission profile. Engine manufacturers also compete in order to be selected and certified in those platforms, typically for the entire life cycle of the platform(14). As a result, engine suppliers compete at two levels, first, in order to place their engine on offer in a given aircraft platform and second in order to have their engine or aircraft/engine combination selected by the final purchaser of the aircraft. Such sales are influenced to varying degrees by the airlines' preferences stemming from engine and fleet commonality considerations.

1.B.2. Market shares

1) Introduction

(38) In previous decisions concerning the aerospace industry(15) the Commission has considered that market shares should be calculated on the basis of the installed base and firm orders to date (which includes all deliveries to date and orders placed but not yet delivered) for aircraft that are currently manufactured (as opposed to aircraft that are no longer in production). This measure disregards aircraft that remain in-service, but are no longer manufactured, because such aircraft have little or no bearing on the market position of relevant engine manufacturers since airlines can no longer place orders for these aircraft.

(39) The Parties contest this methodology in that it gives only a static snapshot of the current situation and ignores the dynamics of past and future competition in a market which, they argue, has the characteristics of a bidding market. Moreover, they argue that the exclusion of aircraft no longer in production disregards the potential revenue benefits that engine suppliers may extract and that they may use to invest in future platforms. Overall, they submit that such an analysis of the installed base is of no value in predicting which engine manufacturers are going to be tomorrow's winners and losers.

(40) The Parties also suggested that the Commission look at how past competition has evolved over the history of the jet engines markets. The Commission, however, considers that an examination of past competition over the 40-year old history of the jet engines market is not a relevant indicator of the present and likely future market position of the existing engine suppliers. This is so because the recent past, the current and the forecast future business environment differ significantly from that prevailing in former times as the patterns of past platform competitions may and indeed have not been reproduced in the current market place and can hardly be illustrative of the way competition in the jet engines market will evolve in a post-merger situation.

(41) The Commission has come to the conclusion that the installed base and the order backlog of aircraft still in production is the best proxy to measure and to interpret the position of competitors in this industry. In this respect, due account has been taken of the fact that incumbency plays a role in the decisions of customers (that is, airlines) concerning their future buys. As the cost curve of an airline is in part influenced by fleet and engine commonality, engine suppliers expect to increase their market penetration more or less proportionately to their current degree of incumbency within an airline. Incumbency can be beneficial to an engine supplier when airlines wish to extend their existing fleet of aircraft. In such a case, airlines can only buy aircraft that are still in production. On the contrary, incumbency may not play any significant role when airlines wish to replace their fleet of ageing aircraft that are no longer in production. When aiming at fleet commonality, such airlines will streamline their purchases of new aircraft (and engines) to the remaining, newer aircraft in their fleet or part of it (sub-fleet). The incumbent engine suppliers with regard to these newer aircraft are therefore more likely to benefit from such fleet extension or replacement.

(42) Moreover, aircraft no longer in production constitute a less significant source of revenue for engine suppliers than aircraft still in production. The profitability of the engine business stems mostly from earnings achieved by the engine suppliers in the aftermarkets. Aftermarket revenue streams are used to finance future engine developments and innovation expenditure that will in turn determine the future competitive position of the respective engine manufacturers. Engines placed on aircraft no longer in production stop generating this source of revenue when such aircraft are retired from airline fleets. In particular, older engines and aircraft are currently under regulatory and environmental pressure and are being increasingly replaced. Moreover, for as long as aircraft no longer in production remain in service, the generated aftermarket revenues steadily decrease. In fact, as the technology of an engine becomes older and therefore more accessible, maintenance and spare parts tend to become cheaper as customers can source non-OEM (original equipment manufacturer) certified parts and services (that is to say, the older the engine, the lower the patent protection on spare parts and maintenance procedures). In addition, the technology of older engines is much simpler than that of the current generation of engines. Accordingly, they requiring less servicing and spare parts and therefore generate less aftermarket revenues. Consequently, the revenues stemming from engines on aircraft no longer in production cannot be compared to those generated by engines on newer aircraft. This situation helps to explain why the intrinsic value of an engine manufacturer's overall installed base, and therefore its ability to fund its activities to compete in the future, can only be assessed by measuring the net present value of the income it expects from its installed base. Failing to measure the significance of the overall installed base of engines through this means would result in a significantly flawed competitive assessment.

(43) Finally, the Commission has also considered the relative success of different engine manufacturers over the last 10 years in achieving engine exclusivity on aircraft platforms.

(44) For these reasons, the Commission considers that the main indicators for the assessment of future competition in this industry are the installed base and the order backlog of engines on aircraft that are still in production. This analysis will be supplemented with the net present value calculation of the future income stream generated by the aftermarkets of the engines that constitute today's overall installed base (that is, the aircraft both still in production and no longer in production) to assess the future revenue streams accruing to the different engine manufacturers and with an analysis of recent platform competitions and by an analysis of the engine exclusivity competitions over the last ten years.

2) Engines for large commercial aircraft

a) Introduction

(45) GE, P& W and RR are the three engine manufacturers acting as independent prime contractors in the market for jet engines for large commercial aircraft. In addition, there exist a number of joint ventures and alliances involving these three independent prime contractors and other subcontractors. The most important of those are CFMI and IAE. For the purposes of market share calculation, where appropriate, the market shares of these joint ventures have been attributed to one or the other of the three prime competitors. The Parties however do not agree with this approach and have argued that such attribution of market shares does not reflect the economic/commercial reality and the legal situation of those joint ventures. The merging Parties stated so in particular in relation to the CFMI joint venture.

b) The treatment of joint ventures

(46) In its assessment of dominance, the Commission considers that it is justified from both a legal and an economic point of view to aggregate the market shares of CFMI and GE. Similarly, the market shares of IAE are aggregated equally between RR and P& W, that is, between the two independent prime contractors, as opposed to the other joint venture partners, MTU and Japanese Aero Engines Corporation. This assessment is in line with the consistent practice of the Commission(16).

(47) In its decision of 1 March 2001 opening an in-depth investigation, the Commission stated that CFMI's market share should be attributed to GE for a series of reasons. First, through its control over CFMI, GE can exercise decisive influence over its commercial policy. In addition, CFMI engines are not sold in competition with those of GE and SNECMA does not compete independently in this market since it is not a prime contractor for commercial aircraft engines. Finally, SNECMA would, in all probability, not object were the merged entity to strengthen its position on the aircraft engine market, as it would also benefit from joint profit maximisation. It was also noted that the market share of IAE had been split equally between RR and P& W since they both are independent prime contractors on the relevant markets, as opposed to their other two joint venture partners.

(48) The Parties argued, however, that CFMI's and GE's sales could not be aggregated for several reasons. Apart from some notable exceptions, SNECMA has sole responsibility for selling CFMI engines in Europe, and the commercial terms of any sales made by GE in this market must be approved by SNECMA. Moreover, SNECMA has production responsibility for 54 % of the content of the new engines whereas GE only has responsibility for the remaining 46 %. The Parties also argue that CFMI's President and CEO is always a SNECMA employee and that, in assessing the IAE joint venture between RR and P& W, the Commission split the joint venture's share equally between them. In sum, the Parties are in effect claiming that both the joint venture partners, GE and SNECMA, and the joint venture itself are competing prime contractors and suppliers of engines for large commercial aircraft and have to be assessed separately in a competitive analysis.

(49) For the reasons set out below, GE, SNECMA or CFMI cannot be seen as independent competing undertakings, in the light of the commercial and marketplace realities, and the market share of GE and CFMI should be aggregated for the purposes of the assessment in the present case. They also explain why SNECMA is not likely to restrain GE's post-merger commercial practices that aim at increasing the market power stemming from the sales of GE and CFMI engines to large commercial aircraft manufacturers.

Neither SNECMA nor CFMI compete with GE in civil jet engines

(50) Within CFMI, the parent companies do not compete against each other or against their joint venture in the market for large commercial aircraft engines. Firstly, as a matter of fact, SNECMA is not currently an independent supplier of commercial jet engines in general. The market investigation indicated that SNECMA has never competed independently in this market and has never certified or sold any jet engines for commercial aircraft outside CFMI. This finding was also confirmed by SNECMA itself at the Oral Hearing. Secondly, as a matter of law, for as long as CFMI functions as a joint venture, a series of non-compete clauses will prevent SNECMA from competing with either GE or CFMI itself(17).

(51) To the extent that GE and SNECMA have not competed in the past and may not compete in the future in any bidding situation for large commercial aircraft and insofar as none of GE's engines produced outside the joint venture competes with any CFMI engine, it is appropriate to consider CFMI and GE as an economic entity whose market shares should be aggregated for the purposes of the competitive assessment of the proposed concentration on the market for large commercial aircraft engines. In addition, to the extent that SNECMA has not sold any commercial jet engines so as to account for a share of the relevant markets, only GE's and CFMI's market shares can be aggregated.

(52) Quite apart from those reasons, there are several other factors to suggest that SNECMA is not likely to oppose GE's future use of CFMI in its commercial strategy, for the purposes of the present analysis.

Technological and financial split within CFMI

(53) The Parties have argued that CFMI is a partnership between equals. For instance, they indicated that SNECMA has production responsibility for 54 % of the content of CFMI engines whereas GE only has responsibility for the remaining 46 %. However, the factual results of the market investigation, which were not contested by the Parties, indicated that GE has control over the high technology parts of the CFMI engine programme. In terms of a strict division of labour, SNECMA is responsible for the engine components and spare parts for the low spool (which includes the fan, low-pressure compressor, and low-pressure turbine) plus the main accessory gearbox and engine installation (mounts, thrust reverser, etc.), while GE is responsible for the engine components and spares for the core engine (which includes the high-pressure compressor, combustor, and high-pressure turbine), the main engine control, and overall system integration. GE and SNECMA provide maintenance and repair support services independently of CFMI. The core engine is the part of the engine where most of the critical technology lies. The lack of proprietary technological know-how in the core engine acts as a significant deterrent for prospective new entrants into the jet engines market. This explains the limited number of prime contractors able to act as independent and stand-alone engine suppliers (namely, GE, RR and P& W) and the need for subcontractors (such as SNECMA, MTU, Volvo, etc.) to become joint venture partners alongside such prime contractors. GE is thus the main commercial engine manufacturer and provider of all high-pressure, high temperature technology in CFMI, that is, of most of what constitutes the key technology of jet engines.

(54) Even outside the core engine, the fan design of CFMI engines is based on GE technology, since it is derived from GE's CF6 engine. SNECMA's initial fan design had a relatively poor efficiency and GE improved it in the subsequent engine models. The result is that both the core and fan design heritage is largely based on GE technology and experience.

(55) The core engine also constitutes the high value portion of the CFMI engine programmes. Although in principle each parent is to make an equal contribution to the joint venture, participate equally in all its operational activities (design, manufacturing, marketing, sales and support) and share equally in the revenues (but not the profits)(18) received by it, each parent is also responsible for the costs it incurred in designing, developing and producing its share of the final product. The low-pressure system is the most expensive part of an engine as it needs to be continually upgraded to keep pace with the changes in technology and the demands of the market. The core engine, on the other hand, once developed, does not need to be modified continuously, although the amount of friction it generates requires frequent maintenance and repair. As such it constitutes the main source of after-sales revenue (spare parts and maintenance/repair support services).

GE's role in the corporate governance of CFMI

(56) The Parties argued that SNECMA has a major role to play in CFMI as can be, for instance, illustrated by the fact that the President and Chief Executive Officer (CEO) of CFMI is traditionally seconded by SNECMA. However, the fact that SNECMA always seconds the president and CEO of CFMI is not embodied in any formal agreement and this practice could thus easily change. In addition, GE is in a statutory position to exert influence on which SNECMA employee will be filling this post at any one time.

Sales and Marketing

(57) The Parties also drew the Commission's attention to the fact that, with some notable exceptions, SNECMA personnel assigned to CFMI have the sole responsibility for CFMI engine sales and marketing in Europe and the commercial terms of any sales made by GE personnel in this market must be approved by them. However sales and support functions are not split equally between GE and SNECMA. GE has reserved the right to sell and market CFMI engines to such European airlines as British Airways, Lufthansa and KLM, the largest and most important customers on the European market. Furthermore, sales and marketing by SNECMA outside Europe has been restricted to the Middle East (with the exception of Saudi Arabia, which GE has reserved for itself), Russia, Africa, Pakistan and India, effectively the stagnant markets. GE, on the other hand, sells and markets CFMI engines to the lucrative and growing markets of South America, south-east Asia and the Pacific(19). Potential customer accounts are also split along these lines. As a result of this, by year-end 2000 GE was responsible for 65 % of the sales and marketing of installed CFM engines and 72 % of orders.

(58) In principle, the personnel of the parents are utilised for their respective sales on behalf of CFMI and, when interfacing with CFM56 customers, each parent should represent CFMI, not SNECMA or GE. GE, however, markets CFM56 engines as its own. For instance, GE Aircraft Engines (GEAE) markets the CFM56 as part of its engine range(20). The CFM56 is also often sold by GEAE sales people who also sell the rest of the GE engine range. In addition, airlines which purchase the CFM56 and other GE engines can be supported by the same GEAE field service representative on the after-market.

SNECMA is not a potential competitor in large commercial aircraft engines

(59) Furthermore, the market share of CFMI can be meaningfully aggregated only with that of GE. SNECMA is not an independent competitor, current or potential, in the large commercial aircraft engine market and has sold no engine so as to account for a share of the market. The Parties have consistently claimed that the merger does not create any horizontal overlap in the market for jet engines for large commercial aircraft, to the extent that Honeywell, a supplier of civil jet engines for regional and corporate jet aircraft, cannot be reasonably considered as a potential entrant in the large commercial aircraft market, owing to the high barriers to entry (in terms of technology and reputation building) prevailing in this industry. The Commission has tested and accepted their argument. However, the same argument also applies to SNECMA. The market investigation confirmed that SNECMA is not a prime contractor for aircraft engines and has never competed in the commercial jet engine market. Thus, unlike GE, SNECMA has no independent capability in the large commercial aircraft engine market. SNECMA has primarily low spool capabilities in design, development, and production for commercial application. Any commercial hot section core work (combustor, high-pressure turbine, etc.) would be new territory for SNECMA. It is a partner in CFMI with a subsidiary role and no separate identity or presence in this industry(21). It has never certified or sold any jet engines for commercial aircraft on its own. Even if it were to develop such engines it would be a lengthy and expensive exercise with very uncertain market acceptance, since SNECMA would have to build up the required credibility and reputation with commercial airlines and commercial airframe manufacturers.

(60) By SNECMA's own admission, its strategy for the development and production of future aircraft engines is no more than the following: to continue to provide CFM56 engine models or future enhanced models/derivatives through CFMI, to participate as a risk sharing partner on the GE90, and to try to be ready to access the small commercial engine market with or without cooperation(22).

(61) GE and CFMI thus do not compete with each other. There is indeed no evidence to suggest that these two entities have competed against each other in any bidding situation in engine procurement. In fact, none of GE's engines produced outside the joint venture compete with any CFMI engine. This finding was also confirmed by SNECMA's representative at the oral hearing.

SNECMA and GE are likely to act as joint profit maiximisers in the post-merger situation

(62) The Parties have also contested the aggregation of CFMI's and GE's share claiming that SNECMA would have no interest in aligning its behaviour as a partner of CFMI on the merged entity's profit maximising commercial behaviour. On the contrary, the Commission considers that SNECMA would have no incentive to object to a common profit maximisation strategy. SNECMA has indeed significant financial stakes in all the GE engines for large commercial aircraft. Table 4 shows SNECMA's participations in GE programmes.

Table 4

>TABLE>

(63) Moreover, SNECMA and GE participate on a 50/50 basis in a joint venture active in parts manufacturing (FAMAT France) and carbon composites fan blades for the GE90 engine (CFAN Texas). Those structural links with GE are particularly important in understanding and assessing SNECMA's incentives not to oppose the merged entity's profit maximisation strategies that are likely, post-merger, to stem from GE's vertical integration or to include product bundling. Indeed, if such strategies were to be profitable to the merged entity, they would also benefit SNECMA, owing to its financial participations in CFMI and in GE's various engine programmes and the fact that none of these programmes is in competition with the engines supplied by CFMI.

(64) Additional evidence of the economic integration between GE and SNECMA is found in the commercial behaviour of GE's aircraft leasing company, GECAS. GECAS has a stated policy to favour purchases of new aircraft powered by GE engines (so-called "GE-only" policy). This policy is also extended to CFMI engines and has the effect of substantially increasing the market penetration of GE and CFMI engines to the detriment of competing engine manufacturers. GE has combined GECAS's services and purchases with a view to increasing its overall level of sales, even though a percentage of the revenues derived from those sales would accrue to SNECMA. There is thus no reason to believe that SNECMA would object to a bundling of CFMI engines with GE and/or Honeywell products and/or services to increase CFMI's market penetration in the future.

The perception of CFMI by GE and the market place

(65) GE also aggregates CFMI's market share with its own. It has done so in its annual reports each year since 1995(23), as well as in at least one internal presentation to market investors (in May 1999) that the Commission was made aware of. Similarly, leading financial analysts also aggregate all engine sales of CFMI and GE(24). In sum, the view of GE as expressed in its annual reports and by the financial analysts that GE and CFMI should be viewed as a single entity for both commercial and competitive purposes is supported by the objective realities of CFMI and in the marketplace.

(66) It is thus appropriate to attribute all of CFMI's market share to GE when assessing GE's dominance on the relevant markets.

The treatment of IAE

(67) RR and P& W are independent prime contractors in the jet engines markets for large commercial aircraft. The Commission has treated IAE in the same manner as CFMI, in that IAE's market share has been aggregated, on an equal basis, with the market shares of those partners which are independent jet engines suppliers, but not with these of MTU and Japanese Aero Engines Corp., which as subcontractors cannot be attributed any share of the relevant markets.

c) Market shares

(68) The assessment of the three engine manufacturers' market positions will be mainly based on the installed base of aircraft still in production and the order backlog.

(69) The Commission sought extensive market data from various sources, including the Parties and their competitors in the jet engine markets. Owing to certain contradictions in the supplied data, the Commission has decided to use the figures submitted by the Parties, while noting that these figures appear to underestimate their position.

Installed base of engines on aircraft still in production

(70) As far as large commercial aircraft are concerned, a distinction can be made between narrow-body and wide-body aircraft. Table 5 shows the installed base of engines on narrow-body and wide-body large commercial aircraft still in production, at the end of the year 2000.

Table 5

Installed base of engines on large commercial aircraft in service on 31 December 2000

(Aircraft still in production)

>TABLE>

Source:

Parties' data.

(71) The total volume of the installed base of engines for narrow-body aircraft still in production is 6106. GE/CFMI accounts for over half the market with a share of 51 %, followed by P& W and RR accounting for 22 % and 27 % of the installed engine base, respectively. The market shares of GE and CFMI have been aggregated, while IAE's share has been split equally between P& W and RR.

(72) The total volume of the installed base of engines for wide-body aircraft still in production amounts to 5898. GE/CFMI has a share of 54 %, followed by P& W and RR with 31 % and 15 %, respectively(25).

(73) It can be concluded from Table 5 that GE is by far the leading supplier of jet engines to large commercial aircraft, both narrow-body and wide-body, that are still in production. GE has, therefore, the best incumbent position with airlines, since its engines are placed on the largest part of the most recent aircraft platforms in service.

Evolution of the installed base

(74) The preceding market share analysis may appear relatively static in that it reflects the current market position of jet engine suppliers on the basis of past competition. In order to give a more dynamic view of past competition, it is appropriate to look at the evolution of the installed base over the last five years. During that period, GE has not only succeeded in maintaining its leading supplier position, but has also displayed the highest market share growth rate.

(75) It has to be mentioned, as recognised by the Parties, that the five-year period preceding the notified merger is a meaningful benchmark for the assessment of the second level of engine competition, that is sales to airlines. A longer period bears the risks of presenting a market situation characterised by different competitive and market conditions from those now prevailing. A longer reference period may therefore be misleading in the assessment of the notified operation(26). Moreover, in the assessment of the first level of engine competition, namely for the selection of engines in a new platform, a period of ten years is considered in line with the Parties' argument that competition at this level must be considered over a longer period.

(76) The graph in the Annex shows the evolution of the installed base of engines on large commercial aircraft still in production in the period from the end of 1995 to the end of 2000 and represents the incremental market positions of the various suppliers over that period. It can be seen that GE has increased its share of the engine installed base at a rate which competitors have not been able to match. In absolute numbers, during that period, GE increased its installed base from 2462 to 6248 engines, as opposed to P& W which passed from 2889 to 3170 engines and RR which passed from 1371 to 2586 engines. Overall, GE has displayed the highest total growth rate during this period, and has increased the gap with its competitors.

Firm orders to date (Backlog)

(77) The examination of the backlog (firm orders to date) can give a better indication of the suppliers' future competitiveness, as it reflects the preference of purchasers in their recent orders and can determine the future market positioning of engine suppliers. The figures in Table 6 concern aircraft in service still in production. It goes without saying that an aircraft that is out of production can no longer be ordered(27).

Table 6

Engine backlog on aircraft still in production

(Orders to be delivered as of 01 January 2001)

>TABLE>

Source:

Parties' data.

(78) The total volume of engines for large commercial aircraft in production that has been ordered as of 1 January 2001 is 5466. Of those orders, GE has secured 65 %, compared to 35 % for its competitors, P& W (16 %) and RR (19 %). This is another indication of the way and the trend in which GE's share in new aircraft is growing. GE is already the market leader for aircraft still in production (52 % of the installed base) and has laid the ground for sustaining and increasing that leadership by securing 65 % of the current order backlog of customers.

Spare parts income stream

(79) The Parties have contested the Commission's use of the installed base and order backlog of aircraft still in production, arguing that the exclusion of aircraft no longer in production overestimates GE's market shares and conceals the past success of its competitors, notably P& W, on platforms that are no longer in production. The Commission considers that aircraft no longer in production cannot have any impact whatsoever on the future increase of the engine suppliers' market share, to the extent that no additional units of such aircraft can be sold to customers in future. However, the Commission recognises that such aircraft may still generate aftermarket revenues, which in turn may determine to some extent an engine supplier's ability to compete in the future. Aftermarket revenues constitute the main source of the cash flow that will finance the development and marketing of new engines, as well as the innovation efforts for the next generations of engines, and hence the suppliers' likely future competition position. In sum, the higher the aftermarket revenues, the more likely a supplier is to remain competitive in the future. As a consequence, in assessing such revenue streams, the Commission has considered the overall installed base of engines on aircraft both in production and out of production.

(80) GE has the highest share of the engines installed on new aircraft models. To the extent that such models will not to be replaced in the near future, GE's share will result in an accrued source of aftermarket revenues, larger than that of its competitors.

(81) P& W has a large share of aircraft that are out of production, which is due to P& W's earlier entry into the jet engines market. Although such aircraft may also constitute a source of aftermarket revenues, it can reasonably be expected that this revenue will diminish in accordance with the rate of withdrawal and replacement of such aircraft in the airlines' fleets(28). Therefore, the revenues that P& W can generate from its existing installed base of engines are not comparable to those that GE may expect to generate. This disparity in cash flow generation will also determine the way competition between these two engine manufacturers will evolve in the future. In addition, GE is likely to benefit from such withdrawals and replacements more than its competitors. Not only is its better incumbency position likely to determine the airlines' choice of engines, but the additional advantages derived from GE's vertical integration militate strongly in favour of this likelihood materialising.

(82) Contrary to the static view of the overall installed base expressed in units of engines, the outcome of the net present value calculation of the future spare parts income is more indicative of what the competitors' respective true market positions are. The Commission's calculations confirmed that, because of the very nature and characteristics of the manufacturers' respective installed bases, GE is again much better placed than P& W when it comes to the assessment of its ability to compete in the future. In this respect, the Parties have argued that it would be inappropriate to aggregate the aftermarket revenues stemming from the installed base of CFMI and GE engines and that only a proportion of those should be attributed to GE, with the rest accruing to SNECMA. However, the Commission considers that such revenues accrue to CFMI as a joint venture and that the parent companies are likely to reinvest such revenue in the financing of future CFMI engines. The same applies to RR and P& W, which, as parents of IAE, are likely to reinvest the revenue derived by IAE engines in the development of IAE engines.

d) Conclusion on GE's market position in large commercial aircraft engines

(83) It can accordingly be concluded that GE enjoys a strong position, indicative of dominance, in the supply of jet engines for large commercial aircraft. Indeed, GE displays several of the features of a dominant undertaking. In particular, GE has the highest current market share, well ahead of that of its competitors. Moreover, it has managed to increase this market share steadily over the last years and, most importantly, at a higher annual growth rate than its competitors have. In addition, in view of its large order backlog, GE has better prospects than its competitors of maintaining and improving its market penetration. Finally, GE expects to generate far more revenues from its overall installed base than its competitors and thus to be better able to compete in the future. The fact that GE's market shares have been not only high but steadily increasing over time both at the expense of P& W and RR is as such indicative of dominance. This market position is, according to the Commission's market investigation, the result of a combination of factors including GE's vertical integration into financial services, aircraft purchasing and leasing as well as into aftermarket services and the existence of significant commonality effects.

3) Large regional jet aircraft

(84) GE and Honeywell are the only engine suppliers whose engines have been certified for large regional jets that are still in service. The merger creates a horizontal overlap that amounts to a 100 % market share. This market share remains unaffected by the inclusion in the picture of aircraft that are no longer produced. Table 7 shows the market positions of the engine suppliers in the large regional jet market, in terms of the installed base of aircraft still in production as well as in terms of the overall installed base (including aircraft out of production on 31 December 2000).

Table 7

>TABLE>

Source:

Parties' data.

(85) Table 8 shows the platforms that will come in service in the immediate future as well as their most recent order backlog.

Table 8

Engine order backlog on large regional jets not yet in service

(To be delivered from 01 January 2001)

>TABLE>

Source:

Parties' data.

(86) Prior to the transaction, GE was already dominant on this market. The merged entity will have a monopoly position in large regional jets that will come in service in the immediate future.

(87) Accordingly, GE can be considered as dominant.

4) Corporate jet aircraft

(88) The merger creates a horizontal overlap in the market for corporate jet engines and in particular in the segment for engines for medium jets. Tables 9 and 10 give the market positions of the engine manufacturers in terms of the installed base of corporate jets as well as of medium corporate jets that are still in production.

Table 9

Engine installed base on corporate jets

(As of 31 December 2000)

>TABLE>

Source:

Parties' data.

Table 10

Engine installed base on medium corporate jets

(As of 31 December 2000)

>TABLE>

Source:

Parties' data.

(89) Honeywell can, therefore, be considered the leading engine supplier on this market.

5) Maintenance, repair and overhaul

a) Spare parts

(90) According to the Parties, proprietary parts sold by an aircraft engine manufacturer face competition from a number of sources, including: (i) the secondary channel, (ii) parts manufacture approval (PMA) sources, and (iii) non-OEM designated repairs (DERs). In addition, the Parties claim that non OEM's have the potential to make every single part provided that they invest in reverse engineering, designing (and if necessary designing around any valid and enforceable OEM intellectual property right), certifying and manufacturing the part.

(91) Replacement parts made by non-OEM suppliers must receive a approval from the relevant regulatory authorities, the PMA. An applicant for PMA can meet this burden in one of three ways. He may show that his part is identical to the design of the type-certified part it will replace, or that he obtained the part design from the type-certificate holder (e.g. through a licensing agreement) or lastly that his part is airworthy by tests and computations. According to the market investigation, meeting the PMA regulations is lengthy and costly. OEMs control the technology necessary to develop a part under PMA and charge high licensing fees, if they agree to license the technology at all. Without a licence agreement, the investment in developing an identical part and proving airworthiness through reverse engineering and extensive testing is significant.

(92) The market investigation examined whether or not PMA spare parts can exercise any competitive pressure on spare parts available from the OEM. It showed that, at least as far as engines still in production are concerned, on average 90 to 95 % of spare parts are only manufactured by OEMs and that there are no non-OEM replacement parts for many of the most expensive parts of the engine. Moreover, it showed that some customers remain reluctant to use PMA parts or are not authorised to use them on the basis of their contractual arrangements with the OEM. As a result, OEMs maintain an overwhelming share of the market for replacement parts and face no competition for many of the spare parts.

(93) Furthermore, as with PMA parts, spare parts supplied by OEM or non-OEM designated repairs are not always considered real substitutes on technical and warranty aspects for spare parts supplied by OEM and represent only a small part of the market (2 to 3 % for the air transport segment according to GE, 10 to 15 % for the regional segment and around 10 to 15 % for the corporate segment according to Honeywell).

(94) Finally, the Commission's investigation showed that the surplus market (that is to say, the secondary channel), in particular with respect to modern engine types, is very limited.

b) MRO services

(95) According to the Parties, the margins obtained through sales of original equipment are decreasing in the aerospace industry and OEMs try more and more to recoup their investment through the after-market. As an illustration, over a 25-year lifespan of an aircraft, airlines would pay around 200 % the price of the engine in MRO. Repair and overhaul service contracts may be entered into at the time the engine is purchased, or subsequently, often when the warranty period is about to expire. In both cases, the customer will typically invite bids from a number of engine repair and overhaul shops before entering into the contract. There are a significant number of players on the MRO market.

(96) Nevertheless, the market investigation established that OEMs can leverage their OEM status to effectively control the after-market, through the control of, firstly, the technical information and intellectual property required for many MRO services and, secondly, the price and supply of spare parts. In addition, the market investigation showed that in doing so OEMs reinforce their position also in the markets for spare parts.

(97) OEMs have a dominant share of the market (around 95 %) for spare parts and there is no competition for the majority of spare parts. The market investigation established that this position gives comparative advantages to OEMs and particularly to GE on the market for the maintenance and overhaul of engines.

(98) Independent MRO providers and airlines claim that when there is no competition on markets for spare parts, prices are above the competitive level and that OEMs which provide MRO services have access to spare parts at a comparatively lower cost. This renders package prices of MRO services and OEM spare parts lower than those of their competitors. This is to the latter's disadvantage since spare parts account on average for 70 % of an MRO invoice.

(99) Moreover, independent MRO providers and airlines claim that when there is no competition on markets for spare parts their prices increase more over time than the consumer price index and that constitutes a difficulty for them to commit to long term fixed price contracts. Indeed, there is an increasing trend for airlines which out-source their maintenance to request a "fleet-hour-agreement" also called a "power-by-the-hour" contract. The customer contracts, on a long-term basis, to pay the service provider an agreed sum per engine flying hour to have all necessary service performed on the engine. These contracts generally cover both the spare parts and services and typically prices are fixed, subject to escalations, for the duration of the agreement. Independent MRO service providers cannot offer this type of contract without taking the risk of bearing the unexpected increased cost of spare parts supplied by OEMs.

(100) In addition, according to the market investigation, OEMs tend to withhold high-tech repairs on engines for their own MRO units. They restrict the release and use of technical data and technical support (making it difficult to obtain certification as an OEM-approved maintenance facility for each individual engine and access to the respective OEM technical data). Moreover, if there is a shortage of spare parts, OEMs supply their shop first. Finally, OEMs use the same inventory parts, both in the manufacturing process and in its MRO activities. This reduces inventory costs, handling fees, etc. For all these reasons, airlines and independent MRO suppliers are not in a position to compete on equal terms with the OEMs who offer MRO services on their own products.

(101) Finally, the presence of OEMs in the market for MRO allow them to increase their sales of spare parts. Indeed airlines try to privilege the repair option rather than the replace part option, which is more expensive for the customer in general. This shrinks OEMs' spare parts market shares. When doing MRO services, OEMs favour the replace option more than airlines do given their access to spare parts at a higher price.

(102) GE is particularly strong on the market for MRO of engines and has tremendously strengthened its position over recent years. P& W and GE are the two largest supplier of MRO services for all large commercial aircraft engines with a turnover of USD [...]* and USD [...]* respectively. RR is the third competitor with a USD [...]* turnover. Lufthansa is the fourth competitor with a USD [...]* turnover. Honeywell is also present on this market with a USD [...]* turnover.

(103) GE's presence has increased sharply over the last 10 years. GE's total turnover in the engines market for large commercial aircraft has increased nearly fourfold over the last 10 years and has more than doubled over the last five years. While RR has mirrored that increase, P& W's total turnover has only increased by 30 % over the same period of time.

(104) In addition, GE has started to provide MRO services for engines on all its competitors' products (RR, P& W and IAE). For example, the total turnover of GE in the MRO services for its competitors' engines evolved from USD 215 million in 1991 to USD 588 million in 2000 in the large commercial aircraft market. As a comparison, the turnover of P& W in the MRO services for competitors' engines in 2000 was [...]* that of GE. Moreover, RR has predominantly concentrated on its own products within the MRO aftermarket and its support on competitor products represents [...]* of the global services market.

(105) Finally, GE's total revenues evolved from a split of 57 % of sales of original equipment and 43 % of after market in 1990 to 45 and 55 % respectively in 1995, and finally to 33 and 67 % respectively in 2000.

(106) GE's position on the MRO market, coupled with the acquisition of Honeywell's product range, is likely to give the merged entity a significant financial and commercial advantage after the completion of the merger.

1.B.3. Factors contributing to GE's dominance in engines

1) GE capital

(107) GE is the world's largest company in terms of market capitalisation(29). In the aerospace sector, GE offers a unique combination of complementary products and services to customers. Indeed, as acknowledged in its own documents, GE is not only a leading industrial conglomerate active in many areas including aerospace and power systems, but also a major financial organisation through GE Capital. GE's financial arm contributes around half of the GE Corporation consolidated revenues and manages over USD 370 billion, more than 80 % of GE's total assets. If GE Capital were an independent company, it would, on its own, rank in the top 20 of the Fortune 500 largest corporations.

(108) In addition to having enormous financial means available in-house, GE's unmatchable balance sheet size offers other major advantages to GE businesses. Indeed, unlike any other company, and in particular other engine manufacturers, as acknowledged in its own documents, GE is able to take more risk in product development programmes than any of its competitors. This ability to absorb product failures without jeopardising its future ability to compete and develop new products in an industry characterised by long term investments is critical(30).

(109) In its recent coverage of GE, Bear Stearns, the independent equity research firm, describes GE Capital as one of the largest financial companies in the world. Bear Stearns also underlines that "GE Capital Services is able to assume higher risks within its portfolio than the average of its peers"(31). Bear Stearns further describes GE Capital as a "global financial powerhouse" and underlines the competitive advantage GE enjoys over its competitors through GE Capital by stating that "GE's ownership of GE Capital Services is, in our opinion, its most significant advantage over its industrial rivals. [...]*. GE's industrial businesses are predominantly leaders in their fields, and GE Capital is no different. Overall, we believe that GE Capital's tremendous size and product breadth produce key sustainable advantages"(32).

(110) Because this industry is characterised by long lead times, that is to say significant gaps between the investment made on new projects and the return on the investment, firms in this industry need to rely heavily on their own internal cash flow generation to fund development and innovation. GE's financial strength through GE Capital therefore clearly represents a significant competitive advantage over RR and P& W. In particular this financial strength allows GE to absorb potential product failure and strategic mistakes. The importance of financial strength in this industry can be illustrated by RR's exit from the market in the 1970s when it could not survive the failure of one of its leading R & D projects.

(111) GE has taken advantage of the importance of financial strength in this industry by relying heavily on discounts on the catalogue price of the engines. These heavy discounting practices actually resulted in moving the break-even point of an engine project further away from the commercial launch of a platform. Given its enormous balance sheet, GE has been in a position to increase rivals' funding cost by delaying the inception of cash flows and consequently increasing the need to resort to external financial means further raising their leverage (debt/equity ratio) and resulting borrowing costs(33). By doing this GE has managed to make its competitors very much vulnerable to any down cycle or strategic mistake.

(112) In that respect, GE's strategy of granting discounts on the catalogue price of the engine must not be confused with an actual price reduction to the customer and therefore cannot be used as an indication of lack of dominance. Indeed, lower prices on the initial engine sales result not in net lower prices to the customer but in the weakening of engine competitors and ultimately in foreclosing them from current and future platforms and airlines competitions.

(113) Contrary to what the Parties submit, heavily discounted original engine sales do not mean lower costs for the final customers. Indeed, the Commission's investigation has established that in order to assess the net cost of an engine to an operator, maintenance and spare parts expenditures(34) have to be added to the initial purchase price of the engine. The results of this adjusted calculation show that the total average cost of an engine has actually increased between 10 and 30 % in real terms over the last 10 years. This is of course due to the offsetting effect of the significant price increases applied annually on all original spare parts(35) manufactured by the original engine supplier.

(114) In addition, GE can, thanks to its financial strength and incumbency advantages as an engine supplier, afford to provide significant financial support to airframe manufacturers in the form of platform programme development assistance that competitors have not been historically in a position to replicate. GE uses this direct financial support to arrange/obtain engine exclusivity on those airframes that it financially assists (GE has secured a total of ten exclusive positions out of the last twelve that were granted by airframe manufacturers) thus depriving competitors of access to exclusive platforms. [segments quoted from the Procurement Agreement between an airframe manufacturer and GE, considered by GE as containing confidential information]*(36).

(115) Exclusivity arrangements can have significant effects on the aircraft engine market(37) since they guarantee significant penetration of an airline's fleet and subsequent incumbency benefits. Exclusivity further benefits the engine manufacturer because exclusive engine supply positions eliminate direct price competition (that is, competition within the same platform) at the level of the airlines.

(116) As the final step in its foreclosure strategy and in order to protect and grow this very lucrative part of its engine business, GE has used its financial strength to invest very large amounts of money for several years into the aftermarket through the purchase of a significant number of repair shops all over the world. This strategy applies not only to the servicing of GE's own engines but also to the engines of its competitors which as a result end up deprived of the critical aftermarket revenues needed to justify both past investments and future product developments.

(117) Quite apart from GE's ability to influence airframe manufacturers, GE also uses its financial strength to influence airlines in their purchasing behaviour by injecting capital into their activities at critical times as explained in the following extract from one of the "key feature articles" by GE's Chairman and CEO entitled "GE Capital: Jack Welch's Secret Weapon"(38):

" And what does [GE]* Capital give GE? Valuable customers, for one thing: [GE]* Capital provides financing for the customers of GE divisions like Aircraft, Power Systems, and Automotive, which helps smooth the way for those divisions to land large contracts. One of the more notable instances of a possible link came when Continental Airlines was struggling in bankruptcy in 1993. Loans from GE Capital helped put Continental back in the air. Next came a big order from Continental for new planes, most with GE engines. Says consultant Tichy: '[GE]* Capital is part of the arsenal for GE's industrial side to beat the competition.'"

(39)

(118) This transaction took place during Continental's bankruptcy reorganisation in 1993. GE Capital is said to have injected up to USD 1 billion into the airline in the form of debt financing as well as the acquisition of an equity stake. One of the conditions appears to have been that all aircraft purchases by Continental should be GE-powered (whenever available).

(119) Today, Continental Airlines' fleet of large commercial aircraft is composed of 16 GE-powered B777-200ER (P& W and RR engines were also available on that aircraft), 21 GE-powered DC10 (a P& W engine was also available on that aircraft), 11 GE-powered B767 (P& W and RR engines were also available on that aircraft), 41 RR-powered B757 (no GE engine available on that aircraft), 58 GE/CFM-powered B737-800 (GE/CFM exclusivity on that aircraft), 65 P& W-powered MD80 (no GE engine available on that aircraft), 36 GE/CMF-powered B737-700 (GE/CFM exclusivity on that aircraft), 65 GE/CMF-powered B737-300 (GE/CFM exclusivity on that aircraft), and 66 GE/CMF-powered B737-500 (GE/CFM exclusivity on that aircraft). In other words, when Continental had a choice of engine available, the airline chose GE engines every time.

(120) As far as Continental's outstanding orders are concerned, the same applies: all engines are GE even when competing engines are on offer.

2) GECAS

(121) Another factor contributing to its dominance is GE's vertical integration into aircraft purchasing, financing and leasing activities through GE Capital Aviation Services (GECAS).

(122) With around 10 % of the total purchases of aircraft, GECAS is the largest purchaser of new aircraft, ahead of any individual airline. It has the largest single fleet of aircraft with 1040 units valued at USD 22,1 billion(40). GECAS is twice as big as ILFC, its direct competitor, in terms of aircraft fleet. GECAS is also the market leader in terms of jet aircraft on order and options with a total backlog of 796 jet aircraft at the end of 2000 (535 for ILFC).

(123) In addition to being the largest purchaser of aircraft, GECAS is one of the two leading leasing companies buying aircraft on a speculative basis with around 40 % of the market for large commercial aircraft and 100 % of the market for large regional jet aircraft.

(124) The Parties contention that GECAS's influence over airframe manufacturers is limited because it purchases less than 10 % of new aircraft fails to take into account the fact that GECAS's market influence derives not from a "share" of aircraft purchases, but from its actual incentive and ability to exercise economic influence at the critical point in the competitive process and therefore foreclose rivals from that process.

(125) While it is true that GECAS accounts for only about 10 % of aircraft purchases, and that "share" figure is smaller than is usually associated with traditional notions of "market power", GECAS's share of aircraft purchases is not a good measure of its ability to exert influence over the engine market and foreclose GEAE's rivals. GECAS's real influence in the marketplace extends beyond its 10 % share as a result of its ability to "seed" smaller airlines with GE-powered aircraft, creating, maintaining and enhancing fleet commonality considerations that will influence these airlines to select similar equipment in the future, whether acquiring them from GECAS or elsewhere.

(126) The results of the Commission's investigation confirmed that, because of both GECAS's demonstrated purchasing bias and its ability to place huge aircraft orders, its 10 % share of aircraft purchases significantly under-represents its influence over the aircraft engines and systems selection process. GECAS's influence actually derives from its ability to create an unmatchable economic incentive for airframe manufacturers to favour GE products. This incentive is indeed created from either the relatively limited commercial risk that an airframe manufacturer faces when granting GE exclusive positions for its products, or the compensation it can get from other GE business units such as GE Capital and GECAS, in particular through sizeable aircraft sales prospects. In those circumstances, it does not necessarily matter that GECAS represents "only" a 10 % share of aircraft sales.

(127) There is evidence that airframe manufacturers have been influenced by GE's powerful combination of GECAS aircraft order prospects and financial contribution from GE Capital to select GE engines for their new airframes. GEAE's competitors are not in a position to replicate such packages.

(128) By way of illustration of its importance to the airframe manufacturers, GECAS has also been the single largest purchaser of jet aircraft in recent years with total orders of 588 aircraft(41). In comparison, the largest purchases from the airlines remained below 300 aircraft over that same period.

(129) As far as large commercial aircraft are concerned, although there are more Boeing than Airbus aircraft in the GECAS portfolio, GECAS is of broadly the same importance to both airframe manufacturers in terms of orders. In its reply dated 26 February 2001 to the Commission's investigation, Boeing indicated that GECAS accounted for a little over 10 % of Boeing's order book with 135 aircraft on order. The figure was equivalent for Airbus with a total GECAS backlog of some 138 aircraft. ILFC has a backlog with Airbus and Boeing of [200 to 300]* and [200 to 300]* aircraft respectively. Southwest Airlines is reported to have the largest backlog of all individual airlines with a total of 144 large commercial aircraft. The next largest order backlog from an airline is that of Delta with 108 aircraft on order. Far from representing a fraction of the orders for large commercial aircraft as the Parties suggest, the leasing companies' influence and importance with Boeing and Airbus have been growing in line with their share of the large commercial aircraft order backlog which was reported to account for over 30 % as of the end of 2000 as confirmed by Mr N. Forgeard, the CEO of Airbus, in an article from the Financial Times(42), with the following statements: "The group [Airbus] expressed concern at the growing share of new orders being accounted for by leasing companies rather than by direct orders from Airlines. 'We are at the upper limit of what can be accepted, there is a danger of losing control of distribution' said Noël Forgeard, Airbus's chief executive".

(130) GECAS appears to be also very important to the airframe manufacturers of regional jet aircraft, Fairchild Dornier, Bombardier and Embraer, accounting for around 24, 11 and 9 % of their order backlogs respectively as of the end of September 2000. [Quotes from internal GECAS documents about GECAS's Regional Jets Marketing Plan, considered by GE as containing confidential information]*(43).

(131) GECAS's recent orders include, among others, 50 firm orders and 100 options placed with Embraer, the Brazilian regional aircraft manufacturer, for its ERJ-170 and ERJ-190 (70 and 90-seat aircraft) as well as large orders for the CRJ-700 (70-seat aircraft) and CRJ-900 (90-seat aircraft) from Bombardier. In addition, its (50 firm and 100 option) order from Fairchild Dornier for its 728JET and 928JET aircraft accounts for three years of production of that particular regional airframe manufacturer. These aircraft are exclusively available with GE engines.

(132) Unlike independent leasing companies such as ILFC, GECAS does not select aircraft equipment on the aircraft that it purchases in accordance with market demand. As a result of GECAS's policy of only selecting GE engines when purchasing new aircraft, 99 % of the large commercial aircraft ordered by GECAS are GE-powered(44).

(133) GECAS has the incentive and the ability to enhance GE's Aircraft Engine division (GEAE) market position and resulting profits through several means. GECAS is one of the two leasing companies that operate as launch customers since they can order multiple aircraft at one time, and wait the extra time for delivery of a new airframe (see below the discussion about the B777X). As a launch customer, GECAS can influence the aircraft equipment selection by the airframe manufacturers and therefore constitute, in combination with other GE features, the element that can tilt the balance in favour of GE as equipment and service supplier. GEAE's competitors are unable to guarantee these purchases and therefore to offer launch or boost orders to airframe manufacturers. GECAS's role as a launch or boost customer has proven particularly effective in obtaining access/exclusivity to new aircraft platforms.

(134) In addition, GECAS has also proved a very effective tool in strengthening GE's position with airlines on those platforms where there is engine choice.

(135) Indeed, GECAS offers a variety of fleet and financial solutions enabling airlines to acquire aircraft such as aircraft financing, leasing and fleet management including straight aircraft purchase, aviation consulting, engine financing, finance leases, operating leases, pilot training, sales and leaseback as well as aircraft trading. As part of its strategy of being the world's premier aviation solution provider, GECAS also provides equity-like financing to ease the introduction of GE-powered jets into leading carriers and helps airlines standardise their fleet around GE-powered aircraft as confirmed in GE's 1999 Annual Report:

"In 1999, we [GECAS] made significant progress on our commitment to help our customers meet their fleet and balance sheet objectives. For example, at China Eastern, one of the largest Chinese airlines, GECAS helped the airline reduce its short-term capacity, standardise its fleet around CFM-powered Airbus narrowbodies and generate hard currency."

(45)

(136) The market investigation has further underlined that GECAS has the ability to standardise fleets around GE-powered aircraft and convince an airline that would not otherwise have leased a GE-powered aircraft to accept such an aircraft by offering far more than leasing services and being able to take advantage of the aviation and financial resources within the GE family(46). Finally, GECAS's ability to shift market shares by seeding airlines with GE-powered aircraft has, given the existence of commonality, a multiplying effect in that those airlines will continue to purchase its engines in the future, therefore magnifying GE's engine sales. Contrary to the Parties' contention in their reply to the statement of objections and at the oral hearing, GECAS has indeed been able to significantly increase GE's position without GECAS's increased purchases of GE engines having been offset by purchases of non-GE engines by airlines or other leasing companies. Consequently, through GECAS's bias in favour of GE engines and its influence over airlines, GE has been able to increase GE's market shares of engines.

(137) Quite apart from the fact that the Parties fail to explain why other leasing companies or airlines, which are in any event not affiliated with any engine or component manufacturer, should counter-react to GECAS's bias, ILFC's purchasing behaviour confirms that it leaves the engine selection on the vast majority of its recent orders "to be determined" and thus allows its future airline customers to participate in engine selection.

(138) A comparison of GE's market position pre-GECAS (from 1988 to 1995) with the post-GECAS situation (1996 to 2000) shows that while GE's engine sales with leasing companies, including GECAS, increased by over 20 share points (or over 60 %), the direct purchases of GE engines by the airlines only dropped by less than 5 share points (or less than 10 %). The fact that other leasing companies and airlines simply have not compensated for GECAS's biased purchases results in a net shift of engine market shares to GE.

(139) The vertical integration of GE also extends to other aerospace business segments. Indeed, through its GE Engine Services (GEES) subsidiary, GEAE also has a global network of maintenance, repair and overhaul (MRO) shops servicing its own large commercial engines as well as those of other original equipment manufacturers (OEM) on a worldwide basis. GEAE also sells turboprop and turboshaft engines and related replacement parts for use in military and civilian aircraft. Finally, GE's aircraft engines are also used as the basis of derivatives for industrial and marine gas turbines.

3) Non-replicability of GE capital/GECAS

(140) The Parties have contested GECAS's influence in GE's dominance and argued that in any case competitors can respond by setting-up of their own aircraft leasing subsidiaries. Their argument is that GECAS can be replicated easily and rapidly and thus be neutralised in its alleged influence over GE's dominance.

(141) The Commission cannot accept this argument. There are three main reasons why a leasing subsidiary of the size and importance of GECAS cannot be easily and quickly replicated.

(142) First, for both P& W and RR the creation of such a leasing company would require entry into a new business activity. Indeed, as GECAS is financially supported by GE Capital's strong balance sheet, any attempt by competitors to create a competing GECAS would first require them to make a significant entry into the financial market industry. While GE Capital, which amounts to around half of the GE Corporation, is a true financial company of its own, UTC is an industrial conglomerate and RR a pure aerospace company, not financial institutions. Moreover, the creation of a leasing company with the size, scope and AAA credit rating of GECAS cannot be reasonably envisaged without the established strong financial backing of a parent company like GE Capital, which as a part of the GE conglomerate and unlike other major financial institutions is still only subject to limited scrutiny by financial regulators, as already explained by the Commission in its statement of objections of 8 May 2001.

(143) Second, even if competing engine manufacturers decided to enter the financial business by setting up a leasing company, it would take them a considerable amount of time and money to reach the level of operability and efficiency of GECAS. It took for instance around 30 years for ILFC to reach its current level of leasing activity. GECAS's rather rapid growth should however not be confused with a potential for easy replicability. Indeed, while it took GECAS only five years following its acquisition of GPA to become what it is today(47), reaching this position was only possible thanks to the available financial means of GE Capital acting as GE's internal bank. Without such strong financial resources, neither UTC nor RR could invest in a fleet of aircraft worth over USD 20 billion like that of GECAS. Furthermore, prior to making this significant step into acquiring its aircraft leasing business, GE Capital had been able to accumulate industry know-how through its decade-long involvement in the leasing business of other equipment such as railcars, medical units and appliances. It is therefore the combination of an extensive know-how with financial strength that made GECAS grow so rapidly. Engine competitors lack comparable financial resources and know-how to reach GECAS's level even over a longer period of time.

(144) Finally, both competing engine suppliers lack the necessary installed base of engines to be able to implement a RR-only or P& W-only policy for the purposes of replicating GE's seeding practices. They would indeed simply not be able to propose interesting solutions to airlines, as these would have to forego the commonality advantages linked to their GE installed base. Because of this lack of market liquidity for such P& W or RR-only aircraft, trying to flood the airlines with such products would not be commercially credible and would automatically result in a significant drop in the residual financial value of such products. Consequently, making the investment in a leasing company that would have to implement such a commercial policy is unlikely to be supported by those investors that would have to supply the funds as it would be much too risky to undertake. In that respect, history is a reliable proof that no engine competitor has been able to replicate the advantages that GE engines enjoy through GE Capital and GECAS(48).

(145) For these reasons, the Commission considers that GECAS' replicability is not an option to competing engine suppliers and therefore such a possibility cannot constrain GE's dominance in the engines markets.

4) Commonality

(146) Commonality across engine types also contributes to GE's dominance. Indeed, the fact that airlines using an aircraft powered by a particular type of engine generally tend to purchase incremental engines from that same engine manufacturer puts GE, as the incumbent engine supplier, in a very favourable position when an airline decides to buy a particular engine for a specific type of aircraft since it will generally prefer to purchase the same type of engines in the future owing to the benefits of fleet/engine commonality(49).

(147) The results of the Commission's investigation show that there can be very substantial economies of scale related to the standardisation of an airline's fleet or part of it (sub-fleet). This is particularly, although not exclusively, relevant for engine maintenance. The investigation has also revealed that although commonality is directly related to the level of market shares achieved by engine manufactures over the past, commonality benefits can be overruled by offsetting practices that GE, through the use of GE Capital and in particular GECAS, appears to be the only company to have the ability to effectively and successfully implement(50). The investigation also confirmed that those airlines that operate mixed fleets on a given mission profile and consequently do not enjoy particularly high commonality benefits at a given time are usually operators undergoing fleet rationalisation or in the middle of a fleet renewal programme.

(148) While engine commonality is only one factor that aircraft operators take into account when purchasing aircraft, the Commission's investigation has indicated that the organisation of the airline's maintenance activities is an important element that will influence an airline when making engine purchase decisions.

(149) There are two distinct types of maintenance. Line or support maintenance is carried out by the airlines (or their subcontractors) at the airports, while heavy maintenance or MRO involves more substantial intervention on the aircraft such as removing an engine from the wing and overhauling it at special locations. In the case of MRO, spare engines will be needed to replace those off-wing for servicing. Spare engines usually represent between [...]* and [...]* % in value of the operational engine fleet of an average airline. With regard to MRO, airlines have the choice to either perform it in-house by their own team and with their own equipment or outsource it to an external repair shop.

(150) Airlines with in-house MRO capabilities (such as Delta, KLM, Air France, and others) are usually, although not always, large airlines with large enough fleets to achieve commonality gains. Contrary to the Parties' argument that commonality has a limited effect on those airlines that perform in-house MRO, the Commission's investigation indicates that the heavy initial investments, both tangible and intangible, and recurring costs in own repair facilities, spare parts inventories, tooling, staff training, working procedures and manuals that are acquired to perform proper maintenance represent strong incentives, in the form of significant switching costs, for airlines to standardise their engine fleets to take advantage of economies of scale (that is, to reduce marginal costs of maintenance).

(151) While most of the replies from the airlines consulted for the purpose of the investigation revealed that costs associated with switching from one engine type to another can only be quantified on a case-by-case basis, some airlines gave readily available figures for the costs of having to retrain a maintenance engineer as an illustration, not of the magnitude, but of the escalation one can expect according to the actual type of switch undertaken. For example, the typical order of magnitude when the new engine belongs to a family for which the engineer is already trained is about EUR 1000 to 5000. When the engine does not belong to a specific family but still comes from the same manufacturer, the cost will increase to around EUR 5000 to 10000. The cost associated with switching is clearly higher when the new engine comes from a different supplier as it could go up to EUR 20000 per engineer since the commonality of this new engine with the previous ones will be limited.

(152) The switching costs associated with the conversion of a test bed to the specifications of a new engine are much more significant and typically range between EUR 1,2 million to EUR 4,5 million when the new engines come from a different manufacturer.

(153) As a result of the airlines' ever growing drive to cost efficiency, commonality benefits are increasingly valued by customers, especially at the level of engines since the engine price is of significant importance, representing on average 25 to 30 % of the total final purchase price of an aircraft. Moreover, the Commission's investigation revealed that the engine is such a major maintenance cost driver that the average total maintenance cost accumulated over the life cycle of an engine ranges between two and three times its acquisition price whereas the total accumulated maintenance cost of an entire aircraft roughly equals its purchase price. Engines, and their subsequent commonality, therefore matter a great deal with regard to the total cost of ownership of an aircraft.

(154) When considering the purchase of an aircraft type that is already in its fleet, an airline will thus gain a substantial advantage from buying aircraft and engines that are identical to those they already operate, relative to buying a different aircraft and engine combination that might play a similar role. This commonality effect is at its strongest within individual engine and aircraft types. For example, a large North American airline confirmed in its reply to the Commission's questionnaire that while aircraft fleet commonality on aircraft purchase is top priority, it values equally highly commonality on engines for new aircraft and, as a consequence, almost always elects to maintain commonality with an engine already in the fleet as long as it meets the mission profile requirements. Another North American airline further underlined in its reply to the Commission's questionnaire that commonality in engines often plays a major role as shown by its decision to purchase P& W-powered B747-200s in 1999. This decision was indeed predicated on its earlier purchase, in 1987, of other P& W-powered B747s (the 400 version).

(155) Furthermore, when considering the purchase of an aircraft type not yet represented in its fleet, the Commission's investigation established that a customer usually prefers to order an engine that will fit into the families of engines that already power its current fleet. Contrary to the Parties' contention that commonality does not apply across engine families, the investigation confirmed that, to the extent that engines within an engine family offer product similarities and share common components or design, an airline customer will indeed benefit from selecting an engine family to power various aircraft types and consequently enjoy benefits from commonality across this engine family. For example, during its negotiations with Airbus for the order of sev