EN Official Journal of the European Union C 51/4

Summary of Commission Decision

of 17 December 2008

declaring a concentration compatible with the common market and the functioning of the EEA Agreement

(Case COMP/M.5141 — KLM/Martinair)

(notified under document number C(2008) 8458 final)

(Only the English version is authentic)

(2009/C 51/04)

On 17 December 2008, the Commission adopted a Decision in a merger case under Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), and in particular Article 8(1) of that Regulation. A non-confidential version of the full Decision can be found in the authentic language of the case and in the working languages of the Commission on the website of the Directorate-General for Competition, at the following address:

http://ec.europa.eu/comm/competition/index_en.html

I. THE PARTIES

(1) KLM Royal Dutch Airlines N.V. (‘KLM’), a Dutch undertaking ultimately controlled by Air France-KLM Holding S.A. (‘Air France-KLM’, France), is a full-service network carrier with its hub at Amsterdam Airport Schiphol (‘Schiphol’). Its two core activities are the air transport of passengers and cargo.

(2) Martinair (‘Martinair’) is a Dutch point-to-point carrier with its base at Schiphol. Martinair provides charter and scheduled air transport of passengers and cargo. Its fleet serves only intercontinental destinations. Martinair operates passenger flights to Vancouver, Toronto, Miami, Havana, Varadero, San José, Punta Cana, Puerto Plata, Cancun, Curacao and Aruba. Its cargo flights operate between Europe and the following continents: Africa, the Middle East, the Far East, North America and Latin America.

II. THE OPERATION

(3) KLM currently owns 50 % of Martinair, sharing the equity 50/50 with Maersk Holding B.V., a Dutch-based wholly-owned subsidiary of A.P. Moller-Maersk A/S (‘Maersk’), a Danish company with interests mainly in sea and land transport. Given the company organisation and corporate governance of Martinair, KLM and Maersk currently jointly control Martinair. KLM intends to acquire the 50 % shareholding of Maersk in Martinair.

(4) Accordingly, on 17 July 2008, the Commission received a notification of a proposed concentration pursuant to Article 4 of the EC Merger Regulation by which KLM acquires within the meaning of Article 3(1)(b) of the EC Merger Regulation control of the whole of the undertaking Martinair by way of purchase of shares.

III. COMMUNITY DIMENSION

(5) The notified concentration has a Community dimension within the meaning of Article 1(2) of the EC Merger Regulation.

IV. PROCEDURE AND SUMMARY

(6) Based on the results of the first phase market investigation, the Commission concluded that the proposed transaction raised serious doubts as to its compatibility with the common market due to competition concerns identified with respect to air passenger transport between Amsterdam and Aruba and Curacao. On 18 August 2008, the parties submitted undertakings which involved a commitment to benchmark the post-merger price evolution of economy class fares on the routes connecting Amsterdam to Aruba and Curacao, vis-à-vis the price evolution of economy class fares on a basket of comparable routes. However, the proposed commitment proved to be unsuitable to eliminate the serious doubts identified by the Commission. On 8 September 2008, the Commission adopted a decision to initiate proceedings under Article 6(1)(c) of the EC Merger Regulation.

V. CONCEPTUAL FRAMEWORK FOR THE COMPETITIVE ASSESSMENT

(7) The proposed concentration involves a change from joint to sole control. Already pre-transaction, KLM therefore exercises some degree of control over Martinair. Moreover, KLM's incentives to compete with Martinair are arguably reduced given that KLM is entitled to half of Martinair's profits.

(8) Nevertheless, the Commission found on the basis of Martinair's organisation, corporate governance and internal documents that KLM has little influence on Martinair's pricing decisions, decisions on entering a particular route, capacity increases or decreases and similar operational decisions. In fact, KLM's influence on Martinair's market conduct is limited to veto rights with regard to more far-reaching, strategic and operational choices including, in particular, strategic choices to operate within certain business segments (e.g. short-haul or long-haul passenger air transport, cargo air transport) and decisions to extend or reduce Martinair's fleet. Moreover, the market investigation largely confirmed that the parties' competitors and customers generally perceive KLM and Martinair as competing with regard to both their passenger and their cargo operations.

(9) In the light of these circumstances, the Commission carefully analysed the effects that the elimination of the existing degree of competition between KLM and Martinair which would result from the proposed concentration might have on competition.

VI. AIR TRANSPORT OF CARGO

6.1. The relevant product and geographic markets

(10) The market investigation confirmed that sea transport is increasingly becoming an economically attractive option not only for intra-European, but also for intercontinental cargo. However, due to their time-sensitiveness, many types of cargo still require transport by air. For the purpose of the present Decision, it is not necessary to decide whether intercontinental cargo, air and sea transport are part of the same market or not as the proposed concentration does not significantly impede effective competition in the common market or a substantial part of it under either market definition.

(11) The market investigation also indicated that there is no need for a subdivision of the air cargo transport market by category or nature of the goods transported. Customers generally buy space which they fill with all sorts of different cargo, including perishables and other goods which might require specific handling. In addition, typically the same aircraft is used to transport the different types of cargo and carriers can adapt their services relatively easily to the specific requirements of certain goods. However, there is no need to decide on the precise market definition in this respect as the proposed concentration does not significantly impede effective competition in the common market or a substantial part of it under either market definition.

(12) In accordance with previous decisions, the Decision defines the market for air cargo transport on a continent-to-continent basis for intercontinental transport of cargo, at least when it concerns continents with a sufficiently developed infrastructure allowing for onward connections. The latter was confirmed for North America and Europe, for all types of goods including time-critical, perishable goods such as flowers. In this respect, the market investigation confirmed that, due to the well-developed European trucking infrastructure, many cargo airports in Europe are substitutable to Schiphol for all kinds of cargo including flowers. As regards, Africa, South America and parts of Asia, the market investigation showed that these continents have to be subdivided on a country-by-country basis.

(13) Moreover, the market investigation revealed that air cargo transport markets are one-directional in nature as the demand for air cargo transport can differ substantially on each end of the route. Finally, the market investigation also confirmed the Commission's findings in previous cases that indirect flights are generally substitutable to direct flights.

(14) In view of the above, the air cargo transport market for the purpose of the Decision is to be divided on the basis of one-way continent-to-continent pairs with respect to routes connecting Europe and North America, and on a continent-to-country basis for all other routes.

6.2. Competitive assessment

(15) As regards air cargo transport between Europe and North America, the parties' combined market shares will remain below 25 % and the parties will continue to face strong competition from several other major combination airlines, such as Lufthansa, British Airways and integrators such as FedEx and UPS. Similarly, with respect to air cargo transport between Europe and those Far Eastern countries where the parties' activities overlap, the parties' combined market shares will reach a maximum of 25 % and the parties will continue to face strong competition from several other carriers, such as Lufthansa, Cargolux, Cathay Pacific and Air China. Therefore, the proposed concentration will not significantly impede effective competition in the common market or a substantial part of it with respect to any of these markets.

(16) With respect to air cargo transport between Europe and South America, the transaction will lead to affected markets on the routes connecting Europe to the following countries: Colombia, Peru and Ecuador. The parties' combined market shares on these routes reach between [30-40] % (on the route from Ecuador to Europe) and [60-70] % (on the route from Colombia to Europe) and the market share increments are significant. The situation is similar with respect to the routes connecting Europe to some Greater Caribbean countries, namely Mexico and Cuba, where the parties' market shares will reach between [20-30] % (on the route from Cuba to Europe) and [50-60] % (on the routes from Mexico to Europe) and again the increments will be significant. With respect to routes connecting Europe to African countries, the parties' market shares will be high in particular on the routes from Europe to Kenya (combined market share of [50-60] %) and from Europe to Sudan (combined market share of [60-70] %), whereas increments will also be substantial on these routes.

(17) However, even on those routes where the parties have combined high market shares and where market share increments are significant, the parties generally face several strong competitors which will constrain them post-transaction. Moreover, barriers to entry into air cargo transport on the relevant routes appear to be relatively low. Indeed, several new players have recently entered on some of these routes. In addition, in the course of the market investigation, customers, amongst which large freight forwarders having some degree of bargaining power, expressed their readiness to switch to a different supplier should the parties decide to increase prices and some of the parties' competitors indicated that they have extra capacity to take up additional demand.

(18) For all these reasons, it is concluded in the Decision that the proposed concentration is unlikely to significantly impede effective competition in the common market or a substantial part of it with respect to any of the routes on which the parties' air cargo transport activities overlap.

VII. AIR TRANSPORT OF PASSENGERS

7.1. The relevant product and geographic market

(19) The parties passenger air transport activities overlap on the routes connecting Amsterdam to the following eight long-haul (holiday) destinations: Vancouver, Toronto, Miami, Punta Cana, Cancun, Havana, Curacao and Aruba.

(20) The market investigation as well as the customer survey commissioned by the Commission in this case confirmed the Commission's practice in previous cases to consider the ‘wholesale’ supply of airline seats to tour operators as a market distinct from the market for supply of scheduled air transport services to end-customers. According to the customer survey, from a demand-side perspective, end-customers do not generally consider package holidays and independent holidays as substitutable. Accordingly, only a small proportion of customers purchasing packages would switch to unbundled flights and an even smaller proportion of customers purchasing unbundled flights would consider purchasing a package.

7.1.1. Supply of scheduled air transport services to end-customers

(21) As regards the market for the supply of passenger air transport services to end-customers, the market investigation and the customer survey confirmed that, for the purpose of the assessment of the proposed concentration, the traditional point of origin/point of destination (‘O&D’) approach on the basis of which the Commission defined the relevant market in previous cases is inappropriate. As regards the point of origin, the market investigation and customer survey revealed that the airports of Düsseldorf and Brussels must be included in the relevant market, at least for flights to the five holiday destinations in the Greater Caribbean (i.e. Punta Cana, Cancun, Havana, Curacao and Aruba) as a large proportion of travellers to these destinations consider these two airports as substitutes to Schiphol for flights to these destinations. For flights to Vancouver, Toronto and Miami, it is not necessary to decide on the precise market definition in this respect as the proposed concentration does not significantly impede effective competition in the common market or a substantial part of it even under the narrowest market definition comprising only flights departing from Amsterdam.

(22) As regards the point of destination, the market investigation and customer survey indicated, at least for the five holiday destinations in the Greater Caribbean, that there is some degree of substitutability between different long-haul (holiday) destinations, but did not provide clear results with respect to the exact scope of the point of destination. However, there is no need to decide on the precise market definition in this respect as the proposed concentration does not significantly impede effective competition in the common market or a substantial part of it under either market definition.

(23) Moreover, the market investigation confirmed the Commission's practice in previous cases that indirect flights should be included in the relevant market, provided that they are marketed as connecting flights on the relevant O&D pair in the computer reservation systems, they are operated on a daily basis and cause only a limited extension of the trip (maximum 150 minutes connecting time).

7.1.2. Wholesale supply of seats to tour operators

(24) In previous decisions, the Commission has considered that the relevant market for the wholesale supply of seats to tour operators should comprise the supply of airline seats to all long-haul destinations without further sub-division of the market by destination. The market investigation indicated that a sub-division of the wholesale market on a route-by-route basis might be warranted. This might be the case at least for those routes where tour operators cannot arbitrage between destinations as they only purchase seats from airlines at the moment when their customers express interest in purchasing a package to a specific destination. However, for the purpose of the present Decision, there is no need to decide on the precise market definition in this respect as the proposed concentration does not significantly impede effective competition in the common market or a substantial part of it under either market definition.

(25) As with respect to the market for the supply of scheduled air transport services to end-customers, the market investigation confirmed that, for the purpose of the present case, the airports of Amsterdam, Düsseldorf and Brussels are part of the same relevant market for the wholesale supply of seats to tour operators.

7.2. Competitive Assessment

7.2.1. The relevant counterfactual for assessing the effect of the proposed transaction relating to the parties' operations in the air transport of passengers

(26) The Commission's market investigation has revealed that Martinair's passenger air transport operations have been loss-making during the last few years and will likely continue to be loss-making, despite Martinair's recent substantial restructuring efforts. In fact, it appears that, to continue to operate its passenger air transport business beyond the next two years, Martinair will need to make some large investments.

(27) The main investment that Martinair would need to make to continue operating its passenger air transport business concerns the renewal of virtually its entire passenger fleet. Martinair's passenger fleet is very old and inefficient. Due to technical problems with the aircraft, Martinair flights are often delayed. Accordingly, Martinair's competitive strength with respect to the long-haul air transport of passengers has been suffering recently and, without the required fleet renewal, is likely to suffer even further. Martinair's financial situation, however, makes it difficult to raise finance for investment in its fleet. In addition, as regards the fleet renewal, KLM has a veto right under Martinair's Articles of Association. Martinair's position in this respect makes it likely that the competitive constraint exerted by Martinair will be eroded in the foreseeable future. In view of these circumstances, the merger specific effects of the proposed concentration with respect to the parties' passenger air transport activities are likely to be limited.

7.2.2. The supply of air transport services to end-customers

(28) As regards flights to the three North American cities of Vancouver, Toronto and Miami, the parties' combined market shares are relatively high ranging between [70-80] % and [70-80] %, if only flights out of Amsterdam are taken into account, and amounting to [50-60] % when including also flights departing from Düsseldorf and Brussels. However, there are numerous credible alternatives available to end-customers whishing to travel from the Netherlands to these three cities, including flights offered by Air Canada, United Airlines, British Airways, Air Transat, Lufthansa and Continental Airlines, which will continue to constrain the merged entity post-transaction. The proposed transaction is therefore unlikely to significantly impede effective competition in the common market with respect to these three routes.

(29) On the routes connecting Amsterdam, Düsseldorf and Brussels to Punta Cana, Cancun and Havana, the parties' combined market shares amount to [70-80] %, [80-90] % and [80-90] % respectively. Martinair operates scheduled and non-scheduled direct flights out of Amsterdam, while KLM operates only indirect flights on these routes. There are several competing direct and indirect alternatives from Amsterdam, Brussels and Düsseldorf. For example, LTU operates a direct service to Punta Cana and Cancun out of Düsseldorf, ArkeFly operates direct services to these two destinations from Amsterdam, Jetairfly serves Punta Cana directly from Brussels, and Iberia offers daily indirect flights to Havana from each of the airports of Amsterdam, Düsseldorf and Brussels.

(30) In addition, the market investigation and the customer survey indicated that, as regards Cancun and Punta Cana, there is significant competitive pressure from other typical ‘sun and beach’ holiday destinations. Also with respect to Havana, the customer survey indicated that a significant proportion of customers would either stop travelling altogether or switch to other destinations if prices for flights to Havana were to increase by 5-10 %. In view of all these circumstances, it must be concluded that also with regard to these three destinations, the proposed transaction is unlikely to significantly impede effective competition in the common market or a substantial part of it.

(31) Finally, on the routes connecting Amsterdam to Curacao and Aruba, both parties operate direct scheduled services out of Amsterdam. There are no alternative flights to these two destinations out of Düsseldorf or Brussels. The parties' combined market share amounts to [80-90] % on both of these routes, while the third player on both routes, ArkeFly, accounts for the remaining [10-20] %. ArkeFly operates scheduled services on both routes serving Aruba with three direct flights per week and Curacao six times a week (seven times since 1 November 2008).

(32) The market investigation and the customer survey showed that these two routes are somewhat different from the other destinations served by the parties. Due to historic and cultural ties between the Netherlands Antilles and the Netherlands, the proportion of travellers visiting friends and relatives is relatively high on these routes and a significant number of Dutch residents have a second home on these islands. Nevertheless, there is still a large proportion of typical holidaymakers travelling to these two destinations. The customer survey showed also for Aruba and Curacao that, in case of a 5-10 % price increase for flights on these routes, a significant proportion of travellers would either stop travelling altogether, switch to ArkeFly or to other holiday destinations.

(33) In view of all these circumstances, the second phase market investigation and the customer survey therefore suggest also for these two routes that the proposed transaction is unlikely to significantly impede effective competition in the common market or a substantial part of it.

7.2.3. The wholesale supply of seats to tour operators

(34) As regards the wholesale supply of seats to tour operators for flights connecting only Amsterdam or Amsterdam, Düsseldorf and Brussels to the three North American cities Vancouver, Toronto and Miami and the three holiday destinations Punta Cana, Cancun and Havana, the situation is similar to that on the market for the supply of scheduled air passenger transport services to end-customers. Given the number of alternative suppliers on these routes the proposed transaction is unlikely to significantly impede effective competition in the common market or a substantial part of it with respect to these destinations.

(35) Concerning Curacao and Aruba, the parties' combined market share amounts to [90-95] % and [90-95] % respectively. The only competitor on these two routes, ArkeFly, uses most of its capacity captively for inclusion in package holidays offered by TUI or other tour operators belonging to the same corporate group as TUI and ArkeFly and therefore has a market share of only [5-10] % on the ‘merchant market’. If captive sales were included, however, ArkeFly's market share would be more than [6-12] times higher, reaching around [40-60] %. In this context, it must be noted that ArkeFly has indicated during the second phase market investigation that, depending on the circumstances, it would consider increasing its sales to competing tour operators if it was approached by a group of tour operators asking them to supply seats on their flights.

(36) In addition, the indirect constraint from the downstream market for end-customers, i.e. customers buying package holidays from tour operators, must be taken into account. The market investigation and the customer survey have shown that Dutch leisure travellers are generally very price-sensitive. If the parties were to raise prices to tour operators post-transaction, a significant number of customers who would normally purchase a package from one of TUI's competitors would likely switch to TUI's packages. In that case, however, these passengers would also be lost for the merged entity which, as a result, would likely refrain from increasing the price.

(37) In view of all these circumstances, also for these two routes the proposed transaction is therefore unlikely to significantly impede effective competition in the common market or a substantial part of it.

VIII. CONCLUSION

(38) For the reasons mentioned above, the Decision concludes that the proposed concentration will not significantly impede effective competition in the common market or in a substantial part of it.