Judgment of the Court of First Instance (Fifth Chamber, extended composition) of 6 June 2002. - Airtours plc v Commission of the European Communities. - Competition - Regulation (EEC) No 4064/89 - Decision declaring a concentration to be incompatible with the common market - Application for annulment - Relevant market - Collective dominant position - Proof. - Case T-342/99.



European Court reports 2002 Page II-02585



Summary

Parties

Grounds

Decision on costs

Operative part



Keywords

1. Competition - Concentrations between undertakings - Assessment of compatibility with the common market - Relevant market - Definition - Criteria - Application to the foreign package holiday market

(Council Regulation No 4064/89)

2. Competition - Concentrations between undertakings - Investigation by the Commission - Findings necessary for recognition of a collective dominant position significantly impeding competition in the common market - Link between the notified concentration and the collective dominant position concerned - Establishment

(Council Regulation No 4064/89)

3. Competition - Concentrations between undertakings - Assessment of compatibility with the common market - Existence of a collective dominant position significantly impeding effective competition in the common market - Definition

(Council Regulation No 4064/89, Art. 2(3))

4. Competition - Concentrations between undertakings - Assessment of compatibility with the common market - Creation of a collective dominant position significantly impeding effective competition in the common market - Conditions

(Council Regulation No 4064/89, Art. 2(3))

5. Competition - Concentrations between undertakings - Assessment of compatibility with the common market - Creation of a collective dominant position significantly impeding effective competition in the common market - Commission's analysis - Close examination of the circumstances relevant for assessing the effects of the concentration on competition in the reference market

(Council Regulation No 4064/89)

6. Competition - Concentrations between undertakings - Assessment of compatibility with the common market - Creation of a collective dominant position significantly impeding effective competition in the common market - Burden of proof

(Council Regulation No 4064/89)

7. Competition - Concentrations between undertakings - Investigation by the Commission - Assessments of an economic nature - Discretion - Judicial review - Limits

(Council Regulation No 4064/89, Art. 2)

8. Competition - Concentrations between undertakings - Assessment of compatibility with the common market - Creation of a collective dominant position significantly impeding effective competition in the common market - Need for the Commission to take into account, in the course of its examination, the level of competition obtaining in the relevant market at the time when the transaction is notified

(Council Regulation No 4064/89)

9. Competition - Concentrations between undertakings - Assessment of compatibility with the common market - Creation or strengthening of a collective dominant position significantly impeding effective competition in the common market - Evidence of tacit collusion between economic operators - Stability of historic market shares

(Council Regulation No 4064/89)

10. Competition - Concentrations between undertakings - Assessment of compatibility with the common market - Creation of a collective dominant position significantly impeding effective competition in the common market - Stable demand displaying low volatility - Relevant factor in finding collective dominant position to exist

(Council Regulation No 4064/89)

Summary

$$1. As regards the application of Regulation No 4064/89 on the control of concentrations between undertakings, a proper definition of the relevant market is a necessary precondition for the assessment of the effects on competition of the concentration notified. In that regard, the definition of the market in the products affected by the merger must take account of the overall economic context so as to make it possible to assess the actual economic power of the undertaking or undertakings in question and, for that purpose, it is necessary first to define the products which, although incapable of being substituted for other products, are sufficiently interchangeable with the undertaking's own products, both as regards their objective characteristics and the competitive conditions and the structure of supply and demand on the market.

( see paras 19-20 )

2. Where, for the purposes of applying Regulation No 4064/89 on the control of concentrations between undertakings, the Commission examines a possible collective dominant position, it must ascertain whether the concentration would have the direct and immediate effect of creating or strengthening a position of that kind, which is such as significantly and lastingly to impede competition in the relevant market. If there is no substantial alteration to competition as it stands, the merger must be approved.

In the case of an alleged collective dominant position, the Commission is obliged to assess, using a prospective analysis of the reference market, whether the concentration which has been referred to it leads to a situation in which effective competition in the relevant market is significantly impeded by the undertakings involved in the concentration and one or more other undertakings which together, in particular because of factors giving rise to a connection between them, are able to adopt a common policy on the market and act to a considerable extent independently of their competitors, their customers, and also of consumers.

( see paras 58-59 )

3. A collective dominant position significantly impeding effective competition in the common market or a substantial part of it may thus arise as the result of a concentration where, in view of the actual characteristics of the relevant market and of the alteration in its structure that the transaction would entail, the latter would make each member of the dominant oligopoly, as it becomes aware of common interests, consider it possible, economically rational, and hence preferable, to adopt on a lasting basis a common policy on the market with the aim of selling at above competitive prices, without having to enter into an agreement or resort to a concerted practice within the meaning of Article 81 EC and without any actual or potential competitors, let alone customers or consumers, being able to react effectively.

The prospective analysis of the market necessary in any assessment of an alleged collective dominant position must not only view that position statically at a fixed point in time - the point when the transaction takes place and the structure of competition is altered - but must also assess it dynamically, with regard in particular to its internal equilibrium, stability, and the question as to whether any parallel anti-competitive conduct to which it might give rise is sustainable over time.

( see paras 61, 192 )

4. Three conditions are necessary for the creation of a collective dominant position significantly impeding effective competition in the common market or a substantial part of it:

- first, each member of the dominant oligopoly must have the ability to know how the other members are behaving in order to monitor whether or not they are adopting the common policy. In that regard, it is not enough for each member of the dominant oligopoly to be aware that interdependent market conduct is profitable for all of them but each member must also have a means of knowing whether the other operators are adopting the same strategy and whether they are maintaining it. There must, therefore, be sufficient market transparency for all members of the dominant oligopoly to be aware, sufficiently precisely and quickly, of the way in which the other members' market conduct is evolving;

- second, the situation of tacit coordination must be sustainable over time, that is to say, there must be an incentive not to depart from the common policy on the market. It is only if all the members of the dominant oligopoly maintain the parallel conduct that all can benefit. The notion of retaliation in respect of conduct deviating from the common policy is thus inherent in this condition. In that context, the Commission must not necessarily prove that there is a specific retaliation mechanism involving a degree of severity, but it must none the less establish that deterrents exist, which are such that it is not worth the while of any member of the dominant oligopoly to depart from the common course of conduct to the detriment of the other oligopolists. For a situation of collective dominance to be viable, there must be adequate deterrents to ensure that there is a long-term incentive in not departing from the common policy, which means that each member of the dominant oligopoly must be aware that highly competitive action on its part designed to increase its market share would provoke identical action by the others, so that it would derive no benefit from its initiative;

- third, it must also be established that the foreseeable reaction of current and future competitors, as well as of consumers, would not jeopardise the results expected from the common policy.

( see paras 62, 195 )

5. The prospective analysis which the Commission has to carry out in its review of concentrations involving collective dominance calls for close examination in particular of the circumstances which, in each individual case, are relevant for assessing the effects of the concentration on competition in the reference market.

( see para. 63 )

6. Where the Commission takes the view that a concentration between undertakings should be prohibited because it will create a situation of collective dominance, it is incumbent upon it to produce convincing evidence thereof. The evidence must concern, in particular, factors playing a significant role in the assessment of whether a situation of collective dominance exists, such as, for example, the lack of effective competition between the operators alleged to be members of the dominant oligopoly and the weakness of any competitive pressure that might be exerted by other operators.

( see para. 63 )

7. The basic provisions of Regulation No 4064/89 on the control of concentrations between undertakings, in particular Article 2 thereof, confer on the Commission a certain discretion, especially with respect to assessments of an economic nature. Consequently, when the exercise of that discretion, which is essential for defining the rules on concentrations, is under review, the Community judicature must take account of the discretionary margin implicit in the provisions of an economic nature which form part of the rules on concentrations.

( see para. 64 )

8. The level of competition obtaining in the relevant market at the time when the concentration is notified is a decisive factor in establishing whether a collective dominant position has been created for the purposes of Regulation No 4064/89 on the control of concentrations between undertakings. As regards the assessment of whether a collective dominant position exists, one of the questions which the Commission is required to address is whether the concentration referred to it would result in effective competition in the relevant market being significantly impeded. If there is no significant change in the level of competition obtaining previously, the merger should be approved because it does not restrict competition.

( see para. 82 )

9. For the purpose of determining whether there is a collective dominant position, the stability of historic market shares is a factor conducive to the development of tacit collusion, inasmuch as it facilitates division of the market instead of fierce competition, each operator referring to its historic market share in order to fix its production in proportion thereto.

( see para. 111 )

10. Economic theory regards volatility of demand as something which renders the creation of a collective dominant position more difficult. Conversely, stable demand, thus displaying low volatility, is a relevant factor indicative of the existence of a collective dominant position, in so far as it makes deviations from the common policy (that is, cheating) more easily detectable, by enabling them to be distinguished from capacity adjustments intended to respond to expansion or contraction in a volatile market.

( see para. 139 )

Parties

In Case T-342/99,

Airtours plc, represented by J. Swift QC and R. Anderson, Barristers, M. Nicholson, J. Holland and A. Gomes da Silva, Solicitors, with an address for service in Luxembourg,

applicant,

v

Commission of the European Communities, represented by R. Lyal, acting as Agent, with an address for service in Luxembourg,

defendant,

APPLICATION for annulment of Commission Decision C(1999)3022 final of 22 September 1999 declaring a concentration to be incompatible with the common market and the EEA Agreement (Case IV/M.1524 - Airtours/First Choice), published under number 2000/276/EC (OJ 2000 L 93, p. 1),

THE COURT OF FIRST INSTANCE

OF THE EUROPEAN COMMUNITIES (Fifth Chamber, Extended Composition),

composed of: P. Lindh, President, R. García-Valdecasas, J.D. Cooke, M. Vilaras and N.J. Forwood, Judges,

Registrar: J. Palacio González, Administrator,

having regard to the written procedure and further to the hearing on 11 October 2001,

gives the following

Judgment

Grounds

Facts and procedure

1 On 29 April 1999, Airtours plc, a United Kingdom company whose main activity is as a tour operator and supplier of package holidays, announced its intention to acquire all the shares in the United Kingdom tour operator, First Choice plc, one of its competitors.

2 On the same day, Airtours notified the proposed merger to the Commission pursuant to Article 4 of Council Regulation (EEC) No 4064/89/EEC of 21 December 1989 on the control of concentrations between undertakings (OJ 1989 L 395, p.1, corrected version in OJ 1990 L 257, p. 13), as most recently amended by Council Regulation (EC) No 1310/97 of 30 June 1997 (OJ 1997 L 180, p. 1) (hereinafter Regulation No 4064/89).

3 In its decision of 3 June 1999, the Commission found that the merger gave rise to serious doubts as to its compatibility with the common market and decided to initiate the investigation procedure in accordance with Article 6(1)(c) of Regulation No 4064/89.

4 On 9 July 1999, the Commission sent the applicant a statement of objections under Article 18 of Regulation No 4064/89, in which it set out the reasons why it took the view, prima facie, that the proposed merger would give rise to a collective dominant position in the United Kingdom short-haul foreign package holiday market. The applicant replied to the statement of objections on 25 July 1999.

5 A hearing was held before the Commission Hearing Officer on 28 and 29 July 1999, pursuant to Articles 14, 15 and 16 of Commission Regulation (EC) No 447/98 of 1 March 1998 on the notifications, time limits and hearings provided for in Regulation No 4064/89 (OJ 1998 L 61, p. 1).

6 On 7 September 1999 the applicant submitted a set of undertakings in accordance with Article 8(2) of Regulation No 4064/89 in order to allay the competition concerns which had been identified.

7 On 9 September 1999 the Advisory Committee on concentrations met and delivered its opinion on the merger and on the undertakings put forward by the applicant.

8 A meeting was held on 15 September 1999, which was attended by representatives of the applicant and of the Commission, following which the applicant submitted a revised set of undertakings.

9 By decision of 22 September 1999 (Case IV/M.1524 - Airtours/First Choice) (Decision C(1999)3022 final, published under Number 2000/276/EC (OJ 2000 L 93, p. 1); hereinafter the Decision), the Commission declared that the concentration was incompatible with the common market and the operation of the European Economic Area under Article 8(3) of Regulation No 4064/89 on the ground that it would create a collective dominant position in the United Kingdom market for short-haul foreign package holidays, as a result of which competition would be significantly impeded in the common market. The Commission stated in the Decision that the undertakings proposed by Airtours on 7 September 1999 would not prevent the creation of a collective dominant position and that the undertakings put forward on 15 September 1999 were submitted too late to be considered at that stage in the procedure.

Procedure and forms of order sought by the parties

10 On 2 December 1999 the applicant brought the present action.

11 Upon hearing the report of the Judge-Rapporteur, the Court of First Instance decided to open the oral procedure and, by way of measures of organisation of procedure, the applicant and the Commission were asked to produce certain documents and reply in writing to various questions.

12 By letters from the Commission of 27 July 2001 and 3 August 2001, and by letter from the applicant of 31 August 2001, the parties complied with the measures of organisation of procedure taken by the Court.

13 The parties presented oral argument and replied to the questions put to them by the Court at the hearing on 11 October 2001.

14 The applicant claims that the Court should:

- annul the decision;

- order the Commission to pay the costs.

15 The Commission contends that the Court should:

- dismiss the action;

- order the applicant to pay the costs.

Substance

16 The applicant relies on four pleas in law in support of its application. The first plea alleges that there were manifest errors of assessment in the definition of the relevant product market and infringement of Article 253 EC. The second plea alleges infringement of Article 2 of Regulation No 4064/89, breach of the principle of legal certainty in so far as the Commission applied a new and incorrect definition of collective dominance in its assessment of the present case, and infringement of Article 253 EC. The third plea alleges infringement of Article 2 of Regulation No 4064/89 - in that the Commission found that the transaction created a collective dominant position - together with infringement of Article 253 EC. The fourth plea alleges infringement of Article 8(2) of Regulation No 4064/89 and breach of the principle of proportionality inasmuch as the Commission did not accept the undertakings proposed by the applicant.

The first plea alleging errors in the definition of the relevant product market and infringement of Article 253 EC

A - The Decision

17 The definition of the relevant product market in the United Kingdom foreign package holiday industry is the only definition challenged by the applicant. The Decision identifies two separate markets, the market for package holidays to long-haul destinations (long-haul package holidays) and that for package holidays to short-haul destinations (short-haul package holidays). In that connection, it is specified in the Decision that the travel industry considers the long-haul sector to comprise all destinations involving a flight time from the United Kingdom substantially in excess of three hours, other than flights to the islands in the Eastern Mediterranean or the Canary Islands, which may take up to around four hours. As a result, all European (mainland and islands) and North African holiday destinations fall into the short-haul category, in contrast to those destinations in, for example, the Caribbean, the Americas or South-East Asia, in respect of which the flight times are substantially longer (typically twice as long or more) (paragraphs 10 to 13 of the Decision).

18 At paragraphs 16 to 28, the Decision sets out the reasons which led the Commission to conclude that the differences between long and short-haul package holidays are, from the point of view of competition, more significant than the similarities and are such as to justify defining separate markets for the purposes of an appraisal of the concentration notified. Those reasons are the following:

(a) first, for airlines (and, therefore, for vertically integrated tour operators) there is limited scope for substitution between long-haul and short-haul flights, given that there is little scope for using the same aircraft for both short and long-haul destinations and given the operating costs for larger as compared with smaller aircraft and the difficulties that charter airlines (including those of the parties to the merger) must overcome if they attempt substantially to reconfigure [their] fleet as between long-haul and short-haul capabilities, namely, the need to make capital investment, the time necessary to do so and the difficulty of leasing aircraft on a short-term basis, inasmuch as charter airlines (including those of the parties) own most of their aircraft or lease them on relatively long leases (typically a lease of five years) in order to reduce costs, maintain quality and ensure continuity of supply (paragraphs 16 to 18 of the Decision);

(b) second, the fact that from the point of view of the ultimate consumer there are a number of significant differences between short and long-haul package holidays:

(i) the image or idea of the holiday: long-haul packages seem more exotic and therefore appeal to single people or couples without children; short-haul package holidays, for example to Mediterranean resorts, are of more interest to families (paragraph 20 of the Decision);

(ii) the time when holidays are taken: long-haul package holidays are less suited to the needs of United Kingdom consumers travelling en famille who, for the most part, go on foreign package holidays during the summer season (roughly, mid-July to the end of August) so as to coincide with the school holidays (and in some areas, factory closures) (paragraph 20 of the Decision);

(iii) transfer time: longer flight times may deter some consumers from choosing a long-haul package holiday, even if it is comparable in other respects to a short-haul package, for example as regards weather, location, price, visas, medical requirements and the like (paragraph 21 of the Decision);

(iv) lack of price substitutability between short and long-haul destinations: prices are appreciably higher for long-haul package holidays and there is only limited convergence between prices for that kind of holiday and prices for comparable short-haul package holidays. Although prices for the two kinds of holiday, particularly at certain times of the year (for example, when the weather is bad) can sometimes be the same or not very different, that very limited overlap is not sufficient to constrain prices throughout the short-haul market, since the long-haul holidays concerned are regarded as effective substitutes by only a very small proportion of customers (paragraphs 22 to 26 of the Decision).

B - Definition of the relevant product market

19 The Court notes, to begin with, that, as regards the application of Regulation No 4064/89 as envisaged in this case, a proper definition of the relevant market is a necessary precondition for the assessment of the effects on competition of the concentration (see, to that effect, Joined Cases C-68/94 and C-30/95 France and Others v Commission (Kali & Salz) [1998] ECR I-1375, paragraph 143).

20 The definition of the market in the products affected by the merger must take account of the overall economic context so as to make it possible to assess the actual economic power of the undertaking or undertakings in question and, for that purpose, it is necessary first to define the products which, although incapable of being substituted for other products, are sufficiently interchangeable with the undertaking's own products, both as regards their objective characteristics and the competitive conditions and the structure of supply and demand on the market (see, to that effect, Case C-333/94 P Tetra Pak v Commission [1996] ECR I-5951, paragraphs 10 and 13, and Case T-83/91 Tetra Pak v Commission [1994] ECR II-755, paragraph 63).

21 The applicant challenges the definition of the relevant product market given in the Decision. Rather than limiting the relevant market to that for short-haul foreign package holidays, the Commission should have defined it as the market comprising all foreign package holidays, including long-haul packages. The applicant complains that the Commission has departed from previous practice regarding the definition of the foreign package holiday market and maintains that the Commission's assessment of demand-side and supply-side substitutability is incorrect. As a result of that flaw in the Commission's reasoning the Decision is vitiated by manifest errors of assessment and thus an error of law.

22 As regards the Commission's proposition that there is no demand-side substitutability between long and short-haul package holidays, the applicant submits that the Commission's arguments concerning, first, the various product characteristics and, second, the differences in average prices for long and short-haul package holidays are mistaken.

23 It refers, first, to product characteristics and challenges the Commission's contention that long-haul holidays are more exotic, are less suitable for families and involve longer flight times. Thus, short-haul destinations, such as Turkey or North Africa, are more exotic than long-haul destinations, such as Florida or the Dominican Republic, which are more family destinations. Travel time to the resort can be as long for short-haul destinations as for long-haul, since what matters is total travel time, including check-in and transfers, rather than flight time in the strict sense. Finally, the applicant claims that variety in the type of holidays offered by tour operators to take account of different lifestyles (for example, family or non-family) and variety of tastes (in particular, so far as accommodation, food, activities, interests and the like are concerned) exists within both the long-haul holiday segment and the short-haul holiday segment.

24 Second, regarding difference in holiday prices, the applicant argues that it is irrelevant to point out that average prices for long-haul destinations exceed those for short-haul destinations when, as in this instance, the products are clearly differentiated. The applicant also points to a price convergence between the two types of holidays, since some short-haul holidays are in the same price-range as some long-haul holidays.

25 The Court notes that it is apparent from the documents before it that the Commission took account of consumer preferences, average flight time, the level of average prices and the limited interchangeability of the aircraft used for each type of destination in reaching its conclusion that short-haul package holidays belong to a separate market from that to which long-haul packages belong. The Commission came to that conclusion, while not, however, disputing that long-haul package holidays are becoming increasingly popular with consumers or that the market studies cited by the applicant in its reply to the statement of objections (see British National Travel Survey 1998, volume 4, The 1998 Holiday Market, and Mintel, Holidays: The booking procedure, 1997) illustrate the tendency of United Kingdom consumers to go further afield for their holidays and particularly to the other side of the Atlantic. Nor did it question the fact that a substantial number of short-haul holidaymakers have also taken a long-haul holiday in the last five years (36%) and that a much greater number (62%) are very or fairly likely to do so over the next five years, as the applicant has indicated in Table 2.4 in its reply to the statement of objections.

26 The Court must therefore consider whether the Commission made a manifest error of assessment when it concluded that those factors were reasons for defining the relevant product market narrowly and excluding long-haul package holidays, which it did not regard as sufficiently interchangeable with short-haul package holidays.

27 First, concerning the average flight time, the Commission pointed out - and was not challenged by the applicant on this point - the significant difference between the average flight time to long-haul destinations, which is over eight hours, and the average flight time to short-haul destinations, which is usually less than three hours (from the United Kingdom, flights to the islands in the Eastern Mediterranean or the Canary Islands may take up to around four hours). The applicant argues that, in practice, what matters to consumers is not the flight time but the total travel time from the home town to the resort. However, it cannot rely on that argument to play down the indisputable difference between average flight times (three hours on average for flights to short-haul destinations compared with eight hours on average for flights to long-haul destinations), since transfer time from the airport to the resort may in fact also vary, whatever the destination.

28 Second, as regards the importance to be attached to the prices of the two types of holiday and their impact on consumers, the Commission found that differences between the average price of a long-haul package holiday and that of a short-haul package are such as to warrant separate market definition. It should be observed in that regard that the Commission accepts that there is a degree of convergence between prices for the two kinds of holiday. However, it contends that the convergence is not such that the two products may be regarded as substitutes or that the prices of one constrain prices of the other.

29 At paragraph 23 of the Decision the Commission explains its reasons for finding that there was no price substitutability between the two kinds of holiday. It considers the prices offered to the consumer to be significantly higher for long-haul package holidays, as reflected in the information supplied by the applicant in Annex 1a to its response of 29 June 1999 to the Commission's request for information.

30 First, the Commission found that there was a difference of over 100% between the average brochure price of long-haul package holidays for the 1998 summer season and that of short-haul packages. It also considered the question comparing similar packages (14 nights, 3-star, self-catering) in Florida and Spain and found that the latter cost on average about half the price of the former. A similar comparison between Florida and Greece or the Canaries gave broadly equivalent results (a difference of around 30 to 40% for catered accommodation). The Decision gives detailed examples of price comparisons between certain short and long-haul tourist destinations offered in the Airtours brochure, which show that significant price differentials exist between the two kinds of destination.

31 The applicant disputes the relevance of average prices as a means of comparing the effect of prices on consumers' decisions where the products are clearly differentiated. It submits that what is significant for defining the relevant product market is the behaviour of customers at the margin and the question of whether they would be prepared to substitute long-haul package holidays for short-haul packages if the price of the latter were to rise. The Commission acknowledges that average prices do not necessarily reflect prices at the margin but is of the view that, where - as in the present case - the differences are so significant, it is unlikely that a sufficient range of genuinely comparable long-haul package holidays is available at prices which are sufficiently similar to constrain prices of short-haul packages, since the long-haul packages concerned are regarded as genuine substitutes by only a very small proportion of the customers.

32 It is therefore appropriate to consider whether the Commission made a manifest error of assessment in relation to the significance of the margin, that is, the number of customers prepared to react to a price increase in short-haul package holidays by purchasing a long-haul package holiday, as compared with the total number of customers who habitually purchase a short-haul package holiday from tour operators.

33 In that regard, the Court notes in limine that it is common ground between the parties that United Kingdom consumers of foreign package holidays are generally very sensitive to the prices of the products.

34 The Commission's argument is set out at paragraph 24 of the Decision, in which it acknowledges that prices of some holidays at certain long-haul destinations, particularly at certain times of the year (e.g. during periods when bad weather is expected) match or come close to those at the upper end (summer peak, better quality accommodation) of the price/quality scale for short-haul ones. It nevertheless went on to conclude that it is not to be expected that this very limited overlap would suffice to constrain prices throughout the short-haul market, since the long-haul holidays concerned would not be regarded as effective substitutes - either on price or other grounds - by more than a very small proportion of customers.

35 In support of that finding, the Commission points out at paragraph 25 of the Decision that none of the long-haul destinations cited by the applicant in its reply to the statement of objections (Table 2.6) in support of its view on price convergence was in the same price-range as that which it had previously supplied.

36 An examination of Annexes 1a and 2 to the applicant's letter of 29 June 1999 responding to the Commission's requests for information of 15 and 21 June 1999 (documents produced by the Commission in the context of measures of organisation of procedure, see Annex 6b/7b to the first set of documents produced by the Commission) reveals that the Commission was right in holding that the differences in average prices are significant, especially if the comparison relates to the same season (summer or winter). Annex 1a in fact shows that for the summer seasons of 1996, 1997 and 1998, average prices per week for short-haul package holidays were, respectively, GBP 354, GBP 378 and GBP 369, while the corresponding figures for long-haul packages were, respectively, GBP 676, GBP 757 and GBP 781.

37 Furthermore, a review of those documents establishes that the Commission's assessment at paragraph 25 of the Decision is well founded. It is apparent from Annex 2 to the applicant's letter of 29 June 1999 that, for short-haul destinations, the applicant had indicated that typical holidays, for example a week in a 3-star hotel, half board, in Majorca, in July or August 2000, cost GBP 485. The figures are appreciably lower than the figures in Table 2.6 on page 21 of the reply to the statement of objections, which is referred to at paragraph 25 of the Decision. Only the prices of holidays offered for December 1999 to Jamaica (GBP 699), Mexico (GBP 649) and Sri Lanka (GBP 699) are closer to the average figures for short-haul destinations applying for the summer season 2000.

38 Likewise, the documents produced by the applicant bear out the Commission's argument. As stated at paragraph 26 of the Decision, it can be seen that in the BA Holidays advertisement for long-haul package holidays produced by the applicant at the hearing before the Commission (see paragraph 26 of the Decision, footnote 23), four destinations were offered at very competitive prices: Barbados (GBP 399), Tobago (GBP 499), Grenada (GBP 529) and St Lucia (GBP 799). However, as the Commission points out, only the package to St Lucia included food, the other holidays included only the flight and the accommodation. In addition, the prices were low-season prices valid for September and October 1999.

39 It should be added that in its reply of 29 June 1999 to the Commission's enquiries of 15 and 21 June 1999 the applicant cited as an example of one of its typical products a summer holiday in Majorca in a 3-star hotel, costing approximately GBP 485, plus a flight supplement.

40 Further, the applicant acknowledged at the hearing that it publishes separate brochures for short and long-haul package holidays.

41 In those circumstances, the Commission's proposition that only a small proportion of the customers of the main United Kingdom tour operators regard long-haul package holidays as substitutes in terms of value for money for short-haul package holidays cannot be regarded as manifestly incorrect.

42 The other arguments advanced by the applicant do not invalidate that finding.

43 The applicant argues that industry-wide studies treat long-haul package holidays as part of the mainstream. It cites, in particular, Holidays - The Booking Procedure, a study by Mintel, in which the point is made that long-haul has broken into the mainstream holiday market. While based on a desire to travel further and see the world outside Europe, pricing has inevitably come into play as a key element in the consumer's choice. In addition, the Commission should have taken into account the statements of third party tour operators obtained in the course of its enquiry, which also show the growing importance of substitution between long and short-haul package holidays.

44 However, in the circumstances of the present case and with reference to market definition, the fact that the Commission did not consider decisive (i) changing consumer tastes, (ii) the growing importance of substitutability between long-haul package holidays to destinations such as Florida and the Dominican Republic, and short-haul packages or (iii) the growth of the market for long-haul packages over recent years is not sufficient to support a finding that the Commission exceeded the bounds of its discretion in concluding that short-haul package holidays are not within the same product market as long-haul packages.

45 Third, as to the applicant's arguments relating to supply-side substitutability and the interchangeability of the aircraft used on short and long-haul routes, the Commission cannot be criticised for having formed the view that the fact that certain dual-purpose aircraft, such as the Boeing 757, may be used to some extent both for long and short-haul destinations was not sufficiently decisive, given the other findings made concerning demand-side product substitutability, to lead it to adopt a wider market definition. In that regard, it is appropriate to refer, as the applicant itself has done, to paragraph 13 of the Commission Notice on the definition of the relevant market for the purposes of Competition Law (OJ 1997 C 372, p. 5):

From an economic point of view, for the definition of the relevant market, demand substitution constitutes an immediate and effective disciplinary force on the suppliers of a given product, in particular in relation to their pricing decisions.

46 Finally, the applicant cannot rely on a failure to state reasons in relation to the definition of the relevant market.

47 The Commission devoted a significant part of the Decision (paragraphs 5 to 28) to explaining why it considered the relevant market to be limited to the market for short-haul package holidays. The Decision thus discloses, in a clear and unequivocal fashion, the Commission's reasoning relating to the definition of the relevant market, in such a way as to enable the Community Courts to exercise their power of review and the persons concerned to be aware of the reasons for the measure in order to defend their rights (see Case C-350/88 Delacre and Others v Commission [1990] ECR I-395, paragraph 15).

48 It follows that the first plea must be rejected as unfounded.

The second plea alleging infringement of Article 2 of Regulation No 4064/89, breach of the principle of legal certainty and infringement of Article 253 EC inasmuch as the Commission applied an incorrect definition of collective dominance in its appraisal of the present case

49 The applicant complains that the Commission, for the purposes of the Decision, applied a new and incorrect definition of collective dominance, which is set out generally at paragraphs 51 to 56 of the Decision, departing from its previous decisions, from Community case-law and from sound economic principles, and also infringing Article 2 of Regulation No 4064/89. The Commission thereby also acted in breach of the principle of legal certainty and Article 253 EC, inasmuch as the Decision is vitiated by a defective statement of reasons.

50 The Commission denies that it adopted a new approach and maintains that it applied the test for collective dominance already used by it in previous cases and approved by the Court of First Instance in its judgment in Case T-102/96 Gencor v Commission [1999] ECR II-753.

51 It is appropriate to point out that the abovementioned paragraphs of the Decision (51 to 56) are in Part VA of the Decision, in which the Commission sets out, purely by way of introduction and summary, the reasons which led it to conclude that the concentration would give rise to the creation of a dominant position and in which it replies generally to observations made by the applicant during the administrative procedure concerning certain of the characteristics of a collective dominant position.

52 In the introduction to its legal analysis of the concentration, the Commission merely sketches the broad outlines of its findings on the effects of the merger, which are subsequently explained and developed in detail at paragraphs 57 to 180 of the Decision.

53 Since the Decision is a measure applying Article 2 of Regulation No 4064/89 to a specific concentration, the Court must, in its review of the legality of the Decision, confine itself to the position adopted by the Commission in relation to the transaction as notified, that is to say, it must examine the way in which the law has been applied to the facts and adjudicate on the merits of the Commission's findings concerning the effects of the concentration on competition. In this case, the specific findings relating to the impact of the transaction on competition, which led the Commission to conclude that the concentration should be prohibited, are stated and developed in paragraphs 57 to 180 of the Decision and are challenged by the applicant in its third plea.

54 It is therefore necessary to consider, first, the merits of the arguments raised by the applicant in its third plea and, at the same time, to take into account its arguments concerning the Commission's general findings at paragraphs 51 to 56 of the Decision.

The third plea alleging (i) infringement of Article 2 of Regulation No 4064/89 in that the Commission found that the concentration would create a collective dominant position, and (ii) infringement of Article 253 EC

55 By this plea, the applicant seeks to show that the Commission made an error of assessment in deciding that the proposed merger should be prohibited. It claims that the Decision does not prove to the requisite legal standard that the outcome of the transaction would be the creation of a collective dominant position of such a kind as significantly to impede competition in the relevant market. In prohibiting the merger, the Commission thus infringed Article 2 of Regulation No 4064/89.

A - General considerations

56 Under Article 2(2) of Regulation No 4064/89, a concentration which does not create or strengthen a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it is to be declared compatible with the common market.

57 Under Article 2(3) of the Regulation, a concentration which creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it is to be declared incompatible with the common market.

58 Where, for the purposes of applying Regulation No 4064/89, the Commission examines a possible collective dominant position, it must ascertain whether the concentration would have the direct and immediate effect of creating or strengthening a position of that kind, which is such as significantly and lastingly to impede competition in the relevant market (see, to that effect, Gencor v Commission, paragraph 94). If there is no substantial alteration to competition as it stands, the merger must be approved (see, to that effect, Case T-2/93 Air France v Commission [1994] ECR II-323, paragraphs 78 and 79, and Gencor v Commission, paragraph 170, 180 and 193).

59 It is apparent from the case law that in the case of an alleged collective dominant position, the Commission is ... obliged to assess, using a prospective analysis of the reference market, whether the concentration which has been referred to it leads to a situation in which effective competition in the relevant market is significantly impeded by the undertakings involved in the concentration and one or more other undertakings which together, in particular because of factors giving rise to a connection between them, are able to adopt a common policy on the market and act to a considerable extent independently of their competitors, their customers, and also of consumers (Kali & Salz, cited above, paragraph 221, and Gencor v Commission, paragraph 163).

60 The Court of First Instance has held that: There is no reason whatsoever in legal or economic terms to exclude from the notion of economic links the relationship of interdependence existing between the parties to a tight oligopoly within which, in a market with the appropriate characteristics, in particular in terms of market concentration, transparency and product homogeneity, those parties are in a position to anticipate one another's behaviour and are therefore strongly encouraged to align their conduct in the market, in particular in such a way as to maximise their joint profits by restricting production with a view to increasing prices. In such a context, each trader is aware that highly competitive action on its part designed to increase its market share (for example a price cut) would provoke identical action by the others, so that it would derive no benefit from its initiative. All the traders would thus be affected by the reduction in price levels. (Gencor v Commission, paragraph 276).

61 A collective dominant position significantly impeding effective competition in the common market or a substantial part of it may thus arise as the result of a concentration where, in view of the actual characteristics of the relevant market and of the alteration in its structure that the transaction would entail, the latter would make each member of the dominant oligopoly, as it becomes aware of common interests, consider it possible, economically rational, and hence preferable, to adopt on a lasting basis a common policy on the market with the aim of selling at above competitive prices, without having to enter into an agreement or resort to a concerted practice within the meaning of Article 81 EC (see, to that effect, Gencor v Commission, paragraph 277) and without any actual or potential competitors, let alone customers or consumers, being able to react effectively.

62 As the applicant has argued and as the Commission has accepted in its pleadings, three conditions are necessary for a finding of collective dominance as defined:

- first, each member of the dominant oligopoly must have the ability to know how the other members are behaving in order to monitor whether or not they are adopting the common policy. As the Commission specifically acknowledges, it is not enough for each member of the dominant oligopoly to be aware that interdependent market conduct is profitable for all of them but each member must also have a means of knowing whether the other operators are adopting the same strategy and whether they are maintaining it. There must, therefore, be sufficient market transparency for all members of the dominant oligopoly to be aware, sufficiently precisely and quickly, of the way in which the other members' market conduct is evolving;

- second, the situation of tacit coordination must be sustainable over time, that is to say, there must be an incentive not to depart from the common policy on the market. As the Commission observes, it is only if all the members of the dominant oligopoly maintain the parallel conduct that all can benefit. The notion of retaliation in respect of conduct deviating from the common policy is thus inherent in this condition. In this instance, the parties concur that, for a situation of collective dominance to be viable, there must be adequate deterrents to ensure that there is a long-term incentive in not departing from the common policy, which means that each member of the dominant oligopoly must be aware that highly competitive action on its part designed to increase its market share would provoke identical action by the others, so that it would derive no benefit from its initiative (see, to that effect, Gencor v Commission, paragraph 276);

- third, to prove the existence of a collective dominant position to the requisite legal standard, the Commission must also establish that the foreseeable reaction of current and future competitors, as well as of consumers, would not jeopardise the results expected from the common policy.

63 The prospective analysis which the Commission has to carry out in its review of concentrations involving collective dominance calls for close examination in particular of the circumstances which, in each individual case, are relevant for assessing the effects of the concentration on competition in the reference market (Kali & Salz, paragraph 222). As the Commission itself has emphasised, at paragraph 104 of its decision of 20 May 1998 Price Waterhouse/Coopers & Lybrand (Case IV/M.1016) (OJ 1999 L 50, p. 27), it is also apparent from the judgment in Kali and Salz that, where the Commission takes the view that a merger should be prohibited because it will create a situation of collective dominance, it is incumbent upon it to produce convincing evidence thereof. The evidence must concern, in particular, factors playing a significant role in the assessment of whether a situation of collective dominance exists, such as, for example, the lack of effective competition between the operators alleged to be members of the dominant oligopoly and the weakness of any competitive pressure that might be exerted by other operators.

64 Furthermore, the basic provisions of Regulation No 4064/89, in particular Article 2 thereof, confer on the Commission a certain discretion, especially with respect to assessments of an economic nature, and, consequently, when the exercise of that discretion, which is essential for defining the rules on concentrations, is under review, the Community judicature must take account of the discretionary margin implicit in the provisions of an economic nature which form part of the rules on concentrations (Kali & Salz, paragraphs 223 and 224, and Gencor v Commission, paragraphs 164 and 165).

65 Therefore, it is in the light of the foregoing considerations that it is necessary to examine the merits of the grounds relied on by the applicant to show that the Commission made an error of assessment in finding that the conditions for, or characteristics of, collective dominance would exist were the transaction to be approved.

B - The Decision

66 The Decision identifies two types of players on the relevant market (see paragraphs 72 and 75), the large tour operators on the one hand, and the secondary or small tour operators on the other:

- the major tour operators are characterised by their relatively large size - each of them having a market share exceeding 10% (according to the Commission's data, Thomson accounts for 27% of sales, Airtours for 21%, Thomas Cook for 20% and First Choice for 11%, that is, overall for 79% of sales. On Airtours' figures, Thomson accounts for 30.7% of sales, Thomas Cook for 20.4%, Airtours for 19.4% and First Choice for 15%, that is, overall for 85.5% of sales). A further characteristic is that they are all integrated both upstream (operation of charter airlines) and downstream (travel agencies);

- the secondary operators are smaller, none of them having a market share in excess of 5%, and in general they do not own either their own charter airlines or their own travel agencies. Apart from Cosmos (which, since it is linked to Monarch, one of the major charter airlines in the United Kingdom, is exceptional among secondary operators where there is no vertical integration), Manos and Kosmar, which are the fifth, sixth and seventh tour operators accounting respectively for 2.9%, 1.7% and 1.7% of sales, there are several hundred competing small tour operators, none of them accounting for more than 1% of sales.

67 It is apparent from the Decision (see the summary of the Commission's appraisal at paragraphs 168 to 172 of the Decision) that the Commission formed the view that the proposed merger would create a dominant position in the United Kingdom market for short-haul foreign package holidays, the effect of which would be to impede competition significantly in the common market for the purposes of Article 2(3) of Regulation No 4064/89, and that it would do so for the following reasons:

- the proposed merger would remove competition between the three large players remaining after the concentration (combined Airtours/First Choice, Thomson and Thomas Cook). Because of the structural features of the market and the way that it operates, which is dependent on capacity decisions, and because of the high degree of market concentration (the three remaining large tour operators would have about 80% of the market if the operation took place) (Decision, paragraph 169), they would no longer have an incentive to compete with each other;

- the operation would increase the degree of transparency and interdependence which already exists, with the result that the three remaining large tour operators would have every interest in adopting parallel conduct so far as the decision as to how many package holidays to put onto the market is concerned, reducing capacity below what is required as a result of market trends (Decision, paragraph 170);

- an examination of past competition bears out this conclusion, since it demonstrates that the relevant market already had a tendency towards collective dominance (Decision, paragraphs 128 to 138);

- deterrents or scope for retaliation exist, which are connected with the fact that if one of the three remaining large tour operators decided not to restrict capacity, there would be a risk that the two others would do the same, which would result in oversupply and serious financial consequences for each of the operators (Decision, paragraph 170);

- the smaller operators or new entrants, that is to say current and future competitors, would be further marginalised as a result of the operation, since they would lose First Choice both as a supplier of airline seats and as a potential distribution channel. In any event, those operators would not have the ability to offset any reductions in capacity brought about by the three remaining large tour operators (Decision, paragraph 171).

68 So far as the effects of the merger on effective competition are concerned, the Commission found that the effect of restricting overall capacity put onto the market would be to tighten the market and bring about an increase in the prices and profits of the members of the dominant oligopoly (see, in particular, paragraph 56 and the final part of paragraph 168 of the Decision).

C - The Commission's alleged errors of assessment

69 The applicant argues that, contrary to the Commission's contention, the factors put forward by the Commission in the Decision to characterise the situation as one of collective dominance were not present at the time of the notification and would not occur were the merger to proceed.

70 More specifically, the applicant claims, first, that, given the characteristics of the relevant market, the Commission has not proved conclusively that, were the merger to proceed, the three remaining large tour operators would have an incentive to cease competing with each other.

71 Second, it argues that, even supposing that such an incentive did exist, the absence of any deterrents or adequate means of retaliation would prevent the emergence of the alleged dominant oligopoly.

72 Third, and in any event, smaller operators and new entrants, namely current and future competitors, would challenge any capacity restrictions brought into effect and consumers would react as a result, so that the three remaining major operators would not be able, as a result of the concentration, to act together to any appreciable extent independently of other competitors and consumers.

73 Fourth, the applicant claims that the Commission incorrectly assessed the impact of the merger on competition in the relevant market.

1. Preliminary observations

74 The applicant's first point is that the natural tendency of operators in the relevant market to set capacity cautiously has by no means prevented them from engaging in competition with each other in the past and that there is no reason to believe that proceeding with the proposed merger would put an end to that competition by creating a situation in which the three remaining large tour operators have a collective dominant position.

75 The Decision is particularly elliptical in its description of the competitive situation at the time of the notification. However, it is not disputed that the Commission concluded that the proposed merger would create, rather than strengthen, a dominant position on the market (Decision, paragraph 194). The Commission has confirmed in its pleadings that it does not contend that that there was a situation of oligopolistic dominance at the time of the notification and that what is at issue is the creation, and not the strengthening, of a collective dominant position. Thus, it does not deny that prior to the proposed merger the major tour operators did not find it possible or profitable to restrict capacity in order to increase prices and revenues.

76 It follows that in this instance the starting point for the Court's examination must be a situation in which - in the Commission's own view - the four major tour operators are not able to adopt a common policy on the market and hence do not face their competitors, their commercial associates and consumers as a single entity, and in which they thus do not enjoy the powers inherent in a collective dominant position.

77 In those circumstances, it was for the Commission to prove that, in view of the characteristics of the United Kingdom market for operating short-haul package holidays and in light of the notified operation, approval of the latter would have resulted in the creation of a collective dominant position restrictive of competition, inasmuch as Airtours/First Choice, Thomson and Thomas Cook would have had the ability, which they did not previously have, to adopt a common policy on the market by setting capacity lower than would normally be the case in a competitive market already distinguished by a degree of caution in matters of capacity.

78 It is therefore necessary to examine the pleas and arguments raised by the applicant in this case in the light of the foregoing considerations.

2. The finding that were the merger to proceed, the three remaining large tour operators would have an incentive to cease competing with each other

79 The applicant submits that the finding that if the merger proceeded, the three remaining large tour operators would have an incentive to cease competing with each other is erroneous because the Commission, first, did not take into account, as it should have done, the competition obtaining between the leading tour operators at the time of the notification and, second, made errors in its appraisal of the characteristics of the market on which it relied as evidence that a collective dominant position would be created, in particular, the past and prospective development of demand, demand volatility and the degree of market transparency.

(a) The assessment of competition between the leading tour operators

80 The applicant submits that the analysis of competition obtaining prior to the notification (referred to as past competition) is of fundamental importance in this instance, since the main incentives invoked by the Commission, namely alleged capacity rigidities, are inherent in the way the market normally operates, concern the industry as a whole and would not be affected were the proposed merger to proceed. The relevant market has been operating competitively in recent years and the applicant challenges the Commission's assertion that there is already a tendency towards collective dominance. In particular, it criticises the way in which the Commission took into consideration the alleged tendency towards collective dominance before examining the implementation of the proposed merger and the volatility of historic market shares.

81 The Commission contends that the way in which the market previously operated and the fact that competition obtained in the past are not significant factors, since the Decision is based on the finding that a collective dominant position would be created as a result of the proposed operation, that is to say that market conditions would be altered in such a way that previously examined incentives and conduct would no longer be an appropriate guide in determining how operators would react in the new market situation. Therefore, it argues that the crucial question is whether the proposed operation would alter current market conditions in such a way that the leading operators would no longer act in the same way as they have done in the past. Thus, it does not follow that because the market was competitive with four large tour operators, it would continue to be so if the number were reduced to three. The Commission nevertheless challenges the arguments put forward by the applicant to show that competition among the main operators has been, and will continue to be, keen.

82 The Court observes, however, that one of the questions which the Commission is required to address where there is alleged to be collective dominance is whether the concentration referred to it would result in effective competition in the relevant market being significantly impeded (Kali and Salz, paragraph 221, and Gencor v Commission, paragraph 163). If there is no significant change in the level of competition obtaining previously, the merger should be approved because it does not restrict competition (see paragraph 58 above). It follows that the level of competition obtaining in the relevant market at the time when the transaction is notified is a decisive factor in establishing whether a collective dominant position has been created for the purposes of Regulation No 4064/89.

83 As the applicant has submitted, an analysis of competition prior to the notification is particularly important in this instance, since the purpose of the tacit coordination likely, in the Commission's submission, to follow the concentration, would be to restrict capacity put onto the market by the three remaining integrated tour operators. The restriction would involve more than their natural caution in capacity planning, which the Commission itself considers inherent in the way that the market normally operates.

(i) The tendency towards collective dominance alleged to exist prior to the proposed merger

84 First, it must be observed that, although the Commission devoted one section of the Decision to an examination of Past Competition (paragraphs 128 to 138), a detailed analysis of that section reveals that, in fact, the Commission does not there express an opinion on the degree of competition obtaining in the market. It confines itself to setting out (paragraphs 128 to 138) a number of circumstances or factors which have been observed in the market in the years leading up to the notification and concludes (Decision, paragraph 138) that there is evidence that there is already a tendency towards collective dominance in the market at present (most especially as regards the setting of capacity). However, those passages of the Decision make no mention of any reduced level of competition in the market prior to the notification.

- The fact that the large tour operators take a cautious approach to capacity planning and take particular note of the estimates of the main competitors

85 At paragraphs 135 and 136 of the Decision, the Commission explains that the large tour operators adopt a cautious approach to capacity planning and take particular note of the estimates of their main competitors (the Decision cites, at paragraph 136, certain statements made by senior executives at the leading United Kingdom integrated tour operators, which illustrate that cautious approach to planning). In the preceding paragraph (paragraph 135), the Decision describes an episode which took place in the summer of 1995, which, the Commission contends, illustrates the consequences of oversupply in the market: during the 1994 planning period, all the tour operators overestimated demand for the summer season 1995 and were left with unsold capacity, which had to be cleared by means of heavy discounting, something which led to them suffering heavy losses.

86 The applicant claims that the major tour operators cannot be criticised for adopting a cautious approach to capacity planning, by taking particular note of the estimates of the other leading operators' plans, since the Community Courts have recognised that the requirement of independence does not deprive economic operators of the right to adapt themselves intelligently to the existing and anticipated conduct of their competitors (Joined Cases 40/73, 41/73, 42/73, 43/73, 44/73, 45/73, 46/73, 47/73, 48/73, 50/73, 54/73, 55/73, 56/73, 111/73, 113/73 and 114/73 Suiker Unie and Others v Commission [1975] ECR 1663, paragraphs 173 and 174). It does not consider such caution to be incompatible with aggressive competition to maintain or increase its market share at the expense of its main competitors. In that respect, the applicant cites the statements made by the main tour operators describing their ambitions to grow.

87 The Commission contends that the intentions ascribed to the main tour operators by the applicant reflect the situation prior to the proposed merger and thus relate to different circumstances. It does not contend that there was previously a situation of dominant oligopoly. Furthermore, the aggressive growth to which certain statements refer had in the past been, and was in the future to be, carried out through acquisitions. Lastly Thomas Cook indicated to the Commission that size was no longer its prime concern, but rather profitability (Decision, paragraph 131).

88 The Court notes that the Decision acknowledges at several places that this natural tendency to cautious capacity planning is a feature of the relevant market in its current state, in which there is no collective dominant position restrictive of competition, and that it impinges upon all operators and not just the large tour operators, even though the latter are more specifically concerned (see paragraphs 60 to 66, 97 and 136 of the Decision). Thus, in paragraph 97 of the Decision, the Commission states that the volatility of demand makes it rational to limit planned capacity and then add capacity later, if demand proves to be particularly strong. In this way the suppliers protect themselves against downwards volatility in demand, and, in paragraph 136, that the large operators take a cautious approach to capacity planning, taking particular note of estimates of the other major operators' plans.

89 In those circumstances and as the Commission has not denied that the relevant market was competitive prior to the notification (in particular at the time of the 1995 crisis), the episode which occurred in that year and to which the Decision attaches great weight cannot, as such, constitute evidence that a tendency towards collective dominance already existed in the industry. The fact that during the 1994 planning period operators miscalculated and suffered heavy losses after overestimating demand for the 1995 summer season can be regarded as no more than an example of the risks peculiar to this market, the distinctive operation of which is explained at paragraphs 59 to 66 of the Decision.

90 It is quite apparent from the remarks cited at paragraph 136 of the Decision that senior executives at the large tour operators are aware of the risks inherent in expansionist strategies in the relevant market, particularly because of the lessons learned from the 1995 episode and because matching capacity to demand is crucial to profitability (see paragraph 60 of the Decision). However, those remarks do not give the slightest indication that there is no competition between the main tour operators.

91 Finally, contrary to the Commission's contention (see paragraphs 137 and 138 of the Decision), the fact that to some extent (30 to 40% of the shares) the same institutional investors are found in Airtours, First Choice and Thomson cannot be regarded as evidence that there is already a tendency to collective dominance in the industry. It is sufficient to point out in that regard that, as the Commission itself has acknowledged in its defence (paragraph 73), there is no suggestion in the Decision that the group of institutional shareholders forms a united body controlling those quoted companies or providing a mechanism for exchange of information between the three undertakings. Furthermore, the Commission cannot contend that those shareholders are a further force for cautious capacity management, unless it has examined to what extent they are involved in the management of the companies concerned. Finally, even assuming that it were proved that they are capable of exercising some influence on the management of the undertakings, since the concerns of the common institutional investors with respect to growth (and thus capacity) merely reflect a characteristic inherent in the relevant market, the Commission would still have to establish that the fact that institutional investors hold shares in three of the four leading tour operators amounts to evidence that there is already a tendency to collective dominance.

92 It is apparent from the foregoing that, since it did not deny that the market was competitive, the Commission was not entitled to treat the cautious capacity planning characteristic of the market in normal circumstances as evidence substantiating its proposition that there was already a tendency to collective dominance in the industry.

- The assessment of horizontal and vertical integration characteristic of the market since publication of the Monopolies and Mergers Commission Report

93 The applicant points out that the United Kingdom Monopolies and Mergers Commission (the MMC) examined the state of competition in the relevant market in 1997 and produced a report entitled Foreign Package Holidays: a report on the supply in the UK of tour operators' services and travel agents' services in relation to foreign package holidays (the MMC Report). It maintains that the MMC concluded in that report that the situation in that market was broadly competitive.

94 The Commission submits that the market situation has changed significantly since the MMC Report was published in 1997, not only because of the increase in vertical integration of the main tour operators, as the applicant claims, but also because of the significant horizontal concentration that has taken place.

95 At paragraphs 128 to 134 of the Decision, the Commission cites, as evidence of a tendency to collective dominance, the horizontal concentration and vertical integration which have characterised the United Kingdom foreign package holiday industry in recent years and which have accelerated since the MMC Report was published in December 1997, due in particular to the number of mid-sized operators taken over by the four major tour operators.

96 The Court observes, however, that if those trends are examined closely, it can be seen that the main tour operators' acquisitions of tour operators, airline companies and travel agencies, referred to at paragraph 134 of the Decision, do not entail the kind of major alterations in the market which would invalidate in 1999 the conclusions on competition in the market reached by the MMC towards the end of 1997 and that, therefore, those acquisitions could not be regarded as evidence of a tendency to collective dominance.

97 First, the Court would point out that, as the applicant has noted, the MMC found in its report published in 1997 that the foreign package holiday business was dynamic, that competition was keen and that there were no significant barriers to entry. It reached that conclusion after carrying out a particularly detailed study (over 300 pages) of the state of the travel business and the way in which it functioned. The study was carried out over 12 months of inquiry and drew on large amounts of data and a great number of views provided by all parties with a presence in the United Kingdom foreign holidays business. For the purposes of drawing up its report, the MMC commissioned four market studies from external consultants and the report was completed in November 1997, only a year and a half before the Commission examined the market in the context of the notified transaction.

98 More specifically, in paragraph 1.6 of its report, the MMC expressed itself as follows:

The travel trade has been far from static over the last ten years and the picture continues to change, with a trend towards more vertical integration. Of the major participants who featured in our 1986 investigation into foreign package holidays, only Thomson has retained a prominent position. We have received a great deal of evidence to the effect that competition in the trade is strong and we broadly agree with this view. While concentration has increased over the past five years, it is not at a particularly high level. Profits are not excessive taken year on year. Players come and go. There are no significant barriers to entering either the tour operator or the travel agent market.

99 The Commission has not challenged that analysis in the Decision, although in several places it refers to findings made by the MMC in the report relating to other matters (paragraphs 9, 11, 47, 70, 76, 81, 114, 115, 123, 128, 129, 131, 133 and 134 of the Decision). It follows that it does not challenge the MMC's findings regarding its description of that market, in 1997, as one in which competition was strong.

100 The Commission argues, however, (Decision, paragraph 123) that conditions of competition in the market have changed significantly since 1997, in particular owing to increased concentration and vertical integration, as is stated at paragraph 134 of the Decision. In that regard, the elimination of mid-sized operators represents an important change in the competitive structure and increases the scope for parallel conduct between the main tour operators.

101 However, the Court finds that the horizontal and vertical integration which has occurred in the United Kingdom foreign package holiday industry since the MMC Report was published are less significant than the Commission alleges.

102 As regards horizontal concentration, it is apparent from the documents before the Court (page 33a of the document, at Annex 5 to the application, notifying the Commission of the merger, paragraph 4.18 of the 1997 MMC Report and paragraph 72 of the Decision) that the development, between 1996 and 1999, of the market shares of Thomson, Airtours and First Choice does not prove that their shares of the short-haul market have increased significantly. The graph illustrating the tour operators' market shares (Annex 5 to the application, page 33a), including all destinations, shows that Thomson's sales of foreign package holidays, which accounted for 25% of sales of foreign package holidays in 1996, accounted for no more than 22% of sales in 1998, whilst Airtours' sales represented 16% in 1996 and 1998, and those of First Choice fell from 10% in 1996 to 9% in 1998. The three leading tour operators active in 1997 therefore accounted for 51% of sales of foreign package holidays in 1996 and for 47% thereof in 1998. That finding is borne out if the data relating purely to short-haul destinations are examined. It is apparent from paragraph 4.18 of the MMC Report that in 1997 the MMC had also examined the market shares of the integrated tour operators by reference to the narrow definition of the product market used in the Decision, since the advantages of also examining the market by reference to such a definition had been pointed out by Thomas Cook at that time. It is clear from a comparison of market shares in 1996 (paragraph 4.18 of the MMC Report) and 1998 (paragraph 72 of the Decision) that Thomson's share fell from 33% to 30% or 27%, depending on the source of the figures, Airtours' share moved from 20% to 19% or 21%, depending on the figures used, and First Choice from 12% to 15% or 11%, depending on the figures used. Only Thomas Cook increased its market share significantly, rising from 6% to 20%.

103 It is clear from this that the key element in the consolidation that has taken place in the foreign package holiday trade since 1997 is Thomas Cook, whose status changed in the course of a few years from that of a small operator to that of a major tour operator following several transactions involving growth by acquisitions (acquisition in June 1996 of Sunworld, acquisitions in 1998 of Flying Colours, which accounted for 3% of the foreign package holiday trade, and of Carlson/Inspirations, which accounted for between 1 and 3% of the trade) (MMC Report, table 4.1, p. 76; Decision, paragraphs 131 and 134). By virtue of that growth, Thomas Cook emerged in 1998 as a fourth large tour operator, which was vertically integrated and thus better placed to compete with the other integrated tour operators. That fact cannot be interpreted as evidence of a lack of competition in the market.

104 If the case of Thomas Cook is left aside, the acquisitions of tour operators referred to at paragraph 134 of the Decision essentially concern the purchase of smaller businesses which have not significantly increased the market share of the main tour operators in the foreign package holiday business. Therefore, the elimination of mid-sized operators, which the Commission contends represented an important change in the structure of competition and increased the scope for parallel conduct between the main operators, amounts to the fact that a new major tour operator has emerged - Thomas Cook, whose market share has risen from 6% to 20%.

105 The Commission contends that the large tour operators' increased level of vertical integration, which has also occurred since 1997, is further evidence of the industry's tendency to collective dominance (Decision, paragraph 138). The Court observes that the Decision is inconsistent in this regard, since it is based at the same time on the premiss that a strategy of vertical integration is necessary in order to compete with the large tour operators. Thus, at paragraph 132 of the Decision, the Commission states that First Choice had adopted a policy of vertical integration into distribution in 1998, the aim of which was to protect itself against the business practices of the other large tour operators in order to avoid paying them commission and to obtain better information on market trends. That need to become vertically integrated is one of the key factors in the Commission's conclusion, the Commission taking the view that a collective dominant position would arise in the present case, in particular because the concentration would remove First Choice as a competitor at all three levels of the supply chain (paragraph 168 of the Decision).

106 It follows that the Commission itself recognises in the Decision that an increased level of vertical integration is pro-competitive, inasmuch as it increases efficiency and limits the interdependence of the large tour operators, who promote their own distribution channels over those of the other main operators. The fact that vertical integration has occurred since the MMC Report was published in 1997 therefore cannot at the same time be evidence of a tendency to collective dominance. In addition, the MMC also analysed in its report the growing tendency to vertical integration and concluded that it was something that was as likely to stimulate competition as to dampen it (see paragraph 2.193 of the MMC Report). In particular, the MMC concluded that the anti-competitive effects of vertical integration were slight in 1997, account being taken of the levels of concentration in the industry.

107 It follows that the Commission was wrong in taking the view that the horizontal concentration and vertical integration that has taken place since the MMC Report was published in 1997 made it necessary to disregard the latter's findings on the level of competition obtaining in the relevant market.

108 It is apparent from the foregoing that the Commission erred in concluding at paragraph 138 of the Decision that the factors set out at paragraphs 128 to 137 thereof are evidence that there is already a tendency towards collective dominance in the market at present (most especially as regards the setting of capacity).

(ii) The assessment of the volatility of historic market shares

109 The applicant goes on to cite as proof that the market is competitive the fact that in the past the market shares of the main tour operators have been volatile, dynamic and fluctuating.

110 According to the Commission, no such volatility has recently been observed in the relevant market. The changes in the large tour operators' market shares, cited by the applicant, result from acquisitions and not therefore from their performance on the market. If acquisitions are discounted, the market shares of the main operators have shown very little movement in recent years, which suggests that organic growth is difficult (Decision, paragraph 128 and footnote 86).

111 It is appropriate to point out that for the purpose of determining whether there is a collective dominant position, the stability of historic market shares is a factor conducive to the development of tacit collusion, inasmuch as it facilitates division of the market instead of fierce competition, each operator referring to its historic market share in order to fix its production in proportion thereto.

112 In the present case, the Commission's finding that the market shares of Thomson, Airtours, Thomas Cook and First Choice remained stable over the last five years is predicated on the assumption that growth by acquisition is to be ignored. The Commission takes the view that where changes in market share result principally from the acquisition of competitors, the quota to be allocated can be calculated by adding the market shares of the purchaser and the target and that therefore the problem of operators seeking to align their market share on peaks they have achieved in the past does not arise.

113 However, there is no justification in the present case for excluding growth by acquisition when assessing the volatility of market shares, inasmuch as in the relevant market the size of the undertakings and their degree of vertical integration are significant factors in competition (see, inter alia, paragraphs 73, 75, 77, 78, 99, 100, 114 and 115 of the Decision). In such circumstances, the fact that the large operators have made numerous acquisitions in the past, either before or after the MMC Report was published, may be taken to be indicative of strong competition between those operators, which make further acquisitions to avoid being outdistanced by their main competitors in key areas in order to take full advantage of economies of scale.

114 Moreover, the assumption that growth by acquisition is to be ignored is at variance here with several remarks made by the Commission itself in the Decision, which suggest, contrary to the submissions in its pleadings, that an acquisition by one of the major operators results, for the other major operators, not in the mathematical addition of the market shares of the purchaser and the target, but in a competitive reaction on their part.

115 The Decision thus points out at paragraph 137: [w]hen Airtours' bid for First Choice became known in April this year, an announcement by Thomson that it would defend its market-share position led to an immediate drop in Thomson's share price of 9% on the same day as the announcement, due to "fears that the company would start a price war", and Thomson's management were obliged to make considerable efforts to convince institutional investors that the announcement had been misinterpreted and that they had no intention of adding capacity in the market but only of mopping up capacity which would be shed by Airtours/First Choice as a result of the merger.

116 Similarly, the Decision states at paragraph 145 that it is apparently widely believed in the industry that all mergers lead to temporary losses of market share for the protagonists due to defection of some customers and suppliers as a result of elimination of duplication in their programmes. An examination of the documents produced by the applicant concerning the development of historic market shares (Annex 6 to the reply, page 2, see also the table on the development of market shares, page 8 of the application) shows that such concerns are well founded. Thus, following Thomson's acquisition of Horizon in 1989, the market share of the new entity should have been 32% (25% for Thomson and 7% for Horizon), whereas it quickly dropped to around 25%.

117 It is appropriate to point out that an analysis of the data produced to the Court shows that, as the applicant has submitted without challenge from the Commission, if growth by acquisition is included, there is considerable variation in the major tour operators' shares of the foreign package holiday market. This can be seen from the table showing the operators' market shares, set out by the applicant in its notification (reproduced on page 8 of the application). Thus, in 1990, Thomson's market share was 21.81%, that of First Choice was 5.82%, that of Airtours was 4.27% and that of Thomas Cook was 2.13%. In 1994 Thomson's market share was 23.13%, Airtours' 15.52%, First Choice's 5.88% and Thomas Cook's 2.41%. Then, in 1998, Thomson's market share was 19.28%, Airtours' 14.26%, First Choice's 7.47% and Thomas Cook's 11.38%.

118 It follows that the Commission erred in holding that market shares resulting from acquisitions should not be taken into consideration and, accordingly, in concluding that the major tour operators' market shares have remained stable over recent years.

119 Finally, as regards competition obtaining in the relevant market, it should be added that the applicant has claimed, and the Commission has not disputed, that the performances of the main tour operators may vary in a given season (with winners and losers) and may also vary from one season to another. That fact must be regarded as evidence that the market is competitive and consequently militates against any finding of collective dominance.

(iii) Conclusion on the assessment of competition between the leading tour operators

120 It follows from the foregoing that the Commission made errors of assessment in its analysis of competition obtaining in the relevant market prior to the notification. First, it did not provide adequate evidence in support of its finding that there was already a tendency in the industry to collective dominance and, hence, to restriction of competition, particularly as regards capacity setting. Second, it did not take into account, as it should have done, the fact that the main tour operators' market shares have been volatile in the past and that such volatility is evidence that the market was competitive.

(b) The assessment of past and anticipated development of demand, demand volatility and the degree of market transparency

121 A section of the Decision entitled Market Characteristics (oligopolistic dominance) (paragraphs 87 to 127) sets out a number of characteristics which, according to the Commission, make the relevant market conducive to oligopolistic dominance. They include, inter alia, product homogeneity, low demand growth, low price sensitivity of demand, the similar cost structures of the main suppliers, a high degree of transparency, interdependence and commercial links between the main suppliers, substantial barriers to market entry and the insignificant buyer power of consumers. According to the Decision (paragraph 87), those characteristics are already present and would remain present if the proposed merger were to take place.

122 The applicant challenges the findings which led the Commission to conclude that those characteristics are already present in the relevant market and that they would make it conducive to oligopolistic dominance if the merger were to proceed. It argues, in particular, that the rate of demand growth and the degree of demand volatility in the relevant market, as well as the degree of market transparency, are, in the present case, factors which, contrary to the Commission's contention, render creation of a collective dominant position more difficult.

(i) Findings on low demand growth

123 The applicant argues in essence that the Commission made an error of assessment in considering demand growth overall to be weak, whilst both the data produced in the administrative procedure and the fact that demand growth is faster than growth in gross domestic product are evidence to the contrary.

124 The Commission sets out its findings about the level of demand growth in the relevant market at paragraphs 92 and 93 of the Decision.

125 At paragraph 92, the Commission states that [a] recent study for a major tour operator, referred to in response to the Commission's enquiries, noted ... that the overall average annual growth rate (3 to 4% over the decade) was quite low. It is also stated that [d]emand growth for the next two years is expected to be close to zero, according to several industry estimates, but with some recovery in prospect thereafter.

126 At paragraph 93, the Commission goes on to state that based on its investigation in this case, it has reached the conclusion that overall growth of demand in the market for short-haul package holidays will continue to be moderate as has been the case in the 1990s. Finally, in conclusion, the Commission finds that market growth is not likely to provide a stimulus to competition within the foreseeable future.

127 The Court holds that the Commission's findings are based on an incomplete and incorrect assessment of the data submitted to it during the administrative procedure.

128 First, it is appropriate to point out that, in response to a measure of organisation of procedure by which the Court called on the Commission to produce the study referred to at paragraph 92 of the Decision, the Commission stated that a full version of that study had at no point been made available to it during the administrative procedure and that all it could produce to the Court was an extract, which a tour operator had annexed to a response to a request for information. That extract consisted of a single page of a document entitled Forecasting Holiday Demand prepared by Ogilvy & Mather at an unknown date.

129 According to that extract, [t]he GB market for holidays abroad has grown massively over the last 20 years. According to the British National Travel Survey, Britons took nearly 30 million holidays abroad (4-plus nights) - more than treble the number in 1978. Over the last decade the market has grown by an average of 3.7% per annum. The extract also states, in relation to demand volatility, that [w]hile underlying market growth has been persistent, annual growth rates have been far from steady. Annual growth rates of 10% or more are quickly followed by sizeable contractions; that not only is holiday demand more volatile than both gross domestic product and consumer durable spending, it is not fully coincident with the economic cycle (for example, the market grew by over 10% during the depth of the 1980/1 recession); and that [t]he volatility of demand makes forecasting volumes highly problematic.

130 However, it is apparent from a cursory examination of that document that the Commission's reading of it was inaccurate. Thus, at paragraph 92 of the Decision, it states that it also noted that the overall average annual growth rate ... was quite low, whilst no statement to that effect is made in the extract sent to the Court. Conversely, the Commission ignored the emphasis placed by the author of the extract on the massive increase in foreign holiday sales that has taken place over the last 20 years. It follows that the Commission construed that document without having regard to its actual wording and overall purpose, even though it decided to include it as a document crucial to its finding that the rate of market growth was moderate in the 1990s and would continue to be so (Decision, paragraph 93).

131 Second, it is apparent from these passages of the Decision (paragraphs 92 and 93) that the Commission did not take account of the rate of demand growth during the two years preceding the notification, 1997 and 1998, which, however, proved to be important points of reference inasmuch as the effects of the 1995 episode had by then been absorbed by the market. It is clear from data in volume 4 of the 1998 British National Travel Survey (dated February 1999), provided in Annex 9 to the applicant's notification of a concentration, that the foreign holiday sector enjoyed strong growth throughout the decade and, thus, also over recent years. It is apparent from page 113 (and the table on page 112) that the number of departures for foreign holidays rose from 21 million in 1989 to 29.25 million in 1998 (an increase of more than 39.2% over the last decade). After the crisis of 1995, as a result of which the number of foreign holidays fell from 26 million in 1995 to 23.25 million in 1996 (a fall of around 10.5%), the number of foreign holidays rose from 23.25 million to 27.25 million in 1997 (an increase of more than 17.2%) and from 27.25 million to 29.25 million in 1998 (an increase of more than 7.3%). It is specifically stated in relation to 1998 that what is concerned is real growth and not a difference caused by the common practice of rounding up figures where the changes from one year to another are small. The fact that those data also relate to long-haul package holidays does not undermine their probative value as regards the tendency to sustained growth, since that type of holiday has accounted for only a fifth of all holidays in recent years (see page 116 of the British National Travel Survey).

132 The Commission failed to take account of those data in its estimates of the level of market growth; instead, it referred to the trend for the next two years, stating at paragraph 92 of the Decision: Demand growth for the next two years is expected to be close to zero, according to several industry estimates, but with some recovery in prospect thereafter. When it was questioned on this point at the hearing, the Commission replied that the finding was based on an econometric study produced during the administrative procedure in response to a request for information. It is noteworthy that neither the nature of that econometric study, nor its authorship, nor the context in which it was produced were mentioned in the Decision. Lastly, it should be added that the estimate of demand growth close to zero is at variance with the following paragraph of the Decision (paragraph 93), in which the Commission itself recognises that the market for short-haul foreign package holidays is likely to continue to grow and that [i]t may also be that the market will grow somewhat faster than overall GDP growth due to increases in vacation time and general wealth.

133 It is clear from the foregoing that the Commission's interpretation of the data available to it concerning growth demand was inaccurate in its disregard for the fact that the market had been marked by a clear tendency to considerable growth over the last decade in general, despite the volatile nature of demand from one year to another, and that the pace of demand growth has increased during recent years in particular. In that context of growth, and having failed to produce any more specific evidence establishing that the tendency to grow would be reversed in future years, the Commission was not entitled to conclude that market development was characterised by low growth, which was, in this instance, a factor conducive to the creation of a collective dominant position by the three remaining large tour operators.

(ii) Findings on demand volatility

134 The applicant submits that demand volatility renders it more difficult to show that a collective dominant position exists, since volatility adds noise to the market making it more difficult to differentiate between changes in demand caused by volatility in the market and capacity increases brought about by departures from the common policy. The fact that it is so difficult to distinguish between the two types of event clearly suggests that any attempted collusion will be unstable.

135 The Commission recognises in the Decision that there is a degree of demand volatility in the market (Decision, paragraphs 92 and 95). However, it argues (Decision, paragraph 97) that in the present case that volatility does not preclude the creation of a collective dominant position but rather the reverse: [it] makes the market more conducive to oligopolistic dominance. The reason is that the volatility demand in combination with the fact that it is easier to increase than to decrease capacity, means that it is rational for the major operators to adopt a conservative approach ("wait and see approach") to capacity decisions. In particular the volatility of demand makes it rational to limit planned capacity and then add capacity later, if demand proves to be particularly strong. In this way the suppliers protect themselves against downward volatility in demand.

136 In any event, at paragraphs 94 to 96 of the Decision, the Commission challenges the arguments put forward by the applicant during the administrative procedure concerning demand volatility and its causes, which are linked to gross domestic product, changing consumer tastes and changing costs (the impact of low-cost airlines). The Commission contends (paragraph 95) that all tour operators are exposed to the business cycle and have to consider the macroeconomic development in their forecast. Therefore it is likely that all tour operators will have similar views as to the market development.

137 The Commission recognises (Decision, paragraph 96 and footnotes 73 and 74) that certain exogenous shocks, such as terrorist attacks on tourists in Egypt or Turkey, may disrupt the planning of tour operators, but it none the less refuses to take them into consideration as a factor likely to make the market less conducive to collective dominance, since such events, which are by nature exceptional, are not peculiar to the short-haul package holiday market but may happ