1999/421/EC: Commission Decision of 26 January 1999 relating to a proceeding pursuant to Article 85 of the EC Treaty (Case IV/36.253 - P& O Stena Line) (notified under document number C(1998) 4539) (Only the English text is authentic)
Date: 1999-01-26
Institutions: European Commission
Subjects: English Channel, Irish Sea, North Sea, ferryboat, joint venture, maritime transport

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 26 January 1999

relating to a proceeding pursuant to Article 85 of the EC Treaty

(Case IV/36.253  P&O Stena Line)

(notified under document number C(1998) 4539)

(Only the English text is authentic)

(1999/421/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

After consulting the Advisory Committee on Agreements
and Dominant Positions in Maritime Transport,

Having regard to the Treaty establishing the European
Community,

Whereas:

Having regard to Council Regulation (EEC) No 4056/86
of 22 December 1986 laying down detailed rules for the
application of Articles 85 and 86 of the Treaty to mari-
time transport (1), as last amended by the Act of Accession
of Austria, Finland and Sweden, and in particular the
second subparagraph of Article 12(4) thereof,

Having regard to the summary of
the application
published (2) pursuant to Article 12(2) of Regulation (EEC)
No 4056/86,

Having regard to the Commission’s notification to the
parties of 10 June 1997 that there exist serious doubts
within the meaning of Article 12(3) of Regulation (EEC)
No 4056/86 as to the applicability of Article 85(3) to the
agreement in question,

Having regard to the summary of the relevant agreement
published (3) pursuant to Article 23(3) of Regulation (EEC)
No 4056/86,

I. THE FACTS

1. The application

(1)

On 31 October 1996 The Peninsular and Oriental
Steam Navigation Company (‘P&O') and Stena Line
Limited (Stena) submitted an application to the
Commission pursuant to Article 12(1) of Regula-
tion (EEC) No 4056/86 for negative clearance
under Article 85(1) of the Treaty or, in the altern-
ative, exemption under Article 85(3) in respect of a
proposed joint venture merging their respective
ferry operations on the Short French Sea and
Belgian Straits.

(1) OJ L 378, 31.12.1986, p. 4.
(2) OJ C 80, 13.3.1997, p. 3.
(3) OJ C 39, 6.2.1998, p. 21.

(2)

On 10 December 1996, SeaFrance SA (‘SeaFrance')
submitted a complaint to the Commission against
the proposal to create a joint venture.

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(3)

(4)

(5)

(6)

(7)

On 13 March 1997, pursuant to Article 12(2) of
Regulation (EEC) No 4056/86, the Commission
published a summary of the application in the
Official Journal of the European Communities
their
and invited interested parties
comments within 30 days (4). Comments were
including
received from a variety of
competitors, customers,
local
government, public representatives, private individ-
uals and one Member State.

sources
trade associations,

to submit

On 10 June 1997, before the expiry of the 90-day
deadline provided for in Article 12(3) of Regulation
(EEC) 4056/86,
the Commission informed the
parties that there existed serious doubts within the
meaning of that Article as to the applicability of
Article 85(3) of the Treaty to the agreement in
question.

On 6 February 1998, pursuant to Article 23(3) of
Regulation (EEC) No 4056/86, the Commission
published a notice indicating its
intention to
exempt the agreement (5).

2. The parties and the complainant

(ro-ro)

P&O is listed on the London Stock Exchange and
is the parent company of a diversified group with
interests including roll-on/roll-off
ferries,
deep sea container and bulk shipping, cruise
international port
vessels, European haulage,
management, exhibition organisation, commercial
construction, property development and the sale of
domestic property. The roll-on/roll-off ferry busi-
ness operates
ferry services
tourist and freight
between Great Britain and mainland Europe and
Ireland.

Stena operates ferry services between Great Britain
and mainland Europe and Ireland. It forms part of
the Stena Line AB group which operates ferry
services in north-western Europe, including routes
in Scandinavia and from the Hook of Holland to
Harwich. Stena Line AB is listed on the Stockholm
Stock Exchange and forms part of the Stena Sphere
group of companies, whose interests include ferries,
offshore contracting for the oil and gas industry,
shipping, drilling, property, finance and metals.

(8)

(9)

(10)

(11)

(12)

P&O and Stena are hereinafter referred to as ‘the
parties'.

The complainant SeaFrance operates ferry services
on the Dover/Calais route. SeaFrance is owned by
the French railway company SNCF.

3. The agreement

The parties have agreed to combine P&O’s and
Stena’s respective ferry operations on the Short
French Sea and Belgian Straits in a joint venture
company called P&O Stena Line. P&O previously
operated a mixed tourist
service
between Dover and Calais on the Short French Sea
and a freight-only service between Dover and
Zeebrugge on the Belgian Straits. Stena previously
operated mixed tourist and freight services between
Dover and Calais and Newhaven and Dieppe on
the Short French Sea.

and freight

The P&O company which previously operated its
Short French Sea and Belgian Straits services, P&O
European Ferries (Dover) Limited, has become the
vehicle for the joint venture. Stena has transferred
all assets and liabilities currently employed on its
Dover/Calais and Newhaven/Dieppe routes to the
joint venture company. The share capital of the
company is owned 60 % by P&O and 40 % by
Stena, although voting rights are split equally
between the two parties. Similarly, representation
and voting rights on the Board of Directors of the
joint venture company are divided equally between
P&O and Stena.

The parties originally envisaged that P&O Stena
Line would have assets of approximately GBP 410
million, funded by approximately GBP 100 million
of equity and the remainder by debt, part of which
would be secured by mortgages over the vessels, the
remainder being guaranteed by P&O. The parties
subsequently informed the Commission that P&O
Stena Line would have assets of about GBP [...]
million (6), funded by a combination of equity, loan
stock, borrowings and securities. Upon starting
operations, its assets included a total of 14 ships:
five multi-purpose ferries (operating mixed tourist
and freight services) and three freight-only vessels
previously owned by P&O; and five multi-purpose
ferries and one fast craft previously owned by Stena.

(4) See footnote 2.
(5) See footnote 3.

(6) Certain information is not included in the published text for

reasons of confidentiality.

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(13)

(14)

(15)

the joint venture would
It was envisaged that
operate a regular service between Dover and Calais
departing every 45 minutes and employing six
multi-purpose vessels. Three multi-purpose vessels
would be withdrawn from service. The joint venture
would continue to operate P&O’s three vessel,
freight-only, service on the Dover/Zeebrugge route
as well as Stena’s one fast craft and one mufti-
purpose vessel service on the Newhaven/Dieppe
route.

The joint venture started operating services on 10
subsequently
March 1998. P&O Stena Line
informed the Commission that
intended to
it
operate a seventh multi-purpose vessel (the Pride of
Bruges) on the Dover/Calais route for the 1998
summer season (May to September) and possibly
thereafter. P&O Stena Line has also informed the
Commission that on 16 October 1998 it removed
the fast craft from the Newhaven/Dieppe route for
a refit, after which the craft was not put back on
the route but delivered back to its owners on 30
October 1998, and that it is consulting with its
employees about the future of its service on that
route.

(port

The parties projected that the joint venture would
give rise to cost savings of GBP 75 million as a
result in savings in the costs of ships and the costs
of overheads
administration and
costs,
marketing). That figure included projected savings
from the removal of Stena’s Pegasus fast craft from
the Newhaven/Dieppe route, and the removal of
Stena’s vessel Antrim from the Newhaven/Dieppe
route to be replaced by P&O’s vessel Pride of
Bruges. In fact, Stena removed the Pegasus from
the Newhaven/Dieppe route in October 1996, well
before the implementation of the joint venture.
Further, the joint venture did not dispose of the
Cambria as originally intended but transferred it
from the Dover/Calais route to the Newhaven/
Dieppe route because the Pride of Bruges has been
kept on the Dover/Calais route. Using the parties’
figures for the costs of those ships, the costs savings
brought about by the joint venture can be esti-
mated to be GBP [...] million.

(16) Under the agreement, P&O and Stena undertake
not to be involved directly or indirectly (other than
through the joint venture) with the provision of
ferry services calling at any port on the English
coastline between (and including) Newhaven and
(but excluding) Harwich or on the European main-
land coastline between (and including) Dieppe and
(but excluding) Zeebrugge. The joint venture’s
ferry
activities are limited to the provision of

services on the Dover/Calais, Dover/Zeebrugge and
Newhaven/Dieppe routes.

(17)

The parties operate other ferry services that have
not been brought into the joint venture.

(18)

P&O operates the following services:

as well
on the Teesport/Zeebrugge

(a) on the North Sea, P&O’s subsidiary P&O North
Sea Ferries operates mixed passenger/freight
services on the Hull/Zeebrugge and Hull/
freight-only
Rotterdam routes,
and
services
Teesport/Rotterdam routes. P&O European
Ferries operated freight-only services on the
Felixstowe/Zeebrugge
Felixstowe/Rot-
terdam routes; these services are now operated
by P&O North Sea Ferries;

and

as

(b) on the Western Channel, P&O European
Ferries
passenger/freight
services between Portsmouth and Le Havre,
Cherbourg and Bilbao;

operates mixed

(c) on the Irish Sea, P&O European Ferries oper-
ates mixed passenger/freight on the northern
corridor. P&O’s subsidiary Pandoro operates
freight-only services in the northern and central
corridors.

(19)

Stena operates the following services:

(a) on the North Sea, Stena Line BV (part of the
Stena Line AB group) operates passenger and
services on the Harwich/Hook of
freight
Holland route;

(b) on the

Irish Sea,

Stena operates mixed
passenger/freight services on all three corridors,
as well as the largely freight-only Holyhead/
Dublin route on the central corridor.

Stena does not operate services on the Western
it operated on the South-
Channel. Until 1996,
ampton/Cherbourg route.

4. Relevant markets.

(20)

This section considers the following two relevant
markets on which the joint venture operates:

(a) the market

for

tourist passenger

services
(passengers and passenger vehicles) on the
Short Sea routes, consisting of routes across the
Short French Sea (routes between Dover, Folke-
stone, Ramsgate, Newhaven and Calais, Dieppe,
Boulogne, Dunkirk; and the Channel Tunnel)
and the Belgian Straits (Ramsgate/Ostend);

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services

(b) the market for unitised freight services (mari-
intermodal
time
services)
and mainland
Europe (Western Channel, Short Sea and North
Sea routes).

between England

and door-to-door

(21)

Section 6 considers the Western Channel, North
Sea and Irish Sea tourist passenger routes on which
the proposed joint venture will not operate, but on
which (together with the Anglo/Continental freight
market) the parties operate their own independent
services.

4.1. Business passengers

(22)

In the Night Services (7) and Eurotunnel (8) deci-
sions, the Commission found there to be distinct
markets for leisure travellers and for business trav-
travellers have
ellers, since the two groups of
different demands. The business traveller values
rapidity, comfort and frequency, whereas leisure
travellers put a higher value on price. Business
passengers and tourist passengers can therefore be
considered separate markets.

(24)

(25)

(26)

(23) Most business passengers wishing to travel between
England and mainland Europe would be likely to
use scheduled air services or high speed train
services (Eurostar and connecting rail services) in
view of their greater rapidity and comfort than ferry
or Le Shuttle services (shuttle services for cars and
lorries through the Channel Tunnel). For business
passengers, Eurostar and air services will be substi-
tutable for ferry and Le Shuttle services. To the
extent that business passengers do use ferry or Le
Shuttle services, the existence of competing rail
and air services means that the joint venture and Le
Shuttle (even if they were not to compete with each
other) would be faced with effective competition
for business travellers. As far as passengers are
concerned
the
the
proposed joint venture may be confined to the
effects on tourist passengers.

assessment

therefore,

of

4.2. Tourist passengers

The complainant SeaFrance questions the extent of
substitutability between maritime services and the
Eurotunnel service. It argues that because the char-
acteristics of the two modes of transport are appre-
ciably different, one can deduce that there will be a
rapid segmentation of demand between those who,
for reasons linked to its characteristics, systemati-
cally prefer the tunnel and those who prefer the
maritime services. This segmentation will occur,
according to SeaFrance, when all customers who so
wish have tried out the tunnel.

There is evidence, however, that market shares of
both ferries and Eurotunnel will vary in response to
relative prices. Between February and May 1996,
Eurotunnel’s market share of Short French Sea car
traffic fell
in successive months from 41 % in
February to 35 % in May. Eurotunnel reduced its
brochure prices with effect from June 1996, and its
market share rose in successive months until the
Tunnel fire in November 1996 from 36 % in June
to 46 % in October.

To the extent that there are categories of passengers
who would either only ever use the ferries or only
ever use the Tunnel, they will not constitute a
separate market because the operators have no
and
means
charging them higher prices.

their preferences

identifying

of

4 . 2 . 2 . E u r o s t a r s e r v i c e s a r e n o t a s u b s t i -

t u t e f o r

f e r r y s e r v i c e s

(27)

The parties consider that the direct city to city rail
services offered by Eurostar has an impact on ‘both
the foot passenger and tourist vehicle sector of the
that
ferry market'. The parties doubt however
distinguishing foot passengers and passengers trav-
elling with a vehicle is helpful or relevant
to
assessing the joint venture.

4 . 2 . 1 . L e

S h u t t l e

s e r v i c e s

a n d

f e r r y

s e r v i c e s a r e s u b s t i t u t e s

(7) Commission Decision 94/663/EC (OJ L 259, 7.10.1994, p. 20),

paragraphs 20 to 27.

(8) Commission Decision 94/894/EC (OJ L 354, 31.12.1994, p.

66), paragraphs 64 to 66.

(28)

Foot passengers (that is passengers who do not
enter a vessel in a coach or car) represented 13 and
17 % respectively of P&O’s and Stena’s passengers
in 1996 (January to October). The numbers were
990 000 and 720 000 respectively. By way of

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comparison, P&O and Stena respectively carried 3,1
and 1,4 million coach passengers, and Short French
Sea ferry operators and Le Shuttle together carried
25,3 million passengers in that period. Eurostar
carried 4,9 million passengers in the full year 1996.

mean that those services offer a significant degree
of competition to services on the Dover/Calais and
Folkestone/Calais routes, and should be included
in the relevant Short Sea market.

(29)

(30)

Eurostar services will clearly not be a substitute for
some categories of ferry and Le Shuttle passengers,
such as those who travel (whether by foot (on the
ferries), car or coach) to take advantage of duty-free
goods and cheaper duty-paid goods in France.
Duty-free sales are unavailable on the Eurostar
system, and the Eurostar services are not as conve-
nient for day trips to retailers located in France.

Eurostar’s main competitors are the airlines:
in
1996 more passenger travelled by Eurostar on the
combined London/Paris
and London/Brussels
routes than travelled by air (18 % fewer passenger
travelled by air between London and Paris in 1996
to October compared to 1995 to October). The
London/Paris or London/Brussels city centre to
city centre tourist who would consider Eurostar
substitutable for ferry and Le Shuttle would, in the
absence of Eurostar, be likely to have travelled by
air rather than ferry or Le Shuttle. The position
may be different for a low-budget tourist, who may
consider scheduled coach services (that use a ferry
or Le Shuttle)
to be an alternative to Eurostar.
Scheduled coach operations are one of the catego-
ries of traffic carried by the ferries and Le Shuttle
where there is
likely to be more keen price
competition due to the purchasing power of the
coach operators and the lack of market transpar-
ency.

(31)

is

tourist
thus only a limited category of
It
passenger for which Eurostar services may in prac-
tice be substitutable for those of the ferries and Le
Shuttle. For the larger proportion of customers the
services will not be sufficiently substitutable for
Eurostar to be considered as being within the same
relevant market as the ferries and Le Shuttle.

4 . 2 . 3 . G e o g r a p h i c a s p e c t

(32)

The volume of the Short French Sea services, their
frequency, speed of crossing and price mean that
the Western Channel and North Sea routes cannot
be considered substitutable. The reduced crossing
time offered by the fast
ferry services on the
Newhaven/Dieppe and Ramsgate/Ostend routes

(33)

The duration of crossing of the Short Sea services is
35 minutes by Le Shuttle or Hoverspeed hovercraft,
ferry to
50 to 55 minutes by Hoverspeed fast
France, 75 to 90 minutes by Dover/Calais conven-
tional ferry, 100 minutes by Ramsgate/Ostend fast
ferry, 125 minutes by Dover/Ostend fast ferry and
135 minutes by Newhaven/Dieppe fast ferry. The
short crossing time means that these routes are in
particular preferable for those passengers who travel
primarily in order to buy duty-free goods and prod-
ucts charged lower rates of duty in France.

(34)

By comparison, crossing times on other services
are:

Harwich/Hook of Holland Stena HSS (high speed
sea service):

3 hours 40 minutes

Poole/Cherbourg:

41/2 hours

Portsmouth/Cherbourg:

Portsmouth/Le Havre:

5 hours (7 to 8 hours
overnight)
(2 hours 25
minutes by fast ferry)

51/2 hours
(71/2
hours overnight)

to 8

Portsmouth/Caen:

6 hours

Hull/Zeebrugge:

13 to 15 hours (over-
night)

(35)

(36)

The Short French Sea ports, particularly Dover,
Folkestone and Calais, have good motorway access.
The Short French Sea offers the widest choice of
type of service (conventional ferry, fast ferry and
tunnel), and significantly higher frequencies than
on North Sea and Western Channel routes. The
high frequencies mean that passengers increasingly
travel without having pre-booked (‘turn up and go')

These characteristics of the Short Sea routes means
that customers have been attracted to using these
routes. Prices on Short Sea services would have to
rise very significantly before customers would
switch to other routes on the Western Channel or
North Sea, and certain categories of customers
(such as day-trippers) would respond to price rises
by deciding not
than by
travel at all
switching to the other routes.

rather

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4.3. Freight market

6. Absence of spillover

(37)

The parties carry freight on ro-ro ferries. Ro-ro
services compete with other means of transporting
unitised freight (9). Unitised freight (as opposed to
bulk freight) is stored, for the purpose of transpor-
tation, in one of a variety of standardised modes
including driver-accompanied vehicles, unaccom-
panied trailers and containers. Unitised freight can
be carried on ro-ro vessels and lo-to (lift-on, lift-off)
vessels, and via the Channel Tunnel on Le Shuttle
Freight services and freight trains.

(38)

Short Sea freight
services compete with other
Anglo/continental freight services, that is, services
between England and mainland Europe (Western
Channel, Short Sea and North Sea routes) (10).

(42)

The Commission has concluded that no restriction
of competition within the meaning of Article 85(1)
arises out of the risk that the parties’ cooperation
within the joint venture might spill over into the
parties’ independent tourist passenger services on
the North Sea, Western Channel and Irish Sea and
their independent freight services on the Anglo/
Continental freight market.

6.1. North Sea tourist services

II. LEGAL ASSESSMENT

5. Article 85(1) of the Treaty

6 . 1 . 1 . M a r k e t

(39)

(40)

The formation of the joint venture constitutes a
restriction of competition within the meaning of
Article 85(1) because the parties were actual
competitors on the relevant markets on which the
joint venture operates.

That restriction of competition is appreciable. The
parties have a high combined market share (even if
their combined market share on the Short Sea
declined following the market entry of Eurotunnel).
The joint venture is a full function joint venture
which operates
transport
its parents, and in a neighbouring
market as
passenger transport market to those in which its
parents operate.

in the same freight

(43)

(44)

(41)

The formation of the joint venture has an effect on
trade between Member States given the importance
of the parties in the Short Sea tourist market and in
the Anglo/Continental freight market (11).

(9) See Commission Decision 97/84/EC (OJ L 26, 29.1.1997, p.

23)

(10) See footnote 9. For

‘Ferry Operators  Currency Surcharges', paragraph 5.
the
the purposes of
Commission considered the relevant geographic aspect of the
freight market to be limited to services between England and
France, Belgium and the Netherlands.

that Decision,

(11) See the sixth recital in the preamble to Regulation (EEC) No
4056/86 describing the effect which restrictive practices
concerning international maritime transport may have on
Community ports.

In 1997, North Sea services carried 470 000 tourist
vehicles and 2,32 million passengers. The North
Sea services comprise those on routes between
ports on the east coast of England and ports in
Belgium and the Netherlands. Services to Hamburg
and Esbjerg (operated by Scandinavian Seaways) are
not considered to be part of the same market. It is
likely to be only a small proportion of tourist trav-
elling on P&O’s and Stena’s services to Belgium
and the Netherlands who would find services to
Hamburg and Esbjerg to be substitutable.

The prices which operators on the North Sea
routes may charge is constrained by the prices
prevailing on the Short Sea. It is clear from data
provided by the parties that rates achieved by the
operators on the North Sea between 1994 and 1996
have followed very closely the rates achieved on the
Short Sea. Market studies also support the argument
that passengers travelling to and from the catch-
ment areas traditionally associated with the North
Sea routes have been switching to the Short. Sea in
recent years. However, the reverse is not evident,
which suggests one-way substitutability i.e.
the
North Sea is constrained by the Short Sea, but not
vice versa. Tourist services on the North Sea routes
should therefore be considered to operate within a
relevant market consisting of North Sea and Short
Sea routes.

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(45) On the North Sea, P&O North Sea Ferries operates services on the Hull/Zeebrugge and
Hull/Rotterdam routes. Stena Line operates on Harwich/Hook of Holland route, on which
in 1997 it introduced HSS fast ferries. Scandinavian Seaways operates on Newcastle/
Ijmuiden (Amsterdam). Olau and then Eurolink until 1996 operated on the Sheerness/Vlis-
singen route, and the P&O European Ferries Felixstowe/Zeebrugge route carried tourist
vehicles until 1996. Market shares of North Sea tourist vehicles are as follows:

Table 1. North Sea and Short Sea tourist vehicle shares

1997
(thousand PCU (1))

226
205
35
2 384
1 738
1 173
580
528
49
248

Total

7 166

1997
(%)

3,15
2,86
0,49
33,27
24,25
16,37
8,09
7,37
0,68
3,46

99,99

P&O (North Sea)
Stena (North Sea)
Scandinavian Seaways (North Sea)
Eurotunnel
P&O (Short Sea)
Stena (Short Sea)
SeaFrance
Hoverspeed
Holyman Sally (Ramsgate/Dunkirk)
Holyman Sally (Ramsgate/Ostend)

Source: The parties.
(1) Passenger car unit.

6 . 1 . 2 . A s s e s s m e n t

(46) Any attempt by the parties to coordinate behaviour on the North Sea will be destabilised
by competition from the Short Sea. Therefore it cannot be concluded that the creation of
the joint venture will make it reasonably foreseeable that the parties will act in a way which
they did not before the creation of the joint venture and in a way which brings about an
appreciable restriction of competition between those parents. The parties’ cooperation on
the Short Sea is therefore unlikely to spill over onto their activities on the North Sea.

6.2. Western Channel tourist services

6 . 2 . 1 . M a r k e t

(47)

In 1997 Western Channel services carried 1,1 million tourist vehicles and 4,22 million
passengers. The Western Channel services comprise routes to the west of the Short Sea
between ports on the south coast of England and ports on the north coast of France.

(48) As with the North Sea, the evidence suggests that prices which operators on the Western
Channel routes may charge is constrained by the prices prevailing on the Short Sea, but
not vice versa. Tourist services on the Western Channel routes should therefore be
considered to operate within a relevant market consisting of Western Channel and Short
Sea routes.

(49) Only P&O European Ferries and Brittany Ferries operate services on the Western Channel
routes. Until 1996 Stena Line operated on the Southampton/Cherbourg route. Since then it
has considered operating a fast ferry on the route. Market shares of Western Channel
tourist vehicles are as follows:

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29. 6. 1999

Table 2. Western Channel and Short Sea tourist vehicle shares

1997
(thousand PCU)

702
440
2 384
1 738
1 173
580
528
49
248

7 842

1997
(%)

8,95
5,61

30,4
22,16
14,96
7,4
6,73
0,62
3,16

99,99

Total

Brittany Ferries (Western Channel)
P&O (Western Channel)
Eurotunnel
P&O (Short Sea)
Stena (Short Sea)
SeaFrance
Hoverspeed
Holyman Sally (Ramsgate/Dunkirk)
Holyman Sally (Ramsgate/Ostend)

Source: The parties.

6 . 2 . 2 . A s s e s s m e n t

(50)

In relation to the Western Channel, the parties argue that there cannot be any coordina-
tion of P&O’s and Stena’s operations since Stena is no longer active on those routes. Stena
should, however, be considered a potential competitor given that it has considered (and can
presumably reconsider) whether to re-enter the Southampton/Cherbourg route with a fast
ferry service.

(51) However, the same considerations apply to the Western Channel, as to the North Sea. Any
attempt by the parties to coordinate behaviour on the Western Channel will be destabilised
by competition from the Short Sea. The parties’ cooperation on the Short Sea is therefore
unlikely to spill over onto their actual or potential activities on the Western Channel.

6.3. Irish Sea tourist services

6 . 3 . 1 . M a r k e t

(52)

The Irish Sea can be divided into three relevant tourist markets: the Northern, Central and
Southern Corridors (12). In 1997 services on the three corridors carried respectively 590 000,
460 000 and 380 000 tourist vehicles and 2,7, 2,8 and 1,5 million passengers. Market shares
in the three corridors are as follows:

Table 3. Northern Corridor Irish Sea tourist vehicle market shares (%)

Routes currently operated

1995

1996

1997

Stena

P&O

Belfast/Stranraer

Larne/Cairnryan

Sea Containers (SeaCat Scotland)

Belfast/Stranraer

Norse Irish Ferries

Belfast/Liverpool

Source: P&O; for 1997, Passenger Shipping Association.

52

28

18

2

47

33

18

2

46

30

21

3

(12) See Commission Decision 94/19/EC,

‘Sea Containers v. Stena Sealink',

(OJ L 15, 18.1.1994, p. 8) para-

graphs 11 and 13.

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Official Journal of the European Communities

L 163/69

Table 4. Central Corridor Irish Sea tourist vehicle market shares (%)

Stena

Dublin/Holyhead
Dun Laoghaire/Holyhead

68

68

64

Routes currently operated

1995

1996

1997

Irish Ferries

Dublin/Holyhead

Sea Containers (Isle of Man Steam
Packet Company)

Dublin/Liverpool

Source: P&O; for 1997, Passenger Shipping Association.

32



32



31

5

Table 5. Southern Corridor Irish Sea tourist vehicle market shares (%)

Routes currently operated

1995

1996

1997

Stena

Rosslare/Fishguard

Irish Ferries

Rosslare/Pembroke

Swansea Cork Ferries

Cork/Swansea

Source: P&O; for 1997, Passenger Shipping Association.

60

25

15

52

27

17

45

42

13

(53)

(54)

Stena is present with mixed freight/passenger services on all three corridors (as well as the
largely freight-only Holyhead/Dublin route on the Central Corridor). P&O operates tourist
services only on the Northern Corridor (in addition, P&O’s Pandoro subsidiary operates
freight-only services in the Northern and Central Corridors).

Ferry operators on the Irish Sea offer landbridge services from Ireland to mainland Europe
combining a crossing on their Irish Sea services with a crossing on a Britain/Continent
service. The proportions of landbridge traffic carried by the principal operators on the Irish
Sea, together with their partners for the leg between Britain and the mainland, are as
follows:

Table 6. Landbridge services on the Irish Sea

Landbridge traffic 1997
(%)

Tourist

Freight

Tourist operator on Britain/Continent legs

Stena
P&O
Sea Containers
Irish Ferries
Swansea Cork

[ . . . ]
[ . . . ]
0,4
[ . . . ]
7,4

[ . . . ]
[ . . . ]
n/a
[ . . . ]
13,6

Stena, Brittany Ferries
P&O, Scandinavian Seaways
Hoverspeed, Scandinavian Seaways
Eurotunnel, P&O, Scandinavian Seaways
P&O, Hoverspeed, Sally, Brittany Ferries

Source: The operators and their brochures. Swansea Cork figures are for 1997 January to June. Stena figures are for

Southern and Central Corridors.

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Official Journal of the European Communities

29. 6. 1999

(55)

Landbridge tickets, at least on the Central and Southern Corridors, account for an appreci-
able, albeit low, proportion of Irish Sea tourist traffic, and a higher proportion of freight.
Landbridge tickets account only for a small proportion (less than 1 %) of Short Sea tourist
traffic.

6 . 3 . 2 . A s s e s s m e n t

(56)

The only corridor on which both parties offer tourist services is the Northern Corridor.
Almost all tourist traffic carried on the Northern Corridor is intra-United Kingdom traffic:

Table 7. Northern Corridor Irish Sea passengers originating in Ireland

Stena

Sea Containers

Source: Stena, Sea Containers.

Number

[(cid:1) 60 000]

(%)

[(cid:1) 5]

2

(57)

In view of the low proportion and low amount of inter-State traffic using the Northern
Corridor tourist routes, it can be concluded that there is no appreciable effect on inter-
State trade.

6.4. Anglo/Continental freight market

6 . 4 . 1 . M a r k e t

(58)

(59)

The Anglo/Continental freight market is characterised by strong price competition, low
barriers to entry, and purchasing power on the part of larger customers.

The market shares of operators of freight services on Anglo/Continental routes are as
follows:

Table 8. Anglo/Continental freight market 1996 (January to October) and 1997

Operator

1996

1997

Volume
(thousand
freight units)

Market shares
(%)

Volume
(thousand
freight units)

Market shares
(%)

A

15

9

7

4

17

8

B

20

25

268

685

157

873

357

A

7

17

4

21

9

B

21

30

426

248

204

122

476

207

Eurotunnel

North Sea Ferries

P&OEF (Felixstowe) (1)

P&OEF (Portsmouth)

P&OEF (Dover)

Stena Short Sea

29. 6. 1999

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Official Journal of the European Communities

L 163/71

Operator

1996

1997

Volume
(thousand
freight units)

Market shares
(%)

Volume
(thousand
freight units)

Market shares
(%)

Stena Western Channel

Stena BV

SNAT/SeaFrance

Brittany Ferries

Sally

Ostend Line

Cobelfret (2)

Olau/Eurolink (2)

Maersk

Bell Line (2)

Geestline (2)

UTL/IFF (2)

DFDS/Torline

12

77

107

125

101

64

146

29

63

45

45

57

58

Other operators (2)

259

B

3

A



3

4

4

4

2

5

1

2

2

2

2

2

9



112

393

181

117



210



90

70

70

85

90

350

B

3

A



3

10

4

3



5



2

2

2

2

2

9

Total

100

48

100

54

(1) P&O European Ferries (Felixstowe) is now part of P&O North Sea Ferries.
(2) Estimates.
Source: P&O and Stena. Column A shows the market share of each service, column B shows the aggregated market

shares of each parents’ retained services, and of the services which now make up the joint venture.

6 . 4 . 2 . A s s e s s m e n t

(60) On the basis of the 1997 market shares, the joint venture would have had a 30 % share,
P&O 21 %, and Stena 3 %. In that period Eurotunnel had a 7 % share (as compared to
15 % in the 10 months before the Tunnel fire), SeaFrance had a 10 % share and eight
other operators had shares of between 2 and 5 %. Even if the joint venture and the parties
were to coordinate their behaviour, they would be unlikely to be able to raise prices
without losing their customers to competitors.

7. Article 85(3) of the Treaty: Short Sea tourist market

7.1. Improvement in the production or distribution of goods, or promotion of technical or

economic progress

(61)

The first and second conditions of Article 85(3) require an assessment of the efficiencies
and other benefits that can be expected from merging the parties’ separate ferry operations
on the Short Sea, and the extent to which those efficiencies will benefit consumers.

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Official Journal of the European Communities

29. 6. 1999

(62)

The creation of the joint venture will bring about
benefits, notably the improved frequency to be
offered by the joint venture, continuous loading,
and estimated cost savings of GBP [...] million. The
overall positive benefits will arise even were the
joint venture to decide to stop operating on the
Newhaven/Dieppe route.

7.2. Allowing consumers a fair share of

the

resulting benefit

(63) Customers can be expected to benefit from the
loading.
improved frequency
Customers can be expected to benefit from the cost
savings to the extent that the joint venture will be
faced by effective competition.

and continuous

(67)

(68)

7.4. No elimination of competition in respect of a
substantial part of the products in question

The fourth condition of Article 85(3) requires an
assessment of whether the proposed joint venture
can be expected to be faced with effective
competition in the Short Sea tourist passenger
market.

In its ‘letter of serious doubts' the Commission
stated its concern that the creation of the joint
venture could lead to a duopolistic market structure
conducive to parallel behaviour of the joint venture
and Eurotunnel. This issue is addressed in the
following section.

8. Risk of creation of duopoly on the Short

Sea tourist market

7.3. No restrictions which are not indispensable

8.1. Market concentration before and after the

creation of the joint venture

(64)

(65)

requires
The third condition of Article 85(3)
consideration of whether less restrictive alternatives
are available to achieve the benefits of the proposed
joint venture.

The Commission considers that
lesser forms of
cooperation between P&O and Stena, such as joint
scheduling,
interlining or pooling, would be
unlikely to lead to the benefits to be achieved by
the joint venture.
In particular, any form of
cooperation less than a joint venture would not
achieve
and
in
marketing, which represent a significant part (GBP
[. . .] million) of the estimated GBP [. . .] million
costs savings.

administration

savings

the

(66) Under the agreement, P&O and Stena undertake
not to be involved directly or indirectly (other than
through the joint venture) with the provision of
ferry services calling at any port on the English
coastline between (and including) Newhaven and
(but excluding) Harwich or on the European main-
land coastline between (and including) Dieppe and
(but excluding) Zeebrugge. The joint venture’s
activities are limited to the provision of
ferry
services on the Dover/Calais, Dover/Zeebrugge and
Newhaven/Dieppe routes. These restrictions can be
regarded as necessary for the creation of the joint
venture.

8 . 1 . 1 . O p e r a t o r s ’ p o s i t i o n s o n t h e m a r k e t
j o i n t

c r e a t i o n o f

t h e

t h e

b e f o r e
v e n t u r e

(69)

(70)

The most important recent change to the market
for cross-channel
ferry services has been the
opening of the Channel Tunnel in 1994. Other
major changes have been the ending, on 31
December 1995, of
the pooling arrangement
between Stena and Société Nouvelle d’Armement
Transmanche (SNAT; now SeaFrance), and the
ending, on 1 March 1997, of the pooling arrange-
ment between Sally Line and Regie Voor Maritiem
Transport (RMT).

Since 1993 there have been large increases in
capacity and market volume, and consumers have
benefited from price reductions. From 1993 to
1996, passenger vehicle numbers increased from
3,6 to 5,8 million, and passenger numbers from
20,3 to 30,2 million (of which 8,7 million were
accounted for by Eurotunnel). In the first half of
1997, passenger vehicle numbers
increased by
11,6 % as compared to the same period in 1996.

(71)

Table 9 shows the market shares of operators of
tourist
services on the Short French Sea for
different periods since 1994.

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Official Journal of the European Communities

L 163/73

Table 9. Short French Sea: market share of tourist vehicles

1993

1994

1995

1996 to
October

October
1996

0,0
45,5
20,4
14,4
11,8
7,9

0,0
49,3
19,7
15,2
9,5
6,3

25,9
35,7
15,0
11,6
6,5
5,3

39,3
26,5
19,5
5,5
6,0
3,2

45,5
23,7
16,6
6,8
4,6
2,8

1997

36,9
26,9
18,2
9,0
8,2
0,8

Total

100

100

100

100

100

100

Eurotunnel
P&O
Stena
SNAT/SeaFrance
Hoverspeed
Sally/Holyman Sally

Source: P&O and Stena.

(72)

(73)

(74)

The market share figures considered in Table 9
relate to the Short French Sea and thus do not
include Holyman Sally’s service on the Ramsgate/
Ostend route. It started a new fast ferry service on 1
March 1997. The service ended in March 1998 and
was replaced from 6 March 1998 by a fast ferry
service between Dover and Ostend jointly owned
by Holyman and Hoverspeed. Sally then continued
to operate a freight service on the Ramsgate/
Ostend route (which also carried passengers from
late June 1998) until the service was closed on 20
November 1998.

(75)

Since the opening of the Channel Tunnel in 1994,
Eurotunnel gained market share until the Tunnel
fire in November 1996. The year-by-year growth in
Eurotunnel’s market share masks uneven monthly
fluctuations. For example, Eurotunnel lost market
share from February to May 1996. Eurotunnel’s
market share in 1997 (37 %) was lower than its
market share immediately before the fire (46 %).
Eurotunnel’s market share can be expected to
return to its level before the fire and to resume
growth.

P&O’s market share fell from 46 % in 1993 to
27 % in 1996 (first 10 months). In the 1997 its
market share was 27 % notwithstanding the effects
of the Tunnel fire. Stena sustained its market share
at around 20 % over the period 1993 to 1996 (first
10 months), but with a drop to 15 % in 1995. Its
rise to 20 % in 1996 (notwithstanding Eurotunnel’s
increased market share) can be attributed to its
success in attracting customers of the Stena/SNAT
pool after it broke up at the end of 1995. Stena was
less successful than the other Dover/Calais ferry
operators in increasing its market share as a result
of the Tunnel fire.

8 . 1 . 2 . D e g r e e
m a r k e t :
m a r k e t s h a r e s

o f
s i z e

c o n c e n t r a t i o n o n t h e
a n d d i s t r i b u t i o n o f

The creation of
the joint venture reduced the
number of operators on the market from six to five.
More significantly, on the basis of 1997 market
shares, the creation of the joint venture increased
the combined market share of the two largest oper-
ators from 64 % (Eurotunnel and P&O) to 82 %
(Eurotunnel and joint venture). Furthermore, the
creation of the joint venture changes the variation
of market share sizes. Before the joint venture there
is one clear leader (37 %), and a spread of sizes of
smaller operators (27 %, 18 %, 9 %, 8 %, 1 %).
the difference in size
After
between the top two operators is reduced (from
over 10 % difference, to 8 %). The distribution of
operators becomes one of
(45 %,
37 %), followed a long way behind by three opera-
tors (9 %, 8 %, l %).

the joint venture,

two leaders

8 . 1 . 3 . I n s t a b i l i t y o f m a r k e t s h a r e s

(76)

The parties point to the instability of market shares
in recent years and the unlikelihood that they will
be stable in the future. They point out that Euro-
tunnel’s prospectus has referred to an intent to
reach a market share of 70 %, and state that other
operators have made investments predicated on
them increasing their market shares. They thus
consider that the ferry operators and Eurotunnel do
not have a community of interest in maintaining
market shares or prices.

(77) Market shares have not been stable due in partic-
ular to the entry of Eurotunnel onto the market.
The growth in Eurotunnel’s market share has not
been linear; in particular the Tunnel fire caused a
reduction in its market share. The ending of the
StenalSNAT pool also caused instability in market
shares.

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Official Journal of the European Communities

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8.2. Factors affecting competition between the

joint venture and Eurotunnel

8 . 2 . 1 . P r i c i n g p r a c t i c e s a n d m a r k e t t r a n s -

p a r e n c y

(78)

There are three main fare categories:

(a) Published brochure fares. Prices typically vary
according to time of year, time of day, length of
stay and type of vehicles and number of passen-
gers. Brochures include discounted fares applic-
able to early bookings. Brochure fares are used
as the basis for fare reductions for groups of 10
or more travelling together in a minibus or
coach.

(b) Promotional fares. These include day trip and
longer stay promotions offered in conjunction
advertised in the
with newspapers, offers
national and local press, duty-free discounts,
discounts offered in brochures (including early
booking fares),
and discounts offered for
example through certain organisations such as
motoring organisations. In 1996 the parties
developed policies of matching competitors’
fares, and direct sales staff have been given
discretion to negotiate rates within defined
limits.

(c) Negotiated rates for ITX operators (that

is,
travel companies offering self-drive holidays
with an inclusive price for a sea crossing and
accommodation), coach package holiday opera-
tors and scheduled coach operators. Rates for
ITX operators are typically agreed in the
summer of the preceding year.

(81) Cars constitute the large majority of tourist vehicles
carried on the Short Sea routes: 94 % for P&O
(1996 to October), 96 % for Stena (1996 to
October) and 97 % for Eurotunnel (1996). Apart
from those vehicles travelling on bookings made
through ITX operators, [. . .] % for P&O in 1995,
and [. . .] % for Stena in the 1995 peak season), and
the limited number of ‘closed' promotions (that is,
promotions limited to a category of persons and
the carriage of
thus not generally publicised),
tourist cars is a market in which transactions are
small and frequent, and at prices that are trans-
parent to other operators. These features indicate
market transparency.

(82)

It is not only the brochure prices that are trans-
parent to other operators. Promotions will be adver-
tised and thus capable of being monitored by
competitors. Operators also have access to monthly
figures for the volumes carried by their competi-
tors, allowing them to monitor effects of shifts in
relative prices.

8 . 2 . 2 . C a p a c i t y c o n s t r a i n t s

(83)

The parties argue that Eurotunnel has ‘vast unuti-
together with its high
lised capacity' which,
frequency of crossings, is one of the factors that
gives it exceptional market power in the Short
French Sea tourist market. Further,
the parties
argue that
the different available capacities and
different rates of capacity utilisation held by Euro-
tunnel and the ferry operators will result in Euro-
tunnel and the ferry operators having significant
incentives to adjust their pricing strategies so as to
grow volumes, fill unutilised capacity and maxi-
mise contributions to fixed costs.

(79)

(80)

The situation in the tourist market differs from that
in the freight market where almost all prices are
negotiated individually between operator
and
freight haulier.

(84)

Parallel behaviour is more difficult when transac-
tions are large, infrequent and not published. The
ferry operators’ contracts with ITX operators and
larger coach operators meet
those conditions.
However, the published brochure and promotional
prices are still significant and the ITX and coach
categories form only a limited part of operators’
traffic and ticket revenue.

8 . 2 . 2 . 1 . N a t u r e

a n d

d i s t r i b u t i o n

o f

c a p a c i t y

The entry on stream of the capacity of Eurotunnel
was accompanied by increased capacity offered by
the ferries. Table 10 gives the figures for 1996
provided by the various operators. When consid-
ering the figures in Table 10, the following should
be borne in mind. The Tunnel fire in November
1996 meant that Eurotunnel’s capacity was reduced
as compared to a full year of operation. SeaFrance
low capacity utilisation rate is at least in part due to
its having started operations only in 1996; in the
first half of 1997 its capacity utilisation rate was
59 %.

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Table 10. Short Sea  1996 capacity and carryings

Capacity
(million PCU)

Carryings
(million PCU)

Capacity utilisation
(%)

9,12

11,8

7,09

4,05

0,67

3,16

4,94

5,1

2,79

1,26

0,36

1,22

Total

35,9

15,7

54

43

39

31

53

38

44

Eurotunnel

P&O

Stena

SeaFrance

Hoverspeed

Sally and Sally/RMT

Source: The operators

(85)

(86)

(87)

The capacity offered varies in nature. Eurotunnel
uses passenger-only or freight-only shuttles. Euro-
tunnel is able to decrease its capacity (in off peak
periods) in relatively small amounts by removing
trains, with only small changes to the frequency of
departures. The parties and SeaFrance use multi-
purpose vessels which can carry both passengers
and freight. The size of these vessels means that
capacity comes in larger lumps, making it more
difficult
to reduce capacity in off peak periods
whilst keeping an acceptable frequency.

The capacity utilisation rates indicated in the table
are nominal figures calculated by dividing the total
carryings by the total nominal capacity of each
operator’s
In practice, operators are
unable to use 100 % of their nominal capacity, and
so the effective utilisation rates are higher than
those indicated.

service(s).

The parties argue that Eurotunnel and the joint
venture can be expected to have considerable spare
capacity over a full year. They estimate that in
1997, had the joint venture gone ahead, each of
Eurotunnel and the joint venture would have had a
46 % capacity utilisation rate (for comparison, the
parties’ actual 1996 capacity utilisation rates were
43 % (P&O) and 39 % (Stem)). However, it is rele-
vant to consider the capacity utilisation at peak
periods in order to assess whether the operators will
at
those times have scope to attract additional
passengers by decreasing prices; this is considered
in points 91 to 99.

(88)

(89)

that a ferry operator has

Eurotunnel’s capacity is determined by the Tunnel
a competitive
system. The necessity to offer
frequency means
to
operate at least three conventional ferries or two
fast ferries. A ferry operator has an incentive to
maximise the capacity of each individual vessel, in
order to lower unit costs. An operator then has to
set prices in order to maximise its revenue from its
chosen level of capacity (indeed the expected
revenues will also been taken into account in the
initial decision as
to capacity). Prices can be
changed more rapidly and flexibly than capacity.

to fill

Firms faced with excess capacity will normally have
an incentive to cut prices
that excess
capacity. Where possible they will seek to price
discriminate between customers (for example by
promotional fares) in order to maximize revenue.
Where prices are transparent, any price cuts will
provoke rapid retaliation. All these effects appear to
have occurred since the end of 1995 when the
increased capacity of the ferry operators coincided
with the entry of the capacity of Eurotunnel. This
has brought benefits for consumers as prices have
fallen.

(90)

The ferry operators have had the further incentive
to compete amongst themselves in order to signal
their commitment to the market and to position
themselves for a possible ferry rationalisation.

8 . 2 . 2 . 2 . C a p a c i t y a t p e a k p e r i o d s

(91)

Eurotunnel and the joint venture have sufficient
capacity to cater for twice the 1996 level of demand
during the year. It must be considered whether

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Official Journal of the European Communities

29. 6. 1999

there is sufficient capacity at critical times of the
year, such as peak periods, which would make it
more likely that those operators would raise prices
in parallel than compete for volume.

(96)

financial

restructuring

That conclusion holds provided that Eurotunnel
does not reach its capacity limits for operating Le
Shuttle tourist services. On the basis of Eurotun-
nel’s own projections, that would not seem likely.
proposals
Eurotunnel’s
included projections that
it would continue to
increase its market share of tourist vehicles on the
Dover/Folkestone to Calais route. It projected that
traffic growth would be significantly lower in the
1996 to 1999 period as compared to the preceding
three years, would fall in 2000 due to the effects of
duty-free abolition, and then would resume annual
growth of less than 5 %. On that basis it projected
its market share on the Dover/Folkestone to Calais
route to continue to grow, reaching 63 % in 2000,
67 % in 2002 and 70 % in 2006. Eurotunnel has
not announced any short-term plans for invest-
ments to increase Le Shuttle tourist capacity; as
stated above, it is aiming to spread tourist demand
away from peak periods. In the longer term,
it
could increase capacity by investing in new signal-
ling (to increase the frequencies of train paths in
the Tunnel) and in new tourist shuttles.

(97) However, if market growth were to be considerably
higher than that for which Eurotunnel has planned,
then Eurotunnel could find that Le Shuttle tourist
services became capacity constrained before it was
willing or able to increase capacity. The most
important factor influencing demand is likely to be
the ending of duty-frees; other factors will include
changes in disposable incomes, holiday patterns
and the erosion of cultural barriers between the two
sides of the Channel.

(98) At off peak times, both the joint venture and Euro-
tunnel have clear incentives to increase loads due
to their low load factors. A sizeable part of the ferry
operators’ income (60 %) is made in periods which
are off peak. This is largely due to the importance
of on-board spending by passengers. Given that
load factors in these periods are only 50 %, raising
prices would be a risky strategy in that it might (a)
deter passengers who would have travelled only for
the purpose of buying duty-free goods, and (b) shift
demand to rival operators. Revenues during the
peak June-August period amount only to 40 % of
the ferries’ annual revenue.

(92)

(93)

(94)

(95)

Eurotunnel defines a capacity restriction as arising
when it cannot accept all traffic that turns up on
the next or immediately following shuttle.
‘Peak
times' are defined as weekends in July and August.
This does not correspond with a situation where
demand exceeds supply in a structural way. Euro-
tunnel introduced a reservation system in order to
avoid some of
the congestion problems experi-
enced at peak times in 1996, and states that it has
been successful, with about 50 % of traffic now
pre-booked.

Peak periods for the ferries occur only on a limited
number of days during the year  mostly week-
ends between May and August  and then only for
a few hours each day. Even at peak periods the
consumer has a choice of fares and the ferry opera-
tors’
fares are differentiated even on individual
days. During the high season it remains possible to
obtain at
three different brochure fares
depending on the day and time of travel, in addi-
tion to promotional offers. A flexible traveller and
the overwhelming majority of the traffic on Dover-
Calais is leisure traffic can shop around to get the
best deal and will not be faced by capacity
constraints.

least

Furthermore, the joint venture indicated that it had
decided to operate a seventh multi-purpose vessel
on the Dover/Calais route for the 1998 summer
season because market growth rates in 1997 and
1998 had exceeded the parties original projections
based on 1996 data. Thus it appears that the joint
venture has in practice decided to increase capacity
rather than be faced with capacity constraints.

Eurotunnel and the ferry operators therefore have
incentives to adjust their pricing strategies so as to
grow volumes rather than increasing prices. The
existence of
spare capacity could restrain any
attempt by either operator individually to raise
prices because its competitor would have the neces-
sary spare capacity at its disposal to carry customers
who switch.

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(99) After 1999, if demand falls following the termination of duty-free sales, then (assuming no
withdrawal of capacity) there will be increased overcapacity in the market. To the extent
that it is possible to forecast, on-board spending will still be important to the ferries, and
Eurotunnel may also have developed its retailing activities in its terminals in the mean-
time. In such a scenario, both parties would therefore still have an incentive to maximise
load factors in order to increase revenues. However, the outcome may be different if
demand for cross-Channel travel were to increase strongly notwithstanding the loss of
duty-free revenues. In such a scenario, Eurotunnel may find its Le Shuttle tourist service
capacity constrained.

8 . 2 . 3 . C o s t s t r u c t u r e s

(100) Firms with differing cost structures are less likely to act in parallel (13). This section
considers the costs structures of Le Shuttle and of the parties’ Short Sea ferry operations.

(101) Le Shuttle’s operating costs in 1996 were as follows.

Table 11. Le Shuttle operating costs, 1996

(4,9 million PCU carried)

million GBP

GBP per PCU

Directly attributable costs:
 Travel agents’ commission
 Terminal costs, Le Shuttle crew wages, retail commer-
cial costs and sales staff, maintenance on rolling stock

 Depreciation on rolling stock
 Le Shuttle’s share of Tunnel operating costs
 Power, fuel, retail staff, Tunnel maintenance, insurance,

operations

 Depreciation on Tunnel, equipment, etc.
 Administration and marketing
 Start up/exceptional costs

Total

Source: Eurotunnel.

[ . . . ]
[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]
[ . . . ]
[ . . . ]

[ . . . ]

(102) The parties’ operating costs in 1996 were as follows:

Table 12. Parties’ operating costs 1996

[ . . . ]
[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]
[ . . . ]
[ . . . ]

(P&O: 3,9 million PCU carried)
(Stena: 2,8 million PCU carried)

P&O

Stena

million
GBP

GPB
per PCU

million
GBP

GPB
per PCU

Travel agents’ commission
Port taxes/port transit costs
Other product cost
Vessel operating costs (excluding depreciation)
Depreciation
Administration and marketing

Total

[ . . . ]
[ . . . ]

[ . . . ]
[ . . . ]
[ . . . ]
[ . . . ]

[ . . . ]
[ . . . ]

[ . . . ]
[ . . . ]
[ . . . ]

[ . . . ]
[ . . . ]
[ . . . ]
[ . . . ]
[ . . . ]
[ . . . ]
[ . . . ]

[ . . . ]
[ . . . ]
[ . . . ]
[ . . . ]
[ . . . ]
[ . . . ]

Source: P&O, Stena. P&O figures cover Dover/Calais only; Stena figures cover Dover/Calais and Newhaven/Dieppe.

(13) This is in particular because, if two firms have the same marginal cost function, they will both, by setting
a profit-maximising cost where marginal cost equals marginal revenue, independently arrive at a price that
maximises joint profits. If marginal costs differ and price differentials between the two firms are not
sustainable, then firms will have difficulty agreeing on a price. See Scherer and Ross, Industrial Market
Structure and Economic Performance, Third Edition, pp. 238 to 244.

L 163/78

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Official Journal of the European Communities

29. 6. 1999

(103) The parties consider variable costs to be those costs which vary according to the amount of
traffic carried on the basis of a given level of investment. Both Le Shuttle and the ferries
will have travel agents’ commissions as such a cost. In addition, the parties will pay port
taxes; on the basis of P&O’s actual costs in 1996 on the Dover/Calais route, the parties
calculate these to be approximately GBP [. . .] per PCU carried. The parties suggest that Le
Shuttle may also have some very minor additional variable costs. The parties rightly
conclude that on this basis Le Shuttle’s variable costs are significantly less than those of the
parties (and thus those that can be expected of the joint venture).

(104) The variable costs identified by the parties are the costs that are variable over the shortest
of periods; they are in fact the same as marginal costs. The parties consider that it is these
relative short-term variable costs of carrying incrementally more traffic that are important,
because it is these costs that will determine pricing strategy.

(105) Table 13 shows the operators’ per unit operating costs (as calculated above) divided into
short-term variable costs (as defined above), semi-variable costs (for the ferries: vessel
operating costs and other product cost; for Le Shuttle: terminal costs, Le Shuttle crew
wages, retail commercial costs and sales staff, maintenance on rolling stock), overheads
(administration and marketing; for Le Shuttle: Le Shuttle share of power, fuel, retail staff,
Tunnel maintenance, insurance, and operations). Le Shuttle’s share of Tunnel depreciation
costs and its start up/exceptional costs are ignored as they can be considered respectively
sunk costs and non-recurring costs.

Table 13. Operators’ per unit operating costs, 1996 (GBP)

P&O

[ . . . ]
[ . . . ]
[ . . . ]
[ . . . ]

Stena

[ . . . ]
[ . . . ]
[ . . . ]
[ . . . ]

Le Shuttle

[ . . . ]
[ . . . ]
[ . . . ]
[ . . . ]

Total

[ . . . ]

[ . . . ]

[ . . . ]

Variable costs
Semi-variable costs
Overheads
Depreciation

Source: Table 11 and 12.

(106) When the combined variable and semi-variable costs are considered, Le Shuttle’s 1996 per
unit operating costs at GBP [. . .] remain lower than those of P&O at GBP [. . .] and
significantly lower than those of Stena at GBP [. . .]. Given the differences in variable and
semi-variable costs, Eurotunnel may have more room to manoeuvre than the ferries when
it comes to sustaining periods of low pricing. In addition, the composition of costs is quite
different between Eurotunnel and the ferries, in particular with regard to the port dues
which are paid by the ferries. There is also scope for further divergence in cost structures in
the future, as the market evolves. Eurotunnel may therefore be tempted to try to increase
market share by underpricing the ferries as it did from May 1996.

8 . 2 . 4 . C o n c l u s i o n a s t o c o m p e t i t i o n b e t w e e n t h e j o i n t v e n t u r e a n d E u r o -

t u n n e l

(107)

In the light of the above, it can be concluded that the characteristics of the joint venture
and Eurotunnel are such that they can be expected to compete with each other rather than
to act in parallel to raise prices.

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L 163/79

8.3. Other actual and potential competitors

will be in particular after the ending of duty-free
concessions in 1999.

(108) The degree of competition in the market will also
be affected by the presence of other actual or
potential competitors to the joint venture and
Eurotunnel. This section first considers whether
other operators already on the market can be
expected
competition.
Secondly, entry barriers are considered in order to
assess whether new operators could be expected to
enter the market.

effective

provide

to

8 . 3 . 1 . I m p a c t o f c o m p e t i t i o n f r o m o p e r a -

t o r s o t h e r

t h a n L e S h u t t l e

(109) At its start of operations, the joint venture was
faced with four competitors: Le Shuttle, SeaFrance,
Hoverspeed, and Holyman Hoverspeed.

(110) SeaFrance considers that the creation of the joint
venture will progressively eliminate competing
ferry operators, in particular SeaFrance, the only
direct
route,
competitor on the Dover/Calais
because of the frequency of the joint venture’s sail-
ings and the benefits the joint venture would derive
from the renown of its parents’ names.

the creation of

(111) Sea Containers (the owner of Hoverspeed) has said
the joint venture can be
that
supported if the position of other operators in the
market were clearly protected. It is concerned that
the joint venture could at any time start fast ferry
services in direct competition to small niche opera-
tors, like Hoverspeed or Holyman Sally, with no
incremental overhead expense. Therefore, through
predatory pricing Hoverspeed and/or Holyman
Sally could be driven out of business.

the

to meet

savings necessary

(112) The parties state that the joint venture will achieve
cost
strong
competition from Eurotunnel. They state that
although competition to the joint venture will
primarily come from Eurotunnel, the joint venture
will also have to respond competitively to the
actions of
the three other ferry operators. The
parties argue that those operators’ recent invest-
ments indicate a clear commitment to stay in the
market.

(113)

the parties’ projections show that

their own
If
operations would not be
they
continued on a stand-alone basis, that raises the
question of how sustainable SeaFrance’s position

sustainable

if

(114) SeaFrance complains that it will be disadvantaged
by the joint venture’s proposed timetable of a
departure every 45 minutes during 18 hours a day
and hourly for the remaining time. P&O currently
operates a 45 minute frequency at peak times only.
The 45 minute schedule allows for continuous
loading. SeaFrance argues that to compete with the
joint venture it would have to consider increasing
its fleet to four or five vessels in order to be able to
offer a competitive frequency.

(115) As a fast ferry operator, Hoverspeed may be better
able to succeed in the more difficult market condi-
the end of duty-free,
tions after 1999. After
customers may place more value on the higher
speed offered by fast craft than on the more exten-
sive leisure and retailing amenities on board the
large multi-purpose vessels. Hoverspeed Holyman
can exploit its geographic niche to Belgium.

(116) The extent to which the other ferry operators will
provide effective competition after 1999 is uncer-
tain. SeaFrance, which would compete the most
directly against the joint venture, may be most at
risk of being unable to remain in the market,
notwithstanding that it was successful in increasing
its market share in 1997. Hoverspeed, including
Hoverspeed Holyman, may have scope to develop
its market niches, but it can be doubted whether it
can provide effective competition given its limited
capacity.

(117)

In conclusion, there is not a sufficient probability
of effective competition from the other operators
after 1999 to conclude that
they alone would
ensure that competition would not be eliminated.

8 . 3 . 2 . P o t e n t i a l

c o m p e t i t i o n :

e n t r y b a r -

r i e r s

(118) The creation of

the joint venture releases ferry
berths at each of Dover and Calais, and therefore
access to berths would not, as it has been in the
past, be an entry barrier.

(119) The minimum efficient scale for Short French Sea
services is considered by the operators to be three
conventional ferries or two fast ferries. The parties
state that, other than relocating suitable ferries
from other routes, the lowest cost entry would be
by means of chartering three conventional ferries
(at between GBP 5 to 10 million each per year

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Official Journal of the European Communities

29. 6. 1999

ferries (at
according to the parties) or two fast
between GBP 3,5 and 4 million according to the
parties), or purchasing two fast ferries. Other alter-
natives include the purchase of second-hand ferries
(the price of which would vary depending on the
age and type of vessel), or, for existing ferry opera-
tors,
relocating ferries currently used on other
routes. Costs could be further increased by the need
to comply with the new safety requirements arising
out of the International Convention for the Safety
of Life at Sea (SOLAS) and the Stockholm Agree-
ment, and the possible need to convert cabin space
in ferries built for longer routes to retail, amuse-
ment and sitting space more appropriate to the
Short Sea.

(120) SeaFrance doubts the feasibility of using second-
hand vessels, because they have to meet SOLAS
standards if switched to a new route. It
thus
considers that the only feasible way to enter the
market with multi-purpose vessels would be to
purchase at
four vessels costing GBP 85
million each, a total of GBP 340 million.

least

adding say a fourth ferry, a new entrant, in order to
operate the minimum scale of operation, would
introduce a lump of new capacity relatively large in
relation to the market thus making retaliation more
likely and so increasing the risk of the entry.

(124) A new entrant would have to establish marketing
and sales operations. The parties consider that
advertising would be likely to cost GBP 1 to 2
million per year. At least during start-up, spending
on advertising relative to sales would probably be
higher relative to sales than the average for the
industry. Marketing costs would be lower for a new
entrant which was an existing ferry operator with
an established marketing and sales operations and
known name.

(125) The creation of the joint venture should not in
itself alter the financial costs (both for ferries and
for marketing and sales) of new entry.

(126)

(121) The SOLAS standards are applicable to all vessels
(old and new) operating on international routes.
The cost of meeting the standards would only be
an additional cost if a ferry was switched from a
domestic route on which it
is not required to
comply with SOLAS requirements.

In conclusion, entry barriers for companies not
already in the ferry industry can be considered
high, making new entry from such a source
unlikely. Entry barriers would be lower for an
existing ferry operator which was able to switch
from other routes vessels already meeting modern
safety requirements. For such an operator, the entry
costs would be limited to the costs of any necessary
and
conversions
marketing and sales costs. Any new entry would
seem more likely to be by way of a take-over of, or
a joint venture with, an existing operator (as was the
case with Holyman Sally).

operations,

Short

Sea

for

(122) The parties acknowledge that

the investments
required in ferries are ‘clearly material and have a
degree of risk attached to them'. Although the
parties state that the risk is limited by the fact that
the ferries could be used on other routes and would
have a resale value, switching ferries (back) to other
routes may itself carry costs.

8.4. Conclusion on the risk of duopoly

(123) The parties also consider that the fact that the
other three existing ferry operators have all made
investments in new ferries shows that the costs and
risks of making investments in ferries do not
constitute an insurmountable barrier to entry. The
costs and risks faced by a potential new entrant
cannot, however, be usefully compared to existing
players investing in incremental capacity increases
and improved services. Unlike an existing player

(127) The Commission considers that characteristics of
the market are such that the joint venture and
Eurotunnel can be expected to compete with each
other rather than to act in parallel to raise prices.
First, although a more concentrated market struc-
ture is brought about by the creation of the joint
venture, with Eurotunnel and the joint venture
each having similar large market shares, market
shares have not been stable in recent years.
Secondly, Eurotunnel and the joint venture are

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Official Journal of the European Communities

L 163/81

unlikely both to face significant capacity restraints
and they have different cost structures. Thirdly,
other ferry operators can, at least until 1999, be
expected to provide competition. The proposed
joint venture can therefore be expected to be faced
with effective competition in the Short Sea tourist
passenger market. The Commission therefore
considers that the fourth condition of Article 85(3)
of the Treaty is fulfilled.

(128) An important change in market conditions will
occur when duty-free concessions are abolished in
mid-1999. The effects of the loss of revenue from
duty-free sales is uncertain. It seems likely that
ticket prices will rise (14) and some operators have
stated that prices will be likely to rise in the order
of 30 to 40 % (15). Price increases would, however,
decrease the number of
tourist passengers and
operators have strong incentives to limit any price
increases by reducing costs and to developing
alternative sources of revenue.

(129) The abolition of duty-free concessions may have
knock-on effects on competition between the joint
venture and Eurotunnel
in one or more of the
following ways. First, Eurotunnel might find its Le
Shuttle tourist
service capacity constrained if
demand for cross-Channel travel were to increase
more strongly than it has projected and notwith-
standing possible prices increases due to the loss of
duty-free revenues. Secondly,
that
operators are not successful in developing revenue
sources to replace duty-free sales, they will have
less incentive to maximise load factors in order to
increase revenues. Thirdly, the extent to which the
other ferry operators will after 1999 be able to
provide effective competition to the joint venture
and Eurotunnel is uncertain.

to the extent

(130) The Commission therefore considers it appropriate
in this case to limit the duration of the exemption
to three years from the date of implementation of
the agreement, that is from 10 March 1998. This
will enable the Commission to assess the impact of
the joint venture on the Short Sea tourist market
after the 2000 summer season, by which time the

(14) See for example the comments of P&O Stena Line Managing
Director Mr Russ Peters ‘Prices are going to go up as and
when duty-free is abolished, but they will still have to be at a
market price that people will pay'
(Lloyd’s List, 24 April
1998).

(15) Sally Chairman and Chief Executive Mr Bill Moses is quoted
as saying ‘The task is to replace the average on board spend
of about GBP 18 per person and I believe passenger fares
(Lloyd’s List, 23 May
will have to go up as much as 45 %'
1998); SeaFrance Managing Director Mr Robin Wilkins is
reported as predicting that ‘passengers will have to pay 30 %
more
are
abolished'

the Channel when duty-free

(Lloyd’s List, 5 May 1998).

to cross

sales

full effects of the end of duty-free concessions on
market conditions can be expected to be known.

9. Article 85(3) of the Treaty: Anglo/Conti-

nental freight market

(131)

In relation to this market the joint venture does not
risk eliminating competition and the other condi-
tions for exemption pursuant Article 85(3) are
fulfilled.

9.1. Improvement in the production or distribu-
tion of goods, or promotion of technical or
economic progress

(132) The creation of the joint venture will bring about
benefits, notably the improved frequency to be
offered by the joint venture, continuous loading,
and the projected cost savings. These benefits will
accrue to freight customers.

9.2. Allowing consumers a fair share of

the

resulting benefit

(133) Freight customers can be expected to benefit from
the improved frequency and continuous loading,
and can be expected to benefit
from the cost
savings to the extent that the joint venture will be
faced by effective competition.

9.3. No restrictions which are not indispensable

(134) As concluded in point 65, lesser forms of coopera-
tion, such as a joint scheduling,
interlining or
pooling, would be unlikely to lead to the benefits
to be achieved by the joint venture. In particular,
any form of cooperation less than a joint venture
would not achieve the savings in administration
and marketing.

9.4. No elimination of competition in respect of a
substantial part of the products in question

(135) The Anglo/Continental freight market is character-
ised by strong price competition, low barriers to
entry, and purchasing power on the part of larger
customers. The joint venture will face competition
including Eurotunnel,
from other
retained services.
SeaFrance
and the parties’
Competition in the Anglo/Continental
freight
market will therefore not be eliminated.

operators

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29. 6. 1999

10. Conclusions

(136) For the reasons set out above, the Commission
finds
the parties’ proposed joint venture
infringes Article 85(1) of the Treaty but is capable
of exemption pursuant to Article 85(3).

that

(137) Pursuant to Article 13 of Regulation (EEC) No
4056/86, a decision applying Article 85(3) of the
Treaty is to indicate the period for which it is to be
valid; normally such period should not be less than
six years. The exemption in this case should take
effect
the
agreement and, for the reasons given at points 128,
129 and 130, its duration should be limited to three
years,

implementation of

from the date of

to the Commission by The Peninsular and Oriental
Steam Navigation Company and Stena Line Limited.

Article 2

This Decision is addressed to:

 The Peninsular

and Oriental Steam Navigation

Company
78 Pall Mall
London SW1Y 5EH
United Kingdom;
 Stena Line Limited
Charter House
Park Street
Ashford
Kent TN24 8EX
United Kingdom.

HAS ADOPTED THIS DECISION:

Article 1

Done at Brussels, 26 January 1999.

Pursuant to Article 85(3) of the Treaty, the provisions of
Article 85(1) of the Treaty are hereby declared inapplic-
able for the period 10 March 1998 to 9 March 2001 to the
creation of the P&O Stena Line joint venture as notified

For the Commission

Karel VAN MIERT

Member of the Commission