2000/276/EC: Commission Decision 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) (notified under document number C(1999) 3022) (Text with EEA relevance) (Only the English text is authentic)
Date: 1999-09-22
Institutions: European Commission
Subjects: United Kingdom, application of EU law, dominant position, economic concentration, merger control, travel agency

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 22 September 1999

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

(Case IV/M.1524 (cid:151) Airtours/First Choice)

(notified under document number C(1999) 3022)

(Only the English text is authentic)

(Text with EEA relevance)

(2000/276/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Whereas:

Having regard to the Treaty establishing the European
Community,

Having regard to the Agreement on the European Economic
Area, and in particular Article 57(2)(a) thereof,

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

Having regard to the Commission’s decision of 3 June 1999 to
initiate proceedings in this case,

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

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

(1) OJ L 395, 30.12.1989, p. 1; corrected version in OJ L 257,

21.9.1990, p. 13.

(2) OJ L 180, 9.7.1997, p. 1.
(3) OJ C 105, 13.4.2000.

On 29 April 1999, the Commission received notification of a
proposed concentration pursuant to Article 4 of Regulation
(EEC) No 4064/89 (herinafter
(cid:145)the Merger
Regulation(cid:146)) by which Airtours plc ((cid:145)Airtours(cid:146)) would acquire
within the meaning of Article 3(1)(b) of the Merger Regulation
control of the whole of First Choice plc ((cid:145)First Choice(cid:146)) by way
of a public bid.

referred to as

On 3 June 1999,
proceedings in application of Article 6(1)(c) of
Regulation.

the Commission decided to initiate
the Merger

I. THE PARTIES AND THE OPERATION

(1) Airtours is a British company active in: tour operating,
travel agencies, charter airlines, hotels and cruise ships
with operations in 17 countries across Europe (notably
in the United Kingdom and Ireland) and North America.
First Choice is a British company active in:
tour
operating, travel agencies, charter airlines, seat broking

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and car rental broking, mainly in the United Kingdom
and Ireland, with some activities in Canada. Airtours
proposes to acquire First Choice by way of public bid.

II. CONCENTRATION

(2) Airtours proposes to acquire the whole of the equity of
First Choice. The notified operation therefore constitutes
a concentration within the meaning of Article 3(1)(b) of
the Merger Regulation.

III. COMMUNITY DIMENSION

(3) The joint worldwide turnover of

the undertakings
concerned exceeds EUR 5 billion (EUR [(cid:133)]*
for
Airtours and EUR [(cid:133)]* for First Choice). Each of the
undertakings has a Community-wide turnover in excess
of EUR 250 million (EUR [(cid:133)]* for Airtours and EUR
[(cid:133)]* for First Choice), but they do not both achieve
more
aggregate
Community-wide turnover within one and the same
Member State. The notified operation therefore has a
Community dimension.

thirds

their

than

two

of

IV. RELEVANT MARKETS

A. Relevant product markets

services

to customers

(4) The parties’ activities overlap mainly in the supply of
leisure travel
in the United
Kingdom and Ireland. As well as supplying package
tours and certain other holiday products, they are also
upstream (airline
both
operation) and downstream (travel agency) business. In
the
previous decisions on cases
Commission has distinguished certain distinct product
markets and these are used as the starting point for
establishing the relevant markets here.

integrated

vertically

in this

area (4)

into

Production: Tour operating

(5) Both parties are tour operators. Tour operators mainly
supply (cid:145)package holidays(cid:146), combining accommodation
and possibly other services in a given (usually foreign)
destination with return travel
(usually by air) to and
from it.

to constitute a separate market

(6) Package holidays have previously been found by the
Commission (5),
from
holidays where the consumer purchases the various
individually. According to Airtours (6) and
elements
others the distinction between the two product types is
becoming less marked as consumers become more
familiar with holidaying abroad and thus more willing
to make their own arrangements, and with the entry
(following liberalisation) of low-cost scheduled airlines
into the European market. Consequently, they consider,
a
should
independent
competitive constraint on package tour operators. The
Commission does not accept this view.

regarded

holidays

be

as

for

consumers

to purchase

can be difficult

there
example,

remain some
it

(7) The total price of an independent holiday may set an
upper limit on the price that can be charged for a
similar package. But it does not follow that it will act as
a sufficient constraint to prevent prices for packages
from rising above the competitive level. Although it
may be possible
the
accommodation and travel elements of a package on
important
their own account,
for
For
differences.
consumers
to make a direct comparison of prices
between a package holiday and its equivalent bought as
separate elements (e.g. as regards transfers to and from
the airport). There are also likely to be additional search
and transaction costs (telephone calls, faxes/letters to the
hotel and airline, arranging car hire, transfers, etc.) and
risks
a
in taking
foreign-based hotel owner)
involved in contracting
separately by comparison with the one-stop nature of
the
the
Commission does not consider that a relatively small
price rise in package holidays would cause sufficient
customers to substitute independent holidays to justify
including independent holidays in the relevant product
market for the present case (7).

package. Accordingly,

purchase

recourse

example

against

(for

of

a

(8) Some packages (for example coach tours)

crossing

involve the
supply of surface transport. Other packages from the
United Kingdom supply only the sea (or Channel
Tunnel)
accommodation, with
the
customers using their own cars. However, nearly 90 %
of all package holidays from the United Kingdom are by
air (8). Accordingly no distinction is made between
product markets in regard to the transport method
employed.

and

(9) Neither Airtours nor First Choice has more than a
minimal presence in British domestic holidays. However,
the British
in the Commission’s view,

like that of

*

Parts of this text have been edited to ensure that confidential
information is not disclosed; those parts are enclosed in square
brackets and marked with an asterisk.

(4) For example, Commission Decision in Case IV/M.1502 (cid:151) Kuoni/
First Choice (OJ C 139 19.5.1999, p. 3), and Commission
Decision in Case IV/M.1341 (cid:151) Westdeutsche Landesbank/Carlson/
Thomas Cook (OJ C 102 13.4.1999, p. 9).

(5) Kuoni/First Choice case, cited in footnote 4.
(6) Reply to Commission’s Statement of Objections, paragraphs 2.20

to 2.31.

(7) The British Monopolies and Mergers Commission (MMC) took a
similar view, for similar reasons, in its investigation of the sector,
((cid:145)Foreign Package Holidays(cid:146)), December 1997, Cmnd 3813, p. 12,
paragraph 2.21, ((cid:145)1997 Report(cid:146)).
(8) Notification, pp. 19 and 23 to 25.

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Monopolies and Mergers Commission (MMC)
in its
1997 report (9), prices of domestic holidays
in the
United Kingdom and Ireland do not constrain prices for
foreign package holidays, given consumers’ preferences
in terms of climate, culture, etc., as well as price levels
and other factors Accordingly, domestic holidays are not
considered to form part of the relevant market for the
present purpose.

(10) Within the foreign air package holiday market a number
of further distinctions are also possible. These include
distinguishing by holiday type, e.g. beach holidays,
skiing, city breaks, or by destination (either on a
country basis or more narrowly).

(11) Airtours considers that there is sufficient substitutability
between these various elements, on both supply and
to make it unnecessary to further
demand sides,
subdivide the package tours product market. They also
point out
in previous
that neither the Commission,
relevant cases, nor the MMC (in the 1997 report) has so
far found it necessary to do so (10).

(12) However, for the reasons set out below, a somewhat
narrower approach is considered to be justified in the
present case in regard to distinguishing separate markets
for package holidays
and short-haul
destinations; the latter comprises mainly (cid:145)sun and sea(cid:146)
holidays (11), which are taken predominantly in the
summer, and particularly in July and August.

to long-haul

in excess of

trade as comprising all destinations

(13) Broadly, the long-haul sector is generally recognised in
the travel
that
involve a flight
time (from the United Kingdom)
three hours (12). Thus
substantially
effectively all European (mainland and islands) and
into the
North African holiday destinations,
fall
(cid:145)short-haul(cid:146)
for
to those
the Americas or South/East
example,
Asia, where the flight
times are substantially longer
(typically, twice as long or more).

category,
the Caribbean,

in contrast

in,

(9) Paragraph 2.22.
(10) Notification, in particular paragraphs 6.52 to 6.60.
(11) The MMC, in its 1997 report, table 3.3, indicates that in 1996,
Spain and Greece together accounted for 5,5 million package
holidays from the United Kingdom out of a total
for Europe
(including Turkey) of 9,5 million (cid:151) or nearly 60 %, with Spain
accounting for 45 %. This proportion has probably
alone
decreased sine then but Spain remains the most popular package
holiday destination.

(12) Notification, Section 6, and sources quoted there; flights to Eastern
Mediterranean destinations or the Canary Islands may take up to
around four hours.

indicative of

tour operating. Moreover,

(14) The parties, and certain of their main tour operator
competitors, have a somewhat stronger presence in the
short-haul sector than in the long-haul sector. In the
latter (summer 1998), Airtours had 13,3 % and First
Choice 16,4 % (total 29,7 %); Thomson had 14,7 % and
Thomas Cook 8,3 % (13). These shares are not,
in
the creation of a dominant
themselves,
position in long-haul
the
long-haul sector tends to be more fragmented than
short-haul, with a large number of smaller, specialist
tour operators, and some suppliers (such as Kuoni, BA
larger groups.
Holidays, Virgin) which are part of
long-haul package holidays account
However,
for a
small proportion (around 15 to 20 %,
relatively
according to Airtours) (14) of
total British package
holiday sales. Consequently, a wider product-market
definition,
to include both long-haul and short-haul
packages, would be unlikely to produce substantially
different market
although
Airtours suggests that it could have some effect from
the viewpoint of assessing the strength of actual and
potential competitors.

and increments,

shares

(15) Airtours suggests (15)that there is convergence in prices
between long-haul and short-haul packages, so that, for
example, a (cid:145)Disneyland(cid:146) holiday in Florida has been sold
its (cid:145)Eurodisney(cid:146)
at a roughly similar price to that of
long-haul prices
equivalent, and that in consequence,
effectively constrain those for short-haul. However,
in
the Commission’s view, and as more fully described
below, the differences between long-haul and short-haul
packages,
in a variety of material respects, are more
significant, in competition terms, than their similarities,
so that
the
purposes of an assessment of the concentration.

is appropriate to separate them for

it

(16) Aircraft are not fully interchangeable between short-haul
and long-haul operations. Certain smaller aircraft types
currently in service in large numbers (e.g. B 737, A
320, MD 80 series) lack the range for most long-haul
journeys and so cannot be used for them. Nor are all
larger aircraft necessarily suitable. Some large tour
operators suggested to the Commission that certain
popular larger aircraft (e.g. B 757) are less suitable for
long-haul operations, since they lack the range for some
journeys
(maximum range, United Kingdom to the
north-eastern American seaboard) and their single-aisle,
narrow-bodied design means the cabin space is too
cramped to provide adequate comfort on longer flights.
Long-haul flights reduce the number of rotations (each
consisting of an outward and a return flight) an aircraft
and its crew can make beteween their home base and
the destination(s) in a given time period, and increase
important costs such as crewing and catering. Three

(13) Notification, table 6.9, source AC Nielsen. Short-haul figures are

set out in table 1 of this Decision.

(14) Notification, paragraph 6.64.
(15) Notification, paragraph 6.58.

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for

rotations per day are possible for many short-haul
long-haul, whereas
destinations, but only one
long-haul aircraft generally carry fewer than twice as
many passengers as a short-haul one (e.g. a typical A
320-series charter configuration is
for around 200
passengers, that for a B 767 or A 330, about 350 (16)).
This in turn increases the number and/or the size of
aircraft needed for an economically viable long-haul
operation compared with a short-haul one.

(17) The operating cost per passenger/mile is generally lower
for larger aircraft
than smaller ones, especially over
longer distances. But it will not always be economical to
use a larger aircraft for a short-haul journey, even where
runways, airport terminal facilities, etc., permit. There
must be sufficient demand to fill the aircraft to a viable
level, which will normally be close to the maximum,
throughout the season; it costs little more to operate an
aircraft with a full
load than it does half-empty. This
means that it is necessary for airlines to match fleet
composition closely to the mix of passengers as
between larger (mainly long-haul) and smaller (mainly
short-haul) types. Airtours, for example, currently has in
its fleet only five aircraft
(A 330, B 767) which it
regards as capable of being used for either long-haul or
short-haul journeys, out of a total of 37 aircraft of all
types (17).

(e.g.

type of consumer

Mediterranean resort, and accordingly appeal more to a
singles or couples
different
without children). They may also be seen as less suitable
in other respects. For example, many British foreign
package holidays are taken during the peak summer
in
holiday period (roughly, mid-July to end-August)
order to coincide with school holidays (and in some
at
areas,
these periods, weather
conditions in some typical
long-haul destinations (e.g.
Florida) will be unfavourable (18).

factory closures);

two weeks,

(21) The substantially longer flight time is also likely to deter
some consumers from choosing a long-haul package
holiday, even if it is comparable in other respects to a
typical short-haul one, e.g. in terms of weather, location,
price, visa and medical requirements, etc. Most package
holidays taken by British customers are for a maximum
of
to much
Continental European practice) the typical amount of
time allowed by employers for their staff’s main annual
holiday. The greater the proportion of the holiday that
has to be spent in the air, the less that can be spent on
the beach, and in practice there can be as much as a
whole day’s difference between the total travelling times
for
long-haul and short-haul holidays. For
journeys to the Americas, in particular, jet-lag can also
reduce the amount of usable holiday time.

(in contrast

reflecting

typical

(and vertically-integrated tour operators)

(18) All these factors will tend to decrease the scope for
airlines
to
substitute between long-haul and short-haul flights, with
consequent effects on prices. Moreover, although it is
possible to lease aircraft on a short-term basis, charter
airlines (including those of the parties) generally either
own most of their aircraft or lease them on relatively
long leases in order to reduce costs, maintain quality
and ensure continuity of
supply; according to the
is
information, a lease of
Commission’s
typical. Accordingly, new investment (and some time)
would be needed for
to substantially
reconfigure its fleet as between long-haul and short-haul
capabilities.

an airline

five years

(19) For the tour operator and the ultimate consumer, there
are in addition other significant differences besides the
above.

three star self catering)

(22) These and other differences are reflected in prices to
consumers. Information provided by Airtours (19) shows
that in summer 1998 the average brochure price of its
long-haul holidays was some GBP [(cid:133)]* compared with
GBP [(cid:133)]* for short-haul, a difference of over [(cid:133)]*. A
comparison made for the Commission by a leading tour
operator between holidays of broadly similar type (14
nights,
in Florida and Spain
showed the short-haul holiday to be on average about
half
the long-haul one. Broadly similar
results were shown on comparisons with Greece and
the Canary Islands, and for catered accommodation at
these destinations (difference of around 30 to 40 %).
stable
Moreover,
relationship between the two groups of prices over time
(cid:151) as would be expected if they were substitutes. For
example, between 1994 and 1995, Spanish prices rose
by 9 % while those for Florida fell by 3 %; between 1997
and 1998 the exact converse of this occurred (cid:151) Florida
prices rose 9 %, Spanish ones fell 3 %.

there was not

found to be

the price of

a

(20) Long-haul holidays,

although probably no longer
regarded as the prerogative of the wealthy, nevertheless
still have, with certain possible exceptions
such as
to the
Florida, a more exotic image in contrast
relatively domesticated one presented by the typical

(16) Source: (cid:145)Hot!(cid:146) (cid:151) Airtours’ in-flight magazine, winter 1998/1999.
(17) Reply to Statement of Objections, p. 22, paragraph 2.43(iii).

(23) Average prices will not necessarily reflect those at the
margin. However, where the differences are as large as

(18) For example, the popular Lonely Planet travel guide makes the
following comment in regard to Orlando, Florida: (cid:145)July and August
are very hot and humid with highs around 90 (cid:176)F (33 (cid:176)C), 95 %
humidity and frequent downpours.(cid:146)

(19) Annex 1(a) to reply of 29 June 1999 to Commission enquiry.

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they are here it is unlikely that a sufficient range of
genuinely comparable long-haul holidays would be
available at a sufficiently similar price to ensure that
long-haul prices constrained those for short-haul (20).

for

between

(24) Price information made available to the Commission
there is only limited
the conclusion that
supports
and
long-haul
prices
convergence
short-haul holidays of comparable type. 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
quality
the
accommodation) of the price/quality scale for short-haul
ones. But it is not to be expected that this very limited
overlap would suffice to constrain prices throughout the
short-haul market,
holidays
concerned would not be regarded as effective substitutes
(cid:151) either on price or other grounds (cid:151) by more than a
very small proportion of customers.

long-haul

(summer

upper

better

peak,

since

end

the

cheapest

short-haul

(25) For example, none of the long-haul holidays cited by
Airtours in its reply to the Statement of Objections (21)
in support of its view on this point was in the same
price range as that which it supplied earlier as typical
for
(around GBP 485 for one week,
July/August 2000, three-star half board in Majorca (22)).
The
for
July/August 1999 is GBP 849 (Thailand, which involves
a flight-time of 11 hours and which at that time of year,
according to Airtours’ brochure, has some 23 cm of
rain per month and only five hours of sunshine per day)
and the cheapest at any time of year is GBP 649
(Mexico, January 2000) reflecting differences from the
typical summer short-haul price of + 43 % and + 33 %
respectively.

long-haul holiday in the

table

(26) Similarly,

in the information about long-haul holidays
cited by Airtours (23) as
offered by BA Holidays,
showing price substitutability between long-haul and
short-haul (and the consequent importance of BA as a
competitor),
there was only one holiday among the
eight displayed that included food. All the rest were
either
and so not directly
comparable with a typical short-haul package, or (in
four instances) (cid:145)fly-drive(cid:146), which Airtours itself does not
consider
as normally
defined (24). The matching holiday in question was seven
nights, four-star all inclusive in St Lucia, and cost GBP
799 per person. A roughly equivalent package in

accommodation only,

a package holiday

to be

(20) This reflects the view expressed by long-haul operator Kuoni on

this point at the oral hearing.

(21) Table 2.6, p. 21.
(22) Annex 2 to reply of 29 June 1999 to the Commission’s enquiry.
(23) BA Holidays (cid:145)world offers(cid:146) poster, produced by Airtours at the oral
hearing, and showing prices available in July 1999 for travel in
September or October 1999.

Tenerife (seven nights, Barcelo Hotel Santiago, four-star,
all inclusive) is priced in the First Choice brochure at
around GBP 550 during the period concerned (cid:151) some
30 % less. Neither would any holiday in the period
concerned be suitable for families with children, since
the British school holidays are over by, at the latest, the
first week in September. It is also relevant that the BA
holidays in question were being offered at these prices
during the (cid:145)lates(cid:146) period, that is only a month or two
before departure, and in consequence are likely to be
offered at a discount over the brochure price used to
provide the basis for comparison; a late short-haul
booking would also attract a discount, further increasing
the differential.

(27)

reply

In its
Statement of
to the Commission’s
Objections, Airtours supplied some customer survey
data in further support of its view (25). These indicated
that a substantial proportion (36 %) of
its sample of
customers who had taken a short-haul package holiday
within the last five years had also taken a long-haul one;
similar proportions had considered or would consider
doing so. However, it cannot be properly inferred from
this, as Airtours seeks to do,
the holidays in
question are true substitutes for each other. Periodic
changes in personal circumstances (such as, e.g.,
the
(cid:145)windfall(cid:146) gains experienced by many British building
society savings-account holders in recent years following
the demutualisation and/or acquisition of their society)
may allow consumers to take a more expensive (or
additional) holiday in some years, but will not affect
their behaviour the rest of the time. The survey data do
not provide any indication of the extent to which this
factor was relevant with the sample. Nor, in particular,
do they provide any comparison of the prices paid for
the two types of holiday.

that

(28) For all the above reasons, therefore, the Commission
considers that the relevant product market, as regards
tour operation,
foreign package
for
holidays.

short-haul

is that

Distribution: Supply of travel agency services

(29) Both parties have travel agency operations in the United
Kingdom (there is no overlap in Ireland.) Travel agents
are retailers, supplying various services to consumers
and business travellers; such as flights, either charter or
scheduled, hotel and other accommodation bookings,
car rental, foreign currency, travel insurance and other
related services. They operate mainly through High

(24) Reply to Statement of Objections, p. 2, paragraph 1.8.

(25) Tables 2.4 and 2.5 and paragraphs 2.37 to 2.39.

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Street shop or office premises, though some also have
telephone sales operations, which are available outside
normal shopping hours. Travel agents are generally
remunerated by a commission from the supplier of the
service concerned, whose agent they are, rather than
directly by the customer for the service itself. In the case
of package holidays, the agent receives a commission
from the tour operator on the price of the holiday sold.
All travel agents in the United Kingdom and Ireland
offer the products of a range of tour operators and
other suppliers amongst their range of products and
services, and all the main tour operators have at least
some of their own travel agencies.

direct-sales

(30) The major tour operators (including the parties), and
some small ones, also have direct-sales operations,
through shops, telephone call centres, or mail order, for
travel agency
their own products. Unlike traditional
permit
not
do
services,
consumers
different
of
offers
suppliers (26). However, this distinction appears to have
only limited importance, at
least so far as package
holidays are concerned. Integrated tour operators/agents
all engage to a substantial extent in (cid:145)directional selling(cid:146)
practices, whereby their agencies give preference to the
products of the (cid:145)in-house(cid:146) tour operators when selling to
clients (27).

operations
the

compare

to

is

as

significant

(31) The Internet and teletext are also used by agents and
operators to advertise availability and prices of holidays.
But the actual booking and sale is, almost invariably,
carried out by traditional means: through a travel agent
(in person, by telephone or by mail), or directly with
the tour operator (shop, telephone call centre, or mail
order). Teletext is only a display system and cannot be
used to make the sale. E-commerce, i.e. actual purchases
regarded by many agents and
via the Internet,
operators
alternative
potential
a
distribution method for the future, and one which may
introduce more independent distributors to the market
(cid:151) although established agents and operators will no
doubt also develop e-commerce operations of their own.
But at present it is undeveloped in the United Kingdom,
even for small-value items such as books,
let alone
major purchases such as package holidays; consumers
perceive it as risky, and it is likely to take some time to
change their attitude. Its current use in the travel trade
is largely confined to airline-ticket-only sales. Digital
television, about
introduced in the United
Kingdom, may eventually be developed as a selling
system, but its impact is unlikely to be significant in the
short term. The great majority of package tour sales
(according to the notification, 81 %) are still made by

to be

(26) The MMC, in its 1997 report, cited in footnote 7, excluded direct
sales operations and telephone sales from its market definition
when considering competition between travel agents (paragraphs
2.24 and 4.29).

(27) As,

for instance, described by the MMC in its 1997 report,

paragraphs 2.69 to 2.83.

travel agents, and most of them (62 % according to the
notification) through in-person sales by shops, though
the latter proportion has been declining, and direct sales
by tour operators have remained static as a proportion
of the total since 1993 (28). These factors suggest that
for tour operators, direct distribution to the consumer
(without going through an agency) is a complement to
the agency sales channel rather than a substitute for
it (29).

(32) The relevant product market is that for travel agency
services, since the parties’ agencies supply the typical
range of products and services, although they also play
an important role in the distribution of
the parties’
products. On present information, however, the merger
is not likely to lead to the creation or strengthening of a
dominant position in travel agency services as a whole,
whether or not direct sales of package holidays by tour
operators, and/or distance sales (i.e. by telephone etc.)
by agents are included. In terms of numbers of outlets,
travel
the parties’ combined share of
agency services is small (cid:151) around 15 % (30).

the supply of

(33) The impact of the merger on the vertical integration of
the industry,
i.e. the ownership by tour operators of
travel agencies and their distribution of their package
is discussed further below (in
holidays through them,
the section on vertical integration).

Supply of airline seats

(34) Both parties operate

International,

their own (charter)

airlines:
Airtours operates Airtours
and First
Choice, Air 2000. They are primarily intended for use
with their own packages, though some of the seats on
them are also supplied to third parties (other tour
operators and brokers). Both parties also buy some seats
from other airlines, both chartered and scheduled,
mainly but not exclusively for incorporation into their
(or others’) packages.

(28) The figures are for 1998. Source: British National Travel Survey

(BNTS), paragraph 6.149 of the notification.

(29) It should also be considered in this connection that while some
small operators in specialist-interest niches may make extensive
use of direct sales, those that offer typical mass market holidays in
competition with the major
integrated operators are more
dependent on distribution through travel agents.

(30) Commission estimate, based on Form CO and MMC 1997 report.

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(35) Charter airlines exist primarily to serve tour operators,
particularly in the most popular sectors of the foreign
holiday market, and account for the great majority of
seats (31) sold to tour operators for British and Irish
package tours. Their operations have a number of
them from those of
characteristics distinguishing
scheduled airlines. Charter airlines operate (generally
non-stop) between the country of origin and the
airports closest
to major holiday destinations. The
choice of routes and the frequency of flights is dictated
by demand from tour operators and charter airlines will
change flying patterns to reflect changes in demand for
foreign package holidays
to particular destinations.
Charter airlines generally expect a tour operator to buy
blocks of seats for at least a holiday season.

(36) The parties’ market shares, and those of

their main
competitors, of the supply of transport services to tour
operators for use in package tours are similar whether
or not scheduled flights are included (32). Scheduled
flights account for a relatively small proportion (12 %)
of all British package tour flights (33). In principle, tour
operators could substitute scheduled airline flights for
charter flights. However, in the Commission’s view, it is
unlikely that prices for scheduled flights will in general
constrain those for charter flights, and in consequence,
scheduled flights should not be considered as part of the
same product market as charter flights for the present
purpose. As
to the
and tour
Commission’s
operators, scheduled flights are not a viable substitute
for charter flights for package tours to most package
holiday destinations, especially short-haul ones.

explained
below,
information from airlines

according

flights,

finding

(Tour operators

them inconvenient

(37) Scheduled airlines operate a network of routes, mainly
linking capital and other major cities; in consequence,
they will not necessarily operate directly to the resort
areas which are the tour operator’s typical (short-haul)
seldom or never use
destination.
indirect
for
customers,
longer, and plane-load for plane-load more
expensive than direct ones.) Tour operators sometimes
buy blocks of seats on scheduled flights to holiday
destinations. But in the Commission’s view, and broadly
supported by comments
several
factors make scheduled flights inadequate substitutes,
from the tour operator’s viewpoint, for more than a
small proportion of charter flights. Indeed, according to
information obtained by the Commission from a small
tour operator during its investigation, scheduled seats
are typically 25 to 30 % more expensive than equivalent
ones on charter flights. Consequently, they are unlikely
to constrain prices for charter flights generally.

from third parties,

so far as

(38) Seats on aircraft used for scheduled flights are usually
more widely spaced than on those used on charter
operations, reducing the capacity and increasing relative
costs and prices. For example,
typical economy seat
spacing on a BA flight
is 31 inches, whereas on
Airtours it can be as little as 28 inches; the difference,
and other changes to layout, allowing the charter airline
to carry more passengers (34). The supply of scheduled
airline seats to European destinations has certainly, as
increased in recent years, notably
Airtours suggests,
low cost airlines in
with the entry or expansion of
Europe essentially,
the British short-haul
package holiday is concerned, Easyjet, Ryanair and the
BA subsidiary Go, following liberalisation. However, the
impact of this change as regards substitutability with
charter flights should not be exaggerated. The range of
destinations and routes
served by these airlines at
is very limited. According to information
present
provided by Airtours (35),
there are no
services by these airlines to any Greek, Turkish, or
North African destination, or to the Canary Islands.
Ryanair has no operations to Spain or Portugal. Easyjet’s
operations
to the popular Spanish destinations of
Barcelona and Malaga are from the relatively unpopular
regional airport of Liverpool; Go’s flights to Spain and
Portugal are all from London Stansted rather than the
more popular Gatwick, which is heavily congested.
Another small scheduled airline, Debonair, based at
Luton,
is cited in Airtours’ reply to the Statement of
Objections (36) as being a useful cource of capacity,
especially at weekends, when its business flying sales are
likely to be low. However, according to the information
just mentioned, Debonair’s only service to a typical
short-haul package destination is to Alicante.

for example,

(39)

In many instances, scheduled seats may simply not be
available, either at all or in appropriate numbers and at
suitable times and prices, even where there are direct
to the destination concerned (37).
scheduled flights
tour
Scheduled airlines are often not able to offer
operators a whole aircraft, or more than a small
proportion of
the week,
and/or for a whole season (38). Their schedules may also
not permit a sufficient number of daily rotations to
to tour
reduce operating costs
operators) to those of a typical charter operation. Tour

(and hence prices

the seats on it,

throughout

(34) Source: press article enclosed by Airtours in its reply of 29 June

1999 to the Commission enquiry.
and
the oral hearing,

documentation

(35) Transparency
presention at
where(cid:146), p. 18.

accompanying Airtours’
(cid:145)low-cost airlines (cid:151) who flies

(36) Letter to Airtours from seat brokers Hunt & Palmer, Apendix 5 to
the reply to the Statement of Objections, and quoted at paragraph
3.48 of the reply.

the only direct

(37) According to one major tour operator, in the great majority of
cases,
sun
destination(cid:146), estecially from regional airports, will be a charter
flight or, for the more popular destinations, one from a (cid:145)leisure(cid:146)
airline such as BA’s recently created (cid:145)Go(cid:146).

available

(cid:145)summer

flilght

to a

(31) Nearly 90 % according to survey data reproduced by the parties in

table 6.17 of the notification.
(32) Notification, tables 6.17 and 6.19.
(33) 1998, source: BNTS, reproduced in table 6.17 of the notification.

(38) BA offers some whole-plane charters at weekends from British
regional airports, using aircraft not required for scheduled services
at those times. This is, however, understood to be a small-scale
operation, and BA has indicated that it has no plans to expand it
substantially.

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operators need to acquire their capacity in bulk and
ahead of time, in order to minimise costs and provide a
reliable offer to customers, most of whom book well in
advance. Scheduled airlines’
flight schedules (and the
aircraft and other resources needed to operate them)
however are, by definition, fixed for quite long periods
at a time, and they need to offer their traditional
customers, especially these with fully-flexible tickets, the
possibility of a seat at relatively short notice. Failure to
do so as a result of taking on substantial amounts of
charter-type business would damage their ability to
operate a network (cid:151) their primary role and the one
generating most of their income.

(40) Consequently, though scheduled airlines are a source of
marginal capacity to tour operators, they are not likely
to replace more than a small proportion of charter
supply, and as a result will not fundamentally affect
charter flight prices (39). These factors also suggest that a
substantial proportion of the scheduled flying used for
package tours is more of a complement to charter flying
than a genuine substitute for it. This conclusion is
further reinforced by the fact that many tour operators
offer travel by scheduled flights,
if at all, only as an
extra-cost option on their packages (except for certain
long-haul or (cid:145)upscale(cid:146) products).

are

essentially national

package holidays
in
still
character (40). Tour operators, even those which sell
holidays in several countries, generally produce and
market their packages on a national basis (cid:151) i.e. for the
Community, with a point of departure in, and for sale
to resident of, each Member State separately. Travel
agents
airline
likewise market nationally. Charter
services can also regarded as national
in character, as
they fly out of and return to their country of origin and
licensing and the demand for
these services arises
mainly from customers resident in the country of origin.

for consumers

(44) There are also a number of practical obstacles which
would make it difficult
to book a
package holiday with a tour operator or travel agent not
established in their (cid:145)home(cid:146) State. Relevant information
and resources (e.g. brochures or booking facilities for
foreign tour operatiors, sales points for travel agents)
will not be available locally, and linguistic differences
could cause communication problems. In addition, the
holiday contract would normally be governed by the
law of residence of the foreign tour operator or travel
agent, making it more difficult for the traveller to seek
redress
complaint. A further
inconvenience arises from the fact that travellers would
have to make their own arrangements for travel to the
point of departure in the territory of the foreign tour
operator or agent.

event of

in the

a

(41) The major tour operators in the British travel market
are vertically integrated, each with its own charter
airline. However, in line with the Commission’s normal
approach in these matters, self-supply is not regarded as
forming part of
the relevant market. The market
therefore consists only of sales to (and by) third parties.

(45)

(42) Accordingly, the relevant product market adopted for
the purposes of the present Decision as regards airline
services, is that for the supply to tour operators of seats on
charter flights to short-haul destinations.

B. Relevant geographic markets

(43) The Commission has accepted in previous decisions that
the markets within Europe for the supply of foreign

in price or otherwise,

In the Commission’s view, which third parties have in
general not contradicted, narrower subdivisions, notably
by airport of departure, or region, are inappropriate in
the present case. Tour operators market their products
substantially differentiating them,
nationally, without
either
for consumers on a
regional basis, and this is, naturally, reflected by travel
agents. Consumers obviously prefer
to fly from an
airport that is reasonably accessible from their home,
although many, especially those in the South-East or
Midlands of England, will be able to reach at least one
alternative departure point within a couple of hours by
road. Package holiday prices generally reflect this, but
are also influenced by differing cost levels for operations
from the different airports. Landing fees and related
factors mean that prices for departures from some of
the smaller regional airports are often higher than for
thse from the main holiday airports (London Gatwick
and Manchester). However,
the premium charged (or
discount offered) is usually relatively small compared to
the total holiday cost, especially when account is taken
of the additional cost of the road journey to a cheaper
airport further away. This relative uniformity of pricing

(39) Information on relative prices supplied by Airtours at the oral
hearing (paper by Professor Neven, p. 10 and table 5) in support
of its view that prices for selected scheduled and charter flights
were comparable, also indicates that
the operator in question
charged (or was charged) a supplement for the scheduled flight in
each of the five instances examined

(40) For example, the Commission Decisions in the following cases:
Havas Voyages/American Express
(OJ C 117,
12.5.1995, p. 8); Thomas Cook Group/LTU/West LB (IV/M.229),
(OJ C 199, 6.8.1992); West LB/Thomas Cook (IV/M.350) (OJ C
216, 11.8.1993); Wagons-Lits/Carlson (IV/M.867)
(OJ C 202,
2.7.1997, p. 4); Westdeutsche Landesbank/Carlson/Thomas Cook
(IV/M.1341), cited in footnote 4.

(IV/M.564)

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and cost suggests that there is a sufficient degree of
overlap between the possible regional or local markets
for them to be regarded for the present purpose as
constituting a single, national one on the demand side,
on a chain of substitution base.

V. COMPETITION ASSESSMENT

A. Introduction: Collective dominance

(46) On the supply side, tour operators and airlines can in
general easily move planes and flights between the
exception of Gatwick
various
especially, where the limited availability of slots acts as a
constraint).

(with the

airports

for

consumers

accommodation

(47) These indications suggest that a further distinction of
geographic markets within the United Kingdom is
unnecessary for the assessment of this case. As regards
Northern Ireland, the costs and other relevant features
of operating and arranging flights and obtaining and
supplying
from
Northern Ireland do not appear to differ substantially
from those for the rest of the United Kingdom, and
selling prices and other product characteristics are
understood to be generally similar in the two areas,
except that there is a wider range of destinations and
other options available from the latter. The relatively
small numbers of package holiday pasengers (around
40 000 or 14 % of the Northern Ireland total, according
to one major operator) who travel
to other British
airports to start their holidays appear to do so in order
to to avail
for
unconnected reasons, such as combining the package
holiday with a visit to friends and relatives elsewhere in
the United Kingdom) rather than on price grounds. The
MMC 1997 report did not make any distinction in its
analysis or finding between Northern Ireland and the
rest of the United Kingdom

themselves of

choice

this

(or,

(48) For these reasons,

it
define a separate geographic market
Ireland in the present case.

is not considered necessary to
for Northern

(49) The Irish market

considered as

is so much smaller than the UK
market (less than 5 % by volume) that its inclusion or
otherwise would not affect the conclusions with regard
to the United Kingdom. As already mentioned, however,
largely
are
tour operating markets
national due, among other reasons, to the difficulty of
making cross-border purchases, and the effects of
currency differences. Moreover, there are certain other
differences between Ireland and the United Kingdom as
regards such aspects as the structure of the industry and
its evolution. Consequently, it is appropriate to regard
Ireland as a separate market from the United Kingdom
for the present purpose.

(50) Accordingly,

the relevant geographic markets for the
present case, for each of the relevant product markets,
are, respectively, the United Kingdom and Ireland.

(51) The Commission considers that on the basis of

Kingdom on

its
competition analysis as set out below,
the notified
lead to the creation of a dominant
concentration will
market position in short-haul package holidays in the
United
of
the
Airtours/First Choice and the two other leading tour
operators (cid:151) Thomson Travel Group plc (Thomson) and
In
the Thomas Cook Group Limited (Thomas Cook).
Ireland,
the
the
lead to either a single or
concentration will not
collective dominant position in any of
the affected
markets.

Commission

collectively,

considers

part,

that

(52) Airtours argued at the hearing that collective dominance
could be thought of as a cartel, but without an explicit
agreement, cartel meetings, etc. Airtours then went on
to explan that such a (cid:145)tacit cartel(cid:146) would be unstable in
foreign package
the British market
be no retaliatory
there would
holidays
mechanism which would prevent any of the participants
in the tacit cartel from cheating (see recital 55).

short-haul

because

for

It

is

sufficient

Instance of

(53) As set out by the Commission in previous cases, and
confirmed by the Court of First
the
European Communities most recently in the merger
case Gencor/Lonrho (41), active collusive conduct of any
kind is not a prerequisite for collective dominance to
occur.
adaptation to market
that
conditions causes an anti-competitive market outcome.
As the Commission’s Decision in the Gencor/Lonrho
states, a collective dominant
case (at
position (cid:145)can occur where a mere adaptation by
members of the oligopoly to market conditions causes
anti-competitive
the
oligopoly becomes dominant. Active collusion would
therefore not be required for members of the oligopoly
to become dominant and to behave to an appreciable
extent
their remaining competitors,
their customers and, ulimately, the consumers(cid:146).

behaviour whereby

independently of

recital 140)

parallel

(54) Furthermore,

view of
Airtours (42) it is not a necessary condition of collective

apparent

contrary

to the

(41) Commission Decision 97/26/EC, Case IV/M.619 (cid:151) Gencor/
judgment of the Court of
Instance of 25 March 1999 in Case T-102/96, Gencor v

Lonrho (OJ L 11, 14.1.1997, p. 30);
First
Commission, not yet published.

(42) For example, as in paragraph 5.2, first indent, on p. 56 of their
reply to the Commission’s Statement of Objections: (cid:145)the allegedly
collectively dominant firms must be able to reach tacit agreement
to raise prices(cid:146).

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(55)

(56)

that the merger makes it rational

dominance for the oligopolists always to behave as if
there were one or more explicit agreements (e.g. to fix
prices or capacity, or share the market) between them.
It
for
is sufficient
to market
the oligopolists,
in ways which will
individually,
conditions,
substantially reduce competition between them, and as a
result of which they may act,
to an appreciable
extent,
independently of competitors, customers and
consumers.

in adapting themselves

to act,

that,

Statement of Objections,

In its
the Commission
identified (43) certain features of market structure and
operation which had been identified as making
anti-competitve outcomes, and in particular collective
dominance, more likely. Airtours considers
in
effect, none of these indicators are present and that,
the major
it would be impossible for
furthermore,
suppliers to retaliate in the event that one of them tried
to win market share from the others by increasing
capacity and offering lower prices. However,
the
Commission did not suggest, nor does it consider, that
all of the features have to be present and/or aggravated
by the merger in order for collective dominance to arise
in a given case. Nor does it regard a strict retaliation
mechanism, such as that proposed by Airtours in its
reply to the Statement of Objections (44) as a necessary
condition for collective dominance in this case; where as
here, there are strong incentives to reduce competitive
action, coercion may be unnecessary. However, in any
case, as set out below, the Commission does not agree
that there is no scope for retaliation in this market.
Rather there is considerable scope for retaliation, which
will only increase the incentives
to behave in an
anti-competitive parallel way.

for

that

In this particular case, the Commission has come to the
conclusion that
the substantial concentration in the
market structure, the resulting increase in its already
considerable transparency, and the weakened ability of
the smaller tour operators, and of potential entrants to
compete will make it
the three major
rational
players that would remain after the merger to avoid or
reduce competition between them,
in particular by
constraining overall capacity. This does not mean that
the Commission believes
there will be no
competition in the market after the merger. Even in
cartels
tight
involving single dominance or
cases
competition is rarely completely eliminated.
In this
particular case, as further discussed below, capacity is
basically set prior to the selling season. A distinction,
therefore, has
to be made between the setting of
capacity pre-season and the sale of capacity during the
selling season. Constraining overall capacity in the
pre-season does not exclude certain competitive actions
during the selling season, for example various types of
promotions. However, constraining the overall amount
of capacity put onto the market ensures that the market
will be kept tight. If capacity is constrained, prices and

profits will be higher
than otherwise, whatever
competition takes place during the selling season. The
Commission has reached the overall conclusion that the
merger would result in a market structure which would
create an incentive for
the three remaining large
operators to constrain capacity in this way.

B. The United Kingdom

Tour operation (short-haul foreign package
holidays)

Introduction

(57)

In the Commission’s view, and based on information
supplied by Airtours and others, the relevant product
market displays a number of characteristics which
distinguish the conditions of competition in it. These
are, in particular, the extent and nature of the vertical
extensive
integration of
commercial and other links between them, and the
limited scope for suppliers to make short-term output
adjustments to match fluctuations in demand.

the major

suppliers,

the

(58)

In the Commission’s view, the merger would not lead to
the creation or reinforcement of a dominant position by
a single firm. However, it would lead to a situation of
collective dominance in short-haul
foreign package
holidays (45).

Functioning of the market

General

(59) Package holidays were devised partly as a way of
achieving high sales volumes and reducing unit costs by
allowing the tour operator to purchase the different
elements (flight, catering, accommodation, etc.) in bulk,
passing some of the savings on to cosumers. Estimates
of tour-operating margins vary, but fairly low average
figures, of the order of 7 % (or around GBP 30 on a
typical holiday price of around GBP 400) have been
should,
for
cited by third parties

recent years.

It

(43) See paragraph 70 ff.
(44) For example, paragraph 5.2, third indent.

(45)

(cid:145)Collective dominance(cid:146) and (cid:145)oligopolistic dominance(cid:146) are used as
syonyms in this Decision.

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however, be noted that vertically-integrated operators
from
will normally also receive income, additionally,
their airline and travel agency activities, and margins on
these aspects
(especially airline operations) may be
higher, so that the gross margins on the total operations
of the integrated operators may be larger that those on
their tour operating activities alone.

(60) Tour operators need to operate at high levels of
capacity utilisation (figures of the order of 95 % or more
in terms of holidays sold have been mentioned to the
Commission) in order to maintain profitable short-haul
operations. Matching capacity and demand is therefore
critical to profitability, especially since package holidays
its
are perishable goods (cid:151) a given package loses all
value unless it is sold before its departure date.

(61) Perishable-goods markets

highly

require

flexible
production and distribution systems so that supply and
demand can be closely matched and waste production
minimised. But
suppliers of package holidays are
severely hampered in precisely aligning capacity and
demand. They need to produce (i.e. contract for the
necessary flights, accommodation, etc.) virtually the
whole of what they expect to sell a long time before it
is consumed (i.e. when the consumer departs for the
holiday destination, or
earliest, when the
at
consumer pays the bulk of the price (cid:151) usually around
eight weeks before departure). A year or even more
ahead is, according to the Commission’s information,
typical (46).

the

contracts with hoteliers and airlines, are typically fixed
12 to 18 months ahead of the holiday season. some
adjustments are possible after this date. However, within
about 12 months of departure date, once the booking
season has begun (i.e. from about the summer of 1999
for departure in summer 2000), the scope for changes
is heavily constrained, due to inflexibility of many
commitments with
problems
suppliers
associated with changing dates, flights, hotels, etc. of
customers who have already booked.

and

the

a

equivalent

to around 25 % of

early booking. These

(64) Only by contracting for their expected needs well ahead
of time, enabling suppliers to plan ahead, can operators
obtain a sufficiently low price to attract an adequate
volume of profitable sales. Tour operators accordingly
need to encourage
improve
cash-flow (cid:151) a substantial deposit (around GBP 200 per
person,
typical
is paid by consumers on
short-haul holiday price)
booking;
though
the balance is payable (irrevocably,
operators and agents can arrange insurance as an
extra-cost option) by two months
in advance of
departure (except, naturally,
for late bookings). They
also reduce the risk of unsold holidays, and the
consequent need for discounting,
later on. Adding
capacity is easier than reducing it during a season,
although in some instances, e.g. where a particular
resort
suitable
accommodation (and/or flights to the relevant airport)
will already have been reserved, at least for the peak
period. But it is generally difficult for tour operators to
unwind their contracts, especially those for air transport,
tour operator,
without
accordingly, bears almost all of
risk of any
contracted capacity remaining unsold.

substantial penalties. The

especially popular,

is proving

the

all

(62) According to Airtours, detailed planning for

the
summer 2000 season (i.e. departures from May 2000)
began[(cid:133)]*. According to Airtours, an increase of
capacity of up to 10 % can be contemplated until the
end of [(cid:133)]* for the forthcoming summer season. After
[(cid:133)]* only very minor changes are possible (47).

(63)

Information from the major tour operators confirms
associated
that opertors’

capacity plans

and the

(46) Notification, paragraph 6.23.
(47)

(cid:145)Competition in the UK foreign package holiday market: An
economic analysis(cid:146), paper by Professor Neven prepared for
Airtours and presented at the Hearing, p. 3, last paragraph.

(65) Faced with this limited ability to reduce output in the
short-term (i.e. once the brochures are published and
the selling season has started), tour operators can, for
the most part, only try to restore equilibrium via the
price mechanism (cid:151) in other words, by discounting
once it becomes clear, and to the extent, that sales of
their holidays appear unlikely to match the supply for
which they have contracted. The fixed costs of
tour
operation (mainly, the cost of the airline seat and most
of the accommodation and catering costs) make up a
high proportion of total costs, so that relatively high
levels of discount can be applied if necessary to clear
unsold stock. Reductions of up to 25 % off the initial
brochure price are, apparently, available on some late
sales, although consumers will often in such cases be
required to accept the operator’s choice of hotel, or
even the resort, according to availability. Discounting of
holidays during the (cid:145)lates(cid:146) part of the selling season is
of
accordingly
retail
(cid:145)end-of-season stock clearance(cid:146)

to
in other

phenomenon

similar

sales

that

a

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the

(e.g.

impact

clothing). However,

sectors
of
discounting on (cid:145)lates(cid:146) in a normal season should be seen
in the context of the operator’s turnover for the season;
it is effectively reduced by only about 5 % (25 % off 25 %
of holidays sold). Discounts (or equivalent
incentives
such as free child places or free insurance) for early
purchase are also offered, but
they are much less
significant both as to the amount of the reduction (5 to
10 % appears typical) and its impact on costs and
turnover. According to one major operator, about three
quarters of all package holidays typically are sold at or
close to the brochure price.

can also use the in-house airline to give preference to
his own holidays with regard to key selling features
such as the convenience of departure times (which are
closely tied to the airport slots held by airlines). At
present, the extent to which the major tour operators
are vertically integrated into airline operation varies, as
does the extent to which they also operate as suppliers
for
of seats to third parties. Thomson and Airtours,
example,
relatively
self-sufficient, sellling fewer seats to third parties, and
buying in fewer seats from other airlines.

airlines

large

have

and

are

(66) The fundamental rigidities in the market have important
for competition. They make suppliers
consequences
closely dependent on each other from a strategic, as
well as a short-term, viewpoint.
In particular, any
decision by a tour operator to try to increase market
share by increasing capacity (i.e. offering more holidays
for sale) will lead to a fall in prices unless competitors
reduce their share by an equivalent amount by cutting
capacity.

Vertical integration

short-haul

(though the proportion of

(69) First Choice has one of the largest charter airlines and
currently sells about 30 % of its airline capacity to other
operators (cid:151) a much greater proportion (and a larger
total number) than Airtours, Thomson or Thomas Cook.
First Choice buys in around 25 % of its seats from other
airlines
seats
bought-in is probably smaller). More importantly, First
Choice is also a major supplier of seats to independent
tour operators (cid:151) the third largest
in 1998 after
Monarch and the Caledonian/Flying Colours group. In
this connection, it should also be noted that since the
some
last-named was acquired by Thomas Cook,
rationalisation appears
taking place, with
consequent impact on third-party seat sales. According
to the Commission’s information, Thomas Cook’s third
party sales in summer 2000 are expected to show a
terms, by
decline of more than half,
comparison with 1998, with adverse effects on supplies
of seats to non-integrated tour operators.

in numerical

to be

have

become

(67) Tour operators throughout Europe, but especially in
increasingly
the United Kingdom,
vertically-integrated, both upstream into air
travel
supply (charter airline operation) and downstream into
retail distribution (travel agency). To date, however,
there has been little integration into accommodation
supply, and this appears unlikely to change in the
foreseeable future, probably because to do so would, in
contrast to the other two aspects, require substantial
foreign countries, with
investment
attendant increased risks and without clear advantages
in terms of cost savings.

in a number of

(70) Possession of

a

they all,

give preference

distribution
dedicated
substantial
channel, such as a chain of
travel agents, produces
similar benefits downstream. Most package holidays are
sold through the agencies of the large groups. Although
the integrated firms all handle each others’ holidays in
through various (cid:145)directional
their agencies,
selling(cid:146) (48)practices,
to their own
products. This enables them to promote their products
and move their stock of
their own holidays more
effectively, and without so much discounting, than if
they relied exclusively for distribution on third parties
(who would probably tend to give preference to the
holidays for which they received the most commission).
Discrimination in favour of
is
its
the MMC
as
facilitated,
conclusions (49) by a lack of transparency in regard to
ownership links (cid:151) customers are relatively unaware of
which airlines, holiday brands and travel agencies are

the in-house product

pointed

out

in

(68) Possession of a substantial

the

in-house charter airline
operation creates a number of competitive advantages
for
in addition to
providing another source of income and control of a
major cost element. The risk of being unable to obtain
sufficient capacity is reduced. An integrated operator

tour operator

concerned,

(48) As defined by the MMC in its 1997 report, this covers a variety of
specific practices (cid:151) such as only offering a competitor’s product
to a customer if an equivalent (cid:145)own(cid:146) product is unavailable (cid:151) see
paragraphs 1.9 and 7.59.

(49) 1997 report, paragraphs 2.84 to 2.97.

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under common ownership (cid:151) and other features of the
distribution system. First Choice has recently begun to
create an in-house agency chain, having found the lack
of one an increasing handicap. The effects of the merger
on competition in the distribution of package tour
holidays are examined more fully below.

(71) There are also a number of commercial links between
the integrated companies, deriving in part from their
vertical integration. The downstream links, via the use
of each other’s travel agency chains, have already been
these are important, since sales through
mentioned;
third party agencies account
for a high
proportion (though not, as a rule, a majority) of the
integrated operators’ holiday sales (50).
In the (cid:145)lates(cid:146)
period it is, for example, important to have as wide a
distribution as possible in order to clear any unsold
stock. Upstream,
they share airline capacity to some
extent, both via direct purchases from each other, and
through swaps and consolidation arrangements whereby
they maximise the efficient use of their respective fleets.

in general

Table 1

Market shares (% by volume) in short-haul foreign package
holidays from the United Kingdom, summer 1998 (52)

Tour Operator

Combined

Airtours

First Choice

Thomson

Thomas Cook

Cosmos/Avro

Manos

Kosmar

Others

Total

Source: AC Nielsen.

Share
(in %)

19,4

15,0

34,4

30,7

20,4

2,9

1,7

1,7

8,2

100

Market structure

Shares and increments

(72) Airtours

submitted various market

share estimates,
based on several sources, in its notification (Form CO).
these to distinguish long-haul and
The only one of
short-haul market sectors was that
from the market
research firm AC Nielsen, reproduced below from table
6.8 of the notification. Airtours does not consider these
data reliable, since they are based on returns from travel
agents only, and may therefore produce a skewed result.
However, the Commission’s own assessment of market
shares for short-haul package holidays, based on a
variety of sources (51), confirms the overall result (cid:151)
giving approximately 32 % for the parties combined
(Airtours 21 %, First Choice 11 %) 27 % for Thomson
and 20 % for Thomas Cook.

(50) Figures for the parties are at paragraph 6.158 of the notification.
(51) Based on actual passenger carrying figures from major operators
and on total market size figures from BNTS and corroborated by
Civil Aviation Authority (CAA) data.

small

into large

recognised trend in the

and
the
the market

(73) As can be seen from table 1, the merger will reduce the
number of substantial, integrated suppliers from four to
three. The elimination of First Choice as an independent
competitor is considered to be particularly significant,
because (as another large tour operator has remarked) it
is the last remaining medium-sized player. Therefore, it
will also substantially increase the gap between the
fringe ones. This
larger players
polarisation of
integrated
companies and smaller non-integrated companies is a
widely
Indeed,
according to Airtours there are two ways of doing
business in this industry. Either (cid:145)stay small and buy
inputs or produce large volumes and integrate vertically(cid:146)
in the words of Professor Neven at the hearing. The
impact of this trend has been a marginalisation of the
fringe suppliers as a competitive force in the market.
Some third parties have indicated to the Commission
that in their view it is already unlikely that the fringe is
strong enough to offer effective competition to the
for the
major players, and that
reason explained below, weaken their
competitive
position even further.

the merger would,

industry.

(74) The merger of the tour operating businesses would also
impact on the associated sectors of airline seat supply
and distribution of package holidays as discussed more
fully below.

(52) Shares relate to Nielsen’s (cid:145)short-haul beach(cid:146) category.

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The fringe

four

large

(75) As table 1 and the foregoing sections make clear, the
relevant product market is characterised by a structure
comprising, prior
tour
to the merger,
operators (the two parties to the merger, plus Thomson
and Thomas Cook), each vertically integrated both
upstream into charter airline operation and downstream
into travel agency and together accounting for the large
majority of sales, plus a numerous fringe of small,
largely non-integrated independent tour operators and
agents. The charter airline sector is more concentrated
than the two downstream sectors, ans self-supply is
significant: there is only substantial charter airline which
sells the majority of
its capacity to third parties (cid:151)
Monarch (which is linked to tour operator Cosmos).

of

the

industry

by mergers

(76) Partly as a result of the process of consolidation and
concentration
and
acquisitions, particularly strong since the MMC’s 1997
report was completed, there is a substantial gap between
the four large operators and the rest. There are three
firms (Cosmos, Manos and Kosmar) with 6 % between
them. Below these, none of the tour operators in the
(cid:145)others(cid:146) category (of which there are several hundred (53))
has more than a 1 % market share. Moreover,
the
majority of the latter appear to operate on a niche basis,
specialising in, for example, skiing, sailing, villas, short
breaks, group travel, etc. In their reply to the Statement
of Objections, Airtours argues that it (cid:145)would be wrong
to conclude that
(the independents) are confined to
niche activities (54)(cid:146). The Commission has not said that
the group of independents exclusively consists of niche
is clear
it
players. On the other hand,
from the
membership list of,
the Association of
for example,
Independent Tour Operators (AITO) that a substantial
number of the independents are only niche players.

(77) Moreover,

in

view,

generally
the Commission’s
supported by third parties, the ability of the fringe of
smaller suppliers to offer effective competition to the
four large tour operators is further constrained by their
small
vertical
integration.

and their

individual

lack of

size

(78) The small size of the fringe operators means, among
other things, that they cannot obtain the benefits of

the

flight at

the larger ones. For example,

scale and scope of
in
to the major operators they cannot offer a
contrast
charter airline a complete planeload of passengers
(except, perhaps, for a few days in the peak season).
This increases the risk for the airline that it will have to
than optimum loading;
less
operate
consequently, the airline is likely to charge the small
operators a higher seat price than the larger ones, to
reflect
is possible for airlines to
consolidate passengers from different operators onto a
single flight, either by themselves or indirectly through
the use by tour operators of a seat broker (55); but this
is obviously more difficult (and thus more expensive)
the more such small groups of passengers the airline or
broker has to try to accommodate.

this higher risk.

It

to

them.

(79) Recent developments have substantially reduced the
choice of charter airline capacity available to the smaller
tour operators, and with it, their ability to negotiate
comparable prices and terms to the larger ones. The
number of charter airlines has been in decline for some
years. According to the Commission’s information, the
recent acquisition by the Thomas Cook group of
Caledonian Airways and Flying Colours is leading to a
further rationalisation, reducing the capacity (and in
particular, its quality) available to the independent tour
operators from an airline which had been a substantial
supplier
have
Smaller
commented that they already face difficulty in obtaining
seats at desirable times (especially weekends) and from
the major tourist airports (Gatwick and Manchester).
Tour operators (and airlines) have commented that they
need to offer departures from both these airports in
to access the main customer centres and so
order
provide a credible national operation (cid:151) otherwise their
prospects for expansion beyond that of a small-scale
player are slight. Other, regional airports are regarded as
second-best by many customers and flights from them
are in some instances more expensive in view of landing
charges etc. Manchester is due to open a new runway
next year. However, Gatwick is acknowledged to be
congested and appears likely to remain so for some
years to come.

operators

tour

(80)

that

It appears
the major operators already have
considerable market strength in regard to seat sales to
independent operators. For example, a tour operator has
commented that Monarch, the only substantial supplier
to the independent sector that would remain after the
merger, already tends to satisfy the needs of the major
operators (which together account for over half of its
third-party sales) before considering what to offer the
the
independents,

refused

discuss

even

and

to

(53) The MMC 1997 report (paragraph 3.20) gives the total for 1997
as about 1 000, although there has probably been some decline
since then.

(54) See p. 33, paragraph 3.27.

(55) Seat brokers help to match supply and demand by selling to tour
operators and others any spare capacity which airlines wish to
dispose of as surplus to their own requirements.

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forthcoming year’s programme with the operator
it had received notice of the majors’
concerned until
requirements.

agency chains, effectively control the primary gateway
to the retail distribution of package holidays, and this is
likely to permit them to discriminate in favour of their
own products and against
those of an emerging
competitor whenever it is rational to do so.

(83)

(81) Similar constraints on the ability of

large

controlled by the

the fringe to
compete effectively against the major players exist in
regard to distribution. Since most package holidays are
sold through travel agents rather than direct, small
operators must have access to travel agencies in order
to sell their products. However, most agency branches,
and all the large chains with broad national coverage,
are
integrated tour
four
operators (56). For example, Airtours and First Choice
have together over 1 000 of the around 7 000 branches
in the United Kingdom (around 14 %), and the other
two large operators have similarly extensive networks.
Although nearly 40 % of package tours are sold through
smaller, non-integrated agencies, most of
these are
small, local operations with only a few branches at the
most. Consequently it is essential for tour operators to
obtain wide distribution coverage through the agencies
of their largest competitors if they seek to expand their
market share. However, the strong position held by the
larger operators in distribution also allows them to
discriminate against the smaller ones in a number of
ways.
it enables them to require the
smaller operators to pay a substantially higher rate of
commission (cid:151) a practice established by the MMC in its
1997 report (57) and confirmed by the Commission’s
enquiries to be continuing and even strengthening. It
also enables them to give preference to their own
products (via directional selling).

In particular,

is

that

than

large

evidence

[(cid:133)]* (58).

suppliers
the

the
cheaply
Furthermore,

In their reply to the Statement of Objections, Airtours
has argued that small operators do not have a cost
disadvantage compared to larger integrated operators. In
particular, they can buy seats at competitive prices and
accommodation at similar prices to the large integrated
operators. However, according to the investigation,
buy
there
smaller
accommodation more
integrated
operators.
operators generally have access to cheaper seats than
the non-integrated operators, who have to purchase
their seats on the market (cid:151) either from regular airlines
or often as part of planes rather than full plane loads.
Therefore,
cost
advantage compared to the fringe operators. However,
more importantly,
tour operators have
found it increasingly difficult to find appropriate charter
seats for their purposes, due to the increased vertical
integration.
are
the
constrained in expanding the number of holidays they
can offer (59).

integrated operators have

independent

Therefore,

suppliers

fringe

the

the

a

(82) A number of

small operators have expressed the
concern to the Commission that
these distribution
arrangements place them at a further competitive
disadvantage. They are dependent on their main
competitors for access to distribution, and they are
accordingly liable to discriminatory action in regard to
such matters as commission rates, racking (the extent to
which their brochures are displayed on the agency’s
shelves (cid:151) an essential aspect of marketing) and
in addition to the deleterious effects of
promotions,
directional selling and the lack of
transparency over
ownership. Some of these features (for example different
commission rates) may be cost-related in that selling
costs may be lower for larger volumes. However, it is
clear that the major tour operators, through their large

(56) Co-op Travel, with a 9 % market share in distribution,

is not
integrated, but it is less significant in the South of England than in
the rest of the United Kingdom.
(57) Paragraph 2.164. However,

in the
circumstances prevailing at the time, find this practice to have
been against the public interest.

the MMC did

not,

to mainland Spain,

(84) The marginalisation of the fringe of small tour operators
has already occurred to a considerable extent. The four
large integrated suppliers already sell between them,
the
over 90 % of all packages
Balearic Islands,
the Canary Islands and Tunisia, and
80 % or more to all other significant short-haul summer
holiday destinations except Madeira and Turkey (77 %
each), Greece (69 %) and France (33 %) (60). According to
industry data (BNTS), Spain is by a large margin the
most popular British holiday destination, accounting for
27 % of all holidays (all
long and short-haul
destinations)
in 1998, and most such holidays (over
80 %, in the case of the Balearic Islands) were packages.
According to Airtours,
(cid:145)show a
the
remarkable resilience (cid:133) : they continue to account for

independents

types,

(58) [(cid:133)].
(59) On page 32 of their reply to the Statement of Objections, the
parties quote Libra Holidays as an example of an independent tour
operator which has expanded capacity. The Commission notes
that Libra Holidays is a specialist operator. It is also noted that
Libra Holidays, even with the capacity expansion, will continue to
the
be a very small operator. However, more importantly,
Commission has not said that no new small
independent tour
operating companies will be established in the future. The
Commission has only said that the group of independent tour
operators has been and will be increasingly marginalised.

(60) Source: Nielsen via Airtours.

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this

that

figure includes

around 7 million pax (61) per year (cid:133)(cid:146). The Commission
long-haul holidays.
notes
it is also noted that the figure is constant
However,
the independents as a group
in absolute terms,
the
have not grown with the market.
increased
figures of Airtours,
marginalisation of the independents as a group (62).

If anything,

show the

therefore,

i.e.

competitors. Cosmos

(85) Airtours has mentioned Cosmos and Virgin Sun as
is
likely new major
future
vertically integrated with the last remaining significant
independent charter airline, Monarch. Virgin Sun is the
short-haul foreign package holiday business of Virgin.
According to Airtours, both companies have ambitions
to expand their businesses. However, in the view of the
Commission, none of these companies is likely to be
able to challenge the major operators in the foreseeable
future. Cosmos/Monarch is,
as mentioned above,
strongly dependent on the majors as purchasers of seats.
Moreover, Cosmos is not vertically integrated into travel
agencies. As to Virgin Sun, the operations are at present
very small. Virgin Sun is not vertically integrated into
travel agencies either. Finally, Virgin Sun has had
considerable trouble in contracting for accommodation
in key short-haul destinations.

Conclusion

(86)

suppliers

In the Commission’s view, the overall effect of these
the notified
factors is that, even in the absence of
merger, the tour-operating market is one in which the
smaller
effective
competition to the four large ones. Consequently, the
the
market
competition between the four large integrated suppliers.
This would even more be the case if
the proposed
merger were to go ahead.

effectively

to offer

outcome

are not

decided

able

by

is

Market characteristics (oligopolistic dominance)

are

and will

remain present

(87) As further described below, a number of characteristics,
which make the market conducive to oligopolistic
dominance
in the
tour-operating market after the merger (63): for example,
low price
product homogeneity,
sensitivity of demand, similar cost structures of
the
transparency, extensive
main suppliers, high market
commercial
suppliers,
the major
between
links
substantial entry barriers and insignificant buyer power
the merger
In the Commission’s view,
(consumers).

low demand growth,

(61) Package holidays.
(62) Reply to the Statement of Objections, pp. 31 and 32.
(63) The characteristics listed are substantially those employed in
previous Commission Decisions in Merger Regulation cases where
oligopoly
see
dominance(cid:146))
Gencor/Lonrho, cited in footnote 41, and Commission Decision
1999/152/EC in Case IV/M. 1016, Price Waterhouse/Coopers &
Lybrand (OJ L 50, 26.2.1999, p. 27).

((cid:145)collective

issue;

was

an

would, for the reasons also described below, reinforce
all these characteristics with the exception of the first
two, and this would contribute to the creation of a
situation of collective dominance among the three large
vertically-integrated players that would remain after the
merger.

Product homogeneity

(88) Although

they

there

between

products,

are
package

different
variations
are
holiday
(short-haul)
fundamentally similar. They all involve the packaging of
the two key elements (travel and accommodation) and
they all depend on bulk buying,
i.e. a measure of
standardisation, to produce the economies of scale and
scope that enable them to be marketed at a lower price
than the equivalent bespoke holiday (i.e. where each
is arranged and contracted for individually).
element
This view was also set out by Airtours
in the
notification, where Airtours in particular said that (cid:145)The
popular
most widely
destinations are fairly homogeneous products(cid:146) (64). The
homogeneous nature of short-haul package tours is
confirmed by market research which shows that about
85 % of customers are influenced mainly by the price in
their choice of holiday, whereas brand loyalty is of little
importance (65). This view was subsequently confirmed
by competitors.

holidays

package

sold

to

(89)

airport, destination country

In the reply to the Statement of Objections, Airtours has
argued that foreign package holidays are differentiated
by quality of accommodation, the date of holiday and
and resort,
departure
customer type and facilities available in all parts of the
package. According to Airtours, the proof is the vast
array of prices available. Furthermore, Airtours has
argued that
is constantly changing in
important ways, e.g. there is a trend towards a decrease
in the average duration of holidays and a trend towards
the
taking more than one holiday a year. However,
main recent
to
relate
long-haul package tours, which are not part of
the
relevant product market (66).

trends quoted by Airtours

the market

(90) The Commission has not

said that

there are no
differences between different package holidays or that
they are always sold at the same price. Quite clearly, for
example, a five-star hotel is not the same as a three-star
hotel and will under normal circumstances command a
higher price. Despite such differences between different
categories of short-haul foreign package holidays it is,
foreign package
however, also clear
holidays are today in the British market
to a large
extent a standardised volume product. Evidence of this
in particular, that the large majority of short-haul
is,
holidays are to the intermediate three-star/self-catering

that short-haul

(64) Notification, p. 30, paragraph 6.40.
(65) Notification, p. 30, paragraphs 6.40 and 6.41.
(66) Reply to the Statement of Objections, paragraphs 2.10 to 2.19.

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accommodation type. Furthermore, it is also noted that
little differentiation is made for the air component, i.e.
passengers go on the same plane, no matter whether
they stay in five-star or three-star hotels. The air seat is
a vital component in deciding how much capacity to
put onto the market. Nevertheless, for the purpose of
the present case the question is whether the differences
short-haul
between different
foreign
categories of
package holidays are such that
they will prevent
oligopolistic dominance of Thomson, Airtours/First
Choice and Thomas Cook after the merger. According
to Airtours it would, because the nature of the product
makes it impossible to tacitly coordinate on price and
there would in any case be numerous possibilities to
cheat on the tacitly agreed prices (67). However, contrary
to the view of Airtours, the Commission has come to
the conclusion that
the product differences will not
prevent
the creation of collective dominance in this
case, due to the way the market functions (68).

(91) As explained above, capacity is basically fixed between
12 to 18 months in advance of a season. The tour
operators maximise profits by maximising the revenue
stream on this pre-fixed capacity. This task is obviously
facilitated, if capacity is kept tight by all tour operators.
in this environment, there is no need for the
Indeed,
oligopolists
to coordinate on price. This was also
confirmed by the economic experts of Airtours at the
hearing, where it was said that it is unlikely that price
competition will be attractive, because firms would be
unable to serve the additional customers attracted by the
in price. Consequently, they would be unable to
fall
change their market share during the season.
In this
industry there is, therefore, no need to coordinate on
price. The crucial question is how much capacity is put
onto the market. In this respect, the differences between
various categories of short-haul package holidays are
not significant. There is only a need to be able to
level of capacity (number of
monitor
integrated tour
holidays) offered by the individual
operators.

the overall

Low demand growth

(92) Holidays abroad are a discretionary item of consumer
spending, and this increases the volatility of demand in

(67) Presentation of Professor Neven and Alan Overd, Lexecon at the

hearing.

(68) This is not inconsistent with statements in the yearly report on
competition policy (for example, the yearly report, 1996). See also
Commission Decision 92/553/EEC in Case
IV/M.190 (cid:151)
NestlØ/Perrier (OJ L 356, 5.12.1992, p. 1).

term. A recent

It also noted that

study for a major

the short
tour
operator, referred to in response to the Commission’s
enquiries, noted a certain unpredictable volatility from
year to year.
the overall average
annual growth rate (3 to 4 % over the decade) was quite
low. The number of holidays abroad (69) taken by British
residents fell by some three million (or over 10 %)
between 1995 and 1996, and there were falls (smaller
in size) in both 1990 and 1991 (cid:151) no doubt mainly in
response to general economic conditions. 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.

(93) Airtours

to

continues

said in their

grow dynamically(cid:146) (70).

reply to the Statement of
Objections that (cid:145)the market for overseas holidays of all
The
sorts
Commission recognises that the market for short-haul
foreign package holidays is likely to continue to grow. It
may also be that the market will grow somewhat faster
than overall GDP growth due to increases in vacation
time
and general wealth. However, based on its
investigation in this case, the Commission has come to
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. In this
respect,
it is also noted as indicated by Airtours that
(cid:145)The huge growth in overseas holidaymaking in the
1970s and 1980s was originally fuelled by the increased
availability of foreign package (rather than independent)
holidays following the removal of statutory price and
volume control on foreign package holidays imposed by
the
the
Commission finds that market growth is not likely to
provide a stimulus to competition within the foreseeable
future. Furthermore,
for the reasons discussed above
(with reference to the fringe), small operators are at a
competitive disadvantage compared to the integrated
operators. Any market growth is, therefore, likely largely
to be captured by the integrated operators, as has
happened over
recent years, according to Airtours’
figures.

British Government.(cid:146) (71)

conclusion,

In

(94) Airtours argued in their reply to the Statement of
Objections and in the presentation at the hearing that
demand volatility adds noise to the market. This makes
it harder to detect cheating and, therefore, to tacitly
coordinate. The main sources of volatility according to
Airtours are GDP-related volatility, exogenous shocks,
changing tastes within the foreign package holiday
market and changing costs (impact of low-cost airlines).

(69) MMC 1997 report,

the
proportion of these which were package holidays has remained
relatively constant in recent years at around 55 %.

table 3.1. The same table shows that

(70) Reply to the Statement of Objections, p. 7, paragraph 2.5.
(71) Reply to the Statement of Objections, p. 7, paragraph 2.6.

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The Commission does not consider either changing
tastes or the impact of low cost airlines to be related to
short-term demand volatility. However, these elements
are both discussed elsewhere in the Decision (72).

(97)

(95)

to

indicated

the Commission that

In the view of
the Commission the business cycle
(GDP-related volatility) is the main cause of short-term
volatility from season to season. Indeed, all the major
operators
in
forecasting demand for a season, the development in
main macroeconomic variables such as GDP growth, the
exchange rate and consumer confidence were among
the most
important parameters considered. However,
the Commission does not find it credible that volatility
due to the business cycle will make the market less
In particular,
conducive to collective dominance.
it
should be remembered that all
tour operators are
exposed to the business cycle and have to consider
forecast.
the macroeconomic development
Therefore, it is likely that all tour operators will have
similar views as to the market development. This would
even more be the case, if the proposed merger were to
go ahead (see section on impact of the merger, recitals
139 to 158).

in their

(98)

(96) As to the effect of exogenous shocks, the Commission
recognises that such shocks are not normally foreseen,
and therefore, cause a disruption to the planning of tour
operators. Examples are terrorist attacks on tourists in
Egypt or Turkey. However, it is not reasonable to argue
that
shocks will make the British
market for short-haul package holidays less conducive
to collective dominance. Exogenous shocks can happen
in all markets (73). They are exceptions to the market
development, and will not, viewed over time, make a
market less conducive to oligopolistic dominance (74).

such exogenous

(72) Changing tastes

are discussed in the

section on product
homogeneity, paragraph 88 ff., and the impact of low-cost airlines
is discussed in the section on supply of airline seats, paragraph 34
ff.

(73) Exogenous

in the bottled-water market,

shocks could take place in the platinum market
(Gencor/Lonrho case, cited in footnote 41) for example through
strikes, or
for example due to
contamination of the water (NestlØ/Perrier case, cited in footnote
68). However, in neither of these markets were exogenous shocks
considered to make the markets less conducive to oligopolistic
dominance.

conducive

In conclusion, the Commission does not consider that
the volatility in demand will prevent the creation of
oligopolistic dominance. On the contrary, volatility of
demand makes
to
the market more
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
is
rational for the major operators to adopt a conservative
approach ((cid:145)wait and see approach(cid:146)) 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.

it

Low price sensitivity

for

shows

short-haul

that price

It has not been possible to obtain data which would
allow a direct estimate of price elasticities in the British
market
foreign package holidays. As
mentioned in the section on product market definition,
there is little brand loyalty and consumers are sensitive
to relatively small differences in the prices of similar
holidays (to the extent that they can find them out).
This
an important decision
is
parameter in the market. However, it is also clear that
people are none the less willing to pay a certain amount
more for their holidays if prices rise generally. A study
by the bank WestLB Panmure (owner of Thomas Cook)
showed that in the years after 1995 tour operators had
decreased capacity and thereby increased their profits,
which also confirms that a collective exercise of market
the
power could increase prices and profits.
supply/demand
the
balance
profitability of the market, rather than the level of sales
as such. Given the barriers to growth facing the small
independent operators, this implies in particular that the
integrated operators could increase the overall level of
if they were to behave in a parallel way. This
prices,
was
experts of
Airtours, who at the hearing said that they believed that
if they were to
the oligopolists could increase prices,
collectively exercise market power.
it
should also be noted that an increase in the average
prices of short-haul package holidays would not have to
imply an increase in the catalogue prices. It could occur
in other ways. Simply creating a tighter market would,
for example,
lead to a reduction in the number of
holidays sold at a discount in the (cid:145)lates(cid:146) period, which
would lead to a higher average price.

also confirmed by the

In this respect,

determines

economic

which

is

It

(74) Indeed,

feature of

if exogenous shocks became a normal

the
market, then it is to be expected that they would be treated as
i.e. they would be
endogenous variables in forecasting demand,
explicitly taken into account. This would reduce the disruptive
impact of the shocks on capacity planning. Moreover, such events
are related to some countries or destinations and will not
necessarily affect the overall demand and supply as holidaymakers
seek other destinations and redistribute flying capacity and seek
additional accommodation at other destinations.

Similar cost structures

(99) There is considerable scope, in general, for economies of
scale in tour operation and charter airline operation.

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in his

concerned,

Professor Neven,

However, the relative importance of scale reduces above
In particular, as far as charter airline
a certain level.
are
operations
the
economic
submission
expert of Airtours,
estimates that the scale economies related to fleet size
the level of 15 to 20 aircraft.
are exhausted at
According to Professor Neven, this is a relatively small
fleet size. This may be compared to the large American
airlines or the large European flag carriers. However, in
the present market, it should be borne in mind that 15
fleet.
to 20 aircraft would be a very substantial
According to their annual reports in 1998, Airtours had
a total fleet of 36 aircraft, Thomson 41 aircraft, and
First Choice 25 aircraft. This was confirmed by Airtours.
According to Airtours,
is
established and of a certain minimum size, economies
of scale in the acquisition of aircraft seats or in-resort
accommodation are relatively limited(cid:146). Above that level,
airline costs are related more to load factors and the
number of rotations (return trips) which can be made
per day (three is considered optimal for short-haul), i.e.
the level of utilisation of aircraft capacity rather than its
absolute size, while direct
tour operating costs are
related to efficient distribution and marketing (e.g.
again, do not
advertising/promotion costs) which,
necessarily allow continuing scale economies above a
certain overall size of operation.

tour operator

(cid:145)once

a

(100) The four large integrated suppliers are each sufficiently
large to have achieved this minimum size. The four
integrated
the
basically
economies of scale in tour operation and charter airline
operation. They fly to the same destinations, to a large
extent use the same hotels, and require the same high
load factors of their operations (more than 95 %).

suppliers

achieved

have

(101) The Commission

conclusion that
basically have the same cost structures.

has
the four

accordingly

the
come
large integrated operators

to

to the previous

the planning of a future season is based on sales in the
previous season, increased or decreased by a forecast of
the market demand for the coming season. Changes
compared
therefore
incremental and the development of the programme of
a tour operator is evolutionary. Consequently, simply
due to past experience,
tour operators know already
before the planning of a season to a large extent what
the offerings of the four integrated suppliers will be for
the new season.

season are

(105) Furthermore,

the

that

each of

four major

integrated
operators will obtain a certain knowledge about
the
changes planned by the other integrated operators. This
is due to the fact
the major operators in the
planning period will be in contact with hotels for their
bed stocks and be in discussions concerning seat
requirements and availability with a view to obtaining
or supplying seat capacity from and to one another or
to agree swaps of seats and slots. Moreover, it would
not be possible for the four major integrated operators,
as publicly quoted companies,
to keep secret any
substantial capacity additions, for example through the
purchase or long-term lease of new aircraft. Even for
non-quoted companies this is not possible, since aircraft
in advance of
normally have to be contracted well
the airline trade
entering into service. Furthermore,
fleet
the
press
composition and forthcoming changes for all airlines in
the world. In addition, in view of the high degree of self
supply of airline seats which is regarded as optimal for
an integrated operator, a small proportionate change in
the number of passengers carried would have a much
greater impact on the operator’s requirements of airline
seats bought in from third parties in the market place.
For all
the four major
integrated operators would know if, for example, one of
the other integrated operators was planning to increase
the number of passengers carried and thus the number
of holidays it could offer. Each of the four integrated
operators is thus well able to monitor the total amount
of holidays offered by each of the others.

regularly publishes descriptions of

the above reasons, each of

Transparency, interdependency and commercial links

(102)

In terms of transparency, a distinction has to be made
between the planning period and selling season, where
the catalogues have been launched. But transparency of
the market
integrated
is high for
operators in both periods.

the four major

(103)

In the planning period, the crucial capacity decisions for
the coming season are made.
In reality, the capacity
decision of the four major integrated operators will be
transparent for each of these suppliers, for the following
reasons.

(104) None of the major tour operators puts out a completely
new programme from one season to the next. Rather,

(106) During

the

selling

the most

important
season,
commercial task of the tour operators is to maximise
the revenue stream from the capacity which has been
contracted, i.e. to sell the capacity at the highest price
possible. For this purpose each of the major operators
have set up yield-management systems. These systems
to be
are designed to enable yields (profit margin)
optimised at varying levels of sales across the different
selling time periods (and in particular in the (cid:145)lates(cid:146)
period). An essential input to these systems is current
information on the prices and availability of competing
products from the other main operators. According to
information obtained during the Commission’s enquiry,
these factors are closely monitored, at times on a daily
basis, so that prices can be varied if necessary. The
resources invested in this process are considerable (one
operator has indicated around 50 staff and an annual
budget of the order of GBP 2 million) (cid:151) an indication
of the importance attached to it. In the investigation,
the Commission found that one vertically integrated
its capacity planning and
tour operator, as part of

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routinely inputs

marketing process,
into its own
computerised market analysis system information about
flight times, prices, destinations, and so forth offered by
its competitors (this can be obtained from brochures
etc.). It is consequently able to determine quite precisely,
as soon as brochures are published, the flight plans of
those competitors and the quantity of holidays they
expect to sell, which can be inferred from such factors
as the number of flights to the various destinations, and
the aircraft and hotels used.

Therefore, operators have no need to tacitly collude on
thousands of prices. Indeed, this point was confirmed by
the economic experts of Airtours: (cid:145)pricing behaviour of
firms after capacity has been determined is not directly
relevant for joint dominance, i.e. the collective exercise
of market power(cid:146) (77).

(107) Once catalogues have been launched,

is that

their own prices

from the viewpoint of competition,

there is also
almost complete transparency as to prices. In particular,
most travel agents, and all the large ones, use Viewdata,
a computerised booking system which displays in real
time the availability and prices of holidays supplied by
participating tour operators, which includes all the large
ones and some of the fringe. An important effect of
this,
it
enables integrated tour operators to see more or less
immediately if
for an equivalent
product diverge from those of competitors. This means
that they can quickly match or otherwise set their prices
relative
if deemed
necessary to adjust
their own rate of sales. Not all
discounts are shown on Viewdata; for example, some
promotions, particularly in the early period, are made
by travel agents, in particular those which are integrated
with tour operators. These may be funded jointly be the
agent and the operator, or by either of
them alone
(although in the case of the agents, their commission
from the operator may be increased to reflect the cost
of doing so) and are not disclosed on-screen. But given
the relatively concentrated nature of the business, and
the need for agencies to advertise the holidays they are
promoting, it is not difficult for the larger operators to
obtain good information about them.

to those of

competitors,

their

(108)

(cid:145)The heterogeneity of

In their reply to the Statement of Objections and at the
hearing Airtours said that
the
product offering means detailed monitoring of price or
is not possible(cid:146) (75). They also state:
(cid:145)There is
output
scope for secret price cuts.
In effect no (cid:147)collusive(cid:148)
price can be agreed for each of the prices on offer, a
firm which is attempting to increase market share can
do so knowing that other firms will not be able to
agreement has been
verify whether or not
undermined(cid:146) (76). The Commission recognises that each
of the large integrated operators has virtually thousands
of different prices due to the sheer size of their holiday
programmes. However, the Commission has not said,
it would be
and does not agree with Airtours,
necessary for
these
firms
different prices in order to reach a collective dominant
position. On the contrary, during the selling season,
there is
the integrated
operators to cut prices in order to gain market share,
which is determined by the amount of capacity offered.

little incentive for any of

to tacitly coordinate all

that

the

information is

and availability

(109) Therefore, the Commission does not consider a very
high degree of transparency of prices to be necessary
for the creation of collective dominance in the present
case. However,
the Commission has noted that such
transparency exists, at least to the extent that real-time
price
to
competitors. The Commission notes that this can be
important information for companies in the operation
of
their yield-management systems and in order to
ensure that their programmes sell according to the plan.
In particular,
it enables the major tour operators to
reduce their risk, since they can see exactly how small a
discount is necessary in order to sustain the desired rate
of sales of their holiday stock, taking into account their
competitors’ prices.

available

to obtain precise, up-to-date

(110) Competition is also constrained by the ability of the
main suppliers
and
accurate estimates of their, and their main competitors’,
market shares. They are aided in this by their vertical
integration and their trading links with each other.
According to the Commission’s information, they are
able to produce detailed comparative sales volume and
market share information on a weekly basis at
the
tour-operating level. This
information also identifies
sales by each of the main agency groups, so that, for
example, each operator knows how many of its (and its
main competitors’) holidays were sold through each
chain (its own and those of competitors), and what this
represents as a share of the total sales (its own and
those of competitors) for that week. The figures are also
expressed in terms of a comparison with the same
period in the previous year.

(111)

In the Commission’s view, the main effects of this very
transparency on competition in this
high degree of
sector are the following.

(112) As has been described above, the rigidities of the market
mean that short-term actions by suppliers are aimed
essentially at selling the holidays which are offered for
the highest possible price, by maintaining the brochure
price as far as possible and limiting discounted sales,
especially those in the (cid:145)lates(cid:146) period. Price adjustments
and other promotional actions aim at maintaining the

(75) Reply to the Statement of Objections, p. 67, paragraph 5.52.
(76) Reply to the Statement of Objections, p. 69, paragraph 5.53.

(77) Paper by Professor Neven, p. 4, third line, cited in footnote 47.

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level of sales over the selling season so as to achieve the
sale of the holidays in stock before their departure dates.
Price adjustments therefore depend on the extent
to
which a tour operator’s sales are on course at any
particular
than the prices offered by
competitors as such. The consequence of this is that if
the market is oversupplied, discounting by all suppliers
is the inevitable consequence, as it is always preferable
to sell at a price which covers at least variable costs plus
a contribution to fixed ones.

rather

time

(113) After

the

the merger, particularly given the

capacity
rigidities and therefore risks, described earlier, of being
of
left with unsold
high degree
holidays,
the
transparency will make it even more likely that
major suppliers will undersupply the market,
leaving
more unsatisfied demand than would be likely under a
less transparent system (in which there would be more
(cid:151) temporary (cid:151) oversupply, requiring lower prices in
order to clear the products) so allowing them to raise
average prices above the competitive level. The fact that
is, relatively speaking, easier to adjust
in general
than downwards during a
capacity upwards
rather
season creates a further
incentive to plan capacity
conservatively (see recitals 134 and 135 below).

it

Barriers to entry

entry and exit

(114) Airtours has suggested that entry barriers into tour
operation, charter airline operation and travel agency
are all
insignificant, pointing to, among other things,
the absence of regulatory constraints and the occurrence
of
in tour operation and airline
operation, and the low financial outlay required to set
up a travel agency (78). If this were the case then, even if
there were an oligopolistic market structure, collective
dominance could not be sustained in the long term. The
MMC 1997 report, while broadly concurring with
there were some
Airtours’ view, also observed that
barriers to growth beyond a relatively small scale (79),
although it did not,
the circumstances
prevailing at
the time, make them the basis of an
adverse finding.

in light of

(115) Since the MMC’s 1997 report was completed, there has
been substantial consolidation in the industry (some of

(78) Notification, paragraphs 6.49 to 6.51, 6.137 to 6.139 and 6.166.
(79) Paragraphs 4.39, 4.53 to 4.55.

increase still

this, apparently, prompted by what some commentators
to
have described as the 1997 report’s (cid:145)green light(cid:146)
further mergers and vertical
integration). In this more
concentrated market (80), any barriers to entry are likely
impact, which in the
to have a more significant
the
further
Commission’s view will
notified operation is put into effect. To be sufficient to
remove the threat of creation of a dominant position,
entry must, clearly, be more than merely possible.
Among other things, it must be sustainable, which, in
markets such as this one, where scale is an important
factor, means that it must be capable of being on, or
quickly acquiring, a sufficient scale to offer a real
competitive challenge to the dominant suppliers. In the
Commission’s view, this is unlikely to be the case here.

if

the

barriers

primary

enquiries,

In tour operation, according to respondents to the
Commission’s
to
entry/expansion are access, on reasonable terms and
conditions, to airline seats and to distribution through
travel agencies. As explained in the vertical integration
section, recitals 67 to 71, both the agency sector and
the charter airline sector are becoming increasingly
controlled by the major operators, and the merger
would substantially hasten this process. The perception
that vertical
in the
long run has, for example, guided First Choice in its
expansion and integration into travel agency and airline
operations.

integration is essential to survival

It is unlikely to be viable for a small operator to match
the integration of the larger ones into airline operation:
they will not generate sufficient tour-operation business
to justify owning (or leasing) a viably sized aircraft fleet.
According to one major integrated operator, some 80 %
of the total costs of airline operation are scale related.
the possession by the large incumbents,
Moreover,
through their
of
good-quality slots at Gatwick, in particular, gives them
an advantage which smaller, non-integrated competitors
cannot hope to replicate.

in-house

airlines,

stock

of

a

(116)

(117)

(118) The above suggests that, even though some charter
airlines might expand their capacity after the merger, in
order to replace capacity rationalised by Airtours, it is
those remaining will be able to offer
unlikely that

(80) A comparison of the figures for all tour operating in table 4.2 of
the MMC 1997 report and the equivalent ones in table 6.4 of the
notification suggests that
tour
operators has increased from around 54 % to over 60 % in the two
years from 1996 to 1998. Since most of the acquisitions involved
have been in the short-haul sector, the increase in concentration
there is likely to have been even more marked.

the share of

the four

largest

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sufficient good quality capacity to independent
tour
operators to enable them to compete effectively with
the major integrated suppliers.

(119) As regards distribution, several smaller tour operators
have commented on the increase in the commissions
(now as much as double the rates of a few years ago)
which they must pay in order for their holidays to be
sold by the major chains, and in particular, Lunn Poly
(the travel agency arm of Thomson and the current
market leader). This would appear to result from the
increased share of distribution (and tour operation)
which the major tour operators now control, rather
than from any increase in the costs of selling the
holidays concerned (which may indeed have reduced as
a result of increased efficiencies arising from the larger
networks).

(123) Airtours has argued that the MMC concluded just two
years ago that there were no significant barriers to entry
in the tour operating market (81), and that (cid:145)conditions of
competition have not materially altered in the short
period since the investigation was completed(cid:146) (82). As is
evident from the above discussion, the barriers to entry
into tour operation are to a large extent caused by the
vertical integration of the major operators, in particular
making availability of suitable air seats and distribution
more difficult for independent operators. However, it is
different
that
not
a
In particular,
conclusion from the Commission.
the
MMC recognised that vertical
integration can be
anti-competitive, but concluded that (cid:145)At current levels
(1997) of concentration in the tour operator and travel
the anti-competitive
agent market, we believe that
effects of vertical
(1997 report,
p. 4, paragraph 1.10). The Commission finds that the
conditions of competition in the market have changed
significantly since 1997, in particular due to increased
concentration and vertical integration.

integration are slight(cid:146)

the MMC reached

correct

(120) A former independent

to one of

tour operator (which sold its
business
indicated to the
the parties)
Commission that it had found further expansion beyond
a market
share of around 5 % impossible without
becoming integrated into distribution, and preferably
into airline operations as well. At that level of share, an
independent tour operator was beginning to reach the
size where its costs would be such that it would be
capable of winning substantial amounts of business
from the major suppliers, rather than remaining a niche
player. Consequently, it was suggested, they would find
it worthwhile to increase their demands for higher
commissions, etc.
for distributing the new entrant’s
holidays, (and, at the airline level, refuse to supply seats
or do so only on adverse terms) in order to prevent
further growth. Eventually, it would become worthwhile
for one of them to acquire the business, and so remove
the threat while increasing its own share (cid:151) which is
what happened.

(124)

(121) Airtours has argued that

low-cost airlines

such as
Ryanair and Go, the British Airways subsidiary, are now
increasingly providing low cost alternatives to popular
holiday destinations.
In the view of the Commission,
those airlines have a limited impact on the short-haul
(see Section
British foreign package holiday market
IV.A. Relevant Product Markets, recital 4 ff.).

Buyer power

such

large,

links with

independent

as Airtours’

Individual consumers have no buyer power.
In some
retail markets, this is counterbalanced to some extent by
the existence of
retailers. Such
retailers do not exist in the package holiday sector in
the United Kingdom (83), however, and most holidays
are sold by travel agencies owned by one or other of
the large operators (or the smaller ones with which they
are increasingly linked through franchises or other
the
arrangements,
Advantage group of small agents), all of which engage
to favour their own
in directional selling in order
products (84). Moreover, other market
imperfections,
such as inadequate information to consumers on the
the
links between agencies, operators and airlines,
difficulty of comparing competing products from the
limited
operators’
available
information
brochures, and the advance,
(cid:145)sight unseen(cid:146) nature of
holiday purchases (in contrast with the ease with which
direct price and product comparisons can be made in
products such as cars, furniture and electrical goods) all
further
the consumer’s ability to offset any
anti-competitive features on the supply side.

limit

tour

in

(122)

are

these factors,

already significant,

In the light of all
the Commission
considers that barriers to entry and expansion in the
and will
relevant markets
In
increase as a result of
particular, the Commission considers that they will be
high enough to remove any realistic possibility of entry,
or expansion by the independent fringe, being sufficient
to constrain the market power of
the three large
suppliers that would remain after the merger.

the notified operation.

(81) Notification, p. 32, paragraph 6.49.
(82) Reply to the Statement of Objections, overview section, point 3.
(83) The largest independent retailer is Co-op Travel, with a share of

9 %.

(84) In theory, consumers could partly offset the effects of directional
selling etc. by shopping around between agencies and other sales
points. But is appears they do this only to a limited extent. The
MMC 1997 report (paragraph 5.118) found that only about half
of consumers buying a package holiday visited more than one
travel agent before doing so.

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(125)

it

is first noted that

In its reply to the Statement of Objections, Airtours
argues that consumers do have buyer power due to the
fact that they demand a variety of different holidays by
reference to lifestyle and income, and the fact
that
individuals shop around. It is, therefore, not possible for
suppliers to tacitly collude on price and output. In this
regard,
the large majority of
short-haul holidays offered by the integrated operators
belong to the same intermediate category (see the
section on product homogeneity, recital 88 ff.). Second,
as far as the impact of shopping around by individual
consumers is concerned the Commission has found (see
recital 97 ff.) that a restriction of supply would lead to a
tighter market and higher prices. Shopping around by
individual consumers will not change this, and in this
sense individual consumers do not have countervailing
buyer power, which could eliminate the effect of
dominance in this case (85).

(126) A submission to the Commission from the British
Consumers’ Association, opposing the merger, identified
many of these concerns, as well as commenting on the
reduction in competition that in its view was likely to
arise from the merger.

Conclusion

(127) On the basis of

the foregoing,

in the Commission’s
view,
the tour-operating market already displays a
number of characteristics which are conducive to the
creation of a collective dominant position among the
In particular, the
main players following the merger.
market characteristics are such that only the four
integrated players are in reality in a position to add
capacity to the market. However,
they will have an
incentive to add capacity in a cautious way due to the
characteristics of the market. In particular, the nature of
the product, the moderate growth of the market, and
the level of transparency mean that capacity expansions
are highly risky due to the inherent danger of creating
the
oversupply and depressing prices. Consequently,
Commission is of
there is at present
the view that
already some exercise of market power by the integrated
operators.

Past competition

(128)

In recent years the main developments in the structure
the British tour-operating market have been
of

(85) In a tight market, a tour operator confronted with a request for a
lower price would simply refuse, because the tour operator would
know that in all likelihood it will be possible to sell the holiday
anyway.

horizontal concentration and vertical
integration. The
existing four vertically integrated tour operators have
grown by acquisition rather than organically; a graph
supplied to the Commission by Airtours of market share
variations
relatively
four now vertically
for
stable market
years (86).
integrated operators over
last
However, the recent rate of acceleration of this market
consolidation, even since the publication of the MMC
1997 report, is striking.

excluding acquisitions

indicates

the
the

shares

five

of

(129) Thomson effectively started the modern British foreign
package holiday industry in the 1960s, at a time when
it was the only tour operator with an in-house airline. It
integrated downwards into retail distribution through
the acquisition of Lunn Poly in the early 1970s. Until a
British stock-market flotation in April 1998, Thomson
was part
a Canadian group (the Thomson
Corporation) and was not subject to constraints on its
competitive
from shareholder
requirements regarding quoted companies in this sector.
the only vertically
For many years, Thomson was
integrated tour operator in the United Kingdom, and
according to the MMC 1997 report, showed some
organic growth during the period from the mid-1980s
to the mid-1990s, since when it has suffered some
erosion of its market share.

behaviour

arising

(130) Airtours was floated on the British stock exchange as a
tour operator in the late 1980s. It established its airline
in 1990 and between 1992 and 1996 spent over
GBP 200 million on acquisitions, including that of the
major travel agency chain Pickfords in 1992. Its strategy
was based on vertical
integration and growth by
acquisition.

(131) Thomas Cook was originally a travel retailer with a
strong focus on travel-related financial services (e.g.
travellers’ cheques). According to the MMC 1997 report,
it was because of pressures in the financial services
sector
that Thomas Cook adopted a diversification
strategy as a tour operator, with its acquisition of
in
Sunworld (including an in-house charter airline)
1996, and Flying Colours (a tour operator with in-house
airline) in 1998, and the formation of a joint venture
with Carlson this year, which brought
in additional
capacity in tour operating, and particularly travel agency
and charter airlines (Caledonian). Thomas Cook has

(86) At the hearing, the economic consultant of the parties, Lexecon,
argued that market shares are volatile. As evidence of that, the
graph from the notification, p. 34, paragraph 6.51 was
reproduced at the hearing.
It should be noted that this graph
If acquisitions are excluded, then there is
includes acquisitions.
very little movement
there is no
in market shares. Therefore,
evidence that the underlying market shares are volatile. On the
contrary, they have been relatively stable.

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made it plain that
longer its prime concern, but rather profitability.

it now considers that size is no

(132) First Choice (formerly Owners Abroad)

It began a policy of

is a quoted
company, which started as a tour operator and acquired
its in-house airline Air 2000 in 1986.
It successfully
defended itself against a hostile bid from Airtours in
integration into retail
1993.
distribution in 1998 (over 200 (cid:145)shop equivalents(cid:146)
according to its 1998 annual report) in order to protect
itself against the directional selling practices of the other
vertically integrated operators, and to avoid the cost
disadvantage of paying their commission rates and to
provide the real-time feedback on market trends for the
operation of a computerised yield-management system
(see the section on transparency,
interdependency and
commercial
links, recital 101 ff.). This policy is still
continuing and First Choice has stated that its policy is
to establish a network of 600 shop equivalents by the
end of 1999.

four

(133) This brief description of the past and recent strategies of
the
indicates how
integrated tour operators
dramatically the structure of the British foreign package
holiday industry has changed since the beginning of the
decade as a result of horizontal and vertical integration.
This consolidation has
resulted in the market-share
structure presented earlier, whereas as recently as 1992
(according to the MMC 1997 report), Thomson was
easily the market
in British foreign package
holidays with 24 % of the market, ahead of Airtours
with 11 %, First Choice with 6 % and Thomas Cook with
4 %.

leader

it

is

to vertical

integration,

the publication of

(134) The acceleration of this market consolidation process
the MMC 1997 report
since
(December 1997), which effectively was seen as giving
the green light
striking,
particularly as far as Thomas Cook (Flying Colours,
Carlson) and First Choice is concerned;
is also
illustrated by the number of mid-sized operators which
have been acquired by the big four. Since the end of
1997, Airtours has made four British acquisitions (three
in tour operation and one, comprising over 100 shops,
in travel agency), and First Choice, eight, including two
tour operators, one (Unijet) with its own airline, and the
rest comprising a total of over 200 travel agency
branches; Thomas Cook has acquired, besides
the
Caledonian airline,
the airline/tour operator Flying
Colours (which in 1997 had a 3 % market share in tour
operation) and Carlson/Inspirations (market shares of 1
to 3 % in tour operating, and around 5 % in travel
agency sales). Thomson has made seven acquisitions in
tour operation and one in travel agency.

(135) An episode which illustrates

consequences of
oversupply in the market occurred during the 1995

the

summer season. During the 1994 planning period, the
sector indicators appeared to predict a buoyant 1995
summer season, following two years of demand growth,
and operators added capacity in anticipation of a further
increase in overall demand. This
increase did not
materialise, and all operators were left with unsold
capacity, as much as 15 % according to one estimate,
which had to be cleared with heavy discounting. The
CAA reported that
the 30 largest British operators
recorded a combined pre-tax loss of GBP 10 million.
from
First Choice, which had just
Owners Abroad and as a result was taking a particularly
optimistic stance, declared significantly lower profits
(GBP 1,3 million in 1995 down from GBP 16,3 million
in 1994) as a result of the particularly heavy cost of
clearing unsold stock, and in October 1995 carried out
what was seen by the industry and financial sector as a
rescue rights issue.

rebranded itself

taking particular note of estimates of

(136) The large operators take a cautious approach to capacity
planning,
the
other major operators’ plans. One large supplier has
indicated to the Commission that it (cid:145)has deliberately not
adopted an expansionist strategy (cid:133). In doing so, it has
followed the lead of [major supplier A] * and [major
supplier B] * on capacity in the knowledge that limiting
capacity will lead to improved margins and profits(cid:146). This
approach is also illustrated by the following quotes from
Chairmen’s /CEO’s statements in 1998 annual reports
and other sources from major British integrated tour
operators:

Airtours:

(cid:145)We remain convinced that the key to profitability in the
tour-operating industry remains the matching of supply
and demand in the market place. It is with this in mind
that we shall continue to monitor each of the markets
in which we operate and where necessary to adjust our
capacity accordingly(cid:146) (1998 annual report).

First Choice:

(cid:145)In line with all the major tour operators, First Choice
has planned cautiously for
summer 1999 and has
reduced the capacity on sale compared to summer
1998(cid:146) (1998 annual report).

Thomson:

(cid:145)For summer 1999, in line with other major operators,
we have constrained the level of capacity in the British
market
in
anticipation of more difficult market conditions(cid:146) (1998
annual report).

equivalent 1998 level,

to below the

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Thomas Cook (Sunworld):

(cid:145)Sunworld has no plans to significantly increase capacity
for summer 1999 (cid:133) it was time to consolidate(cid:146) (Travel
Weekly, 24 June 1998).

only recently) more or less completed their vertical
integration strategies. The proposed merger would
eliminate First Choice as an independent competitor at
this
leaving only three vertically
integrated players, with the consequences described
below.

juncture,

critical

(137) Such statements

a

and

that

start

reports

investors

convince

in annual

institutional

expansionist

any organic

seem to be
particularly directed to shareholders in order to reassure
them that the (cid:145)1995 experience(cid:146) will not be repeated.
Indeed, shareholders seem to exert a watchdog influence
against
strategy. When
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 (cid:145)fears that the company
price war(cid:146) (87),
Thomson’s
would
management were obliged to make considerable efforts
to
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. In this
context it is also noted that Airtours, First Choice and
Thomson are all publicly quoted companies (88), and
according to information submitted by Airtours, about
30 to 40 % of
the shares of each of Airtours, First
Choice and Thomson are held by the same group of
institutional investors. Therefore, there is a large overlap
investors in Airtours, First
between the institutional
Choice and Thomson.
the episode
recounted above, the Commission finds it likely that the
stock market,
in
particular, will have a disciplinary effect on the growth
ambitions of any management to the extent that these
ambitions may lead to capacity additions, which could
depress
prices.
Institutional investors in the sector appear to recognise
that attempts by any of the major operators to grow by
seeking to add capacity and take sale from their
competitors will result in lower profits for all the major
operators, and they have no interest in that happening.

In the light of

institutional

profitability

and these

investors

prices,

share

and

(138)

(most especially as

regards
far as First Choice in particular

In conclusion, there is evidence that there is already a
tendency towards collective dominance in the market at
the setting of
present
capacity). As
is
concerned, the company has recovered strongly since
1995, but has not yet completed its retail development
strategy. Absent the merger, First Choice would very
probably develop quickly into a more powerful, fully
integrated competitor in addition to the existing three,
who have already (albeit in the case of Thomas Cook,

Impact of the merger

Increased concentration

(139) Post-merger, the combined share of the three largest
operators would
be 83 % on the Commission’s
calculation (85 % according to Nielsen) compared with
around 70 % (either source) before it (cid:151) a substantial
increase in the level of concentration, especially since
the fourth largest firm post-merger (Cosmos) has much
less than 5 %, whereas First Choice, which is currently in
fourth position,
than that.
substantially
Furthermore, the Herfindahl-Hirschman index (HHI) on
a conservative basis is estimated to be 1 700 pre-merger
and will increase by more than 450 points to more than
the merger. Therefore, also
2 150 as a result of
lead to a
the merger will
measured on the HHI
substantial
increase in concentration and a very high
level of concentration (89).

larger

is

Loss of First Choice as supplier/distributor for the Fringe

to

the

Commission’s

(140) The integration of First Choice’s airline, Air 2000, into
its
that of Airtours and the ensuing reduction of
presence on the
third-party market would leave
Monarch as effectively the only substantial independent
supplier of airline capacity (its linked operator, Cosmos,
has only a small share in tour operating). Moreover,
according
a
substantial proportion of Monarch’s free capacity (i.e.
the 70 % or so which it does not require for intra-group
use) is sold to Thomas Cook, Thomson, Airtours and
First Choice. These four together account for around
80 % of Monarch’s third-party sales. According to some
third parties small tour operators already face difficulty
in obtaining adequate numbers of seats on the routes
they need at attractive times, because airlines give
priority to their major customers (including of course
their own, in-house tour operators).

information,

(87) Wall Street Journal Europe, 23 April 1999.
(88) Thomas Cook is jointly controlled by Westdeutsche Landesbank

and Preussag.

(89) The calculation is based on the market-share data of

the

Commission and not AC Nielsen data.

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source of distribution for

(141) First Choice is currently developing its travel agency
business. The proposed merger would add First Choice’s
200 to 300 outlets (which it regards as equivalent in
size to 600 ordinary shops) to the 700 of Airtours. In
the absence of the merger, First Choice would be an
the
additional possible
independent operators. After the merger, however, this
source of actual and potential competition would be
lost, and the independents would become even more
reliant on the remaining three large players for their
distribution. Therefore, it is to be expected that, other
things being equal, the merger would further encourage
smaller
the trend towards higher commissions
operators
it would
(see recital 111 ff.). Moreover,
remove the prospect of another substantial agency chain
being created (cid:151) First Choice would appear to be the
only supplier likely to do this within a reasonably short
time, since it combines the necessary financial resources
with the advantages of integration into tour operation,
as well as having the incentives to do so (90).

for

Consequently, the removal of First Choice would further
marginalise the smaller independent and non-integrated
tour operators.

Increased transparency and mutual dependency

(142) At present there is already a certain degree of mutual
dependency between the operators in the market. This
dependency is due to the impact on market conditions
of the overall level of capacity put on the market for a
season. This creates strong economic links between the
major operators.

(143) The operation will make these economic links even
stronger and, therefore, increase the mutual dependency
of the large operators. The merger reduces the number
of competitive relationships that are possible among the
major operators by half, from six to three. The more
such
the more
competitive the market is likely to be, and conversely.

relationships

possible,

that

are

(90) The creation of a substantial

independent retail operation by a
new entrant
(or substantial expansion of existing independent
agencies) is not considered likely for some time to come. Suitable
retail sites are not cheap, and town planning and other restrictions
Internet and digital television
may apply to their development.
selling operations undoubtedly have great potential, but it appears
to be for the longer term; one major operator has suggested that
it would take 5 to 10 years to build a substantial retail business in
the United Kingdom through these emerging technologies. See the
sections on the fringe, recitals 75 ff., and on barriers to entry,
recitals 113 ff.

In particular, the number of bilateral links to which one
of the major operators would not be a party would
reduce from three (for Airtours, First Choice-Thomson,
First Choice-Thomas Cook and Thomson-Thomas Cook)
to just one (for Airtours, that between Thomson and
interdependency
In this way the
Thomas Cook).
between the oligopolists increases significantly due to
the merger. This will increase the incentive to restrict
capacity because it will be much more clear to the three
oligopolists that competing for market share will only
result in depressed profits for all. If one of them broke
ranks and sought to mop up unsatisfied demand by
adding capacity, the others could be expected to react
by doing likewise, creating oversupply. The profits of all
would fall while the strategy of the operator which took
the initiative would be frustrated. In this sense the risk
of reverting to an oversupplied market will act as a
deterrent
to compete for
market share. That the market will operate in this way
is clear from the experience in 1995 and the way
capacity decisions were approached in the following
years
further
marginalisation of the fringe described in recitals 75 to
85 ff. reinforces the likelihood of this outcome.

recitals 134 to 135 ff.). The

the three oligopolists

(see

for

(144) Furthermore,

in

the

reduction

competitive

and
cooperative bilateral relationships from six to three also
increases the transparency of the market. As a result, it
would become much easier
the major
suppliers to detect any attempt to disturb the market,
share. The
for example, by competing for market
increased transparency, therefore, increases the risk that
competitive actions would create oversupply, which as
noted in recital 142 would lead to depressed profits and
consequently be counter-productive.

for one of

(145) This analysis was confirmed in internal documents from
a leading tour operator, which suggested in its response
to the Commission that if the merger goes ahead, there
will be a window of about two years during which this
and another recent merger are being digested and in
which it will be possible for it to acquire market share
from its main competitors without
increasing overall
capacity, which would (it suggests) provoke a price war
(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). After that period,
it suggests, the
market will move to a stable state, and the remaining
large players will be unable to take market share from
one another without exposing themselves to the higher
risks associated with increasing total market capacity.

(146) As far as the impact of

the merger on competition
between the oligopolists is concerned, it should also be
noted that the merger is only expected to lead to overall

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synergies of less than 1 % of the overall costs of the
combined entity. Furthermore, the cost savings mostly
relate to overhead and other fixed costs. Consequently,
the merger would not cause any material change in the
overall cost structure of Airtours/First Choice. Therefore,
changes to the cost structure would not increase the
incentives to compete.

(147) Consequently,

the

and

come

immediate

to the
the Commission has
conclusion that the resulting market structure will create
an incentive for and make it rational for the oligopolists
to restrict supply. However, as explained below,
the
increase in transparency also increases the possibilities
increased
for
retaliation,
interdependency makes retaliation more likely.
for
If,
example, one of the oligopolists decided to compete for
market share, then it would effectively be targeting only
two companies, whereas in the pre-merger situation, the
impact of competitive actions would be more diffuse
and responses likely to be less targeted. As explained
below,
the increased
possibility of
effective and timely retaliation only
reinforces the likelihood that the operation would lead
to collective dominance.

the Commission believes

that

Arguments of Airtours: no scope for tacit coordination

(148) Airtours has argued in their reply to the Statement of
Objections and in the hearing that collective dominance
(cid:145)tacit
amounts
coordination between the large integrated firms is not
likely to be feasible(cid:146) (91). According to Airtours four
conditions must be fulfilled for tacit coordination to be
feasible:

coordination

tacit

that

and

to

(cid:145)(cid:151) when there is little to gain from deviation and a lot
i.e. when there is a

to lose from being punished,
small number of effective competitors

(cid:151) when agreement is easy to reach and deviation can
i.e. when demand is predictable and

be detected,
when products are homogeneous

take place

(149) Airtours, in its arguments, drew a distinction between
punishment during the season and punishment between
seasons. As to punishment during a season,
it claims
that since capacity can only be increased marginally
during a season, firms cannot be punished immediately
through a large increase in capacity. Punishment could,
in principle,
through aggressive price
competition, but this is unlikely to be effective because
the firms which punish will be unable to serve the
the firms
additional customers attracted. Therefore,
to
having deviated will hardly be punished. As
punishment in a later season, it could in principle take
place through a large increase in capacity for
the
this is less likely to be
following season. However,
effective because it will
inflict a lower cost due to
association between
discounting
deviation (from the tacit agreement) and punishment
will be blurred (93). Consequently, for all these reasons,
tacit coordination (and therefore collective dominance
by the large integrated operators) is unlikely.

and because

the

it

is not necessary to show that

(150) As set out in the introductory section, the Commission
does not consider that it is necessary to show that the
market participants as a result of the proposed merger
would behave as if there were a cartel, with a tacit
rather than explicit cartel agreement
(see section A.
Introduction: Collective dominance, recitals 51 to 56).
there
In particular,
would be a strict punishment mechanism (94). What
matters for collective dominance in the present case is
whether the degree of
interdependence between the
oligopolists is such that it is rational for the oligopolists
to restrict output, and in this sense reduce competition
in such a way that a collective dominant position is
created. For the reasons set out above, the Commission
has come to the conclusion that this is the case for the
present merger.

(151) However,

if one of

in this case, even on the basis of Airtours’
it
own arguments about the punishment mechanism,
seems quite clear that there are significant possibilities
to implement punishment,
the integrated
players were to compete for market share by adding
new capacity. In this respect, it should in particular be
noted that the financial impact of an oversupply in the
market would be such that
simply the threat of
reverting to such a market outcome would be a
sufficient deterrent for any of the oligopolists not to
such a strategy. The 1995 experience is
attempt
illustrative of what could happen in a capacity war.

(cid:151) when effective punishment can be implemented

immediately

(152) Furthermore,

the distinction Airtours makes between
retaliation during a season and between seasons is not

(cid:151) when punishment

is not

too costly for

those

implementing it(cid:146) (92).

(93) Airtours also argued that

constraining the large integrated operators. For
discussed earlier,
fringe constrains the large operators.

the Commission does not consider that

the fringe are effective competitors
the reasons
the

(91) Slides from presentation of Lexecon and Professor Neven; paper of

Professor Neven, cited in footnote 47.

(92) Slides from presentation of Lexecon and Professor Neven.

(94) In the Gencor/Lonrho case, cited in footnote 41, the Commission
did not argue that a specific punishment mechanism was
necessary nor did the Court of First Instance in its judgment put
any emphasis on this point.

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share of

in reality that clear. The commercial links between the
integrated operators allow means of retaliation such as
deracking or directionally selling against a specific
competitor, which would force that competitor so sell a
larger
its holidays at discounted prices.
Furthermore, there is some scope for adding capacity
during a season up until February of
the season.
Airtours,
in its reply to the Statement of Objections,
indicates that capacity could be increased by up to 10 %.
While not changing the overall conclusion that capacity
is basically fixed before the selling season, it is noted
that this possibility of capacity adjustments leaves some
scope for using capacity changes as a means of
retaliation during a season (95). Finally, capacity can be
added between seasons. As
link between
punishment and deviation it clearly would not have to
be blurred, because retaliation could simply be signalled
by an operator by announcing that it was acting in
response to a particular action.

to the

In conclusion, the Commission, even on the basis of
Airtours’ own arguments, finds that there is considerable
scope for retaliation both during a season and from one
season to the next. This only reinforces the argument
that the proposed merger would lead to the creation of
an oligopolistic dominant position. More importantly
interdependencies
though,
between the oligopolists will make it rational for the
oligopolists to restrict output.

as discussed above,

the

Arguments of Airtours: The Eckbo-Stillman test

analysis

In its reply to the Statement of Objections, Airtours
presented an empirical
called the Eckbo-
Stillman test. The basic principle of the test is to analyse
the reaction of share prices to major new developments.
If,
for example, a merger was viewed by the stock
the
market as mainly increasing the efficiency of
merging companies, then it would be expected that the
share prices of competitors would fall in reaction to the
announcement of the merger, because the merger would
create a more efficient competitor. If on the other hand
the merger would lead to collective dominance, then it
would be
all
share prices of
companies would increase in reaction to the merger.

expected that

the

(153)

(154)

(155) The

economic

consultant

of Airtours,

Lexecon,
conducted such an analysis using the developments in
the share price of Thomson.
In particular, the study
found that the share price of Thomson fell significantly,
when the Airtours’ bid for First Choice was announced.
The study concluded that this is evidence that the stock
market viewed the Airtours bid as pro-competitive,
since, otherwise, if the merger had been seen as leading
to less competition, the announcement of the bid would
have led to an increase in the share price of Thomson.

relate directly to the market

(156) Analysis of share prices can in some circumstances
provide valuable information about
the competitive
impact of mergers. However, share price developments
are in any case only indirect evidence, since the data
do not
concerned.
Furthermore,
it is also clear that share price data are
often full of extraneous noise due to many other events,
which may or may not be completely unrelated to the
market
in question. The presence of noise can be
expected to be higher than normal during a period
when numerous rumours about possible mergers are
circulating.

the

fact

study.

In particular,

(157) However, the Commission has carefully considered the
methodology, the data and the conclusions put forward
in the study. Apart from methodological problems, the
study fails in explaining all of the main movements in
the share prices of Airtours, First Choice and Thomson.
This means that it cannot be excluded that there could
be other plausible explanations of
the share price
movement of Thomson than the ones put forward in
the
that Thomson
immediately announced plans of aggressive capacity
additions at the same time as Airtours launched its bid
was seen as having a tremendous negative effect on the
share price of Thomson (as well as Airtours), because
capacity utilisation is the crucial driver of profitability in
the foreign package holiday sector. Lexecon has played
down the specific reaction of Thomson in its study.
However, clearly this was the key event influencing the
share price of Thomson (see also the past competition
section, recital 127 ff.). Accordingly, the Commission
has come to the view that no reliable conclusions can
be drawn from the analysis of Thomson’s share price,
level of
other
capacity
to
profitability in this industry.

supplied to the market

than confirmation that

the overall
is

the key

(95) At the hearing the parties argued that in previous cartel cases such
as the Cement case (see Commission Decision 94/815/EC in Cases
IV/33.126 and 33.322 (OJ L 343, 30.12.1994, p. 1)) the suppliers
had kept large over-capacities and had retailiated against cheating
by oversupplying the market by up to 40 %. According to the
parties there is no evidence that this would be the case in this
market. In the view of the Commission it is not appropriate to
draw a comparison with this type of cartel case. In any case, it
should be noted that a 40 % oversupply is not necessary for
effective retaliation in the British market for short-haul foreign
package holidays.

Conclusions

(158) For all the above reasons, the Commission considers
that the foregoing analysis of market characteristics and
structure before and after the merger indicates that the
notified operation would further reduce the likelihood
of
tour
operators, and also that the fringe and new entrants

competition between the major

effective

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would lack the strength to ensure that a competitive
in the more
equilibrium would be restored. Rather,
concentrated market structure that would be created
post-merger, the incentives for all the major suppliers to
avoid engaging in such competition would be increased.
The effect of this would be higher prices and profits. In
other words, the operation would create a sustainable
collective dominant position in the British tour
operating market
comprising Airtours/First Choice,
Thomson and Thomas Cook.

(162) A number of third parties, notably small tour operators,
have expressed concern to the Commission that, after
the merger, Airtours would rationalise its combined
airline operations in order to adjust them relative to the
merged entities requirements, in such a way that sales
to third parties would be substantially reduced. Airtours
has not
this kind.
formally announced any plans of
However, [(cid:133) (96)]*.

Supply to tour operators of seats on charter flights
to short-haul destinations

(159) The market structure at
following the merger.

this level will also change

Table 2

Market shares for the supply of charter airline seats to
third parties (summer 1998)

Airline
(linked tour operator)

Volume
(in thousands of
package holidays)

%

Airtours International
(Airtours)

Air 2000 (First Choice)

Combined

Monarch (Cosmos)

Caledonian/Flying Colours/
Peach (Thomas Cook)

Others (independent)

Britannia (Thomson)

[(cid:133)] *

[(cid:133)] *

[(cid:133)] *

[(cid:133)] *

[(cid:133)] *

[(cid:133)] *

[(cid:133)] *

[1 to 10] *

[10 to 20] *

[20 to 30] *

[30 to 40] *

[20 to 30] *

[10 to 20] *

[1 to 10] *

Total

[3 000 to 4 000] *

100

Source: Airtours estimate, table 6.21 in the notification. Specific figures
for short-haul are not available, but short-haul accounts for the
great majority of the Airtours’ business and that of their main
competitors.

(160)

In the Commission’s view, and based on information
obtained in the course of its enquiries, however, these
figures may somewhat understate First Choice’s market
share, and as a result, the impact of the merger in this
area.

(161) Although the acquisition of First Choice’s

in-house
airline (Air 2000) does not of itself lead to the creation
of a dominant position at this level, it nevertheless has
significant
substantially
effects
strengthens Airtours’ position in tour operating.

in that

vertical

it

(163)

is,

that

It is important to note that figures in table 2 include all
third-party sales,
they include sales to, and
between, the major operators, as well as to independent,
non-integrated tour operators. It is difficult to estimate
shares for these sales, but it would appear that Monarch
and First Choice currently supply a large proportion of
demand from independent tour operators.

(164) As described above and in earlier

sections of

in the Commission’s view, be

this
Decision, a significant effect of the merger in this area
would,
to further
marginalise the fringe of smaller operators, effectively
confining them mostly to limited operations to less
popular destinations, and specialised holiday types
rather than the (cid:145)mainstream(cid:146) (see section on the fringe,
recitals 75 to 85).

Distribution: Supply of travel agency services

(165) Airtours has provided estimates of market share in
travel agency sales of inclusive tours, as follows.

Table 3

Shares of inclusive tour sales by travel agents (1998)

Agency (group)

Going Places (Airtours)

Travel Choice (First Choice)

Share %

[10 to 20] *

[1 to 10] *

Combined

[10 to 20] *

Thomas Cook (including
Worldchoice-Carlson)

Lunn Poly (Thomson)

Co-op Travel

Others

[10 to 20] *

[10 to 20] *

[1 to 10] *

[30 to 40] *

Source: Airtours/BNTS, from table 6.23 of the notification.

(96) Notification, paragraph 6.128.

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(166) On this basis, the three large players remaining after the
merger would collectively have around [50 to 60 %]* of
all agency sales of package holidays, with the next
largest agency (Co-op) having a market share of around
half that of the smallest integrated supplier. Airtours
to be a meaningful result, partly
considers this not
because it does not include the [10 to 20 %]* or so of
packages which are sold by other means, notably
telephone sales, whose inclusion would reduce the share
of the major tour operators. However, the Commission
regards the figures as broadly relevant as an indicator of
market strength in package tour retail distribution, since
most direct telephone sales are made through the call
centres of
the
merger’s impact would also be significant in removing
First Choice as a potential competitor in distribution.

the major tour operators. Moreover,

(167) The addition of First Choice’s tour operating business to
Airtours’ business in travel agency will allow Airtours to
improve the efficiency of its distribution by bringing a
greater volume of tour operating business in-house. As
discussed above, it will also remove First Choice as both
an actual and (more importantly, given its rapid growth)
a potential competitor in distribution.

Summary

it

(168) First Choice is the last remaining medium-sized player
in tour operating (cid:151) the only one with potential to
grow rapidly to the size of the three major suppliers.
Not only is it at present a significant competitor in tour
operating, but
is already vertically integrated into
airline operation and it would shortly become (in the
absence of any merger) a major force in travel agency,
where
leading positions of
Airtours, Thomas Cook and Thomson. In summary, the
merger would remove First Choice as a competitor at all
the supply chain. For the following
three levels of
reasons, this is considered to have adverse effects on
competition beyond those normally to be expected from
similar increments of market shares in other cases.

could threaten the

it

(170) Secondly,

the

would

merger

increase

the
the tour
interdependency and the transparency of
operating market by reducing the number of major
players from four to three. Therefore, the number of
possible competitive relationships are reduced from six
to three, and the number of such relationships to which
one of the major suppliers would not be a party would
reduce from three to one. This is not itself decisive for
the creation of collective dominance. However,
the
market for short-haul foreign package holidays in the
that
United Kingdom is distinguished by the fact
capacity decisions by the major operators are crucial to
the market outcome. This creates interdependency and,
therefore, strong economic links between the major
operators. At present, there is already a certain degree
of mutual dependency between the major operators.
However, the operation will make the interdependency
even stronger. This will increase the incentive to restrict
capacity.
If one of the major operators broke ranks,
there would be a risk that the others would do the
same, which could have serious financial consequences
if it were to lead to oversupply, as demonstrated by the
to
1995 experience. The
an
reverting
risk
oversupplied market will act as a deterrent
for the
oligopolists to compete for market share. In this respect
the
further
reinforced by the possibilities the oligopolists have to
retaliate
example
through the extensive trading links they have with each
other.

creation of

competitive

dominance

collective

actions,

against

for

of

is

(171) Thirdly, the merger would further weaken the ability of
the fringe to compete with the majors. Not only would
Airtours have an even larger share of the tour operating
market, but First Choice would be lost as a supplier of
for the
seats and as a potential distribution channel
fringe and for new entrants. The fringe would, therefore,
be further marginalised as a result of the merger.

(172) The Commission has, therefore, come to the conclusion
that the notified operation would lead to the creation of
short-haul
a dominant position in the market
foreign package holidays in the United Kingdom.

for

C. Ireland

(169) First, as a result of the merger the market will become
the three
even more highly concentrated. Together
oligopolists would have about 80 % of the market. The
remainder of the market is highly fragmented and a
large part of the small operators are niche operators and
not active in the main, mass-market business of the
major operators.

(173) The Commission has come to the conclusion, having
heard Airtours, that the operation would not lead to the
creation or
strengthening of a single or collective
dominant position on any of the affected markets in
Ireland.

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L 93/31

Tour operation (short-haul foreign package
holidays)

(174) According to Airtours’ estimates (objective data on the
same basis as for the United Kingdom does not appear
the merger would add some 7 % to First
to exist),
Choice’s current
share of around 30 %. Thomson’s
Budget operation has a share of 40 %. Thomas Cook has
around 7 %. Only one other operator (the independent,
Michael Stein, 4 %) has a distinguishable market share.

(175) The market share addition resulting from the operation
is substantial and effectively will result in a duopolistic
market structure. The Irish market is, therefore, more
concentrated than the British market. However,
in
contrast to the British market, the operation will not
result in the creation of either a single or collective
dominant position in the Irish tour operation market.

(176)

In reaching this conclusion the Commission has noted
that the Irish market differs from the British market in a
number of substantial aspects.
In particular, the Irish
market is at the moment relatively undeveloped (only
about 700 000 foreign package holidays in 1998). It is
the market
growing rapidly. According to Airtours,
grew by 20 % in 1997 and 14 % in 1998, and there are
prospects for considerable growth for the foreseeable
future. The dynamic growth of the market will provide
a greater incentive to entry and competition between
the existing market participants.

and attractiveness

(177) Barriers to entry and growth are relatively low for the
Irish market. The Commission, in particular, notes that
vertical integration is low, which means that it is easier
to find distribution and seats of
for new entrants
appropriate quality
to compete
effectively. A particular feature of the Irish market in
this respect is that Aer Lingus makes available on an
extensive scale aircraft used on scheduled routes during
the week for weekend charters, and the supply does not
seem to be constrained in the foreseeable future.
the proposed merger would not have the
Therefore,
same negative impact on the fringe players or new
entrants in the Irish market as in the British market.

(178) Finally, the lesser extent of vertical integration in Ireland
means that there are not the extensive commercial links
which are an important feature of the British market.

Supply of seats to tour operators on charter flights
to short-haul destinations

(179) There is substantially less vertical integration into airline
operation in Ireland than in the United Kingdom.

shares

Britannia and Air 2000 (First Choice) are currently the
main charter airlines, and their shares are understood to
be roughly proportionate to their
in tour
operation, but numerically smaller. There is a much
greater use by tour operators of charter flights by other
airlines than those owned by the main tour operators.
In particular, an important source is the national carrier,
Aer Lingus, which has considerable spare capacity at
weekends which is sold to package tour operators.
There is in any case only a small overlap since Airtours’
the
airline presence in Ireland is small. Accordingly,
merger is not considered likely to lead to the creation
or
strengthening of a dominant position in airline
operation in Ireland.

Distribution: Supply of travel agency services

(180) As previously indicated, there is no overlap at this level
in Ireland, and First Choice’s share of this market is
relatively small
(well under 10 % by number of
branches, but more, possibly twice that amount, by
sales). There is, therefore, no creation or strengthening
of a dominant position at this level.

VI. UNDERTAKINGS PROPOSED BY AIRTOURS

The package of undertakings

(181) Airtours has submitted a package of undertakings in
order to remedy the creation of a collective dominant
position in the United Kingdom. The package comprises
the following elements:

a

following

to divest
the

(cid:151) Airtours undertakes
tour-operating
cumulative
business meeting
conditions: (i) it shall be of such minimum size as,
when added to the number of short-haul package
holidays (if any) already offered by the purchaser,
will result in the purchaser offering for sale not less
than [(cid:133)]* short-haul package holidays from the
United Kingdom in the tour-operating year 1999 to
2000;
include the [(cid:133)]* tour-operating
business [(cid:133)]*, and (iii) Airtours will (if requested)
make available to the purchaser a [(cid:133)]* distribution
arrangement
to
which Airtours will make available on reasonable
commission
guaranteed minimum
percentage of racking sufficient to support and assist
the development of the business of the purchaser.

through [(cid:133)]* outlets pursuant

it shall

terms

(ii)

a

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13.4.2000

(cid:151) Save in circumstances where the purchaser of the
tour operating business has an existing charter
airline operation, Airtours undertakes to divest an
airline business comprising not
than [(cid:133)]*
aircraft, First Choice’s air operator’s certificate, the
Air 2000 brand, a head office capable of running
and maintaining the airline and appropriate slot
entitlements
flying
programme for short-haul holidays.

efficient

operate

less

an

to

unlikely that the operation will lead to the creation or
strengthening of a dominant position on this market.

(186) The Commission has consulted interested third parties
on the undertakings. The Commission has reached the
conclusion that the proposed package is insufficient to
remedy the creation of a collective dominant position
on the British tour-operating market.

(cid:151) Airtours undertakes to divest the [(cid:133)]* as conducted
the date the renewed Airtours offer for First

at
Choice becomes unconditional in all respects.

(cid:151) Airtours undertakes that in each of the three holiday
years 1999/2000, 2000/2001 and 2001/2002,
it
will make available on aircraft forming part of the
Airtours International or Air 2000 airlines such
number of round-trip seats to short-haul package
holiday destinations as corresponds to the number
of such sales to independent tour operators such
number of round-trip seats during the holiday year
1998/1999. This undertaking shall cease to have
effect upon completion of the sale (if the same shall
take place) of the airline.

(cid:151) Airtours undertakes to renegotiate the [(cid:133)]*.

(182) The aim of the package is threefold. First,

it aims at
re-creating a (cid:145)fourth force(cid:146) in the tour-operating market.
According to Airtours, it will do so by creating a fourth
player with 5 to 7 % market
share by selling a
tour-operating business of sufficient size to attain that
taking into account the buyers’ market share. Access to
seats would be secured through the divestiture of the
airline. Access to distribution would be secured by the
agreement of guaranteed racking in [(cid:133)]* retail outlets
for [(cid:133)]* years and the [(cid:133)]*.

(183) Secondly,

it attempts to remedy the problems of the
fringe operators by guaranteeing seat capacity for [(cid:133)]*
years (if there is no airline divestment) and improve the
distribution possibilities of the fringe operators.

(184) Thirdly, it seeks to remove any concerns on the Irish

market.

Assessment

(185) The Commission has no further comment as to the
is

impact on the Irish market, since it

finds that

it

(187) As far as the small,

the

independent

to
[(cid:133)]*
seats

aims
divesting
to supply

undertaking
by
seats
to continue

tour operators are
the
secure
concerned,
and by
availability of
committing
to the
independents. The undertaking also aims at securing
distribution[(cid:133)]*. However, the undertaking is not likely
to achieve its purpose. In particular, the agreement to
continue to supply seats to independent tour operators
for a period of [(cid:133)]* years on arms’ length commercial
terms is limited in time and it would be difficult to
monitor and to enforce. Furthermore, [(cid:133)]* will not
protect
tour operators against
directional selling in the large travel agency chains. In
any case, as is clear from the assessment of the impact
the
on
Commission regards the impact on the fringe to be of
secondary importance for competition in the market.

proposed merger,

independent

competition

the small

the

of

(188) The most

important

the
impact of
elimination of First Choice as the fourth large vertically
integrated supplier. The undertaking seeks to remedy
this by re-creating a fourth force in the industry with a
market share of about 5 %.

the merger

is

(189) Airtours has proposed to divest

a

integration.

In particular,

tour-operating
business [(cid:133)]* as well as an airline business [(cid:133)]*.
However,
this new business would be less than one
quarter the size of the smallest of the large vertically
integrated suppliers. This business would be severely
handicapped by not being vertically integrated into
travel agencies. The distribution agreement offered by
Airtours is not sufficient
to compensate for lack of
it provides no
vertical
protection against directional selling [(cid:133)]*. Moreover,
to monitor and
the agreement would be difficult
enforce.
found it
unlikely that such a business would have sufficient
critical mass to support an airline. According to the
economic expert of Airtours, 15 to 20 planes were
needed to maximise the economies of scale available to
an airline.
industry
the impact on
experience (see the assessment of
competition, recital 138 ff.) that a market share of 5 %
is not sufficient to have a viable vertically integrated
tour operating business. Indeed the previous operators
of this size have merged or been acquired in order to
achieve sufficient critical mass. Finally, it is also unclear

the Commission has

from previous

is also clear

In addition,

It

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Official Journal of the European Communities

L 93/33

investigation would have been called for, and it would
also have been necessary to seek the views of interested
third parties pursuant to Article 19(3) of the Merger
Regulation.

VII. CONCLUSION

(194) On the basis of

the above analysis,

the proposed
operation would create a dominant position in the
market for short-haul foreign package holidays in the
United Kingdom, as a result of which competition
would be significantly impeded in the common market
the Merger
within the meaning of Article 2(3) of
Regulation,

HAS ADOPTED THIS DECISION:

Article 1

The concentration by which Airtours plc acquires control
within the meaning of Article 3(1)(b) of the Merger Regulation
of the whole of the undertaking First Choice plc is declared
and with the EEA
incompatible with common market
Agreement.

Article 2

This Decision is addressed to:

Airtours plc
Parkway One
Parkway Business Centre
300 Princess Road
Manchester M14 7QU
United Kingdom.

Done at Brussels, 22 September 1999.

For the Commission

Mario MONTI

Member of the Commission

what the exact impact on the market would be, since
identified which tour-operating
Airtours have not
brands were to be sold. For all
is
unlikely that such a new business would be able to
develop into a fourth force in the British tour-operating
market.

these reasons,

it

(190)

[(cid:133)]*.

(191)

[(97)]*.

(192)

it

is

since

secondary

importance,

In conclusion,
the proposed undertaking would not
prevent the creation of a collective dominant position.
In this respect, the Commission finds the impact on the
fringe of
the
competition between the large integrated operators
which effectively decides the market outcome. However,
the undertaking is not sufficient to recreate a fourth
market force which could provide effective competition
to the large integrated suppliers to such an extent that it
could be considered to replace First Choice from a
it would
competition point of view. On the contrary,
seem that the fourth force proposed by Airtours would
be severely handicapped in competing with the three
major suppliers. The proposed undertaking, therefore,
does not prevent the creation of a collective dominant
position.

(193) At a very late stage in the procedure (15 September
1999), Airtours proposed a new and substantially
modified undertaking. Article 18(2) of Commission
Regulation (EC) No 447/98 of 1 March 1998 on the
notifications, time-limits and hearings provided for in
Council Regulation (EEC) No 4064/89 on the control of
concentrations between undertakings (98) provides that
commitments intended by the parties to form the basis
of a decision of compatibility pursuant to Article 8(2) of
Regulation (EEC) No 4064/89 must be submitted to the
Commission within three months of
the decision to
in
open proceedings, although the Commission may,
exceptional circumstances, extend that period. Airtours
did not put
forward any reasons which could be
regarded as constituting such exceptional circumstances.
In the Commission’s view, there was nothing in the
new proposal which Airtours could not have included
in an undertaking submitted within the three-month
timelimit. Moreover, it would not have been possible, in
the short time that remained before the expiry of the
deadline under Article 10(3) of the Merger Regulation,
for the Commission to evaluate it effectively. Further

(97) [(cid:133)]*
(98) OJ L 61, 2.3.1998, p. 1.