2004/134/EC: Commission Decision of 3 July 2001 declaring a concentration to be incompatible with the common market and the EEA Agreement Case COMP/M.2220 — General Electric/Honeywell (Text with EEA relevance.) (notified under document number C(2001) 1746)
Date: 2001-07-03
Institutions: European Commission
Subjects: aeronautical industry, application of EU law, economic concentration, electrical industry, merger control, restriction on competition

18.2.2004

EN

Official Journal of the European Union

L 48/1

II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 3 July 2001

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

Case COMP/M.2220 — General Electric/Honeywell

(notified under document number C(2001) 1746)

(Only the English text is authentic)

(Text with EEA relevance)

(2004/134/EC)

L 48/2

EN

Official Journal of the European Union

18.2.2004

CONTENTS

I. THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

II. THE OPERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

III. CONCENTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IV. COMMUNITY DIMENSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

V. COMPATIBILITY WITH THE COMMON MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A.

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B. AEROSPACE MARKETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. AIRCRAFT ENGINES AND RELATED MARKETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.A. Relevant markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.A.1.

Product markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Structure of the markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2)

Jet engines for large commercial aircraft

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3)

Jet engines for regional aircraft

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4)

Jet engines for corporate aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) Maintenance, repair and overhaul . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.A.2. Geographic market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.B. Competitive assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.B.1.

Functioning of the market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.B.2. Market shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1)

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) Engines for large commercial aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(a)

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) The treatment of joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Neither SNECMA nor CFMI compete with GE in civil jet engines . . . . . . . .

Technological and financial split within CFMI. . . . . . . . . . . . . . . . . . . . . . . . .

GE’s role in the corporate governance of CFMI . . . . . . . . . . . . . . . . . . . . . . . .

Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SNECMA is not a potential competitor in large commercial aircraft
engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

The perception of CFMI by GE and the market place. . . . . . . . . . . . . . . . . . .

The treatment of IAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) Market shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Installed base of engines on aircraft still in production . . . . . . . . . . . . . . . . .

Evolution of the installed base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Official Journal of the European Union

L 48/3

Firm orders to date (Backlog) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Spare parts income stream . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

(3) Large regional jet aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) Corporate jet aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) Maintenance, repair and overhaul . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(a)

Spare parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) MRO services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.B.3.

Factors contributing to GE’s dominance in engines . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) GE Capital

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) GECAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) Non-Replicability of GE Capital/GECAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) Commonality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) GE’s dominance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6) No competitive constraint

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7) Lack of constraint from current competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(a) Pratt & Whitney (P & W)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) Rolls-Royce (RR)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.B.4.

Lack of countervailing buyer power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.B.5.

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. AVIONICS AND NON-AVIONICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.A. Relevant markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.A.1. Relevant markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Product markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) Avionics products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) Non-avionics products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Buyer furnished equipment versus supplier furnished equipment . . . . . . . .

(2) Geographic market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.B. Competitive assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.B.1. Honeywell is a leading supplier of aerospace equipment

. . . . . . . . . . . . . . . . . . . . . . .

(1)

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) Avionics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(a)

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) BFE products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c)

SFE products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) Non-avionics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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2.B.2. Honeywell’s unique product range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.B.3. Honeywell’s strength in services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Maintenance, repair and overhaul for avionics and non-avionics . . . . . . . . . . . .

(2) Nose-to-tail services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.B.4. Honeywell’s strength in products integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.B.5. Honeywell’s strength in packaged deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.C. Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Rockwell Collins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b)

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c)

Limited financial strength . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(d)

Limited product range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(e) No vertical integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(f)

Immediate exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(g) Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(h)

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(i)

Limited product range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(j) No vertical integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(k) Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hamilton Sundstrand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(l)

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(m) Limited product range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(n)

Limited financial strength . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(o) No vertical integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(p) Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. ENGINE CONTROLS (ENGINE STARTERS)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.A. Relevant markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.A.1.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.A.2. Relevant product market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.A.3. Relevant geographic market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.B. Market shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. EFFECTS ON COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.A.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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4.B.

SFE avionics and non-avionics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.B.1.

Creation of a dominant position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Foreclosure through the vertical integration of Honeywell with GE . . . . . . . . . .

(2) Foreclosure through packaged offers of GE and Honeywell products and
services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.C.

BFE (and SFE-option) avionics and non-avionics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.C.1. Creation of a dominant position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Foreclosure through packaged offers of GE and Honeywell products and
services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) The Parties arguments in relation to packaged offers . . . . . . . . . . . . . . . . . . . . . .

(a)

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) The Parties lack dominance on their respective markets . . . . . . . . . . . . . . .

(c) Customers keep control of prices of individual components . . . . . . . . . . .

(d) Bundling does take place in this industry . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(e) The equipment selection timeline does not allow for bundling . . . . . . . . .

(f)

The Cournot effect of bundling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(g) Competitors can offer counter-bundles and/or can leapfrog . . . . . . . . . . . .

(h) Bundling vis-à-vis airlines cannot take place . . . . . . . . . . . . . . . . . . . . . . . . . .

(i) CFMI engines are not candidates for bundling . . . . . . . . . . . . . . . . . . . . . . . .

(j)

The Agreement between Honeywell and GECAS . . . . . . . . . . . . . . . . . . . . . .

(3) Effects of packaged deals on competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) Foreclosure through the vertical integration of Honeywell with GE . . . . . . . . . .

4.D.

Engines for large commercial aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.D.1.

Strengthening of a dominant position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Foreclosure through packaged offers of GE and Honeywell products and
services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) Elimination of Honeywell as a potential innovation partner . . . . . . . . . . . . . . . .

(3) Foreclosure through the vertical integration with Honeywell engine starters . .

4.E.

Engines for large regional jet aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.E.1.

Strengthening of a dominant position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(a) Horizontal overlap on existing platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) Effects on future platform competitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.F.

Engines for corporate jet aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.F.1.

Creation of a dominant position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Horizontal overlap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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(2) Foreclosure through the vertical integration of Honeywell with GE . . . . . . . . . .

(3) Foreclosure through bundling of GE and Honeywell products and services . . .

4.G. Countervailing power of customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.H. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

C. POWER SYSTEMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.A. Relevant markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.A.1.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.A.2.

Product markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.A.3. Geographic market

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.B. Competitive assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.B.1.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.B.2.

Creation of a dominant position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Horizontal overlap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) Foreclosure through the vertical integration of Honeywell with GE . . . . . . . . . . . . .

(3) Foreclosure through the vertical

integration with Honeywell Electronics and
Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

D. UNDERTAKINGS SUBMITTED BY THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. DESCRIPTION OF THE UNDERTAKINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.A. Avionics and non-avionics products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.A.1. Avionics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) BFE avionics products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) SFE avionics products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

APUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ECS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.B.

Engine starters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.C.

Small marine gas turbines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.D.

Large regional jet engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.E. Other undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.E.1.

Corporate jet engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.E.2. GECAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.E.3. No bundling of avionics, non-avionics or aircraft engine products or services . . . . .

3. ASSESSMENT OF THE UNDERTAKINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.A. BFE products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.B.

SFE products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.C. APU’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3.D.

ECS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.E.

Engine starters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.F.

Small marine gas turbines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.G.

Large regional jet engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. TECHNICAL VERIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. OTHER UNDERTAKINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.A. Corporate jet engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.B. GECAS/Commitment not to engage in bundling practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

E. NEW SET OF UNDERTAKINGS SUBMITTED BY THE PARTIES ON 28 JUNE 2001 . . . . . . . . . . . . . . . .

1.

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.A. GECAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.A.1.

Sale of a minority interest in GECAS to independent third parties . . . . . . . . . . . . . . .

2.A.2. Behavioural commitments on GECAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.B.

BFE/ SFE avionics and non-avionics products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.C.

Engine starters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.D.

Small marine gas turbines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.E.

Large regional jet engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. EVALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.A.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.B. GECAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.B.1.

Sale of a minority interest in GECAS to independent third parties . . . . . . . . . . . . . . .

3.B.2.

Behavioural commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.C.

BFE /SFE avionics and non-avionics products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.D.

Engine starters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.E.

Small marine gas turbines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.F.

Large regional jet engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. TECHNICAL VERIFICATION OF ALL DIVESTITURE PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. CONCLUSION ON THE UNDERTAKINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

VI. OVERALL CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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THE COMMISSION OF THE EUROPEAN COMMUNITIES,

II. THE OPERATION

Having regard to the Treaty establishing the European Com-
munity,

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

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

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

III. CONCENTRATION

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

(6)

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),

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

whereas:

IV. COMMUNITY DIMENSION

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

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

I. THE PARTIES

(3)

(4)

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

lighting,

Honeywell is an advanced technology and manufactur-
ing company serving customers worldwide with aero-
space products and services, automotive products, elec-
tronic materials, speciality chemicals, performance poly-
mers, transportation and power systems as well as home,
building and industrial controls.

(1) OJ L 395, 30.12.1989, p. 1; as corrected by OJ L 257, 21.9.1990,

p. 13.

(2) OJ L 180, 9.7.1997, p. 1.
(3) OJ C 42, 18.2.2004.

(7)

The undertakings concerned have a combined aggregate
worldwide turnover of more than EUR 5 000 million (4)
(for the full year 1999, EUR [...]* (*) for GE and [...]* for
Honeywell). Both GE and Honeywell have a Com-
munitywide turnover in excess of EUR 250 million (for
the full year 1999, [...]* for GE and [...]* for Honeywell),
but they do not achieve more than two-thirds of their
aggregate Communitywide turnover within one and the
same Member State. The notified operation therefore
has a Community dimension.

V. COMPATIBILITY WITH THE COMMON MARKET

A.

INTRODUCTION

(8)

The product markets that are affected by the combi-
nation of the GE and Honeywell businesses are part of
the aerospace and power systems industries. In these
sectors, the transaction brings about significant horizon-
tal, vertical and conglomerate effects.

(*) 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) Turnover calculated in accordance with Article 5(1) of the Merger
Regulation and the Commission Notice on the calculation of
turnover (OJ C 66, 2.3.1998, p. 25). To the extent that figures
include turnover for the period before 1 January 1999, they are
calculated on the basis of average ECU exchange rates and
translated into EUR on a one-for-one basis.

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B. AEROSPACE MARKETS

1. AIRCRAFT ENGINES AND RELATED MARKETS

1.A. Relevant markets

1.A.1. Product markets

1)

Structure of the markets

(9)

(10)

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

In previous cases (5), the Commission has defined three
distinct markets for jet aircraft on the basis of the aircraft
mission profile, that is, the purpose for which the aircraft
is purchased, which is in turn determined by its seating
capacity, its flying range and its economics (i.e. price
and operational cost). These are the markets for large
(i.e. aircraft with more than
commercial aircraft
100 seats, a range of greater than 2 000 nautical miles
and a cost in excess of USD 35 million), regional jet
aircraft (i.e. aircraft with around 30 to 90+ seats, a range
of less than 2 000 nautical miles and a cost of up to
USD 30 million) and corporate jet aircraft (i.e. aircraft
designed for corporate activities and with a cost generally
in the region of USD 3 million to USD 35 million).

(5) See in particular Commission Decision 91/619/EEC in Case
No IV/M.53, Alenia/De Havilland, OJ L 334, 5.12.1991, p. 42;
Commission Decision 97/816/EC in Case No IV/M.877, Boeing/
McDonnell Douglas, OJ L 336, 8.12.1997, p. 16; Commission
Decision 2001/417/EC in Case No COMP/M.1601, AlliedSignal/
Honeywell, OJ L 152, 7.6.2001, p. 1; and Commission Decision
of 10.05.1999 declaring a concentration to be compatible with
the common market (Case No COMP/M.1506, Singapore Airlines/
Rolls-Royce).

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

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

(13)

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

2)

Jet engines for large commercial aircraft

(14)

Large commercial aircraft can carry generally more than
100 passengers across long distances ranging from
2 000 to 8 000 nautical miles. This type of aircraft
forms the largest part of commercial airlines’ fleets and
is generally divided between narrow-body and wide-
body aircraft (6). Narrow-body or single-aisle aircraft
have around 100 to 200 seats and are generally used to
move passengers across medium distances (2 000 to
4 000 nautical miles) as well as to move passengers
from ‘spokes’ or ‘feeder’ airports to larger airports (hubs)
in the case of flight connections. Narrow bodies are
currently manufactured by either Airbus (A318 and the
A320 family) or Boeing (B717, B737 and B757). Most
of the flights within the Community are made with
narrow-body aircraft. Wide bodies or double-aisle air-

(6) See Case IV/M.877, Boeing/McDonnell Douglas.

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craft are larger and can fly longer routes. They typically
carry 200 to 400+ passengers and may fly distances
ranging from 4 000 to 8 000 nautical miles. In the case
of flight connections, hub airports use this type of
aircraft to move passengers who have flown in from
spokes to more remote, usually transcontinental, desti-
nations. Airbus and Boeing are also the only producers
of wide-body aircraft (for Airbus, the A300, A310,
A330, A340 and A380 and their respective derivatives;
for Boeing, the B767, B777 and B747 and their respect-
ive derivatives).

(15) There are currently three independent suppliers of
engines for large commercial aircraft: GE, Rolls-Royce
(RR) and Pratt & Whitney (P&W). These engine manufac-
turers have established joint ventures either among

themselves or with other aerospace companies to manu-
facture and market engines for generic or specific
applications. The most notable joint ventures are CFMI
(a 50/50 joint venture between GE and SNECMA of
France) and International Aero Engines (IAE) (7). The
three independent engine manufacturers and suppliers
are present, although at differing degrees of penetration,
across the whole of the large commercial aircraft range.

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

(7) IAE is a joint venture between P&W, RR, MTU and Japanese Aero
Engines Corp. that manufactures the V2500 engine for narrow-
bodies. With 32 % each, P&W and RR are the controlling partners.

Table 1

Large Commercial Aircraft and Engines

AIRBUS

(engines)

BOEING

(engines)

Narrow-body

Narrow-body

A318

A319

A320

A321

A310

A300-600

A330

Wide-body

PW6000
CFM56-5

CFM56-5
IAE V2500

CFM56-5
IAE V2500

CFM56-5
IAE V2500

GE CF6
PW4000

GE CF6
PW4000

GE CF6
PW4000
RR Trent

A340 200-300 (***)

CFM56-5C (**)

A340 500-600 (***)

RR Trent (*)

A380 (***)

RR Trent
GE/PW
GP7200

B717

BR715 (*)

B737NG

CFM56-5 (**)

B757

B767

Wide-body

B777 200-300
(classic B777)

B777 LR/ER
(B777X)

B747 400 (***)

PW2000
RR RB211

GE CF6
PW4000

GE90
PW4000
RR Trent

GE90 (**)

GE CF6
PW4000
RR RB211

(*) Indicates a single-source engine configuration (i.e. only one engine certified so far).
(**) Indicates a contractual exclusivity (i.e. no other engine can be certified).
(***) Indicates a four-engine aircraft configuration.

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(17) Airlines usually have mixed fleets composed of both
narrow- and wide-body aircraft, although in varying
proportions depending on both their size and the routes
they serve (8). Whether or not
there exist separate
product markets for jet engines for narrow- or wide-
body aircraft would not materially change the competi-
tive assessment of the notified operation.

(21)

(18) Of

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

3)

Jet engines for regional aircraft

(19) The development of regional jets came as a response to
the evolving conditions of air transport over the last 10
to 15 years. The growing demand for air travel and the
increase in the number of smaller, regional airports
created the need for a type of aircraft that could, in a
more economic way than is possible with narrow-
body aircraft, transport lower numbers of passengers
(generally under 100) over relatively short distances (up
to 1 500 to 2 000 nautical miles). Regional jets grew in
number and importance in response to the fact that the
majority of air traffic would consist of more frequent
flights over shorter distances. As opposed to narrow-
bodies, which have a longer flight range, a bigger seating
capacity, higher landing fees and a lower turnaround
rate (9), regional
jets were conceived to carry fewer
passengers, on a more frequent basis over short dis-
tances.

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

and more

powerful

engines,

(8) Large airlines, which have a significant transcontinental activity,
are more likely to have more wide-body in their fleet than smaller
or regional airlines.

(9) Flight turnaround indicates the number of back-and-forth trips
that an aircraft may economically perform in one calendar day.

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

Table 2

Large Regional Jet Aircraft and Engines

Airframe manufacturer

Model type

Engine

BAe Systems

BAe 146

BAe Systems

Avro RJ-100 (*)

BAe Systems

Avro RJ-85

BAe Systems

Avro RJ-70

Fairchild Dornier

728JET

Fairchild Dornier

928JET

Embraer

ERJ-170

Embraer

ERJ-190/100 (*)

Embraer

ERJ-190/200 (*)

Bombardier

CRJ-700

Bombardier

CRJ-900 (*)

(*) Indicates aircraft not yet in service.

HON

HON

HON

HON

GE

GE

GE

GE

GE

GE

GE

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

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

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

(25) The market investigation did not support these views.
Despite its special STOL capabilities, airlines do not
necessarily limit the Avro to any particular niche use but
operate it as a mainstream large regional jet. For instance,
Belgium’s Sabena, which has the largest fleet of Avros in
the Community, flies this type of aircraft to destinations
that do not display any niche characteristics, such as
Frankfurt, Toulouse, Edinburgh, Hamburg and so forth,
whilst flying turboprops to London City airport. The
same applies to German airlines, which are also among
the largest operators of Avros, which operate this type
of aircraft in environments that do not correspond to
the niche
characteristics which the Parties have
described. The market investigation has suggested that,
although airlines may appreciate the special capabilities
of the Avro, they in fact operate the Avro in the same
manner as any other large regional aircraft and do not
limit its flight operability to niche environments alone.
In this sense, the Honeywell-powered Avro is an existing
competing alternative to the other GE-powered large
jets. Furthermore, although the low order
regional
backlog of the Avro may be an indication of the relative
marketing performance of the various sellers (10),
it
cannot constitute a criterion for the purposes of product
market definition. Although the sales forecasts are not
optimistic, this disparity in the order backlog is to a
large degree due to the recent substantial orders that GE
Capital Aviation Services (GECAS, the aircraft leasing
arm of GE) has placed for the Embraer, Fairchild Dornier,
Bombardier large regional
jets after GE secured the
engine exclusivity on these platforms and, as such, does
not necessarily reflect any typical demand pattern of
airlines for large regional aircraft.

(26) As far as the second objection is concerned, the Parties
argued that the small narrow-bodies of Boeing and
Airbus should also be included in the market for large
regional jets. These are the B717 (a 106 to 115-seat

(10) So far, the Avros have secured [...]* % of the orders for large

regional jets in service and not yet in service.

aircraft) powered by the BR715 engine (11) and the A318
(a 107 to 117-seat aircraft) powered by the PW6000 or
the CFM56 engines.

large regional

the equivalent

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

jets

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

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

(11) The BR715 engine is manufactured by RR Deutschland (a joint
venture with BMW). The engines, which are fitted in the tail wing
of the aircraft, have been especially conceived for the B717 and
cannot be used in any other aircraft. B717 is a rename for
the MD95. Following the
launch,
McDonnell Douglas’
acquisition of the company by Boeing, all of the McDonnell
Douglas’ aircraft platforms in production were immediately
discontinued, with the exception of the MD95, which had just
been launched [comments on the sales prospects, considered by
RR as containing confidential information]*.

last

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4)

Jet engines for corporate aircraft

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

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

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

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

5) Maintenance, repair and overhaul

(35)

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

1.A.2. Geographic Market

(36) As already stated in previous Commission decisions (12),
all aircraft engine manufacturers market, sell and support
their engines on a worldwide basis under similar con-
ditions of competition. The transportation costs of
delivery are negligible. The Commission therefore con-
siders that the relevant geographic markets for the
jet engines for large commercial aircraft,
supply of
regional jet aircraft and corporate jet is worldwide. For
the purposes of this Decision, the related markets for
MRO and spare parts need not be finally defined from a
geographical point of view.

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

1.B. Competitive assessment

Table 3

1.B.1.

Functioning of the market

Light
corporate jets

Medium
corporate jets

Heavy
corporate jets

Diamond (P&W)
Citation Bravo
(P&W)
Citation (P&W)

G IV (P&W)
Global Express
(P&W)
Gulfstream V
(P&W)

HS 125 (HON)
Citation Excel (P&W)
Learjet (HON)
Learjet 45 (HON)
Citation VII (HON)
Astra (HON)
Lear 60 (P&W)
Galaxy (P&W)
Falcon 2000 (GE/HON)
Falcon 505 (HON)
Falcon 900 (HON)
Falcon 900 EX (HON)
Citation X (RR)
CL 604 (GE)

(37) The relevant engines markets are composed of engine
manufacturers, on the supply side, and airframe manu-
facturers and final purchasers (airlines, leasing compani-
es and corporations), on the demand side. Engine
manufacturers may compete to sell engines to airlines in
those cases where the purchased aircraft is offered with
an engine choice, that is the case in most of the large
commercial aircraft platforms or in cases where there is
no engine choice and the airline must select between
different aircraft powered by different engines for the

(12) See footnote 5.

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typically for the entire life cycle of

same mission profile. Engine manufacturers also com-
pete in order to be selected and certified in those
platforms,
the
platform (13). As a result, engine suppliers compete at
two levels, first, in order to place their engine on offer in
a given aircraft platform and second in order to have
their engine or aircraft/engine combination selected by
the final purchaser of
the aircraft. Such sales are
influenced to varying degrees by the airlines’ preferences
stemming from engine and fleet commonality consider-
ations.

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

1.B.2. Market shares

1)

Introduction

(38)

In previous decisions concerning the aerospace indus-
try (14) the Commission has considered that market
shares should be calculated on the basis of the installed
base and firm orders to date (which includes all deliveries
to date and orders placed but not yet delivered) for
aircraft that are currently manufactured (as opposed to
aircraft that are no longer in production). This measure
disregards aircraft that remain in-service, but are no
longer manufactured, because such aircraft have little or
no bearing on the market position of relevant engine
manufacturers since airlines can no longer place orders
for these aircraft.

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

they may use to invest

(13) There may be exception to this situation. For instance, the
A318 was originally conceived to be powered only by the
PW6000 engine; however, after its launch and following the
demand of a major potential purchaser, Air France, a CFM-
56 engine was certified and is now available on this platform.
(14) See in particular Commission Decision 91/619/EEC in Case No
IV/M.53, Alenia/De Havilland, OJ L 334, 5.12.1991, p. 42;
Commission Decision 97/816/EC in Case No IV/M.877, Boeing/
McDonnell Douglas, OJ L 336, 8.12.1997, p. 16.

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

(42) Moreover, aircraft no longer in production constitute a
less significant source of revenue for engine suppliers
than aircraft still in production. The profitability of the
engine business stems mostly from earnings achieved by
the engine suppliers in the aftermarkets. Aftermarket
revenue streams are used to finance future engine
developments and innovation expenditure that will in
turn determine the future competitive position of the
respective engine manufacturers. Engines placed on
aircraft no longer in production stop generating this
source of revenue when such aircraft are retired from
airline fleets. In particular, older engines and aircraft are
currently under regulatory and environmental pressure

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and are being increasingly replaced. Moreover, for as
long as aircraft no longer in production remain in
service,
the generated aftermarket revenues steadily
decrease. In fact, as the technology of an engine becomes
older and therefore more accessible, maintenance and
spare parts tend to become cheaper as customers can
source non-OEM (original equipment manufacturer)
certified parts and services (that is to say, the older the
engine, the lower the patent protection on spare parts
and maintenance procedures). In addition, the tech-
nology of older engines is much simpler than that of
the current generation of engines. Accordingly, they
requiring less servicing and spare parts and therefore
generate less aftermarket revenues. Consequently, the
revenues stemming from engines on aircraft no longer
in production cannot be compared to those generated
by engines on newer aircraft. This situation helps to
explain why the intrinsic value of an engine manufac-
turer’s overall installed base, and therefore its ability to
fund its activities to compete in the future, can only be
assessed by measuring the net present value of the
income it expects from its installed base. Failing to
measure the significance of the overall installed base of
engines through this means would result in a signifi-
cantly flawed competitive assessment.

(43)

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

(44)

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

2)

Engines for large commercial aircraft

a)

I n t r o d u c t i o n

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

b) T h e t r e a t m e n t o f j o i n t v e n t u r e s

(46)

(47)

In its assessment of dominance, the Commission con-
siders that it is justified from both a legal and an
economic point of view to aggregate the market shares
of CFMI and GE. Similarly, the market shares of IAE are
is,
aggregated equally between RR and P&W,
between the two independent prime contractors, as
opposed to the other joint venture partners, MTU and
Japanese Aero Engines Corporation. This assessment is
the Com-
in line with the consistent practice of
mission (15).

that

its commercial policy.

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

(45) GE, P&W and RR are the three engine manufacturers
acting as independent prime contractors in the market

(15) See Commission Decision of 29 September 1999 in Case
M.1383, Exxon/Mobil, Commission Decision 1999/458/EC in
Case IV/M.1157, Skanska/Scancem, OJ L 183, 16.7.1999, p. 1;
Commission Decision of 10 January 1994 in Case IV/M.390,
Akzo/Nobel and Commission Decision of 3 June 1991 in Case
IV/M.92, RVI/VBC/Heuliez.

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

(49)

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

Neither SNECMA nor CFMI compete with GE in civil jet
engines

(50) Within CFMI, the parent companies do not compete
against each other or against their joint venture in the
market for large commercial aircraft engines. Firstly, as a
matter of fact, SNECMA is not currently an independent
jet engines in general. The
supplier of commercial
market investigation indicated that SNECMA has never
competed independently in this market and has never
certified or sold any jet engines for commercial aircraft
outside CFMI. This finding was also confirmed by
SNECMA itself at the Oral Hearing. Secondly, as a matter
of law, for as long as CFMI functions as a joint venture,
a series of non-compete clauses will prevent SNECMA
from competing with either GE or CFMI itself (16).

(16) In addition to the main non-compete clause contained in the
original joint venture agreement, 20 years of joint partnership
have created a body of non-compete provisions having the effect
that neither party, and more particularly SNECMA, can easily
withdraw from the CFMI engine programmes for the purpose of
developing a competitive engine.

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

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

Technological and financial split within CFMI

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

18.2.2004

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(54)

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

Sales and Marketing

(55) The core engine also constitutes the high value portion
of the CFMI engine programmes. Although in principle
each parent is to make an equal contribution to the joint
venture, participate equally in all its operational activities
(design, manufacturing, marketing, sales and support)
and share equally in the revenues (but not the profits) (17)
received by it, each parent is also responsible for the
costs it incurred in designing, developing and producing
its share of the final product. The low-pressure system is
the most expensive part of an engine as it needs to be
continually upgraded to keep pace with the changes in
technology and the demands of the market. The core
engine, on the other hand, once developed, does not
need to be modified continuously, although the amount
of friction it generates requires frequent maintenance
and repair. As such it constitutes the main source of
after-sales revenue (spare parts and maintenance/repair
support services).

GE’s role in the corporate governance of CFMI

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

(17) See the CFM Newsletter (Issue 2, 2000). The principles of
cooperation signed by GE and SNECMA on 24 January 1974
stated that the venture would be revenue sharing, rather than
profit sharing. Thus each parent’s profit is a function of its own
efficiency.

(57) The Parties also drew the Commission’s attention to the
fact
that, with some notable exceptions, SNECMA
personnel assigned to CFMI have the sole responsibility
for CFMI engine sales and marketing in Europe and the
commercial terms of any sales made by GE personnel in
this market must be approved by them. However sales
and support functions are not split equally between GE
and SNECMA. GE has reserved the right to sell and
market CFMI engines to such European airlines as British
Airways, Lufthansa and KLM, the largest and most
important customers on the European market. Further-
more, sales and marketing by SNECMA outside Europe
has been restricted to the Middle East (with the exception
of Saudi Arabia, which GE has reserved for itself),
Russia, Africa, Pakistan and India, effectively the stagnant
markets. GE, on the other hand, sells and markets CFMI
engines to the lucrative and growing markets of South
America, south-east Asia and the Pacific (18). Potential
customer accounts are also split along these lines. As a
result of this, by year-end 2000 GE was responsible for
65 % of the sales and marketing of installed CFM engines
and 72 % of orders.

(58)

In principle, the personnel of the parents are utilised for
their respective sales on behalf of CFMI and, when
interfacing with CFM56 customers, each parent should
represent CFMI, not SNECMA or GE. GE, however,
markets CFM56 engines as its own. For instance, GE
Aircraft Engines (GEAE) markets the CFM56 as part of
its engine range (19). The CFM56 is also often sold by
GEAE sales people who also sell the rest of the GE
engine range. In addition, airlines which purchase the
CFM56 and other GE engines can be supported by the
same GEAE field service representative on the after-
market.

(18) According to industry figures, North-American airlines are now
operating 39 % (4 800 units) of the worldwide fleet and are
expected to need some 7 400 aircraft by 2019. Although Asia/
Pacific airlines are currently operating only 18 % of the world’s
fleet, they are expected to operate around 5 900 aircraft by 2019
because of their high traffic growth. Some 57 % of total world
deliveries for large commercial aircraft are therefore forecast to
go to them. European airlines should increase their fleet from
3 300 units in 1999 to around 6 900 units in 2019.

(19) See

vi.html.

http://www.geae.com/geenginecenter/service–comma-

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(59)

SNECMA is not a potential competitor in large commer-
cial aircraft engines

Furthermore, the market share of CFMI can be meaning-
fully aggregated only with that of GE. SNECMA is not
an independent competitor, current or potential, in the
large commercial aircraft engine market and has sold no
engine so as to account for a share of the market. The
Parties have consistently claimed that the merger does
not create any horizontal overlap in the market for jet
engines for large commercial aircraft, to the extent that
Honeywell, a supplier of civil jet engines for regional and
corporate jet aircraft, cannot be reasonably considered as
a potential entrant in the large commercial aircraft
market, owing to the high barriers to entry (in terms of
technology and reputation building) prevailing in this
industry. The Commission has tested and accepted their
argument. However, the same argument also applies to
SNECMA. The market
investigation confirmed that
SNECMA is not a prime contractor for aircraft engines
and has never competed in the commercial jet engine
market. Thus, unlike GE, SNECMA has no independent
capability in the large commercial aircraft engine market.
SNECMA has primarily low spool capabilities in design,
development, and production for commercial appli-
cation. Any commercial hot section core work (combus-
tor, high-pressure turbine, etc.) would be new territory
for SNECMA. It is a partner in CFMI with a subsidiary
role and no separate identity or presence in this indus-
try (20). It has never certified or sold any jet engines for
commercial aircraft on its own. Even if it were to develop
such engines it would be a lengthy and expensive
exercise with very uncertain market acceptance, since
SNECMA would have to build up the required credibility
and reputation with commercial airlines and commercial
airframe manufacturers.

(60) By SNECMA’s own admission,

its strategy for the
development and production of future aircraft engines
is no more than the following: to continue to provide
CFM56 engine models or future enhanced models/
derivatives through CFMI, to participate as a risk sharing
partner on the GE90, and to try to be ready to access
the small commercial engine market with or without
cooperation (21).

situation in engine procurement. In fact, none of GE’s
engines produced outside the joint venture compete
with any CFMI engine. This finding was also confirmed
by SNECMA’s representative at the oral hearing.

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

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

Table 4

GE engine
programme

SNECMA’s
participation

Platforms powered

CF6-50

6 %

CF6-80C2

10 %

A300B4-100, A300B4-200,
A300B4-100F, A300B4-200F,
A300-B2,
B747-200B-EUD,
B747-200B-EUD-SCD, B747-
200B-SCD,
B747-200C,
B747-200F, MD-10-30F, DC-
10-30, DC-10-30F, DC-10-15

A300B4-600, A300B4-600R,
Beluga,
A300B4-600ST
A300C4/F4-600R, A310-200,
A310-300, A310-300F, B747-
300, B747-300SCD, B 747-
400F, B747-200B, B747-400,
B767-200, B767-200B, B767-
300, B767-300F/ER, B767-
200ER, B767-300ER, B767-
400ER, MD11, MD11F/C/CF

(61) GE and CFMI thus do not compete with each other.
There is indeed no evidence to suggest that these two
entities have competed against each other in any bidding

CF6-80A

11 %

A310-200C, A310-200F

CF6-80E1

20 %

A300-300, A300-200

(20) SNECMA has no independent commercial engine business
outside CFMI and has a significantly lesser sales and technology
presence in the venture.

(21) Although they could not do it on their own because of the lack
of technology, they have already unsuccessfully tried to access
the small engine market in collaboration with P&W through the
SPWI joint venture (offering the SPW14/16 engine family).

GE90

24 %

B777

GE90-15

24 %

B777X

GP7000

11 %

A380

18.2.2004

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

(64) Additional

the

economic

evidence of

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

The perception of CFMI by GE and the market place

(65) GE also aggregates CFMI’s market share with its own. It
has done so in its annual reports each year since
1995 (22), as well as in at least one internal presentation
to market investors (in May 1999) that the Commission
was made aware of. Similarly, leading financial analysts

(22) Examples are:

the 1995 Annual Report, page 8:

‘We also
continued our worldwide leadership as GE and CFM Inter-
national, our joint company with SNECMA of France, again won
more than half of the world’s large commercial engine orders’;
the 1998 Annual Report, page 8: ‘Consistent with our industry
leadership during the 1990’s, GE Aircraft Engines and CFM
International, our 50/50 joint company with SNECMA of France,
again won the majority of the world’s large commercial engine
orders’; the 2000 Annual Report, page 11: ‘Again in 2000, GE
Aircraft Engines and CFM International, our 50/50 joint company
with SNECMA of France, together won more large commercial
engine orders than any other engine manufacturer’.

also aggregate all engine sales of CFMI and GE (23). In
sum, the view of GE as expressed in its annual reports
and by the financial analysts that GE and CFMI should
be viewed as a single entity for both commercial and
competitive purposes is supported by the objective
realities of CFMI and in the marketplace.

(66)

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

The treatment of IAE

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

c) M a r k e t s h a r e s

(68) The assessment of

the three engine manufacturers’
market positions will be mainly based on the installed
base of aircraft still in production and the order backlog.

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

(23) For example: Nick Heymann, Prudential Securities, 4 October
2000: ‘Of all engines ordered so far in 2000, GEAE’s market
share is roughly 63 %. In each market, GEAE’s market share has
improved over its estimated market share during 1990 to 1999
(most notably, in wide-bodies where its market share was 49 %
during 1990 to 1999)’; Jennifer Murphy, Morgan Stanley Dean
Witte, 4 January 1999: ‘The heavy equipment businesses continue
to take share and to dominate their new equipment markets
(Power Gen, 60 % share; Medical — 50 %; Aircraft Engines —
60 %, Transportation — 70 %), GEAE’s 60 % share of large-
engine orders in the 1990s should turn into a tremendous and
growing annuity for the next ten years’;
John Inch and Al
Sipzener, Bear Stearns and Co. Inc, 9 February 2001: 66 % of
aircraft engine orders are attributed to GE/CFM according to a
pie chart.

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18.2.2004

Installed base of engines on aircraft still in production

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

Table 5

(75)

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

(Aircraft still in production)

Model

GE/CFMI P&W/IAE RR/IAE

Narrow-body

51 %

22 %

27 %

Wide-body

54 %

31 %

15 %

Overall

52,5 % 26,5 %

21 %

Source: Parties’ data.

(71) The total volume of the installed base of engines for
narrow-body aircraft still in production is 6 106. GE/
CFMI accounts for over half the market with a share of
51 %, followed by P&W and RR accounting for 22 %
and 27 % of the installed engine base, respectively. The
market shares of GE and CFMI have been aggregated,
while IAE’s share has been split equally between P&W
and RR.

(72) The total volume of

the installed base of engines
for wide-body aircraft still in production amounts to
5 898. GE/CFMI has a share of 54 %, followed by P&W
and RR with 31 % and 15 %, respectively (24).

(73)

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

Evolution of the installed base

(74) The preceding market share analysis may appear rela-
tively static in that it reflects the current market position
of jet engine suppliers on the basis of past competition.
In order to give a more dynamic view of past compe-

(24) IAE does not manufacture engines for wide-body aircraft.

tition, it is appropriate to look at the evolution of the
installed base over the last five years. During that period,
GE has not only succeeded in maintaining its leading
supplier position, but has also displayed the highest
market share growth rate.

It has to be mentioned, as recognised by the Parties, that
the five-year period preceding the notified merger is a
meaningful benchmark for the assessment of the second
level of engine competition, that is sales to airlines. A
longer period bears the risks of presenting a market
situation characterised by different competitive and
market conditions from those now prevailing . A longer
reference period may therefore be misleading in the
assessment of the notified operation (25). Moreover, in
the assessment of the first level of engine competition,
namely for the selection of engines in a new platform, a
period of
ten years is considered in line with the
Parties’ argument that competition at this level must be
considered over a longer period.

(76) The graph in the Annex shows the evolution of the
installed base of engines on large commercial aircraft
still in production in the period from the end of 1995
to the end of 2000 and represents the incremental
market positions of the various suppliers over that
period. It can be seen that GE has increased its share of
the engine installed base at a rate which competitors
have not been able to match. In absolute numbers,
during that period, GE increased its installed base from
2 462 to 6 248 engines, as opposed to P&W which
passed from 2 889 to 3 170 engines and RR which
passed from 1 371 to 2 586 engines. Overall, GE has
displayed the highest
total growth rate during this
period, and has increased the gap with its competitors.

Firm orders to date (Backlog)

(77) The examination of the backlog (firm orders to date)
can give a better indication of the suppliers’ future
competitiveness, as it reflects the preference of pur-
chasers in their recent orders and can determine the
future market positioning of engine suppliers. The
figures in Table 6 concern aircraft in service still
in
production. It goes without saying that an aircraft that
is out of production can no longer be ordered (26).

(25) In addition, in the same period GECAS became GE’s leasing arm
and has contributed substantially to increasing GE’s market
penetration.

(26) There is only one exception in so far as there are six outstanding

orders for Boeing’s MD11. They all concern a GE engine.

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Table 6

Engine backlog on aircraft still in production

(Orders to be delivered as of 01 January 2001)

Model

GE/CFMI

P&W

RR

Wide-bodies

660

344

234

%

53 %

28 %

19 %

Narrow-bodies

2 882

543

803

In sum,

engines, and hence the suppliers’ likely future compe-
tition position.
the higher the aftermarket
revenues,
the more likely a supplier is to remain
competitive in the future. As a consequence, in assessing
such revenue streams, the Commission has considered
the overall installed base of engines on aircraft both in
production and out of production.

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

%

68 %

13 %

19 %

(81)

Total LCA

3 542

887

1 037

%

65 %

16 %

19 %

Source: Parties’ data.

(78) The total volume of engines for large commercial aircraft
in production that has been ordered as of 1 January
2001 is 5 466. Of those orders, GE has secured 65 %,
compared to 35 % for its competitors, P&W (16 %) and
RR (19 %). This is another indication of the way and the
trend in which GE’s share in new aircraft is growing. GE
is already the market leader for aircraft still in production
(52 % of the installed base) and has laid the ground for
sustaining and increasing that leadership by securing
65 % of the current order backlog of customers.

Spare parts income stream

(79) The Parties have contested the Commission’s use of the
installed base and order backlog of aircraft still
in
production, arguing that the exclusion of aircraft no
longer in production overestimates GE’s market shares
and conceals the past success of its competitors, notably
P&W, on platforms that are no longer in production.
The Commission considers that aircraft no longer in
production cannot have any impact whatsoever on the
future increase of the engine suppliers’ market share, to
the extent that no additional units of such aircraft
can be sold to customers in future. However,
the
Commission recognises that such aircraft may still
generate aftermarket revenues, which in turn may deter-
mine to some extent an engine supplier’s ability to
compete in the future. Aftermarket revenues constitute
the main source of the cash flow that will finance the
development and marketing of new engines, as well as
the innovation efforts for the next generations of

P&W has a large share of aircraft that are out of
production, which is due to P&W’s earlier entry into the
jet engines market. Although such aircraft may also
constitute a source of aftermarket revenues,
it can
reasonably be expected that this revenue will diminish
in accordance with the rate of withdrawal and replace-
ment of such aircraft in the airlines’ fleets (27). Therefore,
the revenues that P&W can generate from its existing
installed base of engines are not comparable to those
that GE may expect to generate. This disparity in cash
flow generation will also determine the way competition
between these two engine manufacturers will evolve in
the future. In addition, GE is likely to benefit from such
withdrawals and replacements more than its competi-
tors. Not only is its better incumbency position likely to
determine the airlines’ choice of engines, but
the
additional advantages derived from GE’s vertical inte-
gration militate strongly in favour of this likelihood
materialising.

(82) Contrary to the static view of the overall installed base
expressed in units of engines, the outcome of the net
present value calculation of
the future spare parts
income is more indicative of what the competitors’
respective true market positions are. The Commission’s
calculations confirmed that, because of the very nature
and characteristics of
the manufacturers’ respective
installed bases, GE is again much better placed than
P&W when it comes to the assessment of its ability to
compete in the future. In this respect, the Parties have
argued that it would be inappropriate to aggregate the
aftermarket revenues stemming from the installed base

(27) The airframes concerned are all McDonnell Douglas aircraft (e.g.
DC8, DC10 and MD11 in the wide-body segment; DC9, MD80
and MD90 in the narrow-body segment). The DC10 and MD11
wide-bodies are likely to be replaced by B777X’s (GE engine) or
A340’s (RR engine). The narrow-body DC9, MD80, or MD90
are likely to be replaced by B737’s (CFM56 engine) or by the
A320 family (CFM56 or IAE V2500).

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Official Journal of the European Union

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of CFMI and GE engines and that only a proportion of
those should be attributed to GE, with the rest accruing
to SNECMA. However, the Commission considers that
such revenues accrue to CFMI as a joint venture and that
the parent companies are likely to reinvest such revenue
in the financing of future CFMI engines. The same
applies to RR and P&W, which, as parents of IAE, are
likely to reinvest the revenue derived by IAE engines in
the development of IAE engines.

d) C o n c l u s i o n o n G E ’ s m a r k e t p o s i t i o n
i n l a r g e c o m m e r c i a l a i r c r a f t e n g i n e s

(83)

that of

its competitors. Moreover,

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

factors including GE’s vertical

investigation,

3)

Large regional jet aircraft

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

Table 7

Engine installed
base of

GE

HON GE/HON

RR

P&W

Aircraft
duction

in pro-

[60 %-
[30 %-
70 %]* 40 %]* 100 %

0 %

0 %

Overall
base

installed [40 %-

0 %-
[40 %- 90 %-
50 %]* 50 %]* 100 % 10 %

0 %

Source: Parties’ data.

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

Table 8

Engine order backlog on large regional jets not yet in
service

(To be delivered from 01 January 2001)

Models

GE

HON

RR

—

—

—

—

—

—

0

P&W

—

—

—

—

—

—

0

X

X

X

X

X

—

X

—

—

—

—

—

X

X

[90 %-
[0 %-
100 %]* 10 %]*

0 %

0 %

CRJ-900

ERJ-170

ERJ-190

728JET

928JET

Avro RJX

Total

%

Source: Parties’ data.

(86)

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

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

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4) Corporate jet aircraft

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

Table 9

Engine installed base on corporate jets

(As of 31 December 2000)

Engine installed
base of

Aircraft
production

still

GE

HON GE/HON P&W

RR

in [0 %-

[30 %- [10 %-
[40 %-
10 %]* 50 %]* 50 %]* 40 %]* 20 %]*

[40 %-

Aircraft no longer
in production

[10 %-
[0 %-
[50 %-
20 %]* 50 %]* 60 %]* 40 %]* 10 %]*

[30 %-

[40 %-

Overall
installed base

engine [10 %-

[30 %- [10 %-
[50 %-
20 %]* 50 %]* 60 %]* 40 %]* 20 %]*

[40 %-

Source: Parties’ data.

Table 10

Engine installed base on medium corporate jets

(As of 31 December 2000)

Engine installed
base of

Aircraft
production

still

GE

HON GE/HON P&W

RR

in [10 %-

[0 %-
[80 %-
20 %]* 70 %]* 90 %]* 20 %]* 10 %]*

[10 %-

[60 %-

Source: Parties’ data.

(89) Honeywell can, therefore, be considered the leading

engine supplier on this market.

5) Maintenance, repair and overhaul

a)

S p a r e p a r t s

Parties claim that non OEM’s have the potential to make
every single part provided that they invest in reverse
engineering, designing (and if necessary designing
around any valid and enforceable OEM intellectual
property right), certifying and manufacturing the part.

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

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

(93)

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

(90) According to the Parties, proprietary parts sold by an
aircraft engine manufacturer face competition from a
number of sources, including: (i) the secondary channel,
(ii) parts manufacture approval
(PMA) sources, and
(iii) non-OEM designated repairs (DERs). In addition, the

(94)

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

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b) M R O s e r v i c e s

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

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

service provider an agreed sum per engine flying hour
to have all necessary service performed on the engine.
These contracts generally cover both the spare parts
and services and typically prices are fixed, subject to
escalations, for the duration of the agreement. Indepen-
dent MRO service providers cannot offer this type of
contract without taking the risk of bearing the unexpec-
ted increased cost of spare parts supplied by OEMs.

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

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

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

(98)

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

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

(99) Moreover,

independent MRO providers and airlines
claim that when there is no competition on markets for
spare parts their prices increase more over time than the
consumer price index and that constitutes a difficulty
for them to commit to long term fixed price contracts.
Indeed, there is an increasing trend for airlines which
out-source their maintenance to request a ‘fleet-hour-
agreement’ also called a ‘power-by-the-hour’ contract.
The customer contracts, on a long-term basis, to pay the

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

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

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

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

1.B.3.

Factors contributing to GE’s dominance in
engines

1) GE capital

(107) GE is the world’s largest company in terms of market
capitalisation (28). In the aerospace sector, GE offers a
unique combination of complementary products and
services to customers. Indeed, as acknowledged in its
own documents, GE is not only a leading industrial
conglomerate active in many areas including aerospace
and power systems, but also a major financial organis-
ation through GE Capital. GE’s financial arm contributes
around half of the GE Corporation consolidated revenues
and manages over USD 370 billion, more than 80 % of
GE’s total assets. If GE Capital were an independent
company, it would, on its own, rank in the top 20 of
the Fortune 500 largest corporations.

(108) In addition to having enormous financial means avail-
able in-house, GE’s unmatchable balance sheet size offers
other major advantages to GE businesses. Indeed, unlike
any other company, and in particular other engine
manufacturers, as acknowledged in its own documents,

(28) Market capitalisation of USD 480 billion as of 1 June 2001 (far
greater than any other company active in the commercial aircraft
market such as Boeing with around USD 56 billion, UTC with
USD 39 billion and RR with USD 5 billion).

GE is able to take more risk in product development
programmes than any of its competitors. This ability to
absorb product failures without jeopardising its future
ability to compete and develop new products in an
industry characterised by long term investments is
critical (29).

(109) In its recent coverage of GE, Bear Stearns, the indepen-
dent equity research firm, describes GE Capital as one of
the largest financial companies in the world. Bear Stearns
also underlines that ‘GE Capital Services is able to assume
higher risks within its portfolio than the average of its
peers’ (30). Bear Stearns further describes GE Capital as
a ‘global
financial powerhouse’ and underlines the
competitive advantage GE enjoys over its competitors
through GE Capital by stating that ‘GE’s ownership of
GE Capital Services is, in our opinion, its most significant
advantage over its industrial rivals. [...]*. GE’s industrial
businesses are predominantly leaders in their fields, and
GE Capital is no different. Overall, we believe that GE
Capital’s tremendous size and product breadth produce
key sustainable advantages’ (31).

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

(29) GE indeed appreciates the competitive advantage size offers. GE
explains that size allows it to invest hundreds of millions of
dollars in extremely ambitious programmes like the GE90, the
world’s highest-thrust jet aircraft engine, and the ‘H’ turbine, the
world’s highest-efficiency turbine generator. Size also allows GE
to introduce at least one new product in every segment every
year or to continue to invest in a business during a down cycle,
or to make over 100 acquisitions a year, year after year. Finally,
GE claims that, far from inhibiting innovation, its size actually
allows it to ‘take more and bigger swings’. Although GE rightly
recognises that it cannot succeed in every project, GE makes the
point that ‘size allows GE to miss a few without missing a beat’
(as indicated in GE’s 2000 Annual Report, pages 4 and 5).
(30) As indicated in Bear Stearns’ research on GE dated 9 February

2001, page 5.

(31) As indicated in Bear Stearns’ research on GE dated 9 February

2001, page 7.

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(111) GE has taken advantage of the importance of financial
strength in this industry by relying heavily on discounts
on the catalogue price of the engines. These heavy
discounting practices actually resulted in moving the
break-even point of an engine project further away
from the commercial launch of a platform. Given its
enormous balance sheet, GE has been in a position to
increase rivals’ funding cost by delaying the inception of
cash flows and consequently increasing the need to
resort to external financial means further raising their
leverage (debt/equity ratio) and resulting borrowing
costs (32). By doing this GE has managed to make its
competitors very much vulnerable to any down cycle or
strategic mistake.

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

(113) Contrary to what the Parties submit, heavily discounted
original engine sales do not mean lower costs for the
final customers. Indeed, the Commission’s investigation
has established that in order to assess the net cost of an
engine to an operator, maintenance and spare parts
expenditures (33) have to be added to the initial purchase
price of the engine. The results of this adjusted calcu-
lation show that the total average cost of an engine has
actually increased between 10 and 30 % in real terms
over the last 10 years. This is of course due to the
offsetting effect of the significant price increases applied
annually on all original spare parts (34) manufactured by
the original engine supplier.

financial support

(114) In addition, GE can, thanks to its financial strength and
incumbency advantages as an engine supplier, afford
to provide significant
to airframe
manufacturers in the form of platform programme
development assistance that competitors have not been
historically in a position to replicate. GE uses this direct
financial support to arrange/obtain engine exclusivity
on those airframes that it financially assists (GE has
secured a total of ten exclusive positions out of the last
twelve that were granted by airframe manufacturers)
thus depriving competitors of access to exclusive plat-
forms. [segments quoted from the Procurement Agree-
ment between an airframe manufacturer and GE, con-
infor-
sidered by GE as
mation]* (35).

containing confidential

(115) Exclusivity arrangements can have significant effects on
the aircraft engine market (36) since they guarantee
significant penetration of an airline’s fleet and sub-
sequent incumbency benefits. Exclusivity further benefits
the engine manufacturer because exclusive engine supply
positions eliminate direct price competition (that is,
competition within the same platform) at the level of
the airlines.

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

(117) Quite apart from GE’s ability to influence airframe
manufacturers, GE also uses its financial strength to
influence airlines in their purchasing behaviour by
injecting capital into their activities at critical times as
explained in the following extract from one of the ‘key
feature articles’ by GE’s Chairman and CEO entitled ‘GE
Capital: Jack Welch’s Secret Weapon’ (37):

(32) One illustration of the significant competitive advantage enjoyed
by GE over its industrial rivals resides in its AAA credit rating
which extends to all its subsidiaries and enables them to raise
finance cheaper and quicker than competitors.

(33) The Commission’s market investigation has shown that the costs
for the maintenance and spare parts over the lifetime of an
engine average around 200 % of its initial net purchase price, in
real terms (above inflation).

(34) Between 4 to 5 % of annual increase in real terms.

(35) [See above]*.
(36) The exclusively GE-powered B737 accounts for 993 out of a
total 2 885 aircraft on order from Boeing and Airbus where an
engine selection has been made (34 % of total aircraft order
backlog) as of 31 December 2000.

(37) As published by John Curran of Fortune on 10 November 1997
and posted on GE’s website at http://www.ge.com/news/welch/
articles/f1197.htm.

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‘And what does [GE]* Capital give GE? Valuable cus-
tomers, for one thing: [GE]* Capital provides financing
for the customers of GE divisions like Aircraft, Power
Systems, and Automotive, which helps smooth the way
for those divisions to land large contracts. One of the
more notable instances of a possible link came when
Continental Airlines was struggling in bankruptcy in
1993. Loans from GE Capital helped put Continental
back in the air. Next came a big order from Continental
for new planes, most with GE engines. Says consultant
Tichy: “[GE]* Capital
is part of the arsenal for GE’s
industrial side to beat the competition.”’ (38)

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

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

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

2) GECAS

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

(122) With around 10 % of the total purchases of aircraft,
GECAS is the largest purchaser of new aircraft, ahead of
any individual airline. It has the largest single fleet of

aircraft with 1 040 units valued at USD 22,1 billion (39).
GECAS is twice as big as ILFC, its direct competitor, in
terms of aircraft fleet. GECAS is also the market leader
in terms of jet aircraft on order and options with a total
backlog of 796 jet aircraft at the end of 2000 (535 for
ILFC).

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

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

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

(126) The results of the Commission’s investigation confirmed
that, because of both GECAS’s demonstrated purchasing
bias and its ability to place huge aircraft orders, its 10 %
share of aircraft purchases significantly under-represents
its influence over the aircraft engines and systems
selection process. GECAS’s influence actually derives
from its ability to create an unmatchable economic
incentive for airframe manufacturers to favour GE
products. This incentive is indeed created from either
the relatively limited commercial risk that an airframe
manufacturer faces when granting GE exclusive pos-
itions for its products, or the compensation it can get
from other GE business units such as GE Capital and

(38) As indicated on GE’s website, http://www.ge.com/news/welch/

articles/f1197.htm.

(39) As a comparison, GECAS’s main competitor on the market for
aircraft leasing, International Lease Finance Corporation (ILFC),
has a fleet of [400 to 500]* aircraft (February 2001).

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in particular through sizeable aircraft sales
GECAS,
prospects. In those circumstances, it does not necessarily
matter that GECAS represents ‘only’ a 10 % share of
aircraft sales.

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

(128) By way of illustration of its importance to the airframe
manufacturers, GECAS has also been the single largest
purchaser of jet aircraft in recent years with total orders
of 588 aircraft (40). In comparison, the largest purchases
from the airlines remained below 300 aircraft over that
same period.

(129) As far as large commercial aircraft are concerned,
although there are more Boeing than Airbus aircraft in
the GECAS portfolio, GECAS is of broadly the same
importance to both airframe manufacturers in terms of
orders. In its reply dated 26 February 2001 to the
Commission’s
investigation, Boeing indicated that
GECAS accounted for a little over 10 % of Boeing’s order
book with 135 aircraft on order. The figure was
equivalent for Airbus with a total GECAS backlog of
some 138 aircraft. ILFC has a backlog with Airbus and
Boeing of [200 to 300]* and [200 to 300]* aircraft
respectively. Southwest Airlines is reported to have the
largest backlog of all individual airlines with a total of
144 large commercial aircraft. The next largest order
backlog from an airline is that of Delta with 108 aircraft
on order. Far from representing a fraction of the orders
for large commercial aircraft as the Parties suggest,
the leasing companies’ influence and importance with
Boeing and Airbus have been growing in line with their
share of the large commercial aircraft order backlog
which was reported to account for over 30 % as of the
end of 2000 as confirmed by Mr N. Forgeard, the CEO
of Airbus, in an article from the Financial Times (41), with
the following statements: ‘The group [Airbus] expressed
concern at the growing share of new orders being
accounted for by leasing companies rather than by direct
orders from Airlines. “We are at the upper limit of what
can be accepted, there is a danger of losing control of
distribution” said Noël Forgeard, Airbus’s chief execu-
tive’.

(130) GECAS appears to be also very important to the airframe
manufacturers of regional jet aircraft, Fairchild Dornier,
Bombardier and Embraer, accounting for around 24, 11
and 9 % of their order backlogs respectively as of the
end of September 2000. [Quotes from internal GECAS
documents about GECAS’s Regional Jets Marketing Plan,
considered by GE as containing confidential
infor-
mation]* (42).

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

In addition,

(132) Unlike independent leasing companies such as ILFC,
GECAS does not select aircraft equipment on the aircraft
that it purchases in accordance with market demand. As
a result of GECAS’s policy of only selecting GE engines
the large
when purchasing new aircraft, 99 % of
commercial aircraft ordered by GECAS are GE-pow-
ered (43).

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

(40) From Fleet Database from Back Associates, data through
6 December, 2000. Orders include cancelled orders and those
where engine selection is ‘To Be Determined’.

(41) See the article entitled ‘Airbus chief predicts falling aircraft sales

in 2001’ in the Financial Times, 30 January 2001.

(42) [See above]*.
(43) The remainder is accounted for by eight Boeing 757s for which

GE has no engine on offer.

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

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

‘In 1999, we [GECAS] made significant progress on our
commitment to help our customers meet their fleet and
balance sheet objectives. For example, at China Eastern,
one of the largest Chinese airlines, GECAS helped the
airline reduce its short-term capacity, standardise its
fleet around CFM-powered Airbus narrowbodies and
generate hard currency.’ (44)

(136) The market investigation has further underlined that
GECAS has the ability to standardise fleets around GE-
powered aircraft and convince an airline that would not
otherwise have leased a GE-powered aircraft to accept
such an aircraft by offering far more than leasing services
and being able to take advantage of the aviation and
financial resources within the GE family (45). Finally,
GECAS’s ability to shift market shares by seeding airlines
with GE-powered aircraft has, given the existence of
commonality, a multiplying effect in that those airlines
will continue to purchase its engines in the future,
therefore magnifying GE’s engine sales. Contrary to the
Parties’ contention in their reply to the statement of
objections and at the oral hearing, GECAS has indeed
been able to significantly increase GE’s position without
GECAS’s increased purchases of GE engines having been
offset by purchases of non-GE engines by airlines
or other leasing companies. Consequently,
through
GECAS’s bias in favour of GE engines and its influence
over airlines, GE has been able to increase GE’s market
shares of engines.

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

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

(139) The vertical

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

3) Non-replicability of GE capital/GECAS

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

(44) GE’s 1999 Annual Report, page 23.
(45) [Example of GECAS’

involvement in commercial agreements

with airlines, considered by GE as confidential information]*.

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

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

(143) Second, even if competing engine manufacturers decided
to enter the financial business by setting up a leasing
company, it would take them a considerable amount of
time and money to reach the level of operability and
efficiency of GECAS. It took for instance around 30 years
for ILFC to reach its current level of leasing activity.
GECAS’s rather rapid growth should however not be
confused with a potential for easy replicability. Indeed,
while it
took GECAS only five years following its
acquisition of GPA to become what it is today (46),
reaching this position was only possible thanks to the
available financial means of GE Capital acting as GE’s
internal bank. Without such strong financial resources,
neither UTC nor RR could invest in a fleet of aircraft
worth over USD 20 billion like that of GECAS. Further-
more, prior to making this significant step into acquiring
its aircraft leasing business, GE Capital had been able to
accumulate industry know-how through its decade-long
involvement in the leasing business of other equipment
such as railcars, medical units and appliances.
It is
therefore the combination of an extensive know-how
with financial strength that made GECAS grow so
rapidly. Engine competitors lack comparable financial
resources and know-how to reach GECAS’s level even
over a longer period of time.

(144) Finally, both competing engine suppliers lack the necess-
ary installed base of engines to be able to implement a
RR-only or P&W-only policy for the purposes of rep-
licating GE’s seeding practices. They would indeed
simply not be able to propose interesting solutions to
airlines, as these would have to forego the commonality

(46) GPA had a fleet of approximately 500 aircraft at the moment of

its acquisition by GE.

advantages linked to their GE installed base. Because of
this lack of market liquidity for such P&W or RR-only
aircraft, trying to flood the airlines with such products
would not be commercially credible and would auto-
matically result in a significant drop in the residual
financial value of such products. Consequently, making
the investment in a leasing company that would have to
implement such a commercial policy is unlikely to be
supported by those investors that would have to supply
the funds as it would be much too risky to undertake. In
that respect, history is a reliable proof that no engine
competitor has been able to replicate the advantages that
GE engines enjoy through GE Capital and GECAS (47).

(145) For

these reasons,

the Commission considers that
GECAS’ replicability is not an option to competing
engine suppliers and therefore such a possibility cannot
constrain GE’s dominance in the engines markets.

4) Commonality

(146) Commonality across engine types also contributes to
GE’s dominance. Indeed, the fact that airlines using an
aircraft powered by a particular type of engine generally
tend to purchase incremental engines from that same
engine manufacturer puts GE, as the incumbent engine
supplier, in a very favourable position when an airline
decides to buy a particular engine for a specific type of
aircraft since it will generally prefer to purchase the
same type of engines in the future owing to the benefits
of fleet/engine commonality (48).

(147) The results of the Commission’s investigation show that
there can be very substantial economies of scale related
to the standardisation of an airline’s fleet or part of it
(sub-fleet). This is particularly, although not exclusively,
relevant for engine maintenance. The investigation has
also revealed that although commonality is directly
related to the level of market shares achieved by engine
manufactures over the past, commonality benefits can
be overruled by offsetting practices that GE, through the
use of GE Capital and in particular GECAS, appears to
be the only company to have the ability to effectively

(47) RR’s 50 % participation in the Pembroke leasing company is in
no way comparable to what GE Capital has achieved through
GECAS since Pembroke is one tenth of the size of GECAS and
commercially unable to reproduce GECAS’s biased behaviour.
(48) In that respect, GE’s position with European airlines is quite
favourable. Indeed, GE is the incumbent engine supplier (that is
the supplier with over 70 % of the engine installed base) with all
European national flag carriers except for the United Kingdom
and Luxembourg.

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and successfully implement (49). The investigation also
confirmed that those airlines that operate mixed fleets
on a given mission profile and consequently do not
enjoy particularly high commonality benefits at a given
time are usually operators undergoing fleet rationalis-
ation or in the middle of a fleet renewal programme.

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

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

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

(151) While most of the replies from the airlines consulted for
the purpose of the investigation revealed that costs
associated with switching from one engine type to
another can only be quantified on a case-by-case basis,
some airlines gave readily available figures for the costs

(49) [Example of GECAS’

involvement in commercial agreements

with airlines, considered by GE as confidential information]*.

of having to retrain a maintenance engineer as an
illustration, not of the magnitude, but of the escalation
one can expect according to the actual type of switch
undertaken. For example, the typical order of magnitude
when the new engine belongs to a family for which the
engineer is already trained is about EUR 1 000 to 5 000.
When the engine does not belong to a specific family
but still comes from the same manufacturer, the cost
will increase to around EUR 5 000 to 10 000. The cost
associated with switching is clearly higher when the new
engine comes from a different supplier as it could go up
to EUR 20 000 per engineer since the commonality of
this new engine with the previous ones will be limited.

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

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

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

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(155) Furthermore, when considering the purchase of an
aircraft type not yet represented in its fleet, the Com-
mission’s investigation established that a customer usu-
ally prefers to order an engine that will fit into the
families of engines that already power its current fleet.
Contrary to the Parties’ contention that commonality
does not apply across engine families, the investigation
confirmed that, to the extent that engines within an
engine family offer product similarities and share com-
mon components or design, an airline customer will
indeed benefit from selecting an engine family to power
various aircraft types and consequently enjoy benefits
from commonality across this engine family. For exam-
ple, during its negotiations with Airbus for the order of
several A318s, a large European airline asked for an
alternative solution (the CFM engine) to Airbus’s first
offer of a P&W engine (PW6000) because of
the
economies generated by the commonality with other
engines in its fleet. Eventually, benefits such as training,
commercial and support advantages, and so forth can
also be extracted from an established relationship with a
manufacturer that supplies an airline’s engines across its
different aircraft types.

(156) For those airlines which have chosen to outsource their
MRO activities, the extent of the switching costs may
vary according to both the relative importance of (in-
house) line maintenance in their total maintenance cost
and the transaction costs associated with the sending of
the different engine types (such as GE, RR and/or P&W)
to different specific repair shops. Higher transaction
costs often materialise through the effects of exclusive
long-term MRO contractual arrangements that in most
cases constrain operators to either stick to the types of
engines their chosen repair shops carry or find alterna-
tive repair shops for those new engines they contemplate
purchasing. By having to do so, operators are likely to
lose the scale economies benefits that an exclusive
supplier might have been willing to share with its
customers. In the event that a repair shop agrees to
perform MRO on all engines regardless of their initial
make, transaction costs for the airline may be lower
because of the possibility for the shop to spread them
over a greater number of engines, but will still be
significant as diseconomies of scale will inevitably, to a
certain extent, apply to the repair shop itself.

shown from the following extract from Boeing’s ‘Quick
Look’ catalogue of aircraft, engine commonality gener-
ates benefits not only within a given type of aircraft but
also across different aircraft types. This shows that mixed
fleets do not prevent airlines from enjoying engine
commonality advantages:

‘Boeing — Quick Look: 747-400 Features: Commonal-
ity: All 747-400 and 767 advanced engine types are
interchangeable.’ (50)

(158) In addition, the existence of mixed fleets for the same
type of aircraft does not necessarily show the irrelevance
of the commonality benefits since the existence of such
mixed fleets can simply reflect the situation of an airline
in the middle of a fleet renewal programme or the
specific mission profile capabilities of certain aircraft
that result in both aircraft and engine fleet differentiation.
Furthermore, commonality gains are typically very high
until the fleet or subfleet concerned achieves the critical
size that, once reached, will only allow for limited
increased commonality gains. Technological improve-
ments also explain why engine switches might take
place, generally within an engine family, and therefore
diminish commonality within an engine family’s gener-
ations. For example, one of the larger European airlines
confirmed in its reply to the Commission’s investigation
that, in order to benefit from new technological develop-
ments, it recently ordered CFM56-5B engines for its new
A320 while it had purchased CFM56-5A for its older
A320 in 1988. In some cases, the fact that some aircraft
offer no engine choice cannot be overcome by the airline
that purchases a specific airframe with engines it would
not otherwise have purchased. In those instances, the
cost for the absence of choice and the resulting lack of
commonality will have to be borne by the airline with
the ensuing operational cost disadvantage.

(159) Regardless of any airline organisation consideration,
significant additional engine commonality benefits have
also been identified by the Commission’s investigation
at the level of an airline’s utilisation of the aircraft since
engine commonality reduces the number of different
crew qualifications required and reduces the need for
training courses and simulator time. Operators prefer
to avoid such costs, although they are not readily
quantifiable, in order to increase the airline’s flexibility.

(157) In addition, the Parties’ argument that most airlines
operating mixed fleets (fleets where no incumbent
engine supplier can be identified) comprising a number
of aircraft and engines types demonstrates the lack of
importance of commonality, does not hold. First, as

(50) As indicated in the annex to Boeing’s reply to the Commission’s

questionnaire on 19 February 2001.

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as

supplier,

an engine

[description of P&W’s

(160) Finally, when the Parties argue that a large installed
base does not ensure strong future orders and share
by submitting that P&W’s market share was 80 % in
1980 and declined to around 40 % at the end of
2000, they fail to take into account several critical
elements that invalidate such arguments. First, P&W
actually benefited,
from
commonality advantages
that helped it build its
installed base to the level it once reached. Moreover,
P&W is still today the incumbent engine supplier with
a series of airlines, which has actually prevented P&W
from being more rapidly marginalised, at least on the
market for large commercial aircraft engines. However,
P&W engines power on average older aircraft than GE
limited future sales
and therefore can only expect
potential
strategic decisions
concerning the orientation of development efforts on
large commercial aircraft engines, considered by UTC
as containing confidential information]* (51). The B737
was and still
is the most successful aircraft of civil
aviation and [description of P&W’s strategic decisions,
considered by P&W as containing confidential infor-
mation]*. GE managed to reproduce its exclusivity on
the latest generation of that aircraft. The Parties’ further
argument that, by comparison with P&W (and RR),
GE has been less successful in selling engines for the
A380, A330 and the B777 is not indicative of the
commonality. As already
lack of
indicated above,
the A380 example is not yet a
relevant benchmark as a limited number of orders has
been placed so far while Airbus actually expects
around 1 000 units of this aircraft to be marketed. In
addition, every time P&W could get a chance to power
this aircraft,
it will be with GE as a result of their
engine alliance. GE’s lower share of the low selling
A330 platform was reported to be attributed to the
In
technical
order
recently
launched a new derivative of that engine, the CF6-
80E1A3, and its share of engines for the A330 has,
since then, started to rise rapidly. As far as the B777
is concerned, while GE was indeed lagging behind RR
but closely trailing P&W in terms of engine orders for
the classic version of
this aircraft, GE remedied
this potential commonality advantage limitation by
securing the exclusive engine supply for the latest
version of this aircraft (i.e. the ‘B777X’) and it expects
to reverse the current position with an anticipated
[...]* % average market share on all B777 models by
2008. More importantly, P&W’s share of the installed
base is constantly under attack by GE and not the
reverse. Indeed, overcoming commonality hurdles by
turning round airlines and introducing GE-powered
aircraft as is done by GECAS is a possibility that is
not easily replicable by P&W.

inadequacy of GE’s CF6-80E1 engine.

situation, GE has

to remedy this

importance of

(51) [See above]*.

(161) Apart from the fact that from an engine manufacturer’s
perspective commonality is desirable because it generally
lowers development (52), manufacturing and product
support costs, benefits from engine commonality arise
from different levels of an airline’s activities and as such
constitute an undeniable factor that operators take into
account when placing aircraft orders.

(162) As a result of its high share of the worldwide installed
base of engines for both large commercial and regional
aircraft, GE has a greater ability to exploit such com-
monality benefits on all coming tenders. In addition, GE
has at its disposal a number of means to maintain
and develop its leading market position, such as, in
particular,
its ability to leverage both GE Capital’s
financial power and GECAS’s market access to overcome
commonality barriers.

5) GE’s dominance

(163) The Commission considers that the combination of all
these elements makes GE’s high market shares the right
proxy for dominance. Indeed, the ability to put together
its considerable financial strength,
its ability to buy
large quantities of aircraft, to enjoy the benefits of
commonality and to offer comprehensive packaged
solutions to airlines have given GE the ability to foreclose
competition.

(164) Indeed, on 10 of the last 12 platforms for which airframe
manufacturers offered exclusive positions (53), GE man-
aged to place its products. The example of the B777X (54)
is a telling illustration of how GE’s vertical integration
coupled with its financial strength enable GE to win
exclusivity wherever it wishes (55).

(52) For example, it generally costs less to develop a scaled version of
an existing engine than to develop an entirely new engine.
(53) 11 out of 13 if the recent CargoLifter example is included (that
is, over 80 % of all exclusive platforms for which GE has
either decided to bid or not deliberately withdrawn from the
competition).

(54) Based on information supplied by third parties, it can be argued
that the GE exclusive B777X is a platform that is certainly
capable of supporting more than one engine and for which there
is airline demand for more than one engine. Therefore, it could
be argued that in addition to securing the exclusive position on
that platform, GE even managed to turn the stretched version of
the multiple-source classic B777 platform into a single-source
airframe.

(55) It has to be noted that GE did not bid to power Bombardier’s
large regional jet, BRJX. In any event, although P&W in cooper-
ation with SNECMA had developed a suitable engine,
the
development of the BRJX platform was eventually cancelled. GE
won the competitions to power the remaining large regional jets
of Bombardier.

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(165) Indeed, GE’s latest large commercial aircraft exclusive
engine deal was achieved with the GE90-115B, the
largest and probably most expensive engine ever
developed to date. The initial version of the GE90 was,
together with a P&W engine and a RR engine, available
on the first version of the B777-200/300 (better known
as the ‘classic B777’). The B777-200/300 represents
today some 5 % of the total market for large commercial
aircraft as a whole. Although GE won a number of
campaigns before entry into service, its market share
barely went over 30 %. Currently, GE’s share of the
installed base as of 31 December 2000 on the B777-
200/300 is 31 %, RR’s is 35 % and P&W’s is 34 %.

(166) GE managed to get this exclusivity thanks to a combi-
nation of factors that its competitors could not repro-
duce, despite the fact that they were technically capable
of supplying the engine. [Internal GE documents describ-
ing the winning offer combination, considered by GE as
containing confidential information]* (56).

(167) Moreover, GE obtained this exclusivity despite the fact
that its GE 90 engine appeared to have been an inferior
to competing engines. Forbes magazine (57)
product
that GE has
attributes GE’s exclusivity to the fact
managed to redefine the business.
It described the
transaction in the following terms:

‘Instead of selling engines, [Jack Welch] is selling power,
since some clever financing helped GE win the business.
The plane will be sold by Boeing as a package — aircraft
and engines. This is a break with normal practice where
airlines buy airplanes separately from the jet engines
that power them. GE’s twist on this deal is to offer
airlines fixed-price off-wing maintenance of the GE
90 engines, including spare parts, at a preset cost of so
many dollars per flight hour [...]* So critical was this
carrot to Boeing that when Pratt & Whitney engineers
came in with a last-ditch attempt to win the deal, Boeing
told them that their much-improved offer was still
hundreds of million of dollars below target. [...]* Thus
GE is selling not pure engines but a blend of engines,
maintenance and financing.’

(168) The ability of GE to offer engines across the whole range
of the B777 aircraft is a significant advantage that no
other engine manufacturer can enjoy. This exclusivity is
consequently a powerful tool for GE to improve its
position on the classic B777 as the B777X is expected to

it will

become the baseline, and therefore the most frequently
purchased, model for the B777 series. This situation
introduces a true bias in the selection of engines for an
aircraft where engine choice nonetheless exists in the
lead to a rapid increase in the
sense that
market penetration of the GE90, quickly overtaking the
competition and marginalising those B777s powered
by competitive engines.
Indeed, with the problems
associated with operating two engine types on the same
airframe, the preference of B777 customers may be to
switch to the GE90 sooner rather than later, thereby
displacing the RR Trent and PW4000 on the B777-
200ER and B777-300, accelerating the market pen-
etration of the GE90 on the classic B77. Indeed, GE
forecasts in its own internal documents that, following
the introduction of its exclusive growth version, the
GE90 market share will have doubled to [...]* % of the
entire B777 platform over the short to medium term,
while the RR Trent 800 and the PW4000 will both fall
to around 20 % each.

(169) Alternative engine sources are typically available only
on large commercial aircraft, where they enable cus-
tomers to take advantage of competition between engine
manufacturers so as to obtain bigger concessions from
them in return for buying the aircraft. As this was not
the case with the B777X, potential purchasers of that
aircraft have been quoted in the industry press as being
opposed to GE’s exclusive engine supply position on
that airframe. Major airlines such as American Airlines,
United Airlines, British Airways, Cathay Pacific, and
Malaysia Airlines stated that they were unhappy with
the deal, which they described as unwelcome. They
would indeed have preferred a choice of engines due to
better pricing leverage, in addition to the fact that, at the
time of the selection, the GE90 was not as good as the
RR Trent for example. These major customers were
therefore concerned that the deal could have an adverse
impact on their own competitive position.

(170) As far as the only two RR sole-source positions are
concerned, none of them are in any way an expression
of GE’s lack of dominance. [Description of the A340-
500/600 bid process, considered by GE as confidential]*.
[Description of the commercial agreement between RR
and Airbus for the A340-500/600, considered by RR as
containing confidential information]*. The other sole-
source agreement of RR is the B717, which is the
smallest large commercial aircraft for which GE did not
bid (58).

(56) [See above]*.
(57) Forbes, 9 August 1999, ‘Jack Welch, engine salesman — When
GE wants to land an engine contract, it doesn’t sell engines. It
sells power’, by Howard Banks.

(58) GE did not have an existing engine for the B717 platform. The
low sales prospects of that platform may have dissuaded GE
from investing in a new engine. RR, on the other hand, had an
existing engine on offer, which could power the platform.

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(171) The other most significant instances where GE managed
to be the exclusive engine supplier took place on the
market for large regional jet aircraft engines. It is again a
combination of, among others, financial contributions
(USD [...]* in the case of [...]* as described above), aircraft
orders by GECAS (150 aircraft for each of the three
large regional jet manufacturers (59)) and customer sales
financing contributions that positioned GE as the exclus-
ive supplier to these airframe manufacturers.

(172) By preventing the development of a large regional jet
with a non-GE engine, GE eliminated the underpinnings
for future competition and innovation in this market as
well as price competition for the airlines. By comparison,
on smaller regional jets, where competing airframes are
available with different engines, airlines are still able to
obtain concessions from the engine suppliers to help
them decide between the competing airframes. No price
competition will occur with respect to the Bombardier,
Fairchild-Dornier and Embraer large regional jets since
all will be equipped with the same GE engine [quote
jets,
from a GECAS internal document on regional
considered by GE as containing confidential
infor-
mation]*. The only exception to the true monopoly of
the 70 to 90+ seat regional jet airframes is BAe’s Avro
regional jet, which is powered by Honeywell engines.
However, as a result of the merger, even that competition
will cease to exist.

6) No competitive constraint

(173) Unlike any other engine manufacturer, GE can afford to
encourage and systematically obtain exclusivity and
capture aftermarket,
leasing and financial revenues.
From an airframe manufacturer’s perspective, selecting
GE allows the airframe manufacturer to access the largest
customer base of airlines and secure either a significant
launch order or a significant boost order for its aircraft
from GECAS. No other engine competitor has the size,
financial strength or vertical integration to replicate such
offers.

7)

Lack of constraint from current competitors

a)

P r a t t & W h i t n e y ( P & W )

(174) P&W is a division of UTC that also includes Otis
elevators and escalators (Otis), Carrier heating and air-
conditioning systems (Carrier), as well as Sikorsky

helicopters and Hamilton Sundstrand aerospace systems
(Flight Systems). The P&W and Flight Systems segments
comprise UTC’s aerospace business and produce com-
mercial as well as government aerospace and defence
products. More particularly, the P&W products include
aircraft engines and spare parts as well as a full range of
overhaul, repair and fleet management services.

(175) P&W achieved sales of USD 7,4 billion in 2000, which
represent little over 25 % of UTC’s consolidated revenues
[description of the relative importance of the sales of
large commercial aircraft engines for UTC’s consolidated
revenues, considered by UTC as containing confidential
information]*. Support of the installed engines, spare
parts and military activities are becoming so important
to P&W that they represent the long-term stability in
both its production and employment base as confirmed
by M. Remez and B. Nagy in one of P&W’s hometown
newspapers:

‘Connecticut’s largest private employer, P&W, stands to
win orders for thousands of its F119 engines [P&W’s
military engine that will compete with GE’s F120 to
power the Joint Strike Fighter] worth tens of billions of
dollars and stabilise its workforce. But the Pentagon
is likely to change, and it could be killed
proposal
altogether.
If the programme is canceled — a real
possibility, some analysts say — the blow to East-
Hartford-based Pratt and its Connecticut workforce of
12,000 could be devastating.’ (60)

(176) The fact that the overall market share of P&W has been
shrinking drastically over the last two decades, falling by
roughly a half, has largely contributed to the situation
described above. The market share decline has been
most notable in the large end of the engine market
where P&W went from a little less than 40 % of the
engines for large commercial aircraft deliveries in 1990
to achieve only 16 % of those deliveries in 2000. If we
exclude P&W’s share of the A320 deliveries through the
IAE consortium, this figure even goes down to as low as
10 %.

(177) Notes taken by a GE official at a Morgan Stanley
conference on 22 September 1999 reflect the statement
made by George David, UTC Chairman and CEO, clearly
underlining the fact that P&W has been steadily losing
market shares and that this has started to impact their
activities:

(59) [Example of GECAS’

involvement in commercial agreements
with airframe manufacturers, considered by GE as confidential
information]*.

(60) See ‘Riding Fighter’s Wing’ in The Hartford Courant, 12 March

2001.

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‘P&W is seeing increased retirements of its engines (1,5 %
of fleet each year — “bigger impact on us [P&W] than
others in the industry”).’

‘450 parked aircraft in 1999, half of which are P&W-
powered.’

‘[Engine] Shop load dropping 30 % 1999/2000.’ (61)

(181) P&W’s situation is further illustrated by the comments
made by the P&W management on the evolution of
their performances over the recent years. They stated that
the revenues generated by the high margin aftermarket
activities helped P&W limit the level of its revenues
degradation: ‘P&W’s revenues (1999 compared to 1998)
decreased USD 202 million (3 %) in 1999. The decrease
reflects fewer military and commercial engine shipments
and lower commercial spare parts volumes, partially
offset by increases in the commercial overhaul and repair
business, military after-market and P&W Canada’ (63).

(178) P&W’s major engine products are indeed being phased
out, facilitating and accelerating GE’s dominance in jet
engines. For example, P&W’s large fleet of JT8D and
JT9D engines installed on the successful airframes of the
1960s, 1970s, and 1980s are beginning to reach
retirement age. According to the age distribution of the
current commercial airliner fleet, P&W supplied the
engines on the majority of the planes over 15 years old
while GE/CFMI supplies the majority of planes less than
15 years old.

(182) However, whether a manufacturer can afford to invest
in new engine programmes today is heavily influenced
by the ongoing success of mature engine programmes
and the contribution of the revenue stream they generate
year after year. A manufacturer can indeed invest in new
programmes only if it has mature programmes that
supply sustaining funds for the development phase to
the break-even point of the new programmes (which
can be well over 20 years) [description of the evolution
of P&W’s cash flows expected from the after-market,
considered by UTC as containing confidential
infor-
mation]*.

(179) As a result of GE’s increased market penetration and
P&W’s smaller new share and growing retirements
(accelerated by noise-regulated phase-outs of older
stage II equipment), the installed base leadership has
undergone a dramatic change.

(180) The obvious consequence of P&W’s eroded share of the
overall engine market is that P&W, and in particular its
large commercial aircraft engine business, is more than
ever relying on its past achievements. Instead of building
up the stream of future cash flows that would enable it
to offer competitive products and put it in a position to
remain a major contender for future platform wins,
P&W cannot currently do better than cashing in on the
sale of spare parts and services to support its ever
shrinking installed base of engines as confirmed by M.
Remez and B. Nagy:

‘P&W’s share of the commercial engine market has
eroded steadily over the past 15 years, making the
military business the cornerstone of the company’s new
engine work. Without solid military orders, P&W slips
closer to leaving the engine design and engine pro-
duction business, and becoming simply a repair and
maintenance shop.’ (62)

(183) P&W appears to be refocusing its activities away from
the large commercial aircraft engine businesses where it
is no longer present independently and not expected to
secure a stable position in the future, apart from its two
alliances covering specific thrust ranges (IAE with RR
and the Engine Alliance with GE). [Quote from a
Honeywell internal e-mail message, describing P&W’s
position in the market, considered by Honeywell as
containing confidential information]* (64).

(184) The efforts, although often unsuccessful, made by P&W
in trying to increasingly play a major role in the markets
for regional and business jet engines confirm the results
of the Commission’s market investigation that have
revealed the perception amongst several players in the
industry that P&W as an independent competitor is
effectively in the process of slowly exiting from the large
end of the market for engines for commercial aircraft.

(185) [Description of the non-compete clause included in the
agreement of the IAE joint venture, considered by UTC
as containing confidential information]* (65).

(61) As indicated in GE’s internal document 121-DOC-001618-1620.
(62) See ‘Riding Fighter’s Wing’ in The Hartford Courant, 12 March

2001.

(63) UTC’s 2000 Annual Report, page 6.
(64) [See above]*.
(65) [See above]*.

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(186) As regards wide-body aircraft, P&W will supply the
GP7000 engine to the very large aircraft (A380) in
cooperation with GE (in the Engine Alliance). With
the required development adjustments and regulatory
approval extensions, this engine (or derivatives thereof)
is technically capable of being applied to all wide-body
aircraft. In that framework, GEAE and P&W are currently
studying whether the Engine Alliance engine would
be suitable for the B767-400 ERX that Boeing is
contemplating.

(187) It therefore appears that P&W uses these joint ventures
in the large commercial aircraft engine sector (IAE and
the Engine Alliance) to refocus its independent business
activities away from engines for large commercial air-
craft. [P&W’s future strategy in the large commercial
aircraft engine sector, considered by UTC as containing
confidential information]*.

(188) [P&W’s comments as indicated in its reply to the
Commission’s investigation concerning P&W’s recent R
& D strategy, considered by UTC as containing confiden-
tial information]* (66).

(189) [P&W’s future strategy for commercial engineering and
development (E&D) spending on large commercial air-
craft, as indicated in its reply to the Commission’s
investigation, considered by UTC as containing confi-
dential information]* (67).

(190) Regardless of the strategies applied or announced by
P&W in the different aircraft engine market segments, it
must be recalled that, while P&W is part of a relatively
large corporation (although UTC’s market capitalisation
is still less than one-tenth that of GE), it does not enjoy
the financial backing that GEAE has with GE Capital.
The total value of GECAS’s current and ordered aircraft
(around USD [...]*) gives a fair appreciation of GE’s
capacity for strategic use of GE Capital as a financial
power. At the same time, this total only represents some
[...]* % of the total value of GE Capital Services’ assets
(up from [...]* % at the end of 1995).

(191) Similarly, P&W does not have the opportunity to
leverage its engine sales with a tool such as GECAS.
GECAS is indeed the only leasing company fully owned
by an incumbent engine manufacturer.

(192) As a result, P&W cannot be as influential over airlines as
GE Capital/GECAS is through financing arrangements
or incentives, such as offering to assist in placing used
aircraft that may be surplus to an airline’s requirements,
that lead airlines to prefer GE’s products over those of

its competitors [extracts from an e-mail message from
GEAE concerning the selection of GECAS and GEAE by
an airline, considered by GE as containing confidential
information]* (68).

(193) Furthermore, GECAS’s policy of ordering only GE-
powered aircraft together with its proven ability to act
as launch and/or boost customer is another GE feature
that puts GEAE ahead of P&W when it comes to
marketing the original equipment. Unlike GE, P&W is
indeed not in a position to offer airframe manufacturers
the possibility of significant GECAS orders to induce
them to choose GE equipment or grant GE exclusivity
with the CF34.

(194) In the light of the foregoing, P&W appears to no longer
be an effective direct independent competitor to GE for
much of the market for engines for large commercial
aircraft and for large regional jets.

(195) Eventually, since the majority of new aircraft pro-
grammes, at least in the near term, will be corporate
aircraft, it is in this segment that P&W, through P&W
Canada, RR, GE and Honeywell will directly compete.
P&W’s competitiveness and commercial success could
therefore be assessed soon against
the expectation
that, thanks to GE Capital Corporate Aviation Group
(GECCAG), GE’s extension of GECAS and GE Capital
into the corporate jet segment, GE will address each new
opportunity with the same pattern of obtaining platform
exclusivity in return for financial support and large
orders.

b) R o l l s - R o y c e ( R R )

(196) As far as RR is concerned, given [description of RR’s
limitations, considered by RR as containing confidential
information]* (69) and its lack of vertical integration into
significant aircraft purchasing, it clearly cannot replicate
GE’s market strength. Although a very capable supplier
from a technical perspective, RR can therefore not be
considered as a credible bidder for all engines across all
markets and in particular in winning engine exclusivity.

(197) RR is an international company with headquarters in
the United Kingdom, businesses in seven European
countries and joint programmes in a further three. RR’s
main business lines are civil aerospace, defence, marine
systems and energy. RR was privatised by the British
Government
in 1987. RR achieved sales of GBP
5,8 billion in 2000 of which over 50 % were generated
by its civil aerospace activities (GBP 3,2 billion).

(66) [See above]*.
(67) [See above]*.

(68) [See above]*.
(69) [See above]*.

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(198) RR is the only engine manufacturer that does not have
any structural relationships (joint ventures or technical
alliances) in the field of civil aerospace with GEAE. The
only programme on which RR and GE cooperate is the
Joint Strike Fighter (JSF) aircraft in the field of military
fighter engine. Following its acquisition of Allison in
1995, RR joined an already existing GEAE/Allison team
to develop and produce the GE YF120 cruise engine as
an alternate engine for the JSF. This limited teaming
agreement obviously does not address the commercial
aircraft market and confirms RR’s position as the
only economically unrelated competitor to GE in the
commercial aircraft engine market.

(202) Analysts further argue that these receipts should not be
included in earnings, nor should they be treated as a
generator of cash and that without RRSPs, RR’s earnings
would be less than half their forecast level in 2001. This
is clearly illustrated by the following comments by
Deutsche Bank: ‘RR’s results progress was overly depen-
dent on the rise in net RRSPs, which accounted for 57 %
of earnings before interests and taxes (EBIT) growth in
2000. Stripping these out, and the impact of the Vickers
acquisition, there was no underlying EBIT progress’ (72).

(199) While RR is certainly technically capable of competing
with GE on the various markets for commercial aircraft
engines, it is however disadvantaged with respect to GE
in several ways.

(200) Contrary to what the Parties argue, RR has only limited
financial resources and strength. The market capitalis-
ation of GE (around USD 485 billion as of June 2001) is
around a hundred times larger than that of RR (around
USD 5 billion). [comments made by the President of
GECAS on RR’s competitive position, considered by GE
as containing confidential information]* (70).

(203) Deutsche Bank concludes that it is a clear concern that
around 60 % of the EBIT growth comes from a single
source (the RRSPs) with limited predictability and that
the expected change in RRSP flow patterns will place
growing strain on RR’s underlying business as RR’s
inflows are expected to decline after 2001: ‘This signifi-
cant swing will require the underlying RR businesses to
generate an additional GBP 300 million of EBIT in 2005
in order to replace this “lost” profit. To put such a GBP
300 million improvement in context, this represents
almost a doubling of the level of EBIT generated by RR
in 2000, if RRSP flows are excluded from the reported
EBIT figure’ (73).

(201) [independent market analysis on RR’s financial perform-
ance, considered by GE as containing confidential infor-
mation]*. As several independent market analysts indi-
cate, much of RR’s earnings come from payments by
participants in RR’s Risk and Revenue Sharing Partner
(RRSP) programmes. RRSPs consist of government,
financial investors and industrial partners (mainly parts
suppliers) that pay RR money for a stake in an engine
programme. The up-front cost of this equity stake is
paid in cash to RR during the development phase of the
engine programme and is used to offset the negative
impact of R & D on RR. Once the engine enters
production and deliveries start
(assuming sales are
successful), RR then pays out to these RRSP partners in
proportion to their equity stake on the programme. The
impact of the RRSP receipt on the earnings is a growing
issue for concern as indicated by the following statement
from Schroder Salomon Smith Barney: The value of
these RRSPs has escalated in recent years. The net
contribution after repayments was GBP 133 million in
1999 and GBP 212 million in 2000. [Following engine
entry in production and delivery start]* RRSPs are
expected to decline somewhat from 2001 onwards
perhaps turning into net repayments [by RR]* by
2005 (71).

(204) An additional limitation to RR’s true ability to compete
with GE on equal footing is its limited access to external
finances. The aerospace industry and in particular aircraft
engine development require both heavy and long-term
investments that in most cases can only be internally
funded. Competition in the aircraft engine sector will
only exist to the extent that manufacturers can finance
engine developments for new aircraft applications. Given
the high level of risk attached to such long-term projects,
financial partners are unlikely to be willing to play a
major role and wait a decade or more to measure the
return of their investment. In that framework, access to
funds is crucial and RR can only stretch its balance sheet
up to a certain point as it does not enjoy the backing of
an internal financial arm of the magnitude of GE Capital.
[Quote from the comments made by the President of
GECAS on RR’s competitive position, considered by GE
as containing confidential information]* (74).

(70) [See above]*.
(71) Schroder Salomon Smith Barney’s research on RR, 5 March

2001.

(72) Deutsche Bank’s research on RR, 5 March 2001.
(73) Deutsche Bank’s research on RR, 5 March 2001.
(74) [See above]*.

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(205) This limited access to financing also prevents RR from
replicating GE’s practice of significantly funding airframe
manufacturer’s development costs in order to secure
exclusivity of
its products [quote from Honeywell’s
analysis assessing the advantages from systems offering
through a partnership with GE or RR, considered by
Honeywell as containing confidential information]* (75).

(210) [Quote from a GECAS executive on the competitive
position of RR’s affiliate Pembroke, considered by GE as
containing confidential information]* (78).

(211) [RR’s capacity utilisation, considered by RR as containing

confidential information.]* (79)

(206) GE’s use of

its financial power against RR can be
illustrated by a recent example of GE’s ability to couple
its financial power with its power as a customer.

(212) [Investment cost and lead times required for RR to
increase production, considered by RR as containing
confidential information]* (80).

[Description of the GE win and RR’s capability of
competing with such offers, considered by RR as con-
taining confidential information]*.

(213) [Capital investment in plant and equipment and lead
times required for RR to increase production, considered
by RR as containing confidential information]*.

(207) [Quote from [...]* letter to RR stating the reasons for
choosing GE over RR, considered by RR as containing
confidential information]* (76).

(214) [RR’s position to compete for all new engine contracts,
considered by RR as containing confidential
infor-
mation]*.

(208) This linkage of the deal has also been highlighted in an

article in Flight International:

‘CargoLifter has selected the GE CT7-8 turboshaft to
power its CL160 airship, despite earlier indications from
sources close to the programme that the RR Turbomeca
RTM 322 was the first choice engine for the huge “flying
crane”. The memorandum of understanding between
CargoLifter and GE involves the engine manufacturer
supplying and maintaining up to 50 engines — six
CL160 ship-sets plus spares.’ (77)

(209) Apart from ancillary engine services for its original
products and its 50 % shareholding in Pembroke, RR is
not a vertically integrated company. RR does not solely
own or control an aircraft leasing company of the
size of GECAS. Pembroke is a medium-sized leasing
company incorporated in Ireland and is a joint venture
between RR and GATX (another aircraft leasing com-
pany). Pembroke owns 55 aircraft and has an additional
23 on order, while the GECAS fleet amounts to well
over 1 000 aircraft. Unlike GECAS that follows a GE-
only policy, Pembroke orders non-RR-powered aircraft
(such as B737s) and 20 of Pembroke’s fleet of B717s
(powered by 2 RR BR715 engines) were ordered before
RR became a shareholder in December 1998.

(215) Although RR engines are used by more than 50 % of the
world’s top-35 airlines (measured in terms of aircraft
purchases), the Commission’s investigation confirmed
that the number of airlines where RR is the incumbent
engine supplier (i.e. with more than 60 % of the installed
engine base of aircraft currently in production) is limited
to around 15 % of those major airlines (airlines where
RR is the incumbent engine supplier include British
Airways, Cathay Pacific and Garuda Indonesia) (81).

(216) GE is the incumbent supplier to most of the other
airlines and in particular to eight of the 12 major
European airlines (Air France, Lufthansa, KLM, SAS,
Swissair, Alitalia, Iberia and Virgin Atlantic Airways). GE
is therefore significantly better placed than any other
engine supplier to take advantage of commonality
benefits to preserve its dominant incumbent position.
As indicated above, in Europe RR enjoys such a position
only with British Airways.

(217) The significant commonality and scale benefits that
derive from incumbency enable a supplier to maintain
or grow its share within an airline’s fleet. The switching
costs faced by an airline that
is dependent on an
engine supplier for a specific aircraft type and which is
for whatever reason, selecting another
considering,
engine supplier are significant.

(75) [See above]*.
(76) [See above]*.
(77) ‘GE is surprise choice for airship’ in Flight International, 27 March-

2 April 2001, page 30.

(78) [See above]*.
(79) [See above]*.
(80) [See above]*.
(81) The 60 % threshold is used in this industry to define the

incumbent position of an engine or aircraft supplier to airlines.

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(218) [Quote from statements made by RR to the Commission
concerning existence of incumbency barriers, considered
by RR as containing confidential information]* (82)

1.B.4. Lack of countervailing buyer power

(219) GE recognises this disadvantage as one it still has to
overcome, on some instances, by using the contributions
of its different entities (GEAE, GECAS, GEES, and others)
with airlines where P&W (or RR in a few cases) is still
the incumbent supplier [extract from an e-mail message
from GEAE concerning the importance of engine incum-
bency, considered by GE as containing confidential
information]* (83).

(220) Finally, RR experiences limited partnership opportunities
on the market for civil aircraft engine. Given the huge
investments that are required to develop new aircraft
engines, it is very important for an engine manufacturer
to find partners to invest in their programmes and share
the inherent risks.

(221) RRSPs for engines for large commercial aircraft are
effectively limited to subsystem suppliers who can share
technology acquisition and engine programme risk as
well as carry out either component design and pro-
duction, or the more major and extensive function of
designing and developing an entire module of
the
engine. There are few competent designers which have
appropriate financial resources and, accordingly, are
likely to become RRSPs. They include Fiat, Ishikawajima-
Harima (IHI), Kawasaki, Mitsubishi Heavy Industries
(MHI), MTU, SNECMA and Volvo.

(222) MHI and MTU design and produce components for
engines. Module design and development is effectively
limited to MTU, SNECMA and Fiat. However, within
module design and development, there is a clear distinc-
tion between the roles of Fiat, which is capable of
involvement in only gearbox design, and SNECMA and
MTU that are more broadly capable.

(223) On the basis of the foregoing, RR appears to be at a
considerable disadvantage when competing with GE for
future engine contracts. RR therefore appears to be
unable to provide an effective competitive constraint on
GE without taking risks that would jeopardise the very
future of its aircraft engine activities.

(82) [See above]*.
(83) [See above]*.

(224) The Parties have argued that GE’s market position
is constrained by the countervailing buyer power of
customers.

(225) The Commission’s investigation did not support this
view. Customers, either airframe manufacturers or air-
lines, appear to have a strong preference for GE’s
products and services, as shown by the latter’s growing
market share on airframe platforms and in the airlines’
fleet (84). The market investigation showed that in several
instances GE has displayed independent behaviour vis-
à-vis competitors and customers. Its ability to behave
independently stems from its unique financial strength,
vertical integration and positioning across the aerospace
supply chain.

(226) GE has a strong foothold in the airlines’ fleet. Airlines
are small in terms of market share, since no individual
airline accounts for more than 5 % of aircraft orders
per year. Owing to the dispersed nature of demand,
individual airlines on their own do not appear able to
exercise any appreciable countervailing power.

(227) The expected patterns of the airlines’ purchasing behav-
iour and GE’s ability to influence it significantly suggest
that GE will grow, its incumbency in these fleets and
airlines will become more dependent on GE’s product
offering. As revealed by the market investigation, even
large airlines that are large purchasers of GE’s products
are not likely or willing to exert significant buyer power.
This is for instance the case of all the major airlines that
provide MRO services to third party airlines (so-called
‘Technics’ departments). Their need to be able to provide
such services on GE engines obligates them to maintain
a specific commercial relationship with GE,
in their
quality as an OEM. The fact that such airlines will need
access to spare parts, licences and repair processes and a
high degree of know-how on GE’s products puts GE in
the position of an unavoidable trading partner. Under
such circumstances, their buyer power is thus limited by
the imbalance in the commercial relationship.

(84) GE is the leading engine supplier to the majority of European
airlines. For instance, it is the exclusive engine supplier to Aer
Lingus, Alitalia, KLM, Olympic and TAP and the leading supplier
to other airlines (the percentage indicates its share of engines
within each airline): Air France (98 %), Austrian Airlines (81 %),
Finnair (64 %), Iberia (72 %), Lufthansa (84 %), Sabena (81 %),
SAS (79 %) and Swissair (72 %).

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(228) As for airframe manufacturers, some of them are large
(such as Boeing and Airbus) and some are smaller
companies (such as regional and corporate jet manufac-
turers). However, they are all subject to the airlines’
demand for aircraft and engines and cannot disregard
such a demand. Moreover, they are in need of capital
and financial assistance, which GE has appeared to have
granted on several occasions in the past. Finally, they are
under the considerable influence that GECAS may
exercise when placing orders for aircraft. The market
investigation showed that GE is in a position, and has
already managed,
the airlines’ demand for
aircraft by influencing their demand for engines. As a
consequence, GE is in a position to act on the ability of
airframe manufacturers to sell their aircraft to airlines.
This places airframe manufacturers in an unequal bar-
gaining position vis-à-vis GE and as a result seriously
affects their incentive to exercise countervailing power.
Moreover, on several occasions GE has been found to
influence airframe manufacturers’ choices as a result of
its ability to offer products and services that competitors
could not match. This also acts as a disincentive to
countervailing power.

to shift

1.B.5. Conclusion

(229) Given the nature of the jet engines market, characterised
by high barriers to entry and to expansion, GE’s
incumbent position with many airlines, its incentive to
its
use GE Capital’s financial power with customers,
ability to leverage its vertical integration through GECAS,
the limited countervailing power of customers and the
weakening or marginalisation of its direct competitors,
GE appears to be in a position to behave independently
of its competitors, customers and ultimately consumers
and can thus be characterised as a dominant undertaking
on the markets for large commercial jet aircraft engines
and for large regional jet aircraft engines.

2. AVIONICS AND NON-AVIONICS

2.A. Relevant markets

2.A.1. Relevant markets

1)

Product markets

a) G e n e r a l

(230) Honeywell manufactures, apart from engines, a range of
aviation products referred to as avionics and non-
avionics products, or in general as systems.

b) A v i o n i c s p r o d u c t s

(231) Avionics products relate to the range of equipment used
for navigation and
the aircraft,
for the control of
communication as well as for the assessment of flying
conditions. The avionics markets have already been
analysed in previous Commission Decisions (85) and
have been subdivided into large commercial aircraft
(LCA) on the one hand and regional/corporate aircraft
on the other hand. A distinction between these two
segments of aircraft is justified on the basis of differences
relating to the structure of supply and demand (regional/
corporate aircraft have an integrated cockpit versus a
federated cockpit for LCA), their price, size, capabilities
and technical interdependency, and the nature of the
customers. Such differences do not however arise
between regional and corporate aircraft, nor between
narrow-body jets and wide-body jets or small regional
aircraft and large commercial aircraft.

(232) For large commercial aircraft, the customers are both
airframe manufacturers (Airbus and Boeing) and the
airlines. Generally, the avionics products are federated
into an avionics cockpit suite by the aircraft manufac-
turers. This means that, as opposed to regional/corporate
aircraft, some of these products can be chosen/changed
by the airlines.

(233) For Regional and Corporate aircraft, the customers are
the airframe manufacturers (such as Embraer, Fairchild
Dornier, Bombardier, Raytheon, Gulfstream) and not the
airlines. Most products are sold as part of an integrated
cockpit, whereby the aircraft manufacturers rely on the
system integration capabilities of the avionics suppliers
and system integrators.

c) N o n - a v i o n i c s p r o d u c t s

(234) Non-avionics products relate to a variety of (sub) systems
such as, among others, auxiliary power units (APU),
environmental control systems (ECS), electric power,
wheels and brakes, landing gear and aircraft lighting, all
of which are key to the operation of an aircraft.

(235) Those non-avionics products have been defined by the
Commission in previous decisions (86), where it was not
found relevant to make a further subdivision between
large commercial aircraft, regional aircraft, corporate
aircraft or any other aircraft segment.

(85) Commission Decision 2001/417/EC in Case COMP/M.1601 —

AlliedSignal/Honeywell (OJ L 152, 7.6.2001, p. 1).

(86) Commission Decision of 25 May 1999 declaring a concentration
to be compatible with the common market (Case No IV/M.1493
— United Technologies/Sundstrand) according to Council Regu-
lation (EEC) No 4064/89 (OJ C 206, 21.7.1999, p. 19).

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Buyer-furnished equipment versus supplier-furnished
equipment

(236) For aircraft systems (avionics and non-avionics prod-
ucts), a distinction has to be made between buyer-
furnished equipment (BFE) and supplier-furnished equip-
ment (SFE). BFE equipment is purchased by the airlines,
whilst for SFE equipment, the procurement responsi-
bility is taken on by the airframe manufacturers. Stan-
dard avionics products (as opposed to integrated sys-
tems) are generally BFE whilst non-avionics products
(with exception of highly consumable parts such as
wheels and brakes) are SFE.

(237) BFE equipment is multi-sourced, and is selected by
aircraft buyers (airlines or leasing companies) out of
the two or three products certified by the airframe
manufacturer. Aircraft buyers have an important influ-
ence in selecting what equipment will be proposed and
with what priority the suppliers will be certified. For that
purpose, airlines and leasing companies are represented
in advisory committees. Leasing companies can pool
and represent the interests of smaller airlines. Aircraft
buyers that act as a launch customer have also an
important influence on the selection of equipment made
by aircraft manufacturer. For large commercial aircraft,
ARINC (87) standards take on the role of an ‘industry
consensus’ in defining technical requirements. Airframe
OEMs, potential suppliers and aircraft purchasers are all
involved in the development of ARINC characteristics.
Technical requirements typically include interface defi-
nition,
environmental
requirements, and required certification levels. Once
certified by the airframe manufacturer, the airline will
negotiate and buy directly from the avionics supplier.

requirements,

performance

(238) SFE equipment is purchased by the aircraft manufacturer
and not by the airlines. For SFE equipment, competition
occurs at
the design or development phase of an
aircraft platform. The airframe manufacturer defines the
technical requirements after considering factors such as
customer desires, systems integration, regulatory issues,

(87) ‘ARINC’ is Aeronautical Radio, Inc., a corporation owned by the
major airlines and whose charter is to create a common operating
environment for the airline community. Within ARINC is a
committee called the Airline Electrical Engineering Committee
(AEEC), whose function is to foster freedom of choice among
airlines by providing a standard form, fit, and function for BFE
avionics. Standardised interfaces allow the airline to select
avionics from multiple providers.

and safety. In the case of SFE products, launch customers
and important buyers such as leasing companies,
through the advisory committees, can influence the
selection process of the aircraft manufacturer. Typically,
suppliers for SFE equipment are selected by the airframe
manufacturer on the basis of cost, schedule and risk.
There is often a ‘down select’ process until the qualified
competitors offer a final proposal/submittal from which
the airframe manufacturer chooses a winner.

(239) SFE can either be SFE-standard or SFE-option. The
former is single-sourced, whilst for SFE option, the
airframe manufacturer will obtain certification for more
than one (generally two) substitutable products for that
aircraft type and will leave it to the buyer of that aircraft
to make the selection.

2) Geographic market

(240) As indicated by the Commission in prior decisions
relating to civil aircraft equipment (88),
the relevant
geographic market for avionics and non-avionics prod-
ucts is worldwide.

2.B. Competitive assessment

2.B.1. Honeywell is a leading supplier of aerospace

equipment

1)

Introduction

(241) Honeywell is the largest worldwide supplier of aerospace
equipment other than engines with sales of EUR [...]*.
BF Goodrich is the second largest (with EUR [...]*)
although it is mainly competing on other segments of
the market. Hamilton Sundstrand, which is part of UTC,
is third with EUR [...]* and Rockwell Collins fourth
with EUR [...]*. Following the Smiths/TI/Dowty merger,
Smiths is the fifth largest aerospace equipment supplier
with EUR [...]*. The current Honeywell is the result of a
consolidation drive among avionics and non-avionics
manufacturers initiated in the 1980’s which culminated
in 1999 when Honeywell, the leading avionics system
provider merged with AlliedSignal, a very important
component provider for both stand-alone avionics prod-
ucts and non-avionics products.

(88) See Case IV/M. 697 — Lockheed Martin/Loral Corporation,
Commission decision of 27 March 1996, Case IV/M.290 —
Sextant/BGTVDO, Commission decision of 21 December 1992.

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(242) In avionics generally (89), Honeywell has around [50 to
60 %]* of the market and its main competitors are
Rockwell Collins [(20 to 30 %)]* Thales, formerly known
as Sextant [(10 to 20 %)]* and Smiths Industries [(0 to
10 %)]*. These four players thus account for around [90
to 100 %]* of the market whilst the 35 remaining
players have around [0 to 10 %]* of the market. The
latter can be considered as niche players with single,
unique products that sometimes team with each other
and with major players to obtain access to the airframe
manufacturer and the airlines in exchange for tech-
nology.

Table 11

Weather radar

Large
commercial

Regional/
Corporate

Honeywell

[40 %-50 %]* [50 %-60 %]*

Rockwell Collins

[50 %-60 %]* [30 %-40 %]*

Thales

—

[10 %-20 %]*

(243) Honeywell is also a leading supplier of non-avionics
products.
Its main competitor on the non-avionics
markets is UTC, through its Hamilton Sundstrand sub-
sidiary. Others such as BF Goodrich, SNECMA (with
its affiliates Messier-Dowty and Messier-Bugatti) and
Liebherr have a less extended product range.

(246) Com/Nav — VHF/VOR (Comunication/Navigation)
transmits and receives pilot voice and other communi-
cations to/from ground or airborne operation centers.
Honeywell’s only competitors are Rockwell Collins and
Thales. The total volume of this market (Forward fit
only) is EUR [...]* per year. The breakdown is set out in
Table 12.

2) Avionics

a)

I n t r o d u c t i o n

(244) Avionics account for around 5 % of the purchase cost of
an aircraft (90). The market shares (91) on the individual
product groups previously defined as separate markets
are as follows.

b) B F E p r o d u c t s (92)

(245) Weather Radar displays rainfall,

turbulence and,

in
certain models, wind shear. Honeywell’s only competitor
is Rockwell Collins (except for Thales’ limited presence
in the regional/corporate segment). The total volume of
this market (Forward fit only) is EUR [...]* per year. The
breakdown is set out in Table 11.

(89) Each avionics product, however, constitutes a market in itself.
(90) These figures do not reflect the net present value of future cash
flows and thus the net cost to airlines. It is estimated that avionics
represent 20 to 25 % of the total operating cost of an aircraft.
(91) The market data in this section are generally based on the parties’
best estimates by sales value (year 2000) and corrected by the
information supplied by third parties. An evaluation on the basis
of orders placed, is considered by the market as less accurate
given the importance of rebates, incentives and the fact that
orders are sometimes reduced at a later stage of the procurement
process.

(92) The distinction between BFE and SFE is only relevant for large
commercial aircraft. With few exceptions, all avionics and non-
avionics products for regional/business aircraft are sold on an
SFE basis.

Table 12

Comm/Nav

Large
commercial

Regional/
Corporate

Honeywell

[30 %-40 %]* [40 %-50 %]*

Rockwell Collins

[50 %-60 %]* [50 %-60 %]*

Thales

[10 %-20 %]* [10 %-20 %]*

(247) SatCom (Satellite Communications) sends and receives
data and voice telephony to the ground via satellite.
Honeywell competes in this market with Rockwell
Collins. Thales, who recently acquired RACAL, could
potentially enter the large commercial aircraft market
for SatCom, since RACAL is Honeywell’s partner for
the production of SatCom. However, [description of
Honeywell’s strategic teaming agreement with RACAL,
considered by Honeywell as containing confidential
information]* (93). Total volume of this market (Forward
fit only) is EUR [...]* per year. The breakdown is set out
in Table 13.

(93) [Description of Honeywell’s strategic teaming agreement with
RACAL, considered by Honeywell as containing confidential
information]*.

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Table 13

GPS Stand-alone

Large
commercial

Regional/
Corporate

SatComm

Large
commercial

Regional/
Corporate

Rockwell Collins

Honeywell

[50 %-60 %]* [60 %-70 %]*

Thales

Rockwell Collins

[40 %-50 %]* [20 %-30 %]*

Trimble Avionics

—

—

—

[20 %-30 %]*

—

[0 %-10 %]*

Thales

Others

—

—

[0 %-10 %]*

[0 %-10 %]*

(248) MMR (Multi-mode receiver) provides precision approach
guidance to airports that have traditional ground-based
instrument landing systems (ILS) and satellite-based non-
precision approach guidance using a built-in global
positioning system (GPS). Honeywell’s competitors are
Rockwell Collins and Thales. Rockwell Collins is how-
ever dependent on Smiths for supplying the FMS for
integration into Rockwell’s MMR product. Although
Honeywell is also an important supplier of GPS stand-
alone products, GPS stand alone is becoming less
important in the LCA market as this functionality is
integrated in the MMR. Total volume of this market
(Forward fit only) is EUR [...]* per year. The breakdown
is set out in Tables 14 and 15.

Table 14

MMR/GPS

Large
commercial

Regional/
Corporate

Honeywell

[20 %-30 %]* [30 %-40 %]*

Rockwell Collins

[50 %-60 %]* [40 %-50 %]*

Thales

Others

[30 %-40 %]*

—

—

[30 %-40 %]*

Table 15

GPS Stand-alone

Large
commercial

Regional/
Corporate

Honeywell

[40 %-50 %]* [30 %-40 %]*

Litton

[50 %-60 %]*

—

Universal Avionics

—

[30 %-40 %]*

(249) Recorders record flight data information and cockpit
voice. Total volume of this market (Forward fit only) is
EUR [...]* per year. Honeywell is the leading supplier
before L3 Communications. The breakdown is set out in
Table 16.

Table 16

Recorders

Large
commercial

Regional/
Corporate

Honeywell

[40 %-50 %]* [20 %-30 %]*

Rockwell Collins

Thales

L3

Others

—

—

—

—

[30 %-40 %]* [40 %-50 %]*

[10 %-20 %]* [40 %-50 %]*

(250) CMU/ACARS (communication management unit/air-
craft communication addressing and reporting system)
manages the two-way text and data communication
link between an aircraft and ground control centers.
Honeywell is the most important supplier for Boeing
aircraft, followed by Rockwell Collins and Teledyne.
Honeywell
is also the only effective supplier of an
integrated CMU, as its AIMS (94) system is currently the
only certified and installed system (on the B777) (95).
CMU is not available on Airbus aircraft where ATSU,
supplied by Airbus aerospatiale itself, provides the same
functionality as CMU on Boeing aircraft. The CMU
market for regional aircraft is near non-existent. Total
volume of this market (Forward fit only) is EUR [...]* per
year. The breakdown is set out in Table 17.

(94) Aircraft information and management system (AIMS).
(95) Several European firms (including Thales and BAe) initiated,
approximately three years ago, a project to design an integrated
cockpit system for the A380 that includes CMU functions, but
this project has not led to any material products as yet.

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Table 17

Table 18

CMU/ACARS

Large
commercial

Regional/
Corporate

ACAS/TCAS

Large
commercial

Regional/
Corporate

Honeywell

[50 %-60 %]* [60 %-70 %]*

Honeywell

[40 %-50 %]* [50 %-60 %]*

Rockwell Collins

[40 %-50 %]* [40 %-50 %]*

Rockwell Collins

[20 %-30 %]* [10 %-20 %]*

Thales

Teledyne

—

[0 %-10 %]*

—

—

Thales

L3

—

—

[30 %-40 %]* [30 %-40 %]*

and manoeuvring

(251) ACAS processor (airborne collision avoidance system)/
TCAS (96) helps prevent collisions by identifying and dis-
playing the location of surrounding aircraft providing
audible warnings
instructions
(advanced versions). Mode S transponders function to-
gether with ACAS processors for the identification of
other planes and their bearing, as well as determining the
appropriate response to a threat of collision. On this
market Honeywell faces competition from Rockwell Col-
lins and L3 (who acquired the Honeywell business that
was divested as a condition of the AlliedSignal/Honeywell
merger). The Parties submit that L3, being a limited range
avionics product company has increased its sales in the
ACAS market whilst Honeywell has lost market share.
However, the growth of L3 is directly linked to the ACAS
business that L3 bought from Honeywell as a condition
for the approval of the AlliedSignal/Honeywell merger. As
such, Honeywell needed to divest its more technologically
advanced product whilst retaining the older technology
based AlliedSignal product. During the 2000 to 2001
period, L3 had the possibility to rely on a number of
supporting transitory measures following the ACAS
acquisition from Honeywell. The market share of
Rockwell Collins has significantly declined in the past
years. Total volume of this market (Forward fit only) is
EUR [...]* per year. The breakdown is set out in Table 18.

(252) EGPWS/GPWS/TAWS TAWS (terrain avoidance warn-
ing system) is a system that provides the flight crew with
a map-like display of nearby terrain and sounds an
audible alert about a minute’s flight time or more away
from the terrain (such as the ground, a mountain, and
so forth). Honeywell is the near dominant supplier of
certified TAWS, with its EGPWS (enhanced ground
proximity warning system). The predecessor of EGPWS
is the GPWS (ground proximity warning system). Hone-
ywell has near to 100 % of the market. Total volume of
this market (Forward fit only) is EUR [...]* million per
year.

(253) According to the Parties, there is no market where
Honeywell is dominant as even in EGPWS/GPWS, the
market is more competitive than it was at the time of
the AlliedSignal/Honeywell merger. Indeed, the Parties
claim that Thales has developed and introduced a TAWS
device, that other companies, such as BF Goodrich and
UPS Technologies, have announced systems and that
Universal Avionics has already won a bid (teaming with
Rockwell) for the airline Airborne on their B767 fleet.

(254) It is true that Thales has developed a competing product
(called ‘GCAS’) for EGPWS, but up to now it has not
been retained by any airline. Although announced more
than a year ago, no sales have yet been made. According
to Thales, the lack of reputation with an established
TAWS product has proved to be a major barrier to
entry.

(96) Traffic alert and collision avoidance system (TCAS) is the US

term for ACAS.

(255) BF Goodrich has also announced its market entry, but
with a TAWS product that is only suited to installation
on a small number of corporate aircraft.

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(256) Universal avionics developed and certified a TAWS
system and indeed won one sale in January 2001 for
Airborne’s B767 fleet. The Parties have submitted that
Universal was able to win the bid by teaming up with
Rockwell Collins. The latter has however rejected this
statement by saying that there is no agreement of any
kind between the two companies.

(257) Honeywell’s leading position with regard to TAWS is
however not limited to stand-alone products. Honeywell
also a has considerable market share for products
that must interoperate with TAWS (GPS, FMC, Flight
Controls and displays) and benefits from the fact that it
is supplying a number of products which need to
interoperate with the EGPWS (such as the ACAS). As
a result of
the AlliedSignal/Honeywell undertaking,
Honeywell has committed to maintain open standards
and to sell EGPWS modules and future TAWS products
to third parties on non-discriminatory terms

(258) Honeywell is thus in a position to offer broader commer-
cial packages to its customers than any other supplier.
By contrast, a company like Universal Avionics, which
only has one other product in large commercial aircraft
(retrofit FMS), will find its access to the market restrained
and its possibility to offer the same (financial and other)
incentives based on package deals will be limited. IRS/
AHRS (inertial reference system/attitude-heading refer-
ence system) are airframe motion sensors and navigation
sensors which are used by other navigation systems.
Honeywell has a market share of 80 to 90 %(due to
exclusivity on Boeing). Litton has the remaining 10 to
20 %. For regional/corporate aircraft, Honeywell has
around 80 to 90 %, with the remainder for Litton. For
AHRS, which can function as a less costly alternative to
IRS in the regional market, both Thales and Collins have
a strong position. Total volume of the IRS/AHRS market
(Forward fit only) is EUR [...]* per year.

(259) The Parties have claimed that Honeywell’s strong pos-
ition on IRS is not relevant as most airlines switched
over the last 10 years from stand-alone IRS/AHRS to
hybrid ADIRS. In any case, Honeywell has a leading
position in both categories of products.

(260) In addition, the Parties have submitted that in the
regional/corporate jet market, Litton’s sales of IRS grew
at Honeywell’s expense over the past five years (Litton
[200 %+]*compared to [50 to 60 %]* for Honeywell).
Litton has strongly rejected this assumption, indicating

that it sold [100-150]* IRS units (for [30-40 aircraft]*)
in 1995 and that
its sales remained flat before a
downturn to [100-120]* units in 2000. Litton’s presence
on this market is thus limited.

c)

S F E p r o d u c t s

(261) FMS (flight management system) helps flight crews
compute the most efficient flight profile and automati-
cally navigates the aircraft. FMS is a growing market
(about 8,5 % growth per year) and for large commercial
aircraft, Smiths Industries has acquired a significant
position. Honeywell, however, remains the leading sup-
plier. Thales is entering the market (SFE option on
Airbus as soon as the product will be certified). Total
volume of this market (Forward fit only) is EUR [...]* per
year. The breakdown is set out in Table 19.

Table 19

FMS

Large
commercial

Regional/
Corporate

Honeywell

[60 %-70 %]* [30 %-40 %]*

Smiths

[30 %-40 %]*

—

Universal Avionics

Rockwell Collins

Thales

Trimble Avionics

—

—

—

—

[40 %-50 %]*

[10 %-20 %]*

Entering

[0 %-10 %]*

(262) In the Regional/Corporate segment, small players such
as Trimble Navigation, Chelton Avionics and Universal
(with a retrofit product on corporate jets) have obtained
significant positions.

(263) Flight Controls are autopilot systems. Honeywell faces
competition from Rockwell Collins and Thales. Hone-
in future decrease as the next
ywell’s position will
generation of flight controls relies on fly-by-wire tech-
nology where Collins and Thales have a strong position.
Total volume of this market (Forward fit only) is EUR
[...]* per year. The breakdown is set out in Table 20.

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Table 20

Table 22

Flight controls

Large
commercial

Regional/
Corporate

Displays

Large
commercial

Regional

Honeywell

[30 %-40 %]* [30 %-40 %]*

Honeywell

[30 %-40 %]* [50 %-60 %]*

Rockwell Collins

[20 %-30 %]* [40 %-50 %]*

Rockwell Collins

[20 %-30 %]* [30 %-40 %]*

Thales

Others

[40 %-50 %]*

[0 %-10 %]*

—

[20 %-30 %]*

Thales

Others

[40 %-50 %]*

[0 %-10 %]*

—

[0 %-10 %]*

(264) Air data computers guage an aircraft’s ‘true’ airspeed,
altitude and vertical speed. Honeywell has a very strong
position which is uncontested by the major avionics
suppliers. However, air data computers are less fre-
quently sold on a stand alone basis (increasingly as part
of the combined air data inertial reference unit). Smiths
is also present in this market for retrofit sales. The
breakdown is set out in Table 21.

Table 21

Air data

Large
commercial

Regional/
Corporate

Honeywell

[90 %-100 %]*

[20 %-30 %]*

Rockwell Collins

Thales

Others

—

—

[20 %-30 %]*

—

[0 %-10 %]*

[50 %-60 %]*

(265) Displays are electronic instrument systems that display
information from avionics subsystems. Thales is the
clear leader in displays (in sole source position for
Airbus) whilst Honeywell is the leading supplier for the
smaller regional market. Total volume of this market
(Forward fit only) is EUR [...]* per year. The breakdown
is set out in Table 22.

(266) ADIRS/ADIRU (air data inertial reference system/unit) is
a device that combines the functions of the air data
computer and the inertial reference system. Honeywell
is the most important supplier with around [80 to
90 %]* of the market, with Litton accounting for the
remainder.

(267) Flight information systems are only relevant for regional/
corporate market. Honeywell is the leading supplier with
[80 %-90 %]*. Universal weather accounts for the
remainder.

3) Non-avionics

(268) Non-avionics products account for 3-5 % of the purchase
cost of the aircraft (97). For a number of non-avionics
products, Honeywell has a particularly strong position.

(269) APUs (auxiliary power units) are small gas turbine
engines located in a plane’s tail section which are used
to provide electrical power and airflow to the aircraft
cabin and to supply air to pneumatic starters while the
plane is on the ground (they do not provide propulsion).
Honeywell is the leading supplier with [70 to 80 %]* of
the market. UTC (Hamilton Sundstrand and P&W Cana-
da) accounts for the remainder. UTC’s range of products
currently lacks an APU for the 200 to 400 passengers
segment. The Parties have submitted that RR Deutsch-
land, Microturbo (SNECMA) and TRW Lucas also manu-
facture and sell APU’s. However, Microturbo, who
describes itself as ‘predominantly involved in repair and
overhaul of gas turbines’, indicates that it has no such
activities. RR Deutschland and TRW Lucas have never
developed APU’s for LCA and have only a de minimis
experience for other aircraft. Concerning APU’s for LCA,
the barriers to entry for the above mentioned companies
would be as important as for ‘de novo’ entry.

(97) These figures do not reflect the net present value of future cash
flows and thus the net cost to airlines. It is estimated that non-
avionics represent 20 to 25 % of the total operating cost of an
aircraft.

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(270) ECS (environment control systems) include many types
of products which perform different functions in the
aircraft, namely: (i) air-conditioning systems to provide
passengers with heated/cooled conditioned air; (ii) bleed
air systems to control the distribution of the air taken
from the engine and provide it to the air-conditioning,
anti-ice and engine starting systems; (iii) cabin pressure
control systems to maintain comfortable pressure in the
cabin as the aircraft changes altitude; and (iv) anti-ice
systems to use hot air taken from the engine and deliver
it to the wings and engine inlet surfaces to prevent ice
from forming. Honeywell has around [30 to 40 %]* of
the market, Liebherr has [20 to 30 %]*, UTC [30 to
40 %]*, Parker [0 to 10 %]*. Others such as Smiths
account for the remainder.

(271) UTC is the market leader for electrical power generators
with around [40 to 50 %.]* Honeywell has [10 to 15 %]*
of the market, Smiths and TRW/Lucas have around [20
to 30 %]* each. For the APU, ECS and electric power
markets, systems integration will increasingly become a
future oppor-
major competitive discriminator
tunities.

for

(272) On wheels and brakes, Honeywell has around [30 to
40 %]*, BF Goodrich around [30 to 40 %]*, ABS [10 to
20 %]*, and SNECMA [0 to 10 %]*. Recently, Honeywell
has concentrated its activities on the LCA market and is
no longer present on the Regional/Corporate Jet market
[description of Honeywell’s Strategic Alliance agreement
with a third party for the provision of integrated landing
gear systems, considered by Honeywell as containing
confidential information]*.

(273) On aircraft lighting, Honeywell is the leading supplier
with [40 to 50 %]*. Competitors in this market are Hella
[(10 to 20 %)]*, Diehl [(0 to 10 %)]* and Teleflex [(0 to
10 %)]*. A number of niche players (Bruce, Luminator)
and BF Goodrich account for the remainder.

(274) For weight and balance, only used on LCA, Honeywell

has 100 % of the market.

(275) Honeywell currently has no presence in the market for
in flight entertainment (IFE) where Collins is the market
leader [(50 to 60 %)]* before Thales [(20 to 30 %)]* and
Matsushita [(30 to 40 %)]*. [comments on Honeywell’s
strategy for the provision of IFE, considered by Hone-
ywell as containing confidential information]*.

2.B.2. Honeywell’s unique product range

(276) Honeywell has the possibility, unlike its competitors, to
offer a complete range of avionics equipment. Third
parties have indeed confirmed Honeywell’s product
range position by indicating that they are not aware of

any significant avionics or non-avionics system (apart
from engines for large commercial aircraft) necessary to
the operation of aircraft that Honeywell would not be
able to provide.

(277) In their reply to the statement of objections (SO), the
Parties have submitted that no company can supply all
systems that go on an aircraft, and that competing
avionics providers produce some high value products
(such as IFE) that Honeywell does not. However, the fact
that Collins and Thales are the leading suppliers of IFE
does not affect Honeywell’s leading position. First of all,
IFE is not a system that is essential for the functioning
of an aircraft as is the case for the avionics and non-
avionics such as APU’s, landing gear, ECS and others.
Secondly,
the airlines is
important, in contrast with those other systems where
the airlines are relatively indifferent as to the selection of
[Honeywell’s strategy for the
the systems. Thirdly,
IFE market, considered by Honeywell as containing
confidential information]*.

the preference of

for IFE,

(278) The Parties have also argued that Honeywell

largest
avionics and non-avionics customers are generally airfra-
me manufacturers, not airlines. This is correct since [the
majority]* of Honeywell’s sales are for SFE products and
thus to airframe manufacturers. However, as far as
avionics are concerned, Honeywell is the only supplier
with a balanced offer of both BFE and SFE products.
Honeywell’s important access to airframe manufacturers
is not only important for SFE products (which, once
selected, are usually sole source for the lifetime of the
aircraft platforms and sometimes its derivatives) but is
also a major advantage for BFE products. Since BFE
products have to be certified by the airframe manufac-
turer and since the first product certified usually captures
between 50 and 70 % of the market, Honeywell is in a
unique position to secure sales for both SFE and BFE
products.

(279) According to the Parties, Honeywell’s full scale of
products is not unique since teaming among competitors
fills the gaps in their range of products. However, the
market investigation has shown that teaming is an
unsatisfactory business arrangement that does not allow
competitors to replicate Honeywell’s range of products.
In addition, the Parties have failed to define and correctly
apply the concept of teaming as most of the so-called
teaming examples that the Parties have put forward
relate to simple vendor/purchaser relationships that are
clearly insufficient to act as an alternative to Honeywell’s
unique range and integration capacity.

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(280) Honeywell is clearly the only equipment manufacturer
that holds all the avionics subsystems in each segment,
without facing significant gaps. Rockwell Collins,
its
major challenger, lacks some capabilities, in particular
for inertial reference systems (which it has to buy from
Litton), EGPWS and air data sensors. Thales, the third
player, is strongly focused on Airbus and is weak in the
radio and surveillance area.

(281) In the large commercial aircraft market, having a full
range has allowed Honeywell to take a lead in proposing
advanced solutions to customers. For instance, Hone-
ywell was in a position to propose the AIMS cabinet for
the B777 since it integrated its in-house developed
strengths in FMS, displays and maintenance functions,
whilst Rockwell Collins was not in a position to match
the proposal since it has no market presence in large
commercial aircraft flight management.

(282) Covering all avionics areas is a major advantage when
taking on integration projects in the regional aircraft/
corporate jets segment. As the aircraft’s design com-
plexity increases and the airframe manufacturers’ design
capacity decreases, all customers (but especially the
regional and corporate airframe manufacturers) have to
work with system subcontractors. In this context the
supplier who can provide a larger range of products has
a competitive advantage.

2.B.3. Honeywell’s strength in services

1) Maintenance, repair and overhaul for avionics and non-

avionics

(283) The after-markets for aviation represent an annual
turnover of USD [...]* and grow at a 5 to 10 %
annual rate. The after-markets can be split into different
segments: conversions/modifications, line maintenance
(LRU: line replaceable unit), heavy maintenance, engine
maintenance and equipment maintenance. Line main-
tenance accounts for 20 % of the total MRO expenditure,
engines for 26 %, the airframe for 17 %, modification of
the systems for 15 % and components or equipment
maintenance for 23 %.

(284) Avionics and non-avionics competitors are generally
only active in providing maintenance for their own
products. On the general after-market segment, the
major players are airlines (65 %), followed by the OEM’s
(30 %) and independents (98) (5 %).

(285) Due to the speed of technological development, avionics
are not usually repaired but rather replaced or upgraded
in the aftermarket. Upgrades are a constant source of
revenue and the supplier with the largest installed base
is likely to win the eventual upgrade contract.

(286) Honeywell describes the importance of the aftermarket
as follows: [quote from a Honeywell internal document,
considered by Honeywell as containing confidential
information]* (99). For Honeywell, the OEM revenue
share amounts to 30 to 40 % of total revenues with
margins of around [...]*. The aftermarket share accounts
for 40 to 50 % of total revenues with margins of around
[...]* (100).

(287) Honeywell is an important player in the aftermarket,
where it has USD [...]* worth of MCPH (maintenance-
cost-per-hour) programmes, covering [30 to 40 %]* of
avionics, [70 to 80 %]* of turbofans, [40 to 50 %]* of
APUs and [20 to 30 %]* of wheels and brakes. Hone-
ywell’s total aftermarket amounts to USD [...]* of which
[50 to 60 %]* is represented by the sale of parts to third
parties.

2) Nose-to-tail services

(288) Honeywell is the only OEM supplier that can provide
nose-to-tail integrated solutions (avionics, non-avionics
and in some cases also engines) apart from a number of
independent maintenance companies that need to rely
on sub-contractors for most of the subsystems work.

2.B.4. Honeywell’s
gration

strength in products

inte-

(289) Integration refers to the design of a group of products
that naturally interface with each other into an integrated
system. Honeywell is in a strong position to integrate
across the entire aircraft. Firstly, Honeywell has an
integration know-how that matches or surpasses that of
the airframe manufacturers. Secondly, Honeywell has a
complete range of products. Thirdly, airframe manufac-
turers are increasingly relying on the integration capabili-
ties of suppliers.

(98) The major independent players on the market are Timco, Haeco,
Bedek Aviation, FLS Aerospace and to a certain extent also
companies as Sogerma and BF Goodrich Services.

(99) [See above]*.
(100) [As indicated in Honeywell’s confidential internal document]*.

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(290) In their reply to the SO, the Parties have submitted that
airframe manufacturers do not overwhelmingly prefer
integrated systems, and that on a number of occasions,
airframe manufacturers have rejected integration to
safeguard individual selection of systems. However, the
market investigation has shown that for the airframe
manufacturers,
insofar as this
integration is essential
leads to material benefits such as reduced weight,
increased reliability,
lower maintenance costs and a
reduced number of suppliers. Because of competition
between airframe manufacturers, it is clear that such
cost reductions or other competitive discriminators
cannot be ignored.
In any case, even if on certain
occasions airframe manufacturers have halted further
integration, the fact remains that Honeywell has mani-
fested the incentive to maximise the selection of its
systems by integrating them and that, post merger, the
value of equipment that the merged entity will be able
to offer and integrate will exceed 50 % of the lifetime
value generated by the aircraft.

integration of

(291) The Parties have also argued that the main engine rarely
interfaces with avionics and non-avionics systems and
that as such Honeywell’s integration capacity is irrelevant
since it will not be affected by the transaction. The
the
Commission agrees that explicit
engine and systems has not occurred yet, although such
integration is likely to take place in the near future (see
the More Electric Aircraft Engine project) and spin-off
developments of this project could materialise in future
aircraft platforms. In general however, the fact remains
that post merger, Honeywell, as a supplier of avionic,
non-avionics, engine controls and utilities will have
direct access to GE’s engine development and that this
will complement Honeywell’s position as a leading
integrator of avionics and non-avionics.

level, systems (such as avionics and utility controls)
become integrated. Examples of this are [integration
project, considered by Honeywell as containing confi-
dential information]* (102), Honeywell’s Primus Epic or
Rockwell’s Proline (103). On a third level, systems become
fully integrated and only interact with each other. This
is the level where the supplier becomes the solutions
partner. This level of integration has not materialised for
LCA as yet, although Honeywell has offered this solution
to Raytheon and Bombardier (such as the nose to tail
EPIC development).

2.B.5. Honeywell’s strength in packaged deals

(293) In addition to pursuing an integration strategy, Hone-
ywell is well positioned to pursue a strategy of packaging
its products in different
forms including bundling.
Bundling is a simple business arrangement whereby a
number of products are combined in a package and sold
for a single price.

(294) Bundling takes place on three levels. The first level is
that of the aircraft platform when the selection of SFE
equipment takes place. As this equipment will be on
each aircraft during its operational life, this competition
is very important, especially for regional aircraft, where
all equipment is SFE and single sourced. The second
level is that of the airlines or leasing companies who
is that of
select the BFE equipment. The third level
modifications, upgrades and retrofits following,
for
instance, the need to equip an aircraft with a new piece
of mandatory avionics.

(292) Basically, systems integration should either produce
fundamentally lower aircraft costs and/or provide real
aircraft differentiation that airlines will pay a premium
for. There are three integration levels: a first level is the
basic systems integration whereby the supplier integrates
a number of parts (for instance the integrated [inte-
gration project, considered by Honeywell as containing
confidential information]* or IHAS (101)). On a second

(295) Bundling of avionics and non-avionics products to the
airlines takes place on the second level. Such bundling is
not limited to the purchase of the products, but also to
spare parts and maintenance costs over the lifetime
for Airbus aircraft, the
of the aircraft.
negotiations between the avionics supplier and the

In addition,

(101) The surveillance system IHAS (integrated hazard awareness or
avoidance system) combines a number of components. Through
IHAS, products such as TCAS and weather radar equipment, for
which there is competition, can be tied to EGPWS for which
Honeywell has an uncontested position.
In addition, any
competitor that would want to offer IHAS will be dependent on
Honeywell as the latter has all three products that are part of
the IHAS-system. Rockwell Collins is the only company that
has two out of three products in-house; Thales is still lacking all
three. Honeywell is also the leading system integrator capable
of further developing IHAS [potential future application, con-
sidered by Honeywell as containing confidential information]*.

(102) [Description of

the concept, considered by Honeywell as

containing confidential information]*.

(103) Honeywell has a strong position [(40 to 50 %)]* on integrated
avionics suites. Primus Epic, which includes all major functions
of an avionics suite and replaces several stand-alone systems, is
the centrepiece of this controls integration expertise and can be
found on the Raytheon Hawker Horizon, the Embraer ERJ-170
and the Fairchild Dornier 728JET. A Full Epic development
nose-to-tail bid (the first in the market) was presented to
Raytheon for the PD 375/PD 383 on 2 November 2000. For
this aircraft platform, Honeywell won both the Engines and the
full EPIC avionics suite development bid. Collins is the other
supplier [(40 to 50 %)]* with the Proline 4 series suite mainly
for Bombardier.

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airlines cover not only BFE equipment, but also SFE-
option equipment since airlines receive extra incentives
(discounts over the complete package, extended war-
ranty, discounts on the supply of future spare parts,
merchandise credit, offering of products for free) if a
package is taken (purchased in the case of BFE and
chosen in the case of SFE-option). Additional discounts
or concessions take the form of merchandise credits, free
test equipment, free training, free of charge replacement
units, extended warranties or discounts on spare units.
A typical approach is to provide small incentives for
individual products and build a ‘the more you buy, the
better the incentive’ pyramid. Another approach is to
propose that the pricing of products purchased at one
point in time is affected by products purchased at a later
point in time (such as fidelity rebates).

(296) In their reply to the SO, the Parties have argued that
bundling practices have not taken place in the industry
and that, if they have, it could only have been at the
request of the customers. The Commission’s market
investigation has, however shown that this industry is
prone to bundling both from the demand and the supply
sides. There are indeed numerous instances that were
confirmed at the Oral Hearing showing that bundling
happens on a regular basis. The Parties did not deny
such instances but re-qualified them as ‘multi-products
bids’ and further underlined that such practices account
for around [20 to 30 %]* of Honeywell’s turnover.

(297) The Parties have also argued that bids including avionics
and non-avionics products continue to be rare and that
products are selected on technical capability. The market
investigation however has shown that, although the
implementation of the recent Allied Signal/Honeywell
merger has taken time to have its effect on the market,
the number of offers in which Honeywell has bundled
avionics and non-avionics has increased over the past
six months.

2.C. Competitors

(298) Rockwell Collins, Thales and Hamilton Sunstrand (UTC)
are the three major competitors to Honeywell. These
players account for more than 85 % of the avionics and
non-avionics markets, and this concentrated market
structure has been consistent over time.

Rockwell Collins

b)

I n t r o d u c t i o n

(299) The top-3 avionics suppliers account for around 95 %
of the market (104). Together with Honeywell and Thales,
Rockwell Collins is one of these three players.

(300) Collins is part of Rockwell International Corporation.
Apart from avionics, Collins’ parent company is also
involved in industrial automation equipment. Other
than for the large commercial aircraft and regional/
corporate markets, Collins designs and manufactures a
variety of electronic products, including avionics, for
military applications.

(301) Rockwell

International Corporation has publicly
announced its intention,
for strategic and financial
reasons, to spin-off the ownership of Collins to its
shareholders, as they have done in the past for many
other Rockwell businesses. As a result of this operation,
Collins will be an independent, publicly held company
separately quoted on the stock exchange.

c)

L i m i t e d f i n a n c i a l s t r e n g t h

(302) Rockwell’s plan to spin off its avionics manufacturing
division will have a significant impact on Collins’s
financial situation and [description of strategy, con-
sidered by Collins as containing confidential
infor-
mation]*.

(303) While Collins’s parent company with a market capitalis-
ation of around USD 8 billion (as of April 2001) is
already substantially smaller than GE or Honeywell,
once spun off (in all likelihood around mid-2001), the
stand-alone Collins company will only represent a
fragment of its main direct competitor.

(104) Litton, Smiths, Teledyne, L3 Communications are niche players
with technically advanced products who sometimes generate
the majority of their revenues in other markets (such as naval
construction for Litton). These players usually sell their products
to the three majors who have established positions with the
airframe manufacturers and airlines as well as the worldwide
service network to support these positions. Mostly, products
such as Litton’s IRS or Smith’s FMS are integrated in solutions
by Thales or Collins. For a number of products, players such as
L3 Communications, Teledyne or Universal have established
positions in less technology driven products such as recorders,
printers, instruments and displays.

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(304) Consequently, while Collins could in the past benefit
from the larger financial surface of its parent company,
its exit from the Rockwell group of companies will
deprive it of the stronger financial support it enjoyed as
a subsidiary of Rockwell, contrary to Honeywell which
will enjoy the influence of GE Capital’s financial strength.
[Description of the impact on Collins, considered by
Collins as containing confidential information]*.

d)

L i m i t e d p r o d u c t r a n g e

(305) Although Collins is Honeywell’s main challenger in the
regional and business segments, Collins is not in a
position to replicate Honeywell’s product offering since
it lacks a number of key products such as the inertial
reference system (IRS), EGPWS and air data sensors.

(306) Furthermore, unlike Honeywell, Collins does not have
any products for which it qualifies as unique supplier.
Obviously, contrary to Honeywell and in addition to
its reduced avionics product range, Collins does not
manufacture non-avionics equipment or aircraft engines.

e) N o v e r t i c a l i n t e g r a t i o n

(307) Similarly to GEAE’s engine competitors but in contrast
to Honeywell’s post-merger situation, Collins does not
enjoy the opportunity to leverage the sales of its avionics
products with an integrated leasing arm such as GECAS.
Indeed, Collins cannot
influence airlines over their
choice of equipment, nor has it the ability to offer
airframe manufacturers the possibility of significant
GECAS orders in order to obtain exclusivity or select its
SFE equipment and components.

f)

I m m e d i a t e e x p o s u r e

(308) The Parties have submitted that, despite Honeywell’s
position, competitors keep growing at the expense of
Honeywell and that over the past five years Collins, in
particular, has outperformed Honeywell.

(309) The analysis of the respective positions and products of
Collins and Honeywell shows that this contention is not
only inaccurate but, if there is any substance in it at all,
that is likely to disappear if the proposed transaction
goes ahead.

(310) As far as large commercial aircraft platforms are con-
cerned, Honeywell provides the majority content on

several of the new and derivative platforms introduced
during the past five years. The platforms certified during
that period include: Boeing’s B717-200, B737NG, B757-
300, B767-400ER, B767-300F/ER, B777-200ER, B777-
300, and Airbus’s A300BY-600ST-Beluga, A319-100,
A321-200, A330-200 and A318. While Honeywell
reproduces its average leading market position on the
other Boeing platforms, it won the exclusive avionics
position on the [type of
large commercial aircraft,
considered by Honeywell as containing confidential
information]* and controls a significant majority of
content value on both the [type of large commercial
aircraft, considered by Honeywell as containing confi-
dential information]* and the [type of large commercial
aircraft, considered by Honeywell as containing confi-
dential
information]*. Similarly, Collins only takes a
minor position on the Airbus aircraft where together
with Thales, Honeywell captures the majority of content
value. Furthermore, those aircraft that were certified
during the past five years and on which Honeywell is
the exclusive or majority avionics content provider are
also among the best-selling platforms.

(311) Similarly, while Honeywell won competitions to supply
avionics for eight out of the 12 regional aircraft plat-
forms introduced for delivery over the past five years,
Collins managed to capture the avionics supply for only
two of
these. More particularly, Collins’s wins are
limited to one manufacturer, [airframe manufacturer,
considered by Honeywell as containing confidential
information]*, while Honeywell’s eight platform wins
span three aircraft manufacturers (three at [airframe
manufacturer, considered by Honeywell as containing
confidential information]*, four at [airframe manufac-
turer, considered by Honeywell as containing confiden-
tial information]* and one with [airframe manufacturer,
considered by Honeywell as containing confidential
information]*).

(312) Furthermore,

the bulk of Collins’

large commercial
aircraft business consists of the sale of BFE avionics,
for which it currently competes head-to-head against
Honeywell. As such, Collins will be very much depen-
dent on the willingness of airlines not to behave in an
economically rational way (by purchasing the merged
entity’s bundled product offers) and to keep selecting
Collins’ equipment.

g) C o n c l u s i o n

(313) As a result of those different factors, Collins is undoubt-
edly one of Honeywell’s competitors that will be
adversely affected by the proposed merger. [Statement
by Collins at the oral hearing, considered by Collins as
containing confidential information]*.

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Thales

h)

I n t r o d u c t i o n

(314) Thales (formerly known as Thomson-CSF) is a French
company active in the field of professional electronics
and engineering for related commercial and defence
markets. Thales Avionics (formerly known as Sextant
Avionique) is Thales’s subsidiary active in the supply of
civil and military avionics. In 1999, [the majority]* of
all sales were generated by civil avionics, with the
remainder being defence related (essentially military
aircraft, missiles and helicopters).

i)

L i m i t e d p r o d u c t r a n g e

(315) The majority of Thales’s activities are on SFE (option)
products. Thales only recently entered the BFE market,
where its market share is significantly lower than that of
its competitors. Thales has a limited range of products
on offer and is lacking key products such as ADIRS,
weather radar and EGPWS. Like Collins but in contrast
to the merged entity, Thales does not have the ability to
bundle avionics products with other aircraft equipment
such as engines, APU, ECS, electrical power, etc.

(316) Thales Avionics is the third player in the avionics
markets. Overall, Thales has a modest range of products
and lacks a number of key products in the radio and
surveillance area in order to be in a position to challenge
Honeywell’s overall
leading position on the avionics
markets.

(317) Moreover, Thales is particularly dependent on a number
of products (such as FMS, weather radar, IRS, TCAS,
TAWS, communication/navigation) that it has to pur-
chase from competitors (including Honeywell) in order
to be able to provide integrated systems and try to
compete with its competitors’ much wider breadth of
products. For instance, Thales needs to rely on some
to be able to
avionics equipment
provide a complete avionics suite for the Bombardier
DASH 8-400, for which it was selected as the avionics
integrator.

from Honeywell

j) N o v e r t i c a l i n t e g r a t i o n

(318) Like Collins, but in contrast to Honeywell, if the latter is
integrated into GE, Thales does not enjoy leverage
opportunities for its avionics products with the activities
and services of a leasing company such as GECAS. In
addition to its limited financial capacity (105), Thales will

therefore not be in a position to replicate the merged
entity’s comprehensive offerings and market its avionics
products on the same basis as Honeywell as a part of
GE.

k) C o n c l u s i o n

(319) While it is undeniable that Thales has been successful
with some of its products on some of the platforms and
more particularly on the Airbus families, Thales remains
highly dependent on a limited number of relatively
strong positions on a few platforms. This concentrated
position combined with its lack of ability to reproduce
the financial strength of GE Capital, the influence of
GECAS and the bundled offers of Honeywell in any
shape or form significantly reduce Thales’s capacity to
compete on the merits.

Hamilton sundstrand

l)

I n t r o d u c t i o n

(320) The market for non-avionics products is more frag-
mented,
leaving Hamilton Sundstrand as the most
important competitor to Honeywell with a range of
products. Hamilton Sundstrand is, like P&W, one of the
divisions of the UTC Corporation. Hamilton Sundstrand
was only recently acquired by UTC (June 1999) and,
with around USD 2,5 billion, accounts for less than
15 % of UTC’s annual consolidated sales.

m)

L i m i t e d p r o d u c t r a n g e

(321) While Hamilton Sundstrand is the only competitor to
have a comparable non-avionics product range to that
of Honeywell (106), its position in the market is weakened
by its complete absence from the avionics markets.

(322) Moreover, while Hamilton Sundstrand can offer a certain
number of the non-avionics range of products, apart
from electrical power generators, it does not enjoy a
leading position on the markets where it is present.
Honeywell or others are always ahead of Hamilton
Sundstrand. Furthermore, there are market segments for
which Hamilton Sundstrand has no product on offer.
For instance, Hamilton Sundstrand does not manufac-
ture APUs for aircraft
from 200 to
400 passengers.

that can seat

(105) By way of comparison, the market capitalisation of Thales
and all its subsidiaries, including Thales Avionics, is around
USD 8 billion, less than that of GE and Honeywell.

(106) As already described above, Hamilton Sundstrand’s main aero-
space products include APUs, ECS, electrical power, engine
components, hydraulic power and a minor presence in flight
controls.

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n)

L i m i t e d f i n a n c i a l s t r e n g t h

Other competitors

(323) Like its sister company P&W, Hamilton Sundstrand does
not enjoy the financial capabilities that will be extended
from GE, and in particular GE Capital, to Honeywell as
a result of the proposed transaction.

(324) The preceding paragraphs have abundantly illustrated
how GE’s extensive financial resources can tip the scale
in a competition. These practices will obviously apply to
Honeywell’s activities once it is part of GE. GE’s overall
financial support will help Honeywell’s business to
remain ahead of its competitors whenever needed and
consequently further strengthen its leading positions not
only against Hamilton Sundstrand in the market for
non-avionics products but also against Collins and
Thales in the field of avionics.

o) N o v e r t i c a l i n t e g r a t i o n

(325) Like Honeywell’s avionics competitors and GEAE’s
engine competitors, Hamilton Sundstrand does not have
the opportunity to leverage its non-avionics sales with a
tool such as GECAS. Following the proposed transaction,
Honeywell will be the only non-avionics supplier inte-
grated with a leasing company.

(326) As a result, Hamilton Sundstrand’s inability to influence
the airlines when it comes to marketing the original
equipment through financing incentives or service agree-
ments such as those offered by GECAS to airlines will
further prevent Hamilton Sundstrand from challenging
Honeywell’s offering on the merits.

(327) In addition, GECAS’s policy of selecting aircraft with GE
products combined with its ability and incentive to place
launch or boost orders to induce airframe manufacturers
to choose GE equipment or grant exclusivity to GE
constitute another GE feature for which Hamilton
Sundstrand, contrary to Honeywell, will not be in a
position to benefit nor replicate.

p) C o n c l u s i o n

(328) As a result of the combination of the above factors,
it appears that Hamilton Sundstrand’s non-avionics
manufacturing activities are among the candidate sup-
pliers that are most likely to suffer rapidly and intensively
from the foreclosure effects of the proposed merger.

(329) In their reply to the statement of objections, the Parties
have argued that all potential suppliers, no matter what
their current market position, have an incentive to
innovate and as such exert competitive pressure upon
Honeywell. Avionics competitors other than the big
three are niche players with strong innovation skills but
limited access to customers (airframe manufacturers or
airlines). Those smaller competitors have indicated that
they are increasingly facing pressure from Honeywell’s
enhanced bundling capacity and that this will be signifi-
cantly exacerbated after the GE/Honeywell merger.

2.D. Conclusion

(330) In the light of the foregoing, it can be concluded that
Honeywell is the leading supplier of a range of avionics
and non-avionics products and that no competitor is
independently able to replicate its extensive range of
products.

3.

ENGINE CONTROLS (ENGINE STARTERS)

3.A. Relevant markets

3.A.1.

Introduction

(331) Honeywell has important market positions in a number
of engine accessories and controls that constitute essen-
tial input to jet engines. Although GE is not active in
those markets, the merger creates a vertical relationship.
Indeed, GE has a dominant position in the downstream
market for jet engines and Honeywell is the leading
supplier in the upstream market for engine controls, in
particular engine starters.

3.A.2. Relevant product market

(332) Engine controls enable the engine to interact with the
commands of the cockpit and include the following
products: Air turbine Starters; FADEC (electronic engine
control, fuel control, engine generator, fuel metering,
alternators); thrust reverser actuation; valves (bleed valv-
es, control valves, anti-ice valves, solenoid valves);
coolers (heat exchangers,
inlet and outlet ducts to
heat exchangers including regulating valves); sensors
(pressure,
fire and vibration sensors,
ignition systems); filters; and miscellaneous components
(brackets, pulleys, levers, engine monitoring, old hydro-
mech and electronic units, etc.).

temperature,

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(333) The market investigation has suggested that, owing to
the absence of demand- and supply-side substitutability,
those individual products should be considered to
constitute separate markets. From the demand point of
view, it is clear that each product has a distinct role in
the functioning of a jet engine and cannot be substituted
for another. From the supply point of view, suppliers do
not produce all of these products and as a consequence
they have varying market positions in one or the
other product. For instance, Honeywell does not supply
sensors, filters and other miscellaneous products. Engine
control products display high barriers to entry. These
stem from the significant technological requirements
that suppliers have to meet and from the high costs for
engine manufacturers to switch suppliers. As a result, a
price increase in one product would be profitable, since
it would not, readily and easily, induce the supplier of
another product to enter the market where the price
increase has occurred.

regional

(334) The Commission’s market investigation has confirmed
the contention of the Parties that it would not be
appropriate to identify separate markets according to
the different jet aircraft engines (for large commercial
aircraft,
aircraft).
Although there is a difference in the degree of complexity
across the different types of engines (for instance, engine
controls for large commercial aircraft tend to be more
complex than for regional or corporate aircraft), engine
controls are either similar or have the same design
approach across those different
jet aircraft engines.
Where this is not the case, they are adapted, scaled up

and corporate

aircraft,

or down, to fit into the specific engine type. As a result,
suppliers are able to manufacture and supply engine
control for all the jet aircraft engines.

(335) Honeywell is the leading supplier of one specific engine

control product, namely engine starters.

3.A.3. Relevant geographic market

(336) In line with prior Commission decisions relating to the
equipment for civil aircraft (107), the relevant geographic
market for engine starters is worldwide.

3.B. Market shares

(337) The most important competitors for engine controls
are UTC (Hamilton Sundstrand), Parker, Woodward,
Dunlop, Sumitomo, BAe systems and TRW/Lucas. Hone-
ywell’s market shares, and those of its competitors, are
listed in Table 21. As detailed market share data is not
generally available,
is based on the
the assessment
Parties’ year-2000 worldwide figures, which have been
broadly confirmed by the market investigation. It can be
seen that, as opposed to its competitors, Honeywell is
present in all the various product markets and is the
leading supplier in engine starters.

(107) See Case No IV/M.697 — Lockheed Martin/Loral Corporation,
Commission decision of 27 March 1996 or Case No IV/M.290
— Sextant/BGTVDO, Commission decision of 21 December
1992.

Table 23

Accessories and controls

HON

Parker

Hamilton
Sundstrand

Serck

TRW/
Lucas

BAe
Systems/
Wood-
ward

Dunlop

Others

Engine Starters

Electrical Engine Controls

Fuel Controls

Coolers / Heaters

[50 %-
60 %]*

[10 %-
20 %]*

[30 %-
40 %]*

[30 %-
40 %]*

—

—

—

—

Thrust Reverser Actuation

[10 %-
20 %]*

[0 %-
10 %]*

[40 %-
50 %]* (108)

—

—

—

—

[20 %-
30 %]*

[0 %-
10 %]*

—

—

—

—

[20 %-
30 %]*

[30 %-
40 %]*

[10 %-
20 %]*

[0 %-
10 %]*

—

—

[10 %-
20 %]*

—

—

—

—

[10 %-
20 %]*

—

—

[0 %-
10 %]*

[0 %-
10 %]*

[20 %-
30 %]*

[40 %-
50 %]*

[50 %-
60 %]*

Engine Valves (all types)

[20 %-
30 %]*

[10 %-
20 %]*

[10 %-
20 %]*

—

—

—

[10 %-
20 %]*

[40 %-
50 %]*

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the market

(338) As far as engine starters are concerned, the two main
manufacturers, namely Honeywell and Hamilton Sund-
strand, account for more than 90 % of the total market.
However,
investigation has shown that
Hamilton Sundstrand should not be considered a com-
petitor of Honeywell in the engine starters market. This
is because its engine starters are placed only in P&W’s
engines (109) and thus are not made available to the
market.
In this sense, Table 21 reflects production
volume and not sales in the market. According to
Hamilton Sundstrand, a small but significant, non-
transitory price increase in engines starters would not
induce it to sell to the free market. If Hamilton Sund-
strand decides to sell to the free market, this will benefit
RR, that is a competitor of P&W in the downstream
market for engines. However, the expected profits in the
upstream market, stemming from selling engine starters
to RR, could not outweigh the profit loss that P&W
might face in the downstream market for engines. This
is due to the price and profit margin differential
between engines starters and engines. Should Hamilton
Sundstrand’s captive sales of engine starters be excluded
from the free market, Honeywell would be the only large
independent supplier of engine starters.

(339) The Parties have submitted that market shares are not
indicative of market power since competition among
suppliers takes place whilst the engine is under develop-
ment. The size and strength of suppliers, their ability to
invest in engine programmes (characterised by high up-
front investments and a very long period before cash
flows turn positive), a strong technology capability and
in-service support ability are key elements in the aviation
business. As a detailed knowledge of the engine and
airframe systems that interface with the component/
subsystem are fundamental in this business, a sound
track record in applying the technology in aerospace jet
engine applications is a key discriminator for being
selected as an engine starter supplier. Market share is
therefore a measure of the experience of suppliers and,
provided that sufficient resources are attributed to R &
D, market share is a direct indicator of market power. It
can therefore be concluded that high market shares give
significant competitive advantage during the bidding
process due to the need to demonstrate product liability
and track record.

(340) As it will be seen in the following paragraphs, the merger
will lead to vertical foreclosure effects, stemming from
the elimination of Honeywell as an independent supplier
of engine controls to jet engine manufacturers compet-
ing with GE.

(108) It is to be noted that Hamilton Sunstrand considers its market
share to be between 30 and 40 % and that of Honeywell to be
between 60 and 70 %.

(109) Hamilton Sundstrand is owned by United Technology Corpor-

ation (UTC) and is thus a sister company of P&W.

4.

EFFECTS ON COMPETITION

4.A.

Introduction

(341) The proposed merger will bring about anti-competitive
effects as a result of horizontal overlaps and the vertical
and conglomerate integration of the merging Parties
activities. GE has dominant positions in the markets for
large commercial aircraft engines and large regional jet
aircraft engines. The transaction will strengthen GE’s
position on the markets for large commercial aircraft
engines and for large regional jet aircraft engines and
will create a dominant position on the markets for
corporate jet engines. Honeywell already enjoys signifi-
cant leading positions on the markets for avionics and
non-avionics as well as in engine starters. Following the
transaction Honeywell will become dominant in the
BFE, SFE and SFE-option avionics markets.

4.B. SFE avionics and non-avionics

4.B.1. Creation of a dominant position

1)

Foreclosure through the vertical integration of Honeywell
with GE

(342) The main effect of the proposed transaction on the
markets for SFE avionics and non-avionics products
would be the combination of Honeywell’s activities with
GE’s financial strength and vertical
integration into
financial services, aircraft purchasing and leasing, as well
as into aftermarket services.

(343) SFE are products selected on an exclusive basis by
the airframe manufacturer and supplied as standard
equipment for the life cycle of an aircraft. Consequently,
for a supplier of SFE the initial selection of its products
on a platform can guarantee a long-term source of
revenues. In this sense, SFE products bear a strong
similarity with engines supplied on an exclusive basis
(such as in the Boeing 737 or 777X). The ability of GE
to obtain engine exclusivity on platforms was discussed
in the previous paragraphs, where it was seen that in
order to benefit from such a long-term revenue stream,
GE used its considerable financial resources and vertical
integration to induce the relevant airframe manufacturer
to grant an engine exclusivity. As a consequence of its
financial capabilities and vertical integration into aircraft
purchasing, GE has managed to win all the major
competitions to obtain engine exclusivity.

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(344) Following the proposed merger, Honeywell will immedi-
ately benefit from GE Capital’s ability to secure the
exclusive selection of its SFE products on new platforms.
By leveraging its financial power and vertical integration
on the launch of new platforms (for example, through
financing and/or through orders placed by GECAS), the
merged entity will be able to promote the selection of
Honeywell’s SFE products, thereby denying competitors
the possibility to place their products on such new
platforms. That would delay the cash inception of
Honeywell’s competitors and deprive them of the necess-
ary return to fund future investments and innovation.
Honeywell’s products will, in particular, benefit from
GECAS’s role as a significant purchaser of aircraft.
Post-merger, GECAS will extend its GE-only policy to
Honeywell products to the detriment of competitors
such as Collins, Thales and Hamilton Sundstrand and
ultimately of customers. Indeed, given the relative indif-
ference of airlines towards component selection, the
benefits of a non-GE offer for airframe manufacturers
would become less significant than the benefits they
could achieve in the form of additional aircraft purchase
by GECAS.

(345) Furthermore, owing to GE’s strong generation of cash
flows resulting from the conglomerate’s leading pos-
itions on several markets, Honeywell will, following the
merger, be in a position to benefit from GE’s financing
surface and ability to cross-subsidise its different business
segments.

(346) Accordingly, GE’s strategic use of GECAS’s market access
and GE Capital’s financial strength to favour Honeywell’s
products will position Honeywell as the dominant
supplier on the markets for SFE avionics and non-
avionics products where it already enjoys leading pos-
itions.

(347) The effect on rival avionics and non-avionics manufac-
turers will be to deprive them of the future revenue
streams generated by the sales of the original equipment
and spare parts. Future revenues are needed to fund
development expenditure for future products, foster
innovation and allow for a potential leapfrogging effect.
By being progressively marginalised as a result of
the integration of Honeywell
into GE, Honeywell’s
competitors will be deprived of a vital source of revenue
and see their ability to invest for the future and develop
the next generation of aircraft systems eventually elimin-
ated.

(348) Indeed, given the fact that Honeywell’s avionics and
non-avionics competitors are unable to reproduce GE’s
financial strength and vertical integration to any appreci-

large
able degree (see above on the assessment of
commercial aircraft), their limited size and financial
strength would probably lead to a reduction of their
competitive strength in those markets where the exten-
sion of GE’s business practices to Honeywell’s products
would reduce seriously their chances to win future
competitions.

2)

Foreclosure through packaged offers of GE and Honeywell
products and services

(349) As described below, this situation will be compounded
by the new entity’s ability to offer product packages to
the airframe manufacturers. The complementary nature
of the GE and Honeywell product offerings coupled with
their respective existing market positions will give the
merged entity the ability and the economically rational
incentive to engage in bundled offers or cross-subsidis-
ation across product sales to both categories of cus-
tomers (see below on BFE).

4.C. BFE (and SFE-option) avionics and non-avionics

4.C.1. Creation of a dominant position

1)

Foreclosure through packaged offers of GE and Honeywell
products and services

(350) In the post-merger market structure, the merged entity
will be able to offer a package of products that has never
been put together on the market prior to the merger and
that cannot be challenged by any other competitor on
its own. The effects of the proposed merger on BFE and
SFE-option avionics and non-avionics products will thus
be felt in terms of the merged entity’s ability to sell
packages of complementary products, in particular BFE
and SFE-option avionics and non-avionics and engines.
Sales of BFE and SFE-option products are made to
airlines on a regular basis, in particular each time an
airline replaces or complements its fleet of aircraft. On
each of these occasions, the merged entity may promote
the selection of Honeywell’s BFE and SFE-option prod-
ucts by selling them as part of a broader package
comprising engines and GE’s ancillary services such as
maintenance, leasing, finance, training, and so forth.

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(351) The sale of complementary products through packaged
deals may take several forms. It may include, for instance,
mixed bundling whereby complementary products are
sold together at a price which, owing to the discounts
that apply across the product range, is lower than the
price charged when they are sold separately. It may also
take the form of pure bundling whereby the entity sells
only the bundle but does not make the individual
components available on a stand-alone basis. Pure
bundling may also take the form of technical bundling,
whereby the individual components only function effec-
tively as part of the bundled system, and cannot be used
alongside components from other suppliers, that is
to say, they are made incompatible with the latter
components.

Indeed,

(352) The practice of selling packages of products and services
has been confirmed throughout the market investi-
gation.
the Commission’s investigation has
shown that such practices have repeatedly occurred in
this industry. Moreover, the Commission has evaluated
the theoretical premises of mixed bundling as presented
to it in the economic analyses submitted by the Parties
and third parties. The various economic analyses have
been subject to theoretical controversy, in particular as
far as the economic model of mixed bundling, prepared
by one of the third parties, is concerned. However, the
Commission does not consider the reliance on one or
the other model necessary for the conclusion that the
packaged deals that the merged entity will be in a
position to offer will foreclose competitors from the
engines and avionics/non-avionics markets.

(353) As a result of the proposed merger, the merged entity
will be able to price its packaged deals in such a way as
to induce customers to buy GE engines and Honeywell
BFE and SFE-option products over those of competitors,
thus increasing the combined share of GE and Honeywell
on both markets. This will occur as a result of the
financial ability of the merged entity to cross-subsidise
discounts across the products composing the packaged
deal. The Commission’s market investigation has indi-
cated that both airframe manufacturers and airlines are
price-sensitive customers.

(354) The incentives for the merged entity to sell bundles of
products may change over the short to medium term,
for instance when new generations of aircraft platforms
and aircraft equipment are developed. Instead of propos-
ing, for example, product bundles at a better price than
stand-alone products, while leaving the customer the
choice to buy individual products among the bundle or
to only offer a bundle of products, the merged entity
can also be expected to engage in technical bundling,
that
to make its products available only as an
integrated system that is incompatible with competing
individual components. This can potentially reduce the
profitability of competitors to a greater degree than in
the case of mixed bundling and thus increase the
likelihood of market foreclosure. Competitors will find

is,

it more difficult to place their products on the market,
since technical bundling restricts the market share
available to them. Overall,
technical bundling will
adversely affect competitors’ incentives to compete and
under such circumstances, they are not likely to be a
constraining factor to the independent behaviour of the
merged entity. Indeed, non-integrated competitors are
not in a position to duplicate technical bundling. As a
result of these commercial practices, the merged entity
is expected to gain additional market shares. Competi-
tors are expected to lose market shares and see their
profits shrink,
In the
medium term, competitors will have to take decisions as
to whether, in view of their anticipated reduced market
share and profitability, they are able and willing to
continue competing in the markets where the merged
entity is active.

in some cases, significantly.

(355) The merger will, in the short term, affect suppliers of
BFE and SFE-option products. As BFE products are sold
and purchased on a regular basis, the merged entity’s
packaged offers will manifest their effects after the
merger goes through. Because of their lack of ability to
match the bundle offer, these component suppliers will
lose market shares to the benefit of the merged entity
and experience an immediate damaging profit shrinkage.
As a result, the merger is likely to lead to market
foreclosure on those existing aircraft platforms and
subsequently to the elimination of competition in these
areas.

2) The Parties arguments in relation to packaged offers

a)

I n t r o d u c t i o n

(356) The notifying Parties contest the feasibility of product

bundling or packaged deals in this case.

b) T h e P a r t i e s l a c k d o m i n a n c e o n t h e i r

r e s p e c t i v e m a r k e t s

(357) The Parties argue that neither party is dominant in its
respective market and that lacking dominance in at least
one market, the merged entity will not have the power
to impose product bundling.

(358) The Commission’s market investigation has shown that
GE is indeed already dominant on the markets for large
commercial and large regional jet aircraft engines and
that Honeywell has a leading position, in some cases a
monopoly position, on its own product markets.

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c) C u s t o m e r s k e e p c o n t r o l o f p r i c e s o f

i n d i v i d u a l c o m p o n e n t s

(359) The Parties argue that customers are not ready to accept
a uniform bundling price since they prefer to assess the
different prices broken down product by product. In
addition, they claim that as a result of this, bundling
offer has not occurred and will not occur in this industry.

(360) The Commission’s market investigation has however
shown that the Parties can offer, inter alia, mixed and
technical bundling. The merged entity may, indeed, offer
the same product at two different prices depending on
whether or not the product is included in the bundle,
the lower price being of course applied in cases where
the bundle is purchased. The merged entity will, in that
way, be in a position to economically induce customers
to purchase its products and services through bundled
offers rather than on a stand-alone basis. As such,
customers will still be able to know the price of the
individual products and make a rational decision as to
whether it is economically profitable to purchase the
items through a bundled offer.

d) B u n d l i n g d o e s

t a k e p l a c e

i n t h i s

i n d u s t r y

(361) The Parties have submitted that there is no historical
evidence that previous portfolio expanding mergers have
caused entities to switch to bundled offers as a means
of increasing complementarity. Prior to the merger,
Honeywell was already in a position to offer both
engines and components on corporate jets. UTC could
also bundle engines to controls such as APUs, ECS and
electrical power. But, still according to the Parties, there
is no evidence that Honeywell or UTC have substantially
reduced their engine price to promote sales of other
components or substantially lowered its component
prices to promote engine sales. The Commission does
not agree with the statement that bundling has not taken
place in the past. The following paragraphs contain
some indicative examples of past
instances where
bundling took place. Moreover, the Commission con-
siders that the proposed merger will create further
opportunities and incentives for such practices, given
the unprecedented range of products and services that
will be put at the disposal of the merged entity.

(362) [example of a bid, considered by Honeywell as contain-

ing confidential information]* (110)

(363) Honeywell has also maximised equipment selection
through technical tying, for instance, when Honeywell
used proprietary interfaces on the AIMS cabinet (exclus-
ive on the Boeing 777) which rendered other supplier’s
solutions unusable.

(364) Honeywell offered [Airline, name of which is considered
by Honeywell to be confidential]* a [...]* % discount on
future supply of spare parts for individual SFE equipment
(including FMS and ADIRU), a [...]* % discount on the
TCAS system and [...]* % discount on the SATCOM
system. The offer further provided that, in case [Airline,
name of which is considered by Honeywell
to be
confidential]* selected all of these products from Hone-
ywell, additional discounts would be granted: [...]* % for
spare SFE products, [...]* % for TCAS and [...]* % for the
SATCOM system (111).

(365) Furthermore, in a [Airline, name of which is considered
by Honeywell to be confidential]* bid (of [date con-
sidered by Honeywell to be confidential]*) (112) to pro-
vide CMU and voice data recorder (VDR) equipment
retrofit
for approximately [...]* aircraft, AlliedSignal
(now Honeywell) offered to extend the warranty on all,
including previously sold, equipment with [Airline,
to be
name of which is considered by Honeywell
confidential]* to a [duration considered by Honeywell
to be confidential]* if
[Airline, name of which is
considered by Honeywell to be confidential]* bought
both the CMU and the VDR from them. This represented
an increase in warranty [duration considered by Hone-
ywell to be confidential]* depending on the equipment
type. The warranty offered for the stand-alone products
was limited to [duration considered by Honeywell to be
confidential]* depending on the equipment.

(366) Concerning bundling as a result of range-enhancing
mergers, the Commission looked at the formation of
UTC (combining P&W and Hamilton Sundstrand in
June 1999) and the current Honeywell. Although the
reference period is short, Honeywell was first able to
package engines, engine service and avionics in early
2000 (113) and successfully won the competition for the
[ aircraft platform, considered by Honeywell to be
confidential]* in the fall of 2000 as described below.
The Commission can therefore not rely on this argument
to dismiss the likelihood of bundling.

(110) [See above]*.

(111) As indicated in Honeywell internal documents.
(112) As indicated in Honeywell internal documents.
(113) See Case COMP/M.1601 — AlliedSignal/Honeywell, Decision

of 1 December 1999.

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(367) Following the AlliedSignal/Honeywell merger, compe-
titions were held for two platforms where Honeywell
could offer the majority of the systems, including engines
[competition for an aircraft platform as described in
Honeywell’s internal documents, considered by Hone-
ywell to contain confidential information]* (114).

(368) The second competition was for the [type of aircraft
platform, considered by Honeywell to be confidential]*,
where Honeywell’s bundled bid for engines and avionics
was retained. The [type of aircraft platform, considered
by Honeywell to be confidential]* (115) is illustrative of
the bundling strength that Honeywell acquired since its
merger with AlliedSignal. [competition for an aircraft
platform as described in Honeywell’s internal docu-
ments, considered by Honeywell to contain confidential
information]*.

(369) As to UTC, unlike GE and Honeywell, its subsidiary P&W
appears to have neither market power nor dominance in
any product. Additionally, P&W does not enjoy a
financial backing comparable to that of GE Capital nor
is it a sizeable buyer of aircraft nor a significant supplier
of leasing and ancillary services to airlines. In any case,
Honeywell
itself has identified three instances where
UTC was ‘sacrificing systems’ in order to win the engine
competition [description of UTC’s commercial strategy
in Honeywell’s internal documents, considered by Hone-
ywell to contain confidential information]*. The most
striking example was
[description in Honeywell’s
internal documents of UTC’s commercial strategy for an
aircraft platform, considered by Honeywell to contain
confidential information]* (116).

(370) Examples of cross-subsidisation were also found during
the market investigation. For instance, Honeywell has
already engaged in such bundling vis-à-vis a number of
airlines, for instance, description of bid examples for
airlines.

e) T h e

e q u i p m e n t

s e l e c t i o n t i m e l i n e

d o e s n o t a l l o w f o r b u n d l i n g

(371) The Parties have further argued that bundling is unlikely
to occur in relation to new platforms, as the selection of
equipment is made in a timeline that may last over
several years. The Parties submit for instance that the
time difference between the selection of the engine and
that of the avionics or non-avionics product may be as
long as two to four years for a large commercial aircraft
platform and as long as three years for a regional jet
platform. The Parties further argue that the selection
process for the different products is carried out by
different teams. The Parties eventually conclude that the

(114) [See above]*.
(115) [See above]*.
(116) [See above]*.

timeline and the involvement of
long procurement
different counterparts may break the momentum that
product bundling requires.

(372) The Commission’s market investigation has not support-
ed this argument as the timing of the selection process
can be adjusted on a case by case basis according to the
business opportunities that arise in the course of a
selection process. Recent examples indeed show that for
the [aircraft, type of which is considered by Honeywell
to be confidential]*, the [aircraft, type of which is
considered by Honeywell to be confidential]* and the
[aircraft, type of which is considered by Honeywell to
be confidential]*, the aircraft systems were selected at
about the same time as the engines. Furthermore, in the
case of the [aircraft, type of which is considered by
Honeywell to be confidential]*, engine selection and
avionics selection announcements were made at the
same time [date, considered by Honeywell to be confi-
dential]*. On the large commercial aircraft engine mar-
ket, engines for the [large commercial aircraft, type of
which is considered by Honeywell to be confidential]*
were selected at the same time as the APU and the ECS
[date, considered by Honeywell to be confidential]*
while avionics were selected only three months later.

(373) In the light of the foregoing, it cannot therefore be
contended that the systems selection process cannot be
adapted to a timeline enabling bundling to take place.
Furthermore, even in the event of stretched procurement
timelines, contractual arrangements can always make
bundling possible. Product bundles need indeed not to
be put together simultaneously as there are no technical
in putting together a deferred product
obstacles
bundling.
the merged
this means that
In practice,
entity will offer retroactive discounts that will grow
proportionately to the number of products that cus-
tomers will ultimately source from them. Customers will
thus have the possibility to make their component
selection at different points in time, while having the
incentive to choose products of the merged entity to the
extent that their choice will reduce their overall purchase
cost. Such a practice will have exactly the same effects
as a bundled offer negotiated at a specific point in time.
Therefore, there can be no technical obstacles preventing
suppliers from bundling several aerospace components
in their offer to airframe manufacturers.

f) T h e c o u r n o t e f f e c t o f b u n d l i n g

(374) The Parties also argued that their incentives to reduce
the prices of their respective products are low in that the
demand for aircraft is relatively inelastic to the price of
engines and components and also that the overall price
of an aircraft is only one of many factors going into an
airline’s decision whether to purchase additional aircraft.

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(375) The Commission does not consider that the demand
for aircraft equipment and components is completely
inelastic.
Indeed, airlines appear to have substantial
flexibility as to when they purchase or replace aircraft,
as to when they purchase avionics and non-avionics
products and as to how many aircraft they want to hold
in their fleets. It can, therefore, be reasonably expected
that the airlines’ purchasing decisions will be affected to
a certain extent by price variations. Even more so, taking
into consideration that the merged entity is expected to
supply products and services accounting for over half of
the expected free cash flows of an aircraft, a price
increase or decrease in the products and services it will
be able to supply after the merger can be expected to
influence the purchasers’ demand.

(376) In any event, the Parties’ argument on the inelasticity of
the demand does not take into account the fact that the
individual entities’ demand is indeed elastic. Therefore,
even if the demand for aircraft at the industry level were
inelastic, i.e. even in the face of a price reduction by all
entities for the product bundle,
it did not increase
sufficiently to render price reduction profitable the
Commission’s investigation has indicated that a price
reduction of the bundled system by the merged entity is
likely to shift customers’ demand away from competitors
to the merged entity’s bundled product. Indeed, even if
bundling were not to affect the aggregated volume of
the demand for aircraft or engines and components,
bundling would lead to a reallocation and therefore to a
shift of market shares in favour of the merged entity.

g) C o m p e t i t o r s

c a n

o f f e r

c o u n t e r -

b u n d l e s a n d / o r c a n l e a p f r o g

(377) The Parties have insisted that competitors have the
ability to offer competing bundles of products, thus
constraining the merged entity’s ability to profitably
engage in bundling. The Parties further submit that
competitors could do so even in the absence of a
counter-merger, simply by teaming up in order to offer
complementary products that could rival those of the
merged entity.

(378) The Commission cannot agree with this argument.
Indeed, even if competing bundles through teaming
were to be regarded by customers as attractive as
those of the merged entity, customers will then make
purchasing decisions on the basis of the respective prices
of these bundles. As explained above, in the absence of
economic integration among competing suppliers, the
prices of their bundles cannot be expected to be lower

than those of the merged entity. Consequently, the
merged entity is likely to attract more customers than
its competitors.

(379) Teaming has therefore to be disqualified as a viable
alternative to the merged entity’s ability to profitably
bundle products and services from its extensive product
range. Teaming is indeed a fragile and uncertain exercise
as it involves complex coordination among different
entities and can lead to conflicts of interest within the
team when the choice of technology, the positioning of
the products and the allocation of the revenues and
profits need to be decided. Unlike a single supplier,
which has the ability to cross-subsidise components in
order to strategically price its bundle (117), each partner
in a teaming arrangement wishes to maximise its own
profits and is therefore hesitant to sacrifice its own
margins for the benefit of the remainder of the team.

(380) Furthermore, teaming is not always desirable from the
perspective of the customer as teaming can generate
substantial additional administrative and management
costs, such as managing a group of suppliers, that may
offset the financial benefit of the teamed offer. One
other point that should not be underestimated is that, in
any competitive bidding process, a single entity is much
better positioned to address the requests of customers.
A single-management entity is indeed always able to
make quick decisions to enhance the value of a trans-
action by offering price concessions, and other long
term incentives, such as better warranty and payment
terms, free spares, enhanced product support, and so
forth.

(381) The Commission’s investigation has identified several
instances where different suppliers attempted to team
up, although with limited success, and has shown that
most of the instances referred to by the Parties as
examples of teaming have either not taken place or were
unsuccessful. A few of these cases are described below
to illustrate that teaming is not an answer to the merged
entity’s incentive and ability to bundle products and
services in a manner that
is not replicable by its
competitors.

(382) Contrary to what the Parties have submitted, there is no
teaming agreement between Litton and Thales concern-
ing the design and development of an integrated air
data/IRS product (ADIRS/ADIRU). Since both Thales
and Litton were unable on their own to propose the
complete package for the A380 programme (118) , they
each answered separately with their products and each
wrote to Airbus confirming their ability to work together
if necessary.

(117) [...]*.
(118) [...]*.

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(383) The [aircraft, type of which is considered by Honeywell
to be confidential]* example illustrates that teaming is
an uncertain proposition that may lead to conflicts of
interests with respect to future business opportunities.

h) B u n d l i n g v i s - a - v i s a i r l i n e s

c a n n o t

t a k e p l a c e

(384) The Parties further submit that competitors can leap-
frog (119) by introducing technological improvements to
their products and win the next competition over the
incumbent supplier on the platform. However, in order
to be in a position to leapfrog, a competitor needs to
invest heavily in R & D and therefore needs platform
wins to generate the necessary cash flows that will fund
its future R & D expenditure. One of the effects of the
proposed merger will be to foreclose competitors, thus
making it increasingly difficult, if not impossible, for
them to win new platforms and so preventing them from
generating sufficient revenues to engage in leapfrogging.

(385) Because of the substantial time lag between compe-
titions, losing a major one results in being deprived of
significant future cash flows that are needed to invest in
technological R & D. If a supplier incurs major platform
losses with some of its products, its ability to reinvest
might be seriously hampered. Contrary to the merged
entity, the financial ability of GE’s competitors to absorb
such losses while continuing to invest in innovation is
significantly more limited. In addition, leapfrogging is
bound to fail if the leapfrogging company is unable to
match the conditions and range of products offered by
the merged entity.

(386) Finally, the Parties suggested that the More Electrical
Engine/Aircraft could still be developed despite Hone-
ywell’s acquisition by GE because UTC could team
Hamilton Sundstrand up with RR or with TRW/LUCAS
or Smiths. The Commission considers that this alterna-
tive is not viable as TRW/Lucas has never acted as a
Revenue and Risk Sharing Partner in the past and could
hardly take over the role of Honeywell in that project.
Hamilton Sundstrand is vertically integrated with RR’
competitor, P&W, and is part of the Engine Alliance
with GE. In addition, post merger, not only will GE have
the possibility to decide at what moment it ceases to
participate in the project, but it will also have direct
access to the engine data since the electrical generator
needs to interact with the engine.

(119) Leapfrogging means that a supplier replaces the incumbent as a

result of new technological development.

(387) The Parties have claimed that when airlines have a
choice of engines, GE lacks the necessary dominance to
foreclose rival component suppliers and that GE is
contractually bound to offer its engines at specified list
prices. As a result, the Parties argue that while GE can
offer package discounts it cannot actually impose tying.
The Parties further submit that on platforms where there
is no choice of engine, GE lacks the mechanism with
which to tie and cannot therefore prevent a customer
from choosing GE’s engine together with a rival’s
components.

(388) As indicated in the preceding paragraphs, whenever
there is an engine choice, airlines first choose the type
of aircraft they wish to acquire and subsequently the
type of engine that will power the aircraft. The choice of
engine by the airline is then primarily driven by total
cost considerations, to the extent that certified engines
available for choice on a given platform are expected to
offer equivalent technical performances. In this particu-
lar case, the airline puts in competition the certified
engines in order to achieve better pricing and overall
incentives to select the engine. In order to
financial
differentiate themselves from other suppliers, engine
manufacturers will offer product and service bundles
including the original engines, spare engines, MRO
services, spare parts credits, financial services, training
as well as many other related services, and offer their
engines at significantly lower prices than those indicated
in their price lists. Therefore airlines already today
purchase both their engines at prices lower than the
price list and bundles of products and services.

(389) As a result of the proposed merger, the scope of these
packaged offers will be significantly expanded and will
place the merged entity in a position to offer larger and
more diversified bundles that other competitors will not
be able to match. The bundles could, for example,
include engines, avionics and non-avionics products,
true nose-to-tail MRO services, GE Capital financial
solutions, GECAS leasing products, and so forth.

(390) The Parties have also argued that bundling cannot take
place on aircraft where there is engine exclusivity
because the engine price is not determined by the engine
supplier but by the airframe manufacturer [example
provided by the Parties, considered by Honeywell to
contain confidential information]*.

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(391) The Commission’s market investigation has shown that,
even in cases where the price of the engine is set and is
no longer subject to negotiations between the engine
manufacturer and the airframe manufacturer, the mer-
ged entity will be able to offer price concessions either
on the engine itself or on the other components of its
bundle and induce the customer to select the bundle.
According to a major European airline, whenever Boeing
prices a B737, GE steps in with attractive offers on
ancillary engine products and services, spare parts,
financial assistance and other GE items in order to
convince the airline to go for the GE-powered aircraft.

i) C F M I e n g i n e s a r e n o t c a n d i d a t e s f o r

b u n d l i n g

(392) The Parties have submitted that GE and CFMI should be
treated as two independent companies when it comes to
the assessment of product bundling and that CFMI
engines cannot be taken into account for bundling
purposes because SNECMA will not allow the merged
entity to make such bundled offers.

(393) As already indicated above, the Commission considers
that SNECMA does not have an incentive to object to
use of CFMI engines for bundling purposes. Indeed,
provided bundling strengthens the market penetration
of CFMI engines, there is no reason why SNECMA, who
does not compete with GE as an independent engine
manufacturer, should not favour this course of action.
As mentioned above, bundling is likely both to increase
GE/ SNECMA profits and sales volumes and decrease
those of RR and P&W.
In addition, SNECMA has
interests in all other GE engines and can
financial
from GE’s profit maximising
therefore also benefit
strategies. Finally, GE may decide to subsidise the bundle
out of its own share of CFMI profits.

(394) The Parties none the less argue that SNECMA is unlikely
to accept the inclusion of Honeywell’s wheels and brakes
in the bundle since it also supplies those products
In this respect the
in competition with Honeywell.
Commission notes that SNECMA’s wheels and brakes
do not currently compete against those supplied by
Honeywell on platforms where a CFMI engine is selected.
On the A320 family, airlines can choose between
ABS and SNECMA, since Honeywell’s products are not
certified. Similarly, on the B737 family, airlines can only
choose between BF Goodrich and Honeywell, since
SNECMA’s wheels and brakes are not certified. Post-
merger, the combined entity and SNECMA will both
operate on the wheels and brakes market and will jointly
control CFMI. Their combined market share on this
market will be around 50 to 60 %. They will thus have
an interest in coordinating their behavior in order to
increase both their sales of engines and their sales of

wheels and brakes. They could achieve that either by
deciding not to include wheels and brakes in the bundle
or by offering their respective wheels and brakes only in
their own areas of sales responsibilities. There is thus no
reason why SNECMA’s position as a supplier of wheels
and brakes would represent an obstacle to carry out
such bundling practices. In addition, SNECMA has an
incentive to facilitate these bundling practices in order
to go on benefiting from GECAS’ ability to increase
CFMI’s engine market penetration.

(395) For those reasons, the Commission has come to the
for the

conclusion that CFMI engines are relevant
analysis of product bundling.

j) T h e

a g r e e m e n t b e t w e e n H o n e y w e l l

a n d G E C A S

(396) The Parties have argued that the proposed merger will
not bring about any change compared to the situation
prior to it. They point out that there exists an agreement
dating from 1996 between GE and Honeywell (then
AlliedSignal), according to which [description of com-
mercial agreement, considered by Honeywell to contain
confidential information]*. As a result, the Parties argue
that the proposed merger is not likely to change the
purchasing behaviour of GECAS to any material extent
and therefore product bundling should not constitute a
competition concern.

(397) The Commission disagrees with that argument. Firstly,
the fact that a merger internalises an agreement, which
may or may not be considered to be restrictive of
competition prior to the merger, is not a reason not to
object to a merger. Such an agreement does not bring
any structural change in the marketplace as a merger
does. In addition, the agreement has [description of
commercial agreement, considered by Honeywell to
contain confidential
information]*. The incentives to
engage in product bundle are not, therefore, the same as
in the case of full economic integration of the Parties
to the agreement. Finally, [description of commercial
agreement, considered by Honeywell to contain confi-
dential information]*.

3)

Effects of packaged deals on competitors

(398) The ability of the merged entity to cross-subsidise its
various complementary activities and to engage in
profitable forms of packaged sales will have an adverse
effect on the profitability of competing producers of
avionics and non avionics products, as a result of market
share erosion. This is likely to lead to market exit of
existing competitors and market foreclosure both over

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the short term, insofar as price is below average variable
cost, and over the longer term, insofar as competitors
would be unable to cover their fixed costs if they were
to remain active and to proceed with the new investment
in R & D so as to compete viably and in the future.

(399) While this longer-term foreclosure impact on the profits
of competitors would not be linear but
instead is
expected to occur in a step-by-step fashion, the effect on
competitors’ ability to invest in R & D and focus on
new product developments for future competitions will
materialise as soon as the cash flow expected to be
generated internally could not support the necessary
capital expenditure for product development and inno-
vation.

(400) The erosion of the market shares of GE and Honeywell’s
competitors resulting from the merger will
impact
the future strategic choices of the latter. Significant
reductions in profits will lead to substantial decrease of
profitability ratios such as return on capital
(ROC).
When compared to the rate of return required by
investors (i.e. the financial markets), decreased ROC will
result in companies experiencing strong difficulties in
attracting new funds and spending on R & D. This
will in turn seriously threaten the ability of GE and
Honeywell’s competitors to invest for the future so as to
safeguard their market position and viability.

(401) Therefore, due to steep decreases in their ROC, some of
the avionics and non-avionics competitors will see their
viability threatened over the short-term, whereas some
others will gradually lose their ability and incentive to
insofar as the returns they can
compete vigorously,
achieve from a shrunk customer base are severely
reduced.

(402) In sum, the potential effects of bundling by the merged
entity may vary over time. A short-term elimination of
the incentives to compete is likely if competitors are
unable to cover ongoing costs of production. Similarly,
if competitors can still achieve sufficient profitability
levels to remain on the market, the effects of bundling
by the merged entity are likely to make them unable to
engage in long-term investments and other capital
expenditure which would give them a chance to succeed
in the future and remain viable over the medium-term.

(403) Engine and components suppliers compete on inno-
vation for future products on the basis of R & D
expenditure that has to be financed by current and
expected cash flows. In industries such as that under

examination in this case, such expenditure is conditioned
by the large sunk costs incurred by firms, the long lead
times before investment returns materialise, the high
risk as well as the asymmetric information. Since
companies are expected, in such circumstances, to use
retained earnings, rather than raise or borrow capital,
any significant reduction in the current profits will
seriously hamper their ability to invest in the future.
This in turn will reduce their incentives to invest due to
lower than expected future profits. Moreover, those
effects would be further exacerbated were the merged
entity to engage in pure (technical) bundling, which is
likely to be the case in relation to future platforms. Pure
bundling will further reduce the future market available
to competitors and consequently will lower their incen-
tives to strategically invest in this market. Companies’
incentives to engage in R & D activities depend on the
volume of their output in the market to the extent that
R & D costs are largely sunk. Any significant reduction
of this output, stemming from a reduction of the market
available to competing firms, will reduce expected future
profits and therefore current R & D expenditure.

(404) Bundling will result in the foreclosure of suppliers of
BFE products since no other supplier or team of suppliers
will be able to replicate the bundled offer by the merged
entity. As a result, competitors on the markets for BFE
avionics and non-avionics products are expected to be
affected in their ability and incentive to compete and
innovate following likely significant immediate market
share and revenue losses. Consequently,
in the light
of their inability to compete on the merits, exposed
competitors will have to reconsider their activities
and withdraw from those markets dominated by the
Honeywell BFE avionics and non-avionics products,
which will ultimately negatively impact competition

4)

Foreclosure through the vertical integration of Honeywell
with GE

(405) In addition to the implementation of bundling on the
markets for BFE avionics and non-avionics products, the
combination of Honeywell with GE’s financial strength
and vertical
integration in financial services, aircraft
purchasing and leasing, as well as in aftermarket services,
will contribute to the foreclosure effect already described
for SFE avionics and non-avionics.

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(406) Following the proposed merger, Honeywell’s BFE prod-
uct range will benefit from GE Capital’s ability to secure
exclusive positions for its products with airlines (see the
Continental Airlines example) and GECAS’s instrumental
leverage ability to foster the placement of GE products
through the extension of its GE-only policy to Honeywell
products.

addition, it cannot be expected that an individual airline
will put itself at a competitively disadvantaged position
by rejecting package offers in order to preserve compe-
tition in the market.

(411) It can accordingly be concluded that the proposed
transaction will create a dominant position on the
markets for SFE and BFE avionics and non-avionics.

(407) Honeywell’s BFE products will also benefit from GE’s
range of products and services (120) to target competitors’
components on the occasion of replacements, upgrades
and retrofits through GECAS’s ability to favour GE
products vis-à-vis airlines.

(408) Furthermore, GE will also have the incentive to accelerate
the on-going trend of airframe manufacturers to change
BFE products into SFE products since it could later
target those products and achieve exclusive positions by
deploying the set of business practices described in the
previous paragraphs.

(409) GE’s strategic use of GECAS and GE Capital’s financial
strength will thus position Honeywell as the dominant
supplier of BFE avionics and non-avionics products
where it already enjoys leading positions. In the light of
their inability to reproduce GE’s financial strength and
integration to any significant degree, the effect on rival
BFE manufacturers will be to lead them to progressively
reconsider their strategy and not to compete fiercely in
those markets dominated by the merged entity.

(410) The Parties have argued that insofar as customers have
the ability and the incentive to maintain a competitive
supplier base they will not accept at any cost bundling
practices or the effects of vertical integration. However,
the market investigation has shown, first, that airlines
are relatively indifferent as to the choice of SFE avionics
and non-avionics. Second, when selecting the SFE equip-
ment that will remain on the aircraft for its lifetime,
airframe manufacturers cannot ignore the importance
of GECAS as an aircraft buyer since selling one or two
additional aircraft is likely to offset all financial incentives
that Honeywell’s competitors can offer. As far as BFE
equipment is concerned, although commonality and
customer preferences exist, the airlines are, due to their
limited profit margins, not
in a position to reject
commercial offers that represent short-term cost savings.
For airlines, short-term cost reduction outweighs the
possibility of longer-term reduction in competition. In

(120) Such as the GE Engine Service (GEES) network.

4.D. Engines for large commercial aircraft

4.D.1. Strengthening of a dominant position

1)

Foreclosure through packaged offers of GE and Honeywell
products and services

for engines,

(412) Given the complementary nature of the products and
services of GE and Honeywell and the dominant or
leading market positions one or other of them currently
holds, the merged entity will have the ability to engage
in packaged offers of engines, avionics and non-avionics
products as well as related services towards airlines. On
the proposed merger will
the market
therefore have the effect of strengthening GE’s existing
dominance. The effectiveness of GE’s comprehensive
packaged offers can indeed be expected to be increased
and GE is expected to maintain its existing customers
and moreover gain new ones. The combination of
GE’s large commercial aircraft engines and Honeywell’s
avionics and non-avionics products can be expected to
raise the costs of rivals of the merged entity. In order to
compete against the packaged deals of such complemen-
tary products, competitors will have to respond by either
reducing their prices or by teaming up, in which case
their costs are likely to rise.

(413) As far as current customers of GE are concerned, the
proposed merger will have the effect of increasing GE’s
ability to keep them by bundling engines with avionics
and non avionics products. GE is therefore not expected
to lose existing customers.

(414) As far as current customers of P&W are concerned, GE
will have better chances than RR to gain them. P&W
engines mainly power an aircraft which is no longer in
production and is expected to be replaced in the near
future. That aircraft is expected to be replaced by aircraft
powered by GE or RR. In such replacement instances,
customers are more likely to chose GE engines, given
RR’s inability to replicate, either independently or
through teaming, the bundled packages that will be
offered to airlines by the merged entity.

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(415) As far as customers of RR are concerned, GE can also be
expected to gain them, given its ability to leverage its
leading positions for certain avionics and non-avionics
products into the market for large commercial aircraft
engines. Indeed, as described above, the merged entity
will have more than 75 % market share in products such
as inertial reference systems (IRS), enhanced ground
proximity warning system (EGPWS), and APU’s. For
example, the merged entity will have the ability to render
the sale of products where Honeywell has 100 % market
share (such as EGPWS), conditional on the sale of its
engine. In order to obtain such products, airlines will
have no other choice than to buy the engine offered by
the merged entity.

(420) Honeywell

is a key supplier of engine controls to
engine manufacturers (121). In addition, Honeywell is the
leading, if not the only, independent supplier of engine
starters. Following the proposed merger, the merged
entity would have an incentive to delay or disrupt the
supply of Honeywell engine starters to competing engine
manufacturers, which would result in damaging supply,
distribution, profitability and competitiveness of GE’s
engine competitors. Likewise, the merged entity could
increase the prices of engine starters or their spares,
thereby increasing rival engine manufacturers’ costs and
reducing even further their ability to compete against
the merged entity.

(416) In addition, GE may strengthen its dominant position
through package offers or tying vis-à-vis airframers. The
foreclosure of GE’s competitors through their inability
to counter GE’s success in getting platform exclusivity is
therefore expected to increase and occur as early as
when the next platform is launched.

2)

Elimination of Honeywell as a potential
partner

innovation

(417) Finally, the existing dominant position of GE in engines
for large commercial aircraft will be strengthened as a
result of the elimination of Honeywell as a partner in
the development of the More Electrical Engine Aircraft.
By depriving its engine competitors of cooperation with
Honeywell, GE will be the only engine manufacturer
able to develop innovation in that project. As that project
is expected to be determinant for future competition in
this market, GE’s will be able to be the first, if not the
only one, to obtain the benefits of innovation.

(418) This further weakening of competing engine manufac-
turers will therefore strengthen GE’s dominant position
and ultimately harm competition on the market for
large commercial aircraft engines.

3)

Foreclosure through the vertical integration with Hone-
ywell engine starters

(421) P&W manufactures engine starters mainly (122) for its
own captive use. However, if the merged entity increases
its prices or limits the supply of engine starters to GE’s
competitors, P&W could not be expected to make its
own engine starters available to the free market in order
to constrain the merged entity. A price increase in this
specific product would not be a sufficient economic
incentive for P&W to increase its production capacity,
since that would benefit RR, which is the only competi-
tor, post-merger, to buy engine starters on the free
market. The benefits of P&W’s sales of engine starters to
the free market could not outweigh a possible loss in
the market for engines, owing to the relative low value
of engine starters compared to the value of the engine.

(422) In their reply to the statement of objections, the Parties
have argued that several capable starter competitors
can replace GE/Honeywell should the latter behave
strategically. The Parties have mentioned Urenco, Micro-
turbo, Hamilton Sunstrand, Parker and Sumitomo. The
market investigation has not confirmed this. [Descrip-
tion of Honeywell’s commercial relation with a third
party, considered by Honeywell to contain confidential
information]*. Concerning Microturbo, other than its
limited technical capacity (predominantly involved in
repair and overhaul of gas turbines), this SNECMA
affiliate would not have any incentive to go against a
vertical foreclosure move that would be in line with its
profit maximisation strategy. Parker and Sumitomo have
only a limited presence in this market for second source
supply of starters and like Urenco, do not sell starters to
the engine manufacturer (under licence from Hamilton

(419) Quite apart from the effects of product package offers,
the proposed merger will strengthen GE’s dominant
position on the market for large commercial aircraft
engines as a result of the vertical foreclosure of the
competing engine manufacturers that will result from
the vertical relationship between GE’s as an engine
manufacturer and Honeywell as a supplier of engine
starters to GE and its competitors.

(121) Large commercial aircraft engines equipped with Honeywell
engine systems and accessories are, among others, [...]* infor-
mation considered by Honeywell as confidential.

(122) Hamilton Sunstrand is the second source starter supplier for a
number of mature engine programmes such as [...]*. These
starter developments date from Hamilton Sunstrand’s activity
prior to being integrated with P&W. Likewise, P&W depends on
Honeywell for starters on a number of mature engine platforms.

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Sunstrand). Hamilton Sunstrand is part of UTC and
cannot therefore be considered as an independent sup-
plier.

(423) Barriers to entry for new competitors are significant
due to the sophistication of engine starters, the high
associated R & D requirements, the cost of obtaining
product certification and the need to have a strong
technology capability as well as a worldwide product
support network (123). Furthermore, any potential mar-
ket entry of an alternative engine starters supplier would
not be readily available owing to the high switching
costs for users since the market investigation has shown
that switching engine starters, and control systems in
general, on a single engine type is undesirable from both
the point of view of the engine manufacturer and the
operator of the aircraft (124).

(424) The Parties have indicated that contractual obligations
prevent Honeywell from discontinuing the supply of
starters used in existing non-GE engines. The Com-
mission’s investigation indeed confirmed that this agree-
ment stipulates that Honeywell is to accept all orders
placed for them. Should Honeywell fail to satisfy the
order, or materially breach the agreement, it is required
to grant a licence to a third party to manufacture
the component and Honeywell must also provide the
licensee with all proprietary data necessary to enable
manufacture. It remains however clear that such a move
by Honeywell to cease supplying starters would create a
significant amount of disturbance and cost to GE’s
engine competitors. In addition, such tight contractual
controls limiting the possibility of either party to
foreclose without just reason are typical for recent
engine programmes while older programmes do not
include contractual arrangements that can prevent
Honeywell from abstaining to satisfy orders. Honeywell
has a particular strong presence in mature engine
programmes.

(425) In their reply to the statement of objections, the Parties
have submitted that foreclosure has not taken place
despite Honeywell’s existing share of air turbine starters.
Although Honeywell is already a small engines competi-

tor to P&W Canada and RR Allison, it has continued to
supply starters to both. However, it is to be noted that
small engines are sole-sourced and that such engine
competition does not include the incentives to foreclose
competitors that the merged entity would have for LCA
aircraft platforms that can be multi-sourced.

(426) The Parties also submit that engine starters can also be
supplied to airframe manufacturers directly and that any
refusal to supply engine manufacturers would result in
airframe manufacturers ordering starters directly. The
market investigation has however indicated that this is
not always the case as starters for most engines are sold
to the engine supplier for inclusion in engine packages
delivered to the airframe manufacturer. The Parties
further submit that half of its starter supplies were made
directly to airlines. It seems however that these supplies
generally concern spare starter supplies since they are
delivered directly to airlines.

(427) It can accordingly be concluded that the merged entity’s
incentive and ability to profitably raise the price or limit
the output of engine starters as a result of the vertical
relationship between GE’s engines activities and Honey-
well’s supply of engine starters, will increase the costs of
rival engine manufacturers and therefore contribute to
their further foreclosure from the market for large
commercial aircraft engines, thus strengthening GE’s
dominant position.

4.E. Engines for large regional jet aircraft

4.E.1. Strengthening of a dominant position

a) H o r i z o n t a l o v e r l a p o n e x i s t i n g p l a t -

f o r m s

(123) Since the starter interfaces with the engine, the supplier will
need to present a track record in applying the technology in
aerospace jet engine applications as well as an appropriate
product liability and service.

(124) On top of significant switching costs that relate to the modifi-
cation process, certification, flight testing and airframe manufac-
turer charges for every aircraft platform for which the engine is
selected, GE acknowledges the difficulty of re-sourcing engine
control components in an internal document analysing Hone-
ywell’s strengths. GE further concludes that ‘it is likely that P&W
and RR engines will not move [to other suppliers]* due to high
certification costs’.

(428) The first effect of the proposed transaction on the
market for large regional jet aircraft engines is to create
a horizontal overlap between GE’s and Honeywell’s
lead to the strengthening of GE’s
products that will
already dominant position on that market.
Indeed,
following the proposed merger, through the elimination
of Honeywell as an independent supplier, the merged
entity will control 100 % of the jet engine supply on
large regional aircraft platforms not yet in service and
90 to 100 % of the overall engine installed base on the
existing large regional jet platforms.

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(429) With regard to competition between existing platforms
in production, although the increase in market share
resulting from the merger is rather small (around 10 to
20 % on the basis of the orders backlog), the combi-
nation of GE and Honeywell as the only engine suppliers
currently on the market for large regional jet aircraft will
prevent customers from enjoying the benefits of price
competition (such as in the form of discounts) between
suppliers.

(430) The notifying Parties have argued that their monopoly
position is a static phenomenon, since it reflects the fact
they have won the competitions for these four platforms
jets are always
in the past and that since regional
equipped with a single engine source, their selection will
not affect competitive positions in the future. However,
this argument disregards the fact
this market
position will bring about a considerable source of
revenues to the merged entity, which will have a bearing
on the development of engines for future competitions.
In addition,
it disregards the fact that their position
confers a unique incumbency advantage for such future
platforms. Furthermore, GE has managed to secure three
out of
jets platforms, and
Honeywell the fourth, owing, at least in part, to the
influence that GE Capital/GECAS was able to exert over
the airframe manufacturers.

the four large regional

that

(431) The large regional jets market is a growing market. GE
forecasts that more than 4 000 aircraft will be sold over
the next ten to twenty years. Airlines are increasingly
introducing this type of aircraft in their fleets to cope
with the new market conditions of air travelling. The
market position that the merged entity enjoys in this
market will give it a comfortable access to the airlines’
fleets. In other terms, airlines will become more and
more dependent on the merged entity’s engines and
other products, since the proportion of large regional
jets will grow in the airlines’ fleets.

b)

E f f e c t s o n f u t u r e p l a t f o r m c o m p e -
t i t i o n s

(432) Like the market for large commercial aircraft engines,
the market for large regional jet aircraft engines will be
affected by the proposed merger through the implemen-
tation of package offers or cross-subsidisation by the
merged entity. Again, given the complementarity of GE
and Honeywell products and services and the dominant
or leading market positions one or other of them
currently holds, the merged entity will have both the
economically rational incentive and the ability to engage
in package offers of engines, avionics and non-avionics
products as well as related services towards cus-
tomers (125).

(433) As a result of their inability to put together competing
bundled offers to those proposed by the merged entity,
either independently or with other component manufac-
turers, P&W and RR will see a further decline in their
chances of placing their engines on the future large
regional jet airframes. Notwithstanding the fact that the
current platforms are already all powered by either GE
or Honeywell, foreclosure through the inability of the
other engine manufacturers to counter GE’s success in
obtaining platform exclusivity is expected to be repeated
as soon as future large regional
jet platforms are
developed, including all future BAe Avro derivatives,
since GE’s financial strength and vertical integration will
be extended to Honeywell’s engines. Furthermore, GE’s
already unmatchable ability to win platform compe-
titions will be strengthened by the ability to bundle a
wide range of products either on a commercial or a
technical basis.

(434) As a direct consequence of the proposed merger and the
implementation of mixed bundling by the merged entity,
the level of foreclosure of P&W (126) and RR from the
market for large regional
jet aircraft engines will be
exacerbated. Those companies and their shareholders
will therefore most probably be forced to reassess the
opportunity, both in commercial and financial terms,
for them to continue competing and investing on that
specific market. Following their inability to compete on
the merits with the merged entity and in the absence of
any financial return from that market, the most likely
outcome will be for GE’s competitors to withdraw from
the manufacturing and marketing of engines for large
regional jet aircraft, with the ultimate negative effect on
competition on that market.

4.F. Engines for corporate jet aircraft

4.F.1. Creation of a dominant position

1) Horizontal overlap

(435) The immediate effect of the proposed merger on the
market for corporate jet aircraft engines is to create a
horizontal overlap that will lead to the creation of a
dominant position. The combined entity will account
for 50 to 60 % (GE: 10 to 20 %; Honeywell: 40 to 50 %)
of the overall installed base of corporate aircraft and for
80 to 90 % (GE: 10 to 20 %; Honeywell: 70 to 80 %) of
the installed base of engines on medium corporate
aircraft.

(125) The market for large regional jet aircraft engines is, like that for
engines for large commercial aircraft, subject
to technical
bundling and its resulting effects from the part of the merged
entity.

(126) [Commercial performance of a P&W engine, considered by
P&W to contain confidential information]*. As a result of the
application of GE’s dominance toolkit on that market, P&W has
been unable to place that engine on that market to date.

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(436) Honeywell is already the leading player in this market
and the proposed transaction will strengthen Honey-
well’s leading position in the corporate jets market. The
significant combined position of the merged entity and
the relatively lower market shares of competitors are
already indicative of market power. The Parties have
argued that despite this high market position, the merged
entity is not in a position to exercise any sort of market
power, since in general their respective engines have not
been in competition in the past, except for a few
platforms. Airframe manufacturers call upon engine
manufacturers to submit offers, whenever a new plat-
form has been developed and needs to be powered by a
jet engine. The Parties have mentioned that on very few
occasions did GE and Honeywell submit an offer for the
same platform. The argument of
the Parties relies,
thus, on competition on a platform by platform basis.
However, this is not the way product markets have been
defined in the case of corporate jets since this is not
consistent with market definition principles, in so far as
it disregards supply and demand-side substitutability.

(437) The proposed merger is in any event, quite indepen-
dently from this horizontal overlap, likely to create a
dominant position on the market for corporate jet
engines.

2)

Foreclosure through the vertical integration of Honeywell
with GE

(438) Together with the creation of the horizontal overlap, the
proposed combination of GE and Honeywell will have
the effect of immediately extending the benefit of GE’s
financial strength and vertical integration into financial
services, aircraft purchasing and leasing, as well as into
aftermarket services to Honeywell’s activities as an
engine supplier for corporate jet aircraft. Following the
proposed merger, Honeywell will benefit from GE’s
incentive and ability to have its products selected.

regional jet aircraft engines, GECCAG will probably have
a significant influence on competition to equip future
corporate jet aircraft platforms. The way GE, through its
leasing and purchasing activities, influenced the choice
of equipment on the markets for large commercial and
regional
jet aircraft engines can be expected to be
reproduced on the market for corporate jet aircraft
engines.

(441) Accordingly, GE’s likely reproduction of its strategic use
of GECAS with GECCAG together with GE Capital’s
financial strength to favour Honeywell’s products will
position the merged entity as the dominant supplier on
the market for corporate jet aircraft engines where
Honeywell already enjoys a leading position.

(442) The effect on rival corporate jet engine manufacturers
can be expected to be in the range of what has already
taken place, by the effect of GE alone, on the market for
large regional
jet aircraft engines. The integration of
Honeywell with GE is likely to lead to full foreclosure
and the elimination of competitors’ ability to invest in
the development of the next generation of corporate jet
aircraft engines. Since Honeywell’s corporate jet aircraft
engine competitors are unable to reproduce GE’s finan-
cial strength and vertical integration, they will ultimately
have to reconsider their presence on that market and
eventually withdraw since their chances of winning a
competition on the merits will be significantly reduced.

3)

Foreclosure through bundling of GE and Honeywell
products and services

(443) That foreclosure effect on the market for corporate jet
aircraft is likely to be increased by the implementation
of bundling by the merged entity. On this particular
market, the merged entity will have the incentive and
ability to engage in bundling of engines, avionics and
non-avionics products, as well as related services such
as maintenance (127).

(439) In addition, as a result of the proposed merger, Hone-
ywell’s engines and related services will also benefit from
GE’s aircraft leasing and purchasing practices to promote
GE’s products and services as well as from its instrumen-
tal leverage ability to secure marketing and placement of
the GE products. The proposed merger will bring
together the leading engine supplier, Honeywell, with
GE’s corporate jet aircraft leasing company GE Capital
Corporate Aviation Group (GECCAG).

(444) Following their inability to replicate under any form or
shape the bundle offered by the merged entity, RR and
P&W will progressively lose their capacity to secure
platform exclusivity for their engines and will be fore-
closed from that market as
future platforms are
developed. As their cash flows dry out and financial
return drop, the shareholders of those suppliers will
have to make the rational decision to stop investing and
competing on the market
for corporate jet aircraft
engines.

(440) GECCAG was set up by GE to operate as a leasing
company in the corporate jets market by offering
financing and leasing for both new and used aircraft.
Like GECAS on the markets for large commercial and

(127) The market for corporate jet aircraft engines is, like the other jet
engine markets in question, susceptible to technical bundling
the merged entity, with its resulting effects.

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4.G. Countervailing power of customers

(445) The Parties have argued that any form of product tying
in this industry will be constrained by the countervailing
power of customers.

(446) The Commission’s investigation did not support this
view. It first indicated that customers, whether airframe
manufacturers or airlines, appear to have no economic
incentive to exercise countervailing power vis-à-vis GE.
It showed that, as a result of the proposed merger, it can
be expected that customers will continue to have a rather
limited interest in exercising whatever countervailing
power they may have vis-à-vis the merged entity’s
bundled offers.
the historical evidence of
instances where products have been purchased as part
of a bundle suggests that customers are willing to
consider favourably this pattern of purchasing. More-
over, countervailing power may be irrelevant in the case
of packaged offers, since it would mean that customers
refuse to accept lower prices. Indeed, countervailing
power may act as a factor constraining a price increase,
not a price decrease.

Indeed,

(447) The Parties further indicate that powerful customers
such as airframe manufacturers and aircraft operators
will not tolerate tying and that customers would retaliate
in the event of unwanted bundling. Furthermore, GE
would put itself at a significant competitive disadvantage
were it to require the airframe manufacturers to take
various Honeywell equipment
they would not
otherwise have found attractive.

that

(448) The fact that airframe manufacturers are both large
companies with significant financial strength is not
sufficient to prevent the merged entity from bundling.
Airframe manufacturers would like to see competition
preserved over the longer term, since that will give them
lower input costs. However in the event that an airframe
manufacturer favours a less integrated weaker competi-
tor in order to safeguard competition, it will support
higher procurement costs and therefore place itself at a
competitive disadvantage vis-à-vis the other airframe
manufacturers. Competing
airframe manufacturers
would like the others to favour the less integrated bidder,
whilst continuing to buy from the stronger bidder. As a
result, they will all have a strong economic interest to
select the stronger bidder at the expense of the preser-
vation of competition. Moreover,
their incentive to
preserve competition is further reduced by the fact that
if costs rise equally for all of them, it is likely that they
will largely be able to pass the increase on to the final
customers, the airlines, and bear little of the impact
themselves.

(449) Airlines generally welcome the financial incentives that
come with bundled offers. Given the very nature of
their competitive environment, airlines are under great
pressure in the short-term to keep their costs under
control. Therefore, while airlines are likely to understand
that their long-term interests would be better served
through the preservation of competition among sup-
pliers, each individual airline also has, and is likely to
pursue, a short-term interest in achieving costs savings
through the acceptance of bundled offerings. As a result,
airlines will have a very limited incentive to exert
countervailing buying power since they cannot really
afford to deny themselves short-term benefits even if
they are associated with adverse consequences in the
foreseeable future, for instance as soon as they have to
make purchase decisions for the next platform to be
developed.

(450) Airframe manufacturers

cannot disregard airlines’
demand for engines as well as for avionics/non-avionics
products. This derived demand for the combination of
GE engines and Honeywell components is expected to
increase following the proposed merger and therefore
airframe manufacturers will have stronger incentives, in
the medium term, to select GE engines and Honeywell
components than they had prior to the merger.

(451) The proposed merger will extend GE’s incentive and
ability to influence airframe manufacturers to select GE
engines to Honeywell systems, and thereby foreclose
Honeywell’s competitors while strengthening its pos-
ition on the engine markets. The merged entity’s ability
to offer packaged deals, GECAS’s demonstrated and
rational purchasing bias (128), the relative indifference of
other aircraft customers regarding systems selection and
GECAS’s ability to place huge aircraft orders are among
the main factors that will enable the merged entity to
effectively and successfully place Honeywell products
and bundle them with GE products when appropriate.

(452) Following GECAS’s GE-only purchasing bias, and its
inevitable extension to include Honeywell systems, air-
frame manufacturers will know that if they do not select
the merged entity’s bundle of products and systems, they
will be less likely to sell aircraft to GECAS. The fact that
Honeywell products have been selected so frequently in
the past indicates that Honeywell is able to produce
systems of satisfactory quality, which diminishes the risk
for an airframe manufacturer of selecting a Honeywell
system. GECAS’s ability to influence the selection of
Honeywell systems is therefore facilitated by Honeywell’s
already leading positions in its most important aerospace
product markets.

(128) See above GECAS’s ‘GE-only’ policy.

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(453) As a result, since airframe manufacturers know that
most of their customers are indifferent as to systems
selection, as long as the product works properly, they
have great flexibility to select systems without the risk
of losing aircraft sales to customers other than GECAS.
Under these circumstances, a large customer with a very
strong manufacturer preference can affect the outcome
of systems selection on an entire aircraft platform.
GECAS’s likely future purchases represent a huge volume
of sales and profits that it will be able to shift among
airframe manufacturers based on their selection of
components from the merged entity. Therefore, GECAS,
which alone could add significant profitability to an
airframe programme, can be expected to substantially
reduce its purchases of the airframe if non-GE or non-
Honeywell systems are selected. GECAS’s significant
volume of purchases indeed makes it more difficult for
rivals to develop effective counter-strategies since the
profit on even a handful of additional aircraft sales would
outweigh the additional profits from even dramatic price
cuts on APUs or other systems by the merged entity’s
rivals. However, airframe manufacturers and other sys-
tem suppliers know that GECAS does not represent just
one or two additional unit sales, but a large number of
aircraft potentially amounting to significant additional
net revenues for an airframe manufacturer selecting GE
and Honeywell products.

(454) This situation will therefore enable GECAS to influence
airframe manufacturers to favour Honeywell and GE
products in their selection decisions, which will in turn
foreclose the merged entity’s rivals from opportunities
to placing their products on new airframes.

(455) Furthermore, GE’s track record in linking ‘risk sharing’
payments to obtain engine exclusivity will be extended
to Honeywell, which itself has already provided a
comprehensive, bundled offer to [airframe manufac-
turer, name of which is considered by Honeywell to
be confidential]* to secure a sole-source position as
suggested from the following direct quote from an
internal Honeywell e-mail to prepare a meeting with
[airframe manufacturer, name of which is considered by
Honeywell to be confidential]*:

[direct quote from an internal Honeywell e-mail, con-
sidered by Honeywell to contain confidential
infor-
mation]* (129)

(456) In conclusion, both airlines and airframe manufacturers
are unlikely to prevent the foreclosure effects arising out
of the proposed transaction.

(457) The Parties have argued that in recent decisions (130),
the Commission considered that customers do have
countervailing power and that a finding in the present
case that customers’ countervailing power is limited is
in contradiction with such precedents. The Commission
considers that the assessment of countervailing power
in the two previous cases cannot be compared to the
present assessment. As far as the Allied Signal/Honeywell
decision is concerned, the Commission assessed the
relationship between customers and a merged entity
active in avionics and non-avionics. This relationship
has now to be reconsidered in view of the addition of
GE’s products, services and financial strength to the
entity that will result from the proposed transaction.
Customers are not in the same negotiating position vis-
à-vis Honeywell and/or GE as they were prior to the
proposed merger. Moreover, as far the Engine Alliance
Decision is concerned, it has to be noted that again the
weight of the Engine Alliance, a joint venture between
GE and P&W,
is not the same as that held by GE/
Honeywell. The merged entity’s complementary prod-
ucts will account for over half the value of an aircraft.
This will tilt significantly the negotiating balance in
favour of the merged entity to a greater extent than in
the case of the Engine Alliance. Therefore, the present
assessment of countervailing power is not in contradic-
tion with recent precedents, to the extent that the effects
of the proposed merger are not comparable to the effects
of the previous transactions.

4.H. Conclusion

(458) As a result of the foregoing analysis, it can be concluded
that the merger will result in the creation/strengthening
of a dominant position on the markets for large
commercial aircraft engines, large regional jet aircraft
engines and corporate jet aircraft engines, as well as on
the markets for avionics and non-avionics products.

C.

POWER SYSTEMS

1.A. Relevant markets

1.A.1.

Introduction

(459) Although GE and Honeywell are both active in the field
of power systems, the Parties submit that they do not
compete, since GE focuses on gas turbines at or above
5 MW while Honeywell’s products (sold through the
Vericor JV with MTU) have an output of no more than
4 MW.

(129) [See above]*.

(130) Allied Signal/Honeywell and Engine Alliance.

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1.A.2. Product markets

(460) The Parties submit that the relevant product market is
the market for small gas turbines in the 0,5 to 10 MW
range, which could in turn be further segmented into
gas turbines for industrial and marine applications based
on the development origin of the gas turbine. Indeed,
marine gas turbines would be aeroderivative based and
industrial gas turbines would be non-aeroderivative
based.

(461) In previous cases (131) the Commission has examined the
market for gas turbines and has made a subdivision
between gas turbines up to 10 MW (small gas turbines)
and gas turbines above 10 MW (large gas turbines). Gas
turbines burn natural gas or fuel oil to power the turbine
and are generally used when natural gas is readily
available. In a more recent decision (132) it was analysed
whether the dividing line between the small industrial
gas turbines and the large heavy duty gas turbines could
have gone up from 10 MW to 13 MW, however, no
final decision on this issue was taken. Small gas turbines
are used in a wide variety of industrial applications and
can power marine vessels (both military and commer-
cial), although previous decisions have not concluded
whether it would be adequate to identify separate
markets for each application.

(462) The market investigation has indicated that a distinction
between industrial and marine gas turbines is indeed
adequate. Industrial and marine versions of a gas turbine
product are clearly not substitutes from the demand
side. Small marine gas turbines are well suited for
applications that require high speed and specialised
mission capability and where space is at a premium and
power density must be maximised. Small industrial gas
turbines are used for co-generation, mechanical drive
and auxiliary power generation. As to supply-side differ-
ences, marine units employ improved corrosion resistant
materials for certain components, combustion systems
are different depending on the fuel used and in naval
applications the engine must be capable of withstanding
exceptional shock loadings, a requirement not imposed
on industrial designs.

the basis of demand side considerations. Marine gas
turbines are generally aeroderivative (133) (due to small
size and limited requirements) whilst
industrial gas
turbines are non-aeroderivative (heavier but also less
expensive). From the supply side, however, the situation
is less clear as a number of industrial and marine gas
turbines are based on a common aeroderivative engine
platform (as is the case for Honeywell’s products). The
Parties have indicated that such common platform gas
turbines have only a limited possibility to compete with
industrial turbines as aeroderivative gas turbines are
significantly more expensive than the non-aeroderivative
products that are used for industrial applications.

(464) Most competitors for industrial

turbines offer non-
aeroderivative products and sales of aeroderivative tur-
bines for industrial applications are very limited.

(465) It can therefore be concluded that there are two separate
small gas turbine markets, one for industrial and another
for marine applications. The distinction largely depends
on whether the gas turbine design is aeroderivative or
not. The possibilities of converting an industrial turbine
into a marine turbine and vice versa are limited and
costly, both in terms of time and money (USD 15 to
25 million).

(466) The market investigation has also confirmed that recip-
rocating engines, both gas burning and diesel
fuel
burning, are not generally substitutable with gas turbines
in industrial and marine markets since key characteristics
such as cost, performance, maintenance are significantly
different for the different power sources. The decision to
use a turbine rather than a diesel engine is taken very
early in the development of, for instance, a vessel since
the supporting infrastructure will be designed around
this choice. As this infrastructure is very different
between the two engine types, the initial decision cannot
be changed afterwards.

1.A.3. Geographic market

(463) In previous cases the Commission also examined the
substitutability between non-aeroderivative gas turbines
and aeroderivative gas turbines, but did not take a
definitive view as to whether they constitute separate
markets. The market investigation in the present case
has indeed indicated that a distinction can be made on

(467) In previous decisions (134) with regard to gas turbines the
Commission has concluded that the relevant geographic
market is at least the EEA and most likely worldwide.
The assessment in this Decision will be made on the
basis of a worldwide market.

(131) See Case No IV/M.440 — GE/ENI/Nuovo Pignone (II) and Case

IV/M.1623 — AlliedSignal/MTU.

(132) See Case No IV/M.1484 — ALSTOM/ABB.

(133) Aeroderivative gas turbines combine an established aircraft
engine with a power turbine to convert energy from the engine
exhaust into rotational shaft power.

(134) See footnote 131.

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1.B. Competitive assessment

1.B.1.

Introduction

(468) The small marine gas turbine market is a niche market
that accounts for less than 10 % of the small gas turbine
volume. Demand is lumpy and cyclical with a downward
trend. Customers are either fleet owners or Ministries
for defence. On the other hand, the supply side is
concentrated, since marine turbines are derived from
aerospace engines, and is composed of P&W Canada,
RR/Allison, Honeywell and GE.

(469) The Parties have refrained from providing market share
data on their position in the market, although they have
been invited to do so on several occasions, indicating
that they do not have access to total market value
figures. Although it is true that it is difficult to estimate
market shares for these products because companies’
sales tend to vary significantly from year to year as a
result of individual projects, Honeywell and GE clearly
have important market positions that have been consist-
ent over the years.

(470) The bulk of the demand for small marine gas turbines is
for units below 5 MW, since there are only very few
sales of 5 to 10 MW units. If a separate marine market
were to be defined for units below 5 MW,
then
Honeywell’s market share is forecast to be [70 to 80 %]*,
with GE’s share around [10 to 20 %]* (135). Based on a
market for small gas turbines in the 0,5 to 10 MW range,
the direct competitors to Honeywell have estimated
Honeywell’s position in the market at between 40 and
50 % and that of GE at between 25 and 30 %.

(471) Honeywell leads this market through its TF40/TF40B/
TF50 gas turbines (power output between 3 MW and
4,5 MW) which are all based on the Honeywell T55
turboshaft. Honeywell’s 0,5 MW gas turbines are based
on the TPE331-6 turboprop and LT101 helicopter
engine. GE’s 4,5 MW output LM 500 gas turbine is
based on the TF34, a military engine designed to comply
with strict military requirements.

(472) The Parties argue that the proposed merger will not lead
to an overlap, since the only small marine turbine that
GE produces (the 4,5 MW LM 500) has not been sold in
the EEA market since 1980 (with last delivery in 1994).
Worldwide, however, GE received its last order in 1999
while deliveries are foreseen up to 2002.

(135) In their reply to the statement of objections, the Parties have
submitted that on the basis of a market for marine gas turbines
below 5 MW, and for the past five years, Honeywell had [50 to
60 %]* of the market, GE [0 to 10 %]*, RR [40 to 50 %]* and
P&W [0 to 10 %]*.

(473) The Parties also submit that the LM 500 does not
compete with Honeywell’s products, since it is larger,
heavier, and more expensive it and requires a number of
peripherals. Those differences result from the military
origin of GE’s LM 500. However, the market investi-
gation has clearly shown that both GE and HWL
compete in the market as defined above. The market
investigation has not
the differences
between GE’s and HWL’s small (below 10 MW) marine
to distinguish
gas turbines are sufficiently relevant
different product markets. In addition, both GE and
Honeywell are active in the military and commercial
market with products that overlap in power output.
Although the Parties consider that GE’s and HWL’s
products do not compete, GE has participated in compe-
titions against HWL, RR and in some cases also P&W
Canada.

indicated that

(474) Although the Parties argue that GE’s product can
only compete for military applications,
the market
investigation has shown that GE has successfully sold
the LM 500 for commercial purposes in the past. Indeed,
GE’s LM 500 has in 34 cases been sold for military
applications and in six cases for commercial vessels.
Honeywell’s small marine gas turbines also target both
the military and commercial applications.

(475) RR/Allison is GE/Honeywell’s main competitor (between
20 to 30 % market share) with their 501/601 models.
P&W Canada is the second competitor (between a 0 to
10 % market share) with the ST30 (3,3 MW) and
theST40 (4 MW) models and is, according to the Parties,
expected to increase sales of its new small marine gas
turbine.

1.B.2. Creation of a dominant position

1) Horizontal overlap

(476) Following the proposed merger, the merged entity will
have a share of between 65 and 80 % of the market for
small marine gas turbines, combining the two strongest
closest players in the market and creating an entity four
to five times larger than the second player.

(477) The merged entity would thus be by far the largest
player in the small gas turbine marine market. The
Parties have extensively argued that gas turbines have a
very high development cost and that these are derived
from aircraft engines. As such, ‘de novo’ entry in this
market can be excluded. The Parties have also put
emphasis on the fact that migration of industrial small
gas turbines is, even though not impossible, a very
expensive and economically unviable initiative. As such,
it is very unlikely that existing industrial small gas
turbine players will enter
this market. Solar, an
important competitor in the industrial market, has a

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non-aeroderivative solution for marine applications.
However, as the Parties have argued in their reply to the
Commission’s decision to initiate proceedings in the
present case, Solar has made some sales of non-
aeroderivatives for marine applications but those sales
are believed to be very limited.

by Honeywell to be confidential]*. However, and regard-
less the value of such agreements, [supplier, name of
which is considered by Honeywell to be confidential]*
acceptance clearly underlines the value that Honeywell
represents as a Risk and Revenue sharing partner for this
innovative project which cannot readily be replaced.

2)

Foreclosure through the vertical integration of Honeywell
with GE

(478) In addition to the horizontal overlap, Honeywell’s
leading position in this market will be strengthened by
its combination with GE’s financial strength and vertical
integration in financial services and aftermarket services.

(479) Honeywell will

immediately benefit both from GE
Capital’s willingness and ability to secure exclusive
supply positions for its products and GE’s ability to
cross-subsidise its different business segments thanks to
its strong cash flow generation. Indeed, as explained in
the markets for avionics and non-
the analysis of
avionics, GE’s financial strength could be used to boost
the merged firm’s R & D efforts in those areas where
competition proves intense and ultimately discourage
rivals to compete and innovate.

(480) In the light of the foregoing, GE’s use of GE Capital’s
financial might to favour Honeywell’s products will
contribute to positioning the merged entity as the
dominant supplier on the markets for small marine
gas turbine where Honeywell already enjoys a leading
position.

(481) As a result of the integration of Honeywell into GE,
rivals will be deprived of future revenues generated by
the sales of the original equipment and spares parts and
therefore end up progressively marginalised and unable
to fund innovation expenditure and to leapfrog the
merged entity by any means. The progressive foreclosure
from future applications will lead the merged entity’s
competitors to reassess the rationale for their presence
on the market for small marine gas turbines and make
the economically rational decision to withdraw from
those competitions where the addition of GE to Honey-
well products would leave them with no realistic chance
of winning.

(482) The Parties have replied that Honeywell has already
agreed with [supplier, name of which is considered
by Honeywell
to be confidential]* to continue its
commitment to [project, name of which is considered

3)

Foreclosure through the vertical integration with Honey-
well electronics and controls

(483) Finally, since Honeywell

is a supplier of key com-
ponents (136) to [project, name of which is considered
by Honeywell to be confidential]* and GE is in direct
competition to [project, name of which is considered
by Honeywell to be confidential]* (137), the proposed
transaction will give GE direct control over the supply
of such key components to the [project, name of which
is considered by Honeywell to be confidential]*.
In
addition, serious concerns about technology leakage to
GE could arise. Since other sources of supply for the
[part, specification of which is considered by Honeywell
to be confidential]* are limited and since there is
currently no alternative source of supply for the [part,
specification of which is considered by Honeywell to be
confidential]* other than Honeywell, the merged entity
will have an important stronghold further up the supply
chain line. As is the case with aircraft engine applications,
GE will, following the proposed merger, also have the
means to prevent
the [project, name of which is
considered by Honeywell to be confidential]* from being
launched and foreclose its competitors.

(484) On that basis, the merger will lead to the creation of a
dominant position in the market for small marine gas
turbines.

D. UNDERTAKINGS SUBMITTED BY THE PARTIES

1.

INTRODUCTION

(485) On 14 June 2001, GE submitted a proposal for a
package of undertakings to address the competition
concerns identified by the Commission in its statement
of objections of 8 May 2001. The proposal comprised
structural undertakings relating to avionics- and non-
avionics products, engine starters, small marine gas
turbines,
jet engines and behavioural
undertakings concerning corporate jet engines, the com-
mitment not to engage in bundling practices and GECAS.

large regional

(136) [Description of the components, considered by Honeywell to

contain confidential information]*.

(137) GE is the principal competitor to the [project, name of which is
considered by Honeywell to be confidential]* and has been
actively trying to displace the [project, name of which is
considered by Honeywell to be confidential]* with [GE engine,
name of which is considered by Honeywell to be confidential]*.

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(486) The undertakings submitted by the Parties are considered
to be insufficient to eliminate the major competition
problems identified on engines for large commercial
aircraft, avionics and non-avionics. Following the sub-
mission of the undertakings proposal, the Commission
proceeded however with a technical verification of the
structural undertakings to test whether they would meet
the criteria with regard to the viability and the stand-
alone nature of the assets. The result of the technical
verification indicates that, quite apart from the overall
insufficiency to address the competition concerns raised
by the transaction, the proposed structural undertakings
do not meet the basic criteria regarding the viability of
the businesses to be divested.

2. DESCRIPTION OF THE UNDERTAKINGS

2.A. Avionics and non-avionics products

(487) As far as the avionics and non-avionics products are
concerned, the Parties proposed undertakings for avion-
ics and non-avionics products sold on both a BFE (buyer
furnished equipment) and SFE or SFE-option (supplier
furnished equipment) basis.

2.A.1. Avionics

1) BFE avionics products

(488) The Parties’ proposal is focused on BFE avionics equip-
ment [details of which is considered by Honeywell to be
confidential]*. The package, referred to as the [name of
which is considered by Honeywell to be confidential]*,
includes the following products: weather radar for large
commercial aircraft (LCA); Communication/Navigation
(LCA); recorders and data management systems for
both LCA and regional/corporate aircraft; CMU/ACARS
(communication management unit/aircraft communi-
cation addressing and reporting system); EGPWS
(enhanced ground proximity warning system); TCAS
(terrain collision avoidance system); GPS/MMR, which
provides precision approach guidance to airports.

(489) The Parties have also proposed to divest the aeronautical
satellite communications (‘Satcom’) business [...]*.

2)

SFE avionics products

(490) The Parties’ proposal concerning avionics is focused
on the commercial inertial navigation business. That
business includes products such as IRS, ADIRS, AHRS,
air data computer and SAARU (138), which are airframe
motion and navigation sensing devices used by all
navigation systems.

A P U s

to be

(491) Apart from avionics, the Parties have also submitted an
undertaking for auxiliary power unit (APUs). The Parties
have proposed to divest [description, which is con-
sidered by Honeywell
confidential]*. The
divestment thus relates to APUs for corporate and
regional aircraft but not APU’s for LCA. The Parties have
also proposed to divest Honeywell’s commercial repair
and overhaul business in Raunheim, Germany. The
MRO related activities conducted at Raunheim include
amongst other things MRO for APU’s, ground units,
turboprop engines and turbofan engines.

E C S

(492) With regard to environmental control systems, which is
SFE equipment, the Parties have proposed to divest
Honeywell’s European ECS center which focuses on the
regional/corporate aircraft segment.

2.B. Engine starters

(493) In order to resolve the competition problem resulting
from the vertical relationship between GE’s as an engine
manufacturer and Honeywell as a supplier of engine
starters, the Parties have proposed to divest Honeywell’s
engine starter business.

2.C. Small marine gas turbines

(494) The proposed merger will result in a horizontal overlap
between GE and Honeywell’s activities in the market for
small marine gas turbines. The Parties have proposed to
divest Honeywell’s 50 % stake in Vericor, which is the
50/50 joint venture company through which Honeywell
markets its small marine gas turbines, and in which
MTU holds the remaining 50 %.

(138) ADIRS/ADIRU is a device that combines the functions of the
air data computer and the inertial reference system (IRS). AHRS
is a less costly alternative to IRS in the regional market. SAARU
is a back-up system for ADIRS and is only used on the
Boeing 777.

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2.D. Large regional jet engines

it would also select its competitors’ avionics and non-
avionics products when it purchases aircraft for leasing
purposes.

(495) The proposed merger will result in a horizontal overlap
in the market for engines for large regional jet aircraft.
In order to resolve the competition problem, the Parties
have proposed to divest the AS900-series engine that
will power the new Avro jet under development, as well
as the existing ALF502/LF507 engines that power the
current versions of the Avro jet.

2.E. Other undertakings

(496) In addition to those structural undertakings, the Parties
have proposed a number of behavioural commitments
relating to the market for Corporate Jet Engines, GECAS
and abstaining from bundling avionics, non-avionics or
aircraft engine products or services.

2.E.1. Corporate jet engines

(497) In addition to creating a horizontal overlap in the market
for engines for corporate jet aircraft, the proposed
merger would extend the benefit of GE’s financial
strength and vertical integration into financial services,
aircraft purchasing and leasing, as well as into aftermark-
et services to Honeywell’s engines for corporate jet
aircraft. To counter that, the Parties submitted a non-
compete agreement with the purchaser of the ALF502/
LF507 engine series according to which GE (including
GECAS and GE Capital Corporate Aviation Group
(GECCAG)) will abstain from purchasing corporate jet
aircraft on a speculative basis for operating leasing
purposes.

2.E.2. GECAS

(498) The Parties have also proposed to maintain GECAS as a
separate legal entity and to conduct its dealings with
Honeywell on an arm’s length basis. Compliance would
be monitored by an independent expert. The Parties
propose that GECAS would not participate in working
groups of airframe manufacturers that select avionics
and non-avionics equipment. They further propose that
GECAS, acting as a speculative buyer of aircraft, would
not condition its purchases on the incorporation of
Honeywell avionics and non-avionics equipment and
that GE Capital will not finance purchasers or operators
of aircraft for the inclusion of Honeywell avionics and
non-avionics equipment. Finally,
they propose that
GECAS would not influence the selection of avionics
and non-avionics equipment by its customers and that

2.E.3. No bundling of avionics, non-avionics or
aircraft engine products or services

(499) The Parties commit that they will not bundle any GE
products with any Honeywell products when they make
offers to customers, unless a competitor, acting either
alone or as a team, has bundled similar products or
when the customer has requested a bundled offer by GE
in writing. In order to ensure compliance with those
undertakings, the Parties propose to set up an arbitration
scheme, whereby any affected interested third party may
initiate arbitration. The Parties undertake to comply with
any arbitration decision within [...]*.

3. ASSESSMENT OF THE UNDERTAKINGS

3.A. BFE products

(500) The Parties’ proposal constitutes a partial divestiture of
Honeywell’s range of BFE products. Such proposal
would however still
leave leading positions on the
products not comprised in the divestiture package
(instruments, displays, and the regional and corporate
jet versions of those products, see below under SFE).
Such addition of Honeywell’s products to the combined
entity’s packaged offers will result in the foreclosure of
other competing suppliers in these product lines.

(501) In addition, the feed-back from the technical verification
has stressed that the A&AP Business does not represent
Honeywell’s entire business in the relevant product lines
but rather a collection of mature technology products
generally at the end of their life cycle. The respondents
indicate that Honeywell would retain a business which
has the new technology necessary to be competitive.
Indeed, the technical verification has indicated that the
next generation of avionics products is being developed
by Honeywell in other plants and research centers. This
is the case for [certain avionics products, specification
of which is considered by Honeywell to be confidential]*
where the products that are scheduled to replace [certain
avionics products, specification of which is considered
by Honeywell to be confidential]* are under develop-
ment in [Honeywell facility, name of which is considered
by Honeywell to be confidential]*. The new generation
products are either integrated solutions or use different
technology and are as such not included in the proposed
undertaking.

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(502) Even if a purchaser for the [Honeywell business, name
of which is considered by Honeywell to be confidential]*
business with such limited viability could be found, it
would need to make significant R & D investments in
order to catch up with Honeywell’s new technology
developments for the products which the Parties have
not proposed to divest and for which they will continue
to compete in the market. The buyer of the [Honeywell
business, name of which is considered by Honeywell to
be confidential]* business would not be able to achieve
competitiveness unless new product developments to
replace those mature positions are included in the
divestment package.

(503) Regarding Satcom, it is to be noted that [...]*.

3.B. SFE products

(504) First of all, inertial navigation is a product family that
represents only part of
the avionics products that
Honeywell can offer on an SFE basis, and as such, its
range of SFE products would remain very significant.
Indeed, for the other main SFE products such as flight
management systems (for which Honeywell has a [60 to
70 %]* market share) and flight controls (autopilot),
Honeywell’s strength remains unchanged.

(505) Secondly, the undertaking does not address Honeywell’s
integrated solutions for LCA or product families where
the integration and engineering capacity of Honeywell is
a major competitive discriminator. As indicated before,
the main strength of Honeywell is its integration capacity
which has materialised in integrated avionics suites
for regional and corporate aircraft (the Primus Epic
integrated avionics suite). This avionics integration capa-
bility is expected to become important also on LCA
(as discussed in the paragraphs regarding Honeywell’s
integration capacity).

(506) Thirdly, even with regard to the divested IRS product
line,
the undertaking leaves Honeywell’s integration
expertise unaffected. Integrated IRS systems will gradu-
ally replace the stand-alone IRS products, and as such,
as in the case of BFE products, the Parties offer to divest
products that have a limited life ahead.

(507) In addition, the Parties are not willing to divest the core
is the ring
technology for inertial navigation,
laser gyroscopes, base sensors and accelerometers. The
feedback from the technical verification has confirmed
that these are critical components in the inertial navi-
gation business without which the buyer cannot develop

that

a stand-alone and viable business. For the purchaser of
the inertial navigation business (IRS), buying these
products on the market is not considered a viable
alternative since it would render the buyer reliant on
GE/Honeywell , which would entail additional costs and
other competitive disadvantages. The Parties’ proposal
to supply the purchasers with these products on the
basis of a ‘fully allocated cost of production’ would leave
the buyer dependent on a competitor for timely supply
and service and availability of product. Also, the buyer
of the IRS business would not be able to verify the fully
allocated cost of production as Honeywell produces
[comments on Honeywell’s production organisation,
considered by Honeywell to contain confidential infor-
mation]*. In addition, the undertaking does not commit
GE to sell any technological
improvements that GE
might develop for these components. Future generation
ring laser gyro’s, air data sensors and accelometers are
not included in the supply commitment.

3.C. APUs

(508) The Commission considers that the proposal on APUs
is inadequate since the undertaking does not address the
merged entity’s position on LCA. Indeed, on the high
volume selling large commercial aircraft (such as the
B737 and A320 families), APU’s are buyer selectable
equipment that are also sold to airlines on a dual-
sourced basis. As such, the proposal does not address
the merged entity’s ability to package APU’s with BFE
products, the importance of which was underlined by
the market investigation.

(509) Other than the unduly narrow scope of the divestment,
the feedback from the technical verification has high-
lighted significant issues critical to the viability of the
divested businesses.

(510) First of all, the respondents have qualified the most
important APU model as being based on old design
and technology (20 years old) which would limit,
notwithstanding its existing applications, its competi-
tiveness for future applications. Other APUs offered
concern newer products, but with a limited number of
applications. The APU’s to be divested can, according to
the technical verification, not be upgraded to grow into
applications other than corporate and regional aircraft.
The impact on competition is therefore limited.

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(511) Secondly, Honeywell’s small engine business (corporate
and business jet engines and helicopter engines), and
APU business (large and small) are housed in the
same facility in [Honeywell facility, name of which is
to be confidential]*. The
considered by Honeywell
helicopter engines part of this facility is already sched-
uled to be sold and relocated as part of GE’s agreement
with the US Department of Justice. Divesting small
APU’s would require a further division of this facility for
the purchaser(s) of the large regional jet engines and the
small APUs. This may subsequently lead to significant
logistical complications, such as splitting up the com-
mon pool of employees, production lines, tools and
testing facilities between these businesses. In addition,
the purchaser of the divested APU business would need
to secure alternative suppliers for parts that Honeywell
currently produces in-house.

(512) Thirdly, other than the MRO business in Raunheim,
the proposed divestiture does not include Honeywell’s
associated aftermarket business. Without this, the pur-
chaser cannot viably compete in this business since
APU sales have low margins. The commitment is not
accompanied by a non-compete provision regarding the
relevant APU MRO business.

(513) Concerning Raunheim, the Parties will retain the existing
MRO agreements performed at more than one location
using Honeywell products. Income from such contracts
accounts for [...]* % of the divested activities conducted
it can be noted that for
at Raunheim.
[...]* out of the [...]* most important multi-location
customers, the turnover attributable to the Raunheim
plant accounts for more than [...]* % of total turnover.
The scope of this undertaking is thus very limited and
cannot constitute a viable business.

In addition,

3.E. Engine starters

(516) Although the undertaking regarding engine starters
appears clear-cut, the technical verification has indicated
that the divested air turbine starter business does not
include air starter valves. Although those valves are not
directly physically connected (they are connected with a
short length of pipe), the two parts are technically
heavily interrelated and designed to match each other,
for example in terms of air flow characteristic. For that
reason, the two components are purchased as a complete
air starter system from a single source. Since the
commitment does not include any reference to air starter
valves, the competition concern stemming from the
vertical relationship is not adequately resolved.

(517) The divested business could only function as a stand-
alone business if the current activities are re-located
from within certain dispersed Honeywell buildings to
one central building. This is not been committed to and
neither have the Parties committed to grant the Purchaser
a controlled and independent access to the test cells,
which are an essential facility for the purpose of the
engine starter business. Finally, there are also some non-
divested MRO service facilities that currently provide
these services to the business and for which no express
commitment regarding even a transitional service agree-
ment has been given.

3.F. Small marine gas turbines

3.D. ECS

(514) Since this undertaking does not address Honeywell’s
position on LCA, the same reservations apply as for
APUs.

(515) In the light of the foregoing, the proposed undertakings
on BFE and SFE avionics and non-avionics products are
not sufficient to eliminate the dominant positions which
the proposed merger will create or strengthen on the
markets for large commercial engines, avionics and non-
avionics products.

(518) The acceptability of the undertaking regarding small
marine gas turbines depends on the resolution of a
number of practical issues that GE has not been in a
position to address satisfactorily. They relate to the
necessity for a Purchaser to be cleared by the US
Government with respect to export control rules. Since
the commitment is ‘subject to all necessary approvals’
and since the nature of the rules has not been indicated
(whether or not it is discretionary or not), a refusal by
the US Government would signify that no divestiture
will occur but that the Parties have respected their
commitment. Another problem relates to the expected
increase of input costs for the divested business if the
purchaser does not produce helicopter engines. This is
all the more relevant as MTU, the other shareholder in
Vericor, does not produce such engines. Accordingly
there is no commitment to attain a specific result, whose
failure to meet would give rise to certain penalties.

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3.G. Large regional jet engines

4. TECHNICAL VERIFICATION

it believes that

(519) On the face of it, the proposed undertaking would
appear to be sufficient
to remove the competition
problem. However, in reality it would be difficult to put
it into practice. The manufacturer of the Avro jet, BAe
Systems, has drawn the Commission’s attention to
various facts. Firstly,
there are no
interested potential buyers. Secondly, even assuming
that an interested buyer were to be found, the disposal
of the engines would, it is claimed, seriously affect the
viability of the Avro jet. Since both the new Avro and
its AS900-series engines are under development, the
divestiture of the engine to a third party would lead
to significant uncertainty as to the timetable of the
development as well as to the sales prospects of the
aircraft.

(520) [Comments of airframe manufacturer, name of which is
considered by Honeywell
is
uncertain whether the proposed remedy is indeed
capable of
competition problem
it can be noted that the
identified.
commitment does not provide for an alternative divesti-
ture.

to be confidential],

eliminating the

In this respect,

it

(521) The respondents to the technical verification have
unanimously indicated that, if a divestiture was to be at
all possible, both the AS 900 engine and the 502/
507 engines would need to go to one single purchaser
since the AS 900 engine family is the continuation of
the latter and because of
the
customer base. Whilst the Parties have indicated that the
two engine families have no parts or designs in common,
the argument as to commonality remain valid.

the commonality of

(522) The following further issues are not appropriately dealt
with in the commitment: the commitment to transfer
to the Purchaser an engineering team as considered
necessary by the Purchaser to fully support the pre-
and post-certification programs; access to Honeywell
supplied inputs (that are not divested) at current valid
terms for a period sufficient to allow the Purchaser to
manufacture the parts itself or to find alternative third
party suppliers; no effective commitment to have the
proprietary Honeywell design and analysis models ‘trans-
lated’ into the Purchaser’s models; no effective commit-
ment with respect
to any possible disputes about
the allocation of personnel to the divested business
stemming from the fact that some personnel may be
working partly on the military helicopter business which
is to be divested, partly on the Honeywell business
which is retained and partly on the large regional jet
engines business.

(523) In addition to the substantive failure of the proposed
package of undertakings to eliminate the competition
problems identified, the Commission has indicated a
number of general shortcomings in the commitments
concerning the viability of the proposed divestitures
relating to the timeframe for transferring the business
and the extent of access to intellectual property rights
(IPR), personnel, facilities, customers and supplies. Most
of those matters have also been referred to by respon-
dents to the technical verification. In addition, it can be
noted that the proposed trustee has no right to impose
any measures necessary to that the Parties comply with
their commitments and that the trustee’s power to sell
the divested business at no minimum price is con-
strained, which may call into question the mechanism
whereby the trustee can ensure that the business will be
divested in the appropriate time frame.

(524) The technical verification has stressed the logistical
complications in transferring the various businesses and
has shown that a [...]* time-frame may not always be
sufficient. Those doubts have been reinforced by L3’s
difficulties in transferring the divested TCAS product
line following the Allied Signal merger within [...]*
provided for in the Commission Decision (139).

(525) With respect to access to personnel, the access to
sales and marketing people is conditional on ‘mutual
agreement’ between the Parties and the purchaser. The
purchaser is thus not given any right other than not to
agree to purchase the business. Furthermore, the parties’
proposal to limit the transferability of technical person-
nel to those who have had [degree of involvement with
the business to be divested, specification of which
is considered by Honeywell to be confidential]* was
considered to be too strict. In addition, no mechanism
is foreseen to ensure that personnel who had previously
worked for the businesses to be divested and had access
to sensitive information are restricted from using the
information acquired there in the retained business.
Finally, the Parties have not committed to any additional
incentives in order to ensure that key employees agree
to transfer to the purchaser.

(526) Concerning access to Honeywell produced input (when
it is impossible to resource from other producers in view
of non-recurring costs and certification implications),
[duration, specification of which is considered by Honey-
well to be confidential]* supply agreement is considered
inadequate to control the future cost growth. Whilst the
Parties have, in addition, given a general commitment to

(139) See footnote 5.

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enter into the necessary transitional agreements with
any purchaser, such a transitional agreement may not
always allow the purchaser to avoid becoming structur-
ally dependent on the merged entity.

5.B. GECAS/Commitment not to engage in bundling

practices

(527) The proposal of the Parties for the buyer to license
intellectual property rights (IPR) from GE has been
strongly rejected by the technical feed-back. In order for
the buyer to operate viably, he should be able to acquire
all IPR that is only used in the divested business and an
exclusive licence to all shared IPR for the field of use of
the divested business.
Instead, the Parties will only
transfer IPR that is currently exclusively used in the
divested business and is also not capable of being used
in a Honeywell Product in future. As to the shared IPR,
the Parties would retain the IPR for the field of use of
the divested business, thereby considerably facilitating a
re-entry into the business after the end of the non-
compete period.

(528) Finally, the fact that the merged entity thus retains
potential access to most of the divested know-how and
that the proposed non-compete period is [duration,
specification of which is considered by Honeywell to be
confidential]* would make it relatively easy for the
merged entity to re-enter the market. In addition, the
commitment allows the Parties to acquire joint control
in a competing business immediately.

5. OTHER UNDERTAKINGS

5.A. Corporate jet engines

(529) Apart from the fact that the commitment relating to
corporate jet engines is purely behavioural, it cannot be
accepted since it would be tantamount to a reduction of
output and would thus reduce supply to the detriment
of customers. The commitment is thus not equivalent to
the typical non-compete clause generally associated with
the sale of a business which will continue to be operated
by a third party on the market for the acquisition and
leasing of aircraft. Moreover, it may be difficult for any
approved Trustee or Arbitrator to make the distinction
between so-called speculative purchases and financing
in the form of purchases. The dominant position of the
combined entity will thus remain on the market for
corporate jet engines.

(530) The undertakings not to engage in bundling practices
are submitted in relation to the concerns on the use by
the merged entity of its vertical integration and financial
strength and its ability to engage in product bundling.
However, they are purely behavioural and as such cannot
constitute the basis for a clear elimination of the said
concerns.

(531) The legal separation of GECAS does not affect

its
management and thus its control remains in the hands
of GE. It cannot be expected that such separation will
prevent GECAS from exercising the commercial strategy
of GE. For the rest, the undertaking on GECAS remains
a pure promise not to act in a certain manner. Such a
promise is in contrast with the Commission’s stated
policy on remedies and with the purpose of the Merger
Regulation itself. Moreover, the presence of an indepen-
dent expert does not represent any guarantee about
GECAS’s conduct, since any intervention or control by
that Expert will occur ex post. The same is true for the
undertaking on product bundling, whereby the Parties
only promise not to bundle their respective products.
Apart from the fact that they reserve the right to bundle
under certain circumstances, their commitment can only
be policed ex post, that is after it has taken place.
The market investigation has suggested that product
bundling is not characterised by any formality and that
by the time competitors can detect it, and therefore
report it to the monitoring mechanisms proposed by
the Parties, it has already taken place. Moreover, the
proposed undertakings can be expected to require a
significant amount of monitoring work on the part of
the Commission. The arbitration mechanism will give
rise to endless litigation in which the Commission will
have to participate in its capacity as the recipient of the
undertakings.

(532) Overall, the proposed undertakings on GECAS and
bundling do not eliminate the relevant competition
problems identified. Their effect would be that the
Parties would become dominant or strengthen their
In
dominant position but promise not to abuse it.
addition to being complex in their implementation
and in their monitoring, the undertakings cannot be
considered capable of effectively removing the compe-
tition problems identified.

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(533) On the basis of the foregoing, and since the proposed
package is both unviable and insufficient to address the
competition concerns raised by the proposed merger, it
cannot form the basis for an authorisation decision.

E. NEW SET OF UNDERTAKINGS SUBMITTED BY THE PARTIES
ON 28 JUNE 2001

2.A.2. Behavioural commitments on GECAS

(537) The Parties also retain all provisions relating to GECAS
as proposed in the undertaking submitted on 14 June
2001 and described above in sections 2.E.3 and 2.E.4.

1.

INTRODUCTION

2.B. BFE/SFE avionics and non-avionics products

(534) At a very late stage in the procedure, on 28 June
2001, the Parties withdrew the package of undertakings
submitted on 14 June 2001 and proposed a new and
substantially modified set of undertakings. The new
proposal relates to the sale of a minority interest in
GECAS to third parties selected by GE combined with the
behavioural commitments already submitted concerning
GECAS’s conduct in its dealings with Honeywell. In
parallel, the Parties reduce their proposed divestitures of
Honeywell aerospace products.

2. DESCRIPTION

2.A. GECAS

facility that services,

(538) In addition, the Parties have proposed the divestiture of
certain avionics products. Compared to the original set
of undertakings submitted on 14 June 2001, the scope
of the divestment has been significantly reduced. The
divestment no longer includes SFE products or non-
avionics products (except for a maintenance, repair and
overhaul
In
addition, the number of BFE product lines to be divested
has been reduced from seven to two. The rationale for
reducing the divestment package is, according to the
Parties, that a divestment of SFE products is no longer
necessary due to the proposed solution on GECAS and
that the reduction of scope of the BFE package ought to
compensate for the cost accounted by the divestment of
a minority interest in GECAS.

inter alia, APUs).

2.A.1. Sale of a minority interest in GECAS to

independent third parties

(539) Divesting a limited number of BFE avionics product lines
will, according to the Parties, suffice to meet
the
Commission’s concerns regarding bundling of BFE
avionics, non-avionics products and engines.

(535) GE proposes to create a new class B common stock
representing 19,9 % of the voting power of GECAS.
Those non-traded shares will subsequently be sold,
through a private placement as opposed to a public
offering, to one or more independent entities selected
by GE within six months following the Commission’s
decision. The investors that are targeted by GE consist
of financial institutions such as banks or management
funds. GE will in addition retain a veto right on any
future sale and disposal of those shares. The owners of
the class B shares will be granted the right to elect one
of the five GECAS directors, who must be independent
of GE (not an employee, director or supplier to GE).

(536) The independent director will receive advance notice of
any purchase of new aircraft for leasing purposes that
involves the acquisition of Honeywell products as well as
GECAS’s compliance with the behavioural undertakings
described below. GE will maintain its right to prefer GE
engines when it buys aircraft, but will not reserve any
ability to prefer Honeywell products when it buys such
aircraft.

(540) The proposed divestments cover Communication/Navi-
gation ([Honeywell business, name of which is con-
sidered by Honeywell
to be confidential]*), which
includes all products for transmitting and receiving pilot
voice and other communications to/from ground or
airborne operation centers for LCA, but does not include
SatCom (which sends and receives data and voice
telephony to the ground via satellite).

(541) They also cover recorders (which record flight data
information and cockpit voice) and data management
systems (aircraft condition monitoring systems), referred
to as the ‘RDMS Business’, for both LCA and regional/
corporate aircraft.

(542) In addition, the Parties maintain their proposal to divest
Honeywell’s commercial repair and overhaul business in
Raunheim as described above.

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2.C. Engine starters

(543) In order to resolve the competition problems resulting
from the vertical relationship between GE as an engine
manufacturer and Honeywell as a supplier of engine
starters, the Parties maintain their proposal to divest
Honeywell’s engine starter business as described in the
original set of undertakings submitted on 14 June 2001.

2.D. Small marine gas turbines

(544) In order to resolve the competition problems, resulting
from the horizontal overlap between the activities of GE
and of Honeywell in the market for small marine gas
turbines, the Parties maintain their proposal to divest
Honeywell’s 50 % stake in Vericor as described in the
original set of undertakings submitted on 14 June 2001.

2.E. Large regional jet engines

(545) In order to resolve the competition problem, resulting
from the horizontal overlap in the market for engines
for large regional jet aircraft, the Parties have maintained
their proposal to divest the AS900-series engine as well
as the existing ALF502/LF507 engines as described in
the original set of undertakings submitted on 14 June
2001.

3.

EVALUATION

3.A.

Introduction

(546) In making the evaluation of

this late proposal of
undertakings, account must be taken of the requirements
set out in the Merger Regulation and the Commission’s
Notice on remedies acceptable under Council Regulation
(EEC) No 4364/89 and under Community Regulation
(EC) No 447/98 (140) which apply to this kind of post-
deadline submission.

(547) 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 (141) provides that commitments intended
by the Parties to form the basis of a decision of
compatibility pursuant to Article 8(2) of the Merger
Regulation are to be submitted to the Commission
within three months of the decision to open proceedings,
although the Commission may, in exceptional circum-

(140) OJ C 68, 2.3.2001, p. 3.
(141) OJ L 61, 2.3.1998, p. 1.

stances, extend that period. The Parties did not put
forward any reasons which could be regarded as consti-
tuting such exceptional circumstances. The last day for
submitting proposed commitments in this case was
14 June 2001 and the Parties’ new proposal was
submitted on 28 June 2001. In the Commission’s view,
there was nothing in the new proposal which the Parties
could not have included in an undertaking submitted
within the three-month time limit.

(548) Moreover, paragraph 43 of the Commission Notice on
remedies states that where the Parties subsequently
modify the proposed commitments, the Commission
may only accept modified commitments where it can
clearly determine, on the basis of its assessment of
information already received in the course of the investi-
gation, including the results of prior market testing, and
without the need for any other market test, that such
commitments, once implemented, solve the competition
problems identified and allow sufficient time for proper
consultation of Member States.

(549) In the present case the proposed undertakings are
insufficient, they do not allow sufficient time for consul-
tation and in any event they do not solve the competition
problems identified.

3.B. GECAS

(550) The new undertakings regarding GECAS are submitted
in relation to the concerns on the use by the merged
entity of its vertical integration and financial strength.
Although a structural component was added to the
undertaking (namely the divestiture of 19,9 % of the
voting rights in GECAS), the undertaking regarding
GECAS remains purely behavioural in nature and as
such cannot constitute the basis for a clear elimination
of the said concerns. In addition, its scope is limited
essentially to BFE products excluding engines.

3.B.1. Sale of a Minority Interest in GECAS to

Independent Third Parties

(551) The proposal from GE to create a new class of shares
(referred to as class B shares, that is apparently a type of
shares with voting rights but no financial
interests
attached to them) representing 19,9 % of the voting
power of GECAS and subsequently to sell them to one
or more entities selected by GE through a private placing,
does not solve the issue of the change, if only partial, in
control of GECAS so as to result in a modification of
GECAS’s purchasing policy, which is biased towards GE
products.

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(552) The proposal to grant the owners of the class B shares
the right to elect one of the five GECAS directors does
not address the issue of control since the owners of the
class B shares will be designated by GE and most
probably be chosen among institutional financial inves-
tors with no involvement
in the relevant markets.
Furthermore, those 19,9 % would not be traded and any
subsequent sale and resulting change in the ownership
of those 19,9 % voting rights in GECAS would be subject
to GE’s approval and selection. In any event, GE would
retain control of GECAS.

(553) The structure of the proposal therefore does not address
the minimum requirements concerning GECAS, namely:
that it be floated to market participants so as to be
directly subject to applicable Stock Exchange regulations
and knowledgeable industrial players with an interest in
preserving GECAS’s neutrality policy; that GECAS’s by-
laws should enshrine the change in purchasing policy
to a market-oriented market approach; and that the
necessary veto rights should be laid down to allow
proper ex ante control over that aspect of GECAS’s
commercial policy.

(554) The inadequacy of the new proposal regarding GECAS
is further strengthened by the provision maintaining
GE’s right to prefer GE or GE joint venture engines when
GECAS purchases aircraft. In other words, the proposed
undertaking does not affect the creation or strengthening
of dominant positions by the merged entity on all the
jet engine markets. Finally, the undertaking does not
appear to affect GECAS’s bias effect on the selection of
SFE products.

(555) The proposed divestiture of 19,9 % of GECAS by GE
without genuine change in GE’s ability to exercise
control over GECAS to favour GE products will therefore
result in GE’s incentives to influence airframe manufac-
turers being unaltered.

that Honeywell has in the avionics and non-avionics
markets and does not limit the merged entity’s bundling
capacity for products that are sold to airlines. Secondly,
the proposed package does not include Honeywell’s
technologically most advanced products that represent
both growth markets and essential parts for future
integrated solutions. Thirdly, the few proposed product
lines only concern LCA and do not address avionics and
non-avionics on regional/corporate aircraft. Fourthly,
communication/navigation avionics, the most important
product
line covered by the proposal, concerns a
collection of mature technology products that are at the
end of their life cycle and Honeywell has thus excluded
the next generation product line from the divestment
proposal. Fifthly, SatCom, an essential communication/
navigation avionics product
included in the
package. The proposal would thus not reduce the
merged entity’s ability to bundle products and services.

is not

(558) In addition, since the new proposal no longer envisages
[Honeywell
divestment of an entire avionics plant
facility, name of which is considered by Honeywell to
be confidential]* facility as proposed in the original
undertakings), product lines will need to be carved out,
which will subsequently lead to significant logistical
complications such as splitting up the common pool of
employees, production lines, tools and testing facilities.

(559) Concerning the Raunheim plant, it is clear that divesting
an MRO facility does not affect the merged entity’s
leading position for APU’s (which can be bundled with
avionics and engines). In addition, and as found in
the analysis of the first package of undertakings, the
divestment proposal excludes the contracts with multi-
location customers serviced by Honeywell that currently
account
the Raunheim plant’s total
turnover. Accordingly, this undertaking cannot consti-
tute a viable business.

for [...]* % of

3.B.2. Behavioural commitments

3.D. Engine starters

(556) GE has proposed to retain all of its previously proposed
behavioural provisions submitted on 14 June 2001 and
described in the preceding paragraphs.

(560) Since the proposed undertaking in relation to engine
starters has not been modified, the analysis in respect of
the first package remains valid.

3.C. BFE/SFE avionics and non-avionics products

3.E. Small marine gas turbines

(557) The assessment of the avionics and non-avionics prod-
ucts has already been addressed above and is also
relevant for the product lines that are retained in the
new proposal. It can be summarised as follows. First of
all, the proposal does not address the leading positions

(561) Since the proposed undertaking in relation to small
marine gas turbines has not been modified, the analysis
in respect of the first package remains valid.

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3.F. Large regional jet engines

VI. OVERALL CONCLUSION

(562) Since the proposed undertaking in relation to large
regional jet engines has not been modified, the analysis
in respect of the first package remains valid.

4. TECHNICAL VERIFICATION OF ALL DIVESTITURE PRO-

POSALS

(563) Since the structural undertakings retained from the
14 June 2001 undertakings proposal have not been
modified in order to cure the general shortcomings
(relating to the timeframe for transferring the business,
the extent of access to intellectual property rights (IPR),
personnel, facilities, customers, supplies) the analysis
remains valid

5.

PROCEDURE

(564) With respect to the procedural aspect of the undertak-
ings proposal of 27 June 2001, the Parties did not set
forth exceptional circumstances although they claim
that the nature of their new proposal for undertakings
regarding GECAS has been complemented with a struc-
tural dimension that was not previously included.

(565) In any event, paragraph 43 of the Commission Notice
on remedies states that such commitments should allow
sufficient time for proper consultation of Member States
and need no further market test. The fact that the new
package, for the reason set out above, does not fully and
unambiguously, that is in a straightforward manner,
address the competition concerns identified by the
investigation, means that the undertakings proposal of
27 June 2001 fails to comply with the requirements of
the Merger Regulation.

6. CONCLUSION ON THE UNDERTAKINGS

(566) For the foregoing reasons, it should be concluded that
the proposed undertakings do not remove the identified
competition concerns and cannot form the basis for an
authorisation decision.

(567) For all

those reasons,

it should be concluded that
the proposed merger would lead to the creation or
strengthening of a dominant position on the markets
for large commercial jet aircraft engines, large regional
jet aircraft engines, corporate jet aircraft engines, avion-
ics and non-avionics products, as well as small marine
gas turbine, as a result of which effective competition in
the common market would be significantly impeded.
The proposed merger should therefore be declared
incompatible with the common market pursuant to
Article 8(3) of the Merger Regulation,

HAS ADOPTED THIS DECISION

Article 1

The concentration by which General Electric Company
acquires control of the undertaking Honeywell International
Inc. is declared incompatible with the common market and
with the EEA Agreement.

Article 2

This Decision is addressed to:

General Electric Company
3135 Easton Turnpike
Fairfield
Connecticut 06431
USA

Done at Brussels, 3 July 2001.

For the Commission

Mario MONTI

Member of the Commission

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Evolution of the installed base of engines on large commercial aircraft still in production (1995 to 2000)

ANNEX