Summary of Commission Decision of 17 December 2008 declaring a concentration compatible with the common market and the functioning of the EEA Agreement (Case COMP/M.5141 — KLM/Martinair) (notified under document number C(2008) 8458 final)
Date: 2009-03-04
Institutions: European Commission
Subjects: air transport, carriage of goods, carriage of passengers, economic concentration, merger control

C 51/4

EN

Official Journal of the European Union

4.3.2009

Summary of Commission Decision

of 17 December 2008

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

(Case COMP/M.5141 — KLM/Martinair)

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

(Only the English version is authentic)

(2009/C 51/04)

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

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

I. THE PARTIES

III. COMMUNITY DIMENSION

(1) KLM Royal Dutch Airlines N.V.

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

(‘Air France-KLM’, France),

(‘Schiphol’).

(5) The notified concentration has a Community dimension
the EC Merger

within the meaning of Article 1(2) of
Regulation.

IV. PROCEDURE AND SUMMARY

(2) Martinair (‘Martinair’)

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

flights

to

air

respect

transport

passenger

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

II. THE OPERATION

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

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

V. CONCEPTUAL FRAMEWORK FOR THE COMPETITIVE

ASSESSMENT

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

(8) Nevertheless,

the Commission found on the basis of
Martinair's organisation, corporate governance and internal
documents that KLM has little influence on Martinair's
pricing decisions, decisions on entering a particular route,
capacity increases or decreases and similar operational
decisions.
influence on Martinair's
market conduct is limited to veto rights with regard to
choices
more

and operational

In fact, KLM's

far-reaching,

strategic

4.3.2009

EN

Official Journal of the European Union

C 51/5

including, in particular, strategic choices to operate within
certain business segments (e.g. short-haul or long-haul
passenger air transport, cargo air transport) and decisions
to extend or reduce Martinair's fleet. Moreover, the market
investigation largely confirmed that the parties' competi-
tors and customers generally perceive KLM and Martinair
as competing with regard to both their passenger and their
cargo operations.

(9)

In the light of these circumstances, the Commission care-
fully analysed the effects that
the
existing degree of competition between KLM and Martinair
from the proposed concentration
which would result
might have on competition.

the elimination of

VI. AIR TRANSPORT OF CARGO

6.1. The relevant product and geographic markets

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

require transport by air. For

significantly impede

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

(12) In accordance with previous decisions,

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

(13) Moreover, the market investigation revealed that air cargo
in nature as the

transport markets are one-directional

demand for air cargo transport can differ substantially on
each end of the route. Finally, the market investigation also
confirmed the Commission's findings in previous cases
that indirect flights are generally substitutable to direct
flights.

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

6.2. Competitive assessment

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

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

(17) However, even on those routes where the parties have
combined high market shares and where market share
increments are significant, the parties generally face several
strong competitors which will constrain them post-transac-
tion. Moreover, barriers to entry into air cargo transport
on the relevant routes appear to be relatively low. Indeed,
several new players have recently entered on some of these
routes. In addition, in the course of the market investiga-
tion, customers, amongst which large freight forwarders

C 51/6

EN

Official Journal of the European Union

4.3.2009

having some degree of bargaining power, expressed their
readiness to switch to a different supplier should the
parties decide to increase prices and some of the parties'
competitors indicated that they have extra capacity to take
up additional demand.

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

VII. AIR TRANSPORT OF PASSENGERS

7.1. The relevant product and geographic market

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

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

demand-side

from a

survey,

7.1.1. Supply

of

scheduled

air

transport

services

to

end-customers

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

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

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

7.1.2. Wholesale supply of seats to tour operators

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

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

7.2. Competitive Assessment

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

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

few years and will

4.3.2009

EN

Official Journal of the European Union

C 51/7

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

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

are

shares

if only

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

from the Netherlands

to Havana were to increase by 5-10 %. In view of all these
circumstances, it must be concluded that also with regard
to these three destinations, the proposed transaction is
unlikely to significantly impede effective competition in
the common market or a substantial part of it.

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

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

(33) In view of all

these circumstances,

the second phase
market investigation and the customer survey therefore
suggest also for these two routes that the proposed trans-
action is unlikely to significantly impede effective competi-
tion in the common market or a substantial part of it.

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

7.2.3. The wholesale supply of seats to tour operators

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

(30) In addition, the market investigation and the customer
survey indicated that, as regards Cancun and Punta Cana,
there is significant competitive pressure from other typical
‘sun and beach’ holiday destinations. Also with respect to
Havana, the customer survey indicated that a significant
proportion of customers would either stop travelling alto-
gether or switch to other destinations if prices for flights

(35) Concerning Curacao and Aruba,

the parties' combined
market share amounts to [90-95] % and [90-95] % respec-
tively. The only competitor on these two routes, ArkeFly,
uses most of its capacity captively for inclusion in package
holidays offered by TUI or other tour operators belonging
to the same corporate group as TUI and ArkeFly and there-
fore has a market share of only [5-10] % on the ‘merchant

C 51/8

EN

Official Journal of the European Union

4.3.2009

market’. If captive sales were included, however, ArkeFly's
market share would be more than [6-12] times higher,
reaching around [40-60] %. In this context,
it must be
noted that ArkeFly has indicated during the second phase
market investigation that, depending on the circumstances,
it would consider increasing its sales to competing tour
operators if it was approached by a group of tour opera-
tors asking them to supply seats on their flights.

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

for the merged entity which, as a result, would likely
refrain from increasing the price.

(37) In view of all

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

VIII. CONCLUSION

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

(39) Consequently the concentration should be declared compa-
tible with the common market and the functioning of the
EEA Agreement,
in accordance with Article 2(2) and
Article 8(1) of the EC Merger Regulation and Article 57 of
the EEA Agreement.