CELEX: 32018M8985
Language: en
Date: 2018-10-01 00:00:00
Title: Commission Decision of 01/10/2018 declaring a concentration to be compatible with the common market (Case No COMP/M.8985 - The Boeing Company / KLX, Inc.) according to Council Regulation (EC) No 139/2004 (Only the English text is authentic)

EUROPEAN COMMISSION
                                                                 Brussels, 1.10.2018
                                                                 C(2018) 6508 final
In the published version of this decision, some
information has been omitted pursuant to
Article 17(2) of Council Regulation (EC)
No 139/2004 concerning non-disclosure of business                            PUBLIC VERSION
secrets and other confidential information. The
omissions are shown thus […]. Where possible the
information omitted has been replaced by ranges of
figures or a general description.
                                                                 To the notifying party
 Subject:             Case M.8985 - Boeing / KLX
                      Commission decision pursuant to Article 6(1)(b) of Council
                      Regulation No 139/20041 and Article 57 of the Agreement on the
                      European Economic Area2
 Dear Sir or Madam,
 (1)       On 29.8.2018, the European Commission received notification of a proposed
           concentration pursuant to Article 4 of the Merger Regulation by which The
           Boeing Company ('Boeing', United States) acquires, within the meaning of
           Article 3(1)(b) of that Regulation, control of the whole of KLX Inc. ('KLX',
           United States) by way of purchase of shares ('Transaction').3 Boeing and KLX are
           designated hereinafter as the 'Parties'.
 1.        THE PARTIES AND THE OPERATION
 (2)       Boeing is a US-based company, active in the aircraft, defence and space
           industries and related services. Boeing is also a supplier of security systems and
           provider of aftermarket services for the aerospace market, including the
           distribution of aerospace parts and chemicals.
 1       OJ L 24, 29.1.2004, p. 1 (the 'Merger Regulation'). With effect from 1 December 2009, the Treaty
         on the Functioning of the European Union ('TFEU') has introduced certain changes, such as the
         replacement of 'Community' by 'Union' and 'common market' by 'internal market'. The terminology
         of the TFEU will be used throughout this decision.
 2       OJ L 1, 3.1.1994, p. 3 (the 'EEA Agreement').
 3       Publication in the Official Journal of the European Union No C 314, 06.09.2018, p. 14.
 Commission européenne, DG COMP MERGER REGISTRY, 1049 Bruxelles, BELGIQUE
 Europese Commissie, DG COMP MERGER REGISTRY, 1049 Brussel, BELGIË
 Tel: +32 229-91111. Fax: +32 229-64301. E-mail: COMP-MERGER-REGISTRY@ec.europa.eu.
 ---pagebreak--- (3)   KLX, also based in the US, is active in the distribution of small aerospace parts
      and chemicals.
(4)   The envisaged Transaction concerns the acquisition of all shares in KLX by
      Boeing. The proposed Transaction constitutes a concentration within the meaning
      of Article 3(1)(b) of the Merger Regulation.
2.    EU DIMENSION
(5)   The undertakings concerned have a combined aggregate world-wide turnover of
      more than EUR 5 000 million4 (Boeing: […], KLX: […], combined: […]). Each
      of them has an EU-wide turnover in excess of EUR 250 million (Boeing: […],
      KLX: […]), but they do not achieve more than two-thirds of their aggregate EU-
      wide turnover within one and the same Member State. The notified operation
      therefore has an EU dimension pursuant to Article 1(2) of the Merger Regulation.
3.    MARKET DEFINITION
3.1.  Introduction
(6)   The Transaction primarily concerns the distribution of aerospace parts and
      chemicals to aircraft manufacturers and the aftermarket.
(7)   Aerospace parts and chemicals includes several and diversified categories of
      products required as inputs across all phases of a lifecycle of an aircraft. These
      products can be divided into four broad categories: A-class parts (high-value
      repairable parts), B-class parts (parts that can be economically repaired when
      damaged), C-class parts (low value parts that are not repaired, but replaced when
      damaged), and aerospace chemicals (liquids, composite materials and other
      consumables used for the manufacture, repair and general upkeep of an aircraft).
(8)   In light of the activities of the Parties, as explained below under 4.1, for the
      purpose of the assessment of the proposed Transaction, only C-class parts, in
      particular aerospace fasteners and aerospace chemicals are relevant.
(9)   Fasteners are small C-class parts, such as bolts, nuts and screws, used to connect
      all the different parts of an aircraft together in primary structural areas, secondary
      structure, pressurized and non-pressurized applications, and to transfer loads from
      one part to another. Most fasteners are manufactured according to industry
      standards ('standard fasteners'), while other fasteners are produced according to
      specifications developed by manufacturers and aircraft producers who hold the
      design rights ('proprietary fasteners').
(10)  The distribution of aerospace small parts and consumables takes place through
      different channels. They are distributed either directly by parts manufacturers,
      independent distributors, or through brokers. The customers' preference about
      which channel to use is highly dependent on the quantity required, lead time and
      desire for value-add services. Manufacturers often require minimum order
      quantities, while distributors are able to provide smaller quantities, have shorter
4    Turnover calculated in accordance with Article 5 of the Merger Regulation.
                                                      2
 ---pagebreak---        delivery times as they have product stocks and can also provide additional
       services like kitting. In most cases, customers rely on multiple distribution
       channels and they procure the needed aerospace small parts via competitive
       tender offers, long term contracts, or ad-hoc quotes.
(11)   The demand for small aerospace parts depends both on the demand for new
       aerospace equipment and on the demand for replacement parts during the life
       cycle of an aircraft. The customer base is therefore diversified and encompasses
       original equipment manufacturers ('OEMs') and aircraft manufacturers, as well as
       the so-called 'aftermarket', e.g. airlines, maintenance, repair and overhaul
       operators ('MROs') and fixed based operators.
3.2.   Product Market Definition
3.2.1. Commission's Precedents
Upstream market: distribution of aerospace parts and chemicals
(12)   In a previous decision, the Commission considered that the distribution of
       aerospace parts could be divided into different submarkets, such as, on the one
       hand, the distribution of large aerospace parts by airframe and component
       manufacturers, and, on the other hand, the distribution of small parts, requiring
       regular and quick replacement, by independent distributors. Alternative markets
       segmentations were also considered for parts dedicated for large commercial
       aircraft and for general aviation/regional aircraft and for commercial and for
       military aircraft. However, the product market definition was ultimately left
       open.5
(13)   In a more recent decision, the Commission also considered that the market for the
       supply of aerospace parts could be segmented based on the difference between
       customers, i.e.: OEMs and aircraft manufacturers for original parts and MROs or
       airlines for spare parts.6
(14)   The Commission did not address in any previous decision the distribution of
       aerospace chemicals.
Downstream markets: aircraft manufacturing and aftermarkets
(15)   In relation to aircraft manufacturing, Commission precedents have generally
       differentiated the following main categories of aircraft: commercial aircraft,
       military aircraft, helicopters and general aviation aircraft.7 Within commercial
       aircraft the precedents further differentiated between three segments:8 large
       commercial aircraft, regional aircraft and business/corporate jets. As to large
       commercial aircraft, a further distinction was considered between narrow-body
       (or single-aisle) aircraft, and wide-body (or twin-aisle) aircraft. In its most recent
       decision,9 the Commission also considered that, in light of the introduction of
5     Commission Decision in Case M.4241, Boeing/Aviall, para. 10.
6     Commission Decision in Case M.6410, UTC/Goodrich, paras 192-195.
7     Case M.1601, Allied Signal / Honeywell, para 11.
8     Case IV/M.877, Boeing / McDonnell Douglas, paras 15 and 16; Case M.1601, Allied Signal /
      Honeywell, paragraph 13; Case M.2220, General Electric / Honeywell, para 10.
9     Commission Decisions in Case M.8858, Boeing/Safran/JV, para 14.
                                                       3
 ---pagebreak---        additional aircraft, the previous distinction between narrow-body large
       commercial aircraft and regional aircraft may be blurred, but the sub-
       segmentation of the product market for commercial aircraft was ultimately left
       open.
(16)   The Commission’s decisional practice has also differentiated four main categories
       of aviation MRO services based on the part of the aircraft to be serviced and the
       level of service required: line maintenance, heavy maintenance, engine
       maintenance and component maintenance (here referred to as “component
       MRO”). The Commission also considered that these markets might be subdivided
       into separate markets according to the type of the aircraft, distinguishing between
       commercial aviation on the one hand and business aviation on the other hand, but
       did not reach a conclusion as regards market definition. 10
3.2.2. The Parties' view
(17)   As regards the upstream market, the Parties submit that it is appropriate to
       consider an overall market including distribution of all categories of aerospace
       parts. In their view, this product market includes also the distribution of aerospace
       chemicals. This market may be further segmented between larger and more
       complex parts and small spare parts. Further, given that customers […], the
       Parties agree with the approach in Boeing/Aviall11 not to distinguish between
       different categories of spare parts.
(18)   The Parties further submit that at the distribution level the market should not be
       further segmented according to customer categories. From the demand-side, the
       products are functionally interchangeable, there are similar product and service
       requirements across all categories and pricing is also similar. From the supply-
       side, most manufacturers and distributors are able to serve all customer
       categories. However, the Parties acknowledge that for some products it may be
       relevant to distinguish between supply to OEMs (i.e. first install) and supply to
       the aftermarket (where both Parties are active), as they request different services.
(19)   As concerns the downstream market, the Parties aknowledge the previous
       segmentation between commercial aircraft, military aircraft, helicopters and
       general aviation aircraft.
(20)   Further, the Parties note that there are three key categories of market participants
       in the aftermarket, namely MROs, FBOs and airlines, but submit that the
       aftermarket should not be segmented accordingly.
3.2.3. Commission's assessment and conclusion
(21)   As concerns the upstream market, respondents to the market investigation
       explained that they procure aerospace parts both from distributors and
       manufacturers, stressing that while the same products can be purchased through
       both channels, distributors are able to offer additional services.12 Furthermore,
       respondents suggested that the relevant market may encompass the distribution of
10    Commission Decisions in Case M.6410, UTC/Goodrich, paras 174-181, and in Case M.8658,
      UTC/Rockwell, paras 129-138.
11    Commission Decision in Case M.4241, Boeing/Aviall, para. 10.
12    Non-confidential minutes of a phone call with an OEM on 6 August 2018
                                                       4
 ---pagebreak---       all aerospace parts or at least broad categories of aerospace parts and aerospace
      chemicals. However, one respondent highlighted that about 78% of the
      distribution takes place through distributors exclusively dedicated to fasteners.13
      Market participants also did not consider any further sub-segmentation on the
      basis of narrower categories of products (e.g. standard and proprietary fasteners,
      different types of fasteners).14
(22)  As regards a segmentation of the distribution market for aerospace small parts and
      chemicals based on the type of aircraft for which the parts are dedicated, or based
      on the end customer, the market investigation confirmed that a segmentation
      might only be justified on the basis of the end customer and such between OEMs
      (first install) and the aftermarket (spare parts), but not further in relation to
      different subsegments of the aftermarket.15
(23)  The Commission therefore considers that the relevant product market may include
      the distribution via all channels of all small aerospace parts and chemicals or of
      categories of products, such as fasteners, while a narrower segmentation would
      not be appropriate.
(24)  In any event, for the purposes of the present decision, the exact product market
      definition for the distribution of aerospace small parts and aerospace chemicals
      can be left open as no serious doubts arise under either of the alternative market
      definitions.
(25)  As regards the downstream markets, the Commission considers it appropriate to
      assess the aircraft manufacturing market in line with the segmentation followed in
      its precedents described above at paragraph (15), while the exact sub-
      segmentation of the product market for commercial aircraft can be left open in
      this case as no serious doubts arise under either of the alternative market
      definitions.
(26)  As regards aftermarkets, one respondent to the market investigation indicated that
      it would not be appropriate to segment the MRO services as described above at
      paragraph (16)16, while the market investigation as a whole was not conclusive on
      the relevant segmentations.
(27)  In any case, as regards aftermarkets, the Commission considers that, for the
      purposes of the present decision, the exact product market definition can be left
      open as far as it concerns any possible distinction based on the level of service
      required, the part of the aircraft to be serviced or to be replaced, or the type of
      aircraft concerned, as no serious doubts arise under either of the alternative
      market definitions.
13   Non-confidential minutes of a phone call with a distributor on 14 September 2018.
14   Non-confidential minutes of a phone call with two distributors on 23 August 2018 and 14
     September 2018.
15   Non-confidential minutes of a phone call with two distributors on 23 August 2018 and 14
     September 2018.
16   Non-confidential minutes of a phone call with an independent MRO on 11 September 2018.
                                                      5
 ---pagebreak--- 3.3.   Geographic market definition
3.3.1. Commission's precedents
(28)   In previous decisions, the Commission took the view that the appropriate
       geographic market definition for distribution of aerospace parts is at least EEA-
       wide, if not worldwide. However, the precise geographic market definition was
       ultimately left open.17
(29)   The Commission also considered in its precedents18 that the downstream markets,
       both for aircraft manufacturing and aftermarket services, are worldwide in
       geographic scope, without ultimately reaching a final conclusion.
3.3.2. Parties’ views
(30)   The Parties submit that the market for the distribution of small aerospace parts is
       at least EEA-wide and likely global.
(31)   In line with the Commission’s precedents, the Parties submit market shares for
       the downstream market at worldwide level.
3.3.3. Commission’s assessment and conclusion
(32)   As regards the upstream market, the market investigation provided indications
       that both manufacturers and independent distributors of aerospace parts supply
       world-wide.19 For aerospace chemicals, the respondents indicated similarly that
       the market is worldwide or at least EEA-wide.20
(33)   As regards the downstream markets, the Commission considers it appropriate to
       assess the aircraft manufacturing market and the aftermarkets as worldwide in
       line with the segmentation followed in established precedents.
(34)   Accordingly, the Commission considers, in line with its precedents, that the
       relevant markets are worldwide or at least EEA-wide. For the purpose of this
       decision, the precise geographic market definition can be left open as no serious
       doubts arise under either of the alternative market definitions.
4.     COMPETITIVE ASSESSMENT
4.1.   Activities of the Parties and relevant overlaps
(35)   Both parties are active in the distribution of small aerospace parts and aerospace
       chemicals. Boeing is also active downstream as an aircraft manufacturer and an
       MRO.
17    Commission Decision in Case M.4241, Boeing/Aviall, paras 11-12.
18    Commission Decisions in Case M.2220, General Electric/Honeywell, paras 10-34; Case M.1601,
      Allied Signal/Honeywell, para. 13; Case M.6410, UTC/Goodrich, recitals 196-200, Case M.8658,
      UTC/Rockwell, paras 208-211.
19    Non confidential version of the minutes of the phone call with an OEM on 6 August 2018.
20    Non confidential version of the minutes of the phone call with a manufacturer on 23 August 2018;
      Non confidential version of the minutes of the phone call with an airline on 27 July 2018.
                                                       6
 ---pagebreak--- (36)   Boeing distributes aerospace parts through two different channels. Boeing’s
       Global Services business unit ('Boeing Spares’) primarily sells Boeing and third-
       party proprietary parts as well as a small amount of industry standard parts, to
       aftermarket customers. In addition, in 2006, Boeing acquired Aviall Inc. ('Aviall'),
       a distributor of aerospace parts and aerospace chemicals, active also in the sale of
       large aerospace parts such as engine components.
(37)   Further, Boeing set up a captive distributor, under the name 'Boeing Aggregated
       Standards Network ('BASN'), that supplies Boeing approved fasteners ('BAC
       fasteners') to Boeing internally and to OEM (component) suppliers for use in
       manufacturing components for Boeing aircraft.
(38)   Boeing operates on the downstream market for aircraft manufacturing and it
       procures parts essentially from its OEM suppliers, which may supply it with the
       final assembled aircraft part or the individual component. Furthermore, Boeing
       has also a […] activity on the aftermarket as an MRO.
(39)   KLX is a distributor of small aerospace parts and aerospace chemicals, offering a
       range of services such as logistics and management kitting. The two most
       important categories of products sold by KLX are fasteners, which make-up
       [60-70]% of its total turnover, and aerospace chemicals accounting for [10-20]%
       of its turnover.21
(40)   In light of the activities of the Parties, the Transaction gives rise to limited
       horizontal overlaps on the distribution of small aerospace parts and aerospace
       chemicals, which do not result in any affected markets. Further, from the
       information provided by the Parties, it follows that the sub-categories of small
       parts where the Parties mainly overlap are: fasteners, lighting, electrical products
       and bearings.
(41)   The Transaction also leads to vertical links between the upstream distribution
       activities of KLX and Boeing's activities downstream as an aircraft manufacturer
       and an MRO.
4.2.   Market structure
4.2.1. Upstream market: distribution of small aerospace parts and aerospace chemicals
(42)   On the market for the distribution of small aerospace parts and aerospace
       chemicals, the Parties have a post-merger combined share of [5-10%] worldwide
       and [5-10%] EEA-wide (Boeing: [0-5%] WW and below [0-5%] EEA,
       KLX: [5-10%] WW and [5-10%] EEA). Table 1 below reports the market shares
       of the Parties on the market for the distribution of narrower categories of small
       aerospace parts and chemicals where the Transaction would give rise to overlaps
       between the Parties. Table 2 reports estimated market shares for the distribution
       of fasteners based on end-customers.
21    Form CO, Table 2 at p. 5.
                                                7
 ---pagebreak--- Table 1 – Market shares for the distribution aerospace fasteners, aerospace
lightings and aerospace chemicals, based on value (2017)
             Aerospace             Aerospace       Aerospace            Aerospace             Aerospace
             Fasteners             Chemicals       Lighting             Electrical            Bearings
                                                                        Products
Boeing       [0-5]% WW             [0-5]% WW       [5-10]% WW           <[5-10]% WW           <[5-10]% WW
             [0-5]% EEA            [0-5]% EEA      [0-5]% EEA           <[5-10]% EEA          <[5-10]% EEA
KLX          [10-20]% WW           [0-5]% WW       [0-5]% WW            <[5-10]% WW           <[5-10]% WW
             [10-20]% EEA          [0-5]% EEA      [0-5]% EEA           <[5-10]% EEA          <[5-10]% EEA
Combined [10-20]% WW               [0-5]% WW       [5-10]% WW           <[10-20]% WW          <[10-20]% WW
             [10-20]% EEA          [0-5]% EEA      [0-5]% EEA           <[10-20]% EEA         <[10-20]% EEA
Source: Estimates of the Parties, Form CO Table 4 at p. 7.
Table 2 – Market shares for the distribution of aerospace fasteners to OEMs and
the aftermarket, based on value (2017)
                           OEMs                                     Aftermarket
Boeing (Aviall and <[0-5]% WW                                       [0-5]% WW
Boeing Spares)             <[0-5]% EEA                              [0-5]% EEA
KLX                        [10-20]% WW                              [5-10]% WW
                           [10-20]% EEA                             [5-10]% EEA
Combined                   [10-20]% WW                              [5-10]% WW
                           [10-20]% EEA                             [10-20]% EEA
Wesco                      [10-20]% WW                              [0-5]% WW
                           [10-20]% EEA                             [0-5]% EEA
Pattonair                  [5-10]% WW                               [5-10]% WW
                           [5-10]% EEA                              [0-5]% EEA
Source: estimates of the Parties, Form CO Annex 7B
(43)    As concerns the competitive landscape, according to the information provided by
        the Parties and respondents to the market investigation,22 the distribution market
        is highly fragmented. KLX is the market leader for fasteners, followed by Wesco,
        Pattonair and Aligne Aerospace.
4.2.2. Downstream markets
(44)    Boeing’s estimated worldwide market share for 2017 in the market for the
        manufacture of large commercial aircraft is [40-50]%. In the segment of large
        commercial aircraft above 90 seats, Boeing held market shares of [50-60]%. If
        regional aircraft with less than 90 seats are included in the market definition,
        Boeing’s market share amounts to [40-50]%. In the segment of large commercial
        aircraft of more than 120 seats, Boeing's market share amounts to [50-60]%.
        Finally, in the sub-segment of wide-body commercial aircraft of 200 seats or
        more, Boeing held a market share of [50-60]%.23 Therefore the transaction results
        in vertically affected markets. 24
22    Non-confidential version of the minutes of the phone call with a distributor on 23 August 2018.
23    Estimates of the Parties, in terms of number of aircraft deliveries in 2017. See Response by Parties
      to RFI of 20 September 2018.
24    Boeing is also active in the manufacture of military aircraft, but its share in this segment is under
      30%, and it has a limited share in the manufacture of business aviation aircraft. The market shares
                                                        8
 ---pagebreak--- (45)    As regards aftermarkets, Boeing has an estimated market share of [0-5]% on the
        overall global aftermarket, and below [5-10]% under any conceivable product or
        geographic segmentation25 thereof.
4.3.    Assessment of horizontal effects
4.3.1. Parties’ arguments
(46)    The Parties submit that, for the distribution of small aerospace parts, their
        combined market shares on an EEA and worldwide basis are modest and do not
        result in a horizontally affected market. The same applies even considering a
        narrower level, at the specific product categories where the Parties’ distribution
        activities overlap.
(47)    Further, the merged entity would be constrained by the numerous other
        competitors present in the small aerospace parts distribution segment as well as
        the narrower distribution segments for each of the aforementioned product
        categories.
4.3.2. Commission’s assessment
(48)    The Commission observes that, according to the available information, with
        respect to the distribution of small aerospace parts (including aerospace
        chemicals) on a worldwide market as well as EEA-wide, the estimated combined
        market shares of the parties are limited (below [10-20]%). The combined market
        shares for any narrower overlapping category are also below [5-10]%. Only on
        the market for the distribution of fasteners to OEMs, the estimated combined
        EEA market shares are close to [20-30]%.
(49)    In light of the comments received by market participants during the investigation,
        the Commission has carefully examined whether it is likely that, further to the
        Transaction, the Parties would be able to raise prices for aerospace fasteners.
(50)    From the evidence collected during the market investigation26, it results that KLX
        is in a leading position on the distribution market, at least, for aerospace fasteners,
        where it can offer a wide product portfolio and very competitive services.
(51)    However, the Transaction is not likely to remove an important competitive
        constraint. The addition of Boeing market share is very small and KLX and
        Boeing are not close competitors.27 Their customers’ base is different, as KLX is
        more dedicated to OEMs while Boeing is focused on the aftermarket. Further,
        KLX distributes predominantly standard fasteners, Boeing proprietary fasteners.
(52)    The market shares suggest that the merged entity would continue facing strong
        competition from small parts manufacturers, independent distributors and brokers.
      are calculated in in terms of deliveries: estimates of the Parties, Form CO and reply to an RFI of
      20 September 2018.
25    See above para. (16).
26    Non-confidential version of the minutes of the phone call with a distributor on 11 September 2018,
      non-confidential version of the minutes of the phone call with an airline on 30 July 2018.
27    Non-confidential version of the minutes of the phone call with a aerospace hardware manufacturer
      on 8 August 2018.
                                                        9
 ---pagebreak---       The vast majority of respondents to the market investigation confirmed that
      customers would not have difficulties switching to other suppliers. The
      distribution market is said to be competitive and there are several alternative
      suppliers, who would not face capacity constraints and would have the ability and
      incentive to increase their supplies.28
(53)  Further, from the feedback received during the market investigation, it results that
      switching costs and entry barriers are limited. First, KLX’s services are not
      considered as 'must-have' in the industry and the Parties do not have a network of
      exclusive agreements with small parts manufacturers that may limit otherwise the
      ability of downstream players to switch to competitors. The contractual
      relationships in the industry are indeed rather diversified: exclusive agreements
      are not common. Customers have normally both long term contracts as well as ad
      hoc purchases. Long term contracts are usually concluded after a competitive
      selection through a tender and renegotiations of the contractual terms are possible
      under certain circumstances. Furthermore, market participants have business
      relations with multiple manufacturers and distributors. Overall, switching costs
      are not considered as high by the respondents to the market investigation. In
      addition, customers can revert directly to small parts manufacturers (thus
      bypassing distributors) and/or, as e.g. done in the past by Boeing and Airbus, can
      internalise their distribution.29
(54)  As mentioned above at paragraph (43), the market does not present a concentrated
      structure and coordinated effects are therefore unlikely.
(55)  Furthermore, during the investigation, manufacturers of aerospace fasteners and
      of aerospace chemicals did not raise any concerns about the fact that the
      Transaction would impede competition by creating buyer power.30 One
      manufacturer of hardware explained that “while it is true that KLX and Boeing
      will increase their combined procurement share, […] further to the Transaction
      the parties would [not] increase their buyer bargaining power", while according
      to one manufacturer of aerospace chemicals “aircraft manufacturers like Boeing
      are relatively small customers for chemical products, compared to the quantities
      of aerospace chemicals procured by airlines, MROs and OEMs”.
(56)  For the reasons set out above, the Commission concludes that the Transaction
      does not raise serious doubts as to its compatibility with the internal market as
      regard any horizontal effect of the concentration on the distribution of small
      aerospace parts and aerospace chemicals.
4.4.  Assessment of vertical effects
(57)  As the Parties are not active in the manufacture of neither aerospace parts nor
      aerospace chemicals, the Transaction does not raise any vertical links with the
      market upstream from those products.
28   Non-confidential version of the minutes of the phone call with an OEM on 27 July 2018.
29   Non-confidential version of the minutes of the phone call with an OEM on 27 July 2018.
30   Non-confidential version of the minutes of the phone calls with two aerospace hardware
     manufacturers and with a aerospace chemicals manufacturer on 7 August 2018, 8 August 2018, and
     23 August 2018.
                                                      10
 ---pagebreak--- (58)   However, the proposed Transaction leads to two vertical links with the activities
       of Boeing on markets downstream from the markets for the distribution of
       aerospace parts and chemicals. As to the aftermarket, as indicated above at
       paragraph (44) and (46), Boeing has a […] market share of [0-5]% on the overall
       aftermarket, and below [5-10]% under any conceivable product and geographic
       sub-segment. However, the Transaction gives rise to a vertically affected market
       in relation to the manufacture of large commercial aircraft.
(59)   The Commission has thus investigated whether the Transaction is likely to give
       rise to a significant impediment to effective competition by restricting
       downstream rivals’ access to an important input (input foreclosure) or by
       restricting upstream rivals’ access to a sufficient customer base (customer
       foreclosure).
4.4.1. Parties' arguments
(60)   The Parties submit that the Transaction does not create a risk of input nor
       customer foreclosure.
(61)   As concerns the risk of input foreclosure, the Parties explain that the merged
       entity would not have the ability to foreclose. KLX and Boeing are not 'must
       have' suppliers and for each category of small parts distributed by them there are a
       number of manufacturers selling directly as well as a range of other distributors.
(62)   The merged entity would also not have any incentive to foreclose. At present,
       KLX sells to customers other than Boeing, who could turn to the other numerous
       suppliers. As such, any attempt to foreclose competitors or raise prices would
       only drive customers away, and lead to higher losses than any potential gains.
(63)   In addition, the overlapping products' categories would not be important cost
       factors. The cost of small aerospace parts is a de minimis portion of the total cost
       to manufacture or maintain an aircraft.
(64)   As to the risk of customer foreclosure, the Parties contend that Boeing would not
       have the ability to foreclose. This would be the case because Boeing and all the
       OEMs supplying Boeing do not represent a significant portion of total demand for
       small aerospace parts. Other distributors would continue to have access to a large
       customer base even if Boeing shifted all of its small parts (or of any sub-
       categories thereof) purchases to KLX post-Transaction.
(65)   Boeing would have no incentive to reduce its purchases from third-party
       distributors where those distributors offer better pricing or service. Boeing has
       continued to purchase from independent distributors despite owning Aviall for
       over a decade.
(66)   There would be no risk of detrimental effects on the downstream market. There
       could in any event be no noticeable impact on cost of Boeing’s competitors even
       if other small parts suppliers would raise their prices, given the insignificance of
       the cost of small spare parts products in relation to the manufacturing cost of the
       aircraft overall.
                                                11
 ---pagebreak--- 4.4.2. Commission's assessment
       A. Input foreclosure
(67)   A vertical relationship presupposes that the product or service of the undertaking
       active in the upstream market in question constitutes an important input to the
       product or service of the undertaking active in the downstream market. The
       market investigation confirmed that fasteners are critical components despite the
       fact that they do not represent a significant cost factor.31
(68)   However, evidence from the market investigation supports the conclusion that it
       is unlikely that the merged entity would have the ability to foreclose Boeing’s
       competitors on the downstream market. As already explained above at
       paragraphs (51) to (54) and (55), the Commission considers, on the basis of the
       evidence available to it, that the merged entity does not have a significant degree
       of market power and the input market does not present an oligopolistic structure.
(69)   Further, the incentive to foreclose depends on the degree to which foreclosure
       would be profitable. The Commission understands that Boeing would not have
       the incentive to raise prices to the OEMs, current customers of KLX, in order to
       raise costs for competing aircraft manufacturers as this strategy would be
       countervailed by the fact that Boeing’s main competitor on the downstream
       market for the aircraft manufacturing, (i.e. Airbus) does also have integrated
       distribution services (i.e. its subsidiary Satair) and could easily switch its demand
       from KLX to Satair, if not to other parts distributors and manufacturers..
(70)   In addition, the market investigation has indicated that the merged entity would
       have little scope for raising rival aircraft manufacturers or MRO’s costs. Owing to
       the low input cost that small aerospace parts represent in the overall price of an
       aircraft or of the services provided by MROs, any possible price increase could
       not materially affect the ability of rival aircraft manufacturers or MROs to
       compete in the downstream markets.
(71)   For the reasons set out above, the Commission considers that the Transaction
       would be unlikely to have detrimental effects on competition on the downstream
       markets as it woud not result in foreclosure of downstream competitors’ access to
       small aerospace parts or aerospace chemicals.
       B.       Customer foreclosure
(72)   As regards customer foreclosure, in light of the evidence available, the
       Commission finds that the Transaction is not likely to result in customer
       foreclosure for the reasons set out below.
(73)   First, the Commission notes that at present Boeing […] on its captive BASN
       program for the sourcing of proprietary Boeing fasteners. From the information
       submitted by the Parties, and as also confirmed by the respondents to the market
       investigation32 and public sources33, in the effort to better control the quality of
31    Non-confidential version of the minutes of the phone call with a distributor on 14 September 2018.
32    Non-confidential version of the minutes of the phone call with an aerospace hardware manufacturer
      on 8 August 2018.
                                                       12
 ---pagebreak---         fasteners, Boeing switched from using standard fasterners to proprietary BAC
        fasteners for approximately […] of its requirements. As a consequence Boeing's
        demand for standard fasteners from third parties is very limited.
(74)    Furthermore, from the information submitted by the Parties, it results that Boeing
        sources […]. Purchases from independent distributors tend to be […], whereas
        purchases from manufacturers tend to account for [...].
(75)    Despite its market share (see paragraph (44)), the overall demand of Boeing to
        independent distributors is therefore too limited to provide the ability to engage in
        any strategy that could result in any plausible customer foreclosure of upstream
        competitors of KLX.
(76)    Second, as submitted by the Parties, past conduct of Boeing after the acquisition
        of Aviall supports the claim that Boeing does not have any incentive to engage in
        customer foreclosure. Boeing has continued to purchase from independent
        distributors despite owning Aviall for over a decade.
(77)    Third, as regards the possible overall impact of a foreclosure strategy, fasteners
        are low value parts that make up less than 5% of the total cost of any aircraft
        component, so that any impact on final customers appears remote even in the
        unlikely event that Boeing would stop purchasing small parts from third party
        sources and, as a result, potentially raise costs for competitors on the downstream
        markets.
4.4.3. Conclusion
(78)    For the reasons set out above, the Commission concludes that the Transaction
        does not raise serious doubts as to its compatibility with the internal market as
        regards any vertical effect of the concentration between, on the one hand, the
        distribution of small aerospace parts and aerospace chemicals and, on the other
        hand, the manufacturing of aircraft and relevant aftermarkets.
5.      CONCLUSION
(79)    For the above reasons, the European Commission has decided not to oppose the
        notified operation and to declare it compatible with the internal market and with
        the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of
        the Merger Regulation and Article 57 of the EEA Agreement.
                                                           For the Commission
                                                           (Signed)
                                                           Margrethe VESTAGER
                                                           Member of the Commission
33    E.g. Tauber institute for Global operations: Boeing: The Fight for Fasteners, available online
      https://www.supplychainmarket.com/doc/boeing-case-study-0001 (25th September 2028).
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