CELEX: 31998M1305
Language: en
Date: 1998-12-09 00:00:00
Title: COMMISSION DECISION of 09/12/1998 declaring a concentration to be compatible with the common market (Case No IV/M.1305 - EUROSTAR) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)

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31998M1305

COMMISSION DECISION of 09/12/1998 declaring a concentration to be compatible with the common market (Case No IV/M.1305 - EUROSTAR) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)  

Official Journal C 256 , 09/09/1999 P. 0003

COMMISSION DECISION of 09/12/1998 declaring a concentration to be compatible with the common market (Case No IV/M.1305 - EUROSTAR) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)Brussels, To the notifying partiesDear Sirs,Subject: Case No IV/M. 1305: EUROSTARNotification of 6 November 1998 pursuant to Article 4 of Council Regulation No 4064/89.I. THE PARTIES AND THE OPERATION1. The notified proposal consists of the creation of a joint venture, to be known as Inter-Capital and Regional Rail Limited ('ICRR'), which will undertake for a period of 12 years the management of Eurostar (UK) Ltd ('EUKL') on behalf of its owners London and Continental Railways ('LCR').2. ICRR is a consortium whose sole function is to manage EUKL.  The ordinary shareholders in ICRR, and their holdings, are as follows: SNCF (French national railways) 39.96%; National Express Group ('NEG') - a UK company active in the operation of passenger rail, coach and bus services - 34.97%; SNCB (Belgian national railways) 14.99%; and British Airways ('BA') 10.09%. (In addition, the UK Government holds a single special share; however this does not confer any voting rights or other relevant rights.)3. EUKL operates the UK arm of the 'Eurostar' passenger rail services between London and Paris and Brussels through the Channel tunnel.  It is a wholly-owned subsidiary of LCR, a consortium of a number of firms in the transport, construction and financial sectors, which is also responsible for the construction and operation of the proposed fast rail link between the UK end of the tunnel and London (Channel Tunnel Rail Link - 'CTRL').  SNCF and NEG both have small minority shareholdings in LCR. 4. In a second stage of the proposed transaction, due to take place by the end of 1999, the members of ICRR propose to restructure their holdings; in particular, so that BA will become equal-largest shareholder (with NEG) with approximatively [30-40 %][more than 25%] of the shares and corresponding [Deleted for publication ; the text describes the rights corresponding to the particpation].  However, implementation of this second stage is subject to certain pre-conditions.  In particular, it is subject to approval from the relevant competition and other regulatory authorities, and announcement by the UK government of construction of the second (northerly) portion of the CTRL and of a direct rail link between Heathrow airport and the CTRL's future London terminus at King's Cross-St Pancras.  It is accordingly regarded as a separate - notifiable - operation from that presently under consideration.5. By Decision of 28 October 1998 the Commission granted ICRR a partial derogation from the suspension requirement in the Merger Regulation (art. 7(4)) in order to allow it to contribute to the preparation and approval of EUKL's budget and business plan for 1999, on condition that BA plays no part in that process.II CONCENTRATION6. The notified operation, involving the acquisition of control of EUKL by the joint venture ICRR, is a concentration within the meaning of article 3(1)(b) of the Merger Regulation. Under a management agreement between LCR and ICRR, ICRR has the exclusive right to manage EUKL until 2010.  This includes specific rights over EUKL, such as the right to appoint EUKL's two Executive Directors, and a veto over EUKL's budget and business plan.  Moreover all the members of ICRR are required to assume a portion of EUKL's losses (up to a specified maximum level) should these exceed those provided for in EUKL's budget and business plan.  Accordingly, through the management contract, ICRR obtains control of  EUKL.  SNCF, NEG, and SNCB, but not BA, have together decisive influence over ICRR and thus jointly control it.  In particular, SNCF, NEG and SNCB each has the right to appoint a Director to ICRR, to veto appointments by ICRR to the Board of EUKL (where ICRR has the right to appoint the two Executive Directors), and to veto EUKL's budget and business plan.  BA, by contrast, has none of these rights under this first stage [Deleted for publication ; the text describes the second phase of the operation].III. COMMUNITY DIMENSION7. The combined aggregate worldwide turnover of the undertakings concerned exceeds ECU 5,000 million (NEG, ECU 1,637m; SNCF, ECU 14,691m; SNCB, ECU 1,947m; and EUKL, ECU 103m).  The aggregate Community wide turnover of each of at least two of the undertakings concerned exceeds ECU 250 million (NEG, SNCB and EUKL as above; SNCF c. ECU 14,000m) and they do not achieve more than two-thirds of their turnover in one and the same Member State.  The operation therefore has a Community dimension.IV. THE RELEVANT MARKETSA. Overlapping Activities 8. The main overlap between the activities of the consortium members and EUKL arises through BA's air services from London to Brussels and Paris.  The activities of the other consortium members do not overlap with those of EUKL (or with each other) materially, if at all, as explained below.  9. SNCF has a sea ferry subsidiary (Seafrance) which operates cross-channel ferry services, but its share of those services is small (in 1996, it carried [0- 10%] of passengers on the short-sea routes to France [1]).[1]  Source: UK Monopolies and Mergers Commission (MMC) report on the merger between P & O and Stena Line, 1997, as quoted in the Notification10. SNCF and SNCB are owned by their respective States, which also own their respective State airlines - Air France and Sabena.  However, the Commission is not aware of any evidence to suggest that the involvement of SNCF and SNCB in the management of EUKL is likely to bring about any change in the competitive relationship between those railway companies and their respective State airlines on the one hand, and Eurostar on the other. 11. Both railway companies are already operators of Eurostar services (under the 1991 Tripartite Agreement with LCR's predecessor, which was notified to the Commission and received an informal 'comfort letter').  As a result, the notified operation will not lead to any additional overlap between the two State railway companies.12. As already mentioned, SNCF and NEG are also shareholders in LCR.  However under the management agreement LCR will no longer control EUKL.13. NEG operates rail and bus services in the UK, some of which provide possible connections with Eurostar and air services; it also has interests in airport operation, at East Midlands International airport (located near Leicester).  None of these activities overlaps directly with those of EUKL however.  NEG also operates coach services ('Eurolines') between London and Paris, Brussels, and other Continental destinations.  However these services account for only a very small proportion (TABLE POSITION>34. Post-merger, BA's shareholding in ICRR may make this market structure further concentrated.  At present, it would appear that neither BA nor EUKL could raise its fares for 'time-sensitive' travel without losing a significant number of customers to each other and/or other airlines.  However, following the operation and given their respective market shares, whether overall or on a market limited, on the air side, to  Heathrow and Gatwick, BA and EUKL may have a common interest in ensuring that fare levels etc are coordinated. [Deleted for publication ; the text describes the eventual evolution of BA's participation in ICRR] Since they want and probably need BA's market strength and expertise in matters such as [Deleted for publication ; the text describes one field of expertise of BA] etc (see following paragraph) the other consortium members may have an incentive to refrain from any action which BA would regard as contrary to its interests and might provoke its departure from the consortium.  Similarly, BA may be reluctant to put at risk its presumed long-term interest in the consortium - which includes matters such as the development of the Heathrow service - by pricing aggressively against EUKL.35. The consortium also plans to develop a number of joint projects with BA, covering important aspects of EUKL's business such as [Deleted for publication ; the text describes some fields of the business].  These projects will inevitably involve BA much more closely in the strategic management of EUKL.  To undertake them effectively will necessitate the exchange of commercially sensitive information between BA and the other consortium members, as well as EUKL.  The proposed projects are referred to and described in the shareholders' agreement and discussed further below.  It is unclear to what extent they will be carried out during the current phase of the operation.  But they appear to be an important part of the consortium's plans for EUKL, and the parties evidently wish to be free to implement them at an early stage if they consider it appropriate to do so.C. Barriers to Entry/Expansion36. Significant new entry at current price levels does not appear likely.  The main existing competitors appear to offer a comparably frequent service to that offered by BA and Eurostar at present, so that there is no obvious 'quality deficit' for a new entrant to fill or a current player to expand into.  Although there has been some growth in total demand for travel on the routes concerned, most of it appears to have been absorbed by Eurostar rather than by the airlines.  ICRR's planning for EUKL assumes total demand growth for its services at roughly [0-10] % p.a.  By contrast, demand on the air side is static or falling.  According to the Notification, total air passenger numbers on the Paris route have fallen by around [10-20] %, since the inauguration of the Tunnel; for the Brussels route there has been only a [0-10] % increase over the same period.  37. The growth in telecommunications and IT-based communication may lead to some reduction in business travel.  However business travel is generally less 'discretionary' than leisure travel, and is not subject to competition from ferries or the Shuttle.  So it would seem less likely to fall in the long term, albeit it is likely to rise and fall in the short-term in line with general economic trends.  Nevertheless, for the time being at least, there appears to be little scope for profitable operation from satisfying new (business) demand rather than undercutting existing suppliers.38. New entrants on the air side would also face practical barriers.  Slots at Heathrow, in particular, will be hard to come by, especially in the quantities needed to offer a sufficiently frequent service to attract business passengers.  It is true that, as the parties point out, Virgin has entered the Brussels route via a code-sharing operation with Sabena, which avoided or reduced the need for Virgin to acquire new slots for this purpose.  It is not known whether this operation is profitable.  But it is unclear how far it should be regarded as genuine new entry, rather than simply adding to the strength of the incumbent by integrating a potential independent competitor.  Nor does it appear likely that a similar development would occur again.  Other airlines are unlikely to possess large numbers of extra slots that they would be prepared to share with new competitors on routes that were not profitable, or only marginally so.39. Existing operators all have substantial excess capacity.  BA estimates current average capacity utilisation for airlines at [50-60] % for Brussels and [60-70] % for Paris; Eurostar's are [30-40] % and [45-55] % respectively. [Deleted for publication ; the text describes the profitability of the lines]  Existing air competitors' capacity utilisation and revenue from business passengers are unlikely to be significantly better than BA's (and may well be worse, given, eg, BA's strong network and the interchange passengers it will generate).  Most of the current air operators are large international airlines, with the ability to retaliate against any price-cutting new entrant.  New entrants' services would in any case be unlikely to cover their costs for some time.  This would appear likely to remain the case even if prices rose within a range of 5 or 10% of their present level; new entrants' costs will be significantly higher than those of incumbents.40. The other main airlines on the routes in question- ie Air France, Virgin/Sabena and British Midland - probably have the capacity to expand and absorb a substantial part of the time-sensitive passenger traffic currently carried by BA and Eurostar.  However to achieve this in the present state of the market they would need to reduce their prices relative to those of BA and Eurostar.  BA has the leading share on the air services concerned and is also, unlike most of the competitors, profitable overall, with a strong network of other routes.  Its ability to retaliate against expansion attempts by the other competitors could well be strengthened by its links with Eurostar, the market leader on both routes.  It is therefore possible that Eurostar and/or BA could effectively overcome any attempt by the others to gain market share by reducing prices, since their combined share is so much larger than any competitor's.  It could accordingly be rational for competitors to follow any upwards movement in prices initiated by BA and/or Eurostar, rather than challenge it, since they would then acquire some extra revenue at no risk.D. Possible Anticompetitive Effects41. The notifying parties suggest that the consortium provides neither the means nor the incentive for anticompetitive behaviour.  They point out that the consortium's revenue from the EUKL management contract is proportionate to EUKL's turnover and to any cash surplus it may eventually generate, and that EUKL is highly unprofitable at present.  The returns to individual consortium members are distributed proportionately to their shareholding, which means that (in this first phase) BA would obtain only a small fraction of any gains ([less than £5 out of every £100] according to the notification).  This, they suggest, would make a unilateral fare increase by BA on its air routes (or by EUKL alone) unviable.42. Moreover, an important part of EUKL's total operating costs - namely, the fee for using the tunnel, which accounts for [30-40] % of total costs - is effectively fixed for several years to come.  It remains the same until passenger numbers exceed [less than 15 million] million, which on present predictions is not due to occur until [before 2010].  Accordingly, in the view of the consortium, to maximise its revenue, the consortium needs above all to increase EUKL's turnover as well as reduce its costs.  Since [less than 80 %] of Eurostar's passengers are 'leisure' travellers, who would, they suggest, be likely to be deterred from travelling at all if prices rose, the net effect of any fare increase on EUKL - whether unilateral or joint - would be to jeopardize EUKL's recovery and substantially reduce the consortium's income.43. However this argument assumes that an increase could not be limited to fares for time-sensitive passengers, whereas such an increase may  be possible since, as discussed above, it may be possible to price-discriminate against them .  The distinction might become blurred if the levels of the two main Eurostar fare types were close to each other, although this appears not to be the case  Typical business (ie fully flexible) fares are two or three times the price of leisure ones (see above under 'product market').44. A sustainable 5-10% increase in business fares would generate significant additional revenue for EUKL.  Depending on the assumptions made, this could substantially exceed the cost savings anticipated by the consortium ([£ Deleted for publication] or so in total over the next three years).  Predicted growth in total volumes is around c.[0-10% ] p.a, and [[Deleted for publication ; the text describes the cashflows expected for EUKL] ].  The addition of this extra revenue would have a significant effect on EUKL's profitability, reducing the cashflow shortfall immediately and returning the company to profit sooner.  The effect on the profitability of BA's services seems likely to be comparably significant.  So - even if some of this additional revenue were lost through reduced demand or customers switching to other operators - there would be an obvious incentive for the consortium and for BA to raise business fares provided competitors did likewise.45. The notifying parties argue that if such a joint move were commercially beneficial, it would have happened already since, for example, fares are transparent.  However, on the basis of the information currently available, the notified operation may facilitate such behaviour, in that it is likely to change the structure of competition in the market.  46. The operation could remove, or at any rate reduce, the incentives for BA and Eurostar to compete with each other, since BA´s stake in the consortium provides them with a common interest in ensuring that Eurostar succeeds.  The strategic rationale for that interest has already been mentioned.  In addition, as well as being paid a management fee based on turnover and a share of any surplus, the consortium members stand to lose, between them, up to [Deleted for publication] (of which BA will be responsible for c.[Deleted for publication]) if the target levels of cashflow in EUKL's budget are not met.47. The notifying parties maintain that, due to various safeguards incorporated into the arrangements for taking over EUKL, the notified operation does not make a joint price rise by BA and EUKL any more likely than before.  They point out that besides having under this first phase of the transaction no Directorship, BA will play no part in the setting of EUKL's fares [Deleted for publication ; the text describes the organisation of the management].  Moreover BA has no right of veto over its budget or business plan; also, unlike the other consortium members, it will not be entitled to receive certain detailed confidential pricing, cost and customer information.48. However, these safeguards are not all-embracing and are arguably insufficient.  The restriction on BA receiving confidential pricing and cost data can be waived in a number circumstances.  Clause 6.10 of the Shareholders Agreement expressly allows such information to be passed over for the purpose of carrying out any of a wide range of 'special joint projects' specified in Schedule 4 of that Agreement.  These include [Deleted for publication ; the text describes the type of commercially sensitive information].  Eurostar and/or BA.  Moreover the provision extends to any other joint project that may be considered desirable by ICRR.  The parties are not, at this stage, contractually committed to carrying out any or all of these projects.  But most of them (eg [Deleted for publication ; the text describes the content of the projects]) are of great importance for the long-term success of EUKL.  Moreover, although some (eg [Deleted for publication ; the text describes the content of the projects]) could, conceivably, be carried out by or with third parties who were not members of the consortium, it is doubtful whether the other parties would have the necessary expertise to undertake them successfully alone.  By contrast, BA would be best placed to be a partner in many of them; eg its expertise in eg [Deleted for publication ; the text describes BA's fields of expertise].49. BA would of course be under an obligation not to use the shared data for other purposes.  But legitimate use of the information could make it possible for BA and EUKL to engage in anticompetitive parallel behaviour.  For example, the exchange of information needed for developing [Deleted for publication ; the text describes possible joint projects] would allow BA and EUKL to have a much better idea of the detail of each other's competitive position - both present and expected future - in regard to matters such as costs, fares etc.  This in turn would be of considerable relevance to decisions on fare-setting, promotions, commissions to sales agents, timetabling etc.  50. There is no prohibition on BA offering confidential information to EUKL in the course of these joint projects and it is difficult to imagine how these projects can be carried out without such disclosure on both sides.  Unless BA were committed to the success of EUKL - by an arrangement such as the present one - such mutual exchanges might well be considered too risky to be acceptable to the parties concerned.  In this context it should also be noted that BA has already, with the other consortium members, been closely involved in the affairs of EUKL, via the considerable work already undertaken in order to prepare the consortium's bid for the management of EUKL.  The bid involved setting cost reduction and cashflow targets, and these could not have been produced without detailed analysis of all the relevant factors.51. Finally in this connection, account has to be taken of the effect on current decisions in the consortium and by BA of BA's likely expanded role in the consortium in the near future.  Although implementation of the planned second stage of the operation is subject to various preconditions, it is clearly the intention of all concerned to proceed with it if possible; indeed the parties are contractually bound to do so as soon as the conditions are met.  For BA, according to the notifying parties, the main reason for its presence in the current operation is its interest in developing [Deleted for publication ; the text describes possible joint projects] .  It is arguable that participation in EUKL is not necessary for such arrangements to be effective, but BA evidently believes it is at least desirable.  52. Taken together, these indications suggest that the consortium members, including BA, may have a common interest in engaging in anticompetitive parallel behaviour, even before the second stage of the operation.  Moreover, the prospect of the second stage could enhance this and ensure that they do not act in ways which would reduce the chances of its being implemented.  There are also, as already suggested, indications that the creation of the consortium may allow the common interest to be developed and to influence the policies and practices of EUKL.  And as suggested above, it is by no means certain that other competitors are sufficiently strong to prevent such anti-competitive effects from arising.53. There is, therefore, a risk that if completed as proposed, even this first phase of the operation could create the conditions for anti-competitive parallel behaviour on the part of BA and EUKL in the market for time-sensitive passenger travel on the routes in question.  On the other hand, the scale of that risk, and the likelihood of it materialising, remain uncertain.  As already mentioned, BA's ability to influence the decisions of the consortium, and hence the behaviour of EUKL, is limited, notably by its relatively small shareholding and absence of Directoral powers.  Its ability to use its participation in ICRR as a means to enable it to raise prices on its own services is also, arguably, constrained by the limitations which the members of ICRR imposed on the sharing of confidential information with BA.VI. MODIFICATION TO THE AGREEMENTS 54. The parties have however, for the avoidance of doubt, modified their agreements to clarify the situation and thereby remove any risk of anti-competitive effects arising from this first stage of the operation. The shareholders of ICRR have, by means of a supplemental shareholders agreement, agreed amongst themselves that for the duration of the notified operation, none of the joint projects or collaborative agreements mentioned above will be entered into without the Commission's prior consent, and that in negotiating these matters amongst themselves they will not exchange commercially-sensitive information without the Commission's prior consent. Appropriate administrative arrangements for ensuring this are also incorporated.55. The effect of these modifications, in the Commission's view, is to ensure that the other consortium members can be prevented from engaging in any joint projects or sharing of commercially-sensitive information with BA that could lead to the creation of the conditions for anticompetitive parallel behaviour. [Deleted for publication ; the text describes the conditions under which anticompetitive parallel behaviour would be more likely]   Consequently the modifications are considered to remove the risk of creation of the conditions for anticompetitive parallel behaviour at this first stage of the operation.VII. ANCILLARY RESTRICTIONS56. The notifying parties have requested that the following be regarded as ancillary restrictions: i) a requirement on all shareholders in ICRR not to engage in a competing business with that of EUKL (this does not apply to BA's existing air operations); ii) for the duration of the management agreement, not to solicit away from EUKL any of its senior staff.  These appear acceptable as directly related and necessary to the concentration in accordance with the terms of the relevant Commission Notice.VIII. CONCLUSION57. For the above reasons, the Commission has decided not to oppose the notified operation and to declare it compatible with the common market and with the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of Council Regulation (EEC) No 4064/89.For the Commission,