Commission, March 23, 2018, No M.8869

Subject: Case M.8869 – Ryanair / LaudaMotion

Commission decision pursuant to Article 7(3) of Council Regulation No 139/20041 and Article 57 of the Agreement on the European Economic Area2

Request for derogation

 Dear Sir or Madam,

(1) We refer to your application for a derogation from the suspension obligation provided for in Article 7(1) of the Merger Regulation with regard to the proposed acquisition by Ryanair Holdings Plc ("Ryanair", Ireland) of sole control over LaudaMotion GmbH ("LaudaMotion", Austria) (the "Transaction"), submitted pursuant to Article 7(3) of the Merger Regulation on 19 March 2018.

(2)  Ryanair and LaudaMotion are together referred to as the "Parties".

1. THE PARTIES AND THE TRANSACTION

(3)  Ryanair operates air transportation services in Europe.

(4)  LaudaMotion, which is owned by Mr. Niki Lauda, operates business charter flights in Europe and has secured an Austrian Air Operator Certificate to   operate scheduled and charter passenger services. In February 2018, LaudaMotion acquired certain assets of NIKI Luftfahrt GmbH ("NIKI"), the leisure subsidiary of bankrupt airline Air Berlin, after NIKI had filed for insolvency.

(5) On 16 March 2018, the Parties reached agreement on binding Heads of Terms,3 pursuant to which Ryanair would acquire a 75% shareholding in LaudaMotion in two inter-related stages ("Step One" and "Step Two").

(6)  Step One involves the following:

(a) Ryanair would acquire a 24.9% shareholding in LaudaMotion for a purchase price of EUR […];

(b)  Ryanair would provide six aircraft under a wet-lease agreement to LaudaMotion for the Summer 2018 IATA Season;

(c) Ryanair would add scheduled aircraft capacity of LaudaMotion to its website and begin to offer these LaudaMotion seats for sale;

(d)  Ryanair would provide the working capital for LaudaMotion's daily operations and would be responsible to fund any losses incurred.

(7)  Step Two involves the following:

(a)  Ryanair would acquire a further 50.1% shareholding in LaudaMotion for a purchase price of EUR […], subject to LaudaMotion efficiently operating no less than 75% of the former NIKI slots at Palma de Mallorca airport;

(b)  Ryanair would acquire the right to appoint three of the five members of  the Board of LaudaMotion;

(c) Ryanair would be responsible for growing the fleet of LaudaMotion to at least 30 aircraft over […] years […];

(d) Ryanair would assist LaudaMotion in growing its presence in the scheduled air travel sector in Europe. Ryanair would promote LaudaMotion's services and sales by referring to LaudaMotion as a "partner" airline.

(8)  According to Ryanair, neither Mr. Niki Lauda nor any undertaking other than Ryanair would have any rights that might confer joint control over LaudaMotion. Therefore, by acquiring 75% of LaudaMotion's shareholding and the right to appoint the majority of its Board, Ryanair would acquire sole control over LaudaMotion within the meaning of Article 3(1)(b) of the Merger Regulation.

(9)  In addition, Ryanair submits that the two steps together comprise a single concentration within the meaning of Article 3 of the Merger Regulation, considering that both stages are provided for in a single agreement and are clearly inter-related. The economic reality underlying the two steps and the Parties' economic  aim  in  implementing  the  two  steps  are  identical,  i.e.  Ryanair's acquisition of sole control over LaudaMotion. Ryanair further submits that the Transaction is structured in two steps largely to address LaudaMotion's immediate need for financial and operational support. Finally, Ryanair notes that, in a similar situation of acquisition of a controlling shareholding in an undertaking in two steps, the Commission found that the two steps comprised a single concentration.4

(10) The Commission notes that the acquisition by Ryanair of the right to appoint the majority of the members of LaudaMotion's Board, hence its acquisition of sole control over LaudaMotion, is conditional upon the implementation of the whole of the Heads of Terms, including Steps One and Two.5 As a consequence, the implementation of Steps One and Two separately would not enable Ryanair to acquire control over LaudaMotion.

(11)  Furthermore, under the Heads of Terms, Step Two would not be implemented only under two circumstances: (i) if the Transaction is not approved on regulatory or competition grounds; or (ii) if LaudaMotion efficiently operates less than 75% of the former NIKI slots at Palma de Mallorca airport. According to Ryanair, the likelihood of the latter circumstance is remote.6 In any case, all of Ryanair's obligations under the Heads of Terms, including those related to Step One, would become void if these circumstances were to occur.7

(12)  In addition, according to the Heads of Terms, Step Two is to be implemented "as soon as possible" after Step One, and only subject to the two conditions referred  to in paragraph (11) above.8

(13)  Given that the concentration is only brought about by Step One and Step Two taken together and that both steps are interdependent, meaning that one  step would not be carried out without the other, the Commission considers that Step One and Step Two are unitary in nature. In view of their unitary nature and the short period of time in which the two steps are to be implemented, and pursuant to paragraphs 38 and 48 of the Commission Consolidated Jurisdictional Notice,9 Step One and Step Two constitute a single concentration within the meaning of Article 3 of the Merger Regulation.

2. THE EU DIMENSION

 (14) The undertakings concerned have a combined aggregate world-wide turnover of more than EUR 5 000 million (Ryanair: c. EUR 6 500 million and  LaudaMotion:

c. EUR […] million).10 Each of them has an EU-wide turnover in excess of EUR 250 million, and they do not achieve more than two-thirds of their aggregate EU- wide turnover within one and the same Member State.11

(15) The Transaction therefore has an EU dimension within the meaning of Article 1(2) of the Merger Regulation.

3. THE APPLICATION FOR A DEROGATION

 (16)  Ryanair requests a derogation from the suspension obligation provided for in Article 7(1) of the Merger Regulation to implement Step One of the Transaction, as described above in paragraph (6).

4. THE CONDITIONS FOR A DEROGATION PURSUANT TO ARTICLE 7(3) OF THE MERGER REGULATION

 (17)  Pursuant to Article 7(1) of the Merger Regulation, a concentration falling under that regulation shall not be implemented either before its notification or until it  has been declared compatible with the common market. Pursuant to Article 7(3)  of the Merger Regulation, the Commission may, on the basis of a reasoned request, grant a derogation from the obligation imposed by Article 7(1) of the Merger Regulation.

(18)  Article 7(3) of the Merger Regulation provides that, in deciding on the request,  the Commission must take into account, inter alia, the effects of the suspension  on one or more undertakings concerned by the concentration or on a third party and the threat to competition posed by the concentration.

(19)  A derogation from the obligation to suspend concentrations is granted only exceptionally, normally in circumstances where suspension provided for in the Merger Regulation would cause serious damage to the undertakings concerned by a concentration, or to a third party.

A. The Transaction falls under the suspension obligation pursuant to Article 7(1) of the Merger Regulation

 (20)  Given that the Transaction consists in the acquisition of sole control by Ryanair over Laudamotion, via two inter-related steps to be implemented in a short period of time, it constitutes a concentration within the meaning of Article 3 of the Merger Regulation. As indicated in paragraph (15) above, the Transaction has an EU dimension according to Article 1(2) of the Merger Regulation. Hence, the Transaction is subject to the suspension obligation laid down in Article 7(1) of the Merger Regulation.

(21)  In the Commission's view, carrying out Step One of the Transaction before the notification of the Transaction or before it has been declared compatible with the internal market by the Commission pursuant to the Merger Regulation would amount to a partial implementation of a concentration, given that Step One and Step Two constitute a single concentration.12 Moreover, the measures as set out in paragraph (6) are substantial in themselves and intrinsically linked to the constitution of the concentration.

B. The effects of the suspension on the undertakings concerned and third parties

 Ryanair's arguments

 (22)  Ryanair considers that all measures comprising Step One are necessary to preserve LaudaMotion as an effective competitor until the Transaction is  approved by the Commission and completed by the Parties.

(23)  Without the derogation, Ryanair submits that LaudaMotion would likely go out of business entirely or be forced to scale back its operations significantly, reducing the number of routes served and flights operated.

(24) More specifically, Ryanair claims that, absent the derogation, (i) LaudaMotion would unlikely be able to operate NIKI's planned schedule; (ii) LaudaMotion would likely lose critical slots; (iii) LaudaMotion would have a reduced access to leased aircraft; (iv) LaudaMotion would unlikely be able to compete effectively throughout the Summer season, and beyond; (v) crucial staff would leave LaudaMotion; and (vi) eventually, the interests of consumers would  be irreparably harmed.

The Commission's assessment

 (25) The Commission considers it likely that, if no derogation from the suspension obligation is granted regarding Step One, LaudaMotion would not be able to deploy a sufficiently large fleet to use its portfolio of slots and to offer a sufficient volume of seats for sale to end customers to operate independently on the retail market. Without immediate financial and operational support, LaudaMotion  would risk losing critical slots and the scale necessary to prevent a significant deterioration of its assets, which would threaten its competitive sustainability.

(26)  Slots, i.e. the permission to land and take-off at a specific date and time at congested airports, are essential for airlines' operations. The Commission has insisted, in the framework of its airport policy, that "slots are a rare resource"  and "access to such resources is of crucial importance for the provision of air transport services and for the maintenance of effective competition."13 The Parties also consider that at some airports such as Palma de Mallorca airport, "slots are scarce and valuable".14

(27)  As part of the acquisition of certain assets of NIKI, LaudaMotion acquired slots at congested airports, in particular at Palma de Mallorca and Duesseldorf airports. Under the Slot Regulation,15 the general principle regarding slot allocation is that an air carrier having operated its allocated slots for at least 80% of the time during the relevant IATA Season is entitled to the same slots in the equivalent  scheduling period for the following year (the "grandfather rights").16 Consequently, under this "use it or lose it" rule, slots that would have been insufficiently used by LaudaMotion would be lost by LaudaMotion and reallocated via the slot pools.

(28) The measures under Step One would enable LaudaMotion to use its slots in accordance with the "use it or lose it" rule, notably through the wet-lease of aircraft17 and the sale of the added scheduled aircraft capacity of LaudaMotion on Ryanair's website ensuring a sufficient load-factor to sustainably operate those aircraft.18

(29)  Without the implementation of Step One before the Commission's final decision on the Transaction, LaudaMotion would unlikely be able to operate its Summer 2018 IATA Season flight schedule as from the beginning of the season (25 March 2018), thus making it difficult to operate 80% of its slots over the season. Consequently, the Commission considers it likely that LaudaMotion would be forced to immediately and definitively reduce the number of routes that it plans to operate, including routes formerly operated by NIKI

(30) Such hampering of LaudaMotion's ability to provide passenger air transport services and to use its slots would likely have negative effects on LaudaMotion, which would irrevocably lose crucial assets and rights to operate.

(31)  Furthermore, the potential harm caused to LaudaMotion by the delay in implementing Step One might have negative effects on passengers, whose flights might be cancelled or who would be left with reduced choice, as well as on employees and creditors.

(32) Moreover, a delay in implementing Step One might prevent LaudaMotion from operating its planned supply agreements with Thomas Cook/Condor and block seat agreements with Lufthansa and therefore have negative effects also on these third parties.19

Conclusion

 (33) Against this background and based on the available evidence, the Commission concludes that the suspension obligation imposed by Article 7(1) could lead to serious harm to LaudaMotion. Furthermore, on the basis of the information submitted by Ryanair, a derogation from the suspension obligation would not have adverse effects on any third party.

C.  The threat to competition posed by the Transaction

 Ryanair's arguments

 (34) In Ryanair's views, the Transaction raises no competition concerns on the markets for scheduled passenger air transport services.

(35)  In line with the Commission's recent decisions concerning the acquisition of a non-operational air carrier,20 Ryanair submits that the city-pair approach usually applied to ongoing airline operations would fail to capture the structural effects of the Transaction, since none of the aircraft leased by LaudaMotion is currently operational and seats currently available for sale by LaudaMotion represent only a de minimis proportion of the capacity that LaudaMotion is expected to operate in IATA Summer Season 2018.21 Rather, the effects of the Transaction should be assessed in terms of aggregated slot holding resulting from the Transaction in relation to the markets for air passengers services from or to the relevant airports.

(36)  On the basis of the Parties' combined slot holding at the relevant coordinated airports, Ryanair considers that no competition concerns would arise on the relevant markets for the provision of flight services from or to the relevant airports.

The Commission's assessment

(37)  The Transaction relates to passenger air transport services, considering that (i) Ryanair provides passenger air transport services to end customers and, marginally, to tour operators, and (ii) LaudaMotion will start providing scheduled and charter passenger air transport services as from Summer 2018 IATA Season.

(38) In its prior decision practice related to passenger air transport services, the Commission has defined the relevant market on the basis of the "point of origin/point of destination" ("O&D") city-pair approach, whereby the effects of a transaction on competition are assessed for each O&D separately.22

(39)  At this stage and taking into account the information provided by Ryanair, the Commission considers that the Transaction is unlikely to give rise to competition concerns on any routes, for the following reasons.

(40) First, NIKI as an air carrier has definitively exited the routes that it used to  operate until December 2017; consequently, an O&D assessment of the effects of the Transaction based on NIKI's former operations would not properly reflect the specific change brought about by the Transaction on the passenger air transport markets. The effects of the Transaction would rather be measured on the routes that LaudaMotion plans to progressively operate using assets transferred from NIKI and on which, for the time being, it does not exert a significant constraining influence.

(41)  Indeed, LaudaMotion has only recently entered the (retail) market for the provision of scheduled passenger air transport services on a limited number of routes, and with limited capacity.23 In this regard, LaudaMotion plans to supply a very large proportion of its intended capacity in the Summer 2018 IATA   Season to Thomas Cook/Condor and Lufthansa,24 in the framework of agreements that would not be impacted by the Transaction.25

(42)  Therefore, in view notably of the de minimis available capacity offered for sale by LaudaMotion, the competitive pressure exerted by LaudaMotion seems insufficient for the Transaction to cause prima facie competitive concerns under the O&D approach.

(43)  In addition, in a number of prior decisions related to air carriers, where the transaction entailed the transfer of a position at certain airports, the Commission has considered the effects of the transaction on the operation of passenger air transport services at a given airport in terms of the slot portfolio held by a carrier at the airport, without distinguishing between the specific routes served from or to that airport.26 Considering that the Transaction relates primarily to the acquisition of LaudaMotion's position at certain airports,27 it is necessary to assess whether  the Transaction is likely to lead to the creation or strengthening of a dominant position in slot holding, which might in turn have anti-competitive effects on the markets for passenger air transport at these airports.

(44) On the basis of the information submitted by Ryanair, the Parties' combined slot holding post-Transaction would be below […]% at all but […] relevant airports. At the […] airports where their combined slot holding would be above […]%, reaching at most […]%, the increment brought about by the Transaction would be negligible and would unlikely have any material impact on Ryanair's market position at these airports.28 Therefore, post-Transaction, the Parties' combined slot holding seems unlikely to give rise to competition concerns on the markets for passenger air transport at an airport.

Conclusion

 In view of the above and on the basis of the information available, it appears prima facie that the Transaction is not likely to pose a threat to competition within the EEA.

D.   Balance of interests

 (45)  Based on the above, it appears that the suspension obligation could seriously  affect LaudaMotion's ability to preserve its key assets and thus to become an effective competitor on the markets for the provision of passenger air transport. The Commission further considers that prima facie the Transaction is not likely to pose a threat to competition, and a derogation does not appear to have adverse effects on one or more of the Parties, on any air carrier or tour operator to which it plans to supply capacity or on passengers. Therefore, the Commission decides to grant a derogation in accordance with the application and to the extent specified  in section 5 below.

5. CONCLUSION

 (46)  The Commission considers that Ryanair's request for a derogation from the suspension obligation provided for in Article 7(1) of the Merger Regulation in relation to Step One of the Transaction, as described above in paragraph (6), meets the requirements set out in Article 7(3) of the Merger Regulation.

(47)  On the basis of the above considerations, and in accordance with Article 7(3) of the Merger Regulation and Article 57 of the EEA Agreement, Ryanair is granted  a derogation from the obligations imposed by Article 7(1) of the Merger Regulation for the measures identified in paragraph (6) of this decision and until the Commission takes a final decision under the relevant provisions of the Merger Regulation.

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   Annex 1 to Ryanair's application for a derogation.

4   Case M.4346 - NTN/SNR, paragraphs 4-8.

5  In that regard, the Heads of Terms state: "This HoT is binding on both parties NL [the current holding of LaudaMotion] and Ryanair as a condition precedent to any investment by Ryanair in LM [LaudaMotion]."

 6     Ryanair submits that […].

7    Heads of Terms, paragraph 6.

8    Heads of Terms, paragraph 6.

9    OJ C 95, 16.4.2008, p. 1.

10  Ryanair has extrapolated turnover data associated with LaudaMotion following its acquisition of part  of former NIKI's business, by identifying the percentage of slots operated by NIKI in Summer 2017 IATA Season that […] LaudaMotion business would operate over the course of a full Summer IATA Season post-Transaction and by applying that percentage to NIKI's 2017 worldwide revenue. On this basis, LaudaMotion's worldwide turnover would amount to c. EUR […] million in 2017. Ryanair considers that this approach provides a conservative estimate, as NIKI's slots retained by LaudaMotion are expected to generate a higher revenue per slot than NIKI's former operations based on its overall slot portfolio. The Commission considers that this approach is in line with previous precedents estimating turnover on the basis of sales of airline seats by using the corresponding slots (see Case M.8672 - easyJet/Certain Air Berlin Assets, paragraph 20). Ryanair has also used a second method calculating […]. On this basis, LaudaMotion's worldwide turnover would amount to c. EUR […] million in 2017.

11  Ryanair submits that the thresholds are met under the three methodologies applied by the Commission in airline cases (the "point of sale", "point of departure" and "50/50" methodologies). In 2016, by way of illustration, c. […]% of NIKI's worldwide turnover was achieved in the EU using the point of sale methodology, c. […]% using the point of origin methodology and c. […]% using the 50/50 methodology.

12  ECJ Case T-411/07 - Aer Lingus Group v Commission, paragraph 83: "In that regard, the acquisition of a shareholding which does not, as such, confer control for the purposes of Article 3 of the merger regulation may fall within the scope of Article 7. The Commission's approach must be understood as using the concept of ‘single concentration’ to limit the risk of finding itself in a situation in which a decision finding incompatibility would need to be supplemented by a decision to dissolve in order to put an end to control acquired even before the Commission has taken a decision on its effects on competition."

13 Recital (4) of the Commission Proposal for a Regulation of the European Parliament and  of the Council on common rules for the allocation of slots at European Union airports (COM/2011/827 final of 01 December 2011).

14  Heads of Terms, paragraph 7.

15  Council Regulation (EEC) No 95/93 of 18 January 1993 on common rules for the allocation of slots at Community airports, OJ L 14, 22.1.1993, p.1.

16  Article 8(2) of the Slot Regulation.

17  Heads of Terms, paragraph 7: "Ryanair will also contribute 6 of its aircraft under a wet lease agreement to LM for the S2018 schedule […]."

18  Heads of Terms, paragraph 8.

19  Under the Heads of Terms, it is agreed that LaudaMotion will honour its planned commercial agreements with Thomas Cook/Condor and Lufthansa (paragraph 13).

20  Cases M.8672 – easyJet/Certain Air Berlin Assets and M.8633 – Lufthansa/Certain Air Berlin Assets.

21  According to Ryanair, LaudaMotion has pre-sold a very large proportion of seats on flights that it intends operating in Summer 2018 IATA Season to Lufthansa and Thomas Cook/Condor.

22  See for instance Case M.7541 – IAG/Aer Lingus, paragraph 14. Under the O&D approach, the Commission has distinguished the retail market for the supply of scheduled passenger air transport services from the wholesale market for the supply of seats to tour operators (see for instance Case M.8046 – TUI/Transat France, paragraph 66). The Commission has also left open the question of whether the supply of dry seats to passenger by a charter airline on a given route could be considered as part of the same market as scheduled services provided on that same route for non-premium passengers (see for instance Case M.6828 – Delta Air Lines/Virgin Group/Virgin Atlantic Limited, paragraph 68). Given that Ryanair is marginally active in the wholesale  supply of airline seats and does not provide charter services, at this stage, these two possible markets will not, at this stage, be further considered as separate markets.

23   LaudaMotion has launched its website on 16 March 2018 and will start its flight operations from Germany on 25 March 2018 and from Austria in June 2018 with a fleet of 14 aircraft, to be compared to NIKI's former fleet of 35 aircraft (see Press Release dated 16 March 2018, available on https://www.laudamotion.com/en/fileadmin/dam/user upload/Laudamotion/PR Laudamotion flights available  for booking.pdf).

24   Ryanair notably indicates in its application for a derogation that Lufthansa is negotiating a blocked  seat agreement with LaudaMotion for 90% of seats on five of NIKI's aircraft.

25  Heads of Terms, paragraph 13.

26 See  for  instance  Cases  M.8672  –  easyJet/Certain  Air  Berlin  Assets,  paragraph  41;  M.8633      –

Lufthansa/Certain Air Berlin Assets, paragraph 58; M.6447 – IAG/bmi, paragraph 483.

27  In that regard, paragraph 6 of the Heads of Terms procures that a condition to the implementation of Step Two is that LaudaMotion efficiently operates at least 75% of the former NIKI slots at Palma de Mallorca airport. In paragraph 7 of the Heads of Terms, the Parties have acknowledged that "slots are scarce and valuable".

28  At […] airport, post-Transaction, the Parties would have a combined slot holding of […]% in Summer IATA Season, with a gross increment of […]%. At […] airport, the Parties would have a combined slot holding of […]% in Winter IATA Season, with a gross increment of below […]%