Merger Update

RNS Number:1069U
Office of Fair Trading
09 May 2008



60/08                                                                 9 May 2008



                           AIR FRANCE-KLM/VLM MERGER:
                      OFT SEEKS SLOT DIVESTMENT REMEDY FOR
                         LONDON CITY - AMSTERDAM ROUTE


The OFT is considering whether to accept undertakings in lieu of reference from
Air France-KLM (AFKL) in relation to AFKL's acquisition of VLM Airlines NV
(VLM). If suitable undertakings are not obtained, the merger will be referred to
the Competition Commission.

The OFT has concerns that the merger will substantially lessen competition in
the provision of scheduled flights for business travel between London City
Airport (LCY) and Amsterdam's Schipol airport (AMS). However, the OFT has
suspended any referral as AFKL has offered to divest a sufficient number of
take-off and landing slots at LCY and AMS to an up-front buyer. The OFT
considers that this remedy, in principle, appears clear-cut and would restore
competition on the LCY to AMS route.

The OFT's substantive concerns arise for the following three reasons:

First, there are good grounds for considering that LCY to AMS is a separate
market, because enough business passengers on this route value the speed and
convenience of using it compared to using Heathrow (LHR) or other London
airports.

Second, the merging parties are each other's closest competitors on this route.
Even allowing for entry by British Airways on this route in May 2008, the
parties will clearly remain the principal choices for business travellers
requiring peak-time outbound and inbound flights between LCY and AMS, with a
combined share per week in the 70-80 per cent range of both seat capacity and
number of flights

Third, there is insufficient evidence to suggest that competitive responses by
other carriers could replicate the lost competition between the parties, because
rival airlines would face capacity constraints that limit the addition of
flights at peak times from LCY - even if corporate customers were to guarantee
them business if they did enter. Accordingly, the OFT believes that these entry
barriers would permit AFKL to raise prices or reduce frequency or other service
levels to business travellers on the LCY to AMS route post-merger.

The OFT will now consider AFKL's undertakings proposal further.

Simon Pritchard, OFT Senior Director of Mergers, said:

'While entry and expansion permitted us to clear the recent easyJet/GB airways
case, the critical entry barrier here is that business travellers tend to fly at
peak times, when LCY and LHR are severely congested. Even if corporate customers
encourage them, this hinders other airlines from adding peak-time flights to
AMS. As a result, we have concerns on LCY to AMS, a route worth over #50 million
per year. We have taken on board the European Commission's learning from
previous airline merger cases and insisted on divestment of the slots to an
up-front buyer to be used on this route. This will provide a safeguard that
direct competition will be restored, such that UK business travellers will again
have two principal choices from LCY to AMS at peak times.'


NOTES

1. AFKL has acquired VLM via AFKL's wholly-owned subsidiary, Cityjet Limited.


2. The Reference Test - the OFT has a duty to make a reference to the
Competition Commission if the OFT believes that it is or may be the case that
relevant merger situation has been created; and the creation of that situation
has resulted, or may be expected to result, in a substantial lessening of
competition within any market or markets in the United Kingdom for goods or
services.


3. Under the Enterprise Act 2002 a relevant merger situation is created if two
or more enterprises have ceased to be distinct enterprises; and the value of the
turnover in the United Kingdom of the enterprise being taken over exceeds #70
million; or as a result of the transaction, in relation to the supply of goods
or services of any description, a 25 per cent share of supply in the UK (or a
substantial part thereof) is created or enhanced.


4. Under section 73 of the Enterprise Act 2002 the OFT may, instead of making a
reference, and for the purpose of remedying, mitigating or preventing the
substantial lessening of competition concerned, or any adverse effect which has
or may have resulted from it or may be expected to result from it, accept from
such of the parties concerned as it considers appropriate undertakings to take
such action as it considers appropriate. In doing so, the OFT will have regard
to the need to achieve as comprehensive a solution as is reasonable and
practicable to the substantial lessening of competition and any adverse effects
resulting from it.


5. Upfront buyer - the OFT considered in this case that a necessary requirement
to suspend the duty to refer and consider undertakings is that the divesture of
the LCY slots should be to a suitable purchaser approved by the OFT before the
OFT accepts the undertakings. This means that the OFT will consult publicly on
the suitability of the proposed slot purchaser, as well as any other aspects of
the draft undertakings, during the public consultation period.


6. Before accepting any such undertakings the OFT shall give notice of the
proposed undertakings under Schedule 10 of the Enterprise Act 2002, and consider
any representations made in accordance with that notice.


7. The full text of this decision will appear in the mergers section.



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