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Commission questions takeover bid

February 17, 2011

By Staff Reporter

The Commission is responsible for drafting, regulating and implementing European Law, including ensuring fair competition across the European Union.
Ryanair has not broken any law with its bid, but the Commission could block the deal if it rules that it hinders competition. However the airline said it intended to submit a further offer later if the Commission does not rule a bid as anti-competitive in principle.
The Commission said its concerns were its initial findings from a “Phase 1” inquiry, but that it had decided to institute a full-scale “Phase 2” investigation. This can run for up to 90 working days, meaning it would have until 11th May to decide on whether the deal could be permitted or should be blocked. “The decision to open an in-depth inquiry does not prejudge the final result of the investigation,” the Commission said in a statement.
“My main priority on this case is to make sure that consumers would continue to enjoy a competitive choice of airline services,” Competition Commissioner Neelie Kroes said.
The budget airline said that its current bid was being withdrawn but that it would intend to make a “further offer” for Aer Lingus if the Commission’s in-depth inquiry did not block a deal in principle.
In its statement, the Commission said that its “initial market investigation indicates that the proposed acquisition would raise serious competition concerns in the passenger air transport sector and in particular could reduce choice for consumers.” It could also “give rise to higher fares than would be likely if the two carriers remained separate,” it added.
“The proposed take-over … would bring together the two main airlines operating out of Ireland thereby leading to important overlaps on a large number of European routes. On many routes the carriers are the only two competitors. They are also the main operators out of Dublin airport.
“The Commission’s initial investigation has found that the two carriers are each other’s closest competitors for services out of Ireland and that barriers to entry are high. The proposed merger could lead to the elimination of actual and potential competition between the two carriers on a large number of routes out of Ireland as well as eliminate current base competition at Dublin airport,” the statement continued.
It also revealed that Ryanair had proposed a “package of remedies” to meet the Commission’s concerns following its initial findings.
“The market testing of the initial remedies concluded that the proposal was not sufficient to remove the serious doubts identified,” it added.
“Ryanair submitted a substantially improved remedy proposal at a late stage of the procedure. However, the time remaining before the deadline for completion of the initial investigation was insufficient to allow to verify whether the modified commitments would clearly rule out the serious doubts identified,” the Commission said.
Ryanair attacked the ruling. “We are disappointed with the delay in the European Commission’s approval of Ryanair’s offer for Aer Lingus,” said Chief Executive Michael O’Leary, adding that the delay which will result from the detailed inquiry was “unnecessary” and could have been dealt with in the “Phase 1” or initial inquiry just completed.
In a typically combative statement, Ryanair said it had given the Commission sufficient time to test its proposed remedies.
The airline also revealed it had agreed to surrender 500 slots operated by a combined Aer Lingus and Ryanair — “including valuable slots at London Heathrow” — in order to secure Phase 1 approval. Ryanair claimed that the Commission had failed to follow its own “stated policy of encouraging consolidation amongst European airlines”, and claimed that it had approved much larger airline mergers such as the recent tie-up between Dutch airline KLM and Air France with just a Phase 1 inquiry.
It also said that while the KLM/Air France takeover controlled 62 percent of movements at Paris Charles de Gaulle airport, Ryanair and Aer Lingus are responsible for a smaller proportion (61 percent) of movements at Dublin Airport.
“The Commission appears to be applying different and totally inconsistent principles to the Ryanair-Aer Lingus deal than it applied to the much larger Air France-KLM deal, which was waved through with little difficulty in Phase 1,” Ryanair added.
The airline also rejected the Commission’s view that the deal could drive up fares, saying it planned to reduce Aer Lingus fares by almost 10 percent over four years.
“The fact that Aer Lingus’ fares will fall under Ryanair’s ownership would make this consolidation far more consumer friendly than the phase I approved Air France-KLM merger which has resulted in average fares and yields rising significantly in the eighteen months since that merger,” the airline argued.
Ryanair said it still believed “consumers and competition would win in the end”.
The Commission decision is a serious setback however for the airline, indicating that it is viewing the merger differently because of Ireland’s island location at the western fringe of Europe compared to those between airlines operating on Continental Europe. With air links critical to an island, a dramatic change reducing a market dominated by two carriers to one large airline has clearly sparked concern within the Commission.
Legal experts had suggested in press reports earlier that because three-quarters of Ryanair’s business is outside Ireland, and because the Commission had backed the Air France-KLM and Lufthansa-Swissair mergers, a takeover was unlikely to be opposed. Only 19 mergers and takeovers out of 3200 referrals made to the Commission since 1990 have been blocked.
The revelation that Ryanair is also proposing to give up Aer Lingus slots at Heathrow will also bring alarm to those opposed to the merger, meaning that Irish travelers to London would use other Stansted, Luton or Gatwick which are remoter from the city unlike Heathrow, and would also deprive travelers of the benefit of worldwide connections offered by the huge Heathrow hub at the world’s busiest airport.
Even if Ryanair wins this battle, with only 25 percent of the shares its chances of winning over 50 percent remain remote, with Irish Government, Aer Lingus employee shareholders and pilots opposed to the take-over commanding 46 percent of the shares.
Ryanair may pin its hopes on a future improved future offer to shareholders, upping its current

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