Antitrust hurdles to M&A activity in Europe have been lowered somewhat as a result of a recent decision by the European Court of First Instance ("CFI"). In the Airtours decision, the CFI for the first time overruled the European Commission on a merger prohibition and set new standards for determining when a merger can be prohibited under the theory of "collective dominance." The Court applied an analysis similar to that used in the US to analyse mergers, so the decision is also significant in that it represents another step in the growing convergence of European and US merger rules.
The transaction involved the proposed 1999 acquisition by Airtours of First Choice, both of which were UK-based packaged tour operators. In the market for "short-haul" packaged tours (those primarily from the UK to continental Europe/Mediterranean destinations) the transaction would have combined the second and fourth largest firms, creating the largest firm (with a 32% share). Post-acquisition, the three largest firms (Airtours, Thompson and Thomas Cook) would have had 79% of the market. (Under the HHI standard used in the US, the post-acquisition HHI would have been about 1,800 with an increase of about 500 points as a result of the transaction, which are levels of concern in the US). The Commission had ruled that the transaction would have violated EC merger law by creating a position of "collective dominance" among the three major tour operators.
New Standard for Judging "Collective Dominance" Cases
Under EU law, a transaction is unlawful if it will "create or strengthen a dominant position" in a relevant market. In this case, the Commission did not allege that Airtours/First Choice alone would have had a "dominant position;" rather, the Commission contended that the transaction would enable the three largest tour operators to engage in "collectively dominant" behaviour by reducing capacity, and raising prices, of short-haul package tours. The "collective dominance" theory is similar to the "coordinated effects" theory used in the US to judge mergers which significantly increase concentration in a highly concentrated market. The EC-developed theory has been controversial since the EC Merger Regulation, read literally, would seemingly only prohibit mergers that create a "dominant position" in a single firm.
While the Court has previously upheld the validity of the "collective dominance" theory, the Airtours decision sets a markedly higher evidentiary standard for its application in any particular case. To prohibit a transaction under this theory, the Court held that the Commission must have "convincing evidence" that the transaction will have the "direct and immediate effect" of enabling the merging parties and their competitors to "adopt a common policy on the market" which will "significantly and lastingly impede competition in the relevant market." For "collective dominance" to be found in any particular case, the Commission must establish that each of the following criteria are met: (1) there must be sufficient "market transparency" so that each member of the dominant oligopoly has "the ability to know how the other members are behaving in order to monitor whether or not they are adopting the common policy;" (2) there must be a means for other oligopoly members to "retaliate" against any departures from the common policy, so that members have an "incentive not to depart from the common policy;" and (3) the Commission must show that the "foreseeable reaction of current and future competitors, as well as consumers, would not jeopardize the results expected from the common policy." These criteria are similar to those in the US Merger Guidelines, which state that, in evaluating whether a merger will increase the likelihood of post-merger coordination among industry members, it is important to consider how likely each competitor could "detect" and "punish" deviations from the coordinated conduct and how likely new entry/expansion by others would defeat any anti-competitive coordination.
Court Rules New Standard Not Met in this Case
The Court reviewed in detail the Commission's findings and concluded that it failed to establish any of the three "collective dominance" criteria, focusing principally on the first and third criteria. On the issue of "market transparency," the Court ruled that conditions in the package tour industry made it difficult for one tour operator to know what capacity others had planned. The Court found that "the complexity of the capacity planning procedure" would be a "major obstacle" to any tacit coordination. The Court also found that demand for package tours was growing and that demand on any particular route is volatile and that these demand conditions are "evidence that the market is competitive and militates against any finding of collective dominance." The Court rejected the Commission's findings that tour operators depend on each other for airline seats and use the same hotels. Thus, the Court determined that the package tour market was not transparent and that any deviations from coordinated behavior would not be easily detected by rivals.
The Court also ruled that any attempted post-acquisition coordination would be defeated by new entry/expansion by smaller UK tour operators or by foreign tour operators. The Court found that several of the smaller UK tour operators had stated an intent to expand; that many of them already served the most popular destinations (including Spain and the south of France); that smaller firms had access to seats on scheduled airlines or foreign airlines and thus need not have their own aircraft; that brokers would facilitate the sale of tour packages by smaller firms; and that hotels charged the same prices to smaller operators as to larger operators. On this basis, the Court concluded that any attempt to exercise "collective dominance" would be defeated by tour package sales by small or foreign tour operators.
The Airtours decision provides a roadmap of evidence that needs to be established by the Commission to sustain a merger challenge premised upon the "collective dominance" theory. Correspondingly, it provides considerable guidance to merging companies as to the facts that need to be developed to avoid application of the more restrictive doctrine. Specifically, facts should be developed to establish as many of the following market characteristics as possible:
- That the "relevant market" includes many firms other than the merging parties. To avoid having the market defined narrowly to exclude other competitors, it will be important to show that the other - often smaller - rivals are seeking to serve the same customers as the merging parties with products priced at approximately the same level. (In Airtours, the market was defined to exclude "long-haul" package tours because they were often sold to different customer groups, and generally priced twice as much, as the "short-haul" tours);
- That the market is currently performing competitively (in Airtours, the Court relied heavily on a report showing that the package tour market had been performing competitively) - this would include evidence of competitive prices (relative to costs), volatility of market shares, the frequency of new product offerings or other innovations and new entry or expansion by smaller competitors;
- That products in the market are differentiated (by price, positioning, performance, etc.) - such that any coordinated conduct would need to maintain agreements covering a wide range of competitive factors;
- That demand in the market is increasing - which should give members of any alleged oligopoly the incentive to cheat and which would encourage new entry;
- That pricing and output decisions are complex - requiring that each firm make its own assumptions, and undertake detailed analysis, of likely future demand conditions and costs;
- That customers are sophisticated/knowledgeable and would likely be able to detect attempted anti-competitive conduct and be able to protect themselves by switching to smaller competitors, or competitors in adjacent markets;
- That sales are made infrequently and/or in large quantities - thus incentivising companies to cheat on any coordination;
- That smaller firms, or firms in adjacent markets, would be able to expand capacity and take sales from larger competitors; and
- That the acquired firm is not a pricing "maverick" or a particularly innovative firm.