The Spanish National Competition Commission Expresses Concerns about the Merger between Two German Air Transport Companies and Opened an In-depth Investigation in Spain (Air Berlin/Condor)

After three months of investigation, on 25 March 2008, the Spanish Competition Authorities decided to open a second phase investigation regarding the proposed takeover of Condor Fledgiest GmbH (“Condor”) by Air Berlin Plc (“Air Berlin”).

Condor is a charter carrier based in Germany, which mainly offers low-frequency leisure flights in Europe. In Spain, Condor operates flights from German airports to a significant number of destinations in Spain, including the Balearic and Canary Islands. Condor’s main shareholder is the travel group Thomas Cook (75.1%). Most of Condor’s sales come through Thomas Cook tour operations (near 60-70%).

Air Berlin is the second-biggest German airline behind Lufthansa. Air Berlin’s main hub airport in Spain is based in Palma de Mall orca. This company offers short-haul flights between several German and other European airports and fourteen Spanish cities (either within the territory of the Iberian Peninsula or in the Balearic Islands), as well as three cities in Portugal. It also provides domestic flights, mainly to the Canary Islands.

Air Berlin planned to acquire a 75.1% stake in Condor from Thomas Cook, which in turn would acquire a maximum stake of 29.99% in Air Berlin.

This transaction would imply an overlap between Condor and Air Berlin activities in at least seventy-two routes with origin or destination in Spain, forty-two of these routes to the Canary Islands, twenty-four to the Balearic Islands and eight to other Spanish cities within the territory of the Iberian Peninsula.

Since in almost half of these routes there would only be seasonal overlaps, either during the summer (twenty-six) or winter (eight) months, the Spanish Competition Authorities decided to analyse the effects of the planned takeover taking the summer and the winter season separately. Most of Condor and Air Berlin’s clients are tourists that travel to Spain for leisure and market shares fluctuate significantly depending on the season.

Almost all of the routes affected by this transaction are served by three operators, Air Berlin, Condor and Tuifly. The number of air carriers in these routes after the merger would be reduced from three to two. There are other air carriers present in these routes, such as Iberia or Lufthansa. However, their market shares are almost negligible, mainly due to the differences on the prices applied by these companies and the frequency of flights.

Condor and Air Berlin are close competitors in several routes, in particular in those that connect the Balearic and Canary Islands with German airports. The takeover of Condor by Air Berlin would give rise to a significant addition of market shares (over 20%) that would amount to very high levels. In the routes with destination to the Canary Islands, the market shares after the merger would amount to more than 90% in twelve routes and between 50% and 60% in other eighteen routes. Air Berlin would strengthen as well its position in the routes with destination the Balearic Islands, where the combined market shares of Air Berlin and Condor would be near 80% in eight routes and 60% in five routes.

The Spanish Competition Authorities also took into account that a significant part of Condor and Air Berlin’s sales in the routes affected by this transaction were made through tour operators (i.e., in sixty-four out of the seventy-two routes with overlaps more than 50% of the total sales were made through tour operators). As a result of the planned transaction, Air Berlin would have a very significant link with one of the main tour operators in the area, Thomas Cook, which would become the main shareholder of Air Berlin, with a stake close to 30%.

As previously pointed out, the resulting entity would only face competition from thinly, a carrier vertically integrated with another tour operator, TOY. Since TUI would have important commercial links with the merger entity, the Spanish Competition Authorities considered that Tuifly would have less incentives to compete with Air Berlin in these routes.

Furthermore, the merger would then increase the likelihood that Air Berlin and Tuifly coordinate their behaviour in these routes, lessening competitive pressure. Coordination among these air carries may be facilitated by the fact that, after the merger, Air Berlin and Tuifly would be symmetric. In addition, the services provided by both operators would be relatively homogeneous and the level of transparency regarding prices is very high, mainly due to the use of the Internet.

Likewise, Spanish Competition Authorities raised concerns about the possible incentives of other operators to replicate Condor’s offer. In particular, Spanish Competition Authorities considered that the reduced number of passenger using the affected routes and the important role played by tour operators would discourage other air carriers from entering these routes.

In light of the above, the Spanish Competition Authorities decided to open an in-depth investigation mainly in order to verify if any third operator would be in a position to replicate Condor’s offer.

The parties, however, have announced their intention to abandon this transaction and have finally withdrawn the application for merger approval.