Decision of 2 October 1991 declaring the incompatibility with the common market of a concentration (Case No. IV/M053 - Aerospatiale-Alenia/de Havilland) Council Regulation (EEC) No. 4064/89 (Only the English, French and Italian texts are authentic) THE COMMISSION OF THE EUROPEAN COMMUNITIES, Having regard to the Treaty establishing the European Economic Community, Having regard to Council Regulation (EEC) No. 4064/89 of 21 December 1989 on the control of concentrations between undertakings (1) , and in particular Article 8(3) thereof, Having regard to the Commission Decision of 12 June 1991 to initiate proceedings in this case, Having given the undertakings concerned the opportunity to make known their views on the objections raised by the Commission, Having regard to the opinion of the Advisory Committee on Concentrations (2) , Whereas: I. BACKGROUND The nature of the proceedings 1. These proceedings concern a proposed operation which was notified on 13 May 1991 pursuant to Article 4 of Council Regulation (EEC) No. 4064/89 (the "Merger Regulation") consisting of the joint acquisition by Aerospatiale SNI (Aerospatiale) and Alenia-Aeritalia e Selenia Spa (Alenia) (1) OJ No. L 395, 30.12.1989, p.1, rectified version OJ No. L 257, 21.9.1990, p.13 (2) OJ No. C
Transcript
Decision of 2 October 1991declaring the incompatibility with the common market
(Only the English, French and Italian texts are authentic)
THE COMMISSION OF THE EUROPEAN COMMUNITIES,
Having regard to the Treaty establishing the European EconomicCommunity,
Having regard to Council Regulation (EEC) No. 4064/89 of 21December 1989 on the control of concentrations betweenundertakings(1), and in particular Article 8(3) thereof,
Having regard to the Commission Decision of 12 June 1991 toinitiate proceedings in this case,
Having given the undertakings concerned the opportunity to makeknown their views on the objections raised by the Commission,
Having regard to the opinion of the Advisory Committee onConcentrations (2),
Whereas:
I. BACKGROUND
The nature of the proceedings
1. These proceedings concern a proposed operation which wasnotified on 13 May 1991 pursuant to Article 4 of CouncilRegulation (EEC) No. 4064/89 (the "Merger Regulation")consisting of the joint acquisition by Aerospatiale SNI(Aerospatiale) and Alenia-Aeritalia e Selenia Spa (Alenia)
(1) OJ No. L 395, 30.12.1989, p.1, rectified version OJ No.
L 257, 21.9.1990, p.13(2) OJ No. C
of the assets of the de Havilland division (de Havilland)from Boeing Company (Boeing).
2. On 4 June 1991 the Commission decided to continue thesuspension of the concentration pursuant to Article 7(2) ofthe Merger Regulation and on 12 June 1991, the Commissioninitiated proceedings in this case pursuant to Article6(1)(c) of this Regulation.
The parties
3. Aerospatiale is a French company active in the aerospaceindustries. Its product range includes civil and militaryaircraft and helicopters, missiles, satellites, spacesystems and avionics. Alenia is an Italian companypredominantly active also in the aerospace industries. Itsproduct range includes civil and military aircraft,satellites, space systems, avionics, and air and maritimetraffic control systems. Aerospatiale and Alenia jointlycontrol the Groupement d'Intérêt Economique (GIE) Avions deTransport Régional (ATR) which was set up in 1982 in orderjointly to design, develop, manufacture and sell regionaltransport aircraft. There are currently two ATR regionalturboprop aircraft on the market.
4. De Havilland, which is a Canadian division of Boeing, onlymanufactures regional turboprop aircraft. The former deHavilland Corporation (DHC) was nationalised by the Canadiangovernment in 1982 and sold to Boeing in 1986. There arecurrently two de Havilland regional turboprop aircraft onthe market.
II. CONCENTRATION
5. The notified operation is a concentration in the form of aconcentrative joint venture within the meaning of Article 3of the Merger Regulation since:
- de Havilland will be run by an operating company whichwill be jointly controlled by Aerospatiale and Alenia,and
- the activities of Aerospatiale and Alenia in regionalturboprop aircraft (commuters) have already beenconcentrated in the GIE ATR since 1982.
III. COMMUNITY DIMENSION
6. The combined aggregate worldwide turnover of Aerospatiale,Alenia and de Havilland exceeds 5 billion ECU (Aerospatiale:4.7 billion ECU, the Finmeccanica group, to which Aleniabelongs: 5.2 billion ECU, de Havilland: 0.5 billion ECU). Aerospatiale and Alenia each achieve a Community-wideturnover of more than 250 million ECU. Furthermore, theundertakings concerned do not achieve more than two-thirdsof their Community-wide turnover within one and the same
Member State. Thus the concentration has a Communitydimension within the meaning of Article 1(2) of the MergerRegulation.
IV. ASSESSMENT UNDER ARTICLE 2 OF THE MERGERREGULATION
7. The operation has as its effect that Aerospatiale and Aleniawhich control the world and European leading manufacturer ofregional aircraft (ATR) acquire the world and Europeannumber two (de Havilland) as explained below. Regionalaircraft (commuters) are aircraft in a range of between 20and 70 seats intended for regional carriers and have anaverage flight duration of approximately one hour. Theregional transport market is mainly characterised by lowdensity traffic where turboprop engined aircraft are, as ageneral rule, less expensive to operate than jet aircraft. Although the market has for the time being and will haveuntil the mid-90s a relatively high growth rate, thecommuter market is comparatively small in terms of aerospacemarkets generally (total worldwide value of deliveries ofnew commuter aircraft in 1990: $2.3 billion, which isestimated at less than 2% of the value of the totalaerospace industry).
(1) Relevant product markets
8. The relevant product markets affected by the proposedconcentration are those of regional turboprop aircraft.
Regional jet aircraft currently being developed (Canadair's50-seat CL601 RJ jet) cannot be included in these markets. The commuter manufacturers and the airlines questioned onthis issue have stated almost unanimously that it isunlikely that regional jet aircraft will compete withtraditional turboprops of a similar capacity. Regional jetaircraft have significantly higher acquisition and operatingcosts, and furthermore the time-saving which a regional jetwould offer compared to turboprops is not significant untilroutes of 400 - 500 nautical miles are involved. Theaverage distance operated by turboprops is less than half ofthis, and according to the parties' own figures as many as85% of all regional transport aircraft flights are in factbelow 400 nautical miles. It is considered therefore thatthere is no significant overlap of turboprops and regionaljets.
Jet aircraft of around 100 seats developed for short andmedium haul flights (in particular the Boeing 737, theFokker 100 and the British Aerospace BAe 146) are also notin competition with regional turboprop aircraft. These jetaircraft cost around twice as much as the largest turbopropaircraft, and are used on longer routes or routes with highdensity. The Commission has therefore followed the marketdefinition of the parties, and all the competitors andcustomers contacted, by excluding jet aircraft from therelevant product markets.
9. The parties exclude turboprop aircraft of below 20 seatsfrom the overall commuter market. This is generallyaccepted by the industry and by the customers. Aircraftbelow 20 seats are subject to different type certificationstandards from the 20-70 seat aircraft. For aircraft of 19seats and below, the certification security requirementssuch as crash-worthiness, systems reliability, fatigueresistance, damage tolerance, heat release of cabinmaterials in case of fire, etc, are much more lenient. These aircraft are physically smaller to the extent that thelevel of comfort is not comparable (for example, most do notprovide toilet facilities, many are unpressurised, andnormally passengers cannot stand up in the aircraft). Mostof these aircraft are not developed specifically forcommercial passenger transport, but are derived from generalaviation aircraft. All documentation obtained in theCommission's enquiry regarding forecasts of the developmentof the overall commuter market, manufacturers' marketingcomparisons, and strategic planning analyses deal only withcommuters within the range of 20-70 seats.
10. The parties in the notification, the customers and thecompetitors in their replies to the Commission's enquiry allidentified distinct markets within the overall commutermarket of 20-70 seat aircraft. The division into differentrelevant markets within the overall market is consideredcorrect by the Commission.
A relevant product market comprises in particular all thoseproducts which are regarded as interchangeable orsubstitutable by the consumer, by reason of the products'characteristics, their prices and their intended use.
It would not appear, for example, that a 60-seat commuter isinterchangeable or substitutable with a 30-seat commuter.They are used on routes with a significantly differentdensity. The prices vary significantly, [...].(*)
11. According to the Commission's analysis three relevantproduct
markets exist. The segmentation which realisticallyreflects the different conditions of competition in theoverall market distinguishes between commuters with 20-39seats, 40-59 seats and 60 seats and over.
(*) Within a range of between $6 million and $13 million
In the published version of the Decision someinformation constituting business secrets has beendeleted in accordance with Article 20(2) of Regulation(EEC) No. 4064/89.
12. In terms of the types in current production or indevelopment
this would show direct competition as follows:
- 20-39 seats
British Aerospace J41 (27 seats)Embraer 120 (30 seats)Dornier Do 328 (30 seats)Saab 340 (33 seats)de Havilland Dash 8-100 (36 seats)
13. This analysis is based in particular on the following:
- The segmentation above is generally consistent with theviews of the overwhelming majority of customers andcompetitors which replied to the Commission's enquiries. 86% of these customers considered that the segment of20-39 seats formed a separate relevant product market. 68% of customers considered that above this segment therewas a further break as defined above. The othercustomers (14%) proposed that the overall market of 20-70seats be divided into at least two relevant productmarkets, although not broken in the same way as suggestedby the majority.
As to the competitors of ATR and de Havilland, thesegment of 20-39 seats was also identified as a separaterelevant product market by Saab, Embraer, Fokker, BritishAerospace and Dornier. Saab, Fokker and Embraer furtherdistinguished the aircraft competing in the middlesegment of 40-59 seats and those competing in the segment60 seats and above as competing in separate relevantproduct markets. Only Casa identified the relevantproduct markets in a significantly different way,proposing three segments of 15-30 seats, 31-49 seats and50-70 seats.
- The table at point 12 shows that there are distinctclusters of aircraft around 30 seats, 50 seats and 65seats. It is generally accepted within the industryconcerned and amongst customers that the differentaircraft types in these clusters compete directly againstone another. For the ATR42 for example, the strongestcompetition is from the de Havilland Dash 8-300 and theFokker 50. For the de Havilland Dash 8-100 for example,the strongest competition is from the Saab 340 and theEmbraer 120. The segmentation therefore shows the groupsof aircraft which are usually evaluated against eachother by airlines.
- This segmentation is plausible given that it shows thatATR, de Havilland, Saab and British Aerospace havedeveloped types which compete in a different segment totheir original type. It cannot be expected that acommuter manufacturer would develop a new type to competedirectly in normal circumstances with another type of itsexisting product range. Alternative segmentations whichwould suggest that the two de Havilland types, forexample, would directly compete are not consideredrealistic.
14. As to possible supply-side substitutability between segmentsthere may be some possibility in the medium-term for thecommuter manufacturers to modify existing types (to"stretch"), so as to develop a new competing product in ahigher segment, e.g. ATR 42 to ATR 72. This does not affectthe analysis that a type in one segment would not besubstitutable for a type in another segment. Furthermore,according to a study carried out for the parties, it wouldtake considerable time, longer than three or four years, for manufacturers for example of 30-seat aircraft to switchtheir facilities to produce 50-seat aircraft, to the extentthat these facilities already exist.
15. The parties do not agree with the Commission's definition ofrelevant product markets. In the notification the partiespropose that the overall market is divided into two distinctsegments, one of 20-50 seats and one of 51-70 seats. Thissegmentation is said to be mainly based on the fact thatunder the regulations of the major countries a second airhostess is mandatory above 50 seats, and that this changesignificantly increases the operating costs of the carriers. This proposed segmentation is not however internallyconsistent. The segments are defined as 20-50 seats and 51seats and over. In the larger segment, the analysis of theparties includes the 50 seater Dash 8-300, Fokker 50 andSaab 2000 types. According to such an analysis the ATR 42with 48 seats is in another relevant product market to thesethree 50 seater types. This does not reflect the marketreality since the ATR 42 is considered by competitors and
customers to be the main direct competitor of these 50seaters.
16. Following the Commission's decision to open proceedings, theparties modified their initial proposal and suggested thatthe total market (20-70 seats) should be taken as therelevant product market since segmentation is considered tobe arbitrary at least to a certain extent. The results ofthe Commission's enquiry show, however, that there is abroad consensus amongst competitors and customers as to therelevant product markets described above. This does notsustain the parties' contention that the segmentation isarbitrary, or the contention that the markets should beaggregated.
17. The parties contend that the number of seats is not the onlyfactor taken into account by airlines in their decisions asto which aircraft to acquire. Other factors such astechnical characteristics and direct operating costs arealso cited as relevant. On this basis, aircraft indifferent size segments are said to compete directly.
The Commission considers that the parties draw an incorrectconclusion from the fact that customers take into accountseveral factors in making their decisions as to whichaircraft to acquire:
- When airlines are considering acquiring new aircraft thefirst stage in their analysis is to identify thecharacteristics of the routes which the aircraft willservice. Route characteristics comprise in particularthe expected passenger traffic and the frequency offlights. The analysis must take into account the levelof business travel and the number of slots. Traffic andfrequency define the ideal number of seats for the routesin question. The principal factor dictating an airline'sfleet requirement is thus the approximate number of seatsrequired to suit its route network.
- Once the basic approximate capacity requirement isdefined, then the airline will choose between aircraftwhich are in the required capacity range. The choicewill usually be amongst the aircraft grouped together inthe relevant product markets defined above. This isshown by the replies of the customers, and theclustering of aircraft types. Having defined the basiccapacity requirement, other factors such as price, directoperating costs, technical characteristics and level ofcomfort, for example, are evaluated. These factors willdetermine which aircraft of those being considered winsthe order.
- The replies of customers to the Commission's enquiry bearout this general analysis. Factors other than seatcapacity do not therefore define the relevant productmarkets, but determine only which is the most suitableaircraft within a given relevant product market.
18. The parties claim that in 8 cases (over an unspecifiedperiod) competition existed between two aircraft belongingto different (but adjacent) relevant product markets asdefined above for specific orders. These very limitedexceptions in themselves are not considered to disprove thegeneral analysis for the reasons outlined below.
In exceptional circumstances a customer may choose betweenaircraft of significantly different capacities. Onehypothetical example would be as follows based on dataprovided by the parties. For routes of low density, forexample an average of 30 passengers but with higher peaknumbers, an airline might consider acquiring an ATR 42 witha capacity of 48 seats against an Embraer 120 with acapacity of 30 seats. The break-even point in terms ofnumber of passengers for an average flight (150 nauticalmiles) is [...](*)
Against this however, by acquiring the ATR 42, the airlinecan meet higher demand at peak times should it materialise. There may be some low density routes therefore where alarger plane may be considered by the airline as competitivewith a smaller plane. However, for higher density routes,small aircraft are not substitutable for larger aircraft.
Between the segments as identified therefore, there may besome substitutability of smaller planes by larger planes,but there would appear to be no similar substitutability oflarger planes by small planes.
The parties have submitted three examples of what is claimedto be substitution by airlines of larger aircraft by smalleraircraft, two of these being US airlines, the other aScandinavian airline. These examples in fact only show thatthese airlines did not choose aircraft of exactly the samecapacity in replacing very old aircraft of a formergeneration. This is hardly surprising since routecharacteristics would not be expected to remain fixed overtime. However, as ATR's own study(3) of market potentialstates as a general conclusion, replacement of a given
(*) Break-even point comparison(3) Aerospatiale, Strategic Planning Division, 1990-2009,
Regional Transport Market Forecast.
aircraft within a capacity class will be ensured either byaircraft with a similar capacity or by aircraft belonging toa higher seat class category.
19. The parties claim that small aircraft may be substitutablefor larger aircraft since carriers could make more frequentflights. This is not considered to be realistic as thefollowing example demonstrates.
The theoretical substitution of a 33-seat Saab 340 for a 66-seat ATR 72 for example would imply that the airline wouldmake twice as many flights with the Saab 340 to carry thesame number of passengers on a given route. This would onlybe feasible if the direct operating costs of the Saab 340were 50% or less of those of the ATR72(4). According to theparties' figures, however, the direct operating costs of theSaab 340 are [...] of those of the ATR72. This means that ahypothetical airline substituting two flights of the Saab340 for one flight of the ATR72 would incur costs which were[...] higher(5). This would not be economically reasonablein particular since airlines operate on very low profitmargins and this would lead to substantial losses.
Furthermore the ability to make twice as many flights woulddepend on twice as many slots being available for theairline. This is not realistic given the general scarcityof slots, in particular in the EC, especially in the mainairports. Even if double the slots were to be madeavailable, it is doubtful whether the additional slots wouldbe at suitable times. This is particularly important forroutes with business traffic.
(2) Geographical reference market
20. The commuter markets from an economic point of view areconsidered to be world markets. There are no tangiblebarriers to the importation of these aircraft into the ECand there are negligible costs of transportation.
There is a significant mutual penetration in particularbetween the markets of North America and Europe. Europeancommuter manufacturers compete successfully in NorthAmerica, and the one North American competitor, deHavilland, has a strong market position within the EC. ATR,for example, has sold 39% of its ATR42 aircraft in North
(4) The direct operating costs of an average flight include
depreciation, insurance, fuel, cockpit crew, cabin crew,maintenance, and landing fees.
(5) If the costs of one ATR 72 flight are taken as 100, thecosts of two Saab 340 flights would be [...].
America, and de Havilland has sold 58% of its Dash 8-300aircraft in Europe. The most significant region in the restof the world is the Asia-Pacific region. Most of thecommuter manufacturers are present in this region, and inparticular Casa, Fokker, ATR and de Havilland.
In their analyses, the parties exclude China and the EasternEuropean countries from the overall world market. Thiswould appear correct since there is no interpenetrationbetween the markets of China and the Eastern Europeancountries and the overall world markets, and it is notexpected that there will be such interpenetration in theforeseeable future. Generally speaking, some of thesecountries, in particular the USSR and China, have their ownaircraft industries which fulfil the domestic demand. Theaircraft produced do not meet the certification standardsrequired by airlines in the rest of the world. Similarlythe aircraft produced by the western manufacturers are toohighly specified and usually too expensive for the airlinesin China and Eastern Europe. Although in the long term itcannot be excluded that significant demand may emerge fromEastern Europe for such products, this depends however onthe general economic development of these countries.
It is considered therefore that the geographical market tobe taken into account is the world market excluding Chinaand Eastern Europe.
(3) Market structure
21. In the notification it is proposed that market shares shouldbe calculated on the basis of firm orders to date (whichincludes all deliveries to date and orders placed but notyet delivered) for each commuter type which is currentlymanufactured or developed. This is the broad method ofmarket share calculation used in the aircraft industry sinceit is considered to reflect the competitive position of themanufacturers of the aircraft on the market in terms oftheir industrial strength. This cumulation of sales smoothsout
distortions in annual figures which may result from anuneven pattern of orders and deliveries in a low-volumemarket(6).
22. These market share figures do not take into account theexisting stock of all turboprop aircraft still flying (ATR +de Havilland account for around 25%). This existing stockincludes aircraft that are no longer produced and sold, aswell as aircraft sold by competitors no longer on the marketsuch as Shorts. These aircraft were based on completelydifferent technology. There is a distinct break between thecurrent generation of commuter aircraft (the new technologycommuters) and the old aircraft which are no longerproduced. The old aircraft such as the Fokker F27 and theBritish Aerospace HS 748 were developed in the late 1950s orthe early 1960s. From an economic and technical point ofview they were already obsolete by the early 1980s. Aircraft developed from the early 1980s were based on a newgeneration of engines and airframes adapted to these enginesto meet the requirements of airlines at this time. This newgeneration of commuter aircraft was designed in particularto be much more fuel efficient following the rise in oilprices in the 1970s, and to achieve higher standards ofperformance and passenger comfort. All of the commutertypes now in production or development belong to this newtechnology generation of aircraft.
Although there may be some residual marketing advantage formanufacturers now on the market with new technology aircraftarising from their links to airlines still flying their old aircraft (further discussed at points 36 and 39), this isnot relevant for the calculation of market shares. It ismeaningless to analyse market shares for the formergeneration of products in assessing the market power of themanufacturers now and in the future. The market shareanalysis must therefore be based only on orders anddeliveries of new technology aircraft currently on themarket. This is not disputed by the parties.
23. On the relevant product markets, the world and EC marketshares calculated on the basis of firm orders by units areaccordingly as follows(7)(8):
(6) Total orders as at 31.08.91 have been analysed in the
enquiry. The Commission obtained from all themanufacturers full details of numbers of orders,deliveries and options. These figures have been used inthe market share calculations. They vary slightly fromthe estimates supplied by the parties.
24. Following the Commission's decision to open proceedings, theparties submit that options should also be taken intoaccount in calculating the market shares. It is consideredhowever that options are not a sufficiently reliableindicator of the market strength of a manufacturer sincethey can be and are easily cancelled. According to theexperience of ATR for its programme, on average [...] ofoptions taken out for an aircraft which is already on themarket and has proved its reliability are converted intofirm orders. Only some [...] of options taken out for anaircraft not yet in service are however likely to beconverted. Options for aircraft not yet in service may beplaced by airlines only as an insurance to preserve thepossibility of actually ordering the aircraft at a laterstage should it prove successful. Although the conversionrate of options into orders can be measured historically, itis difficult to predict the future conversion rate foraircraft not yet in service at the present time, since thiswill depend on factors such as technical performance. Thisis in particular true for the options currently taken outfor the Saab 2000. This aircraft which is still in thestage of development is designed to meet a possible need ofcustomers for turboprop aircraft to fly longer distancesthan the normal commuter routes. According to the partiesand the competitors, it is not at all clear whether this isa significant customer requirement and it is thus contestedwithin the industry whether the Saab 2000 will in fact
(8) The market shares for all aircraft of over 40 seats
which is considered to be one market rather than two by aminority of respondents to the Commission's enquiry areas follows:
40 seats and overWorld: ATR 51% + DHC 15% = 66%, Fokker 17%, Saab 6%,
Casa 6%, BAe 5%EC: ATR 57% + DHC 15% = 72%, Fokker 16%, BAe 7%, Casa
5%, Saab 0%.
achieve significant orders on its completion. If optionswere nonetheless to be taken into account in calculating themarket shares, based on the conversion rates experienced inthe past for the successful ATR programme, the market shareswould be as follows based on orders plus options:
World: ATR 42% + DHC 17% = 59%, Fokker 19%, Saab 16%, Casa6%EC: ATR 50% + DHC 21% = 71%, Fokker 22%, Casa 6%, Saab 1%
60 seats and over
World: ATR 82%, BAe 18%EC: ATR 79%, BAe 21%.
25. In order to obtain an overall view of the impact on theentire commuter industry the three relevant product marketsas defined have been aggregated. It is considered necessaryfor this purpose to take into account the different sizes ofthe various types. The number of firm orders has thereforebeen multiplied by the standard number of seats for eachtype. This is so as to obtain an overall view of the totalcommuter market for 20-70 seats since the same weight cannotbe given to a 30 seat type as to a 60 seat type. The marketshares are accordingly as follows(9):
(9) The market share figures do not vary significantly if
options are taken into account converted for all aircrafton the basis of the high rates achieved for thesuccessful ATR programme in the past. The figures onthis basis are:World: ATR + DHC = 47% (nearest competitor, Saab 21%)EC: ATR+ DHC = 66% (nearest competitor, Fokker 12%).
If the figures are calculated alternatively on thebasis of list prices of each aircraft as opposed to aweighting by seats, the figures on the basis of firmorders are:World: ATR + DHC = 47% (nearest competitor, Saab 20%)EC: ATR + DHC = 63% (nearest competitor, Fokker 14%).
The figures calculated on the basis of list prices andalso taking into account options are:World: ATR + DHC = 44% (nearest competitor, Saab 23%)EC: ATR + DHC = 64% (nearest competitor, Fokker 13%).
- in the relevant product market of 40-59 seats the new entitywould obtain about 64% of the world market and about 72% inthe EC,
- in the relevant product market of 60 seats and above, thenew entity would have about 76% of the world market andabout 74% in the EC,
- ATR and DHC after a merger would obtain worldwide a share ofabout 50% of the overall commuter market and about 65% inthe EC.
(4) Impact of the concentration
A. Effect on ATR's position
27. The proposed concentration would significantly strengthenATR's position on the commuter markets for the followingreasons in particular:
- high combined market share on the 40-59 seat market, and ofthe overall commuter market;
- elimination of de Havilland as a competitor;
- coverage of the whole range of commuter aircraft;
- considerable extension of the customer base.
a) Increase in market shares
28. The proposed concentration would lead to an increase inmarket shares for ATR in the world market for commutersbetween 40-59 seats from 46% to 64%. The nearest competitor(Fokker) would have 22%. This market together with thelarger market of 60 seats and above where ATR has a worldmarket share of 76% is of particular importance in thecommuter industry since there is a general trend towardslarger aircraft. This trend is particularly marked inEurope since airport fees favour the use of larger aircraftbecause of the crowded skies and limited airport capacities.
[...]
Already at the end of 1990 84% of total commuter seatcapacity ordered in the EC was accounted for by aircraft of40 seats and above, compared to 57% worldwide. The trendtowards larger aircraft in Europe can be seen in thegeographic breakdown of the sales of the various types. Whilst for the 48-seat ATR42, 44% of the aircraft have beensold in Europe and 39% in North America, for the 66-seatATR72, 67% have been sold in Europe and 19% in NorthAmerica. For de Havilland, 14% of the 36-seat Dash 8-100aircraft have been sold in Europe and 78% in North America,whilst 58% of the 50-seat Dash 8-300 aircraft have been soldin Europe and 35% in North America. The counterpart oflarger aircraft becoming more important in Europe is thataircraft in the 30 seater market are relatively moreimportant in North America than Europe. Embraer for examplehas sold 71% of its 33-seat aircraft in North Americacompared with only 18% in Europe.
29. ATR would increase its share of the overall worldwidecommuter market of 20-70 seats from around 30% to around50%. The nearest competitor (Saab) would only have around19%. On the basis of this the new entity would have halfthe overall world market and more than 2 1/2 times the shareof its nearest competitor.
30. The combined market share may further increase after theconcentration.
The higher market share could give ATR more flexibility tocompete on price (including financing) than its smallercompetitors. ATR would be able to react with moreflexibility to initiatives of competitors in the marketplace.
Following a concentration between ATR and de Havilland, thecompetitors would be faced with the combined strength of twolarge companies. This would mean that where an airline wasconsidering to place a new order, the competitors would bein competition with the combined product range of ATR and deHavilland. The sales strategy of the formerly separatecompanies would now be concerted. The combination couldenable the new entity ATR/de Havilland to be more flexiblein setting its price than its competitors where a sale iscontestable, because of their absolute size advantage interms of sales base. Furthermore, unlike the competitors,the combined entity would have all the advantages of afamily of commuters to offer. This may give rise to theability, inter alia, of offering favourable conditions for aspecific type of aircraft in mixed deals. It may beconceivable that, for example, where an airline wants toacquire a small commuter of around 30 seats and a commuterof around 60 seats, then ATR/de Havilland could offerspecial conditions for the ATR72 when it is ordered with aDash 8-100 where more competition is likely. The partiesstate that in practice there is no chance of mixed dealstaking advantage of market power in one segment to sell inanother. However, in comments introduced by economicconsultants on the parties' behalf, reference is made to theability of the combined entity to package together regionalaircraft.
The parties themselves expect that the aggregation of ATRand de Havilland marketing and manufacturing forces "willcertainly lead to an improvement of their position in NorthAmerica and Europe among the regional aircraft producers",so that the position of the combined entity would bestronger than that of ATR and de Havilland currently.
b) Elimination of de Havilland as a competitor
31. In terms of aircraft sold, de Havilland is the mostsuccessful competitor of ATR. In the relevant productmarket of 40-59 seats, Fokker has a higher market share thande Havilland, but Fokker at the end of 1990 had a backlog ofonly 27 orders for the Fokker 50 whilst de Havilland had abacklog of 72 orders for the Dash 8-300 (second only to ATRwith 103 orders for the ATR 42).
Furthermore, de Havilland has plans to develop a newaircraft - the Dash 8-400 - to compete in the top segment(60 seats and over)(10). If the concentration goes aheadtherefore, de Havilland would be eliminated as a potentialcompetitor from this segment where ATR has a market share of76%.
The parties argue that if the proposed concentration doesnot proceed, although de Havilland would not be immediatelyliquidated, its production might be phased out by Boeing sothat de Havilland might in any case be eliminated as acompetitor in the medium to long term. Without prejudice asto whether such a consideration is relevant under Article 2of the Merger Regulation, the Commission considers that suchelimination is not probable.
According to a pre-acquisition review of de Havillandcarried out for Aerospatiale-Alenia at the end of 1990, thefollowing factors, inter alia, were identified as criticalin assessing the investment decision from abusiness/financial point of view: de Havilland produces highquality, well known and highly respected products, the netselling prices of which have been increasing; progress hasalready been made in reducing excess employees, andrelations with trade unions have improved; there is stillhowever scope for further improvement in productionmanagement since de Havilland's productivity is relativelypoor. [...](*)
On the evidence made available to the Commission, there istherefore no likelihood that de Havilland, in the absence ofthe proposed concentration, would in any case be phased out. Boeing has however expressed its preference to sell deHavilland rather than continue to operate it. This wouldseem possible given that the parties are not the onlypotential buyers. British Aerospace, for example, hasexpressed an interest to buy de Havilland.
c) Coverage of the whole range of commuter aircraft
32. The new entity ATR/de Havilland would be the only commutermanufacturer present in all the various commuter markets asdefined above.
(10) Boeing has currently suspended this programme in order
to give the buyer of de Havilland an opportunity toconduct its own programme analysis to determine whataction would be taken after the sale.
(*) Analysis of financial position of de Havilland.
Embraer sells only a commuter type in the 20-39 seat market.Fokker and Casa are only represented in the 40-59 seatmarket and British Aerospace is not represented in the 40-59seat market. Saab is predominantly active in the 20-39 seatmarket. The new 50-seater Saab 2000, which will bedelivered from 1992/3 onwards, is a fast turboprop commuterwhich meets a special need for customers operating regionalroutes of relatively long distances.
It appears that in the sector concerned having a completerange of products would give ATR/de Havilland a significantadvantage in itself. From the demand side, airlines derivecost advantages from buying different types from the sameseller. It was stated in the oral hearing by BritishAerospace, for example, that in forecasting future sales ofthe 64-seat ATP it is assumed that existing customers forthe 48-seat ATR42 acquire the 66-seat ATR72 when theyidentify a need for a larger plane. There is currentlycompetition between ATR and British Aerospace for theuncommitted business, including that of existing deHavilland customers. If the proposed concentration were toproceed, the Dash 8 customers would be seen by BritishAerospace as committed to the new combined entity also fortheir requirements for larger planes.
According to a study submitted by the parties, it is arguedthat the inability of a manufacturer to offer a full rangeof seating capacities under the same umbrella may harm thedemand for other existing aircraft of that manufacturer. Thus, a significant regional carrier whose aircraft needsmay call for a full complement of aircraft capacities tomeet the route needs of that carrier might be dissuaded frompurchasing smaller aircraft from a single manufacturer ifthe needs of the carrier for a larger aircraft could notalso be met from the same aircraft manufacturer. This logicflows from the fixed costs borne by the carrier for eachaircraft manufacturer dealt with by that carrier. Thesecosts include the fixed costs of pilot and mechanic trainingas well as the costs of maintaining different in-houseinventories of parts and the fixed costs of dealing withseveral manufacturers when ordering parts stocked only bythe individual manufacturers themselves.
One of the stated main strategic objectives of the partiesin acquiring de Havilland is to obtain coverage of the wholerange of commuter aircraft. The competitive advantageswhich would arise from this would emerge over time.
The parties' economic consultants state that having productsavailable across the broad spectrum of market potentialreduces considerably the risk associated with future demand.
In the short term, ATR and de Havilland would establishcommon marketing and product support which may result insome cost savings for the combined entity. It may bepossible later to further rationalise product support byincreasing the 30% commonality of spare parts between ATRand de Havilland which already exists. This rationalisationwould have cost saving implications also for customers wherethey acquire aircraft types of both ATR and de Havilland.
In practice the advantages of having complete coverage ofthe market are only present where airlines have or intend tohave a fleet consisting of aircraft in different productmarkets. According to figures supplied by Fokker, over halfof the aircraft sold in the markets of 40 seats and abovefor example are operated in fleets where there are alsoaircraft of around 30 seats. It appears therefore that atleast having a more complete coverage of the market issignificant.
d) Broadening of customer base
33. ATR would significantly broaden its customer base after theconcentration. On the basis of deliveries to date, theparties state that ATR has currently delivered commuters to44 customers worldwide and de Havilland has deliveredcommuters to 36 other customers giving a combination of 80customers in all. This compares with, for example, Saabwhich has 27 operating airline customers and Fokker whichhas around 20 airline customers operating the Fokker 50. This figure of 80 customers does not take into accounthowever the substantial backlog of orders not yet deliveredof both companies placed by yet other customers. It islikely therefore that the customer base would be higher inthe foreseeable future. This is already reflected in themarket share figures.
The customer base is an important element of market powerfor aircraft manufacturers since there is at least to someextent a lock-in effect for customers once their initialchoice of aircraft is made.
Once a customer has made a commitment to a particularmanufacturer, then there is usually a cost consideration inplacing orders with another manufacturer. Customers indicatethat there are relatively high costs arising from differenttechnology used leading to training costs for maintenanceand for pilots, and to different spare part requirements. The analysis of the fleets of the airlines shows that allairlines have only one type of new generation aircraftwithin a particular relevant product market. Furthermore,where airlines have aircraft from different relevant productmarkets, the fleet analysis shows that they always operateaircraft of the same manufacturer across different markets
where the manufacturer produces types of the size required,eg Brymon Air operates a fleet of Dash 8-100 and Dash 8-300aircraft, NFD operates a fleet of ATR42 and ATR72 aircraft. This applies equally to airlines which have very largefleets such as American Airlines. The only examples ofmixed manufacturer fleets are where the airlines operate 50-seater ATR or Fokker aircraft together with aircraft in thesmall 30-seater market. This is inevitable since neitherATR nor Fokker produce aircraft of this category.
The analysis is the same if the outstanding orders ofairlines are examined. The only airline which has ordered adifferent aircraft to the type it is already operating in aparticular category has chosen to replace its current smallFokker 50 fleet by the new Saab 2000. It already operates alarge number of Saab 340 aircraft.
The established airlines who have already acquired ATR or deHavilland commuters are therefore likely to stay with themin placing future orders.
The likelihood is thus that ATR/de Havilland would retain atleast the current level of customers.
B. Assessment of the strength of the remaining competition
34. In order to be able to assess whether the new combinedentity
would be able to act independently of its competitors, inview of its strengthened position, it is necessary toassess the current and expected future strength of theremaining competitors.
35. As to the competitors a distinction can be drawn betweenthose which are medium-sized specialists and those whichbelong to large groups in which commuters form a relativelysmall part of their overall aerospace activity.
The medium-sized competitors
36. Fokker has been a successful competitor in the 40-59 seatmarket in the past. It now produces however only onecommuter (the Fokker 50) and does not have a family ofproducts to offer. Because of its relatively limitedresources, it has only one other significant product, theFokker 100 jet. Its military business is very limited.
The Fokker 50 has a relatively low share of 9% of theoverall worldwide market of 20-70 seats and 22% of themarket of 40-59 seats where ATR/de Havilland combined wouldhave 64%. It has only 5% of the worldwide backlog ofcommuter orders (overall market), representing less than oneyear of Fokker's production capacity at the end of 1990.
Fokker may benefit to a certain extent from some customerloyalty from its sales of the Fokker 27 aircraft in the1960s and 1970s. The low market share achieved by theFokker 50 however shows that this has not been a significantfactor. There has not been, in any event for customers, alock-in effect from these old aircraft since the Fokker 50is a new technology aircraft. It is considered thatFokker's relative success with the Fokker 100 jet would haveno effect on sales of the Fokker 50. Although there aresome production synergies between the Fokker 50 and Fokker100, the market success of the two aircraft is not linked. Fokker's experience shows that customers who acquire theFokker 100 jet are not influenced by this in their decisionsas to which 50-seat turboprop to acquire. As outlined inthe notification, Boeing's experience with de Havillandconfirms that there are no significant marketing synergiesbetween jet and turboprop aircraft.
Fokker could be particularly affected by the combinedstrength of ATR/de Havilland. It has not yet built up alarge customer base for the Fokker 50 and has smallerresources than ATR. After a concentration between ATR andde Havilland, it would be more difficult for Fokker tobroaden its product range of commuters by producing astretch version of the Fokker 50 given the outlinedcompetitive advantages of
the new entity. The concentration may have in this light acrucial impact on the situation of Fokker as a competitor inthe aircraft market.
37. Casa is only present on the market of 40-59 seats so far ina marginal way with an aircraft derived from a militaryversion. Casa has however intentions to increase itsparticipation in the civil aircraft markets, and to developa new commuter so as to diminish its existing dependence onthe military markets.
It would not be easy for Casa to maintain its plans todevelop this new commuter following completion of theproposed concentration, since Casa will find it difficult tocompete against the market power of the combined entityATR/de Havilland. The proposed concentration will impedeCasa becoming a significant competitor in the civil aircraftmarket generally.
38. Embraer has stated that it will remain in the small segment(20-39 seats) with its current commuter type. Embraer is aBrazilian company which has concentrated its resources inthe development of a new regional jet. It was announced inJuly 1991 however that this project - the EMB 145 - has beencancelled. Although the EMB 145 was said to be a goodproduct, Embraer considered that it would be putting it onthe market too late. It is questionable whether Embraerwill now be able to develop a commuter type in the largersegments since the existing competitors in those segmentshave already been present for some time. Furthermore, aftercompletion of the proposed concentration, it is less likelythat Embraer could compete effectively in these segmentsagainst ATR/de Havilland.
The large aerospace groups
39. British Aerospace has the resources to broaden its currentproduct range in the commuter markets. Its current marketshare is however small (4% of the overall world commutermarket) and it has only 2% of the worldwide backlog ofcommuter orders, representing less than one year of itsproduction capacity at the end of 1990. Future investmentin the commuter markets by British Aerospace would depend onwhether there exist more profitable opportunities elsewherein the group and whether a stronger commitment to thecommuter markets would be rational. Other than its broadaerospace activities, British Aerospace has significantinterests in non-aerospace industries including cars,telecommunications and property.
In adjacent markets, British Aerospace manufactures the 19-seat turboprop aircraft J31 and the 95-seat BAe 146 jet. There are production synergies between the J31 and 27-seat
J41 and also between the 64-seat ATP and the BAe 146 jetarising from production in the same factory and sharing ofcommon costs. There may be limited competitive advantagefor the British Aerospace J41 arising from the existence ofthe small J31, but this will not be significant in thefuture in particular in the EC. The market for smallaircraft of below 20 seats has been in overall decline sincethe early 1980s and in fact has always been relatively smallwithin the EC. As for Fokker with the Fokker 100 jet andFokker 50 turboprop, no competitive advantage is gained forthe ATP turboprop from selling the BAe 146 jet. As forFokker from the old F27 aircraft, there may be some customerloyalty to British Aerospace resulting from the sales in the1960s and 1970s of the 46-seat HS748, although this aircraftwas not in the same product market as the current 64-seatATP. The low number of orders achieved by the ATP howevershows that this has not been a significant factor.
Following the completion of a concentration between ATR andde Havilland, since British Aerospace has only a very smallcustomer base in the commuter markets, it is doubtful thatit would focus on these markets. It already has anidentifiable gap between its two existing models in the keyproduct market of 40-59 seats. Furthermore, the alreadydifficult competitive situation for the 64-seat ATP vis-à-vis the 66-seat ATR72 would be worsened after completion ofthe proposed concentration given the strength of the newentity.
The proposed concentration will therefore lead to BritishAerospace becoming further marginalised as a competitor inthe commuter markets.
40. Saab can be expected to stay in the 20-39 seat market whereit has a relatively healthy position. It is developing a50-seat fast turboprop commuter which is expected to come onthe market in two years time. This may to a certain extentonly be a limited competitor to ATR and de Havilland sinceit meets a special need for customers operating regionalroutes of relatively long distances. The turboprop marketsgenerally are short-haul markets with flights of an averageof around one hour. Because take-off and landing times area relatively high proportion of the overall flight time forshort routes, speed is not so relevant since only some fiveminutes can be shaved off a particular flight by even the25% increase in speed envisaged for the Saab 2000. It maybe therefore that most customers would not be willing to paya premium for this plane. This implies that this plane,given its technical and cost characteristics, will occupy aniche market which will not compete directly in the marketfor 40-59 seat commuters.
41. Dornier, which is part of the Daimler-Benz group viaDeutsche
Aerospace (DASA), will enter the small commuter market witha 30-seat type in 1993. In assessing DASA's futurecompetition with ATR however, it must be noted that aMemorandum of Understanding has been entered into betweenDASA and Aerospatiale and Alenia as to future development ofa regional jet. If the decision is taken to develop thisregional jet, it is intended that these companies would thenform the joint venture "International Commuter" for themarketing of the whole range of regional aircraft, includingcommuters, manufactured by the three companies. IfInternational Commuter is formed in this way, Dornier wouldnot remain a real competitor of ATR/de Havilland. Theformation of International Commuter is not however yetdefinitely decided and would be subject to review under theEC competition rules. If DASA does not enter into a finalagreement with Aerospatiale and Alenia, then it may become asignificant competitor in the 20-39 seat market.
Overall evaluation of the remaining competition
42. It follows from the above that effective competition for thecombined entity would only be maintained in the market of20-39 seat commuters, although even here the ability of thecompetitors to compete with the combined entity would lessento a certain extent given the overall advantages to ATR/deHavilland arising from a broad sales base and coverage ofall the markets. In the markets for commuters of 40 seatsand over, apart from the limited competition from the Saab2000, it is questionable whether the other existingcompetitors could provide effective competition in themedium to long term.
C. Assessment of the customers
43. In order to be able to assess whether the new combinedentity
would be able to act independently of customers, in view ofits strong position and the relative weakness of thecompetitors, the position of customers in the commutermarkets must be examined.
44. Regional transport has evolved over recent years. Themarket has benefited from deregulation and liberalisationpolicies, first in North America and now in Europe. According to the notification, it is expected that therewill be a need for additional commuters which would gobeyond mere replacement of existing aircraft.
The impact of the proposed merger in this context is not thesame for the established airlines as for airlines yet toemerge.
45. The established airlines which have already acquired ATR orde Havilland comuters are for the reasons outlined in point33 likely to stay with them in placing future orders. Inview of the lock-in effect, these customers considerthemselves tied to the manufacturer who supplied theaircraft. This limits their bargaining power in placingfuture orders even if they are subsidiaries of majorairlines.
46. New airlines or established airlines replacing an entirefleet will have initially a free choice because there is nolock-in effect at that moment.
New airlines which are small-scale operators, typicallytrying out new routes would have a relatively weakbargaining position since they will acquire only a limitednumber of aircraft. They will in fact frequently enter themarket through leasing rather than buying aircraft. Newairlines (or established airlines replacing an entire fleet)which are subsidiaries of major airlines may have morebargaining ability in those cases where the parent companiesplace large orders. Some American companies may have suchability. There are no similarly large scale Europeanregional carriers for the time being. To the extent thatany bargaining ability exists amongst these airlines, itwould be reduced by the elimination of an importantcompetitor from the markets.
47. Leasing companies offer bridging facilities for new marketentrants wishing to avoid the exposure of long termownership, at least at the outset. It is likely thereforethat leasing will be a significant means of market entrygiven the high capital cost of aircraft and the risk offailure.
Leasing companies at the end of 1990 had placed 170 ordersfor commuter aircraft, [...](*) of which are accounted for byATR and de Havilland ([...] ATR and [...] de Havilland). This amounts to some 10% of the overall worldwide market. Leasing companies act as intermediaries betweenmanufacturers and airlines facilitating the acquisition byairlines of new equipment on a flexible basis.
Since leasing companies place their orders for aircraftwithout knowing where they will be leased, they must predictwhich products their potential customers will require. Theleasing companies therefore usually only buy the productswhich are best established on the market to avoid the riskof being left with stocks. The buying policy of leasing
(*) almost all
companies therefore reflects existing majority customerpreferences. Leasing companies could be seen therefore asmarket followers rather than market makers, accentuatingdemand, their success depending on the popularity of theproducts acquired. This is a significant constraint on theability of leasing companies to exercise bargaining powerwhere there is insufficient competition on the markets,since they cannot take the risk of being left with stocks ofunpopular products.
This analysis is confirmed by the views of the Irish-basedGPA group, which is the world's largest aircraft leasingcompany. GPA has acquired only ATR and de Havillandcommuters, partly through a joint venture company in whichATR has a 25% interest. The decision to buy these aircraftwas based on the assessment that these aircraft were amongthe most popular on the market. It was considered that theywould provide an attractive leasing product to a wide rangeof customers due to their being part of a family ofaircraft, technical strengths, record of innovation andmarketing support.
It would therefore not be easy for the leasing companies toswitch to other manufacturers because of the risk of beingleft with stock. The products of the other manufacturersare not as popular and would be more difficult to place. The proposed concentration thus significantly reduces thechoice for leasing companies and can be expected to lead toa situation in which they may depend to a certain extent onATR/de Havilland.
48. From the customers' replies to the Commission's enquiry, itseems that most established airlines found it difficult toassess the impact of the proposed concentration on thegeneral conditions of competition based on the informationavailable to them. Half of the respondents stated thatthere would be no direct impact on their company since theyalready have a commitment to a particular commutermanufacturer and have thus no plans, or even realisticpossibility to switch to another manufacturer. Some ofthese airlines have already placed their orders to fulfiltheir medium-term demand and others anticipate no furtherorders. 25% of the airlines which replied expressednonetheless concern about the reduction of choice andelimination of competition which they perceived to be adirect result of the concentration.
It appears therefore that for most established airlines adirect negative effect from the proposed concentration wouldonly appear over time. The impact would be immediate forairlines which will come on to the market in the future, inparticular following deregulation in the EC.
49. Even if in general terms customers would want to switch toa significant extent to the competitors of ATR/de Havilland,there is only a limited possibility given that the existingcapacity of each competitor on average is estimated to becapable only of an increase of some 15-20% in one to twoyears. This amounts to under 10% of the overall currentworldwide commuter production capacity.
50. The parties claim that in the future customers may have thepossibility of acquiring second-hand aircraft and that thesewould compete with new aircraft to a certain extent.
It is not considered that second-hand aircraft willsignificantly compete with new aircraft even in the longterm. As stated by the parties, there is for the time beingno significant second-hand market. It has also been statedby the parties that the older aircraft which are replaced bynew aircraft are relegated to secondary needs. Thesesecondary needs include freight and postal transport whichis a completely different type of demand to the demand forpassenger transport. The second-hand market is thereforelikely to be a different market from that for new aircraft.
D. Summary of effect of the proposed concentration on thecommuter markets
51. The combined entity ATR/de Havilland will obtain a verystrong position in the world and EC commuter markets of 40seats and over, and in the overall world and EC commutermarket, as a result of the proposed concentration. Thecompetitors in these markets are relatively weak. Thebargaining ability of the customers is limited. Thecombination of these factors leads to the conclusion thatthe new entity could act to a significant extentindependently of its competitors and customers, and wouldthus have a dominant position on the commuter markets asdefined.
52. The proposed concentration would create a dominant positioneven if the parties' definition of the relevant productmarket as that of the overall market of 20-70 seat aircraftwere considered correct.
ATR would increase its market share in this market from 29%to 50% worldwide and from 49% to 65% within the EC. Theeffects of the strengthening of ATR's position in terms ofhigher sales base, the coverage of the whole range ofcommuter aircraft and the broadening of the customer basewould be the same on this larger market as outlined for themarkets of 40-59 seats and 60 seats and above.
Furthermore, the market power of ATR/de Havilland in anoverall commuter market is even stronger than is reflected
in the market shares. In the overall commuter market, thereis an identifiable general trend towards larger aircraft inparticular in the EC as explained in point 28. The highersegments have therefore a strategic importance for theoverall commuter market both now and in the future. Theevaluation of market power must reflect this dynamic of themarket and take into account the fact that a competitor isparticularly strong in the strategic parts of the overallmarket. The extremely strong position which would beobtained by ATR/de Havilland in the higher segments togetherwith the other structural factors as outlined above leads tothe conclusion that a dominant position would also becreated on an overall market of aircraft of 20-70 seats.
E. Potential entry into the market
53. In general terms, a concentration which leads to thecreation
of a dominant position may however be compatible with thecommon market within the meaning of Article 2.2 of theMerger Regulation if there exists strong evidence that thisposition is only temporary and would be quickly erodedbecause of high probability of strong market entry. Withsuch market entry the dominant position is not likely tosignificantly impede effective competition within themeaning of Article 2.3 of the Merger Regulation. In orderto assess whether the dominant position of ATR/de Havillandis likely to significantly impede effective competitiontherefore, it is necessary to assess the likelihood of newentry into the market.
54. Any theoretical attractiveness of entry into the commutermarket by a new player must be put into perspective takinginto account the forecast demand and the time and costconsiderations to enter the market.
Based on the parties' figures, the overall market potentialfor 20-70 seat commuter aircraft over the next 20 years isestimated at around [...] units, including the backlog ofaround 700 units. It is expected that the current level ofdemand will be maintained only until the mid-90s, andthereafter decline and stabilise. The average annual levelof demand from the mid-90s onwards could then be estimatedat around [...](*) units compared to the current rate of some[...] units.
It follows that in terms of increase in annual deliveriesthe market appears to have therefore already reachedmaturity.
55. Even for a company currently active in a related industrynot
already present on the commuter market - in practice thiswould seem to be limited to large jet aircraft manufacturers- it would be very expensive to develop a new commuter fromscratch. According to the study submitted by the parties,there are high sunk initial costs of entering the regionalaircraft market and delays in designing, testing and gainingregulatory approval to sell the aircraft. These areimportant for several reasons. The critical point is thatwith substantial fixed and sunk costs of entering theindustry, these markets will be viable only for a limitednumber of producers. Furthermore, once a manufacturer iscommitted to the design and production of an aircraft, it isextremely costly and lengthy to adjust that design andproduction to unanticipated changes in market demand foraircraft. Critical design features of the aircraft includeits size, weight, engine specifications with attendant pay-load, fuel efficiency and distance capacity. The magnitudeof the initial sunk development costs of the aircraftconstitutes a significant risk associated with commitment toa particular aircraft. If the manufacturer errs in design,these initial costs are not recoverable.
In terms of time, the study states that it takesapproximately two to three years of marketing research todetermine which plane is required to meet the anticipatedneeds of the market. This involves forecasting changes inaircraft technology as well as forecasting the evolvingnature of the market. From the point of initial researchand development to the point of producing and deliveringaircraft, an additional four years would likely elapse. Thetotal time lag involved is of the order of six to sevenyears. This does not include any time required to constructor acquire plant facilities necessary for aircraftconstruction.
(*) Substantially lower: around 2/3 of current rate
The study concludes that there is no doubt that the presenceof substantial and fixed entry costs significantly reducesthe entry response by others to any successful aircraft byone manufacturer.
56. It follows from the above that a new entrant into the marketwould face high risk. Furthermore, given the time necessaryto develop a new aircraft and the foreseeable development ofthe market as described above, a new manufacturer may cometoo late into the market to catch the expected period ofrelatively high demand. Any new market entry at this stagecould only come when the market would have declined fromcurrent levels and have stabilised. It is thereforedoubtful whether a break-even level of sales could beachieved by a new entrant since even existing competitorsare not yet at break-even point in their product cycles.
57. For these reasons it is considered that it would not berational to now enter the commuter aircraft market. This isaccepted by the parties. The parties argue however thatsome newly industrialised countries would decide nonethelessto support the development of a local commuter industry. Even if some time in the future such a local commuterindustry were established in the way the parties suggest, itis considered unlikely that significant inroads into theinternational markets could occur in this way. Such anuncertain possibility would not in any case be sufficient tojustify a conclusion that the dominant position of ATR/deHavilland is only temporary.
As to market entry in the foreseeable future, furthermore,there is no known development programme by a company not yeton the market other than as assessed below. All competitorscontacted consider that it is not probable that there willbe another entrant into the market because given the currentstructure of the market the level of development costs isout of all proportion to any possible return.
58. The parties cite Aero Czechoslovak Aeronautical Works (ACAW)as a manufacturer which could enter the relevant commutermarket with its 40-seat turboprop aircraft, LET 610, withinthe next five years. This aircraft has been designed tomeet the requirements of the markets of the USSR and theother former COMECON countries. This aircraft has been indevelopment since 1977 and is now only at the stage ofprototype testing. In 1989, a decision in principle wastaken to develop a version which would meet the requirementsof western certifications, and it is envisaged to equip thisvariant with engines from General Electric. It may bedifficult, however, for ACAW to enter the relevant marketswithout a partner established in these markets since ACAWmay not be able to set up alone the necessary maintenance
and product support facilities. Furthermore, the LET 610is of unproven reliability since it has not yet flown andACAW has no experience at all in the commuter marketsaffected by the proposed concentration as defined. It willbe difficult for ACAW to obtain the necessary credibilityfor western airlines to seriously consider evaluating itsaircraft.
This manufacturer is not therefore considered to be arealistic potential entrant, or alternatively if it were toenter, it would not play a significant role in theforeseeable future.
59. The parties also cite the Indonesian company, IndustriPesawat Terbang Nusantara (IPTN), as a manufacturer whichcould enter the western commuter market with the 50-seatturboprop aircraft N250. IPTN has collaborated with Casa inthe development of the CN235, but to date has not itselfdeveloped a commuter aircraft. First plans for the N250were made in 1987, and it is expected to only obtain itsfirst certification in 1996 at the earliest. This aircraftseems likely to be successful in Indonesia which has anestimated potential demand for 400 aircraft over the next 20years. It may be possible for IPTN also to sell outsideIndonesia to a certain extent. Sales outside Indonesiawould however be dependent on IPTN establishing thereliability of the new aircraft which would take severalmore years following certification.
In this light, sales outside Indonesia are a matter ofspeculation only, and would not occur within a time-scalewhere IPTN could be taken into account as a significantpotential competitor under the Merger Regulation.
60. The parties also mention the Ilyushin 114 which has beendeveloped for the USSR and the former COMECON countries. The first deliveries of this aircraft are expected in 1992to Aeroflot. The parties state that this aircraft will notcompete in Europe or North America. This analysis appearscorrect. The main importance of the Ilyushin 114 isconsidered to be as the future main aircraft (perhaps withthe aircraft of ACAW) of the eastern geographic area.
61. Boeing, which is selling de Havilland, has stated inresponse
to a specific request that it has no intention of re-entering the market for turboprops, and will concentrate itsactivities on jet aircraft and helicopters. Its experiencewith de Havilland has demonstrated that no significantsynergies exist between manufacturing jet aircraft andmanufacturing turboprop aircraft. The parties state that atthe basis of Boeing's decision to sell de Havilland lies the
consideration of the weaker than expected link betweenregional and large civil aircraft.
There is no indication either that McDonnell Douglas orLockheed as the other main North American jet manufacturers,have any intention of entering the turboprop markets. Evenin the period of high growth in the North American marketsin the early 1980s, these manufacturers did not enter.
62. There are currently no Japanese manufacturers of commuters.Furthermore, the Japanese are largely not present in theaircraft industries generally in particular because of apost-war treaty prohibiting production and exportation ofaircraft until 1995. It may be therefore that in the futureJapanese manufacturers would be interested to play a certainrole in the aerospace industry. It is, however,questionable whether the commuter market would be a focusgiven its apparent lack of strategic and technical interestwithin the
aerospace industry generally, and the risks of unprofitabletrading as outlined above. It is considered therefore thatthere is no identifiable Japanese potential entrant.
Evaluation of the possibility of new entry
63. It follows that there is no realistic significant potentialcompetition in the commuter markets in the foreseeablefuture.
The parties claim that the commuter markets are volatile onthe basis that in the early 1980s Fokker and BritishAerospace had high market shares and this did not preventsignificant market entry, notably of ATR.
A change in market structure from the early 1980s to theearly 1990s does not demonstrate that these markets arevolatile. The situation in the early 1980s was verydifferent from the current situation.
The markets in the early 1980s were characterised by thefollowing factors:
- There were very few competitors on the markets. In thesmall commuter market of 20-39 seats, there was onlyShorts, and in the market of 40-59 seats there were onlyFokker, British Aerospace and to a limited extent deHavilland.
- The aircraft on the markets and in particular those ofFokker and British Aerospace were very old, evenobsolete, products. The markets were ripe for theintroduction of new and better performing aircraft.
- Forecasts showed that there would be high growth in themarkets over the following decade arising fromderegulation in North America. These forecasts provedjustified.
- The markets were therefore attractive to new entrants andit was rational for entry to occur.
The markets in the early 1990s, in contrast, arecharacterised by the following factors:
- There are eight competitors altogether already on themarkets. The aircraft available are all based on moderntechnology which fulfils the stringent customerrequirements in this respect for the foreseeable future.
- Current forecasts as outlined above show that the marketsare approaching maturity and will decline and stabilisefrom the mid-1990s.
- The markets are not therefore attractive to new entrants,and it is not rational to now enter. The expectation israther that some of the existing competitors will leave.
64. It is considered therefore that a change in market structuresimilar to that which took place in the 1980s is unlikely torecur in the 1990s. Furthermore, the possibility of marketentry would be further reduced if the proposed concentrationgoes ahead.
F. Other general considerations
65. The parties argue that one of their objectives in acquiringde Havilland is to reduce costs. The potential cost savingsarising from the concentration which have been identifiedamount to only some 5 million ECU per year. According tothe estimates of the parties' economic consultants, thesecost savings to the combined entity would arise fromrationalising parts procurement, marketing and productsupport.
Without prejudice as to whether such considerations arerelevant for the assessment under Article 2 of the MergerRegulation, such cost savings would have a negligible impacton the overall operation of ATR/de Havilland, amounting toaround 0.5% of the combined turnover. The parties haveidentified (although have not quantified) cost savings whichcould be made by better management of certain aspects of deHavilland's internal operation. These cost savings wouldnot arise as a consequence of the concentration per se, butare cost savings which could be achieved by de Havilland'sexisting owner or by any other potential acquirer.
66. The parties have not claimed that cost savings will arisefrom combining the research and development activities ofATR and de Havilland. This is in line with undertakingsgiven to the Canadian authorities to maintain de Havillandas a full-function aircraft manufacturer.
67. ATR's current position in the industry is very healthy.Given the relatively high initial costs of development fornew aircraft, it is normal for manufacturers in thisindustry to show losses in the early years of a programme. It takes some time before a sufficient level of sales hasbeen achieved to amortise the development costs. [...](*)
Since ATR has also established an excellent position in themarket, and efficient production management, it does notneed to obtain by acquisition further capacity or market
(*) ATR financial projections.
shares in order to guarantee its long term success as amajor player in the worldwide commuter industry.
68. The parties have stated that a competitive advantage (whichhas not been quantified) will be obtained from acquiring deHavilland by enabling manufacturing in a dollar area toreduce the currency fluctuation risk. For the ATR productrange this will only arise, however, to the extent thatproduction could be shifted between Europe and NorthAmerica.
Although some advantage may be obtained from a dollarmanufacturing base, it should be noted that no competitorother than de Havilland has such a base. It is doubtful inpractice that production of ATR aircraft would betransferred to Canada in any significant way.
69. For the above reasons, the Commission does not consider thatthe proposed concentration would contribute to thedevelopment of technical and economic progress within themeaning of Article 2(1)b of the Merger Regulation. Even ifthere was such progress, this would not be to the consumers'advantage.
The consumers will be faced with a dominant position whichcombines the most popular aircraft families on the market. Choice will be significantly reduced. There is a high riskthat in the foreseeable future, the dominant position ofATR/de Havilland would be translated into a monopoly.
Both British Aerospace and Fokker, the two principalcompetitors in the markets of 40 seats and above, havestated that the concentration would seriously jeopardise thesurvival of the ATP and Fokker 50 aircraft. These twocompetitors expect that the proposed concentration wouldlead to ATR/de Havilland pursuing a strategy of initiallylowering prices so as to eliminate the competitors at leastin the key markets of 40 seats and above.
Neither Fokker nor British Aerospace consider it possiblefor them to withstand such a price war. Consequently bothwould leave the markets.
In evaluating these statements, it is noted that suchconduct could be rational since the proposed concentrationwould mean that ATR/de Havilland would exceed the thresholdof market shares which would make such a pricing policylikely given that it would be the optimal profit maximisingstrategy.
Having established a monopoly, ATR/de Havilland would beable to increase prices without any competitive check.
70. With this perspective, the proposed concentration wouldbecome even more harmful to the customers over time as thedominant position translates to a monopoly. Higher pricesfor commuters have a proportionally large impact on regionalairlines since the price of an aircraft accounts for some30-40% of their total operating costs.
71. The proposed concentration would also lead to adverseeffects
in the adjacent 100-seat jet market. The British AerospaceBAe 146 jet is produced in the same factory as the ATPcommuter so that fixed costs are spread over the twoaircraft. A similar interdependency exists between theFokker F100 jet and the Fokker 50 commuter. Removal of thecommuter product lines of both companies would thereforeweaken their competitiveness in the 100-seat jet marketwhere they are already facing strong competition from theBoeing 737.
V. CONCLUSION
72. For the reasons outlined above, it is considered that theproposed concentration would lead to a situation whereby thecombined entity ATR/de Havilland could act to a significantextent independently of its competitors and customers on theworld markets as defined for commuters of 40-59 seats and 60seats and over. The proposed concentration thereforecreates a dominant position on the world markets. Furthermore, according to the above analysis, this dominantposition is not merely temporary and will thereforesignificantly impede effective competition. It isconsidered that such a dominant position is also createdeven if the relevant product market is the overall 20-70seat market.
The conditions of competition in the EC commuter markets arenot appreciably different from those prevailing in theoverall world markets. The market shares of the new entitywould be similar in both the world and EC markets forcommuters of 60 seats and over and even higher in the ECmarket for commuters of 40-59 seats than in the worldmarket. These markets are also relatively more important inthe EC than in the rest of the world. As to the overallmarket 20-70 seats the market shares of the new entity wouldbe higher in the EC than in the rest of the world. It isconsidered therefore that the proposed concentration createsa dominant position which significantly impedes effectivecompetition in the common market within the meaning ofArticle 2.3 of the Merger Regulation.
HAS ADOPTED THIS DECISION
Article 1
The proposed concentration between Aerospatiale and Aleniaand de Havilland is declared incompatible with the commonmarket.
Article 2
This decision is addressed to:
Aerospatiale SNI37 Boulevard de MontmorencyF-75781 Paris Cedex 76
and
Alenia-Aeritalia & Selenia SpaP. le V. Tecchio 51/aI-80125 Napoli
