Brussels, 11 February 2004
Commission clears merger between Air France and KLM subject to conditions
The European Commission has authorised the concentration between Air France and KLM after the companies successfully resolved concerns about reduced competition, mainly between Paris and Amsterdam and between Europe and the United States. The review of the first significant merger in the European airline industry has led the Commission to seek the surrender of 94 single take-off and landing slots per day. This will enable rival airlines to start a service where competition would have been eliminated or significantly reduced therefore preserving choice of carriers and competitive prices for European travellers. The Commission also obtained assurances from the Dutch and the French governments that they would give traffic rights to other carriers wishing to stop over in Amsterdam or Paris en route to the United States or other non-EU destinations. They also assured they would refrain from regulating prices on long haul routes where other carriers offer indirect services competing with Air France and KLM.
"The outcome of this case shows that the long-awaited consolidation of the European airline sector can be done in full respect of competition rules. The merger between KLM and Air France will provide air passengers with a greater choice of destinations and services without having to pay a higher price on those routes where their presence is the strongest", Competition Commissioner Mario Monti said.
On 18 December 2003, Air France and KLM notified a framework agreement according to which Air France will acquire control of KLM.
Although the deal will create the largest airline group in Europe, the companies' networks are largely complementary, the Commission's investigation showed. Air France is more present than KLM in Southern Europe and Africa, for example, whereas KLM operates a higher number of routes to Northern Europe and the Far East.
From a consumer point of view, the combination will allow KLM customers to have access to more than 90 new destinations while Air France customers will be offered 40 new routes. The combination of the two airlines is also expected to bring benefits to consumers and the economy as a whole from costs savings as well as from service improvements resulting from combined networks.
But problems needed to be solved
The Commission has always looked favourably on the consolidation on the airline sector, but has also insisted that consolidation would not be done at the detriment of consumers. This is true for the alliances that have taken place in the last decade. It is even truer for mergers which are cleared once and for all, as opposed to the six-year antitrust immunity usually granted to alliances.
Despite it being largely complementary, the Air France/KLM deal - the first real merger in the European airline industry - will eliminate or significantly reduce competition on 14 routes where they currently compete actively of potentially. These are:
The Commission's experience in this field shows that the main barrier to market entry lies in the scarcity of take-off and landing rights at the highly congested European airports and Paris and Amsterdam are no exception. Remaining national regulatory restrictions may also prevent free competition especially with regard to indirect flights on long haul routes.
In order to overcome the Commission's concerns, the parties have committed themselves to surrender 47 pair of slots (i.e. 94 single take-off and landing slots) per day(1). This creates the conditions for a total of up to 31(2) new return flights a day to emerge on the affected routes. This means, for example, that a competitor could start six new daily return flights between Paris and Amsterdam and the same or another competitor would also offer one daily return flight between Amsterdam and New York guaranteeing that passengers on these routes have a choice of services and competitive prices.
For the first time, the surrender of slots is for an unlimited duration, compared with six years for the alliances, and the slots must be returned to the slot coordinator if they are misused or underused by the new entrant, not to the airline partners. In order to encourage market entry, a new operator might also acquire so-called grandfather rights over the slots obtained for the Paris-Amsterdam route after a confidential period, provided that the new entrant stays on the route for at least three years. This means he will be able to use them for other destinations once the high-speed railway link will be completed between the two capitals or when other competitors will have emerged. The impact of such a provision is to increase the value of the slots released, and, thereby, to significantly reduce the risk of lack of new entry.
As usual, the undertaking on slots is accompanied by measures requiring the airline partners to refrain from increasing their offer of flights ("frequency freeze") on the affected routes to give the new entrant(s) a fair chance to establish itself/themselves as (a) credible competitor(s). Among the other undertakings given, KLM and Air France also agreed to enter into so-called intermodal agreements with land transport companies, for example to increase the attractiveness of the Thalys railway link between Paris and Amsterdam (e.g. a business passenger would make the outward trip by train and the return by plane to take advantage of higher air frequencies).
Finally, the Dutch and French national authorities have assured the Commission they would give traffic rights to other carriers wishing to stop over in Amsterdam or Paris en route to the United States or other non-EU destinations. They also assured they would refrain from regulating prices on long haul routes. This is important because the Commission took into account the existence of indirect, or network, competition on long-haul routes as a factor moderating the finding of dominance.
Consolidation in the airline industry has until now taken the form of alliances which do not involve a change in ownership. Examples of alliances to which the Commission granted a six-year antitrust immunity, according to Regulation 3975/87 on the application of competition rules to agreements relating to air transport between EU airports, include Lufthansa/Austrian Airlines, British Airways/SN Brussels Airlines and BA/Iberia. The Commission is currently finalising its review of another such alliance between Air France and Alitalia.
The Commission is also still reviewing the impact on competition of the Skyteam alliance between Air France, Alitalia and Delta among others.
(1) To be able to operate a return flight a day a company needs four slots : one to take off at airport A + one to land at airport B plus another 2 to make the return trip in the evening, for example.
(2) Not all airports are congested (e.g. Lagos) and therefore slots may not need to be surrendered at both ends of a given route