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Mergers: Commission prohibits proposed acquisition of TNT Express by UPS – frequently asked questions
Commission Européenne - MEMO/13/48 30/01/2013
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Brussels, 30 January 2013
Mergers: Commission prohibits proposed acquisition of TNT Express by UPS – frequently asked questions
(See also the press release: IP/13/68)
What are the main features of the small package delivery industry?
A small package differs from a freight unit in that a single person can handle it without specific equipment such as a forklift. Operators active in this segment employ dedicated structures - such as local sorting centres, larger sorting centres (called hubs), truck and small van fleets and in certain cases aircraft fleets - that are not suitable for freight transport. This is why small package delivery services are specific within the logistics and transport industry. The main service providers are so-called "integrators", followed by national postal operators, freight forwarders (who in general resell small package delivery services effectively provided by other companies), as well as a myriad of local small delivery companies, some of which cooperate within international partner networks.
What is an integrator?
An integrator controls an international integrated air and ground small package delivery network. In practice, integrators control extensive aircraft fleets which allow them to move small packages quickly over long distances. Integrators also control ground networks made up of road vehicles and sorting centres, which allow them in particular to move small packages within a given country to and from their air gateways. An integrator does not necessarily own aircraft. Instead, it may rely on contractual arrangements, such as chartering or leasing, that they allow to determine aircraft routings, frequencies and schedules. Some "non-integrators" use air transport for their small package delivery operations. However, they do it by simply buying capacity on flights operated by third parties, which does not provide the same level of flexibility as that enjoyed by integrators. In Europe, there are only four integrators: UPS and TNT Express (the parties to the concentration at issue), DHL (a subsidiary of Deutsche Post) and FedEx (a US-based company).
What are intra-EEA express services?
Express services are those for which a provider commits to delivering small packages on the day following pick-up (sometimes before noon or even earlier in the morning). For international deliveries in the European Economic Area (EEA), it is very challenging to meet such a commitment. It requires networks which are specifically organised for this type of very fast deliveries, very finely tuned processes, sophisticated IT systems. Moreover, "intra-EEA express" deliveries, unlike slower services (which are called "deferred" or "standard") require air transport to meet the time commitments, in particular for long distance shipments. Demand for Intra-EEA express services comes predominantly from business users. They need these services to ship sensitive – and sometimes high-value - items, such as time-critical documents, spare parts, critical machinery components, samples sent for testing or approval, healthcare devices or products etc.
On what basis did the Commission conclude that intra-EEA express and deferred services are in separate markets?
The Commission's market investigation showed that many customers need to be sure that certain items they ship are delivered the next day. They are ready to pay a significant price premium for this service and for the thorough track-and-trace services associated to it. Such customers would not be ready – and in certain cases, would simply not be able – to switch from express to deferred services as a result of a price increase. For some of them, it would require a significant re-organisation of their supply chains.
Moreover, the evidence collected by the Commission, in particular concerning UPS and TNT's own practices, show that service providers are to a large extent able to distinguish customers that would be ready to switch from express to deferred as a result of a price increase from those that would not, and can take this element into account in price negotiations. Indeed in the small package delivery industry, prices are not uniformly set for all customers. Most customers negotiate discounts, which can be substantial. In this context, service providers collect detailed information on customers, notably on their expected and past shipping behaviour, volumes and specific requirements for delivery speed. This allows service providers to identify customers that would be unlikely to consider deferred services as an option and would therefore more easily accept a price rise for express services.
Besides, the investigation has shown that whilst certain assets are used for both express and deferred services, networks used only for deferred would require substantial adaptations to be used also for express. Necessary adaptations consist for example in the use of faster – but smaller – road vehicles, quicker sorting times in depots and hubs, or additional line-haul links between hubs and depots. Furthermore, a significant part of intra-EEA express deliveries cannot be performed without air transport, contrary to deferred deliveries. As a result, providers of deferred services would be unlikely to be able to quickly launch express services, even if they had incentives to do so.
What is the geographic scope of the market for intra-EEA express deliveries?
Most customers negotiate their contracts for intra-EEA express services on a national basis. A supplier cannot easily gain new customers and volumes in a given country without having already a market presence in that country. Therefore, the Commission considered that these markets were national in scope. The market for intra-EEA express services of a given country includes all intra-EEA express deliveries performed for customers located in that country, irrespective of the destination of the shipments.
What are the Commission's concerns on intra-EEA express markets?
UPS, TNT Express and DHL are strong market players and close competitors, while all other competitors, including FedEx, are far less important. The take-over of TNT Express by UPS would have reduced the number of significant providers from 3 to 2 in Bulgaria, the Czech Republic, Denmark, Estonia, Finland, Hungary, Latvia, Lithuania, Malta, the Netherlands, Poland, Romania, Slovakia, Slovenia and Sweden.
This would have meant a significant loss of competition and would likely have harmed customers. This has been corroborated by the price concentration analysis conducted by UPS, which measured the relationship between the price and the number of players on the various markets at issue on the basis of prices actually charged by UPS and TNT Express in the recent past. This analysis predicted that prices would increase in 29 EEA countries, despite DHL's position as market leader in a number of countries. The Commission performed its own price concentration analysis, which confirmed this outcome but forecasted higher price increases than UPS' model.
Since barriers to entry are particularly high on these markets given the need for sophisticated IT systems, air transport and ground networks geared to express in all countries, it is unlikely that these price increases would have been counteracted by the entry of new competitors. In addition, customers do not have sufficient bargaining power to counteract predicted price increases. Finally, even if the planned concentration was likely to generate cost savings for the combined entity, the part of these savings that would have been passed on to customers would have been insufficient to compensate for price increases resulting from the lessening of competition.
On that basis, the Commission concluded that without proper remedies, the planned concentration would significantly harm customers in 15 countries: Bulgaria, the Czech Republic, Denmark, Estonia, Finland, Hungary, Latvia, Lithuania, Malta, the Netherlands, Poland, Romania, Slovakia, Slovenia and Sweden.
On what basis did the Commission consider that non-integrators exerted no significant competitive constraint on UPS and TNT Express?
Non-integrators mainly focus on domestic and international deferred services, rather than international express. This is the case even for large postal operators such as La Poste and Royal Mail, which offer cross-border small package delivery services in a number of countries through subsidiaries such as DPD, Chronopost and Seur (for La Poste), GLS and Parcelforce (for Royal Mail).
Their offering of intra-EEA express services is limited. In most countries, these services are offered on the basis of road transport. In these cases, intra-EEA express deliveries usually cannot be performed for destinations located beyond neighbouring countries.
By contrast, from any given EEA country, UPS and TNT Express can reach nearly all other EEA countries on the next day thanks to their air network. Furthermore, for the majority of these countries, they can cover most of the national territory with express intra-EEA inbound deliveries, i.e. incoming express packages.
In the few cases where non-integrators use air transport to a meaningful extent, they do it on the basis of outsourcing, by simply buying capacity on flights operated by commercial airlines or integrators. However, this does not allow them to reach a similar level of efficiency and reliability as integrators. Indeed, through the control that they exercise on aircraft routings and schedules, integrators constantly adapt their air networks to their flows of small packages so as to maximise efficiency. Moreover, integrators have put in place far-reaching contingency plans involving, for example, the use of back-up aircraft or changes of routings, in order to address unforeseen events, such as adverse weather conditions. This strongly limits the risks of delays.
In addition, customers often perceive non-integrators' services as being of lower quality than integrators' services, notably in terms of reliability and track-and-trace.
How did the Commission analyse the claimed benefits of the merger?
UPS communicated that by combining its networks with those of TNT significant cost savings could be achieved which would benefit customers. The range of annual savings would be € 400-550 million in three main areas: (i) ground transportation costs (ii) air network and (iii) management and administrative overheads.
The Commission carried out an in-depth assessment of these efficiencies claimed by UPS. It found that overhead costs were unlikely to benefit customers, because their allocation to individual packages and therefore pricing decisions for customer contracts could not be verified. Efficiencies related to ground and air transportation costs would normally benefit customers. However, the Commission's investigation found that efficiencies regarding ground transportation costs that could be ascribed to express deliveries were not clear enough. Therefore, the Commission could only take into account efficiencies related to air transportation. These were expected to materialise sufficiently quickly after the implementation of the concentration and were unlikely to be achievable by other means than the planned concentration.
The Commission calculated the part of these cost savings that would be passed on to consumers in the form of a price reduction and compared these figures with the price increases predicted by its price concentration model. This showed that in many countries efficiencies passed on to customers would not outweigh price increases caused by the lessening of competition.
This analysis was one of the elements taken into consideration to identify the countries in which the transaction would be likely to raise competition concerns.
Why were the remedies proposed by UPS insufficient to remove the competition concerns?
UPS proposed a first remedy package on the last day of the remedies deadline. It then submitted two successive revised versions. Even though the proposals were put forward at a very late stage of the process, the Commission took them very seriously and conducted two extensive market tests.
UPS' remedy proposals were based on two main pillars: (1) a divestment of TNT Express' subsidiaries in the 15 countries where the Commission had identified competition concerns, plus two additional countries (Spain and Portugal) in the event that the purchaser would be a non-integrator, in order to increase the divested intra-EEA express volumes; (2) a 5- year access to UPS's intra-European air network in order to allow the purchaser to continue the intra-EEA express operations of the divested businesses, should the purchaser be a non-integrator.
For the competition concerns to be addressed, the Commission had to be satisfied that the divested TNT businesses would likely be acquired by a company able and willing to continue the intra-EEA express operations of the acquired entities and compete actively with UPS and DHL in these markets. Only such a company could be regarded as a "suitable purchaser" in the meaning of the EU Merger Regulation.
However, from the outset it was clear that only very few potentially suitable purchasers existed. Among the integrators, FedEx would have been the only possible suitable purchaser. Indeed, a hypothetical acquisition by DHL would have been likely to give rise to similar competition concerns as for the merging parties.
As regards non-integrators, the number of potential purchasers that could be regarded as suitable was limited, in particular for the following reasons:
- First, the market test showed that certain non-integrators might be willing to purchase the divested businesses to focus on their domestic and international deferred operations – which form the core business of non-integrators – and might neglect or even abandon altogether the intra-EEA express operations of the divested businesses. Therefore, it would have been possible to accept a non-integrator as a purchaser only with sufficient elements demonstrating that the buyer had a strategy to maintain and expand intra-EEA express operations.
- Secondly, there was a risk that after 5 years, the purchaser would not be able to find a suitable air transport solution as a substitute for the temporary access offered by UPS to its own air network. Again, the Commission would have needed to receive sufficient assurances from a non-integrator purchaser that it would find an adequate air transport solution after 5 years.
- Thirdly, to continue to perform intra-EEA express services from the countries covered by the remedy package to all the other EEA countries, the purchaser would have needed suitable networks or partnerships in these other destination countries. This last condition is not met by the vast majority of the non-integrators, who have a limited geographic footprint in Europe.
In view of these constraints and the position taken by the various market players during the market tests, it turned out that there would be only very few potentially suitable purchasers and considerable uncertainties as to whether any of them would eventually purchase the divested businesses, continue its intra-EEA express operations and exert sufficient competitive pressure on UPS.
Under these circumstances, a solution ensuring that the concentration would not be implemented before a binding agreement was signed between UPS and a suitable purchaser was required. However, UPS did not propose to commit to signing such an agreement before implementation of the acquisition as part of the remedies package (a so-called "upfront buyer" solution). It made a last minute attempt to sign such an agreement before the Commission completed its investigation (so-called "fix-it-first solution") but this attempt did not materialise. Therefore, the Commission had to conclude that the remedies were insufficient.
In the market tests, La Poste expressed an interest in the divested businesses. UPS and La Poste had also engaged in negotiations concerning the remedies, although this occurred at a late stage during the procedure. Having thoroughly analysed the information provided by La Poste, the Commission could not conclude that the company was a suitable purchaser. In particular, the Commission was unconvinced that DPD would have, on the basis of the volume in express deliveries involved, the incentive to invest in its own air transport solution after the 5 year air access agreement with UPS and to upgrade its ground network in order to become a sufficient competitive threat on the merged entity in express deliveries. This further increased the serious risks that the remedies would not be effective.
Did you cooperate with the US authorities?
In view of the limited operations of TNT Express in the United States, the transaction was not reviewed by the US competition authorities. The main territory that would have been affected by the planned take-over would have been Europe.