Lessons to learn from airline mergers

With the summer holidays having officially taken off, one of the peak business times of many industries has started as well. One of these industries is not only the centre of attention for many travellers, but also of many regulators: the airline industry. So, time for a ´seasonal´ topic – recent airline merger cases and relevant lessons also for other industries.

While we have recently blogged about trends in German merger control (read about it here), mergers in the airline industry are a very international topic, as – naturally – many geographic markets can be affected. In the recent past, airline deals have often only been cleared subject to remedies. Some prominent cases that have just undergone merger control or where the review is ongoing include Lufthansa´s acquisition of ITA, Korean Air´s acquisition of Asiana Airlines and IAG´s proposed acquisition of Air Europa.

In the front row seat: slot divestment

One remedy airline mergers often have in common is a slot divestment. This means that airlines offer some of their take-off and landing slots at different airports for sale to their competitors. The idea behind the remedy is that slots are the main barrier to entry into the market. Therefore, by offering to sell them to competitors, new market entries should be possible.

A prominent case with this kind of remedy stems already from 2004, when the European Commission cleared one of the most famous airline deals: the merger between Air France and KLM. Predictably, this merger was subject to commitments, meaning that the parties committed to inter alia surrender 47 pairs of slots (i.e., 94 single take-off and landing slots) per day. The Commission stated that this commitment could mean that competitors could pick up these slots and this would guarantee that passengers on these routes have a choice of services and competitive prices. This was also the first time the surrender of slots was for an unlimited duration and unused slots were to be returned to the slot coordinator rather than to the airline partners. The slot divestment was accompanied by measures forcing the airlines to refrain from actions that would hinder the new entrants from establishing themselves as competitors.

EC turned the auto pilot off

This way of handling cases went on for quite some time, but lately, the Commission seems to be driving for a change. Oliver Guersent, the director-general of the Commission, said in 2023 that the authority is shifting to a “more rigorous approach” to remedies in airline mergers, as an ex-post analysis had shown that concessions like divesting slots have failed to mitigate competitive harm.

The announcement of a new approach would certainly not (or no longer) surprise Air Canada and Air Transat, who announced in 2021 to the Commission that the parties decided to terminate the planned acquisition of Air Transat by Air Canada. Air Canada was cited to state that the parties offered an enhanced package of remedies beyond what has traditionally been accepted by the Commission in previous airline mergers. The Commission, however, said that based on the results of the market test, the remedies offered appeared insufficient.

2024 has already shown the Commission´s new way of handling airline mergers twice, with the conditionally cleared acquisitions of Asiana Airlines by Korean Airlines and of ITA by Lufthansa. Both cases went through a phase 2 investigation and were eventually cleared with substantive remedies.

Oliver Guersent said that the remedies secured in Lufthansa/ITA were among the toughest imposed on an airline deal. In both decisions, the divestment of slots still plays a major role, but more and stronger additional structural remedies were agreed to as well:

• Korean Air will, for example, divest Asiana´s global cargo freighter business (including slots, traffic rights, flight crew etc.) and will make available to rival airline T´Way the necessary assets to enable it to start flight operations on the four overlap routes.

• Lufthansa and the Italian Ministry of Economy and Finance (MEF) (the current sole stakeholder of ITA) made commitments for short- and long-haul flights and for the Milan Linate airport. One example is that the parties must make available to one or two rival airlines the necessary assets to enable them to start non-stop flights between Rome and Milan and certain airports in Central Europe. On top of that, Lufthansa and the MEF can only implement the transaction following the Commission´s approval of suitable remedy takers.

Overall, it seems that the Commission is trying to make sure more than ever that the offered opportunities for competitors will actually have an appreciable impact.

Politics in the back seat

In the reality of airline mergers, political aspects are hard to overlook. Governments often have shares in airline companies – see the MEF as one example. And even where this is not the case, a country can still have commercial interests (such as jobs, taxes, prestige) in a domestic airline.

On the one hand, this can result in politicians trying to influence antitrust authorities to clear certain deals or, vice versa, to push companies to find compromises. One example would be the Italian Prime Minister Giorgia Meloni who said “Something curious is going on. The same European Commission which asked us for years to find a solution to the ITA problem, then blocks it when we do come up with a solution”. Such statements do not go unheard at regulators – just yesterday, Commission Executive Vice-President rebuked any allegations that the clearance of the transaction was politically motivated. Furthermore, before the Korean Airlines / Asiana Airlines clearance, South Korea´s transport minister appealed to the parties to address the competition authorities’ concerns.

On the other hand, the involvement of governments can be a strong advocate for clearance.  In Lufthansa / ITA, “the Commission took into account the fact that the MEF will retain a controlling stake in ITA […] and will continue to have incentives to have ITA compete against Lufthansa’s joint venture partners in North America […]”.

So, what lessons can be learned?

Overall, there are two main general takeaways from the development of airline merger reviews:

• First, no matter how established a remedy practice is, it does not mean that the Commission will not review and adapt the practice one day.

• Second, politics can play a role in merger control. It depends on the respective country and regulator whether involving politics has a positive or negative influence on a proceeding, and to which extent. While it is important to keep in mind that regulators do not operate in a vacuum, any political lobbying should be exercised carefully – most all antitrust regulators want to be seen as independent and neutral preservers of competition, not as tools for a political agenda.

Photo by Nikola Tasic on Unsplash.