EU Competition Policy

Prof Filip AbrahamKU Leuven and Vlerick Business School

What is Competition Policy?

Competition policy has the objective of managing competition in product markets through: merger control: preventing anti-competitive mergers and

acquisitions (M&A’s) antitrust policy

preventing cartels and other anti-competitive agreements preventing abuses of dominant position

state aid control (in the EU) limiting distortions to intra-EU competition and trade resulting from

national subsidies But allowing subsidies when it is in common (EU) interest

Competition is based on the territorial principle, not on the nationality of the companies involved

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Who is in Charge? no multilateral competition authority US

long tradition focus on dominant positions and M&A’s federal government and courts in charge

Europe national governments and EU Commission subsidiarity principle: EU Commission deals

with larger and cross-border cases

Asia recent interest in control of dominant positions

and M&A’s national governments in charge

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Why is Competition Policy Important for Business?

competition authorities can hurt companies by: blocking M&A’s, imposing fines and ordering the

repayment of subsidies negatively affecting the valuation of companies by

financial markets involving the company in a long and expensive battle

with the competition authorities causing severe reputational damage

companies should be prepared top managers should be aware of the basic rules of the

game laywers of the companies should have an expertise in

competition policy or/and the company should rely on specialized law firms

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European Fines in Recent Cases

Company Year Fine in millions of €

Sector

Intel 2009 1 006 computer chipsMicrosoft 2008 899 softwareSaint-Gobain 2008 896 car glassMicrosoft 2013 561 softwareMicrosoft 2004 497 softwareThyssen-Krupp 2007 479,8 elevatorsHoffman-La Roche 2001 462,2 vitaminsSiemens 2007 396,5 electrical partsPilkington 2008 370 car glassSasol Limited 2008 318,2 chemicalsMicrosoft 2006 280,5 software

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Anti-Trust: The EU against Microsoft

complaint by Sun Microsystems in December 1998

the ruling of the Commission on March 24, 2004 technical information for servers

bundling of Media-Player

fine of 497 mio €

court appeal for delay of sanctions rejected in 2004

December 22,2005: new fine of 280,5 mio for not complying with the ruling

September 2007: the European Court of First Instance backs the 2004 decision of the Commission

2008: fine of 899 mio € for not providing information to competitors. Microsoft appeals

2009: Microsoft accepts compromise: Windows allows choice between different internet browsers

2012: fine of 899 mio € is reduced in appeal to 860 mio €

2013: new fine of 561 mio € for breach of the 2009 compromise in Microsoft Windows 7 Service Pack 1.

several similar cases in recent cases: e.g. Google, IBM,…

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Merger Policy: Dealing with Cross-Border Mergers and Acquisitions

The “friendly” Take-over of Air Lingus by Ryanair

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Three Attempts of Take-Over

Ryanair is minority stakeholder of Aer Lingus with 29.8 % of the shares ahead of the Irish government with 25.1%

Case 1: 30/10/2006-27/06/2007: prohibition

Case 2: 8/01/2009-23/01/2009: case withdrawn

Case 3: 24/07/2012-27/02/2013: prohibition

Europe‘s largest low frills carrier 400 routes in 24 countries 51 bases, main: Dublin, Brussels South, Milan Bergamo and Stansted 305 aircraft, 62 routes out of Dublin “point-to-point”/”no-frills”

Ryanair

Ireland‘s old ”flag carrier“

66 routes ex-Ireland

3 bases (Ireland), main: Dublin

“point-to-point”/”mid frills

Aer Lingus

The Two Players

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Methods of Investigation

extensive use of standard investigative methods (questionnaires, interviews, site visit in Dublin, etc).

views from a large number of market participants inside and outside Ireland including competitors, customers, travel agents, consumer associations, public authorities and airport carriers

customer survey among passengers at Dublin airport

econometric analysis as complementary evidence regression analysis to identify the level of competitive constraints

between the merging parties and by competitors price correlation as an input to market definition

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The Relevant Market

main criterium: substitution in demand and supply

relevant product market: direct scheduled air transport passenger services

relevant geographic market “city-to-city" approach: routes between a given point (or

region) of origin an a given point (or region) of destination airports in a city/region are competing routes out of Ireland (Dublin) and London (Stansted) no significant impact of charter airlines

no separate market for "time-sensitive” passengers overlapping routes (= 46 markets in 2012 up from 35 in

2007) 12

Actual Competition: Market Shares of Passengers from and to Dublin

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combined market shares of Ryanair andAer Lingus increased from 80% in 2007 to 87% in 2012

Actual Competition:Overlapping routes

35 overlapping routes in 2007

46 overlapping routes in 2012

market positions in the overlapping routes of Aer Lingus and Rynair strenghtened in the period 2007-2012

Actual Competition: Market Shareson Overlapping Routes in 2012

46 overlapping routes combined market share

28 monopoly routes 100%

11 routes only competition from charter airlines

7 routes - very high market shares- competition from other

scheduled carriers who often connect passengers to their network hubs (e.g. British Airways, Lufthansa and Air France)

Horizontal merger guidelines, court rulings and case law state that very large market shares of 50% or more may in themselves be evidence of the existence of a dominant market position

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Actual Competition:Do the companies compete on overlapping routes?

Econometric analysis establishes that: Ryanair and Aer Lingus are each others’ closest

competitors on many routes Ryanair's presence is associated with Aer

Lingus charging around 7-8% lower prices when considering city-pairs and around 5% lower prices when considering airport-pairs.

Both airlines monitor each other prices and react accordingly

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Ryanair’s promotion materials

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Aer Lingus’ Promotion Materials

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Potential Competition

Irish airports are hard to penetrate for new competitors The Irish markt is a small peripheral market with limited

growth Aer Lingus and Ryanair have a strong base newcomers would face substantial sunk costs for

marketing, promotion, brand recognition EasyJet has tried and failed Several companies (e.g. BA) have left Dublin

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Vertical Integration

The Dublin Airport is congested

There are few slots available

There is runway congestion

There is terminal congestion20

The Efficiency Defence

Ryanair claims that:consumer benefits from cost savings from economies of scale and better management of Aer Lingus

the efficiency defence is rejected because:

Cost savings to be realised on Aer Lingus according to Ryanair

Million € per annum

staff costs 75-85

aircraft costs 35-45

airport charges 2.5-3.5

improved aircraft utilization 10.5- 1.5

fuel and oil costs 5-10

maintenance costs 50-70

distribution costs 9.5-10.5

advertising 6-8

total 200-250

Aer Lingus argues it is cost efficient and disputes the estimates of Ryanair

the Ryanair model is specific and cannot automatically be imposed on another airline

the cost savings and the benefits to the consumer are not verifiable ir consumer benefits from cost savings from economies of scale and better management of Aer Lingus

Aer Lingus could achieve many of the cost savings without the merger 21

No take-off…..

Ryanair offered commitments/remedies. Final remedies consisted of: divestiture of Aer Lingus’ operations on 43 overlapping routes to Flybe giving up a number of take-off and landing slots so that IAG/British Airways

could compete on 3 routes from London to Dublin, Shannon and Cork Flybe and IAG/British Airways committed to operate the routes for three years

The Commission rejected the final commitments/remedies: insufficient counterweight to the position of the merged Ryanair-Aer Lingus entity doubt on whether the proposed remedies could be put in place in a timely

matter uncertainty about the commitment to continue operating the routes after the

three years

National case by UK competition authority: Ryanair is asked to lower its 24% equity stake in Aer Lingus to reduce anti-competitive interference in Aer Lingus’ business strategy 22

State Aid Policy in the EUDealing with National Subsidies that Distort Competition

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What is a Subsidy?

governmentinvolvement

Evaluationof

Subsidies

subsidy instrument

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What is a Subsidy?The Banking Crisis

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What is a Subsidy? Focus on Several Instruments in the Banking Crisis

guarantees of bank liabilities

recapitalisations

impaired asset relief

support for bank restructuring 28

What is a Subsidy?Are Tax Advantages Considered as State Aid?

from an economic point of view, tax advantages can contain a subsidy element

EU has been cautious in legislating taxes first pillar issue: EU can legislate but many EU member states consider the right to tax as

a part of national sovereignty unanimity requirement for EU tax laws

recent global effort to close tax loopholes EU is increasingly using state aid policy to

force companies in paying higher taxes

What is a Subsidy?

governmentinvolvment

How big is the Subsidy?

benefit to the firm

cost to the government

Evaluationof

Subsidies

subsidy instrument

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Size of the Subsidy of National Governments to Banking in the Post-Lehman Period

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What is a Subsidy?

governmentinvolvment

How big is the Subsidy?

benefit to the firm

cost to the government

What Type of Subsidy? Selectivity

horizontal

sector- or firm-specific

regional

Evaluationof

Subsidies

subsidy instrument

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Selectivity: How to “Horizontalize”Banking Subsidies?

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Selectivity: The Double Irish overall corporate tax rate in Ireland is 12.5% double Irish tax scheme used by e.g. Apple Apple attributes global profits to its Irish

subsidiary the Irish-based subsidiary makes royalty

payments to a second Irish subsidiary managed from a tax haven with zero profit taxation

the Irish-based subsidiary from Apple makes royalty payments to the second subsidiary and claims those payments as tax deductions in Ireland

is this a selective subsidy?

What is a Subsidy?

governmentinvolvment

How big is the Subsidy?

benefit to the firm

cost to the government

What is the Objective of the

Subsidy?

What Type of Subsidy? Selectivity

horizontal

sector- or firm-specific

regional

Evaluationof

Subsidies

Does subsidy distort competition?

subsidy instrument

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Does Subsidy Distort Competition?The Banking Case

important cross-border dimension: banks compete across national jurisdictions

member states do not internalize effects beyond their national jurisdictions

danger of subsidy wars and conflicts between member states

different ability and willingness to support banks

incentives of banks: avoid distortions between aided and non-aided banks, avoid moral hazard

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What is a Subsidy?

governmentinvolvment

How big is the Subsidy?

benefit to the firm

cost to the government

What is the Objective of the

Subsidy?

What Type of Subsidy? Selectivity

horizontal

sector- or firm-specific

regional

Evaluationof

Subsidies

approvalprohibition

conditional approval

Does subsidy distort competition?

subsidy instrument

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Conditional Approval in Banking: Guidelines on Rescue Aid

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Conditional Approval in Banking: Guidelines on Restructuring Aid

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Final Decision: Conditional Approval

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