Approved, with restrictions, the transaction between Latam, Iberia and British Airways

During the judgment session of 8 March 2017, the Tribunal of the Administrative Council for Economic Defense – CADE approved, with restrictions, the joint-venture  between TAM and Latam Airlines Group, and Iberia and British Airways (International Airlines Group – IAG – members), concerning cargo and passenger air transport in the routes between Europe and South America (Merger 08700.004211/2016-10).

According to the Reporting Commissioner, João Paulo de Resende, the merger causes competitive problems that affect the direct route São Paulo – London regarding the passenger air transport. Mr. Resende stated that the efficiencies submitted were not sufficient to “counterbalance the creation of a monopoly in this important route between Brazil and Europe”.

To minimize the identified anticompetitive effects, a Merger Control Agreement (ACC in its acronym in Portuguese) was negotiated. The agreement aims at mitigating the existing entry barriers in this route, to limit the exercise of market power by the airlines involved in the joint venture and materialize the transference of the benefits obtained with the transaction to the final consumers.

Remedies

By means of the ACC, the parties committed to make available, without cost, for potential competitors, slots (timetable of arrivals and departures) at London Heathrow airport or at London Gatwick airport, according to the choice of the potential entrant. The slots should be available for ten years and for daily flights without stopovers departing from Guarulhos airport, in São Paulo.

The parties also have to formalize the Special Prorate Agreement – SPA, also known as Interline Agreements, with the potential entrant, in the best conditions signed with a third party (except intra alliance), from the cities of São Paulo and London. Resende explained in his vote that the economic viability of international transatlantic flights (main route) depends on the supply of local ramifications. Thus, it is necessary to ensure to potential entrants the means to attract passengers coming from others cities than São Paulo and London, in order to guarantee the principal route’s minimum capacity.

The Interline Agreements enable an airline to sell its flights jointly those of another company, attracting consumers that are not coming from the destinations of the airline’s direct flights.  

According to the ACC, the interested airline (potential entrant) will have the right to choose among 15 routes departing from London and eight routes departing from Guarulhos. The potential competitor will also be a “most favored nation” within the SPAs signed by the parties with others airlines, with the exception of those signed with the members of the OneWorld alliance and those resulting from regulatory decisions.

 Under the conditions established in the ACC, if no potential entrant shows interest in the operation of the São Paulo – London route, the parties  committed themselves to maintain the current capacity level (seats offer) operated by both airlines in this same route, for seven years.

“This measure aims to guarantee that the monopolist’s market power would not be exercised in a context of minimum capacity, since it would not make sense to raise the prices and to have a lower demand. This commitment maintained including in the hypothesis in which a new airline starts to operate this route and decides, later on, to abandon it. In this case, the parties will have to reestablish the agreed minimum capacity until the remedy’s final period”, as explained by Commissioner Resende.

It was determined, finally, that Latam should create two additional routes between Brazil and Europe, one of them departing of one city that is not São Paulo nor Rio de Janeiro. The agreement is valid for seven years.

The fourth remedy was not related to a specific competition concern, but it aimed at ensuring that the efficiencies presented by the parties will be, at least partially, forwarded to consumers. Its purpose is to create “a demand towards a less congested national airport, allowing that passengers from other Brazilian cities to have access to a direct flight to Europe”.

After the Reporting Commissioner’s vote, Commissioner Paulo Burnier presented his vote, making considerations about the importance to seek, whenever possible, structural remedies in mergers cases, without long deadlines for the obligations’ compliance.

According to Burnier, the central mission of the competition authorities is to   “make a  timely intervention, preferentially structural, with the needed and effective remedies, adequate and able to be implemented in a short time period”, supporting his contribution on the recent International Competition Network – ICN’s Merger Remedies Guide, published in 2016.

After that, Commissioner Burnier decided to follow the Reporting Commissioner’s vote, understanding that the proposed remedies presented an appropriated solution, even though a permanent structural solution would be, in his perspective, preferable than the temporary structural solution presented at the ACC.