Why Brussels will say no to Ita-Lufthansa. Unfortunately
The agreement for the sale of Ita to Lufthansa moves to the second phase of analysis. The analysis by Ugo Arrigo for LaVoce.info
In January, upon expiry of the deadlines set in the first preliminary phase after the notification of the business combination, the European Commission decided not to give the green light to the May 2023 agreement between the Italian Ministry of Economy and Finance and Lufthansa for the sale of Ita Airways.
We therefore moved on to the in-depth investigation of the second phase, aimed at verifying in great detail the compatibility of the aggregation with the European rules on mergers. The deadline for the new decision is now June 6, after the expiry of the agreement with the Lufthansa group at the end of May and also the eve of the vote for the European Parliament, which will start the procedure for the renewal of the Commission itself.
The Commission's decision may be surprising if we consider the degree of liberalization of the Italian air transport market, among the highest in the Union and certainly the highest among the largest countries. In fact, in none of them does the historic national carrier (in our case Ita which succeeded it) have such a small market share and the major low cost company such a high one. After liberalisation, completed in 1997, the Italian market more than tripled and the spaces created with its growth together with those freed up by the weakness of the national carrier were all occupied by the new low cost carriers, who thus achieved market shares unthinkable elsewhere.
THE ITALIAN MARKET BY SEGMENTS
The Commission's concern that "the operation may reduce competition in the market for air passenger transport services on various short and long-haul routes within and outside Italy" must therefore be verified on the basis of the numbers of the different segments of the Italian market, assessing where there is currently competition with the Lufthansa group and how it could possibly be reduced following the merger.
The macro segments are given by domestic flights, international intra-European flights and intercontinental flights, which include medium haul to North Africa and the Middle East and long haul to the rest of the world.
Chart 1 – Market shares on domestic flights (2022)
In 2022, in the domestic flights segment, Ryanair transported 16 of the 32 million passengers, with a share of almost 50 percent, holding a position that in the other major countries is firmly held by their respective national carriers. The low-cost carriers as a whole, including Easyjet, WizzAir and Volotea, reached 25 million passengers and 78 percent of the market. The new carrier Ita Airways, now growing, was the second operator in 2023, with just under 6 and a half million passengers and 20 percent. Since the Lufthansa group was not present in this segment, the aggregation could only strengthen Ita and with it also the degree of competition towards the dominant operator Ryanair.
Chart 2 – Market shares on intra-Europe flights (2022)
The segment of international flights within Europe (87 million total passengers) also sees the predominance of low-cost carriers: the Ryanair group had 37 percent of the market in 2022, while all the low-cost carriers, excluding those belonging to national carriers, reaches 62 percent. The remaining 38 percent belongs to groups, including intra-group low cost carriers, or individual traditional carriers and is divided as follows: the three large European groups together have 27 percent, of which Lufthansa and Iag (British, Iberia, Vueling and Aer Lingus) just over 10 percent each, Air France-KLM 6 percent; then there is Ita with 3.5 percent and all the other carriers, flying the flag of smaller and regional countries, with 8 percent. In the hypothesis that Lufthansa had already had full control of Ita in 2022, its share would have been 14 percent instead of 10 percent, with a probable effect also in this segment of increased competition compared to the dominant low-cost carrier , rather than the opposite.
In assessing the effects on competition, however, the European Commission seems to have looked not at market segments, but only at specific routes, as can be seen from the press release with which it announced the transition to the second phase: "Lufthansa and Ita are close competitors in the supply of passenger air transport services on certain routes to and from Italy. The deal could reduce competition on short-haul routes connecting Italy with central European countries. On some of these routes, Lufthansa and ITA compete head-to-head with non-stop connections with only limited competition, mainly from low-cost carriers, such as Ryanair, which in many cases operate from more remote airports."
The "certain" routes are undoubtedly those that connect the Ita airports of Fiumicino and Linate with the Lufthansa hubs of Frankfurt and Munich, on which the conditions of competition are however completely similar to those concerning connections with the hubs of the other major European carriers, such as Paris Charles De Gaulle and London Heathrow.
In this season and on a typical weekday, from Linate and Fiumicino to Frankfurt there are only Lufthansa and Ita flights, 11 in total from the German group and 3 from Ita. Instead, from Fiumicino to Munich there are 5 from Lufthansa and only one from Ita. Therefore, it is true that with aggregation competition would cease. However, this season there are only Air France and Ita flights from Linate and Fiumicino to Paris Charles De Gaulle, 8 in total for the French carrier and 4 for Ita. And in this case the two carriers are allies, both being part of the global SkyTeam alliance, so they are not in competition. Therefore, if Ita landed in the Lufthansa group, leaving SkyTeam, it would reduce competition on Frankfurt, but it would increase it on Paris, and also on Amsterdam, on whose routes in addition to KLM there is Easyjet. As regards connections with London Heathrow from Linate and Fiumicino, but also from Malpensa, there are exclusively British Airways, for a total of 16 daily flights from the three airports. Therefore, a solitary monopolist.
The problem of poor competition in the large European hubs does not actually only concern connections from Italy, but is generalized and historical: it arises from the original rules of liberalization which allowed the dominant carriers to retain all the slots they possessed, the so-called "grandfather rights".
The EU Commission should not forget this original sin and bring up the topic only in relation to the ITA project with Lufthansa. If it then came to the conclusion that the aggregation is not possible for reasons of lack of competition in the European hubs, then Ita could not aggregate with anyone else nor could anyone else aggregate in the future with the large carriers that dominate their hubs.
INTERNATIONAL ALLIANCES
Chart 3 – Market shares on flights outside Europe (2022)
At this point it remains to examine the intercontinental flight market. It is very different from the previous two, on the one hand due to the almost total absence of low cost carriers, which only cover some routes towards Morocco and some Middle Eastern countries, on the other due to the multiplicity of traditional foreign carriers that connect the their countries with Italy. Adding up all those with less than 3 percent of the market we arrive at 55 percent overall. In the long haul the first carrier, with a 10 percent share, is Emirates, which connects not only the Emirates to Italy, but also Malpensa to New York with fifth freedom connections, followed by Delta Airlines with 8 percent and from Ita with 7 percent.
For the EU Commission in this segment "The operation could reduce competition on some long-haul routes between Italy and the United States, Canada, Japan and India, due to strong competition between ITA, Lufthansa or the Lufthansa joint venture partners" ( United Airlines and Air Canada). It's really like this? Until now Ita was part of SkyTeam together with Delta and Air France-KLM. If Ita merged into Lufthansa it would leave SkyTeam for Star Alliance, ceasing to compete with United, which is part of the second alliance, but starting to do so with Delta. But the competition doesn't diminish, it simply shifts due to changing alliances.
We have seen that in the domestic and European segments, the aggregation of Ita with Lufthansa would increase Ita's ability to compete with the dominant operators in these markets, while in the intercontinental segment the competition would shift due to the change of alliances, but overall it would not decrease. There is therefore an apparent error in the Commission's reasoning by negatively evaluating the reductions in competition where they occur, without symmetrically appreciating the increases in competition where they occur, with the latter potentially greater than the former. Unless the Commission is also sensitive to changes in competition and therefore to changes in the balance between the large European groups.
At this point the original sin of European antitrust emerges: being entrusted directly to the Commission rather than to an independent Authority, as happens in individual countries and also in ours with the Competition and Market Authority. The European Competition Commissioner is the European equivalent of a minister. Who guarantees the guarantor? Who guarantees that it is independent and guarantor of (only) competition and not of (large) competitors?
Article published on lavoce.info
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/smartcity/perche-bruxelles-dira-no-a-ita-lufthansa/ on Sun, 18 Feb 2024 06:30:36 +0000.