Competition lawyers slam EC over BA-KLM merger failure

The European Commission (EC) is under attack from lawyers over its handling of the proposed merger between British Airways (BA) and KLM.

The now defunct talks between the carriers, which would have resulted in a £5bn merger, fell through on 21 September following two and a half months of negotiations, after both sides failed to reach agreement on a number of fundamental questions surrounding the tie-up.

Slaughter and May represented BA in the UK, led by corporate partner Stephen Cooke with competition partner Philippe Chappatte. Sullivan & Cromwell advised in the US, led by corporate partner Frank Aquila and competition partner Daryl Libow, with Zuckert Scoutt & Rasenberger.

Linklaters‘ Dutch alliance partner De Brauw Blackstone Westbroek acted for KLM, led by Pierre Nijnens, a partner at the London office. US advice was provided by Cravath Swaine & Moore, led by corporate partner Daniel Cunningham.

The EC is examining issues arising from consolidation in the airline sector. Transport commissioner Loyola de Palacio is working on proposals examining whether slots between alliances can be sold instead of being exchanged. Sources say that confusion over the issue has made it difficult for the EC to rule on competition issues arising from carriers’ mergers or alliances.

A number of competition lawyers argue that, during the BA-KLM talks, the EC demonstrated a lack of knowledge in regulating the consolidation. One lawyer says: “The EC team is desperately trying to produce a policy on a world that is changing on a day-to-day basis.”

The EC specifically has been criticised after the merger taskforce published a five-page questionnaire to be sent to European airline rivals, suggesting remedies to ensure fair competition if the merger went through. Stephen Walsh, legal director at BA, says: “We’d been keeping the commission informed, and they had consulted our competitors on what would have happened if we had formed a company.”

The EC suggested a range of remedies which may have eased through the BA-KLM merger, such as the Dutch airline selling off its low-cost airline Buzz. But one competition lawyer observes: “It’s very unusual to have a meeting with the merger taskforce in advance of clarification to the relevant markets; that, and also looking at the remedies in advance and having them road tested in advance. There has not been a definitive point of reference in their case law on a complicated [deal] such as this.”

But a spokeswoman for the Competition Directorate General says that the EC was involved in the failed merger talks between KLM and Alitalia earlier this year, giving it a point of reference. Commenting on the publication of a questionnaire, she says: “I don’t see anything unusual in consulting people that understand the subject matter. It shows that [the EC] is not working in an isolated environment.” She also argues that mergers between airlines would be regulated under the EC’s merger policy, which has been in place since 1990.

Only Swiss Air has to date been successful in merging with another airline – Sabena – in which it holds a 49.5 per cent stake, which it is hoping to increase to 85 per cent, depending on Brussels’ approval. It is understood that BA was also hoping to acquire 49 per cent of KLM.

The EC is examining the alliances between United Airlines and Lufthansa, and KLM and Northwest Airlines at present. Under the alliance, the parties concerned have ownership of a high number of slots at airports, which would be one of the issues that the EC is hoping to address. Legal sources say that the EC blueprint will also examine route-to-route and indirect routes agreements between alliances.

Commenting on the BA-KLM talks, a lawyer close to the deal concedes: “In informal meetings with the commission, there were talks on the regulatory costs [of the merger]; there were actually few competition concerns. There were about 10 or 11 overlapping routes, and a question of dominance over the UK and Dutch routes.”

However, a number of other regulatory hurdles eventually put a stop to the merger. The majority of airlines tend to form alliances rather than merge, which gives them access to a larger number of airport slots while allowing them to keep in place bilateral agreements for landing rights with other countries.

Because an airline is substantially owned and effectively controlled by the nationals such as local government or shareholders, route rights are awarded to a specific carrier. So if the BA-KLM merger had been successful, KLM would no longer be a Dutch airline, therefore jeopardising its bilateral agreements.

One competition lawyer argues that even if EC guidelines had been in place before talks commenced, there were a number of other regulatory hurdles that staggered the progress of the merger, specifically the “open skies” policy between the UK and the US.

The UK allows only two US airlines to fly into Heathrow at present, United Airlines and American Airlines, the latter of which has an alliance agreement with BA. The Justice Department of Transportation has not granted anti-trust immunity to this alliance, but has granted this privilege to KLM, which has aligned itself with Northwest Airlines. The merger with KLM would have given BA greater access to the US market.

The Justice Department on Transportation, however, is reported to have said it would not grant anti-trust immunity to BA had the merger been successful, unless some agreement with the UK Government could be reached on the open skies policy.

UK-US open skies talks are scheduled for later this month.