UK Wet Lease Arrangements and Merger Control Rules

Background

In August 2018, Aer Lingus and CityJet announced that they would enter into the wet lease arrangement, to take effect from 28 October 2018. The arrangement involved Aer Lingus taking over the operation of CityJet's London City to Dublin route, with CityJet providing the aircraft (in Aer Lingus livery), maintenance services, insurance and crew (these three elements making the aircraft lease "wet", as opposed to a "dry" lease of the aircraft alone), and transferring to Aer Lingus its slots at London City and Dublin airports, and its customer relationships.

Why did the CMA launch a merger inquiry?

This was another example of a transaction not being notified by the parties, but picked up by the CMA's mergers intelligence function.  The CMA opened a formal inquiry on 29 October 2018.  Its first step was to determine whether the arrangement constituted a 'relevant merger situation' as defined in s.23 Enterprise Act 2002 (two or more 'enterprises' have ceased to be distinct and either the value of the turnover in the UK of the enterprise being taken over exceeds £70 million or the enterprises have a share of supply of 25% of more in goods or services). 

The most interesting aspect of the decision is the CMA's analysis of whether the wet lease, customer relationships and slots together amounted to an "enterprise". 

The parties argued that the three elements of the arrangement did not together constitute an enterprise, because the arrangement concerned a single route, it did not include certain important components of offering air transport services (e.g. ground handling operations or a transfer of pilots and other aircraft crew from CityJet to Aer Lingus), the slots could have been obtained by other means and the value of the customer relationships was insignificant.

The CMA rejected these arguments.  It referred in particular to the 2015 judgment of the Supreme Court in the Eurotunnel case, concerning Eurotunnel's acquisition of certain assets of a cross-Channel ferry business.  In that case, the Supreme Court held that the test is one of economic continuity.  An acquirer of assets acquires an “enterprise” where:

• those assets give the acquirer more than might have otherwise been acquired by going into the market and buying factors of production; and
• the extra is attributable to the fact that the assets were previously employed in combination in the “activities” of the target enterprise. The period of time between cessation of trading and acquisition of control of the assets may be a relevant factor, but is not necessarily decisive

Applying that test in this case, the CMA noted that:

• the fact that the wet lease covered only one route and did not include ground handling did not prevent the subject of the arrangement from constituting an enterprise.The lease of the aircraft allowed continuity between CityJet's and Aer Lingus's operation of the route.A transfer of employees under TUPE was not a necessary condition to the transfer of an enterprise.In this case it was unnecessary because the wet lease secured the availability of crew to allow Aer Lingus to operate the route;
• the slots were critical to the operation of the route, because London City and Dublin are both slot-constrained. The parties acknowledged that it was unlikely that slots would have been available unless an existing operator ceased or reduced its operations.The inclusion of the slots was critical to the Aer Lingus's entry onto the route; and
• the transfer of customer relationships ensured that Aer Lingus was able to start operations with the benefit of booked customers and referrals.Existing customers who had booked with CityJet were offered a transfer to Aer Lingus or a refund (over 90% opted for a transfer) and customers visiting the CityJet website after the start date were redirected to Aer Lingus.The transfer of customer relationships is not a typical feature of an acquisition of bare assets.

The CMA decision suggests, although it is not certain, that all three of the elements of the transaction were necessary in order for it to constitute an enterprise.  It commented:

"The simultaneous transfer of CityJet’s customer relationships in addition to the wet lease and slots reduced the risk for Aer Lingus that it would be short of customers in its initial period post-commencement of the Merger. Conversely, the fact that Aer Lingus was transferred slots ensured that its leased aircraft, crew and transferred customers did not remain grounded."

This gave Aer Lingus more than it would have obtained by going out to the market, allowing it to continue the service on a seamless basis.

The CMA therefore concluded that the transaction might constitute the transfer of an enterprise.

CMA's decision

The CMA cleared the transaction because it had not resulted in or would be unlikely to result in a substantial lessening of competition:

• CityJet had already made a strategic business decision to focus on its wet lease operations and to exit its scheduled flight routes by the end of 2018. As a result of this change in business direction, it was inevitable that CityJet would ultimately have exited the London City to Dublin route for strategic reasons;
• No airline other than Aer Lingus would have had the capabilities, the strategic intention or the desire to enter into an arrangement with CityJet for this particular route – the fact that CityJet marketed this route only to Aer Lingus supported this finding; and
• The exit by CityJet and its assets from this route would not represent a substantially less anticompetitive outcome than the effect of the merger.

Comment

The CMA's decision highlights the fact that the legal definition of a 'relevant merger situation' is sufficiently broad to include transactions that may not immediately be considered subjects of potential merger controls, such as those involving a wet lease.

Offering some reassurance to aircraft lessors and lessees, the CMA's findings emphasise the fact that it was not the wet lease alone – including the aircraft, crew, maintenance and insurance – that triggered this inquiry. The other two core elements of the transaction, namely the transfer of customer relationships from CityJet to Aer Lingus and, crucially, the acquisition of landing slots, were essential to the analysis. Certainly this finding by the CMA is aligned with the decision from other competition authorities that have investigated wet leases as possible mergers, such as the German competition authority's 2017 decision into the wet lease arrangement between Lufthansa and Air Berlin. 

More widely, the decision is an important application of the principle set out in the Eurotunnel judgment, and demonstrates the need to consider merger control analysis in any situation where there is an acquisition of the use of assets of, or other elements of, a business that is to be continued in some form by the acquirer, even it is not structured as a conventional business acquisition.

More Information

If you would like to hear more about this and other competition developments, please get in touch with Peter, Nicholas or one of our Competition team.