The European Commission Prohibited the Takeover of Aer Lingus by Ryanair - Case Study Example

Introduction There has been a concern of modeling competitive relationships within the passenger air transport industry (Gaggero, 2010). The main impetus of this measure is the increasing significance of deregulation and hence a competitive market among the passenger air transport network. Network industries such as the aviation and transport industries are considerably influenced by competition and regulation (Giorgio, 2007). In order to ensure fair and healthy competition in the air transport industry, a number of regulations have been adopted. These regulations are also in such a way as to protect the passenger rights. The industry must balance public values and private considerations (Paul, 2004). Monopolistic networks are regulated through liberalization. The British Airways initiated a takeover bid of BMI, which received opposition from the European Union in 2007. The European Commission prohibited the takeover of Aer Lingus by Ryanair. The Ryanair is a leading flight service provider that uses the internet to market its services. Main Debate The European Commission is responsible for the enforcement and implementation of the EU regulations (Clause and Isabela, 2004). It conducts surprise inspections, and in the event a company is found to be doing illegal businesses, which restrict competition, it is fined up to 10% of their annual turnover. According to the European Commission, elimination of a competitor in the Irish airline would result in harmful effects to consumers in a general sense (Clause and Isabela, 2004). This paper is a critical analysis of competition and regulation in the airline industry based on British Airways takeover bid on BMI. In this stance, a link is established between strategies of airline business and network of structures and the resulting completion in the divergent models of business structures. This is a highlight of market structure stability and the role played by the completion and regulation policies. The British Airways industry trades as a BMI or British Midland International. The airline is headquartered at the Donington Hall in Castle Donington near East Midland Airport in the United Kingdom. The airline has destinations to Europe, Middle East, Africa and Central Asia from its operational base at London Heathrow Airport. The BMI is a recognized subsidiary of the IAG. It was bought from the Lufthansa in the 2011. Other subsidiaries included the Bmibaby and the BMI Regional. Despite the deregulatory measures from the European Union single market, the British Airways intends to merge the BMI into its system. The BMI Group facilitated and boosted flight services remarkably. In the year 2002, for example, staggering 7.95 million passengers were served. By the year 2005, the number had risen to 10.1 million. The British Airways on-going takeover bid is, therefore, a welcomed idea in this perspective (Lars and Pervez, 2004). There was a complete takeover of BMI by Lufthansa in the year 2009. This aimed at suspending the loss-making routes thereby adjusting capacity. The measures employed included fleet reduction of nine aircraft from the main airline fleet among others. Following the regulations and competition, seasonal routes from London Heathrow to Palma and Venice were discontinued unceremoniously. Critically analyzing this restructuring of the BMI system, it turns out that discontinuing some airline will result in the loss of around 600 jobs and more than 10 percent of the airline’s workforce. However, it can be stated here with regard that in the year 2010 flight numbers were reduced from six to four between Dublin and London. This was attributed to poor economic climate that led to low consumer demand. The Dublin base was closed down due to the dying consumer demand (Lars and Pervez, 2004). Lufthansa made public it plans to sell the BMI in September 2011. Two companies presented their bids to take over the BMI. By the onset of November, the same year, the British Airways had presented its interest ahead of the Virgin Atlantic. The IAG under the British Airways won the bid by being the first and highest bidder. The deal to sell the BMI included the BMI Regional and the Bmibaby separately. The BMI Region and the Bmibaby act as subsidiaries to the BMI and the AIG which are the main service providers. The British Airways takeover bid of the BMI did not go down well with the European Union especially now that the Virgin Atlantic had lost on bidding. Attempts made to stop the British airways takeover of BMI have remote chances of it being approved by the EU competition commissioner (Lars and Pervez, 2004). Approval of such claims would result in unprecedented economic hitch between the two blocs. This will subsequently destabilize the market relations of the two airlines. Competition would seriously dent the consumer choice in the single market. Reports have revealed that the British Airways on-going takeover of BMI will be given a go-ahead without further enquiry from the EU (Barry and Angus, 2004). The acquisition of the BMI was envisioned to tap half of all flights in Heathrow. With these considerations, the BA made a decision relinquishing 14 prized landing slots to allay competition concerns. However, this remedy was criticized to be woefully inadequate. The concept of balancing between competition and regulation in the Airways industry is one that fascinates businesses and politics in equal measure (Lars and Pervez, 2004). The issue of a single market for air transport came with benefits to passengers; there is a wider choice of carriers and services with reduced fares, unlike the case were in the past. When critically viewed, it comes out that the level of liberalization is insufficient. Liberalization culminates in the creation of an open market that provides for fair competition. This means that other measures are needed in order to protect the passenger’s interests and ensure that their profit margins are optimized from the single market. The US deregulation Act of 1978 on the domestic airline industry was a significant precursor of deregulation moves elsewhere in Europe between the years 1992 and 1997. It was perceived that the industry mature enough to survive under conditions of open market that is characterized by a lot of completion rather than economic regulation. The hub-and-spoke was the dominant network structure. It was believed to add value to cost and demand in equal measure. Under regulation, it was difficult to live up to the expectations of the demand side benefits. This was due to the regulatory barriers upon entry. Economic regulation brought with it the choice of frequency and ancillary service completion because of constrains in fare and market completion. The deregulation measures enhanced the liberalization of British Airways industry. The industry would adapt strategies that enabled it to meet their market demands and also reorganize themselves globally. Passengers could easily access flight services on a broader geographical scope under the hub-and-spoke network structure. The passengers had the potential of taking flights to a number of destinations. This business regulation promoted high service delivery that led to development of the market at a time when the airline industry had not gained a lot of popularity among many people especially in the European Union (Clause and Isabela, 2004). It can be said conclusively without lose of generality that the small centres in the feeding spokes enabled service carriers to operate large aircrafts between certain centres. This helps in increasing the passenger volumes significantly. This led to lowered costs per seat that was available. Insofar as, there has been a lot of deregulation on the route schedules and pricing for a number of years, many aspects of the airline industry are still highly regulated. The British local government has implemented the regulatory policies of the airline industry. The local governments own and manage airports in their regions and thus they are in full charge of the key bottlenecks to the airport and the airline industry. According to the British airport local commissions, it comes out that such market mechanisms as the bidding process are allocated gates without any formality (Clause and Isabela, 2004). On the basis of deregulation, it is also revealed that most international routes are deregulated gradually through bilateral open-sky agreements (Brian, 2009). This is evidenced between the UK and EU. The UK and EU played a leading role in the formation of merger groups. Different airline industries came together in agreements to form trading organizations in the air transport sector. These are agreements meant to allow the concerned countries to take flight to and from each other without regulatory measure or sanctions. The underlying statute of the agreements does not necessarily require a guarantee for public safety. However, it should not be adverse to public interests (Clause and Isabela, 2004). According to Wald et al., Lack of restrictions in the airline industry does not allow for a competitive edge in the market (2010). The British Airway takeover bid of BMI was aimed at maximizing it profit margins. The profits in the airways industry are volatile hence without well stipulated regulatory procedures they may not be realized. Free markets are found to be working well in industries where there are substantial fluctuations. Fluctuations act as incentives as they make the industry be innovative in a bid to respond to any change in demand and costs. This is prevalent in the British Airways industry. With its takeover of BMI, it expects to expand its scope of service delivery and improve the quality of services offered to the passengers. This can only be realized under a competitive market as that in the EU. There are also federal regulations that pertain to some airports. The British Airways employs federal regulations to avoid congestion in its busy airport. However, this has resulted to the lagging behind of the market realities. In as much as the end- consumer for the airline tickets face a market driven menu of prices there are key inputs to the Airways industry that are allocated using the non-market mechanisms. Hence, there still exist regulatory elements even after the many years of deregulation (Paul, 2004). Deregulation came with changes in the structure of airlines. Most airlines started to use the hub and spoke system. The British Airways was not alone in this. Other hubs included the United’s Chicago O’Hare, Denver, and Washington’s Dulles. The hub and spoke system has equalized competition significantly, as it has allowed passengers from small and midsized cities to be highly connected. It is also noteworthy that the system has increased airline concentration at the hubs. This has subsequently led to an increase in the carrier choice at non-hub cities and the frequency of service but also to increase the market concentration at hubs. It should be noted here that the hub-and-spoke system under this regulation is a bit conditional on the airway and airport infrastructure. The system is time consuming, labour intensive and thus leads to an expensive venture. The network connections affect the favored hub- and- spoke in linearly connected airways. The European Union flight regulations provide for passenger right and protection of citizens. This has facilitated mobility and social integration in the airways industry (Paul, 2004). Despite these regulatory measures, a number of passengers are not aware of their rights! This is probably because there has not well spelt out implementation procedures. National authorities in the airways industries interpret and apply the law in different ways, which leaves passengers confused. The European Community is actively involved in regulating air transport. These regulations are enacted by the EC (Giorgio, 2007). The airline industry has been noted to be a complex mix of competitive and regulated industry. With this said, it only remains that the policy choices are likely to affect the level of competition (Giorgio, 2007). Central policies are required as mechanisms for allocating airport facilities and boarding gates. The British Airways relies on non-market mechanisms to allocate facilities that are almost scanty. Policy changes are required in order to allow for competition in the market (Paul, 2004). Competitive bidding for such facilities as boarding gates and landing rights is likely to encourage competition among the airlines. It might also promote supply increase by the airport authorities when the bid values are found to be higher than the actual costs. Regulatory measures such as the antitrust policy may also affect competition in the airline industry. The antitrust policy aimed at establishing a merger (Joseph, 2003). The merger decisions were championed by the UK and the EU blocs. The companies stand high chances of developing new products in an efficient way. Costs are reduced by coming together as a merger. Increasing the production efficiency leads to a competitive market especially in the air transport industry. The EU has made efforts to move towards a liberalized market. This will play a leading role at expanding its profit margins and tame any effects of AIG and BMI now under the British Airways (Stephen, 2011). This was however lampooned that the merger was likely to increase flight charges hence inconveniencing passengers and likely consumers of these services. On the flip side, the concentrated markets are likely to bring benefits as it will have created a larger network with frequent and convenient flights (Martin, 2007). The mergers also provide incentives for efficacious managerial skills and dominant business practices. It is worthy recommending that the mergers should harmonize these two conflicting entities in the airline industry. Another significant regulatory dimension involves imposing substantial foreign ownership of airlines and on domestic flights by foreign-owned airlines. This will increase the level of competition for both international and domestic flights (Gillen, 2005). The increased competition in the European single market has been a key factor contributing to its attractive nature for other companies to opt joining forces. The British Airways industry operates in an environment where prices and domestic routes are set given the market conditions. The access to key inputs such as airport boarding gates is determined by the non-market mechanisms. The policies that have been set to allocate key inputs are speculated to yield efficient outcomes (Gaggero, 2010). Restructuring the EU airline industry would give the Commission hard times controlling non-competitive practices and malpractices (Ludwig and Elmar 2011). The EU advocates liberalization so as to open up markets for competition. This will allow consumers, especially passengers, to benefit from lowered prices and new services which are efficient and consumer-friendly. In the long run, the economy becomes competitive. Before the national air flight markets, there were strong monopolistic systems in the airline industry. There was only one carrier with limited regulations in the British national air transport market. The international air travel transactions were under strict national pacts. There is a need to differentiate the between the monopolistic competition, oligopolistic competition and models of oligopolistic competition. The first one is intended to optimize and/or maximize flight structures between airports and is largely applied to complex hub-and-spoke systems. The coordination charges and costs are remarkably high under these systems (Giorgio, 2007). The models have an extensive network of optimization procedures. This will enable companies to come up with feasible and viable flight schedules as directed by the passenger demands, capacity constraints and flight restrictions. Monopolistic models that lack extensive network optimization operate on simpler network structures (Giorgio, 2007). Conclusion In conclusion, a tiff prevailed between the British Airways and the EU upon acquisition of the BMI from the Lufthansa. The British Airways was the first and highest bidder hence they took over the running of the BMI with its subsidiaries. Proper regulatory measures are thus required in order that there is a fair and competitive market in the airline industry. Open sky judgements and meetings are invaluable for the future of European aviation (Brian, 2009). This will have an impact on the worldwide regulation of air transport. The EC plays a leading role in implementing the European regulations of air transport (Giorgio, 2007). Under the EC management, an allocation procedure is presented to serve the interests and needs of air carriers and consumers and thus comply with international laws. These regulations ensure a competitive market in the airline transport industry. It worth recommending that proper regulatory measures be established to control airline businesses. This will guarantee passenger welfare and interests. For instance, the UK and EU intervention to form merger groups an idea that works to both the interests of the passengers and the service providers in the Airline Industry. Unscrupulous service providers should undergo punishment accordingly to maintain a competitive market economy. This will ensure continual sustainability and survival of the Airline industry. List of References Barry, J. R. and Angus, M. (2004). Competition Law and Policy in the EC and UK, 3rd edition. London: Routledge. Brian, F. H. (2009). Beyond Open Skies: A New Regime for International Aviation, 2nd edition. London: Kluwer Law International. Clause, D. E. and Isabela, A. (2004). European Competition Law Annual 2002: Constructing the EU Network of Competition Authorities. Oxford: Hart Publishing. Gaggero, A. (2010). Airline Competition in the British Isles. Transportation Research: Logistics and Transportation Review. 2 (E), p270-279. Gillen, D. (2005). Regulation, Competition and Network Evolution in Aviation. Journal of Air Transport Management.11 (1), p161-174. Giorgio, M. (2007). Ec Competition Law. Cambridge: Cambridge University Press. Kokkoris, L. (2010). The Reform of EC Competition Law: New Challenges. Lars, O. and Pervez, N. G. (2004). European Union and the Race for Foreign Direct Investment in Europe. Emerald: Emerald Group Publishing. Ludwig, W. and Elmar, G. (2011). Handbook on Aviation Law. London: Kluwer Law International. Martin B. (2007). The Impact of EU Law on the Regulation of International Air Transportation. New York, NY: Ashgate Publishing, Ltd. Stephen, H. (2008). Straight and Level: Practical Airline Economics, 3rd edition. New York, NY: Ashgate Publishing. Stephen, S. (2011). Airline Marketing and Management, 7th edition. London: Ashgate Publishing Ltd. Wald, A., Fay, C. and Gleich, R. (2010). Introduction to Aviation management. London: LIT Verlag Munster. Bibliography Alessandro, C. (2008). The Airline Industry: Challenges in the 21st Century. New York, NY: Springer. John, F. O. and George, W. (2011). Air Transport in the 21st Century: Key Strategic Developments. New York, NY: Ashgate Publishing, Ltd. Rigas, D. (2006). The Airline Business. London: Routledge. Read More