ANALYSIS: Aegean-Olympic merger faces tough hurdles

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On 16 October, the European Commission is to judge on whether Greece's two largest airlines - Aegean Airlines and Olympic Air - should be allowed to merge.

This is the airlines' second attempt to combine. The first, in 2011, was blocked by the Commission on competition grounds. Once again, the deal now hinges on the carriers' ability to convince Brussels that the consumer will not be hurt by a tie-up.

The carriers argue that only by combining can they achieve the economies of scale required to become viable.

So, will the merger bid be successful? Based on the Commission's market tests, it seems highly unlikely.

When it launched its investigation, the Commission identified six routes from Athens that risked becoming a "monopoly" if Aegean and Olympic merged, namely Alexandroupolis, Chania, Corfu, Kos, Mytilene and Santorini, while on routes from Athens to Heraklion, Rhodes and Thessaloniki, it feared the merger would lead to the removal of an "important competitor".

Innovata schedules show that on the first six routes, the market has remained virtually unchanged between April and August, with Olympic and Aegean the only operators on the routes.

However, on routes from Athens to Thessaloniki, Heraklion and Rhodes, the data shows competition has actually lessened in the last four months.

Cyprus Airways, which accounted for between 15 and 32% of seat capacity in each market in April, has pulled out of all three as part of its own restructuring plan.

 cyprus routes april

 Flightglobal FlightMaps Analytics

 Cyprus Airways routes from Athens in April

 

 Flightglobal FlightMaps Analytics

 Cyprus Airways routes from Athens in August

Crucially, the Commission noted in April that there were indications Cyprus Airways would not constitute a "viable competitive force", and the fact that the Cypriot national carrier is the subject of a separate investigation into alleged illegal state aid makes it unlikely that European regulators will have much faith in its future competitiveness.

"One of the Commission's initial concerns was that Cyprus Airways may not prove to be a viable competitor on Greek domestic routes. If the Commission has now identified that as actually being the case, it will make it harder for the merger to go through," says Mark Daniels, an associate in the competition team at legal firm Norton Rose Fulbright.

Konstantinos Kalligiannis, aviation consultant and academic at the Hellenic American University, is more optimistic that the deal will go through.

"Although this decision will be based more on a legal, and possibly political, context rather than a purely aviation context, I believe that the planned merger between Olympic Air and Aegean Airlines has much more chance to get the approval from the European Commission this time than it had in the past," he says.

"There are two main reasons why I believe this. Firstly, the competition between the two airlines has by now been limited to only a very few routes. Secondly, the financial crisis in Greece is putting huge financial pressures to both airlines and therefore it would seem reasonable that the European Commission would prefer to appear as facilitating the survival of at least one Greek airline rather than facilitating a limited domestic competition that could result in both airlines going out of business."

 

 Flightglobal FlightMaps Analytics

 Aegean and Olympic networks in August

So what could tilt the Commission in favour of the merger? In April, the Commission said its assessment took account of "relevant factors such as the state of the Greek economy and the financial situation of the parties".

Nadejda Popova, analyst for the travel and tourism industry at Euromonitor International, says the outlook for the Greek economy remains poor.

"Domestic tourism is showing a very strong decrease and has dropped by 21% from 2012, showing the impact of the economic crisis on arrivals," she says.

"Certainly we won't return to pre-recession levels until 2017 and we are seeing a substantial decline in the purchasing power of Greeks, which is down 30% on 2009. This is driving Greek's consumer thinking when it comes to choosing to go on holiday."

Popova also believes that statements from the airlines that there is no "Plan B" if the merger does not go ahead will need be considered by the Commission. She nevertheless believes the deal is unlikely to be given the go-ahead.

"This is in the hands of the European Commission and it is very difficult to say what will happen, but when you look at the decision in the Ryanair/Aer Lingus case, which has similarities with this case, probably the commission will block this merger in my view," he says.

And what of the parties involved? Both carriers posted losses in 2012: Aegean of €10.5 million ($14 million) and Olympic Air of €8.6 million. That said, the losses are narrowing for both compared with where they were in 2011.

The carriers recently sent the Commission a last-minute plan to remedy some of the Commission's concerns, the details of which remain unknown, but Daniels remains convinced the proposed merger faces significant impediments, namely that the two carriers will struggle to be offer a remedy that can really convince the Commission.

"What is quite interesting, in previous mergers, is that airport slots have typically been offered at congested airports as the main remedy to satisfy competition concerns, but that kind of commitment is not relevant here because slots are generally available at Greek airports.

"The parties could seek to argue the 'failing firms' defence, in which they would need to show that one of them would risk disappearing from the relevant routes if the merger does not go through and there is no less anti-competitive alternative, but this is normally quite a high hurdle as the regulators are not keen to accept that argument."