Aviation Bulletin - February 2013

EU/UK merger control - Court of Appeal decision in Ryanair v Competition Commission and Aer Lingus

John Milligan

On 13 December the English Court of Appeal handed down a judgment which concluded that it would not contravene the obligation of 'sincere cooperation' between the EU and member states for the UK Competition Commission (CC) to proceed with its investigation into Ryanair's 29.82% stake in Aer Lingus. The European Commission is currently conducting a second phase investigation of Ryanair's current notified bid for the entirety of Aer Lingus' capital and this is due to be completed in January 2013. As a result of the ruling, the CC is under no obligation to stay its investigation. The CC has a statutory timescale of 24 weeks (extendable by up to eight weeks), and its investigation would be expected to be concluded after the EU Commission's decision.

EU proceedings

The facts of the case are unusual and have generated long running litigation on the interaction of the EU Commission's exclusive 'one stop shop' jurisdiction under the EU merger regulation 139/2004 with national merger control regimes, in this case the Enterprise Act 2002. Ryanair had first notified its bid for the acquisition of the whole of Aer Lingus (having already acquired a minority stake) to the European Commission in 2007. This was prohibited as incompatible with the competition rules, the Commission emphasising differences from previous airline mergers in that this was a merger of the two main airlines in a single country, operating from the same home airport (Dublin), both low-cost airlines, operating on a point-to-point basis and with a greater number of overlapping routes than in previous airline cases.

Aer Lingus had requested the EU Commission to order that Ryanair divest the shares it had already acquired, but the EU Commission refused to do so on the basis it had no such power. The EU merger regulation confers jurisdiction on the EU Commission over mergers in which, as a minimum, the acquirer has the possibility of exercising a decisive influence over the activity of the undertaking being acquired. Ryanair's stake fell short of this level. The Court of Appeal decision reports that, while the EU Commission concluded that it had no such power itself, the EU Commission suggested that the UK competition authorities might.

The Office of Fair Trading (OFT) initially indicated that that the EU merger regulation, which prohibits member states applying their own legislation to a concentration caught by the regulation, precluded it from investigating. Action by Aer Lingus before the EU Commission and the General Court seeking divestment and interim measures to prevent the exercise by Ryanair of voting rights were not successful; nor was Ryanair's appeal against the EU Commission's prohibition (Joined cases T-342/07 and T-411/07, 6 July 2010). Proceedings in the EU came to an end at this point.

OFT investigation

In September 2010 the OFT requested information from Ryanair under the Enterprise Act 2002 merger control provisions to enable it to decide whether its minority shareholding gave it a material influence over the behaviour and policy of Aer Lingus, as a result of which it would have jurisdiction to investigate. 'Material influence' is a lower level of control than the 'decisive influence' test used by the European Commission under the EU merger regulation.

The OFT has four months in which to refer a merger to the CC, time running from the date of completion, or the date the merger was made public if later, though there is an exception whereby the time is suspended where there are EU proceedings under way. Ryanair objected that this limit had expired in 2007.

The OFT in January 2011 decided that the time limit for reaching a decision on the minority acquisition did not begin to run until the expiry of the time for appealing the EU General Court's judgment. The Competition Appeal Tribunal (CAT) upheld the OFT, stating that, had the domestic merger rules been applied before Aer Lingus's appeal had been finally resolved, there would have been a risk of the OFT infringing Article 21(3) of the EU merger regulation (which provides that no Member State shall apply its national legislation on competition to any concentration falling within the scope of the EU merger regulation). That risk was such as to trigger the duty of sincere co-operation under Article 4 of the EU Treaty, meaning that the OFT was obliged to avoid that risk.

OFT referral to CC

The OFT subsequently referred Ryanair's minority shareholding to the CC on 15 June 2012. On 19 June Ryanair announced its public bid, invited the CC to stay its investigation and subsequently notified the EU Commission. The CC informed the parties that it had decided to continue its investigation and required the production of documents by Ryanair and responses to a merger enquiry questionnaire. This refusal to stay was the subject of the appeal to the CAT that the investigation should be stayed pending the EU Commission's investigation into the public bid on the basis of the exclusive jurisdiction of the EU Commission. The CAT held that Ryanair's minority holding did not constitute a 'concentration' under the EU merger regulation and that the CC's jurisdiction over the minority stake was distinct from the EU Commission's jurisdiction over the public bid and was, therefore, unaffected by the prohibition on applying national law to any concentration having a Community dimension.

The Court of Appeal upheld the CAT, adding that a cautious approach must be followed by the national authorities but generally stating that even if there was a theoretical possibility that the CC's decision on the minority shareholding could be relevant to that of the EU Commission on the public bid, or vice versa, the EU Commission's decision would be delivered first. In any event, even if the CC finished its investigation first, it could defer the implementation of any remedial action until the conclusion of the EU Commission's investigation.

EU "stops the clock" on the ETS

Mark Bisset

On 12 November 2012, the EU Climate Commissioner Connie Hedergaard announced that the Commission planned to "stop the clock" and suspend application of the EU Emissions Trading Aviation Directive 2008/1001 as regards flights to and from third countries on both EU and non-EU airlines. This means that the Directive will not be enforced and payment will not be required by EU regulatory authorities in respect of extra-EU flights by airlines which exceed their emissions limit and are unable to buy additional allowances.

Application of the Directive has been suspended until an ICAO Council meeting next autumn to allow a global market based initiative, which appears to have been gathering momentum, and which creates a chance to develop a global solution. The Directive has been widely criticised by non-EU airlines and governments and was subject to a challenge by the Air Transport Association of America (now Airlines for America) before the English High Court which was referred to the Court of Justice of the European Union (CJEU). In December 2011 the CJEU Grand Chamber held that the Directive was not contrary to the Chicago Convention and general principles of international law.

The Commission states that it is taking this step to allow ICAO a chance to put a global ETS solution in place but if this comes to nothing by next autumn the Directive will be reactivated.

Further details are expected from the Commission on how this "stop the clock" procedure will be implemented, but we set out in this brief note the answers to some of the main questions that have been raised since the announcement was made, so far as information is currently available.

Which flights are impacted?

The suspension applies to all "international" flights whether operated by EU carriers or non-EU carriers. An "international" flight is any flight to and from the EU, which includes for this purpose Croatia (being an accession state), the EEA states (Norway, Iceland and Liechtenstein) and (from 2014) Switzerland. The Directive continues to apply to all intra-EU flights whether operated by EU carriers or non-EU carriers.

How will this be implemented?

In the press announcement on 12 November 2012, Ms Hedergaard explained that whilst she has had regular consultations with the Member States prior to making the announcement, there would need to be a formal proposal which the European Council, the European Parliament and Member States would all have to endorse. However, she also stated that she would not have made the press announcement if she was not confident of their support.

The principle is that the Aviation Directive will remain fully in force but will be supplemented by a derogation that covers international flights. This will be done by way of adding a paragraph to Article 16 of the Directive so that action will not be taken against aircraft operators which do not meet the Directive's reporting and compliance obligations arising before the ICAO Assembly in respect of international flights. The only condition for this is that they have not received, or have returned, free allowances received in 2012 for such flights. Compliance sanctions will not be taken in case of the non-reporting of such emissions.

This derogation will need to follow the EU's co-decision procedure, and the Directorate-General for Climate Action (DG CLIMA) is hopeful that it will be ready by April 2013. There remains, however, the possibility that the European Council or, more likely, the European Parliament, may raise objections. Further, as the scheme is implemented through national legislation in each Member State, the derogation will have to be implemented nationally as well, so potentially there could be delay at the local level.

There is also, of course, the possibility of legal challenge to the validity of the derogation, in many respects relying on the mirror image of some of the...