The Competition and Markets Authority (CMA) has completed its first merger investigation into a wet lease arrangement between two airlines.1
In August 2018, Aer Lingus announced it would take over CityJet's scheduled passenger flights between London City and Dublin airports on 28 October 2018. Customers with CityJet bookings due to fly on or after this date were transferred to Aer Lingus, with the CityJet website redirecting new customers to the Aer Lingus website. However, regular passengers on the service were unlikely to notice much of a difference as the route continued to be operated by CityJet under a wet lease to Aer Lingus. Under the wet lease CityJet provides aircraft, crew, maintenance services and insurance on behalf of Aer Lingus. In addition to the wet lease arrangement, CityJet's slots at London City and Dublin airports were transferred to Aer Lingus.
The CMA cleared the acquisition after a Phase 1 investigation. CityJet demonstrated that it had already decided to stop operating the London City-Dublin route before entering into the arrangement with Aer Lingus. The CMA also found that no other airline would have been interested in taking over the route, meaning there was not a more competitive alternative (counterfactual) to Aer Lingus taking over the route.
How does a wet lease arrangement trigger UK merger control?
The CMA's full decision has not yet been published, but the case highlights that parties entering into a wet lease arrangement need to consider whether the arrangement might constitute a "relevant merger situation". If so, the CMA has jurisdiction over the matter and could elect to conduct a merger investigation (or the parties could voluntarily notify the matter for review by the CMA).
In the UK, a "relevant merger situation" is created where two or more enterprises cease to be distinct (and certain turnover or share of supply thresholds are met).2 An enterprise is the activities, or part of the activities, of a business.3 Enterprises may cease to be distinct if one party acquires assets, employees, contracts and/or goodwill from another, but not if only bare assets are acquired.
The UK does not have a mandatory merger notification regime, so you would only expect a wet lease arrangement constituting a "relevant merger situation" to be scrutinised by the CMA if it stands to affect competition on one or more routes. But, if a wet lease arrangement is subject to even a Phase 1 review, this can take several months to resolve4 and the parties will often be subject to interim enforcement orders preventing them from implementing the arrangement while it is under review by the CMA.
Not all wet lease arrangements will invoke UK merger control
A standalone wet lease arrangement appears unlikely to meet the test for a "relevant merger situation". Indeed, in the current case, the CMA's focus appears to have been Aer Lingus's acquisition of slots from CityJet, and likely the transfer of customers from CityJet to Aer Lingus, rather than the wet lease itself. While the CMA's detailed assessment of how the Aer Lingus/CityJet arrangement qualified for a merger investigation (as a "relevant merger situation") will be of interest once available, the decision indicates that a wet lease arrangement will usually need something more – such as the transfer of slots and/or customers from one business to another – before the merger control regime kicks in.
The CMA's approach in Aer Lingus / CityJet to wet leasing arrangements is also consistent with that of the German competition authority (the Bundeskartellamt). In its 2017 review of a wet lease arrangement between Lufthansa and Air Berlin, the Bundeskartellamt said that aircraft leasing arrangements should not be assessed in the same way as a direct takeover of a competitor, but suggested that parties would face more scrutiny where the arrangement involves the transfer of slots.5
Footnotes
1 Aer Lingus Limited / CityJet Designated Activity Company (21 December 2018)
2 Section 26 Enterprise Act 2002
3 Section 129 Enterprise Act 2002
4 The CMA has 40 working days to reach its Phase 1 decision but, in practice, informal pre-notification engagement with the CMA can be expected to take at least a month.
5 Case B9-190/16. See here.
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