Affected market: Bus services
The OFT’s decision on reference under section 22 given on 17 January 2005.
Arriva plc (Arriva) is part of the Arriva group, a transport company operating bus and train services across the UK. In the year ending 31 December 2003, Arriva’s turnover was approximately £1,751 million.
Meadowhall Limited (Merseyline) was a small independent bus operator based in Merseyside. In the year ending 31 December 2003, its turnover was £735,836.
On 2 August 2004, Arriva acquired the entire issued share capital of Merseyline for a total consideration of £375,000. The administrative deadline for the OFT’s decision in this case is 17 January 2005 and the extended statutory deadline is 9 February 2005.
As a result of this transaction, Arriva and Merseyline have ceased to be distinct. The parties overlapped in the supply of bus services in Merseyside, a substantial part of the UK and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met. A relevant merger situation has been created.
Arriva and Merseyline overlapped in the supply of bus services in Merseyside, where Merseyline operated four commercial services (see note 1). Merseyline did not bid for tendered bus services prior to the merger.
Arriva argues that the relevant product frame of reference is the transport sector as a whole; and that, in particular, the car provides the main demand-side substitute for bus services.
When choosing between different particular means of transport, for broadly the same journey, passengers will take into account a number of factors, including access to the particular means of transport, personal preference, their value of time, and the relative costs of the available alternatives.
Survey evidence provided by Arriva states that 53 per cent of bus users in the North West could not use a car and a further 33 per cent could only do so if a driver was available (see note 2). Accordingly, the proportion of bus travellers for whom the private car is a viable option appears too low to render a 5-10 per cent increase in bus fares unprofitable.
During the course of the investigation no evidence was forthcoming to justify deviating from the OFT’s approach in previous decisions in this sector where it considered bus services to be a separate frame of reference from other forms of transport, including the car.
A bus service comprises of a number of journeys from a fixed point of origin to a fixed point of destination covered by that service. Arriva argues that the relevant geographic frame of reference for assessing this merger is travel over point-to-point journeys. While demand-side factors support a finding that the transaction should be considered in terms of its impact on this basis, the supply-side perspective suggests that substitution between routes is possible, suggesting the assessment should be undertaken over a wider area. Accordingly, both the three individual point-to-point routes where the parties overlapped (see note 3) and, in this case, Merseyside as a whole must be considered when assessing the transaction’s actual and potential effects on competition.
Post merger, Arriva estimates that its share of the commercial bus sector in Merseyside is 64 per cent (increment 1 per cent) and in excess of 50 per cent (increments no more than 10 per cent) on each of the three routes where the parties competed head-to-head (as measured by on-bus revenue/passenger data provided by Arriva).
Actual and potential competition
The OFT considered whether the parties constrained each other’s competitive behaviour in two respects. First, on the three point-to-point routes where their services overlapped, they may have directly placed pressure on each other’s prices and quality of service (such as frequency and reliability). Second, Merseyline may have imposed a potential constraint on Arriva’s bus operations in Merseyside more generally through the threat of entry by switching buses onto Arriva’s other routes, with the same effect.
Although the overlap routes are limited in geographic scale, the merger leaves only one other bus competitor in place on each. However, the weight of evidence available suggested that Merseyline was an insubstantial constraint on Arriva and the other competitor on these routes: the Merseyside public transport executive (PTE) did not regard Merseyline as a significant constraint; none of the parties’ business documents suggest that Arriva regarded Merseyline as a constraint; and no evidence was provided by third parties to support a contrary finding.
Likewise, in relation to the competitive constraint that Merseyline may have presented in Merseyside more generally, it does not appear that this was material. Merseyline was a small operator in terms of both scale and scope of operations, as evidenced by the minimal increment to Arriva’s share of commercial bus operations in the area as a result of this acquisition. Arriva suggests that Merseyline had no intentions to expand in size. The fact that its fleet of 20 buses had an average age in excess of 15 years tends to corroborate this since it is indicative of a lack of willingness to invest. Accordingly, the loss of any potential to expand by Merseyline on Arriva’s other Merseyside routes is not expected to have any material impact on competition post-merger.
It is therefore concluded that Merseyline did not pose a substantial competitive constraint on Arriva, either directly on the overlap routes or potentially in the wider Merseyside area.
Barriers to entry and expansion
Given the above conclusion, the assessment of barriers to entry has not proved critical to the outcome in this case.
Although there is no evidence of recent entry on the overlap routes, there were three operators on the overlap routes already. In general, small-scale entry on individual routes has low costs (e.g. vehicle costs and an operator’s licence). However, the rationale for Arriva to acquire Merseyline was the latter’s rights to access bus stands at the two Central Liverpool bus stations (Paradise Street and Queen Square) twice hourly in relation to three routes (see note 4). Access to bus stands in the stations is restricted (for congestion reasons) to twenty departures per hour and all stands are at that capacity between 7am and 7pm. Both Arriva and third parties suggest that greater revenue derives from routes with access to the bus stations than those without. However, the use of the bus stations is not essential to operating the overlapping routes. Adjacent off-road parking in the centre of Liverpool is possible and is used by the remaining competitor to run a successful service.
In summary, while Arriva may enjoy a competitive advantage over rivals in respect of its access to the bus stands, the substantial share of supply of its competitor on these routes tends to suggest that this advantage does not represent a major barrier to entry (or expansion).
One third party suggested barriers to entry were high due to Arriva’s ability to predatory price on certain ticket types. However, the merger would not appear to increase any such ability.
Buyer power of individual commercial bus passengers is limited.
There are no vertical issues raised in this case.
THIRD PARTY VIEWS
Third parties were unconcerned about the merger, with the exception of one who felt Merseyline constrained Arriva on the overlap routes, albeit only when taken in combination with the third operator, but was not able to provide any evidence to support this.
The parties overlap in the supply of bus services in Merseyside. The transaction qualifies under the share of supply test. Consistent with previous decisions, the frame of reference in this case concentrates on commercial bus services on the three point-to-point routes on which the parties overlapped and on a wider basis within Merseyside as a whole. The merger removes the smallest of three competitors on each of the point to point overlaps. However, a strong competitor remains on each route and there is no evidence from either Arriva or third parties that Merseyline was a material constraint on those routes. Likewise, the small scale of Merseyline’s operations and evidence that it may not have been willing to make the investment necessary to expand indicates that it did not provide a constraint on Arriva’s commercial bus operations in Merseyside more generally.
Consequently, the OFT does not believe that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- Bus service routes 10B (City Centre – Page Moss), 20 (Aigburth Vale – Tower Hill), 35 (City Centre – Halewood) and 92 (Penny Lane – Bootle (North Park)).
- Arriva Bus Passenger Survey 2004: North West – A Presentation (by NOP Consumer, 10 December 2004).
- 10B, 35 and 92.
- 10B, 20 and 35.