OFT closed case: Acquisition by National Express Group plc of the Inter City East Coast rail franchise.
Affected market: Passenger rail transport
Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.
The OFT's decision on reference under section 22(2)(a) given on 20 December 2007. Full text of decision published 10 January 2008.
Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.
National Express Group plc (NEG) is a major UK public transport operator with existing rail, bus and coach operations. NEG's subsidiary National Express Limited (NEL) administers and markets a network of express coach services throughout Great Britain. Although NEL owns and operates some coaches, particularly those used on airport services, the majority of vehicles and drivers employed to operate its coach services are contracted in from a large number of third party coach operators.
The Inter City East Coast (ICEC) franchise involves the running of regular rail services between London Kings Cross, Peterborough, Doncaster, Leeds, York, Newcastle, Edinburgh and Glasgow, and a limited number of services extending to other destinations (including Inverness, Aberdeen and Hull). The annual turnover of the Intercity East Coast (ICEC) franchise in 2006/07 is expected to be around £545 million.
NEG was the successful bidder for the ICEC franchise awarded by the Department for Transport (DfT) in August 2007. The new franchise commenced on 9 December 2007.
The transaction was notified on 25 September 2007. The (extended) 40-working-day administrative deadline expired on 3 December 2007 and the (extended) statutory deadline will expire on 26 December 2007.
The annual turnover of the ICEC franchise in 2006/07 is expected to be around £545 million which, together with the turnover of NEG, would meet the required turnover thresholds to constitute a community dimension pursuant to Art. 1 of the European Community Merger Regulation (ECMR). However, since both NEG and ICEC achieve more than two-thirds of their community-wide turnover within one and the same Member State, i.e. the UK, the transaction is not considered to have a community dimension (Art. 1(3) ECMR).
The award of the ICEC franchise constitutes an acquisition of control of an enterprise by virtue of section 66(3) of the Railways Act 1993. Therefore, NEG and ICEC have ceased to be distinct. The anticipated turnover from the first year of operating the franchise exceeds £70 million, so the turnover test pursuant to section 23 (1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes it is or may be the case that a relevant merger situation has been created.
THIRD PARTY VIEWS
Few grounds for concern were identified by local authority bodies and passenger representative groups.
Some transport operators thought that there is scope for some competition between rail and coach services for off-peak/leisure passengers. Their views differed on whether the merger might have a detrimental impact on such competition.
The parties overlap in the supply of public passenger transport services - that is, the provision of rail services by the ICEC franchise and the provision of coach services by NEL. The transaction gives rise to 50 point-to-point overlapping flows. On some of these flows there will only be very limited or no competition from other coach or rail operators. After an initial assessment which included the application of the usual filters, an in-depth assessment of 13 flows has been carried out.
With regard to London – Leeds, the OFT is satisfied that Megabus will effectively constrain NEG post-merger. Megabus is already active on this flow offering considerable seating capacity. NEG has submitted survey evidence and internal documents which demonstrate that Megabus competes most intensely with NEL on high-passenger and high-revenue flows such as London – Leeds and this has been confirmed by third party evidence. In relation to the three closely linked flows (London – Bradford, London – Keighley and London – Skipton), the OFT considers that the existence of indirect train services via Leeds, and Megabus coach to Leeds combined with various local transport options to the final destination are sufficient to constrain NEG post-merger.
The relevant London – Scotland flows (London – Aviemore, London – Sterling) are considered to continue to be constrained by air travel to Glasgow, Edinburgh and Inverness. Evidence before the OFT indicates that low-cost air travel has significantly increased in the last few years and now provides competition to both rail and coach services. Indirect rail services on these flows may also, to some extent, constrain NEG post-merger.
London – Darlington is served by Megabus' service to Scotch Corner, which is located just seven miles from Darlington and well connected to Darlington through local bus services.
Accordingly, no concerns arise on the above mentioned flows. However, the OFT has identified a group of three mid-distance flows (London-York, London-Doncaster, London-Durham) where there will be no actual competition from another coach operator and only very limited competition from open access rail operators on two of the flows. Evidence provided by NEG suggests that on mid-distance routes competition from low-cost airlines provides a much weaker constraint than on the London-Scotland flows. Megabus is not active on any of these flows and the OFT has not received flow-specific evidence to suggest that potential competition would be strong enough to alleviate its competition concerns. The available evidence suggests that the (threat of) entry by Megabus (or any other coach operator) cannot be considered to be sufficiently timely or likely to deter NEG from exploiting the reduction in rivalry resulting on these flows.
On three additional flows (London-Berwick-upon-Tweed, Glasgow-Newcastle, Glasgow-York) on an initial assessment, the OFT considered plausible but did not test whether indirect rail services may constitute a sufficient constraint on NEG post-merger. The OFT did not consider it necessary to conclude on the question of whether or not the realistic prospect of a substantial lessening of competition would be created. Even if these flows were found to raise competition concerns, it would not have changed the ultimate decision in this case.
Consequently, the OFT believes 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 pursuant to section 22(1) of the Act.
On this basis the OFT is under a duty to make a reference to the Competition Commission. However, the OFT has considered whether it would be appropriate to exercise its discretion to apply the exception to the duty to refer pursuant to section 22 (2) (a) of the Act to the facts of this case.
Overall, given the cumulative weight of the peculiar issues raised by rail franchise awards cases, the lack of a deterrence multiplier, the small scale of the issues at stake, and the lower 'realistic prospect' standard of belief the OFT has in relation to its SLC findings, the OFT considers that the total impact of the merger on consumer welfare is likely to be limited, and that the costs associated with a CC inquiry are disproportionate to the prospect of benefits from such action. Accordingly, taking into account all the relevant facts specific to rail franchise awards and this award in particular, the OFT exercises its discretion not to refer because the markets are of insufficient importance to warrant a reference.
This merger will therefore not be referred to the Competition Commission pursuant to section 22(2)(a) of the Act.