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
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
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
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
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
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.