Rivalry keeps an industry vibrant

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The proposed merger between Go and Easyjet has provoked minimal controversy. This belies the important questions it poses for the future of competition policy.

Most commentators on the proposed merger of Go and EasyJet have said there are no big competition policy issues. They are wrong. The merger raises serious questions, not just about low-cost airlines in Britain but also about the nature of competition policy itself. These need a full inquiry by the Competition Commission.

In the past few years, merger investigations have tended to focus on one issue. Will the new company have too large a market share in some narrowly defined market? If so, it may be able to raise prices to the disadvantage of consumers.

As this approach has developed, the offices of the Competition Commission have come to take on the appearance of a military war room. The locations of supermarkets and bank branches are plotted with pins on maps. Where is the nearest Asda? How far from Lloyds TSB to the Royal Bank of Scotland? But competition in these micro-markets is not the only issue in antitrust policy. It is not even the most important issue. Competition in modern business is not static but a developing process. And, as in a real military campaign, maps are out of date before they are compiled.

Competition isamechanism to promote rivalry and innovation, generating new products, new technologies and new business models. This process of competition is why western shops are full of attractive consumer goods while GUM, the great department store in Moscow that reaped all the benefits of scale economies and massive buying power, did not have anything worth buying.

We all know that a merger between J. Sainsbury and Tesco would be a disaster for consumers. Not because I would have to drive an extra mile to reach a competing supermarket, and SainsburyTesco would take advantage of the inconvenience to raise prices, but because rivalry between Tesco and Sainsbury has made the British retail sector vibrant.

The Competition Commission understood this dynamic perspective when it rejected Comet’s bid for Dixons and Lloyds TSB’s proposed acquisition of Abbey National. The regulator was concerned not just with competition as it was, but also as it might be. Comet and Dixons faced local competition from independents but what kept them on their toes was national rivalry with each other. Abbey is potentially a stronger competitor to established banks in the future than it is today. The commission found arguments in current market shares to support its conclusion, but the real issue was the effect the merger might have had on the competitive process.

The case of EasyJet and Go is unusual because the case on process is unusually strong while the case on market shares seems weak. That is why the decision will influence the future shape of competition policy. Aviation analysts have looked at their route maps and found there are not many destinations served by both EasyJet and Go, and on most of them British Airways carries more passengers. The exception seems to be Edinburgh to Belfast. And surely Edinburgh to Belfast cannot be a deal-breaker?

But of course there is not much current overlap in routes. If you are setting up a business, you aim at the markets your rival does not serve, not the ones he does. That is especially true if he is threatening legal action against you for predatory behaviour, as EasyJet did with BA. If the low-cost airline business thrives and grows, EasyJet and Go will in future be competing with each other on a whole variety of routes. And they will have knocked BA off many of them. That is the development that is in jeopardy.

You see things very differently when you view competition as a dynamic process. The airline industry in Europe is changing rapidly. There are three low-cost innovators, all with different positioning. Ryanair has focused on people who want a really low fare and do not mind if the flight to Brussels drops them at Charleroi. This cuts off the company from the business market. No hotshot lawyer defending a merger at the European Commission will risk missing a meeting because he is still on the bus from Charleroi.

Go’s strategy is different. The company emerged from British Airways and behaves as a stripped-down business airline. It has the traditional complex stay-a-Saturday fare structures and boarding passes. It has a professional feel, while Ryanair and EasyJet still look like enthusiastic amateurs. KLM and BMI, two established airlines, also set up low-fare subsidiaries. These are not independent of their high-fare parents and it is hard to imagine they would be around for long if the independents disappeared.

EasyJet is positioned between Ryanair and Go because, against expectations, its services have attracted business travellers. This threatens to revolutionise air travel in Europe. The traditional economics of the European airline business depend on seating people who will pay £500 return for an hour’s flight and a quarter-bottle of champagne in the front of the aircraft, along with Americans collecting frequent flyer points, misled by codeshares into thinking their European flight is with American or United. You then fill the back with leisure travellers on a budget. If low-cost entrants can attack the market from both ends, they have a winner.

Moreover, this is an industry where the internet has made a real difference. Deregulation in Europe was slow to take effect because travel agents tend to put their clients on the national flag carrier and BA did not do well in France or Germany. Now carriers can get directly to the traveller. More than 90 per cent of EasyJet passengers book on the web.

No one knows how the European airline industry will develop. It may be that established companies introduce leaner operations and better value services. The history of aviation tells us that most low-cost carriers went bust when incumbents responded. It is more likely that the low-cost model will eventually take a large part of the overall market, forcing a substantial reduction in the number of traditional flag carriers. Perhaps Ryanair’s model will prove the most successful, perhaps EasyJet’s, perhaps Go’s. The Competition Commission should not try to guess the outcome of the process. It should ensure that competition gives customers the chance to decide.

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