Mario Monti’s parallel universe


The European Commission was severely rebuked by the Court for its refusal to allow Airtours to acquire First Choice. But the verdict of the marketplace, in which Airtours is in desperate straits while First Choice has gone from strength to strength, confirms the wisdom of the Commission’s decision: rarely has an anti-trust agency been so comprehensively vindicated by subsequent events.

Antitrust policy is having a tough time. Microsoft is celebrating the abandonment, in effect, of the US government’s action against it. Europe is still a problem for the company. But the European Commission’s policies are in disarray after three stinging rebuffs in the Court of First Instance.

Airtours won a famous victory in the summer when the court overruled the Commission’s objections to its plans for a hostile takeover of First Choice, a package tour rival. But Airtours – or MyTravel as it is now called – is not celebrating. Nor does it plan to revive its bid. For years, the company has spent too much time talking to its bankers and lawyers and too little talking to its customers. But these discussions are no longer about its acquisition strategy; the subject is how MyTravel can survive.

Airtours was once the most profitable and tightly run of package holiday operators but, under the visionary leadership of Tim Byrne, the chief executive, its aspirations ran ahead of its management capabilities. The company bought poor businesses and overpaid for others; and its integration strategy consisted of a costly rebranding as MyTravel. When the company encountered difficulties in meeting market expectations for earnings growth, it adopted racy accounting practices. With Andersen – who else? – now replaced as auditors by Deloitte, its past figures are under scrutiny and its share price is down by more than 90 per cent.

The tale of Airtours is a classic example of the hubris of 1999. First Choice, by contrast, has gone from strength to strength. After struggling through the 1990s, it is now the best-run package tour company in Europe and has increased both margins and market share. Today it could easily mount a bid for MyTravel but most people in the business cannot see why it would want to.

We shall never know exactly what would have happened if the rejected merger had gone ahead. But we can take it as virtually certain that the effective First Choice management would have been replaced by the less effective Airtours management and that the disappearance of First Choice would have deprived customers of a choice they have increasingly chosen to exercise. Everyone would have been worse off. It is rare for a decision by an antitrust agency to be so quickly vindicated by events.

So why was it this, of all cases, that provoked a dramatic rebuke from the court to the Commission and Mario Monti, competition commissioner? Here we move into the strange world of legal processes. If you read the Commission’s decision, and the court’s judgment, you feel like a spectator at a Japanese play. You admire the skill and finesse of the actors as they engage in their ritual moves but their activities bear only the most tenuous relationship to the real world outside.

Of course, we have the benefit of hindsight and the Commission did not. And courts are not allowed hindsight. We know that the market for package tours has taken a beating as a result of the rise of low-cost airlines and the effects of September 11 2001 – but the Commission did not know that in 1999 and the court in 2002 refuses to know it, because the legal clock stopped in 1999. The court is not concerned with whether the Commission reached the right answer but whether it reached its answer in the right way.

These legal processes are badly adapted to handling business issues. They impose a constrained, static view of how markets operate. The court’s judgment is principally concerned with whether the Commission made correctly the formal moves required to identify something called collective dominance, a concept largely unknown to economics or business strategy until European lawyers invented it.

Nothing in the Commission’s decision or the court’s judgment reveals any recognition of competition as a dynamic and inherently uncertain process, one in which badly-managed companies such as Airtours overreach themselves and smaller companies such as First Choice grasp market share; in which some innovative business strategies succeed and others fail; and in which the process of continuing rivalry between companies gives consumers new products and better-run businesses.

Competition is a mechanism of disciplined pluralism, which rewards success and penalises failure. The purpose of competition policy is to protect that mechanism. Rejecting the Airtours bid achieved that objective with great success.

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