The transaction between the Latvian national airline airBaltic and Deutsche Lufthansa AG (Lufthansa), which will result in Lufthansa acquiring a 10% share in airBaltic, is currently in the public domain. It has been announced in the media that this transaction will be assessed by Germany’s national competition regulatory agency – the Federal Cartel Office; therefore, one might wonder whether the Competition Council of Latvia (CC) should also assess this transaction.
As regards the notification of the transaction in question, the Competition Law (CL) provides that a transaction must be notified to the CC if the merger transaction results in the acquisition of sole decisive influence or joint decisive influence or a change in the nature of the decisive influence, and certain turnover criteria must be met. This means that not all transactions resulting in a change in the structure of a market player are mergers subject to State control. If there is no change of control in the transaction, they are not subject to merger control by the CC.
Based on the information currently available to the CC, the transaction will result in the Latvian State retaining sole decisive influence over airBaltic and, therefore, does not require clearance by the CC. On the other hand, if the transaction were to lead to a change of control, the acquirer (provided that the turnover thresholds in Latvia are met) would have to notify the CC[1].
As regards decisive influence, the CC notes that it can be both sole and joint. Joint decisive influence exists when two or more undertakings or persons are able to exercise decisive influence over another undertaking. Decisive influence in this sense usually takes the form of the power to block actions that determine the company’s strategic business activities. In certain cases, joint decisive influence may also arise for the minority shareholder, for example, when that shareholder is granted special rights, such as the right to veto strategic commercial decisions of the joint venture, the right to veto decisions on the appointment and dismissal of senior management and the approval of the budget, etc.
The CC underlines that merger control regulation may differ across EU Member States. This applies both to the types of transactions that are defined as “mergers” and to the notification thresholds. For example, in Germany, the acquisition of minority shares is also subject to authorisation by the German competition authority in certain cases, whereas in Latvia, the CC does not provide for such authorisation. The German Federal Cartel Office may also require undertakings to notify mergers in particular economic sectors under certain circumstances, even if they do not meet the turnover thresholds[2]. Thus, there may be situations where a transaction is notifiable in some EU Member States but not in others (in some cases, the scale of the transaction may also require notification to the European Commission).
Potential impact of the transaction on competition
As regards the potential competitive effects of the airBaltic-Lufthansa transaction, the CC notes that in the aviation sector, the impact of competition on consumers is mainly through price, choice and quality, but innovation and sustainability also play a role. Thus, from a competition perspective, the transaction between airBaltic and Lufthansa could theoretically result in a number of potential benefits, such as more convenient flight connectivity between airBaltic and the Lufthansa Group (e.g., Swiss International Air Lines, Austrian Airlines, Brussels Airlines, etc.) and greater financial stability for airBaltic. Lufthansa could also transfer knowledge that would improve airBaltic’s management, thereby reducing costs and increasing airBaltic’s overall competitiveness with other airlines.
The CC is concerned that this type of transaction, where a competitor acquires minority shares of a competitor, may also create risks. Minority shareholdings affect Lufthansa’s economic incentives and after acquiring minority shares of airBaltic, Lufthansa can look after its own profits while also having an interest in maximising the profits of airBaltic as it owns part of it. Thus, Lufthansa and airBaltic may have less incentive to compete aggressively with each other, especially on routes where both carriers are (or could potentially be) competing for the same customer. This can lead to higher prices, less choice (fewer alternative flights to the same destination), or other negative consequences for customers.
An additional risk is Lufthansa’s potential access to commercially sensitive information of airBaltic, such as pricing, demand trends, planned investments or development directions. This may give Lufthansa a competitive advantage if it uses this information (which it would not otherwise have access to) to adjust its market behaviour. Such access to information increases the risks of coordination between competitors.
The CC notes that the overall impact of the transaction on the above factors will depend on the actual involvement of Lufthansa in airBaltic, the future forms of cooperation, the evolution of the strategy of both companies, and the reactions of competitors. The CC will therefore continue to monitor developments and, if necessary, provide support to the German Federal Cartel Office.
In the case of any questions or uncertainties regarding the submission of a merger notification, the CC invites market participants to apply for pre-merger advice by calling 67282865 or by sending an e-mail to pasts@kp.gov.lv. For secure communication with the Authority, please use the e-address.
[1] Guidelines on the drafting of merger reports (paragraph 40). Available at: https://www.kp.gov.lv/lv/tirgus-dalibnieku-apvienosanas/zinojumu_par_tirgus_dalibnieku_apvienosanos1.pdf
[2] Explanation of merger control in Germany: https://www.bundeskartellamt.de/EN/Tasks/Merger_control/Obligation_notify/obligation_notify_key_aspects_node.html#frage1