Full text decision

Anticipated acquisition by Korean Air

Lines Co., Ltd of Asiana Airlines Inc.

Decision on relevant merger situation and substantial

lessening of competition

ME/6924/21

Please note that [] indicates figures or text which have been deleted or replaced in

ranges at the request of the parties or third parties for reasons of commercial

confidentiality.

SUMMARY

1. On 17 November 2020 Korean Air Lines Co. (Korean Air) and Asiana Airlines Inc.

(Asiana) entered into a binding Share Subscription Agreement, pursuant to which

Korean Air will subscribe for, and purchase from, Asiana shares representing

63.88% of the total issued and outstanding stock of Asiana (the Merger). Korean Air

and Asiana are together referred to as the Parties, and for statements referring to

the future, as the Merged Entity.

2. The Parties both supply scheduled air passenger transport services (air passenger

services) and air cargo transport services (air cargo services) internationally,

including between the UK and South Korea.

3. The Competition and Markets Authority (CMA) has assessed whether it is or may be

the case that the Merger may be expected to result in a substantial lessening of

competition (SLC) as a result of:

(a) horizontal unilateral effects in the supply of air passenger services on the

London-Seoul route; and

(b) horizontal unilateral effects in the supply of air cargo services on (i) the Europe

to South Korea route for customers transporting cargo from the UK to South

Korea; and (ii) the South Korea to Europe route for customers transporting

cargo from South Korea to the UK.

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Horizontal unilateral effects in the supply of air passenger services on the

London-Seoul route

4. Both Parties supply air passenger services between London Heathrow Airport

(LHR) and Seoul’s Incheon International Airport (ICN).

5. The Parties are the only suppliers of direct air passenger services between London

and Seoul. British Airways – the only other supplier of direct air passenger services

on the route prior to the COVID-19 pandemic – exited the route in 2020.

6. Even when indirect flights are taken into account, the Parties are the largest

suppliers on the route and would hold a very significant market position post-

Merger. According to the Parties’ estimates, on any IATA season from Summer

2019 to Winter 2021/2022, the Parties’ combined share of supply of air passenger

services between LHR and ICN – including direct and indirect (one-stop) flights –

was around 50%. Moreover, the CMA believes that this share does not fully reflect

the strength of the Parties’ market position, given that the evidence received by the

CMA indicates that indirect air passenger services do not provide a strong constraint

on direct services on the London-Seoul route.

7. The evidence received by the CMA indicates that the Parties are competing closely

on the London-Seoul route. The Parties are the only providers of direct flights and

both operate out of LHR and ICN with similar schedules (with arrival and departure

times within an hour and a half of each other – the closest alternatives available to

customers). The Parties are both South Korean-based airlines (so provide a similar

in-flight offering). The majority of third-party respondents to the CMA’s investigation

indicated that the Parties were strong or the strongest competitors on the route.

8. Based on share of supply data and third-party feedback, the CMA found that

carriers such as Lufthansa, Finnair, Air France-KLM, Etihad and Emirates – all of

which operate indirect flights on the London-Seoul route – exert a weak to moderate

competitive constraint on the Merged Entity. The CMA does not consider there are

any other carriers that exert a material competitive constraint on the Merged Entity

on the route. The CMA therefore considers that there is insufficient constraint from

alternative suppliers to constrain the Merged Entity post-Merger.

9. The CMA therefore believes that the Merger gives rise to a realistic prospect of an

SLC as a result of horizontal unilateral effects in relation to the supply of air

passenger services on the London-Seoul route.

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Horizontal unilateral effects in the supply of air cargo services

10. Both Parties offer direct air cargo services between the UK and South Korea via

dedicated freight aircraft and passenger aircraft (using space in the luggage hold,

referred to as belly-hold cargo).

11. The evidence received by the CMA indicates that, in contrast to air passenger

services, customers for air cargo services often purchase services in only one

direction. The CMA also found that competitive conditions in the supply of air cargo

services differ depending on the direction of travel. The CMA has therefore

considered competition in each direction of the route separately (rather than using

‘paired’ approach applied in its assessment of passenger services).

12. In keeping with its duty to consider whether competition concerns arise in any

markets within the UK, the CMA considered the options available to customers

transporting cargo by air from the UK to South Korea (and vice versa). The evidence

available to the CMA indicates that the use of transhipment by land and sea

between the UK and European airports is common. The CMA also has found that

there may be some important UK-specific aspect of competition that affect the

strength of alternative suppliers available for some customers of these services. The

CMA has therefore considered the competitive effects of the Merger within frame of

references (in each direction) that include (direct and indirect) flights between

Europe and South Korea, while taking into account UK to South Korea (and South

Korea to UK) aspects of competition.

The Europe to South Korea route for customers transporting cargo from the UK to

South Korea

13. The Parties have high combined shares of supply and the Merged Entity will be, by

some distance, the largest player in the supply of air cargo services on both the

Europe to South Korea and UK to South Korea routes. Customs data on volumes of

cargo transported from the UK to South Korea and its (direct and indirect) routing

indicate that direct flights account for significant proportion of cargo transported from

the UK to South Korea.

14. Other evidence received by the CMA also indicates that the Parties are competing

closely and that the constraint from alternative suppliers on the Merged Entity will be

limited post-Merger.

(a) The Parties are currently the two main suppliers of direct air cargo services

from the UK to South Korea, being the only providers of scheduled direct cargo

flights other than IAG/British Airways (who currently competes only pursuant to

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a codeshare arrangement with Korean Air). While there are also some

unscheduled direct flights, these appear to be most a weak constraint on the

Parties. The Parties are therefore particularly close competitors for customers

with a preference for direct flights.

(b) Several customers of the Parties’ services from the UK to South Korea

expressed a strong preference for direct flights. The majority of customers that

responded to the CMA’s investigation raised concerns about the impact of the

Merger, primarily on the basis that the Parties are the main suppliers of direct

air cargo services between the UK and South Korea.

competitor is half the size of Air Asiana) and do not offer direct scheduled

services. Some customers identified limited or no alternatives to the Parties,

while ranking the Parties as the strongest providers. A small number of

customers listed alternatives to the Parties but identified those alternatives as

weaker than the Parties.

15. While the CMA found some evidence on recent capacity expansion on the route, the

suppliers that have expanded remain small compared to the Parties and do not offer

direct scheduled services (so are generally weaker competitors to the Parties than

the Parties are to each other). There is no indication that any spare global capacity

could be reallocated to expand the capacity of direct flights between the UK and

South Korea.

16. The CMA therefore believes that the Merger gives rise to a realistic prospect of an

SLC as a result of horizontal unilateral effects in the supply of air cargo services on

the Europe to South Korea route for customers transporting cargo from the UK to

South Korea.

The South Korea to Europe route for customers transporting cargo from South

Korea to the UK

17. The Parties have high combined shares of supply and are among the largest

players in the supply of air cargo services on the South Korea to Europe or UK

routes. Customs data on volumes of cargo transported from South Korea to the UK

and its (direct and indirect) routing indicate that direct flights account for significant

proportion of cargo transported from South Korea to the UK.

18. Other evidence received by the CMA also indicates that the Parties are competing

closely and that the constraint from alternative suppliers on the Merged Entity will be

limited post-Merger.

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(a) The Parties are currently the two main suppliers of direct air cargo services

from South Korea to the UK. The Parties are therefore particularly close

competitors for customers with a preference for direct flights.

(b) Several customers of the Parties’ services from South Korea to the UK

expressed a strong preference for direct flights. The majority of customers that

responded to the CMA’s investigation raised concerns about the impact of the

Merger, primarily on the basis that the Parties are the main suppliers of direct

air cargo services between South Korea and the UK.

do not offer direct scheduled services. Some customers identified limited

alternatives to the Parties, but generally ranked the Parties as the strongest

providers.

19. As with the Europe to South Korea route, there is some evidence on recent

capacity, but no indication that any spare global capacity could be reallocated to

expand the capacity of scheduled direct flights between South Korea and the UK.

20. The CMA therefore believes that the Merger gives rise to a realistic prospect of an

SLC as a result of horizontal unilateral effects in the supply of air cargo services on

the South Korea to Europe route for customers transporting cargo from South Korea

to the UK.

Conclusion

21. The CMA is therefore considering whether to accept undertakings under section 73

of the Enterprise Act 2002 (the Act). The Parties have until 21 November 2022 to

offer an undertaking to the CMA that might be accepted by the CMA. If no such

undertaking is offered, then the CMA will refer the Merger pursuant to sections 33(1)

and 34ZA(2) of the Act.

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ASSESSMENT

PARTIES

22. Korean Air and Asiana provide air passenger services and air cargo services

internationally, including between the UK and South Korea.

Both Parties have their

principal hub at Seoul’s ICN and are listed on the Korea Stock Exchange.

23. Korean Air’s turnover in the financial year 2021 was approximately £[] billion

worldwide and approximately £[] in the UK.

24. Asiana’s turnover in the financial year 2021 was approximately £[] billion

worldwide and approximately £[] in the UK.

TRANSACTION

25. On 17 November 2020 Korean Air and Asiana entered into a binding Share

Subscription Agreement, pursuant to which Korean Air will subscribe for, and

purchase from, Asiana shares representing 63.88% of the total issued and

outstanding stock of Asiana.

26. The Parties informed the CMA that the Merger is also the subject of review by

competition authorities in the European Union, South Korea, the USA, China,

Japan, Taiwan, the Republic of Turkey, Vietnam, Australia, Malaysia, Singapore and

Thailand.

The Parties also offer (i) ground handling services to airports in South Korea; (ii) aviation maintenance,

repair and overhaul services at South Korean airports; and (iii) flight training carried out in South Korea. Final

Merger Notice submitted to the CMA on 14 September 2022 and as amended on 29 September 2022 (FMN),

paragraphs 12.60-12.81.

FMN, paragraphs 2.4 and 2.8.

Attachment 2 to the FMN. The revenue is determined based on a ‘point of sale’ method. The Parties

submitted revenue figures based on three separate methodologies: (i) 50/50 split, in which revenue is

allocated equally between country of origin and destination; (ii) point of origin, in which revenue is allocated

to the country of departure; and (iii) point of sale, in which revenue is allocated to the country in which the

ticket was sold.

Attachment 2 to the FMN. The revenue is determined based on a ‘point of sale’ method.

FMN, paragraphs 1.2,2.1 and 2.3 and Attachment 1 to the FMN. The Parties submitted that Korean Air

(which is publicly listed) is affiliated – through its largest shareholder, Hanjin KAL (who has a 27.57%

shareholding in Korean Air) – with Hanjin KAL and Hanjin Transportation, neither of which have overlapping

activities with the Parties with respect to the UK (FMN, paragraphs 2.5 and 2.41). These entities are

therefore not discussed further in this decision.

FMN, paragraph 2.29. Of these, the Parties informed the CMA that Merger has received clearance from

competition authorities in the Republic of Turkey, Taiwan, Thailand, Vietnam, Singapore, Malaysia and

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PROCEDURE

27. The Merger was considered at a Case Review Meeting.

JURISDICTION

28. Each of Korean Air and Asiana is an enterprise. As a result of the Merger, these

enterprises will cease to be distinct.

29. In 2021, Asiana generated a revenue of £[] in the UK.

Accordingly, the Merger

does not satisfy the turnover threshold set out in section 23(1)(b) of the Act.

30. According to share of supply data submitted by the Parties, the Merged Entity will

have a share of more than 25%, with an increment resulting from the Merger, in:

(a) the supply of air passenger services on the London-Seoul route (whether

considering direct or indirect flights for time sensitive (TS) or non-time sensitive

(NTS) passengers);

and

(b) the supply of air cargo services on the routes from (i) Europe to South Korea

for customers transporting cargo from the UK to South Korea and (ii) South

Korea to Europe for customers transporting cargo from South Korea to the

UK.

31. Accordingly, the share of supply test in section 23(4) of the Act is met.

32. The CMA therefore believes that it is or may be the case that arrangements are in

progress or in contemplation which, if carried into effect, will result in the creation of

a relevant merger situation.

33. The initial period for consideration of the Merger under section 34ZA(3) of the Act

started on 20 September 2022 and the statutory 40 working day deadline for a

decision is therefore 14 November 2022.

Australia, and conditional approval from the Korea Fair Trade Commission (KFTC) on 13 May 2022, subject

to certain structural and behavioural remedies.

See Mergers: Guidance on the CMA’s jurisdiction and procedure, January 2021 (as amended on 4 January

2022) (CMA2revised), from page 46.

Attachment 2 to the FMN. The revenue is determined based on a ‘point of sale’ method. The turnover test

is not met regardless of how Asiana’s UK turnover is being calculated.

See Tables 1 to 4 below.

See Tables 5 and 8 below.

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COUNTERFACTUAL

34. The CMA assesses the prospects for competition with the merger against the

competitive situation without the merger (ie the counterfactual).

In an anticipated

merger, the counterfactual may consist of the prevailing conditions of competition, or

conditions of competition that involve stronger or weaker competition between the

merger firms than under the prevailing conditions of competition.

35. The counterfactual assessment is not intended to be a detailed description of the

conditions of competition that would prevail absent the merger (which are better

considered in the competitive assessment) and will often focus on significant

changes affecting competition between the merger firms, such as, among other

things, exit by one of the merger firms.

In Phase 1 investigations, if the CMA must

consider multiple potential counterfactual scenarios where each of those scenarios

is a realistic prospect, the CMA will choose the one where the Parties exert the

strongest competitive constraint on each other, and where third parties exert the

weakest competitive constraints on the merger firms.

36. For the CMA to accept an exiting firm counterfactual at Phase 1, it must believe,

based on compelling evidence, that it is inevitable that, absent the Merger: (i) the

firm would have exited (through failure or otherwise) (Limb 1); and (ii) there would

not have been an alternative, less anti-competitive purchaser for the firm or its

assets to the acquirer in question (Limb 2).

The Parties’ submissions

37. In the Parties’ merger notice submitted to the CMA in September 2022, the Parties

submitted that, the appropriate counterfactual is one in which Asiana will be a

substantially weaker competitor on the relevant routes

as compared to its

competitive position prior to the COVID-19 pandemic and in 2021.

While the

Merger Assessment Guidelines (CMA129, March 2021) (Merger Assessment Guidelines), paragraph

3.1.

Merger Assessment Guidelines, paragraph 3.2.

Merger Assessment Guidelines, paragraph 3.8.

Merger Assessment Guidelines, paragraphs 3.8 and 3.12.

Merger Assessment Guidelines, paragraphs 3.21 and 3.23. At Phase 2, the CMA will assess whether the

most likely counterfactual is one in which the ‘exiting’ firm would have exited the relevant markets and there

would not have been an alternative, less anti-competitive purchaser for the firm or its assets than the

acquirer in question.

Ie in the supply of air passenger services on the London-Seoul route and the supply of air cargo services

on the Europe to South Korea and South Korea routes.

FMN, paragraph 11.5.

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Parties submitted that, in the view of the Korea Development Bank (KDB),

Asiana

is likely to exit the supply of air passenger services on the London-Seoul route, the

Parties did not submit that it was inevitable that Asiana would exit the relevant

routes.

In particular, the Parties submitted that:

(a) Asiana continues to face financial difficulties, given in particular that:

(i) Asiana faced financial difficulties before COVID-19, resulting in difficulties

meeting its obligations to its creditors and Asiana signing various

Memorandums of Understanding (MoUs) with the state-owned KDB and

its largest shareholder, Kumho E&C.

These MoUs included self-rescue

plans

and resulted in Asiana receiving short-term borrowings of £1.6

billion from KDB and the Export-Import Bank of Korea.

(ii) After entering into these MoUs, Asiana’s financial position has continued

to deteriorate.

While the Parties noted that Asiana has seen some

improvement in its financial results in 2021, they submitted that Asiana

continues to experience financial difficulties as result of ongoing

disruption caused by the COVID-19 pandemic.

(b) As a consequence of these financial difficulties, in the KDB’s view, Asiana is

likely to exit the supply of air passenger services on the London-Seoul route

and, if it does not exit, will be a significantly weakened competitor on the route.

KDB is a wholly state-owned policy development bank in South Korea and a major creditor of Asiana.

Amongst others, KDB facilitates the restructuring of Korean companies. FMN, paragraph 2.4.

In the FMN, the Parties did not make any submissions as to whether there would have been an alternative,

less anti-competitive purchaser for Asiana or its assets to Korean Air.

FMN, 11.9-11.14. The first MoU was signed on 6 April 2018. Additional MoUs were signed on 3 May 2019,

22 April 2020 and 14 September 2020.

This included, for instance, plans for improvement of Asiana’s financial structures and business

restructuring. FMN, paragraph 11.10.

FMN, paragraph 11.14.

In particular, the Parties submitted that, according to Asiana’s financial statements for the year ending 31

December 2019, Asiana’s current liabilities exceeded its current assets by approximately £2 billion. In March

2020, Asiana’s auditor considered that Asiana could no longer be rehabilitated through financial support.

Asiana entered into a special agreement with KDB and other interested parties to pursue the sale of Asiana

and received approximately £2,2 billion in public funds to ensure its business is supported until November

2020. The sale of Asiana was unsuccessful. FMN, paragraphs 11.15-11.18.

FMN, paragraphs 11.19 and 11.22-11.28. The Parties noted, however, that IATA (whose data Korean Air

uses for internal, long-term demand projections) forecasts (as at March 2022) that air passenger demand will

recover to 2019 levels in 2024 (FMN, paragraph 21.12).

The Parties submitted that, while Asiana is currently generating profits in air cargo services, such profits

are linked to a surge in air cargo rates compared to those prior to the COVID-19 pandemic. The Parties

submitted that KDB considers that air cargo rates are likely to return to previous levels, at which point it will

be difficult for Asiana to continue to generate profits and compete against ‘mega carriers’ with low-cost

structures, and as such Asiana’s air passenger services business cannot be sustained by the temporary

surplus in its air cargo service business. FMN, paragraph 11.30.

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The Parties noted that Asiana is particularly vulnerable to competition from

low-cost carriers on short-and-mid-haul flights and Asiana’s financial difficulties

mean it is unlikely to be able to make the investments needed in order to

remain competitive.

the London-Seoul route, Asiana’s ability to compete in the supply of air cargo

services on the Europe to Korea and Korea to Europe routes would be

substantially weakened. In this regard, the Parties submitted that:

(i) it would be difficult to maintain a fleet of cargo planes in the event that

Asiana were to exit the supply of air passenger services;

and

(ii) even if Asiana’s air cargo services could continue to exist without air

passenger services,

Asiana’s ability to compete would be reduced as it

would have less capacity given the absence of passenger belly cargo.

38. In response to the CMA’s issues letter, the Parties submitted that:

(a) the criteria for the ‘exiting firm’ test are met and absent the Merger Asiana will

exit all the relevant markets, including the London-Seoul route;

(b) further, absent the Merger, Asiana would have already exited the relevant

markets (given that Asiana has received a cash injection from Korean Air that

was premised on consummation of the Merger, without which Asiana would

have already faced insolvency); and

weakened competitor, however there is no specific evidence on precisely what

Asiana in this materially weakened form would look like (as given that, absent

the Merger, Asiana would exit the market, there is no ‘Plan B’).

Specifically, the Parties submitted that Asiana’s aircraft fleet is dated (meaning that it is less able to service

long-haul flights effectively) and its technology and infrastructure require significant upgrades to keep pace

with the changing airline market. FMN, paragraph 11.21.

FMN, paragraph 11.32.

The Parties submitted that it would be difficult to maintain a fleet of cargo planes in the event that Asiana

were to exit the supply of air passenger services. FMN, paragraph 11.32.

FMN, paragraph 11.32.

The Parties’ response to the CMA’s issues letter of 19 October 2022 (the Parties’ response to the issues

letter), paragraph 25.

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The CMA’s assessment

39. The Parties’ initial submission for the purposes of the CMA’s formal investigation, as

set out in the final merger notice, was that the appropriate counterfactual is one in

which Asiana will be a substantially weaker competitor – as compared to its

competitive position prior to the COVID-19 pandemic and in 2021 – in each of (i) the

supply of air passenger services on the London-Seoul route and (ii) the supply of air

cargo services on the Europe to South Korea and South Korea routes. This was

based on the position that, in the view of the Parties and the KDB, Asiana is likely to

exit the supply of air passenger services on the London-Seoul route.

40. The Parties subsequently stated, in response to the issues letter, that the criteria for

the ‘exiting firm’ test are met, but also noted that they ‘understand’ that such a

position ‘is highly unlikely to be accepted at Phase 1’.

41. While the CMA has received extensive evidence of Asiana’s financial difficulties, the

available evidence does not support the position that the continuation of the

prevailing conditions of competition is not a realistic prospect.

42. As concerns an exiting firm scenario, the Parties have not provided compelling

evidence that it is inevitable that, absent the Merger, Asiana would have exited the

relevant routes, and there would have been no alternative, less anti-competitive

purchaser for Asiana or its assets. There is, for example, limited evidence to allow

the CMA to consider whether Asiana would have been able to restructure itself

successfully and whether an alternative, less anti-competitive, alternative purchaser

for the firm or its assets would have been available. Moreover, the fact that the

Parties only submitted that the exiting firm test is met at a very advanced stage of

the CMA’s investigation (ie in response to the issues letter) has limited the CMA’s

ability to conduct the evidence-gathering that would typically be required to assess

whether this test is met.

In the Parties’ response to the CMA’s issues letter, the Parties indicated that they had not submitted that

the criteria for an exiting firm counterfactual were met because the CMA had indicated that it would be highly

unlikely to accept such a counterfactual in Phase 1. The CMA notes that while the evidential threshold in

order for the CMA to find at Phase 1 that the test for an exiting firm counterfactual is met is high, it may be

met where the CMA receives compelling, contemporaneous evidence that Limb 1 and Limb 2 of the test are

met. See, for example, the CMA’s decision of 30 March 2022 in respect of the anticipated merger of Nijjar

Group Holdings (Acton) Limited and Medina Holdings Limited (ME/6907/202) and the CMA’s decision of 21

December 2018 in respect of the completed transaction between Aer Lingus Limited and Cityjet Designated

Activity Company (ME/6782/18).

As noted in paragraph 35, in Phase 1 investigations, if the CMA must consider multiple potential

counterfactual scenarios where each of those scenarios is a realistic prospect, the CMA will choose the one

where the Parties exert the strongest competitive constraint on each other, and where third parties exert the

weakest competitive constraints on the merger firms.

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43. As concerns a counterfactual that Asiana would be a substantially weaker

competitor:

(a) As set out in the CMA’s guidance, if the CMA finds that the merger firm would

not be likely to exit absent the merger, it does not follow that it may instead

decide that the firm would be a weaker competitor in the counterfactual.

The

CMA has therefore separately considered whether the evidence submitted by

the Parties supports the position that Asiana would be a substantially weaker

competitor to the standard required in Phase 1 proceedings.

(b) To the extent that Asiana’s financial difficulties and other disruption resulting

from the COVID-19 pandemic have affected Asiana’s ability to compete on the

London-Seoul route to date, the impact of these factors will be reflected in the

prevailing conditions of competition on the route.

Parties have not adduced any evidence to show which aspects of Asiana’s

recent performance are related to the Merger (and therefore should be

excluded from the appropriate counterfactual).

(d) The Parties have not advanced any specific evidence as to why, if Asiana does

not exit the route, its ability to compete in the supply of passenger services on

the route absent the Merger would be substantially weakened.

(e) While the Parties have provided submissions in relation to the commercial and

operational challenges facing Asiana, these were in many cases unevidenced

(and therefore provide only limited support for the position that these

challenges will result in a significant change in the nature of Asiana’s

commercial offering). For example, while the Parties submitted that Asiana’s

aircraft fleet is generally dated and its technology and infrastructure require

significant upgrades to keep pace with the changing airline market, the CMA

has not received probative evidence to support this point (or to explain its

specific impact on Asiana’s performance on the routes within the scope of the

CMA’s investigation).

Merger Assessment Guidelines, paragraph 3.25.

With regard to these financial difficulties, the CMA notes that that Asiana’s financial position has improved

as of 2019. While Asiana generated a consolidated operating loss of []£[] in 2019, it has since seen two

years of consecutive year-on-year growth in its operating profits, with an operating profit of £[] in 2021.

While Asiana’s consolidated revenues were negatively impacted by the pandemic in 2020, it has since seen

its revenues increase in 2021 on prior year levels (FMN, Table 11.1). While the CMA notes the Parties

submitted that the improvement in Asiana’s finances was triggered [], this indicates that Asiana’s financial

position has been improving and may continue to stabilise.

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(f) Similarly, with regard to Asiana’s future ability to compete in the supply of air

cargo services on the Europe to South Korea and South Korea to Europe

routes, the Parties have not advanced any specific evidence as to why, if

Asiana does not exit the supply of air passenger services on London-Seoul

route, its ability to compete on the air cargo services routes absent the Merger

would be substantially weakened.

44. The Parties told the CMA that evidence to support the position that Asiana would be

a substantially weakened competitor absent the Merger is generally not available

because there is no ‘Plan B’.

45. The CMA notes, however, that the fact that a firm is subject to financial difficulties

(even where very significant) generally does not, in isolation, automatically mean

that the firm should be considered to be a substantially weakened competitor. For

example, while Asiana may continue to face financial difficulties, it is not clear how

these would affect its ability to compete in air passenger services on the London-

Seoul routes or air cargo services on the Europe to South Korea and South Korea to

Europe. There may, for example, be options open to Asiana that do not result in exit

or an otherwise diminished competitive offering on this route (eg, in terms of

reduced frequency or a less competitive schedule for air passenger flights, or less

capacity in its air cargo services offering) on those routes.

46. Accordingly, the CMA has not received sufficient evidence that, in the event that

Asiana does not exit the supply of air passenger services on London-Seoul route,

Asiana’s ability to compete in either the supply of air passenger services on the

London-Seoul route or the supply of air cargo services on the Europe to South

Korea and South Korea routes, would be substantially less than in the prevailing

conditions of competition, such that a counterfactual of the prevailing conditions of

competition is not realistic.

Conclusion

47. The CMA therefore considers that the appropriate counterfactual with respect to air

passenger services on the London-Seoul route and air cargo services on the

Europe to South Korea and South Korea to Europe routes for customers

transporting cargo from the UK to South Korea and from South Korea to the UK is

the prevailing conditions of competition. The CMA has taken into account the

As set out in paragraph 37(c), the Parties’ submissions that Asiana would be substantially weakened as a

competitor in the supply of air cargo services on the Europe to South Korea and South Korea to Europe

routes are premised on their submission that Asiana would be likely to exit the supply of air passenger

services on the London-Seoul route.

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ongoing impact of the ongoing COVID-19 pandemic, where relevant, in its

competitive assessment.

FRAME OF REFERENCE

48. The CMA is required to consider whether it is or may be the case that the Merger

may be expected to result, in a substantial lessening of competition within any

market or markets in the UK for goods or services.

Air passenger services

49. The Parties both provide air passenger services between the UK and Korea through

operating flights from LHR to ICN and vice versa.

The Parties’ submissions

50. The Parties submitted that, for the purpose of assessing the competitive effects of

the Merger on air passenger services, the appropriate frame of reference is the non-

directional

London-Seoul route.

In particular, the Parties submitted that:

(a) The appropriate frame of reference should adopt the ‘point of origin/point of

destination’ (O&D) city pair approach

used by the European Commission in

previous merger cases (in which every combination of an airport or city of

origin to an airport or city of destination is defined as a distinct market).

(b) Indirect (one-stop) flights exert significant competitive pressure on direct (non-

stop) flights. The Parties noted in this respect that, in previous merger cases,

the European Commission has found that, for long-haul routes (generally

Section 33(1) of the Act.

Meaning that competitive conditions on the route are assessed without distinguishing by direction of travel.

FMN, paragraph 13.1.

In respect of air passenger services, the European Commission has in previous merger decisions defined

relevant markets on the basis of two approaches: (i) the O&D approach (where the target was an active air

carrier) and (ii) the ‘airport-by-airport’ approach (where the target held an important slot portfolio). Under the

O&D approach, every combination of an airport or city of origin to an airport or city of destination is defined

as a distinct market. Such a market definition reflects the demand-side perspective whereby passengers

consider all possible alternatives of travelling from a city of origin to a city of destination, which they do not

consider substitutable for a different city pair. By contrast, under the ‘airport-by-airport’ approach, every

airport (or substitutable airports) is defined as a distinct market meaning that the effects of a transaction on

competition are assessed for all O&Ds, taken together, to or from an airport (or substitutable airports). See,

eg, M. 9287 Connect Airways / Flybe (5 July 2019), paragraphs 47-48 and 120.

FMN, paragraph 13.12.

Page 15 of 64

above 6 hours), indirect (one-stop) flights compete with direct (non-stop)

flights.

passengers

given that (i) the competitive dynamics for TS and NTS

passengers are uniform as between all air passenger service providers and (ii)

the increasing price sensitivity of corporate customers makes such a distinction

redundant. The Parties submitted, however, that in previous merger cases the

European Commission has noted that it may be relevant to distinguish

between TS passengers and NTS passengers for long-haul routes

and that

demand for air passenger services is sensitive to factors such as punctuality,

direct/indirect flights, travel time, frequency, mileage, the brand of service

provider (including the alliance it belongs to) and services such as inflight

meals.

(d) While under the O&D approach the European Commission has considered that

flights to or from airports with sufficiently overlapping catchment areas may be

considered as substitutes, airport substitutability is of limited relevance for the

purpose of the CMA’s assessment.

This notwithstanding, the Parties

submitted that, with respect to London, the London airports (LHR, Gatwick

(LGW), City, Stansted, Luton) should be consisted substitutable with each

other and that LGW in particular could provide a competitive constraint on

LHR,

given:

(i) there are examples of previous decisions in which the European

Commission and CMA had found or considered that LGW and LHR may

be substitutable on certain routes;

FMN, paragraph 13.19. See, eg, M. 7541 IAG / Aer Lingus (14 July 2015), paragraph 33.

The European Commission has previously used ‘TS passengers’ to refer to time sensitive passengers who

tend to travel for business purposes, require significant flexibility with their tickets (such as cost-free

cancellation and modification of the time of departure, etc) and tend to pay higher prices for this flexibility in

contrast to ‘NTS passengers’ to denote non-time sensitive customers who travel predominantly for leisure

purposes or to visit friends and relatives, book long time in advance, do not require flexibility with their

booking and are generally more price-sensitive. See, eg, M. 7333 Alitalia / Etihad (14 November 2014),

paragraphs 70-74.

FMN, paragraphs 13.16-13.17. See, eg, M. 7541 IAG/Aer Lingus (14 July 2015), paragraphs 20-29.

FMN, paragraph 13.11(i).

FMN, paragraphs 13.24-13.27.

Parties’ response to the issues letter, paragraph 32(b).

FMN, paragraphs 13.24-13.25. See, eg, AT.39596 AA/BA/IB (25 June 2010) (Commitment 1.1.1) (in which

the European Commission recognised that long-haul services to LGW are substitutable for services to LHR)

and Investigation into the AJBA, Decision to issue interim measures directions dated 17 September 2020 (in

which the CMA considered the constraint of LGW on LHR on a route-by-route basis).

Page 16 of 64

(ii) there are good road and rail connections between LGW and London

which mean that using the fastest train available, the travel time from

LGW to London is only slightly longer than from LHR to London;

(iii) Korean Air operated flights between LGW and ICN in 2012;

and

(iv) LGW is closer to areas of Greater London that are traditionally associated

with the Korean community, and [] or more of Korean Air’s passengers

for the London-Seoul route have Korean nationality.

The CMA’s assessment

The O&D city pair approach

51. The CMA has not received any evidence to suggest that the O&D city pair approach

is not an appropriate framework for the purposes of assessing the competitive

impact of the Merger on air passenger services. In this respect, the CMA has not

received any evidence that there are differences in supply or demand that mean that

the competitive conditions differ according to the direction of travel (such it would be

appropriate to consider separate frames of reference for ‘unidirectional’ routes from

London to Seoul and from Seoul to London). The CMA notes that, unlike for the

supply of air cargo services (see paragraph 59), passengers tend to purchase return

flights. The CMA has considered the substitutability of airports serving the London-

Seoul route below.

TS/NTS passengers and direct/indirect flights

52. The CMA has considered all types of passengers and direct and indirect flights in its

frame of reference. The CMA has considered the relative constraint from indirect

flights and the impact of the Merger on alternatives for customers with different

needs where relevant in the competitive assessment.

Airport substitutability

53. The CMA notes that, in applying the O&D approach, the European Commission has

previously found that (i) flights to or from airports with sufficiently overlapping

catchment areas can be considered as substitutes in the eyes of passengers

(particularly if the airports serve the same main city); and (ii) in order to correctly

capture the competitive constraint that flights to or from two different airports exert

FMN, paragraph 13.26.

Parties’ response to CMA’s issues letter, paragraph 32 (a).

Parties’ response to the issues letter, paragraph 32(b).

Page 17 of 64

on each other, a detailed analysis taking into consideration the specific

characteristics of the relevant airports is necessary.

54. The CMA considers that there may be limited substitutability – at least for some

customers – as between LHR and other London airports for air passengers

travelling between London and Seoul, having regard to the following evidence.

(a) The only direct flights between London and Seoul are between LHR and ICN

(see paragraph 84 (a). There have not been any direct flights between London

and Seoul from other London airports in the last four years.

(b) While most competitors that responded to the CMA’s investigation indicated

that, in principle, (indirect) flights between other London airports and ICN could

be alternatives to direct flights between LHR and ICN where available, one

submitted that flights from another London airport would not be considered a

viable alternative for the majority of passengers. Another submitted that while

indirect flights from LGW to ICN are available, LGW offers a much lower and

weaker connecting option for customers.

55. For the purpose of assessing the competitive impact of the Merger, the CMA has

considered all London airports from which (direct or indirect) flights to/from Seoul

are operated in its frame of reference and has considered the relative constraint

from other London airports where relevant in the competitive assessment.

Conclusion

56. In light of the evidence summarised above, for the purpose of assessing the

competitive impact of the Merger on air passenger services, the CMA considers the

appropriate frame of reference to be the supply of air passenger services on the

(non-directional) London-Seoul route. The CMA has not sub-segmented the frame

of reference by reference to TS/NTS passengers, direct/indirect flights or particular

airports but has taken into such distinctions, where appropriate, in its competitive

assessment.

The evidence used by the European Commission to characterise airport substitutability includes inter alia a

comparison of actual distances and travelling times to the indicative benchmark of 100 km/1 hour driving

time, the outcome of the market investigation (views of the airports, the competitors, and other market

participants), and the parties' practices in terms of monitoring. See, eg, M. 9287 Connect Airways / Flybe (5

July 2019), paragraph 61.

Third-party response to the CMA’s Combination Airlines Questionnaire (2021), question 4. 2021 refers to

questionnaires sent in November 2021. The CMA reached out to respondents to confirm that the information

and views they provided remain accurate as of September 2022 and took account of any revisions in its

assessment.

Page 18 of 64

Air cargo services

57. As set out above, the Parties overlap in the supply of air cargo services. Both

Parties offer air cargo services between the UK and South Korea via dedicated

freight aircraft and passenger aircraft (using belly-hold cargo).

The Parties’ submissions

58. The Parties submitted that, for the purpose of assessing the competitive effects of

the Merger on air cargo services, the appropriate frames of reference are air cargo

services on the route from Europe to East Asia and the route from East Asia

Europe.

In particular, the Parties submitted that:

(a) Unlike air passenger services, it is appropriate to assess competition by

reference to separate frames of reference for unidirectional routes.

The

Parties noted in this regard that air cargo transport generally involves one-way

routes and the type of customers and demand varies depending on the

direction of the route.

(b) Consistent with the European Commission’s findings in previous merger

decisions, the appropriate geographic scope at each end of the route is Europe

and East Asia.

58,59

In support of this position, the Parties noted that the

European Commission has previously found the appropriate geographic scope

at each end of the route to be continent-wide where local infrastructure is

adequate for onward connections (eg, by road, train, or inland waterways).

Further, the Parties submitted that:

FMN, paragraphs 12.39, 12.50 and 12.53.

In this regard the Parties’ submitted data for ‘East Asia’ comprising South Korea, China, Japan, Hong

Kong and Taiwan (FMN, footnote 157).

In the alternative, the Parties submitted that, consistent with the Korea Fair Trade Commission (KFTC)

Korean Air/Asiana (22 February 2022) (KFTC Decision), the appropriate geographic scope would be Europe

to South Korea (and vice versa). FMN, paragraph 13.40.

FMN, paragraph 13.1.

FMN, paragraph 13.28. The Parties noted that this is consisted with the findings of the KFTC with respect

to the Merger (FMN, paragraph 13.54, citing KFTC Decision, paragraph 403).

FMN, paragraphs 13.31 and 13.40. In previous merger decisions, the European Commission has found

cargo is generally less time sensitive than passengers and cargo is usually transported by trans-modal

means of transport "behind" and "beyond" the points of (air) origin and destination, meaning the geographic

scope at either end of the route should be defined more broadly. See, eg, M. 6447 IAG/BMI (30 March

2012), paragraph 87.

In the alternative, the Parties submitted that, consistent with the KFTC Decision, the appropriate

geographic scope would be Europe to South Korea (and vice versa) (FMN, paragraph 13.40).

For example, in M. 6447 IAG/BMI (30 March 2012), paragraph 94. FMN, paragraph 13.31. The Parties

noted however that, given the relatively expensive fare (as compared to waterline shipping) air cargo

Page 19 of 64

(i) with respect to the Europe end of the route, the Parties submitted that the

European Commission has consistently found the relevant geographic

scope to be Europe (including the UK) and that there is no reason for the

CMA to depart from this approach following the UK’s exit from the

European Union (EU);

and

(ii) with respect to the East Asia end of the route, the Parties submitted that

the applicable trade and customs regime and infrastructure in place

supports transhipment (ie by road, train and by sea) to/from other

countries in East Asia.

Commission,

the appropriate frame of reference encompasses all cargo,

without further sub-segmentation by reference to type of aircraft or cargo

carrier (eg carriers operating dedicated freight aircraft only as compared to

carriers operating belly-hold cargo services only or ‘combination’ carriers

offering both), or type of cargo.

In particular, the Parties submitted that:

(i) all freight necessarily requires some transhipment even in the context of

a non-stop flight where cargo must be loaded onto a truck at origin,

transhipped from truck to aircraft and vice versa on arrival;

and

(ii) even ‘special cargo’, such as pharmaceutical (eg vaccines) and fresh

cargo is transported on routes requiring transhipment (eg through cargo

services are used to move valuable or fragile cargo, such as semiconductor, electronic devices, or

automotive parts. (FMN, paragraph 13.29).

In this respect, the Parties submitted that: (i) the European Commission has previously included in a

‘Europe-wide’ geographic scope countries outside of the single market and customs union (eg Switzerland)

and with much less developed infrastructure links to mainland Europe than the UK (eg Iceland and Malta); (ii)

the transport links between the UK and mainland Europe that were part of the reason for the European

Commission having defined a Europe-wide market as including the UK remain fully in place; and (iii) while

there are some additional administrative procedures required for imports and exports between the UK and

the EU, these do not materially change the applicable customs/regulatory procedures as the UK remains a

party to the Common Transit Convention (CTC), an EU customs treaty allowing goods to move across

borders under simplified (or no) procedures between the EU and the CTC countries, or between the CTC

countries. FMN, paragraphs 13.31 and 13.34.

In this regard, the Parties noted the existence of free trade agreements and agreements that support

simplified customers clearance processes and ongoing cooperation between the Korean, Chinese and

Japanese governments to progress transportation logistics in the region. FMN, paragraphs 13.43

-13.45.

For example, in M. 8361 Qatar Airways / Alisarda / Meridana (22 March 2017), paragraphs 37_41 (the

market was left open), M. 6828 Delta Air Lines / Virgin Group / Virgin Atlantic Limited (20 June 2013,

paragraphs 79-81, M. 6447 IAG/BMI (30 March 2012), paragraph 93

-96.

FMN, paragraphs 13.36-13.39.

FMN, paragraph 13.37(i).

Page 20 of 64

being unloaded from one aircraft and repacked on another where being

transported via indirect – ie multi-stop, multi-aircraft – flights).

The CMA’s assessment

Unidirectional routes

59. The CMA considered the following evidence in relation to whether demand and

supply for air cargo services between the UK and South Korea differs by direction of

travel.

(a) The CMA notes that cargo typically travels only in one direction (unlike for the

supply of air passenger services, where passengers tend to purchase return

flights). Some of the customers that responded to its investigation purchase air

cargo services in only one direction.

(b) The shares of supply submitted by the Parties (see Table 5 and 8) indicate that

competitive conditions, in particular the relative sizes of air cargo service

providers, differ depending on the direction on the route. By way of example

AeroLogic held a share of just [0-5]% on the South Korea to Europe route in

2020, but a share of [5-10]% (making it the largest player other than the

Parties) on the Europe to South Korea route; DHL similarly had a share of [0-

5]% on the South Korea to Europe route in 2020, but [5-10]% on the Europe to

South Korea route.

60. The CMA therefore considers that the appropriate frames of reference in air cargo

services are unidirectional.

Geographic scope

61. The European Commission has previously assessed the air transport of overall

cargo on a continent-to-continent basis and continent-to-country basis. As regards

Europe, the European Commission has concluded that the relevant geographic

market for air cargo encompasses the entire continent because the local

FMN, paragraph 13.37(ii).

Third-party responses to CMA’s Cargo Customer Questionnaire, question 3.

The CMA notes that this is consistent with previous merger decisions in which the European Commission

found that air cargo transport markets are unidirectional due to differences in demand at each end of the

route. See, eg, See, eg, M. 8361 Qatar Airways / Alisarda / Meridiana (22 March 2017), paragraph 39, and

M. 6447 IAG/BMI (30 March 2012), paragraph 90.

Page 21 of 64

infrastructure is adequate to allow for onward connections, for instance, by road,

train or inland waterways.

62. The CMA is required to consider the impact of the Merger on competition within any

market or markets in the UK. For the purpose of its assessment, the CMA

considered the options available to customers transporting cargo by air from the UK

to South Korea (and vice versa). In this regard, the CMA considered the available

evidence as to whether routes involving transhipment by land (road and rail) and

sea (i) from the UK to European airports for onwards shipment by air to South Korea

and (ii) from other East Asian airports to South Korea are considered alternatives to

(direct or indirect) flights from the UK to South Korea (and vice versa).

In this

regard:

(a) Data supplied by the Parties (see paragraph 144 below) indicate that around

two-thirds of cargo originating in the UK is transported to South Korea on either

indirect flights from the UK or through routes involving transhipment.

(b) The majority of competitors that responded to the CMA’s investigation stated

that the use of transhipment between the UK and European airports for onward

air transport to or receiving cargo transported by air from South Korea is

common.

For instance, a competitor told the CMA that it is common to ship

M. 3280 Air France / KLM (11 February 2004), paragraph 36. The CMA notes that in previous merger

decisions, the European Commission considered that for air cargo services – as with air passenger services

– from the demand side, the users ask for transport of freight on a point of origin – point of destination basis

(and, as such, each point-of-origin / point-of-destination pair constitutes, in principle, a relevant market).

However, the European Commission found that the peculiarities of the cargo sector justify a wider

geographic scope than for air passenger services given: (i) freight may be routed with a higher number of

stop-overs such that any indirect route (including with multiple stop-overs) is substitutable to any direct route

(provided the total travel time and cost remain reasonable); and (ii) air transport of freight is often a part of

multi-modal transport (eg by truck from the origin point to the air gateway, by air to the destination gateway

and by truck from that gateway to the final destination) even when the gateway is very distant from the point

of origin. See JV.19 – KLM / Alitalia (11 August 1999), paragraphs 21

-23.

In the reverse direction, the CMA considered the available evidence as to whether routes involving

transhipment by land (road and rail) and sea (i) from South Korea to other East Asian airports for onwards

shipment by air to the UK and (ii) from other European airports to the UK are considered alternatives to

(direct or indirect) flights from the South Korea to the UK.

These data do not allow the CMA to assess the proportion of cargo originating in the UK is transhipped but

notes feedback from competitors that indicates that transhipment is common.

Third-party responses to CMA’s Combination Airlines Questionnaire (2021), questions 15 and 16. Third-

party response to CMA’s Cargo Airlines Questionnaire (2021), question 14. One third party explained that

regarding shipments to Europe, Asian airlines generally do not like sending too many aircrafts to the UK as it

is restrictive. Many cargo aircrafts may be sent into Frankfurt, Paris or Amsterdam, for example, and then

road fed out of these hubs to final destinations. Airlines generally have agreements with trucking providers.

This third party does the opposite: it ships the cargo to London, which will then be picked up by, for example,

a truck owned by this airline company and taken to Amsterdam to be flown to its final destination (note of call

with a third on 8 June 2021).

Page 22 of 64

cargo via truck from the UK to another airport in Europe and then fly to ICN.

Further, a number of competing providers of air cargo services noted that they

offered trucking services between the UK and European airports.

investigation stated that the use of transhipment between South Korea and

East Asian airports for onward air transport to or receiving cargo transported

by air from the UK/Europe is not common.

One of these competitors

explained that shipping cargo into South Korea by sea from another East Asian

airport takes a significant amount of time and that transporting cargo from

another East Asian airport via land is not possible given the only land border of

South Korea is North Korea.

63. The CMA therefore considers that the appropriate frames of reference includes

flights from Europe to South Korea and vice versa.

Direct/indirect flights

64. The CMA has considered direct and indirect

flights between the UK and South

Korea and between other airports in Europe and South Korea in its frames of

reference. The CMA has received evidence that for some customers, overall transit

time and direct flights may be important (see paragraph 66122(b)). The CMA has

taken into account the extent to which indirect flights constrain direct flights in its

competitive assessment.

Type of cargo and cargo carrier

65. Overall, third-party feedback indicates that segmentation by type of air cargo or air

cargo carrier is not appropriate. Most competitors – including competitors operating

belly cargo and freighter services – explained that they can transport any or most

types of cargo.

A few competitors told the CMA they are able to transport general

Note of call with a third-party on 15 June 2021.

Note of call with a third-party on 15 June 2021; third-party response to CMA’s Combination Airlines

Questionnaire (2021), question 15.

Note of call with a third party on 7 June 2021; note of call with a third-party on 6 July 2021; note of call with

a third-party on 16 June 2021.

Note of call with a third party on 7 June 2021.

The Parties submitted that it is conventional in industry terminology for “direct” cargo flights to include non-

stop and multi-stop flights (in this context the cargo stays on the same aircraft until it reaches its final

destination) whereas indirect cargo flights refer to cargo transported by one-stop and multi-stop flights

provided that the cargo will move from one aircraft to another before it reaches its final destination (FMN,

paragraph 12.54 and Parties’ response to the CMA’s RFI dated 1 and 2 September 2022, footnote 4.).

Third-party response to CMA’s Cargo Competitor Questionnaire (2021), question 2; third-party responses

to CMA’s Combination Airlines Questionnaire (2021), question 11; third-party responses to CMA’s

Combination Airlines Questionnaire (2022), question 11.

Page 23 of 64

cargo.

Finally, one competitor said it is able to ship, amongst others, express

goods

and another, mail and pharmaceuticals.

Some competitors noted that

there are constraints on belly cargo space.

66. The CMA received mixed customer feedback as to whether the supply of air cargo

services should be segmented by type of cargo. A few customers clarified that they

tend to use the same airlines for different types of cargo

while a few others stated

the contrary (eg in the case of the transport of semiconductor capital equipment).

One of these third parties explained that airlines have a similar level of service for

various types of cargo, whilst for others transit time is an important factor in their

choice of provider. One customer said that for some types of cargo, such as

oversized or perishable goods, the services provided by the Parties are the only

available option given their quality and the Parties’ handling experience.

67. On this basis, the CMA considers that it is appropriate to assess the effects of the

Merger in relation to a frame of reference for the supply of air cargo services without

further sub-segmentation by type of cargo or cargo service provider. To the extent

that the Parties are closer competitors for certain types of cargo, for example, cargo

that is express or needs to travel directly, the CMA has considered this in the

competitive assessment.

Conclusion

68. In light of the evidence summarised above, for the purpose of assessing the

competitive impact of the Merger on air cargo services, the CMA considers the

appropriate frames of reference to be the supply of air cargo services on the Europe

to South Korea and South Korea to Europe routes for customers transporting cargo

from the UK to South Korea and from South Korea to the UK.

69. The CMA’s evidence gathering at Phase 1 has focussed on customers of the

Parties’ air cargo services from the UK to South Korea and from South Korea to the

Third-party responses to CMA’s Combination Airlines Questionnaire (2021), Q11.

Third-party responses to CMA’s Combination Airlines, question 11.

Third-party responses to CMA’s Cargo Customer Questionnaire (2021), question 6.

Third-party responses to CMA’s Cargo Customer Questionnaire (2022), question 8; and third-party

responses to CMA’s Cargo Customer Questionnaire (2021), question 6.

Some customers explained that they use different airlines for different types of cargo, but their response

did not include any comments as to whether the other airlines are able to supply air cargo services for all

types of cargo. In this regard, one customer told the CMA that it uses Korean Air for certain types of cargo

due to loyalty advantages whereas another said it uses Asiana for other types of cargo because their rates

are more competitive than Korean Air. Another customer explained it takes into account capacity when

selecting the air cargo provider and clarified the type of cargo is not a criterion that it takes into account. See

third-party responses to CMA’s Cargo Customer Questionnaire (2022), question 8.

Page 24 of 64

UK. In this regard, the CMA notes that there may be some important UK-specific

aspects of competition which affect the strength of the alternative suppliers available

for some customers of these services. In assessing the effects of the Merger for

these customers, the CMA has therefore considered competition at the Europe to

South Korea (and South Korea to Europe) level and taken into account UK to South

Korea (and South Korea to UK) aspects of competition.

Conclusion on frame of reference

70. For the reasons set out above, the CMA has considered the impact of the Merger in

the following frames of reference:

(a) the supply of air passenger services on the London-Seoul route;

(b) the supply of air cargo services on the Europe to South Korea route for

customers transporting cargo from the UK to South Korea; and

customers transporting cargo from South Korea to the UK.

COMPETITIVE ASSESSMENT

71. The CMA has considered horizontal unilateral effects in the supply of:

(a) air passenger services on the London-Seoul route (TOH1);

(b) air cargo services on the Europe to South Korea route for customers

transporting cargo from the UK to South Korea (TOH2); and

transporting cargo from South Korea to the UK (TOH3).

In terms of air passenger services, the Parties also overlap on 54 indirect routes from LHR based on 2018-

2020 DDS Estimate Data. The CMA notes that there are only five indirect routes where the Parties have a

combined share of supply of more than 20%: London-Daegu (South Korea); London-Gimhae (South Korea);

London-Palau (Palau Island); London-Fukuoka (Japan) and London-Weihai (China). The number of

passengers on each of these routes is however low and varies between 100 and 15,000. FMN, paragraphs

14.34-14.36. Given this, these overlaps are not discussed further in this decision.

The Parties also overlap in the provision of air cargo services between the UK and other countries. The

Parties calculated share of supply estimates (using CASS cargo data) on a unidirectional O&D country to

country pair basis for the past three years for routes from the UK to countries other than South Korea and

from countries other than South Korea to the UK on which the Parties both provide air cargo services (16 in

total). For these routes, the Parties' combined shares were less than 10% in all cases (and for 8 routes, less

than [0-5]%) (FMN, paragraph 14.57 and Tables 14.31, 14.34-14.36). As such, these overlaps are not

considered further in this decision.

Page 25 of 64

72. Horizontal unilateral effects can arise in a horizontal merger when one firm merges

with a competitor that previously provided a competitive constraint, allowing the

merged entity to profitably raise prices or degrade non-price aspects of its

competitive offering (such as quality, range, service, and innovation) on its own and

without need to coordinate with rivals.

Horizontal unilateral effects in the supply of air passenger services on the

London-Seoul route (TOH1)

73. The CMA has assessed whether it is or may be the case that the Merger may be

expected to result in an SLC as result of horizontal unilateral effects in the supply of

air passenger services on the London-Seoul route.

74. In its assessment, the CMA has considered: (i) shares of supply; (ii) the closeness

of competition between the Parties; and (iii) the competitive constraint from

alternative suppliers remaining post-Merger. The CMA has also considered the

Parties’ submissions on the extent to which South Korean regulations may constrain

the ability of the Parties to increase prices and the impact of the Merger on policy

interests of the Korean Government. The CMA has taken into account in its

assessment the Parties’ submissions and the views of third parties.

Shares of supply

75. Tables 1 to 4, below, show the Parties’ estimated shares of supply of air carriers

operating the ICN-LHR route for IATA seasons Summer 2019 to Winter 2021/2022

for (i) direct flights (for all passengers) and direct and indirect (one-stop) flights for

(ii) all passengers (iii) TS passengers only and (iv) NTS passengers only.

76. The Parties provided data in relation to ICN-LHR. To the extent that LGW or another

London airport is a substitute to LHR, or another Seoul airport is a substitute for ICN

(see paragraph 545355), the shares in Tables 2 to 4 below may overstate the

Parties’ position on the London-Seoul route. The CMA does not consider that any

overstatement would materially affect the CMA’s overall findings in respect of air

Merger Assessment Guidelines, paragraph 4.1.

The Parties provided estimates based on DDS Estimate data. DDS Estimate data is based on actual

ticketing data from subscribing airlines and estimates for non-subscribing airlines (FMN, paragraph 14.8).

The CMA has not considered it necessary to consider in detail the appropriateness of using DDS Estimate

data for shares of supply estimates given that the shares estimated are consistent with other evidence

indicating a limited number of rivals to constrain the Merged Entity post-Merger.

Page 26 of 64

passenger services given the evidence presented below in paragraphs 80 to 95 in

relation to closeness of competition and alternatives.

Table 1: ICN-LHR route, non-stop operations only, (both NTS and TS passengers) shares of supply, %, 2019-2021

Summer

2019

Winter

2019/20

Summer

2020

Winter

2020/21

Summer

2021

Winter

2021/22

Korean Air

[40-50]

[80-90]

[60-70]

Asiana

[30-40]

[10-20]

[30-40]

Combined

[70-80]

[90-100]

British Airways

[20-30]

[5-10]

[0-5]

Other

[0-5]

Source: FMN, Annex 19 (Tab 1b). Notes: in Annex 19, shares of supply of less than 2% have been aggregated to the ‘other’ category.

As, further to British Airways ceasing operations on the route in Winter 2020/2021, the CMA understands the share attributable

to ‘Other’ in Summer 2021 to reflect a discrepancy in the available DDS Estimate data.

Table 2: ICN-LHR route, non-stop and one-stop operations, (both NTS and TS passengers) shares of supply, %, 2019-2021

Summer

2019

Winter

2019/20

Summer

2020

Winter

2020/21

Summer

2021

Winter

2021/22

Korean Air

[30-40]

[60-70]

[50-60]

[30-40]

Asiana

[20-30]

[10-20]

[5-10]

[10-20]

Combined

[60-70]

[70-80]

[50-60]

British Airways

[10-20]

[0-5]

Lufthansa

[0-5]

[5-10]

[10-20]

Finnair

[0-5]

[5-10]

[10-20]

Etihad

[0-5]

[5-10]

[0-5]

Air France-KLM

[0-5]

[5-10]

[10-20]

Qatar Airways

[5-10]

[10-20]

[0-5]

Emirates

[0-5]

Turkish

[0-5]

Other

[10-20]

[5-10]

[0-5]

[5-10]

[0-5]

Source: FMN Table 14.2

Table 3: ICN-LHR route, stop and one-stop operations (TS passengers only) shares of supply, %, 2019-2022

Summer

2019

Winter

2019/20

Summer

2020

Winter

2020/21

Summer

2021

Winter

2021/22

Korean Air

[50-60]

[40-50]

[80-90]

[60-70]

[40-50]

Asiana

[10-20]

[5-10]

[10-20]

Combined

[60-70]

[80-90]

[70-80]

[60-70]

British Airways

[20-30]

[0-5]

Lufthansa

[0-5]

[5-10]

Qatar Airways

[0-5]

[5-10]

[0-5]

Air France-KLM

[5-10]

[10-20]

[5-10]

In this regard, the CMA notes that the Parties submitted that airport substitutability is of limited relevance

for the purpose of the CMA’s assessment (FMN, paragraph 13.27) and submitted share of supply and

schedule/frequency data for the LHRICN route. The CMA therefore understands that the Parties do not

consider that their shares of supply or an analysis of schedule/frequency would materially differ if indirect

flights from other London airports (and to other Seoul airports, if available) were included in these data.

Page 27 of 64

Finnair

[0-5]

[10-20]

Emirates

[0-5]

Etihad

[5-10]

[0-5]

Other

[10-20]

[5-10]

[0-5]

Source: FMN Table 14.3

Table 4: ICN-LHR route, non-stop and one-stop operations (NTS passengers only) shares of supply, %, 2019-2022

Summer

2019

Winter

2019/20

Summer

2020

Winter

2020/21

Summer

2021

Winter

2021/22

Korean Air

[30-40]

[60-70]

[40-50]

[30-40]

[20-30]

Asiana

[30-40]

[20-30]

[10-20]

[5-10]

[10-20]

Combined

[60-70]

[70-80]

[50-60]

[40-50]

British Airways

[10-20]

[0-5]

Lufthansa

[0-5]

[5-10]

[10-20]

Finnair

[0-5]

[5-10]

[10-20]

Etihad

[0-5]

[5-10]

[10-20]

Air France-KLM

[0-5]

[5-10]

[0-5]

Qatar Airways

[5-10]

[10-20]

[0-5]

Emirates

[0-5]

Turkish Airlines

[0-5]

Other

[10-20]

[5-10]

[0-5]

Source: FMN Table 14.4

77. Table 1 shows that, as of Winter 2020/2021, the Parties are the only operators of

direct services on the LHR-ICN route.

Prior to BA’s exit from the route, the Parties

had a combined share of supply in excess of [70-80]% (on non-stop operations).

78. Tables 2-4 show that, on any IATA season from Summer 2019 to Winter 2021/2022,

the Parties’ combined share of supply of direct and indirect (one-stop) operations

the LHR-ICN route was in excess of [40-50]%, irrespective of whether all

passengers are considered together or TS and NTS passengers are considered

separately. In Summer 2019 (prior to the COVID-19 pandemic), the Parties’

combined share of supply exceeded [60-70]% on any basis. With the exception of

Winter 2020/2021,

Korean Air and Asiana were the largest and second largest

operators on the route in any IATA season since Summer 2019.

79. Based on the evidence summarised above, the CMA considers that the supply of air

passenger services on the London-Seoul route is concentrated. Post-Merger, the

As noted, further to British Airways ceasing operations on the route in Winter 2020/2021, the CMA

understands the share attributable to ‘Other’ in Summer 2021 to reflect a discrepancy in the available DDS

Estimate data. As the only flights between London and Seoul during this period were between LHR and ICN

(see paragraph 78) these shares represent the Parties’ share of supply on the London-Seoul route.

When Qatar Airways had a share of supply of direct and indirect (one-stop) operations of [10-20]% for all

passengers and [10-20]% for NTS passengers. Qatar Airways’ share of supply in Winter 2021/2022 is [0-5]%

or less.

Page 28 of 64

Merged Entity will be the largest supplier on the route, with a share of supply of

more than three times that of the next largest supplier.

Closeness of competition

80. The Parties submitted that, unlike air cargo services, demand for air passenger

services is sensitive to factors such as punctuality, direct/indirect flights, travel time,

frequency, mileage, the brand of service provider (including the alliance the airline

belongs to) and services such as inflight meals.

81. Closeness of competition is a relative concept. Where there is a degree of

differentiation between the merger firms’ products, they may nevertheless still be

close competitors if rivals’ products are more differentiated, or if there are few

rivals.

82. The CMA has considered the following evidence in its assessment of closeness of

competition between the Parties.

(a) The Parties are currently the only airlines offering direct flights on the London-

Seoul route (and prior to Winter 2020/2021 were two of only three carriers

offering direct flights on the route) (see Table 1). The Parties are therefore the

only alternatives for customers seeking direct flights between London and

Seoul.

(b) The Parties are both South Korean-based airlines, and both have their hub

based in ICN. A third party indicated that the inflight service offering of Korean

Air and Asiana is similar. This third party stated that the Parties, as South

Korean airlines, offer a more ‘Korean service’ in terms of language, food and

entertainment.

Another third party noted that both Parties had a similar

proposition to each other.

95,

Summer 2022 inclusive show that, across all seasons in this period, the

Parties’ flights are the closest alternatives available to customers on the LHR-

FMN, paragraph 13.11(i). See also paragraph 28(c).

Merger Assessment Guidelines, paragraph 4.10.

Note of call with a third party on 16 June 2021.

Third-party response to CMA’s Combination Airlines Questionnaire (2021), question 7.

Third parties submitted that the main factors that customers consider when booking a flight for the London-

Seoul route are price, schedule (ie arrival/departure time and/or total travel time), and quality of service.

Some third parties also indicated that customers would consider whether the flight is direct or not when

selection their air carrier for the London-Seoul route. See Third-party responses to CMA’s Combination

Airlines Questionnaire, question 6.

Page 29 of 64

ICN route in terms of departure and arrival time, with inbound

and

outbound

flights departing and arriving within an hour and a half of each

other.

(d) The CMA notes that Asiana’s weekly frequency has reduced from 7 weekly

flights in Summer 2019 to 3 weekly flights in Summer 2022.

100

The CMA has

not considered weekly frequency to be a strong indicator of relative closeness

of competition on the London-Seoul route given (i) as at Summer 2019 and

Winter 2019/2020, weekly frequencies were the same across the majority of

carriers operating (direct and indirect) flights on the LHR-ICN route

101

and (ii)

weekly frequencies in the subsequent seasons have fluctuated further to

(ongoing) disruption as a result of the COVID-19 pandemic.

102

(e) The Parties both operate out of LHR. To the extent that LGW or other London

airports are substitutable with LHR, the Parties will nonetheless be closer rivals

than carriers operating from other airports. As set out in paragraph 54(b) 54,

some third parties told the CMA that flights from an airport other than LHR are

not a viable alternative for the majority of passengers and that LGW offers a

much lower and weaker connecting option for customers.

83. In addition, the CMA has considered the following evidence in its assessment.

(a) The majority of third-party respondents to the CMA’s investigation indicated

that both of the Parties were strong (and in the majority of responses, the

strongest) competitors on the London-Seoul route.

103

In Winter, the Parties’ flights departed from ICN at 13:00 (for Korean Air) and 14:30 (for Asiana) and

arrived at LHR at 16:30 and 18:00, respectively. Inh Summer, the Parties’ flights departed from ICN at 13:30

(for Korean Air) and 14:30 (for Asiana) and arrived at LHR at 17:25 and 18:50, respectively. FMN, Tables

14.6-14.12.

In Winter, the Parties’ flights departed from LHR at 18:50 (for Korean Air) and 20:10 (for Asiana) and

arrived at ICN at 14:50 and 16:05, respectively (with the exception of Winter 2021/2022 in which Asiana’s

flights departed at the earlier time of 19:50 and arrived at 16:00). In Summer, the Parties’ flights departed

from LHR at 19:35 (for Korean Air) and 20:50 (for Asiana) and arrived at ICN at 14:35 and 15:50,

respectively. FMN, Tables 14.13-14.20.

The CMA notes that while these schedules pertain to LHR-ICN, the CMA has not received evidence from

the Parties or third parties to indicate that schedules for carriers operating other (indirect) flights as between

other London airports and ICN (or other Seoul airports, if available) would be close alternatives.

100

FMN, Tables 14.6,14.12, 14.14 and 14.20.

101

FMN, Tables 14.6,14.7, 14.14 and 14.15.

102

As noted, IATA forecasted in March 2022 that that air passenger demand will recover to 2019 levels in

2024. FMN, paragraph 21.12.

103

A competitor submitted that the Parties operate a similar type of service to each other. See note of call

with a third party on 15 June 2021; third-party responses to CMA’s Combination Airlines Questionnaire

(2021), question 7.

Page 30 of 64

(b) Asiana usually monitors the prices of Korean Air and British Airways

104

when

setting prices for air passenger services on the London-Seoul route.

105

84. On the basis of the evidence set out above, the CMA considers that the Parties are

close competitors in relation to the supply in air passenger services on the London-

Seoul route.

Competitive constraint from alternative suppliers

85. The Parties submitted that the market for air passenger services is highly

competitive

106

and noted that British Airways has previously operated direct flights

on the London-Seoul route and could re-enter if demand recovers, which would

reintroduce a strong competitor on the route.

107

Further, the Parties submitted that

indirect flights exert significant competitive pressures on direct flights on the

London-Seoul route.

108

86. As noted in paragraph 7777, Table 1 shows that, since Winter 2020/2021 the

Parties are the only airlines flying direct on the London-Seoul route. Therefore, the

Merger would remove the only alternative supplier for customers seeking direct

flights between London and Seoul.

87. Third-party feedback indicates that indirect flights do not provide a strong constraint

on direct flights on the London-Seoul route. For instance, one third party submitted

that while, as a rule, one-stop flights compete with direct flights, the extent to which

they can do so depends on the market penetration of direct flights on a route, and

noted the significant extent to which direct flights operated by the Parties (and

previously British Airways) penetrated the London-Seoul route prior to the COVID-

19 pandemic.

109

Other third parties noted that majority (>80%) of flights on the

London-Seoul route prior to the COVID-19 pandemic were direct flights.

110

88. Tables 2-4 show that, as of Winter 2020/2021, the Parties’ main rivals on the

London-Seoul route in terms of indirect flights include Finnair, Lufthansa, and Air

France-KLM.

104

As set out in paragraph 76, British Airways has exited and no longer operates the London-Seoul route.

105

FMN, paragraph 15.105.

106

FMN, paragraph 1.9.

107

FMN, paragraph 3.2.

108

FMN, paragraph 3.3. The Parties further submitted that a number of carriers operating indirect flights

(including Lufthansa, Finnair, Etihad, Air France-KLM and Qatar Airways) who are in a position to increase

capacity in response to any reduction of competition. The CMA’s assessment of the possibility of there being

entry or expansion to mitigate an SLC is set out in the countervailing constraints section below.

109

Note of call with a third party on 6 July 2021.

110

Third-party response to CMA’s Combination Airlines Questionnaire, questions 2 and 3.

Page 31 of 64

(a) Finnair provides one stop flights on the London-Seoul route via Helsinki.

Lufthansa provides one stop flights on the London-Seoul route via Munich or

Frankfurt, and Air France-KLM offers flights on the London-Seoul route via

Paris.

(b) A small number of third parties responding to the CMA’s investigation identified

these airlines as alternatives to the Parties. However, these third parties

considered that these indirect carriers exert only a weak or moderate

competitive constraint on the Merged Entity in relation to the London-Seoul

route.

111

89. In relation to smaller rivals shown in Tables 2-4, a small number of third parties

identified other indirect airlines such as Emirates

112

and Etihad

113

which could act as

a constraint on the London-Seoul route. However, as above, third parties generally

identified the competitive constraint exerted by these indirect airlines as weak or

moderate. The CMA also notes that, based on Table 2, none of these alternatives

identified by third parties have a material share of supply

114

and all of the other

indirect airlines have a low share of supply relative to the Parties.

115

90. Based on the evidence set out above, the CMA considers that indirect flights do not

provide a strong constraint on direct flights on this route. Furthermore, share of

supply data and third-party feedback show that carriers such as Lufthansa, Finnair,

Air France-KLM, Etihad, and Emirates exert a weak to moderate competitive

constraint on the Merged Entity. The CMA does not consider there are any other

carriers that exert a material competitive constraint on the Merged Entity.

91. As concerns the possibility of future re-entry of British Airways, the CMA considers

that this is currently uncertain and has therefore not given detailed consideration to

the impact on competition that such re-entry would have.

116

92. To the extent that evidence is available on what impact this could have, the CMA

notes that (i) the market would remain highly concentrated, with only two options for

customers seeking direct flights on the London-Seoul route (ie the Merged Entity

and British Airways); (ii) while competitors

117

indicated that British Airways was

(before it exited the route) a stronger competitor than the suppliers discussed

111

Third-party responses to CMA’s Combination Airlines Questionnaire (2021), question 7.

112

Third-party responses to CMA’s Combination Airlines Questionnaire (2021), question 19.

113

Third-party responses to CMA’s Combination Airlines Questionnaire (2021), question 19.

114

For instance, in Summer 2021 Etihad’s share of supply is [0-5]% whilst Emirates’, [0-5]%.

115

For instance, in Summer 2021 Korean Air’s share of supply is [30-40]% whereas Asiana’s, [10-20]%. The

third largest player is Air France-KLM with a share of supply of [10-20]%.

116

[].

117

Third-party response to CMA’s Combination Airlines Questionnaire (2021), question 7.

Page 32 of 64

above, British Airway’s share was half or less than a third of the Parties’ combined

share of supply prior to the COVID-19 pandemic;

118

and (iii) as set out above,

Asiana’s and Korean Air’s flights appear to be the closest alternatives to each other

in light of the specific nature of their offerings.

The constraint of South Korean regulation on the Parties’ ability to increase prices

93. The Parties submitted that, post-Merger, the Merged Entity will not be able to freely

increase prices on the London-Seoul route as (i) prices are strictly controlled by the

South Korean government

119

and (ii) there are further restrictions on prices as a

result of the remedies offered to the KFTC pursuant to its investigation of the Merger

(the KFTC Remedies).

120

94. With respect to existing price controls under South Korean regulation, as set out

above, in its assessment of whether a merger gives rise to horizontal unilateral

effects, the CMA considers whether the merger removes a competitor that

previously provided a competitive constraint, allowing the merged entity profitably to

raise prices or degrade non-price aspects of its competitive offering (such as quality,

range, service and innovation) on its own and without needing to coordinate with its

rivals. The Parties have submitted that they compete with each other and rivals on

the London-Seoul route. To the extent that price controls under existing South

Korean regulation restrict the Parties’ ability to increase prices, the CMA

understands that such controls apply to all carriers operating on the route and do

not prevent the Parties or their rivals flexing their prices (at least to some extent)

within applicable regulatory parameters.

121

Further, the CMA notes that price is only

118

As set out in Table 1, in Summer 2019 (prior to the COVID-19 pandemic and British Airways’ subsequent

exit) British Airway’s share of supply of non-stop operations on the London-Seoul route was [20%-30]% as

compared with the Parties’ combined share of supply of [70-80]% (of which [30-40]% was attributable to

Asiana). While British Airways had a similar share of supply to Asiana for TS passengers of direct and

indirect (one-stop) flights between LHR and ICN, its share of supply was approximately half the size of

Asiana’s for all passengers and NTS passengers only.

119

The Parties submitted that air carriers need to obtain an approval from the Ministry of Land, Infrastructure

and Transport (MOLIT) or file a report with MOLIT for passenger airfares in relation to South Korea outbound

flights. According to the Parties, any request must justify the current airfares and any proposed change to

these. The Parties also submitted MOLIT imposes a price ceiling applicable to all cabin classes. The Parties

further submitted that these rules have a spill-over effect on South Korea inbound flights particularly because

charging very different fares for the same trip, depending on the location of departure may damage

consumers’ trust and lead to customer dissatisfaction. FMN paragraphs 25.33-25.55.

120

Specifically, the Parties submitted that under the KFTC Remedies, the average fare for each route, each

quarter and each seat class cannot be increased by more than a certain threshold. FMN paragraph 25.32.

121

The CMA understands that air fares on South Korea inbound can be increased under the South Korean

regulation provided the airline company submits the necessary justification. The CMA has not received

evidence that South Korean regulation prevents airlines competing with respect to price on inbound flights on

the London-Seoul route. In this regard, one third party told the CMA that its submissions to MOLIT have

never been challenged (note of call with a third party on 16 June 2021). Further, the CMA understands that

Page 33 of 64

one parameter of competition. The CMA has not received any evidence that

applicable South Korean regulation restricts the Parties’ and rivals’ ability to

compete on other competitive parameter parameters, such as quality of services or

innovation.

95. With respect to the impact of the KFTC remedies, the CMA notes that such

remedies are a consequence of the Merger and, as such, should not be

incorporated into the counterfactual against which the CMA assesses the

competitive impact of the Merger.

122

96. For the reasons set out above, the CMA does not consider that existing South

Korean regulation or proposed KFTC remedies are relevant factors for its

assessment of the competitive impact of the Merger on the London-Seoul route.

The impact of the Merger on policy interests of the Korean Government

97. The Parties submitted that the Merger significantly affects important policy interests

of the Korean Government and that, in line with the principle of comity,

123

the CMA

should take into account the effects in and interests of South Korea in its

assessment of the Merger. The Parties noted, in particular, that:

(a) the KDB (a South Korea state-backed entity) promoted the Merger in an effort

to restructure the aviation industry in South Korea and maintain its long-term

viability and, as such, that the Merger allows for the recovery of funds provided

to Asiana by its state-backed creditors and the protection of the Korean airline

industry and economy;

124

and

(b) the Merger primarily concerns customers in South Korea and will have a

minimal impact on UK customers.

125

98. The Act imposes a duty on the CMA to refer anticipated mergers for an in-depth

phase 2 investigation if it believes that it is or may be the case that (i) arrangements

any such regulation is applicable only to the fares on South Korea outbound flights and has not received

evidence that air carriers would be dissuaded from increasing the fare for South Korea inbound flights.

122

Merger Assessment Guidelines, paragraph 4.1.

123

In this respect, the Parties referred to the principle of comity as the concept of mutual respect among

equal sovereign entities and plays a role in determining the recognition which one sovereign nation allows

within its territory to the legislative, executive or judicial acts of another. Parties’ submission on public

interest, section 3.

124

Parties’ submission on public interest, section 3.

125

The Parties submitted that, even prior to the COVID-19 pandemic, []% or more of Korean Air’s

passengers on the London-Seoul route had a Korean nationality whilst only []% of passengers had a

British nationality. Parties’ submission on public interest, section 3. The Parties further noted that the KFTC

in its investigation of the Merger recognised the economic benefits afforded by the Merger whilst imposing a

number of conditions which will further enhance competition, including on the London-Seoul route.

Page 34 of 64

are in progress or in contemplation which, if carried into effect, will result in the

creation of a relevant merger situation

126

(the jurisdictional test) and (ii) the

creation of that situation may be expected to result in a substantial lessening of

competition within any market or markets for goods or services in the UK

127

(the

SLC test).

99. The role of comity within the UK merger control regime was recently considered by

the UK Competition Appeal Tribunal (the CAT) in Sabre Corporation v CMA.

128

that judgment, that CAT noted that considerations of territoriality (and therefore

comity) are already taken into account within the jurisdictional test that the CMA is

required to apply. The CAT noted, in particular, that the suggestion that this test

‘should be construed restrictively (whether on the basis of the principle of comity or

otherwise) is contrary to the wider purposes of merger control […] – that is, the

importance of ensuring effective merger control in the public interest’.

129

100. In this case, the CMA believes (as set out in paragraph 31 above) that the

jurisdictional test is met with respect to the Merger.

130

101. As concerns the CMA’s substantive assessment of a merger, the CAT also noted

that ‘[c]onsiderations of territoriality are further provided for in the SLC test, itself

directed towards competition within any market or markets in the UK’.

131

126

Section 33(1)(a) of the Act. In establishing whether the jurisdictional test is met, the CMA assesses

whether: the turnover test (whether the UK turnover of the enterprise being taken over exceeds £70 million)

set out section 23(1)(b) of the Act is met; or the share of supply test (whether the merged enterprises both

either supply or acquire goods or services of a particular description in the UK and will, after the merger,

supply or acquire 25% or more of those goods or services in the UK as a whole or in a substantial part of it)

set out in section 23(3)-4) of the Act is met.

127

Section 33(1)(b) of the Act.

128

Sabre Corporation v Competition and Markets Authority, CAT judgment of 21 May 2021, paragraph 66

‘[…] we do not consider that considerations of comity assist in the resolution of the jurisdictional issues in this

case. Here, Parliament has expressly identified the relevant connecting factors which enable consideration of

a merger with an “extra-territorial” dimension. Both jurisdictional tests in section 23 are based on a UK

territorial connection. As regards the turnover test, there exists a jurisdictional nexus with the United

Kingdom because the relevant turnover arises “in the United Kingdom”. As regards the share of supply test,

the jurisdictional nexus to the United Kingdom is provided by the fact that the goods or services are supplied

“in the United Kingdom, or in a substantial part of the United Kingdom”. Considerations of territoriality (and

thus comity) are addressed within the share of supply test itself.’

129

Sabre Corporation v Competition and Markets Authority, CAT judgment of 21 May 2021, paragraph 74.

130

Korean Air also submitted that it believes that the Merger, when implemented, will constitute a relevant

merger situation. FMN, paragraph 5.2.

131

Sabre Corporation v Competition and Markets Authority, CAT judgment of 21 May 2021, paragraph 86.

Page 35 of 64

102. In this case, the CMA has assessed whether the Merger may be expected to result

in an SLC in the supply of air passenger services on the London-Seoul route (which

sits within the definition of a market in the UK for the purposes of the Act).

132

103. Accordingly, for the reasons set out above, the CMA believes that comity

considerations are already taken into account in the application of the jurisdictional

test and the SLC test. The CMA does not believe that there is any other basis to

take the factors raised by the Parties into account in assessing the competitive

impact of the Merger in the supply of air passenger services on the London-Seoul

route.

Conclusion on TOH1

104. For the reasons above, the CMA considers that the Merger gives rise to a realistic

prospect of an SLC as a result of horizontal unilateral effects in the supply of air

passenger services on the London-Seoul route.

Horizontal unilateral effects in the supply of air cargo services on the Europe

to South Korea route for customers transporting cargo from the UK to South

Korea (TOH2)

105. The CMA has assessed whether it is or may be the case that the Merger may be

expected to result in an SLC as result of horizontal unilateral effects in the supply of

air cargo services on the Europe to South Korea route for customers transporting

cargo from the UK to South Korea.

106. In its assessment, the CMA has considered: (i) shares of supply; (ii) the closeness

of competition between the Parties; and (iii) the competitive constraint from

alternative suppliers remaining post-Merger.

133

The CMA has taken into account in

its assessment the Parties’ submissions and the views of third parties.

132

The CMA has also assessed whether the Merger may be expected to result in an SLC in the supply of air

cargo services on the Europe to South Korea for customers transporting cargo from the UK to South Korea

and the South Korea to Europe route for customers transporting cargo from South Korea to the UK, as set

out in the CMA’s assessment of TOH2 and TOH3 below. The CMA’s assessment of the Parties’

submissions on the interests of the policy interests of the Korean’s government applies equally to those

TOHs. This is therefore not discussed further in this decision.

133

The Parties submitted that the Korean regulation discussed in paragraph 93 above restricts the Parties’

ability to increase cargo airfreight fees (FMN, paragraph 25.33). As explained in relation to TOH1, the CMA

does not consider that that any such regulation prevents competition as between the Parties and their rivals

with respect to price or other competitive parameters and so this is not discussed further in this decision.

Page 36 of 64

Shares of supply

The Parties’ estimates

107. The Parties submitted estimated shares of supply for the supply of air cargo

services on the Europe to South Korea route in terms of volume, based on data

from CASS, TRASS, FOIS and DHL.

134

The Parties submitted that these estimates

are likely to underestimate the shares of supply of their competitors. In this regard,

the Parties submitted that:

(a) Estimates for DHL using TRASS data are likely to underestimate DHL

volumes. The Parties have estimated DHL’s volumes only on cargo

transhipped through Leipzig airport, although DHL also uses other European

airports.

(b) Cargo volumes of other integrators are based on DHL volumes. Accordingly, it

is likely the cargo volumes of other integrators are also underestimated.

135

108. Table 5 below shows the Parties’ estimates of shares of supply (estimated as

described above).

Table 5: Europe to South Korea route, cargo volume (tonnes) and shares of supply (%), 2019-2021

Year

2019

2020

2021

Carrier

Volume

(tonnes)

Market

Share (%)

Volume

(tonnes)

Market

Share (%)

Volume

(tonnes)

Market

Share (%)

Korean Air

[



]

[20-30]

[



]

[30-40]

[



]

[30-40]

Asiana

[



]

[10-20]

[



]

[10-20]

[



]

[10-20]

Combined

[]

[40-50]

[]

[50-60]

[]

[40-50]

AeroLogic

[]

[0-5]

[]

[5-10]

[]

[5-10]

DHL

[]

[5-10]

[]

[5-10]

[]

[5-10]

Turkish

[]

[0-5]

[]

[0-5]

[]

[0-5]

Cargolux

[]

[0-5]

[]

[0-5]

[]

[0-5]

Ethiopian Airlines

[]

[0-5]

[]

[0-5]

[]

[0-5]

Finnair

[]

[0-5]

[]

[0-5]

[]

[0-5]

Atlas Air

[]

[0-5]

[]

[0-5]

[]

[0-5]

Lufthansa

[]

[5-10]

[]

[0-5]

[]

[0-5]

FedEx

[]

[0-5]

[]

[0-5]

[]

[0-5]

KLM

[]

[0-5]

[]

[0-5]

[]

[0-5]

134

The shares reflect volume of cargo on direct and indirect flights taking off from Europe (including the UK)

and landing in South Korea. CASS stands for Cargo Accounts Settlements System, a system that is used to

simplify the billing and accounts systems between airlines and freight forwarders. Not all air cargo service

suppliers settle through CASS (FMN, paragraphs 14.46(ii) and 14.50(iii)). TRASS data is collected by the

South Korean customs and captures cargo that has first been trucked from the UK to a European airport

before being flown to Korea (Parties’ response to the issues letter, paragraph 85). FOIS (Flight Operation

Information System) shows data on arrivals and departures to and from South Korea (FMN, paragraph

14.68(ii)).

135

FMN, paragraphs 14.74-14.75.

Page 37 of 64

Air France

[]

[0-5]

[]

[0-5]

[]

[0-5]

UPS

[]

[0-5]

[]

[0-5]

[]

[0-5]

TNT

[]

[0-5]

[]

[0-5]

[]

[0-5]

Polar Air Cargo

[]

[0-5]

[]

[0-5]

[]

[0-5]

Other

[]

[20-30]

[]

[10-20]

[]

[10-20]

Total

[]

100.0

[]

100.0

[]

100.0

Source: Issues letter response slide deck, Slide 32 (Parties’ calculation based on data from CASS, TRASS, FOIS and DHL).

109. Based on the Parties’ estimates, in 2021, the Parties had a combined share of the

supply of air cargo services on the Europe to South Korea route of [40-50]% (with

an increment of [10-20]%). The Parties are the two largest suppliers on the route.

They are followed by AeroLogic, DHL, and Turkish Airlines, whose shares of supply

are [5-10]%, [5-10]%, and [0-5]% respectively. The CMA therefore notes, by way of

comparison, that the increment brought by the Merger is similar to the combined

2021 share of supply of the next three largest competitors on the route.

110. The CMA further notes that the COVID-19 pandemic does not appear to have had a

material impact on the position of the Parties and their competitors on the Europe to

South Korea route. In 2019, the Parties were the two largest players on the route

with a combined share of [40-50]% (and with the Merger increment being [10-20]%).

The only other competitor with a share of supply above 5% ([5-10]%) was DHL,

followed by a tail of smaller players.

111. As noted above, the CMA’s investigation found that there may be some important

UK-specific aspects of competition which affect the strength of alternative suppliers

for some customers. For example, the CMA received a number of concerns from

customers transporting cargo from the UK to South Korea. These customers

indicated that they do not regard the transhipment of cargo to be a desirable option

and strongly prefer flights from the UK to South Korea (see paragraph 122(b)(ii)

below). The CMA has therefore also considered the Parties’ estimated shares of

supply for the supply of air cargo services on the UK to South Korea route.

136

Table 6: UK to South Korea route, cargo volume (tonnes) and shares of supply (%), 2019-2020

136

The shares reflect volume of cargo on direct and indirect flights taking off from UK and landing in South

Korea. These estimates were calculated using the methodology described in paragraph 107.

137

2021 data not provided.

2019

2020

137

Carrier

Volume (Tonnes)

Share of volume (%)

Volume (Tonnes)

Share of volume (%)

Korean Air

[]

[20-30]

[]

[30-40]

Asiana

[]

[20-30]

[]

[20-30]

Combined

[]

[40-50]

[]

[50-60]

Other Airlines

IAG/British Airways

[



]

[10-20]

[



]

[5-10]

CargoLogicAir

[



]

[0-5]

Page 38 of 64

Source: FMN Table 14.39 (Parties’ calculation based on data from CASS, TRASS, FOIS and DHL).

112. The CMA notes that, based on the Parties’ estimates, the Parties’ shares of supply

are higher on the UK to South Korea route compared to the Europe to South Korea

route. In 2020, their combined share of supply was [50-60]% on a UK basis

compared to [50-60]% on a European basis.

TRASS data

113. In addition to the shares as described above, the Parties also provided data on

volumes of cargo departing from the UK and arriving in South Korea based on

TRASS data.

138

The Parties submitted that TRASS data are the most

comprehensive and representative data available as they reflect the origin and

actual route of shipment (including transhipment by air and truck) whereas CASS

data (which are used together with other data in the Parties’ estimates set out

above) are based on airway bill information and reflect the origin as the airport of

departure.

139

114. Table 7 below shows the cargo volumes for goods transported from the UK to South

Korea from 2019 to 2021, split by the country through which the cargo is

transhipped. Figures for ’direct’ indicate that cargo originating in the UK is not

transhipped through another country.

Table 7: Cargo volume from the UK to South Korea (TRASS data), 2019-2021

Flight type

Transhipment

country

2019

2020

2021

Volume

(tonnes)

Share of

volume

(%)

Volume

(tonnes)

Share of

volume

(%)

Volume

(tonnes)

Share of

volume (%)

Direct

N/A

4,733

35.6

4,036

33.4

4,817

35.0

Indirect

Germany

1,118

8.4

1,535

12.7

1,946

14.1

Netherlands

307

2.3

808

6.7

1,385

10.1

Turkey

802

6.0

756

6.2

922

6.7

Qatar

653

4.9

664

5.5

893

6.5

UAE

693

5.2

459

3.8

717

5.2

138

TRASS data is data from the Korean Customs authorities and captures all cargo entering South Korea

and the true origin of that cargo. Parties’ response to the issues letter, paragraph 85.

139

Parties’ response to the issues letter, paragraph 85.

Volga-Dnepr-Airlines

[]

[0-5]

Integrators

DHL

[]

[0-5]

[]

[5-10]

FedEx

[]

[0-5]

[]

[0-5]

TNT

[]

[0-5]

[]

[0-5]

UPS

[]

[0-5]

[]

[0-5]

Others

[]

[30-40]

[]

[20-30]

Total

[]

100.0

[]

100.0

Page 39 of 64

Belgium

879

6.6

658

5.4

679

4.9

Luxembourg

265

2.0

248

2.0

424

3.1

China (inc. HK)

847

6.4

591

4.9

404

2.9

Azerbaijan

510

3.8

619

5.1

304

2.2

France

264

2.0

130

1.1

229

1.7

Russia

288

2.2

492

4.1

215

1.6

Others

1924

14.5

1103

9.1

839

6.1

Total

13,283

100.0

12,099

100.0

13,774

100.0

Source: Updated Cargo Briefing paper, Annex 3, and issues letter Response Slide Deck, slide 10.

115. Table 7 shows that [30-40]% of cargo transported from the UK to South Korea in

2021 was transported via direct flights departing from the UK. According to the

Parties, as the Parties only transport cargo from the UK to South Korea via direct

flights from the UK to South Korea, their share of supply in cargo transported from

the UK to South Korea is at most [30-40]%.

140

The Parties submitted that allocating

this [30-40]% share of cargo carried from the UK to the Parties would be an

overstatement of their position, as other carriers such as British Airways and

providers of unscheduled flights also offer direct services.

141

The CMA’s assessment

116. The CMA considers that the Parties’ estimates indicate that they have high

combined shares of supply and are, by some distance, the largest players in the

supply of air cargo services on the Europe to South Korea and UK to South Korea

routes.

117. The TRASS data show that direct flights account for a significant proportion of cargo

transported from the UK to South Korea. As the Parties are the main suppliers of

direct flights from the UK to South Korea, the TRASS data therefore also confirm

that they are significant suppliers of air cargo services for customers transporting

cargo from the UK to South Korea (and therefore any overstatement of their market

position would be limited in practice).

118. Moreover, while the TRASS data provides useful information on the extent to which

customers transporting cargo from the UK to South Korea use direct and indirect

flights to transport cargo to South Korea (see paragraph 11364), it provides only

140

Parties’ response to the issues letter, paragraph 85.

141

Parties’ response to the issues letter, paragraph 85.

Page 40 of 64

limited insight into the closeness of competition between the Parties and the extent

to which the Parties’ customers regard other suppliers as alternatives.

119. In any case, the CMA notes that the Parties’ submission that their share of supply is

at most [30-40]% based on TRASS data (see paragraph 115) is based on the

position that the Parties offer only direct flights. The CMA has not been able to verify

in the time available to it following the Issues Meeting whether all of the Parties’

volumes of cargo transported from the UK to South Korea are on direct flights from

the UK, or whether cargo originating in the UK is transhipped by land/sea to other

airports in Europe and transported on the Parties’ flights from those airports. It is

therefore not necessarily the case that the Parties’ stated share of [30-40]%

provides an overstatement of their position.

120. The CMA has considered this evidence in the round together with the other

evidence it received relating to closeness of competition between the Parties and

the strength of the alternatives to the Parties remaining post-Merger.

Closeness of competition

121. The Parties submitted that, compared to air passenger services, demand for air

cargo services is less time-sensitive, and services are less sensitive to the route

format, travel time and the brand of service provider. The Parties further submitted

that cargo owners are extremely sensitive to price, given the quality of air cargo

services is substantially similar across all service providers.

142

As evidence of this

position, the Parties noted that 65% of cargo is shipped from the UK to South Korea

via indirect routings (see Table 7). The Parties further noted that this indicates that

there are likely to be no particular risks associated with the handling of indirect

cargo compared to the handling of direct cargo.

143

122. The CMA considered the following evidence in its assessment of closeness of

competition between the Parties.

(a) In terms of market structure, the Parties are currently the two main suppliers of

direct air cargo services from the UK to South Korea (see paragraph

126(a)126).

142

FMN, paragraph 13.28.

143

Parties’ response to the issues letter, paragraph 92(c).

Page 41 of 64

(b) The CMA gathered information from customers who use the Parties’ air cargo

flights from the UK to South Korea to transport cargo from the UK to South

Korea:

(i) All customers responding to the CMA’s investigation rated both of the

Parties as the strongest suppliers for transporting cargo from the UK to

South Korea (taking any route into account).

144

(ii) The majority of customers that responded to the CMA’s investigation

raised concerns in relation to the Merger, primarily on the basis that the

Parties are the main suppliers of direct air cargo services between the UK

and South Korea. One noted that the Parties are the only two airlines with

non-stop, direct services between the UK and South Korea.

145

Further,

some of these customers indicated that their business needs require

direct flights from the UK, whilst some others

146

noted that even when

direct flights are not required, they remain the preferred option due to

faster transit time. Some of these customers also explained that indirect

cargo flights present a greater risk of logistical issues (eg delayed flights

and risk of goods getting damaged or going missing).

147

144

Third-party responses to CMA’s Cargo Customer Questionnaire (2022), question 8; and third-party

responses to CMA’s Cargo Customer Questionnaire (2021), question 11. Korean Air received an average

score of 4.9 and Asiana received an average score of 4.3 (both out of 5, where 5 is very strong) and were

the most common providers listed. The Parties submitted that the CMA’s cargo customer questionnaire was

unduly focused on UK to South Korea and, with the exception of ranking transit options, questions relating to

competitors were directed to focus on ‘main suppliers of Air Cargo Services from UK to South Korea’, which

would likely cause respondents to focus only on direct options without considering options more broadly for

UK via Europe, including in relation to competitiveness for price. The CMA considers that the risk of bias in

customers’ responses on these grounds is low. The CMA notes that it asked customers a total of three

questions specifically on their use of air cargo services for cargo travelling from the UK South Korea, the first

two setting out various transit options that customers may consider to this end (including mixed transit routes

where cargo is transhipped to an airport in Europe for onward transport by direct or indirect flight to South

Korea) and the third asking customers who they consider to be the main suppliers of air cargo services from

the UK to South Korea.

145

Third-party response to CMA’s Cargo Customer Questionnaire (2022), question 12.

146

Third-party responses to CMA’s Cargo Customer Questionnaire (2021), question 6.

147

Third-party responses to Cargo Customer Questionnaire (2022), response to question 7; and third-party

responses to Cargo Customer Questionnaire (2021), response to questions 6 and 10.

Page 42 of 64

(i) The vast majority of competitors responding to the CMA’s investigation

rated both Parties as the strongest competitors for transporting cargo

from the UK to South Korea.

148

(ii) One competitor responding to the CMA’s investigation raised concerns,

specifically relating to the provision of air cargo services, indicating that

the Merger would enhance the Parties’ dominant market position.

149

123. The Parties submitted a bidding analysis, which the Parties submit shows that they

hardly encounter each other in competition for cargo transportation between the UK

and South Korea.

150

Further, the Parties submitted that both have a low success

rate in bidding for cargo tenders.

151

In considering the weight that should be given to

this analysis, the CMA notes that competition does not tend to occur via tender; the

Parties stated that there are generally no contracted volumes with customers,

rather, cargo sales are made by customers who make individual inquiries by email

or telephone each time that they require air cargo services.

152

The CMA’s

assessment of the Parties’ tender data confirms this position, showing that cargo

volumes for which the Parties have competed for by way of tender (either

successfully or unsuccessfully) make up less than []% of the cargo carried by the

Parties.

153

On this basis, the CMA considers that the analysis submitted by the

Parties does not provide meaningful insight into competition in the supply of air

cargo services.

124. For the reasons set out above, the CMA considers that the Parties compete closely

in the supply of air cargo services on the Europe to South Korea route for customers

transporting cargo from the UK to South Korea.

148

Whether through a direct or indirect flight from the UK to South Korea or through transhipment by

land/sea to another airport in Europe for onward transport by air to South Korea. Third-party responses to

CMA’s Combination Airline Questionnaire (2021), question 19; and third-party responses to CMA’s Cargo

Competitor Questionnaire (2022), question 10. Korean Air received an average score of 5, and Asiana

received an average score of 4.6 (both out of 5). Both airlines were the most common providers listed.

149

Third-party response to CMA’s Cargo Competitor Questionnaire (2022), question 24.

150

FMN, paragraph 16.12.

151

FMN, paragraph 16.14.

152

FMN, paragraph 16.1.

153

Data supplied by the Parties indicates that the tenders awarded to the Parties to carry cargo from UK to

South Korea account for less than []% of the Parties’ volume carried on the route. The Parties submitted

that this conclusion did not take into account the [] number of bids lost by the Parties and provided data on

the Parties’ bids (including those lost) from Europe to South Korea in the 2018 to 2021 period (see Issues

Meeting Slide deck, slide 42). This shows that over the 2018 to 2021 period, the Parties collectively bid for

[] tonnes on routes from Europe to South Korea, winning [] of them. As set out in slide 32 of the Issues

Meeting Slide deck, the Parties collectively transported [] tonnes from Europe to South Korea over the

same period. The total cargo volumes bid on (including bids not won) therefore would represent less than

[]% of the cargo transported.

Page 43 of 64

Competitive constraint from alternative suppliers

125. The Parties submitted that the supply of air cargo services between Europe and

South Korea and the UK and South Korea is highly competitive.

154

In particular, the

Parties submitted that:

(a) IAG/British Airways is currently able to compete effectively by offering direct

flights between LHR and ICN pursuant to its codeshare agreement with

Korean Air (the BA Codeshare Agreement).

155

Further, under the UK – South

Korea Air Services Agreement (ASA), Korean carriers are required to have

codeshares with UK carriers in order to operate cargo freighters.

156

Therefore,

according to the Parties, Korean Air is required to maintain the codeshare

agreement with IAG/British Airways and this provides significant bargaining

power to IAG/British Airways when it comes to negotiating cargo rates under

the BA Codeshare Agreement. In addition, British Airways has previously

offered belly-hold cargo while operating direct air passenger flights between

LHR and ICN and could re-enter if demand recovers.

157

(b) Non-scheduled cargo carriers can offer a direct service from the UK and these

non-scheduled flights can enter at any time when demand arises. The Parties

submitted that volumes of cargo transported on non-scheduled direct flights

from the UK to South Korea increased by around 600% between 2020 and

2021.

158

via routes involving transhipment by land/sea and onward air transport from

other airports in Europe) such as Qatar Airlines and Turkish Airways exert a

significant constraint on the Parties. In this regard, the Parties submitted that

risks to goods are not material, and the Parties carry indirect goods on other

routes.

159

Moreover, according to the Parties, should the prices on the Parties’

flights increase by 10%, the Parties would expect a loss of []% of their

154

Parties’ response to the issues letter, paragraph 102 and FMN, paragraph 4.2.

155

The Parties submitted that British Airway’s exit from air passenger services on the London-Seoul route

has had no impact on the BA Codeshare Agreement with respect to air cargo services. British Airways can

continue to engage with freight forwarders and use Korean Air’s aircraft for the transportation of such cargo

(FMN, paragraph 12.43-12.44).

156

Parties’ response to the issues letter, paragraph 97(d).

157

FMN, paragraphs 3.2, 15.13 (ii, a), and 26.86.

158

Issues letter response slide deck, slide 14.

159

Issues letter response slide deck, slide 13.

Page 44 of 64

customers to indirect alternatives (although no evidence was provided to

substantiate this position).

160

(d) Integrators are one of the most significant groups of competitors. According to

the Parties, integrators transport small parcels, e-commerce cargo, vaccines

and other cargo.

161

(e) Finally, air cargo services are characterised by excess capacity, both between

the UK/Europe and South Korea routes and globally. The Parties further

submitted this excess capacity is likely to continue and this drives intense

competition.

162

126. The available evidence indicates that there are several alternative options for

customers transporting cargo from the UK to South Korea – including other direct

flights from the UK and indirect options (whether indirect flights from the UK or

routes involving transhipment by land/sea to other airports in Europe). The evidence

also indicates, however, that these alternatives would provide only a limited

constraint on the Merged Entity.

(a) The Parties are the only independent suppliers of scheduled direct air cargo

services from the UK to South Korea (and vice versa). While IAG/British

Airways offers scheduled direct air cargo services between the UK and South

Korea, since exiting the supply of air passenger services on the London-Seoul

route, it only does so via to the BA Codeshare Agreement. The CMA notes

therefore that IAG/British Airways’ ability to compete effectively pursuant to this

agreement relies on Korean Air continuing to offer such capacity at

commercially acceptable rates. Further, while a small number of customers

identified IAG/British Airways as a strong supplier for transporting cargo from

the UK to South Korea, IAG/British Airways’ share of supply on the Europe to

South Korea route and the UK to South Korea route prior to the COVID-19

pandemic (when it also offered belly-hold cargo on its direct air passenger

flights between LHR and ICN) was small relative to the Merged Entity’s. With

respect to the possibility of future re-entry of IAG/British Airways’ direct belly-

hold cargo, the CMA considers that this is uncertain (see paragraph 91). The

160

Parties’ response to the issues letter, paragraph 88.

161

Parties’ response to the issues letter, paragraph 97(c).

162

FMN, paragraphs 4.2 and 15.126. The Parties estimated the overall excess capacity and each of the

Parties’ excess capacity in air cargo services from Europe to South Korea based on both the Seabury and

CASS data (FMN, Tables 15.26, 15.28 and 15.30, Parties’ response to the issues letter response). In relation

to excess capacity more generally, see Issues letter response slide deck, slide 17.

Page 45 of 64

CMA therefore considers that the constraint remaining from IAG/British

Airways post-Merger is likely to be weak.

(b) The CMA estimates that non-scheduled direct services represented [10-20]%

of the capacity on direct air cargo flights from the UK to South Korea route in

2021.

163

The CMA notes, however, that no third parties that responded to the

CMA’s investigation identified non-scheduled cargo flight providers as a main

competitor or supplier for transporting cargo from the UK to South Korea.

164

Further, the CMA notes that all customers who responded to the CMA’s

investigation rated frequency of service as an important factor when choosing

an air cargo supplier to transport cargo from the UK to South Korea

(suggesting that non-scheduled services would generally be considered as a

materially weaker alternative).

165

include AeroLogic, DHL, Turkish Airlines, and Lufthansa, all of which provide

indirect services from the UK (via indirect flights from the UK or routes

involving further transhipment). These competitors are likely to be less close

competitors to the Parties, given that they do not provide direct scheduled

services.

(d) Some customers that responded to the CMA’s market investigation identified

limited alternatives (and in the majority of cases, no alternatives) to the Parties

for transporting cargo from the UK to South Korea, while ranking the Parties as

the strongest providers, with Korean Air first, and Asiana second (see

paragraph 112(b)). A small number of customers listed British Airways, Air

France/KLM, Cargolux, Emirates, and Etihad Airways as alternatives to the

Parties, but these competitors were scored as weaker alternatives compared

to the Parties.

166

The CMA therefore believes these carriers would exert a

limited constraint on the Merged Entity. The CMA notes that the Parties’

submissions that they would lose [] proportion of customers to rivals in the

163

FMN, Table 14.33 shows that total capacity on the UK to South Korea route in 2021 according to Seabury

was 24,939 tonnes. The Parties state that, based on Seabury data, non-scheduled flights volume rose from

423 tonnes in 2020 to 3,040 tonnes in 2021 on the UK to South Korea direct route. On the Europe to South

Korea route, Parties state that non-scheduled flights volume rose from [] tonnes in 2020 to [] tonnes in

2021, out of 483,000 tonnes (Parties’ response to the issues letter, paragraph 132(c)).

164

The Parties noted that IAG/British Airways operated direct non-scheduled air cargo services from the UK

to South Korea in 2021 (Parties’ response to the issues letter, paragraph 132(c)). The CMA has considered

the remaining constraint from British Airways in paragraph 125(a) above.

165

Third-party responses to CMA’s Combination Airlines Questionnaire (2021), question 5. All respondents

considered frequency as an important factor that is considered when selecting a supplier of air cargo

services. Customers rated frequency 4 or more out of 5 (where 5 is the most important).

166

Third-party responses to Cargo Customer Questionnaire (2022), question 8.

Page 46 of 64

event of a price increase are entirely unsubstantiated and therefore cannot be

considered to provide evidence of the strength of these alternatives.

(e) The CMA also notes that one integrator identified by the Parties as a

competitor indicated it is not materially active in the transport of cargo on the

route and stated that it is focussed more on small parcels rather than cargo.

167

127. The CMA also considered the extent to which spare capacity exists on the Europe

to South Korea route, as well as the extent to which spare capacity exists more

generally, on a global basis, and could be brought on to the Europe to South Korea

route:

(a) On the Europe to South Korea route, the evidence on the current level of spare

capacity is mixed. Data from Seabury

168

, provided by the Parties, indicates that

carriers such as Lufthansa have significantly increased their capacity on the

route between 2019 and 2021.

169

The CMA notes that these carriers remain

small relative to the Parties and do not operate direct scheduled flights.

170

addition, the Parties provided estimates of spare capacity on the route and

stated that these estimates show that there is substantial excess capacity.

171

The CMA notes that these estimates have certain limitations. In particular, the

data combines two data sources measuring different elements and may also

underestimate utilisation. In light of the limitations in these data, the CMA

considers that only limited weight should be placed on these estimates.

172

(b) On the other hand, the majority of competitors responding to the CMA’s

investigation explained that they do not typically have capacity available to

accommodate additional demand for air cargo services from the UK to South

Korea.

173

Some competitors noted that there are constraints on belly cargo

space or that they are operating a limited number of weekly frequencies.

Finally, one competitor noted that the COVID-19 pandemic brought volatility in

167

Third-party submission dated 26 November 2021.

168

Seabury data shows air cargo capacity (not shipment volume) on a given direct flight, and as such,

cannot be used to infer capacity from Europe to Korea via the Middle East.

169

Issues letter response slide deck, slide 32.

170

Table 5 shows that in 2021 Lufthansa had a share of supply of [0-5]% compared to the Parties’ combined

share of [40-50]%.

171

FMN, Table15.26 and paragraph 15.126. The Parties’ estimates indicate that capacity utilisation between

Europe and Korea is 60%.

172

The numerator in the Parties’ estimates is based on CASS data and the denominator is based on

Seabury data. The Parties have stated that CASS data can underestimate demand, as it does not include

non-scheduled charter flights and integrators and may not include all carriers that appear in Seabury data.

(FMN, paragraph 14.46 and 14.50)..

173

Third-party responses to CMA’s Combination Airlines Questionnaire (2021), question 13.

Page 47 of 64

the market, suggesting it would be hard to estimate the available supply once

air passenger services recover from the pandemic.

International Air Transport Association (IATA) data

174

which indicates that

there is spare capacity in air cargo services globally. The Parties submitted

that this spare capacity could be brought on to serve customers on the Europe

to South Korea route. The data submitted shows that there is a cargo load

factor (a measure of capacity utilisation) of 58% globally, and a cargo load

factor of 70% on the Europe-Far East route. While the IATA data suggest that

there is likely to be spare capacity globally in the supply of air cargo services,

any expansion of capacity is likely to involve suppliers of indirect services,

which are a weaker constraint on the Parties.

128. Given the above, the CMA considers that the Merged Entity will face limited

competitive constraints the supply of air cargo services on the Europe to South

Korea for customers transporting cargo from the UK to South Korea route post-

Merger.

Conclusion on TOH2

129. Based on the evidence summarised above, the CMA considers that the Parties

have high combined shares of supply and the Merged Entity will be, by some

distance, the largest player in the supply of air cargo services on both the Europe to

South Korea and UK to South Korea routes. Customs data on volumes of cargo

transported from the UK to South Korea and its (direct and indirect) routing indicate

that direct flights account for significant proportion of cargo transported from the UK

to South Korea.

130. Other evidence received by the CMA also indicates that the Parties are competing

closely and that the constraint from alternative suppliers on the Merged Entity will be

limited post-Merger.

(a) The Parties are currently the two main suppliers of direct air cargo services

from the UK to South Korea, being the only providers of scheduled direct cargo

flights other than IAG/British Airways (who currently competes only pursuant to

a codeshare arrangement with Korean Air). While there are also some

unscheduled direct flights, these appear to be most a weak constraint on the

174

IATA gathers industry data and produces estimates relating to passenger travel, cargo, safety and flight

operations. See: IATA - Data & Statistics.

Page 48 of 64

Parties. The Parties are therefore particularly close competitors for customers

with a preference for direct flights.

(b) Several customers of the Parties’ services from the UK to South Korea

expressed a strong preference for direct flights. The majority of customers that

responded to the CMA’s investigation raised concerns about the impact of the

Merger, primarily on the basis that the Parties are the main suppliers of direct

air cargo services between the UK and South Korea.

competitor is half the size of Air Asiana) and do not offer direct scheduled

services. Some customers identified limited or no alternatives to the Parties,

while ranking the Parties as the strongest providers. A small number of

customers listed alternatives to the Parties but identified those alternatives as

weaker than the Parties.

131. While the CMA found some evidence on recent capacity expansion on the route, the

suppliers that have expanded remain small compared to the Parties and do not offer

direct scheduled services (so are generally weaker competitors to the Parties than

the Parties are to each other). There is no indication that any spare global capacity

could be reallocated to expand the capacity of direct flights between the UK and

South Korea.

132. The CMA therefore believes that the Merger gives rise to a realistic prospect of an

SLC as a result of horizontal unilateral effects in the supply of air cargo services on

the Europe to South Korea route for customers transporting cargo from the UK to

South Korea.

Horizontal unilateral effects in the supply of air cargo services on the South

Korea to Europe route for customers transporting cargo from South Korea to

the UK (TOH3)

133. The CMA has assessed whether it is or may be the case that the Merger may be

expected to result in an SLC as result of horizontal unilateral effects in the supply of

air cargo services on the South Korea to Europe route for customers transporting

cargo from South Korea to the UK.

134. In its assessment, the CMA has considered: (i) shares of supply; (ii) the closeness

of competition between the Parties; and (iii) the competitive constraint from

alternative suppliers remaining post-Merger. The CMA has taken into account in its

assessment the Parties’ submissions and the views of third parties.

Page 49 of 64

Shares of supply

The Parties’ estimates

135. The Parties submitted estimated shares of supply shares of supply for the supply of

air cargo services on the South Korea to Europe route in terms of volume, based on

data from CASS, TRASS, FOIS and DHL. The Parties submitted that these

estimates are likely to underestimate the shares of supply of their competitors for

the reasons set out in paragraph 107.

136. Table 8, below, shows the Parties’ estimates of shares of supply (estimated as

described above).

Table 8: South Korea to Europe route, cargo volume (tonnes) and shares of supply, %, 2019-2021

Year

2019

2020

2021

Carrier

Volume

(tonnes)

Market Share

(%)

Volume

(tonnes0

Market

Share (%)

Volume (tonnes)

Market Share

(%)

Korean Air

[



]

[20-30]

[



]

[30-40]

[



]

[30-40]

Asiana

[]

[10-20]

[]

[10-20]

[]

[10-20]

Combined

[]

[30-40]

[]

[40-50]

[]

[40-50]

Cargolux

[]

[5-10]

[]

[5-10]

[]

[10-20]

Lufthansa

[]

[10-20]

[]

[10-20]

[]

[10-20]

Turkish

[



]

[10-20]

[



]

[5-10]

[



]

[5-10]

KLM

[]

[0-5]

[]

[0-5]

[]

[0-5]

Finnair

[



]

[5-10]

[



]

[0-5]

[



]

[0-5]

Air France

[]

[5-10]

[]

[0-5]

[]

[0-5]

LOT

[



]

[0-5]

[



]

[0-5]

[



]

[0-5]

AeroLogic

[]

[0-5]

[]

[0-5]

[]

[0-5]

British Airways

[



]

[0-5]

[



]

[0-5]

[



]

[0-5]

DHL

[]

[0-5]

[]

[0-5]

[]

[0-5]

FedEx

[



]

[0-5]

[



]

[0-5]

[



]

[0-5]

TNT

[]

[0-5]

[]

[0-5]

[]

[0-5]

UPS

[]

[0-5]

[]

[0-5]

[]

[0-5]

Others

[



]

[10-20]

[



]

[10-20]

[



]

[10-20]

Total

[]

100.0

[]

100.0

[]

100.0

Source: Issues letter Response Slide Deck, slide 31 (Parties’ calculation based on data from CASS, TRASS, FOIS and DHL).

137. Based on the Parties’ estimates, in 2021, the Parties had a combined share of the

supply of air cargo services on the South Korea to Europe route of [40-50]% (with

an increment of [10-20]% brought about by the Merger). The Parties’ largest

competitors are Cargolux, Lufthansa, and Turkish Airlines, whose shares of supply

are of [10-20]%, [10-20]%, and [5-10]% respectively. The CMA notes that, based on

2021 data, post-Merger, the Merged Entity would have a share of supply of almost

four times the size of the next largest player.

Page 50 of 64

138. The CMA further notes that the COVID-19 pandemic does not appear to have a

material impact on the position of the Parties and their competitors on the South

Korea to Europe route. In 2019, the Parties’ combined share by volume was [30-

40]%, with a Merger increment of [10-20]% on this route. The Merger increment was

larger than any other competitor’s share of supply on this route in 2019.

139. As noted above, the CMA’s investigation found that there may be some important

UK-specific aspects of competition which affect the strength of alternative suppliers

for some customers. For example, the CMA received a number of concerns from

customers transporting cargo from South Korea to the UK. These customers

indicated that they do not regard transhipment of cargo to be a desirable option and

strongly prefer flights from the South Korea to the UK. The CMA has therefore also

considered the Parties’ estimated shares of supply for the supply of air cargo

services on the South Korea to UK route.

175

Table 9: South Korea to UK route, cargo volume (tonnes) and shares of supply (%), 2019-2020

Source: FMN Table 14.40 (Parties’ calculation based on data from CASS, TRASS, FOIS and DHL).

140. The CMA notes that, based on the Parties’ estimates, in 2020 the Parties have a

combined share of supply of [20-30]% with an increment of [5-10]%, while the only

other significant competitor identified is British Airways with a share of supply of [5-

10]%.

TRASS data

141. As discussed in paragraph 113, in addition to the shares as described above, the

Parties have also provided shares of supply based on TRASS data.

175

The shares reflect volume of cargo on direct and indirect flights taking off from South Korea and landing in

the UK. These estimates were calculated using the methodology described in paragraph 113.

176

2021 data not provided.

2019

2020

176

Carrier

Volume (Tonnes)

Share of volume (%)

Volume (Tonnes)

Share of volume (%)

Korean Air

[



]

[10-20]

[



]

[10-20]

Asiana

[



]

[5-10]

[



]

[5-10]

Combined

[



]

[10-20]

[



]

[20-30]

Other Airlines

IAG/British Airways

[



]

[10-20]

[



]

[5-10]

Integrators

DHL

[



]

[0-5]

FedEx

[



]

[0-5]

TNT

[]

[0-5]

UPS

[]

[0-5]

Others

[]

[60-70]

[]

[60-70]

Total

[]

100.0

[]

100.0

Page 51 of 64

142. Table 10 below shows the cargo volumes for goods transported from South Korea

to the UK in 2021, split by the country through which the cargo is transhipped.

Figures for ‘direct’ indicate that cargo originating in South Korea arriving in the UK is

not transhipped through another country.

Table 10: Cargo volume from the South Korea to UK route (TRASS data), 2021

177

Flight type

Transhipment

country

Volume (tonnes)

Share of volume

(%)

Direct N/A 2,118 29.2

Indirect

Qatar 1,812 25.0

Germany 1730 23.9

Turkey 338 4.7

China 188 2.6

Luxemburg 187 2.6

Hong Kong 139 1.9

Finland 138 1.9

Azerbaidjan 126 1.7

France 116 1.6

Netherlands 110 1.5

AE 98 1.3

Russia 93 1.3

Others 51 0.7

Total 7,244 100.0

Source: Issues letter response slide deck, slide 11.

143. Table 10 shows that [20-30]% of cargo transported from South Korea to the UK in

2021 was transported via direct flights departing from South Korea. According to the

Parties, as the Parties only transport cargo from South Korea to the UK via direct

flights from South Korea to the UK, their share of supply in cargo transported from

South Korea to the UK is at most [20-30]%.

178

The Parties further submitted that

allocating this [20-30]% share of cargo carried from South Korea to the Parties

would be an overstatement of their position, as other carriers such as British

Airways and providers of unscheduled flights also offer direct services.

177

Data only provided for 2021.

178

Parties’ response to the issues letter, paragraph 85.

Page 52 of 64

The CMA’s assessment

144. The CMA considers that the Parties’ estimates indicate that they have high

combined shares of supply and are among the largest players in the supply of air

cargo services on the South Korea to Europe or UK routes.

145. The TRASS data show that direct flights account for significant proportion of cargo

transported from South Korea to the UK. As the Parties are the main suppliers of

direct flights from South Korea to the UK, the TRASS data therefore also confirm

that they are significant suppliers of air cargo services for customers transporting

cargo from South Korea to the UK (and therefore, any overstatement of their market

position would be limited in practice).

146. Moreover, as noted in paragraph 117, while the TRASS data provides useful

information on the extent to which customers transporting cargo from South Korea

to the UK use direct flights and indirect to transport cargo to the UK, it provides only

limited insight into the closeness of competition between the Parties and the extent

to which the Parties’ customers regard other suppliers as alternatives.

147. In any event, as noted at paragraph 119, the CMA notes that the Parties’

submission that their share of supply is at most [20-30]% based on TRASS data

(see paragraph 139, 142) is based on the position that the Parties offer only direct

flights. The CMA has not been able to verify in the time available to it following the

Issues Meeting whether all of the Parties’ volumes of cargo transported from South

Korea to the UK are on direct flights from South Korea, or whether cargo originating

in South Korea is transported on the Parties’ flights to other European airports and

transhipped by land/sea from those airports to the UK. It is therefore not necessarily

the case that the Parties’ stated share of [20-30]% provides an overstatement of

their position.

148. The CMA has considered this evidence in the round together with the other

evidence it received relating to closeness of competition between the Parties and

the strength of the alternatives to the Parties remaining post-Merger.

Closeness of competition

149. The CMA considered the following evidence in its assessment of closeness of

competition between the Parties.

(a) In terms of market structure, the Parties are currently the two main suppliers of

direct air cargo services from South Korea to the UK (see paragraph 122(a)).

Page 53 of 64

(b) The CMA gathered information from customers who use the Parties air cargo

flights from South Korea to the UK to transport cargo from South Korea to the

UK:

(i) Around half of the customers that responded to the CMA’s investigation

rated both of the Parties as the strongest competitors for transporting

cargo from South Korea to the UK (taking any route into account).

179

(ii) The majority of customers that responded to the CMA’s investigation

raised concerns in relation to the Merger, particularly because the Parties

are the main suppliers of direct air cargo services between South Korea

and the UK. The majority of customers indicated a preference for direct

flights from South Korea to the UK, with one indicating they were a

business requirement.

180

(i) All but one of the competitors responding to the CMA’s investigation rated

Korean Air highest, with Asiana being rated equal or second highest by

all but two of the competitors for transporting cargo from South Korea to

the UK.

181

(ii) As noted in paragraph 122(c)(ii), one competitor responding to the CMA’s

investigation raised concerns, specifically relating to the provision of air

cargo services, indicating that the Merger would enhance the Parties’

dominant market position.

182

179

Third-party responses to CMA’s Cargo Customer Questionnaire (2022), question 11; and third-party

responses to CMA’s Cargo Customer Questionnaire (2021), question 15, Korean Air received an average

score of 4.2 and Asiana received an average score of 4 (both out of 5, where 1 is very weak and 5 is very

strong) and were the most common providers listed. See further footnote 149.

180

Third-party responses to CMA’s Cargo Customer Questionnaire (2022), question 10; and third-party

responses to CMA’s Cargo Customer Questionnaire (2021), question 14.

181

Whether through a direct or indirect flight from South Korea to the UK or to an airport in Europe for

transhipment by land/sea to the UK. Third-party responses to CMA’s Cargo Competitor Questionnaire

(2022), question 18; and third-Third-party responses to CMA’s Combination Airline Questionnaire (2021),

question 27. Korean Air received an average score of 5 and Asiana received an average score of 4.5 (both

out of 5) and were the most common providers listed.

182

Third-party response to CMA’s Cargo Competitor Questionnaire, question 24.

Page 54 of 64

150. The Parties submitted a bidding data analysis which, for the reasons discussed in

paragraph 123, the CMA considers does not provide meaningful insight into

competition in the supply of air cargo services.

183

151. For the reasons set out above, the CMA considers that the Parties compete closely

in the supply of air cargo services on the South Korea to Europe route for customers

transporting cargo from South Korea to the UK.

Competitive constraint from alternative suppliers

152. For the reasons set out in paragraph 125, above, the Parties submitted that the

supply of air cargo services between Europe and South Korea and the UK and

South Korea is highly competitive.

153. The available evidence indicates that there are several alternative options for

customers transporting cargo from South Korea to the UK – including other direct

flights from South Korea and indirect options (whether indirect flights from South

Korea or routes involving transhipment by land/sea from other airports in Europe).

The evidence also indicates, however, that these alternatives would provide only a

limited constraint on the Merged Entity.

(a) As discussed in paragraph 126(a), the Parties are the only independent

suppliers of scheduled direct air cargo services from the UK to South Korea.

While IAG/British Airways offers scheduled direct air cargo services from the

UK, since exiting the supply of air passenger services on the London-Seoul

route, it only does so via to the BA Codeshare Agreement. The CMA considers

that the constraint remaining from IAG/British Airways post-Merger is likely to

be weak, given (i) its ability to compete effectively pursuant to the BA

Codeshare Agreement relies on Korean Air continuing to offer such capacity at

commercially acceptable rates (ii) while a small number of customers identified

IAG/British Airways as a strong supplier for transporting cargo from South

Korea to the UK,

184

its share of supply on the South Korea to Europe route and

the South Korea to UK route prior to the COVID-19 pandemic was small

183

Data supplied by the Parties indicates that the tenders awarded to the Parties to carry cargo from South

Korea to the UK account for []% of the Parties’ volume carried on the Korea to UK route. The Parties

submitted that this conclusion did not take into account the [] number of bids lost by the Parties and

provided data on the Parties’ bids (including those lost) from South Korea to Europe in the 2018 to 2021

period (see Issues Meeting Slide deck, slide 42). This shows that over the 2018 to 2021 period, the Parties

collectively bid for [] tonnes on routes from South Korea to Europe, winning [] of them. As set out in

slide 31 of the Issues Meeting Slide deck, the Parties collectively transported [] tonnes from South Korea

to Europe over the same period. The total cargo volumes bid on (including bids not won) therefore would

represent []% of the cargo transported from Korea to Europe.

184

Third-party responses to CMA’s Cargo Customer Questionnaire (2022), question 11.

Page 55 of 64

relative to the Merged Entity’s and (iii) the possibility of future re-entry of its

direct belly-hold cargo is uncertain.

(b) While the Parties noted constraint from non-scheduled direct air cargo

services, no third parties that responded to the CMA’s investigation identified

non-scheduled cargo flight suppliers as a main competitor or supplier for

transporting cargo from South Korea to the UK.

185

Further, most customers

who responded to the CMA’s investigation rated frequency of service as an

important factor when choosing an air cargo supplier on the route (suggesting

that non-scheduled services would generally be considered as a materially

weaker alternative).

186,187

include Cargolux, Lufthansa, and Turkish Airlines, all of which provide indirect

services from South Korea (via indirect flights from South Korea and/or routes

involving further transhipment). These competitors are likely to be less close

competitors to the Parties, given that they do not provide direct scheduled

services.

(d) Customers that responded to the CMA’s market investigation identified limited

alternatives to the Parties for transporting cargo from South Korea to the UK,

with half of them ranking the Parties as the strongest providers (with Korean

Air first, and Asiana second), and only one customer listed more than two

alternatives to the Parties. Some customers listed Qatar Airlines, Turkish

Airlines, British Airways, Cargolux, Air France, Lufthansa, Finnair, and

Singapore Airlines as alternatives to the Parties, but only Qatar Airlines was

rated stronger than the Parties, and none were identified more frequently than

the Parties.

188

The CMA therefore believes these carriers would exert a limited

constraint on the Merged Entity. As discussed in paragraph 126(d), the CMA

notes that the Parties’ submissions that they would lose [] proportion of

customers to rivals in the event of a price increase are entirely unsubstantiated

185

As noted in respect of TOH2, the Parties noted that IAG/British Airways operated direct non-scheduled air

cargo services from the UK to South Korea in 2021 (Parties’ response to the issues letter, paragraph 132(c)).

The CMA has considered the remaining constraint from British Airways in paragraph 125(a)) above.

186

Third-party responses to CMA’s Combination Airlines Questionnaire (2021), question 5. All respondents

considered frequency as an important factor that is considered when selecting a supplier of air cargo

services. Customers rated frequency 4 or more out of 5 (where 5 is the most important).

187

The Parties did not submit data on the proportion of capacity on direct air cargo flights from South Korea

to the UK accounted for by unscheduled flights.

188

Third-party responses to CMA’s Cargo Customer Questionnaire (2022), question 11; and third-party

responses to CMA’s Cargo Customer Questionnaire (2021), question 15

Page 56 of 64

and therefore cannot be considered to provide evidence of the strength of

these alternatives.

(e) As noted in paragraph 126(e) 126(e), the CMA also notes that one integrator

identified by the Parties as a competitor indicated it is not materially active in

the transport of cargo on the route and stated that it is focussed more on small

parcels rather than cargo.

189

154. In relation to spare capacity, the CMA considers that, for reasons similar to those

set out in paragraph 127, the evidence on the extent to which there is spare

capacity on the South Korea to Europe route is mixed:

(a) On the South Korea to Europe route, data from Seabury, provided by the

Parties, indicates that carriers such as Lufthansa have significantly increased

their capacity on the route between 2019 and 2021.

190

The CMA notes that

these carriers remain small relative to the Parties and do not operate direct

scheduled flights.

191

(b) On the other hand, the majority of competitors responding to the CMA’s

investigation explained that they do not typically have capacity available to

accommodate additional demand for air cargo services from South Korea to

the UK.

192

127(c), while IATA data suggest that there is likely to be spare capacity

globally in the supply of air cargo services, any expansion of capacity is likely

to involve suppliers of indirect services, which are a weaker constraint on the

Parties.

155. Given the above, the CMA considers that the Merged Entity will face limited

competitive constraints on the South Korea to Europe route for customers

transporting cargo from South Korea to the UK post-Merger.

Conclusion on TOH3

156. Based on the evidence summarised above, the CMA considers that the Parties

have high combined shares of supply and are among the largest players in the

189

Third-party submission dated 26 November 2021.

190

Issues letter response, paragraph 87.

191

Table 8 shows that in 2021 Lufthansa had a share of supply of [10-20]% compared to the Parties’

combined share of [40-50]%.

192

Third-party responses to CMA’s Combination Airlines Questionnaire (2021), question 13.

Page 57 of 64

supply of air cargo services on the South Korea to Europe or UK routes. Customs

data on volumes of cargo transported from South Korea to the UK and its (direct

and indirect) routing indicate that direct flights account for significant proportion of

cargo transported from South Korea to the UK.

157. Other evidence received by the CMA also indicates that the Parties are competing

closely and that the constraint from alternative suppliers on the Merged Entity will be

limited post-Merger.

(a) The Parties are currently the two main suppliers of direct air cargo services

from South Korea to the UK. The Parties are therefore particularly close

competitors for customers with a preference for direct flights.

(b) Several customers of the Parties’ services from South Korea to the UK

expressed a strong preference for direct flights. The majority of customers that

responded to the CMA’s investigation raised concerns about the impact of the

Merger, primarily on the basis that the Parties are the main suppliers of direct

air cargo services between South Korea and the UK.

do not offer direct scheduled services. Some customers identified limited

alternatives to the Parties, but generally ranked the Parties as the strongest

providers.

158. As with the Europe to South Korea route, there is some evidence on recent

capacity, but no indication that any spare global capacity could be reallocated to

expand the capacity of scheduled direct flights between South Korea and the UK.

159. The CMA therefore believes that the Merger gives rise to a realistic prospect of an

SLC as a result of horizontal unilateral effects in the supply of air cargo services on

the South Korea.

BARRIERS TO ENTRY AND EXPANSION

160. Entry, or expansion of existing firms, can mitigate the initial effect of a merger on

competition, and in some cases may mean that there is no SLC. In assessing

Page 58 of 64

whether entry or expansion might prevent an SLC, the CMA considers whether such

entry or expansion would be timely, likely and sufficient.

193

Air passenger services on the London-Seoul route (TOH1)

The Parties’ submissions

161. The Parties submitted that, while the air passenger services sector can be

characterised in general by a low supply elasticity compared to other sectors (given

the high cost of aircraft and inability to ‘store’ unsold seats), route specific

investments are not static and so there is very high supply elasticity in relation to

specific routes.

194

162. In relation to the London-Seoul route in particular, the Parties submitted that:

(a) there are number of carriers operating indirect flights (including Lufthansa,

Finnair, Etihad, Air France-KLM and Qatar Airways) on the route who are in a

position to increase capacity in response to any reduction of competition;

195

(b) airport slots are not a significant barrier to entry in either London or South

Korea, given:

(i) in South Korea, while ICN is a fairly congested airport, the congestion

levels have in the past not prevented air carriers from launching or

expanding their capacity on routes to/from this airport. In addition, ICN

has plans to increase its capacity by building a fourth runway and expand

the second passenger terminal, which will be complete by 2024;

196

and

(ii) in London, there are five airports which service London and at the very

least LHR and LGW are substitutable. In any event, the Parties have a

limited number of slots at LHR.

197

193

Merger Assessment Guidelines (CMA129), March 2021, from paragraph 8.40.

194

In this respect, the Parties submitted that air carriers currently have significant capacity and flexibility to

plan their network operations and so could easily expand to a single route without incurring significant costs

or time. FMN, paragraph 21.3.

195

FMN, paragraph 3.3.

196

FMN, paragraph 21.3.

197

FMN, paragraph 21.5. The Parties further noted that expansion in seats offered on a route often does not

require any additional slots to be obtained as an airline can simply redeploy a larger plane to fly the route

(FMN, paragraph 21.6).

Page 59 of 64

The CMA’s assessment

163. Based on third-party evidence, the CMA understands that there are barriers to entry

and expansion in the supply of air passenger services on the London-Seoul route. In

particular, third parties noted the difficulty in obtaining slots at LHR and ICN

198

and

one third party clarified there have been no new entrants on the London-Seoul route

in the last four years.

199

According to one third party, indirect carriers need to take

other factors into account such as connectivity which might be affected by, amongst

other factors, constraints on air traffic rights and limited airport slots.

200

164. The majority of the third parties that responded to the CMA’s market investigation

were not able to comment on entry and expansion in relation to the London-Seoul

route as they do not have visibility on this topic.

201

One respondent told the CMA

that future entry is unlikely given the negative impact of COVID-19 on demand.

202

Another respondent indicated it would enter the London-Seoul route only if certain

key barriers to entry relating to this route such as the limited availability of slots at

ICN could be surmounted.

203

165. Finally, in relation to the Parties’ submission on the expansion of ICN airport, the

CMA notes that this expansion is uncertain and that there is no current visibility on

how the potential future slots will be distributed among air carriers. The CMA has

therefore not placed weight on this.

166. Accordingly, the CMA considers that the evidence received does not indicate that

entry or expansion will be timely, likely or sufficient to mitigate any SLC arising.

Air cargo services on the Europe to South Korea route for customers transporting

cargo from the UK to South Korea (TOH2) and the South Korea to Europe route for

customers transporting cargo from South Korea to the UK (TOH3)

The Parties’ submissions

167. The Parties submitted that the barriers to entry and expansion in the air cargo

services market are low. In this regard, the Parties submitted carriers can be flexible

in their choice of airport and slots are not a constraint.

198

Third-party responses to CMA’s Combination Airline Questionnaire (2021), question 10.

199

Third-party responses to CMA’s Combination Airlines Questionnaire (2021), question 10.

200

Third-party response to CMA’s Combination Airlines Questionnaire (2022), question 10.

201

Third-party responses to CMA’s Combination Airlines Questionnaire (2021), question 9.

202

Third-party response to CMA’s Combination Airlines Questionnaire (2021), question 10.

203

Third-party response to Combination Airlines Questionnaire (2022), question 2.

Page 60 of 64

168. According to the Parties, as the scheduling of air cargo takes place approximately

21 days before the flight, new flights can be scheduled, provided there are available

aircrafts. In particular, the Parties submitted that:

(a) Virgin Atlantic started providing non-scheduled air cargo flights on the ICN-

LHR route in February and March 2021, and therefore is a prospective

entrant;

204

(b) there has been a significant increase in non-scheduled cargo supply between

the UK and South Korea using direct flights (in this regard, the Parties noted in

particular that Maleth Aero (Malta) increased supply significantly in 2021);

between Europe and East Asia during the COVID-19 pandemic whereas

Lufthansa, Aerologic, UPS, and Ethiopian airlines expanded capacity on the

Europe to South Korea route;

205

(d) there are no inherent restrictions to entry from the UK ASA, as the agreement

only covers two London airports, ie LHR and LGW;

206

and

(e) to the Parties’ knowledge, many European countries do not have material

restrictions for additional flights.

The CMA's assessment

169. Most of the competitors that responded to the CMA's market investigation told the

CMA that it is difficult to enter routes that serve customers sending cargo from the

UK to South Korea and from South Korea to the UK. According to these

competitors, this is because of the strong position of the incumbents. Some of these

competitors noted that entry is difficult given the length of the flight and the trusted

service level of the incumbents.

207

204

The Parties submitted Virgin Atlantic’s total volume of supply to arrivals in South Korea was [] (which

amounts to [0-5]% of share based on FOIS data and [0-5]% based on CASS data).

205

FMN, paragraphs 22.15-22.21 and Parties’ response to the issues letter, paragraph 132(c).

206

Parties’ response to the issues letter, paragraph 135.

207

Third-party responses to CMA’s Combination Airlines Questionnaire, question 30; Third-party responses

to CMA’s Cargo Competitor Questionnaire, question 21.

Page 61 of 64

170. Furthermore, regardless of whether multiple European countries have open sky

agreements

208

or permissive regimes with South Korea,

209

some competitors told

the CMA that there are barriers to expansion such as limits to the number of weekly

flights (for both cargo and passenger) between their hub country and South

Korea.

210

171. Given the above, the CMA considers that evidence received in the investigation

does not indicate that entry or expansion will be timely, likely or sufficient to mitigate

any SLC arising.

COUNTERVAILING BUYER POWER

172. The Parties submitted that:

(a) in relation to the supply of air passenger services, customers are well informed

and select their service provider on the basis of their preferences.

211

(b) in relation to the supply of air cargo services, customers are sophisticated

purchasers with access to pricing information concerning the Parties and their

competitors. The Parties further noted customers usually appoint freight

forwarders to arrange the shipment of their goods

212

and that, in line with the

Commission’s precedent, major freight forwarders are able to exert a certain

degree of countervailing buyer power vis-à-vis air cargo carriers.

213

Additionally, the Parties submitted that some freight forwarders have their own

dedicated air cargo fleet whilst others can lease aircraft from airlines with

excess capacity.

214

173. As set out in the CMA’s guidance, most forms of buyer power that do not result in

new entry – for example, buyer power based on a customer’s size, sophistication, or

ability to switch easily – and are unlikely to prevent an SLC that would otherwise

arise from the elimination of competition between the merger firms. This is because

208

An open sky agreement between two countries grants airlines from the countries involved operational

rights to fly passengers and cargo in and out of the other country in question.

209

The Parties submit that Austria, Denmark, Finland, Germany, Greece, Portugal, Spain, and Sweden have

open sky agreements, and Belgium, Italy and the Netherlands have permissive regimes. Parties’ response to

the issues letter, paragraph 135.

210

Third-party response to CMA’s Combination Airlines Questionnaire (2021), question 13 and; third-party

response to CMA’s Cargo Competitor Questionnaire (2022), question 13.

211

FMN, paragraph 23.1.

212

The Parties submitted that, based on 2019 data, the top ten freight forwarders account for []% of

volume on the UK to South Korea route.

213

M. 5141 KLM/Martinair (17 December 2008) paragraph 52.

214

FMN, paragraphs 23.2-23.6.

Page 62 of 64

a customer’s buyer power depends on the availability of good alternatives they

can switch to, which in the context of an SLC will have been reduced.

215

For the

reasons set out in detail above, the CMA believes that the Parties’ customers will

not have good alternatives to switch to post-Merger. On this basis, the CMA does

not consider that customers will be able to exert buyer power to prevent an SLC

arising.

THIRD-PARTY VIEWS

174. The CMA contacted customers that use the Parties’ air cargo services. The CMA

also contacted competitors of the Parties both in relation to air passenger services

and air cargo services.

175. A significant majority of customers raised concerns that the Merger may result in a

reduction of competition in relation to the supply direct cargo services between the

UK and South Korea and may lead to price increases.

176. Almost half of the competitors in the supply of air cargo services raised concerns

regarding the impact of the Merger on competition, whereas the majority of the

competitors in the supply of air passenger services did not raise concerns in relation

to the Merger. A small number of competitors submitted that the Merger would

strengthen the Parties’ presence on the London-Seoul route and at ICN.

177. Third-party comments have been taken into account where appropriate in the

competitive assessment above.

CONCLUSION ON SUBSTANTIAL LESSENING OF COMPETITION

178. Based on the evidence set out above, the CMA believes that it is or may be the

case that the Merger may be expected to result in an SLC as a result of:

(a) horizontal unilateral effects in the supply of air passenger services on the

London-Seoul route;

(b) horizontal unilateral effects in the supply of air cargo services on the Europe to

South Korea route for customers transporting cargo from the UK to South

Korea;

215

Merger Assessment Guidelines, paragraph 4.20.

Page 63 of 64

Korea to Europe route for customers transporting cargo from the South Korea

to UK.

Page 64 of 64

DECISION

179. Consequently, the CMA believes that it is or may be the case that (i) arrangements

are in progress or in contemplation which, if carried into effect, will result in the

creation of a relevant merger situation; and (ii) the creation of that situation may be

expected to result in an SLC within a market or markets in the United Kingdom.

180. The CMA therefore believes that it is under a duty to refer under section 33(1) of the

Act. However, the duty to refer is not exercised whilst the CMA is considering

whether to accept undertakings under section 73 of the Act instead of making such

a reference.

216

The Parties have until 21 November 2022

217

to offer an undertaking

to the CMA.

218

The CMA will refer the Merger for a phase 2 investigation

219

if the

Parties do not offer an undertaking by this date; if the Parties indicate before this

date that they do not wish to offer an undertaking; or if the CMA decides

220

by 28

November 2022 that there are no reasonable grounds for believing that it might

accept the undertaking offered by the Parties, or a modified version of it.

Colin Raftery

Senior Director, Mergers

Competition and Markets Authority

14 November 2022

216

Section 33(3)(b) of the Act.

217

Section 73A(1) of the Act.

218

Section 73(2) of the Act.

219

Sections 33(1) and 34ZA(2) of the Act.

220

Section 73A(2) of the Act.