The European Commission has opened an investigation into the planned merger between Olympic Air and Aegean Airlines. There are concerns the proposed merger could raise serious competition concerns of very high, potentially monopolistic, market shares on all domestic routes and on a number of international routes where both parties operate.
The EC also has doubts as to the compatibility of the transaction with the EU Merger Regulation in connection with the provision of public service obligation routes and ground handling services in Greece. The EC has until 07-Dec-2010 to make a final decision on whether the merger would significantly impede effective competition in the European Economic Area, or any substantial part of it.
Olympic Air commenced operations effective 01-Oct-2009, officially replacing the state-owned Olympic Airlines, previously known as Pantheon and Olympic Airways. The core units of Olympic Airlines were sold to the Marfin Investment Group in Mar-2009 and the new airline started with a clean sheet. The carrier initially operated 21 domestic and international routes and plans to increase its fleet, based around A319/A320s and Bombardier Dash 8-Q400 turboprops, to 32 aircraft, investing approximately USD1.1 billion in the process. It also intends to join the SkyTeam alliance. The A340s that set its predecessor apart from the competition on short-mid haul routes have departed as they were too expensive. Olympic Air also announced plans to create a subsidiary, named Macedonian Airlines, to be headquartered in Thessaloniki. Olympic holds the rights to the brand name.
Automatic for the People
Aegean Airlines has profited from the weakness of Olympic during its various incarnations, with a non-unionised and customer-oriented workforce and has demonstrated that Greece can run a profitable airline. Now the largest Greek airline by size, Aegean has remained profitable, won a string of awards and has prospered under a measured expansion strategy. For the 12 months ended 31-Dec-2009, Aegean Airlines increased revenues to EUR622.7 million (+2%), and achieved an EBITDAR of EUR95.6 million (-6%); EBITDA EUR31.5 million (-45%), pre-tax profit EUR32.5 million (-19%) and net profit EUR23 million (-22%).
Passenger numbers increased by 10% to 6.6 million. The airline blamed the figures, not unnaturally, on the deteriorating Greek economy. It took delivery of eight new aircraft for a total of 30. Aegean Airlines joined the Star Alliance in Jun-2010 and, before talk of a merger, promised to offer genuine competition to Olympic, which – in all its incarnations so far – has remained "the people’s airline". The extent to which that link has been retained is evident in the fact that Olympic Air reputedly paid USD20 million for the "OAL" ICAO code for Olympic Airlines, having initially been allocated "NOA". The IATA code "OA" was transferred automatically, almost as if to help perpetuate the dynasty.
But then Aegean Airlines and Olympic Air announced that each company's shareholders had reached an agreement to merge the two airlines, and to create a new company to be listed on the Athens Stock Exchange. The original agreement would see the main shareholder of Aegean (Vassilakis Group) and the sole shareholder of Olympic (Marfin Investment Group) take an equal shareholding in the combined entity. The combined company would carry the name and logos of Olympic Air. Subsequently they were joined by Laskaridis Group, another investor In Aegean. Apart from its Aegean Airlines interests, Vassilakis Group is an investor in motor vehicle import, distribution, rental and leasing. Apart from Olympic Air, Marfin invests in food and beverage, shipping (notably through Attica Group, which owns Superfast Ferries and Blue Star Ferries), ground handling (through Olympic Handling), MRO services (through Olympic Engineering), healthcare, real estate, IT and telcos, tourism and leisure, and financial services. Laskaridis’ other investments are in ground handling, shipping and shipyards, tourism and real estate sectors.
Too much power
No one could reasonably argue that Marfin, Vassilakis and Laskaridis lack sectoral experience but that is part of the problem: that perhaps they have too much power. The two airlines they own dominate Athens International Airport with 76 routes between them. The total number of routes they do not operate is 101, spread between 72 airlines. There are only five other Greek airlines represented at the airport of which three – Argo, Astra and Sky Express – have only one route each. The two larger airlines are Athens Airways, a regional carrier which commenced operations in Jan-2009 with an innovative fares structure (six routes, all domestic) and Viking Hellas, which operates four routes, connecting two European cities – Amsterdam and Manchester – with three in Iraq via a mini-hub at Athens.
The prospects for Greece’s airlines are not helped by the successive downgrading of the country’s sovereign debt, ultimately to "junk" status in late Apr-2010, with further downgrades possible if the government is unable to implement its fiscal and infrastructural reform programme. Nor have they been helped by a series of strikes, the latest by truck drivers who closed petrol stations across the country, and with warnings of worse to come from fringe political organisations.
The concern over potential monopolisation of routes is warranted. Greece has 227 inhabited islands, many of which cannot offer a full range of business, social and health facilities, meaning that public service obligation (PSO) air routes (in addition to sea ferry routes) are needed so that the inhabitants can have easy access to Athens and the other principle city, Thessaloniki. Within a PSO scheme an airline will typically be subsidised by one or more of several methods to operate a route, for example by having its operating costs and a reasonable profit guaranteed by the state over the course of a concession.
The difficulty lies when there is monopoly power vested in one airline, which can reduce its operating costs accordingly, so that the overall cost to the state is reduced while the airline continues to benefit financially from the guarantee. Such a scenario would preclude other, smaller airlines from competing. One example of that power is in Ireland, where in 2008 Ryanair – which does not actually operate many PSO routes – called for the ending of the "excessive and wasteful" subsidies paid to Irish regional airline Aer Arran (claimed to be more than EUR100 million over six years at up to EUR100 per passenger) to operate PSO routes, and claiming they were "propping up" the smaller airline. With its much tighter cost controls Ryanair could probably operate some of the routes without subsidy. More worrying though was Ryanair’s claim that PSO routes with "such tiny traffic figures" were unjustified, pointing to much improved motorways, bus and rail services and that the money would be better spent on hospitals and schools.
The position in Greece is not the same as in Ireland, with so many islands, but the same argument could be made for such services to be provided only by ferry, instead of by air, which could have a devastating effect on tourism.
Historically, Olympic Airlines continued to be responsible for some flights to Greek islands designated as "public service" right up to its closure in Sep-2009 after which the State conducted a public tender and redistributed the routes. It has to be said that some of the other airlines do not help themselves. In May-2010, the Greek Civil Aviation Authority stripped Athens Airways of the right to serve a number of government-subsidised routes. This was reportedly due to unexplained delays and cancellations by Athens Airways.