EU press release on Boeing Merger

[James Love <love@cptech.org>]

  Passed on by Andreas Zuber...  
  
  
  THE COMMISSION CLEARS THE MERGER BETWEEN BOEING AND McDONNELL
  DOUGLAS UNDER CONDITIONS AND OBLIGATIONS
  
  
  DN: IP/97/729     Date: 1997-07-30
  
       TXT: FR EN
       PDF: FR EN
       Word Processed: FR EN
  
  IP/97/729 
  
  Brussels, 30th July 1997 
  
  THE COMMISSION CLEARS THE MERGER BETWEEN BOEING AND McDONNELL
  DOUGLAS UNDER CONDITIONS AND OBLIGATIONS
  
  The European Commission has decided to declare the acquisition by The
  Boeing Company (Boeing) of the McDonnell Douglas Corporation (MDC)
  compatible with the common market subject fo full compliance by Boeing
  with commitments submitted to the Commission. The Commission has found
  that the proposed merger leads to a significant strengthening of
  Boeing's already existing dominant position in the worldwide market
  for large commercial jet aircraft. The Commission considers that this
  strengthening arises from MDC's own competitive potential in large
  commercial jet aircraft, from the enhanced opportunity for Boeing to
  enter into long-term exclusive supply deals with airlines (already
  exemplified by those with American, Continental and Delta), and from
  the acquisition of MDC's defence and space activities, which latter
  confer advantages in the commercial aircraft sector through
  "spill-over" effects in the form of R&D benefits and technology
  transfer. 
  
  Boeing, in the course of intensive negotiations with the Commission,
  has offered commitments to resolve the competition problems identified
  by the Commission. 
  
  These include: 
  
  -  the cessation of existing and future exclusive supply deals, 
  
  -  the "ring-fencing" of MDC's commercial aircraft activities, 
  
  - the licensing of patents to other jet aircraft manufacturers, 
  
  - commitments not to abuse relationships with customers and suppliers
  and - a commitment to report annually to the Commission on military
  and civil aeronautics R&D projects benefiting from public funding. 
  
  These commitments are considered adequate to resolve the identified
  competition problems, and the Commission has therefore decided to
  declare the operation compatible with the common market subject to
  conditions and obligations. The Commission has reached its decision
  after a rigorous analysis based on EU merger control law, and in
  accordance with its own past practice and the jurisprudence of the
  European Court. The Commission expects Boeing to comply fully with its
  decision, in particular as regards the commitments made by Boeing to
  resolve the competition problems identified by the Commission. The
  Commission will strictly monitor Boeing's compliance with these
  commitments. The EU Merger Regulation allows for appropriate measures
  to be taken by the Commission in the event of non-compliance by
  Boeing. 
  
  The market for large commercial jet aircraft is world-wide and the EU
  is an integral and important part of this world market, with a similar
  competitive structure. European airlines are forecast to account for
  almost a third of future demand over the next ten years, and Boeing
  and MDC's combined market share is about two thirds of the EU market. 
  
  In arriving at this decision the Commission has taken into account
  concerns expressed by the U.S. Government relating to important US
  defence interests. The Commission took the US Government's concerns
  into consideration to the extent consistent with EU law, and has
  limited the scope of its action to the civil side of the operation,
  including the effects of the merger on the commercial jet aircraft
  market resulting from the combination of Boeing's and MDC's large
  defence and space interests. 
  
  After an intensive five-month investigation, the Commission has found
  that Boeing, a fully integrated civil and military aerospace company,
  already has a dominant position in the world-wide market for large
  commercial jet aircraft. Boeing's existing dominance stems from its
  very high market share (64% world-wide), the size of its fleet in
  service (60% world-wide), and the fact that it is the only
  manufacturer that offers a complete family of aircraft. This position
  cannot be challenged by potential new entrants, given the extremely
  high barriers to entry in this hugely capital intensive market.
  Boeing's dominance is further demonstrated by the recent conclusion of
  long-term exclusive supply deals with three of the world's leading
  carriers, American, Delta and Continental Airlines, who would have
  been unlikely to lock themselves into twenty year agreements with a
  supplier who did not already dominate, and seem likely to continue to
  dominate, the large jet aircraft market. 
  
  The most immediate reinforcement of Boeing's dominance in large
  commercial jet aircraft would arise through Boeing's increase in
  overall market share (in terms of current order backlog) from 64% to
  70%. Moreover, Boeing could add to its already existing monopoly in
  the largest wide-body aircraft segment (the segment of the Boeing 747)
  a further monopoly in the smallest narrow-body segment. 
  
  The Commission recognises that Douglas Aircraft Company (DAC, the
  commercial aircraft division of MDC) has suffered a decline in its
  business performance in recent years (although the potential success
  of the MD95 has not yet been tested). This decline has been due to a
  level of investment which has been low relative to that of Boeing and
  Airbus, and seems likely to have been exacerbated by a fall in
  customer and investor confidence following MDC's abandonment of the
  MDXX program, and indeed the announcement of the proposed Boeing
  take-over. Nevertheless, Boeing itself has declared since that
  announcement that it would be able to benefit from DAC's remaining
  competitive potential. The acquisition of such an advantage
  constitutes a strengthening of a dominant position under EU law. 
  
  Another vital element in the strengthening of Boeing's dominance would
  result from the large increase of Boeing's customer base, from 60% to
  84% of the current world-wide fleet in service. By ensuring
  preferential access to this customer base, Boeing would increase
  opportunities for future sales through significant leverage over
  existing MDC aircraft users (through customer support services for
  example). Closer ties with those airlines that currently use MDC
  aircraft would give Boeing the opportunity to better identify and
  influence customer needs, or to induce them to change their current
  MDC aircraft for Boeing models. In particular, Boeing could use this
  leverage to induce airlines to enter into long term exclusive deals.
  Boeing has already entered into exclusive agreements with airlines
  which are currently the first, third and fourth largest operators of
  MDC aircraft. Prior to these agreements, exclusivity deals of this
  kind had never been used in this industry. The proposed merger would
  further enhance Boeing's capability to enter into similar exclusive
  agreements in the future, and could create a knock-on effect on other
  large airlines which could be induced to enter into similar deals. 
  
  Although the Commission's investigation did not lead it to conclude
  that the proposed merger would create or strengthen dominance in the
  defence or space sectors, the Commission considers that Boeing's
  dominant position on the civil aircraft market would be significantly
  strengthened as a result of the addition of MDC's defence and space
  business. The acquisition of the world's number two defence
  manufacturer and leading manufacturer of military aircraft would
  considerably enhance Boeing's access to publicly-funded R&D and
  intellectual property. The large increase in Boeing's defence-related
  R&D would confer an increase in know-how and other general advantages
  as well as an increase in the benefits obtained from the transfer of
  military technology to commercial aircraft. The combination of
  Boeing's and MDC's know-how and patent portfolio would be a further
  element for the strengthening of Boeing's dominance. Moreover, the
  overall combination of both the civil and defence and space activities
  of the two companies would increase Boeing's bargaining power
  vis-a-vis suppliers, enabling Boeing to leverage its relationships
  with suppliers to the detriment of its competitors. 
  
  Boeing has proposed remedies, with a view to resolving the
  reinforcement of the dominant position resulting from the combination
  of the competitive potential of DAC with Boeing's dominant position,
  from the increased opportunity for exclusive contracts, which have a
  foreclosure effect on the market, and from the overall effects
  ("spillover") arising from military operations, in particular research
  and development, on large commercial jet aircraft activities. As far
  as the first point is concerned, the Commission's investigations
  revealed that no existing aircraft manufacturer was interested in
  acquiring DAC from Boeing, nor was it possible to find a potential
  entrant to the commercial jet aircraft market who might achieve entry
  through the acquisition of DAC. In view of the impossibility of a
  divestment of DAC, Boeing commits itself to maintain DAC as a separate
  legal entity for a period of ten years and to supply to the Commission
  reports, publicly available and certified by an independent auditor,
  on DAC's results. Moreover, Boeing proposes to limit the leverage
  effect created by MDC's existing fleet, by committing itself not to
  link the sale of Boeing aircraft to its access to the DAC fleet in
  service. As far as exclusive deals are concerned, Boeing commits
  itself to refrain from further such deals until 2007, and not to
  enforce the exclusivity rights in the existing contracts. 
  
  On the overall effects, Boeing has offered to concede to competitors
  non-exclusive licenses for patents, together with underlying know-how,
  held by Boeing arising from publicly-financed R&D. Moreover, Boeing
  commits itself to provide to the Commission, for a period of 10 years,
  an annual report on "non-classified" aeronautical projects in which it
  participates, and which benefit from public financing. These
  commitments will increase transparency of links between civil and
  military activities. Finally Boeing commits itself not to profit from
  its relationships with suppliers in order to obtain preferential
  treatment. This package of remedies, taken as a whole, addresses the
  competition problems identified by the Commission, and the Commission
  has therefore decided to declare the operation compatible with the
  common market. 
  
  In accordance with the Agreement between the European Communities and
  the Government of the United States of America regarding the
  application of their competition laws, the European Commission and the
  Federal Trade Commission have carried out consultations. The
  Commission has taken into account concerns expressed by the U.S.
  Government relating to important US defence interests. The Commission
  took the US Government's concerns into consideration to the extent
  consistent with EU law, and has limited the scope of its action to the
  civil side of the operation, including the effects of the merger on
  the commercial jet aircraft market resulting from the combination of
  Boeing's and MDC's large defence and space interests. 
  
  
  -- 
  _______________________________________________________
  James Love | Center for Study of Responsive Law
  P.O. Box 19367 | Washington, DC 20036 | 202.387.8030
  http://www.cptech.org | love@cptech.org