The Federal Cartel Office (FCO) recently issued a decision on a merger control notification from Lufthansa and Air Berlin regarding a wet lease. The agreement is part of Air Berlin's restructuring process. The case underlines the fact that the FCO's application of the concept of 'control' differs from the European Commission's view and raises further questions relating to German merger control.
Air Berlin intends to lease 38 passenger aircraft to Lufthansa, including cockpit and cabin crews. The agreement has a six-year term that could be extended subject to certain conditions. The passenger aircraft are based at German and Austrian airports. Lufthansa will not acquire further assets, departure or landing slots or a customer base. Such agreements are called 'wet leases'. Air Berlin is not the owner of the 38 passenger aircraft, but leases them from third parties. According to the FCO, it is usual in wet leases for the responsibility for flight operation, crew planning and maintenance to remain with Air Berlin. Lufthansa also intends to acquire 25 of the 38 passenger aircraft, 10 of which will be leased from third parties (without further services, such as cockpit or cabin crews (these agreements are called 'dry leases')). Lufthansa also intends to acquire full ownership of 15 of these 25 passenger aircraft. When the FCO granted clearance it was unclear whether and how agreements between Lufthansa and third parties will be negotiated and entered into. The FCO based its decision on the assumption that the agreements had already been entered into.
In the view of the European Commission, to which Lufthansa and Air Berlin had already proactively filed a notification, the wet leases did not constitute a concentration within the meaning of the EU Merger Regulation. The commission did not regard the wet lease as an acquisition of control over the aircraft.
In the one-month preliminary examination proceedings, the FCO decided that the notified transaction did not satisfy the criteria for a prohibition decision as set out in Section 36(1) of the Act against Restraints of Competition. In the end, the FCO left open the question of whether the wet lease did in fact constitute a concentration within the meaning of German merger control law.
Arguments for concentration
Lufthansa and Air Berlin, the parties to the concentration, had argued that the wet lease was not a concentration because it granted only a right to use the passenger aircraft without giving Lufthansa full title to the aircraft. It had filed the notification proactively.
The FCO emphasised that the acquisition of a substantial part of the assets of another undertaking (a concentration under German merger control law) does not necessarily mean that the ownership of an asset must be transferred to the acquirer. According to the FCO's findings, the six-year term of the wet lease was unusual in the aviation industry. The usual planning horizon in aviation for planning slots and flight routes is between six months and a maximum of one year.
The FCO regarded the 38 Air Berlin passenger aircraft to be a substantial part of the assets of another undertaking. The aircraft constitute approximately 25% of all aircraft that Air Berlin possesses as assets. The lease will lead to 7% growth of the Lufthansa aircraft fleet. Thus, according to the FCO's findings, the wet lease may strengthen Lufthansa's market position. In the FCO's view, the agreements between Lufthansa and the third parties relating to 25 of the 38 passenger aircraft secure the market position transferred to Lufthansa by conclusion of the wet lease with Air Berlin. These agreements must be analysed within the merger control proceedings, because the agreements have an even longer term than the wet lease between Lufthansa and Air Berlin. The FCO also stated that Lufthansa could even be seen to acquire (partial) control over the 38 passenger aircraft, but gave no reason for this point of view.
The FCO published a press release and case report on its website.
Analysis
Regarding the notion of 'concentration', German merger control law has a wider scope of application than European merger control law. It also covers the acquisition of non-controlling minority shareholdings and the acquisition of competitively significant influence over another company. However, both German and European merger control law share the definition of 'control'. In 1998 the definition of control was adopted into German merger control law, for which European merger control law served as a blueprint. It is commonly understood that the interpretation of the German law provisions followed the interpretation of the respective provisions in the EU Merger Regulation. Yet the case at hand demonstrates that the FCO may interpret the concept more broadly than the commission. While the latter stated that a wet lease does not constitute a concentration, the FCO left open the question of whether a wet lease constitutes a concentration and even indicated that it might constitute an acquisition of control. It did not decline jurisdiction, as the commission had done, but decided on the merits of the case and conducted market testing.
The FCO also has another interpretation for the definition of 'concentration'. Under German law the acquisition of control, the acquisition of 25% of the shares or voting rights in another company and the acquisition of competitively significant influence form a concentration, but so too does the acquisition of the assets or a substantial part of the assets of another undertaking.
Such reasoning raises two questions. First, it seems a common understanding that the acquisition of assets always constitutes an acquisition of control. In its decision the FCO left open the question of control and acquisition of assets, but it could be concluded from the FCO's view that there may be transactions that constitute an acquisition of assets, but not an acquisition of control. Second, it is firm legal opinion that an acquisition of assets requires a transfer of the full right with no further rights relating to the object of the transaction remaining with the seller (eg, transfer of title in fixed assets). The FCO apparently wants to deviate from that understanding. Since the FCO left open the question of whether the wet lease constituted a concentration, it remains to be seen whether it will stick to this new interpretation.
Irrespective of the abysses of German merger control and the peculiarities of Lufthansa/Air Berlin, the FCO decision has underlined that companies should be cautious when entering into long-term leases and should bear in mind potential merger control filing requirements. Filing a notification to the competition authorities is recommended if there is any uncertainty.
For further information on this topic please contact Rolf Hempel or Martin Cholewa at CMS Hasche Sigle by telephone (+49 711 9764 308) or email ([email protected] or [email protected]). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.
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