Despite the uncertain future facing the global travel industry as a result of the COVID-19 pandemic, on 9 April 2020, the UK’s Competition and Markets Authority (“CMA”) announced its decision to block the proposed Sabre/Farelogix transaction, citing concerns that “UK passengers [would] miss out on the benefits from continued innovation”. The CMA’s decision came just days after the transaction was given the green light to proceed by the US District Court in Delaware.
Sabre is one of three major suppliers of global distribution systems (“GDS”). GDS are the predominantly used technology to connect airline content (e.g., information on flight fares, availability, schedules, and other aspects of an airline’s offer) with travel agents. Farelogix is a pioneer of innovative technology that connects airlines directly with travel agents, providing an alternative to GDS. It also supplies software that enables airlines to include ancillary products (such as extra legroom, baggage, and in-flight meals) in their booking systems.
Sabre announced the acquisition of Farelogix for $360 million (approximately €328 million) in November 2018. The CMA opened a Phase II investigation on 2 September 2019. The CMA’s concerns related to two markets: (1) the supply of merchandising solutions to airlines on a worldwide basis and (2) the supply of distribution systems to airlines on a worldwide basis.
Supply of merchandising solutions to airlines
Both Sabre and Farelogix provide airlines with IT solutions to man- age various tasks within their booking systems. Sabre provides IT solutions that cater to airlines’ “core” needs (e.g., central reserva- tion, inventory and departure control) (referred to as “core PSS”), as well as IT solutions enabling airlines to offer products that are ancillary to these core functions (“non-core PSS”). Farelogix supplies non-core PSS, but not core PSS.
The CMA’s focus was on the supply of a subset of non-core PSS: “merchandising solutions”. Merchandising solutions enable an airline’s offer to include options to purchase various additional products, such as extra luggage allowance, seat upgrades and in-flight meals. While Sabre’s merchandising solutions can only be used in conjunction with its own core PSS, Farelogix’s merchandising solutions have much broader compatibility.
The CMA found that, absent the transaction, Sabre has a strategic incentive to enhance its merchandising capabilities in order to compete with Farelogix’s more versatile product. The CMA found that the transaction could jeopardise Sabre’s continued investment and lead to a loss of innovation in merchandising solutions. This would result in less consumer choice, fewer new features, upgrades being released more slowly, as well as higher prices stemming from the loss of a significant competitor in merchandising procurement.
Supply of distribution solutions to airlines
While merchandising solutions facilitate the “packaging together” of airlines’ products and services, the CMA was also interested in the subsequent level of the supply-chain: technological solutions for the distribution of such “packaged” airline content.
The merging companies overlap in IT solutions for the indirect dis- tribution of airline content via travel agents (rather than directly, via airlines’ own websites and call centres). Global distribution systems (“GDS”) are the predominant means by which airline content is distributed to travel agents. Sabre is one of three major suppliers of GDS. Farelogix is not a GDS supplier; however, it is active in the supply of alternative technological solutions for the distribution of airline content. These alternative technological solutions by-pass the GDS, enabling direct contact between airline and travel agent.
Whilst GDS is currently the most common means (approximately 90%) of distributing airline content to travel agents, the CMA pointed to indications of imminent change in the industry. From an airline’s perspective, a weakness of GDS is that it is GDS (as opposed to airlines) that put together the package offered to passengers (including route, seat type, schedule, price, etc.). As a result, there is demand for an alternative technology that provides airlines with greater control over offer content.
Farelogix has played an instrumental role in the development of a new messaging standard, which allows dynamic personalised offers to be created by airlines and to be communicated to and accessed by travel agents in real time. The CMA reported that the majority of airlines have a strategy to adopt this new messaging standard and also that Sabre plans to develop its capabilities in this field as a response to the threat the development represents to its GDS business.
The CMA emphasised that Farelogix’s role in pushing GDSs to improve their offerings to airlines was a much better indicator of the competitive constraint it posed than was its small market share. The CMA concluded that the transaction would reduce innovation in distribution solutions, harming airlines and travel agents.
Relevance of COVID-19 to CMA’s merger review
Not only did the CMA’s decision come just two days after clearance was obtained in the US, it was seemingly unaffected by the COVID- 19 crisis, despite the fact that the merging parties operate in supply chains severely impacted by the pandemic. In the press release accompanying the announcement of its decision, the CMA recog- nised that its decision comes “at a time of uncertainty and disrup- tion in the global travel industry due to the COVID-19 pandemic”.
While present circumstances make it difficult to foresee how the competitive situation will develop in these markets either with or without the transaction, the CMA noted that it has seen no evidence of a “disproportionate impact” on Sabre or Farelogix with respect to the COVID-19 crisis relative to the rest of the industry. The CMA stated that the parties failed to make representations about how the pandemic impacts the competitive assessment and did not assert that either party would exit the market or become significantly weaker relative to other competitors.
CMA claims jurisdiction despite limited UK nexus
The merging parties also made submissions questioning the CMA’s jurisdiction to review the transaction in the first place. The CMA has jurisdiction to review a proposed merger when either the target’s UK turnover exceeds £ 70 million, or the merging parties have a 25% “share of supply” for a product or service in the UK (and the merger results in an increment/increase to that share of supply).
As Farelogix generates very little, if any, UK turnover, jurisdiction was claimed on the basis of the “share of supply” test (defined by the CMA in this case as “supply of IT solutions to UK airlines for the purpose of airlines providing travel services information to travel agents, to enable travel agents to make bookings”). Although Sabre alone meets the 25% share of supply threshold through its provision of GDS to UK airlines, the merging parties disputed that the purchase of Farelogix would lead to an increment. At most, Farelogix provides IT solutions to one UK airline, British Airways (“BA”), but only in order to fulfil its obligations under a separate agreement with American Airlines. Pursuant to this agreement, Farelogix provides IT solutions to partners of American Airlines that market and operate a “segment” of an American Airlines booking. For example, if BA were to operate the London to Shanghai segment of an American Airlines booking for a journey from New York to Shanghai (via London), Farelogix may provide IT solutions to BA with respect to the London to Shanghai segment.
The merging parties submitted that Farelogix contracted with American Airlines and therefore did not provide services to BA. However, the CMA disagreed, concluding that “the effect of the agreement, when considered in the context of a number of other related agreements, is that British Airways [is the recipient of the relevant Farelogix IT solutions]”. The CMA stated that while the revenue Farelogix received from these bookings was small, UK law does not require a minimum increment to confer jurisdiction.
Despite the US District Court’s decision to permit the transaction to proceed in the US just days before, the complications caused by COVID-19, and the question marks raised over its jurisdiction, the CMA was not deterred from blocking the transaction. The CMA’s decision is therefore a further indication of its increasingly bold, interventionist approach and a demonstration of its willingness to claim jurisdiction over transactions with a limited UK nexus.
This was also the first instance of the CMA indicating the narrow circumstances in which the COVID-19 pandemic may affect the outcome of its merger review. Its statements in this case suggest that the impact of COVID-19 must be so severe that one of the parties is considered to be a failing firm, or that the merging parties’ ability to compete is likely to be disproportionally affected, relative to their rivals.