FIRSTGROUP/SCOTRAIL INQUIRY

Statement of issues

The Competition Commission (CC) has today published an issues statement as part of its inquiry into the proposed acquisition by FirstGroup plc (FirstGroup) of the ScotRail franchise.

The inquiry was referred to the CC by the Office of Fair Trading (OFT) on 13 January 2004, and will seek to establish whether the proposed acquisition may be expected to result in a substantial lessening of competition within any market or markets in the UK, including the supply of public transport services on point-to-point routes in Scotland.

FirstGroup, which operates a wide range of bus services in Scotland, has bid to take over the Scottish Passenger Rail franchise currently operated by ScotRail Railways Ltd (a subsidiary of National Express Group plc (NEG)). FirstGroup’s bid, along with those from two other companies—Arriva plc and NEG—is currently being assessed by the Strategic Rail Authority.

The issues statement follows the initial process of gathering information, views and evidence and identifies clearly for all interested parties, the specific questions and areas the inquiry will be examining. This will form the basis for the private hearings with FirstGroup. The full issues statement is attached at the end of this release and relates to:

(a) the relevant market;
(b) extent of overlap between FirstGroup’s bus and ScotRail services;
(c) existing competition between rail and bus services on a number of particular routes and the effect of the merger on competition;
(d) other possible wider effects of the merger on competition;
(e) entry;
(f) whether the merger may therefore be expected to result in a substantial lessening of competition; and
(g) any customer benefits that might arise from the merger.

The services in question are mainly in Strathclyde, on a number of services to and from Edinburgh and one rail service in Aberdeen.

If the inquiry group (the Group) considers that the proposed merger may be expected to result overall in a substantial lessening of competition, it will consider whether and, if so, what remedies might be appropriate, issuing a statement at a later date.

The CC is required to publish its report by 28 June 2004 although the CC normally seeks to publish its reports before the final date.

This issues statement should not be seen as implying that the Group has identified any competition concerns—the CC has yet to reach any conclusions on this inquiry. The purpose of making the statement of issues public is to inform all interested parties and give them an opportunity to raise any further points with the CC.

Anyone wishing to comment on any of the issues set out below is requested to do so by 4 March 2004 in writing to:

The Inquiry Secretary,
FirstGroup/Scotrail Inquiry
Victoria House
Southampton Row
London WC1B 4AD

or by email to:

The CC will now continue to gather evidence in this inquiry and will publish its provisional findings according to the administrative timetable available on the CC’s web site at www.competition-commission.org.uk.

Notes for editors

The Enterprise Act 2002 empowers the OFT to refer to the CC completed or proposed mergers for investigation and report which create or enhance a 25 per cent share of supply in the UK (or a substantial part thereof) or where the UK turnover associated with the enterprise being acquired is over £70 million.
The CC has a 24-week period in which it is required to publish its report, which may be extended by no more than eight weeks if it considers that there are special reasons why the report cannot be published within that period.
The FirstGroup/ScotRail Inquiry Group consists of four members—Professor Paul Geroski (Deputy Chairman of the CC), Robert Bertram, Chris Goodall and Charles Henderson—supported by the CC’s staff.
The CC’s process for merger references requires the Group to define the relevant market and carry out an assessment of the competitive effects of the proposed merger, and, in the context of any remedies it may consider, take into account any customer benefits that might arise from the merger.
Further information can be obtained from the CC’s web site at: www.competition-commission.org.uk.
Enquiries should be directed to Francis Royle, Press Officer, 020 7271 0242 or Rory Taylor on 020 7271 0488 / .
The full text of the OFT’s referral of this case can be found at the OFT web site at www.oft.gov.uk/Business/Mergers+EA02/Decisions/Clearances+and+referrals/FirstGroup+Plc.htm. There is also a link to this from the CC web site.

Statement of issues

A. The relevant market

1. Whether it is appropriate to regard specific point-to-point flows where bus and rail services overlap as separate markets. Relevant considerations include:

(a) Whether bus and rail services which overlap on point-to-point flows can be regarded as separate, complementary markets or as effective substitutes on such flows. This will include consideration of evidence on the extent to which demand for bus and rail services is affected by the price of the respective service (the ‘own-price elasticity’ of demand), and evidence on the extent to which such demand is also affected by the price of the other service (the ‘cross-price elasticity’ of demand).
(b) The interlinked nature of different point-to-point flows on particular rail or bus routes.
(c) Whether the definition of the market should also take into account supply-side substitutability of operators, particularly bus operators—ie, their ability and willingness to expand into new routes in a particular area.
(d) Whether the characteristics of Glasgow are different in this respect than previous areas considered by the CC (for example, the West Midlands).

2. Whether wider geographical markets, such as areas in and around Glasgow, Edinburgh and the networks which operate within them, or Scotland as a whole, should be regarded as appropriate; and whether we should also take into account a market for competing for public sector support for the operation of bus and rail services.

3. Whether, on the other hand, bus and rail services on, for example, point-to-point flows in Scotland can be regarded as part of a wider market including private transport (cars) and taxis. Relevant considerations include:

(a) Evidence on the extent to which prices of bus and rail services relative to private transport or taxis affect their relative use (the cross-price elasticity of demand between public and private transport).
(b) The divergent trends in price of bus and rail services, relative to the cost to the user of private transport or taxis: on figures we have seen, for example, the price of public transport has risen by about 40 per cent in real terms over the last 20 years while the cost of using cars has been largely unchanged.
(c) The extent to which users of public transport do not have private cars available.
(d) Other factors affecting the use of public and private transport (convenience etc).

B. Extent of overlap between FirstGroup and ScotRail services

4. The OFT in its decision document referred to over 800 point-to-point flows in Aberdeen, Edinburgh and the Lothians, and Greater Glasgow where FirstGroup bus services and ScotRail services overlapped (although the number of overlaps in Aberdeen was very limited). Of these, it referred to some 160 point-to-point flows in Greater Glasgow and Edinburgh where there were no other bus operators, or where bus journey time was less than double train journey time. We are considering the criteria for identifying overlaps, for example:

(a) Whether the presence of another operator on particular flows is sufficient to ensure no significant loss of competition after the merger, or whether this may depend on the identity of that operator—for example, whether one of the major bus groups in the UK rather than smaller, more local operators—or require the presence of a number of operators.
(b) Whether, if bus journey times are more than twice rail journey times, buses are unlikely to compete with rail services; or whether a more appropriate allowance for higher journey times of bus journeys should be used.
(c) Whether other criteria would be appropriate in distinguishing point-to-point flows where there may be a substantial lessening of competition in addition to or instead of the above—for example, a particular minimum level of revenue or passenger numbers; or a minimum ratio of bus to rail passengers or rail to bus passengers, and, if so, what those minimum levels or ratios ought to be.

C. Existing competition between rail and bus services and effect of merger on competition on those flows

5. Among the concerns expressed to us is whether FirstGroup could alter bus fares or reduce service frequencies or change quality, on either an overlapping part or all of a route, to induce passengers to switch from its bus to its overlapping rail operations to increase overall profitability, or vice versa. Among relevant considerations are:

(a) Evidence that competition exists between bus and rail services, on particular routes or at a network level.
(b) Whether controls over rail fares, service quality and frequencies as part of the ScotRail franchise would prevent the loss of any such competition affecting rail services; including whether such controls could be relaxed or changed in future.
(c) The extent to which the undertakings agreed with the OFT in 2002 by FirstGroup in relation to its bus services following its acquisition of SB Holdings in 1996 would prevent any such effects on bus services: including whether such undertakings could be relaxed or changed in future.
(d) The implication of any revenue sharing arrangements as part of the ScotRail franchise on the incentive to attract passengers from bus to rail. The invitations to tender, for example, originally invited bids on the alternative bases that all revenue risk was borne by the franchisee, or that it was borne by the Scottish Ministers; if the latter approach was to be adopted, there may be no incentive to attract passengers from bus to rail.
(e) Whether FirstGroup would have scope to attract passengers from bus to rail (for example by any reconfiguration of bus routes), or there would be other constraints on FirstGroup’s ability to increase bus fares or reduce services on such flows: for example, lack of capacity on rail services at particular times; need to operate other parts of the routes or at other times of day where bus does not compete with rail; difficulty in targeting any discriminatory prices only at those fare stages on a bus route where overlap with rail exists; and possible restrictions due to zonal fares.
(f) The effect, therefore, of any increase in bus fares or reduction in services on overall revenues of the rail and bus services (taking into account also prospects for entry by other bus operators—Issue E); whether there are any cost advantages from switching passengers from bus to rail; and whether therefore overall profitability would increase as a result.
(g) Alternatively, whether there could be an incentive to encourage passengers to substitute use of rail services by use of bus services (for example, if revenue risk on the ScotRail franchise was to be borne by Scottish ministers).

D. Other possible wider effects of the merger on competition

6. It has been suggested to us that, following the merger, FirstGroup would account for some 70 per cent of public transport services in Scotland. Relevant issues include:

(a) Whether FirstGroup would be in a position to offer bus/rail tickets (for example, travel cards, or other combined tickets for journeys including both bus and rail services) usable only on its services, and whether this would deter use of other bus operators’ services or of joint ticketing schemes with other operators, reducing effectiveness of competition from other operators and inhibiting entry.
(b) Whether competition could be reduced by other possible interactions between FirstGroup bus and rail services, for example, in provision of information to rail passengers only about its own bus services; availability of information about its rail operations only to its bus operations; and joint marketing of its own services.
(c) Whether FirstGroup’s large share of public transport in Scotland and parts of Scotland as a result of the merger could enable it to exert undue influence over those bodies which specify the level and standards of public transport services.
(d) Whether FirstGroup could restrict competition to supply replacement bus services when ScotRail services are suspended.
(e) Whether the effect of a merger would be that advertising on ScotRail properties of services other than FirstGroup’s was restricted.
(f) Whether FirstGroup could use any leverage from its monopoly on rail services to extend its bus operations into new areas, against vulnerable operators, for example, by cross-subsidization, or predation.
(g) Whether, on the other hand, the Group should consider whether the proposed merger benefits competition in the franchise process (hence also, whether any remedies—see below—could reduce competition in that process).

E. Entry

7. The Group will need to consider whether prospects of entry would be sufficient to prevent adverse effects on competition. Relevant considerations include:
(a) Whether there is any prospect of entry to rail services given, for example, any restriction on entry resulting from the licensing of rail services; operational constraints on the establishment of competing services; and the absence of subsidy to operate such services.
(b) Whether there are barriers to entry to operation of new bus services, in respect either of limited entry on to specific overlaps flows or routes, or entry on a wider basis to compete across FirstGroup’s existing networks, including the possibility of competitive response by FirstGroup to any threat of entry. The OFT decision document, for example, referred to concern by third party customers and competitors about the threat of retaliation, but also to FirstGroup’s argument that it would have no incentive to engage in a strategy of predation.

F. Whether the merger may be expected to result in a substantial lessening of competition

8. In the light of its analysis of the issues, the Group will need to consider whether the merger may be expected to result in a substantial lessening of competition.
9. If so it would be required to consider appropriate remedies to any such substantial lessening of competition, and to other adverse effects—for example, on fares or the level of quality of service operated—that may result, and to take into account any customer benefits resulting from the merger.

G. Customer benefits

10. Although the Group will not consider possible remedies until it has reached any such provisional finding, it would nonetheless welcome comments at this stage on any customer benefits (which may extend beyond only consumer benefits) directly attributable to the merger to be taken into account in considering any possible remedies. In this context the Group may wish to consider:

(a) Whether the proposed merger may be expected to have benefits for transport integration in Scotland that would not otherwise occur.
(b) Any other benefits to passengers from the proposed merger.
(c) Whether, should the franchise be awarded to FirstGroup, it would also be relevant to consider any benefits to Scottish ministers and taxpayers from any better terms offered by FirstGroup for the franchise, or more generally by enhanced competition for the franchise whether or not it actually wins that franchise.

H. Possible remedies

11. Again, although the Group will not consider possible remedies until it has reached any provisional finding on whether the proposed merger may be expected to result in a substantial lessening of competition, it would welcome comments on whether any structural or behavioural remedies, such as would influence the operation of either bus or rail services, would be appropriate, taking customer benefits into account.