ARRIVA Plc and Lutonian Buses Ltd: A report on the merger situation

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On 10 July 1998, the Secretary of State for Trade and Industry referred to us (see Appendix 1.1) for investigation and report the acquisition by ARRIVA plc (ARRIVA) of enterprises under the control of Lutonian Buses Ltd (Lutonian). The effect of the merger is to increase ARRIVA's share of bus miles in Bedfordshire (including the town of Luton) and Hertfordshire-which we conclude constitutes a substantial part of the UK-from about 52 per cent to about 54 per cent, satisfying the requirements for our investigation under the Fair Trading Act 1973 (the Act).

In 1997, ARRIVA was the third largest operator of bus services in Great Britain, its operations in Bedfordshire and Hertfordshire being carried out primarily by its subsidiary ARRIVA the Shires Ltd (ARRIVA the Shires). Within the borough of Luton, at the time of the merger ARRIVA the Shires (together with its Challenger operation) accounted for 82 per cent of the market, measured in terms of bus miles, and Lutonian for 13 per cent. Between them, therefore, they accounted for almost all commercial bus mileage in Luton. Lutonian operated services entirely within Luton, where it had a number of minibus routes, serving streets where ARRIVA the Shires did not initially operate but overlapping with the services of ARRIVA the Shires on the main routes out of Luton town centre. It also charged lower fares than ARRIVA the Shires.

In October 1997, ARRIVA the Shires introduced its own low-cost minibus oper-ations-named Challenger-on exactly the same routes as the six most profitable Lutonian routes, its services being timed to run shortly in front of those of Lutonian, and its fares being below those of Lutonian, hence further below those of ARRIVA the Shires' other services with which it also overlapped. During its brief period of operation, Challenger was run at a significant loss, and with no effective plan for achieving profitability. Although there may have been other responses open to Lutonian, in our view, based on the evidence we have received, it was primarily due to the unduly aggressive competition from Challenger that the owners chose to sell. We regard the purpose of Challenger as having been to drive Lutonian out of the market or to restrict its competitive development rather than to offer long-term competitive benefits to bus passengers in Luton.

In our view, Lutonian had been an effective competitor, providing a spirit of enter-prise and competition, and a degree of innovation and choice in the Luton market, which was valued by passengers. The merger has resulted in the removal of the only independent competitor to ARRIVA the Shires on intra-urban bus services in Luton. There has been, as a result of the merger, a clear loss of a separate competitor and the elimination of competition on many services in Luton (for which the current operation of the Lutonian brand under ARRIVA's control does not compensate). Lutonian had a record of establishing new routes for previously unserved areas, and an objective to continue this. The merger has, therefore, resulted also in the loss of Lutonian as a potential competitor in providing other commercial services elsewhere in Luton.

We believe that there is insufficient prospect of competition from new entry to provide a sufficient constraint to discourage ARRIVA from taking advantage of its enhanced market power in Luton following the merger. The main barrier to entry is, in our view, the prospect of retaliation by the incumbent who, by controlling Lutonian, now occupies all the main niches in the Luton bus market. In this case, the merger, following closely upon the operation of Challenger, is itself likely to have reinforced the reputation of ARRIVA the Shires for responding aggressively to competition, so reinforcing such a barrier to entry.

We believe that the loss of competition and potential competition on commercial services in Luton may be expected to result in higher fares and/or lower choice and/or less innovation on routes and services and poorer levels of service. We do not believe that any benefits from the merger are sufficient to offset the adverse effects identified. We have, therefore, concluded that the merger may be expected to operate against the public interest.

We considered whether controls on such matters as fares or frequencies, or measures to encourage new entry, would be sufficient to remedy those adverse effects. In our view, they would fail to address adequately the loss of future benefits of competition, service and innovation which Lutonian as an independent operator might have been expected to con-tinue to provide. We believe the detriments we have identified would be effectively remedied only by requiring ARRIVA to divest Lutonian (which since the merger has been maintained as a separate subsidiary) to a purchaser approved by the Director General of Fair Trading (DGFT).

In order to facilitate such a divestment and to assure potential acquirers that unduly aggressive conduct by ARRIVA in Luton would not be allowed to hinder their establishment within the Luton bus market, divestment would need to be linked with behavioural controls. In our view, such measures should be designed to ensure that, in the short term, there would be no action by ARRIVA that would hinder the ability of the divested business to establish a financially viable operation in competition with ARRIVA; in the longer term, appropriate measures to protect the divested business from predatory or unduly aggressive conduct should apply. In implementing such controls, attention may need to be given (to the extent the DGFT thinks appropriate) to such matters as fare levels, the timing, introduction and frequency of services, and other competitive relationships between the respective operators.

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