Are missiles tuned to replace commercial aircraft
COMMISSION DECISION of 30 July 1997 on the compatibility of a concentration with the common market and the EEA Agreement Case IV / M.877 - Boeing / McDonnell Douglas (Only the English text is authentic) (Text with EEA relevance ) (97/816 / EG)
THE COMMISSION OF THE EUROPEAN COMMUNITIES,
based on the Treaty establishing the European Community,
based on the Agreement on the European Economic Area, in particular Article 57 paragraph 1,
based on Council Regulation (EEC) No. 4064/89 of 21 December 1989 on the control of business combinations (1) as amended by the Act of Accession of Austria, Finland and Sweden, in particular on Article 8 (2),
Based on the Agreement between the European Communities and the Government of the United States of America on the application of their competition rules (2), in particular Articles II and IV,
Having regard to the decision of the Commission of 19 March 1997 to initiate the procedure in this case,
after the companies involved have been given the opportunity to comment on the objections raised by the Commission,
Having regard to the opinion of the Advisory Committee on the Control of Business Combinations (3),
(1) On February 18, 1997, a proposed merger was notified to the Commission in accordance with Article 4 of Regulation (EEC) No. 4064/89 (hereinafter referred to as "Merger Regulation") by The Boeing Company (hereinafter referred to as "Boeing") within the meaning of of Article 3 (1) (b) of the Merger Regulation takes control of the entirety of McDonnell Douglas Corporation (hereinafter referred to as "MDC").
(2) After examining the notification, the Commission decided on 7 March 1997 that the implementation of the concentration would be suspended until a final decision had been taken. It then concluded that the proposed concentration fell within the scope of the Merger Regulation and gave rise to serious concerns as to its compatibility with the common market. It therefore decided on March 19, 1997 to initiate proceedings under Article 6 (1) (c) of the Merger Regulation.
I. THE PARTIES
(3) Boeing, a US public company whose shares are freely traded, has two main business areas, namely the manufacture of commercial aircraft and defense and space technology. The commercial aircraft division comprises the development, construction and marketing of jet-powered commercial aircraft and customer service; Customers are commercial air carriers all over the world. The armaments and space technology division comprises the research, development, manufacture, conversion and maintenance of military aircraft and helicopters and related systems technology, space and rocket systems, rocket engines and information services.
(4) MDC, also a US public company whose shares are freely traded, has four main businesses: military aircraft, missile, space and electronic systems, commercial aircraft and financial services. In the first two divisions, the company's activities range from conception through development and manufacture to the maintenance of the following main products: military transport aircraft, combat aircraft and training systems, civil and military helicopters and systems technology, rockets, satellites, vehicles with launchers, space station components and systems, and lasers and sensors as well as command, control, communication and evaluation systems. The commercial aircraft division comprises the design, development, manufacture, conversion and sale of jet-powered commercial aircraft and their components. MDC is also active in aircraft finance, commercial equipment leasing and real estate trading for its own use and for commercial customers.
II. THE PROJECT
(5) On December 14, 1996, Boeing and MDC entered into an agreement whereby MDC will become a wholly owned subsidiary of Boeing.
III. THE MERGER
(6) The transaction constitutes a concentration within the meaning of Article 3 of the Merger Regulation, since Boeing acquires control over the entirety of MDC within the meaning of Article 3 (1) (b) of the Merger Regulation.
IV. COMMUNITY SIGNIFICANCE
(7) The total global turnover of the two companies exceeds ECU 5 billion (Boeing ECU 17 billion, MDC ECU 11 billion). Both companies have a Community turnover of more than ECU 250 million (Boeing [...] (4), MDC [...]), But not more than two thirds of their total Community turnover in one and the same Member State. The notified concentration is therefore of Community importance.
V. THE IMPACT OF THE PROJECT IN THE EUROPEAN ECONOMIC AREA
(8) The project not only has Community-wide significance within the meaning of the Merger Regulation (see Chapter IV), but also significant economic effects on the EEA market for large commercial aircraft, as can be seen from the "competitive assessment" in Chapter VII.
(9) For the assessment of the project, the world market for large jet-powered commercial aircraft is the relevant market. The EEA forms an integral and important part of this world market with a very similar competitive structure. According to Boeing's 1997 Current Market Outlook, around 30% of total global demand forecast for the next ten years will come from European airlines. The average market share of Boeing and MDC in the EEA over the past ten years has been 54% and 12% respectively (61% and 12% worldwide). As for the fleet currently operating in the EEA, Boeing has around 58%, MDC around 20% and Airbus around 21% (5) in this fleet (compared to global shares of 60%, 24% and 14%).
(10) The project is therefore of significant importance in the EEA as it affects the world market, of which the EEA forms a substantial part.
VI. COOPERATION WITH US AUTHORITIES
(11) In accordance with the Agreement between the European Communities and the Government of the United States of America on the Application of their Competition Rules (hereinafter referred to as "the Agreement"), the European Commission and the Federal Trade Commission have made all necessary notifications. The European Commission has sought, in accordance with Article VI of the Agreement, to address important national concerns of the United States, and in particular those related to the consolidation of the US defense industry. In addition, on June 26, 1997, the European Commission communicated its preliminary conclusions and concerns to the US authorities under Article VI of the Agreement and requested the Federal Trade Commission to consider the important concerns of the European Union in maintaining competition in the large commercial aircraft market wear. Mr Pitofsky, Chairman of the Federal Trade Commission, stated in a letter written on the same day that the Federal Trade Commission would take into account the concerns of the European Communities in its decision. The Federal Trade Commission decided on July 1, 1997 by a majority not to raise any objection to the merger.
(12) The US Department of Defense and the US Department of Justice notified the European Commission on the 13th. The Commission has addressed these concerns to an extent that is accountable under Community law. As far as US arms interests are concerned, for example, it has limited its field of action to the commercial aircraft sector of the project, since it has not identified any strengthening or establishment of a dominant position in the arms sector as a result of the planned merger. In addition, it did not elaborate on the concerns expressed in the statement of objections about the effects of the merger on the international market for combat aircraft. As regards DAC, for the reasons set out below, it did not consider that a divestment would be a way of solving the competition problems created by the merger.
VII. COMPETITIVE ASSESSMENT
A. RELEVANT PRODUCT MARKETS
(13) The operation has an impact on the market for large jet propelled airliners.
1. New large airliners
(14) It is characteristic of the demand side that buyers make their purchase decision in several phases. First the operational, then the technical requirements and finally the economic and financial aspects are examined. The operating criteria include the flight routes (traffic volume and distance), the optimal distribution of seats, cargo space and flight frequencies (few flights with large or frequent flights with small machines) and the availability of slots at airports. Technical criteria include: Range, capacity, performance and reliability, uniformity of the aircraft fleet (measure of the ease with which a new aircraft can be integrated into the existing fleet) as well as maintenance and customer service networks. Finally, the net present value according to the purchase price, the expected operating income and costs as well as the residual value play a role in the choice.
(15) It is widely recognized that the regional aircraft market (which includes, for example, Fokker, Bombardier and British Aerospace models) is different from the large commercial aircraft market in which Boeing, MDC and Airbus operate. None of the last three manufacturers mentioned offer models with up to 100 seats and a range of up to 1,700 miles, the maximum combination that regional airlines generally consider suitable for their specific needs. Most regional aircraft are incompatible with the large aircraft types in terms of range, operational characteristics, cargo transportation, and so on. Large airlines only purchase regional aircraft for certain regional flight connections or subsidiaries (e.g. British Airways or Swissair / Crossair).
(16) It is also widely recognized that the only aircraft affected by the project are those built in the West, as other aircraft (such as the Russian Ilyushin) are used in current models for technical reasons, as well as for reasons of reliability, des Customer service and image do not compete.
The notifying company referred to the relevant product markets as the markets for narrow-body and wide-body commercial jet aircraft. The Commission has found that manufacturers and customers have different views on the precise subdivision of the overall market. The customer selection criteria listed above are so complex that a binding subdivision of the market for large commercial aircraft is not possible. The subdivision into narrow-body aircraft (with one central aisle) and wide-body aircraft (with two aisles), as proposed by the notifying company, seems to be generally accepted as an approach for further differentiation. The operating characteristics of the narrow-body aircraft include an approximate range of between 2,000 and 4,000 miles and a carrying capacity of 100 to 200 passengers; in the case of wide-body aircraft, the range is between 4,000 and 8,000 or more miles and the seating capacity is between 200 and 400 or more. Recital 38 further subdivides the markets for narrow-body and wide-body aircraft.
In view of the above, the Commission assumes that there are two separate relevant markets within the overall market for large jet-propelled commercial aircraft, the market for narrow-body aircraft and the market for wide-body aircraft. Since the narrow-body and wide-body markets are structured in a similar way and the competition problems resulting from the proposed merger are the same, the Commission will examine the effects of the merger on both markets together.
2. Used aircraft
(17) As mentioned above, the overall product market is the market for large jet-powered commercial aircraft. This market also generates significant sales of used aircraft. An estimated 30% of the passenger aircraft delivered later change hands without being used for another purpose; more than two thirds of the demand for cargo aircraft is met with converted, used passenger aircraft. However, in line with previous Commission decision-making practice (Commission Decision 91/619 / EEC (6) in Case IV / M.053 - Aerospatiale-Alenia / de Havilland), the market for used aircraft is to be regarded as a separate product market.
(18) On the one hand, it should be noted that, due to the longevity of certain goods, a distinction should definitely be made between printing and competitive printing by goods from other manufacturers. In the case of large commercial aircraft, the life expectancy of which can be more than 20 years, the existence of a large aircraft fleet (probably cyclical) limits the sales opportunities for new aircraft per se.
(19) As regards the market for used large jet propelled commercial aircraft, its characteristics make it a separate market from the market for new aircraft. The prices for used aircraft tend to be lower, with higher operating costs and, of course, a shorter service life. The Commission's investigation has shown that second-hand aircraft can be a viable alternative for smaller airlines who are forced to purchase other aircraft due to limited financial resources. For large airlines, used aircraft are usually not available in sufficient numbers and uniformity for longer-term needs, but they can sometimes meet a specific short-term need. For them, used aircraft are more of a complement than a replacement. The trade in used aircraft is therefore to be seen as an independent product market that is separate from the market for new aircraft, in which Boeing and MDC are active. It is therefore not taken into account in the following explanations.
B. SPATIAL RELEVANT MARKET
(20) Large jet-propelled airliners are sold and operated under similar competitive conditions around the world. The average transport costs for delivery are minimal. The Commission therefore takes the view that the relevant geographic market for large jet-powered airliners is the world market.
C. EFFECTS OF THE MERGER ON THE MARKET FOR LARGE JET-POWERED COMMERCIAL AIRCRAFT
I. Current market structure for large jet propelled airliners
1. The competitors
(21) There are currently three companies competing on the world market for large commercial aircraft: Boeing, Airbus and MDC.
(22) Boeing is a fully integrated aerospace company, active in all areas of the aerospace industry: commercial aviation, defense and space travel (see above). Boeing is the world market leader in large commercial aircraft and generates around 70% of its income in this sector.
(23) MDC is also a fully integrated aerospace company and is active in all areas of the aerospace industry (see above). MDC is the world's third largest manufacturer of large commercial aircraft, the largest manufacturer of military aircraft and the second largest defense industry company. Around 70% of the company's turnover in 1996 came from the space and armaments business, the rest from the commercial aircraft sector.
(24) Airbus Industrie is the second largest manufacturer of large commercial aircraft in the world. The company was founded in 1971 as an economic interest group (WIV). Members include the private companies Daimler-Benz Aerospace Airbus (DASA) (37.9%) and British Aerospace (20%) as well as the state-owned companies Aerospatiale (France) (37.9%) and CASA (Spain) (4, 2%). This partnership is unique in that the companies involved are subject to the laws of their country of origin. Research, development and production of the aircraft are financed by the partners; Airbus Industrie takes on the marketing and customer service. Fully assembled parts of an Airbus aircraft are produced in various locations across Europe and then transported to France or Germany for final assembly. For example, Aerospatiale manufactures the cockpit, DASA the propellant devices and British Aerospace the wings. The respective know-how of the partners is decisive for the division of production.
2. The customers
(25) The customers of large commercial aircraft are airlines (scheduled and charter airlines) and leasing companies.A total of 561 airlines using aircraft of western origin were identified on the market, including 246 with more than five aircraft. However, only a relatively few of these will be active as buyers in the aircraft market in any given year. Even over a longer period of time, demand is concentrated on a few very large companies. Between 1992 and 1996 z. B. accounted for over [. . .] of Boeing sales to its five largest customers. In addition, it is estimated that half of the world's aircraft fleet is owned by the 12 largest airlines. It is estimated that leasing companies account for around 20% of demand.
(26) The decisive factor for the demand for aircraft is the demand for air transport services, which has been growing steadily since the end of the 1950s despite economic fluctuations. The growth of this branch of the economy has been stimulated in the last few years not least by the liberalization of air traffic within the Community and the additional demand from China and the former Eastern Bloc countries.
(27) The market is expanding and demand is forecast to grow strongly, albeit with some reservations because of the general economic dependence of this industry. In its 1997 market forecast, Boeing expects demand for 7,330 aircraft over the next 10 years, which corresponds to an order value of USD 490 billion (at the 1996 dollar value). The majority will be in the three major regions: Asia / Pacific (1,750 aircraft), North America (2,460 aircraft) and Europe (7), which is forecast to have a potential of 2,070 aircraft or USD 137 billion. This would correspond to 28% of total global demand. If this share remained unchanged, the European order value in 20 years (18 according to the MDC) would amount to USD 307.5 billion and for the world market to USD 1.1 trillion.
3. Market shares
(28) The notification does not propose any particular method for calculating market shares. However, it does provide backlog, new orders, and net orders in dollars and quantities for the past 10 years. The order backlog is widely regarded as the best indicator of market position in this industry. In order to gain a complete overview of the market situation, the development of this indicator over the last ten years should be examined. The annual order backlog reflects the development of net orders (number of new binding orders minus number of canceled orders) over a certain period of time. In addition, the order value and not the number of pieces must be used as a basis in order to take into account the size and price differences of the various types of aircraft, as z. For example, a Boeing 737-300 with a price range of $ 38 to 44 million cannot be given the same weight in calculating market share as a Boeing 747-400 with a price range of $ 156 to $ 182 million. As is customary in this branch of industry, the calculations are made on a dollar basis.
(29) The figures presented in the notification and by Airbus show the following world market shares measured by the value of the order backlog as of December 31, 1996 (see Annex I):
(30) Although British Aerospace's RJ series and the Fokker 70/100 are assigned to the narrow-body aircraft segment in the notification, the Commission takes the view that these aircraft belong to a different market (see above). Moreover, due to their marginal importance, their inclusion would not make a significant difference in the results. Even today's Russian models (such as the Ilyushin) are not taken into account, as they are still not a real alternative despite technical advances in terms of reliability, customer service and image.
(31) Between 1987 and 1996 the average market share in terms of global order backlog was:
(32) The table in Annex I and the graph in Annex II show that Airbus' market share increased from 24% to 27% between 1987 and 1989 and has remained more or less constant since then. Boeing's market share decreased slightly in 1989, but increased again by 1996 (from 57% to 64%). MDC's market share, on the other hand, fell continuously from 19% in 1988 to around 6% in 1996.
(33) The development of the markets for wide-body and narrow-body aircraft was similar to that of the market as a whole (see Annex I and the graphs in Annexes III and IV). In the market for wide-body aircraft, Airbus' share increased significantly in 1989 from 13% to 31%, which was mainly due to orders for the new A 330 and A 340, and has remained at around 30% since then. Boeing's market share fell significantly to around 50% in 1989, but has since increased steadily to over 70%. MDC saw a steady decline from around 20% to around 2%. For narrow-body aircraft, Airbus has increased its market share to over 30% since 1989, Boeing's remained relatively constant at around 55% and MDC's fell from 19% to 11%.
(34) The structure of the market within the EEA is roughly the same as that of the world market (see Annex V):
(35) As the tables in Annex V and the graphs in Annexes VI, VII and VIII show, developments in the market as a whole and in the markets for wide-body and narrow-body aircraft were similar to those in the world market. Since 1989, Boeing has continuously increased its share of the overall market from 50% to over 60%. After a significant increase from 20% to 33% by 1989, Airbus' market share continued to grow more slowly. MDC has seen a steady decline from around 20% to 2% since 1988. In the wide-body aircraft market, Airbus saw a significant increase from 11% to around 36% between 1987 and 1989, which then leveled off to around 30%. Boeing's share fell significantly in 1989 (to 51%), but then rose steadily to around 69%. The MDC share fell steadily: in 1990 it was 19%, in 1996 it was only around 1%. In the narrow-body aircraft market, Airbus has increased its share since 1989 to around 47%, Boeing's remained more or less constant at around 50%, and MDC's fell from around 19% to 2%.
(36) The assessment of developments on the world market can be summarized as follows: Airbus was able to grow significantly at the end of the 1980s / beginning of the 1990s and has since maintained its position at this level. Boeing increased its market share to over 60% in the 1990s, while MDC's share, particularly in the wide-body aircraft market, steadily declined. The cumulative market share of Boeing and MDC has been relatively constant since 1989 at around 70%.
(37) Boeing's very high market shares already indicate a strong position both in the overall market for large commercial aircraft and in the two markets mentioned in the notification. In addition, Airbus had made up ground compared to Boeing in the 80s, but was unable to significantly expand its position in the 90s, whereas Boeing was able to improve its already high market share more or less continuously during this period. This suggests that Airbus found it difficult to attack Boeing's market position even after reaching close to 30% in the 1980s. This is also reflected in the fact that Airbus has not really caught on with most of the ten largest aircraft fleet operators in the world (see table in paragraph 69). Boeing's market power, by which the company is significantly beyond the influence of its competitors with regard to its behavior, is an example of a dominant position such as that of the Court of Justice of the European Communities in its judgment in Case 322/81, Michelin / Commission, has described (8).
4. Market segments
(38) The market for large jet-propelled commercial aircraft can be divided into several segments. The table below shows how this industry (9) broadly divides this market.
Although, according to an MDC proposal to the Commission, the individual segments overlap to some extent due to cost considerations related to the uniformity of the fleet, around 70% of the aircraft are used in such a way that the above-mentioned subdivision applies. In particular, the 100 to 120-seat narrow-body aircraft can only be replaced to a very limited extent because of the higher flight operating costs by 120 to 200-seat narrow-body aircraft. At the other end of the scale, among the largest types of wide-body aircraft, only Boeing is represented with the 747-400 and 777-300 models. On certain long-haul routes with high passenger volumes, such as from Europe or the USA to Japan, there currently seems to be no alternative to the Boeing 747, which combines the highest transport capacity with the longest range of all existing aircraft. The same applies to certain domestic routes with high traffic volumes and significant slot restrictions.
According to the Boeing notification, airlines' purchase decisions are increasingly based on "type series"; After an airline has selected such a series, it will choose the model. Although Boeing claims that Airbus can also offer such type series, the table above clearly shows that only Boeing benefits from the advantage of being able to offer a complete type series, since, unlike Airbus, it is active in every segment.
(39) Cargo aircraft represent another segment within the overall market for large commercial aircraft. Even if their basic design is similar to commercial aircraft, special precautions such as the installation of large loading openings on the main deck, structural reinforcements due to the higher payload and their own loading and cabin systems required. From a demand perspective, large cargo aircraft cannot be substituted for versions of the same model designed for passenger traffic. Nevertheless, the Commission does not classify the market for cargo aircraft as a separate product market because of the high degree of flexibility in changing offers - cargo aircraft are versions of passenger models that are converted for cargo traffic. New and converted aircraft could be delivered at short notice without significant additional costs or risks.
5. Operational aircraft fleet
(40) As stated in its annual report for 1995, Boeing has been the number one aircraft manufacturer in the world for more than three decades and has manufactured more machines than all other manufacturers combined. Because of the typically long service life of these products, Boeing has by far the largest customer base and thus a clear competitive advantage over the competition.
(41) In the global operational fleet of aircraft of western origin, Boeing has a share of around 60%, MDC around 24% and Airbus only around 14%, more than 25 years after Airbus was launched. The remaining 2% are Lockheed machines still in operation; However, Lockheed has stopped manufacturing civil aircraft since 1984. A large proportion of the existing aircraft fleet is not yet a guarantee of success for an aircraft manufacturer, especially if it only offers a few models. However, when a large operational fleet and a wide range of products come together, the existing fleet can become a key factor with a decisive influence on the fleet planning and purchasing policies of the airlines. The savings that can be achieved with a uniform fleet of aircraft, e.g. B. in the spare parts inventory and the training of the crews influence the purchase decision of the airlines significantly and can often lead to the purchase of a certain model, even if the competing aircraft was offered cheaper. All the airlines that have replied to the Commission on this question have stressed the importance of their fleet in buying new models.
(42) It must therefore be noted in this context that Boeing not only has the largest fleet in existence, but also by far the widest range of products, with types for all conceivable categories of large commercial aircraft.
6. Exclusive contracts
(43) Boeing recently entered into agreements to exclusively supply American Airlines (American), Delta Airlines (Delta) and Continental Airlines (Continental) with large commercial aircraft. In November 1996, American Airlines and Boeing agreed a long-term partnership under which Boeing would become American's exclusive aircraft supplier until 2018. American has placed firm orders for 103 aircraft, including 75 of the next generation of the 737 series, twelve 777-200s, twelve 757s and four 767-300ERs. At Boeing's list price, the order is worth $ 6.6 billion. American also acquired "purchase rights" with a price guarantee for the purchase of an additional 527 jets during the contract period, which is limited to over 20 years. Based on these purchase rights, American can determine when it would like to exercise its purchase options with delivery times of 15 months for narrow-body aircraft and 18 months for wide-body aircraft. Normally the delivery time is between 18 and 36 months. American Airlines received these purchase rights free of charge in return for a commitment to buy only from Boeing. In addition, Boeing apparently offered retrospective discounts on machines American had purchased through previous tenders.
(44) On March 20, 1997, Boeing entered into another exclusive long-term contract with a major airline. The term of the contract with Delta Airlines, according to which Delta also orders exclusively from Boeing, is 20 years. 106 firm orders were agreed by 2006, including ten 767-300ERs, five twin-engine 757-200 aircraft, 70 next-generation 737s and 21 767-400ERX aircraft with a total value of 6.7 billion USD. In addition, there are option rights for 124 machines with an estimated value of 8.3 billion USD and 414 flexible options until 2018. On June 10, 1997, Continental agreed in principle to 35 firm orders and further purchase options from Boeing, provided that it would take place in the next 20 years of supplying Boeing exclusively for all of its large commercial aircraft needs.
(45) The fact that three of the largest airlines in the world have maintained supply relationships with a single supplier for twenty years already shows that Boeing has a dominant position in the market for large commercial aircraft. It is also likely that these three contracts were facilitated by the proposed concentration (as explained below). Even if the customers, as already mentioned, derive economic benefits from these agreements, these are likely to be destroyed again by the insoluble bond to a single supplier over such a long period of time, since competing products may in the meantime be cheaper, with higher-quality technology and better service.
(46) Boeing's exclusive contracts with the three airlines in question will have significant foreclosure effects on the world market for large commercial aircraft over the next 20 years. For the period from 1997 to 2016, it is estimated that 14,400 new aircraft will be delivered worldwide, of which 2,400 have already been firmly ordered from Boeing, MDC or Airbus. This leaves an open market for around 12,000 machines. Of this, however, an estimated 13% (or over 30% of the US market) fall under the three exclusive contracts with options and purchase rights.
7. Future market growth
(47) The parties have argued that the supply of used aircraft and the buying power of the airlines are already and will continue to limit Boeing's market power.
The Commission's view that used aircraft are not generally an effective substitute for new aircraft has already been set out (above). This should prove to be particularly true over the next twenty years, when aircraft demand is expected to grow by over 80%. Second-hand aircraft are likely to be able to meet only a fraction of this growing demand, as much (over 80%) of the world's current operational fleet will have to be retired and replaced during the same period.
The expected market growth will also decrease, regardless of the buying power of the airlines. At a time when aviation demand is expected to grow significantly (estimated to be 5% annually), airlines will, to some extent, compete with each other to purchase new aircraft in an attempt to meet this demand, thereby increasing theirs Negotiating position with the providers will worsen.In addition, given its monopoly in the segment of the largest wide-body aircraft and, following the proposed merger, in the segment of the smallest narrow-body aircraft, the buying power of the airlines vis-à-vis Boeing is in any case limited.
8. Potential competition
(48) Boeing indicated in its notification that potential new entrants from Russia, India and the Far East (China, Japan, South Korea and Indonesia) could enter the market for large commercial aircraft.
(49) On the other hand, Boeing itself admits that the barriers to entry are high. The initial development and investment costs are extremely high (over $ 10 billion for a new wide-body aircraft, according to Boeing), and the production process involves significant learning curve effects and the economies of scale and scale that a newcomer must achieve in order to remain competitive in the longer term. In addition, very strict safety regulations must be met in Europe, Japan, the USA and other countries.
(50) Boeing also assumes in its notification that the potential new entrants mentioned are likely to be active primarily in the market for regional aircraft and not in the market for large commercial aircraft (see above for the market definition). This has been confirmed in their replies to the Commission by (e.g.) East Asian companies that are either active in the regional aircraft market or as subcontractors for Boeing in programs for large commercial aircraft.
(51) Significant effects of potential competition on the current competitive situation can therefore be ruled out for the foreseeable future.
(52) In view of the various current structural characteristics of the markets for large commercial aircraft described above and in particular Boeing's market share, the size of the operational Boeing aircraft fleet, the recent conclusion of long-term exclusive contracts with large customers and the lack of potential new entrants, the Commission has reached the provisional conclusion that Boeing already has a dominant position in the overall market for large commercial aircraft and the sub-markets for narrow-body and wide-body aircraft.
II. Boeing's dominant position strengthened
(53) The proposed concentration would strengthen Boeing's dominant position in the large commercial aircraft market by:
- the addition of MDC's competitive potential in the large commercial aircraft market with Boeing's dominant position in that market;
- the considerable increase in Boeing's overall potential and in the defense and space business, with considerable spillover effects on the market for commercial aircraft, making Boeing's position there even more invulnerable.
1. MDC's aviation business and its aftermath
(54) The proposed concentration would lead directly to:
a) Boeing's share of the overall large commercial aircraft market would grow from 64% to 70%;
b) Boeing would only be confronted with one competitor in the future as a result of the takeover of MDC activities in this market;
c) Boeing would expand its customer base, based on the existing fleet, from 60% to 84%;
d) Boeing would increase its commercial aircraft capacities, in particular through qualified personnel;
e) Boeing would be in an even better position to persuade airlines to enter into exclusive contracts, which would further isolate the market.
a) Increase in market share
(55) Based on the current order book, Boeing would increase its share of the overall large commercial aircraft market from 64% to 70%, of the wide-body market from 71% to 73% and of the narrow-body market from 55% to 66%.
(56) In addition, Boeing would add to its already existing monopoly on the largest aircraft types a further monopoly in the market segment of the smallest narrow-body types, the 100 to 120 seaters. This segment is particularly important as the major airlines make substantial use of these machines to operate their hub feeder services and to keep low-traffic routes profitable. On such routes, the models with 100 to 120 seats are difficult to substitute for larger narrow-body types such as the Airbus 319, as their operating costs per route are higher. For this reason, the Boeing 737-500 and 737-600 models and the MD 95 will be the only competitors in the smallest segment of the narrow-hull market for the foreseeable future. It should be noted that although Airbus is in talks with China and other Asian manufacturers about the development of a 100-seat aircraft, these negotiations are still at an early stage and the investment decision will depend on market and development scenarios. So this project is unlikely to have any impact on the market for the foreseeable future. Boeing would also come close to monopoly in the cargo aircraft segment. Between 1990 and 1996, Boeing and MDC achieved annual average global market shares of 67% and 23%, for a total of 90%, for sales of new cargo aircraft.
(57) However, since MDC is no longer a real force in the commercial aircraft market, as stated above, it is likely that Boeing will, in the course of time, also, given that there is no other potential buyer for the MDC commercial aircraft business without the merger it would achieve a monopoly in the segment of 100 to 120-seat aircraft and a monopoly-like position in the cargo aircraft segment.
b) The competitive potential of MDC
i) MDC's competitive influence has historically been greater than its market share reflected
(58) Although MDC's market share has continued to decline, as indicated above, it appears that MDC's influence on the competitive conditions in the large commercial aircraft market has been greater than its 1996 market share indicated.
The Commission received replies from 31 airlines. All of them have bought new aircraft in the last five years, two of them exclusively MDC models. Of the remaining 29, 20 indicated that in the cases in which Boeing or Airbus had won the bid, MDC had also submitted bids for all or at least some of the types in demand. 13 companies stated that the MDC offer had influenced the outcome of the negotiations with the successful bidder with regard to price or other conditions. Two airlines considered the MDC offer to have a major influence, three others had a minor influence and seven notable.
This is confirmed by a study carried out by Lexecon Ltd on behalf of Airbus and presented at the hearing, in which 52 aircraft tenders were analyzed between 1994 and 1996 and those tenders in which MDC participated were compared with those in which MDC did not. It was found that the presence of MDC resulted in a reduction in the order price of over 7% compared to the list price, provided that orders were placed with Airbus.
ii) MDC is no longer a real force in the market for the independent sale of new aircraft
(59) Douglas Aircraft Company (DAC), which operates MDC's commercial aircraft business, had an operating profit of US $ 100 million in 1996, compared to US $ 39 million and US $ 47 million in 1995 and 1994, respectively. In addition, DAC still owns has an order backlog of $ 7 billion. The operating income of DAC came mainly from the DAC spare parts and service business and not from the sale of new aircraft. Compared to the larger, more modern model series offered by Boeing and Airbus, DAC currently only offers three narrow-body models and one large-capacity model, which, according to Boeing, do not derive any significant advantages from common features and all versions of earlier Douglas models and no aircraft with a completely new design are. These are obviously the main reasons for the continued decline in DAC market share. In addition, the current order backlog ensures future production only for a limited period of time. Since the end of the MDXX program in October 1996, DAC has received virtually no new orders. This coincides with the airlines' impression that MDC is slowly turning its back on the commercial aircraft business. In this context, it is also significant that DAC has lost its main customers American, Northwest Airlines, Delta and Continental, the four largest DAC aircraft users, in the past nine months. The loss of these "trailblazing" customers who are for other benchmarks and one of them, Delta, which even launched the MD90, was another signal to the market that DAC would have no prospects in the large commercial aircraft market. In these circumstances it can be concluded that DAC is no longer a real independent market force.
iii) The acquisition of the MDC commercial aircraft business by a third party is unlikely
(60) Without the concentration, DAC could theoretically have been eligible for takeover by other aerospace companies. [. . .]. However, DAC's position in the market deteriorated dramatically in 1997. Extensive market research by the Commission has shown that the acquisition of DAC by a third party is in fact very unlikely. This is obviously related, among other things, to the deterioration in the situation of DAC. Neither Airbus, the only remaining competitor for large commercial aircraft, nor any of its parent companies have expressed any interest in acquiring DAC. In addition, no other potential buyers were interested in entering the large commercial aircraft market as a result of the DAC acquisition. Given DAC's current competitive position, only Boeing is willing to take over MDC's commercial aircraft business.
iv) The competitive potential of the MDC commercial aircraft business can, however, be a significant market factor after it has been integrated into the Boeing Group
(61) Boeing has stated that it can only decide whether to keep the DAC product lines after it has had access to the in-house DAC data. Moreover, according to Boeing, such a decision would depend on a number of factors, including social and political considerations. However, there are indications that, despite the current difficult situation of DAC, Boeing may decide to continue all or some of its DAC products for at least a certain period of time. If Boeing continues production of DAC aircraft, the current negative attitudes about MDC's prospects could change. This could also reduce, to some extent, the reluctance of airlines to buy DAC aircraft because of the uncertain future of the DAC commercial aircraft business. As part of the Boeing group of companies, DAC aircraft could be co-marketed with Boeing aircraft, and Boeing could decide when or not to compete for DAC aircraft.
However, should Boeing decide over time to completely or partially cease production of DAC aircraft, it would be in a much better position than Airbus to win the market share that would become available. With its privileged access to DAC's large customer base, Boeing would, as will be explained below, be in an advantageous position to gradually replace the still operational DAC machines.
c) Operational fleet
(62) Boeing would also increase its share of the operational fleet from 60% to 84% (compared to only 14% for Airbus), thereby enhancing its long-term customer relationships and position in the after-sales business. Of the 561 companies operating Boeing, MDC or Airbus aircraft at the end of 1996, 75 owned exclusively MDC aircraft and 10 exclusively MDC and Airbus aircraft. In addition to the 316 airlines with a pure Boeing fleet, the 50 companies with Boeing and MDC aircraft, the 62 companies with aircraft from Boeing and Airbus and the 26 with aircraft from all three manufacturers (only 22 airlines own exclusively Airbus aircraft) Boeing would therefore have access to a further 85 airlines that have not yet operated any Boeing aircraft.
(63) The closer contact with these companies resulting from the ongoing service business could improve Boeing's sales prospects by influencing their needs. However, due to its own service activities, Boeing already maintains close contacts with a large number of airlines.
(64) In general, Boeing's acquisition of the MDC parts and maintenance business can add significant weight to MDC aircraft users, whose MDC fleets, as noted above, account for 24% of the total global aircraft fleet.
d) Use of MDC capacity
(65) According to its own information, Boeing only uses [. . .] of its production capacity. Accordingly, [. . .] of its capacity unused. However, this information only concerns the machine capacity and not the actual workforce. There are indications that Boeing is seeking MDC technicians, particularly for its own development and manufacture of commercial aircraft. MDC's 1996 annual report, in connection with the plan to manufacture a new commercial aircraft, mentions that hundreds of MDC technicians began working for Boeing on the project in December 1996.
(66) The Commission accepts the statement that it is relatively difficult to transfer technicians involved in fighter aircraft production to the commercial aircraft sector. However, this is not really a problem for technicians in the military transport aircraft sector. Indeed, according to MDC, fluctuations in the commercial aircraft programs and the C-17 (military transport aircraft) program have occasionally caused production workers to switch between the commercial aircraft programs and the C-17 program.
(67) In the aviation industry, flexible capacities or the ability to easily increase or decrease production play a crucial role. From the airline's point of view, a manufacturer that can deliver when demand increases rapidly has an advantage. An essential prerequisite for a rapid increase in capacity is the availability of a qualified workforce, which Boeing would strengthen through access to the MDC workforce.
e) Exclusive contracts
(68) The proposed concentration would make it much easier for Boeing to conclude agreements such as those with American, Delta and Continental. These airlines are among the largest in the world and are "launching" new aircraft models as buyers, so they are actually the only airlines with sufficient resources to opt for completely new aircraft models or series. In particular, Boeing could offer airlines that currently operate both Boeing and MDC aircraft, under an exclusive contract, additional MDC aircraft as well as spare parts and service for older MDC aircraft. If Boeing were in control of the MDC, if airlines that ordered MDC aircraft wanted to modernize their fleet, they would simply cancel those MDC orders, and the penalties that airlines would normally have to pay in the event of cancellation would be inapplicable. Allegedly, Boeing has agreed to take back the MD90s already delivered to Delta Airlines and to cancel further MD90s as part of an exclusive contract. When Boeing was asked about this by the Commission, it could neither confirm nor deny this.
(69) The fact that American, Delta and Continental, with which they already have exclusive contracts (10), have the largest, third largest and fifth largest MDC operational fleets, respectively, gives an idea of the current and potential relationship between size the current operational MDC fleet of major airlines and the increased opportunities for Boeing after the merger to enter into further exclusive supply agreements with such airlines:
It can also be observed that exclusive contracts have never been concluded in the large commercial aircraft sector and that their duration is unprecedented.
(70) In general, the fact that Boeing would have a wider range of products after the merger, its financial resources and its increased capacity to meet the airlines' supply needs in the short term would make it much easier for Boeing to get the airlines to enter into exclusive contracts. There is no way Airbus could offer exclusive contracts because it does not sell a full range of aircraft.
(71) Exclusive contracts with the ten largest airlines in the world could block over 40% of the world market (based on the airlines' current operational fleets as part of the world fleet). Such a scenario is quite conceivable because the consequence could be that other large airlines do not want to be excluded from the apparent advantages that their competitors benefit from due to exclusive contracts that have already been concluded. This could result in a world market in which on the one hand the largest airlines with the largest fleets, which would be controlled by Boeing after the merger, and on the other hand only smaller airlines, whose demand for aircraft would give rise to competition.
Moreover, these contracts are likely to have a long-term effect not only because of their already very long duration, but also because of the very long lifespan that characterizes the products of the sector concerned. Boeing assumes, for example, that aircraft developed after 1980 could have an operating life of 28 to 31 years. Accordingly, z. B. Aircraft that are purchased in the last contract years - even if the contract is not renewed - cover the airlines' needs until 2045/47. In addition, it cannot be assumed that after such an extremely long, exclusive relationship with Boeing, the airlines will be prepared to bear the costs of switching to another aircraft manufacturer with a different model series.
2. Overall impact of the MDC defense and space business acquisition
(72) The overall impact of the MDC defense and space acquisition would strengthen Boeing's dominant position for the following reasons:
a) Boeing's overall financial potential increased;
b) Boeing's greater access to government-funded R&D and an increase in its intellectual property portfolio;
c) increase in bargaining power vis-à-vis suppliers;
d) Opportunities for offset agreements and "tied deals".
a) The financial potential
(73) After the merger, Boeing will be the largest integrated aerospace company in the world with projected revenues of over US $ 48 billion in 1997. According to the 1995 figures, the commercial aircraft business accounted for around 70% of the total Boeing business. At MDC it is exactly the opposite: around 70% of its total business was in the defense and space business. Notwithstanding the recent acquisition of Rockwell Defense and Aerospace, Boeing will nearly triple its defense and space operations through the proposed MDC acquisition. This will make it much easier for Boeing to cope with the economic phases in the commercial aircraft sector, since revenues in the defense and space sector have obviously been much more constant in recent years than in the commercial aircraft sector, despite budgetary constraints.
(74) Since Airbus is an "economic interest group" (WIV) and as such does not disclose its accounts, a detailed financial comparison between Airbus and Boeing or MDC is not possible. However, the relative size of the three companies can be seen in their total sales for 1996:
The turnover of the four Airbus partners in the aerospace sector was in 1996:
Despite the contrary arguments put forward by Boeing, it should be noted that the sales of the four Airbus partners cannot be included in the sales of Airbus. With regard to the sales achieved in the military aerospace industry, it is important to note that the four Airbus partners together do not constitute an integrated company like Boeing and MDC, which form independent companies. Incidentally, the only Airbus partner with significant activities outside the aerospace sector is DASA, which belongs to the Daimler-Benz group. Daimler-Benz would certainly consider it uneconomical to finance Airbus to a considerable extent with the help of its other activities (primarily vehicle production), especially with an Airbus share of only around 37% (see above).
(75) How healthy the financial structures are at both Boeing and MDC can be seen from the debt-to-equity ratio (4.1: 10.5 or 3.4: 3.0 billion USD) (11) .
(76) The following operating results for 1996 indicate the individual and combined strengths of Boeing and MDC (USD billion) (12):
(77) Boeing's pre-tax profits, including MDC, were forecast by Lehman Brothers to increase from USD 4.4 billion in 1997 to USD 7.3 billion on sales of USD 54.8 billion in 2000. Lehman Brothers states that "Boeing has $ 15 billion in cash on its balance sheet by the end of the decade and could reach $ 20 billion by the beginning of the next century" (13).
(78) The Boeing and MDC accounts do not provide any indication of the profit margins on their various models. The calculations of financial analysts reveal significant differences between the profit margins for the various Boeing models. The profit margins for the models 737 and 747 (the smallest and largest models) are estimated to be significantly higher (around 30%) than for the models 757 and 767 (medium-sized aircraft), for which the profit margins are estimated at around 18% ( 14). This indicates with a certain probability that Boeing has a monopoly-like position in the smallest and largest market segment (see above under the definition of the passenger aircraft market). Therefore, Boeing is likely to be able to cross-subsidize sales of medium-sized aircraft where competition is more intense because it has higher margins on the smallest and largest aircraft where there is less or no competition. For these reasons, it can be expected that Boeing, if it were to gain MDC products, would have the opportunity to set prices at no profit or below cost in the mid-market where it deems appropriate, and lose revenue there Finance division with its higher profit margins in the segments of the smallest and largest models. Aside from such sales, cash and profit calculations, Boeing will be able to cross-subsidize its commercial aircraft sales to an even greater extent in cases where there is specific competition, by doubling its government funding for military R&D and tripling its total revenue in the defense and aerospace sectors would like to meet (e.g. in the mid-range segment of the wide-body aircraft market).
(79) One possible example of such a pricing strategy that Boeing actually used was the Model 737. Regarding the order for a new commercial aircraft from Scandinavian Airline Systems (SAS) in March 1995, The Washington Post reported (15):
"The SAS in-house evaluation committee recommended buying 50 of the new 100-seat MD-95s proposed by Douglas for $ 20 million each ... Instead, the [SAS chairman] stated that SAS had Boeing 35 new models of the venerable 737 would order at around $ 19 million per lot, a significant discount from list price. "Boeing's strategy was obviously designed to prevent Douglas from ever bringing the MD-95 to market," said one tenderer . "
(80) According to Boeing, the lowest published price in 1996 for the 100-seat 737 is USD 32 million. Assuming that the financial analysts' calculations of the profit margin of around 30% on a Boeing 737 are reasonably correct (16), the actual sales price of USD 19 million per aircraft to SAS would mean that Boeing would not profit at all from this deal made (32 million USD less 30% = around 22 million USD).
(81) As has already been explained, with the MDC products (particularly the small MD-95 segment) and a much larger overall potential, Boeing would be much more likely to have the opportunity to engage in such pricing practices, in particular, as has already been stated, because of its strong and increasingly powerful nature Cash flow position.
(82) In a letter to a Japanese leasing company regarding the signing of an aircraft order with Airbus, it was reported at the hearing that an example could be found of Boeing's willingness in the past to use all its financial strength not only on competitors , but also to exert pressure on customers:
"I want you to know that Boeing is taking such a decision ... extremely seriously. This is not only a shock to me and my colleagues, it will certainly have a negative impact on the future of our longstanding relationship."
"... Moreover, what is more serious, it could have undesirable consequences for cooperation between Japan and America in the aerospace sector."
(Signature of Mr. Ronald Woodard, Boeing Commercial Airplane, Group President, December 17, 1996).
b) Access to government funded R&D
(83) Since Boeing would significantly expand its defense and space operations, it would have far better access to the portion of research and development carried out by the US Department of Defense (hereinafter "DoD"), the National Aeronautics and Space Administration ( hereinafter referred to as "NASA") and other public institutions. This would be the case in particular with regard to research and development in the military aircraft sector.
i) R&D in the US aerospace industry is largely government funded
(84) According to figures from the Aerospace Industries Association of America, all industrial R&D (state and privately funded) in the United States averages 3-4% of net manufacturing sales. In the US aerospace sector, however, industrial R&D accounts for 12-14% of net sales. In all branches of the economy, companies finance around 80% of all industrial R&D, around 20% of which is co-financed by the state. The relationship in the aerospace industry is completely different: around 60% of all industrial R&D is funded by the American government and only 40% by companies themselves.
(85) In 1994 the State spent USD 8.8 billion on industrial R&D across the aerospace sector. Of this, around $ 8 billion was spent on development activities, while the remainder was spent on basic and applied research. The main investors in industrial R&D were the DoD and NASA. The DoD's total budget for aerospace R&D (for aircraft and related equipment) was $ 6.8 billion, while NASA's budget was $ 1.5 billion. For 1995 the numbers were $ 7.1 billion and $ 1.3 billion, respectively. The DoD awarded research, development, testing, and evaluation (FETuB) aerospace contracts for $ 5.8 billion in 1994 and nearly the same amount in 1995.
(86) In general, the DoD spends significantly more on R&D than the European Defense Ministries (hereinafter referred to as "VM"). In 1996, the DoD allocated a total of $ 34.8 billion to R&D. In contrast, VM total R&D expenditure in the Community (excluding Austria, Sweden and Finland) was $ 11.7 billion. Defense ministries in France, Germany and the UK, the main partners in the Airbus project, accounted for US $ 10.6 billion. The situation is similar in the space sector. In 1996, the NATO budget was $ 13.8 billion. In contrast, the contribution of the Member States to the budget of the European Space Agency (EEA), which is by far the largest of all space budgets in the EU, was USD 3.1 billion. These numbers, which are clearly disproportionate to one another, cannot be compared precisely with one another, since the four CMs in the community do not necessarily coordinate their actions.
ii) American defense and space R&D is typically government funded
(87) Unlike production or procurement programs, which are generally carried out under fixed price agreements, defense and space development programs are usually carried out under reimbursement agreements. The most important R&D contracts are the so-called "Engineering and Manufacturing Development" (EMD) contracts, with which the process engineering production development of a system is financed before the actual production phase of a program begins. The agreements in question are usually entered into as "Cost Plus Award Fee" (CPAF) or "Cost Plus Incentive Fee" (CPIF) contracts.
(88) CPAF contracts provide for a reimbursement of costs plus a surcharge based on an award plan negotiated at the beginning of the contract. CPIF contracts provide for a reimbursement plus a performance fee based on performance and deadline goals. In some cases, a contractor invests its own resources in research and development during the early stages of an armaments program. This initial cost is usually included in the total program cost when the contractor is later awarded a DoD production order for the same item. In addition, through the DoD's Independent Research and Development (IR&D) reimbursement program, eligible DoD contractors can recoup a portion of the cost of their own independent R&D activities through additional payments under the aforementioned DoD Cost Plus contracts. Since 1991, the definition of eligible independent research and development has included all projects that may be of interest to the DoD. As a result, most of the research and development for armaments products or any armament-related applications is funded by the DoD. R&D for armaments programs and space technology and programs are also often fully funded, especially when the primary recipient of the program is the US government.
iii) Boeing will significantly increase the number of its R&D contracts in the defense sector as a result of the proposed merger
(89) Over the past five years, Boeing's average annual revenue from government R&D contracts has been around [. . .]. Around [. . .] of these revenues came from R&D activities for NASA space programs, particularly for the space station. Although Boeing currently only manufactures limited military aircraft (AWACS, KC-135 tanker) and does not build combat aircraft, military aircraft represented the second largest segment of its R&D revenue. . .] of its revenue from contracts with the US government. In fact, Boeing is involved in major military aircraft development programs such as: B. for the fighter aircraft F-22, Joint Strike Fighter and the tilt wing aircraft V-22. MDC received an average of [. . .] to [. . .] annually, of which around [. . .] accounted for military aircraft. As a result of the planned merger, Boeing will more or less double its R&D revenues in the military aircraft segment.
(90) The new Boeing / MDC would be involved, to a lesser or greater extent, in all of the current DoD programs with the highest R&D budgets. The following funds are available for these programs:
(91) The main aircraft programs for the foreseeable future will be Joint Strike Fighters (JSF), F-22 and F / A-18. System leader for F-18 is MDC, F-22 is being jointly developed by Lockheed and Boeing. Boeing and Lockheed are currently competing for the final JSF contract. The Commission believes that the merger would allow Boeing and MDC to combine their technological resources with a better chance of winning the final main contract for the development of the JSF.
iv) Boeing will gain several general competitive advantages from significantly increasing its defense R&D
(92) An obvious advantage of defense R&D for a commercial aircraft manufacturer, as mentioned above, is the ability to apply publicly funded technology to the commercial aircraft sector. Manufacturers of commercial aircraft do not only benefit from military R&D activities in terms of technology transfer. The extensive participation of private companies in highly specialized military R&D projects promotes the technical staff of these companies and thus the general know-how. Military R&D also pays off for basic equipment, such as B. Special machines that can later be used for commercial aircraft.Even if a military R&D project does not lead to a particular technological outcome ("unsuccessful programs"), it can be of commercial benefit to the company that carried it out because it is now aware of the "research dead ends" to be avoided.
(93) Such an increase in general know-how will occur in particular in design and manufacture. For example, the American DoD sponsors a major design technology program that uses advanced CAD / CAM systems for product modeling and simulation, greatly reducing the time and risks associated with starting production of a new aircraft. These techniques are also used for civil programs. Other examples are the know-how for the application of new composite materials technologies in military programs like the V-22, F-22 and B-2, in which the necessary knowledge for the design and the production of material structures, which meanwhile for the B-777 is used or the "Design Manufacturing and Productibility Simulation", a system developed by MDC in the course of its military programs, by means of which the duration of the conception phase could be reduced considerably and which was used for the development of the MD-XX. In this connection, it should be noted that Boeing, in its reply to the statement of objections under Article 18, stated that it had the know-how from civil programs in the fields of computer and software, advanced tools, manufacture and automation of the manufacture of electronic products has been used as part of military programs such as the F-22, V-22, and RAH-66. While Boeing claims that the civilian sector cannot derive substantial benefits from the know-how of military programs, these examples demonstrate that the know-how gained in the civil and military sectors is mutually beneficial.
v) Boeing will derive far greater benefits from the proposed merger from the transfer of military technology to the commercial aircraft sector
(94) Much of the technology developed in the defense sector can be used in commercial aircraft construction. Boeing's greater involvement in military R&D will primarily affect military aircraft, especially combat aircraft. Due to the greater compactness of the systems, combat aircraft technology is not entirely transferable, but it is largely transferable. The following list provides an overview of the extent to which Lockheed Martin estimates that fighter aircraft systems and technologies are suitable for applications in the commercial aircraft sector:
(95) It is true that, as Boeing and MDC have explained, a recipient of State funding for military R&D often outsources a significant part of its contract. However, this does not reduce the ability of a main contractor such as Boeing or MDC to make full use of the know-how and technical knowledge gained within the framework of such programs, since the main contractor will always have access to all details of the R&D activity carried out. In any case, it is questionable to what extent and how often state-funded R&D is subcontracted. MDC stated e.g. For example, composites are usually developed by material suppliers rather than Boeing or MDC. As part of the DoD-funded Manufacturing Technology program, however, the development of low-cost materials for fuselage applications was awarded to Boeing and for wing applications to MDC. This Manufacturing Technology program accounted for the largest portion of the DoD's 1996 technology transfer budget, totaling $ 1,768 million.
(96) In addition to its leading position in the combat aircraft sector, MDC is also one of the leading manufacturers of military transport aircraft. Apparently, technology developed in this sector can be fully applied to commercial aircraft. MDC recently announced that it had decided to manufacture its C-17 military transport aircraft as a commercial airliner. In this context, the Boeing 747, which was initially developed for a tender for a military transport aircraft, is a historical example.
(97) On the question of the commercial application of military technology, Boeing has stated that under the 1992 Community-US Large Aircraft Trade Agreement, Boeing has not been involved in any US defense or other programs since 1993 has benefited recognizable ways for airliner programs. However, in a statement made at the June 13, 1997 hearing, Boeing admitted that in any event, military and commercial research applications largely overlap. Boeing claimed that such overlap benefits the industry as a whole, not just individuals like it. However, this seems extremely unlikely as military research contracts are subject to security and confidentiality regulations. NASA in particular has resorted to so-called "limited exclusive rights" to ensure information protection by non-governmental parties involved in NASA agreements. For example, many programs in connection with "High Speed Civil Transport" (HSCT), the likely successor to Concorde, may not be disclosed for a period of at least five years.
(98) The Commission emphasizes that this Decision does not deal with the interpretation of the concept of "indirect support" in Article 5 of the abovementioned Agreement, but that it is carrying out an economic study with a view to the application of the Merger Regulation. In light of this, it is not critical whether Boeing has received any discernible cost advantage over the past three years through its aforementioned involvement in any of its current specific commercial aircraft programs. The only thing that matters for the proceedings under the Merger Regulation is that Boeing's much greater involvement in military R&D activities over time, as described above, would give the company a significant competitive advantage over its only remaining competitor in the commercial aircraft sector.
(99) In the Commission's view, this is particularly true because in the United States the dividing line between defense and civil aviation programs is less clear than in the EU. This has to do with US policy that arms, space, and civil aircraft technology are closely linked. In August 1995 z. B. the National Space and Technology Council:
"The substantial fundamental technological concordance between military and civil aviation products and services must be used to increase the productivity and efficiency of our research and development activities. To this end, government and industry must work together actively to achieve technological goals that are applicable to both civil and civil aviation as well as military applications ... The DoD, the Federal Aviation Administration (FAA), and NASA need to focus more on this new dual-use aspect of technology development programs. "
A December 1995 Congressional Research Service report again stated:
"The DoD has emphasized the development of dual-use technology, both to use the commercial manufacturing facilities for the manufacture of military products and to contribute to the use of military technology for civil purposes."
Many other examples can be cited of the US administration's support for dual-use technology. Such a policy would be pointless if there was not already a transfer between military and civil applications in the aerospace sector.
In fact, in many cases there was a direct transfer of the finished product from the military to the commercial sector, e.g. B .:
- The B52 (aerodynamics) and the KC135 (wings, cockpit, engine conception) contributed to the development of the B707 and later the B727, B737 and B757;
- The B777 benefited from the system integration technologies derived from the AWACS development;
- the production series derived from the MD11 benefits from the KC10.
The most important contribution of the military sector to civil applications, however, results from the basic technology, which leads to considerable increases in productivity and cost savings.
(100) The argument could be that Boeing's benefits from, and increased involvement in, government-funded research and development in the defense, space and civil aviation sectors after the proposed merger should be compared with the likely public support for the development of commercial aircraft, which its only remaining competitor, Airbus, could maintain in the future. In defense and aerospace research and development, there is and will certainly continue to be an extremely large gap between spending in the United States and Europe that is in Boeing's favor. The US government, and particularly NASA, spend far more on research and development in the commercial aircraft sector than is the case for similar purposes in Europe. In Germany, for example, the country of one of Airbus' main partners, the federal budget for R&D in civil aviation in 1995 was DEM 142 million (around USD 90 million). That same year, NASA's aerospace R&D budget was $ 1.3 billion. However, in 1995 there was also a federal budget of DEM 208 million (around USD 130 million) for general research in the aviation sector. That number compares, however, with the US Federal Aviation Administration's $ 2.2 billion research, engineering and development budget. Numerous statements by US government officials, including NASA officials in particular, also point to the growing interest in civilian applications of this R&D solely for the benefit of US industry. This applies both to subsonic aircraft and to the HSCT, for which extensive, target-oriented state R&D funds are made available. There is no repayment obligation for any of the support in question.
In contrast, the 1992 agreement between the Community and the United States on trade in large civil aircraft provides, among other things, expressly sets limits and repayment terms on the type of government funding that is generally granted in Europe and that will certainly remain at the heart of future government funding for the European aviation industry, namely loans that are repaid through commissions per aircraft sold. These loans can represent up to a third of the total development cost of a new large civil aircraft and must be repaid plus interest.
(101) This disparity existed before the proposed operation, but its effects were at least partially mitigated by the fact that the benefits of the US government-funded R&D benefited two competing companies and, in the case of MDC, only affected a limited commercial aircraft business. After the merger, all of Boeing's and MDC's government-funded R&D would be concentrated in a single entity, which has by far the largest commercial aircraft business in the world.
vi) Intellectual Property
(102) In a high technology industry such as the manufacture of commercial aircraft, intellectual property, whether in the form of patented or unpatented know-how, is particularly important for the competitiveness of market participants. The merger of the leading international commercial aircraft manufacturer and the leading international military aircraft manufacturer will result in the amalgamation of two important portfolios in the field of intellectual property. Over 500 patents belong to Boeing and could be relevant for commercial aircraft. MDC is estimated to have around 150 such patents (17). With 86 Boeing patents and 26 MDC patents, it would potentially be possible to restrict access to important future technology. These patents cover the following areas:
- Aircraft structures for which a great deal of R&D has been carried out to produce lighter and stronger materials that allow greater range, higher speed and payload, extend the life of an aircraft and reduce maintenance costs. Boeing and MDC have exclusive patents in some of these areas;
- Composite materials, i.e. a combination of two or more separate materials that result in an extraordinary increase in the performance of the airframe, in particular with regard to weight, strength and rigidity, fatigue fracture resistance and design flexibility (e.g. Boeing's wings, which are entirely made of composite materials exist) concerns;
- Aerodynamics: In this area, recent innovations contribute to lower fuel costs, reduction in noise during take-off and landing, greater range and higher speed and shorter development phases;
- Flight control: This is the area in which the most spectacular technical advances have been made in recent years. Boeing and MDC were among others in this area. active in NASA's Advanced Subsonic Technology Program, and Boeing has acquired first patents in the field of optoelectronic flight control;
- Electricity and electronics, which are critical to safety and cost-effectiveness, are areas in which both Boeing and MDC have undertaken extensive R&D activities, particularly under government contracts.
(103) In summary, the Commission notes that the amalgamation of the know-how and patents of Boeing and MDC will further strengthen Boeing's dominant position in the large commercial aircraft sector.
c) Bargaining power with suppliers
(104) Aircraft manufacturers depend on a large number of suppliers for a wide variety of goods and services, ranging from materials and components to larger systems, essential parts of the airframe and engines. In numerous cases, the suppliers are also involved in the design and development of the aircraft. Large suppliers, especially airframe manufacturers, sometimes enter into agreements with aircraft manufacturers to share the risks and revenues.
i) The proposed concentration will lead to a substantial increase in Boeing's buying power
(105) It is estimated that 50% of an aircraft manufacturer's activities are subcontracted. In 1996 Boeing sold around [. . .] and MDC for around $ 11 billion. The combination of these aircraft activities would certainly lead to a substantial increase in Boeing's buying power over its suppliers. Boeing has provided a list of suppliers that sell for at least $ 10 million to the Boeing Commercial Airplane Group and has given estimates of their sales to Boeing, MDC and Airbus compared to the total sales of those suppliers. Of [. . .] Suppliers for whom Boeing was able to provide such an estimate supplied [. . .] Companies both Boeing and MDC, and [. . .] of these companies achieved at least 50% of their total sales or of their sales in the entire aerospace sector or in certain cases in the commercial aircraft sector with Boeing and MDC. However, the number of suppliers who achieved at least 50% of their sales with Boeing and MDC is certainly much larger, since Boeing was only able to partially account for sales in the defense and space sector. The supply relationships resulting from MDC's large military business were therefore only taken into account to a limited extent. In this context, it should also be noted that most of the aerospace suppliers questioned by the Commission said that losing Boeing / MDC as a customer would be very problematic for them.
ii) Boeing's increase in buyer power could significantly weaken Airbus' competitive position
(106) After the merger, Boeing would in particular increase its buying power vis-à-vis the large number of suppliers who supply components for both civil and military applications. Adding the buying power of MDC, particularly in the military sector, to Boeing's already strong position in the commercial aircraft sector, the overall dependency of Boeing's suppliers could grow and result in them having to give Boeing priority over Airbus. Boeing would be able to put pressure on numerous suppliers to prevent them from working with its only competitor, Airbus, or to give Boeing preference over Airbus in capacity planning.
(107) There is evidence that Boeing's current buying power may have had some impact on Airbus' access to suppliers who would have shared the risk with it. For example, it was widely reported that earlier this year Northrop Grumman decided not to take the risk of developing the A3XX. Following this, Northrop Grumman announced that it had received a $ 262 million contract from prime contractor Boeing to upgrade its AWACS radar. In addition, Boeing recently placed a $ 400 million contract with Northrop Grumman to manufacture passenger and cargo doors for its 737, 757 and 767 aircraft. In this context it is noteworthy that supplies to Boeing constitute the vast majority of Northrop Grumman's commercial aircraft business. After the merger, these supplies would be in addition to Northrop Grumman's supplies for MDC's defense business, which in absolute terms even exceed current supplies to Boeing.
(108) In general terms, the increase in Boeing's buying power could likely significantly weaken Airbus' competitive position and thus strengthen Boeing's position.
d) Offset agreements and tying deals
(109) Offset agreements are a system whereby a supplier provides technology or production capacity in the buyer's country for someone to buy a product. Direct offset consists of the production or technology for the product being sold. Indirect offset is not product-related, but generally relates to a related field of technology.
(110) Offset agreements in the commercial aircraft sector are less common than in the case of military aircraft, for which they are the norm. In the commercial aircraft sector, offset agreements have also been limited in part by international agreements. Nevertheless, they play a relatively important role in this sector, especially in countries with state-owned airlines. Two recent cases can be cited as examples. In 1996, Malaysian Airlines ordered 25 aircraft from Boeing as part of an offset program to allow Malaysia to develop its avionics and composites industries. According to press reports, the South African Department of Commerce and Industry recently introduced a 50% offset for all long-term government purchases. This new offset policy will also apply to South African Airways, which had to cease efforts to purchase 7 new Boeing aircraft while the new offset rules were being worked on. For its part, Boeing has stated that it has previously signed several offset agreements in the commercial aircraft sector.
(111) The ability to do offset deals gives US commercial aircraft manufacturers a significant competitive advantage in general. A February 1997 report by the Manufacturers Alliance on Offset Agreements for Foreign Sales of Military and Non-Military Equipment reproduced the following statement by the Director of the Office of Aerospace, US Department of Commerce:
"The government notes that, as in the case of offset agreements in the defense sector, the greater flexibility of US manufacturers in offering offset agreements gives US companies a significant competitive advantage. For Airbus, a joint venture of four governments For example, it is difficult to source components from a non-member country as the work has to be spread across the four countries. Because of their greater flexibility in this regard, Boeing and McDonnell Douglas have been more successful in penetrating the East Asian markets in particular. "
(112) Boeing already has significant offset capacity due to its large commercial aircraft business. Combined with MDC's defense business, Boeing's offset capabilities would increase significantly, which would give it another competitive advantage. The merger would make it even easier for Boeing to enter into tying deals in certain countries for the sale of Boeing commercial aircraft in connection with MDC military aircraft.
(113) In the light of the foregoing, the Commission considers that the proposed concentration would lead to the strengthening of a dominant position which would significantly impede effective competition in the common market within the meaning of Article 2 (3) of the Merger Regulation.
A. BOEING OBLIGATIONS
(114) In order to address the competition concerns, Boeing has made the following commitments to the Commission:
Boeing's proposal for the DAC fleet
1. Boeing is committed to the following structural measures: Boeing will maintain DAC as a separate legal entity for a period of ten years and submit to the Commission an independent auditor-certified report on the operating results of DAC's business in the commercial aircraft sector. This report will also be published. Under these conditions, Boeing will have the right to administer the separate legal entity as a whole and to make all relevant business decisions. The aforementioned period can be shortened in consultation with the Commission if Boeing does not maintain at least two DAC aircraft programs.
2. Boeing is committed to providing high quality customer service for DAC aircraft as it is for Boeing aircraft. This includes all services that are usually available temporarily for Boeing aircraft (currently the entire network of agents, a round-the-clock advice service, all aspects of spare parts service, including delivery the next day, quick service ("responsive AOG support") in the event of aircraft breakdowns, perfect maintenance and flight training). In addition, Boeing will apply Boeing's guidelines and procedures for supply and pricing in the aftermarket and ensure an appropriate level of technical support.
3. Boeing declares that it will neither refuse nor threaten to refuse service on DAC aircraft (including spare parts) and that it will not penalize or threaten to penalize any airline in relation to service on its DAC aircraft (e.g. E.g. by raising prices or extending delivery times for spare parts) because it wants to buy aircraft from another manufacturer. Boeing undertakes to continue to publish the information (including prices) currently contained in the DAC spare parts catalog.
4. Boeing will not use its privileged access to the operational DAC fleet to take advantage of the opportunity to persuade current DAC operators to buy Boeing aircraft. In particular, Boeing will not offer spare parts and service to certain DAC operators on more favorable terms than other DAC operators in order to persuade them to purchase Boeing aircraft.
Boeing's proposal for exclusive contracts
Boeing will not conclude any additional exclusive contracts until August 1, 2007, except for tenders in which another manufacturer has offered to conclude an exclusive contract.
Boeing will not insist on its exclusive rights based on the contracts with American, Delta and Continental announced on November 21, 1996, March 20, 1997, and June 10, 1997, respectively.
An exclusive contract within the meaning of this obligation is a contractual obligation entered into by a customer not to buy or lease any jet-powered commercial aircraft within a certain maximum gross take-off weight range from another aircraft manufacturer or to purchase a certain percentage of aircraft from a single manufacturer.
Boeing's proposal for patents
Boeing will, at the request of a commercial aircraft manufacturer, grant a non-exclusive license for a reasonable fee for any "government sponsored patent" that could be used to manufacture or sell jet-powered commercial aircraft. Boeing will also license the know-how in connection with such a patent, which is essential for the full, efficient and rapid exploitation of the patent.
"Government sponsored patents" are patents for an invention developed by Boeing in the performance of one or more of its contracts with the US government, or for which Boeing has licensed rights.
Boeing will also grant a non-exclusive license to another aircraft manufacturer for blocking patents, including the related know-how mentioned in the first paragraph, for a reasonable fee, if that manufacturer is willing to license its blocking patents under similar conditions.
If Boeing and the other commercial aircraft manufacturer cannot agree on the fee or whether the patent is a "government-funded patent" that could be used to manufacture or sell jet-powered commercial aircraft, or whether it is a blocking patent, an independent arbitrator will be referred to the matter according to terms and conditions and procedures jointly agreed by Boeing and the other manufacturer.
Boeing will provide an annual report to the Commission for a period of ten years or earlier if the Commission accepts that similar information is provided under bilateral intergovernmental agreements or that there has been a significant change in the conditions of competition, including market shares and product range Submit patents still valid for an invention developed by him in the execution of one or more of his contracts with the US government or actually exploited by him for the first time.
Boeing's proposal on the transparency of R&D projects
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