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The EU’s flawed assessment of horizontal aspects in GE/Honeywell: re-visiting the last pillar of the European prohibition decision

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Abstract

The paper argues that—in contrast to the decision of the European Commission in 2001 and the ruling of the Court of First Instance in 2005—the merger between General Electric and Honeywell International would not have led to anti-competitive horizontal effects. Applying the European Community Merger Regulation valid at the time of decision and empirical evidence available in 2001, the relevant markets are defined taking into account demand-side substitutability and supply-side substitutability. The worldwide bidding markets for large regional jet aircraft engines, corporate jet aircraft engines and small marine gas turbines are characterised by potentially volatile market shares, high importance of after-sales revenue and profitable outside options. According to the two-level approach of the European Commission, the analysis considers firstly the competitive situation of the engine manufacturer in relation to its direct customer, the aircraft or marine vessel manufacturer, and secondly the competitive effects in the respective market of end-use applications. The paper shows that GE was not in the position to exert market power prior to the merger and would not have been ex post.

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Notes

  1. Only the court decision GE v. Commission is discussed here, since the appeal of Honeywell was dismissed for formal reasons, see also Drauz and König (2006, p. 111).

  2. General Electric (2006).

  3. For a more recent analysis of GE’s aerospace business, see Derber and Holland (2007).

  4. See also Girardet (2006, pp. 85–86) regarding the threshold.

  5. Before publishing several aspects of the decision were redacted for confidentiality purposes.

  6. European Commission (2001, p. 4); Kolasky (2006, pp. 74–75). The Commission presented as evidence three internal GE documents indicating that engine manufacturers could influence the market of aircraft by offering rebates on engines or maintenance, repair and overhaul services with a view to promoting sales of the aircraft/engine package.

  7. Similar relationships apply for the business of small marine gas turbines.

  8. For example, International Aero Engines AG (IAE) is a joint company of Pratt & Whitney USA, Rolls-Royce UK, Japanese Aero Engines Corporation (JAEC) and German MTU producing the V2500 engine which is the alternative engine to the CFM56 on the A320 single aisle aircraft family. Pratt & Whitney produces the combustor and high-pressure turbine, Rolls-Royce the high-pressure compressor, JAEC the fan and low-pressure compressor and MTU the low-pressure turbine. Pratt & Whitney and Rolls-Royce assemble and test the engines at their respective facilities, and staff seconded from partner companies are responsible for the sales, marketing, support and administration of the program.

  9. In addition to purpose-built corporate jets larger commercial jets up to the A380 are converted for corporate use.

  10. This range is required for coast to coast traffic in North America which is an important characteristic for a considerable number of corporate jet users.

  11. Long-term average in the engine MRO business based on author’s expertise.

  12. The figures in the year 2000 are distorted due to the large GECAS orders which are not considered in the calculation of shares. In 2000, GE alone placed 135 of 187 GE-powered regional jet orders, i.e. over 58 % of the total number of large regional aircraft orders in that year, through its leasing company GECAS.

  13. The data represents engine manufacturers’ market shares based on the number of aircraft orders. While the various aircraft types and their engines may be of different US$ values (as per published list prices) no adjustment in this respect has been made in order to show directly the market success of aircraft engine manufacturers in a market where an aircraft competes with another aircraft. It is assumed here that airlines request all bidders to offer the same number of aircraft for a certain mission profile irrespective of the published list prices. This seems to be justified on the basis that the airline owns a given number of slots within its route network and plans for a defined number of pilots, crew and support staff.

  14. It is often argued that, if there is a competitive bidding market market shares might be of limited or no significance (Klemperer 2008, p. 583). However, this is true only for ‘ideal bidding markets’. The market for large regional aircraft is not an ideal bidding market according to the criteria of Klemperer (see Schumacher 2010, pp. 79-80).

  15. See Kovacic (2001).

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Acknowledgments

I would like to thank Matthias Pflanz (Charles River Associates) for helpful comments on earlier versions of this paper. Errors are obviously mine.

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  1. TH Wildau, Technical University of Applied Science, 15745, Wildau, Germany

    Philipp Schumacher

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Schumacher, P. The EU’s flawed assessment of horizontal aspects in GE/Honeywell: re-visiting the last pillar of the European prohibition decision. Eur J Law Econ 35, 211–240 (2013). https://doi.org/10.1007/s10657-012-9373-9

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