Resolution No. 37 – Case NC 388-11 – Inquiry by Conadecus regarding the concentration operation between LAN Airlines S.A. and TAM Linhas Aéreas S.A.

07/06/2016

The Competition Court, in a divided decision, approved the merger between LAN Airlines S.A. and TAM Linhas Aéreas S.A. (LAN and TAM, respectively), analyzed by this Tribunal because of an inquiry by Corporación Nacional de Consumidores y Usuarios de Chile (CONADECUS), subject to the following mitigation measures: (i) exchange of four of LAN or TAM’s daily slot pairs in Sao Paulo Guarulhos Airport, with airlines interested in starting or increasing regular air transportation services in the Santiago – Sao Paulo route; (ii) extension of LATAM’s Frequent Passenger Program benefits to passengers of an interested airline, for 5 years and in the terms indicated by the Tribunal; (iii) subscription of interline agreements in the Santiago – Sao Paulo, Santiago – Rio de Janeiro and/or Santiago – Asunción routes, with interested airlines who offer services in those routes; (iv) prohibition to increase the monthly supply of available seats in the Santiago – Sao Paulo route, in the period between 15 minutes before and 15 minutes after the flight itinerary of the exchanged slots; (v) modification of LAN’s Self-Regulation Plan, in the terms indicated in the Resolution; (vi) relinquishment of membership of at least one of the two global alliances to which LAN and TAM belong; (vii) elimination and revision of code sharing agreements with airlines that do not belong to the same global alliance as LATAM, in the indicated routes and intermediate routes; (viii) resignation by LAN of at least four 5th freedom right frequencies to Lima, in order for them to be reassigned to another Chilean airline, and restriction to LATAM’s participation in future frequency tenders; (ix) commitment by LAN to state its favorable opinion to a unilateral open skies policy for cabotage in Chile by foreign airlines, without reciprocity; (x) commitment to promote growth and the normal operation of the airports of Guarulhos (Sao Paulo) and Arturo Merino Benítez (Santiago), in order to ease access to other airlines; (xi) establishment of non-exclusionary commercialization conditions with distributors and travel agencies; LATAM cannot establish incentives or commissions based on its participation on total sales of the agent, or equivalents.

As long as LATAM hasn’t fully complied with the aforementioned condition (i), air fares for passenger and cargo transport in the routes Santiago – Sao Paulo and Santiago – Rio de Janeiro cannot be increased, and LATAM must maintain: (i) at least 12 weekly round trip flights in routes connecting Chile with USA, operated directly by LATAM; and (ii) at least 7 weekly round trip flights in routes connecting Chile with Europe, operated directly by LATAM. Lastly, LATAM must hire an independent third party, who will assist the National Prosecutor’s Office in the terms indicated in Condition XV, for the adequate monitoring of LATAM’s compliance to the aforementioned mitigation conditions.

This decision was agreed upon with a minority ruling by Judge Mr. Menchaca, who approved the operation without the conditions regarding: (i) the resignation of frequencies to Lima; and (ii) the prohibition to increase air fares for cargo transport. This, since the judge considered that those measures are not related to the effects of the Operation, and they were not discussed during the process.

Judge Mr. Velozo held a minority ruling. This judge was for rejecting the Operation, considering the following: (i) concentration of LAN with its closest competitor would consolidate a dominant carrier in Latin America, strengthening LAN’s power in the internal air market, with all the risks this implies for Chilean consumers; (ii) the possibility of timely and viable entry by companies who can challenge LATAM in air transport of passengers between Santiago and Brazil is reduced, and the mitigation conditions are not sufficient to revert that situation; (iii) entry of new airlines who compete with the merged company in most routs to and from Chile is not expected, given LATAM’s position in Santiago airport, and in its hubs in Lima and Sao Paulo; (iv) current competitors of LAN in Chile will probably connect with LATAM for the international segments of the trips they offer, which will favor cooperation relations instead of rivalry; (v) the merged company will be able, by itself, to establish new barriers to entry and expansion of competitors, via strategic behavior, and will have significant incentives to do so; (vi) the consolidation of a regional duopoly may increase risks of coordinated conducts that tend to allocate the market, with the implied negative consequences for Chilean consumers: (vii) this Judge does not consider prudent to authorize a merger of this magnitude as long as there are no substantial advances in the liberalization of this industry in South America, and he considers that the merger may be harmful for said deregulation; (viii) the companies that wish to merge have not demonstrated in which way does the Operation benefit consumers in the national and international passenger air transport markets, nor have they demonstrated how the efficiencies they intend to reach will not be an obstacle to competition; (ix) the cost savings or productive efficiency gains LAN is pursuing could be reached in ways that impose less risks to competition, such as merging with a South American actor apart from TAM, or deepening or broadening its commercial agreements with other airlines in the region; (x) the substantial increment of LAN’s market power that this Operation will cause, will not be effectively controllable by Chilean competition authorities. For all these reasons, the dissident Judge concludes that the most cost-effective way to preserve competition is not authorizing this merger.

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