Likely to be approved
The parties are likely to obtain all the necessary antitrust approvals around the world because in this industry, to be a market leader doesn’t mean to have market dominance, in our view. The data available for this industry (provided by Cirium) suggests that the merged entity would enjoy around 18-20% of leased aircraft manufactured by western companies, this is mainly Boeing, Airbus and Embraer. This market share is well ahead of the next competitor, Avalon, which merely has around 5%. While this gap could be outcome determinative in many industries, the truth is that this market has low barriers to entry and low switching costs for airlines, suggesting that the merged entity may not have market power to raise prices after the transaction.
This industry is highly fragmented, with more than 100 companies worldwide providing aircraft leasing services, including financial institutions, leasing companies and peers. Additionally, in the last ten years, new companies have emerged in this sector and others have expanded via acquisitions, reshaping the competitive landscape. What is more, American Airlines, Air France-KLM, Azul, LATAM, China Southern Airlines or EVA air, the main customers of the aircraft leasing companies, can easily switch providers as there aren’t significant sunk costs or a learning curve due to new technology. The main restrictions may come from contract limitations rather than technical or market restrictions.
Rationale of the deal
AerCap is taking a calculated risk in acquiring GECAS, assuming that airlines will need more aircrafts in the near future. GECAS and AerCap are trying to renew their fleets by substituting widebody aircrafts for newer and more environmentally-friendly narrowbody ones in line with the trend in the the aviation industry where the Airbus 320neo family and the Embraer E-Jet E2 single aisle seem to be taking over older aircrafts.
The rationale of this deal is that the merged entity would be able to negotiate better financial terms to acquire new aircrafts from Boeing, Airbus and Embraer and eventually some of these efficiencies could be passed on to airlines and final customers. The antitrust concerns stemming from this deal aren’t straightforward and this could play out well for the companies. The benefits from better terms and eventually lower prices for consumers, will likely be compared by regulators against the potential risk that the merged entity would use this bargaining power to squeeze both manufacturers and airlines. Yet, as mentioned above, the low barriers to entry and switching costs may make this theory of harm difficult to prove for regulators.
Remedies are easy to craft
If regulators were to consider the deal anticompetitive, the companies could easily offer remedies that would likely appease them. Unlike other global deals were remedies are difficult to design, as could be the case of AON-WTW, and companies have no option but the abandon de deal, AerCap and GECAS could divest as many aircrafts as needed to allow potential buyers to better compete with them. Additionally or alternatively, depending on the concerns, the merged entity could modify the terms of the leasing agreements with airlines to facilitate early termination in case of an increase of the prices as a result of the merger.
It may be approved after a light review
The companies filed the deal in Brussels on June 18 and the deadline for a phase I merger review is set for July 26. Despite the size of the market and the companies’ overlaps, regulators in Europe could clear this merger after a 25-working-day phase-one review. This deal reminds us to the 2018 UTC-Rockwell Collins deal, where the companies obtained a phase-one approval with divestitures after months of pre-notification talks.
A deal between number one and number two in any market would normally go to a phase-two review. Yet, this deal may not be particularly complex, as markets don’t involve new technology. Regulators may focus on the impact of the deal on third parties and what remedies, if any, could fix any potential concerns.
