ACCC points to competition threats if Stella-JTG merger gets the go-ahead

Issues & Trends – July 2010

ACCC points to competition threats if Stella-JTG merger gets the go-ahead

THE Australian Competition and Consumer Commission (ACCC) has made it abundantly clear that it has no intention of “rubber stamping” the proposed merger of Jetset Travelworld (JTG) and Stella Travel Services.
In an extensive “Statement of Issues” released earlier this month, the ACCC has raised a series of concerns about the effect which the merger could have on competition in the retail, corporate,
tour wholesaling and air ticket consoli-dation sectors.

It points to the potential for the merged group to foreclose rival whole-salers, the danger of “tacit co-ordination” between Flight Centre and a merged Stella-JTG, the difficulties that would be faced by a breakaway group of agents attempting to offer an alternative to the Stella-JTG chains and the erosion of competition among consolidators.

The issues it raises include:

Qantas’ significant shareholding in the merged firm. The ACCC states: While Qantas may not have the ability and incentive to substantially foreclose retail stores not affiliated with the merged firm, it may have some ability and incentive to restrict access to some or all of its products, to some extent.”
That sounds like the ACCC recog-nises that any “breakaway group” from the major franchise networks would find life very difficult without a Qantas deal.

• The market power of a merged Stella-JTG. The ACCC acknowledges that JTG and Stella do not own and control all their stores but it points out they have considerable control over the products they sell and how they price them. The ACCC also considers JTG and Stella are “each other’s closest competitors due to the similarities in their business models”. While accepting Flight Centre will remain a significant competitor, it expresses concern that this “may not effectively replace the vigorous competition between the Jetset and Stella retail networks”.

The ACCC also accepts that the internet will provide additional competition, but it is concerned that “to the extent that online and direct sales are not a viable option for some customers, the merged firm and Flight Centre may, through tacit co-ordination, be able to achieve higher commissions from content providers or profitably reduce the choice of products available and level of service provided to consumers”.

The issues paper also queries the ability of agents to set up rival chains “due to the sunk costs and lead times involved in achieving the economies of scale and brand recognition required to compete with large incumbent retail groups”.

The ACCC reveals it is looking at the realistic ability for “an incumbent buying group or block of franchisees from the merged firm’s retail network, to form an independent rival network”. It calls for further submissions on this issue.

On the retail front, the preliminary view formed by the ACCC is that a merged Stella-JTG could “extract more favourable terms from preferred suppliers and retail members, while at the same time reducing competitive pressure to pass on any volume benefits to end consumers”.

• Stella-JTG’s wholesaling power. The ACCC asserts “Jetset and Stella account for a relatively small proportion of all travel packages sold by whole-salers to retailers in Australia. But it is worried that the merged entity’s retail dominance could provide it with “the ability and incentive” to foreclose rival wholesalers.

While there is some scope for wholesalers to deal directly with agents in franchise and buying groups, the ACCC says its “market inquiries to date indicate that supplier agreements negotiated with franchisors and buy-ing group head offices are the most important and efficient means of distri-bution for wholesalers”.
n Consolidation concerns. The ACCC fears that competition in this sector could be “at significant risk”, given the in-house consolidation volumes of JTG-Stella, Consolidated Travel’s stake in Jetset and its 50 per cent sharehold-ing in Orient Express Travel Group.

“The ACCC’s inquiries indicate that there would be limited options outside of the merged firm, Consolidated Travel and the Orient Express Travel Group for retailers that require the services of an air ticket consolidator,” the issues paper states.

Saying it is unlikely that there would be vigorous competition between Stella-JTG, Consolidated Travel and OETG, the ACCC expresses concern for small retailers without the volume to bypass consolidators to do their own direct deals with airlines.