2004/134/EC: Commission Decision of 3 July 2001 declaring a concentration to be incompatible with the common market and the EEA Agreement Case COMP/M.2220 — General Electric/Honeywell (Text with EEA relevance.) (notified under document number C(2001) 1746)

Article 2
This Decision is addressed to:
General Electric Company 3135 Easton Turnpike
Fairfield
Connecticut 06431 USA
Done at Brussels, 3 July 2001.
For the Commission
Mario Monti
Member of the Commission
(1) OJ L 395, 30.12.1989, p. 1; as corrected by OJ L 257, 21.9.1990, p. 13.
(2) OJ L 180, 9.7.1997, p. 1.
(3) OJ C 42, 18.2.2004.
(4) Turnover calculated in accordance with Article 5(1) of the Merger Regulation and the Commission Notice on the calculation of turnover (OJ C 66, 2.3.1998, p. 25). To the extent that figures include turnover for the period before 1 January 1999, they are calculated on the basis of average ECU exchange rates and translated into EUR on a one-for-one basis.
(5) Parts of this text have been edited to ensure that confidential information is not disclosed; those parts are enclosed in square brackets and marked with an asterisk.
(6) See in particular Commission Decision 91/619/EEC in Case No IV/M.53, Alenia/De Havilland, OJ L 334, 5.12.1991, p. 42; Commission Decision 97/816/EC in Case No IV/M.877, Boeing/McDonnell Douglas, OJ L 336, 8.12.1997, p. 16; Commission Decision 2001/417/EC in Case No COMP/M.1601, AlliedSignal/Honeywell, OJ L 152, 7.6.2001, p. 1; and Commission Decision of 10.05.1999 declaring a concentration to be compatible with the common market (Case No COMP/M.1506, Singapore Airlines/Rolls-Royce).
(7) See Case IV/M.877, Boeing/McDonnell Douglas.
(8) IAE is a joint venture between P& W, RR, MTU and Japanese Aero Engines Corp. that manufactures the V2500 engine for narrow-bodies. With 32 % each, P& W and RR are the controlling partners.
(9) Large airlines, which have a significant transcontinental activity, are more likely to have more wide-body in their fleet than smaller or regional airlines.
(10) Flight turnaround indicates the number of back-and-forth trips that an aircraft may economically perform in one calendar day.
(11) So far, the Avros have secured [...]* % of the orders for large regional jets in service and not yet in service.
(12) The BR715 engine is manufactured by RR Deutschland (a joint venture with BMW). The engines, which are fitted in the tail wing of the aircraft, have been especially conceived for the B717 and cannot be used in any other aircraft. B717 is a rename for McDonnell Douglas' last launch, the MD95. Following the acquisition of the company by Boeing, all of the McDonnell Douglas' aircraft platforms in production were immediately discontinued, with the exception of the MD95, which had just been launched [comments on the sales prospects, considered by RR as containing confidential information]*.
(13) See footnote 5.
(14) There may be exception to this situation. For instance, the A318 was originally conceived to be powered only by the PW6000 engine; however, after its launch and following the demand of a major potential purchaser, Air France, a CFM-56 engine was certified and is now available on this platform.
(15) See in particular Commission Decision 91/619/EEC in Case No IV/M.53, Alenia/De Havilland, OJ L 334, 5.12.1991, p. 42; Commission Decision 97/816/EC in Case No IV/M.877, Boeing/McDonnell Douglas, OJ L 336, 8.12.1997, p. 16.
(16) See Commission Decision of 29 September 1999 in Case M.1383, Exxon/Mobil, Commission Decision 1999/458/EC in Case IV/M.1157, Skanska/Scancem, OJ L 183, 16.7.1999, p. 1; Commission Decision of 10 January 1994 in Case IV/M.390, Akzo/Nobel and Commission Decision of 3 June 1991 in Case IV/M.92, RVI/VBC/Heuliez.
(17) In addition to the main non-compete clause contained in the original joint venture agreement, 20 years of joint partnership have created a body of non-compete provisions having the effect that neither party, and more particularly SNECMA, can easily withdraw from the CFMI engine programmes for the purpose of developing a competitive engine.
(18) See the CFM Newsletter (Issue 2, 2000). The principles of cooperation signed by GE and SNECMA on 24 January 1974 stated that the venture would be revenue sharing, rather than profit sharing. Thus each parent's profit is a function of its own efficiency.
(19) According to industry figures, North-American airlines are now operating 39 % (4800 units) of the worldwide fleet and are expected to need some 7400 aircraft by 2019. Although Asia/Pacific airlines are currently operating only 18 % of the world's fleet, they are expected to operate around 5900 aircraft by 2019 because of their high traffic growth. Some 57 % of total world deliveries for large commercial aircraft are therefore forecast to go to them. European airlines should increase their fleet from 3300 units in 1999 to around 6900 units in 2019.
(20) See http://www.geae.com/geenginecenter/ service_commavi.html.
(21) SNECMA has no independent commercial engine business outside CFMI and has a significantly lesser sales and technology presence in the venture.
(22) Although they could not do it on their own because of the lack of technology, they have already unsuccessfully tried to access the small engine market in collaboration with P& W through the SPWI joint venture (offering the SPW14/16 engine family).
(23) Examples are: the 1995 Annual Report, page 8: "We also continued our worldwide leadership as GE and CFM International, our joint company with SNECMA of France, again won more than half of the world's large commercial engine orders"; the 1998 Annual Report, page 8: "Consistent with our industry leadership during the 1990's, GE Aircraft Engines and CFM International, our 50/50 joint company with SNECMA of France, again won the majority of the world's large commercial engine orders"; the 2000 Annual Report, page 11: "Again in 2000, GE Aircraft Engines and CFM International, our 50/50 joint company with SNECMA of France, together won more large commercial engine orders than any other engine manufacturer".
(24) For example: Nick Heymann, Prudential Securities, 4 October 2000: "Of all engines ordered so far in 2000, GEAE's market share is roughly 63 %. In each market, GEAE's market share has improved over its estimated market share during 1990 to 1999 (most notably, in wide-bodies where its market share was 49 % during 1990 to 1999)"; Jennifer Murphy, Morgan Stanley Dean Witte, 4 January 1999: "The heavy equipment businesses continue to take share and to dominate their new equipment markets (Power Gen, 60 % share; Medical - 50 %; Aircraft Engines - 60 %, Transportation - 70 %), GEAE's 60 % share of large-engine orders in the 1990s should turn into a tremendous and growing annuity for the next ten years"; John Inch and Al Sipzener, Bear Stearns and Co. Inc, 9 February 2001: 66 % of aircraft engine orders are attributed to GE/CFM according to a pie chart.
(25) IAE does not manufacture engines for wide-body aircraft.
(26) In addition, in the same period GECAS became GE's leasing arm and has contributed substantially to increasing GE's market penetration.
(27) There is only one exception in so far as there are six outstanding orders for Boeing's MD11. They all concern a GE engine.
(28) The airframes concerned are all McDonnell Douglas aircraft (e.g. DC8, DC10 and MD11 in the wide-body segment; DC9, MD80 and MD90 in the narrow-body segment). The DC10 and MD11 wide-bodies are likely to be replaced by B777X's (GE engine) or A340's (RR engine). The narrow-body DC9, MD80, or MD90 are likely to be replaced by B737's (CFM56 engine) or by the A320 family (CFM56 or IAE V2500).
(29) Market capitalisation of USD 480 billion as of 1 June 2001 (far greater than any other company active in the commercial aircraft market such as Boeing with around USD 56 billion, UTC with USD 39 billion and RR with USD 5 billion).
(30) GE indeed appreciates the competitive advantage size offers. GE explains that size allows it to invest hundreds of millions of dollars in extremely ambitious programmes like the GE90, the world's highest-thrust jet aircraft engine, and the "H" turbine, the world's highest-efficiency turbine generator. Size also allows GE to introduce at least one new product in every segment every year or to continue to invest in a business during a down cycle, or to make over 100 acquisitions a year, year after year. Finally, GE claims that, far from inhibiting innovation, its size actually allows it to "take more and bigger swings". Although GE rightly recognises that it cannot succeed in every project, GE makes the point that "size allows GE to miss a few without missing a beat" (as indicated in GE's 2000 Annual Report, pages 4 and 5).
(31) As indicated in Bear Stearns' research on GE dated 9 February 2001, page 5.
(32) As indicated in Bear Stearns' research on GE dated 9 February 2001, page 7.
(33) One illustration of the significant competitive advantage enjoyed by GE over its industrial rivals resides in its AAA credit rating which extends to all its subsidiaries and enables them to raise finance cheaper and quicker than competitors.
(34) The Commission's market investigation has shown that the costs for the maintenance and spare parts over the lifetime of an engine average around 200 % of its initial net purchase price, in real terms (above inflation).
(35) Between 4 to 5 % of annual increase in real terms.
(36) [See above]*.
(37) The exclusively GE-powered B737 accounts for 993 out of a total 2885 aircraft on order from Boeing and Airbus where an engine selection has been made (34 % of total aircraft order backlog) as of 31 December 2000.
(38) As published by John Curran of Fortune on 10 November 1997 and posted on GE's website at http://www.ge.com/news/welch/ articles/f1197.htm.
(39) As indicated on GE's website, http://www.ge.com/news/welch/ articles/f1197.htm.
(40) As a comparison, GECAS's main competitor on the market for aircraft leasing, International Lease Finance Corporation (ILFC), has a fleet of [400 to 500]* aircraft (February 2001).
(41) From Fleet Database from Back Associates, data through 6 December, 2000. Orders include cancelled orders and those where engine selection is "To Be Determined".
(42) See the article entitled "Airbus chief predicts falling aircraft sales in 2001" in the Financial Times, 30 January 2001.
(43) [See above]*.
(44) The remainder is accounted for by eight Boeing 757s for which GE has no engine on offer.
(45) GE's 1999 Annual Report, page 23.
(46) [Example of GECAS' involvement in commercial agreements with airlines, considered by GE as confidential information]*.
(47) GPA had a fleet of approximately 500 aircraft at the moment of its acquisition by GE.
(48) RR's 50 % participation in the Pembroke leasing company is in no way comparable to what GE Capital has achieved through GECAS since Pembroke is one tenth of the size of GECAS and commercially unable to reproduce GECAS's biased behaviour.
(49) In that respect, GE's position with European airlines is quite favourable. Indeed, GE is the incumbent engine supplier (that is the supplier with over 70 % of the engine installed base) with all European national flag carriers except for the United Kingdom and Luxembourg.
(50) [Example of GECAS' involvement in commercial agreements with airlines, considered by GE as confidential information]*.
(51) As indicated in the annex to Boeing's reply to the Commission's questionnaire on 19 February 2001.
(52) [See above]*.
(53) For example, it generally costs less to develop a scaled version of an existing engine than to develop an entirely new engine.
(54) 11 out of 13 if the recent CargoLifter example is included (that is, over 80 % of all exclusive platforms for which GE has either decided to bid or not deliberately withdrawn from the competition).
(55) Based on information supplied by third parties, it can be argued that the GE exclusive B777X is a platform that is certainly capable of supporting more than one engine and for which there is airline demand for more than one engine. Therefore, it could be argued that in addition to securing the exclusive position on that platform, GE even managed to turn the stretched version of the multiple-source classic B777 platform into a single-source airframe.
(56) It has to be noted that GE did not bid to power Bombardier's large regional jet, BRJX. In any event, although P& W in cooperation with SNECMA had developed a suitable engine, the development of the BRJX platform was eventually cancelled. GE won the competitions to power the remaining large regional jets of Bombardier.
(57) [See above]*.
(58) Forbes, 9 August 1999, "Jack Welch, engine salesman - When GE wants to land an engine contract, it doesn't sell engines. It sells power", by Howard Banks.
(59) GE did not have an existing engine for the B717 platform. The low sales prospects of that platform may have dissuaded GE from investing in a new engine. RR, on the other hand, had an existing engine on offer, which could power the platform.
(60) [Example of GECAS' involvement in commercial agreements with airframe manufacturers, considered by GE as confidential information]*.
(61) See "Riding Fighter's Wing" in The Hartford Courant, 12 March 2001.
(62) As indicated in GE's internal document 121-DOC-001618-1620.
(63) See "Riding Fighter's Wing" in The Hartford Courant, 12 March 2001.
(64) UTC's 2000 Annual Report, page 6.
(65) [See above]*.
(66) [See above]*.
(67) [See above]*.
(68) [See above]*.
(69) [See above]*.
(70) [See above]*.
(71) [See above]*.
(72) Schroder Salomon Smith Barney's research on RR, 5 March 2001.
(73) Deutsche Bank's research on RR, 5 March 2001.
(74) Deutsche Bank's research on RR, 5 March 2001.
(75) [See above]*.
(76) [See above]*.
(77) [See above]*.
(78) "GE is surprise choice for airship" in Flight International, 27 March-2 April 2001, page 30.
(79) [See above]*.
(80) [See above]*.
(81) [See above]*.
(82) The 60 % threshold is used in this industry to define the incumbent position of an engine or aircraft supplier to airlines.
(83) [See above]*.
(84) [See above]*.
(85) GE is the leading engine supplier to the majority of European airlines. For instance, it is the exclusive engine supplier to Aer Lingus, Alitalia, KLM, Olympic and TAP and the leading supplier to other airlines (the percentage indicates its share of engines within each airline): Air France (98 %), Austrian Airlines (81 %), Finnair (64 %), Iberia (72 %), Lufthansa (84 %), Sabena (81 %), SAS (79 %) and Swissair (72 %).
(86) Commission Decision 2001/417/EC in Case COMP/M.1601 - AlliedSignal/Honeywell (OJ L 152, 7.6.2001, p. 1).
(87) Commission Decision of 25 May 1999 declaring a concentration to be compatible with the common market (Case No IV/M.1493 - United Technologies/Sundstrand) according to Council Regulation (EEC) No 4064/89 (OJ C 206, 21.7.1999, p. 19).
(88) "ARINC" is Aeronautical Radio, Inc., a corporation owned by the major airlines and whose charter is to create a common operating environment for the airline community. Within ARINC is a committee called the Airline Electrical Engineering Committee (AEEC), whose function is to foster freedom of choice among airlines by providing a standard form, fit, and function for BFE avionics. Standardised interfaces allow the airline to select avionics from multiple providers.
(89) See Case IV/M. 697 - Lockheed Martin/Loral Corporation, Commission decision of 27 March 1996, Case IV/M.290 - Sextant/BGTVDO, Commission decision of 21 December 1992.
(90) Each avionics product, however, constitutes a market in itself.
(91) These figures do not reflect the net present value of future cash flows and thus the net cost to airlines. It is estimated that avionics represent 20 to 25 % of the total operating cost of an aircraft.
(92) The market data in this section are generally based on the parties' best estimates by sales value (year 2000) and corrected by the information supplied by third parties. An evaluation on the basis of orders placed, is considered by the market as less accurate given the importance of rebates, incentives and the fact that orders are sometimes reduced at a later stage of the procurement process.
(93) The distinction between BFE and SFE is only relevant for large commercial aircraft. With few exceptions, all avionics and non-avionics products for regional/business aircraft are sold on an SFE basis.
(94) [Description of Honeywell's strategic teaming agreement with RACAL, considered by Honeywell as containing confidential information]*.
(95) Aircraft information and management system (AIMS).
(96) Several European firms (including Thales and BAe) initiated, approximately three years ago, a project to design an integrated cockpit system for the A380 that includes CMU functions, but this project has not led to any material products as yet.
(97) Traffic alert and collision avoidance system (TCAS) is the US term for ACAS.
(98) These figures do not reflect the net present value of future cash flows and thus the net cost to airlines. It is estimated that non-avionics represent 20 to 25 % of the total operating cost of an aircraft.
(99) The major independent players on the market are Timco, Haeco, Bedek Aviation, FLS Aerospace and to a certain extent also companies as Sogerma and BF Goodrich Services.
(100) [See above]*.
(101) [As indicated in Honeywell's confidential internal document]*.
(102) The surveillance system IHAS (integrated hazard awareness or avoidance system) combines a number of components. Through IHAS, products such as TCAS and weather radar equipment, for which there is competition, can be tied to EGPWS for which Honeywell has an uncontested position. In addition, any competitor that would want to offer IHAS will be dependent on Honeywell as the latter has all three products that are part of the IHAS-system. Rockwell Collins is the only company that has two out of three products in-house; Thales is still lacking all three. Honeywell is also the leading system integrator capable of further developing IHAS [potential future application, considered by Honeywell as containing confidential information]*.
(103) [Description of the concept, considered by Honeywell as containing confidential information]*.
(104) Honeywell has a strong position [(40 to 50 %)]* on integrated avionics suites. Primus Epic, which includes all major functions of an avionics suite and replaces several stand-alone systems, is the centrepiece of this controls integration expertise and can be found on the Raytheon Hawker Horizon, the Embraer ERJ-170 and the Fairchild Dornier 728JET. A Full Epic development nose-to-tail bid (the first in the market) was presented to Raytheon for the PD 375/PD 383 on 2 November 2000. For this aircraft platform, Honeywell won both the Engines and the full EPIC avionics suite development bid. Collins is the other supplier [(40 to 50 %)]* with the Proline 4 series suite mainly for Bombardier.
(105) Litton, Smiths, Teledyne, L3 Communications are niche players with technically advanced products who sometimes generate the majority of their revenues in other markets (such as naval construction for Litton). These players usually sell their products to the three majors who have established positions with the airframe manufacturers and airlines as well as the worldwide service network to support these positions. Mostly, products such as Litton's IRS or Smith's FMS are integrated in solutions by Thales or Collins. For a number of products, players such as L3 Communications, Teledyne or Universal have established positions in less technology driven products such as recorders, printers, instruments and displays.
(106) By way of comparison, the market capitalisation of Thales and all its subsidiaries, including Thales Avionics, is around USD 8 billion, less than that of GE and Honeywell.
(107) As already described above, Hamilton Sundstrand's main aerospace products include APUs, ECS, electrical power, engine components, hydraulic power and a minor presence in flight controls.
(108) See Case No IV/M.697 - Lockheed Martin/Loral Corporation, Commission decision of 27 March 1996 or Case No IV/M.290 - Sextant/BGTVDO, Commission decision of 21 December 1992.
(109) Hamilton Sundstrand is owned by United Technology Corporation (UTC) and is thus a sister company of P& W.
(110) [See above]*.
(111) As indicated in Honeywell internal documents.
(112) As indicated in Honeywell internal documents.
(113) See Case COMP/M.1601 - AlliedSignal/Honeywell, Decision of 1 December 1999.
(114) [See above]*.
(115) [See above]*.
(116) [See above]*.
(117) [...]*.
(118) [...]*.
(119) Leapfrogging means that a supplier replaces the incumbent as a result of new technological development.
(120) Such as the GE Engine Service (GEES) network.
(121) Large commercial aircraft engines equipped with Honeywell engine systems and accessories are, among others, [...]* information considered by Honeywell as confidential.
(122) Hamilton Sunstrand is the second source starter supplier for a number of mature engine programmes such as [...]*. These starter developments date from Hamilton Sunstrand's activity prior to being integrated with P& W. Likewise, P& W depends on Honeywell for starters on a number of mature engine platforms.
(123) Since the starter interfaces with the engine, the supplier will need to present a track record in applying the technology in aerospace jet engine applications as well as an appropriate product liability and service.
(124) On top of significant switching costs that relate to the modification process, certification, flight testing and airframe manufacturer charges for every aircraft platform for which the engine is selected, GE acknowledges the difficulty of re-sourcing engine control components in an internal document analysing Honeywell's strengths. GE further concludes that "it is likely that P& W and RR engines will not move [to other suppliers]* due to high certification costs".
(125) The market for large regional jet aircraft engines is, like that for engines for large commercial aircraft, subject to technical bundling and its resulting effects from the part of the merged entity.
(126) [Commercial performance of a P& W engine, considered by P& W to contain confidential information]*. As a result of the application of GE's dominance toolkit on that market, P& W has been unable to place that engine on that market to date.
(127) The market for corporate jet aircraft engines is, like the other jet engine markets in question, susceptible to technical bundling the merged entity, with its resulting effects.
(128) See above GECAS's "GE-only" policy.
(129) [See above]*.
(130) Allied Signal/Honeywell and Engine Alliance.
(131) See Case No IV/M.440 - GE/ENI/Nuovo Pignone (II) and Case IV/M.1623 - AlliedSignal/MTU.
(132) See Case No IV/M.1484 - ALSTOM/ABB.
(133) Aeroderivative gas turbines combine an established aircraft engine with a power turbine to convert energy from the engine exhaust into rotational shaft power.
(134) See footnote 131.
(135) In their reply to the statement of objections, the Parties have submitted that on the basis of a market for marine gas turbines below 5 MW, and for the past five years, Honeywell had [50 to 60 %]* of the market, GE [0 to 10 %]*, RR [40 to 50 %]* and P& W [0 to 10 %]*.
(136) [Description of the components, considered by Honeywell to contain confidential information]*.
(137) GE is the principal competitor to the [project, name of which is considered by Honeywell to be confidential]* and has been actively trying to displace the [project, name of which is considered by Honeywell to be confidential]* with [GE engine, name of which is considered by Honeywell to be confidential]*.
(138) ADIRS/ADIRU is a device that combines the functions of the air data computer and the inertial reference system (IRS). AHRS is a less costly alternative to IRS in the regional market. SAARU is a back-up system for ADIRS and is only used on the Boeing 777.
(139) See footnote 5.
(140) OJ C 68, 2.3.2001, p. 3.
(141) OJ L 61, 2.3.1998, p. 1.
2004/134/EC: Commission Decision of 3 July 2001 declaring a concentration to be incompatible with the common market and the EEA Agreement Case COMP/M.2220 — General Electric/Honeywell (Text with EEA relevance.) (notified under document number C(2001) 1746)

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