On July 19, 2013, the Federal Trade Commission (FTC) announced that it had entered into a consent agreement with General Electric Company (GE) allowing GE to acquire the AeroEngine division of Italy’s Avio S.p.A. (Avio).¹ The proposed Agreement Containing Consent Order (Consent Order) settles allegations that GE’s acquisition of Avio’s aviation business would have allowed GE to disrupt the design and manufacture of an engine used in a specific Airbus aircraft – an aircraft for which a GE joint venture manufactures the only other engine option. In a departure from the typical divestiture requirement, the FTC imposed certain behavioral remedies to alleviate the FTC’s concern that the Avio acquisition might allow GE to lessen competition in the sale of engines for the Airbus aircraft in order to benefit its existing joint venture.

Background

Through its AeroEngine division, Avio designs and manufactures components for aircraft engines.² In February 2012, Avio signed an agreement with engine manufacturer Pratt & Whitney (P&W) to manufacture accessory gearboxes (AGBs) for P&W’s Pure Power PW1100G Engine.³ This P&W engine is used in the Airbus A320NEO aircraft.

GE has a 50 percent interest in CFM International (CFM), a joint venture with French company Snecma S.A.⁴ CFM designs and manufactures engines for aircraft, including the Leap 1-A engine.⁵ According to the FTC’s Complaint, CFM’s Leap 1-A engine is the only other engine aside from P&W’s that is used in the Airbus A320NEO aircraft.⁶

According to the FTC’s Complaint, AGBs, a component of jet engines, “are specifically designed for the requirements of individual engine platforms,” and thus an AGB designed for one engine platform cannot be substituted for another AGB designed for a different engine platform.⁷ P&W, therefore, is unable to substitute an AGB made for another engine platform for the AGB that Avio manufactures for P&W’s Pure Power PW1100G Engine in response to a small but significant and non-transitory increase in price for the Avio AGB.⁸ Accordingly, the FTC determined that Avio’s AGB designed for P&W’s Pure Power PW1100G Engine comprised its own relevant product market.⁹

Similarly, the FTC Complaint alleges that “[a]ircraft engines are engineered specifically for . . . the aircraft on which they are installed,” and thus the purchaser of an aircraft engine cannot substitute an engine that does “not meet the specific requirements of the relevant aircraft platform, or which has not been certified by aviation authorities for use on that aircraft.”¹⁰ Purchasers of the Airbus A320NEO aircraft, therefore, could not substitute another engine for either the P&W or CFM engines designed and manufactured specifically for that aircraft in response to a small but significant and non-transitory increase in price for these engines. Accordingly, the FTC determined that the “aircraft engines chosen by Airbus for, and certified for use on, the A320neo constitute their own relevant product market.”¹¹

As the Complaint alleges, the FTC’s concern was that after acquiring Avio, GE, with its existing interest in CFM, would possess the incentive and ability to disrupt the design and certification of Avio’s AGB for the P&W engine.¹² This, in turn, would give GE the incentive and ability to delay delivery, reduce quality, or raise prices of engines for the Airbus A320NEO.¹³ The FTC believed, therefore, that the acquisition may substantially lessen competition and “tend to create a monopoly” in the narrowly defined market for Airbus A320NEO engines in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act.¹⁴

Remedy

The proposed Consent Order seeks to eliminate any incentive GE might have to disrupt the design and manufacture of Avio’s AGB.¹⁵ To achieve this goal, the proposed remedy imposes a number of behavioral requirements.

First, the proposed Consent Order incorporates parts of both P&W’s original 2012 contract with Avio relating to “the design and development of the AGB and related parts for the PW1100G” and a recently signed commercial agreement between P&W, GE, and Avio.¹⁶ Under the proposed Consent Order, GE must perform its obligations under the newly signed agreement with P&W and may not act to, or direct Avio to act to, limit or impair Avio’s performance under both the original and newly signed agreements with P&W.¹⁷ This includes a two-year ban on GE interference with Avio staffing decisions as they relate to the work being performed on the AGB for P&W, a four-year obligation to provide Avio with the resources necessary to perform work on the AGB for P&W, and an obligation on GE’s part not to interfere with P&W’s ability to have technical and customer service representatives onsite at Avio’s facility.¹⁸ Similarly, Avio must perform its obligations under the original and newly signed agreements with P&W, including providing incentives for certain employees working on the AGB for P&W’s engine to stay on with Avio.¹⁹

Second, the proposed Consent Order provides for certain protections for P&W if it were to terminate its agreement with Avio. Such protections include a requirement that GE provide P&W with certain transition services, including access to specialized Avio tools and licenses to intellectual property “to help Pratt & Whitney or a third-party supplier produce AGBs and related parts for the PW1100G.”²⁰

Finally, the proposed Consent Order calls for a firewall to prevent GE access to proprietary information shared by P&W with Avio relating to the AGB for P&W’s engine, and an FTC-appointed monitor to oversee compliance with the consent agreement.²¹

Analysis

Behavioral remedies are relatively uncommon in merger cases and typically used by the FTC only when the preferred approach of requiring a divestiture is impractical or ineffective to resolve the FTC’s concerns about anticompetitive effects. The FTC’s use of behavioral remedies in this case to resolve concerns about GE’s acquisition of Avio’s aviation business appears targeted to address the particularly narrow markets at issue given the highly specific nature of the design and manufacture of engines and engine components for aircraft. GE’s acquisition of Avio raised FTC concerns about the effect on competition for one Avio customer/market – a single relationship between Avio and P&W concerning the supply of Avio’s AGB for P&W’s engine – and on one customer/market for GE’s joint venture with CFM – the supply of engines for one Airbus aircraft. That the FTC opted to impose behavioral remedies rather than following the typical approach of requiring divestiture of particular businesses, product lines, and/or assets may not be so surprising in this context.

Additionally, the FTC’s investigation paralleled that of the European Commission (EC), and the two agencies worked closely together to resolve concerns about the potential effects of the proposed transaction.²² Notably, the EC has closed its own investigation into the acquisition without imposing any further conditions.²³