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Page 1: An empirical assessment of the merger between … · An empirical assessment of the merger between Iberia, Clickair and Vueling Xavier Fageda Sanjuan University of Barcelona and GIM-IREA

AnempiricalassessmentofthemergerbetweenIberia,ClickairandVueling

XavierFagedaSanjuanUniversityofBarcelonaandGIM-IREA

abstract

in this paper, i apply a difference-in-difference estimator to examine the impact of the merger between Iberia, Clickair and Vueling on route flight frequency, which is considered to be the main attribute of quality in the sector. Controlling for different indicators of competition and several route attributes, I show that the merger has implied a decrease in route flight frequency but the magnitude of this effect is modest. a plausible explanation of my result is a more collusive behavior of airlines offering flights in the routes affected by the merger.

Keywords: airlines, merger, competition, flight frequency, difference-in-difference estimator.JEL classification: L93, D43, L4.

resumen

en este artículo se aplica un estimador de diferencias en diferencias para examinar el impacto de la fusión entre iberia, Clickair y Vueling en la frecuencia de vuelos a nivel de ruta, que está considerado como el principal atributo de calidad en el sector. Controlando por diferentes in- dicadores de competencia y varios atributos a nivel de ruta, muestro que la fusión ha supuesto una disminución de la frecuencia de la ruta de vuelo, pero la magnitud de este efecto es modesto. una explicación plausible de mi resultado es un comportamiento más colusivo de las compañías aéreas que ofrecen vuelos en las rutas afectadas por la fusión.

Palabras clave: aerolíneas, fusiones, competencia, frecuencia de vuelos, estimador de dife- rencias en diferencias.

Clasificación JEL: L93, D43, L4.

1. Introduction

SeveraleventsmayhaveinfluencedtheevolutionofcompetitionintheSpanishairlinemarketinthelastyears.Theincreaseinthecapacityofthelargestairports,particularlyMadridandBarcelona,hasdilutedthenegativeeffectrelatedtowhatisconsideredthemainbarriertoentryinthesector,thescarcityofslots.Furthermore,the increasing presence of leading low-cost airlines like Ryanair or Easyjet havespurpricerivalry1.Notealsothatsomestepshavebeendonetowardsaliberalizationof trafficbetweenSpainandnon-EuropeanUnioncountriesbeing theopen skies

1 SeeFAGEDAandFERNÁNDEZVILLADANGOS(2009)foranempiricalexaminationoftheeffectofthesetwoeventsonpriceschargedbyairlinesinasetofdomesticroutes.

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78 CUADERNOSECONóMICOSDEICEN.O88

agreement between United States and the European Union the most clear andimportantexample.

However, theSpanishairlinemarkethasalsobeenaffectedbyaconsolidationprocesswithlikelynegativeconsequencesintermsofcompetition.Inthisregard,theformerSpanishflagcarrier,Iberia,hasbeeninvolvedintworecentmergers.IberiabecamethemainshareholderofVuelingafterthemergerofthisairlinewithitslow-cost-subsidiary,Clickair.Additionally,IberiarecentlymergedwithBritishAirways.Giventhatairlinesusuallyoperateonaninternationalbasisgiventhenatureofitsactivity,decisionsaboutmergersusuallyaremadebytheEuropeanCommissionandnotbynationalcompetitionauthorities.

The merger between Iberia and British Airways has not had an impact oncompetition, at least in terms of traffic in non-stop routes, in the Spanish airlinemarket2.ThismergerwasapprovedinNovember2008bytheEuropeanCommission(caseno.COMP/M.5747-Iberia/BritishAirways)andtheintegrationwasdoneinJanuary2011althoughbothfirmsstilloperateunderdifferentbrands.NotethatbothairlineswerealreadyoperatinglikeasingleairlineintermsoftheirroutechoicesbeforethemergerastheywerecloselyintegratedwithintheOneworldalliance.Infact,bothairlineswerejustofferingservicessimultaneouslybeforethemergerintheroutesthatlinkMadridandBarcelonawithLondon-Heathrow.

AdescriptiveanalysisforthesetworoutesrevealsthefollowingfactsusingflightfrequencydataofRDCaviation.Inthecomparisonofthesupplyinaperiodbeforethemergerwascompleted(years2008and2009)andafter themerger(2012and2013), Imaycheckadecrease infrequencies in therouteMadrid-Londonof just3percentandastrongstabilityintheshareofthetwoairlinesofferingservicesthere;60percentoftotalflightsareoperatedbyIberiaand40percentbyBritishAirwaysinbothperiods.IntherouteBarcelona-London,thedecreaseintotalroutefrequenciesbetweenthetwoperiodsisabout23percent.Intheperiodbeforethemerger,theshareofIberiawasabout40percentwhiletheshareofBritishAirwayswasabout�0percent.Intheperiodafterthemerger,BritishAirwaysistheonlyairlinethatoffersservicesinthisrouteandithasincreasedfrequenciestopartiallycompensatethewithdrawalofIberia.ThewithdrawalofIberiaontherouteBarcelona-LondonmustbeunderstoodwithinthemoregeneralstrategyofIberiaofconcentrateallitsflightsinitshub,Madrid.FromBarcelonaairport,IberiacurrentlyonlyoffersflightstotheroutethatlinkwithMadrid.Thus,theinfluenceofthemergerinthesupplyofflightsintherouteBarcelona-Londonisnotrelevant,asitisnotthecaseintherouteMadrid-London.

TheimpactofthemergerbetweenIberia,ClickairandVuelingdeservesmuchmoreattentionintermsoftheanalysisoftheireffectsonthesupplyofflightsinnon-stoproutesdepartingfromSpanishairports.Indeed,ahighnumberofrouteswere

2 Theimpactonconnectgingtrafficmayhavebeenstrongerbuttheanalysisofcompetitioninrouteswithdifferentstopswouldrequireworkingwithdemanddataforthetrueoriginanddestinationofpassengers.Unfortunately,Idonothavesuchdatatoundertakethisanalysis.

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ANEMPIRICALASSESSMENTOFTHEMERGERBETWEENIBERIA,CLICKAIRANDVUELING 79

simultaneouslyoperatedbyIberiaandVueling,orClickairandVuelingbeforethemergerwasapproved.Furthermore,pricerivalrybetweenClickairandVuelingwasintenseinsuchaperiod(Fagedaet al.,2012).Itmayalsobeexpectedthatfrequencycompetitionwasalsostrongintheyearsprevioustothemerger.

Mergers may have a detrimental effect on the welfare of passengers in twodifferentbutinterrelateddimensions;pricesandflightfrequency.Flightfrequencyisconsideredthemainattributeofqualityintheairlinemarketbecauseitdeterminesthescheduledelaycostwhichisthedifferencebetweentheactualanddesiredtimeof departure (Bilotkach et al., 2010). Note also that flight frequency is a strongdeterminantofpricesasithasaninfluenceonthefixedcostsofairlinesandloadfactorsoftheplanes.

Inthispaper,IexaminetheimpactonflightfrequenciesofthemergerbetweenIberia, Clickair and Vueling. I run several regressions controlling for differentindicatorsofcompetitiontakingadvantageofarichdataset that includedomesticandinternationalroutes.Theeconometricevaluationofthemergerisdonethroughthedifference-in-differencemethodwhichisamethodwidelyusedintheanalysisofmergers.ResultsofmyanalysismaybeusefultoassesstheeffectsofsuchmergerforpassengersandhencetheymayhelpmotivatefuturedecisionsofthecompetitionauthoritiesonmergersintheSpanishairtransportmarket.

Here,itisimportanttoremarkthatseveralstudieshaveexaminedtheimpactofmergersonprices(i.e.KimandSingal,1993;Morrison,199�;Peters,200�;ZhangandRound,2009;DobsonandPiga,2013)but there isscarceevidenceabout theimpactofmergersonfrequencies.OnlytheworksofBilotkach(2011),Borenstein(1990), Fageda and Perdiguero (2014), Richard (2003) andWerden et al. (1991)haveprovidedempiricalanalysisofthemergersonfrequencies.

The remaining of this paper is organized as follows. In the second section, Iprovidesomedetailsandrelatedreferencesofthemergerexamined.Then,Ispecifythe empirical model and state my expectations for each explanatory variable.The followingsection reports the regression results.The last sectioncontains theconcludingremarks.

2. The merger between Iberia, Clickair and Vueling

In200�Iberiainitiatedanewbusinessplanthatledtotheconcentrationofitsoperationsatitsmainhub,theairportofMadrid-Barajas.Afurthermeasureinthisplanwastocreateanewlow-costairline,Clickair,withanoperatingbaselocatedin theairportofBarcelona-ElPrat. Iberiahada20percentstake inClickairandcontrolled 80 per cent of its economic rights. Using Iberia’s slots and resources,ClickairsoonacquiredthelargestmarketshareatBarcelonaairport.NotethatIberiadidnothaveformallyamajorityholdinginthecapitalofClickairsothatitisdoubtfulwhetherthetransferofslotswaslawful.

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80 CUADERNOSECONóMICOSDEICEN.O88

OneofthemostprobablemotivesforthecreationofClickairwastocompetewithanotherSpanishlow-costairline,Vueling,whichhadbecomeaseriouscompetitortoIberiaintheSpanishdomesticmarket.Indeed,Fagedaet al. (2012)showsthatwhileoperatingasIberia,theformerSpanishflagcarrierwasrestrictedinitsattemptstochargelowerpricesthanthoseofitsrivals.AsClickair,however,Iberiawasabletochargeverylowprices.Datainthisstudyshowthatthehead-to-headcompetitionbetweenClickairandVuelingledtoasubstantialreductioninpricesontheroutesinwhichbothcompaniesoperated.Infact,thefinancialsituationofthelatterairlineseriouslydeterioratedinthisperiodtothepointthatwasnearbankruptcyin2008.

InJuly2008,Iberia,ClickairandVuelingagreedatwo-stepmergerdeal:first,ClickairwastakenoverbyVueling(withClickairceasingtooperate)and,second,Iberiabecametheleadingshareholderinthenewfirm(nowcalledVueling).Iberiathusobtained45.8percentoftheshares,whilethesecondlargestshareholderwasNefinsawith4.15percentof the shares.Nefinsa is theownerofAirNostrum,aregionalairlinethathasafranchiseecontractwithIberia.Theremaining50percentofthecapitalwasownedbyshareholders(investmentfundsandindividualinvestors)withholdingswellbelow1percent3.Thus,IberiaeffectivelycontrolstheboardofdirectorsofthenewVueling.InJanuary2009,theEuropeanCommissionagreedtothemergerbetweenIberia,ClickairandVuelingontheconditionthatcertainslotsongivenroutesweretransferredtootherairlines(caseno.COMP/M-53�4-Iberia/Vueling/Clickair).ThemergerwascompletedinJuly2009.

IberiadoesnothadamajorityholdinginthecapitalofVuelingjustafterthemerger,since itheld less than50percentof shares.However, the integrationof the twocompanies’respectiveoperationswasquiteclear(recallthatallotherinvestorswereminorityshareholders inVueling’scapital).Since themergerwasmadeeffective,mostofVueling’sflightsareofferedundercode-shareagreementswithIberia;yet,theydonotoperatesimultaneouslyonanyrouteexceptMadrid-Barcelona(whichisoneofthedensestroutesintheworld).Furthermore,sincethemergercameintoeffect,theyhavesharedthesamefrequentflyerprogram.

Fagedaet al.(2012)showthatthenewsubsidiaryofIberiawasabletoincreaseprices substantially after themergerwascomplete.Thus, thewarpricesbetweenClickairandVuelingwasfollowedbyasubstantialincreaseofpricesonceVuelingwas integrated in Iberia’s group. It is not unreasonable to state that Iberia wasfollowing a predatory behaviour to force the exit of a serious rival. Given thatpredatorybehaviourisconsideredtobeananti-competitivepractice,itwouldappearthatamergerappraisalshouldalsoincludetheevaluationofpredatorypracticesbythefirmacquiringitsrival.

FagedaandPerdiguero(2014)provideanempiricalexaminationofthemergerbetween Iberia,Clickair andVueling that is closely relatedwith this study.Theyexamine the impactonpricesandfrequenciesof thismerger.Theyfindamodest

3 Recently, IAG (which it is the financial holding controlling Iberia and BritishAirways) took theremainingcapitalofVueling.

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ANEMPIRICALASSESSMENTOFTHEMERGERBETWEENIBERIA,CLICKAIRANDVUELING 81

effect on prices and frequencies when considering the affected routes in generalterms.However,theirresultsshowthattheimpactonpricesishighwhentheroutesaffectedarethosewhereIberiaandVuelingweresimultaneouslyoperatingbeforethemergerandtheimpactonfrequenciesishighwhentheroutesaffectedarethosewhereIberiaandClickairweresimultaneouslyoperatingbefore themerger.Theyarguethat thebehaviorof theairlinesfollowingthemergermayberelatedto thedifferentpassengertypeswhoarethepredominantusersoftheroutesaffectedbythemerger.Itwouldappearthattheproportionofleisuretravelers(pricesensitiveandlesstimesensitive)ishigheronrouteswherethetwolow-costairlinespreviouslyoperated.Bycontrast, theproportionofbusinesspassengers (more timesensitiveandlesspricesensitivethanleisurepassengers)appearstobehigheronroutesonwhichthenetworkcarrierandoneofthelow-costcarrierspreviouslyoperated.

ThispaperconductsasimilaranalysistothatofFagedaandPerdiguero(2014)butittakesadvantageofaricherdataset.Hence,Icanprovideamorerigoroustestoftheimpactoftheconsideredmergeronflightfrequencies.ThestudyofFagedaandPerdiguero(2014)wasbasedon73domesticroutesanddataofflightfrequenciesweretakenforasampleweek.Theperiodanalyzedwasfromthesummerof2001to the summerof2011,considering the summerof2009 theperiod inwhich themerger was binding. Routes affected by the merger were considered to be thosewhereVuelingwascompetingwithClickairorIberiainatleastoneseason(eithersummerorwinter)ofthepreviousyearstothemerger.Notealsothatthelevelsofcompetitionwerejustapproximatedbytheconcentrationindex.

The empirical analysis in this study uses 189 routes including domestic andinternationalroutes.Hence,IcananalyzewhethertheimpactofthemergerhasbeenstrongerindomesticorinternationalroutesandIcancontrolfornewvariableslikecompetition from secondary airports (which mainly affects international routes).Notealsothatinformationforflightfrequenciesrefertoallyearandnotjustasampleweek.

Additionally,Imakeastricterseparationbetweentheperiodsbeforeandafterthemerger.Toguaranteethesymmetrybetweenthetwoperiods,Iconsiderdatafortwoyearsbeforethemergerwasapproved(years200�and2007)andtwoyearsafterthemergerwascompleted(years2010and2011).Hence,Idropfromtheanalysistwoyears(years2008and2009)inwhichtheairlinesinvolvedinthemergerwerelikelynotcompetingintensively.Alternatively,itcouldbealsointerestingtoexaminethebehavioroftheairlineswhentheywereawareofthemergerbutstillwasnotmadeeffective.However,myfocushere ison the impactof themergersonpassengers(in termsofflight frequency) andnot on thebehavior of the airlines in differentscenarios.

Ialsomakeastricterseparationbetweentheroutesaffectedornotaffectedbythe merger. I consider that the routes affected by the merger are those routes inwhichVuelingwascompetingwithClickairor Iberiaboth in200�and2007andthe routes not affected by the merger are considered to be those where Vuelingwasnotcompetingwithanyof theotherairlinesneither in200�nor2007.So, I

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82 CUADERNOSECONóMICOSDEICEN.O88

drop those routeswhereVuelingwascompetingwithanyof theotherairlines in2006or2007becausetheseroutescannotbestrictlyclassifiedasroutesaffectedby(ornot)competitionbetweentheairlinesinvolvedlaterinthemerger.Concerningtheroutesaffectedby themerger, Icanexamine the impactof themerger in twoclearlydifferentscenarios:1)In theperiodprevious to thenegotiationofmerger,competitionbetweentheairlinesinvolvedintheoperationwasintenseintheroutesinwhichtheywereofferingsimultaneouslyservices,2)intheperiodafterthemergerwas complete, only one of the airlines involved in the merger (eitherVueling orIberia)wasofferingservicesinthesamesetofroutes4.

NotealsothatIaddothervariablesthatmayapproximatethelevelsofcompetitionintherouteliketheshareoflow-costairlinesortheshareofthemergedairlinesintheroute.ThemainlimitationofthisstudyinrelationtothatofFagedaandPerdiguero(2014)isIdonothaveavailableinformationforprices.

Overall, Ihavebeenable tocollectcompletedatafor189routesfor theyears200�,2007,2010and2011sothatmysamplecontains75�observations.TheroutesconsideredhaveBarcelona, Ibiza,MadridorSevilla as origin airports.ThemainoperatingbaseofbothClickair andVuelingwasBarcelonabutVuelingalsohada relevantpresence inMadrid, IbizaandSevilla.Thedestinationairportsareanyairport located in the European Union. In this regard, I exclude intercontinentalflights because neitherClickair norVueling offered flights to non-European des-tinationsintheperiodprevioustothemerger.Amongthe189routes,33areaffectedbythemerger(15departfromBarcelona,14fromMadrid,2fromIbizaand2fromSevilla;19linkdomesticdestinationsand14internationaldestinations).

3. The empirical model

Inthissection,Iimplementamultivariateanalysistoidentifytheimpactoftheconsideredmergeronroutesflightfrequencies.Iusesimilarcontrolvariablestothoseemployedinotherempiricalstudiesthatestimatethedeterminantsoffrequenciesonairroutes(see,forexample,Schipperet al.,2002;Richard,2003;Pai,2010;CalzadaandFageda,2012;Bilotkach et al.,2010,2013;BruecknerandLuo,2013;ZouandHansen,2014).Theequationtoestimateforroutekattimet(Frequency)takesthefollowingform:

Frequencykt=β0+β1Distancek+β2Populationkt+β3Income_per_capitakt++β4Dsecondary

kt+β5Dtourism

k+β�Dinternational

k+β7DBCN

k+β8DIBZ

k+β9DSVQ

k++β10D

merger_yeart+β11D

merger_routesk+β12Diff-in-Diffkt+β13Competitionkt+ekt [1]

4 The exception is the route Madrid-Barcelona where both Vueling and Iberia are offering servicesalthoughmostofflightsofIberiaareoperatedasashuttleairservice.

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ANEMPIRICALASSESSMENTOFTHEMERGERBETWEENIBERIA,CLICKAIRANDVUELING 83

In this equation, the dependent variable is the total number of annual flightsofferedbyairlinesonroutekinyeart.Asexplanatoryvariables,Iincludevariablesthat measure the population and per capita income of the destination in order tocontrolfordemand.Iexpectairlinestoofferhigherfrequenciesonroutesthatlinkricherandmorepopulouscities.Ialsotakeintoaccounttheinfluenceoftheroute’sdistance,calculatedasthenumberofkilometersflowntolinktheroute’sendpoints.Airlinesmayprefertousesmallerplanesathigherfrequenciesonshort-haulroutes.Thus,Iwouldexpectanegativerelationshipbetweendistanceandfrequency

Ialsoconsideradummyvariablethattakesavalueofoneforroutesandperiodsinwhichairservicesareofferedsimultaneouslyfromtwooriginairports(i.e., BarcelonaandGirona,BarcelonaandReus)tothesamedestination.Forexample,RyanairmaybeofferingflightstoAmsterdamfromGironaandairlineslikeVuelingorTransaviamaybealsoofferingflightstothesamedestinationfromBarcelona.Demandinthoseroutescouldbehigherthanpredictedbytheotherexplanatoryvariablesofmymodelsothecoefficientassociatedtothisvariableisexpectedtobepositive.Indeed,city-pairmarketsthatarecoveredbymultipleairportsareusuallydensemarkets.

Ialsoincludeadummyvariablethatdistinguishbetweendomesticandinternationalroutes and another that identify tourist routes. By tourist routes, I mean routesthat have a destination airport located in Balearic islands, Canary islands, Sicily,Sardinia,Corsica,MalagaandAlicanteasithasbeenconsideredinotherpreviousstudies(FagedaandFlores-Fillol,2012a,2012b).Imayexpectthatfrequenciesarehigherindomesticroutesduetohigherdemand,whilefrequenciesshouldbelowerintouristroutesastheproportionofleisurepassengersmaybehigherintheseroutes.Furthermore, I include dummy variables for the different origin airports takingMadridasthereferencecase.GiventhatMadridisahubanetworkairline,IexpectanegativesigninthecoefficientassociatetothesedummyvariablesduetothehigherdemandderivedfromconnectingtrafficinMadridairport.

Toanalyzetheeffectthatthemergerhashadonfrequencies,Iuseadifference-in-differenceestimator.ThevariableDmerger_year isadummyvariable that takes thevalue1forallroutesintheperiodsafterthemergerand0otherwise.Thisvariablereflectsthechangeinfrequenciesbeforeandafterthemergeronalltheroutes.ThevariableDmerger_routesisadummyvariablethattakesthevalue1forallperiodsoftimeonlyonthosespecificroutesaffectedbythemergerand0otherwise.IunderstandroutesaffectedbythemergerasbeingthoseonwhichVuelingwasofferingservicessimultaneously with Clickair or Iberia in the years previous to the merger (200�and2007).Thisvariablereflectsthefrequenciesofferedonthoseroutesaffectedbythemergerinrelationtothosethatremainunaffected.ThevariableDiff-in-Diff isconstructed through the interactionbetweenDmerger_year andDmerger_routes.Hence, thisvariableisadummyvariablethattakesthevalue1onlyintheperiodsafterthemergerandonlyforthoseroutesaffectedbythemerger,and0otherwise.Thecoefficientaccompanyingthisvariableisthedifference-in-differenceestimator.Ifthecoefficientisnegativeandsignificantthenthemergerledtoareductioninfrequencies,whileifthecoefficientispositiveandsignificantthenitledtoanincreaseinfrequencies.

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84 CUADERNOSECONóMICOSDEICEN.O88

Iincludedifferentvariablesthatseektocapturecompetitionattheroutelevel5.InafirstsetofregressionsIconsidertherouteconcentration,measuredusingtheHerfindahl-Hirschmanindex,intermsofflightfrequencies.Theexpectedsignofthecoefficientassociatedwithrouteconcentrationisnegativegiventhatairlinescompeteinfrequencies.Inasecondsetofregressions,Iconsidertherouteshareoftheairlinesinvolvedinthemergerandtheshareoflow-costairlinesontheroute.Sharesforbothvariablesarecalculatedintermsoffrequencies.Theexpectedsignofthecoefficientassociatedwiththeshareoftheairlinesinvolvedinthemergerisnegativebecauseahighershareoftheseairlinesmayimplysofterroutecompetition.

Theexpectedsignofthevariablefortheshareoflow-costcompetitorsisnotclearapriori.Ontheonehand,ahighershareof low-costairlinesmayimplystrongercompetitionontheroutebut,ontheotherhand,low-costairlinesmayofferlowerfrequenciesthannetworkairlinesastheymaybemoreinterestedincapturingleisurepassengers.Inthisregard,GoolsbeeandSyverson(2008)examinetheresponsesofincumbentUSairlinestothethreatofentryofSouthwestusingasampleofUSroutes.TheyfindthatincumbentsreducepriceswhenSouthwestthreatensaroutebutthesefarecutsarenotaccompaniedbyanincreaseinfrequenciesorseats.Anotherstudythatexaminestheimpactoflow-costcarriersonfrequenciesisthatofBettiniandOliveira(2008).Theyanalyzethedeterminantsofmajorcarrier’scapacityinroutesconnecting the30biggestBrazilianairports, includingas explanatoryvariablesadummyforthoseroutesinwhichGolisofferingflights.Theyfoundpositiveeffectsoflow-costentryonmajorcarrier’scapacity.

Airline frequency data at the route level have been obtained from RDC aviation(Capstatsstatistics),whileroutedistancedataaretakenfromtheOfficialAirlineGuide(OAG).PopulationandincomepercapitadatarefertotheNUTS3regions(“provincias”)and have been provided by Cambridge Econometrics (European Regional Databasepublication).NoteIuseanexplanatoryvariablethatconsidertheshareoflow-costairlinesintheroute.Table1providesalistoflow-costairlinesthatofferservicesinroutesofoursampleinatleastoneoftheyearsoftheconsideredperiod.

5 Itcouldbearguedthatconcentrationvariablesmaybesimultaneouslydeterminedwiththenumberoftotalflightsofferedintheroute.Anypossibleendogeneitybiascouldaffectthemagnitudeandsignofthecoefficientsforthesevariablesbutisshouldnotaffectthedifference-in-differenceestimator.Thisbeingsaid,theaimofthispaperistoexaminetheimpactofthemergercontrollingfortheintensityofcompetitionandnottoexaminetheimpactofcompetitiononfrequencies.Notethatitishardtofindgoodinstrumentsfortheconcentrationvariableas thelagsof thesevariablesarestronglycorrelatedwiththecontemporaneousvariable.

TABLE 1LIST OF LOw-COST AIRLInES OFFERInG AIR SERVICES In ROuTES

OF OuR SAMPLE

AirOne,AirBerlin,AlpiEagles,Condor,easyjet,Germanwings,Hapagfly,LTU,Monarch,MyAir,MyTravelLite,NIKI,Norwegian,Ryanair,SkyEurope,SmartWings,Sterling,Thomson,Transavia,

VirginExpress,Volare,WindJet,Wizzair

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ANEMPIRICALASSESSMENTOFTHEMERGERBETWEENIBERIA,CLICKAIRANDVUELING 85

4 Estimation and results

Iperformtheestimationusingthreedifferenttechniquesasarobustnesscheck;theordinaryleastsquares(OLS),therouterandomeffectsandtheroutefixedeffects.Theordinaryleastsquaresdonotallowconsideringunobservedrouteheterogeneitybutitisnotconditionedbysomeinconsistencyproblemsthatmayaffecttheotherestimators.

The use of random or fixed effects allows us to consider unobserved routeheterogeneity.Anadvantageofthefixedeffectsmodelisthatitallowsustocontrolforanyomittedvariablesthatcorrelatewiththevariablesofinterestandwhichdonotchangeovertime.Ashortcomingofthefixedeffectsmodelisthattheeffectoftime-invariantvariables cannotbe identified.Note also that thefixedeffects estimatormaynotbeconsistentwhenthenumberoftimeperiodsissmallasitismycasehere.Therandomeffectsmodelhastheadvantagethatitmaycaptureboththebetweenandthewithinvariationofthedatabutadisadvantageoftherandomeffectsmodelisrelatedwiththepotentialbiasderivedfromthecorrelationbetweentheexplanatoryvariablesandtherandomeffects.

Table 2 shows the descriptive statistics of the variables used in the empiricalanalysis,whileTable3showsthecorrelationmatrix.Allthevariablesshowsufficientvariabilitytoproviderobustestimationsandnoneoftheexplanatoryvariablesissocorrelatedtocreateamulticollinearityproblem.

Table 4 shows the test for mean differences for the most relevant variablesin our analysis in the period before and after the merger; flight frequency andcompetitionvariables.Regardingtheroutesaffectedbythemerger,thedescriptivestatistics suggest a modest increase in concentration while the share of low-cost

TABLE 2DESCRIPTIVE STATISTICS OF THE VARIABLES uSED

In THE EMPIRICAL AnALySIS

Mean Standard deviationFrequencies 1485.37 2097.22Distance 11�0.58 582.9Population 1889.80 233�.�5Incomepercapita 28.51 14.28Dsecondary 0.13 0.34Dtourism 0.18 0.38Dinternational 0.�5 0.47HHI 0.�� 0.2�Share_lowcost 0.2� 0.37Share_merged_airline 0.40 0.37

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8� CUADERNOSECONóMICOSDEICEN.O88

TABL

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ies

1D

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nce

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Popu

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n0.

24–0

.05

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.03

0.20

0.21

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22–0

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ism

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0.43

0.24

0.53

0.12

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20.

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0.11

–0.5

71

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ANEMPIRICALASSESSMENTOFTHEMERGERBETWEENIBERIA,CLICKAIRANDVUELING 87

TABL

E 4

MEA

n D

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CES

In F

REq

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tes a

ffect

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erge

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fect

ed b

y th

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r

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e m

erge

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r the

m

erge

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T-st

atist

ic fo

r m

ean

diffe

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es

(Ho:

no

diffe

renc

e)

Peri

od b

efor

e th

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erge

rPe

riod

afte

r the

m

erge

r

T-st

atist

ic fo

r m

ean

diffe

renc

es

(Ho:

no

diffe

renc

e)Fr

eque

ncie

s41

41.4

233

87.�

71

.23

1051

.47

9�7.

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390.

44–1

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0.71

0.71

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are_

low

cost

0.05

0.15

–3.8

5***

0.24

0.35

–3.4

2***

Shar

e_m

erge

d_ai

rlin

e0.

580.

511

.90*

0.37

0.37

0.0

5

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88 CUADERNOSECONóMICOSDEICEN.O88

airlineshasincreasedandtheshareoftheairlinesinvolvedinthemergerhasbeenreduced.Therefore,datadonotshowaclearworseningofthecompetitionontheroutesaffectedbythemerger.However,thedecreaseinfrequenciesissubstantial.Concerningtheroutesnotaffectedbythemerger,thereisahighstabilityinthemeanvaluesforalltheconsideredvariables.Theonlyexceptionhastodowiththeshareoflow-costairlinesthathassignificantlyincreasedintheperiodafterthemerger.

AnotherinterestingfactfromTable4isthestrongdifferencesinthemeanvaluesforthetwoperiodsregardingroutesaffectedandnotaffectedbythemerger.Inthisregard,routesaffectedbythemergeraredenserbecausemeanfrequenciesarehigher.Furthermore,thelevelsofconcentrationintheseroutesarelowerbuttheshareoflow-costairlinesisalsolower.

Table5showstheresultsofestimatesofthefrequencyequationwhenusingallsampleandvariables.Theoverallexplanatorypowerofthemodelisreasonablehighwhentheestimationismadeusingordinaryleastsquaresandrandomeffects,whileitismuchlowerwhenusingthefixedeffectsestimation.Recallthatthefixedeffectsmodeldoesnotidentifyvariablesthataretime-invariantlikedistanceorthedummyforinternationalroutes.Inthisregard,theHausmantesttakesavalueof18.31andwearenotabletoacceptthenullhypothesisthatdifferencesincoefficientsarenotsystematic.Thus,therandomeffectsmodelismoreinformativebutthefixedeffectsmodelismorereliable.

Thesignof thecoefficientsestimatedfor thevariablesofdistance,populationandincomepercapitahavetheexpectedsignsandarestatisticallysignificantwhenusingtheordinaryleastsquaresandrandomeffectsmethods,whileonlythevariableofincomepercapitaworksasexpectedintheestimationthatusesfixedeffects(thevariableofdistancecannotbeidentified).

The coefficient associated with the dummy variable for routes in which airservicesareofferedfromsecondaryairports ispositive inall regressionsbut it isonlystatisticallysignificantintheregressionthatusesordinaryleastsquares.Whiledemand in these routes may be higher than predicted by the other explanatoryvariables, its statistical significance is conditioned upon the estimation methodused.

The coefficient of the dummy variable for tourist routes is not significant inanyregressionso thatwedonotfindadifferentialeffect for tourist routes in thefrequencychoicesofairlines.Onthecontrary,thecoefficientofthedummyvariablefor international routes is negative and statistically significant in all regressions.Hence,itseemsthatdemandishigherindomesticroutesevenaftercontrollingforotherdemandshifters.Asexpected,thecoefficientsofthedummyvariablesfortheoriginairportsarenegativeandstatisticallysignificantintheregressionswheretheycanbeidentified.

Regardingcompetitionvariables,thecoefficientoftheconcentrationvariableisnegativeandstatisticallysignificantinallregressionsasexpected.Inasimilarvein,thecoefficientofthedummyvariablefortheshareoftheairlinesinvolvedinthemergerisalsonegativeandstatisticallysignificantinallregressions.Onthecontrary,

Page 13: An empirical assessment of the merger between … · An empirical assessment of the merger between Iberia, Clickair and Vueling Xavier Fageda Sanjuan University of Barcelona and GIM-IREA

ANEMPIRICALASSESSMENTOFTHEMERGERBETWEENIBERIA,CLICKAIRANDVUELING 89TA

BLE

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).

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90 CUADERNOSECONóMICOSDEICEN.O88

resultsforthevariableoftheshareoflow-costairlinesaremixed.Itscoefficientisnegativeandstatisticallysignificantintheregressionthatusesordinaryleastsquaresbutitispositiveandnotstatisticallysignificantintheregressionthatusesrandomandfixedeffects.Thus,noclearconclusionscanbereachedregardingthisvariable.

Thecoefficientofthedummyvariablefortheperiodafterthemergerisnegativeinall regressionsalthough it isnot statisticallysignificantwhen theestimation ismadeusingtheordinaryleastsquares.Notethattheeconomicsituationwasworseintheperiodafterthemergersothatthisexplainsthenegativesignofthiscoefficient.In this regard, the impactof thecrisisshouldbesimilar in routesaffectedby themergerandroutesnotaffectedbythemerger.Hence,mytestabouttheimpactofthemergeronroutefrequenciesshouldnotbeconditionedbytheeconomicsituationofthecountryafterthemerger.TheeffectoftheeconomiccrisisonlycouldplayarolewhenImakethecomparisonbetweendomesticandinternationalroutesaslongasdomesticroutescouldbemorenegativelyaffectedbythecrisis(seebelow).

The coefficient of the dummy variable for routes affected by the merger ispositiveinallregressionsalthoughitisnotstatisticallysignificantwhenusingthefixedeffectsmethod.ThisresultissimilartowhatIfoundinthedescriptivestatisticsanalysisdevelopedabove.Indeed,routesaffectedbythemergerseemstobedenserthanotherroutesevenwhencontrollingforothercontrolfactorsthatmayexplainroutefrequencies.

The main variable of my analysis is the variable that identity the difference-in-differenceestimationwhichistheresultoftheinteractionbetweenthedummyvariablefortheperiodafterthemergerandthedummyvariableforroutesaffectedbythemerger.Thecoefficientassociatedtothisinteractionvariableisnegativeinallregressions.Itisnotstatisticallysignificantwhenusingtheordinaryleastsquaresanditisstatisticallysignificantatthe1percentlevelwhenaccountingforthepanelnatureofmydate(i.e.regressionswithrandomandfixedeffects).

Table � shows the results of estimates of the frequency equation for differentsubsamples. Here I only report results for the difference-in-difference estimatoras it is themainfocusof theanalysis.First, Iconsider routes that justdepart fromMadrid or Barcelona airport (I do not have enough observations tomake specificregressions for routes departing just from Ibiza orValencia).Then, I consider justdomestic or international routes. The difference-in-difference estimator is negativeinallregressionsforallsubsamples.InthecaseofroutesthathaveMadridairport,thecoefficientisstatisticallysignificantatthe10percentlevelinallregressions.Inroutesdeparting fromBarcelonaairport, thecoefficientof thevariable isgenerallystatisticallysignificantatthe5percentor1percentlevel.Regardingdomesticroutes,the interactionvariable isstatisticallysignificant inall regressionsat the5percentlevel.WhenIfocustheattentiononinternationalroutes,thedifference-in-differenceestimatorisnotstatisticallysignificantwhenIusetheordinaryleastsquaresanditisstatisticallysignificantatthe1percentlevelwhenIusefixedorrandomeffects.

Table7showstheelasticitiesobtainedfromtheestimatesforthedifference-in-difference variable. The magnitude of the estimated elasticities moves generally

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ANEMPIRICALASSESSMENTOFTHEMERGERBETWEENIBERIA,CLICKAIRANDVUELING 91

TABL

E 6

FREq

uEn

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Eq

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ES (R

ESu

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dom

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swith

orig

in

inM

adrid

airp

ort

(N=2

�7)

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(452

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itho

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celo

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t(N

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TES:Standarderrorsinparenthesis(R

obusttoheterocedasticity).Significanceat1percent(***),5percent(**),10percent(*),15percent(+).Inspecification(1)

competitionismeasuredthroughHHI,whileinsp

ecification(2)ism

easuredthroughthevariablesforthesh

areoflow–costairlinesandsh

areofthemergedairline

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92 CUADERNOSECONóMICOSDEICEN.O88

around4percent.Takingthemeanvaluesforthewholesample,thiswouldmeanthatthemergerhasimpliedareductioninabout60flightsperyear(alittlebitmorethanoneflightperweek).Overall,myregressionsshowaclearfallinroutefrequenciesalthoughthemagnitudeoftheeffectisrelativelymodest.

IdonotfindconsistentdifferencesintheimpactofthemergeronfrequenciesinrouteswithorigineitherinMadridorBarcelonaairport.Otherwise,theimpactofthemergerseemstobestrongerfordomesticthanfornationalroutestakingintoaccountthatelasticitiesobtainedwiththefixedeffectsestimatorarelessreliableastheydonotcapturetheeffectoftime-invariantvariables.

It is important to remark here that I find a negative impact of themerger onfrequenciesevenaftercontrollingforseveralcompetitionindicatorsandotherrouteattributes.Thus,giventhelevelsofcompetition,themergerhasimpliedareductioninthenumberofflightsofferedbyairlinesintheroutesaffectedbythemerger.

Indeed,thedropinflightfrequenciesmayberelatedtothehigherconcentrationorgreatershareofthemergedairline.Thisairline,whichcouldbelessexposedtoflightsofferedbyitsrivals,couldreducefrequenciestosavefixedcostsandensurehigherloadfactorsforitsplanes.Thisdropinfrequenciescouldalsobeassociatedwithanincreasedpresenceoflowcostcarriersontheroutesaffectedbythemerger.However,myregressionstakeintoaccountallthesefactors.

Itcouldalsobearguedthatthedropinfrequencyisduetothefactthat,inthepost-mergerperiod,theoveralleconomicsituationofSpainwasworse.However,thereisnothingtoleadustothinkthattheroutesaffectedbythemergerhavesufferedmostfromthecrisisthanotherroutes.

TABLE 7ELASTICITIES FOR THE DIFF-In-DIFF VARIABLE EVALuATED AT SAMPLE

MEAnS

OLS Random effects Fixed effects(1) (2) (1) (2) (1) (2)

Allroutes –0.43 –0.54 –0.47 –0.49 –0.44 –0.47RouteswithorigininMadrid

airport(N=2�7)

–0.38 –0.3� –0.37 –0.41 –0.3� –0.40

RouteswithorigininBarcelonaairport

(N=280)

–0.3� –0.49 –0.38 –0.41 –0.38 –0.39

Domesticroutes(N=2�0)

–0.39 –0.49 –0.39 –0.44 –0.31 –0.35

Internationalroutes(N=49�)

–0.22 –0.39 –0.29 –0.35 –0.29 –0.34

NOTES:Standarderrorsinparenthesis(Robusttoheterocedasticity).Significanceat1percent(***),5percent(**),10percent(*),15percent(+).Inspecification(1)competitionismeasuredthroughHHI,whileinspecification(2)ismeasuredthroughthevariablesfortheshareoflow–costairlinesandshareofthemergedairline.

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ANEMPIRICALASSESSMENTOFTHEMERGERBETWEENIBERIA,CLICKAIRANDVUELING 93

Hence,themostplausibleexplanationofmyresultsisamorecollusivebehaviorofairlinesofferingflightsintheroutesaffectedbythemerger.Intheperiodprevioustothemerger,competitionbetweenVuelingandtheothertwoairlinesinvolvedinthemergerwasvery intense. In theperiodafter themerger,competitionbetweenVuelingandotherairlinesoperatingintherouteseemstobesofter(regardlessthelevelsofconcentrationortheshareofVuelingintheroute).

In thisregard,amorecollusivebehaviorcouldalsoexplain that the impactofthemergerhasbeenstrongerindomesticroutes.RivalsofVuelingintheseroutesareusuallyAirEuropaorSpanairwhileairlines likeRyanair,Easyjetareusuallyoperatingintheinternationalroutes.ItcouldbethatbigEuropeanlow-costairlineswereimplementingamoreaggressivebehaviorininternationalroutesthatwereabletodoairlineswiththebulkoftheirtrafficintheSpanishmarket.

However,thehigherreductioninfrequenciesindomesticroutescouldalsobeexplainedbyastrongerimpactofthecrisisinsuchroutesasSpaininyears2010and2011wassufferingmorethecrisisthanothercountriesoftheEuropeanUnionthatconcentrateahighnumberofdestinationsininternationalroutesdepartingfromSpanishairportslikeGermany,UnitedKingdom,FranceorItaly.

Overall,themergermayhavehadanegativeimpactonpassengersintermsoflowerflightfrequencies.Itseemsthatthisnegativeimpactmaybeexplainedbyamorecollusivebehaviorofairlinesofferingflightsintheaffectedroutes.However,themagnitudeofthenegativeimpactistoomodesttoputintoquestionthedecisionoftheEuropeanCommissiontoapprovethemerger.

Overall, competition authorities should not be particularly concerned by thedynamics of the Spanish airline market as airport constraints are not currently amajorentrybarrierandairlineslikeRyanair,Easyjet,AirBerlinorNorwegianhaveanincreasingpresenceinthismarket.IberiahasalargeshareofflightsinMadridairportbut inter-hubcompetitionand the increasingpresenceof low-cost airlinesandhigh-speed trainservicesareweakening itsdominantposition.Vuelinghasastrongposition inBarcelonaairportbutRyanair (andother low-cost carriers) arefearsomerivalsforthisairline.

Intense competition in the airline segment contrasts with the monopoly ofAENA in themanagement of airports with commercial traffic (Bel and Fageda,2011; Comisión Nacional de los Mercados y la Competencia, 2014).The partialprivatizationof theairportoperator runningcanaggravateproblems in the futureintermsofefficiencyandincentivesarisingfromthelackofcompetitionbetweenairportstocapturetrafficofairlines.Hence,competitionauthoritieswilllikelyhavetofocusontheairportsegmentofthemarketinthecomingyears.

5. Concluding remarks

Inthispaper,IhaveshowthatthemergerbetweenIberia,ClickairandVuelinghasimpliedareductioninthetotalnumberofflightsofferedinrouteswheretwoof

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94 CUADERNOSECONóMICOSDEICEN.O88

theseairlineswereoperatingsimultaneouslybeforethemergerwasmadeeffective.However,themeanestimatedimpactofthisfrequencyfallisjustaboutalittlebitmorethanoneflightperweek.Note that in theroutesaffectedby themerger theincreaseintheconcentrationindexhasbeensmallandtherehasbeenanincreaseintheshareoflow-costairlines.Inthisregard,itisalsoremarkablethedecreaseintheshareofthemergedairline.Overall,itdoesnotseemthatthemergedairlineisabletoexploitunilaterallyitsmarketpowerafterthemergerwasmadeeffective.Atleast,thisisnotarobustexplanationfortheresultsofmyanalysis.

What it seems is that the behavior of airlines operating in the routes affectedby themerger is lesscompetitiveafter thanbefore themerger. In this regard, theintenserivalrybetweenVuelingandClickair in theperiodbefore themergerwasnotfinanciallysustainableinthelongertermatleastfortheweakerairline.Itisnotsurprisingtofindsomeevidenceofamorecollusivebehaviorintheperiodafterthemergerbecauseawarpricewasinplaceintheperiodbeforethemerger.Thus,thedecisionoftheEuropeanCommissiontoapprovethemergerseemstobejustified.Inthisregard,notealsothatthebankruptcyofVuelingwasalsounavoidableinthecontextoftheaggressivebehaviorofitsrival.

Thisbeingsaid,theex-postactionsofcompetitionauthorities(inthecaseoftheairlinesectortheEuropeanCommission)shouldbecomplementedbyex-anteactionsofnationalauthorities.ThetransferofslotsofIberiatoClickairwasdoubtfulfromalegalpointofviewanditcouldbethecasethatthesetwoairlineswerefollowingapredatorybehaviorbeforeVuelingwasforcedtomergewiththem.Inanycase,theincreasedpresenceoflow-costairlinesinamarketwherecapacityconstraintsatthelargestairportsarelessseverethatusetobe,seemstoguaranteeareasonableintensityinthelevelsofcompetitioninthecomingyears.

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[3]BILOTKACH,V.(2011):«Multimarketcontactandintensityofcompetition:evidenceformanairlinemerger», review of industrial organization, 38,95-115.

[4]BILOTKACH,V.,FAGEDA,X.,FLORES-FILLOL,R.(2013):«AirlineConsolidationandtheDistributionofTrafficbetweenPrimaryandSecondaryHubs»,regional science and urban economics, 43,951-9�3.

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ANEMPIRICALASSESSMENTOFTHEMERGERBETWEENIBERIA,CLICKAIRANDVUELING 95

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