The Proposed Merger of Two Airlines – Can Everyone Fly Now?
May 4, 2020
The rumoured merger between our national flag carrier, Malaysia Airlines Berhad (MAS) and our largest low-cost airline carrier, AirAsia Group (AirAsia) has been the talk of the town for a few weeks amidst the COVID-19 pandemic. With many airlines across the globe slumping into voluntary administration, including Virgin Australia Group (Virgin), Australia’s first big corporate casualty of the pandemic, the aviation industry faces a threat of significant decline of market competition. For instance, the falling of Virgin may prompt Qantas Airways Limited (Qantas) to arise as the only significant airline player in Australia, leading to plummeting competitive levels in Australia.
The aviation market in Australia had been previously duopolized by both Virgin and Qantas. According to authorities, swift action in enforcing competition laws will be taken by its antitrust watchdog against anti-competitive behaviour such as attempts to swamp airline routes, artificially push down prices or lock in exclusive deals with airports and suppliers in a bid to ensure that airlines are able to compete effectively as the industry rebuilds.
It is therefore clear that although the primary goal of an airline merger is to enable parties to eliminate duplicative operating costs, thereby reducing their total costs on labour, service and operations whilst maximizing revenue, the after-effects of a merger involving two major competing airline titans raises far-reaching concerns.
This article is aimed at discussing some competition law issues which may ensue from a merger between MAS and AirAsia.
Voluntary Merger Control
Since March 2016, the primary legislation relating to aviation services is the Malaysian Aviation Commission Act 2015 (MACA 2015). Currently, the MACA 2015 is the only legislation in Malaysia which provides for a voluntary merger control regime in addition to prohibiting anti-competitive agreements and abuse of dominance in the aviation services market. Section 54 of the MACA 2015 states that any merger which “have resulted or may be expected to result in a substantial lessening of competition in any aviation service market” is prohibited.
As any notification regarding an anticipated merger or merger under MACA 2015 is on a voluntary basis, parties are required to assess whether a merger may result in a “substantial lessening of competition” (SLC) and determine whether a merger notification should be made to the Malaysian Aviation Commission (MAVCOM), an independent entity established under the MACA 2015 to regulate economic and commercial matters related to civil aviation in Malaysia. Guidance for determining what constitutes a SLC is contained in the ‘Guidelines on Substantive Assessment of Mergers’ published by MAVCOM.
Present Market Position
It is reported that, at present, AirAsia controls approximately 50% of the aviation market, whilst MAS’ market share stands at about 30%. A merged entity formed between both parties would therefore be in a position to control a significant portion of the aviation market share in Malaysia, at approximately 80%, creating room for the merged entity to behave, to an appreciable extent, independently of its competitors, customers and ultimately of the consumers.
The ‘Guidelines on Abuse of Dominant Position’ issued by MAVCOM, provides that in general, an enterprise holding market share above 60% serves as an indicator that such enterprise holds a dominant position in a relevant aviation service market. Combined with other relevant factors in totality including the ability to impose excessive, predatory or discriminatory pricing and the capacity to profit from a price above competitive levels for a sustainable period, that would indicate that the enterprise holds significant market power and the potential for abuse of its dominant position may arise.
The justification of a “failing firm defence” which may be raised in favour of the proposed merger amidst the COVID-19 pandemic is acknowledged by MAVCOM in its ‘Commentary on Government Assistance to the Aviation Industry amidst the COVID-19 Pandemic’ issued in March 2020. This defence, which has been typically used in merger proceedings as a last resort argument, contends that regardless of anti-competition issues which may arise as a result of the merger, the alleged failing party involved in the merger would exit the relevant aviation service market and competition provided by that party would be lost anyway.
With MAS’ financials deteriorating up to 94% since flight restrictions were imposed across most countries to curb the COVID-19 pandemic, facing an estimated US$3.32 billion loss in revenue following lower demand and yields across Asia, it is plausible for an argument to be made that MAS would have exited the aviation market in any case. However, it is pertinent to note that “failing firm defences” are often rejected by competition authorities due to the significant amount of evidence required to support such an argument, including producing to their satisfaction, commercially-sensitive and confidential information relating to the failing party.
The “failing firm defence” must be substantiated with proof and evidence that a merger party is genuinely failing and that it would fail should the merger not occur. In this regard, MAVCOM has asserted that it will strictly assess the merits of any such claim to ensure that parties are not abusing the law whilst acknowledging that aviation industry players are facing unprecedented challenges arising from the economic crisis caused by the COVID -19 pandemic.
The Korean Experience
Interestingly, just recently in South Korea, the acquisition of Eastar Jet by its rival, Jeju Air, both being South Korean’s notable low-cost carriers, was approved by the country’s antitrust watchdog. This was on the basis that Eastar Jet was deemed “unrecoverable” under its applicable competition legislation and was thus granted an exception from applicable competition laws notwithstanding that the acquisition relating to a horizontal merger would inevitably reduce competition in the aviation service market. Competition in the aviation market in South Korea remains fierce notwithstanding the aforesaid merger, with the existence of 5 other budget carriers based in South Korea, namely Jin Air, Air Busan, Air Seoul, T’way and Fly Gangwon, with 2 new competitors, Air Premia and Aero K, slated to enter the aviation industry later this year.
Conclusion
The trend of airlines forming alliances, consolidating and entering into mergers are not uncommon, especially so during a global recession. This may particularly ring true in light of the decreased demand for air travel due to numerous travel restrictions and border closures imposed by countries worldwide in response to the COVID-19 pandemic. In the United States, the 2008 recession due to the financial crisis led to the creation of the big three airlines we see today, when Delta and Northwest, United and Continental, and American and US Airways merged, respectively.