On 9 September 2021, Malaysia's economic aviation regulator, the Malaysian Aviation Commission (MAVCOM), announced that it had approved a merger between Korean Air Lines Co Ltd and Asiana Airlines Inc (the "parties").(1) This decision by the MAVCOM marks the first time that a merger case was analysed by a regulator in Malaysia from a competition law perspective.
Competition matters in the Malaysian aviation industry are carved out from the general competition legislation (ie, the Competition Act 2010) and are governed by Part VII of the Aviation Commission Act 2015 (the "MAVCOM Act"). The MAVCOM Act is unique in that it is presently the only legislation in Malaysia that expressly includes a merger control regime (for further details, please see "Merger control within Malaysia's aviation industry").
Section 54 of the MAVCOM Act prohibits mergers if they result, or may be expected to result, in a substantial lessening of competition in any aviation service market. The MAVCOM Act provides a voluntary merger notification and application system, which means that a merger party has the option of notifying the MAVCOM of its merger or potential merger and applying for a decision as to whether the merger or potential merger in question infringes or will infringe the prohibition under section 54 of the MAVCOM Act.
On 19 March 2021, the parties voluntarily notified the MAVCOM of their anticipated merger and submitted an application to the MAVCOM to determine whether their anticipated merger would infringe the section 54 prohibition. The anticipated merger related to scheduled air passenger services between Malaysia and South Korea.
The application invoked the "failing firm defence", which essentially means that a merger party may justify a merger by claiming that their potential exit from the aviation market would cause the competition they provide to be lost anyway. In the present case, Asiana Airlines stated that it had been in a situation of financial distress for some time and could not be rehabilitated but for the anticipated merger.
On 17 August 2021, the MAVCOM published its proposed decision on its website and invited the relevant industry players and the public at large to provide any written feedback. A few weeks thereafter, the MAVCOM announced that it had approved the merger and published its final decision.
The MAVCOM utilised what it calls the "substantial lessening of competition" (SLC) test to determine whether the anticipated merger between the parties would infringe section 54 of the MAVCOM Act. Following a comprehensive analysis of various factors, the MAVCOM made several conclusions, which are summarised below.
Market power and market concentration
The anticipated merger would affect only one route – namely, Seoul to Kota Kinabalu (the "relevant route"), as this was the only overlapping route in the passenger transport services provided by the parties or their related airlines between Malaysia and South Korea. The parties' post-merger combined market share for the relevant route was approximately 70-80% in 2020.
Although the parties' post-merger market share for the relevant route would be high, the anticipated merger would have limited unilateral effects as the parties would not be able to increase the airfares above competitive levels as such airfares are strictly controlled by the South Korean Ministry of Land, Infrastructure and Transport. The MAVCOM also noted that the relevant route was a particularly thin route.
Entry and expansion
The barrier to enter and expand the relevant route was low.
Countervailing buyer power
Passengers could exercise strong countervailing power against the parties on the relevant route.
Failing firm defence
Asiana Airlines had provided sufficient evidence, including annual reports, financial statements and restructuring plans, to be considered a "failing firm".
Economic efficiencies or social benefits
Significant economic efficiencies or social benefits would arise from the anticipated merger, such as:
- sharing operational best practices to maximise consumer benefits;
- improved safety and reduced training costs; and
- efficiencies relating to maintenance, repair and overhaul.
Result of SLC test
Taking all of the above into consideration, the MAVCOM determined that the anticipated merger between Korean Air Lines and Asiana Airlines, if carried into effect, had passed the SLC test and would not infringe section 54 of the MAVCOM Act.
Given the significant effect that the covid-19 pandemic has had on the aviation industry, it was only a matter of time before such a merger was broached between aviation service providers in Malaysia. By publishing a detailed analysis of the competition effects of the anticipated merger between the parties in this case, the MAVCOM will certainly encourage other aviation service providers to utilise the voluntary merger notification and application system provided in the MAVCOM Act.
The benefits of the voluntary merger notification and application system, particularly for anticipated mergers, should not be understated. Utilising this process enables aviation service providers to seek an early determination of the competition effects of prospective mergers, rather than taking the risk of being found to have infringed section 54 of the MAVCOM Act only after the merger has been completed. This is particularly important given that, in the event a party is found to have infringed any competition prohibition in the MAVCOM Act, section 59(c) empowers the MAVCOM to impose a financial penalty of up to 10% of the worldwide turnover of the enterprise over the period during which the infringement occurred.
Moving forward, it remains unclear whether the current government will proceed with the proposal by the former Pakatan Harapan government for the MAVCOM itself to be merged with the nation's safety aviation regulator, the Civil Aviation Authority of Malaysia. If the aviation regulators are indeed merged, it remains equally unclear whether the new regulator will retain the MAVCOM's powers to govern competition in the aviation industry, including merger control.
For further information on this topic please contact Tan Shi Wen or Eric Gabriel Gomez at SKRINE by telephone (+603 2081 3999) or email ([email protected] or [email protected]). The SKRINE website can be accessed at www.skrine.com.
(1) For further information, please click here.