Struggling Asia-Pacific airlines find there are antitrust lines they can't cross

As a number of governments across the Asia-Pacific region struggle with how to ensure they still have a functioning aviation industry once Covid-19 restrictions ease, regulators have shown a willingness to relax some competition rules. However, they are also drawing a hard line at anything that would lead to a post-pandemic scenario with substantially reduced competition.

This line appears to have been at its most apparent in Australia and Malaysia, where struggling carriers are in danger of exiting the market completely and leaving behind only one major player.

Virgin Australia Group entered into voluntary administration on Tuesday, raising the prospect of rival Qantas remaining as the only significant provider of domestic air travel in Australia.

Aviation experts also warn that loss-making Malaysian Airlines could go bankrupt without financial aid or fresh capital, leading a senior minister to comment last week that merging the state carrier with the Malaysia-based AirAsia Group should again be considered.

No monopolies

Their respective competition regulators, however, have made it clear that a monopolized domestic airline industry is not an option.

On Monday, Australian Competition & Consumer Commission Chairman Rod Sims said "having two airlines is absolutely fundamental to Australia’s economic prosperity".

This was backed by Australian Treasurer Josh Frydenberg and Deputy Prime Minister Michael McCormack, who said in a joint statement that the government remained committed to having two commercially viable airlines.

“We will ensure the ACCC strongly enforces competition laws so airlines are able to compete effectively as the industry rebuilds,” said the statement, which was issued on Tuesday in response to news that Virgin Australia had gone into voluntary arbitration.

The same tone was used by the Malaysian Aviation Commission, or Mavcom, which told MLex earlier this week that any moves toward consolidating the local aviation industry amid the Covid-19 crisis would still be assessed against the competition provisions of the country’s aviation laws.

“While the Malaysian Aviation Commission has not received any merger applications at this juncture, we take note of recent news reports concerning the potential merger between Malaysia Airlines Berhad and AirAsia Group Berhad,” Mavcom said in a reply to MLex.

“In accordance with the Malaysian Aviation Commission Act 2015, any merger or anticipated merger that may substantially lessen competition in any aviation market is prohibited by law.”

No bailouts

At the same time, though, neither government appears to be willing or able to bail out the ailing airlines at this point.

According to Mavcom, government aid should be the last resort, given that its fiscal resources are already under considerable pressure from the expenditure required to fund the public health system and assist financially distressed households and small businesses.

Mavcom added that the state carrier had already been supported by the government for far too long.

“Given that the [government], via its investment companies, has already expended significant resources in supporting Malaysia Airlines for the last 20 years, and that any assistance is not likely to yield positive returns, there may be little appetite to further do so for Malaysian carriers in general,” it said.

In Australia, the government has maintained it won’t give Virgin Australia a financial bailout, offering industry-wide support instead, with a A$1.2 billion financial package last month.

“We’ve announced more than a billion dollars’ worth of support measures, which help Virgin, which help Qantas, which helps some of those regional airlines,” Treasurer Josh Frydenberg said.

Both governments have suggested the carriers look to shareholders or new investors instead for capital infusion.

But for Virgin Australia, any new money from overseas would face extra scrutiny and possible delays, as the government has also announced all proposed foreign investment will be subject to review. Canberra has said that these new rules aren't directed at any particular country, but most of the myriad efforts to tighten the foreign-investment regime over the past five years reflect mounting political concerns over Chinese investment.

Failing-company defense

If the airlines fail to get new money and find that a potentially anti-competitive merger is the only way to stay alive, companies may try to fall back on the failing-company defense and argue that they would exit the market if not for the deal.

However, in Australia this argument is unlikely to fly.

In an interview with MLex, former ACCC Chairman Allan Fels said the only issue for the regulator to consider if Virgin were to collapse would be which of Virgin assets Qantas should be allowed to acquire.

“In a normal failing-firm merger, the ACCC would be hesitant to let Qantas take any bits of Virgin,” Fels told MLex, but added that the economic challenges caused by Covid-19 could change that.

What’s more, this kind of failing-company merger argument was mounted in 2017 by Australia rail-freight company Aurizon as it sold off its assets to rival Pacific National. That decision sparked legal action from the ACCC and eventually forced Aurizon to find another buyer for most of its rail assets.

In Malaysia, the aviation regulator also recognized that the failing-company argument could be used but warned that it would strictly assess the merits of any such claim and look into whether any less anti-competitive options are available.

“Factors under consideration include the ability of the alleged failing firm to meet its financial obligations in the near future, the existence of any serious prospect of reorganizing the business, the likelihood of the alleged failing airline to exit the market within the near future [in the absence of the merger], and the existence of any less anti-competitive alternative to the merger in question,” Mavcom said in a commentary on the issue.

But the regulator, which is responsible for safeguarding competition in the aviation industry, would rather see the state carrier seek sources of funds — or perhaps a new owner — abroad, than allow a merger-to-monopoly under its watch.

“Mavcom recommends for the [government] to adopt a similar ownership liberalization policy for the aviation industry as this allows industry players to access a wide range of funding sources from the local and international capital markets.”

A little leniency

Despite the tough stance by regulators in some jurisdictions, some competition authorities in the region have shown they’re willing to exercise a bit of leniency over merger reviews to take into consideration the unusual circumstances created by Covid-19.

In South Korea, HDC Hyundai Development’s acquisition of Asiana Airlines, the country’s second largest carrier, received a quicker-than-usual approval.

In announcing the approval of the deal on April 3, the Korea Fair Trade Commission said “it proceeded the merger review as fast as we could to take into account struggles that the aviation industry face in the Covid-19 pandemic.”

Today, the regulator approved another deal – the country’s largest budget carrier Jeju Air’s acquisition of its rival Eastar Jet – despite anticompetitive concerns. The regulator called its decision “exceptional” in approving the deal that could save Eastar Jet that had been insolvent and was about to go bust.

Merger-review rules set by the anti-monopoly act allow the regulator to give merger clearance on deals that involve a company that is finding it hard to get back to business, without imposing remedies to resolve anticompetitive concerns.

The deal, which was announced last Dec. 18, has seen its transaction value drop by 15 billion won ($12.3 million) from the initial value to the actual one that they agreed because of deteriorating conditions in the aviation sector. If they merge, Jeju Air will emerge as the third-largest provider of international flights in the country, after Korean Air and Asiana Airlines.

The regulator found a few anticompetitive concerns such as possible airfare increases on some of flight routes but concluded that the deal is expected to bring greater efficiency to the aviation industry in relation to anticompetitive effects.

It’s worth noting, though, that neither of these deals raised significant competition concerns.

India’s antitrust regulator has likewise said it will make concessions to the merger rules in order to make it easier for struggling companies to merge. Its law also requires the Competition Commission of India to consider the failing-companies defense, if it comes to that.

Condoning cooperation

Aside from mergers, leniency has also been on display for companies coordinating and cooperating in ways that would normally be precluded by national competition law.

The ACCC has granted almost 20 such authorizations since March 20, including to airlines. The idea behind the authorizations is that if more companies survive the economic impact of the Covid-19 outbreak, then competition will be stronger when the recovery comes.

In New Zealand, the Commerce Commission, the local competition watchdog, has also said companies won’t face enforcement action when cooperating to ensure the supply of essential goods and services during this period.

Experts in Australia and New Zealand have said that coordination authorizations and merger decisions made during this period will be the foundations for resetting competitive tensions in their respective markets when the virus passes.

India has declined to issue any outright exemptions from the country’s competition law amid goods shortages and supply-chain disruption caused by the Covid-19 pandemic, because the law contains provisions allowing businesses to cooperate to face these challenges.

In an advisory issued on Sunday night, the CCI said that the law had “in-built safeguards to protect businesses from sanctions for certain coordinated conduct, provided such arrangements…result in increasing efficiencies.”

But the watchdog said that businesses collaborating with competitors to guarantee the continued supply of essential goods and services wouldn’t be punished. However, it warned that “only such conduct of businesses which is necessary and proportionate to address concerns arising from Covid-19 will be considered.”

This is a point antitrust regulators across the region are consistent on: Consideration will be given to the unusual circumstances created by Covid-19, as long as companies don’t cross hard antitrust lines.