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MAVCOM greenlights Malaysia’s first airline competition-related merger case

27 September 2021

On 9 September 2021, the nation’s economic aviation regulator, the Malaysian Aviation Commission (“MAVCOM”), announced that it had approved a merger between Korean Air Lines Co Ltd (“Korean Air Lines”) and Asiana Airlines Inc (“Asiana Airlines”) (collectively, (“the Parties”).1 This decision by MAVCOM marks the first time that a merger case was analysed by a regulator in Malaysia from a competition law perspective.
 
Aviation merger control
 
As background, competition matters in the Malaysian aviation industry is carved out from the general competition legislation (i.e., the Competition Act 2010) and governed by Part VII of the Malaysian Aviation Commission Act 2015 (“MAVCOM Act”). The MAVCOM Act is unique in that it is presently the only legislation in the country which expressly includes a merger control regime. Further details on merger control within the Malaysian aviation industry can be found in our previous alert.2
 
In brief, 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 MAVCOM of its merger or potential merger and to apply 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.
 
Brief facts
 
On 19 March 2021, the Parties voluntarily notified MAVCOM of their anticipated merger and submitted an application to MAVCOM to determine if 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, 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, MAVCOM announced that it had approved the merger and published its final decision.  
 
MAVCOM’s Decision
 
MAVCOM utilised what it calls the Substantial Lessening of Competition Test (“SLC Test”) to determine if the anticipated merger between the Parties would infringe section 54 of the MAVCOM Act. Following a comprehensive analysis of various factors, MAVCOM made several conclusions which are summarised below:
 
  1. Market power and market concentration: The anticipated merger would only affect 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% to 80% in 2020. 

  2. Unilateral effects: 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. MAVCOM also noted that the Relevant Route is a particularly thin route. 

  3. Entry and expansion: The barrier to enter and expand the Relevant Route is low. 

  4. Countervailing buyer power: Passengers can exercise strong countervailing power against the Parties on the Relevant Route. 

  5. Failing firm defence: Asiana Airlines had provided sufficient evidence such as annual reports, financial statements and restructuring plans to be considered a ‘failing firm’. 

  6. Economic efficiencies or social benefits: Significant economic efficiencies or social benefits would arise from the anticipated merger, such as sharing operational best practices to maximize consumer benefits, improved safety and reduced training costs, and efficiencies related to maintenance, repair and overhaul.  
Taking all of the above into consideration, 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.
 
Comment
 
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, MAVCOM will certainty encourage other aviation service providers to utilise the voluntary merger notification and application system provided in the MAVCOM Act.
 
The benefits of this voluntary merger notification and application system, particularly for anticipated mergers, should not be understated. Utilising this process allows 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 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 if the current government will proceed with the proposal by the former Pakatan Harapan government for 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 MAVCOM’s powers to govern competition in the aviation industry, including merger control.
 
Alert prepared by Tan Shi Wen (Partner) of our Competition Law Practice and Eric Gabriel Gomez (Associate) of our Aviation Law Practice.
 

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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