The Covid-19 pandemic continues to take a heavy toll on the global aviation industry, with airline operators in particular being severely impacted.
In Malaysia, significant air travel restrictions have been imposed since March 2020 as part of the various iterations of movement restrictions under the Movement Control Orders and National Recovery Plan. These travel restrictions have heaped more problems onto the national flag carrier, Malaysia Airlines Berhad, which had reportedly been facing financial difficulties well before the onset of the pandemic.
The nation's economic aviation regulator, the Malaysian Aviation Commission ("MAVCOM"), has reminded the industry through its 'Commentary on Government Assistance to the Aviation Industry Amidst the Covid-19 Pandemic' that the relevant merger control provisions must be adhered to and it has stressed that the immediate relief provided by mergers must be balanced against any risks to the long-term health and competitiveness of the aviation services market.
Aviation merger control provisions and guidelines
Unlike competition in most other industries which is governed by the Competition Act 2010, competition in the local aviation industry is specifically governed by Part VII of the Malaysian Aviation Commission Act 2015 ("MAVCOM Act"). Uniquely, the MAVCOM Act is presently the only legislation in the country which expressly includes a merger control regime to regulate competition.1
Pursuant to section 54 of the MAVCOM Act, mergers are prohibited if they result, or may be expected to result, in a substantial lessening of competition in any aviation service market. Guidance on what amounts to a "substantial lessening of competition" is provided in MAVCOM's 'Guidelines on the Substantive Assessment of Mergers' ("Substantive Merger Guidelines").
Perhaps most relevant to the current climate of the aviation industry is the part of the Substantive Merger Guidelines which states that if a merger party is failing, it may invoke the 'failing firm defence'. This 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.
Procedurally, sections 54 and 55 of the MAVCOM Act provide a voluntary notification regime for an anticipated merger and a merger respectively. Essentially, 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. Guidance on this voluntary notification regime can be found in MAVCOM's 'Guidelines on Notification and Application Procedure for an Anticipated Merger or a Merger' ("Procedural Merger Guidelines").
Pursuant to the Procedural Merger Guidelines, merger parties should carry out a self-assessment and ought to notify MAVCOM if the merger or potential merger may result in a substantial lessoning of competition within any aviation service market. Given that the notification regime is voluntary, mergers can be concluded without any application or approval from MAVCOM. However, if a merger party fails to provide any notification, MAVCOM may initiate an investigation into the merger transaction and it has the power to direct, amongst others, that the merger be dissolved or modified if it is found to be in breach of the section 54 prohibition.
Given the unprecedent circumstances brought about by the Covid-19 pandemic, cooperation between airlines is warranted now more than ever before. However, the need for healthy competition will always be important to ensure the best possible prices for consumers. Navigating these two elements will not be easy and it will be interesting to see how MAVCOM applies its legislative powers if a merger is broached within the Malaysian aviation industry.
1 The Government had previously announced that the Competition Act 2010 will be amended by mid-2020 to introduce merger control provisions. The amendments have been delayed for various reasons but can be expected to be introduced within the foreseeable future. It is to be noted that mergers in the telecommunication sector are regulated under the Guidelines on Substantial Lessening of Competition issued by the Malaysian Communications and Multimedia Commission.
Originally Published 18 August 2021
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