Competition law developments in East Asia - March 2017

This month’s editors: Maxime Vanhollebeke, Pearl Yeung, Michael Kim, Sophie Chen and Lydia Fung.

Below is an excerpt from our monthly Competition Report. More detailed commentary on these issues and other recent competition law developments in the Asian region are to be found in this month’s edition of our report available on a free subscription basis (see further below).

Since the entry into force of the merger control regime under the Philippine Competition Act last year, the Competition Commission has progressively ramped up its enforcement activities. As at the end of March, it had adopted 16 clearance decisions, issued clarification notes on the computation of merger notification thresholds and on procedural matters. It had also decided to open an in-depth investigation in respect of a transaction in the telecommunications sector, where the parties challenge the Commission’s jurisdiction in court.

In an indication that the merger review regime is quickly coming of age, this month the Competition Commission released a final version of its Merger Review Guidelines, following a public consultation held last September. In this document, the Commission provides detailed guidance on the types of transactions that qualify as a merger under the Act. The guidelines also provide a first outline of the framework for the substantive analysis, relying on concepts that are generally consistent with those found in other jurisdictions.

While local practitioners and foreign investors will welcome the detailed guidance, it is noteworthy that in their final version the Merger Review Guidelines no longer refer to safe harbours below which anticompetitive effects are unlikely. The draft that was released for public consultation in September of last year relied on market share thresholds and on other numerical measures of market concentration, allowing parties to M&A transactions to easily perform a first assessment of the likely analysis under the Competition Act.  The final guidelines are much more prudent in this respect.

On 13 March, the Competition Commission of Singapore (CCS) published its decision of 12 December 2016 to clear a proposed joint venture between Singapore Airlines and Lufthansa for air passenger services between selected destinations in Asia-Pacific and Europe. The decision was made in view of the parties’ voluntary commitments with respect to two routes (Singapore-Frankfurt and Singapore-Zurich) where the parties had a high combined market share and few competitors.

While airline joint ventures seek to replicate the effect of a full merger, they are not incorporated but rather take the form of detailed cooperation agreements. Accordingly, the framework under which they are assessed is Section 34 of the Competition Act, which prohibits anticompetitive agreements. Where the joint venture involves actual or potential competitors, the arrangement can potentially restrict competition in breach of Section 34. As the parties’ proposed joint venture in this case entails a significant degree of cooperation on competitive parameters, the parties sought a decision from the CCS on whether the proposed joint venture would infringe Section 34. The CCS was notified of the proposed transaction on 5 February 2016.

The scope of the proposed joint venture covers the provision of air passenger services between selected destinations in Europe (Germany, Austria; Belgium and Switzerland) and in Asia-Pacific (Singapore, Australia, Indonesia and Malaysia). The joint venture contemplates a different form of cooperation depending on the routes involved.  On the one hand, the parties will engage in a metal-neutral cooperation (including revenue, pricing, schedule and capacity coordination) on four routes where at least one party offers a direct flight (Singapore-Frankfurt, Singapore-Munich, Singapore-Zurich and Singapore-Dusseldorf). On the other hand, the parties will engage in pricing and sales and marketing coordination (but no revenue sharing) on indirect services between the European and Asia-Pacific destinations that are within the scope of the joint venture.  As the Competition Act only concerns competition within Singapore, the CCS only considered the effects of the joint venture on the direct and indirect services between Singapore and the relevant European destinations.

In line with its usual market definition approach in the aviation sector, the CCS identified each origin and destination (O&D) city pair between Singapore and the relevant European destinations as the relevant markets. The CCS also agreed with the parties that the markets need not be segmented between leisure and business passengers. As the parties intend to coordinate on pricing, inventory management, sales and marketing on all relevant routes, the CCS found that the proposed joint venture was, by its nature, restrictive of competition.

The CCS was particularly concerned that there were demonstrable appreciable adverse effects on competition with respect to the Singapore-Frankfurt and Singapore-Zurich routes, where the parties are the only two airlines to offer direct flights, with a combined market share exceeding 80 per cent. The CCS found that indirect flights on these two routes posed limited competitive constraints, as none of the airlines offering indirect flights had gained significant market shares in recent years. The CCS did not identify similar concerns for the Singapore-Munich and Singapore-Dusseldorf routes, where the parties’ combined market share is lower – (59 per cent and 20-30 per cent respectively) – and where the parties faced keen competition from the Gulf carriers.

With respect to the indirect routes between Europe and Singapore, the CCS was of the view that the joint venture would only lead to a minimal loss of competition, since Singapore Airlines does not operate its own flights to these destinations, but instead relies on codeshare and interline arrangements with Lufthansa. However, on the basis that the joint venture involved pricing coordination between the parties on these indirect routes, the CCS considered that the cooperation would also by its nature infringe Section 34.

Despite these concerns, the CCS proceeded to assess whether the joint venture might nevertheless result in a net economic benefit, in which case it would not infringe Section 34. The CCS accepted the parties’ submissions that the joint venture would lead to increases in capacity and frequency on the parties’ four main overlapping routes, as well as an increase in passenger numbers and tourists to Singapore, which would benefit Singapore’s economy. On balance, the CCS therefore considered that the proposed joint venture would result in a net economic benefit for all routes except the Singapore-Frankfurt and Singapore-Zurich routes, where such efficiencies would be insufficient to outweigh the appreciable adverse effects it had identified.

To address the CCS’ concerns, the parties provided voluntary commitments to maintain the current capacity levels on both routes, to gradually increase capacity over the routes, and to carry a minimum number of Singapore point-of-sale passengers on both routes in each calendar year. The parties also undertook to appoint an independent auditor to monitor compliance with these commitments, and provide a report to the CCS on an annual basis.

The CCS was satisfied that these commitments would be sufficient to mitigate the competition concerns on the Singapore-Frankfurt and Singapore-Zurich routes and lead to increased passenger numbers and tourists to Singapore, and accordingly benefit Singapore’s economy, thereby fulfilling the conditions of the net economic benefit exclusion set out in Section 35 and paragraph 9 in the Third Schedule of the Act, and the proposed joint venture was cleared on this basis. The parties may apply for a variation, substitution or release of these commitments five year after their implementation.