THE QANTAS/EMIRATES DECISION

Citation(2014) 26 SAcLJ 436
Date01 December 2014
Published date01 December 2014
How the Competition Commission of Singapore Used the Net Economic Benefits Exclusion to Regulate the Air Passenger Market

The Competition Commission of Singapore (“ccs”) did not properly assess the Net Economic Benefits (“NEB”) created by the co-operation agreement between Qantas Airways Ltd and Emirates. In particular, the high market shares of the two companies should have excluded the NEB defence under the Competition Act (Cap 50B, 2006 Rev Ed), even more so as the remedies proposed by the parties are likely to increase their market share further. The CCS appears to have failed to follow the letter of the Competition Act and instead effectively regulated the airlines sector through the use of competition tools, undermining the enforcement of competition rules and restricting competition in the airlines sector. The more recent decision on the Qantas/Jetstar co-operation shows an improvement in the assessment of economic benefits. The CCS must continue to improve its competitive assessment, must restrict the use of the NEB defence and possibly adopt the more internationally accepted slot divestment remedy as a way of solving competition concerns in airline agreements, or it will hurt competition and consumers in Singapore.

I. Introduction: CCS in the global context

1 In March 2013, the Competition Commission of Singapore (“CCS”) conditionally approved the agreement between Qantas Airways Ltd (“Qantas”) and Emirates (“Decision”),1 two major international

airlines.2 While the divestment of airport slots has become the preferred tool of competition authorities around the world to alleviate the anti-competitive effects of agreements between airlines, CCS took an unprecedented and surprising step. On the identified routes where the new entity would have a market share of nearly 60% (Singapore- Melbourne and Singapore-Brisbane), the parties offered to maintain or increase the number of passengers in and out of Singapore as a condition to their co-operation agreement. Under the argument that the proposed undertakings would generate net economic benefits (“NEBs”) for the Singapore economy, CCS granted its approval to the Qantas/Emirates co-operation. This article highlights the costs of accepting remedies under the NEB defence.

2 After this first introduction part, the second part of the article looks at the Decision in detail, taking the view that the competitive assessment by CCS is incomplete, that the assessment of the proposed remedies is not discussed in the Decision, and that the NEB defence was inappropriate to assess the proposed co-operation. CCS appears to have failed to follow the letter of the Competition Act3 and effectively regulated the airlines sector through the use of competition tools, undermining the enforcement of competition rules and restricting competition in the airlines sector. In this second part, the author argues that by accepting that the parties increase the number of seats on the identified routes, CCS has generated anti-competitive effects beyond the original concerns identified in the proposed co-operation. The third part provides some analysis in relation to the past practice of CCS and the fourth part looks at decisions in the airline sector in the European Union (“EU”). The European Commission (“EC”) has never considered the Art 101.34 exclusion (the EU equivalent of the NEB defence) nor the increased number of seats as a remedy to anti-competitive effects generated by airlines co-operation, for the reason that it does not attempt to regulate the airline sector but rather focuses on enforcement of competition rules. The fifth part details the positive elements coming out of the Decision. The article concludes that the Decision is not only a mistake from a competition enforcement point of view, it is essential that CCS rectifies its flawed approach to NEB and to agreements between airlines when it has a chance to do so, in the near future.

II. The Qantas/Emirates conditional clearance

A. Jurisdiction

3 The Decision was taken under s 44 of the Competition Act. Pursuant to s 44, companies voluntarily notify their agreements to CCS and apply for a decision.5 CCS examines the agreements to determine whether they violate s 34 of the Act, which prohibits agreements having the object or effect of restricting or distorting competition within Singapore.6 It should be noted that s 44 of the Act follows in its wording and spirit the international standards in competition law, for instance, Art 101 of the Treaty on the Functioning of the European Union (“TFEU”),7 and s 1 of the Sherman Act in the US.8

4 On 12 October 2012, Emirates and Qantas notified CCS of their planned co-operation. Under the Master Co-operation Agreement signed by the parties a month prior to their notification, Qantas and Emirates planned to co-ordinate across their passenger and freight global networks, on every aspect of the airlines' activities (planning, scheduling, operating, capacity, sales, marketing, pricing, connectivity airport facilities, etc). In effect, even though the agreement leaves the two corporate entities separate, they would nonetheless act as a single airline. In a previous decision, CCS noted that “for regulatory reasons, merger between airlines from different countries are not common”, and that this type of highly integrated joint venture was at the end of the spectrum of the possible agreements between airlines.9 Applying the same increased scrutiny, CCS considered that the highly integrated nature of the agreement made it likely to enter into the scope of s 34 of the Competition Act, which lists agreements that have the object or effect of limiting competition as those which “directly or indirectly fix purchase or selling prices or any other trading conditions”.10 This assessment, rather simply, follows the EC's practice, where agreements between airlines on similar aspects of air traffic have fallen within the

scope of Art 101 of the TFEU. The CCS assessment of the scope of s 34 focused on price fixing,11 in accordance with the CCS Guidelines on the Section 34 Prohibition (“s 34 Guidelines”).12

B. Limited competitive assessment

5 CCS took as a starting point, in accordance with its own case law and international practice, that the relevant geographic market should be defined as an Origin-Destination (“OD”) city pair. This is consistent with the EC practice, cited here in example, and the EC assessment that passengers are travelling to a specific destination “and will not substitute another destination when faced with a small, non-transitory increase in price”.13 However, CCS did not take into account destinations which are geographically very close to the identified cities. In the case of Brisbane for instance, it would have been possible to mention the effects on low-cost airlines such as JetStar, Tiger, Scoot and Air Asia. Several of these airlines, while not serving the Brisbane- Singapore and Melbourne-Singapore routes, serve the Singapore-Gold Coast route, a mere hour away from Brisbane by car. However, this applies for tourist passengers only, while the economic benefits of an increase in the number of passengers generally focuses on business travellers only (as the increase in tourists flying from Brisbane for instance is neutralised by the number of Singaporeans flying out to Brisbane, who do not bring economic benefits to Singapore).

6 Here again and despite not taking into account the neighbouring cities, the similarities with the EC practice and the references to it are striking, and call for little comment. CCS referred to its own Bus Cartel case14 to establish that it does not have to prove that an agreement is anti-competitive by effect and falls under the s 34 prohibition if the agreement has the object of restricting competition. Nonetheless, CCS proceeded to detail the market share of the parties on the relevant routes, noting that these exceeded by far the 20% market share threshold that shields agreements from enforcement

of s 34.15 CCS provided market shares, sourced by Changi Airport and IATA Airport Intelligence Services, of nearly twice the level of those provided by the parties in their submission.16 No reference is made to these discrepancies.

7 A difference appears at that point of the competitive assessment between the EC treatment of agreements between airlines and the CCS assessment. Connecting passengers, in the EC's view, benefit from airline alliances: through increased connectivity at the arrival hub, connecting passengers benefit from an increased choice of final destinations; in EC decisions, this element has proven useful for airlines to put forward the pro-competitive effect of their alliances or agreements, as routes were treated as complimentary goods.17 In some other EC decisions on the contrary, the European regulator has underlined the potentially restricted access to connecting traffic, “namely through refusal to conclude interline or special pro-rate agreements”.18 In sum, the competitive assessment of airline agreements by the EC is made of two parts: the increment in market shares for city pairs, and the detailed analysis of connecting flights and their potential effects for connecting passengers.

8 In its Decision, however, CCS did not seem to take into account specific connecting flights and potential restrictions, but it did take the view that passengers could choose not to fly on one of the non-Australian based competitors to the parties (which leaves practically only Singapore Airlines) as these companies do not have the right to operate domestic flights in Australia. CCS indicated that this “aggravates the adverse effects on competition on these two routes”, because Singapore Airlines cannot simply increase its capacity and its number of seats on these routes to lure in new passengers, in contrast to an Australian airline.19 Singapore Airlines is bound to be the biggest loser in the proposed alliance: the increased...

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