FEATURE: AirAsia and Malaysia Airlines win competition tribunal decision on market sharing

The first decision by the Malaysian Competition Appeal Tribunal since its inception more than four years ago caught the media and public’s attention. The verdict overturned the Malaysian Competition Commission (MyCC) ruling that AirAsia and Malaysia Airlines (MAS) had colluded to share the market.

The case involves the country’s two major carriers, MAS and AirAsia, who entered into a Collaboration Agreement together with AirAsia X Bhd as part of a short-lived share swap deal involving their major shareholders, Khazanah Nasional Bhd and Tune Air in 2011. The share swap was unwound in 2012.

On March 31 2014, the MyCC ruled that MAS and AirAsia’s Collaboration Agreement had violated the prohibition against market-sharing agreement under section 4(2)(b) of the Competition Act 2010 (CA 2010) and imposed financial penalties of RM10 million each. On February 4 2016, the five members of the Competition Appeal Tribunal (CAT), unanimously decided that the MyCC misinterpreted the Collaboration Agreement and failed to show there was a market sharing object.

Grounds of decision
The CAT summarised and discussed seven grounds of appeal in its grounds of decision, including:

• The Malaysia Competition Commission (MyCC) misinterpreted the Collaboration Agreement.

MyCC’s case of market sharing was built largely around the Collaboration Agreement between MAS and AirAsia. The CAT however agreed with AirAsia and MAS that the Collaboration Agreement is a framework conditional agreement subject to detailed antitrust analysis and subsequent approval. A plain reading of the terms of the Collaboration Agreement did not warrant a finding of restriction by object within the meaning of section 4(2)(b) of the CA 2010. Furthermore, the MyCC did not give any reason or analysis for its decision that the purported object of the Collaboration Agreement was one of market sharing.

• MyCC cannot rely totally on the deeming provision

Section 4(2)(b) reads

Without prejudice to the generality of subsection (1), a horizontal agreement between enterprises which has the object to share market or sources of supply is deemed to have the object of significantly preventing, restricting or distorting competition in any market for goods or services.

MyCC contended that section 4(2)(b) can be triggered by the mere entry into the Collaboration Agreement. This was rejected by the CAT. Instead, the CAT held that MyCC is required to establish the object of the Collaboration Agreement was to share market to succeed under the aforesaid provision. MyCC’s attempt to rely totally on the deeming provision does not absolve itself from the duty to prove restriction by object under section 4(2)(b).

• No ceding of routes by MAS

MyCC also relied on the withdrawal of Firefly from East Malaysian routes, arguing that this ceded those routes to AirAsia. The CAT agreed with the appellants that MAS, as parent company of Firefly, made the route withdrawals independently and outside the scope of the Collaboration Agreement. MyCC failed to establish the causal link between the Collaboration Agreement and the route withdrawal.

It also observed there was never any ceding of the East Malaysian routes to AirAsia as the appellants also argued that those routes were taken back by MAS from Firefly.

Significance               
The decision is significant on a number of levels –

• Deeming provision is not a short cut

CAT’s decision will force the competition authority to address the cardinal issue whether there is an object to share market before attempting to rely on section 4(2)’s deeming provision. In other words, MyCC must establish an agreement restricts competition by object before it invokes the deeming provision. This is in line with AirAsia’s counsel’s submission on the 2 limbs approach under section 4(2) –

Limb 1:

(2) Without prejudice to the generality of subsection (1), a horizontal agreement between

enterprises which has the object to –

…

(b) share market or source of supply;

…

Limb 2:

… is deemed to have the object of significantly preventing, restricting, or distorting competition in any market for goods or services.

A careful reading of section 4(2)(b) (read together with section 4(1)) would clearly show that the deeming proviso is only applicable to the second limb. In other words, it is only when the MyCC has proven the object to share market in the first limb that the agreement could be deemed to significantly prevent, restrict or distort competition.

• Restriction by object test

The CAT appears to have laid down the test in deciding whether an agreement is restricted by object

- “…in order to decide whether an agreement is restricted by object – “[ r]egard must be had inter alia to the content of its provisions, the objectives it seeks to attain and the economic and legal context of which it forms part”. Based on the aforementioned test, the onus is on MyCC has to prove an alleged anti-competitive object based on interpretation of the agreement in question. Words and expressions used by the parties will be construed and given effect accordingly to ascertain the intention of the parties. We however note that the CAT did not take the opportunity to discuss the meaning of “economic and legal context” as submitted by AirAsia’s counsel.

• Definition of relevant market

With regards to market sharing, the CAT pointed out that the MyCC did not or failed to define the relevant market. The CAT observed that definition of relevant market is integral in any competition inquiry. This observation of the CAT puts us in line with the approach taken by other jurisdictions which also recognise definition of the relevant market is the key aspect of any competition inquiry. It is only after having defined the relevant market that the MyCC can assess whether a particular conduct is anti-competitive in nature.

Collaboration and merger
The CAT also cautioned that a simplistic use of the deeming provision of section 4(2) of the CA 2010 on airlines business may not be proper. This decision acknowledges that alliances between airlines could enhance efficiency and service quality, and it would be wrong to assume that collaboration between two airliners is per se illegal.

This will provide some guidance to the Malaysian Aviation Commission which was recently established by the Malaysian Aviation Commission Act 2015. This new Commission has taken over regulation of the competition and economic issues relating to the aviation industry. It is also noteworthy that the new Act introduced merger control over aviation service markets in Malaysia.

This landmark decision of the CAT has provided some much sought after clarity on the interpretation of section 4(2) of the CA 2010 and is a welcome decision.

Nicole Leong is a senior associate of Tay & Partners, which represented AirAsia in this case.