Saturday, 7 September 2013

MyCC acts tough on airlines

IT is a landmark decision by the Malaysia Competition Commission (MyCC) to fine two airlines – national carrier (Malaysia Airlines) and South-East Asia’s largest low-cost airline, AirAsia.

Their fault – both collaborated way back in August 2011 to distort competition in the local aviation scene.

The penalty is a fine of RM10mil each. Though it is a small amount for the airlines, it sends a very strong message to the market place that anti competitive behaviour is not welcomed now that MyCC is in existence.

“If it was any other country, the comprehensive collaboration framework (CCF) would have been shot down even before it was started,” said an analyst.

He says that “since MyCC started it has been so quiet” but after two years, it has sent a very powerful message and that is the kind of action people are wanting to see and the AirAsia/MAS cooperative pact was something too blatant to ignore.”

Yesterday MyCC surprised the market with its “proposed decision” to slap fines of RM10mil each on both AirAsia and MAS for infringing Section 4(2) (b) of the Competitions Act by entering into an agreement that has as its objective the sharing of markets in the air transport services sector within Malaysia provided by both airlines.

“Market sharing is considered a serious infringement under the Act as it is deemed to have the object of significantly preventing, restricting, or distorting competition in any market for goods and services,” said MyCC chairman Tan Sri Siti Norma Yaakob in a statement released yesterday.

“When businesses agree to share markets, they are agreeing to stop competing at the expense of the consumers,” she added.

Financial penalties

The statement said the financial penalties were based on the turnover earned between Jan 1, 2012 and April 30, 2012 for the Kuala Lumpur-Kuching, Kuala Lumpur-Kota Kinabalu, Kuala Lumpur-Sandakan and Kuala Lumpur-Sibu routes.

The financial penalties were less than 10% of their respective worldwide turnovers between January and April 2012, MyCC said.

It is a “proposed decision” which means that the two airlines are given 30 days to argue their case either orally or in writing as to why they think what they did was not seen to be an anti-competitive behaviour.

MAS group chief executive officer Ahmad Jauhari Yahya in an SMS to StarBizWeek says that “we are reviewing the charge.”

The airline told Bursa Malaysia later that it would submit its written representation and indicate whether it intends to make an oral representation to MyCC no later than Oct 18 that it was reviewing the proposed decision in consultation with its legal counsel.

AirAsia in its strongly worded statement says it “intends to vigorously defend the allegations.”

AirAsia says it has always put compliance as its utmost priority and similarly taken necessary steps to ensure that the CCF was in compliance with applicable law in every respect. “As such we will review the matter with our counsel and reply to MyCC with our defence within the specified period of time.”

Fighting it all the way

Separately, AirAsia group CEO Tan Sri Tony Fernandes said in an SMS that “we will fight it all the way.

“I or Datuk Seri Kamarudin Meranun was never called to discuss this. It was well documented that Firefly jet operations were losing large amounts of money. After the collaboration ended, MAS has not restarted their jet operations because it was losing money.

“So we are extremely disappointed and I am sure MAS is. It is easy to try to make MAS and AirAsia an example when there are so many real anti competitive situations in the country,” Fernandes says.

He added that “it is such a traversity that AirAsia is one company that has fought for a level playing field and has injected so much competition into the market and yet again another obstacle is put in front of it. When will the authorities see the amazing good AirAsia has done for the country? I am at a loss but I will never give up the fight for my staff.”

To recap, AirAsia and MAS were locked in a battle for the local and regional air market share for many years.

But the fight intensified when MAS via its wholly owned unit, Firefly entered the low cost air space by offering cheap fares for flights into Sabah and Sarawak. It used jets for the service and its entry heighten competition in the sector.

Though Firefly was losing money on the routes, it continued to attract travellers because it offered full services at low-cost fares. To diffuse competition a deal was hammered on Aug 9, 2011 so that both the airlines will be “friends’’ and cooperate instead of being bitter rivals.

Hence came the CCF where both parties agreed to sharpen their focus of core competencies, deliver better products and choice for customer and ultimately create greater value for all stakeholders.

As part of the collaboration, a share swap deal was also hammered out whereby AirAsia via its parent company, Tune Air Sdn Bhd took up a 20.5% equity stake in MAS.

In turn MAS parent, Khazanah Nasional Bhd (which has nearly 70% stake in MAS) took 10% in AirAsia. This led to Fernandes and Meranun sitting on MAS board while some of Khazanah’s representative sat on AirAsia board. Then it was agreed that MAS will remain a full service carrier, Firefly will cease to operate its jet services, and AirAsia will stay a low cost carrier.

But the pact drew widespread criticism as the CCF was seen as anti-competitive in nature and its current and future business practices were seen to be an abuse of its dominant position.

Competition law

Competition law regulates both horizontal agreements between companies operating at the same level in the production or distribution chain and vertical agreements - which are agreements between companies operating at different levels of the supply chain.

But the CCF and share swap went though despite all the grouses by many parties. However, when the Competition Act came into force on Jan 1, 2012, the Malaysian Consumer Association (Fomca) lodged a complaint with the MyCC on Feb 24, 2012 against the cooperation between MAS and AirAsia.

Eight months after the share swap was inked and after intense lobbying by MAS Employees Union (Maseu) the share swap was unwound.

An analyst said “even though both the airlines want to argue their case, the fact remains that MyCC is seen to be doing something and even if the fine is reduced to RM1mil it is still a strong signal sent out by MyCC that the market does not condone anti-competitive behaviour and that is important in a globalised market place.”

This is also MyCC’s first big case where it fines a company since the Competition Act came into force. However, it had closed the Cameron Highlands Floriculturist Association case that involved price-fixing on their products but no penalty was imposed. MyCC now has 40 complaints of which 26 are under investigations.

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