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29 April 2020
On 16 March 2020, as part of its efforts to contain the COVID-19 outbreak, the government announced that a nationwide movement control order (MCO) would be in force from 18 March 2020 until 31 March 2020. The MCO imposed a complete restriction on Malaysian nationals travelling abroad. Only Malaysian citizens or residents would be allowed to re-enter the country subject to a 14-day quarantine. The MCO has since been extended twice, on 26 March 2020 to 14 April 2020 and on 10 April 2020 to 28 April 2020.
On 27 March 2020 the government announced a relief and economic stimulus package worth RM250 billion ($57 billion) to assist individuals and businesses to weather the economic challenges brought about by the COVID-19 pandemic. In addition to earlier economic stimulus packages announced by the government, these included initiatives which would indirectly assist the aviation industry. However, no specific financial assistance was announced.
On 27 March 2020 the Malaysian Aviation Commission (MAVCOM) issued a commentary covering its views and position on the role of the government in providing assistance to airlines during the COVID-19 pandemic.(1) MAVCOM's commentary on potential government fiscal policies includes the following points.
Lender of last resort
In 2018 the International Air Transport Association (IATA) found that the air transport industry, including airlines and their supply chain, is estimated to support $5.2 billion of Malaysia's gross domestic product.(2) Notwithstanding its sizeable contribution to the Malaysian economy, MAVCOM noted that the government is already likely to be under considerable financial pressure through funding the public health system and assisting financially distressed households and small businesses. In this regard, MAVCOM has urged the government to offer financial assistance only as a means of last resort after all other alternatives have been exhausted. These alternatives should include seeking assistance from the airlines' respective shareholders.
Arguments for and against financial assistance
According to the IATA, 450,000 jobs were supported by Malaysia's air transport sector in 2018, with only approximately 100,000 directly involved in the aviation industry. The risk of unemployment as a result of a collapse of airlines was highlighted by MAVCOM along with other consequences of non-intervention, including reduced international connectivity and disrupted supply chains.
By contrast, the risks of providing financial assistance were also cautioned against. As MAVCOM has rightly pointed out, such assistance may risk moral hazard and prolong inefficiencies by shielding industry players from taking difficult but necessary measures during the COVID-19 crisis. However, MAVCOM has also suggested that there may be little interest in government to offer financial interest to airline carriers given that it had, through different investment companies, already expended significant resources in supporting Malaysia Airlines over the past 20 years.
MAVCOM has also suggested the following more targeted options in place of outright bailouts that risk being viewed as unexpected profits for the airlines:
In this regard, any assistance measures by the government must be carefully structured to ensure that they focus on the following policy objectives:
Principles of good governance
MAVCOM has also proposed the following principles of good governance already enforced by the European Union and the United States in an attempt to prevent any misuse of public funds:
Consider non-fiscal solutions
MAVCOM has suggested loosening the compliance burdens for slot usage at no cost. However, it finds that the most relevant policy relaxation in the aviation sector would be ownership liberalisation, particularly because the government had already undertaken ownership liberalisation of the Malaysian telecoms industry during the 1997 Asian financial crisis. MAVCOM has cited various examples of liberal ownership requirement policies for the aviation industry in other countries.
Further, MAVCOM has recommended a similar ownership liberalisation policy for the Malaysian aviation industry to allow industry players access to a wide range of funding sources from local and international capital markets to face the current capitalisation and liquidity challenges. MAVCOM has called for such ownership liberalisation to be accompanied by effective regulatory oversight to ensure that industry players are not abusing their liberalisation rights.
Mergers remain under MAVCOM
Mergers, which are likely to be considered by the airlines to mitigate the effects of the COVID-19 pandemic, will continue to be subject to the Aviation Commission Act 2015 to safeguard industry and consumer interests. Express reference is made to the discussion by Malaysia Airlines and AirAsia over a potential merger before the COVID-19 pandemic.
The Competition Act 2010 does not apply to commercial activity regulated under the MAVCOM Act. Mergers of enterprises in the aviation service market are governed by Part VII (Competition), Division 4 of the Competition Act.
Relevant merger provisions
Mergers that have resulted or may be expected to result in a substantial lessening of competition in any aviation service market are prohibited.(3) Parties to a merger or parties to an anticipated merger must notify MAVCOM and apply for a decision.(4) If MAVCOM decides that there is an infringement, it will require that it cease immediately. MAVCOM may impose a financial penalty of up to 10% of the worldwide turnover of the enterprise during the infringement period.(5)
MAVCOM also has the power to close investigations without finding an infringement by accepting an undertaking by an enterprise to agree to or refrain from certain actions.(6)
If a merger does not infringe the prohibitions against mergers, MAVCOM must determine whether this is because of the effect of an exclusion, whether there is an exemption by the minister or because an undertaking has been accepted.(7)
Merger resulting in monopoly
MAVCOM predicts that any merger between two domestic airlines would hold a monopoly status in many domestic routes. MAVCOM is particularly concerned that such a merger could have the unintended consequence of distorting the market in the long term. As a result of such a merger, Malaysian consumers may experience higher airfares, reduced frequencies and choices and deteriorating service quality resulting from the lower degree of competition.
Failing firm defence
In light of the COVID-19 pandemic, MAVCOM predicts a rise in merger parties invoking the 'failing firm defence' by which a party claims that it is a failing firm and would be compelled to exit the market if the merger is not allowed. Here, competition would be reduced with or without the merger and so the merger should be allowed. In assessing the failing firm defence, MAVCOM considers whether:
For the failing firm defence to succeed, it must also be substantiated with evidence that a merger party is genuinely failing and that it would fail if the merger is not allowed.
The severe impact of the COVID-19 pandemic is underlined in MAVCOM's Industry Report, Waypoint (6th Edition, March 2020), in which MAVCOM's initial forecast for Malaysia's passenger traffic from a growth of between 4.6% and 5.7% was revised to a contraction of between 36.2% and 38.1%. The key statistics from the industry report are as follows:
The aviation industry remains at the mercy of the COVID-19 pandemic. Its impact on the Malaysian economy during this period of uncertainty and crisis depends on national-level efforts to contain the virus. Until then, the global restrictions imposed on travel will continue to severely undermine business in the industry, possibly to the extent of necessitating government intervention in the market. It would be prudent for the government to consider MAVCOM's position when conducting any cost-benefit analysis of measures or aid. Whether the government will consider MAVCOM's suggestions in the present climate is uncertain, particularly given the proposed disbandment of MAVCOM as announced by the Ministry of Transport in December 2019.(9)
For further information on this topic please contact Trevor Jason Mark Padasian or Ryan Jaafar at SKRINE by telephone (+603 2081 3999) or email (firstname.lastname@example.org or email@example.com). The SKRINE website can be accessed at www.skrine.com.
(1) See here.
(2) See here.
(8) See here.
(9) See here.
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