ANALYSIS: Competition central to ruling on Qantas-Emirates

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Warnings from Qantas chief executive Alan Joyce about the "complete demise" of Qantas operations to Europe, without an alliance with Emirates, made little difference to the Australian Competition and Consumer Commission in its preliminary approval of the alliance.

In its decision, which grants anti-trust immunity to Qantas-Emirates if their venture is finally approved in March, the Commission seems less concerned about Qantas and more concerned about the presence of enough rivals to keep the alliance honest.

Qantas depicts its Emirates deal as "an urgent strategic imperative". Without it, the Australian carrier warns, its international operations, which lost $450 million this past financial year, are "in terminal decline".

"There is no alternative for us, to make Europe work," says Joyce.

Such claims are a variation on the "failing company" doctrine, as it is called in anti-trust circles. It applies when one of the parties to a merger or acquisition is in imminent danger of failure. As the US Supreme Court explained, it is better "if a company continues to exist even as a party to a merger than if it disappears entirely from the market".

The failing company doctrine applied explicitly to Boeing's takeover of McDonnell Douglas when the latter was near collapse. The doctrine extends to immunised joint ventures, which are in effect operational mergers. It could thus play a role in such tie-ups as recently mooted between Etihad Airways and Kingfisher Airlines.

The warning by Qantas about its failing European operations takes the doctrine one step further by conceding that Qantas itself faces no danger of collapse, but its European routes do. Courts and regulators generally have treated this so-called "failing division" argument with skepticism because it attempts to extend an exception even further, but US Department of Justice guidelines recognise it under limited conditions.

In any event, the Commission gives little weight to the argument. It concedes that Qantas, as an end-to-end carrier, faces some disadvantages. The biggest, says the Commission, are on those long-haul routes "where Qantas competes with Middle Eastern and Asian mid-point carriers". These disadvantages, it predicts, are most likely to affect Qantas' Sydney-London and Melbourne-London services.

The regulator's so-called "counter-factual", where it compares what is likely to happen with and without the Emirates alliance, is the only place it concedes anything about a Qantas weakness. Without the alliance, the Commission predicts that Qantas is likely to continue to fly at least one service per day to the UK and, within Asia, to continue to operate on profitable routes.

As for the warning that Qantas might retreat to a "virtual network", the agency sees this as "unlikely" for regions other than the UK and Europe.

From these assumptions, the Commission concludes there is some potential benefit from a Qantas-Emirates alliance that increases passenger access to each carrier's network, raises some prospect of new routes and frequencies, and provides other benefits and efficiencies. It does not explicitly weigh these advantages against a possible Qantas retreat.

In what is hardly a ringing endorsement, the Commission concludes: "The extent of public benefit conferred by each source individually is likely to be small and in some cases may be negligible. However, viewed in aggregate...the alliance is likely to confer material, although not substantial, public benefits."

At no point does the regulator suggest it is important to keep an Australian airline on the "Kangaroo" route. In terms of airline nationality, its analysis is neutral. Taking the Commission at its word, it seems to regard keeping Qantas in the market via an Emirates alliance as offering "small, although not substantial, public benefits".

This decision underscores how much the Commission's emphasis is on protecting competition - not a particular competitor. This is especially clear in its analysis of the Australia-UK route, where the concentrated effect of a Qantas-Emirates alliance is highest. Combined, the two carriers control almost 50% of this route. The next largest player, Singapore Airlines, moves only 12% of the traffic. The balance is split between at least 10 other airlines. Qantas-Emirates overshadows all others.

The Commission might have carved out the Australia-UK market from its approval. But in this market it sees "a large number of established carriers" - notably Singapore, Etihad, and Cathay Pacific, plus the growing presence of Qatar Airways and the Chinese airlines. None controls much market share, but all have the "ability and incentive" to expand their operations in response to any attempt by the alliance to reduce or limit growth in capacity.

Only in the Australia-New Zealand market does the Commission voice any concern, because the Air New Zealand-Virgin Australia alliance is the only significant rival. As Commission director Rod Sims explains: "Our concern was that, with Qantas and Emirates combining, there would be just two players."

It is always a concern, he says, "when three goes to two". Hence, the Commission imposed conditions to ensure no loss of capacity. Its decision illustrates how competition regulators focus more on overall competition than on warnings about who might fail if a deal is not approved.