The decision by Australia's Competition and Consumer Commission (ACCC) not to oppose Virgin Australia's takeover of 60% of Tiger Airways Australia represents a classic application of the so-called failing company doctrine, a widely recognised antitrust concept.
The commission concluded that Tiger was likely to leave the Australian domestic market unless the takeover was allowed. Even though regulators had earlier voiced "considerable competition concerns" about the effect of Virgin Australia acquiring Tiger, and thus reducing the number of domestic airlines from three to two, in the end it was convinced that leaving Tiger to fend for itself was not an option.
As the commission explained: "Essential to reaching this view was the ACCC's assessment, made after thorough and extensive testing of the issue, that Tiger Australia would be highly unlikely to remain in the local market if the proposed acquisition didn't proceed."
This rationale parallels that of the US Supreme Court in the first case to articulate this doctrine. The court allowed International Shoe, a dominant shoe manufacturer, to take over a failing competitor, because 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 is frequently invoked, but rarely applied in airline acquisitions and joint ventures. In the recently approved alliance between Qantas and Emirates, for example, Qantas warned that the future of its international operations would be in jeopardy if the ACCC did not approve its proposed venture with Emirates. The commission ignored that claim, but approved the alliance on other grounds.
In Tiger's case, the commission went to considerable lengths to determine the likelihood that Tiger Australia would fail without Virgin's takeover. It had evidence that Tiger Australia has lost more than $A216 million ($222 million) since its launch six years ago and has never made a profit. The airline lost about $A68 million in the past two financial years and is heading for an annualised loss of some $A56 million this year. Despite recapitalisation by its Singapore parent, its equity base is shrinking.
Commission chairman Rod Sims explains, "In six years in Australia, Tiger has never made an operating profit, and its current losses are large. These losses remain a big drag on the entire Tiger group. Our investigations showed that Tiger Australia had been unable to establish itself as a viable competitor despite substantial investment and numerous changes of management and strategy over the years. We concluded that it was highly likely that Tiger Australia would leave the market if this acquisition didn't go ahead."
The commission also considered whether anyone besides Virgin could save the struggling airline. Tiger's parent warned that Virgin Australia was the only potential investor it had in mind.
"The ACCC also tested the likelihood of Tiger Australia's performance being improved by either its current owner (the Singapore-based Tiger Airways Holdings Limited) or other potential shareholders or joint venture partners if the proposed acquisition did not proceed," it says. "The ACCC considered it unlikely given the current circumstances that Tiger Australia would be turned around under any of these scenarios to provide vigorous competition as an independent operator."
Simply because a company is failing, does not automatically mean that its takeover by a rival is the best result. As law professor Edward Correia explains in the Antitrust Law Journal, "allowing a merger to save a failing firm presents a trade-off between two undesirable outcomes - loss of assets from the market, and increased concentration. Clearly there must be times when increased concentration is better than assets exiting the market, but it is not obvious when. The history of the failing company defense is the struggle to answer the question."
On this point, the commission's explanation is sparse. It simply notes that, unless the takeover is allowed, Tiger's "key assets, being the 11 Airbus aircraft, would very likely be redeployed into the Asian operations of its parent company."
Indirectly, however, the commission acknowledges the competitive value of keeping Tiger in Australia, even if majority-owned by Virgin Australia. During the application process, Virgin described how it planned to beef up Tiger as a low-cost rival to Jetstar. The commission notes that, "Virgin Australia now has the opportunity to pursue its stated objective of transforming Tiger Australia into an effective competitor to Jetstar for price sensitive travellers."
The ACCC did duck a potential dispute with Virgin Australia. In February, ACCC chairman Sims indicated that one of the conditions of approving Virgin's takeover bid might be a requirement forcing Virgin to implement its plan to boost Tiger's fleet from 11 to 35 planes by 2018. Virgin chief executive John Borghetti strongly objected. The commission's decision is silent on this point, but Sims told reporters after the decision that the ACCC simply could not impose such a condition in a merger case.