2012Cambridge Business & Economics ConferenceISBN : 9780974211428
An Overview On The Application of Malaysian Competition Act 2010 In Air Transport Industry
NORADURA HAMZAH
SAFINAZ MOHD HUSSIEN
MAHMUD ZUHDI MOHD NOR
Law Faculty
Universiti Kebangsaan Malaysia
43760 Bangi,
Selangor
MALAYSIA
Phone No: +690196580667 (Noradura Hamzah)
E-mail:
An Overview On The Application of Malaysian Competition Act 2010 In Air Transport Industry
NORADURA HAMZAH
SAFINAZ MOHD HUSSIEN
MAHMUD ZUHDI MOHD NOR
Law Faculty
Universiti Kebangsaan Malaysia
43760 Bangi,
Selangor
MALAYSIA
ABSTRACT
Competition Law is a new branch of law in Malaysian legal system. Malaysian Competition Act 2010 (CA 2010) was gazette IN 2010 and is enforce starting from January 1, 2012. Section 3(1) CA 2010 provides that CA 2010 applies to all commercial activities both, within and outside Malaysia. Schedule 2 of CA 2010 listed multimedia and telecommunication as well as energy sector being sectors excluded from CA 2010. Since there is no exclusion and exemption, CA 2010 is enforce in the air service sector. Competition in air servicesector in Malaysia is very unique compared to other domestic transportation sectors. The framework in air services sector is divided in accordance with its route of services offered i.e international and domestic. Both services have different framework. The international air services rely on the international regime underpinning the principle of state sovereignty over its air space. On the other hand, the domestic air service is governed by policy and regulation. However, the competition framework in air services is incompatible with the provision of CA 2010. It isopposed tothe objective of CA 2010,that encourages efficiency, innovation and entrepreneurship, which promotes competitive prices, improvement in the quality of products and services and wider choices for consumers. Therefore, this paper aim to provides an overview on the framework of competition in Malaysian air transport sectorand the application of CA 2010 in order to indentify the anti competitive conduct exercise under the current framework and to identify the anti competitive conduct recognized by law. This study will also look at the difference between the frameworks of air services sector with the provisions of the CA 2010. This is to prove that the existing framework of the air transport sector is unclear, inadequate and not suitable to promote efficient competition. Hence it is an impediment to CA 2010.
KEY WORD : Competiton Law, Malaysian Competition Act 2010, Competition In Airline Sector
INTRODUCTION
The system of modern competition law is a world phenomenon. It started with the enactment of Sherman Act 1890 in the United States of America and later spread out through out many countries in the world. Till date there are about 120 systems of competition law in the world. It is evidence on the importance of the system to world economic development[1].
On the 10th Malaysian Plan, Malaysian acknowledge that healthy competition is needed to make the economy more efficient and dynamic[2]. Therefore, Malaysian Competition Act 2010 (CA 2010) was introduced to provide a regulatory framework against market manipulation and cartel practices that may affect market efficiency.
CA applies to all services sectors including the air transport industry[3]. Prior to the enforcement of CA 2011, competition in the domestic transport and air services sector are affected by regulations imposed under three ministries, namely the Ministry of Transport (MOT), the Ministry of Works (MOW) and the Ministry of Entrepreneur Development (MET)[4]. However with the existence of CA 2011, the services sectors are now bound by the rules of competition in the CA 2010.
The air services sector however is unique compared to other transport services sector. Air transport sector is divided into two categories that is domestic and international services. On the hand, other domestic transportation such as buses, taxis, trains and light rail freight train only offered services within one jurisdiction. These differentiate the legal framework of both the different transport services.
Prior to January 1, 2012, the Malaysian air transport services industry has no proper legal framework on competition. Competition among airlines is based on the policy issued by government. This is because, since independence, the economic sectors in Malaysia have been regulated primarily at the sectoral level[5]. Economic regulation in these sectors mainly took the form of government control over entry conditions (via licenses and permits) and in some sectors, prices[6]. However, beginning January 1, 2012, the air transport industry in Malaysia is subject to the general application of the Competition Act 2010.
Generally, the competition framework of the air services sector in Malaysia is divided into two; based on the types of services offered by airlines, i.e the international and domestic services. Framework of international air services sector in Malaysia depends on international conventions to which Malaysia ratify. The main convention underpinning the framework of international services is the 1944 Chicago Convention. However, the application of this convention is not visualized into the form of legislative drafting. Malaysia also adopted the rules and regulation advised by International Civil Aviation Organisation (ICAO) and International Air Transport Association (AITA) to which Malaysia is a member. Meanwhile, the domestic frameworks rely on the regulation and related policy.
The basic principle underlying the 1944 Convention International Civil Aviation (Chicago Convention) is the principle of sovereignty of a state's airspace[7]. It justifies the right of a country to protect its airspace from encroachment by foreign aircraft. For this purposes, schedule air services is permitted to operate into Malaysia if it is covered by either an Air Services Agreement, a license issued in accordance with Civil Aviation Regulation 1996 or other aeronautical arrangement[8]. The requirement mention above had limits market entry to Malaysian air services industry. This principle is fundamentally contrary to competition objective under CA 2010.
The competition process intended by CA 2010 should encourages efficiency, innovation and entrepreneurship, which promotes competitive prices, improvement in the quality of products and services and wider choices for consumers. Therefore, balance cooperation between the government and the air services industry is essential to the enjoyment of trade and economic prosperity. At the same time they need to work together to protect their national territory and to liberalize air services between the countries.
However, the policy introduced by the government is incompatible with the provision of CA 2010. Existing policy also minimize the solution to the issues that arise in global and domestic competition. The lack of a clear competition provision for the international and domestic air services in Malaysia may not cause any significant problems before. In fact, imbalances and differences in the underlying principle of the framework in air transport sector with CA 2010 was never been questioned.
However, with the enforcement of the CA 2010, the application of international conventions, ICAO or IATA rules and regulation and, domestic policies and regulations are now is barrier to the successfulness of CA 2010. The unclear policies have hindered the process of more fair competition. Furthermore, the limited process of liberalization and deregulation policies in aviation sectors will cause an imbalance in the implementation of CA 2010 in Malaysia.
Therefore, this study will look at the Malaysian air services sector’s framework in order to indentify the anti competitive conduct exercise under the policy. This study will also look at the provisions of the CA 2010 to identify anti competitive conduct recognized by law. This study will also look at the difference between the frameworks of aviation sector with the provisions of the CA 2010. This is to prove that the existing framework of the aviation sector is unclear, inadequate and not suitable to promote efficient competition. Hence it is an impediment to CA 2010.
It is important to identify the differences and shortcomings in the present framework to ensure the success of CA 2010. Moreover, an empirical study in this field in Malaysia has yet to be found. Therefore, this study contributes to the body of knowledge in this field and it could be a stepping-stone to other relevant studies.
THE BEGINNING OF COMPETITION AS IN 2006 AIR TRANSPORT SERVICES RATIONALIZATION
Since the earlier year, the air services industry in Malaysia is dominated entirely by Malaysia Airlines (MAS) which handles flights on behalf of Malaysia Airlines Bhd (PNB)[9]. However, on March 27, 2006, the then, Prime Minister has announced a restructuring plan for its domestic flight services[10]. This restructuring plan had affected the dominant position of MAS.
The air services restructuring plan or batter phrase, as the rationalization of domestic aviation sector was effective from August 1, 2006[11]. It is made in accordance with the emergence of Air Asia as the new air service operators in the domestic air transport industry in Malaysia.
The rationalization process has been demonstrated ambiguity and confusion in the policy formulated. It’s is a clear evidence to prove the government's intervention in the competitive landscape of domestic aviation sector. The proportion of market reflected this sentiment. Market was split into two different segmentation knows as market of routes based and market based on the type of services offered.
Market for the type of route has been sub-divided into two main sub-market-based; comprising domestic trunk routes and domestic non-trunk route. Determination of major trunk routes is based on international connectivity and business traffic[12]. It focus on the ability of connecting flights from domestic routes to international routes and business-class level. For that purpose, three airports had been appointed as a hub for major domestic routes. Airports involved are the KL International Airport (KLIA), Kuching International Airport and Kota Kinabalu International Airport. Nineteen sets of main domestic routes had also been identified.
The market for fair competition is basically seen in the context of the market in nineteen major trunk routes discussed above. In this context, competition exists when MAS and Air Asia are allowed to operate in concert for the whole route. Both air transport operators are also given freedom to determine their own capacity, frequency and type of aircraft used[13]. This situation should be able to create a climate of healthy competition between the two.
However, rationalization had also limit the competition which should exist in the domestic trunk routes. This is because the market for all nineteen domestic trunk routes have been arranged and sub-divided into two distinct market categories. The market is now seen in terms of types of services rendered[14]. MAS had been instructed to offer premium-class flights and Air Asia is offering low-fare service[15]. The purposed of market segmentation based on services rendered was intended to ensure healthy competition to create an efficient air service and affordable in the domestic aviation sector[16].
To achieve this goal, MAS is subjected to a price limitation set by government. MAS is not allowed to set fares below full economy class fares available[17]. The pre-conditions are meant to ensure the market remains on the type of services provided.
At the same time, the domestic airline industry has allowed Air Asia to have exclusive rights to operate domestic non-trunk routes[18]. Air Asia became a dominant force and form a monopoly to dominated all ninety-six domestic non-trunk routes without any competition. The route also includes flight routes to social services in rural Sabah and Sarawak which was taken over from MAS[19].
Rationalization plan for domestic air route services as discussed above was intended to ensure competitiveness between MAS and Air Asia. However, the policy is quite vague and not consistent with the principles of competition. It is because market as the main element in competition had not been identify. Therefore, relevant market has not been clarified.
Market definition probably refers to the distribution of market sector inclusive of domestic trunk routes and domestic non-trunk air routes. It can also be viewed in the context of market-based type of service offered consisting of premium service and low fares. In this context the service type is not made clear whether it amounts to a market definition or merely re-branding.
It can be said that in the event that market was define based to its diversion between domestic trunk routes and domestic non-trunk routes, therefore the air services industry is promoting fair competition when allowing MAS and Air Asia to compete in all domestic trunk routes. However, routes based market definition is not balanced because competition exists only in domestic trunk route. There is an imbalance in the competition when rationalization allows dominance and monopoly of the market for the domestic trunk routes by giving exclusive rights to Air Asia in all non-trunk route.
THE DEVELOPMENT OF COMPETATIVE CONDUCTS FROM THE YEAR 2006 TO 2011
Rationalization packaged done in 2006 as discussed above, has seen that MAS had surrender its rural air services (RAS) in Sabah and Sarawak to Air Asia. Air Asia operates RAS via FAX. However, in March 2007, Air Asia had withdrawn its RAS service on grounds of focusing on its long-haul low-cost airline services[20].
In 2007, MAS set up a budget airline known as Firefly[21]. Firefly focuses in offering domestic air services via its two main hubs i.e International Airport in Penang and Subang Airport and three secondary hubs including Kuala Lumpur International Airport (KLIA), Kota Kinabalu International Airport and Senai International Airport.
However, following the MAS latest network rationalization program announced in the end of 2011, Firefly has restricted its services offerings in all domestic routes from its main hub[22]. The Malaysian air services industry is now been introduced with another segmentation of market, based to the type of aircraft. The Firefly is now restricting their market operation based to the types of aircraft offered, i.e the ATR 72-500 turboprop[23].
Meanwhile, between the years 2007 to 2011, there was growth in the development of air services industry in Malaysia. Air Asia through AirAsia X had gained access to many international routes. Almost 90% of AirAsia X international routes is said to has overlap with MAS[24].
Further, by the end of 2011, MAS and Air Asia has agreed to a comprehensive corroboration framework (CCF)[25]. Under the CCF, shareholders of the two air services operators swap each other shares in both airlines. The outcome of the CCF shows that both shareholders are now hold interest in both airlines.
The air service framework does not make clear as to whether the formation of Firefly, the overlapping routes between AirAsia X and MAS and the CCF between MAS and Air Asia as highlighted above create competition among the air services operators or its infringe the process of competition.
On the other hand, CA 2010 (which at the time of rationalization had been gazette but yet be enforced) through Malaysian Competition Commission (MyCC) establish a test for market definition and relevant market to settle these issue[26]. Market under CA 2010 refer to a market in Malaysia or in any part of Malaysia, and when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services[27].
Relevant market for the purposed of CA 2010 refers to identifying all the close substitutes for the product under investigation[28]. In order to indentify relevant market, MyCC introduce the test of ‘Hypothetical Monopolist Test’ ("HMT”)[29]. HMT define relevant market as the smallest group of products (in a geographical area) that a hypothetical monopolist controlling that product group (in that area) could profitably sustain a price above the ‘competitive’ price i.e. a price that is at least a small but significant amount above the competitive price[30].
products can be substituted both on the demand and on the supply side. "the smallest group of products (in a geographical area) that a hypothetical monopolist controlling that product group (in that area) could profitably sustain a price above the ‘competitive’ price i.e. a price that is at least a small but significant amount above the competitive price."
This test is commonly used in other jurisdictions with competition law[31]. However, since the events occurred before the enforcement of CA 2010, therefore, the air services framework omit to make clear and confirm on the definition of relevant market in order to confirm the competition practice among air service operator.
MALAYSIAN COMPETITION ACT 2010
Malaysian Competition Act 2010 (CA2010) is a general competition law applicable to all commercial activities both within and outside Malaysia[32]. Section 3(2) states that the application of CA 2010 to any commercial activities outside Malaysian market is apply only when it has an effect on competition in any market in Malaysia. It has specifically clarified the description of commercial activities.
Commercial activities for the purpose of CA 2010 exclude any activity directly or indirectly in the exercise of governmental authority; any activity conducted based on the principle of solidarity; and any purchase of goods or services not for the purposes of offering goods and services as part of an economic activity[33].