(i) the names of the merger parties;
a. Korean Air Lines Co., Ltd. (“Korean Air”); and
b. Asiana Airlines, Inc. (“Asiana”),
(collectively, the “Parties”).
(ii) a description of the transaction;
On 17 November 2020, Korean Air entered into a share subscription agreement with Asiana, pursuant to which Korean Air will subscribe for and purchase from Asiana 131,578,947 shares of common stock, amounting to KRW 1.5 trillion (approx. S$1.79 billion) and representing 63.88 per cent. of the total issued and outstanding capital stock of Asiana (the “Transaction”).
(iii) a description of the business activities of the merger parties worldwide and in Singapore;
Korean Air is primarily active in four main activities globally: (i) passenger air transport services; (ii) air cargo transport services, (iii) aerospace, and (iv) hotel businesses.
In Singapore, Korean Air provides only passenger air transport services and air cargo transport services.
Asiana engages primarily in domestic and international airline services, including both passenger and cargo, a telecommunications business, and air transport support services, among others globally. Asiana IDT operates the telecommunications business and provides IT services, while Asiana Air Port operates the air transport support services (air cargo loading/unloading and ground operations). Asiana’s other subsidiaries include: Kumho Resort (a resort condominium and golf resort), Weihaipoint Hotel & Golf Resort (a hotel and golf resort in Weihai, China), and Kumho T&I (other financial services).
In Singapore, Asiana provides only passenger air transport services and air cargo transport services.
(iv) a description of the overlapping goods or services, including brand names;
The Parties overlap in:
- the supply of bidirectional passenger air transport services between Singapore and Seoul (the “Overlapping Passenger Air Transport Route”); and
- the supply of international air cargo transport services on the following unidirectional routes: (a) Singapore to Korea, (b) Korea to Singapore, (c) Singapore to China, (d) China to Singapore, (e) Singapore to Japan, (f) Japan to Singapore, (g) Singapore to North America and (h) North America to Singapore (the “Overlapping Air Cargo Transport Routes”).
(v) a description of substitute goods or services;
Passenger air transport services
Substitutes of passenger air transport services on the Overlapping Passenger Air Transport Route are passenger air transport services by other competing airlines on the Overlapping Passenger Air Transport Route.
Air cargo transport services
Substitutes of air cargo transport services on the Overlapping Air Cargo Transport Routes are air cargo transport services by other competing providers that operate on the Overlapping Air Cargo Transport Routes.
(vi) the applicant’s views on:
a. definition of the relevant market(s);
The Parties submit that the relevant markets are:
- the supply of bidirectional passenger air transport services between Singapore and Seoul (i.e. the Overlapping Passenger Air Transport Route); and
- the supply of international air cargo transport services on the following unidirectional routes: (a) Singapore to Korea, (b) Korea to Singapore, (c) Singapore to China, (d) China to Singapore, (e) Singapore to Japan, (f) Japan to Singapore, (g) Singapore to North America and (h) North America to Singapore (i.e. the Overlapping Air Cargo Transport Routes).
b. the way in which competition functions in this market;
Passenger air transport services
Passenger demand for air travel is influenced by a variety of factors, including but not limited to price, flight scheduling and connectivity, frequent flyer programme and rewards, nationality of carrier and safety record. These factors taken in combination will influence an individual passenger’s demand preferences, depending on the origin and destination (“O&D”) route he/she is travelling on.
Air cargo transport services
The air cargo transport services industry is generally characterised by intense price-competition. The air cargo transport market is currently characterised by an excess of capacity, which grants customers (such as freight forwarders) strong bargaining power over air cargo transport service providers. Freight forwarders, who act on behalf of individual customers, have significant incentives to pressure the air cargo transport service providers to lower their prices to the extent possible in order to increase his own margins, given the pressure exercised by the downstream end customer. In other words, if an air cargo service provider is unable to meet the freight forwarder and customer’s demand, the freight forwarder can simply move to another service provider, of which there are many, in pursuit of the best price and service.
c. barriers to entry and countervailing buyer power; and
Barriers to entry
There are no material barriers to entry or expansion in the passenger air transport services market or air cargo transport services market. Singapore adopts a liberal aviation policy which gives airlines complete flexibility to respond to market opportunities.
In relation to slot allocation, despite slot congestion in Singapore Changi Airport (“SIN”), carriers would still be able to expand their capacity through aircraft up-gauging or updating aircraft seat configurations. In addition, slot congestion at SIN will be alleviated through the infrastructure developments being undertaken by the Changi Airport Group (“CAG”). CAG is in the process of building a third runway at SIN, and the three runway system is targeted for operational use in 2024/25, which will increase SIN’s capacity. It has also been reported that in early 2030s, Terminal 5 will also be ready which will further increase capacity. In Korea, while Incheon International Airport (“ICN”) is a fairly congested airport, the congestion levels have in the past not prevented carriers from launching or expanding their capacity on O&Ds to/from ICN. In particular, slot allotment at these airports is organised in such a way that new airlines are given priority so that they are able to compete with the Parties. As such, slot allocation at these airports cannot be categorised as a material barrier to entry.
Moreover, as opposed to passenger services, air cargo does not require slots for a precise schedule. On the contrary, cargo operations can easily take place at night. Therefore, any carrier with surplus aircraft can enter the market with ease or increase frequency on a given route.
Ease of switching and countervailing buyer power
There are no switching costs involved when a passenger decides to switch between carriers when booking a new journey or itinerary. Passengers can, and do, easily switch between a range of available carriers, including both full service carriers and low cost carriers.
Similarly, there are no switching costs when a customer (e.g. freight forwarder) decides to switch between air cargo service providers. Typically, there is no cancellation fee if a forwarder decides to cancel an order. Therefore, it is easy for forwarders to switch between carriers.
In addition, the air cargo transport market is currently characterised by an excess of capacity, which grants customers (such as freight forwarders) strong bargaining power over air cargo transport service providers. The Parties consider that such bargaining power would in itself alleviate any potential concerns of an alleged increased market power of the Parties on any individual cargo route market following completion of the Transaction.
d. the competitive effects of the merger (non-coordinated, coordinated and/or vertical effects, as relevant).
The Parties submit that non-coordinated effects will not arise as a result of the Transaction due to:
- the wide range of competitors that currently exist in the provision of passenger air transport services and air cargo transport services on the Overlapping Passenger Air Transport Route and Overlapping Air Cargo Transport Routes, which can expand their operations in response to any hypothetical increase in prices or reduction in the quality of services or flight offerings;
- the absence of material barriers to entry or expansion on the Overlapping Passenger Air Transport Route and Overlapping Air Cargo Transport Routes;
- the ability of passengers and customers to switch easily between airlines and air cargo transport service providers, and the strong countervailing buyer power of customers of air cargo transport in a market characterised by excess capacity; and
- regulatory constraints in relation to airfares and air freight fees, such that the merged entity will simply not have the liberty to set its prices freely, even if it would be hypothetically considered to have gained market power on certain routes.
The Parties submit that coordinated effects will not arise as a result of the Transaction as:
- there are numerous competitors in the provision of passenger air transport services and air cargo transport services, and the ease of switching by passengers / customers in these markets creates strong commercial incentives for carriers to continue pricing competitively, creating instability and reducing sustainability of coordinated behaviour; and
- there is an absence of material barriers to entry in the provision of passenger air transport services and air cargo transport services generally, and accordingly high potential for increased competition, which similarly creates disruptive effects and reduces sustainability of any coordinated behaviour.