Antitrust laws and their impact on Korean Air’s proposed merger with Asiana Airlines

A classic example of antitrust law lies within the European Union law, where Article 102 of the Treaty on the Functioning of the European Union, prevents anticompetitive behaviour by a business through exploitation of a dominant position in the market.[1] A breach of antitrust laws, such as an unlawful or anticompetitive merger and acquisition, could result in authorities revoking the deal or demanding a change in the contract. This article will explore the effects of antitrust laws on Korean Air Co. Ltd’s (KAL) turbulent journey to acquire Asiana Airlines Inc.

(Source: The Soul of Enterprise, accessed on https://www.thesoulofenterprise.com/tsoe/antitrust)

Origin Of Antitrust Law

 Antitrust law dates back to the United States (US) Sherman Antitrust Act 1890. It is a US federal statute which “prohibits activities that restrict interstate commerce and competition in the marketplace. It outlaws any contract, conspiracy, or combination of business interests in restraint of foreign or interstate trade”.[2]  Without such laws, a business may easily gain a dominant position and create a monopoly which would obstruct the balance between the producer and consumer, leading to a surge of shortages and increased prices.[3] Antitrust laws regulate healthy market competition which is essential to four key economic concepts – scarcity, supply and demand, costs and benefits, and incentives. This encourages lower priced, higher quality, and more innovative products for consumers to choose from. [4] Within the EU, competition law is derived from Articles 101 to 109, listing the trade regulation within the internal market which may affect the trade between Member States. In Article 101 (1) (c)(d), it is prohibited from “sharing markets or sources of supply”[5] and to “apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”.[6]

 Antitrust law has had a strong impact on approving M&A. They prevent monopolies by ensuring that deals do not allow overly dominate market power from one company.[7] The laws are also implemented to dissolve existing firms that have unlawfully formed monopolies within their industry to establish fair practice. Today, antitrust laws are crucial at maintaining a stable and safe economy for both consumers and producers.

(Picture credit- Joe Pries, accessed on https://aviationweek.com/air-transport/airports-networks/korean-air-moves-toward-completing-asiana-buy)

Breach Of Competition by KAL

In November 2020, KAL sought to acquire Asiana Airlines. However, in February 2023, the European Commission (EC) voiced its concerns that this acquisition would greatly reduce the competition in the commercial and cargo markets between EU and South Korea. Concurrently, the Department of Justice (DOJ) was considering a lawsuit to thwart this deal. [8] Japan also opposed this deal, claiming that KAL would monopolise this sector; it is currently under review by Japan Fair Trade Commission.[9] In a desperate attempt for approval, KAL has proposed to minimise its monopoly by renouncing four of its EU member routes, specifically to Rome, Frankfurt, Paris and Barcelona.[10] Moreover, KAL has managed a belated agreement with Asiana Airlines’ board of directors to sell their cargo unit. It is in KAL’s hopes that this revised plan would receive the full support from the EC, DOJ and Japan Fair Trade Commission.[11] Should a certain firm exhibit anticompetitive behaviour such as that of market dominance, this adversely impacts the supply of feasible options, leaving consumers worse off. This is the situation in the proposed merger. As Asiana Airlines was KAL’s only rival, this merger would make KAL South Korea’s dominant carrier, removing any possible competition.[12] Through a full-scale investigation of the deal, EU antitrust regulators has claimed that this “transaction could reduce competition in the provision of passenger transport services”.[13]

 The economic concept of scarcity would be greatly hindered by this merger. Scarcity is defined as the “demand for a good or service is greater than the availability of the food or service”.[14]  If the merger is accepted, KAL would be required to handle most international flights departing South Korea. They would have to cater to demands twice the size from their usual pool of consumers. The supply and demand would inevitably be affected and KAL would likely increase the prices due to the extra workload and demands.[15]

 Apart from consumers, employees are equally affected by anticompetitive acts. More often than not, M&A leads to job losses and poor morale.[16] Paid Asiana Airlines employees have been observed to showcase a visible drop on morale due to increased possibilities of a pay cut or job loss.[17] Furthermore, their concerns could also be stemmed from Asiana Airlines’ limited ability to expand and grow. With the unique branding of Asiana Airlines dissolved by KAL, employees may be less devoted. Despite KAL’s guarantee to retain employment, skepticism has aroused especially after Jing Kwang-ho, a former internal board member against the merger, was pressured to resign from those in favour. [18]

 A Similar Story - Jetblue and American Airlines

Recently, the DOJ has ordered American Airlines and JetBlue Airways to abandon their partnership called the Northeast Alliance.[19] According to U.S. District Judge Leo Sorokin, American and JetBlue clearly breached the antitrust law by “replacing full-throated competition with broad cooperation”. [20] The partnership was essentially an indirect method of price fixing where the airlines were selling seats on each other’s flights, greatly reducing competition. An economist under the Biden administration discovered that consumers would spend more than $700 million a year extra due to this breach of antitrust regulations. [21] Due to their anticompetitive measures of controlling the prices and option for consumers, the alleged partnership was swiftly brought down. This draws resemblance to the proposed KAL merger of Asiana Airlines. It portrays the DOJ’s stance, which might mirror other relevant authorities’ rulings.    

Final Verdict

The decision has yet to be made by the remaining parties – EC, DOJ and Japan Fair Trade Commission. However, the future for this merger seems bleak for KAL. Despite the updated proposal, the fact that KAL emerges as the sole dominant carrier reduces any competition in the South Korea market. Drawing links from the failed Northeast Alliance, this is a clear breach of the antitrust law and there is a slim chance for this merger to be accepted.

[1] Consolidated version of the Treaty on the Functioning of the European Union [1957] OJ C 115, 9.5. 2008, 89

[2] ‘Sherman Antitrust Act’ (Legal Information Institute) <https://www.law.cornell.edu/wex/sherman_antitrust_act> accessed 01 November 2023 

[3] Papandreou, A. G. (1949). Market Structure and Monopoly Power. The American Economic Review, http://www.jstor.org/stable/1810487

[4]Mohammad Shahjahan Siddiqui, “Defining the importance and challenges of market competition” (2023)  

[5] Article 101 2008

 [6] Id

[7]Twin A, ‘Antitrust Laws: What They Are, How They Work, Major Examples’ (Investopedia)<https://www.investopedia.com/terms/a/antitrust.asp#:~:text=Antitrust%20laws%20are%20regulations%20that,firms%20that%20have%20become%20monopolies> accessed 03 November 2023 

[8] ‘Biden Administration May Sue over Korean Airline Merger’ (POLITICO) <https://www.politico.com/news/2023/05/18/doj-lawsuit-korean-airline-merger-00097547> accessed 3 November 2023 

[9] Sakamaki S, ‘Korean Air’s Planned Acquisition of Asiana Airlines under Japanese Competition Review, with Possible Focus on Korea-Japan Routes: Mlex Market Insight’ (MLex, 6 November 2023) <https://mlexmarketinsight.com/news/insight/korean-air-s-planned-acquisition-of-asiana-airlines-under-japanese-competition-review-with-possible> accessed 3 November 2023 

[10] Min-hyung L, ‘Asiana’s Board Votes in Favor of Delayed Takeover by Korean Air’ (koreatimes, 3 November 2023) <https://www.koreatimes.co.kr/www/tech/2023/11/129_362457.html> accessed 3 November 2023 

[11] ‘Korean Air-Asiana Merger Faces Further Delays from European Regulators’ (Airline Weekly, 20 March 2023) <https://airlineweekly.skift.com/2023/03/korean-air-asiana-merger-faces-further-delays-from-european-regulators/#:~:text=Korean%20Air%20is%20a%20member,member%20of%20the%20Star%20Alliance> accessed 3 November 2023 

[12] ‘Mergers: Commission Opens in-Depth Investigation into Proposed Acquisition of Asiana by Korean Air’ <https://ec.europa.eu/commission/presscorner/detail/en/ip_23_925> 

[13] Chee FY, ‘Korean Air-Asiana Deal May Hurt Competition, EU Says, Opening Probe’ (Reuters, 18 February 2023) <https://www.reuters.com/markets/deals/eu-regulators-investigate-korean-airs-proposed-takeover-asiana-2023-02-17/> accessed 13 November 2023 

[14] Mergers: Commission Opens in-Depth Investigation into Proposed Acquisition of Asiana by Korean Air’ <https://ec.europa.eu/commission/presscorner/detail/en/ip_23_925> 

[15] Mergers: Commission Opens in-Depth Investigation into Proposed Acquisition of Asiana by Korean Air’ <https://ec.europa.eu/commission/presscorner/detail/en/ip_23_925> 

[16] Muhammad UK, ‘Global Business and Management Research: An International Journal (2012)’ (2012) 4 Mergers, Acquisitions and Downsizing: Evidence from a Financial Sector 

[17]  Lee M, ‘Asiana Employees Anxious about Security after Unit Sale’ The KoreaTimes (6 November 2023) 

[18] Id 

[19] Press TA, ‘American Airlines and JetBlue Must End Partnership in the Northeast U.S., Judge Rules’ (NPR, 20 May 2023) <https://www.npr.org/2023/05/20/1177295597/american-airlines-jetblue-must-end-partnership-judge> accessed 18 November 2023 

[20] Rubin J, ‘Judge Calls American Airlines-JetBlue Alliance a Naked Restraint of Trade’ (IR Global, 5 October 2023) <https://irglobal.com/article/judge-calls-american-airlines-jetblue-alliance-a-naked-restraint-of-trade/> accessed 18 November 2023 

[21] Koenig D and Press TA, ‘American Airlines, JetBlue Alliance Was “a Naked Agreement Not to Compete with One Another,” Judge Rules’ (Fortune, 20 May 2023) <https://fortune.com/2023/05/20/american-airlines-jetblue-northeast-alliance-naked-agreement-not-to-compete/> accessed 18 November 2023