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On 15 March 2005, the Fair Trade Commission (FTC) promulgated the Principles for Handling Business Combination Filings by Civil Air Transport Enterprises as the guidance for air carriers to prepare combination notification, and for the FTC to review such notification.
The continued rise in fuel prices, along with in-creases in war risk insurance premiums and airport charges, have raised the operating costs of civil air carriers and squeezed their profits. In addition, the entry into service of Taiwan's high-speed rail system, scheduled for late Octo-ber 2005, is expected to strongly impact the demand for air travel. It is likely that the pres-sure to reduce costs and increase operating effi-ciency will drive air carriers to merge with each other.
According to statistics published by the Civil Aeronautics Administration, the domestic air routes currently in operation in Taiwan are served by only four airlines—Far Eastern Air, TransAsia Airways, Uni Air, and Mandarin Air-lines—and most of the domestic air transport market is highly concentrated in structure. In view of the scale of operations and market share of each carrier, it is very likely that any combi-nation activity between them would meet the current thresholds in terms of sales volume and market share for a business combination to re-quire prior clearance under the Fair Trade Act.
The main content of the Principles is as follows:
Analysis procedure: When considering a combination notification from civil air carriers, the FTC will analyze various factors, includ-ing the definition of the markets affected by the business combination, the combination's impact on competition, its impact on eco-nomic efficiency, and remedial measures.
Definition of markets: In principle, the FTC will take the "city pair" (e.g. Taipei-Kaohsiung) served by an air route as the scope of the immediate market. But it will also consider the substitutability of other air routes serving neighboring destinations, and substitutability between air transport and rail, road, and water transport.
Competition analysis: The FTC will consider factors including market structure, barriers to entry, the unilateral effects of the combination, and its coordinated effects. In principle it is to be hoped that after a business combination, competitors of an equivalent scale will still remain; otherwise the participants will have to adequately justify the merger in terms of effi-ciency gains, or will have to undertake ap-propriate remedial measures to mitigate the effects of the merger and restore the level of competition existing prior to the merger.
Efficiency analysis: the FTC will consider factors of overall economic benefit, such as whether the business combination is condu-cive to reducing operating costs, network ra-tionalization, the effective use of resources, promoting competition, or rescuing a failing enterprise.
Remedial measures: Of their own accord, or after consultation with the FTC, carriers par-ticipating in a business combination may adopt measures such as transferring some of their assets, business activities, route operat-ing rights, takeoff and landing quotas, or time slots to competitors not participating in the merger, in order to mitigate the degree to which the merger reduces competition. When reviewing remedial measures proposed by participating enterprises, the FTC will con-sider factors such as the measures' relevance to the restraints on competition created by the merger, whether they are conducive to re-storing the previously existing level of com-petition, and whether they can be implemented in an effective and timely manner.
Judgment of overall economic benefit versus disbenefits of reduced competition: If the FTC believes that the business combination will have no marked restrictive effect on competi-tion, or that although it will reduce competi-tion, it is adequately justified in terms of effi-ciency gains, or that appropriate remedial measures have been adopted that are sufficient to restore the level of competition existing prior to the merger, then it will find that the overall economic benefit of the merger out-weighs the disbenefits of reduced competition.
