Airline competition in focus amid shake-up of mergers legislation

The largest 1 per cent of firms make around half of all acquisitions. Picture: Getty Images

New studies have shown when two airlines fly the same route, fares drop 29 per cent and by 51 per cent when three fly in competition.

The figures were cited in a speech on Monday night by Competition Minister Andrew Leigh to the Chifley Research Centre in Melbourne.

The wide ranging speech comes as the government is due to consider stronger merger laws with submissions on the proposals to make merger notification compulsory and require the merger parties to show the deal doesn’t hurt competition.

The onus of proof is now on the Australian Competition and Consumer Commission.

Leigh noted the government’s Competition Taskforce has teamed up with Professor Robert Breunig at the Australian National University for a project looking at airline competition.

The government is under fire for blocking attempts by Qatar Airlines to land more flights to Australia in competition with Qantas.

Leigh said the new work “adds to the relatively limited evidence base demonstrating the relationship between competitive pressures and consumer prices.

“Initial work by Omer Majeed and co-authors shows how competition has had a significant downward impact on fares,” he said.

“When one airline services a route, airfares average 39.6 cents per kilometre. With two competing airlines, the average fare drops to 28.2 cents. With three competitors, to 19.2 cents. In other words, the price per kilometre is halved when three competitors fly a route compared with the situation when there is only a single monopoly airline. With four or five competitors, the price drops further still. (They find these results for all routes and the top 200 routes by passenger traffic.)”

Leigh said he backs ACCC pleas for compulsory notification, noting: “Under the voluntary notification system, the Australian Competition and Consumer Commission has considered about 330 mergers each year on average over the past decade.

“Initial results from the mergers database tracking labour flows suggests there are many more mergers than this each year, somewhere between 1000 and 1500,” he said.

“For every merger that is notified to the Australian Competition and Consumer Commission, there are two to three more mergers and acquisitions that take place,” Leigh said.

The Minister also noted: “Acquisitions are disproportionately made by huge firms. The largest 1 per cent of firms make around half of all acquisitions.

“The data also shows that larger firms have increased merger activity over the 2010s and that acquisitions are most common in manufacturing, retail, professional services, and health and social services.”

Leigh claimed: “The database shows target merger firms are more likely to have a trademark or patent compared to an average firm. Merger target firms are more than twice as likely to have a patent (0.4 per cent relative to 0.15 per cent of firms overall) and almost twice as likely to have a trademark (4.5 per cent relative to 2.4 per cent of all firms)

“This highlights the purchase of intellectual property as a possible motivating factor behind mergers,” he said.

On the issue of non-compete clauses which Leigh is opposing, he said: “An online survey conducted by Dan Andrews from the e61 Institute and Bjorn Jarvis from the Australian Bureau of Statistics found that one in five Australian workers is subject to non-compete clauses.”

Leigh also added: “The academic literature highlights a curious fact about mergers. According to work by Geoff and J. Gay Meeks, only one in five research papers find that the typical merger boosts profits or sharemarket value.

“In a book titled The Merger Mystery: Why Spend Ever More on Mergers When So Many Fail?, they point out that mergers often boost the remuneration of managers, while leading to lay-offs among workers. For the sake of shareholders, workers and citizens, it is important to ensure that Australia’s regulatory system is not facilitating value-destroying mergers,” Leigh said.

The Minister argued: “Productivity growth and living standards rely on competition, which is why it is central to our economic agenda for building a stronger economy and a fairer society.”