Revisiting the Failing Firm Defence in Light of Airline Mergers.

[By Tanvi Shetty]

The author is a student at the O.P. Jindal Global University


Despite the Centre allowing for 100% FDI (i.e., A foreign carrier can invest up to 49% in an Indian firm)[1] and easing of pre-requisites for a carrier to operate on international routes[2], the airline industry is often in a slump given its dependency on the fuel prices and labour-intensive operations. Most Indian carriers fail to break even and many airlines such as Jet Airways have shut shop. With the onset of the pandemic and the general sag in the airline industry, firms have sought to combinations to increase efficiencies and break even. The Competition Commission of India (“CCI”) is likely to review such mergers in order to analyse the potential Appreciable Adverse Effects on Competition (“AAEC”) and a strong defence at the perusal of such airlines is the “failing firm defence”. The defence enunciates that in the absence of a merger, the assets of the failing firm would entirely exit the market thereby affecting market competition adversely.

The failing firm defence was revisited in context of Covid-19 and the conversation opened up in different jurisdictions. Various anti-trust regulators acknowledged how mergers and consolidations may ensue in the market given the depleting state of economies globally. While the CCI issued an advisory note to businesses, there was no mention of facilitation of mergers. The note was limited to s.3(3) of the Act focusing on arrangement that would increase market efficiencies considering Covid-19[3]. Nevertheless, the Act under s.20(4)(k)[4] recognises it as a defence and the matter is often reviewed closely and linked to insolvency proceedings (IBC proceedings)[5].

On a global stage , the ‘failing firm’ defence has been used restrictively. In the EU, the commission’s rulings on the Aegean/Olympic II[6]shed light on how a previously declined acquisition of airline was approved amidst the plummet of the Greek Economy. In the present case, the two airlines had applied before the European Commission for sanctioning of their merger amidst the global financial crisis of 2008. They were refused on grounds of lack of sufficient evidence being provided to the commission to meet the requirements of a failing firm. The burden of proof was that the deterioration in market competition was not a direct result of the merger and even in the absence of the merger, the competitive structure was likely to deteriorate[7]. Stemming from this there are three criterions that the commission looked at in their assessment: 1) Failing the consummation of this merger, the firm would be incapable of existing; 2) It is the least anti-competitive measure available; 3) In the absence of the merger, the assets of the firm would exit the market[8].

Premised on these three defining factors, the assessment of the commission focused on the failing state of Greek economy which had made it non-viable for firms to break-even. They analysed if the parent group, Marfin Investment Group, and its subsidiaries could sustain the losses of Olympic Airlines . Furthermore they assessed if there were any other potential buyers who were willing to acquire assets of the airlines or the firm in general. Subsequent to such assessment, the ‘failing firm’ defence was upheld, and the transaction was allowed in 2013 by the commission.

 In the recent acquisition of Asiana by Korean Air, however, the Korean Fair-Trade Commission (“KTFC”) did not accept the failing firm defence, despite the depleting financial health of the carrier and the prevailing pandemic. The idea was that the firm should be non-viable, meaning the company is one that is insolvent or expected to become so soon due to the serious deterioration of its financial structure[9]. This approach once again recapitulates the intersection between insolvency and anti-trust regulations as merely being in a “weak” financial state would not be alone effective.

Considering the same, airline carriers looking to merge or be acquired must have to ensure that their perusal of the “failing firm” defence is substantially backed. A mere argument that the pandemic has affected the operations of a carrier alone may not be sufficient as the pandemic is a “temporary” economic occurrence[10] and economies have begun to heal in the aftermath of it.

Nevertheless, various reports[11] portray how the airline industry may take a while to recover and carriers can broach the argument that the firm would not be able to sustain long enough to reap the benefits of the market recovery. It would be ideal for carriers approaching the commission to adopt an industry specific approach, wherein rather than arguing that their position is “weaker” with regards to other competitors, the inability of the firm to recover post the pandemic would have to be established. It would be ideal to show how there is an inability to make good on the debt in the long run and if the entity is being held by a company, further research supporting the poor financial state of the holding company must also be placed before the commission. In consonance with the Aegean/Olympic II order, the carriers can provide financial evidence to establish and fulfil the three criterions as has been adopted by the EU.

However, a policy conundrum pops-up when it comes to whether thresholds for the failing firm defence are to be lowered or not. While the debate on the same is ongoing, this post argues how the aftermath of Covid-19 combined with the pre-existing state of the airline industry calls for the Indian regulator to reconsider the thresholds that have been set for the “failing firm defence”..

Airlines are capital extensive industries that often fail to break even and there runs a risk in suggesting a lowering of thresholds as the same may be the cause of various carriers consolidating and using the defence to their own benefit. What needs to be noticed here is that in crisis such as the pandemic and ongoing recession, the policymakers at the centre have two choices : 1) They can either increase state aid for financially unstable firms and redirect the tax-payers money to the same or 2) They can allow for such consolidations to happen which may create synergies that benefit the consumers and may not end up affecting the competition drastically[12].

Speaking from the perspective of the airline industry, the Indian government had introduced the UDAN scheme which focused on improving air-travel and connecting Tier-2 and Tier-3 cities with metropolitans and offering benefits to carriers on excise paid on fuel[13]. The scheme however failed to consider that many airlines do not possess the fleet to fly such regional routes. The pre-existing factors coupled with the pandemic depict how state aid may be an ineffective route to revitalise an industry. The airline industry is an oligopoly, and it has a restricted number of players given the high entry barriers. A firm exiting the market would be much more onerous on the consumers than a consolidation especially since the ticket costs would surge. In comparison, a merger may lead to minimal anti-competitive effects. It could be established that the AAEC that is caused would occur even without the consummation of the merger as there would be a reduction in market competition. The SLC (Significant Lessening of Competition) test that the EU adopts can be established here by firms as a way of evidencing their state. By depicting how the exit of a firm in an oligopolistic market would lead to substantial reduction in competition could help substantiate the failing firm defence better. In an oligopoly there is either collusion amongst players or a price-setter wherein the others follow suit. The exit of a player would not only restrict the market more but may also allow for higher prices adversely affecting the consumers.

While the argument made above in no way calls for the CCI to lower its threshold for airlines, there may be a need to look at it from an industry specific perspective wherein over and above establishing the three criterions, the commission can also account for the capital extensive nature of the industry and the overall synergies that consolidations may create. It befalls upon the airlines interested to consolidate to establish and evidence the relevant factors to enable CCI to look at the transaction in a holistic manner.


[1]Tripathi, Dhirendra,Mint, “WHY IS THE RATE OF FAILURE OF AIRLINES SO HIGH IN INDIA?”,16 July 2019,, ( last visited on Oct.22 , 2022)

[2]Prior to 2016, airlines needed to fly domestic for 5 years and must have had a capacity of 20 carriers to fly abroad. However, this pre-condition has now been altered to airlines being required to fly on 20 domestic routes before they can fly internationally.

[3]Competition Commission of India , ADVISORY TO BUSINESSES IN TIMES OF COVID-19,April 19,2020,

[4]The Competition Act,2022 , §.20(4)(k)

[5]Combination Registration No. C-2018/07/582

[6]Aegean/Olympic II (Case No COMP/M.6796)

[7]Aegean/Olympic II (Case No COMP/M.6796),p.142

[8]Council Regulation (EC) No 139/2004

[9]Lee, Jae Woon and Chung, Sabin, The Korea Fair Trade Commission’s Conditional Approval of the Korean Air-Asiana Merger (August 10, 2022). Vol 43 Issue 8, European Competition Law Review (2022), The Chinese University of Hong Kong Faculty of Law Research Paper No. 2022-32 ; Monopoly Regulation and Fair Trade Act ,1990 ( Korean Merger Guidelines)

[10]AssimakisKomninos,Iakovos Sarmas, White & Case LLP“A RE-AWAKENING OF THE FAILING FIRM DEFENCE IN THE EU IN THE AFTERMATH OF COVID-19?”, 16 Apr. 2020,, (last visited on Oct.24 , 2022)

[11]Weston, Geoffrey, et al, Bain&C.,“AIR TRAVEL FORECAST: WHEN WILL AIRLINES RECOVER FROM COVID-19?” , 20 Oct. 2022, , (last visited on Oct.29 , 2022)

[12]John Bruce, Mat Hughes et al , “THE FAILING FIRM DEFENCE DURING AND POST-COVID-19: POLICY AND THE EVIDENCE REQUIRED.”, April 29 2022 , Competition Law Journal (Vol 21 Issue 1),2022

[13]Hindustan Times,“COVID-19 PANDEMIC TO HIT CENTRE’S AMBITIOUS REGIONAL CONNECTIVITY SCHEME UDAN.”  1 Nov. 2020, , (last visited Oct.30 ,2022)


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