Ever since the civil aviation sector has been liberalized, some significant changes have taken place therein. With Competition Law becoming a touchstone for economic efficiency, it is worthwhile to review the sector with Competition Law prism.
The nature of the civil aviation industry though highly competitive, poses certain unique challenges in the field of competition law. These are by way of the various practices adopted by industry players, the market dynamics that revolve around the functioning of the civil aviation industry, policy frameworks governing the industry, capital requirement, nature of services rendered and so on. It does not allow expedited growth in capacity to meet a rising demand, as development of infrastructure, both airline and airport, takes time. Coupled with this are certain industry programmes such as frequent flier incentives, alliances between airlines, mergers and acquisitions, open price determination and the like which have the capability of acting negatively on the market and require a careful case to case analysis by competition authorities to ensure that they do not cross the line between competitive and anti competitive.
The private sector participation in Indian Civil Aviation sector has come a long way. From Tata Aviation Service in 1932 to its nationalization in 1953 to 1986 when the industry was liberalized and partially opened up to the private sector, allowing them to operate as air taxi operators but not fully designated air carriers. These initially included Air Sahara, Jet Airways, Damania Airways, East West Airlines, Modiluft and NEPC Airways. Further, in 1994 the Air Corporation Act was repealed thus ending the monopoly of Indian Airlines and Air India which had ruled the Indian skies for decades but still enjoyed a formidable market presence.
Aviation is a highly regulated market, where there are natural monopolies, for example of airport operators and bilateral agreements between countries, but which nevertheless requires a fair, open, and transparent competitive environment which understands the context of the airline industry. The opening up of the airline industry has also threatened traditional businesses in the industry. Curiously, they have opted to attempt to use the Competition Act, 2005, as a means to protect practices that were inherently not conducive to a competitive and efficient market. For instance, the Competition Commission of India has accepted the report of the Director General rejecting allegations from TAAI that the shift to a net fare model for travel agent compensation amounted to an anticompetitive agreement and an abuse of dominant position (TAAI has recently appealed the decision). This was the first case brought against some airlines under the purview of the Competition Act. The CCI in accepting the DG’s report collectively demonstrated a nuanced understanding of not only international competition law practice and jurisprudence, but the functioning of the airline industry, and the interplay between the DGCA, the regulator, and competition law.
Other issues which may come under the competition law purview in the airline industry are airline bailouts of Air India and Kingfisher, concerted price action by oil companies on airline fuel, regulations setting minimum and maximum price for tickets, actions by airport operators vis-àvisground handling and fees, to name a few. For instance, the charging of user development fees has been litigated and debated as a consumer and regulatory issue, but not as an abuse of dominant position issue till date.
Going by simple rule of demand and supply, if demand for one good is rising then supply correspondingly is increased to match the demand. However, this does not hold true for the aviation sector as capacity cannot be augmented in response to demand. Airports have a fixed capacity and in terms of their ability to handle traffic. In absence of alternate airports, the major metropolitan airports are becoming congested and are constrained in terms of capacity. Now this may act as a barrier to entry for new entrants as there is acute shortage of slots, ground handling and others.
Capacity constraint benefits the incumbents more than the late entrants as they are able to occupy airport infrastructure on a first come first serve basis. Time is money and carriers understand this very well, that is why carriers like Air India and Jet have strategically timed flights to fit the schedules of the business class. For example, Air India has occupied prime slots and timed its flights at strategic timings such as 7 AM to 12 Noon and 6PM to 9PM. Similar is the case for Jet. However, this entails incumbency benefits as these two incumbents have cornered peak slots on major trunk routes which may deprive other airlines from having access to such peak slots. Typically morning slots between 6:00- 8:00 AM are very popular with businessmen as they can reach their destination by 11 AM, finish off their work and come back by evening. Airlines want to capitalize on this weakness of passengers knowing that they don’t have any alternatives. Passengers flying to Mumbai are unlikely to swap their morning flights with evening flights irrespective of the fare differences. If a person swaps his morning flight and delays his trip by 5 hours ,he is able to save Rs 1000 i.e. effectively Rs. 200 per hour, but the opportunity cost for his business would any day be more than the income saved.
This is the reason that despite their being availability of oddly timed cheaper tickets on low cost airlines, most of Air India and Jet’s executive class seats for peak slots show full when checked for availability, one day before departure. Carefully examining the schedules, we find heavy presence of Jet and Air India on morning flights and evening flights. Both the carriers have chosen very strategic time slots. Therein lies the catch for abuse of dominance. These carriers will have enhanced pricing power with reference to exploiting the business class.
The system works best, however, when all airlines have an equal stake. At the time when all participating airlines had a strong influence over the allocation of slots at their home base, the slot allocation exercise was unlikely to leave any significant participants strongly dissatisfied.
What are the Competition Law issues in civil aviation industry in India?
Section 3 of the Competition Act, 2002 prohibits associations or enterprises to enter into an agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.
The Competition Act, 2002 inter alia prohibits : (a) Anti-competitive agreements; (b) Abuse of dominance and (c) Regulation of M&A. There are some characteristics that are intrinsic to the aviation industry in India that are increasingly being viewed as anticompetitive, such as, Frequent Flier Programs & Travel Agent Incentive Schemes. Airlines use the above-mentioned loyalty programs to distinguish between business & leisure travellers. The ones travelling for business purposes may not be able to plan and wait for the best prices available as compared to the leisure travellers who generally would take into account of the cost factor so that they benefit from a wide choice of routes available & also a higher level of competition.
Further, price transparency in the system of fare declaration also has potential of being misused as it could enhance the chances of collusion and may be termed as anti-competitive. The air transport policy have some features for example minimum fleet size, route dispersal guidelines, experience requirement may also have anticompetitive effects.
In 2006 & 2007, the Indian aviation sector witnessed its biggest merger so far when Jet Airways (“Jet”) announced its acquisition of Air Sahara (“Sahara”) for an estimated Rs. 2,300 crores (US$ 500million). The Jet Sahara deal created quite a stir in the aviation industry, and competitor airlines felt that the merger would create a monopoly, as Jet, who already enjoyed a dominant position in the Indian aviation sector, would gain further market share post-merger. The second significant deal was Kingfisher – Air Deccan merger which was seen as strategic merger in the aviation sector. The third one was Air India – Indian Airlines merger which was aimed to consolidate the two state run carriers to optimise the use of assets. All these significant M& A deals in the Aviation sector have escaped the scrutiny of Competition Commission, because most important provisions of the Competition Act relating to anti-competitive agreements, abuse of dominant position and regulation of combinations had not come in force.
If such deals have to happen today, definitely the nitty gritties of the deal may be considered and evaluated by the Competition Commission from all angles of the Competition Act.
Which factors specifically should be looked into by the CCI for bringing efficiency in the sector?
There are some regulatory barriers inherent in our domestic air transport policy which may constrain new entry and have anticompetitive effects. The regulations governing minimum fleet size , minimum equity requirements, route dispersal guidelines to the domestic operations and experience requirements for international operations and exclusive right to national carriers to fly to Gulf Routes, etc., may also be termed as entry barrier and anticompetitive.
Some of the other constraints which act as entry barriers are Slot Constraint, Landing and take off Rights, which are referred to as Slots are important consideration for a new entrant in the sector as peak timed slots registers higher passenger load factors as compared to the oddly timed slots, but are scarcely available. These factors may be considered by the relevant authority to determine whether such provisions in the policy are affecting the competition in the aviation industry.
One of the most important considerations in front of the Commissions across the world when evaluating cases from a competition angle is to consider the possibility of new entry.
The Competition Authorities may not interfere in a case even if an existing incumbent is making super normal profits by abusing his dominant position. Reason being the possibility of new entry which would erode the incumbency benefit and bring prices back to the normal level. However, problems may arise in those cases where the incumbency benefits cannot be checked by possibility of new entry. This is indeed the problem with the Airline Industry. There isn’t free entry in this industry. New entry is curtailed owing to the regulatory barriers are capacity constraints (namely slot allocation competition in vertically related markets) and hence an important source of competition is and will be lost.
A cartel is a group of formerly independent producers whose goal is to increase their dominance. Any agreement which causes or is likely to cause, appreciable adverse effects on competition in markets in India is prohibited. Any such agreements will be void.
All M&A are bound to come under CCI’s lens if the prescribed turnoverlevels for M&A are assets of the merged entity if is more than Rs. 1000 Crores or a turnover of more than Rs 3000 Crores (these limits are US $ 500 million and 1500 US$ in case one of the firms is situated outside India.).
Indian skies saw unprecedented airline mergers and acquisitions, in 2003 with Jet Airways buying out Sahara (later rebranded and launched as Jet-Lite) and the government announcing the amalgamation of Indian Airlines and Air India (first as ‘Indian’ and later as ‘Air India’). Kingfisher airlines bought over Air Deccan in a surprise deal and rebranded the revolutionary carrier as its low cost wing, Kingfisher Red. These playerscollectively, post consolidations have a claim of over 80% of the market share.
Jet Sahara – 7000 Crores, Kingfisher Deccan – 6000 Crores, Indian Airlines Airindia – 15000 Crores. Hence, all three mergers comfortably qualify for the Competitive scrutiny of CCI for any possible anti-competitive effects and abuse of dominance cases.
Under Section 4 of the Competition Act, 2002, the Commission considers some factors in determining whether a combination would have or is likely to have appreciable adverse effect on competition in the relevant market.
Strategic alliances fall short of outright mergers and in particular, preserve the participant’s identity and autonomy. They constitute a framework within which the participating airlines are committed to developing extensive cooperation in technical, commercial and operational areas. Typically the alliance will endeavour to attain economies of scale by joint equipment purchasing and maintaining, insurance, personnel training etc. Difficulties would arise where the cooperation eliminates competition on aroute or where the partners control access to essential facilities.
An effective enforcement of the Competition Act, 2002, and also the CCI entering into MOUs with competition authorities in other countries such as the Federal Trade Commission, EU Competition Commission among others to ensure better coordination and more effective investigation can work wonders form competition perspective. This includes adding the concept of antitrust immunity to the Act by defining it so that it may easily be applied to the various provisions of the Competition Act in a more transparent manner. Apart from this, having “open skies” agreements which are less restrictive in regard to the number and identity of airlines and routes or capacities that can be flown rather than bilateral air agreements which restrict the number of airlines as seen in the proposed BA/AA alliance.
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