-by Rishabh Warrier
The Indian aviation market has seen very tumultuous conditions, with frequent bankruptcies and shutting down of companies. The recent demise of Jet Airways, at one point holding the highest share in the Indian Market, and others like Kingfisher and Air India are prime examples. The Indian aviation sector is no stranger to violations of the Act, 2002. These violations have been a result of, but not limited to, introduction of anti-competitive clauses and unfair alliances. Additionally, while initially the strict licensing given by the government had led to monopolistic behaviours by public sector companies, at present, there exists a certain cartelisation by the private sector companies. The article delves into the interface between competition law and the aviation sector.
Aviation Sector no Stranger to Anti Competitive Elements
The aviation industry has been, in the past, criticized for allegedly flouting competition law rules. The said allegations pertained to the fact that certain airlines had colluded to introduce a “fuel surcharge” for transferring cargo. A price was fixed at 5 rupees, yet there was a certain increase in the fuel surcharge price which did not entirely correspond with the amount of increase in fuel prices. The above mentioned introduction of this surcharge along with its increase was said to be in contravention of §3 of the Competition Act, 2002. §3(1) read with §3(a) of the Act, which states that collusion leading to determining prices as a cartel or doing an act that shall have an adverse effect on competition in India be deemed an ‘anti-competitive’ practice.
A case was filed against 5 airlines, Jet Airways, SpiceJet, GoAir, Indigo and Air India for price collusion. In this case of Express Industry Council of India v. Jet Airways and ors., the CCI enquiry committee held that, “holistic and comprehensive appreciation of revisions effected by the airlines in FSC indicates concerted and coordinated efforts by the airlines”. Henceforth, the committee held 3 of these companies, Indigo, SpiceJet and Jet, to have violated §3 of the Act, 2002. While conduct which runs parallel to each other is generally allowed, it is only acceptable when done independently without the knowledge of others.
Such behaviour in the aviation industry, though, is far from surprising due to the very nature of the aviation industry. The Indian aviation industry has been dominated by very few players which results in what may be termed as an collusive oligopoly. In an oligopoly, firms, as they have an equal market power, may collude to attain mutual benefit. The possibility of anti-competitive elements in such a market is higher due to various barriers to entry, which help in collusion. Very high ATF (fuel) prices and a depreciating rupee means that few entities want to enter the aviation market, which act as the above mentioned barriers to entry.
Does Collusion Among Airlines Lead to Anti-Competitiveness?
Another problem which may result as a barrier to fair competition would be creation of alliances amongst multiple airlines. Alliances include agreements between different companies to collaborate in various aspects like code-sharing, flier programmes etc. A case in point was the merger between Jet and Sahara in 2006, which would have led to Jet having a 50% market share. While there existed an apprehension that this merger would create a monopoly, the govt. authorities cleared the merger as they felt this would amount to healthy competition in an emerging industry.
It has been argued that such mergers which can impact the industry on a large scale should have stricter scrutiny. For example, a deal between two American companies was struck down as it had the possibility of reducing competition drastically, in addition to having a higher control on market prices. Perhaps the timing of the Jet-Sahara merger, when the Act, 2002, wasn’t fully enacted, may have let such a slip to happen.
Yet, there have been apprehensions that such code-sharing and alliances between major players may be counter-intuitive to competition law’s objectives. There have been arguments that a more efficient way of analysing mergers would be to use guidelines present in the US, like the Clayton test. The Clayton test states that an alliance is deemed to have anti-competitive elements if it has the chance to reduce competition substantially and further, to use this to concentrate market power. The Clayton test, and Horizontal Merger Guidelines of the US, could possibly be used to scrutinize mergers in a better fashion than a mere application of §19(3) of the Act, 2002.
Another possible method is the point of origin/point of destination approach, wherein each route is seen separate from the consumers viewpoint. Such an approach looks not only a singular factor of direct flight connectivity, but also indirect flights, connectivity in case of overlapping catchment zones etc. Granting anti-trust immunities to alliances, hence, should be carefully scrutinized as it might lead to barriers to entry for new entities. This could lead to a cartel like behaviour which shall be detrimental to the industry and the public in general.
Horizontal agreements, hence, can lead to strong mergers which would lead to concentration of profits. The government could focus on revised policies to alleviate such a situation. The Indian aviation sector has largely not seen the profits regular in the global aviation industry. Jet fuel prices in India, one of the highest in the world, has resulted in lesser profits for airlines. Furthermore, government intervention, in terms of a price cap of 35 dollars, has seen further reduction of possible profits. Moreover, various regulations adopted by the government like ‘grandfather clauses’ further disincentivize additional players from joining the industry. These clauses aid a carrier to keep an aircraft slot with itself, if the slot is used for a certain percentage of the time per season. As a result, the major players keep a majority of the slots to themselves, restricting the entry of new airlines. Additionally, aviation industry is highly susceptible to extraneous conditions like a volcano or war etc. While the above mentioned factors don’t show the flouting of fair competition by airlines, it shows government apathy. This apathy results in a lesser number of airlines and hence, possibly, a desperate attempt at collusion to at least break even.
The economic policies of 1991, through privatization and globalization gave rise to a more ‘of-the-time’ law in the form of the Competition Act. This article has delved into the aviation sector, analysing elements of competition. The Indian aviation market has been plagued by various problems which has resulted in barriers to entry. These barriers include high ATF prices, government intervention, inter alia. These factors have resulted in an oligopolistic market, making it easier to indulge in anti-competitive practices like cartelization. There have also been arguments to keep a check on horizontal agreements, being entered into by corporation for common interest rather than public welfare. In lieu of these facts, the government. should frame more definite laws to prevent such practices. Additionally, addressing the previously mentioned issues plaguing the aviation industry may help in increasing incentives to join the industry and hence, improve competition.
ABOUT THE AUTHOR
Rishabh Warrier is a first-year law student from NALSAR University, Hyderabad who has always had a keen interest in writing.